SEC Filing | Mesa Air Group

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 001-38626

MESA AIR GROUP, INC.

(Exact name of registrant as specified in its charter)


Nevada		85-0302351
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

410 North 44th Street, Suite 700 Phoenix, Arizona 85008		85008
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (602) 685-4000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	MESA	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of February 7, 2023, the registrant had 40,420,611 shares of common stock, no par value per share, issued and outstanding.

TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION	2

Item 1. Financial Statements	2

Condensed Consolidated Balance Sheets	2

Condensed Consolidated Statements of Operations and Comprehensive Loss	3

Condensed Consolidated Statements of Stockholders' Equity	4

Condensed Consolidated Statements of Cash Flows	5

Notes to Condensed Consolidated Financial Statements	6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3. Quantitative and Qualitative Disclosures About Market Risk	37

Item 4. Controls and Procedures	38

PART II – OTHER INFORMATION	39

Item 1. Legal Proceedings	39

Item 1A. Risk Factors	39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3. Defaults Upon Senior Securities	39

Item 4. Mine Safety Disclosures	39

Item 5. Other Information	39

Item 6. Exhibits	39

SIGNATURES	41

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans, and objectives of management for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," “should,” "could," "can," "may," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2022 filed with the Securities and Exchange Commission on December 29, 2022. Unless otherwise stated, references to particular years, quarters, months, or periods refer to our fiscal years ended September 30 and the associated quarters, months, and periods of those fiscal years. Each of the terms "the Company," "Mesa Airlines," "Mesa," "we," "us" and "our" as used herein refers collectively to Mesa Air Group, Inc. and its wholly owned subsidiaries, unless otherwise stated. We do not assume any obligation to revise or update any forward-looking statements.

The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

▪

public health epidemics or pandemics such as COVID-19;

▪

the severity, magnitude, and duration of the COVID-19 pandemic, including impacts of the pandemic and of business’ and governments’ responses to the pandemic on our operations and personnel, and on demand for air travel;

▪

the supply and retention of qualified airline pilots and mechanics and associated costs;

▪

the volatility of pilot and mechanic attrition;

▪

dependence on, and changes to, or non-renewal of, our capacity purchase and flight services agreements;

▪

failure to meet certain operational performance targets in our capacity purchase and flight services agreements, which could result in termination of those agreements;

▪

increases in our labor costs;

▪

reduced utilization - the percentage derived from dividing (i) the number of block hours actually flown during a given month by (ii) the maximum number of block hours that could be flown during such month under our capacity purchase agreements;

▪

the direct operation of regional jets by our major partners;

▪

the financial strength of our major partners and their ability to successfully manage their businesses through the unprecedented decline in air travel attributable to the COVID-19 pandemic or any other public health epidemic;

▪

restrictions under our Amended and Restated United CPA to enter into new regional air carrier service agreements, excluding our existing Flight Services Agreement with DHL, which will remain in place until the earlier to occur of (i) January 1, 2026 and (ii) the Company’s satisfaction of certain Performance Milestones (as defined in the Amended and Restated United CPA);

▪

our significant amount of debt and other contractual obligations;

▪

our compliance with ongoing financial covenants under our credit facilities; and

▪

our ability to keep costs low and execute our growth strategies.

Additionally, the risks, uncertainties and other factors set forth above or otherwise referred to in the reports we have filed with the SEC may be further amplified by the global impact of the COVID-19 pandemic. While we may elect to update these forward-looking statements at some point in the future, whether as a result of any new information, future events, or otherwise, we have no current intention of doing so except to the extent required by applicable law.

Part I – Financial Information

Item 1. Financial Statements

MESA AIR GROUP, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts) (Unaudited)


	December 31,		September 30,
	2022		2022
ASSETS
Current assets:
Cash and cash equivalents	$	56,077	$	57,683
Restricted cash		3,343		3,342
Receivables, net		13,115		3,978
Expendable parts and supplies, net		25,509		26,715
Prepaid expenses and other current assets		3,953		6,616
Total current assets		101,997		98,334

Property and equipment, net		945,545		865,254
Intangible assets, net		—		3,842
Lease and equipment deposits		1,781		6,085
Operating lease right-of-use assets		11,896		43,090
Deferred heavy maintenance, net		10,311		9,707
Assets held for sale		73,000		73,000
Other assets		14,984		16,290
Total assets	$	1,159,514	$	1,115,602

