Item 1. Business
ITEM 1. BUSINESS
General
Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa," the "Company," "we," "our," or "us") is the holding company of Mesa Airlines, a regional air carrier providing scheduled passenger service to 86 cities in 36 states, the District of Columbia, Canada, Cuba, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. As of September 30, 2023, Mesa operated a fleet of 80 regional aircraft consisting of 54 E-175 aircraft and 26 CRJ-900 aircraft with approximately 296 daily departures, four 737 cargo aircraft and approximately 2,303 employees. Mesa’s fleet were conducted under our Capacity Purchase Agreements ("CPAs") and Flight Services Agreement ("FSA"), leased to a third party, held for sale or maintained as operational spares. Mesa operates all of its flights as either United Express or DHL Express flights pursuant to the terms of the CPA entered into United Airlines, Inc. ("United") and FSA with DHL Network Operations (USA), Inc. ("DHL") (each, our “major partner”). Prior to the wind-down and termination of the Company's CPA with American Airlines, Inc. ("American") on April 3, 2023, Mesa also operated flights as American Eagle. All of the Company’s consolidated contract revenues for the twelve months ended September 30, 2023 and September 30, 2022 were derived from operations associated with the American CPA prior to April 3, 2023, the United CPA, DHL FSA, and leases of aircraft to a third party.
Under the CPA with United (the "United CPA") and FSA with DHL (the "DHL FSA"), we operated or maintained as operational spares a fleet of 120 aircraft as of September 30, 2023. We also lease two aircraft to a third party as of September 30, 2023. We operate 54 E-175 and 26 CRJ-900 aircraft under our United CPA, and four Boeing 737-400F aircraft under our DHL FSA. For our fiscal year ended September 30, 2023, approximately 23% of our revenues were earned under the American CPA, approximately 73% were earned under the United CPA, approximately 1% were earned from leases of aircraft to a third party and approximately 3% were earned under the DHL FSA. All of the Company’s consolidated contract revenues for the twelve months ended September 30, 2023 and September 30, 2022 were derived from operations associated with the American CPA, the United CPA, FSA, and leases of aircraft to a third party.
The United CPA involves a revenue-guarantee arrangement whereby United pays fixed-fees for each aircraft under contract, departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time), and reimbursement of certain direct operating expenses in exchange for providing flight services. United also pays certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of the CPA, United controls route selection, pricing, and seat inventories, reducing our exposure to fluctuations in passenger traffic, fare levels, and fuel prices. Under our FSA with DHL, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo flight services. Ground support expenses including fueling and airport fees are paid directly by DHL.
Regional aircraft are optimal for short- and medium-haul scheduled flights that connect outlying communities with larger cities and act as "feeders" for domestic and international hubs. In addition, regional aircraft are well suited to serve larger city pairs during off-peak times when load factors on larger jets are low. The lower trip costs and operating efficiencies of regional aircraft, along with the competitive nature of the CPA bidding process, provide significant value to major airlines.
Impact of Pilot Shortage and Transition of Operations to United
During our twelve months ended September 30, 2023, the severity of the pilot shortage, elevated pilot attrition, the transition of our operations with American to United, and increasing costs associated with pilot wages adversely impacted our financial results, cash flows, financial position, and other key financial ratios. One of the primary factors contributing to the pilot shortage and attrition is the demand for pilots at major carriers, which are hiring at an accelerated rate. These airlines now seek to increase their capacity to meet the growing demand for air travel. A primary source of pilots for the major U.S. passenger and cargo carriers
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are the U.S. regional airlines. As a result of the pilot shortage and attrition, the Company has increased overall hourly pay of nearly 118% for captains and 172% for new-hire first officers.
As a result of pilot shortage, we produced less block hours to generate revenues and incurred penalties for operational shortfalls under our CPAs. During the twelve months ended September 30, 2023, these challenges resulted in a negative impact on the Company’s financial results highlighted by cash flows used in operations of $24.1 million and net loss of $120.1 million including a non-cash impairment charge of $54.3 million related to the Company designating 14 CRJ-900 aircraft as held for sale and our customer relationship intangible asset. These conditions and events raised substantial doubt about our ability to continue to fund our operations and meet our debt obligations over the next twelve months.
To address such concerns, management developed and implemented several material changes to our business designed to ensure the Company could continue to fund its operations and meet its debt obligations over the next twelve months. The Company implemented the following measures during the year ended September 30, 2023, and through the date of issuance of the financial statements.
