Business Context and Reporting Period
The supplied filing is Mesa Air Group, Inc.’s Form 10-Q, not a Republic Airways Holdings Inc. filing. It covers the quarter and six months ended March 31, 2019 (Mesa’s fiscal second quarter); the comparable periods are 2018.
Mesa operated 145 regional aircraft and about 609 daily departures, serving 129 cities. All operating revenue came from capacity purchase agreements with American Airlines and United Airlines, which control routes, pricing and seat inventory and supply fuel for contracted flying.
Financial Results and Key Metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Operating revenue | $177.1 million, up 5.7% | $355.3 million, up 6.9% |
| Operating income | $34.4 million, versus $16.3 million | $73.6 million, versus $31.4 million |
| Net income | $13.2 million, versus $2.4 million | $32.3 million, versus $25.0 million |
| Diluted earnings per share | $0.38, versus $0.10 | $0.92, versus $1.06 |
| Operating cash flow | Not separately reported in the supplied text | $69.8 million, versus $41.2 million |
Contract revenue rose 8.5% for the quarter and 9.4% for the six-month period, driven mainly by increased flying and performance incentives. Block hours increased 14.5% and 16.1%, respectively. Pass-through and other revenue fell 33.7% for the quarter and 29.6% for six months. Calculated operating margins were approximately 19.4% for the quarter and 20.7% for six months.
For the six months, maintenance expense declined $20.6 million, chiefly because of fewer engine overhauls and C-checks; aircraft rent fell $8.4 million following the purchase of nine previously leased CRJ-900s. These savings were partly offset by higher general and administrative costs and depreciation. The quarter included a $3.6 million loss on extinguishment of debt from refinancing the Spare Engine Facility.
At March 31, cash and cash equivalents were $77.7 million, restricted cash was $3.6 million, and current assets totaled $160.1 million against current liabilities of $226.7 million. Long-term debt and capital lease liabilities on the balance sheet totaled about $844 million, net of unamortized debt issuance costs; reported debt including current maturities before those costs was $857.8 million. Cash, cash equivalents and restricted cash declined $25.7 million over six months. Capital expenditures were $34.3 million, while financing activities used $77.0 million net, including $163.7 million of principal repayments.
Interest expense was $13.8 million for the quarter and $28.6 million for six months. About $555.1 million of debt was variable-rate; management estimated a 50-basis-point rate change would have affected six-month interest expense by approximately $2.8 million.
Material Changes, Outlook and Risks
- Improved pilot staffing supported higher flying and reduced premium pilot pay. Maintenance timing materially benefited reported expenses, so the decline may not indicate a lasting cost reduction.
- In January 2019, Mesa refinanced its Spare Engine Facility with a $91.2 million, five-year term loan at LIBOR plus 3.10%, replacing borrowing at LIBOR plus 7.25%; the transaction generated the $3.6 million extinguishment loss.
- An amendment to the American agreement revised operating-performance measures, offered additional incentives, and permits American to permanently withdraw up to six aircraft if Mesa fails to meet the measures. Two aircraft were to become operational spares effective April 2, 2019.
- Some United aircraft agreements had expirations beginning in 2019; certain terms are extendable at United’s option. The filing states that termination of either major capacity purchase agreement would materially harm the business.
- Management said cash, operating cash flow and available facilities should fund operating and capital needs and support covenant compliance for at least 12 months. This is management’s expectation, not a guarantee; no quantified earnings guidance was provided.
- Key risks include dependence on American and United (about 54% and 46% of six-month revenue, respectively), pilot availability and retention, contract renewal and utilization, debt service and covenant compliance, and interest-rate exposure. All reported revenue and receivables were tied to the two airline partners.
- Management said legal, employment and FAA matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important Facts to Verify
- Confirm the intended issuer: the provided filing identifies Mesa Air Group, Inc. (Nasdaq: MESA), not Republic Airways Holdings Inc.
- Review American and United agreement terms, aircraft expiration dates, performance conditions and the potential impact of any aircraft withdrawal or termination.
- Assess whether higher flying and improved pilot staffing are sustainable, and how maintenance timing affects future expenses and cash needs.
- Check debt maturities, variable-rate exposure, collateral and covenant requirements; Mesa reported compliance with specified covenants at March 31, 2019.
- Consider the distinction between six-month net income of $32.3 million and diluted EPS of $0.92, compared with $25.0 million and $1.06 a year earlier; weighted-average diluted shares increased substantially.
- Note that the filing restated 2018 basic EPS to include certain warrants; the restatement did not change net income or the other listed primary financial statements.