Mesa Airlines(MESA) - 2021 Q1 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements regarding future operating results, financial condition, business strategies, and management plans, which may differ materially from expectations due to known and unknown risks and uncertainties - This report contains forward-looking statements regarding future operating results, financial condition, business strategies, and management plans, where actual results may differ materially from expectations due to known and unknown risks, uncertainties, and other important factors[6][7] - Key factors that could cause actual results to differ from expectations include the severity, duration, and impact of the COVID-19 pandemic, the supply and retention of qualified pilots, reliance on and potential changes to capacity purchase agreements, increased labor costs, reduced utilization under capacity purchase agreements, the financial strength of major airline partners, and the company's debt levels and ability to comply with financial covenants[8] PART I – FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements of Mesa Air Group, Inc. as of December 31, 2020, along with detailed notes Item 1. Financial Statements This section provides Mesa Air Group, Inc.'s unaudited condensed consolidated financial statements as of December 31, 2020, including balance sheets, statements of operations and comprehensive income, stockholders' equity, and cash flows, along with detailed notes covering various accounting aspects Condensed Consolidated Balance Sheets This section presents the condensed consolidated balance sheets, highlighting key financial positions at quarter-end Condensed Consolidated Balance Sheets Key Data (As of December 31, 2020 vs September 30, 2020) | Metric ($ in thousands) | December 31, 2020 | September 30, 2020 | Change | Change Rate (%) | | :--------------------------------- | :------------- | :------------- | :----- | :--------- | | Cash and cash equivalents | 181,300 | 99,395 | 81,905 | 82.4 | | Restricted cash | 3,634 | 3,446 | 188 | 5.5 | | Accounts receivable, net | 15,412 | 13,712 | 1,700 | 12.4 | | Consumable parts and supplies, net | 22,760 | 22,971 | (211) | (0.9) | | Prepaid expenses and other current assets | 12,897 | 16,067 | (3,170)| (19.7) | | Total current assets | 236,003 | 155,591 | 80,412 | 51.7 | | Property and equipment, net | 1,194,061 | 1,212,415 | (18,354)| (1.5) | | Intangible assets, net | 7,722 | 8,032 | (310) | (3.9) | | Lease and equipment deposits | 1,851 | 1,899 | (48) | (2.5) | | Operating lease right-of-use assets | 114,666 | 123,251 | (8,585)| (7.0) | | Other assets | 514 | 742 | (228) | (30.7) | | Total assets | 1,554,817 | 1,501,930 | 52,887 | 3.5 | | Current liabilities: | | | | | | Current portion of long-term debt and financing leases | 99,745 | 189,268 | (89,523)| (47.3) | | Current portion of deferred revenue | 51,253 | 9,389 | 41,864 | 445.9 | | Current maturities of operating leases | 44,712 | 43,932 | 780 | 1.8 | | Accounts payable | 47,576 | 53,229 | (5,653)| (10.6) | | Accrued compensation | 7,029 | 12,030 | (5,001)| (41.6) | | Other accrued expenses | 37,581 | 45,478 | (7,897)| (17.4) | | Total current liabilities | 287,896 | 353,326 | (65,430) | (18.5) | | Non-current liabilities: | | | | | | Long-term debt and financing leases, net of current portion | 624,116 | 542,456 | 81,660 | 15.1 | | Non-current operating lease liabilities | 53,570 | 62,531 | (8,961)| (14.3) | | Deferred credits | 5,176 | 5,705 | (529) | (9.3) | | Deferred income taxes | 69,111 | 64,275 | 4,836 | 7.5 | | Deferred revenue, net of current portion | 26,504 | 14,369 | 12,135 | 84.5 | | Other non-current liabilities | 4,147 | 1,409 | 2,738 | 194.3 | | Total non-current liabilities | 782,624 | 690,745 | 91,879 | 13.3 | | Total liabilities | 1,070,520 | 1,044,071 | 26,449 | 2.5 | | Total stockholders' equity | 484,297 | 457,859 | 26,438 | 5.8 | | Total liabilities and stockholders' equity | 1,554,817 | 1,501,930 | 52,887 | 3.5 | Condensed Consolidated Statements of Operations and Comprehensive Income This section provides the condensed consolidated statements of operations and comprehensive income, detailing revenue and expense performance Condensed Consolidated Statements of Operations and Comprehensive Income Key Data (For the Three Months Ended December 31, 2020 vs December 31, 2019) | Metric ($ in thousands) | December 31, 2020 | December 31, 2019 | Change | Change Rate (%) | | :--------------------------------- | :------------- | :------------- | :----- | :--------- | | Contract revenue | 127,158 | 171,800 | (44,642)| (26.0) | | Pass-through and other revenue | 23,213 | 12,236 | 10,977 | 89.7 | | Total operating revenue | 150,371 | 184,036 | (33,665) | (18.3) | | Operating expenses: | | | | | | Flight operations | 36,964 | 52,644 | (15,680)| (29.8) | | Fuel | 390 | 169 | 221 | 130.8 | | Maintenance | 52,864 | 58,095 | (5,231)| (9.0) | | Aircraft rent | 10,048 | 11,329 | (1,281)| (11.3) | | Aircraft and traffic services | 901 | 1,064 | (163) | (15.3) | | General and administrative | 13,073 | 12,996 | 77 | 0.6 | | Depreciation and amortization | 20,470 | 20,552 | (82) | (0.4) | | CARES Act grant recognition | (11,311) | — | (11,311)| 100.0 | | Total operating expenses | 123,399 | 156,849 | (33,450) | (21.3) | | Operating income | 26,972 | 27,187 | (215) | (0.8) | | Other (expense) income, net | (8,033) | (12,867) | 4,834 | (37.6) | | Income before income taxes | 18,939 | 14,320 | 4,619 | 32.3 | | Income tax expense | 4,821 | 3,535 | 1,286 | 36.4 | | Net income and comprehensive income | 14,118 | 10,785 | 3,333 | 30.9 | | Net income per share (basic) | 0.40 | 0.31 | 0.09 | 29.0 | | Net income per share (diluted) | 0.39 | 0.31 | 0.08 | 25.8 | Condensed Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, including common stock, additional paid-in capital, and retained earnings Changes in Stockholders' Equity (As of December 31, 2020) | Metric ($ in thousands) | Balance September 30, 2020 | Share-based compensation expense | Stock repurchases | Restricted stock issuance | Warrants issued, net | Net income | Balance December 31, 2020 | | :--------------------------------- | :----------------- | :----------- | :------- | :------------- | :--------------- | :----- | :----------------- | | Common stock and additional paid-in capital | 242,772 | 850 | (19) | — | 11,489 | — | 255,092 | | Retained earnings | 215,087 | — | — | — | — | 14,118 | 229,205 | | Total | 457,859 | 850 | (19) | — | 11,489 | 14,118 | 484,297 | - As of December 31, 2020, the company had 35,532,162 shares of common stock issued and outstanding, and 4,899,497 warrants outstanding[17] Condensed Consolidated Statements of Cash Flows This section presents the condensed consolidated statements of cash flows, categorizing cash movements from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Key Data (For the Three Months Ended December 31, 2020 vs December 31, 2019) | Metric ($ in thousands) | December 31, 2020 | December 31, 2019 | Change | Change Rate (%) | | :--------------------------------- | :------------- | :------------- | :----- | :--------- | | Net cash provided by operating activities | 79,273 | 38,230 | 41,043 | 107.3 | | Net cash used in investing activities | (1,773) | (12,828) | 11,055 | (86.2) | | Net cash provided by/(used in) financing activities | 4,593 | (36,692) | 41,285 | (112.5) | | Net change in cash, cash equivalents, and restricted cash | 82,093 | (11,290) | 93,383 | (827.1) | | Cash, cash equivalents, and restricted cash at end of period | 184,934 | 61,211 | 123,723| 202.1 | - In the fourth quarter of 2020, the company's operating cash flow significantly increased, primarily due to higher net income and an increase in deferred revenue[20][172][174] Investing cash outflows substantially decreased, and financing cash flow shifted from a net outflow to a net inflow, mainly as proceeds from the U.S. Treasury loan agreement offset debt repayments[20][172][174] Notes to Condensed Consolidated Financial Statements This section provides detailed notes explaining the accounting policies, significant transactions, and other relevant information supporting the condensed consolidated financial statements 1. Organization and Operations This note describes Mesa Air Group, Inc.'s business as a regional airline operating under capacity purchase agreements with major carriers - Mesa Air Group, Inc. is a regional airline providing scheduled flight services, operating 159 aircraft with approximately 420 daily flights and 3,200 employees as of December 31, 2020; all flights operate under the American Eagle, United Express, or DHL Express brands, generating revenue through Capacity Purchase Agreements (CPAs) and Flight Service Agreements (FSAs)[22] - The company's financial arrangements with major airline partners are revenue-guaranteed models, where major airlines pay fixed monthly amounts, fixed fees per flight hour and departure, and reimburse certain direct operating expenses, thereby reducing the company's exposure to fluctuations in passenger traffic, fares, and fuel prices[23] - On November 19, 2020, the company entered into an amended and restated capacity purchase agreement with American Airlines, effective for five years (January 1, 2021, to December 31, 2025), covering 40 aircraft and granting American Airlines the right to withdraw aircraft under specific conditions[26][27] On December 22, 2020, this agreement was further amended to add CRJ-900 aircraft and allow American Airlines to withdraw incremental aircraft with 60 days' notice[28] - On November 4, 2020, the company amended and restated its