Mesa Airlines(MESA) - 2021 Q4 - Annual Report

Part I Business Mesa Air Group operates as a regional air carrier for major partners, utilizing capacity purchase and flight services agreements to ensure revenue stability and mitigate operational risks General Overview Mesa Air Group provides scheduled passenger and cargo services as a regional carrier for major partners under agreements that guarantee revenue and mitigate operational risks - Mesa operates as a regional carrier for American Eagle, United Express, and DHL Express, serving 129 cities across 39 states, the District of Columbia, the Bahamas, and Mexico[13] FY 2021 Revenue Breakdown by Partner | Partner | Revenue Contribution | Agreement Type | | :--- | :--- | :--- | | United Airlines | ~52% | CPA | | American Airlines | ~45% | CPA | | DHL Express | ~1% | FSA | | Third-Party Leases | ~2% | Lease | - The company's agreements provide guaranteed monthly revenue, fixed fees per block hour, and reimbursement of certain operating expenses, which mitigates financial volatility from fuel prices, ticket prices, and passenger numbers[15] Business Strategy Mesa's business strategy focuses on maintaining a low-cost structure, attracting and retaining personnel, managing a prudent capital structure, and minimizing aircraft-related financial risks - Mesa's core strategies include: - Maintain Low-Cost Structure: Achieved through responsible outsourcing, flying large regional aircraft with lower maintenance costs, and diligent control of administrative expenses - Attractive Work Opportunities: Offering competitive compensation and opportunities to fly modern, large regional jets to attract and retain pilots - Prudent Capital Structure: Maintaining a conservative balance sheet to optimize terms with lessors and vendors - Minimize Tail Risk: Structuring aircraft financing to align with the terms of its capacity purchase agreements, reducing financial exposure beyond contract life[19][20][22] Aircraft Fleet As of September 30, 2021, Mesa's fleet comprised 167 owned and leased aircraft, including Embraer, CRJ, and Boeing models, primarily assigned to American, United, and DHL operations Aircraft Fleet Assignment as of September 30, 2021 | Partner/Status | E-175 | CRJ-700 | CRJ-900 | CRJ-200 | Boeing 737 (Cargo) | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | American Eagle | — | — | 40 | — | — | 40 | | United Express | 80 | — | — | — | — | 80 | | DHL Express | — | — | — | — | 2 | 2 | | Leased to third party | — | 14 | — | — | — | 14 | | Unassigned/Spare | — | 6 | 24 | 1 | — | 31 | | Total | 80 | 20 | 64 | 1 | 2 | 167 | Aircraft Ownership as of September 30, 2021 | Type of Aircraft | Owned | Leased | Total | | :--- | :--- | :--- | :--- | | E-175 Regional Jet | 18 | 62 | 80 | | CRJ-900 Regional Jet | 49 | 15 | 64 | | CRJ-700 Regional Jet | 18 | 2 | 20 | | CRJ-200 Regional Jet | 1 | — | 1 | | Boeing 737 Cargo Jet | — | 2 | 2 | | Total | 86 | 81 | 167 | Capacity Purchase and Flight Services Agreements Mesa's revenue is primarily derived from long-term capacity purchase and flight services agreements with American, United, and DHL, providing fixed revenues and cost reimbursements - The American CPA was amended effective January 1, 2021, covering 40 CRJ-900 aircraft for a new five-year term ending December 31, 2025[33] - Under the United CPA, Mesa operates 80 E-175 aircraft, with United owning 62 (including 20 new E-175LLs) and leasing them to Mesa at nominal amounts, and the agreement for 42 aircraft extended to between 2024 and 2028[36][37][41] - In November 2020, the United CPA was amended for United to own the 20 new E175LL aircraft, including adjusted rates and a one-time prepayment of $81.5 million from United to Mesa[42] - The DHL FSA, commenced in October 2020, has a five-year term for Mesa to operate two Boeing 737-400F cargo aircraft, with DHL leasing the aircraft and reimbursing heavy maintenance costs[44][46][47] Human Capital Management As of September 30, 2021, Mesa employed 3,241 individuals, with a significant portion unionized, facing industry-wide pilot and mechanic shortages impacting operations and costs Employee Breakdown as of September 30, 2021 | Employee Group | Number of Employees | Representative | | :--- | :--- | :--- | | Pilots | 1,258 | Air Line Pilots Association | | Flight Attendants | 1,143 | Association of Flight Attendants | | Dispatchers | 42 | N/A | | Maintenance Dept. | 531 | N/A | | Administrative | 267 | N/A | - Approximately 74.1% of the company's employees were represented by labor unions under collective-bargaining agreements[63] - The collective bargaining agreement with the Air Line Pilots Association (ALPA) became amendable in July 2021, and with the Association of Flight Attendants (AFA) in October 2021[64][130] Risk Factors The company faces significant business risks including high dependence on major partners, substantial debt, and labor shortages, alongside industry-specific challenges like pandemic impacts, intense competition, and regulatory burdens Risks Related to Our Business Mesa's business is highly vulnerable to its dependence on major airline partners, significant debt obligations, and the ongoing challenge of attracting and retaining qualified pilots and mechanics - The company is highly dependent on its agreements with American and United, which accounted for approximately 45% and 52% of total revenue, respectively, in fiscal year 2021[95] - As of September 30, 2021, the company had approximately $670.3 million in total long-term debt and must comply