Business Context and Reporting Period
Company: Mesa Air Group, Inc. (Mesa)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2008
Business Overview: Mesa operates regional airline subsidiaries (Mesa Airlines, Freedom Airlines, Air Midwest) providing passenger service under revenue-guarantee code-share agreements with major carriers (United, Delta, US Airways). It also operates an independent inter-island Hawaiian carrier (go!) and holds a joint venture interest in Kunpeng Airlines in China. Air Midwest operations are classified as discontinued operations pending asset sales.
Key Financial Metrics
| Metric (in thousands) | Q1 2008 (3 Months) | Q1 2007 (3 Months) | YTD 2008 (6 Months) | YTD 2007 (6 Months) |
|---|---|---|---|---|
| Net Operating Revenues | $320,329 | $296,315 | $646,921 | $629,847 |
| Operating Income | $27,676 | $(23,484) | $27,753 | $(3,669) |
| Net Income (Loss) | $9,420 | $(23,986) | $5,213 | $(15,973) |
| Diluted EPS (Continuing Ops) | $0.51 | $(0.71) | $0.45 | $(0.42) |
| Cash & Equivalents | $41,387 | $72,377 | $41,387 | $44,056 |
| Restricted Cash | $102,789 | $12,195 | $102,789 | $12,195 |
| Total Debt | $594,080 | $632,125 | $594,080 | $632,125 |
| Operating Cash Flow (6 Mo) | $106,172 (2008) vs $60,729 (2007) |
Note: Q1 2008 results include a $34.1 million gain from the settlement of the Hawaiian Airlines lawsuit. Q1 2007 results included a $25.3 million impairment charge for contract incentives.
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $9.4 million for the quarter, compared to a net loss of $24.0 million in the prior year quarter. This improvement is primarily driven by the $34.1 million gain on the Hawaiian Airlines lawsuit settlement and a reduction in losses from equity method investments.
- Revenue Growth: Net operating revenues increased 8.1% year-over-year to $320.3 million. This was achieved despite a decrease in contract revenue due to the elimination of the Delta Dash-8 operation at JFK, offset by higher fares in the go! segment and sublease income.
- Fuel Costs: Fuel expense increased 17.6% to $118.8 million due to a $0.99 per gallon increase in average fuel prices. However, approximately 95% of fuel costs were reimbursed by code-share partners.
- Discontinued Operations: Net loss from discontinued operations (Air Midwest) increased to $8.0 million from $1.4 million, largely due to a $9.1 million impairment charge on Beechcraft 1900D aircraft.
- Liquidity: Cash and cash equivalents decreased by $31.0 million over the six-month period. A significant portion of liquidity ($90.0 million) was tied up in restricted cash as a surety bond for the Hawaiian Airlines litigation.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management highlighted the successful settlement of the Hawaiian Airlines lawsuit, which resolved a significant contingent liability. However, the outlook is heavily influenced by ongoing litigation with Delta Air Lines regarding the termination of the ERJ-145 Delta Connection Agreement. While a preliminary injunction was issued in Mesa's favor, Delta has announced an appeal. Management warns that if Delta successfully terminates the agreement, Mesa may be unable to meet financial obligations and could be forced to seek reorganization protection.
Key Risks and Contingencies
- Delta Litigation: Delta notified Mesa of intent to terminate the ERJ-145 agreement. If terminated, Mesa estimates a loss of $20 million per month in revenue and significant unreimbursed costs, potentially leading to insolvency.
- Debt Repurchase Obligations: Holders of Senior Convertible Notes due 2023 have a "Put Right" to force repurchase. Mesa reached a forbearance agreement with 82% of holders to defer 75% of the obligation until January 2009, but $23.2 million remains subject to potential repurchase. Additionally, $77.8 million in notes due 2024 may be subject to repurchase in February 2009.
- Stock Price: Mesa received notice from NASDAQ that its stock price has failed to maintain the $1.00 minimum bid price requirement, creating a risk of delisting by December 15, 2008.
- Kunpeng Joint Venture: The Chinese joint venture continues to incur losses, and Mesa is exploring selling its interest to mitigate future capital requirements.
Unusual Items
- Hawaiian Settlement Gain: A $34.1 million non-operating gain recorded in Q1 2008 related to the settlement of the Hawaiian Airlines lawsuit.
- Debt Purchase Gain: A $7.4 million gain recorded from purchasing senior convertible notes on the open market at a discount.
Investor Verification Checklist
- Delta Litigation Status: Verify the current status of the appeal regarding the preliminary injunction and the likelihood of the ERJ-145 agreement termination.
- Liquidity Sufficiency: Assess whether current cash flows and available capital are sufficient to meet the $23.2 million (2023 notes) and $77.8 million (2024 notes) potential repurchase obligations in 2009.
- Discontinued Operations Exit: Confirm the timeline and financial impact of the sale of the remaining 20 Beechcraft 1900D aircraft.
- NASDAQ Compliance: Monitor stock price performance to determine if the company will meet the $1.00 minimum bid price requirement to avoid delisting.
- Fuel Reimbursement: Verify the stability of fuel cost reimbursement rates from code-share partners, as this significantly impacts operating margins.