capacity purchase agreement with United Airlines, transferring ownership of 20 E175LL aircraft from the company to United Airlines, which then leased them back to the company for 12 years of operation[32] The company agreed to adjusted rates and received the right to waive minimum utilization clauses until December 31, 2021[33] United Airlines also prepaid $81.5 million for future services, of which $33.3 million was recognized as revenue by December 31, 2020[33] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the condensed consolidated financial statements - The company prepares its condensed consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) and has elected to "opt out" of the extended transition period for the JOBS Act, thus following the same accounting standards as other non-emerging growth public companies[36][38] - Contract revenue is recognized as services are provided, comprising fixed monthly fees and additional amounts based on flight hours and departures[39] Pass-through revenue includes passenger and hull insurance, aircraft property taxes, and maintenance costs for certain E-175 aircraft[42] The company treats a portion of its capacity purchase agreement revenue as operating lease revenue[42] Deferred Revenue Recognition Schedule ($ in thousands) | Period Ending | Total Amount Due | | :------------- | :--------- | | Remainder of 2021 | 48,420 | | 2022 | 9,714 | | 2023 | 9,563 | | 2024 | 8,503 | | 2025 | 1,338 | | Thereafter | 219 | | Total | 77,757 | - The company uses the direct expense method for regional jet engine overhauls, airframes, landing gear, and routine scheduled maintenance, recognizing expenses when maintenance is completed or during the repair period if the difference is significant[48] For the three months ended December 31, 2020, engine overhaul expenses were $14.4 million (of which $9.6 million was pass-through), and airframe C-check expenses were $10.1 million (of which $7.1 million was pass-through)[50] 3. Recent Accounting Pronouncements This note discusses the adoption and potential impact of recently issued accounting standards on the company's financial reporting - The company is evaluating the impact of ASU 2020-04 (Reference Rate Reform) on its consolidated financial statements[51] The new credit loss model was adopted on October 1, 2020, with no significant impact[52] Topic 842 (Leases) was adopted on October 1, 2019, leading to the recognition of operating lease right-of-use assets and lease liabilities, but without a material impact on the statements of operations and cash flows[53][54] 4. Concentrations This note details the company's reliance on major airline partners for substantially all its revenue and accounts receivable - As of December 31, 2020, all of the company's consolidated revenue and accounts receivable were derived from capacity purchase agreements with American Airlines and United Airlines, and a flight service agreement with DHL[59] Major Customer Revenue Contribution (For the Three Months Ended December 31, 2020) | Customer | 2020 Revenue Share (%) | 2019 Revenue Share (%) | | :--- | :----------------- | :----------------- | | American Airlines | 46 | 51 | | United Airlines | 53 | 49 | | DHL | 1 | 0 | - Termination of capacity purchase agreements with American Airlines or United Airlines would have a material adverse effect on the company's business prospects, financial condition, operating results, and cash flows[61] 5. Intangible Assets This note provides information on the company's intangible assets, primarily customer relationships, and their amortization Intangible Assets, Net ($ in thousands) | Metric | December 31, 2020 | September 30, 2020 | | :--- | :------------- | :------------- | | Customer relationships | 43,800 | 43,800 | | Accumulated amortization | (36,078) | (35,768) | | Net | 7,722 | 8,032 | - For the three months ended December 31, 2020, amortization expense was approximately $0.3 million, with an estimated $0.9 million for the remainder of 2021, and $1.0 million, $0.9 million, $0.8 million, and $0.7 million for fiscal years 2022-2025, respectively[63] 6. Balance Sheet Information This note provides additional details on specific line items within the condensed consolidated balance sheets Key Balance Sheet Items ($ in thousands) | Item | December 31, 2020 | September 30, 2020 | | :--- | :------------- | :------------- | | Consumable parts and supplies, net | 22,760 | 22,971 | | Prepaid expenses and other current assets | 12,897 | 16,067 | | Property and equipment, net | 1,194,061 | 1,212,415 | | Other accrued expenses | 37,581 | 45,478 | - As of December 31, 2020, the company identified no indicators of impairment for long-lived assets[64] Depreciation expense was approximately $20.2 million for both the 2020 and 2019 periods[65] 7. Fair Value Measurements