with financial covenants, where failure could lead to debt acceleration[105][111] - The limited supply of qualified pilots, driven by FAA qualification standards, has increased labor costs and presents a risk of being unable to meet required flight schedules, potentially resulting in penalties[115][116] - The company faces "tail risk" with aircraft lease commitments extending beyond existing flying contracts, potentially incurring costs if new agreements or subleases are not secured[134] Risks Related to Our Industry The airline industry poses systemic risks to Mesa, including the severe impact of the COVID-19 pandemic, intense competition, extensive government regulation, and external operational factors - The COVID-19 pandemic led to a severe decline in air travel demand, causing major partners to significantly cut capacity and resulting in a material decline in block hours for Mesa in fiscal 2020 and 2021[160][161][162] - To mitigate the pandemic's impact, the company received $95.2 million from the Payroll Support Program (PSP) and extensions, and a $200.0 million secured loan from the U.S. Treasury under the CARES Act[164][165][166] - The airline industry is highly competitive and has undergone significant consolidation, limiting the number of potential major airline partners for regional carriers[169] Risks Related to Owning Our Common Stock Owning Mesa's common stock carries risks including price volatility, charter restrictions on ownership and transfers, absence of dividends, and reduced disclosure as an emerging growth company - As of September 30, 2021, the company had outstanding warrants issued to the U.S. Treasury to purchase 4,899,497 shares of common stock, which could be dilutive to existing shareholders if exercised[179] - The company's charter restricts ownership by non-U.S. citizens to 24.9% of voting power and 49.0% of total capital stock to comply with federal law[181] - To preserve its net operating loss carryforwards, the charter prohibits stock transfers resulting in any person or entity owning 4.75% or more of outstanding capital stock[184] - The company does not intend to pay dividends, and its ability to do so is restricted by certain lease facilities and its loan agreement with the U.S. Treasury[186] Properties As of September 30, 2021, Mesa's properties include a fleet of 167 owned and leased aircraft, alongside various leased facilities for corporate, training, maintenance, and office operations Aircraft Fleet Details as of September 30, 2021 | Aircraft Type | Owned | Leased | Total | Passenger Capacity | Average Age (years) | | :--- | :--- | :--- | :--- | :--- | :--- | | E-175 Regional Jet | 18 | 62 | 80 | 70-76 | 4.8 | | CRJ-900 Regional Jet | 49 | 15 | 64 | 76-79 | 15.0 | | CRJ-700 Regional Jet | 18 | 2 | 20 | 70 | 17.7 | | CRJ-200 Regional Jet | 1 | — | 1 | 50 | 27.7 | | Boeing 737 Cargo Jet | — | 2 | 2 | N/A | 26.9 | | Total | 86 | 81 | 167 | | | - The company leases numerous facilities, including its corporate headquarters and training center in Phoenix, Arizona, and hangars and warehouses in key operational locations like Dallas, Houston, and Washington-Dulles[201] Legal Proceedings Mesa is defending two class action lawsuits alleging federal securities law violations related to its 2018 IPO, though management anticipates no material adverse financial impact - Mesa is subject to two class action lawsuits alleging violations of the Securities Act of 1933 in connection with its August 2018 IPO[202] - Management believes the ultimate outcome of these lawsuits is not likely to have a material adverse effect on the company's financial position, liquidity, or results of operations[203] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Mesa's common stock trades on Nasdaq, the company does not pay dividends, and it repurchased shares in FY 2021 to cover employee equity award tax obligations - The company's common stock has traded on The Nasdaq Global Select Market under the symbol "MESA" since August 10, 2018[206] - The company has not declared or paid any cash dividends and does not intend to in the foreseeable future[209] - In FY 2021, the company repurchased 155,174 shares for $1.5 million to cover income tax obligations on vested employee equity awards[216] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Mesa's financial performance for fiscal years 2019-2021, detailing the COVID-19 pandemic's impact, operational responses, revenue and expense drivers, liquidity, and capital resources Impact of the COVID-19 Pandemic The COVID-19 pandemic significantly impacted Mesa's revenues and operations, leading to reduced block hours, but the company mitigated effects through cost savings and substantial government aid - The company received a total of $95.2 million under the initial Payroll Support Program (PSP) and an aggregate of $108.2 million under extensions PSP2 and PSP3 during fiscal 2021[229] - In October 2020, the company entered into a five-year, $200.0 million secured loan agreement with the U.S. Treasury under the CARES Act, borrowing the full amount by November 2020[229][327] - A portion of the company's reduced labor costs from government assistance was passed on to its major partners in the form of temporary rate reductions during the 2021 fiscal year[229][450] Results of Operations In FY 2021, operating revenues decreased 7.6% to $503.6 million and net income fell to $16.6 million, primarily due to temporary rate reductions despite increased block hours FY 2021 vs. FY 2020 Financial Results (in