Mesa Airlines(US:MESA)2025-05-13 23:19Part I Business Overview Mesa Air Group operates as a regional air carrier primarily under a Capacity Purchase Agreement with United Airlines, facing liquidity challenges addressed by strategic asset sales and a pending merger with Republic Airways General Operations and Partner Agreements Mesa's operations are primarily driven by its Capacity Purchase Agreement with United, which generated 97% of FY2024 revenue and is transitioning to an all E-175 fleet by March 2025 - As of September 30, 2024, Mesa operated 67 aircraft (55 E-175s, 12 CRJ-900s) for United Express; the United CPA accounted for 97% of consolidated contract revenues in FY202414 - The company wound down its CPA with American Airlines on April 3, 2023, and its Flight Services Agreement with DHL on March 1, 2024145455 - United is exercising its right to remove all CRJ-900 aircraft from the CPA, with the final 12 to be removed by the end of February 2025, transitioning Mesa to an all E-175 fleet for United49 - Subsequent amendments to the United CPA extended rate increases through March 2026 and provided for up to $14.0 million in reimbursements for pilot training costs related to the E-175 fleet transition5253 Merger with Republic Airways Mesa entered a merger agreement with Republic Airways on April 4, 2025, contingent on approvals and a concurrent Three Party Agreement with United that includes CPA rate increases and asset dispositions - The company entered into a merger agreement with Republic Airways on April 4, 2025, with Mesa continuing as the surviving corporation17 - A concurrent Three Party Agreement with United and Republic provides for the termination of the current United CPA, asset disposals, and a 3% increase in CPA block hour rates, retroactive to January 1, 2025, subject to the merger's completion252632 - The merger's completion is contingent on several conditions, including shareholder approvals, regulatory clearance (HSR Act), and no material adverse effects on either company21 Liquidity and Going Concern Mesa reported a $91.0 million net loss in FY2024, raising going concern doubts, which management addressed through asset sales, debt restructuring, and CPA rate increases - FY2024 net loss was $91.0 million, largely due to a $73.7 million impairment expense on held-for-sale assets, raising concerns about the company's ability to fund operations and meet debt obligations29 - Management's remediation plan includes significant asset sales, such as 18 E-175 aircraft to United for $227.7 million gross proceeds and 15 CRJ-900 airframes for $19.0 million33 - The company obtained waivers for financial covenant defaults related to minimum liquidity requirements under its United Revolving Credit Facility and modifications to its UST Loan covenants3336 - As of September 30, 2024, the company has $50.5 million in principal debt payments due within twelve months and a $113.7 million UST Loan payment due in October 202537 Aircraft Fleet and Human Capital As of September 30, 2024, Mesa operated a fleet of 98 aircraft with 67 active under the United CPA, employing 1,838 people with a significant unionized workforce Aircraft Fleet as of September 30, 2024 | Type | Active under CPA | Held for sale | Leased to third party | Unassigned | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | E-175 | 55 | — | — | 5 | 60 | | CRJ-900 | 12 | 24 | — | — | 36 | | CRJ-700 | — | — | 2 | — | 2 | | Total | 67 | 24 | 2 | 5 | 98 | - The company employed 1,838 people as of September 30, 2024, including 596 pilots and 559 flight attendants66 - Approximately 62.8% of employees are represented by labor unions (ALPA and AFA), with collective bargaining agreements for both groups becoming amendable in 20227071 Risk Factors Mesa faces substantial risks including high dependency on the United CPA, significant debt, labor shortages, competition, and uncertainties related to its pending merger and the utilization of federal Net Operating Losses - Dependence on United: The company derives substantially all operating revenue from its CPA with United (97% in FY2024); termination or non-renewal of this agreement would have a material adverse effect9899 - Financial Risks: The company has a significant amount of debt, with approximately $310.3 million in total long-term principal balance as of September 30, 2024; failure to