Mesa Air Group (NASDAQ:MESA) is a regional airline that has weathered its fair share of challenges in recent years, demonstrating resilience and adaptability in the face of industry headwinds. As a key player in the United Express network, Mesa has played a crucial role in connecting communities across the United States, Cuba, and Mexico. However, the company's journey has not been without its obstacles, requiring strategic maneuvers to maintain profitability and secure its long-term viability.
Company History and Background
Founded in 1982, Mesa Air Group began operations in 1985, initially focusing on providing regional air service to larger airlines using smaller turboprop aircraft on routes that were less profitable for major carriers. Over time, the company expanded its fleet and route network, adding regional jet aircraft to its operations. A significant milestone in Mesa's history came in 1998 when it began flying as a US Airways Express carrier, which drove substantial growth for the company in the early 2000s.
The 2008 financial crisis and subsequent industry downturn posed a major challenge for Mesa, leading to the company filing for Chapter 11 bankruptcy protection in 2010. Mesa emerged from bankruptcy a year later after restructuring its operations and debt, a period marked by fleet changes, route network adjustments, and workforce reductions as the company worked to return to profitability.
Following its emergence from bankruptcy, Mesa focused on strengthening its partnerships with larger airlines. In 2010, the company entered into a capacity purchase agreement (CPA) with United Airlines, which remains its primary source of revenue today. Throughout the 2010s, Mesa continued to evolve its fleet, transitioning away from older regional jets in favor of newer, more efficient Embraer E-175 aircraft. This fleet modernization helped improve the company's operating performance and cost structure.
Current Operations
As of June 30, 2024, Mesa Air Group operates a fleet of 73 aircraft and employs approximately 1,990 individuals. The company's operational footprint spans 73 cities in 32 states, Cuba, and Mexico, solidifying its position as a vital component of the regional aviation landscape.
Financials
Mesa's financial performance has been marked by both successes and setbacks in recent years. For the fiscal year ended September 30, 2023, the company reported total revenue of $498.06 million, a decrease from the previous year's $531.00 million. This decline was largely attributed to the wind-down of the company's flight services agreement with DHL, as well as the transition of its operations from American Airlines to United Airlines. Despite these headwinds, Mesa's adjusted EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent) for the 2023 fiscal year stood at $23.19 million, showcasing the company's ability to navigate challenging conditions.
The fiscal year 2023 also saw a net loss of $120.12 million, with operating cash flow at -$24.09 million and free cash flow at -$60.73 million. These figures reflect the significant challenges Mesa faced during this period, including decreased scheduled flying activity, increased pilot wages, and rising interest rates.
In the most recent fiscal quarter ended June 30, 2024, Mesa reported total operating revenues of $110.79 million, a slight decrease from the $114.69 million generated in the same period the previous year. The company's net loss for the quarter was $19.91 million, or $0.48 per diluted share, compared to a net loss of $47.56 million, or $1.17 per diluted share, in the prior-year quarter. Despite these losses, the company's adjusted EBITDAR for the quarter was $10.63 million, a positive indicator of its ability to generate cash flow.
The decrease in revenue and net loss compared to the prior year quarter was primarily driven by fewer aircraft under contract, higher deferred revenue, and the wind-down of the DHL flight services agreement. However, these factors were partially offset by an increase in the United block hour compensation rate.
Liquidity
The company's liquidity position has been a point of focus, with cash and cash equivalents totaling $16.30 million as of the most recent quarter. Mesa also has $12.40 million available under the United Revolving Credit Facility, which is collateralized by the company's spare parts. However, the company's financial flexibility remains constrained, as evidenced by its debt-to-equity ratio of 2.74, current ratio of 0.45, and quick ratio of 0.29.
To address these liquidity challenges, Mesa has undertaken several strategic initiatives, including the sale of surplus aircraft and engines, the renegotiation of lease agreements, and the implementation of cost-cutting measures. The company has also negotiated amendments to its United CPA to improve its financial position.
As of the most recent quarter, Mesa was not in compliance with a financial covenant related to minimum liquidity. However, the company subsequently reached an agreement with United to obtain a waiver for the covenant breach through December 2024. Mesa continues to monitor its covenant compliance, as any noncompliance could have a material impact on its operations.
Recent Performance
The company's operational performance has been a point of emphasis, with Mesa reporting a controllable completion factor of 99.94% for United Airlines during the third quarter of fiscal 2024, an improvement from the 98.83% recorded in the same period the previous year. This metric, which excludes cancellations due to weather and air traffic control, highlights the company's commitment to operational excellence and its value proposition to its major partner, United Airlines.
Future Outlook and Challenges
Looking ahead, Mesa has faced additional challenges, including the removal of CRJ-900 aircraft from its United fleet and the transition of its pilots to the E-175 platform. To address these changes, the company has reached an agreement with United to extend the increased block-hour rate on its E-175 flying through August 31, 2025, while also securing reimbursement of up to $14 million in expenses related to the transition to an all-E-175 fleet.
In December 2022, Mesa entered into an amended and restated CPA with United Airlines, which among other things, extended the term and provided for increased compensation rates. However, United has asked Mesa to accelerate the removal of CRJ-900 aircraft and transition the pilots to the E-175 fleet, which will lead to increased costs and impact block hour capabilities while pilots are in training.
Despite the headwinds, Mesa has demonstrated its resilience and adaptability. The company's management team has taken proactive steps to streamline operations, optimize its fleet, and strengthen its financial position. These efforts include asset sales, debt reduction, furloughs, and negotiating amendments to its United CPA.
Business Overview
Mesa Air Group operates as a single business segment focused on providing scheduled passenger service as a regional air carrier. The company's fleet consists of 73 regional aircraft, including 55 Embraer E-175 and 18 Bombardier CRJ-900 aircraft, with approximately 279 daily departures as of June 30, 2024.
The company's entire consolidated contract revenue is derived from its capacity purchase agreement (CPA) with United Airlines, as well as a now terminated flight services agreement (FSA) with DHL and lease of aircraft to a third party. Under the United CPA, Mesa Airlines provides regional flying on behalf of United, using the United brand and receiving a fixed monthly amount per aircraft under contract, plus additional amounts based on the number of flights and block hours flown. United also reimburses Mesa for certain direct operating expenses and directly pays for and supplies all aircraft fuel and related fueling costs for flying under the CPA.
Conclusion
In conclusion, Mesa Air Group's journey has been one of navigating challenging industry conditions, adapting to changing market dynamics, and charting a steady course towards sustainable growth. As the company continues to evolve and respond to the ever-changing landscape of regional aviation, its ability to leverage its strengths, address its weaknesses, and capitalize on emerging opportunities will be key to its future performance and the creation of long-term shareholder value. The company's focus on operational excellence, strategic partnerships, and financial restructuring efforts will be crucial in overcoming the current challenges and positioning Mesa for success in the competitive regional airline industry.