Delta Air Lines has embarked on an aggressive campaign to end deals with two of its regional partners, Mesa Air Group and Pinnacle Airlines.
The carrier told Mesa in late March it would end its contract with Mesa's Freedom Air unit, which operates 41 regional jets under the Delta Connection banner. Delta claimed Freedom was in breach of contract because it had failed to complete enough of its flights in recent months. Mesa sued and at the end of May won an injunction against the termination of the contract, although Delta is expected to appeal.
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Mesa argues that it cancelled flights and removed flights at Delta's own request. Before winning the injunction Mesa warned that it could be forced into bankruptcy protection if it could not stop Delta from cancelling the contract. In a Securities and Exchange Commission filing, Mesa said the loss of $20 million in monthly revenue from the Delta deal could quickly lead to default if it could not restructure its debt, acquire additional capital or otherwise restructure.
Although Mesa did rearrange its capital structure by issuing more shares, the Delta operations accounted for about 20% of its 2007 revenue. It would lose an estimated $960 million over the next four years without the deal.
For Mesa, once held out as an ideal regional with its diversity of partners, the developments are a disappointment, coming after its cash-eating Hawaiian adventure and the shutdown earlier this year of its small turboprop unit Air Midwest. In Hawaii, where Mesa's Go! unit is incurring big losses, Mesa agreed at the end of April to pay Hawaiian Airlines $52.5 million in a financial settlement that closed a long-running dispute over its alleged misuse of confidential information it obtained during Hawaiian's bankruptcy.
Delta also is targeting Pinnacle, telling the regional that it will end its contract for flying 16 regional jets at the end of July. Delta argues that Pinnacle, too, failed to meet its minimum performance standards after seven months of their contract. Pinnacle says it, too, will fight, with Pinnacle chief executive Phil Trenary claiming that Delta's schedules were unrealistic. Analyst Lily Ng of Merrill Lynch calculates that the nine regional jets Pinnacle flies for Delta generate about $3.5 million a month in revenue.
Pinnacle's main client is Northwest, for which it flies 129 50-seaters. But as Delta takes over Northwest, Pinnacle's options may be limited. JPMorgan's Jamie Baker says "with Delta believing that it has found reasonable early-out flexibility at Mesa and Pinnacle, we wonder if similar efforts aimed at its Republic and SkyWest flying may be forthcoming."
Source: Airline Business
