Mesa Air Group, Inc. Business Information, Profile, and History

Company Perspectives

The turnaround at Mesa Air Group is complete. The focus moving forward is to maintain the carrier's superior operational performance; sustain its strong relationships with its codesharing partners; incorporate more regional jets into the company fleet; work with other carriers on forging new codesharing relationships; and improve profitability and shareholder value.

History of Mesa Air Group, Inc.

More than 13 million passengers a year fly Mesa Air Group, Inc., although they may not know it by name: the company's subsidiaries (Mesa Airlines, Inc.; Air Midwest, Inc.; and Freedom Airlines, Inc.) operate regional feeder flights under the brands America West Express, Delta Connection, US Airways Express, and United Express. Mesa also flies under its own brand. The group's young fleet visits more than 165 cities in the United States, Canada, and Mexico. Its fleet of 184 planes collectively makes more than 1,100 flights every day. About half of revenues were coming from America West and US Airways.

Beginnings

By his own admission, Larry L. Risley barely graduated from high school, having judged anything above a "C" grade "a wasted effort." He then enlisted in the U.S. Army and eventually obtained an aviation mechanic's license, aspiring to emulate his two older brothers, who were employed as union mechanics for two major airlines. However, following the career path chosen by his brothers proved difficult for Risley, who became a somewhat itinerant worker, securing employment at general aviation fields then quickly losing his job or quitting in anger, as he disliked working under anyone's supervision. In between his stints as an aviation mechanic, Risley found employment where he could get it, including selling burglar alarms and working as a janitor in a baby clothes factory. Later recalling this period of his life, Risley noted, "I was really out of my element."

Risley's prospects brightened in 1970 when he found his first opportunity to work alone, unfettered by a supervisor, opening an aircraft engine shop in Waxahachie, Texas. This comfortable niche, however, soon deteriorated. Several of his customers reneged on payments, debts mounted, and Risley's engine shop dissolved. It would be roughly another decade before an opportunity for success arrived, but when it did, Risley took hold and entrenched himself in the industry that had for so long eluded him.

In 1979, through the efforts of his brother-in-law, Risley was hired by Four Corners Drilling Co., an oil company based in Farmington, New Mexico, to manage its charter airline service. Oil was a plentiful and lucrative commodity in the region during this period, and Risley was kept busy maintaining a fleet of 14 small planes that shuttled oil drillers to and from the desert. The oil boom era in the region was short-lived, however, shuddering to a stop in 1980. The downward spiral of oil prices forced Four Corners Drilling to sharply reduce its drilling activities. The company's fleet was sold as a consequence, but Risley convinced the company to keep one plane, a five-seat Piper, so he could try to establish a shuttle airline service between Farmington and Albuquerque.

With this one small plane, Risley established the foundation from which Mesa Airlines evolved. He advertised on local radio, placed signs along the roads surrounding Four Corners Regional Airport, and, perhaps most importantly, charged half the ticket price of his rival, Frontier Airlines Inc. After two years, during which both Risley and his wife had worked seven days a week maintaining and operating the shuttle service, the couple decided to purchase the plane, offering their pickup truck and house as collateral against a $125,000 loan. The following year, 1983, their fledgling enterprise was incorporated as Mesa Air Shuttle, Inc.

From the beginning Risley's operating philosophy was to fly only small planes between cities and towns in need of additional airline service and to pay close attention to the company's operating costs. Those costs largely resulted from aircraft maintenance, a task for which Risley was particularly well suited. Keeping costs low also carried over into other areas, such as having the pilots of the shuttle service assist in loading passengers' baggage, reducing the number of gate crew at arrival and destination points, and keeping the number of reservation agents to a minimum. Risley's strategy was to have a comparatively small workforce operating small planes that flew their routes with greater frequency, initially five times a day between Farmington and Albuquerque, than the company's competitors. If all reservation agents were busy booking flights, the incoming calls were directed to other Mesa employees. If the entire staff was busy handling reservations, as they often were during Mesa's first decade of operation, Risley himself would answer the phone and book a passenger's flight.

Acquisitions: 1980s

Very early then, the characteristics that would set Risley's company apart from other regional/commuter airline companies were established, and the shuttle service prospered. From the single, five-seat Piper, the company's fleet gradually grew, with each new plane and each new service route enabling the company to generate greater revenues. With the exception of a small loss in 1984, Mesa recorded a profit throughout the 1980s and reached a financial level that enabled it to begin acquiring other companies, thus broadening its presence in the southwestern United States.

