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Monday, October 20, 2003

Mesa Seeks New Atlantic Coast Board To Approve Its Takeover Bid

Action is First Hostile Takeover in Airline Industry in 20 Years

Mesa Air Group [Nasdaq: MESA] has filed a preliminary consent statement with the U.S. Securities and Exchange Commission seeking to replace the board of Atlantic Coast Airlines (ACA) [Nasdaq: ACAI] and take its takeover bid directly to shareholders of ACA. The move was prompted by the absence of a response from ACA to Mesa's takeover offer, and it marked a shift to a hostile takeover by Mesa.

The filing is a prelude to Mesa seeking votes from ACA's shareholders to appoint seven new directors to the board who, presumably, would approve Mesa's offer.

Phoenix-based Mesa also declared its intention to begin its proposed exchange of 0.9 Mesa shares for every share of ACA, which is based at Washington's Dulles International Airport.

"We are disappointed that we have not received a response from ACA management or its board of directors to our October 6 letter outlining an acquisition proposal for ACA," said Jonathan Ornstein, Mesa's chairman and CEO. "We have made a full and fair proposal to merge with ACA based on a proven strategy that we believe will result in long-term profitability."

ACA declined to comment, but advised its shareholders to "take no action at this time." The airline plans to respond to Mesa's offer after its board reviews it, but did not say when that would be. Mesa's bid would be the first hostile takeover in the airline industry in more than 20 years.

Mesa hopes the merger would create the leading operator in the regional aviation sector, with a stronger balance sheet and greater access to capital to fund the combined growth of both companies.

The business model would be based on revenue-guarantee code-share relationships with major airlines serving hub networks. This model, applied to an enlarged asset base and a broader portfolio of client partnerships, would offer "more balanced revenue distribution and strong synergies," Ornstein said. "Accordingly, we are taking steps to give ACA shareholders the opportunity to replace existing directors with those who are committed to fairly considering our offer or a similarly attractive alternative," he said.

Mesa also said it will seek a shareholder resolution asking ACA's board to repeal ACA's "poison pill" provision that makes it prohibitively expensive to buy ACA without prior board approval.

James Higgins, an analyst with Credit Suisse/First Boston, predicted Mesa will have to raise its stakes to acquire ACA. "We believe that if heavily-leveraged Mesa were to use only its own shares and some of ACAI's spare cash, the exchange ratio could go as high as 1.1 Mesa shares [versus 0.9 shares] to one ACAI share, and that $1 or so per ACAI share in cash could be paid out."

That would bring the price to roughly $14 per ACA share from the current estimate of $11.30, he said. "A germane question is: 'How much can Mesa afford to pay?' " Higgins said.

His firm has kept its "outperform," or positive, rating on Mesa shares, as the deal appears to be "a relatively low-risk transaction that will de-lever its balance sheet, provide the aircraft to realize growth, put it in better stead with an increasingly important partner United Airlines [(OTC: UALAQ)], and provide more geographic and customer diversification."

As for ACA, risk-tolerant investors might still be willing to buy shares, but the odds that "something can still go wrong with this deal" are reasonably high, Higgins said. Because of the possible resulting drop in ACA share prices, his firm retained a "neutral" rating for that stock.

>>Contact: Jonathan Ornstein or Peter Murnane, Mesa Air Group, 602-685-4000; Steve Lipin or Tim Payne, Brunswick Group, 212-333-3810.<<

Mesa Proposes New ACA Board


Mesa Air Group intends to nominate the following seven individuals for election as directors of the board of Atlantic Coast Airlines:

1) Nathaniel A. Davis, previous president and chief operating officer, XO Communications; director of XM Satellite Radio Holdings;

2) Andre V. Duggin, chairman of the board and CEO of A.V. Consultants, an insurance and risk-management company;

3) Theodore F. Kahan, senior managing director, El Camino Capital Group, a real estate investment company; former executive vice president of The Davis Companies;

4) James R. Link, consultant, JLink Associates, a financial/marketing consulting firm; CEO of PAC/AV; and CEO of TRW Investments, a venture capital firm; former vice president of worldwide sales at Raytheon Aircraft Co.;

5) David T. McLaughlin, chairman of the board, Orion Safety Products; chairman of the American Red Cross; previous president of Dartmouth College; director of Viacom, Orion Safety Products and Infinity Broadcasting;

6) Peter F. Nostrand, chairman of the board, president and CEO, SunTrust Banks, Greater Washington; former president of Crestar Bank, Washington, D.C., and Crestar Bank, Md.;

7) Archille R. Paquette, retired president and chief operating officer, Air Midwest.

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