• We have 15 aircraft under the RASPRO finance lease with a buyout obligation of $50.3 million at the end of March 2024. We entered into purchase agreements with two separate parties to purchase the RASPRO aircraft and related engines. One agreement is for 30 engines for a total of $19.5 million. The second agreement is for 15 airframes (without engines) for a total of $18.8 million. Both of these transactions are expected to be completed by the end of March 2024, with net cash from these transactions expected to be approximately $(12.1) million.
• We entered into an agreement to sell 11 CRJ-900 aircraft to a third party. The Company has closed the sale of seven of the aircraft which generated $21.0 million in gross proceeds and approximately $1.5 million in net proceeds after partial debt reduction on the UST Loan. Subsequent to September 30, 2023, we closed the sale of the remaining four CRJ-900 aircraft to the third party for gross proceeds of $12.0 million. Net proceeds from the sale of all four aircraft was $6.5 million after partial debt reduction of our loan with the United States Department of the Treasury ("UST Loan").
• We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on seven CRJ-900 aircraft which began January 2023 through December 2024, providing approximately $14.0 million of liquidity. Additionally, the junior noteholder, MHIRJ, agreed to forgive approximately $5.0 million in principal contingent upon the repayment of $4.2 million in principal by December 31, 2023.
• We entered into an agreement to sell seven surplus CRJ-900 aircraft to American. The Company has closed the sale of three of the aircraft which generated approximately $29.7 million in gross proceeds and approximately $2.4 million in net proceeds after partial debt reduction. Subsequent to September 30, 2023, the Company closed the sale of the remaining four CRJ-900 aircraft to American for gross proceeds of $41.5 million. Net proceeds from the sale of all four aircraft was $5.7 million after the retirement of the EDC Loan and MHIRJ junior note. $0.6 million in proceeds from the sale of each aircraft was repaid to MHIRJ for a total of $4.2 million, and we achieved approximately $5.0 million of forgiveness on the MHIRJ junior note.
• We established and drew upon a new line of credit with United totaling $25.5 million. The United line of credit contains an additional deemed prepayment of $15 million with potential forgiveness upon the achievement of a certain number of block hours flown as well as maintaining a 99.3% controllable completion factor ("CCF") over any rolling four-month period from April 2023 through December 2024. As of November 2023, the foregoing milestones have been achieved for such rolling four-month period. As a result, $9 million of the $15 million will be deemed prepaid one business day following the repayment of the Effective Date Bridge Loan discussed elsewhere herein. We consider it likely that we will achieve additional forgiveness in fiscal year 2024. Subsequently, this facility was amended to permit the Company to re-draw approximately $7.9 million of the Effective Date Bridge Loan previously repaid and increased the amount of Revolving Commitments from $30.7 million to $50.7 million. See Note 10 for a discussion of the line of credit and amount drawn as well as discussion on the deemed prepayment.
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• On January 11, 2024 and January 19, 2024, we entered into the First Amendment to our Third Amended and Restated United CPA and the Second Amendment to our Third Amended and Restated United CPA (the "January 2024 United CPA Amendments"), respectively. The January 2024 United CPA Amendments provide additional liquidity and certain other amendments described below:
o Increased CPA rates, retroactive to October 1, 2023 through December 2024, which are projected to generate approximately $63.5 million in incremental revenue over the next twelve months.
o Amended certain notice requirements for removal by United of up to eight CRJ-900 Covered Aircraft (as defined in the United CPA) from the United CPA.
o Extended United's existing utilization waiver for the Company's operation of E-175 and CRJ-900 Covered Aircraft (as defined in the United CPA) to June 30, 2024.
• On January 11, 2024 and January 19, 2024, we entered into Amendment No. 4 to our Second Amended and Restated Credit and Guaranty Agreement, Amendment No. 1 to Stock Pledge Agreement and Limited Waiver of Conditions to Credit Extension and Waiver and Amendment No. 5 to our Second Amended and Restated Credit and Guaranty Agreement (collectively, the "January 2024 Credit Agreement Amendments"), respectively. The January 2024 Credit Agreement Amendments provide for the following:
o The repayment in full of the Company's $10.5 million Effective Date Bridge Loan obligations, and the prepayment (and corresponding reduction) of approximately $2.1 million in Revolving Loans (as defined therein), with the proceeds from the sale, assignment, or transfer of the Company's vested investment in Heart Aerospace Incorporated.
o As a result of the repayment of the Effective Date Bridge Loan and pay down of the Revolving Loans, the shares of capital stock of Archer Aviation, Inc. held by the Company are being released as collateral for the United credit facility, subject to certain conditions.
o The waiver of certain financial covenant defaults with respect to the fiscal quarters ended June 30, 2023, September 30, 2023, and December 31, 2023 and the waiver of projected financial covenant defaults with respect to the fiscal quarter ending March 31, 2024.
o An increase in the Applicable Margin (as defined in the United credit facility) during a specified period of time for borrowings under the Credit Agreement.
o Loan prepayment requirements in connection with the sale of four specified aircraft engines and the addition of such engines as collateral for the United credit facility for a specified period of time.
