I sent the following letter to the U.S. Trustee today for receipt Wednesday morning.
July 27, 2010
Tracy Hope Davis
Acting United States Trustee
33 Whitehall Street, 21st Floor
New York, NY 10004
Attention: Andrea B. Schwartz, Trial Attorney
Re: Mesa Air Group, Inc., et al., Case No. 10-10018 (MG) (Jointly Administered)
Request for Appointment of An Equity Committee
Dear Ms. Hope Davis:
The purpose of this letter is to explain how events of the past week demonstrate the critical need to establish an Equity Committee in connection with the reference case.
Friday, July 23, 2010, the Monthly Operating Report for the one month period ending June 30, 2010 was posted on the docket. Operating income increased rather dramatically from an average of $1,032,000 over the previous four months, to $13,695,000 during June. However, income before discontinued operations for June was a stated loss of $275,336,000, primarily due to recognition of a loss on rejection of aircraft leases of $446,630,000, plus the effect of an income tax benefit.
During the past week several major airlines have reported operating results for the second quarter of 2010. Overwhelmingly, the reports show sharply rising revenue, load factors, and profits. But during this same period of time, Mesa Air Group, Inc and its affiliated debtor entities (collectively, the “Debtors”) have released information showing that the Debtors have been completely unable to take advantage of the improving market conditions. This fact alone brings into question whether the Debtors are taking prudent steps to protect the interests of stockholders.
The estimated loss on rejection of aircraft leases is believed related to 56 aircraft what have either been rejected or abandoned, and is equal to almost $8 million per unit. It's important to determine if this estimate is reasonable under current circumstances of improving market conditions.
The undersigned contacted an aircraft leasing company by phone on Monday, July 26, 2010 to gain additional information on the costs associated with unilateral termination of aircraft leases. There is a multitude of alternative methods for dealing with unneeded, leased aircraft, including sale, sublease, and return to the lessor. Making matters even more complicated, the cost of each can vary widely depending on the details of the transaction.
The leasing company had access to information regarding the aircraft which the Debtors have on lease. With this information, it was possible to determine that the estimated lease cancellation costs were approximately equal to the wholesale value of the aircraft, and unreasonably high. The leasing company also revealed that it had been contacted four months ago by an agent of the Debtors regarding purchase of the aircraft, but was not interested at that time. However, the market for these aircraft has improved so much in the four months that they may now be interested in a purchase. Further, the leasing company stated that they have the financial resources to immediately purchase all the aircraft involved.
With the many alternatives for dealing with excess aircraft, management's decisions can result in costs that are several times a minimum achievable cost. For instance, if the Debtors were willing to sublease the aircraft, many fees would be avoided and they could capitalize on the improving marketconditions. Most aircraft leases allow subleasing, and such a provision could be negotiated into those few that don't. But if management was to decide not to consider that option, it may eliminate the least expensive alternative. If management believed that relationships with the lessors was important going forward, they may be inclined to agree to termination terms that a third party may feel unjustly enriches the lessors.
The quality of information given in this letter would probably be further improved had it not been that the Debtors have thus far been able to seal documents related to renegotiation of leases on aircraft that the Debtors wish to retain. On June 30, 2010, Diana G Adams, the then current US Trustee, filed an objection with the court objecting to filing under seal information concerning aircraft lease agreements. Successful repeal of the court's decision to seal the lease documents would shed much needed light on this matter.
It has become especially important to open the documents relating to renegotiated leases. It's hoped that the lessors have not provided favorable renegotiated lease rates in consideration of very lucrative termination payments on other agreements. Such a situation would effectively amount to a cost against existing equity holders in exchange for a reduction in operating costs after emergence from bankruptcy. Unfortunately, the cost may be sufficiently great to wipe out existing stockholders, so that none are around to reap the benefits their money has been used to purchase.
The undersigned continues to his effort to have established an Equity committee because he believes that the Debtors can satisfy all obligations to creditors, retain all existing equity holders, reduce the number of employee terminated, and lay the foundation for a stronger company going forward. This might be accomplished by keeping most if not all of the aircraft being considered for return to lessors, and finding other means by which the aircraft can be used and useful.
Thank you for your time and consideration.
Very truly yours,
