Mesa Air looks for shareholders' OK to offer more shares

PHOENIX — Mesa Air Group Inc. hopes shareholders will soothe its financial troubles this week by allowing the airline to issue millions of new shares valued at nearly twice the company's current market capitalization.

The Phoenix-based carrier is expected to ask permission Tuesday at its annual shareholders meeting to sell as much as $37.8 million in new common stock. The shares would help the airline pay off debt that comes due in June and bolster the company's beleaguered operation.

If it's not able to sell more shares, Mesa said in a regulatory filing that there "can be no guarantee that the Company would have adequate cash resources" to pay holders of the senior convertible notes it issued.

Mesa's shares have dropped 75 percent in value since the beginning of the year, closing at 74 cents Friday. While the new shares could pay off the notes, they would seriously dilute Mesa's remaining stock value.

"We think there's concerns about the ongoing viability of their business model," said Standard & Poor's airline analyst Jim Corridore said Corridore. S&P has a "sell" rating on Mesa shares.

The entire airline industry has been ravaged by high fuel prices. But Mesa Air Group has had an especially rough year with bad news on a number of fronts.

Delta Air Lines Inc. criticized the performance of Mesa subsidiary Freedom Airlines and said in March it planned to pull Freedom's contract-flying agreement worth $20 million a month. Mesa is suing Delta to force the airline to keep the contract.

Meanwhile, Mesa's inter-island Hawaiian carrier, Go, sparked a price war and that subsidiary reported a $20 million operating loss in its first 16 months.

Mesa's competitors in Hawaii, Hawaiian Airlines Inc. and Aloha Airlines, also filed lawsuits against the carrier. Hawaiian accused Mesa of improperly using confidential information before entering the inter-island market. Aloha accused Mesa of violating federal law by offering cut-rate fares at below cost.

Mesa agreed to pay Hawaiian $52.5 million last month to settle the lawsuit. The Aloha suit is pending.

In April, Mesa said it needed help paying senior convertible notes that it issued in 2003. Holders can make the company repurchase those notes June 16, forcing it to come up with as much as $37.8 million.

Bob McAdoo, an analyst with Avondale Partners, said the Hawaiian settlement may have made it easier for Mesa to pay those notes back. Mesa was appealing an $80 million judgment, so it essentially saved $37.5 million by settling. That's almost as much as it needs to pay off the notes.

"They've got some cash back," McAdoo said. "I don't know how much that relieves the pressure."

Mesa, which is one of the largest regional carriers in the U.S., is somewhat shielded from high fuel costs that have plagued the industry. Its contracts with major carriers allow Mesa to be reimbursed for fuel and other operating costs.

But it's possible that Mesa's revenue will shrink nevertheless this year as other airlines look to trim routes and save fuel.

"Their other partners may decide at some point they'll need less of Mesa's services," Corridore said. "It's unlikely that they'll need more anytime soon, given what they're facing with fuel."

The shareholder meeting will be at Mesa Air Group's Phoenix headquarters.

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On the Net:

http://www.mesa-air.com

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