May
24
A new chapter for Mesa?
Filed Under Sunrise on KGMB9 | 1 Comment
The Securities & Exchange Commission requires publicly-traded companies to notify them — and, thereby, the public — whenever something happens that might materially affect the company. So Mesa Air Group this week felt obliged to file a notice to the SEC that it might have to file for Chapter 11 next week, depending on the outcome of a certain court hearing.
This has nothing to do with the $52 million Mesa paid to settle its differences with Hawaiian Airlines, or the pending suit by the corporate ruins of Aloha Airlines, which seeks to blame Mesa for the fact that Aloha Airlines doesn’t have an airline any more. No, this is a contract dispute between Mesa and Delta Air Lines. But ripples from their rift could reach our shores.
Mesa owns the go! interisland service and also flies a scant few routes under its own imprimatur on the mainland. But mostly Mesa makes its living flying regional service for major U.S. airlines under other brand names. Mesa flies most United Express flights, for example. And it has two separate regional contracts with Delta Air Lines, one of which, accounting for 20% of Mesa’s entire revenue base, Delta wants to cancel.
If I read it right, the two sides do not dispute the fact that a number of flights were canceled, and Delta says the number is greater than acceptable, putting Mesa in breach of contract. Mesa says Delta is trying to redefine terms in the contract retroactively and has gone to court to prevent the cancellation. But Mesa’s own pilots say half the pilot work force has turned over in a year and Mesa sometimes cancels flights because it hasn’t got enough pilots to drive the planes.
In its SEC filing, Mesa said the loss of 20% of its revenue, millions a month, would trigger a domino effect of debt service defaults and force it into bankruptcy. It would also be stuck with 34 planes it would have trouble redeploying at a time when airlines are parking planes to save fuel.
Ordinarily, Chapter 11 wouldn’t be a bad thing for Mesa or go!, since bankruptcy judges can compel vendors to keep supplying the company. Stories abound of companies hobbled by chronic supply shortages until they’re driven into receivership and suddenly can operate normally again.
But we have seen how it can be otherwise. Aloha suddenly lost its lavish funding by investors, and its debtor-in-possession lender, which had its own problems due to the credit crisis on the mainland, imposed more conditions than usual, driving Aloha to shutdown. ATA Airlines suddenly lost its biggest contract, flying charters for the Air Force, and that was the end of ATA.
Mesa’s situation is not precisely comparable. It relies heavily on a few contracts but no single one of them is as vital as that Air Force deal was to ATA. Mesa has more cash than Aloha did. It also has the advantage of being a collection of airlines rather than a unified whole, so if it really gets into a jam it could shed a whole operation without affecting the rest of the company much. I doubt if it would shut down go! but it might sell it, if it could find someone who wanted it in this environment.
Then there is the matter of what is to become of Jonathan Ornstein. Mesa is very much a CEO-driven company. Mesa couldn’t be more driven by one personality if it sold popcorn and its CEO were named Orville. Can he survive a bankruptcy?
When Hawaiian Airlines entered its last Chapter 11, its majority shareholder and CEO, John Adams, found himself ejected from management at the behest of the the creditors. Bankruptcy judges have got that kind of authority.
May
24
Jennifer wrote to ask if there was something more to the mortgage default crisis than the mortgage defaults. Her premise was that subprime mortgages didn’t seem to be a big enough part of the total mortgage universe to have set off so much trouble.
While she was about it, she also mentioned having heard some fellow accusing OPEC of precipitating the oil price surge to create recession deals and acquire a bunch of valuable American assets. What about that, she wanted to know.
Occam’s Razor teaches, “When you hear hoofbeats, don’t think zebras.” In other words, if there is an obvious explanation for something, there is no need to search for a less obvious one. This isn’t always true, but it usually is. And in this case it applies.
Subprime mortgages may not be a big part of the total mortgage universe but they are a huge part of defaults. The crisis, in which investors suddenly lost all interest in buying mortgage-backed securities, was caused by loss of confidence, and unlike the actual defaults the loss of confidence extended to the entire universe of mortgage-based investments.
As for OPEC, two points ought to be made. The first is that OPEC doesn’t control a majority of the world’s oil. It hasn’t done so for years. It cannot by itself manipulate the market (and, incidentally, despite administration requests for Saudi Arabia to pump more, it cannot much affect the situation for the good by introducing more product, either).
