Filing identity and reporting period
Important identification issue: The supplied filing is Mesa Air Group, Inc.’s Form 10-K, not a Republic Airways Holdings Inc. filing. It covers the fiscal year ended September 30, 2023; it does not report a standalone 2023 fourth quarter. The filing was signed January 26, 2024.
Mesa is a regional airline and cargo operator. At fiscal year-end it reported 120 aircraft in its fleet and operated passenger flights primarily for United Airlines and cargo flights for DHL. The American Airlines capacity purchase agreement (CPA) wound down and ended April 3, 2023.
Financial results and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Operating revenue | $498.1 million | $531.0 million |
| Operating loss | $84.3 million | $185.0 million |
| Net loss | $120.1 million; $3.04 per diluted share | $182.7 million; $5.06 per diluted share |
| Operating cash flow | $(24.1) million | $13.4 million |
| Adjusted EBITDA | $24.2 million | $66.6 million |
Operating margin was approximately -16.9% in FY2023 versus -34.8% in FY2022; net margin was approximately -24.1% versus -34.4%. These ratios are calculated from reported revenue and losses. Adjusted EBITDA is a company-defined non-GAAP measure and should not be viewed as a substitute for GAAP results.
Revenue declined 6.2%, while completed block hours fell 30.4%, available seat miles fell 36.5%, and passengers fell 21.9%. Contract revenue decreased 12.0% to $421.3 million; pass-through and other revenue rose 46.2% to $76.8 million. Revenue mix shifted: American contributed about 23% of FY2023 revenue and United about 73% (FY2022: 45% and 48%, respectively).
At September 30, 2023, cash and cash equivalents were $32.9 million, restricted cash was $3.1 million, and the company reported a $129.3 million working-capital deficit. Gross long-term debt and finance leases, including current maturities, were $538.3 million; $163.6 million of principal maturities were due within 12 months. The company reported $20.1 million available to borrow under its United revolving facility. Debt and lease obligations remain substantial, and 56.4% of long-term debt was variable-rate.
Material changes and unusual items
- FY2023 operating loss improved to $84.3 million from $185.0 million, and net loss narrowed by $62.6 million. The comparison is affected by FY2022’s $171.8 million impairment charge; FY2023 included $54.3 million of impairment charges related to CRJ-900 aircraft designated for sale and a customer-relationship intangible asset.
- Flight-operations expense increased 22.4% to $216.7 million, principally due to pilot pay increases and training. Maintenance expense remained high at $199.6 million. Interest expense rose to $49.9 million from $35.3 million.
- Investing cash flow was $142.3 million, largely reflecting $178.6 million of aircraft and engine sale proceeds. Financing cash flow was $(143.1) million, including $203.0 million of principal repayments. Cash declined by $25.0 million during the year.
- The American CPA termination and transition of flying to United reduced aircraft utilization and contributed to lower activity. United represented approximately 73% of FY2023 revenue, making the business highly dependent on that partner.
- The company reported $5.4 million of net gains on investments in FY2023, compared with $13.7 million of net losses in FY2022. The FY2023 net loss also included an $8.7 million income-tax benefit.
Outlook, risks, and contingencies
Management stated that pilot shortages, attrition, reduced block hours, operating shortfalls, and debt obligations had raised substantial doubt about the company’s ability to fund operations and meet obligations over the following 12 months. Management concluded that executed and planned actions alleviated that doubt, but the forecast relied on estimates of future flying, costs, asset-sale proceeds, and covenant compliance. The filing provides no general earnings or revenue guidance.
- January 2024 amendments to the United CPA, after the fiscal year-end, increased rates retroactively from October 1, 2023 through December 2024; Mesa projected approximately $63.5 million of incremental revenue over the next 12 months. The amendments also extended a utilization waiver through June 30, 2024 and revised notice terms for possible removal of up to eight CRJ-900 aircraft.
- Management cited aircraft and engine sales, United credit availability, reduced debt payments, and deferred maintenance spending as liquidity measures. A planned sale of 12 surplus engines for $56.0 million gross proceeds was expected to close by March 2024, with about $40.0 million intended to repay associated debt. Additional asset-sale transactions and proceeds were subject to completion and other conditions.
- United credit amendments in January 2024 waived specified historical and projected covenant defaults, including for the quarter ending March 31, 2024. The amendments also increased the applicable borrowing margin. Continued covenant compliance and lender waivers remain significant risks.
- The filing describes two material weaknesses in internal control over financial reporting: IT access/change-management controls and debt-covenant monitoring. The independent auditor concluded that internal control over financial reporting was not effective as of September 30, 2023, although it gave an unqualified opinion on the financial statements. Disclosure controls were also deemed ineffective by management.
- A covenant-related error led to a $30.6 million debt reclassification in the June 2023 Form 10-Q and correction of related disclosures; it did not affect total liabilities or that quarter’s reported earnings or cash flows. A separate prior-year gain-classification error was deemed immaterial and did not affect net income or cash flows.
- Other key risks include reliance on United and the terms of its CPA, pilot and mechanic availability and labor costs, debt service and variable interest rates, maintenance needs for an aging fleet, aircraft-sale execution, and Nasdaq’s minimum-bid-price deficiency notice, with a stated compliance deadline of May 1, 2024.
Most important facts for investors to verify
- Confirm the issuer: this is Mesa Air Group’s filing, not Republic Airways Holdings’.
- Track unrestricted cash, borrowing availability, the $163.6 million near-term principal requirement, and actual proceeds and debt reductions from announced asset sales.
- Assess whether the January 2024 United rate amendments generate the projected incremental revenue and whether United maintains aircraft utilization and the CPA.
- Review covenant compliance, the scope and timing of lender waivers, and remediation of both material weaknesses in financial reporting controls.
- Monitor pilot staffing, block hours, operating performance, maintenance deferrals, and the potential effect on future costs and flight capacity.
- Check progress toward Nasdaq listing compliance and the consequences of any further covenant or liquidity shortfall.