• On December 1, 2023, we entered into an agreement with a third party to sell 12 surplus GE model CF34-8C aircraft engines and related parts. The gross proceeds of $56.0 million will be used to retire approximately $40.0 million in associated debt and provide additional liquidity to fund operations and current debt obligations as they come due. The transaction is expected to close by the end of March 2024.
• Subsequent to September 30, 2023, we entered into a purchase agreement with a third party which provides for the sale of 23 engines for gross proceeds of $11.5 million which will be used to pay down our UST Loan. The transaction is expected to close by the end of December 2024.
• In addition to already executed agreements to sell aircraft, the Company is actively seeking arrangements to sell other surplus assets primarily related to the CRJ fleet including aircraft, engines, and spare parts to reduce debt and optimize operations.
• We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level of flight activity.
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The Company believes the plans and initiatives outlined above have effectively alleviated the substantial doubt and will allow the Company to meet its cash obligations for the next twelve months following the issuance of its financial statements. The forecast of undiscounted cash flows prepared to determine if the Company has the ability to meet its cash obligations over the next twelve months was prepared with significant judgment and estimates of future cash flows based on projections of CPA and FSA block hours, maintenance events, labor costs, and other relevant factors. Assumptions used in the forecast may change or not occur as expected.
As of September 30, 2023, the Company has $163.6 million of principal maturity payments on long-term debt due within the next twelve months. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, as well as the liquidity created from the additional measures identified above. If our plans are not realized, we intend to explore additional opportunities to create liquidity by refinancing and deferring repayment of our principal maturity payments that are due within the next twelve months. The Company continues to monitor covenant compliance with its lenders as any noncompliance could have a material impact on the Company’s financial position, cash flows and results of operations. See Sources and Uses of Cash in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional disclosure.
COVID-19 Pandemic
Beginning in fiscal 2020, COVID-19 surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas. The COVID-19 pandemic negatively affected our revenue and operating results during fiscal years 2023, 2022, 2021, and 2020. Any similar outbreaks in the future may have a material impact on our financial condition, liquidity, and results of operations in future periods. See “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion regarding the impact of the COVID-19 pandemic on our financial results. Also, see “Part I. Item 1A. Risk Factors” for a discussion of the risks and uncertainties associated with the COVID-19 pandemic.
Our Business Strategy
Our business strategy consists of the following elements:
Maintain Low-Cost Structure
We have established ourselves as a low cost provider of regional airline and cargo flight services. We intend to continue our disciplined cost control approach through responsible outsourcing of certain operating functions, by flying large regional aircraft with associated lower maintenance costs and common flight crews across fleet types, and through the diligent control of corporate and administrative costs by implementing company-wide efforts to improve our cost structure.
Attractive Work Opportunities
We believe our employees have been, and will continue to be, a key to our success. We intend to continue to offer competitive compensation packages, foster a positive and supportive work environment and provide opportunities to fly state-of-the-art, large-gauged regional jets to differentiate us from other carriers and make us an attractive place to work and build a career.
Aircraft Fleet
We fly only large regional jets manufactured by Bombardier Aerospace (“Bombardier”) and Embraer S.A. ("Embraer"), as well as 737 cargo jets manufactured by Boeing. Mitsubishi Heavy Industries (“MHI”), who acquired the CRJ business from Bombardier, and Embraer are the primary manufacturers of regional jets operated in the United States, which allows us to enjoy operational, recruiting and cost advantages over other regional airlines that operate smaller regional aircraft from less prominent manufacturers.
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As of September 30, 2023, we had 120 aircraft (owned and leased) consisting of the following:
Embraer
Regional
Jet-175
(70-76 seats)
Canadair
Regional
Jet-700
(50-70 seats)
Canadair
Regional
Jet-900
(76-79
seats)
Boeing 737
(Cargo)
Total
United Express
54
—
26
—
80
DHL Express
—
—
—
4
4
Held for sale
—
15
—
15
Leased to third party
—
2
—
—
2
Subtotal
54
2
41
4
101
Unassigned
6
—
13
—
19
Total
60
2
54
4
120
(1) As of September 30, 2023, the Company has 15 CRJ-900 aircraft classified as assets held for sale.
