Filing summary
Important identification note: The supplied filing is for Mesa Air Group, Inc. (Nasdaq: MESA), not Republic Airways Holdings Inc. It is a Form 10-Q for the quarter ended December 31, 2021, Mesa’s first fiscal quarter of fiscal 2022; the filing was signed February 9, 2022.
Business context
Mesa operates regional passenger flights for American Airlines and United Airlines under capacity purchase agreements, and cargo flights for DHL. It also leases aircraft to GoJet. At quarter-end, Mesa reported 167 aircraft, about 457 daily departures, and 2,999 employees. Its agreements provide fixed and activity-based fees and reimburse certain costs, while major partners control routes, pricing, and seat inventory.
Financial results
| Metric | Quarter ended Dec. 31, 2021 | Quarter ended Dec. 31, 2020 |
|---|---|---|
| Operating revenue | $147.8 million | $150.4 million |
| Operating income (loss) | $(4.0) million | $27.0 million |
| Net income (loss) | $(14.3) million | $14.1 million |
| Operating cash flow | $4.8 million | $79.3 million |
| Capital expenditures | $19.8 million | $1.8 million |
| Adjusted EBITDA (non-GAAP) | $17.0 million | $47.4 million |
| Adjusted EBITDAR (non-GAAP) | $26.6 million | $57.5 million |
Operating margin was approximately (2.7)% versus 17.9%; net margin was approximately (9.7)% versus 9.4%. Contract revenue rose 7.7% to $136.9 million, while pass-through and other revenue fell 53.2% to $10.9 million. Total revenue declined 1.7%. Available seat miles increased 26.0%, block hours 24.3%, and passengers 47.2%; contract revenue per available seat mile fell 14.6% to 6.50 cents.
Operating expenses increased 23.0% to $151.7 million. Flight operations expense rose 28.8% to $47.6 million and maintenance expense rose 11.6% to $59.0 million, reflecting higher flying, labor, training, and maintenance activity. The prior-year quarter included $11.3 million of government grant recognition; none was recognized in the current quarter. Other expense included a $6.5 million loss on equity investments, primarily Archer.
Balance sheet, debt, and liquidity
At December 31, 2021, cash and cash equivalents were $102.3 million, with $3.4 million of restricted cash. Cash, cash equivalents, and restricted cash totaled $105.7 million, down $18.2 million during the quarter. Current assets were $138.3 million and current liabilities $250.4 million. Total assets were $1.434 billion, total liabilities $960.0 million, and stockholders’ equity $474.5 million.
Long-term debt and finance leases, including current maturities, had a gross carrying amount of $678.6 million; net long-term debt was $658.5 million. Mesa reported $499.6 million of variable-rate debt and $179.0 million of fixed-rate debt, including current maturities. Debt is largely secured by aircraft or equipment. Operating cash flow was positive, but substantially below the prior-year quarter; investing cash outflow was $26.9 million, mainly capital expenditures and equipment deposits.
Outlook, risks, and unusual items
- Management said it expected to meet cash needs for the next 12 months through cash, financing arrangements, and operating cash flows, while cautioning that results differing from projections could adversely affect liquidity. The filing provides no specific earnings or revenue guidance.
- COVID-19 continued to affect travel and operations; the timing and pace of recovery remained uncertain. Pilot and mechanic availability, attrition, and rising labor costs were identified as important risks.
- American and United accounted for approximately 45% and 49% of quarterly revenue, respectively. The filing warns that termination of either agreement would materially harm the business.
- In a subsequent event, American waived defaults related to Mesa missing certain controllable completion and on-time performance thresholds for November and December 2021 and January 2022, resetting the three-month measurement period to February 2022. American also waived related aircraft withdrawal rights for those misses. Future performance failures could again put aircraft or the agreement at risk.
- Approximately $499.6 million of borrowings were LIBOR-based. Mesa disclosed LIBOR transition uncertainty and no interest-rate hedging; a hypothetical 50-basis-point rate change would have affected quarterly interest expense by about $0.6 million.
- Commitments include about $52.2 million to purchase ten spare engines, with five still expected for delivery in 2022. Forward purchase agreements for Archer and Heart electric aircraft involve potential base commitments of $200 million and up to $1.2 billion, respectively, but purchases depend on future agreement of terms and conditions. A February 2022 agreement for 100 hybrid-electric VTOL aircraft was also conditional on further terms, including price.
- Two putative securities class actions concerning the IPO seek unspecified damages. Management said the outcomes were not expected to materially adversely affect financial position, liquidity, or results of operations.
Most important facts to verify
- Confirm the intended issuer: the supplied document is Mesa Air Group’s filing, not a Republic Airways Holdings filing.
- Track American CPA operational performance after the reset, including whether any further aircraft withdrawals or termination rights arise.
- Assess liquidity and covenant headroom against current obligations, capital spending, maintenance needs, and debt maturities.
- Review the sensitivity of earnings and cash flows to LIBOR replacement, variable-rate debt, and refinancing conditions.
- Verify the status, negotiated terms, and actual funding obligations for engine purchases and the conditional electric-aircraft agreements.
- Distinguish recurring operating performance from non-cash investment valuation changes, prior-period government support, and non-GAAP adjusted measures.