Mesa Air Group Shows Everything That's Wrong with the Bankruptcy Code

Last Updated Sep 30, 2010 10:38 AM EDT

At the beginning of 2010, Mesa Air Group (MESA), regional provider of air travel, filed for Chapter 11 bankruptcy and began to put together its reorganization plan. The plan has now been revealed, and it shows everything that's wrong with the bankruptcy code in this country. Management used this as a tool to slash and burn and feels none of the pain itself.

If you'd like to follow along, you can find the Mesa reorganization plan filing here (enter docket 1059). Mesa was not out of money, and in fact it says it has funded the reorganization with cash on hand as well as operating revenues and some asset sales. No outside money was needed. So what was needed? A vehicle to dump all the extra airplanes and other random assets that management no longer wanted.

Before the bankruptcy filing, Mesa owned 44 airplanes and leased another 134. During bankruptcy, Mesa abandoned 21 of its owned aircraft and rejected 96 leases (13 were leased again under an amended contract). The new Mesa now will operate a mere 77 airplanes, much to the dismay of all those lessors who are now stuck with homeless planes.

But why did Mesa have so many airplanes it couldn't use? That's the million dollar question. It's because of how it ran its business. There was an agreement with Delta (DAL) for a substantial amount of flying, but Delta terminated for non-performance. The last flight was on August 31 of this year.

United (UAUA) has also walked away from the majority of its operation with Mesa, only holding on to the last 20 airplanes it couldn't ditch. Five of those airplanes will come off contract at the end of 2011, 2012, and 2013 with the remaining five sticking around until 2017. I don't expect we'll see that being renewed and neither does Mesa. It plans to sublease those planes out once they come out from contract with United.

Both the Delta and United relationships were marked by ongoing litigation. Then there is the 5 airplane operation with go! Mokulele in Hawai'i. That has been scarred by litigation since Mesa started by reviewing the books of bankrupt Hawaiian and Aloha Airlines and then coming in on its own to push them out of business (it succeeded with Aloha). Don't forget the joint venture with Kunpeng in China either. That fell apart. Mesa was supposed to provide 20 regional jets, but the relationship soured and Mesa was out.

You would think that with all these failures, management would be held responsible, but that's not the case. While employee count has dropped from 3,303 at the beginning of the year to 2,782 now, none of those losses are coming from senior management. Instead, the exact same management team will remain in position, and they'll be given 10 percent of the common stock as well as a $5.5 million note. Where's the accountability? Not here.

So how exactly is Mesa getting out of this mess? Thank US Airways (LCC), which basically owns Mesa. More than 70 percent of Mesa's revenue comes from its agreement with US Airways and that will only increase as the United deal unwinds. (The tiny go! Mokulele operation is responsible for less than 10 percent.) And it's that US Airways agreement that expires in 2012. Without an extension, there was no way Mesa would be able to get out of bankruptcy, because it wouldn't have a viable business left.

US Airways knew that, and I have no doubt the airline walks away happy. In exchange for a contract extension through September 30, 2015, US Airways gets 10 percent of the company's common stock along with a $5.5 million note. It's good to be US Airways here, and I can't say I blame the airline for extracting a pound of flesh.

But where does that leave us? Management has slashed its workforce, pushed aircraft obligations back on the lessors, and come up with an extension from US Airways. Despite many failures over the years, managements gets a chunk of stock and a note. This just isn't right. It's not how bankruptcy proceedings should work. There needs to be some accountability.

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[Photo via Flickr user asrusch/CC 2.0]