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Big Sky Revisited


Big Sky may be pawn within airline's parent company

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Mar 24, 2008

The decision to kill Big Sky Airlines may not be based entirely on the airline's profits or losses.

The little company may be a pawn in a larger game by investors to claim the profits of Big Sky's parent company, Minneapolis-based MAIR Holdings Inc.

Some of the giant hedge funds buying stock in MAIR have no interest in running Big Sky, but want to sell off the airline and distribute MAIR's holdings, which could approach $150 million.

MAIR bought the Billings-based Big Sky in 2002. That same year, MAIR merged with Mesaba Airlines, which filed for bankruptcy three years later and now is owned by Northwest Airlines.

Expansion failure

A decision last year to expand Big Sky's territory to include East Coast routes out of Boston failed due to lack of customers, skyrocketing fuel prices and severe weather.

Today, Big Sky is MAIR's only operating company. When Big Sky, an airline that has been flying out of Billings for 30 years, is sold or liquidated, the dash will be distributed to investors and the Minneapolis holding company will go out of business.

Here's why that history matters to investors and the attempt by Big Sky employees to buy this airline and keep it flying in Montana.

Since buying Big Sky the publicly traded MAIR has reported losses of more than $22 million, losses that have declined after the East Coast expansion ended.

Buying Bill Sky

Employees led by the Montana pilots' union, Local 15 of the United Transportation Union, have formed Phoenix Acquisitions LLC and are attempting to raise enough money to buy Big Sky and keep flying the Montana routes. To succeed they also must win back from Great Lakes Aviation the federal Essential Air Service contract, which pays $8.5 million per year for flights throughout Eastern Montana.

Great Lakes was awarded the EAS subsidy in December, after Big Sky announced it would stop flying.

But this isn't just a story of a troubled airline.

There's enough money at MAIR to catch the interest of several hedge funds, including Schultze Asset Management, LLC, of New York.

Think of a distressed company as a fish with the mostly unregulated hedge funds as sharks.

When a troubled company is broken up, assets are freed up to pay investors who want quick profits.

Schultze started buying MAIR stock in early 2007, and a few months later the fund stated in a U.S. Securities and Exchange Commission filing that Big Sky shares are "substantially undervalued." Schultze then demanded that MAIR sell Big Sky Airlines and distribute the cash.

MAIR stock may be a bargain because the cash-burning losses from the airline's failed East Coast expansion have ended.

In January, Big Sky President Fred deLeeuw persuaded the U.S. Department of Transportation to move up by two months a $136,000 monthly increase in the company's EAS subsidy.

So the Montana contract now pays $8.5 million per year for two years and makes Big Sky profitable, according to deLeeuw.

And then there are the MAIR/Big Sky planes and cash.

Big Sky leases five Beachcraft 1900Ds and owns seven of the twin- engine turbo props.

The seven 19-seaters collectively are worth about $22 million.

MAIR also is sitting on nearly $34 million in cash, according to MAIR's Chief Executive Paul Foley, and will have $25 million cash in reserve after paying off its debts.

Also, when all the court battles are over, MAIR expects to receive a big settlement in the neighborhood of $100 million from Mesaba through its bankruptcy reorganization.

This money is tied up in the U.S. 8th Circuit Court of Appeals and won't be available until at least March 2009, Foley said.

Add these assets up and MAIR may have $150 million. Divide that total by the 15 million stock shares outstanding and MAIR's stock should be selling for around $10.

But the stock is trading at less than half that price, around $4.50. Apparently, that rich hidden value is what attracts Schultze and other hedge funds and is one major force pushing for the sale of Big Sky Airlines.

redorbit.com

Big Sky may be pawn within airline's parent company
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