A majority of Mesa's acquisitions in its first decade were not outright purchases of other airline companies, but instead were code-sharing agreements reached with major airline companies, a necessary arrangement for a small airline company following the deregulation of the airline industry in 1978. A code-sharing agreement is a franchise that enables smaller airlines to benefit from the air traffic attracted by larger carriers without incurring their enormous marketing expenses, by operating a shared service on certain routes or reselling seats on another operator's aircraft.

In the mid- and late 1980s, Mesa signed two such agreements, first with Midwest Express, then with United Airlines, and additional agreements followed. Generating nearly $5 million in sales in 1985, Mesa embarked on a five-year period of prodigious growth, elevating itself to the top ranks of regional/commuter airlines in the United States. In 1986 it forced a much larger airline company, Air Midwest, out of the New Mexico region. The following year the company changed its name to Mesa Airlines, Inc., went public, and increased its sales volume to $14.3 million, a nearly 200 percent increase from two years earlier.

That year, 1987, proved to be a busy one for Risley's company and not without its disappointments. Mesa acquired the assets and the Denver, Colorado-based route system of Centennial Airlines, a purchase that resulted in a $250,000 loss for Mesa. The decision to acquire Centennial's service routes emanating from Denver and thereby compete against much larger, more entrenched air carriers represented a step away from Risley's initial corporate strategy to only enter markets suffering from a dearth of established air carriers. Operating as an independent in a market occupied by airline companies possessing much larger financial resources, Mesa found that its approach of offering low air fares and more frequent service was not enough to unseat the larger air carriers.

Despite this setback, Mesa continued to expand. By 1989, the airline's annual sales had reached $22.5 million, more than four times the revenues recorded four years earlier, and the mainstream press began to take notice. A year earlier Inc. magazine had named Mesa as one of the country's fastest-growing small public companies. In 1989 Mesa formed Skyway Airlines as a wholly owned subsidiary to fly in conjunction with Midwest Express Airlines out of Milwaukee, Wisconsin, extending Mesa's reach northward. In the same year, the company became the only commuter airline in the world authorized by Pratt & Whitney, an aircraft engine manufacturer, to perform complete overhauls of the PT6, the primary type of engine used by Mesa's planes. Mesa's construction of a $1 million engine shop illustrated Risley's focus on reducing aircraft maintenance costs. Within a year, the costs incurred from building the engine shop were recouped, positioning Mesa as one of the few vertically integrated commuter airlines in the world.

Mesa Airlines quadrupled in size between 1985 and 1990, and doubled in size in roughly the five months preceding the company's tenth anniversary in October 1990 by acquiring Aspen Airways' United Express franchise at United's Denver hub. Risley could look back on a decade of enormous success. By letting each market dictate the size of the particular aircraft serving that market, Mesa had perennially recorded one of the lowest seat-per-mile costs in the industry and could efficiently operate its 33 planes. Mesa planes by this time serviced a considerable portion of the United States: its Skyway planes serviced Iowa, Wisconsin, Illinois, Indiana, Michigan, and New York; its United Express code-sharing agreement took Mesa planes throughout Colorado, Wyoming, Nebraska, and South Dakota; and its original route system, evolving from the company's Farmington-to-Albuquerque flight, now covered New Mexico, Arizona, Texas, and Colorado. All this was enough to make Mesa one of the ten largest commuter/regional airlines in the nation. The airline's greatest growth, however, was still to come at the hands of Jonathan Ornstein, an airline financier who joined the company during its tenth year of operation. Ornstein had originally approached Risley to inquire about purchasing Mesa, an offer Risley declined, but the meeting eventually led to Ornstein's employment by the company. Once Ornstein arrived, he began prodding Risley to pursue purchases of additional airline-related assets and to increase Mesa's influence in the commuter/regional airline industry, aggressively following a course Risley had previously pursued with moderation.

One year after Ornstein's arrival, Mesa acquired Air Midwest, Inc., an airline that operated under a code-sharing agreement with USAir Inc. The purchase extended Mesa's presence into Missouri by virtue of USAir's base operations in Kansas City and signaled the beginning of an era in which Ornstein and his desire to increase Mesa's magnitude would figure prominently. Later that year, in 1991, Mesa formed a new subsidiary, FloridaGulf Airlines, spreading the company's influence into the southeastern United States. By the conclusion of 1991, a disastrous year for many air carriers, particularly for Eastern, Pan-Am, and Midway Airlines, each of which ceased operation, Mesa continued to exhibit robust performance. The company posted a 39 percent increase in earnings from 1990, a 69 percent increase in revenues to $78 million, and a 50 percent increase in passengers from the previous year.