comply with debt covenants could lead to acceleration of payments104110 - Labor Risks: The business is vulnerable to pilot and mechanic shortages, which can increase attrition and labor costs; while recent pay raises have helped, a return to high attrition could negatively impact operations and finances114115119 - Merger Risks: The merger with Republic is subject to numerous conditions, including shareholder and regulatory approvals, and may not be completed; failure to complete the merger could adversely affect the company170171 - Tax Asset Risks: The ability to utilize approximately $511.7 million in federal Net Operating Loss (NOL) carryforwards may be limited by an "ownership change" under Section 382 of the Internal Revenue Code148149 Cybersecurity Mesa's Board Audit Committee oversees its NIST-based cybersecurity program, which includes technical safeguards and third-party risk management, with no material threats identified as of the report date - The Board's Audit Committee oversees the cybersecurity program, which is integrated into the company's enterprise-wide risk management184193 - The cybersecurity strategy includes technical safeguards, incident response plans, third-party risk management, and regular employee training; the company uses third-party firms for periodic assessments187188189190 - As of the filing date, the company does not believe that risks from cybersecurity threats are reasonably likely to have a material effect on its business, operations, or financial condition197 Properties As of September 30, 2024, Mesa's active fleet comprised 67 jets (55 E-175s, 12 CRJ-900s) with a transition to an all E-175 fleet underway, supported by leased corporate and operational facilities Active Aircraft Fleet (as of Sep 30, 2024) | Aircraft Type | Owned | Leased | Total | Passenger Capacity | Average Age (years) | | :--- | :--- | :--- | :--- | :--- | :--- | | E-175 Regional Jet | 18 | 37 | 55 | 70-76 | 8.7 | | CRJ-900 Regional Jet | 7 | 5 | 12 | 76-79 | 18.2 | | CRJ-700 Regional Jet | — | 2 | 2 | 50-70 | 17.4 | - The company leases its corporate headquarters (33,770 sq. ft.) and training center (23,783 sq. ft.) in Phoenix, AZ, along with hangar and office space in Texas, Kentucky, and Washington D.C.199 Part II Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Mesa's FY2024 saw a 4.3% revenue decrease to $476.4 million and an improved net loss of $91.0 million, with management actively addressing persistent liquidity challenges through asset sales and debt restructuring Results of Operations (FY 2024 vs. FY 2023) In FY2024, total operating revenues decreased 4.3% to $476.4 million due to reduced block hours, while operating expenses decreased 6.9% to $542.2 million, narrowing the operating loss to $65.8 million despite increased asset impairment Operating Revenues Comparison (in thousands) | Revenue Type | 2024 | 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Contract | $404,322 | $421,298 | $(16,976) | (4.0)% | | Pass-through and other | $72,087 | $76,767 | $(4,680) | (6.1)% | | Total operating revenues | $476,409 | $498,065 | $(21,656) | (4.3)% | Operating Expenses Comparison (in thousands) | Expense Category | 2024 | 2023 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Flight operations | $184,472 | $216,748 | $(32,276) | (14.9)% | | Maintenance | $184,725 | $199,648 | $(14,923) | (7.5)% | | Depreciation and amortization | $40,041 | $60,359 | $(20,318) | (33.7)% | | Asset impairment | $73,709 | $54,343 | $19,366 | 35.6% | | Total operating expenses | $542,229 | $582,411 | $(40,182) | (6.9)% | - The effective tax rate was (0.6)% in FY2024 compared to 6.9% in FY2023, with the variance from the statutory rate primarily due to state taxes and changes in the valuation allowance on net operating losses289 Liquidity and Capital Resources As of September 30, 2024, Mesa held $15.6 million in cash, with $34.2 million generated from operations and $169.3 million from asset sales, while facing significant near-term debt obligations including a $113.7 million UST Loan due in October 2025 - As of September 30, 2024, the company had $15.6 million in cash and cash equivalents and $3.0 million in restricted cash313 Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2024 | FY 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $34,244 | $(24,091) | | Net cash provided by investing