Cracks in the US airline industry are widening, pushing smaller regional air carriers such as Mesa Air to the brink of bankruptcy.
Regional jet operators such as Mesa and ExpressJet are being pressured by flight cutbacks from national airlines that reduce the number of passengers into outlying areas where regional carriers fly.
"Without the flights from the major carriers, the regional carriers don't have a sufficient customer base to support their operations," said Lorraine McGowen, a bankruptcy attorney at the Orrick law firm in New York.
National airlines are re-evaluating the hub-and-spoke model they have used for decades as transfer points to get passengers to their destinations as they try to find ways to manage fuel, staff and other costs.
Last month, Mesa, which provides regional service for Delta Air Lines, US Airways and United Airlines, said that Delta planned early termination of its Delta Connection agreement with Mesa's Freedom Airlines subsidiary.
Mesa said it would contest Delta's plan, which threatens to lop off about 20 percent of Mesa's passenger revenue. The contract is worth about USD$23 million per month to Mesa, according to its latest US SEC filing.
Phoenix-based Mesa is also running out of options to fund potentially crippling debt obligations, said Roger King, an airlines analyst at credit research firm CreditSights.
The company has two convertible notes coming due, one for USD$38 million in June and another for USD$100 million in February, and bondholders have an option to make the company repurchase those notes, King said.
"The first one might not be the stake in the heart, but the second one would be," said King, adding that his analysis shows the company may have about USD$130 million in cash.
Mesa, which has delayed filing its first quarter financial results with the SEC, has not publicly addressed the issue of bankruptcy protection, and its general counsel, Brian Gillman, declined to comment on whether bankruptcy was a possibility.
The company said late on Wednesday that its shareholders had approved a plan to issue as many shares as necessary to buy back all of its senior convertible bonds, due in 2023.
But based on its current stock price of 63 cents per share, whether it can reach that goal is questionable, analysts said.
"Their options are very limited," King said. "They might just want to declare bankruptcy now."
Mesa shares are down from USD$7.25 a year ago and Standard & Poor's removed the company from its SmallCap 600 index in April, citing the company's market value as USD$33 million. Since then, market capitalization has fallen to less than USD$18 million, according to Reuters data.
Mesa convertible notes due in 2023 last traded at about 24 cents on the dollar.
Also, companies owing money to Mesa are failing to make payments. Big Sky Airlines, a regional airline based in Billings, Montana, received a notice of default and a demand for payment of about USD$4.8 million from Mesa in April. Big Sky, the principal subsidiary of MAIR Holdings, ceased all operations in March and said its assets would be liquidated.
Last month, Mesa also agreed to pay USD$52.5 million to Hawaiian Airlines as settlement of a dispute over the use of confidential information.
Other regional airlines may also come under pressure as major carriers re-evaluate flight patterns.
"Our airline industry is just in need of complete overhaul," said Marti Kopacz, who leads the corporate advisory and restructuring services group at accounting firm Grant Thornton. "They're trading at cash on the balance sheet values."
In the last five months, seven US airlines have filed for bankruptcy protection or stopped operating, including Frontier Airlines, Skybus Airlines, ATA Airlines and Aloha Airlines.
That puts pressure on competitors who are not operating under bankruptcy protection. Shares of ExpressJet, Pinnacle Airlines and JetBlue Airways are all down more than 50 percent year-to-date.
Shares of SkyWest and Republic Airways have each fallen more than 20 percent year-to-date.
Experts say the key question for regional airlines may be whether even bankruptcy can save their business model.
"Even to be in bankruptcy you've got to have financing, you've got to have a business plan... that will make sense and generate cash," Kopacz said.
Orrick's McGowen said that for some airlines, a Chapter 11 reorganization may not be an option.
"Given the reduction in routes by the major carriers, the major losers in changes in the hub-and-spoke system are the regional carriers built around those hubs," she said.
"Some regionals are so small, liquidation is the only bankruptcy option available," she added.
