Facing the loss of a $20 million-a-month contract with Delta Air Lines, the parent of go! airline warned investors yesterday of a potential bond default.

The news of further financial difficulties at Mesa Air Group comes eight days after Aloha Airlines ended its passenger service blaming, in part, a fare war brought on by Mesa.

In a filing with the Securities and Exchange Commission yesterday, Mesa said it is seeking shareholder approval to issue up to $37.8 million in new common stock to pay off its bondholders.

If Mesa is unable to obtain shareholder approval for the stock issue, the company said it could end up defaulting on the bonds.

"This could mean a bankruptcy filing if shareholders don't go along," said Scott Hamilton, a Washington state-based aviation industry consultant. "And if shareholders do go along, it does not remove the risk of a bankruptcy because of the dire language" in the filing.

Shares of Mesa closed at $1.32 on the Nasdaq market, up 9 cents. Since the June 2006 launch of interisland carrier go!, Mesa's stock has fallen by more than 85 percent.

The nearly $38 million Mesa wants to raise by selling new stock is more than the entire stock market value of the company and is more than a third of the $91 million in unrestricted cash and marketable securities on the airline's books.

STRUGGLING INDUSTRY

Mesa's filing come as the nation's airline industry has taken a beating in recent days.

ATA Airlines and Skybus Airlines closed their doors late last week and last Monday, Aloha Airlines shut down its passenger service and laid off 1,900 workers. Aloha cited higher jet fuel prices and the interisland fare war launched by go! as chief reasons for its failure.

A Mesa spokesman declined comment on a potential bankruptcy filing and declined to discuss any possible impact on its Hawai'i operations. The airline's general counsel Brian Gillman said the filing simply "preserves Mesa's option" on paying off its obligations.

Mesa had issued $100.1 million in convertible bonds in June 2003. The bonds are due in June 2023, but investors can force the company to buy them back this June, the company said in its SEC filing.

AIRLINES CLASH

Problems arose last week when Delta said it was canceling a $20 million-a-month contract with Mesa's Freedom Airlines subsidiary. According to Delta, Freedom had a weak performance.

On Monday, Mesa sued Delta in an effort to keep the contract.

The Delta lawsuit comes after Mesa was sued by Hawaiian Airlines for misusing thousands of pages of confidential business information to start go!

In October, a federal bankruptcy judge ordered Mesa to pay Hawaiian $80 million after he found that Mesa destroyed key evidence.

Mesa is appealing the decision.