Mesa Airlines(MESA) - 2020 Q4 - Annual Report

PART I Item 1. Business Mesa Air Group operates as a regional air carrier under capacity purchase agreements with American and United, providing scheduled passenger service and mitigating fuel and passenger risks, despite COVID-19's impact on 2020 operations - Mesa Airlines operates as a regional air carrier, providing scheduled passenger service to 102 cities in 39 states, the District of Columbia, and Mexico[13] - All flights are operated as American Eagle or United Express under capacity purchase agreements, which provide guaranteed monthly revenue and mitigate exposure to fuel prices, ticket prices, and passenger fluctuations[13][15] Fiscal Year 2020 Revenue Distribution by Major Airline Partner | Partner | Revenue Share | | :------ | :------------ | | American CPA | 52% | | United CPA | 48% | - The COVID-19 pandemic negatively affected revenue and operating results in fiscal 2020, with expected continued impact on financial condition and liquidity[17] - Key business strategies include maintaining a low-cost structure, offering attractive work opportunities, maintaining a prudent capital structure, and minimizing 'tail risk' on aircraft leases[18][19][20][21] General COVID-19 Pandemic Our Business Strategy Aircraft Fleet Capacity Purchase Agreements Maintenance and Repairs Competition Seasonality Aircraft Fuel Insurance Human Capital Management Safety and Security Facilities Foreign Ownership Government Regulation Legal Proceedings Corporate Information Item 1A. Risk Factors The company faces significant risks from high dependence on airline partners, substantial debt, pilot shortages, and the severe impact of the COVID-19 pandemic - The company is highly dependent on its capacity purchase agreements with American and United, which account for nearly all operating revenue. Termination or non-renewal of these agreements would severely impact the business[87][88] - Reduced aircraft utilization levels, particularly due to the COVID-19 pandemic, have adversely impacted financial results and are expected to continue into 2021[90] Debt and Lease Obligations (as of September 30, 2020) | Obligation Type | Amount (in millions) | | :-------------- | :------------------- | | Total Long-Term Debt | $743.3 | | Future Minimum Lease Payments | $112.9 | | Debt Service Obligations | $853.4 | - The supply of qualified pilots is limited due to FAA Qualification Standards, leading to increased labor costs and potential operational disruptions if pilot attrition rates exceed recruitment capabilities[106][107][110] - The COVID-19 pandemic has resulted in a severe decline in demand for air travel, leading to significant capacity cuts by major airline partners and a material adverse impact on the company's business, operating results, financial condition, and liquidity[148][149][152] Item 1B. Unresolved Staff Comments No unresolved staff comments are reported - No unresolved staff comments were reported[187] Item 2. Properties The company operated a fleet of 146 aircraft as of September 30, 2020, and maintains various leased facilities suitable for its needs Aircraft Fleet as of September 30, 2020 | Aircraft Type | Owned | Leased | Total | Passenger Capacity | Average Age (years) | | :------------------ | :---- | :----- | :---- | :----------------- | :------------------ | | E-175 Regional Jet | 18 | 42 | 60 | 76 | 4.9 | | CRJ-900 Regional Jet| 48 | 16 | 64 | 76/79 | 14.0 | | CRJ-700 Regional Jet| 18 | 2 | 20 | 70 | 16.7 | | CRJ-200 Regional Jet| 1 | — | 1 | 50 | 26.7 | | Boeing 737 Cargo Jet| — | 1 | 1 | — | 26.1 | | Total | 85| 61 | 146| | | - The company's fleet size and mix are subject to change based on contract and lease expirations, growth opportunities, and transitions to other airline partners[187] Key Leased Facilities | Type | Location | Approximate Square Feet | | :--------------------- | :------------- | :---------------------- | | Corporate Headquarters | Phoenix, Arizona | 33,770 | | Training Center | Phoenix, Arizona | 23,783 | | Hangar | Houston, Texas | 74,524 | Item 3. Legal Proceedings The company faces two class action lawsuits regarding its 2018 IPO, but management expects no material adverse financial impact - The company is subject to two putative class action lawsuits alleging federal securities law violations in connection with its August 2018 IPO[190] - These lawsuits, filed in March and April 2020, claim materially false and misleading statements or omissions in the IPO registration statement and seek unspecified monetary damages[190] - Management believes the ultimate outcome of these lawsuits