Mesa's Fight with Delta May Result in Bankruptcy Filing

People will often try to predict when an airline will file for bankruptcy protection, but it's rare to actually know the answer two months in advance. Mesa Air Group has just taken that step. If the airline loses its legal battle with Delta, we'll see the airline file for reorganization under Chapter 11 by July 20 at the latest.

It seems so strange to hear that, right? But the writing is on the wall. For those who don't know, Mesa Air Group operates Air Midwest, Mesa Airlines, go!, and Freedom Airlines. Air Midwest flies small turboprops on routes to places you've never heard of, but you don't need to worry about that. It will be shut down in a month anyway. go! is the upstart Hawaiian interisland carrier that some blame for the demise of Aloha. Mesa and Freedom both fly as regional feeders for Delta, United, and US Airways. Mesa also has a joint venture in China, but the bulk of the airline group's flying is done as regional feed.

Over the past couple of years, Mesa has faced several hurdles. Much of the recent pain has centered around go!'s fight with Aloha and Hawaiian, and this goes well beyond the money-losing operation itself. There have been multiple lawsuits, and in one, Mesa was forced to pay Hawaiian $52.5 million (reduced from $90 million in a settlement). And there could be more beyond that. To compound the problem, Mesa has a potential $37.5 million payment to convertible bond holders due on June 16. Management was able to raise cash via a common stock offering, but you can see where this is going. There are a lot of demands on their cash, and at the end of 2007, they had less than $100 million unrestricted. The airline still hasn't released results from the March quarter, and there's trouble brewing with Nasdaq over this.

So as you can see, things haven't been stellar for the airline lately. That brings us to the Delta issue. Apparently, this is the one that Mesa says will push it over the edge. In short, Delta claims that Mesa failed to meet operational performance goals that were delineated in their regional feed contract. Because of that, Delta wants to cancel the contract and force Mesa to take back its 50-seat regional jets. Mesa, however, says that's not the full story:

The alleged failure to maintain the specified completion rate in the contract is due to Delta's own request of Mesa to remove flights to benefit Delta's overall operation and/or to accommodate Delta mainline flights. These flights, among others, have always been taken out of Freedom's performance calculations in the past and Delta acted consistent with this practice and has paid Mesa both its base margin and its incentive margin after crediting Mesa for the Delta mandated schedule changes and /or cancellations.

This sort of reminds me of Game 3 of the NBA Western Conference Finals the other night. There were plenty of people complaining that San Antonio was fouled at the very end of the game, but whether that's true or not, it sort of misses the point. Had San Antonio played a better game, they wouldn't have been in position to lose at the end.