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.

JetBlue CEO Dave Barger talks about focusing on customer services and profitability, adopting new technology and fostering a strong company culture, instead of fleet growth in the near future.

The premises for Air Macau’s business model has been taken away, what should the airline do to survive a rapidly changing operating environment?

Air Macau is in trouble.

The net asset value of the airline stood at a negative 91.2 million Chinese Yuan (USD $13.3 million) at the end of last year, to avoid bankruptcy according to Macau laws, shareholders had to pump a 431.2 million Chinese Yuan emergency fund into the airline to keep it float. 

The situation is not likely to improve, if not deteriorate, as the Air Macau’s  main revenue source – cross Taiwan Strait traffic between Mainland China and Taiwan will no doubt shrink significantly, as direct air link between the two sides have been established since 2008 and continue to grow rapidly in 2009.

A little background

In 1949, after suffering defeat in the Chinese Civil War, the KMT party led by Chiang Kai-shek fled mainland China and retreated to Taiwan Island, where it continued its rule as the Republic of China, while the winning communist party established the People Republic of China on the mainland.

Fearing an invasion from the communist party, the KMT banned direct flight, mail and cargo transportation with the mainland. Passengers traveling to mainland will have to go through a third point, usually Hong Kong or Macau.

However, in the past 20 years, as the economy in the mainland takes off, traffic volume and frequency across Taiwan Strait grew exponentially. Since 1980, more than 53 million visits to the mainland by Taiwan residents have been recorded, more than 2 million Taiwanese live in Beijing, Shanghai and other mainland cities permanently for business and personal reasons. Further more, Taiwanese investment in the mainland has reached USD $100 billion since 1990, resulting in huge business travel demand between the two sides. But travelers between Taiwan and China have to stop in Hong Kong or Macau and change planes, a requirement that adds four hours to what could be a one-hour flight across the 100-mile-wide Taiwan Strait and is seen as a costly obstacle to further economic integration.

About Air Macau

Air Macau was established in 1994 to take advantage of the cross Taiwan Strait travel demand, if fact, more than 70% of its revenue comes from transporting passengers between Taiwan and Mainland China via Macau.  It offers a one-plane service for passengers travelling between the two sides, although they must complete a brief transfer procedure in the Macau International Airport and wait for about 30 minutes in the departure lobby, passengers can board the same plane once again and continue to their destinations. The airline will also assist Taiwanese passengers to obtain mainland entry permit if required.

Ownership info

Air Macau Route Network

Air Macau Fleet (Credit: Wikipedia)

Financials (Latest data available)

Reputation / Brand Equity

Air Macau is not an inspiring airline when it comes to its brand image, unfortunately.

Here are some passenger reviews found on airlinequality.com

“Economy class was full, seats were cramped but bearable for the 1.5 hr flight. Food was poor. MFM-TPE sector had no boarding bridge so has to take the bus to the aircraft.”

“Shanghai to Taipei The flight was delayed for more than 3 hours without explanation. Eventually, we were informed to board an A300. It was an awful and old aircraft and full of terrible smell, and the air conditioning was not functioning properly. This airline does not pay attention to flight safety – I consider Air Macau is the worst airline I have ever taken.”

“Macau-Shanghai. Business Class. Full cabin. Drinks, meal, tea and coffee all served and cleared away 45 minutes after take-off. Why the rush? I filled in a Customer Comment card requesting a reply but never received it. I definitely recommend avoiding Air Macau – it is worth going to HKG just to use DragonAir – 1,000 times better than Air Macau.”

The problem: Political landscape changed & the cash cow is dying

In spite of being a mediocre airline with few endearing attributes, Air Macau has survived so far by relying on the cross-strait traffic created by political barriers between Taiwan and the mainland. However, things are changing, trade and transit ties have improved quickly since Beijing-friendly Taiwan President Ma Ying-jeou took office in May 2008.

As of July 2009, seven mainland airlines, including China Southern, Xiamen Airlines, Hainan Airlines, Shenzhen Airlines, China Eastern Airlines and Shandong Airlines have set up offices in Taiwan and started direct flights between mainland China and Taiwan. At the same time, Taiwan based China Airlines, Uni Airways, TransAsia Airways have started their own direct flights to mainland China as well.

As a result, travellers now enjoy shorter travel time, lower ticket prices and more frequency than ever before to fly across Taiwan Strait.

Therefore, Air Macau is in a dire situation: 70% of its revenue comes from travellers between Taiwan and Mainland China, however, there is little, if any reason for most people to transfer through Macau after Aug 31, 2009, when airlines from both sides of the Taiwan Strait started or increased their own direct flights. The premises at the core of its business model has been taken away, how does this airline survive? or will it have no choice but fade away? 

In part II of this post, I will examine the obstacles and opportunities in Air Macau’s operating environment, and propose a few strategic directions that Air Macau might take to rethink and revitalize its business model. (… to be continued. )

It is interesting to see how airlines differentiate themselves on print ads, here are a few that I collected. I will continue to update this post as I collect more of them.

Continental Airlines

Now, I haven’t read the ZAGAT survey, but in my book, Continental takes the most creative ads award.

American Airlines

American Airlines’ ad is clearly targeting at the corporate trend of reducing travel by adopting new technology such as video conferencing, does it get the message across?

ANA

Singapore Airlines

Porter Airlines

JetBlue

Is it just me? This image and language feels so ordinary, unfitting for an airline with a reputation for renovation.

Emirate Airlines

Royal Jordanian

Qatar

Cathay Pacific

Korean Airlines

The small print says:

Your very private hideaway awaits you…

An oasis of pure luxury. Our exclusive Kosmo Suites features a fully flat bed seat, a wider touch-screen LCD monitor that features a host of multimedia on demand, and fully automated retractable walling. Consider it your very own utopia at the touch of a button.

British Airways

Totally uninspiring, British Airways should be able to do better than this!

Lufthansa

Air France

Sky Team

As always, I hope you enjoy these pictures. If you encounter other print ads for airlines in your readings, could you scan/photo and send them to me? Thanks!