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and finance leases	$	88,802	$	97,218
Current portion of deferred revenue		1,204		385
Current maturities of operating leases		5,354		17,233
Accounts payable		51,257		59,386
Accrued compensation		9,097		11,255
Other accrued expenses		30,561		29,000
Total current liabilities		186,275		214,477
Noncurrent liabilities:
Long-term debt and finance leases, excluding current portion		597,816		502,517
Noncurrent operating lease liabilities		9,533		16,732
Deferred credits		2,869		3,082
Deferred income taxes		16,705		17,719
Deferred revenue, net of current portion		17,607		23,682
Other noncurrent liabilities		28,938		29,219
Total noncurrent liabilities		673,468		592,951
Total liabilities		859,743		807,428
Commitments and contingencies (Note 16)
Stockholders' equity:
Common stock of no par value and additional paid-in capital, 125,000,000 shares authorized; 36,378,550 (2023) and 36,376,897 (2022) shares issued and outstanding, 4,899,497 (2023) and 4,899,497 (2022) warrants issued and outstanding		259,864		259,177
Retained earnings		39,907		48,997
Total stockholders' equity		299,771		308,174
Total liabilities and stockholders' equity	$	1,159,514	$	1,115,602

See accompanying notes to these condensed consolidated financial statements.

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except per share amounts) (Unaudited)


	Three Months Ended December 31,
	2022			2021
Operating revenues:
Contract revenue	$	128,450		$	136,894
Pass-through and other revenue		18,723			10,863
Total operating revenues		147,173			147,757

Operating expenses:
Flight operations		58,320			47,598
Maintenance		48,287			58,981
Aircraft rent		4,083			9,586
General and administrative		13,988			12,578
Depreciation and amortization		15,203			21,028
Intangible asset impairment		3,719			—
Other operating expenses		1,126			1,972
Total operating expenses		144,726			151,743
Operating income (loss)		2,447			(3,986	)
Other income (expense), net:
Interest expense		(11,276	)		(7,930	)
Interest income		71			51
Loss on investments, net		(1,679	)		(6,462	)
Other income (expense), net		417			(59	)
Total other expense, net		(12,467	)		(14,400	)
Loss before taxes		(10,020	)		(18,386	)
Income tax benefit		(930	)		(4,112	)
Net loss and comprehensive loss	$	(9,090	)	$	(14,274	)
Net loss per share attributable to
common shareholders
Basic	$	(0.25	)	$	(0.40	)
Diluted	$	(0.25	)	$	(0.40	)
Weighted-average common shares outstanding
Basic		36,378			35,963
Diluted		36,378			35,963

See accompanying notes to these condensed consolidated financial statements.

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts) (Unaudited)


	Three Months Ended December 31, 2021
						Common
						Stock and
						Additional
	Number of			Number of		Paid-In			Retained
	Shares			Warrants		Capital			Earnings			Total
Balance at September 30, 2021		35,958,759			4,899,497	$	256,372		$	231,675		$	488,047

Stock compensation expense		—			—		716			—			716
Repurchased shares		(2,275	)		—		(15	)		—			(15	)
Restricted shares issued		7,500			—		—			—			—
Net loss		—			—		—			(14,274	)		(14,274	)
Balance at December 31, 2021		35,963,984			4,899,497	$	257,073		$	217,401		$	474,474


	Three Months Ended December 31, 2022
						Common
						Stock and
						Additional
	Number of			Number of		Paid-In			Retained
	Shares			Warrants		Capital			Earnings			Total
Balance at September 30, 2022		36,376,897			4,899,497	$	259,177		$	48,997		$	308,174

Stock compensation expense		—			—		688			—			688
Repurchased shares		(847	)		—		(1	)		—			(1	)
Restricted shares issued		2,500			—		—			—			—
Net loss		—			—		—			(9,090	)		(9,090	)
Balance at December 31, 2022		36,378,550			4,899,497	$	259,864		$	39,907		$	299,771

See accompanying notes to these condensed consolidated financial statements.

