Even when they're paying pilots so poorly they can't make a profit.NEW YORK (MarketWatch) -- Mesa Air Group Inc. looked destined for obscurity after declaring bankruptcy, reflecting the turmoil among regional carriers struggling to right themselves in a difficult business environment.
On Tuesday, Mesa Air filed for Chapter 11 protection from creditors in order to shed itself of excess aircraft under lease contract, a process it hopes will take just six months. The Phoenix-based carrier picked up the extra planes before the recession hit, when the big network carriers were contracting out their short, less-profitable routes to smaller operators. See full story.
Now, the big carriers are trying to dump those contracts or renegotiate them at far-lower prices. The recession has rolled back air travel among business people and vacationers, leading the airlines to focus on their more profitable long-haul routes and cut out the short hops to save cash.
Couple that with some recent high-profile crashes -- such as the one operated by Colgan Airlines, a unit of Pinnacle Airlines that left 50 people dead outside Buffalo in February -- and it's clear to see that relying on small regional carriers has become a less popular way to do business.
"The major airlines have been gradually working down their [profit] margins; pitting the regionals against each other to get a lower price, and now people are complaining about the quality of their pilots," said CreditSights bond analyst Roger King.
'The whole regional industry is in a vice right now with quality on one end and major carriers on the other.' Roger King, CreditSights
"So the whole regional industry is in a vice right now with quality on one end and major carriers on the other," he said.
Though none of the other regional carriers appears to be on the brink like Mesa Air, companies such as ExpressJet Holdings, Pinnacle and SkyWest Inc. have also been getting squeezed, analysts said.
And while legacy and budget carriers are expected to profit if an industry recovery plays out this year, regional airlines will likely see anemic growth. Among the big carriers, only UAL Corp.'s United Airlines has been increasing its regional flying, analysts said.
Bleak business backdrop
Indeed, while the legacy carriers were raising cash this fall through new debt issuances, all was quiet among the regionals, analysts said. And though partnering and code-sharing seems all the rage among big carriers, most regional airlines have been left out.
Some of the big airlines are even risking lawsuits to break existing contracts with the regional airlines, such as the one that Mesa filed against Delta Air Lines in which it is seeking damages in excess of $70 million.
In response, regional airlines have been trying to diversify and change tactics, but results have been poor, King said.
ExpressJet, for one, failed at trying to fly its own brand, while Mesa's joint-venture attempt in China turned out a disappointment. Flyi Inc.'s Independence Air tried a series of high-profile promotions, including partnering with the Washington Redskins football team, but couldn't overcome wider financial problems.
Only Republic Airways appears to be strengthening its business position successfully, though it remains early.
The Indianapolis-based carrier purchased Frontier Airways in August, expanding its Denver-based service, but also had to back out of the Hawaii market because of poor performance and demand.
In June, Republic had purchased Midwest Airlines.
But for now among the regional airlines, Mesa Air appears to be foundering the most seriously.
"Mesa is unique in the group because they are very small," said Gimme Credit bond analyst Vicki Bryan.
No one wants to extend credit to the carrier, which doesn't have enough cash, Bryan said. Nor does Mesa enjoy any cost advantage, and the carrier faces a lot of competition.
In sum, Bryan said: "They won't survive any airfare wars.