The following table lists the aircraft we own and lease as of September 30, 2023 and the passenger capacity of such aircraft:
Type of Aircraft
Owned
Leased
Total
Passenger
Capacity
E-175 Regional Jet
18
42
(2)
60
70-76
CRJ-900 Regional Jet
54
—
54
76-79
CRJ-700 Regional Jet
—
2
2
50-70
Boeing 737 Cargo Jet
—
4
(3)
4
Total
72
48
120
(2) All 42 of these E-175 aircraft are owned by United and leased to us at nominal amounts.
(3) Three of these Boeing 737 aircraft are subleased to us by DHL at nominal amounts and the fourth aircraft is leased to us by a third party.
MHI and Embraer regional jets are among the quietest commercial jets currently available and offer many of the amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, overhead and under seat storage, lavatories and in-flight snack and beverage service. The speed of MHI and Embraer regional jets is comparable to larger aircraft operated by major airlines, and they have a range of approximately 1,600 miles and 2,100 miles, respectively. We do not currently have any existing arrangements with MHI or Embraer to acquire additional aircraft.
Capacity Purchase and Flight Services Agreements
Our agreements consist of the following:
▪ Operation of E-175 and CRJ-900 under our United CPA;
▪ Operation of Boeing 737 aircraft under our DHL FSA.
The financial arrangements between the Company and its major partners include a revenue-guarantee arrangement. Under these revenue-guarantee provisions, our major partners pay us a fixed minimum monthly amount per aircraft under contract, plus additional amounts related to departures and block hours flown. We also receive direct reimbursement of certain operating expenses, including insurance. Other expenses, including fuel and ground operations are directly paid to suppliers by our major partners. We believe we are in material compliance with the terms of our United CPA and DHL FSA.
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We benefit from the revenue guarantee arrangement under our United CPA and DHL FSA because we are sheltered, to an extent, from some of the elements that cause volatility in airline financial performance, including variations in ticket prices, fluctuations in number of passengers and fuel prices. However, we do not benefit from positive trends in ticket prices (including ancillary revenue programs), the number of passengers enplaned, or reductions in fuel prices. United retains all revenue collected from passengers carried on our flights. In providing regional flying under our CPA, and cargo flying under our FSA, we use the logos, service marks and aircraft paint schemes of our major partners.
The following table summarizes our available seat miles ("ASMs") flown and contract revenue recognized under our CPAs for our fiscal years ended September 30, 2023 and 2022, respectively:
Year Ended September 30, 2023
Year Ended September 30, 2022
Available
Seat Miles
Contract
Revenue
Contract
Revenue
per ASM
Available
Seat Miles
Contract
Revenue
Contract
Revenue
per ASM
(in thousands)
(in cents)
(in thousands)
(in cents)
American
790,513
$
107,019
¢
13.54
2,668,953
$
234,184
¢
8.77
United
3,444,900
$
294,129
¢
8.54
4,005,795
$
207,003
¢
5.17
Other
—
$
20,150
—
—
$
37,295
—
Total
4,235,413
$
421,298
¢
9.95
6,674,748
$
478,482
¢
7.17
American Capacity Purchase Agreement
In December 2022, we entered into Amendment No. 11 (the “American Amendment”) to our Amended and Restated Capacity Purchase Agreement previously entered into in November 2020 (as theretofore amended, the "American CPA"). The American Amendment provided for the termination and wind-down of the American CPA by April 3, 2023 (the “Wind-down Period”), at which time all Covered Aircraft (as defined in the American CPA) were removed from the American CPA. In March 2023, we began to transition aircraft operated under the American CPA to the United CPA. The American CPA was previously set to expire by its terms on December 31, 2025.
Under the terms of the American Amendment, during the Wind-down Period (i) we continued to receive a fixed minimum monthly amount per aircraft covered by the American CPA, plus additional amounts based on the number of flights and block hours flown during each month, subject to adjustment based on the Company’s controllable completion rate and certain other factors, and (ii) American agreed not to exercise certain termination or withdrawal rights under the American CPA if we failed to meet certain operational performance targets for the three consecutive month period ending January 31, 2023.
No Material Breach (as defined in the American CPA) occurred that would have required the payment of liquidated damages. Pursuant to the American Amendment, as no material breaches occurred during the wind-down period, American agreed to waive Mesa’s failure to meet certain past operational performance targets and other requirements, which triggered termination and withdrawal rights for American pursuant to the terms of American CPA. All CCF targets were met during the Wind-down Period, and there were no penalties associated with that performance metric. The parties executed a written mutual release of all claims and acknowledgment that no Material Breaches occurred.