MESA AIR GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)


	Three Months Ended December 31,
	2022			2021
Cash flows from operating activities:
Net loss	$	(9,090	)	$	(14,274	)
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Depreciation and amortization		15,203			21,028
Stock compensation expense		688			716
Loss on investments, net		1,679			6,462
Deferred income taxes		(1,014	)		(4,224	)
Amortization of deferred credits		(213	)		(213	)
Amortization of debt discount and issuance costs and accretion of interest into long-term debt		1,379			3,199
Intangible asset impairment		3,719			—
Other		55			243
Changes in assets and liabilities:
Receivables		(9,137	)		248
Expendable parts and supplies		1,150			(978	)
Prepaid expenses and other operating assets and liabilities		2,290			2,094
Accounts payable		(7,008	)		174
Deferred revenue		(5,256	)		(4,184	)
Accrued expenses and other liabilities		(656	)		(4,868	)
Operating lease right-of-use assets and liabilities		177			(672	)
Net cash provided by (used in) operating activities		(6,034	)		4,751

Cash flows from investing activities:
Capital expenditures		(16,740	)		(19,775	)
Investments in equity securities		—			(200	)
Refund (payment) of equipment and other deposits		131			(6,954	)
Net cash used in investing activities		(16,609	)		(26,929	)

Cash flows from financing activities:
Proceeds from long-term debt		39,000			30,811
Principal payments on long-term debt and finance leases		(17,544	)		(24,510	)
Payments of debt and warrant issuance costs		(417	)		(2,293	)
Repurchase of stock		(1	)		(15	)
Net cash provided by financing activities		21,038			3,993

Net change in cash, cash equivalents and restricted cash		(1,605	)		(18,185	)
Cash, cash equivalents and restricted cash at beginning of period		61,025			123,867
Cash, cash equivalents and restricted cash at end of period	$	59,420		$	105,682

Supplemental cash flow information
Cash paid for interest	$	7,763		$	2,815
Operating lease payments in operating cash flows	$	4,679		$	10,152
Supplemental non-cash operating activities
Right-of-use assets obtained in exchange for lease liabilities	$	236		$	4,190
Supplemental non-cash financing activities
Finance lease obtained in exchange for lease liability	$	76,185		$	—
Investments in warrants to purchase common stock	$	—		$	100
Accrued capital expenditures	$	—		$	1,722

See accompanying notes to these condensed consolidated financial statements.

MESA AIR GROUP, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Organization and Operations

About Mesa Air Group, Inc.

Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa" or the "Company") is the holding company of Mesa Airlines, a regional air carrier providing scheduled passenger service to 106 cities in 42 states, the District of Columbia, the Bahamas, Cuba, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. As of December 31, 2022, Mesa operated a fleet of 158 aircraft with approximately 293 daily departures and 2,478 employees. Mesa’s fleet were conducted under the Company’s Capacity Purchase Agreements (“CPAs”) and Flight Services Agreement (“FSA”), leased to a third party, held for sale or maintained as operational spares. Mesa operates all of its flights as either American Eagle, United Express, or DHL Express flights pursuant to the terms of CPAs entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”) and FSA with DHL Network Operations (USA), Inc. (“DHL”) (each, our “major partner”). All of the Company’s consolidated contract revenues for the three months ended December 31, 2022 and 2021 were derived from operations associated with these two (2) CPAs, FSA, and leases of aircraft to a third party.

The CPAs between us and our major partners involve a revenue-guarantee arrangement whereby the major partners pay fixed-fees for each aircraft under contract, departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time), and reimbursement of certain direct operating expenses in exchange for providing flight services. The major partners also pay certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of these CPAs, the major partners control route selection, pricing, and seat inventories, reducing our exposure to fluctuations in passenger traffic, fare levels, and fuel prices. Under our FSA with DHL, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo flight services. Ground support expenses including fueling and airport fees are paid directly by DHL.

Impact of Pilot Shortage and Attrition

During our three months ended December 31, 2022 and fiscal year ended September 30, 2022, the severity of the pilot shortage, elevated pilot attrition, and increasing costs associated with pilot wages adversely impacted our financial results, cash flows, financial position, and other key financial ratios. One of the primary factors contributing to the pilot shortage and attrition is the demand for pilots at major carriers, which are hiring at an accelerated rate. These airlines now seek to increase their capacity to meet the growing demand for air travel as the global pandemic has moderated. A primary source of pilots for the major U.S. passenger and cargo carriers are the U.S. regional airlines.

