The quest of Atlantic Coast Airlines (ACA) to become the first low-fare, low-cost regional jet operator ran into a turbulence when Jonathan Ornstein's Mesa Air Group made an unsolicited $512 million takeover bid that has turned hostile.

While some are sceptical about Mesa's surprise all-stock offer, the move has refocused the debate on profitable ACA's strategy for breaking free of its long-time codesharing partner United Airlines.


Mesa, like ACA, is a United Express carrier and Ornstein says he would bring it back into the fold, reversing ACA's plan to become an independent carrier at Washington Dulles. Under the plan, ACA would use its 50-seater Bombardier CRJs to compete with other discount carriers such as Southwest Airlines, jetBlue and AirTran Airways. ACA would also place itself in direct competition with United as it added larger aircraft. ACA says only that it will stay with this strategy while it reviews Mesa's unexpected bid.

'We really feel our business model makes the most sense,' argues Ornstein, questioning the low-cost regional concept. 'We think it is the wrong strategy for them when it can have 7-9% margins that can be guaranteed by a major carrier.' Mesa studied ACA's strategy after it was announced in July, but Ornstein believes it is a 'contradiction in terms' to have a regional jet point-to-point network without a codeshare. 'If you started from scratch, maybe. If you start with another aircraft, maybe,' he says.

'United would like to maintain ACA as a feeder operation. As far as we can be involved in that decision, it would be helpful,' adds Ornstein, who discussed his bid with United before going public.

Analyst Holly Hegeman of says Ornstein 'has made no bones about the fact that he will fly for the majors at low rates. This deal clearly works for Ornstein in terms of playing up to United.' CSFB analyst Jim Higgins says it is unlikely Ornstein would have gone ahead with the offer without 'some strong sense that United approved'. Higgins adds that ACA's relatively weak defences leave it vulnerable.

Ornstein says he had asked ACA to consider a sublease of some of its 118 regional jets, but had been rebuffed. He says he holds an undisclosed, but relatively small stake - less than 5% - in ACA, the value of which soared by almost 40% following Mesa's bid.

Mesa wants to create the USA's leading independent regional. With $1.2 billion revenues, a combined fleet of 215 regional jets and 82 turboprops, it would be 'committed to a core business model with consistent, stable margins through revenue-guarantee agreements,' says Ornstein Mesa began serving as the United Express feeder at Denver in July, resuming a codesharing deal that United had severed in 1998. Mesa, which also owns subsidiaries that fly for America West, US Airways, Midwest Express and others, now plans to operate at least 55 regional jets for United. But even combined with ACA, Mesa would derive less than half its revenues from United. ACA now depends on United for 80% of its sales, with the rest coming from a codesharing pact with Delta Air Lines using Fairchild Dornier 328JETs.

Source: Airline Business