Atlantic Coast Air gets an offer

Mesa's all-stock bid adds up to $512 million

Board considering proposal

Buyer would halt plan to launch a low-cost line

October 07, 2003|By NEW YORK TIMES NEWS SERVICE

The Mesa Air Group said yesterday that it was offering to buy Atlantic Coast Airlines for $512 million in stock in a deal that would form the largest regional airline in the country.

Mesa, which is based in Phoenix, said it would continue to fly to small and midsize cities for United Airlines and that it would halt Atlantic Coast's plans to create a low-cost airline.

Mesa sent a letter yesterday to Kerry B. Skeen, the chairman and chief executive of Atlantic Coast, offering 0.9 share of Mesa for each share of Atlantic Coast.

Shares of Mesa closed at $12.55 on Friday and fell 99 cents yesterday, to $11.56. Atlantic Coast closed at $9.02 a share on Friday and rose $2.03 yesterday to $11.05.

Atlantic Coast said in a statement that its board was considering the offer. "While it undertakes this review, ACA will continue with its current operations and with the implementation of its plans to operate as an independent airline," the company said.

Mesa said the merger would create a company with $1.8 billion in annual revenue, 9,000 workers and 297 planes.

Atlantic Coast said in late July that it was planning to end its agreement to run regional flights for United Airlines, a unit of the UAL Corp., and start its own low-cost carrier.

Shares of Atlantic Coast plummeted after that announcement, and analysts have been skeptical of the airline's chances of success in operating an independent carrier.

But Atlantic Coast has been reluctant to affirm a contract with United since UAL filed for bankruptcy protection in December and began using that leverage to renegotiate terms of its contracts with virtually all of its suppliers and partners.

About 80 percent of Atlantic Coast's revenue comes from United.

It also runs flights for Delta Air Lines under the name of Delta Express.

Mesa also operates regional flights for United, which is its second-largest customer after America West Airlines.

Atlantic Coast, based in Dulles, Va., runs flights mostly on the East Coast.

Mesa, which had $605 million in revenue for the year ended in September, operates in the West and Midwest. The two route structures complement each other.

For Mesa, the acquisition would give it an opportunity to quickly add planes to its fleet without having to find new aircraft financing, which is difficult to obtain these days.

Jonathan G. Ornstein, chairman and chief executive of Mesa, said in a phone interview that Mesa would not proceed with Atlantic Coast's plan to create a low-cost airline and instead reaffirm a contract with United.

"Both of these carriers have done very well in the past," Ornstein said. "The big issue here is the direction going forward."

"We think the company's best option going forward is to re-establish these relationships," he said, referring to Atlantic Coast's partnership with United.

Jeff Green, a United spokesman, said his company was still in talks with Atlantic Coast to work out new contract terms but that "there's no guarantee a deal will be reached with them." United has been working on contingency plans to continue regional service in the areas covered by Atlantic Coast should that deal fall through, Green added.

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