As a result of pilot shortage and attrition, we produced less block hours to generate revenues and incurred penalties for operational shortfalls under our CPAs. During the three months ended December 31, 2022, these challenges resulted in a negative impact on the Company’s financial results highlighted by cash flows used in operations of $6.0 million and net loss of $9.1 million including a non-cash impairment charge related to the Company’s American intangible asset of $3.7 million. These conditions and events raised financial concerns about our ability to continue to fund our operations and meet debt obligation in the next twelve months.

To address the events that gave rise to such concerns, management developed and implemented the following material changes to its business designed to ensure the Company could continue to fund its operations and meet its debt obligations over the next twelve months. In addition to successfully implementing these effective measures, the Company expects to develop and implement additional measures aimed at addressing periods beyond the next twelve months.

•

During the fourth quarter 2022, the Company reached an agreement with ALPA which increased overall pilot hourly pay by nearly 118% for captains and 172% for new-hire first officers. As a result of this agreement, we have experienced reduced attrition rates and attracted new pilots.

•

The Company and American have agreed to terminate and complete a wind-down of the American CPA. This will ultimately eliminate financial penalties incurred under the American CPA. In December 2022, we entered into Amendment No.11 to our American CPA that includes, among other things, disclosure regarding the wind-down of our operations with American and the termination of the American CPA.

•

In December 2022, we entered into the Third Amended and Restated Capacity Purchase Agreement with United which amended and restated the existing United CPA. This agreement increases block hour revenues to cover increased wages agreed to with ALPA and adds CRJ 900 aircraft currently operating under the American CPA.

•

We entered into an agreement with United to sell 18 CRJ-700 aircraft during the fiscal year ended September 30, 2022, of which ten (10) were sold. The approximate net proceeds from the sale in the prior period was $36.8 million after retirement of debt. The sale of the remaining eight (8) aircraft that are classified as assets held for sale at December 31, 2022, as discussed in Note 6, closed during January 2023. The approximate net proceeds from the sale after retirement of debt is $8.0 million.

•

We entered into an agreement with a third party to sell 11 of our CRJ-900 aircraft and one (1) CRJ-200 aircraft to raise capital and retire debt, as discussed in Note 6. The approximate net proceeds of the sale are expected to be $8.2 million after retirement of debt.

•

We entered into an agreement to sell 30 spare engines to United to raise capital and retire debt. The approximate gross proceeds from the sale are expected to be $80 million and will retire debt of $26.4 million. See Note 16 for a discussion of the engine sale agreement transaction and closing deliverables.

•

We established and drew upon a new line of credit with United totaling $25.5 million. See Note 9 for a discussion of the line of credit and amount drawn.

•

We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on seven CRJ-900 NextGen aircraft for the period of January 2023 through December 2024, providing up to $14 million of liquidity. Additionally, the junior noteholder, MHIRJ, agreed to reduce its loan amount by approximately $5 million.

•

We entered into an agreement with RASPRO Trust, reducing the buyout pricing on all 15 CRJ-900 aircraft at lease termination by a total of $25 million.

•

We established the Mesa Pilot Development Program (the "MPD Program") to increase the pilot supply to Mesa. We have entered into an agreement to purchase up to 29 state-of-the-art Pipistrel Alpha Trainer 2 aircraft. This new fleet will be the backbone of our MPD Program to help commercial pilots accelerate their accumulation of flight hours to reach the minimum flight hours required by FAA and then be hired by Mesa. As part of the program, pilots will be provided with the opportunity to accumulate up to 1,500 flight hours required to fly a commercial aircraft at Mesa Airlines. Flights costs of $25 per hour, per pilot, will be fully financed by us with zero interest, providing no upfront out-of-pocket expense for flight time while the candidate is accruing the required hours to earn their ATP certificate.

•

We added flight training simulators and flight training instructors to expand our training capacity to backfill pilots lost to attrition.

•

We expanded the United Aviate program participation to include all pilots flying for Mesa. Previously, pilots had to fly under the United Express contract for a minimum of two (2) years to qualify for the flow through to United Airlines. Now, all pilots regardless of contract, are eligible to flow through to United Airlines enhancing Mesa's ability to attract and retain pilots.

•

We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level of flight activity.

The plans and initiatives outlined above have effectively alleviated pressure on financial performance. While we continue to implement and monitor our plans and initiatives, there is no guarantee that these will continue to be effective and achieve their desired objectives.

As of December 31, 2022, the Company has $