Private Jet, Military Sectors Help Stave Mercury Decline.

MERCURY Air Group Inc. is flying through the storm created by the Sept. 11 terrorist attacks and the overall national economic downturn. But the news isn't necessarily all bad for the company, which has four airline-affiliated businesses ranging from cargo to private jet operations.

Like many aviation-related businesses, the Sept. 11 terrorist attacks sent stocks to the floor. Shares of Los Angeles-based Mercury Air went from $5.50 on Sept. 10 to a 52-week low of $3.10 after the stock markets re-opened after the attacks. But unlike similar businesses, the company has rebounded to more than $5 last week.

Joe Czyzyk, president and chief executive, attributes the re-bound to the fact that the bulk of Mercury's business is not involved in the commercial airline industry.

"It was nothing more than myself and other board members getting on the phone and telling shareholders and institutions that we are not part of aviation," Czyzyk said.

Cargo most hurt

Mercury Air is made up of four segments. Two have seen increases in business since Sept. 11, one has remained flat and one has suffered a decrease, he said.

The segment most hurt is the Mercury Air Cargo Inc. division, which caters to major airlines like China Airlines, Japan Airlines, EVA Airways Corp. and Cathay Pacific Airways. Earnings are down 20 percent in that segment. But problems were developing in that segment before Sept. 11 and were a major reason for the company's net loss reported in its most recent quarter.

Mercury Air reported a net loss of $825,000 (12 cents per diluted share) for the fourth quarter ended June 30, compared with net income of $729,000 (11 cents) in the like year-earlier quarter.

Fourth-quarter revenues were $119 million, vs. $89.2 million a year ago.

Mercury Air's fuel services division, which was supposed to be spun off this month, also experienced setbacks. Czyzyk and other executives were on the road preparing for the public offering of 19 percent of MercFuel Inc., when the events of Sept. 11 caused the market to tank. Those plans have been set back.

Christopher Schulz, an analyst at The Spin off Report in New York, said Mercury Air should go forward with the IPO because the division continues to be the company's least profitable and most volatile. Most of its customers are mid-tier passenger or cargo aircraft - not the major airlines that were most impacted by Sept. 11.

"As it stands regularly, it's not the greatest of businesses, with a high volatility of sales so you have to deal with the occasional write-down of receivables," Schulz said.

While Mercury Air may have to sell MercFuel shares at a lower price in a future IPO, it is not desperate for money. And if the IPO doesn't raise as much as the company had hoped, MercFuel could be attractive to a leading manager of fuel sales, such as World Fuel Services Corp., Schulz said.

Mercury Air just received $71.5 million in financing from an unnamed syndicate of European funds to be used to pay back subordinated debt, restructure senior debt and finance future acquisitions of private jet operations.

Czyzyk said he expects $25 million of the money to go toward re-financing debt and the remaining toward acquisitions of private jet operations. The private jet subsidiary, Mercury Air Centers, has seen a 15 percent increase in revenue since Sept. 11, he said.

"It pains me to say anything we would see as benefiting from such a horrific event, but what's happened from the increased security is quite a few corporations out there are concerned about their executives flying," he said. "There became an influx and greater demand for charters, for private business jets, to keep America going."

And Mercury Air's government contracting business, Maytag Aircraft Corp., also has done well. Maytag's services include re-fueling, weather observation, air traffic control, terminal services and base maintenance operations for 52 military base locations, Czyzyk said.

Because of the increased state of emergency alerts throughout military operations nationwide, Maytag's services have been in higher demand.

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Mercury Air Group Inc.

Stock Prices


YEAR (June 30)                   2001    2000

Revenue (millions)             $478.4  $334.3
Operating Expenses (millions)    96.0    76.8
Operating Income (millions)      3.75    3.94
Net Income (millions)             2.4     2.0
Earnings Per Share              $0.36   $0.30

Quarterly Net Income (millions)

SUMMARY

Business: Operations service aviation industry

Headquarters: Los Angeles

CEO: Joe Czyzyk

Market Cap: $34.2 million Dividend Yield: N/A [*]

Total Liabilities: $39.1 million P/E Ratio: 14.6

Long-Term Debt: $42.3 million

(*.) Mercury Air Group does not pay dividends.