SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15495
MESA AIR GROUP, INC.(Exact name of registrant as specified in its charter)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.
On August 8, 2001 the registrant had outstanding 32,059,658 shares of Common Stock.
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TABLE OF CONTENTS
INDEX
PART I —FINANCIAL INFORMATION
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PART 1. FINANCIAL INFORMATIONItem 1.
MESA AIR GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME(Unaudited)(in thousands, except per share amounts)
See accompanying notes to consolidated financial statements
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CONSOLIDATED BALANCE SHEETS(Unaudited)(in thousands except share amounts)
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CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(in thousands)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Mesa Air Group, Inc. and its subsidiaries (collectively referred to herein as “Mesa”) is an independently owned regional airline serving 142 cities in 36 states, the District of Columbia, Canada and Mexico. Mesa operates a fleet of 130 aircraft and has approximately 1,100 daily departures.
Mesa’s airline operations are conducted by three regional airlines utilizing hub-and-spoke systems. Mesa Airlines, Inc. (“MAI”), a wholly owned subsidiary of Mesa, operates as America West Express under a code sharing agreement with America West Airlines, Inc. (“America West”) and as USAirways Express under code-sharing agreements with USAirways, Inc. (“USAirways”). Air Midwest, Inc., a wholly owned subsidiary of Mesa, also operates under a code-sharing agreement with USAirways and flies as USAirways Express and also operates an independent division, Mesa Airlines, from a hub in Albuquerque, New Mexico. CCAIR, Inc. (“CCAIR”), a wholly owned subsidiary of Mesa, operates under a code-share agreement with USAirways that permits CCAIR to operate under the name USAirways Express and to charge their joint passengers on a combined basis with USAirways.
Approximately 96% of Mesa’s consolidated revenues for the quarter ended June 30, 2001, were derived from operations associated with code-sharing agreements with America West and USAirways. For the quarter ended June 30, 2001, approximately 65% of Mesa’s airline revenues were derived from cost plus contractual arrangements. All of MAI’s America West Express operations and USAirways Express jet operations are on a cost plus basis. The percentage of revenue generated under cost plus agreements is expected to increase in the future as Mesa adds additional regional jets to its America West Express and USAirways Express operations. The Company’s code-sharing agreement with America West expires in 2012. The Company’s code-sharing agreements with USAirways expire on various dates from 2003 through 2005, with the regional jet agreement expiring in 2008. Mesa derives the remainder of its passenger revenues from a combination of local fares, through fares and joint fares.
During fiscal 2001 several significant events have occurred:
In October 2000, the Company and US Airways amended the US Airways regional jet service agreement to expand the number of regional jets under contract from 28 to 32 and extend the term to 2008. The Company and US Airways also amended prorate agreements covering Kansas City, Pittsburgh, Philadelphia, New Orleans and Tampa/Orlando. The Kansas City agreement was extended from 2000 to 2005 and amended to eliminate the ability of either party to terminate the agreement without cause and permit the Company to add additional code share partners in Kansas City. The other four prorate agreements were extended by one year over their previous expiration dates.
In November 2000, the Company and America West amended their agreement to expand the number of regional jets operated from 17 to 22 and extend the term of the agreement for regional jets from 2004 to 2012.
In December 2000, the Company reached agreement with Fleet Capital for a $35 million line of credit, collateralized by the Company’s inventory and receivables. The agreement, which expires in December 2003, has provisions that allow the expansion of available credit to $50 million by adding new lenders. The Company will use the facility for general working capital purposes. There were no amounts outstanding under this facility at June 30, 2001.
In February 2001, the Company and Midwest Express marked the launch of their code share program in Kansas City. The agreement provides incremental passenger revenue at minimal additional operating cost.
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In March 2001, the Company reached an agreement with America West Airlines on a new long-term codeshare agreement to provide up to 83 additional regional jets to the America West system. Under the agreement, Mesa will provide 43 additional aircraft, including three 50-seat CRJ-200s, 20 64-seat CRJ-700s, and 20 80-seat CRJ-900s. Mesa will provide the CRJ-200s beginning in April 2001, while the CRJ-700 and CRJ-900 deliveries commence in the first quarter of 2002 and first quarter of 2003, respectively. The codeshare agreement will be effective as of February 1, 2001, and will expire no sooner than 2012. Mesa will be the launch customer of the CRJ-900, a new derivative of the popular CRJ family of aircraft manufactured by Bombardier Inc. of Canada and powered by General Electric engines. Mesa currently operates 50 regional jets for America West and US Airways. In addition to the firm orders, Mesa has an option to acquire an additional 80 CRJ-700 and CRJ-900 regional jets, of which 40 would be provided to America West.