United Capacity Purchase Agreement
Under the United CPA, we have the ability to fly up to 80 aircraft for United. The aircraft can be a mix of any number of E-175 or CRJ-900 aircraft so long as the number of aircraft operating at any given time does not exceed 80. As of September 30, 2023 we operated 54 E-175 and 26 CRJ-900 aircraft under our Third Amended and Restated CPA with United dated December 27, 2022, which amended and restated the Second Amended and Restated CPA dated November 4, 2020 (as amended, the “United CPA” or the "Amended and Restated United CPA"). Under the United CPA, United owns 42 of our 60 E-175 aircraft. The E-175 aircraft owned by United and leased to us have terms expiring between 2024 and 2028, and the 18 E-175 aircraft owned by us have terms expiring in 2028. Additionally, United leased 20 E-175LL aircraft
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to us at nominal amounts during the year ended September 30, 2023. The E-175LL aircraft were removed from the CPA beginning in February 2023, with the last E-175LL aircraft being removed in April 2023.
In exchange for providing flight services under our United CPA, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United.
United reimburses us on a pass-through basis for certain costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units (" APUs ") and component maintenance for the aircraft owned by United. Our United CPA permits United, subject to certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove aircraft from service, by giving us notice of 90 days or more. If United elects to terminate our United CPA in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected aircraft leased from United at no cost to us. In addition, if United removes any of our 18 owned E-175 aircraft from service at its direction, United would remain obligated, at our option, to assume the aircraft ownership and associated debt with respect to such aircraft through the end of the term of the United CPA.
On December 27, 2022, we entered into the Amended and Restated United CPA, which provides, among other things, for the following amended terms:
▪ The addition of up to 38 CRJ-900 aircraft to be operated by the Company on behalf of United under the Amended and Restated United CPA, dependent on the number of E-175 aircraft the Company is operating. As of September 30, 2023, we operated 24 CRJ-900 aircraft under our Amended and Restated United CPA;
▪ An increase in rates to cover the Company’s pilot pay increases instituted in September 2022, effective through September 2025;
▪ United to be responsible for all costs associated with converting the CRJ-900 aircraft for operation in United’s network;
▪ Terms providing that United may remove the CRJ-900 aircraft from the scope of the United CPA, subject to certain notice and other requirements;
▪ United’s existing utilization waiver for the Company’s operation of E-175LL Covered Aircraft (as defined in the United CPA) to be extended to December 31, 2023;
▪ The extension of existing monthly operational performance incentives; and
▪ An agreement by the Company to not enter into new regional air carrier service agreements, excluding the Company’s existing agreement with DHL, and provided that this restriction shall not apply from and after the earlier to occur of (i) January 1, 2026 and (ii) the Company's satisfaction of certain Performance Milestones (as defined in the Amended and Restated United CPA).
Additionally, in January 2023, in consideration for entering in the Amended and Restated United CPA and providing the revolving line of credit, discussed in Note 10, the Company (i) granted United the right to designate one individual to the Company's board of directors (the "United Designee"), which occurred effective May 2, 2023 with the appointment of Jonathan Ireland and (ii) issued to United 4,042,061 shares of the Company’s common stock equal to approximately 10% of the Company’s then issued and outstanding capital stock on such date (the "United Shares"). United's board designee rights will terminate at such time as United's equity ownership in the Company falls below five percent (5%) of the Company's issued and outstanding stock.
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United was also granted pre-emptive rights relating to the issuance of any equity securities by the Company and certain registration rights, set forth in a definitive registration rights agreement with United, granting United customary demand registration rights in respect of publicly registered offerings of the Company, subject to usual and customary exceptions and limitations. See also Note 18 for a discussion regarding the amendment to the Company's bylaws as it relates to the Amended and Restated United CPA.
Pursuant to the United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement. During August of 2022, we committed to a formal plan to sell 18 of our CRJ-700 aircraft and terminated the leases on the 18 CRJ-700 aircraft, which have all subsequently been sold.
Our United CPA is subject to early termination prior to its expiration in various circumstances including:
▪ If certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances;
▪ If we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United, subject to 30 days' notice and cure rights;
▪ If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the agreement;
▪ If we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling another air carrier;
▪ United, subject to certain conditions, including the payment of certain costs tied to aircraft type, may terminate the agreement in its discretion, or remove E-175 aircraft from service, by giving us notice of 90 days or more; and
▪ If United elects to terminate our United CPA in its entirety or permanently remove aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us.
DHL Flight Services Agreement
On December 20, 2019, we entered into a FSA with DHL (the “DHL FSA”). Under the terms of the DHL FSA, we operate four Boeing 737 aircraft to provide cargo air transportation services as of September 30, 2023. In exchange for providing cargo flight services, we receive a fee per block hour with a minimum block hour guarantee. We are eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support expenses including fueling and airport fees are paid directly by DHL.
