Northwest Owes Mesaba $28 Million

Mesaba Airlines has reason to feel a bit abused these days by Northwest Airlines.

On Wednesday, the regional carrier disclosed that Northwest -- for the second time -- chose not to pay it for services provided before Northwest's Sept. 14 bankruptcy filing. That brought to $28 million Northwest's lapsed payments to Mesaba.

In addition, Northwest wouldn't say Wednesday whether it will stick with its prior commitment to begin delivery of 15 Bombardier regional jets to Mesaba next month.

Last week, Eagan, Minn.-based Mesaba learned that Northwest plans to terminate leases on 35 69-seat jets it has provided to Mesaba.

Some industry observers expect Mesaba and Northwest will end their relationship and seek new partners. But Mesaba insists it wants to continue to provide regional flying services for Northwest.

"Absolutely," said Mesaba spokeswoman Elizabeth Costello. "We want to be part of the solution for Northwest when they emerge from bankruptcy."

Mesaba and Pinnacle Airlines, another regional carrier, ferry Northwest passengers from outlying cities to Northwest hubs. Mesaba serves about 100 small markets for Northwest.

Northwest, also based in Eagan, has indicated it will pay Mesaba for services provided while Northwest flies under bankruptcy protection.

Asked about its future relationship with Mesaba, Northwest referred to remarks made by CEO Doug Steenland on the day Northwest filed for bankruptcy.

"Both Mesaba (and Pinnacle)... will continue to be a part of our network," Steenland said, while noting there would be "discussions" about planes and other issues. "But the nature of these relationships and the service that they provide will remain for the foreseeable future unchanged."

Industry analysts, however, expect Northwest will squeeze its two regional carriers for more-favorable contracts, trying to force them to accept lower profit margins, just as Northwest will try to extract more favorable terms from aircraft leasing firms and other key suppliers.

Doug Abbey, a principal with the Velocity Group consulting firm, believes Northwest will do more than put a big squeeze on Mesaba. The Mesaba-Northwest relationship is terminal, he forecasts.

"I suspect that Northwest is shopping around for a replacement and Mesaba is shopping around, too," Abbey said. "History will reveal this has been a troubled relationship.... There is going to be a parting of the ways."

The relationship between Northwest and Mesaba is "fairly complicated," Abbey said.

Northwest owns about a quarter of the shares of Mesaba's parent company, MAIR Holdings. And while Northwest accounts for almost all of Mesaba's revenue, Mesaba flies more than 5 million passengers a year for Northwest.

"It's a symbiotic relationship," Abbey said. "But the superior party in the relationship most certainly is Northwest."

Northwest could partner with Mesa or Chautauqua airlines for regional air services, Abbey said.

He said the prospects are good for Mesaba to end up flying with another carrier, too. "It could be with a red tail, blue tail or green tail," he said, hinting there could be several possible big-carrier partners for Mesaba.

For now though, Mesaba, which relies on Northwest for more than 90 percent of its revenue, is bracing for hard times. The 35 jets that Northwest plans to take back by Dec. 20 accounted for about half of Mesaba's Northwest Airlink fleet.

Northwest leases planes to Mesaba and pays it to fly Northwest customers. Mesaba supplies the pilots, flight attendants and mechanics.

In past filings with the Securities and Exchange Commission, MAIR Holdings has warned that a Northwest bankruptcy could push Mesaba into bankruptcy, too.

With Northwest entering bankruptcy and failing to make payments to Mesaba, the service agreement between the two carriers seems to permit either one to end their business relationship.

Mesaba expects losses in the third and fourth quarters, it said Wednesday. The company is assessing its options, Mesaba President John Spanjers said in a Wednesday letter to employees.

"We are looking at a number of alternatives available to us and, unfortunately, Northwest's circumstances are forcing Mesaba to make difficult choices of our own," he wrote. "These choices will likely include layoffs."

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