Many missteps led to Mesa’s bankruptcy, will the airline learn from its mistakes?
On Jan 5th, Mesa Air Group Inc. filed for Chapter 11 bankruptcy protection in New York, citing an untenable financial situation.
The Phoenix-based regional airline is asking a federal bankruptcy court to allow it to continue flying and operating during its reorganization.
Although many analysts have seen this coming for a long time, the news still caused quite a stir among airline industry professionals, people are wondering: what happened to Mesa? Granted the airline industry in general is going through a rough patch among the current economic crisis, but why is Mesa faltering while other regional carriers are doing relatively well?
Here are some factors I feel may have contributed to Mesa’s downfall:
1. The operating environment for 50-seat regional jets has changed.
Between 1993 and 2001, the 50 seat regional jet enjoyed tremendous growth. Although many people were doubtful about those small jets in the beginning, once Cincinnati-based Comair, a launch customer for the 50-seat Canadair Regional Jet, showed real success filling in gaps that Delta mainline planes couldn’t do profitably, or doing some hub bypass flying, the race was on to get as many RJs as you could get, at one point, airlines need to wait for 2 years for deliveries.
That was then, the operating environment for small regional jets changed dramatically over the past few years.
On one hand, the fuel price doubled or tripled to over 5 usd/gallon in late 2008 before settling down in 2009 when the recession hits, but is still much higher than the 1990 price, that greatly increased regional aircraft operating costs. On the other hand, with the fast growth of the low cost/low fare airlines such as Southwest Airlines and Ryan Air, the average airline ticket price has demonstrated a downward trend for the past ten years, basically airlines are paying more money to operate aircraft but getting less revenue on each flight. While this trend negatively impact mainline operations, the small regional jet operation is hit extremely hard. Due to its small capacity, the operating cost per seat of the 50-seat regional jet is almost twice as much as that of larger aircraft such as a A320. Combined with a low fare, some 50-seat flight can’t make money even if the aircraft is full.
As a result, the industry is increasingly shifting to 70-0seat or 90-seat regional jets for their added customer comfort and improved economics.
2. The regional airline business model is changing, and Mesa is not adapting very well.
In the years following 9/11, while almost all the mainline carriers in the US were in the red and needed government bailout money to survive, the regional airlines were doing surprisingly well- they were all profitable and making money. but how?
Turns out all the regional airlines have a “Guaranteed revenue per departure” agreement with their mainline partners, under this agreement, the regional airlines are guaranteed a fixed payment from their mainline partners regardless of how many passengers they actually feed into the system, and the major airlines are responsible for pricing, route planning and marketing efforts.
In Mesa’s case, about 96 percent of its consolidated passenger revenue came from code-share “revenue guarantee” agreements with US Airways, United Air Lines and Delta.
Under current harsh operating environment, it is only natural that mainline carriers such as Delta, United are looking to their regional to shoulder some of that risk.
In May 2008, Skywest, another US based regional airline, entered into a “at-risk” agreement with United airline to fly seven 50-seat Bombardier CRJ200 for the mainline carrier. Under this agreement, Skywest will absorb all the operating costs of the regional aircraft and pro-rate any profits with United, it is not doubt a welcoming development for United Airlines.
In Nov 2009, United terminated an agreement for Mesa to operate 26 CRJ200 on its behalf, with the aircraft to be phased out by April 30, 2010. Prior to that, Mesa also lost a contract to operate 10 Dash8 for United.
3. Missed opportunities and poor relationship management with mainline partners.
In an interview with Flight Global reporter Mary Kirby, Mesa CEO Jonathan Ornstein admitted that he has made a mistake and missed a opportunity to secure more business for his regional airline.
That opportunity was seized by Republic Airways, another regional airline group, who in September 2005 purchased 113 slots at Ronald Reagan Washington National Airport, 24 at LaGuardia Airport, and 10 Embraer 170 aircraft from US Airways with an agreement to lease those assets back to US Airways. The deal was necessary for US Airways to emerge from bankruptcy protection. In return, Republic got a new contract and made a handsome return on its investment.
"Clearly the company would be in far different shape if we had in fact invested in US Airways," says Ornstein.
He adds: "I would say probably the single biggest mistake in my career was not making that investment…"
You can read Kirby’s story here: http://www.flightglobal.com/blogs/runway-girl/2008/02/mesa-ceo-jonathan-ornstein-adm.html
It is well known that Mesa is locked in an legal fight with Delta , after Delta canceled its agreement with a Mesa unit in 2008 saying it had poor completion rates.
Mesa also got into fight with United over some quite straightforward language in a contract to replace 10 CRJ200 with CRJ700. According to aviation blogger Brett Snyder:
If you’re interested in the anatomy of a dysfunctional relationship, let me introduce you to United (UAUA) and its regional partner Mesa Air Group (MESA). A relatively straightforward part of the contract in which Mesa flies some aircraft under the United Express brand is now the center of attention. A combination of what appears to be ego and lack of interest has now exploded to land these two in court, fighting it out.