thousands) | Metric | FY 2021 | FY 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $503,591 | $545,070 | (7.6)% | | Total Operating Expenses | $440,395 | $464,903 | (5.3)% | | Net Income | $16,588 | $27,464 | (39.6)% | | Diluted EPS | $0.43 | $0.78 | (44.9)% | | Block Hours | 323,219 | 313,110 | 3.2% | - The 14.2% decrease in FY 2021 contract revenue was primarily due to temporary rate reductions provided to major partners as a result of lower labor costs from government assistance[273] - Maintenance expense in FY 2021 increased by 13.3% to $217.6 million, driven by a rise in C-check expenses and pass-through maintenance on the E-175 fleet[277] FY 2020 vs. FY 2019 Financial Results (in thousands) | Metric | FY 2020 | FY 2019 | Change (%) | | :--- | :--- | :--- | :--- | | Total Operating Revenues | $545,070 | $723,357 | (24.6)% | | Total Operating Expenses | $464,903 | $602,220 | (22.8)% | | Net Income | $27,464 | $47,580 | (42.3)% | | Diluted EPS | $0.78 | $1.36 | (42.6)% | | Block Hours | 313,110 | 456,247 | (31.4)% | Liquidity and Capital Resources As of September 30, 2021, Mesa had $120.5 million in unrestricted liquidity, with cash generated from operations and a U.S. Treasury loan, while managing $824.5 million in total long-term debt - As of September 30, 2021, the company had $120.5 million in unrestricted cash and cash equivalents[333][341] Cash Flow Summary (in thousands) | Cash Flow Activity | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $132,871 | $174,662 | $151,676 | | Net cash used in investing activities | ($33,471) | ($26,667) | ($104,842) | | Net cash used in financing activities | ($78,374) | ($117,655) | ($81,467) | - As of September 30, 2021, total long-term debt (including principal, projected interest, and lease obligations) was $824.5 million, with 73.7% at a variable interest rate[343][344] Quantitative and Qualitative Disclosures About Market Risk Mesa's primary market risk is interest rate exposure on its $496.2 million variable-rate debt, while fuel price risk is mitigated by partner agreements - The company is subject to interest rate risk on its $496.2 million of variable-rate debt, where a 50 basis point change would impact annual interest expense by approximately $2.5 million[408] - Fuel price risk is largely mitigated as major partners directly procure and pay for fuel under the terms of the service agreements[411] Financial Statements and Supplementary Data This section presents Mesa's audited consolidated financial statements for fiscal years 2019-2021, including balance sheets, income statements, cash flows, and comprehensive notes on accounting policies and key financial items Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2021 | Sep 30, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $120,517 | $99,395 | | Total current assets | $158,386 | $155,591 | | Property and equipment, net | $1,151,891 | $1,212,415 | | Total Assets | $1,456,597 | $1,501,930 | | Liabilities & Equity | | | | Current portion of long-term debt | $111,710 | $189,268 | | Total current liabilities | $258,192 | $353,326 | | Long-term debt, excl. current | $539,700 | $542,456 | | Total Liabilities | $968,550 | $1,044,071 | | Total Stockholders' Equity | $488,047 | $457,859 | Consolidated Statement of Operations Highlights (in thousands) | Account | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Total operating revenues | $503,591 | $545,070 | $723,357 | | Total operating expenses | $440,395 | $464,903 | $602,220 | | Operating income | $63,196 | $80,167 | $121,137 | | Net income | $16,588 | $27,464 | $47,580 | Controls and Procedures Management concluded that Mesa's disclosure controls and internal control over financial reporting were effective as of September 30, 2021, with no material changes during the quarter - Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective at a reasonable assurance level[631] - Management determined that the company maintained effective internal control over financial reporting as of September 30, 2021, based on the COSO framework[636] - The Annual Report does not include an attestation report from the company's auditor on internal controls, as Mesa qualifies for an exemption as an "emerging growth company" under the JOBS Act[637] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2022 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2022 Proxy Statement[640] Executive Compensation Executive compensation details are incorporated by reference from the forthcoming 2022 Proxy Statement - Information regarding executive compensation is incorporated by reference from the forthcoming 2022 Proxy Statement[642] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the forthcoming 2022 Proxy Statement - Information regarding security ownership is incorporated by reference from the forthcoming 2022 Proxy Statement[643] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the forthcoming 2022 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the forthcoming 2022 Proxy Statement[644] Principal Accountant Fees and Services Details on principal accountant fees and services are incorporated by reference from the forthcoming 2022 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the forthcoming 2022 Proxy Statement[645] Part IV Exhibits and Financial Statement Schedules This section provides an index of all exhibits and financial statements filed as part of the Annual Report on Form 10-K - This section contains the index of financial statements and a list of all exhibits filed with the Form 10-K[647][649]