Business context and reporting period
Issuer discrepancy: 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 June 30, 2022, Mesa’s fiscal third quarter, with nine-month results through that date.
Mesa operates regional passenger flights for American and United under capacity purchase agreements (CPAs), and cargo flights for DHL. At June 30, 2022, it reported 168 aircraft, approximately 360 daily departures, and approximately 2,600 employees. Its partners control routes and pricing and pay or reimburse many operating costs.
Financial results and key metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Operating revenue | $134.4 million | $125.2 million | $405.4 million | $372.8 million |
| Operating income (loss) | $0.2 million | $14.4 million | $(48.5) million | $58.1 million |
| Net income (loss) | $(10.0) million | $4.3 million | $(67.0) million | $24.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $13.6 million | $131.2 million |
- Quarterly contract revenue rose 8.4% to $118.9 million; pass-through and other revenue was essentially unchanged at $15.5 million. Nine-month contract revenue increased 15.5% to $367.8 million, while pass-through and other revenue fell 30.8% to $37.6 million.
- Quarterly operating margin was approximately 0.2%, versus 11.5% a year earlier. Nine-month operating margin was approximately negative 12.0%, versus positive 15.6%. These are calculated from reported operating income and revenue.
- Quarterly adjusted EBITDA was $20.1 million versus $35.3 million; nine-month adjusted EBITDA was $52.9 million versus $124.2 million. These are non-GAAP measures; the filing cautions they have limitations and should not replace GAAP measures.
- Cash and cash equivalents were $54.4 million at June 30, 2022, down from $120.5 million at September 30, 2021; restricted cash was $3.3 million. Cash, cash equivalents, and restricted cash together fell $66.1 million over the nine months to $57.8 million.
- Gross long-term debt, including current maturities, was $653.4 million; net carrying value including current maturities was $636.0 million. Current debt and finance lease maturities were $112.8 million. Total current liabilities were $240.3 million against current assets of $95.4 million.
- Nine-month capital expenditures were $33.2 million. Investing cash use was $40.4 million and financing cash use was $39.3 million.
Material changes versus prior comparable periods
- Despite higher revenue, quarterly operating income fell to near breakeven and the company swung to a net loss. Nine-month results moved from profit to substantial operating and net losses.
- Block hours fell 25.5% year over year in the quarter and 5.8% over nine months. Quarterly available seat miles declined 24.5%.
- Government grant recognition provided no expense offset in 2022, compared with $26.1 million in the prior-year quarter and $93.4 million in the prior-year nine-month period.
- Flight operations costs increased, reflecting pilot wages, training, and related costs. Lower maintenance expense partly offset these pressures; nine-month maintenance was broadly flat.
- The company recorded a $39.5 million impairment charge on CRJ aircraft classified as held for sale and $12.6 million in net investment losses over nine months.
- Operating cash flow declined to $13.6 million from $131.2 million. Management attributed the 2022 cash generation partly to non-cash add-backs and unfavorable changes in operating assets and liabilities.
Outlook, risks, contingencies, and unusual items
- Pilot shortage and utilization: Management said elevated pilot attrition and training constraints reduced block-hour production and could cause further reductions. Hiring had not kept pace with attrition; pilot wage and bonus initiatives increased labor costs. The ALPA collective bargaining agreement was amendable in July 2021 and remained under negotiation.
- Liquidity and debt: Management said cash on hand, operating cash flows, aircraft sales, refinancing the revolving facility, and further CPA amendments were expected to provide adequate resources for at least 12 months, but acknowledged those initiatives were not assured. The CIT revolving facility had $15.6 million outstanding and matured December 31, 2022. Failure to repay or refinance could trigger defaults and cross-defaults; the filing warns the company did not have sufficient liquidity to repay all debt if accelerated.
- Planned liquidity actions: Mesa had formally listed 12 excess aircraft for sale and planned to sell 18 CRJ-700 aircraft leased to a third party. It also said it had deferred or delayed major maintenance spending to align with flight activity. Management cited $112.8 million of principal maturities due within 12 months.
- Partner performance and contract exposure: Mesa missed American CPA controllable flight-completion and on-time-departure minimums in May and June, giving American certain aircraft withdrawal rights and potential termination rights after further consecutive misses. American had not exercised withdrawal rights as of the filing date; a July amendment reset the three-month measurement periods for termination rights to begin in August. Mesa also missed DHL performance minimums for April through June; DHL waived the resulting termination right. These arrangements remain critical, as American and United generated approximately 46% and 47% of quarterly revenue, respectively.
- Interest-rate risk: Much of Mesa’s debt was variable-rate and LIBOR-based. The filing reported $471.4 million of variable-rate debt and $484.5 million of LIBOR-based borrowings; a hypothetical 100-basis-point rate change would have affected nine-month interest expense by approximately $3.5 million. Mesa had no interest-rate hedges.
- Other notable items: A proposed $5 million settlement of IPO-related securities class actions was to be paid by D&O insurers, subject to court approval. Mesa also disclosed conditional forward-purchase commitments for electric aircraft, including a stated maximum $1.2 billion Heart commitment; purchases depend on future agreement on terms and conditions.
- No formal numerical earnings or operating guidance was provided. Management stated that demand for air travel was strong but its recovery path remained uncertain, and that COVID-19 effects and pilot availability could affect operations and liquidity.
Important facts for investors to verify
- Confirm the intended issuer: the filing text identifies Mesa Air Group, Inc., not Republic Airways Holdings Inc.
- Track pilot hiring, training throughput, attrition, labor negotiations, and resulting block-hour utilization and costs.
- Verify progress and proceeds from planned aircraft sales, the CIT facility refinancing or repayment, and the company’s ability to meet near-term debt maturities and covenants.
- Monitor American and DHL performance thresholds, any aircraft removals or penalties, and the effect of CPA amendments; assess the concentration of revenue with American and United.
- Review cash generation and working-capital trends, including whether the low operating cash flow and declining cash balance improve in subsequent filings.
- Assess further aircraft impairment or sale-price changes, investment valuation losses, and the status and potential economics of electric-aircraft commitments.