CAROLE SHIFRIN PHOENIX
As Mesa chairman and chief executive, Jonathan Ornstein has managed to change the ink in the company accounts from red to black and has taken a 50% pay cut to ensure that the company is on solid ground
Sitting in his office in the Phoenix desert miles from any ocean, Jonathan Ornstein, the chief executive officer of Mesa Air Group, is making waves - he always has, and probably always will. The head of one of the USA's top regional airline groups is an outspoken 44-year-old who has gained a reputation as a talented manager. He also has a reputation for speaking his mind, tending to churn the waters. The only issues he seems understandably reluctant to discuss are trade unions and Mesa's upcoming contract negotiations.
Ornstein was a blunt critic of the US Government's move in 1997 to require regionals with aircraft of 10 or more seats to operate under the same rules as those with mainline jets. He predicted that the requirements - which relate primarily to training, dispatch and maintenance procedures - would destroy smaller turboprop operators by adding to their costs without providing any safety-related gains. He has waged war on the US Regional Airline Association (RAA)since it supported the change. He finally resigned his airline's RAA membership this spring, charging the association with failing to represent the interests of its members. He started a rival organisation, Regional Aviation Partners, to provide grass-roots lobbying on behalf of small carriers and communities.
Ornstein has also railed against turboprop manufacturers for wanting to maintain what he calls above-market rates for their aircraft, even when the economics have changed, putting, he says, many carriers "on the verge" of failure.
Although restrained on the subject of Mesa's labour contracts, he is critical of the scope clauses in contracts between major carriers and the pilots union which limit the number of regional jets (RJs) they can fly. "It's a terrible restraint of trade and it is unfair to the citizenry and consumers."
His forthrightness is coupled with a demonstrated ability to get a moribund airline working again. Since rejoining Mesa as an executive in early 1998 - he had last worked there before between 1989 and 1994 - the group's fortunes have transformed. When he arrived, Mesa was reeling from a poor operational record, which had led to the cancellation of codeshare partnerships with United Airlines and its close neighbour America West Airlines. Above all, the red ink was flowing freely.
Mesa is now profitable and its balance sheet has improved dramatically. Its operational performance has been restored. It renewed its partnership with America West, put in place a stronger relationship with US Airways, and began codeshare services on behalf of Midwest Express Airlines.
Part of its turnaround centres on a reduction of turboprop flying in favour of more lucrative RJ operations, even though Ornstein laments the decline of such services and resulting loss of air service to small communities. "There's a real disservice going on here because rural communities are basically being left out of the national transportation system as a result of the higher cost associated with all this increased government regulation," he says.
Today Mesa Air serves 120 cities across the USA, plus some routes to Canada and Mexico, with a fleet of 126 aircraft. It operates as America West Express from hubs at Phoenix and Columbus, Ohio, and as US Airways Express throughout the East and Midwest, as well as codesharing with Midwest Express from Kansas City. It also works independently as Mesa Airlines primarily from Albuquerque, and next year will begin operating as Frontier Express from a new hub at Denver.
Entrepreneurial tendencies
Ornstein has been interested in aviation since he was "a little kid" and would have become an Army helicopter pilot, he says, if his eyesight had been better. His entrepreneurial tendencies were obvious pretty early. While in his teens - having saved up some money - he wrote letters to South American air forces offering to buy surplus World War 2 fighter aircraft. Although his offers were declined, he is convinced it was a good idea. "I had this big interest in aviation, and I thought it's a piece of history, and I knew that they were for sale," he says. "It would have been a good deal if I had bought them too."
Ornstein did not get into aviation in a serious "business" way until he was almost 30, after ten years in the brokerage business in California. He had left the University of Pennsylvania after three years - his personalised licence plate reads "DROPOUT" - after getting an unexpected job as a stockbroker in Los Angeles. "My lack of success in the brokerage business has been well documented," he says, although he worked at it for ten years.
A chance meeting led to his involvement in raising some money for Air LA, a small California commuter airline. He spent so much time there, he decided to join the airline full time. As one of seven employees, his tasks ran the gamut - loading and unloading baggage, cleaning the aircraft, taking reservations, handling passenger tickets. "We did everything," he says. "Everybody had to."
The need for another aircraft led Ornstein to Mesa Airlines, then based in Farmington, New Mexico, where he met Larry Risley, Mesa's founder and top official, who Ornstein calls his "mentor in the business". When Mesa offered to buy Air LA and was turned down, Ornstein says he looked more closely at Mesa and realised its stock was undervalued. "If nothing good came out of the brokerage business, at least I had a basic understanding of balance sheets and how to value companies," he says. He formed a partnership with a few former clients and bought 5% of Mesa for $316,000.
He joined Mesa the next year as head of scheduling and planning and spent the next five years there in various capacities, including president of West Air, an unprofitable United Express carrier bought by Mesa. It was one of his early "turnaround" successes. He also served as Mesa's executive vice president in charge of investment activities and acquisitions, spearheading its financially rewarding participation in the reorganisation of America West. He also got airline investor David Bonderman, an Ornstein friend, involved.