activities | $148,788 | $142,285 | | Net cash used in financing activities | $(200,474) | $(143,147) | - The company has significant debt, including a $113.7 million UST Loan due in a single installment on October 30, 2025; total long-term debt principal (including current portion) was $310.3 million104302 - The company has $13.2 million available for borrowing under its United Revolving Credit Facility as of September 30, 2024104 Critical Accounting Estimates Mesa's critical accounting estimates involve significant judgment in lease accounting, revenue recognition under the CPA (including $123.0 million in lease revenue for FY2024), long-lived asset impairment assessments, and income tax estimates, particularly the valuation allowance for deferred tax assets - Revenue Recognition: The CPA is treated as a single performance obligation (flight services) satisfied over time; a significant portion is deemed lease revenue, totaling $123.0 million in FY2024360362 - Property and Equipment Impairment: The company groups assets at the CPA level for impairment testing; despite operating losses and CRJ-900 removals, no impairment was recorded on the operating fleet as future undiscounted cash flows exceeded carrying value367370452 - Income Taxes: The company maintains a valuation allowance against deferred tax assets it deems not more-likely-than-not to be realized; the valuation allowance was $41.6 million as of September 30, 2024371548 Financial Statements and Supplementary Data Audited consolidated financial statements for FY2024 report a $91.0 million net loss on $476.4 million revenue, with total assets decreasing to $596.9 million and stockholders' equity to $110.2 million, reflecting significant asset sales and subsequent events like the Republic merger and debt restructuring Consolidated Financial Highlights (in thousands) | Metric | As of/For Year Ended Sep 30, 2024 | As of/For Year Ended Sep 30, 2023 | | :--- | :--- | :--- | | Total Operating Revenues | $476,409 | $498,065 | | Net Loss | $(91,015) | $(120,116) | | Total Assets | $596,858 | $898,467 | | Total Liabilities | $486,616 | $698,431 | | Total Stockholders' Equity | $110,242 | $200,036 | - Subsequent Events: After fiscal year-end, the company entered a merger agreement with Republic, agreed to sell 18 E-175s to United for $227.7 million (expecting a $120.6 million loss in FY25), received $4.5 million in debt forgiveness from United, and obtained crucial debt covenant waivers570577579580 - Assets Held for Sale: The company recorded a $73.7 million impairment charge in FY2024 related to classifying CRJ-900 aircraft, engines, and parts as held for sale502 - The company has had three different auditors for the fiscal years presented: Ernst & Young LLP (FY2022), RSM US LLP (FY2023), and Marcum LLP (FY2024)390397410 Controls and Procedures As of September 30, 2024, management concluded that disclosure controls and procedures were not effective, yet internal control over financial reporting was effective, with previously identified material weaknesses successfully remediated - Management concluded that disclosure controls and procedures were not effective as of September 30, 2024587 - Despite the issue with disclosure controls, management determined that the company maintained effective internal control over financial reporting (ICFR) as of September 30, 2024591 - Previously disclosed material weaknesses related to IT controls, debt covenant compliance, and an omitted subsequent event disclosure have been remediated as of September 30, 2024592593596 Part III Directors, Executive Officers, Compensation, and Corporate Governance Information for Items 10 through 14, covering directors, executive officers, compensation, and corporate governance, is incorporated by reference from the company's definitive 2025 Proxy Statement - Information for Part III (Items 10, 11, 12, 13, and 14) is incorporated by reference from the company's 2025 Proxy Statement602604605606 Part IV Exhibits and Financial Statement Schedules This section details the financial statements, schedules, and exhibits filed with the 10-K, including key agreements, debt waivers, and management certifications - This section contains the consolidated financial statements and a list of all exhibits filed with the 10-K, including material contracts and management compensatory plans608610