Small regional airlines face cash crunch

NEW YORK (Reuters) - Cracks in the airline industry are widening, pushing smaller regional air carriers such as Mesa Air Group Inc (MESA.O) to the brink of bankruptcy.

Regional jet operators such as Mesa and ExpressJet Holdings Inc (XJT.N) 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, labor and other costs.

Last month, Mesa, which provides regional service for Delta Air Lines Inc (DAL.N), US Airways Group Inc (LCC.N) and UAL Corp's (UAUA.O) 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 $23 million per month to Mesa, according to its latest U.S. Securities and Exchange Commission 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 $38 million in June and another for $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 $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 $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 $33 million. Since then, market capitalization has fallen to less than $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 $4.8 million from Mesa in April. Big Sky, the principal subsidiary of MAIR Holdings Inc MAIR.O, ceased all operations in March and said its assets would be liquidated.

Last month, Mesa also agreed to pay $52.5 million to Hawaiian Airlines as settlement of a dispute over the use of confidential information.

OVERHAUL NEEDED

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 U.S. airlines have filed for bankruptcy protection or stopped operating, including Frontier Airlines FRNTQ.PK, Skybus Airlines, ATA Airlines and Aloha Airlines.

That puts pressure on competitors who are not operating under bankruptcy protection. Shares of ExpressJet, Pinnacle Airlines Corp (PNCL.O) and JetBlue Airways Corp (JBLU.O) are each down more than 50 percent year-to-date.

Shares of SkyWest Inc (SKYW.O) and Republic Airways Holdings Inc (RJET.O) 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.

(Additional reporting by Emily Chasan, Walden Siew and Bill Rigby; Editing by Toni Reinhold)