These positive results were dwarfed by what was to follow. In May 1992, Mesa announced the completion of a merger combining Mesa Acquisition Corp., a wholly owned subsidiary of Mesa, with WestAir Holding Inc., California's largest regional airline. For Mesa the acquisition was enormous, doubling its size and making it the largest regional/commuter airline in the United States. WestAir Holding was organized as a wholly owned subsidiary after the merger and continued to operate under its code-sharing agreement with United Airlines as United Express, based in Fresno, California.

New Challenges in the 1990s

As Mesa entered the mid-1990s, it continued to look for additional acquisitions, guided by both Risley and Ornstein. In 1994, a year in which the company expected to post $354 million in sales, Risley was contemplating the purchase of CCAir Inc., a commuter airline based in Charlotte, North Carolina, for $32 million, as well as other, smaller, acquisitions, such as a $3 million acquisition of SunAir, an airline serving the Virgin Islands and Puerto Rico, and a 24 percent share in a small commuter carrier based in Britain. As the company continued to expand, succeeding where other airlines had failed, it gained the attention of investors and competitors alike, becoming, for some, the prototype of a regional/commuter airline for the future. Air Transport World named it Regional/Commuter Airline of the Year in 1993.

Mesa's corporate holdings were renamed Mesa Air Group in December 1994. However big and powerful it was becoming, Mesa was also developing a reputation for delayed flights and overbooking, particularly at Denver International Airport. The FAA investigated this and allegations of poor maintenance, ultimately fining the carrier and recommending that several of the carrier's operations be merged. In essence, the FAA felt the carrier's operations had not kept pace with its furious growth.

As sales approached the half-billion dollar mark in 1996, Mesa's growth propelled the airline to order 16 Canadair Regional Jets (CRJs) worth $20 million apiece. It sent ten of them to Fort Worth's Meacham International Airport, which had no scheduled passenger service at the time, although American Airlines operated a huge hub at nearby Dallas-Fort Worth International. However, regulations limited Mesa to flights within Texas, traffic did not meet projections, and this operation folded within a year.

An even more devastating setback came when United Airlines replaced Mesa with SkyWest for its West Coast regional feeder services. The loss was severe, as Mesa had garnered 47 percent of its sales from United. Mesa lost $45 million on sales of $423 million in 1998, down from $510 million in 1997, and employment was cut nearly in half.

Risley announced his retirement against this dismal backdrop in early 1998. Ornstein, who had left the company to become CEO of Virgin Express, had led a group of investors that acquired 6.6 percent of Mesa shares and won two board seats. He became CEO of Mesa Air Group himself in May 1998 and set out to reverse the carrier's decline, cutting unprofitable routes, refining Mesa's pricing formula, and disposing of excess aircraft. He also fired 17 of his executives, retaining just one.

Mesa's next largest partner after United was US Airways, which was scrambling to keep up with competitors offering jet service on feeder routes. Although other carriers, Chautauqua and CCAir, also partnered with US Airways on the East Coast, Mesa was the only one operating regional jets at the time. Ornstein planned to expand the US Airways Express operations still further. Mesa Air Group bought CCAir Inc., another US Airways Express partner headquartered in Charlotte, North Carolina, for about $53 million worth of stock. By 1999, Ornstein had succeeded in directing the carrier back toward profitability as he had previously done during a brief tenure at Continental Express. It did not hurt that Bombardier paid Mesa $9 million to settle claims related to aircraft financing and trade-in options. Mesa operated 30 Canadair Regional Jets and 22 de Havilland Dash 8 turboprops at the time, making it one of Bombardier's largest customers.

The company relocated its headquarters to Phoenix from Farmington, New Mexico, in late 1998, and soon afterward, a new corporate logo was unveiled that featured a red sun, which represented a new sun rising for Mesa. As Forbes reported, Ornstein's first career as a stockbroker ended with him being fined and suspended for lying to clients. In his career as an airline executive, however, restored profits and on-time performance of better than 90 percent gave him credibility among Mesa's passengers, shareholders, and employees.