Mesa, on the other hand, really screwed this one up. If they were willing to deliver the airplanes by April 30, why go through all these shenanigans? Who cares if the first notice was valid? They kept pushing the issue and now, it wouldn’t surprise me to see them out of luck.
You can read the whole story here: http://industry.bnet.com/travel/10004273/united-airlines-fights-mesa-air-group-over-airplanes-part-i/
4. Unscrupulous business practices – The Hawaiian debacle
While Hawaiian Airlines and Aloha Airlines went through bankruptcy in 2004, Mesa met with them and reviewed operational records and forecasts, but ultimately decided not to acquire or invest in either airlines. Two years later, after Mesa announced plans to launch a subsidiary airline called “Go!” in Hawaii, Hawaiian Airlines sued to block the launch, claiming that Mesa had violated a confidentiality agreement. Aloha Airlines filed a similar suit against Mesa later in 2006.
In September 2007, the CFO of Mesa Air Group was fired after being found deleting files from his work computer, even though the company argued that he was deleting porn from the computer, the judge overseeing the Go! case ruled that Mesa destroyed evidence and ordered Mesa to pay an $80 million settlement with interest, along with legal fees, to Hawaiian Airlines.
No doubt that settlement is a huge blow to Mesa’s cash flow and contributed to its eventual bankruptcy filing.
5. Bad fleet planning
Mesa has a total of 177 aircraft in its fleet, but 52 of them are parked. Most of these out of service aircraft are 50 seat RJs and even smaller turboprops such as Beechcraft 1900 and Bombardier Dash8.
In addition, 25 more aircraft will be out of service after their contract with United ends in the near future.
Clearly the company didn’t plan for market volatility and failed to respond to the shifting market trends in a swift and decisive way.
In Dec 2006, Mesa entered into a joint venture agreement with China’s Shenzhen Airlines to form a regional subsidiary called Kunpeng Arilines. Mesa was hoping to offload their idle CRJ200s to Kunpeng, that plan was quickly proven to be just wishful thinking, Kunpeng now fly 5 Embraer E190 with 100 ARJ21 on order.
In Aug 2008, Mesa indicated that it intends to sell all of its shares in Kunpeng to Shenzhen Airlines.
6. A bad reputation, and a tarnished brand
After the news of Mesa’s bankruptcy application broke, there are a lot of discussion on the internet and some common themes about Mesa emerged:
- Bad customer services
- Low reliability
- Low pay for pilots and staff
- Won’t be missed
- Other airlines will easily pick up their routes and services
With these kind of brand image, it is not surprising that both Delta and United wanted to end their code-share agreement with Mesa. If Mesa survive it is current crisis, it will have to work hard to address these issues.
What lies ahead?
As painful as Chapter 11 is, it is probably the medicine that Mesa desperately need.
"After careful consideration, the company determined that a Chapter 11 filing provides the most effective and efficient means to restructure with minimal impact on the business and our customers," Chairman and CEO Jonathan Ornstein said. "This process will allow us to eliminate excess aircraft to better match our needs and give us the flexibility to align our business to the changing regional airline marketplace."
He added that despite efforts over the last two years to trim costs and debt, MAG is
"nonetheless faced with an untenable financial situation resulting primarily from our continued lease obligations on aircraft excess to our current requirements. . .Our company has ample liquidity to support itself during this process and we are confident we will emerge from Chapter 11 an even stronger operation."
Breaking free from leases or purchasing obligations through Chapter 11 will no doubt offload some unwanted smaller aircraft and financial burden from Mesa’s shoulder, but to return to profitability and to drive future growth, Mesa need to do some soul searching and address some of the issues listed above.
Air New Zealand is building a powerful brand by focusing on improving its Psychological values, something cannot be matched by its rivals quickly.
I am very excited about Air New Zealand, even though I have never flown with them – yet.
What grabbed my attention, and many other’s, are Air New Zealand’s innovative, social media savvy and buzz-generating marketing campaigns. And we, the traveling public, are increasingly curious about the airline, and personally, I can’t wait to experience the airline when the appropriate occasion arises!
1. Nothing to hide
The “Nothing to hide” campaign was designed to differentiate Air New Zealand from competing airlines who charge passengers additional fees for checking bags and for drinks onboard. Air New Zealand have airfares that include baggage allowances and refreshments.
The controversial and widely publicized TV advertising campaign, Nothing to hide, was launched on 10 May 2009.
It featured more than ninety Air New Zealand staff, eight of whom were chosen for starring roles and who swapped their real uniforms for a body painted version. Chief Executive Officer Rob Fyfe made a cameo appearance in full body-paint.
Air New Zealand also made a in-flight safety video using the same theme, the safety video, called “The Bare Essentials of Safety”, it has garnered more than 4 million views on Air NZ’s official You Tube channel alone.