This note describes the fair value hierarchy and methods used to measure certain financial instruments, particularly long-term debt - The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair values[66] The fair value of the company's long-term debt is determined to be Level 3, estimated using discounted cash flow methods with unobservable inputs[67] Fair Value of Long-Term Debt ($ in millions) | Metric | Carrying Value December 31, 2020 | Fair Value December 31, 2020 | Carrying Value September 30, 2020 | Fair Value September 30, 2020 | | :--- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Long-term debt and financing leases (including current portion) | 746.4 | 777.3 | 743.3 | 768.7 | 8. Long-Term Debt, Financing Leases and Other Borrowings This note details the composition of the company's long-term debt, financing leases, and other borrowing arrangements, including recent government loans Long-Term Debt Composition ($ in thousands) | Debt Type | December 31, 2020 | September 30, 2020 | | :--- | :------------- | :------------- | | Notes payable to financial institutions (due 2022) | — | 41,472 | | Notes payable to financial institutions (due 2024) | — | 55,674 | | Senior and subordinated notes payable to guarantors (due 2027) | 105,989 | 105,887 | | Notes payable to guarantors (due 2028) | 172,137 | 172,137 | | Senior and subordinated notes payable to guarantors (due 2028) | 134,325 | 138,114 | | Senior and subordinated notes payable to guarantors (due 2022) | — | 47,319 | | Senior and subordinated notes payable to guarantors (due 2022) | — | 29,682 | | Notes payable to financial institutions (due 2020) | 1,523 | 1,523 | | Notes payable to financial institutions (due 2020) | — | 4,182 | | Other notes payable to financial institutions (due 2023) | 6,185 | 6,864 | | Notes payable to financial institutions (due 2024) | 58,988 | 63,341 | | Notes payable to financial institutions (due 2023) | 43,750 | 48,125 | | Notes payable to financial institutions (due 2023) | 5,500 | 6,000 | | Revolving credit facility | 22,296 | 22,930 | | Notes payable to financial institutions (due 2025) | 195,705 | — | | Total long-term debt (including current portion) | 746,398 | 743,250 | | Less: Unamortized debt issuance costs | (11,174) | — | | Less: Note warrants | (11,363) | (11,526) | | Net long-term debt (including current portion) | 723,861 | 731,724 | | Less: Current portion | (99,745) | (189,268) | | Net long-term debt | 624,116 | 542,456 | - On October 30, 2020, the company entered into a secured loan agreement with the U.S. Department of the Treasury for up to $200 million, borrowing $43 million on October 30 and $152 million on November 13[76][78] This loan matures on October 30, 2025, and is collateralized by specific aircraft and engines[82] The company also issued 4,899,497 warrants to the U.S. Treasury[82] - Prior to receiving the U.S. Treasury loan, the company repaid $167.7 million of existing aircraft debt, recognizing a $1.0 million net gain on debt extinguishment[84] As of December 31, 2020, the company was in compliance with all debt covenants[85] 9. Earnings Per Share and Equity This note presents the calculation of basic and diluted earnings per share and provides information on equity-related items Net Income Per Common Share ($ in thousands, except per share data) | Metric | December 31, 2020 | December 31, 2019 | | :--- | :------------- | :------------- | | Net income attributable to Mesa Air Group | 14,118 | 10,785 | | Basic weighted average common shares outstanding | 35,531 | 35,023 | | Diluted weighted average common shares outstanding | 36,647 | 35,182 | | Net income per share (basic) | 0.40 | 0.31 | | Net income per share (diluted) | 0.39 | 0.31 | - In the fourth quarter of 2020, both basic and diluted net income per share increased, primarily due to higher net income[86] Dilutive share adjustments include U.S. Treasury warrants and restricted stock[87] 10. Common Stock This note provides details on the company's common stock, including warrants issued and dividend policies - The company issued 4,899,497 warrants to the U.S. Treasury with an exercise price of $3.98 per share, expiring five years from the issuance date, and exercisable via net share settlement or net cash settlement[92][93] - The company has historically not paid common stock dividends, and loan and guarantee agreements, as well as aircraft lease agreements, restrict or prohibit the company from paying dividends to common stockholders[94] 11. Income Taxes This note explains the company's income tax provisions, effective tax rates, and net operating loss carryforwards Effective Tax Rate (ETR) | Period | ETR (%) | | :--- | :------ | | For the three months ended December 31, 2020 | 25.5 | | For the three months ended December 31, 2019 | 24.7 | - The effective tax