In 1994, at Bonderman's request, Ornstein left Mesa to join Continental Express as president and chief executive officer, once again to restructure a money-losing carrier into a profitable, stand-alone operation. Two years later, when Continental decided not to spin it off, Ornstein was enticed to Europe by Richard Branson to develop a low-cost, low-fare jet carrier - Virgin Express - in Brussels.
Difficult situation
Four years after he left Mesa, Ornstein was back. In early 1998, he joined its board of directors after Barlow Partners, a private investment fund in which he is managing partner, purchased about 7% of the airline's common stock. He became chief executive in May 1998, adding the title of president in July and chairman of the board a year later. With his "fond feeling for Mesa", he says, "coming back was the easiest thing I could do, in spite of how difficult the situation was once I got here."
The company, one of the largest independently owned regional carriers in the world, had become a wreck. United, on short notice, had cancelled Mesa's codeshare agreements to provide passenger feed at Denver, Los Angeles and in the Pacific Northwest. The action left Mesa with a surplus of nearly 90 turboprop aircraft and stations in dozens of communities to which it no longer ran a service. America West also had cancelled its feed arrangement with Mesa. Although "operational performance" was the reason given by both carriers, and Ornstein admits Mesa's operation was "pretty cruddy," he thinks there were other reasons.
On his return to Mesa, Ornstein's immediate challenge was to regain the confidence of America West and maintain its partnership with US Airways. The United relationship could not be salvaged, he says. "It was only a question of trying to get out of that with the least amount of damage." Mesa was able to reinstate its partnership agreement with America West, aided in part by Ornstein's relationship with key America West shareholder Bonderman. "That was maybe the turning point for the company," Ornstein says.
Another action taken quickly was to shut down Mesa's nine-month old, money-losing independent jet operation from Fort Worth's Meacham Field, and move the jets to the East to fly for US Airways. He also renegotiated a more attractive partnership agreement with US Airways, in this case working with US Airways chief executive Rakesh Gangwal, with whom he had worked before. Mesa also quickly disposed of 32 of the excess Beech 1900s, and moved the company's headquarters from Farmington to Phoenix to "clean out the cobwebs" and attract new talent.
"The situation was so bad that there was no activity too radical to consider because we had to do something really quickly or we would have been out of business," Ornstein says.
Mesa also hired lawyers to collect money owed to it, and began negotiations with Bombardier Regional Aircraft Division to resolve differences over the terms of the agreement under which Mesa ordered its Canadair RJs. "It took a lot of work to get turned around and come to - let's just say - a better understanding of the agreement."
The airline also took actions to regain its operational integrity and to run the company more efficiently, such as cutting back on the number of spare aircraft at hubs from two or three to one and reducing its parts inventory by $15 million. Another plan was to realign its fleet across operating subsidiaries in an effort to concentrate all its Beech 1900Ds at Air Midwest. Historically, both Air Midwest and Mesa Airlines operated the aircraft, with each having separate flight operations, training and maintenance programmes.
Another key element in Mesa's turnaround has been the reduction of flying it does for its partners under prorate arrangements - under which the regional is allocated a portion of each passenger's fare based on a standard industry formula and pays all the operating costs - in favour of contract flying.
All Mesa's RJs are operated on a contract basis. Under these contracts, the partners collect all revenues but Mesa is paid its fixed costs - aircraft, fuel, maintenance, parts and so on - plus a mark-up for its services. It is less risky for the regional, according to Mike Lotz, Mesa's president and chief operating officer, because it eliminates the variables of fuel prices, passenger revenue and weather. "We're insulated from all three," he says.
Contract flying provides guaranteed margins of 8-12%, considered acceptable. Although lower than the potentially greater margins regionals can earn under prorate flying, the contracts also protect against the downside. The regional also gives up its freedom of scheduling since the partners want to pick the cities served and the timing of flights to connect with their own services, although they do consult.
Lotz, who is credited by Ornstein with "spearheading the operational turnaround of the airline", says Mesa's ERJ-145 and CRJ operations are now ranked number one in North America by the manufacturers. "That's what the business is now - who can provide reliable jets at affordable prices." he says. "That's our strength." Lotz and Ornstein met when both were at Continental and they have been "partners" ever since. Lotz joined Ornstein as chief operating officer at Virgin Express and came with him to Mesa as chief operating officer, adding the title of president last year.
On a revenue basis, 65% of Mesa's flying in the last quarter was contract flying and 35% was on the basis of prorates. Back in 1998 when he arrived prorate flying accounted for 95% of revenues but is expected to fall to only 15% by 2004, maybe 10% in 2005. On a capacity basis, prorate flying will decline to 12% of available seat kilometres in 2002 and drop to 7% in fiscal 2004.
