Mesa could be forced into bankruptcy by Delta connection agreement termination

By Caroline Salls

Pittsburgh, May 22 - Mesa Air Group, Inc. is preparing for a possible July termination of its Delta Air Lines, Inc. connection agreement, which could ultimately force Mesa to file bankruptcy, according to an 8-K filed with the Securities and Exchange Commission.

Mesa subsidiary Freedom Airlines, Inc. is also a party to the connection agreement.

According to the 8-K, Mesa's forecasts, which were included in a presentation made to holders of its senior convertible notes due 2023 and senior convertible notes due 2024, assume that the company's flying under the Delta contract would end in July, but Mesa said this would only occur if it receives an unfavorable ruling in its ongoing litigation with Delta.

If the contract does end in July, Mesa said it would be responsible for continuing expenses related to aircraft leases, fixed maintenance obligations, furlough and personnel redundancy costs, retraining costs for flight crews and other general costs and expenses related to the contracted services.

In addition to a convertible notes payment restructuring and aircraft return, Mesa said it would accelerate the wind-down of Air Midwest and negotiate supplier payment deferrals if the Delta contract is terminated.

According to a separate 8-K filed with the SEC, in the past few weeks, Mesa has resolved its litigation with Hawaiian Airlines, has entered an aircraft return agreement with Raytheon Aircraft Co., has received shareholder approval of its proposal to issue shares of common stock to 2023 noteholders who elect to put their notes in June and has reached agreements with some noteholders to defer their put right until January 2009.

Put agreement details

Specifically, Mesa said its board of directors approved separate agreements with holders of the 2023 notes related to the put requirement.

The company said the noteholders have the right to require it to repurchase the notes on June 16 at a price of $397.27 per $1,000 note, plus interest.

If all of the noteholders exercise this right, Mesa said it would be required to repurchase the notes for $37.8 million in cash, common stock, or a combination thereof.

Under the agreements approved by the company's board, holders of $66.5 million principal amount of the notes have agreed to forbear from exercising their put right on 75% of their notes, or $19.8 million of the $37.8 million subject to the put.

In exchange, the company has agreed to purchase 25% in principal amount of the noteholders' convertibles at a purchase price equal to 75% of the put price.

The noteholders will have the right to put the notes on Jan. 31, 2009, with the put price to be payable in cash, common stock or a combination thereof, at the company's option.

Also in consideration for the forbearance, Mesa has agreed to issue two-year warrants to purchase 25,000 shares of common stock for each $1 million principal amount of notes deferred, for a total of 1.25 million shares.

The warrants have a per share exercise price of $1.00, will contain anti-dilution protection for major corporate events, such as stock splits and stock dividends, and will not be exercisable if a noteholder would beneficially own more than 4.99% of the company's outstanding capital stock.

Mesa said it must pay a total of $5 million to the noteholders by May 27.

Connection agreement dispute

Mesa said that Delta notified it on March 28 of its intent to terminate the connection agreement, which includes Mesa's agreement to operate 34 regional jets under Delta's name, as a result of Freedom's alleged failure to maintain a specified completion rate on its Delta Connection flights during three months of the six-month period ended in February.

Mesa said it vehemently denies that there is any basis for termination of the connection agreement.

As a result, Mesa filed a lawsuit against Delta on April 7, alleging breach of the connection agreement and asking the court to order Delta to perform under the agreement.

In addition, Mesa filed a motion for preliminary injunction on May 9 in the U.S. District Court for the Northern District of Georgia to prevent Delta's wrongful termination of the agreement.

The preliminary injunction hearing is scheduled to begin on May 27 and end on May 29.

If Delta is successful in terminating the connection agreement, Mesa said it believes it will be unable to redeploy the leased aircraft in a timely manner, or at the lease rates it receives under the agreement.

In addition to losing roughly $20 million per month in revenue, or $960 million over the next four years, Mesa said it estimates that it would incur more than $250 million to $300 million in leasing costs, labor and other costs over the next four years.

As a result, Mesa said its cash flows from operations and its available working capital would not be enough to meet its cash requirements, including its lease obligations, which will result in lease agreement defaults.

Mesa said its failure to obtain additional capital through equity or debt financings, asset sales or debt and lease terms restructurings to cure the lease agreement defaults would trigger defaults under some of its other agreements.

If the lease agreements are terminated and the company's related obligations were accelerated, Mesa said it would be forced to file for Chapter 11 bankruptcy, which could jeopardize its ability to continue as a going concern.

Phoenix-based Mesa operates 181 aircraft.

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