rate increased in the fourth quarter of 2020, primarily due to permanent book-to-tax deductible expense differences, state taxes, changes in state net operating loss valuation allowances, and changes in state apportionment and statutory rates[95][96] - As of September 30, 2020, the company had federal and state net operating loss carryforwards of approximately $512.4 million and $223.9 million, respectively, expected to expire between 2027-2038 and 2021-2040, respectively[97] 12. Share-Based Compensation and Stock Repurchases This note details the company's share-based compensation plans, restricted stock activity, and stock repurchase programs Restricted Stock Activity (For the Three Months Ended December 31, 2020) | Metric | Number of Shares | Grant Date Fair Value ($) | | :--- | :------- | :----------------- | | Unvested restricted stock September 30, 2020 | 1,195,548| 5.47 | | Granted | 5,000 | 7.71 | | Vested | (7,500) | 7.37 | | Forfeited | (17,500) | 4.59 | | Unvested restricted stock December 31, 2020 | 1,175,548| 5.48 | - As of December 31, 2020, unrecognized compensation cost related to unvested share-based compensation arrangements was $4.2 million, expected to be recognized over a weighted-average period of 2.0 years[98] Share-based compensation expense was $0.9 million and $1.3 million for the 2020 and 2019 periods, respectively[99] - The company repurchased 2,256 shares of common stock for $20,000 during the three months ended December 31, 2020, to cover income tax obligations arising from vested employee equity awards and warrant conversions[99] 13. Employee Stock Purchase Plan This note describes the company's Employee Stock Purchase Plan, allowing eligible employees to acquire common stock at a discount - The 2019 Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase company common stock at a 10% discount through payroll deductions, contributing 1% to 15% of eligible compensation each semi-annual period[102] The ESPP authorizes the issuance of up to 500,000 shares of common stock, with 99,644 shares issued as of December 31, 2020[103] 14. Leases and Commitments This note outlines the company's leasing arrangements and significant contractual commitments, including future minimum lease payments - The company adopted Topic 842 on October 1, 2019, recognizing $154.6 million in right-of-use assets and $141.9 million in lease liabilities[104] As of December 31, 2020, the company leased 18 aircraft, airport facilities, office space, and other property and equipment, with operating lease right-of-use assets of $114.7 million and current and non-current lease liabilities of $44.7 million and $53.6 million, respectively[105][106] Operating Lease Expense and Future Minimum Lease Payments ($ in thousands) | Metric | For the Three Months Ended December 31, 2020 | For the Three Months Ended December 31, 2019 | | :--- | :--------------------- | :--------------------- | | Operating lease cost | 13,839 | 16,784 | | Period Ending | Total Future Minimum Lease Payments | | :--- | :------------------- | | Remainder of 2021 | 38,095 | | 2022 | 33,242 | | 2023 | 15,973 | | 2024 | 14,682 | | 2025 | 1,494 | | Thereafter | 160 | | Less: Interest | (5,364) | | Amounts Recorded on Consolidated Balance Sheets | 98,282 | - The company revised its agreement with General Electric Company, deferring delivery and payment dates for 20 new spare CF34-8C5 engines, with total purchase commitments of approximately $118.9 million, and deliveries expected to commence in May 2021[111] 15. Contingencies This note addresses various legal proceedings and other contingent matters, assessing their potential financial impact - The company is involved in various legal proceedings and FAA civil actions, but management believes these will not have a material adverse effect on the company's business, financial condition, or operating results[113] 16. Subsequent Events This note discloses significant events that occurred after the balance sheet date, such as additional government financial assistance - In February 2021, the company received $48.6 million in financial assistance from the U.S. Treasury under the Payroll Support Program Extension (PSP2) of the Consolidated Appropriations Act, with the first installment of $24.3 million received on February 8, 2021[114] This aid comes with conditions, including no involuntary layoffs or furloughs until March 31, 2021, and prohibitions on stock repurchases and dividend payments until March 31, 2022[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition and operating results for the three months ended December 31, 2020, focusing on the impact of COVID-19, revenue and expense components, non-GAAP measures, and liquidity Overview This section provides a general description of Mesa Airlines' business model as a regional airline