RJET

Business Context and Reporting Period

Company: Mesa Air Group, Inc. (Mesa)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2002
Business Overview: Mesa is a holding company operating regional air carriers providing scheduled passenger and airfreight service. Approximately 98% of consolidated passenger revenue is derived from code-share agreements with major carriers, primarily America West Airlines and US Airways. The company operates a fleet of 124 aircraft serving 147 cities across 37 states, Canada, and Mexico.

Key Financial Metrics

Note: Fiscal 2002 results include impairment and restructuring charges of $26.7 million (pretax). Fiscal 2001 results include impairment and restructuring charges of $80.9 million (pretax).

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 5.1% to $496.8 million. While revenue under revenue-guarantee contracts increased 12.4% due to the addition of regional jets, pro-rate revenue decreased 35.7% due to reduced capacity and industry-wide declines following the September 11, 2001 attacks.
• Expense Reduction: Total operating expenses decreased significantly to $503.0 million from $594.0 million. This was driven by a reduction in impairment and restructuring charges (from $80.9 million in 2001 to $26.7 million in 2002) and lower flight operations costs due to fleet optimization.
• Improved Profitability: Operating loss narrowed to $6.2 million from $70.6 million, and net loss improved to $9.3 million from $48.1 million.
• Asset Disposition: The company ceased operations of its CCAir subsidiary in November 2002, resulting in a $19.8 million restructuring charge. Additionally, 12 Beechcraft 1900D aircraft were returned to the manufacturer.

Guidance, Outlook, Risks, and Contingencies

• US Airways Bankruptcy: US Airways filed for Chapter 11 bankruptcy protection on August 11, 2002. While the bankruptcy court ratified the existing code-share agreements in November 2002, the company faces risks if US Airways fails to emerge from bankruptcy or if agreements are terminated.
• Legal Proceedings:
  • Beus Gilbert: An arbitrator awarded the law firm $5.8 million in fees; Mesa has appealed this decision.
  • ALPA Litigation: The Air Line Pilots Association filed suit alleging violations of the Railway Labor Act regarding the formation of a new subsidiary, Freedom Airlines.
• Fleet Expansion: Mesa has firm orders for 15 CRJ-700s and 25 CRJ-900s from Bombardier, with deliveries scheduled through 2008. The company is the launch customer for the CRJ-900.
• Liquidity: Management believes cash and marketable securities (exceeding $45 million as of December 6, 2002) plus potential proceeds from canceling aircraft orders are sufficient to meet operating needs, even in the event of code-share terminations.
• Forward-Looking Risks: Risks include fuel price volatility (though 76% of fuel costs are reimbursed under contracts), inability to collect receivables from partners, and changes in government regulations.

Investor Verification Checklist

• US Airways Viability: Monitor the progress of US Airways' Chapter 11 restructuring and the stability of the code-share agreement.
• Receivables Quality: Verify the collectability of the $29.1 million in receivables, noting the $12.8 million allowance for doubtful accounts, largely tied to code-share partners.
• Restructuring Costs: Confirm the final costs associated with the CCAir shutdown and the return of Beechcraft 1900D aircraft.
• Legal Outcomes: Track the status of the appeal regarding the $5.8 million legal fee award and the ALPA labor lawsuit.
• Capital Expenditures: Assess the company's ability to finance the delivery of new CRJ-700 and CRJ-900 aircraft without straining liquidity.