Carrier Continues Takeover Bid for Atlantic Coast Despite Stiff Management Opposition

Mesa Air Group [Nasdaq: MESA] posted a last-minute high bid of $9.15 million to purchase the assets of bankrupt Midway Airlines, a deal that includes eight regional jets and $90 million in debt. If the bid is approved, Mesa could begin flying a carrier based where the planes are now kept - at Raleigh-Durham International Airport in North Carolina - as early as January, said former Midway CEO Robert Ferguson. But Mesa officials said no decisions had yet been made.

"The assets of Midway Airlines will be placed into service under long-term revenue-guarantee contracts with our airline partners, significantly enhancing our growth in 2004," said Jonathan Ornstein, Mesa's chairman and CEO. "With our competitive, low-cost structure and our tremendous employees, these assets will provide excellent service to our airline partners and are anticipated to earn meaningful returns for our shareholders."

Mesa's bid edged out Connecticut-based investment firm Wexford Capital, the only other bidder, which declined to raise its $8.6 million offer for the assets. The Mesa bid is subject to the final approval of the U.S. Bankruptcy Court, the Federal Aviation Administration and the Department of Transportation.

Wexford owns Indianapolis-based Chautauqua Airlines - which provides regional service for American Airlines [NYSE: AMR], Delta Air Lines [NYSE: DAL] and US Airways [Nasdaq: UAIR] - and has invested in Denver-based Frontier Airlines [Nasdaq: FRNT].

The assets Mesa bid on include Midway's operating certificate; six leased Bombardier [Toronto: BBDb] CRJ aircraft, two owned CRJ aircraft, and Midway's right to three additional leased aircraft; all of Midway's CRJ spare parts and support equipment; all aircraft landing and/or takeoff slots at New York LaGuardia and Washington National airports; and all related acquisition materials associated with the operation of Midway's CRJ operations.

Mesa flies under its own banner in New Mexico and Texas, and under code-sharing arrangements elsewhere with United Airlines [OTC: UALAQ], US Airways, Frontier Airlines and America West Airlines [NYSE: AWA].

Federal bankruptcy Judge A. Thomas Small, who approved the sale of Midway's assets to Mesa, denied an objection from a Midway pilots' union attorney, who argued that the buyer should honor the pilots' labor agreement. The bids from both Mesa and Wexford were conditional upon dropping Midway's labor deal with its pilots.

But a Mesa consultant, Edward Wegel, who testified at the Dec. 10 bankruptcy hearing, said Mesa likely would hire many of Midway's former pilots, mechanics and flight attendants, because they are already trained on the aircraft, although Mesa would not confirm this.

"We're cautiously optimistic that this will work out," said Mark Stewart, a former pilot who heads the Air Line Pilots Association (ALPA) chapter representing Midway's 85 former pilots. Mesa's pilots also are unionized pilots represented by ALPA.

The pilots had contended that a clause in their labor contract requires the contract to be binding upon any merged company or successor to Midway. Their contract sets work rules, salaries and specifies that pilots should be rehired according to their seniority with Midway.

On Oct. 30, Small ordered Midway's assets liquidated under Chapter 7 of the federal bankruptcy code after the carrier decided to give up a 26-month struggle to reorganize. Midway quit trying to exit bankruptcy when it was unable to agree to a list of concessions from its pilots. The concessions were a condition of a $10 million to $15 million loan from an unidentified investor that the carrier said it needed to acquire to repay creditors if and when its bankruptcy protection was lifted (CRAN, Sept. 15).

In its unsuccessful bid, Wexford offered to rehire as many former Midway employees as possible and to retain Midway's old headquarters and a warehouse in Morrisville, N.C. Wexford wanted to operate Midway's aircraft as Ascent Airlines, primarily a feeder for US Airways, like Midway did before Small ordered Midway liquidated. Wexford also reportedly offered Ferguson, Midway's former president and CEO, the same position at the new airline.

Mesa will assume a 20-month lease on Midway's former offices, but it is unclear how many, if any, former Midway employees it will re-hire. Mesa also indicated that no decision had been made about keeping the headquarters in Morrisville, restarting flights operated by Midway, or hiring Ferguson.

Acquiring the regional jets apparently was the main reason Mesa went after Midway's assets. It is increasingly difficult for airlines to secure financing for new jet purchases due to weakened worldwide economy - and the state of the airline industry in general - following the terrorist attacks of Sept. 11, 2001. Midway's regional jets already have been financed, and Mesa already operates the same type in its fleet.