Ornstein says the forecasts reflect Mesa's strategy to base its growth on expanded RJ flying for its partner airlines. It currently operates 32 CRJ-200s in America West Express service and 20 Embraer ERJ-145s in US Airways Express service. It has 16 more 145s on firm order.
This year, Mesa also ordered 40 more RJs from Bombardier, in the process becoming launch customer for the 84-seat CRJ-900. It will begin taking the first of 20 CRJ-700s, with 64 seats, in the first quarter of 2002 and the first of 20 CRJ-900s in early 2003. All the new CRJs are to be flown for America West. In general, Mesa does not order aircraft unless it has partner agreements in hand, although at least five of seven CRJ-200s kept in reserve for "opportunities" are going to be used in its new Frontier Express services next year.
Based on its current fleet plan - including jets on firm order and a planned reduction of its 19-seat turboprops but not any of 184 RJ options - Mesa expects an average annual capacity growth of 30% for fiscal years 2002 through 2004.
Although Ornstein admits to "trying to find more business", he also notes there is only so much more growth Mesa can handle in the next few years. "The one thing I'm not going to do is put Mesa in the position where we sacrifice the operational integrity we have worked so hard to achieve.
"What I'm really focusing on right now is the growth beyond 2004 and 2005," he says. The perfect deal would be one in which Mesa gives some of its near-term RJs options to a major or national carrier that needs them in return for a commitment of growth for Mesa between 2005 and 2008, he says. "I'd like to expand the jet operation, but just do it further out, to know that Mesa has a future to 2018."
Although Mesa took substantial charges for its restructuring, its efforts have paid off. After losing money between 1997 and 1999, Mesa reported a net profit of $58.9 million in 2000, and expected to be in the black this year. It reported net and operating profits for the last 10 quarters. Its stock price, except for a decline following last month's terrorist acts, had trebled. Mesa also reduced prorate flying by 20%, at least for the short term, and Ornstein and Lotz cut their own pay by 50% to try to maintain the company's strong financial position.
There are still challenges. Mesa's Air Midwest subsidiary, which operates a fleet of 55 Beech 1900Ds as a codeshare partner of US Airways, has not been profitable. However, Ornstein says it should be so under its recently renegotiated agreement with Beech owner Raytheon. Although the details are confidential, Raytheon, which financed the aircraft, agreed to changes aimed at reducing Mesa's operating costs for the aircraft. Mesa also tries to maximise use of the turboprops; its codeshare with Midwest Express involves 12 departures already operated from Kansas City for US Airways in an effort to boost loads and revenues.
Cost challenges ahead
Mesa's CCAir subsidiary, a Charlotte-based commuter it acquired last year, is also losing money. The carrier has a fleet of 21 turboprops - seven Dash 8s and 14 BAe Jetstream 31s - operating on flights as a code-share partner of US Airways. "The problem with CCAir is that its cost structure is stubbornly high," Ornstein says, adding that unattractive aircraft leases in a time of softening turboprop flying is part of the problem.
Also coming up for Mesa are a number of key labour negotiations, not least of which is an agreement with the Air Line Pilots Association which expires in December. Noting that Mesa upgrades its pilots to jet captain in two years, Ornstein says there are hopes that the pilot talks will go smoothly. "Let's not either of us do something stupid and upset the applecart," he says. "There is too much opportunity."
Ornstein and Lotz this spring signed five-year employment contracts with the company, extending their stay until 2006. Ornstein says that he is happy where he is - he and his partners control a fair amount of Mesa stock and he has a very supportive board of directors.
Ornstein says he has no plans or aspirations to go to a larger carrier. "I don't think that going to work at a big company would be that interesting to me," he says. "Plus the fact that you would have to be 'politically correct' all the time, and I can't stand that."
This interview was conducted before 11 September. Since then, Mesa Air Group has had to react to the dramatically changed landscape. Nine days after the terrorist acts, Mesa was forced to send 20% of its employees on furlough (unpaid leave) and order a 10% pay cut for remaining non-union employees for 90 days. The carrier will meet unions to seek similar pay concessions.
The measures followed others taken a few days earlier to try to maintain the company's strong financial position in the face of nation-wide disruptions and reduced passenger traffic. The regional already had reduced its turboprop flying by 20% and its total operations by 7%. Mesa's top two officials cut their own pay by half and other senior executives took a 20% pay cut. "It's a very difficult period," said a disheartened Ornstein. "It's a family here; everyone has worked hard to turn the whole company around."
Mesa has had 11 Embraer ERJ-145s grounded because of the closure of Washington's National Airport and passenger loads on aircraft in general have been very low. "Unless people feel secure, they're not going to get on aircraft," Ornstein said. "As soon as demand returns and we go back to a full schedule, we'll bring everyone back."
Mesa is to give weapons training to pilots undergoing recurrent training. It has also put security guards on flights.
Source: Airline Business