Filing summary
Entity and period: The supplied filing is Mesa Air Group, Inc.’s Form 10-Q for the quarter ended March 31, 2021, not a Republic Airways Holdings Inc. filing. It covers Mesa’s fiscal second quarter and six months ended March 31, 2021. Confirm the issuer and period against the intended filing.
Business context
Mesa operates regional passenger flights for American Airlines and United Airlines under capacity purchase agreements, and cargo flights for DHL. At March 31, 2021, it operated 163 aircraft and approximately 440 daily departures. Its partners generally control routes, fares and passenger inventory, and pay specified fees and reimburse certain costs.
Financial performance and position
| Metric | Three months ended March 31, 2021 | Six months ended March 31, 2021 |
|---|---|---|
| Operating revenue | $97.3 million, down 45.9% | $247.7 million, down 32.0% |
| Operating income | $16.8 million | $43.7 million |
| Net income | $5.7 million; diluted EPS $0.14 | $19.8 million; diluted EPS $0.52 |
| Operating cash flow | Not stated for the quarter | $78.6 million |
Year-to-date investing cash outflow was $11.7 million and financing cash outflow was $18.5 million. Cash, cash equivalents and restricted cash increased $48.4 million to $151.2 million; unrestricted cash was $147.9 million.
At March 31, total assets were $1.520 billion and total liabilities were $1.029 billion. Current assets of $197.1 million were below current liabilities of $261.4 million. The balance sheet reported $704.0 million of net long-term debt, including current maturities and after specified discounts and issuance costs; gross debt before those deductions was $725.4 million. Management separately described $718.2 million of secured indebtedness excluding capital leases. These measures have different stated bases and should not be treated as interchangeable.
Changes versus comparable periods
- Second-quarter contract revenue fell 50.7% to $81.7 million; block hours declined 31.7%, and available seat miles fell 32.2%. The company attributed weaker flying and lower rates to COVID-19 effects, fewer aircraft flying under the American agreement, and temporary partner rate reductions associated with payroll support.
- Despite lower revenue, quarterly net income rose from $1.9 million to $5.7 million. Results included $56.0 million of government grant recognition recorded as a reduction of operating expenses; year-to-date grant recognition was $67.3 million, including $11.3 million recognized from earlier support.
- Year-to-date operating cash flow increased from $65.2 million to $78.6 million. Cash at period end was $151.2 million versus $55.8 million a year earlier.
- Year-to-date maintenance expense declined 14.5%, while pass-through and other revenue increased 47.2%, mainly reflecting reimbursed E-175 maintenance costs.
Outlook, risks and unusual items
- Liquidity outlook: Management said cash, operating cash flow, credit facilities, financing arrangements and government assistance were expected to fund operations and capital needs and support covenant compliance for at least the next 12 months. This depends on operating results and other assumptions; no specific revenue or earnings guidance was provided.
- Government support: Mesa estimated approximately $52.2 million of PSP3 assistance and received an initial $26.1 million installment in April 2021. Support is restricted to employee wages, salaries and benefits and carries employment, dividend/buyback and executive compensation conditions. PSP2 also included service-related obligations and other restrictions.
- Partner dependence: American and United accounted for approximately 45% and 53% of quarterly revenue, respectively. Termination or material changes to either agreement could significantly harm results and liquidity. American has discretion to remove aircraft under contractual terms; United also has specified removal and termination rights.
- Debt and rates: Mesa reported $533.8 million of variable-rate debt tied to LIBOR and did not hedge interest-rate exposure. It warned that LIBOR’s replacement could affect borrowing costs. The Treasury loan carries collateral coverage and minimum liquidity covenants; Mesa reported compliance with all debt covenants at March 31.
- Unusual items and commitments: The quarter included $4.5 million of lease termination expense related to purchasing a previously leased CRJ-900. Mesa recorded a $16.4 million Archer Aviation warrant asset with a corresponding vendor-credit liability tied to a contemplated eVTOL aircraft purchase. It also committed approximately $50 million for 10 engines, with deliveries scheduled from July 2021 through November 2022.
- Contingencies: Two putative securities class actions relate to the IPO and seek unspecified damages. Management, after consulting counsel, did not expect the lawsuits or routine legal matters to have a material adverse effect. The filing also identifies pandemic, staffing, partner, debt and covenant risks.
Important facts for investors to verify
- Confirm that Mesa Air Group, Inc.—rather than Republic Airways Holdings Inc.—is the intended issuer, and that March 31, 2021 is the intended reporting period.
- Assess earnings excluding the substantial payroll support grant and the effect of temporary partner rate reductions.
- Reconcile the filing’s different reported debt measures, maturities, lease obligations and Treasury loan collateral and covenant requirements.
- Review exposure to American and United, including aircraft withdrawal rights and the outlook for flying volumes and contract rates.
- Verify PSP3 amounts received, remaining eligibility and restrictions, and the assumptions underlying management’s 12-month liquidity statement.
- Evaluate potential dilution from the 4,899,497 Treasury warrants, exercisable at $3.98 per share, and the terms and accounting of the Archer-related transaction.