Under our DHL FSA, DHL leases two Boeing 737-400F aircraft and one 737-800F and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and overhauls including life limited parts (“LLPs”), landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by us. A third Boeing 737-400F aircraft is leased to us under an operating lease by a third party.
The DHL FSA expires five years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL has the option to extend the agreement with respect to one or more aircraft for a period of one year with 90 days’ advance written notice.
Our DHL FSA is subject to the following termination rights prior to its expiration:
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▪ If either party fails to comply with the obligations, warranties, representations, or undertakings under the DHL FSA, subject to certain notice and cure rights;
▪ If either party is declared bankrupt or insolvent;
▪ If we are unable to legally operate the aircraft under the DHL FSA for a specified number of days;
▪ At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 days' written notice.
▪ If we fail to comply with performance standards for three consecutive measurement periods.
▪ If we are subject to a labor incident that materially and adversely affects our ability to perform services under the DHL FSA for a specified number of days;
▪ Upon a change in control or ownership of the Company; and
▪ DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and the Company does not provide alternate services at our expense, or if the aircraft becomes unavailable for more than 30 days due to unscheduled maintenance.
Maintenance and Repairs
Airlines are subject to extensive regulation. We have a FAA mandated and approved maintenance program. Aircraft maintenance and repair consists of routine and non-routine maintenance, and work performed is divided into three general categories: line maintenance, heavy maintenance, and component service. We also outsource certain aircraft maintenance and other operating functions. We use competitive bidding among qualified vendors to procure these services. We have long-term maintenance contracts with AAR to provide fixed-rate parts procurement and component overhaul services for our aircraft fleet. Under these agreements, AAR provides maintenance and engineering services on any aircraft that we designate during the term of the agreement, along with access to a spare parts inventory pool, in exchange for a fixed monthly fee.
Line maintenance consists of routine daily and weekly scheduled maintenance checks on our aircraft. Line maintenance is performed at certain locations throughout our system and represents the majority of and most extensive maintenance we perform. Major airframe maintenance checks consist of a series of more complex tasks that can take from one to four weeks to accomplish and typically are required approximately every 28 months, on average, across our fleet. Engine overhauls and engine performance restoration events are quite extensive and can take two months. We maintain an inventory of spare engines to provide for continued operations during engine maintenance events. We expect to begin the initial planned engine maintenance overhauls on our new engine fleet approximately four to six years after the date of manufacture and introduction into our fleet, with subsequent engine maintenance every four to six years thereafter. Due to our current fleet size, we believe outsourcing all of our heavy maintenance, engine restoration, and major part repair is more economical than performing this work using our internal maintenance team.
Competition
We consider our primary competition to be U.S. regional airlines that currently hold or compete for CPAs for passenger services with major airlines. Our competition includes, therefore, nearly every other domestic regional airline, including Air Wisconsin Airlines Corporation; Commuetair, Inc. ("Commuteair"); Endeavor Air, Inc. (owned by Delta) ("Endeavor"); Envoy Air, Inc. ("Envoy"), PSA Airlines, Inc. ("PSA") and Piedmont Airlines, Inc. ("Piedmont") (Envoy, PSA and Piedmont are owned by American); Horizon Air Industries, Inc. (owned by Alaska Air Group, Inc.) ("Horizon"); SkyWest Inc., parent of SkyWest Airlines, Inc.; Republic Airways Holdings Inc.; and Trans States Airlines, Inc.
Major airlines typically offer CPAs to regional airlines on the basis of the following criteria: availability of labor resources; proposed contract economic terms; reliable and on-time flight operations; corporate financial resources including ability to procure and finance aircraft; customer service levels; and other factors.
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Certain of our competitors are larger and have significantly greater financial and other resources than we do. Moreover, economic downturns, combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies, liquidations, and business combinations among major and regional carriers. The effect of economic downturns is somewhat mitigated by our reliance on a CPA with revenue-guarantee provisions, but the renewal and continued profitability of our partnership with United is not guaranteed.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year since the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased utilization of our aircraft in the summer months and are unfavorably affected by increased fleet maintenance and by inclement weather during the winter months.
Aircraft Fuel
Our CPA and FSA provide that our major partners source, procure, and directly pay third-party vendors for all fuel used in the performance of those agreements. Accordingly, we do not recognize fuel expenses or revenues for flying under our CPA and FSA and we face very limited exposure to fuel price fluctuations.