Also, during the second quarter of fiscal 2001, the Company continued its turboprop restructuring plan by announcing a plan to retire an additional eight B1900 aircraft. As part of the restructuring plan, the Company took an impairment charge of $22.7 million to retire an additional eight B1900 aircraft and additional costs to dispose of aircraft previously sold or under contract to be sold.
The following tables set forth quarterly and year to date comparisons for the periods indicated below:
OPERATING DATA
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FINANCIAL DATA
RESULTS OF OPERATIONS
Operating Revenues:
In the quarter and nine months ended June 30, 2001, operating revenues increased by $19.4 million (16.1%), and $53.9 million (15.5%), respectively, as compared to the corresponding periods in 2000. This increase was primarily due to the increase in capacity, as measured by available seat miles (“ASM’s”), in the Mesa system. ASM’s increased by 18.7% and 13.4% for the quarter and nine-month period ended June 30, 2001 over the same period in 2000, respectively. The increase in ASM’s was a result of the number of regional jets added to the fleet, which have additional seats and fly longer stage lengths.
Operating Expenses
Flight Operations
In the quarter ended June 30, 2001, flight operations expense increased 24.3% to $69.4 million (8.2 cents per ASM) from $55.8 million (7.8 cents per ASM) from the comparable period in 2000. In the nine months ended June 30, 2001, flight operations expense increased 25.6% to $200.6 million (8.1 cents per ASM) from $159.7 million (7.3 cents per ASM) in the corresponding period in 2000. The increase was primarily due to an increase in capacity (ASM’s) and higher fuel costs.
Maintenance Expense
In the quarter ended June 30, 2001, maintenance expense increased 14% to $23.7 million (2.8 cents per ASM) for the quarter ended June 30, 2001, from $20.8 million (2.9 cents per ASM) for the comparable period in 2000. In the nine months ended June 30, 2001, maintenance expense increased 18.3% to $71.0 million (2.9 cents per ASM) from $60.0 million (2.8 cents per ASM) in the corresponding period in 2000. The increase in maintenance costs is primarily the result of certain unscheduled engine overhauls and an overall increase in available capacity.
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Aircraft and Traffic Service Expense
In the quarter ended June 30, 2001, aircraft and traffic servicing expense increased by 1.5% to $13.4 million (1.6 cents per ASM) from $13.2 million (1.9 cents per ASM) during the comparable quarter of the previous fiscal year. In the nine months ended June 30, 2001, aircraft and traffic servicing expense increased 2.5% to $41.3 million (1.7 cents per ASM) from $40.3 million (1.9 cents per ASM) in the corresponding period in 2000. The increase in aircraft and traffic service expense is primarily due to increased headcount to support the Company’s increase in flying activity.
Promotion and Sales
In the quarter ended June 30, 2001, promotion and sales expense decreased 16.7% to $6.2 million (0.7 cents per ASM) from $7.5 million (1.1 cents per ASM) from the prior year’s comparable quarter. In the nine months ended June 30, 2001, promotion and sales expense decreased 14.5% to $19.5 million (0.8 cents per ASM) from $22.9 million (1.1 cents per ASM) in the corresponding period in 2000. Mesa’s contract with America West and our Jet Contract with USAirways eliminates booking fees and travel agency commissions being charged directly to Mesa and as such, these costs per ASM are expected to decline as the America West Express and USAirways jet operations grow.
