Filing summary
Entity and period mismatch: The supplied filing is Mesa Air Group, Inc.’s Form 10-Q, not a Republic Airways Holdings Inc. filing. It reports the quarter and nine months ended June 30, 2019 (Mesa’s fiscal third quarter), and was signed August 14, 2019.
Business context and reporting period
Mesa operates regional flights as American Eagle and United Express under capacity purchase agreements. At June 30, 2019, it operated 145 aircraft, with about 761 daily departures. American and United accounted for approximately 53% and 47% of quarterly revenue, respectively; all reported revenue was derived from these two partners.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data. Quarter and nine-month comparisons are to the corresponding 2018 periods.
| Metric | Quarter ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Revenue | $180.2; up 4.9% | $535.5; up 6.2% |
| Operating income | $17.1, versus a $0.5 loss | $90.7, versus $30.9 |
| Net income | $3.0, versus an $11.1 loss | $35.3, versus $13.9 |
| Diluted earnings per share | $0.09, versus a $0.48 loss | $1.01, versus $0.58 |
| Operating cash flow | Not separately presented here | $114.1, versus $63.2 |
| Capital expenditures | Not separately presented here | $116.7 |
- Quarterly operating margin was approximately 9.5% and net margin approximately 1.7%; nine-month margins were approximately 16.9% and 6.6%, respectively.
- Cash and cash equivalents were $79.9 million at June 30, down from $103.3 million at September 30, 2018. Restricted cash was $3.6 million. Cash, cash equivalents and restricted cash declined $23.6 million during the nine-month period.
- Current assets were $158.2 million and current liabilities $245.9 million. The balance sheet reported $881.2 million of debt and capital leases; the debt note lists $896.7 million of debt including current maturities before unamortized issuance costs. The debt note identifies $597.5 million as variable-rate and $299.2 million as fixed-rate.
- Management said existing cash, operating cash flow and credit facilities were expected to cover operating and capital needs and support covenant compliance for at least 12 months. The filing reports $788.7 million of secured indebtedness in its liquidity discussion.
Material changes versus the prior comparable period
- Quarterly revenue grew with increased flying; block hours increased 10.8%. For nine months, block hours increased 14.3%. Contract revenue rose, while pass-through revenue fell, primarily with lower pass-through maintenance revenue.
- Quarterly operating results improved notably from a loss to income. Management attributed the change in part to increased flying, lower lease-termination expense, and the absence of the prior-year share-appreciation-rights compensation charge.
- Nine-month operating expenses declined 6.0%. Lower maintenance expense, aircraft rent, general and administrative costs, and lease-termination expense more than offset higher depreciation and amortization. Management cautioned that maintenance costs vary with the timing of major maintenance events.
- Capital spending exceeded operating cash flow during the nine months. Investing cash outflow was $96.0 million, including $116.7 million of capital expenditures, partly offset by $20.1 million from investment-security sales. Financing cash outflow was $41.6 million.
Outlook, risks, contingencies and unusual items
- No quantified earnings or revenue guidance is provided. Management’s liquidity assessment covers at least the next 12 months and is subject to operating results, cash needs, financing access and covenant compliance.
- In July 2019, American permanently withdrew two aircraft after Mesa failed to meet performance metrics under the amended agreement. Mesa said operational spares’ unavailability contributed to the failure. The agreement permits American to withdraw up to six aircraft under specified conditions.
- United’s aircraft contract expirations create renewal uncertainty. After quarter-end, United exercised a two-year extension for seven United-owned E-175 aircraft. Mesa said it expected to continue operating certain CRJ-700 aircraft whose agreements were nearing expiry, while discussions with United continued.
- Dependence on two airline partners, agreement renewals or termination, pilot supply and retention, labor costs, operating performance, debt service, variable interest rates and covenant compliance are material risks. A 50-basis-point interest-rate change was estimated to affect nine-month interest expense by about $3.0 million. Fuel-price exposure is largely borne by the airline partners under the agreements.
- Unusual costs included $9.5 million of lease-termination expense in 2019 and a $3.6 million loss on extinguishment of debt related to repayment of the Spare Engine Facility. The company refinanced that facility with a $91.2 million term loan at LIBOR plus 3.10%, compared with LIBOR plus 7.25% previously.
- The 2018 comparative per-share figures were restated to reclassify warrants with a nominal conversion price into basic shares. The restatement affected earnings per share and share counts, but not net income, balance sheets, equity statements or cash flows.
- The company reported ordinary-course legal and FAA proceedings that management did not believe would have a material adverse effect; outcomes are not assured. Management stated disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer and filing period: this document is Mesa Air Group’s June 30, 2019 Form 10-Q, not a Republic Airways Holdings filing.
- Review American’s aircraft withdrawals and performance provisions, and the status and economics of the United contract extensions and expirations.
- Assess pilot staffing, operational performance and whether increased flying can be sustained without disproportionate maintenance and labor costs.
- Reconcile debt and capital-lease presentations, scheduled maturities, variable-rate exposure, liquidity needs and covenant requirements.
- Evaluate recurring cash generation against aircraft purchases and maintenance requirements; management’s Adjusted EBITDA and EBITDAR are non-GAAP measures and exclude certain costs.