Management Accounting

Cash-Poor Airlines Down, Almost Out

Two more, Mesa and Silverjet, project a bleak outlook.
Stephen TaubMay 23, 2008

Over the years, the airline business has rarely proved to be highly profitable — even when oil wasn’t going for $125 a barrel.

Joining a long list of competitors, Mesa Air Group and Silverjet both say they are in a cash crunch that could have major impacts on their operations.

In a regulatory filing, Mesa said that if Delta Air Lines terminates an agreement under which Mesa provides connecting flights to the larger carrier, cash flows from operations and available working capital would be insufficient to meet its cash requirements. That would result in a series of defaults, Mesa said.

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Mesa operates 34 leased regional jets using Delta’s name. In fiscal 2007, the arrangement accounted for about 20 percent of the company’s revenue. On April 7, Mesa filed a lawsuit against Delta, alleging breach of the arrangement. On May 9, the company filed a motion for a preliminary injunction to prevent Delta from terminating the deal. The hearing for this matter is scheduled for next week.

Mesa said if Delta terminates the agreement, it will be unable to redeploy the 34 aircraft in a timely manner and will lose $20 million per month in revenue, or about $960 million over the next four years. And the carrier estimated that leasing costs, labor, and other costs totaling about $250 million to $300 million over the next four years would be incurred.

Elsewhere, British carrier Silverjet says trading in its shares has been halted and that its working-capital reserves are limited. The airline adds that advances under a loan facility “are required as a matter of urgency.”

In addition, Silverjet says it has yet to receive the full drawdown of an initial $5 million payment it sought on May 2 under an agreement with Viceroy Holdings.

The rampaging price of oil is what is causing all the turmoil, of course. On Monday American Airlines took the drastic step of charging passengers $15 to check their first bag. It also announced major service cuts.