Footnoted frequent flyer files for Chapter 11

Yesterday, Mesa Air Group (MESA) announced that it was filing for Chapter 11. Here’s a snip from a statement made by Chairman and CEO Jonathan Ornstein in yesterday’s press release:

“Over the past two years, we have worked closely with our lessors, creditors and other constituents to restructure our financial obligations. These efforts have led to the elimination of over $160 million of debt obligations, the return of a number of aircraft, and the restructuring of inventory management and engine overhaul agreements. We are nonetheless faced with an untenable financial situation resulting primarily from our continued lease obligations on aircraft excess to our current requirements.

While we haven’t paid attention to Mesa in awhile, it has been something of a frequent flyer here on footnoted, which is rarely a positive indicator. Almost six years ago we footnoted about the generous employment contracts, including hefty retention bonuses being paid to Ornstein and then President and COO Michael Lotz (he’s still president, but is now also listed as CFO). Then, in January 2005, we footnoted this unusual related party transaction. And then, in 2008, there was this footnote for $3,000 a month in something called “discretionary business investigation purposes” for Ornstein. At the end of 2007, my friend, Herb Greenberg, had Ornstein on his short list for worst CEO of the year.

So was this cause and effect? It’s obviously easy to say that now, since hindsight is always 20-20. Not to mention the fact that the airline business can be a challenging business model, especially these days. Still, since not every regional carrier has wound up filing for bankruptcy, you have to wonder if there was something about Mesa.

People often ask me how to spot smoking guns — stocks likely to blow up — and the answer is that it’s not quite that easy. More often, it’s a mosaic — different clues that you pick up along the way. In that way, it’s a lot like gathering intelligence or, perhaps, trying to detect cancer before it metastasizes. But one of the most consistent clues we’ve come across in six plus years of digging in are executives who seem very generous when it comes to paying themselves. Indeed, in a lot of ways, the situation at Mesa reminds me a lot of the situation at Source Interlink, which was also a frequent flyer and which also filed for bankruptcy last April.