Escaping bankruptcy is the biggest hurdle currently facing Mesa. Even if the firm is able to avoid financial distress, it still faces substantial uncertainties. Because Mesa receives monthly payment streams from its code-sharing partners, counterparty risk is a huge danger to Mesa's existence. With sky-high fuel prices and domestic passenger demand abating, there is no guarantee its code-sharing partners can survive outside of Chapter 11. Therefore, a financial collapse of its partners could be life-threatening for Mesa. Additional hazards include potential contract restructuring and costly legal battles.

..... Last fall, the firm fired its former CEO George Murnane III for deleting computer files that revealed that Mesa had garnered an unfair advantage against its interisland competitors in Hawaii. Although Murnane appeared to act in isolation, this dishonest act causes us to, at the very least, question the integrity of management. (airdog note: Mesa claimed Murnane was just deleting pornography and "accidently" deleted the files.)Furthermore, the most recent decision to continue Hawaiian service despite enormous losses might be the final blow for a firm nearing financial distress. These two reasons--the dishonest act and its continued Hawaiian service--provide the basis for the poor Stewardship Grade we assign to Mesa.

....During the last three years, Mesa's operating margins fell from 12.4% to a negative 5.7%, as the firm's Hawaiian operations continue to produce steep losses. As wage pressures intensify and industry cutbacks mount, we expect future profitability to suffer.

As a result of its capital expansion, Mesa boasts a debt/capital ratio of 0.93. To make matters worse, the firm recently paid roughly $52 million in a legal settlement to Hawaiian, leaving the firm what we believe to be an insufficient $104 million in unrestricted cash.