operating under capacity purchase agreements - Mesa Airlines is a regional airline providing scheduled flight services, operating 159 aircraft with approximately 420 daily flights as of December 31, 2020[117] All flights operate under the American Airlines, United Airlines, or DHL Express brands, with all revenue derived from these capacity purchase agreements and flight service agreements[118] - The company's long-term capacity purchase agreements provide fixed monthly revenue, fixed fees per flight hour and departure, and reimbursement for certain direct operating expenses, thereby insulating the company from fluctuations in fuel prices, fares, and passenger traffic[119] Impact of the COVID-19 Pandemic This section analyzes the significant adverse effects of the COVID-19 pandemic on the company's revenue and financial condition, and mitigation efforts - The COVID-19 pandemic led to a significant decline in air travel demand, materially adversely impacting the company's revenue and financial condition[120] In the fourth quarter of 2020, contract revenue decreased due to reduced flight volumes for the CRJ-900, CRJ-700, and E-175 fleets[121] - The company partially offset the negative impacts of the pandemic through Payroll Support Program (PSP) funding, a U.S. Treasury loan agreement, and stringent cost-saving measures[121] Due to the fixed revenue structure of its capacity purchase agreements, the company experienced a relatively smaller impact[121] - As of December 31, 2020, the company's cash and cash equivalents balance was $181.3 million[122] Components of Results of Operations This section breaks down the key components of the company's operating revenues and expenses - Operating revenue primarily includes contract revenue (fixed monthly fees and additional fees based on flight hours/departures from capacity purchase agreements) and pass-through and other revenue (passenger and hull insurance, aircraft property taxes, and E-175 aircraft maintenance costs)[124][125][126] - Operating expenses include flight operations (pilot, flight attendant salaries, benefits, and training), fuel (for non-CPA/FSA flights), maintenance (engine overhauls, airframes, landing gear, and routine maintenance), aircraft rent, aircraft and traffic services, general and administrative expenses, and depreciation and amortization[127][128][129][130][131][132] - The company is currently managed and operated as a single operating and reporting segment, with all resource allocation and performance assessment based on consolidated financial information[135][136] Cautionary Statement Regarding Non-GAAP Measures This section provides a cautionary note on the use and limitations of non-GAAP financial measures like Adjusted EBITDA and Adjusted EBITDAR - The company presents Adjusted EBITDA and Adjusted EBITDAR in this report as non-GAAP financial measures for supplemental disclosure, as management believes they are commonly used valuation metrics in the airline industry[137] Adjusted EBITDA is defined as net income or loss plus interest, income taxes, depreciation, and amortization, adjusted for the impact of liability revaluation, lease termination costs, debt extinguishment losses, and related financing expense write-offs[138] - Adjusted EBITDAR is defined as net income or loss plus interest, income taxes, depreciation, amortization, and aircraft rent, adjusted for the impact of liability revaluation, lease termination costs, debt extinguishment losses, and related financing expense write-offs[139] - These non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP, as they do not reflect certain cash expenditures, capital expenditures, working capital requirements, debt interest or principal payments, and may be calculated differently by other companies[140] Results of Operations This section presents a detailed analysis of the company's financial performance, including revenue, expenses, and profitability for the period Operating Revenue (For the Three Months Ended December 31, 2020) | Metric ($ in thousands) | 2020 | 2019 | Change | Change Rate (%) | | :--- | :----- | :----- | :----- | :--------- | | Contract revenue | 127,158| 171,800| (44,642)| (26.0) | | Pass-through and other revenue | 23,213 | 12,236 | 10,977 | 89.7 | | Total operating revenue | 150,371| 184,036| (33,665)| (18.3) | | Operating Data: | | | | | | Available Seat Miles (ASMs) | 1,670,943| 2,735,386| (1,064,443)| (38.9) | | Block Hours | 69,247 | 115,562| (46,315)| (40.1) | | Revenue Passenger Miles (RPMs) | 1,171,411| 2,151,593| (980,182)| (45.6) | | Average Stage Length (miles) | 637 | 573 | 64 | 11.2 | | Contract Revenue per Available Seat Mile (CRASM) | ¢7.61 | ¢6.28 | ¢1.33 | 21.2 | | Passengers | 1,829,714| 3,697,138| (1,867,424)| (50.5) | - Total operating revenue for the fourth quarter of 2020 