General and Administrative Expense
In the quarter ended June 30, 2001, general and administrative expense increased 51.6% to $9.6 million (1.1 cents per ASM) from $6.3 million (0.9 cents per ASM) during the comparable quarter of the previous fiscal year. The increase in the quarter is primarily due to higher insurance costs ($0.8 million), increased IS costs ($0.5 million), an increase in 401(k) matching ($0.3 million), and bank fees associated with the Company’s line of credit ($0.2 million). In the nine months ended June 30, 2001, general and administrative expense increased 38.8% to $27.2 million (1.1 cents per ASM) from $19.6 million (0.9 cents per ASM) in the corresponding period in 2000. The increase is primarily due to the establishment of legal reserve, increased health insurance costs and fees associated with the Company’s line of credit. The reserve was established for a contingency fee arrangement with Mesa’s attorneys for certain attorney and consulting fees incurred as a result of settling outstanding litigation with United Airlines.
Depreciation and Amortization
In the quarter ended June 30, 2001, depreciation and amortization decreased 8.8% to $3.2 million (0.4 cents per ASM) as compared to $3.6 million (0.5 cents per ASM) for the quarter ended June 30, 2000. In the nine months ended June 30, 2001, depreciation and amortization decreased 13.5% to $10.5 million (0.4 cents per ASM) from $12.1 million (0.6 cents per ASM) in the corresponding period in 2000. The decrease is primarily due to the disposal of Beech 1900 aircraft and the cessation of depreciation on aircraft held for sale.
Impairment of Long-Lived Assets
Impairment of long-lived assets included an impairment charge of $22.7 million to retire an additional eight B1900 aircraft and additional costs to dispose of aircraft previously sold or under contract to be sold.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, Mesa’s cash and cash equivalents and marketable securities totaled $50.9 million, compared to $34.1 million at September 30, 2000. During the period, the Company has used cash to pay aircraft rental costs of approximately $18.5 million, purchase aircraft parts and equipment of approximately $12.6 million and to prepare B1900’s for return of approximately $9.2 million. Mesa’s cash and cash equivalents and marketable securities are intended to be used for working capital, capital expenditures and acquisitions. In addition, the Company has a $35 million line of credit facility with Fleet Capital. There were no amounts outstanding on the line as of June 30, 2001.
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Mesa had receivables of approximately $39.4 million at June 30, 2001, which consisted primarily of amounts due from code-sharing partners America West and USAirways and passenger ticket receivables due through the Airline Clearing House. Under the terms of the USAirways agreement, Mesa receives a substantial portion of its revenues through the clearing house. Historically, Mesa has generated adequate cash flow to meet its needs.
In May 2001, Mesa restructured various past contractual claims it had against Bombardier Regional Aircraft Division. Under this restructuring, Mesa received $25.2 million to resolve these outstanding claims. Amounts received have been classified as deferred credits and are being amortized over 15 years.
Management’s belief that Mesa will have adequate cash flow to meet its operating needs is a forward-looking statement. Actual cash flow could materially differ from this forward looking statement as a result of many factors, including the termination of one or more code-sharing agreements; failure to sell, dispose, or redeploy excess aircraft in a timely manner; a substantial decrease in the number of routes allocated to MAI under its code-sharing agreements with USAirways; reduced levels of passenger revenue, additional taxes or costs of compliance with governmental regulations; fuel cost increases; increases in competition; increases in interest rates and general economic conditions. Mesa has minimal market risk with respect to market risk instruments such as foreign currency exchange risk and commodity price risk. Mesa is subject to interest rate risk with respect to current and future aircraft financing. The Company’s exposure to market risk has not changed significantly since September 30, 2000.
In December 1999, the Company’s Board of Directors authorized the Company to repurchase up to 10%, approximately 3.4 million shares, of the outstanding shares of its Common Stock. In January 2001, the Board approved the repurchase by the Company of up to an additional one million shares of its Common Stock. As of July 24, 2001, the Company has acquired approximately 3.0 million shares of Common Stock for approximately $17.8 million leaving approximately 1.4 million shares available for repurchase under the current Board authorizations.
AIRCRAFT
The following table lists the aircraft owned and leased by Mesa for scheduled operations as of March 31, 2001:
PENDING DEVELOPMENTS
ERJ Program
In January 2000, Mesa entered into an agreement with Empresa Brasiliera de Aeronautica SA (“Embraer”) to acquire 36 50-passenger Embraer ERJ-145 regional jets. Deliveries began late in the third quarter of fiscal 2000 and will continue through late fiscal 2002. Mesa also has options for an additional 64 aircraft with the right to convert deliveries into 37-seat ERJ 135’s. Mesa introduced the ERJ-145 aircraft into revenue service early in the third quarter of fiscal 2000 as USAirways Express. Mesa intends to move the CRJ regional jets currently flying as USAirways Express to America West Express and replace them with the ERJ-145’s as deliveries take place. As of
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August 6, 2001, the Company has taken delivery of 18 of these aircraft, which have been financed as operating leases. In conjunction with this purchase agreement, Mesa has $12.7 million on deposit with Embraer, which is included with lease and equipment deposits.
