Mesa Air goes deeper in debt, worries about future

Phoenix-based Mesa Air Group CEO Jonathan Ornstein said Tuesday he hopes to exit the company's much-touted but money-draining Chinese airline, win a court battle to keep flying regional service for Delta Air Lines and find creative ways to pay off bondholders for a huge debt that will be due in early 2009.

"Clearly, we face some pretty serious challenges," Ornstein said in a conference call announcing his company's third-quarter financial results.

Those results aren't very promising, either.

Mesa posted a loss of $3.76 million on revenue of $353.9 million for the quarter that ended June 30. That's compared with a profit of $2.61 million on revenue of $340.4 million for the same period a year earlier.

The soaring jet fuel costs that plagued the major U.S. carriers weren't the key issue last quarter for Mesa, which mostly flies regional services for the big airlines and gets reimbursed for fuel.

It is a factor, however, for the company's Hawaiian-based inter-island subsidiary go!, which gained passengers during the quarter thanks to the bankruptcy of former rival Aloha Air, but lost money because of fuel prices.

The cost of shutting down its subsidiary Air Midwest, which ceased all operations June 30, legal expenses, unexpected maintenance costs and declining passenger counts, combined with the go! fuel tabs, sent Mesa Air's bottom line into the red last quarter.

But gassing up go! is only one of Mesa's big worries about the future.

High on the company's top concerns is winning the court battle with Delta, Ornstein said.

Delta said it wants to drop Mesa's service because of performance issues. Mesa said the performance problems were caused by Delta, and losing the business would cost Mesa a big chunk of its operations.

Mesa hurdled an early obstacle by winning an injunction that will keep its planes in the air for Delta until the final court battle is decided.

But the biggest problem Mesa faces is paying off bondholders for debt due in early 2009, Ornstein said.

"Clearly, the company does not have the money to pay the bonds, so we'll have to be creative," he said.

One of the ways he hopes to raise cash is by selling Mesa's part ownership in the much-heralded, year-old joint venture with China-based Shenzhen Airlines to fly regional service in China.

Ornstein said the per-ticket take would have been good if they had sold a lot of tickets.

He said Shenzhen significantly over estimated how many people want to fly around China.

"It's not the big hit we hoped for," Ornstein said. "And we felt if we have the opportunity to generate some cash now, that is worth more to us."

Ornstein said he sent a letter of intent to Shenzhen offering to sell Mesa's share of the business, but would continue to lease planes to the China-based airline.

Mesa Air shares, already a single-digit percentage of their 52-week high, slipped a penny to 53 cents.