decreased by 18.3% year-over-year to $150.4 million, primarily due to a 26.0% decline in contract revenue from reduced flight volumes for the CRJ-900, CRJ-700, and E-175 fleets[141][146] Pass-through and other revenue increased by 89.7%, mainly driven by pass-through maintenance revenue for the E-175 fleet[146] Operating Expenses (For the Three Months Ended December 31, 2020) | Metric ($ in thousands) | 2020 | 2019 | Change | Change Rate (%) | | :--- | :----- | :----- | :----- | :--------- | | Flight operations | 36,964 | 52,644 | (15,680)| (29.8) | | Fuel | 390 | 169 | 221 | 130.8 | | Maintenance | 52,864 | 58,095 | (5,231)| (9.0) | | Aircraft rent | 10,048 | 11,329 | (1,281)| (11.3) | | Aircraft and traffic services | 901 | 1,064 | (163) | (15.3) | | General and administrative | 13,073 | 12,996 | 77 | 0.6 | | Depreciation and amortization | 20,470 | 20,552 | (82) | (0.4) | | CARES Act grant recognition | (11,311)| — | (11,311)| 100.0 | | Total operating expenses | 123,399| 156,849| (33,450)| (21.3) | - Total operating expenses decreased by 21.3% year-over-year to $123.4 million, primarily due to lower flight operations expenses (pilot and flight attendant wages, training costs) and maintenance expenses (engine overhauls, C-checks, parts contracts)[148][150][156] CARES Act grant recognition of $11.3 million further reduced operating expenses[148][150][156] Maintenance Cost Details ($ in thousands) | Maintenance Item | 2020 | 2019 | Change | Change Rate (%) | | :--- | :----- | :----- | :----- | :--------- | | Engine overhauls | 4,753 | 8,751 | (3,998)| (45.7) | | Pass-through engine overhauls | 9,633 | 1,851 | 7,782 | 420.4 | | C-checks | 2,958 | 6,051 | (3,093)| (51.1) | | Pass-through C-checks | 7,138 | 1,220 | 5,918 | 485.1 | | Parts contracts | 5,787 | 9,687 | (3,900)| (40.3) | | Rotable and consumable parts | 5,318 | 7,405 | (2,087)| (28.2) | | Other pass-through expenses | 3,112 | 4,337 | (1,225)| (28.2) | | Labor and other | 14,165 | 18,793 | (4,628)| (24.6) | | Total | 52,864| 58,095| (5,231)| (9.0) | Adjusted EBITDA and EBITDAR ($ in thousands) | Metric | December 31, 2020 | December 31, 2019 | | :--- | :------------- | :------------- | | Net income | 14,118 | 10,785 | | Adjusted income before income taxes | 17,989 | 14,320 | | Interest expense | 9,082 | 12,628 | | Interest income | (126) | (58) | | Depreciation and amortization | 20,470 | 20,552 | | Adjusted EBITDA | 47,415 | 47,442 | | Aircraft rent | 10,048 | 11,329 | | Adjusted EBITDAR | 57,463 | 58,771 | Liquidity and Capital Resources This section discusses the company's strategies and sources for managing its liquidity and capital needs, especially in response to the pandemic - In response to the COVID-19 pandemic, the company implemented several measures to increase liquidity, including collaborating with major partners and OEMs to defer future aircraft and spare engine deliveries[162] - The company's primary liquidity sources include cash grants under the Payroll Support Program, the U.S. Treasury loan agreement, existing cash, cash generated from operations, and external borrowings[163] In the fourth quarter of 2020, the company secured a $195 million five-year U.S. Treasury loan and an $81.5 million prepayment from United Airlines, used to repay existing long-term debt[163] - The company believes that cash flows from operating activities, existing cash and cash equivalents, short-term investments, available credit facilities, financing arrangements, and CARES Act government assistance will be sufficient to meet operating and capital requirements for the next 12 months and ensure compliance with debt covenants[167] Cash Flows ($ in thousands) | Metric | For the Three Months Ended December 31, 2020 | For the Three Months Ended December 31, 2019 | | :--- | :--------------------- | :--------------------- | | Net cash provided by operating activities | 79,273 | 38,230 | | Net cash used in investing activities | (1,773) | (12,828) | | Net cash provided by/(used in) financing activities | 4,593 | (36,692) | | Net change in cash and cash equivalents | 82,093 | (11,290) | | Cash and cash equivalents at end of period | 184,934 | 61,211 | Off-Balance Sheet Arrangements This section clarifies the company's off-balance sheet arrangements, primarily related to leased aircraft - The company had no off-balance sheet arrangements during the reporting period and currently has none[176] Most leased aircraft are held through trusts, where the company does not bear the risk of loss and is not considered the primary beneficiary, with the maximum exposure being remaining lease payments and any return condition obligations[177] Critical Accounting Policies and Estimates This section highlights the critical accounting policies and estimates that require significant judgment in preparing the financial