Filing identity and reporting period
Important discrepancy: The request identifies Republic Airways Holdings Inc., but the supplied Form 10-Q is for Mesa Air Group, Inc. It covers the three months ended December 31, 2018—Mesa’s fiscal first quarter of 2019—and was signed February 13, 2019. Verify the issuer before relying on this summary.
Mesa operates regional flights for American Airlines and United Airlines under capacity purchase agreements. At quarter-end it operated 145 aircraft, serving 121 cities, with approximately 628 daily departures. The airline partners control routes, fares, seat inventory and fuel for contracted flying.
Financial performance and condition
Amounts below are in millions of dollars unless stated otherwise. Income-statement and cash-flow comparisons are with the three months ended December 31, 2017; balance-sheet comparisons are with September 30, 2018.
| Metric | Quarter ended Dec. 31, 2018 | Prior comparable quarter / change |
|---|---|---|
| Revenue | $178.2 | $164.7; up 8.2% |
| Operating income | $39.2 | $15.0 |
| Operating margin | 22.0% | 9.1% |
| Income before taxes | $25.0 | $0.8 |
| Income tax expense (benefit) | $5.9 | $(21.8) |
| Net income | $19.1 | $22.6 |
| Basic / diluted earnings per share | $0.80 / $0.55 | $2.00 / $0.96 |
| Operating cash flow | $44.1 | $28.1 |
| Capital expenditures | $26.0 | $10.3 |
Contract revenue increased 10.4% to $170.4 million, while pass-through and other revenue declined 25.1% to $7.7 million. The filing reports no single consolidated gross-margin measure. Operating margin was about 22.0%; net margin was about 10.7%, versus 13.7% in the prior period. EBITDA was $58.2 million and EBITDAR was $72.3 million; both are non-GAAP measures.
Cash, cash equivalents and marketable securities totaled $103.6 million at quarter-end; restricted cash was another $3.6 million. Cash and restricted cash combined were $92.2 million, down $14.9 million during the quarter. Current assets were $173.7 million versus current liabilities of $231.2 million. Balance-sheet long-term debt and capital leases totaled $877.7 million, including $149.8 million current; the debt note reports $891.7 million of debt before unamortized issuance costs. Total liabilities were $1.05 billion. Aircraft and equipment securing debt had a $1.14 billion net book value.
Operating cash flow was $44.1 million; investing cash outflow was $20.3 million and financing cash outflow was $38.7 million, including $38.6 million of principal repayments. Capital spending was primarily for five spare engines. The filing says existing cash, operating cash flow and available facilities should fund operating and capital needs and support covenant compliance for at least 12 months.
Material changes and drivers
- Operating income rose substantially, while net income fell to $19.1 million from $22.6 million. The prior-year comparison included a large tax benefit associated with the Tax Cuts and Jobs Act; the current-quarter effective tax rate was 23.8%.
- Operating capacity expanded: available seat miles increased 17.4%, block hours 17.7%, and passengers 9.3%. Contract revenue growth reflected additional United E-175 aircraft, increased flying across the fleet and fewer contractual utilization credits. Contract revenue per available seat mile declined 6.0% to 6.29 cents.
- Operating expenses declined 7.2% to $138.9 million. Maintenance fell $14.5 million, mainly because fewer major engine overhauls and pass-through C-check events occurred; management cautions that maintenance timing can cause period-to-period variation.
- Aircraft rent decreased $4.1 million after Mesa purchased nine CRJ-900s previously leased. Depreciation and amortization increased $2.6 million, partly reflecting those aircraft purchases and spare engines. Flight operations expense rose 8.3%, primarily with increased flying and crew wages.
- Operating cash flow improved year over year, but capital expenditures increased and debt repayments drove financing cash outflow. Cash and cash equivalents declined from $103.3 million at September 30 to $88.6 million at December 31.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management expects cash on hand, operating cash flow and existing credit facilities to meet needs for at least the next 12 months, subject to results and other uncertainties.
- Revenue is entirely dependent on American and United capacity purchase agreements: American represented about 53% and United about 47% of quarterly revenue. Termination of either agreement could materially harm the business. Contract terms do not always align with aircraft lease obligations, and partner audits or billing disputes can affect collections.
- After quarter-end, Mesa entered a $91.2 million, five-year term loan at LIBOR plus 3.10% to refinance its more expensive spare-engine facility, pay related fees and interest, and finance six engines. The loan is secured by 27 engines and related collateral.
- After quarter-end, Mesa and American agreed to proposed capacity-agreement amendments: two aircraft were to become operational spares, reducing American-operated aircraft from 64 to 62 effective April 1, 2019, with additional payments through December 2020. New performance measures could lead American to withdraw up to six aircraft; after repeated failures, Mesa also has an option to withdraw six aircraft. The filing describes a term sheet, not a completed definitive amendment.
- Key operating risks include pilot supply and attrition, labor costs, utilization and operational performance, partner financial strength and contract renewals, significant debt, covenant compliance, and the ability to control costs and execute growth plans.
- $576.2 million of debt was variable-rate and based on LIBOR; Mesa reported no interest-rate hedges. It estimated that a hypothetical 50-basis-point rate change would affect quarterly interest expense by approximately $2.9 million. Fuel-price exposure is largely limited because partners supply and pay for fuel on contracted flights.
- Mesa reported legal and FAA proceedings that it did not believe would have a material adverse effect, while noting outcomes cannot be assured. Adoption of the new revenue standard did not materially affect reported amounts. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm that the intended filing is Mesa Air Group’s 10-Q, not Republic Airways Holdings Inc.
- Review the definitive American agreement, performance results and any aircraft withdrawals; the disclosed term sheet allows reductions in capacity.
- Assess dependence on the two airline partners, contract expirations and the alignment of capacity agreements with aircraft lease commitments.
- Examine debt maturities, variable-rate exposure, loan security and covenant compliance, including the post-quarter $91.2 million refinancing.
- Separate recurring operating performance from maintenance timing and the prior-year Tax Act benefit when comparing earnings and cash generation.
- Monitor liquidity and capital needs against aircraft, engine and maintenance spending, debt service and the stated 12-month liquidity outlook.