Mesa Airlines is winding down its flying for American Airlines and said that it is close to an agreement to fly those jets for United Airlines, sending shares of the regional airline sharply higher on Monday.
“We are excited to announce we have negotiated a wind down of our operations with American and are finalizing a new agreement with United which would transition all CRJ900s currently flying for American Eagle to United Express,” Mesa’s CEO Jonathan Ornstein told employees in a note over the weekend.
United declined to comment.
Mesa shares were up more than 11% on Monday morning after spelling out a five-year United agreement in a news release. Mesa said it would also sell 11 “surplus” CRJ900 planes to a third party to raise money and pay down debt.
Mesa also said it is looking at other ways to boost liquidity by selling additional planes, parts and engines.
Derek Kerr, American’s CFO and president of American’s regional brand American Eagle, told staff on Saturday that Mesa and American will end their flying agreement next year, citing American’s concerns about Mesa’s financial and operational problems which are tied to a rise in costs and the industry’s pilot shortage.
“As a result, we have concerns about Mesa’s ability to be a reliable partner for American going forward,” Kerr said in an employee memo. “American and Mesa agree the best way to address these concerns is to wind down our agreement.”
The final Mesa flight for American will be on Apr. 3, though American is slashing Mesa flights in March, Kerr said in his note.
Large carriers like American, United and Delta Air Lines routinely contract regional airlines to fly many shorter routes, accounting for roughly half of departures, though that varies by airline.
The heart of the problem stems from a shortage of pilots, which is most acute at regional carriers and has become more severe since travel demand snapped back after a pandemic travel slump. Mesa and other regional airlines have boosted wages to attract and retain pilots. American has also raised wages at its regional subsidiaries.
“This is 100% about pilots,” said Brett Snyder, founder of Cranky Flier travel website and a former airline manager.
Mesa’s Ornstein said the deal with United will allow its pilots a better shot at transitioning to the larger carrier and called out United’s massive new orders for new planes, including at least 100 Boeing 787 Dreamliners it announced last week.
The Air Line Pilots Association, which represents United pilots, said it will “carefully examine any changes to make sure they are compliant” with its contract. An ALPA representative for Mesa’s pilots didn’t immediately comment.
American declined to fund higher pilot rates for other regional partners, Mesa’s CEO told staff in the note, adding that it was penalized for not being able to meet pre-Covid contract obligations.
“These two actions were costing us approximately $5 million in losses per month,” Ornstein said.
American didn’t comment on Ornstein’s memo.
Mesa had a net loss of about $67 million in the nine months ended June 30, according to a securities filing. Last week, the airline postponed its quarterly earnings report.
Cowen airline analyst Helane Becker said the changes should help Mesa return to profitability by its next fiscal year.
“The American contract ends April 3, 2023, but Mesa appears to be losing money on the contract, so we don’t expect positive earnings before the June 2023 quarter at the earliest,” Becker cautioned.
As of Sept. 30, 2021, about 45% of Mesa’s revenue came from American and 52% from United, according to the company’s last annual filing, which was published a year ago. Mesa also flies for DHL.
American said its agreement with Mesa was mostly tied to its hubs at Dallas/Fort Worth International Airport and Phoenix Sky Harbor International Airport.
American plans to concentrate its flying with its wholly owned regional subsidiaries like Envoy and PSA, as well as an independent regional carrier SkyWest. Air Wisconsin will also fly for the American Eagle brand, starting its agreement earlier than originally planned, American’s Kerr said.
“The flying previously done by Mesa will be backfilled by these high-quality regional carriers as well as our mainline operation, ensuring we can continue to build and deliver the very best global network for our customers,” Kerr wrote.