Insurance
We maintain insurance policies that we believe are of types customary in the airline industry and as required by the DOT, lessors and other financing parties, and our major partners under the terms of our CPA and FSA. The policies principally provide liability coverage for public and passenger injury; damage to property; loss of or damage to flight equipment; fire; auto; directors' and officers' liability; advertiser and media liability; cyber risk liability; fiduciary; workers' compensation and employer's liability; and war risk (terrorism). Although we currently believe our insurance coverage is adequate, we cannot assure you that the amount of such coverage will not be changed or that we will not be forced to bear substantial losses from accidents.
Human Capital Management
As of September 30, 2023, we employed approximately 2,303 employees, consisting of 807 pilots or pilot recruits, 647 flight attendants, 32 flight dispatchers, 483 maintenance employees and 334 employees in administrative or other roles. Our continued success is partly dependent on our ability to continue to attract and retain qualified personnel. We have never been the subject of a labor strike or labor action that materially impacted our operations.
FAA regulations require pilots to have an Airline Transport Pilot ("ATP") license with specific ratings for the aircraft to be flown, and to be medically certified as physically fit to fly. FAA and medical certifications are subject to periodic renewal requirements including recurrent training and recent flying experience. Mechanics, quality-control inspectors, and flight dispatchers must be certificated and qualified for specific aircraft. Flight attendants must have initial and periodic competency training and qualification. Training programs are subject to approval and monitoring by the FAA. Management personnel directly involved in the supervision of flight operations, training, maintenance, and aircraft inspection must also meet experience standards prescribed by FAA regulations. All safety-sensitive employees are subject to pre-employment, random, and post-accident drug testing.
The airline industry has from time to time experienced a shortage of qualified personnel, particularly with respect to pilots and maintenance technicians. In addition, as is common with most of our competitors, we have faced considerable turnover of our employees. Regional airline pilots, flight attendants, and maintenance technicians often leave to work for larger airlines, which generally offer higher salaries and better benefit programs than regional airlines are financially able to offer. Should the turnover of employees,
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particularly pilots and maintenance technicians continue at the rate that has occurred over the recent past and/or, sharply increase, the result will be significantly higher training costs than otherwise would be necessary, as well as a shortage in the required number of applicable personnel, and we may need to request a reduced flight schedule with our major partners, which may result in operational performance penalties under our CPA or FSA. We cannot assure that we will be able to recruit, train and retain the qualified employees that we need to carry out our expansion plans or replace departing employees.
As of September 30, 2023, approximately 63.1% of our employees were represented by labor unions under collective-bargaining agreements, as set forth below. No other employees of ours or our subsidiaries are parties to any other collective bargaining agreement or union contracts.
Employee Groups
Number of
Employees
Representative
Labor
Agreement
Amendable
As of
Pilots
807
Air Line Pilots Association
10/17/2022
Flight Attendants
647
Association of Flight Attendants
8/30/2022
Dispatchers
32
Maintenance Department
483
Administrative
334
The Railway Labor Act ("RLA") governs our relations with labor organizations. Under the RLA, the collective bargaining agreements generally do not expire, but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, they must notify the other party in the manner agreed to by the parties. Under the RLA, after receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board ("NMB") to appoint a federal mediator. The RLA prescribes no set timetable for the direct negotiation and mediation process. It is not unusual for those processes to last for many months, and even for a few years. If no agreement is reached in mediation, the NMB in its discretion may declare at some time that an impasse exists, and if an impasse is declared, the NMB proffers binding arbitration to the parties. Either party may decline to submit to arbitration. If arbitration is rejected by either party, a 30-day "cooling off" period commences. During that period (or after), a Presidential Emergency Board ("PEB") may be established, which examines the parties' positions and recommends a solution. The PEB process lasts for 30 days and is followed by another "cooling off" period of 30 days. At the end of a "cooling off" period, unless an agreement is reached or action is taken by Congress, the labor organization may strike and the airline may resort to "self-help," including the imposition of any or all of its proposed amendments and the hiring of new employees to replace any striking workers. Congress and the President have the authority to prevent "self-help" by enacting legislation that, among other things, imposes a settlement on the parties. The table above sets forth our employee groups and status of the collective bargaining agreements.
Refer to “Impact of COVID-19 Pandemic” included in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” for information on human capital management actions taken by the Company in response to the COVID-19 pandemic.
Safety and Security
We are committed to the safety and security of our passengers and employees. We have taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety of our operations. Some of the safety and security measures we have taken with our major partners include aircraft security and surveillance, positive bag matching procedures, enhanced passenger and baggage screening and search procedures, and securing of cockpit doors. We are committed to complying with future safety and security requirements.