Mesa has undertaken an aggressive growth strategy that includes expanding its code-share partnerships with major airlines, acquiring new or leased regional jets as they become available, and acquiring Washington Dulles-based regional carrier Atlantic Coast Airlines (ACA) [Nasdaq: ACAI] (CRAN, Dec. 15).

Mesa and ACA management have been locked in a battle for control of the airline since Mesa proposed an unsolicited takeover of ACA in October. ACA management and employees are resisting the takeover, but Mesa wants to bypass them and take its offer directly to ACA shareholders. Mesa is asking ACA shareholders to vote out the current ACA board of directors in favor of a board handpicked by Mesa. The new board likely would approve Mesa's takeover bid.

On Dec. 11, ACA said that shareholders of record as of Dec. 12 would qualify to vote on the "consent solicitation" initiated by Mesa to replace ACA's board. Mesa initiated the consent solicitation on Dec. 9. Only stockholders of record as of the close of business on that date will be entitled to execute, withhold or revoke consent.

ACA shareholders will have 60 days from the record date to execute their shares in favor or against Mesa's consent request to replace ACA's board. ACA has filed materials with the Securities and Exchange Commission in opposition to Mesa's consent solicitation.

ACA CEO Kerry Skeen sent a letter to ACA stockholders on Dec. 10 pleading with them to reject Mesa's attempt to replace ACA's current board of directors.

ACA's board "believes that Mesa is attempting to take control of your company in order to advance Mesa's interests - with no regard for the serious harm its actions could cause for ACA and its stockholders," Skeen wrote.

ACA has a unique opportunity to use its position at Washington Dulles International Airport to pursue operations as low-cost carrier Independence Air, Skeen wrote. ACA's board approved of the strategy "after months of careful comparison to the economics and risks of entering into a new, lower margin contract with United Airlines," he wrote.

ACA continues to move forward with its plan to become an independent carrier, recently ordering 25 new Airbus A320s. Skeen said that, nearly 12 months after entering bankruptcy, its partner United had not yet presented the court with a reorganization plan to emerge from bankruptcy.

But after Skeen sent the letter, UAL Corp., the parent of United, said on Dec. 16 that it had obtained $2 billion in financing, a major step toward emerging from bankruptcy protection. UAL said the loan package was obtained from J. P. Morgan Chase & Company and Citigroup. The two banks each will underwrite $200 million of the non-guaranteed portion of the loan and $800 million of the guaranteed portion. United said the package requires a guarantee from the Air Transportation Stabilization Board, adding that it plans to update its previous proposal to the agency soon. The board rejected United's initial request last year for backing of a $2 billion loan.

Mesa has indicated that it will begin soliciting consents to elect its handpicked nominees to ACA's board and that it intends to begin an exchange offer to acquire ACA in a stock-for-stock deal.

"You should understand that, even if Mesa commences an exchange offer for ACA, Mesa will be under no obligation to complete that offer unless a long list of conditions is satisfied," Skeen wrote to the ACA shareholders. "Mesa is dependent on companies that are competitors of ACA's Independence Air, and Mesa's directors and officers have a fiduciary responsibility to act in the best interests of Mesa stockholders, not you. Your board believes that Mesa's consent solicitation, asking you to replace the ACA board, is designed primarily to benefit Mesa."

The non-binding memorandum of understanding (MOU) that Mesa and United signed on Nov. 12 proposes new, less favorable terms for ACA to operate as a regional feeder for United, Skeen added (CRAN, Nov. 17). In the MOU, United agreed to increase the fees it will pay to Mesa if Mesa's nominees are elected to ACA's board and approve the terms of the MOU, regardless of whether Mesa ever seeks an acquisition of ACA. Mesa's MOU with United would reward Mesa stockholders, not ACA's stockholders, for the value inherent in ACA, Skeen said.

"Although Mesa attempts to portray itself as a concerned ACA stockholder whose interests are aligned with yours, we believe that the MOU gives rise to a significant conflict of interest for Mesa that you should keep in mind when considering Mesa's proposals," Skeen said. "Specifically, we believe that Mesa stands to gain far more in direct benefits from the deal that it has negotiated for itself with United than it does from its holdings in ACA."

The ACA board believes that the only thing that's certain about the election of Mesa's handpicked board nominees is that ACA would be under the control of directors whose objectivity is "questionable," and who have no experience in managing ACA, Skeen said. "Do not trust Mesa to act in your best interests."

Skeen said that Mesa's board nominees have "little experience" in the airline industry. None of them has reported owning any ACA stock, but several of them own Mesa stock or have business relationships with Mesa, which Skeen said could impair their objectivity.

>>Contact: Jonathan Ornstein or Peter Murnane, Mesa, 602-685-4000; Rick DeLisi, ACA, 703-650-6550.<<