A little more than a year ago, Mesa Airlines’ chief executive Jonathan Ornstein was highly optimistic about the US regional carrier’s contract to fly its Bombardier CRJ900s on behalf of United Airlines, rather than longtime partner American Airlines.
”When we moved the planes to United, I thought we had made it to the promised land,” Ornstein tells FlightGlobal on 19 January. ”Unfortunately, for myriad reasons, it just did not work out that way, and it forced us to do this really massive restructuring of our agreement in order to maintain our viability.”
As Phoenix-based parent Mesa Air Group disclosed on 18 January, the company has amended its capacity purchase agreement with United to “significantly improve Mesa’s operating income and liquidity”.
Mesa estimates that the new agreements – retroactive to 1 October 2023 and extending through 31 December 2024 – will generate $63.5 million of additional revenue.
The company has also sold or agreed to sell 29 of its “excess” CRJ900s and dozens of engines, generating an additional $198 million, and sold most of its shares in advanced air mobility companies Archer Aviation and Heart Aerospace to United.
”I am a big believer in both of those companies,” Ornstein says. ”That being said, I have to look out for Mesa first.”
Taken together, the manoeuvres have reduced Mesa’s debt obligations and could improve the company’s profitability, Ornstein says.
“We had to restructure this so that we have a viable entity,” he says. “I don’t think it was anyone’s fault – it just didn’t work. It really just came down to the fact that they [United] weren’t paying us enough, but they ultimately paid us what are now market rates.”
In December 2022, Mesa severed its contract with American in favour of a five-year capacity purchase agreement with Chicago-headquartered United. Previously, the regional carrier had operated on behalf of both American and United as American Eagle and United Express, respectively.
At the time, Ornstein said Mesa had been losing about $5 million monthly due to higher pilot pay rates and penalties for not meeting contracted block-hour requirements, while American raised concerns about Mesa’s financial and operational stability.
”With American, I didn’t totally understand the strategy,” Ornstein says. ”It’s like, ’We’re going to raise pilot wages that will basically cost all your margin, plus some,’ and then refuse to pay us… If the goal was to run us off, I guess that’s what they did.”
The transition to flying CRJ900s for United proved more difficult than Ornstein anticipated, however. It struggled to fly enough block hours to cover costs amid an acute pilot shortage that grounded a significant portion of its regional jet fleet.
The headwinds have continued into 2024, as Mesa has yet to report its fiscal fourth-quarter results and has been notified by the US Securities and Exchange Commission that it is at risk of being de-listed from the Nasdaq stock exchange.
The delay is related to a “$30 million factual balance sheet mis-statement”, according to the company’s financial filings.
Ornstein says he is confident the company will file its fiscal fourth-quarter report soon. He explains that the discrepancy arose due to poor monitoring of a loan that had been transferred from a bank to United during its transition.
“When we moved the loan to United, I don’t know if it was laziness, I don’t know if it was the easier way to do it, but we basically took the entire loan – all the documents, everything – and just moved it over lock, stock and barrel to United,” he says. ”I think our finance department assumed that because it was a bank covenant, it was not part of the new deal with United.”
“So, both Mesa and United, we just didn’t watch it,” he continues. “That’s our fault, frankly. It should have been watched.”
Mesa defaulted on the loan in June due to unawareness, Ornstein says. The company has recently been working to reclassify the debt to short-term from long-term.
Ornstein acknowledges that his company’s financial situation remains difficult, but he is hopeful that his team has “righted the ship”. Moving forward, much depends on whether the carrier can fly enough block hours to return to profitability.
“I don’t think anybody really understood how sensitive the numbers were from a block-hour basis – when we don’t fly the block hours, they just don’t pay for the fixed costs,” he says. “It has been really painful.”