statements - The company prepares financial statements in accordance with GAAP, requiring estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses[178] No changes were made to critical accounting policies in this report[179] Recently Issued Accounting Pronouncements This section refers to disclosures regarding the impact of new accounting standards on the company's financial reporting - Recently issued accounting pronouncements may have a potential impact on the company's financial condition and operating results, with specific disclosures provided in Note 2, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, primarily interest rate risk and limited commodity price risk, and their potential financial impact - The company faces interest rate risk due to its variable-rate long-term debt based on LIBOR[182] As of December 31, 2020, the company had $545.8 million in variable-rate debt[183] A 50 basis point change in market interest rates would impact interest expense by approximately $2.7 million for the fourth quarter of 2020[183] - LIBOR is expected to cease after 2021, which could result in different or higher interest payments on the company's LIBOR-indexed debt than anticipated[185] The company currently does not use derivative instruments to hedge against changes in interest rates[186] - The company's foreign currency risk is minimal, primarily related to station operating expenses denominated in non-U.S. dollar currencies[187] Due to capacity purchase agreements, the company is largely insulated from fuel price fluctuations[188] Item 4. Controls and Procedures This section assesses the effectiveness of the company's disclosure controls and procedures as of December 31, 2020 - As of December 31, 2020, the company's management, including the Chief Executive Officer and Chief Financial Officer, assessed the disclosure controls and procedures to be effective[189] - Any internal control system has inherent limitations, providing only reasonable, not absolute, assurance, and its effectiveness is subject to the exercise of judgment and the inability to completely eliminate improper conduct[191] Management will continue to monitor and upgrade internal controls[191] PART II – OTHER INFORMATION This section contains additional information not covered in the financial statements, including legal proceedings and risk factors Item 1. Legal Proceedings This section describes ongoing legal actions, including federal securities class action lawsuits related to the company's IPO - The company faces two federal securities class action lawsuits related to its IPO, alleging material false and misleading statements or omissions in the IPO registration statement, seeking unspecified monetary damages and other relief[193] - As of December 31, 2020, management, after consulting with legal counsel, believes these lawsuits and other routine legal matters are unlikely to have a material adverse effect on the company's financial condition, liquidity, or operating results[194] Item 1A. Risk Factors This section refers to previously disclosed risk factors that could materially affect the company's business, financial condition, and future performance - The company recommends referring to "Item 1A. Risk Factors" in its Fiscal Year 2020 Form 10-K and the "Cautionary Note Regarding Forward-Looking Statements" section of this Form 10-Q for a comprehensive understanding of significant risk factors that could materially adversely affect its business, financial condition, and future performance[195] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's repurchase of common stock to cover tax obligations related to employee equity awards - The company repurchased 2,256 shares of common stock for $20,000 during the three months ended December 31, 2020, to cover income tax obligations arising from vested employee equity awards and warrant conversions[196] Item 3. Defaults Upon Senior Securities This section confirms no defaults occurred on senior securities during the reporting period Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company's operations Item 5. Other Information This section indicates that there is no other information to disclose for the reporting period Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including key agreements and certifications - Exhibits include the amended and restated capacity purchase agreement with American Airlines and its first amendment, certifications by the Chief Executive Officer and Chief Financial Officer under the Sarbanes-Oxley Act, and XBRL-related documents[199] SIGNATURES This section confirms the official signing of the report by Mesa Air Group, Inc.'s authorized officer - This report was formally signed by Mesa Air Group, Inc. on February 9, 2021, by Michael J. Lotz, President and Chief Financial Officer[202][203]