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Virgin (VIR,VOZ,etc.etc) interested in Atlantic Coast

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Old October 14th, 2003, 02:56 AM
A Guy Called Tyketto
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Default Virgin (VIR,VOZ,etc.etc) interested in Atlantic Coast

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Atlantic Coast Shares Go Up as Sales Talk Goes On
Mesa Air Group Offered to Buy Regional Airline, and Virgin Atlantic May
Also Be Interested

By Keith L. Alexander and Amy Joyce
Washington Post Staff Writers
Wednesday, October 8, 2003; Page E01

Shares of Dulles-based Atlantic Coast Airlines Holdings Inc. continued
to climb yesterday as investors anticipated the airline would be sold,
whether to Mesa Air Group Inc. or some other acquirer.

"The market thinks the company is in play and somebody else may come
along and force Mesa to up its bid," said Benchmark Co. airline analyst
Helane Becker.

On Monday, Phoenix-based Mesa offered $512 million in stock for
Atlantic Coast, which dominates Terminal A at Dulles International
Airport, in a deal that would create the nation's largest regional
airline company. Based on Mesa and Atlantic Coast's closing stock
prices Friday, the offer was about $11.30 a share, a 25 percent premium
from Friday's price. Shares of Atlantic Coast climbed 83 cents
yesterday to $11.88, up 7.5 percent. Shares of Mesa closed at $12.25,
up 69 cents or nearly 6 percent.

Meanwhile, industry sources said billionaire Richard Branson, founder
of London's Virgin Atlantic Airways, has shown interest in investing in
Atlantic Coast and helping the airline maintain its independence.

Branson has long suggested that he wants to start a low-cost airline in
the United States. This summer Atlantic Coast, which has 142 planes and
serves 84 destinations, said it planned to sever its 14-year
relationship as a United Airlines regional carrier and transform itself
into an independent low-fare carrier by late spring.

Because of U.S. foreign ownership rules, Virgin would not be able to
own more than 25 percent of the voting control of Atlantic Coast or 49
percent of its equity. A relationship between Atlantic Coast and Virgin
would make the local airline the nation's only low-fare operation with
an international tie.

A spokeswoman for Virgin Atlantic said the airline was not interested
but declined to comment on whether Virgin USA, a U.S. unit created to
explore the start-up of a low-cost carrier, might be.

In a conference call with airline analysts and investors, Mesa chief
executive Jonathan G. Ornstein said that after several telephone
conversations with Atlantic Coast shareholders, he is increasingly
optimistic that they favor Mesa's bid.

Ornstein said that if Atlantic Coast's management decides to fight the
bid, Mesa is prepared to take its proposal directly to shareholders for
a vote. "It's the least attractive option, but it is one we would
pursue," he said.

Atlantic Coast spokesman Rick DeLisi declined to comment on whether the
airline had received bids from other carriers or investors. Instead,
DeLisi said that Mesa's bid was "under active" consideration by its
board and that the airline was continuing its normal operations as well
as its planning to become a low-fare airline.

If Virgin gets into a bidding war with Mesa, Ornstein would be
competing with his former employer. In 1996, Ornstein worked for
Branson when he developed Virgin Express, the low-cost European carrier
of Virgin Atlantic.

Ornstein acknowledged that Mesa's proposal could trigger a bidding war
for Atlantic Coast and eventually the consolidation of many of the
smaller, independent regional carriers.

Such a consolidation, Ornstein said, was "something that made a lot of
sense" and that Mesa would "like to be in the forefront of."

Leo Schefer, president of the Washington Airports Task Force, said that
Mesa's bid is a strong testament to Atlantic Coast's operations but
that he does not want Atlantic Coast to abandon its low-cost operation
strategy. Schefer said Atlantic Coast internally has dubbed its
low-cost airline "Goldilocks." "Not too big, not too small, but just
right," he said.

Both Mesa and Atlantic Coast operate regional airlines for United
Airlines under the United Express name and receive a set fee from
United for each flight they make. This business model has proved
lucrative for the regional carriers, insulating their bottom line from
sharp declines in airline travel of the past three years.

But Atlantic Coast decided to break away from United this summer after
the bankrupt airline sought to reduce the fees it was paying Atlantic
Coast. About 85 percent of Atlantic Coast's business is with United.

Ornstein said Mesa has no plans to downsize Atlantic Coast's operations
at Dulles International Airport. Instead, he said, the airline could
serve as the base for Mesa's East Coast unit. Ornstein said that it
would "be very attractive" if Kerry B. Skeen, Atlantic Coast's chairman
and chief executive, opted to stay on and run the airline.

Ornstein said Mesa's long-term strategy is to become United's biggest
regional airline. Only 15 percent of the airline's revenue comes from
United, while nearly 50 percent comes from flights it operates for
Arlington-based US Airways out of Pittsburgh, Philadelphia and
Charlotte. With the addition of Atlantic Coast, Ornstein said, nearly
46 percent of its revenue would come from United and 26 percent from US

Because of Atlantic Coast's relationship with Delta Air Lines, Mesa
would also pick up about 10 percent of its revenue from Delta.

Increasing Mesa's reliance on United is the biggest risk involved in
the deal, considering United is in bankruptcy and isn't expected to
emerge until mid-2004, Ornstein said. But he said becoming a regional
operation for United is a sounder business plan than Atlantic Coast's
plan to become a low-cost carrier.

"It is our feeling that United is going to be a survivor and will come
out stronger out of bankruptcy," Ornstein said.

Ornstein said earnings of the combined airline could improve by 25
percent, largely through synergies in maintenance and supplier costs.
Annual revenue would be about $1.8 billion.

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