While there are a lot of “ifs” in its latest Security and Exchange Commission filings, it was clear that Mesa Air Group could be facing bankruptcy, something predicted by Wall Street analysts during recent investor calls at other airlines. Related Story It also announced an agreement with note holders to defer the deadline for notes due next month.
Mesa Air Group said that if Delta’s termination of Freedom’s Delta Connection agreement, effective in July, is successful and if the aircraft were unable to be redeployed or other capital found to cover aircraft lease expenses, certain fixed maintenance obligations, furlough and personnel redundancy costs, retraining costs for flight crews and other general costs and expenses, Mesa may be forced into bankruptcy. Related Story
In fiscal 2007, the agreement accounted for approximately 20 percent of the Mesa’s total revenues. On May 9, Mesa filed in U.S. District Court for the Northern District of Georgia for a preliminary injunction to block Delta's action which goes to court next week. It is also suing Delta for breach of contract.
Mesa said that termination of the Freedom contract covering 34 Embraer 145s loses the company $20 million per month in revenue or $960 million over the next four years. Mesa estimated leasing costs, labor and other costs total approximately $250 to $300 million over the next four years. Mesa also said that it will be unable to redeploy the aircraft in a timely manner, or at the lease rates commensurate with its Delta Connection rates resulting in defaults on the leases unless it can raise capital through equity or debt financings, asset sales, consensual restructuring of debt and least terms. It further said that such defaults would trigger other defaults.
“The company’s cash flows from operations and its available working capital would be insufficient to meet these cash requirements, including its obligations under the lease agreements, which will result in defaults,” it stated in its filing. “In such event, the company’s financial condition would require that the company seek protection under applicable U.S. reorganization laws in order to avoid or delay actions by its lessors, creditors and code-share partners, which could materially adversely affect the company’s ability to continue as a going concern.”
The news came as it also announced it reached an agreement with note holders deferring some of the $37.8 million that comes due next month. Related Story  On May 20, Mesa’s board approved separate agreements with certain holders of its Senior Convertible Notes due 2023 which had the right to require the company to repurchase the notes on June 16 (the “Put”) at a price of $397.27 per $1,000 note (the “Put Price”) plus any accrued and unpaid cash interest. If all of the holders of the notes exercised this right, the company would have been required to repurchase the notes for approximately $37.8 million in cash, common stock, or a combination thereof.
The agreement calls for those holding approximately $66.5 million in aggregate principal amount of the notes, or about 77 percent, to forego exercising their Put right on 75 percent in aggregate principal amount of notes or $19.8 million. However, Mesa is still obligated to pay note holders $5 million on May 27. In exchange, Mesa will purchase the remaining 25 percent at a price equal to 75 percent of the Put Price and a requirement to purchase the notes on January 31, 2009 in cash, common stock or both. Mesa also agreed to issue two-year warrants to purchase 25,000 shares of common stock for each $1 million in aggregate principal amount of notes deferred (or an aggregate of approximately 1.25 million shares of common stock). The warrants have a per-share-exercise price of $1, will contain anti-dilution protection and be limited to not more 4.99 percent of outstanding stock.
Mesa has been desperately trying to right its troubled ship and, in the past few weeks, announcing the resolution of its litigation with Hawaiian Airlines, Related Story an agreement to return 14 of 34 Beech 1900Ds to Raytheon Aircraft Company, eliminating $28 million in long-term debt, and shareholder approval of increasing common stock to pay off the Senior Convertible Notes. Related Story
On May 16, 2008, Mesa Air Group, Inc.paid Raytheon $500,000 and for the return of 14 of its 34 Beechcraft 1900D aircraft. The aircraft, which could easily be placed, were held up owing to a dispute between Mesa and Raytheon Aircraft Credit Corporation. Related Story On May 12, 2008, Mesa reached a settlement agreement with MAIR Holdings, Inc. the parent company of Big Sky Airlines, in relation to the early return of 10 Beechcraft 1900D aircraft following Big Sky’s announcement that it was ceasing operations and liquidating its assets. Pursuant to the settlement agreement, Mesa will receive $1.5 million from Big Sky and will retain Big Sky’s security deposits and special supplemental rent.