Mesa searching for creative ways to handle upcoming debt maturities in light of cash shortfall

By Jennifer Lanning Drey

Portland, Ore., Aug. 19 - Mesa Air Group, Inc. is looking for creative ways to address the large amount of debt the company has maturing in early 2009, Jonathan Ornstein, chief executive officer of Mesa, said Tuesday during the company's third-quarter earnings call.

As previously reported, the company might be required to buy back the $23.2 million in principal amount remaining on its senior convertible notes due 2023 on Jan. 31 in connection with forbearance agreements, and it may need to buy back the $77.8 million in principal amount of senior convertible notes due 2024 on Feb. 10.

"Clearly, the company does not have the money to pay those bonds, so we will have to be creative, but we think it's in everyone's interest to come to a reasonable solution, so that the company can continue to move forward and return to sustained profitability," Ornstein said.

During the question-and-answer portion of Tuesday's call, the CEO added, "We do have the ability to give them stock, but I think we are looking to be a little bit more creative so we can all see some of the benefits of hopefully an improving environment."

Mesa had unrestricted cash of $46.7 million at June 30.

Plan to reduce debt, grow cash

During the third quarter, Mesa returned 14 of its 34 Beechcraft 1900D aircraft to Raytheon Aircraft Co., which eliminated $28 million of long-term debt associated with the financing of the aircraft.

Also during the quarter, Mesa entered into a letter of intent with Shenzhen Airlines detailing its intent to sell its interest in Chinese joint venture Kunpeng Airlines to Shenzhen.

Ornstein said given the situation, if completed, the cash gained from the transaction would be more valuable to Mesa in a capacity other than the joint venture.

Litigation adds to headwinds

Mesa also faces continued challenges of increased fuel costs and pending litigation with Delta Air Lines over Delta's desire to terminate a contract with Mesa wholly owned subsidiary Freedom Airlines, Inc.

Mesa won a preliminary injunction in the Federal Court in Atlanta that keeps Delta from terminating the contract; however, Delta is appealing the decision. The court has not yet set a date to hear the appeal.

"We remain confident, not only in our position, but in the strength of the injunction, that our position will be upheld," Ornstein said.

As previously reported, Mesa could be forced into Chapter 11 bankruptcy if Delta is allowed to terminate the contract.

Mesa's third-quarter earnings included after-tax income from continuing operations of $1.8 million. Operating revenues for the period were $353.9 million, a 4% increase over the same period in 2007.

In the third quarter 2007, Mesa reported a net gain from continuing operations of $4.4 million.

Phoenix-based Mesa operates 181 aircraft.

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