Filing identity and reporting period
Important discrepancy: The filing text is for Mesa Air Group, Inc. (Nasdaq: MESA), not Republic Airways Holdings Inc. It reports the quarter and nine months ended June 30, 2021; Mesa’s fiscal year ends September 30, making this its fiscal third quarter. Investors should confirm that this is the intended filing.
Mesa operates regional passenger and cargo flights for American Airlines, United Airlines and DHL under capacity-purchase and flight-services agreements. At June 30, 2021, it reported 155 aircraft in its fleet, approximately 470 daily departures and 3,191 employees.
Financial results and liquidity
Amounts below are in millions of dollars unless otherwise indicated.
| Metric | Three months ended June 30, 2021 | Prior-year quarter | Nine months ended June 30, 2021 | Prior-year period |
|---|---|---|---|---|
| Operating revenue | $125.2 | $73.1 | $372.8 | $437.0 |
| Operating income | $14.4 | $15.2 | $58.1 | $56.3 |
| Operating margin | 11.5% | 20.8% | 15.6% | 12.9% |
| Net income | $4.3 | $3.4 | $24.1 | $16.1 |
| Diluted earnings per share | $0.11 | $0.10 | $0.62 | $0.46 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $131.2 | $103.6 |
- Quarterly revenue rose 71.2% year over year as flying and travel demand recovered from the pandemic-affected comparison period. Operating income nevertheless declined 5.6%, with maintenance and flight-operation costs rising. Net income increased 25.1%.
- For the nine-month period, revenue fell 14.7%, primarily due to reduced flying, temporary rate reductions for major partners and fewer aircraft operating under the American agreement. Net income increased despite lower revenue, supported in part by greater payroll-support grant recognition and lower interest expense.
- Nine-month Adjusted EBITDA was $124.2 million versus $118.7 million; Adjusted EBITDAR was $153.9 million versus $157.9 million. These are non-GAAP measures and should not be treated as substitutes for GAAP results.
- Cash and cash equivalents were $180.4 million at June 30, 2021, with restricted cash of $3.4 million. Cash, cash equivalents and restricted cash increased by $80.9 million over the nine-month period. Investing cash use was $17.0 million and financing cash use was $33.3 million.
- Balance-sheet current assets were $222.4 million against current liabilities of $276.0 million, a working-capital deficit of approximately $53.6 million. Total liabilities were $1.03 billion and stockholders’ equity was $494.7 million.
- Gross long-term debt, including current maturities, was $713.7 million; reported net long-term debt after issuance costs and warrant discount was $693.5 million. The company had $521.1 million of variable-rate debt and reported compliance with debt covenants at quarter-end.
Material changes and unusual items
- Payroll-support grants reduced reported operating expenses by $26.1 million in the quarter and $93.4 million in the nine months, compared with $43.0 million recognized in the prior-year periods. A further $26.1 million of PSP3 support remained deferred at June 30 and was expected to reduce operating expenses in the quarter ending September 30, 2021. Grant conditions include restrictions on layoffs, dividends, share repurchases and executive compensation.
- Quarterly maintenance expense increased 130.1% to $52.0 million, reflecting more C-checks, component work, pass-through maintenance and labor costs. Pass-through costs are reimbursed under partner agreements, but the timing and collection of billings remain relevant.
- Nine-month results included $4.5 million of lease-termination expense related to purchasing a previously leased CRJ-900 aircraft. The company also recognized a $1.0 million gain on extinguishment of debt.
- In February 2021, Mesa obtained Archer Aviation warrants valued at $16.4 million in connection with an electric-aircraft arrangement; the amount was recorded as an asset with an offsetting vendor-credit liability. Subsequent to quarter-end, Mesa invested $5.0 million in Heart Aerospace and entered into a conditional agreement to purchase 100 electric aircraft, with an option for 50 more. Completion depends on future terms and conditions.
Outlook, risks and contingencies
- Management said financial results improved in the June quarter and expected that improvement to continue through the remainder of fiscal 2021. It stated that existing cash, operating cash flow, financing arrangements and government assistance were expected to cover operating and capital needs and support covenant compliance for at least the next 12 months. This is management’s assessment, not a guarantee.
- COVID-19 and the pace of air-travel recovery remain risks. Mesa is highly dependent on American and United: they represented approximately 45% and 51% of quarterly revenue, respectively, and substantially all revenue came from its three major partners. Termination of either major airline agreement could materially harm the business.
- American’s agreement runs through December 2025 but includes aircraft withdrawal rights; United may terminate or remove aircraft subject to contractual conditions. The business is also exposed to pilot and mechanic availability, attrition, labor costs, operational performance and maintenance requirements.
- Interest-rate exposure is material: a hypothetical 50-basis-point rate change was estimated to affect nine-month interest expense by approximately $2.6 million. Mesa had no interest-rate hedges and noted uncertainty around the transition away from LIBOR.
- Two putative securities class actions concerning the IPO seek unspecified damages. Management believed the lawsuits and routine legal matters were not likely to have a material adverse effect. Mesa also disclosed a $50.0 million commitment for ten spare engines, with delivery dates from July 2021 through November 2022.
- Management reported effective disclosure controls and procedures. It stated that it had no off-balance-sheet arrangements as defined by SEC rules.
Most important facts to verify
- Confirm the issuer: the supplied filing identifies Mesa Air Group, Inc., not Republic Airways Holdings Inc.
- Review the sustainability of earnings excluding payroll-support grants and other unusual items, and confirm the timing and conditions for remaining grant recognition.
- Assess cash needs against the working-capital deficit, debt maturities, maintenance spending and the Treasury loan’s collateral and liquidity covenants.
- Check the status and terms of American and United capacity agreements, aircraft withdrawal rights and any changes in flying or partner concentration.
- Evaluate the recovery outlook alongside pilot and mechanic staffing, maintenance cost trends, variable-rate debt exposure and the LIBOR transition.