(Excerpted from a national ratings firm's report dated July 21, 2008)

The future for regional carrier Mesa Air Group looks bleak, as the ill effects of both contract restructuring and a potentially devastating lawsuit mount.


.... Mesa has many troubles looming. First, the firm recently escaped an attempt by Delta to terminate its contract (16% of total revenue) because of poor performance. Second, US Airways has been reducing Mesa's capacity with no guarantee for a contract renewal. Even if US Airways renews the contract early next decade, we suspect it will come at substantially lower contractual reimbursement rates. Last, the firm is amid a second lawsuit for unscrupulous activity relating to its Hawaiian go! operations. If the firm has to post bond at the conclusion of the Aloha case for an amount similar to the $90 million it had to post as a result of its dispute with Hawaiian Holdingsit may have serious trouble continuing as a going concern.

We've reduced our fair value estimate to $0.40 per share from $0.50, after increasing the probability of financial distress. We believe the continued economic softening will further strain Mesa's already weak financial position. We estimate (after stripping out marketable security sales) the firm burned through roughly $48 million in cash during the first half of the year.

We further estimate Mesa has roughly $104 million in unrestricted cash. By any standards, this is inadequate to satisfy its $149 million in debt payments maturing during the year. Although Mesa is trying to sell its Air Midwest operations (book value $31 million), we question if a buyer of such unattractive assets exists. Moreover, if Delta is victorious in its appeal, the costs incurred could be fatal for Mesa. Although Mesa already received shareholder approval to issue more equity, we believe this will only provide a temporary solution. Even if the firm escapes its financial turmoil, we don't suspect a bright future. .....(continued next post)