The second point is that no hypothetical evil party needs to precipitate an economic downturn in order to snap up valuable properties and companies. All it has to do is wait for the next trolley. The global economy is too complicated for anyone, including the U.S. government, or even the allied governments acting in concert, to manipulate; and if anyone with global holdings did manage to do it, the potential for acquisition deals would be far outweighed by the risk of unintended consequences for the holdings one already has.
I’ve been seeing this a lot lately, this attraction to theories in which current events do not evolve organically but are brought about by design.
Some former Aloha Airlines pilots, for example, are utterly convinced that their creaky, gas guzzling jets would still be flying were it not for the company’s evil, venal management. Aloha management, aided by investors who had more money than sense, kept the airline going for about a year longer than it had any right to last, given current economic conditions and predatory pricing by a competitor. In the process they brought Aloha’s performance to the forefront of the industry. The rank-and-file deserve credit for this, too, but when mostly the same rank-and-file worked for the previous management, performance wasn’t as good, so it seems churlish to pretend that Aloha would be fine today if it hadn’t for those jerks in the executive suite.
In a previous radio halflife, working in management myself at a company that was financially troubled, I recall well how employees who prided themselves on their skepticism nevertheless repeatedly embraced fanciful theories about what was “really” going on in the company when the actual situation was plain for anyone to see.
If these theories aren’t supported by the facts, why are we so quick to embrace them? I think it’s because we’re not comfortable with the idea that anything is completely out of our control. If everything is one person’s fault we can get them fired. If everything is one country’s fault, we can wage war against them. Just having a secure belief that we know what’s going on can be comforting.
By contrast, it is highly discomforting to realize that the economy has become so complicated that no person, country or other entity can control it. Yet this is the case.
I think the popularity of James Bond movies and the original “Mission: Impossible” television series and the current forensic science shows stems directly from the fact that, after a hard day at the office with all kinds of things falling through the cracks and some team members perhaps not pulling their weight, you can watch another team in another place execute the most complicated plans, always equipped with the finest gear, so skilled and working together so well that when thrown a curve they can improvise and get back on plan.
We need this. We need it so badly we even prefer our enemies brilliant.
May
22
When the final chalk line is drawn around the airline industry, David Caruso will turn around slowly, remove his sunglasses, and say, “We are looking for a punk investment broker.”
“YEEAAAAAAAAAOOOOOOOH!”
I suggest to you that wingtips clipped the airlines’ wings.
Wall Street turks in search of ever-larger profit returns created demand for mortgage-based investments which in turn led to promiscuous mortgage lending to people who had no business getting a home loan.
When the mortgage-backed securities bubble burst and stocks took a dive, turks in search of ever-larger profit returns took money out of stock and put it into commodities futures, like oil. Rising oil prices lured them to these contracts, and then their own demand for these contracts led to even faster-rising oil prices.
Efforts by the Fed to solve the mortgage default credit crisis by pouring billions of dollars into the global economy, meanwhile, led to a weaker dollar, which in turn made dollar-denominated securities cheaper for people who keep their wealth in other brands of money, like euros or yen. Oil, of course, is a dollar-denominated commodity.
Result: crude oil topping $130 a barrel, jet fuel that has doubled in price in the past 12 months, and airlines taking steps that will clearly damage them, yet which they cannot avoid, like pulling out of routes that would be profitable if oil cost $80 a barrel, and charging $15 for the first checked bag, as American announced Wednesday it will now do.
In the business and entrepreneurial community it has long been an article of faith that it’s good for everyone in society if some people are allowed to become rich. The idea is that it is useful to incentivize people to work hard to achieve wealth, and that when they do they will spend the money in a variety of useful ways, investing in start-ups, giving money to charity, buying more sandwiches, whatever. The point is that you benefit from other people getting rich even if you don’t get rich yourself.
What we have learned in the past year is that is ain’t necessarily so. Until about a year ago the world had all kinds of wealth that could have been used to endow nonprofits, contribute to economic activity through spending, or invest in companies. Instead it got diverted into wheel-spinning middleman activities — buying and selling securities and futures contracts — that don’t benefit most of society at all. All this wealth, misspent, very nearly wrecked the economy. It is certainly wrecking the airlines.
This verges on a sermon, but I haven’t actually said that wealthy investors should avoid high-return investments out of high-mindedness. No such worthy incentive is required. One may avoid flipping futures to make a quick profit for the simple reason that it’s a whole lot riskier than was previously realized. Is this not clear now?
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