and other routine legal matters is not likely to have a material adverse effect on the company's financial position, liquidity, or results of operations[191] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to Mesa Air Group, Inc[192] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common stock trades on Nasdaq under "MESA" since 2018, with no dividends paid, and its performance has declined since IPO - Common stock has traded on The Nasdaq Global Select Market under "MESA" since August 10, 2018[194] - The company has not paid cash dividends and does not expect to in the foreseeable future, intending to retain future earnings and being subject to dividend restrictions in lease facilities[197] Indexed Returns (August 10, 2018 - September 30, 2020) | Company Name/Index | 8/10/2018 | 9/30/2020 | | :----------------- | :-------- | :-------- | | Mesa Air Group, Inc.| $100.00 | $25.11 | | NASDAQ Composite | $100.00 | $145.67 | | NASDAQ Transportation Index | $100.00 | $90.89 | Item 6. Selected Financial Data This section summarizes consolidated financial and operating data from 2016-2020, showing 2020 declines in revenue, net income, and operating metrics due to COVID-19 Selected Consolidated Statements of Operations Data (in thousands, except per share data) | Metric | 2020 | 2019 | 2018 | | :---------------------- | :---------- | :---------- | :---------- | | Operating revenues | $545,070 | $723,357 | $681,595 | | Operating income | $80,167 | $121,137 | $72,648 | | Net income | $27,464 | $47,580 | $33,255 | | Net income per share (Diluted) | $0.78 | $1.36 | $1.32 | | Total assets | $1,501,930 | $1,451,917 | $1,472,388 | | Long-term debt and financing leases, excluding current portion | $542,456 | $677,423 | $760,177 | | Stockholders' equity | $457,859 | $425,868 | $374,467 | Selected Operating Data | Metric | 2020 | 2019 | 2018 | | :---------------------- | :---------- | :---------- | :---------- | | Block hours | 313,110 | 456,247 | 410,974 | | Departures | 166,776 | 246,634 | 227,978 | | Passengers | 8,500,072 | 14,664,441 | 13,556,774 | | Available seat miles (thousands) | 7,581,506 | 10,863,623 | 9,713,877 | | Contract revenue per ASM (cents) | 6.68 ¢ | 6.29 ¢ | 6.58 ¢ | | Operating cost per ASM (cents) | 6.13 ¢ | 5.54 ¢ | 6.27 ¢ | Adjusted Non-GAAP Financial Data (in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------- | :---------- | :---------- | :---------- | | Adjusted EBITDA | $163,306 | $208,652 | $164,778 | | Adjusted EBITDAR| $212,108 | $260,858 | $233,670 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance, liquidity, and operations, focusing on COVID-19's impact, revenue declines, cost measures, and CARES Act funding - Total operating revenue decreased by $178.3 million (24.6%) in fiscal year 2020 compared to 2019, primarily due to decreased flying across all fleets as a result of COVID-19[268] - Net income for fiscal year 2020 was $27.5 million ($0.78 per diluted share), down from $47.6 million ($1.36 per diluted share) in 2019[232] - The company received $95.2 million in CARES Act Payroll Support Program (PSP) funds, with $83.8 million recognized in fiscal 2020 to offset payroll expenses[278] - Subsequent to year-end, the company secured a $200.0 million secured loan facility from the U.S. Treasury under the CARES Act, with $195.0 million borrowed by November 13, 2020[235][328] - Cash and cash equivalents stood at $99.4 million as of September 30, 2020, with total unrestricted liquidity of $99.4 million[231][334] Overview Impact of the COVID-19 Pandemic 2020 Financial Highlights Industry Trends Seasonality Components of Our Results of Operations Results of Operations Cautionary Statement Regarding Non-GAAP Measures Adjusted EBITDA and Adjusted EBITDAR Liquidity and Capital Resources Sources and Uses of Cash Restricted Cash Cash Flows Commitments and Contractual Obligations Off-Balance Sheet Arrangements Critical Accounting Policies Emerging Growth Company Status Recent Accounting Pronouncements Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on variable-rate debt, with limited foreign currency and fuel price risk due to capacity agreements - The company is subject to interest rate risk on its variable-rate long-term debt, which is based on LIBOR[391] Interest Rate Risk Exposure (as of September 30, 2020) | Debt Type | Amount (in millions) | | :----------- | :------------------- | | Variable Rate| $486.6 | | Fixed Rate | $259.9 | - A hypothetical 50 basis point increase in market interest rates would have increased interest expense by approximately $2.4 million in fiscal year 2020[392] - The company has de