The messages here are really not that different from any other airline safety announcements, how many of us have plugged our ears with iPods or buried our heads in magazines during the safety announcements onboard other airlines’ flights?
Not if you are onboard an ANZ flight, the way they delivered it, you couldn’t help but pay attention!
Check out “Behind the scenes”- making of these videos at Air New Zealand’s Nothing To Hide site: http://www.nothingtohide.co.nz/
It seems that Air New Zealand just issued a challenge to Southwest Airlines and its CEO Mr. Herb Kelleher, how exciting! Check it out here:
2. The Match Making Flight and Party
On Oct 15, 2009, one hundred single Americans set a world-first for inter-hemisphere mingling, meeting 150 love-seeking Kiwis at Air New Zealand’s Great Matchmaking Party at a ultra-glam bar, Twentyone, in Auckland. The singles had connected up to six-months prior via a social network established for Air New Zealand’s Matchmaking Flight, and this 250-person event offered U.S. and N.Z. singles the chance to meet face-to-face, testing whether “opposites attract” applies to travelers from the opposite side of the globe.
Has Air New Zealand decided to enter the match making business? That is probably not their plan. Air transportation has always been about helping people make a connection – for business or pleasure. And what better connection can one make than finding love?
According to Kathryn Gregory, Air New Zealand’s marketing director for the Americas, “The jury is still out on whether long-distance love will come to fruition down under, but from the stories Air New Zealand crew and on-ground staff have shared, I’m confident there have been some magnetic connections, Air New Zealand has always focused on providing our customers with life-changing experiences, and when it comes to the Matchmaking Flight, what’s more life-changing than falling in love?!”
Once again, Air New Zealand’s fantastic crew members came through and provided fun and excitement with a rousing performance of “Single ladies” at the party.
3. The Pink Flight
We are always exploring new and creative ways to demonstrate the casual elegance and quirkiness of New Zealand’s culture," said Roger Poulton, Air New Zealand vice president – the Americas. "Air New Zealand reflects the country’s diversity-embracing nature and celebrates people from all walks of life. This initiative is one of the many ways we strive to serve our guests, and you can expect many additional kiwi surprises throughout the year.
4. Other brand defining sponsorships:
The Air New Zealand brand name is also associated with several other major events in New Zealand:
Featured performance at the ANZFW 09:
5. Marketing / Branding lessons we can learn from Air New Zealand
In spite of all these clever, innovative marketing campaigns, for an airline brand to succeed, it has to provide tangible values for its customers, in Air New Zealand’s case, these values are well recognized by its customers, here are some awards the airline has won recently:
- Best Cabin Staff Australia/NZ Region – 2009 World Airline Awards by Skytrax
- Best Passenger Service Award – 2008 Air Transport World magazine awards
- Best Airline to the South Pacific, Australia and New Zealand – 2007 by Business Traveler Magazine
- Australasia’s Leading Business Class Airline- 2007 the 14th Annual world Travel Awards
However, tangible values, such as new aircraft, spacious cabin, comfortable seats, good food and services, as important as they are, can be easily matched by competitors.
Increasingly, Psychological brand values, very common and powerful ones such as fun, pride, status, artistic taste, personal bond and aspirations, are becoming the deciding factors that influence passengers in making their travel choices. These values, however, cannot be matched quickly, they have to be carefully planned and cultivated over a long period of time.
In helping its passengers connect with each other, Air New Zealand established a connection with its customers on a personal level; in showing off their bare body in an artistic way, the staffers helped to project a hip, trendy yet honest image of the airline. In dressing up in Pink, from the crew to the airplane itself, the airline really get the message across: we are open, we are accepting and we are ready to have fun!
By co-branding its name with crowd drawing events such as rugby competitions and fashion shows, Air New Zealand aims to inspire the same kind of passion people have for sports and fashion and extend it to the Air New Zealand brand name.
I am also impressed by how media savvy Air New Zealand is, they are active on Twitter, they build a Social network site to support the match making flight, they are also present on Facebook, You Tube and Flickr. Their social media prowess puts most North America based airlines to shame.
Image below is Ritz Carlton Hotel’s advertisement as it appeared on Business Traveler Middle East Sept/Oct 2009 edition:
Compare it with American Airlines’ Ads on Fortune Magazine:
hmm… See the resemblance?
Is this a case of Ad Agencies not doing their due diligences or Ritz and AA joining forces in their marketing efforts? There is no evidence to suggest it is the latter case though.
What do you think? Leave a comment!
Check out and rate some of other airlines’ print ads at http://www.betterwings.net/2009/08/print-ads-of-airlines-a-live-post/
By the way, you can also follow me @BetterWings.
This is a case study on Air Macau that can be viewed on its own, however, for a better understanding of the dilemma Air Macau is facing, please view part one of this document by clicking here.
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