REPUBLIC AIRWAYS HOLDINGS INC. quarterly report, Q3 FY2023

Filing identity and reporting period

Important discrepancy: The supplied filing is Mesa Air Group, Inc.’s Form 10-Q, not a filing by Republic Airways Holdings Inc. It covers the quarter ended June 30, 2023 (Mesa’s fiscal third quarter) and the nine months ended June 30, 2023. The financial figures below are Mesa’s.

Business context and financial performance

Mesa operates regional passenger flights primarily for United Airlines under a capacity purchase agreement (CPA), and cargo flights for DHL. The American Airlines CPA ended April 3, 2023. At quarter-end, Mesa operated 56 E-175 and 24 CRJ-900 aircraft under the United CPA, plus four Boeing 737 cargo aircraft under its DHL agreement. United represented approximately 96% of quarterly revenue.

Quarterly operating and net loss margins were approximately -35% and -41%, respectively; nine-month margins were approximately -17% and -24%. These are calculated from reported revenue and losses. No GAAP gross-margin measure is presented.

Cash flow, debt and liquidity

• Nine-month operating cash flow was negative $13.8 million, versus positive $13.6 million a year earlier. Capital expenditures were $31.6 million.
• Investing cash flow was positive $109.0 million, principally reflecting $139.9 million of proceeds from aircraft and engine sales. Financing cash flow was negative $104.7 million, including $142.6 million of debt and finance-lease principal payments.
• Cash and cash equivalents were $48.3 million at June 30, 2023; restricted cash was $3.1 million. Cash, cash equivalents and restricted cash totaled $51.5 million.
• Reported gross long-term debt and finance leases, including current maturities, were $577.5 million. Net long-term debt was $566.3 million, including current maturities. $124.3 million of long-term debt and finance leases was classified as current; management also described $124.3 million as debt due within 12 months.
• Current liabilities of $222.1 million exceeded current assets of $181.1 million. Assets held for sale had a net book value of $112.0 million. The company reported compliance with its debt covenants at quarter-end.

Material changes and unusual items

• Revenue fell 14.7% year over year in the quarter and 5.3% over nine months. Contract revenue declined as block hours and aircraft under contract decreased; quarterly block hours fell 28.6% and nine-month block hours fell 32.9%.
• Flight operations expense rose 19.2% in the quarter and 23.6% year to date, primarily due to higher pilot pay and training costs. The pilot shortage and attrition also reduced flying and contributed to operational shortfalls.
• Quarterly impairment expense was $30.5 million, relating to seven CRJ-900 aircraft designated as held for sale. Nine-month impairment totaled $51.0 million, including aircraft and the American customer-relationship intangible asset.
• The June sale of 20 spare engines to United generated $53.7 million gross proceeds and approximately $26.9 million net proceeds after specified debt reductions; Mesa recorded a $6.7 million gain for the quarter.
• Mesa issued approximately 4.0 million shares to United during the nine-month period. Shares issued and outstanding increased to 40.8 million at June 30, 2023 from 36.4 million at September 30, 2022.

Outlook, risks and contingencies

Management said asset-sale proceeds, operating cash flows and other liquidity measures should enable Mesa to meet obligations for the 12 months following issuance of the financial statements, but cautioned that the plans may not achieve their objectives. Planned or pursued actions included completing surplus-aircraft sales, seeking financing or other solutions for the RASPRO aircraft repurchase obligation, seeking additional liquidity from United, and monetizing other surplus assets. Seven CRJ-900 sales were expected to generate approximately $71.8 million gross and $8.5 million net after debt retirement; final completion was expected in October 2023. No formal earnings guidance is provided in the supplied text.

Key risks include the pilot shortage and labor costs, dependence on United and the United CPA, substantial debt and near-term maturities, variable interest rates and LIBOR-to-SOFR transition, and the ability to complete asset sales and secure liquidity. Management disclosed that disclosure controls and procedures were not effective as of June 30, 2023, despite remediation of two previously identified material weaknesses. Routine litigation was not expected by management to have a material adverse effect. The filing also describes conditional forward purchase commitments for electric aircraft, including stated base commitments of up to $200 million for Archer and $1.2 billion for Heart; purchases remain subject to future agreement on terms and conditions.

Investor verification priorities

1. Confirm the issuer: this is a Mesa Air Group filing, not a Republic Airways Holdings filing.
2. Track liquidity, operating cash flow, the $124.3 million of debt due within 12 months, and compliance with minimum-liquidity and other debt covenants.
3. Verify completion and net proceeds of announced aircraft sales, and resolution and funding of the RASPRO repurchase obligation.
4. Assess whether United flying, pilot availability, operational performance and compensation can support improved revenue and cash generation, given the company’s high customer concentration.
5. Review subsequent control-remediation disclosures and any changes to the company’s stated ability to meet obligations.