Mesa to pay $80M

A judge's ruling says go!'s parent company improperly used data from Hawaiian Air

Mesa Air Group, whose startup airline go! turned interisland travel upside down with airfares as low as $1, will have to pay a big price for entering the Hawaii market.

Federal Bankruptcy Judge Robert Faris ruled yesterday that Phoenix-based Mesa must pay Hawaiian Airlines $80 million for using confidential information Mesa obtained as a potential investor during Hawaiian's bankruptcy.

But Faris denied Hawaiian's request for an injunction that would have prevented go! from selling tickets for one year.

Mesa said it will appeal the decision to U.S. District Court, but is required to put up an $80 million letter of credit in the meantime.

Faris ruled that Mesa used the material it got from Hawaiian to gain a competitive advantage when it started up go!

Jonathan Ornstein, chairman and chief executive officer of Mesa, called the monetary award "exorbitant" and said Mesa "remains committed to the (Hawaii) market."

Mark Dunkerley, president and CEO of Hawaiian, hailed the ruling as "a triumph for fair competition and ethics over dishonesty and illegal behavior."

In addition to the $80 million in damages, Faris ruled that Mesa must pay Hawaiian interest of 3.97 percent per year plus attorneys' fees.

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Mesa Air Group, parent of interisland carrier go!, must pay Hawaiian Airlines $80 million for entering the Hawaii market using confidential information obtained as a potential investor during Hawaiian's bankruptcy, a federal bankruptcy judge ruled yesterday.

Mesa said it will appeal the decision, but it is required to put up an $80 million letter of credit while its appeals are pending.

Judge Robert Faris, who had taken the matter under advisement on Oct. 4 following an eight-day evidentiary hearing and trial, said Mesa breached a confidentiality agreement by failing to return to Hawaiian or destroy evaluation material on a timely basis, then used that material to gain a competitive advantage when entering the Hawaii market.

Faris also ruled that Mesa must pay Hawaiian interest of 3.97 percent per year as of the date of yesterday's ruling, as well as pay for attorney fees and return any confidential information still in Mesa's possession.

But Faris denied Hawaiian's request for an injunction that would have prevented go! from selling tickets for one year because he said the award of the monetary damages adequately redressed the harm suffered by Hawaiian. The court did not award damages for any injury Hawaiian may sustain in the future as a result of Mesa's misconduct. Hawaiian had sued Mesa for $173 million.

Hawaiian said it intends to study Faris' opinions and the law to determine what steps it can take to recover damages it could suffer in subsequent periods.

Faris also issued a written order on his earlier oral decision in which he ruled that Mesa Chief Financial Officer Peter Murnane -- albeit acting alone -- deliberately destroyed electronic evidence that Mesa had a duty to preserve, which made it more difficult and costly for Hawaiian to prove portions of its case.

Murnane, who has been on 90-day paid administrative leave, is expected by industry insiders to resign shortly in the wake of Faris' decision.

Mark Dunkerley, president and chief executive of Hawaiian, hailed the ruling as "a triumph for fair competition and ethics over dishonesty and illegal behavior."

"Nobody benefits when a company like Mesa misuses confidential information to gain an unfair competitive advantage, then lies about it and destroys evidence," he said.

Dunkerley took issue with Mesa's frequent mantra that its low-cost fares, which have dropped to as low as $1 one way, enable families and friends on neighboring islands to see each other again at affordable prices.

"Mesa pretends that they are in Hawaii to help the consumer," Dunkerley said. "As the evidence in this trial showed, the reality is that Mesa's intent was to drive local competition out of business and raise fares. We are pleased that the court laid out the facts for all to see."

Jonathan Ornstein, chairman and CEO of Mesa, called the monetary award "exorbitant" and said the company "remains committed to the (Hawaii) market."

"While we're extremely disappointed and think that the finding far outweighs any damages that they received, we are pleased that we're able to continue to sell tickets because we believe (preventing that) was their real goal," Ornstein said.

"I'm concerned that the judge put the interest of Hawaiian ahead of that of Hawaii and that with such an exorbitant number that he was effectively trying to penalize us and trying to create a de facto injunction, allowing the incumbent carriers to maintain a duopoly."

Analyst Nick Capuano, who covers Hawaiian for Los Angeles-based Imperial Capital LLC, said that the ruling taken at face value is worth about $1.70 a share for the company's earnings. Hawaiian, which reported yesterday that third-quarter earnings soared 152.3 percent to $19.6 million, ended last quarter with $215.3 million in cash and equivalents.

"It's obviously a huge win for Hawaiian," Capuano said. "No doubt it will be appealed, but to the extent it's upheld, it certainly weakens Mesa and it's good for Hawaiian."

Aviation industry consultant George Hamlin suggested that Mesa might want to cut a deal with Hawaiian to have go! exit the market in exchange for reducing the judgment.

"At this stage, it sounds like vindication for Hawaiian," said the Washington, D.C.-based Hamlin, who is managing director of Airline Capital Associates, an aviation consulting and aviation firm headquartered in New York City. "If go! does continue to operate in the market, it might be an opportune time to exit if it's losing money"

Mesa, which won't report its fiscal fourth-quarter earnings until sometime in November, had $209.9 million in cash and equivalents as of its last reporting period ended June 30.

Ornstein said Mesa "feels an obligation" to stay in the Hawaii market and that "fortunately or unfortunately," it has the money to pay for any amount it is assessed.

First, though, Mesa plans to appeal its case to the U.S. District Court, and, if unsuccessful there, to the Ninth Circuit Court of Appeals.

Faris' ruling encouraged Aloha Airlines, which has a separate lawsuit against Mesa pending in U.S. District Court alleging that Mesa used confidential information obtained as a potential investor in Aloha's own bankruptcy.

"Contrary to what Mesa has been saying, today the court confirmed what we have been saying all along: that Mesa's actions as a new entrant have been inconsistent with fair play," said David Banmiller, president and CEO of Aloha.

Aloha is scheduled to go to trial against Mesa in April.