Filing summary
Important identification: The supplied filing is Mesa Air Group, Inc.’s Form 10-Q, not Republic Airways Holdings Inc.’s. It covers the quarter ended March 31, 2020 (Mesa’s fiscal second quarter) and the six months ended March 31, 2020. Financial amounts below are in U.S. dollars; unless noted, amounts are in millions.
Business context and reporting period
Mesa operates regional flights as American Eagle and United Express under capacity purchase agreements with American Airlines and United Airlines. At March 31, 2020, it operated 145 aircraft, with about 662 daily departures. All reported operating revenue came from the two airline partners; the agreements provide fixed payments and reimburse certain costs, but also include revenue linked to flights and block hours flown.
Financial performance and liquidity
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Six months ended March 31, 2020 | Six months ended March 31, 2019 |
|---|---|---|---|---|
| Operating revenue | $179.9 | $177.1 | $363.9 | $355.3 |
| Operating income | $13.9 | $34.4 | $41.1 | $73.6 |
| Net income | $1.9 | $13.2 | $12.7 | $32.3 |
| Operating margin | 7.7% | 19.4% | 11.3% | 20.7% |
| Net margin | 1.0% | 7.5% | 3.5% | 9.1% |
| Adjusted EBITDA (non-GAAP) | $35.3 | $53.7 | $82.7 | $111.9 |
| Adjusted EBITDAR (non-GAAP) | $47.6 | $67.8 | $106.4 | $140.1 |
For the six months, operating cash flow was $65.2, investing cash flow was negative $24.8, and financing cash flow was negative $57.1. Cash, cash equivalents and restricted cash ended at $55.8, including $52.4 of unrestricted cash and $3.4 of restricted cash. The company reported gross debt, including current maturities, of $802.0 and net debt of $788.0; current debt was $168.2 and noncurrent net debt was $619.8. Operating lease liabilities totaled $122.3. The company said $12.0 remained available under its $35.0 revolving facility after drawing $23.0.
Material changes versus the prior comparable period
- Second-quarter operating revenue increased 1.6%, but operating income fell about 60% and net income fell about 86%. For the six months, revenue increased 2.4%, while operating income fell about 44% and net income fell about 61%.
- Maintenance expense rose 41.8% in the quarter and 43.7% for the six months, primarily due to the timing and number of engine overhauls and airframe C-checks. Some maintenance costs were reimbursable by airline partners.
- For the quarter, contract revenue declined 2.4%; pass-through and other revenue rose 91.4%, largely reflecting maintenance-related reimbursements. Six-month contract revenue declined 0.8%, while pass-through and other revenue increased 74.7%.
- Quarterly block hours fell 3.3%, revenue passenger miles fell 14.2%, and passengers fell 18.5% year over year. Six-month block hours declined 1.4% and passengers declined 8.0%.
- Interest expense was lower than in the prior-year periods, which included a $3.6 debt-extinguishment loss. Adoption of the new lease standard added right-of-use assets and lease liabilities to the balance sheet; the company said it did not materially affect lease expense or cash flows.
Outlook, risks and unusual items
- COVID-19 and demand: Management said the pandemic materially harmed demand and financial position, with further adverse impact expected in the June 2020 quarter. Mesa reported April 2020 block hours of 10,297, down 72.4% from April 2019, and anticipated significant schedule reductions could continue through 2020 and into 2021. It planned for a modest recovery beginning in the September 2020 quarter, while emphasizing that timing and pace were uncertain.
- Liquidity measures and government support: Mesa received $92.5 of CARES Act payroll support, with $30.8 received in April and the balance scheduled in installments through September. The support carries conditions, including restrictions on involuntary layoffs or furloughs through September 30, 2020, limits on executive compensation, continuing essential air service, and restrictions on dividends and share repurchases. Mesa also applied for CARES Act secured loans; the application outcome was pending. It expected to defer about $7.0 of employer Social Security taxes.
- Debt-payment deferral: An aircraft lender agreed to defer $28.0 of principal payments through September 30, 2020, with repayment due as a lump sum on that date. Mesa was seeking more favorable terms; modification was not assured.
- Partner and contract exposure: American and United generated approximately 51% and 49% of six-month revenue, respectively. American gave notice after quarter-end to withdraw three aircraft, leaving 56 CRJ-900 aircraft under that agreement. American contract aircraft tranches expire between 2021 and 2025, and extensions were under discussion. United’s planned delivery of 20 E175LL aircraft was postponed, with deliveries then expected to begin in September 2020 and finish by June 2021.
- Commitments and contingencies: Mesa reported approximately $118.9 of spare-engine purchase commitments, including 20 engines scheduled for delivery in 2021. It disclosed two putative class actions alleging securities-law violations related to its IPO; management did not believe the cases were likely to have a material adverse effect, but outcomes were uncertain. The company reported no fleet or finite-lived intangible-asset impairment as of March 31, 2020, but planned additional impairment testing in the third quarter.
- Other risks: The filing highlights dependence on the two airline partners, pilot supply and attrition, debt and financial covenants, COVID-19 uncertainty, and $533.1 of variable-rate debt tied to LIBOR. Management said disclosure controls and procedures were effective as of quarter-end.
Important facts for investors to verify
- Confirm the issuer and filing period: the source is Mesa Air Group, Inc., for the quarter ended March 31, 2020, not Republic Airways Holdings Inc.
- Track actual block hours, partner capacity reductions, and the timing and extent of any demand recovery versus management’s stated expectations.
- Verify receipt and use of CARES Act support, the status and terms of any secured loan application, and whether the $28.0 deferred debt payment was renegotiated.
- Review cash generation, available revolver capacity, debt maturities and covenant compliance as operations and maintenance spending change.
- Monitor American and United contract renewals, aircraft withdrawals, and the revised E175LL delivery schedule.
- Assess whether the IPO lawsuits, engine commitments, or later impairment tests produce material costs or asset write-downs.