CRJ Program
In August 1996, the Company entered into an agreement with Bombardier Regional Aircraft Division (“BRAD”) to acquire 16 CRJ 50-passenger jet aircraft. The agreement also granted the Company an option to acquire an additional 16 jet aircraft and provided for additional rolling options to acquire a third block of 16 aircraft. In fiscal 1997, the Company exercised options to purchase 16 of the 32 CRJ aircraft reserved under the option provisions of the BRAD purchase agreement. In connection with the 32 CRJ aircraft, all are currently under permanent financing as operating leases with terms of 16 1/2 to 18 1/2 years. In fiscal 1998, Brad canceled the third block of rolling options.
In May 2001, the Company finalized its agreement with BRAD to acquire 20 64-seat CRJ-700s, and 20 80-seat CRJ-900s. Deliveries of the CRJ-700 and CRJ-900 will commence in the second quarter of fiscal 2002 and the second quarter of fiscal 2003, respectively. Mesa will be the launch customer of the CRJ-900. In addition to the firm orders, Mesa has an option to acquire an additional 80 CRJ-700 and CRJ-900 regional jets.
Beechcraft 1900D
During the second quarter of fiscal 2001, the Company continued its turboprop restructuring plan by announcing a plan to retire an additional eight B1900 aircraft. This reduction is in addition to the plan to dispose of 30 excess B1900 aircraft announced in fiscal 1999. As of March 31, 2001, the Company had disposed of 17 of these aircraft. Under an agreement with Raytheon Aircraft Corporation, the Company has the right to sell to Raytheon six B1900 aircraft beginning in October 2001 and five additional B1900 aircraft beginning in October 2002. The Company is currently in discussions with Raytheon to return an additional four B1900’s. The Company is actively seeking proposals for the disposition of the remaining six B1900 aircraft. Mesa further reduced its fleet by returning two aircraft to the lessor upon expiration of their leases in the second quarter of fiscal 2001.
The Company has also been in discussions with Raytheon regarding the cost of operating B1900D aircraft purchased from Raytheon. While these discussions have been ongoing, the Company has not made payments to Raytheon on the debt associated with the aircraft and is currently in default under those debt agreements. As such, amounts outstanding under this debt agreement have been classified as current in the financial statements.
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This Form 10-Q filing, and particularly this Pending Developments section, contains certain statements including, but not limited to, information regarding the replacement, deployment and acquisition of certain numbers and types of aircraft, and projected expenses associated therewith; costs of compliance with FAA regulations and other rules and acts of Congress; the passing of taxes, fuel costs, inflation, and various expenses to the consumer; the relocation of certain operations of Mesa; the resolution of litigation in a favorable manner, and certain projected financial obligations. These statements, in addition to statements made in conjunction with the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “ estimate,” and similar expressions, are forward-looking statements within the meaning of the Safe Harbor provision of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or the future financial performance of Mesa and only reflect Management’s expectations and estimates. The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements: changing business conditions in certain market segments and industries; an increase in competition along the routes Mesa operates or plans to operate; material delays in completion by the manufacturer of the ordered and yet-to-be-delivered aircraft; changes in general economic conditions; changes in fuel prices; changes in regional economic conditions; Mesa’s relationship with employees and the terms of future collective bargaining agreements; the impact of current and future laws, Congressional investigations and governmental regulations affecting the airline industry and Mesa’s operations; bureaucratic delays; amendments to existing legislation; consumers unwilling to incur greater
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costs for flights; unfavorable resolution of negotiations with municipalities for the leasing of facilities; and risks associated with litigation outcomes. One or more of these or other factors may cause Mesa’s actual results to differ materially from any forward-looking statement. Mesa is not undertaking any obligation to update any forward-looking statements contained in this Form 10-Q.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Submission of Matters to vote for Security Holders
Item 5. Other Matters
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Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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