Growing in 1999 and Beyond

A turnaround was in evidence by 1999; however, the company posted a loss for the year due to an accounting charge related to retirement of turboprop aircraft. It was replacing them in part due to expensive new federally mandated training requirements for 19-seat aircraft such as the 1900D that made up most of Mesa's turboprop fleet (it also flew the larger Dash-8). At the same time, major airlines were shifting more of their routes from large airliners to less expensive regional jets operated by their feeder partners. Mesa finally bought Charlotte's CCAir in 1999.

Mesa Air was able to post a profit ($59 million) in 2000 after three years of losses. Revenues were $472 million. The airline was operating a thousand flights a day and its network connected 120 destinations in 38 U.S. states, Canada, and Mexico. It ended the fiscal year with 134 aircraft in its fleet; it had worked out an arrangement to return up to 31 of the 1900D turboprops to their manufacturer, Raytheon Aircraft. At the same time, it was buying more regional jets, adding ones from Embraer of Brazil to its existing Canadian-made CRJs.

Risley retired as Mesa's chairman in 2000. He then ran a small charter operator, Austin Express, for a time and passed away in September 2004 at the age of 59. Mesa announced plans to add the initials "Lima Romeo" to the fleet's tail numbers in honor of Risley.

The company announced plans to double its business with America West Airlines in 2001. By this time, a majority of its contracts with major airlines virtually guaranteed a profit on each flight regardless of fuel costs. Following the expanded America West deal, Mesa formed a new non-unionized subsidiary called Freedom Air.

Mesa stopped doing its own engine maintenance in 2002, selling off its Desert Turbine unit to Pratt & Whitney Canada, Inc. The airline lost about $60 million in 2001 and 2002. Mesa won wage concessions from employees in the difficult aviation environment after the September 11, 2001 terrorist attacks, and there were some temporary layoffs.

In 2003 Mesa was able to rekindle its relationship with United Airlines, whose partner in the Denver area, Air Wisconsin, was retiring its turboprops. Mesa picked up service to medium-sized Colorado cities using ten of its Dash-8s.

The carrier was growing organically and was making bids to buy out others in 2003 and 2004. Looking east, it paid $9 million for assets of bankrupt Midway Airlines while simultaneously attempting a $500 million hostile takeover of Atlantic Coast Airlines (ACA), a United Express carrier on the East Coast.

ACA succeeded in remaining independent, dropping its United Express and Delta Connection feeder contracts and renaming itself Independence Air. However, it failed to take off as a low-cost carrier, and was bankrupt by the end of 2005.

Mesa's Freedom Airlines unit replaced ACA as a Delta Connection carrier in March 2005. Two of Mesa's other partner airlines, America West and US Airways, were merging following US Airways' restructuring. In addition, Mesa's final major airline partner, United Airways, was shifting more volume to Mesa's regional jets as it exited Chapter 11.

While its rivals and partner airlines alike were flying through bankruptcy, Mesa was winging its way to record earnings. Revenues rose from $523 million to $897 million in 2004; the company was profitable again, posting income of about $25 million a year. Net income was a record $57 million in 2005, while operating revenues of $1.1 billion technically made Mesa a major airline. More than 13 million people flew Mesa a year, and the carrier was looking to set establish a regional jet service in the Hawaiian Islands in 2006.

Principal Subsidiaries

Mesa Airlines, Inc.; Air Midwest, Inc.; Freedom Airlines, Inc.; MPD, Inc.; Regional Aircraft Services, Inc.; MAGI Insurance, Ltd. (Barbados); Ritz Hotel Management Corp; Mesa Air Group--Aircraft Inventory Management, LLC.

Principal Competitors

Continental Airlines, Inc.; Frontier Airlines, Inc.; MAIR Holdings, Inc.; SkyWest, Inc.; Southwest Airlines Co.

Chronology

• Key Dates
• 1982 Mesa Shuttle begins flying between Farmington and Albuquerque, New Mexico.
• 1985 Company begins a five-year growth spurt that will quadruple its size.
• 1987 Company goes public as Mesa Airlines, Inc.
• 1988 Inc. magazine names Mesa one of the fastest-growing small companies in the United States.
• 1992 Acquisition of WestAir doubles Mesa's size.
• 1994 Mesa Air Group holding company is formed.
• 1997 United Airlines dumps Mesa, instantly cutting revenues 40 percent.
• 1998 Jonathan Ornstein succeeds founder Larry Risley as CEO; relocates headquarters to Phoenix.
• 1999 Mesa buys Charlotte's CCAir Inc.
• 2003 Mesa begins flying turboprops for United Express again.
• 2005 Mesa joins Delta Connection, posts revenues of more than $1 billion.