minimis foreign currency risk and limited exposure to fuel price risk due to its capacity purchase agreements[394][395] PART I – Financial Information Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents audited consolidated financial statements, including balance sheets, income statements, cash flows, and comprehensive notes, along with auditor reports - The consolidated financial statements for the year ended September 30, 2020, were audited by Ernst & Young LLP, who issued an unqualified opinion[403] - The company adopted ASU No. 2016-02, Leases (Topic 842), effective October 1, 2019, recognizing right-of-use assets and lease liabilities on the balance sheet[404][507] Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2020 | Sep 30, 2019 | | :---------------------- | :----------- | :----------- | | Cash and cash equivalents | $99,395 | $68,855 | | Total current assets | $155,591 | $157,841 | | Property and equipment, net | $1,212,415 | $1,273,585 | | Operating lease right-of-use assets | $123,251 | — | | Total assets | $1,501,930 | $1,451,917 | | Current portion of long-term debt and financing leases | $189,268 | $165,900 | | Current maturities of operating leases | $43,932 | — | | Total current liabilities | $353,326 | $256,706 | | Long-term debt and financing leases, excluding current portion | $542,456 | $677,423 | | Noncurrent operating lease liabilities | $62,531 | — | | Total liabilities | $1,044,071 | $1,026,049 | | Total stockholders' equity | $457,859 | $425,868 | Consolidated Statements of Operations Highlights (in thousands) | Metric | 2020 | 2019 | 2018 | | :---------------------- | :---------- | :---------- | :---------- | | Total operating revenues| $545,070 | $723,357 | $681,595 | | Total operating expenses| $464,903 | $602,220 | $608,947 | | Operating income | $80,167 | $121,137 | $72,648 | | Net income | $27,464 | $47,580 | $33,255 | | Basic EPS | $0.78 | $1.37 | $1.34 | | Diluted EPS | $0.78 | $1.36 | $1.32 | Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 2020 | 2019 | 2018 | | :-------------------------------------- | :---------- | :---------- | :---------- | | Net cash provided by operating activities | $174,662 | $151,676 | $118,939 | | Net cash used in investing activities | $(26,667) | $(104,842) | $(138,563) | | Net cash provided by (used in) financing activities | $(117,655) | $(81,467) | $66,411 | | Net change in cash and cash equivalents | $30,340 | $(34,633) | $46,787 | 1. Organization and Operations 2. Summary of Significant Accounting Policies 3. Contract revenue and Pass- through and other 4. Recent Accounting Pronouncements 5. Concentrations 6. Intangible Assets 7. Balance Sheet Information 8. Fair Value Measurements 9. Long-Term Debt and Other Borrowings 10. Earnings Per Share 11. Common Stock 12. Income Taxes 13. Share-Based Compensation 14. Employee Stock Purchase Plan 15. Leases and Commitments 16. Contingencies 17. Selected Consolidated Quarterly Financial Data (unaudited) 18. Subsequent Events PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement[607] - The company has a code of conduct and ethics applicable to all employees and directors, available on its investor relations website[608] Item 11. Executive Compensation Executive compensation details are incorporated by reference from the 2021 Proxy Statement - Executive compensation information is incorporated by reference from the 2021 Proxy Statement[609] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and related stockholder matters are incorporated by reference from the 2021 Proxy Statement - Security ownership information for beneficial owners and management is incorporated by reference from the 2021 Proxy Statement[610] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Proxy Statement[611] Item 14. Principal Accountant Fees and Services Principal accountant fees and services information is incorporated by reference from the 2021 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[612] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all documents filed as part of the Form 10-K, including consolidated financial statements, schedules, and a comprehensive exhibit index - The section includes consolidated financial statements and an exhibit index[614][616] - Financial statement schedules are omitted as the required information is presented in the consolidated financial statements or notes[615] - The exhibit index details various agreements, including capacity purchase agreements with United and American, credit agreements, and employment agreements, many of which are incorporated by reference[617][618][619][620][621][622][623][624]