Our ongoing focus on safety relies on training our employees to proper standards and providing them with the tools and equipment they require so they can perform their job functions in a safe and efficient manner. Safety in the workplace targets several areas of our operation including dispatch, flight operations and maintenance.
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The TSA and the U.S. Customs and Border Protection, each a division of the U.S. Department of Homeland Security, are responsible for certain civil aviation security matters, including passenger and baggage screening at U.S. airports, and international passenger prescreening prior to entry into or departure from U.S. international flights are subject to customs, border, immigration, and similar requirements of equivalent foreign governmental agencies. We are currently in compliance with all directives issued by such agencies. We maintain active, open lines of communication with the TSA at all of our locations to ensure proper standards for security of our personnel, equipment and facilities are exercised throughout our operations.
Facilities
In addition to aircraft, we have office and maintenance facilities to support our operations. Each of our facilities are summarized in the following table:
Type
Location
Ownership
Approximate
Square Feet
Corporate Headquarters
Phoenix, Arizona
Leased
33,770
Training Center
Phoenix, Arizona
Leased
23,783
Parts/Stores
Phoenix, Arizona
Leased
12,000
Hangar
Phoenix, Arizona
Leased
22,467
Office, Hangar and Warehouse
El Paso, Texas
Leased
31,292
Parts Storage
Dallas, Texas
Leased
8,143
Hangar
Houston, Texas
Leased
74,524
Hangar
Louisville, Kentucky
Leased
26,762
Hangar
Dulles, Washington
Leased
28,451
Cargo Building
Dulles, Washington
Leased
1,475
Warehouse
Tucson, Arizona
Leased
13,276
Warehouse, Office
Erlanger, Kentucky
Leased
7,070
Our corporate headquarters and training facilities in Phoenix, Arizona are subject to long-term leases expiring on November 30, 2032 and May 31, 2025, respectively.
We believe our facilities are suitable and adequate for our current and anticipated needs.
Foreign Ownership
Under DOT regulations and federal law, we must be owned and controlled by U.S. citizens. The restrictions imposed by federal law and regulations currently require that at least 75% of our voting stock must be owned and controlled, directly and indirectly, by persons or entities who are U.S. citizens, as defined in the Federal Aviation Act, that our president and at least two-thirds of the members of our Board of Directors and other managing officers be U.S. citizens, and that we be under the actual control of U.S. citizens. In addition, at least 51% of our total outstanding stock must be owned and controlled by U.S. citizens and no more than 49% of our stock may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into " open skies " air transport agreements with the U.S. which allow unrestricted access between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country. We are currently in compliance with these ownership provisions.
Government Regulation
Aviation Regulation
The DOT and FAA have regulatory authority over air transportation in the United States and all international air service is subject to certain U.S. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries involved. The DOT has authority to issue certificates of public convenience and necessity, exemptions and other economic authority required for airlines to provide domestic and foreign air transportation. International routes and
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international code-sharing arrangements are regulated by the DOT and by the governments of the foreign countries involved. A U.S. airline's ability to operate flights to and from international destinations is subject to the air transport agreements between the United States and the foreign country and the carrier's ability to obtain the necessary authority from the DOT and the applicable foreign government.
The U.S. government has negotiated "open skies" agreements with many countries, which allow broad access between the United States and the applicable foreign country. With certain other countries, however, the United States has a restricted air transportation agreement. Our international flights to Mexico are governed by a bilateral air transport agreement which the DOT has determined has all of the attributes of an "open skies" agreement. Our flights to Canada, and Cuba are governed by bilateral air transport agreements between the United States and such countries. Changes in U.S., Mexican, Canadian or Cuban aviation policies could result in the alteration or termination of the corresponding air transport agreement, or otherwise affect our operations to and from these countries. There is still a degree of uncertainty about the future of scheduled commercial flight operations between the United States and Cuba as a result of changes in diplomatic relations between the two governments, as well as travel and trade restrictions implemented by the U.S. government in 2017. We are largely sheltered from the economic impact changes to existing "open skies" agreements or volatility in U.S., Mexican, Canadian, or Cuban aviation polices because United controls route selection and scheduling under our CPA.
The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements and other matters affecting air safety. The FAA requires each commercial airline to obtain and hold an FAA air carrier certificate. We currently hold an FAR-121 air carrier certificate. In July 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the "FAA Qualification Standards"). The FAA Qualification Standards, which became effective in August 2013, require first officers to hold an ATP certificate, requiring 1,500 hours total flight time as a pilot. Previously, first officers were required to have only a commercial pilot certificate, which required 250 hours of flight time. The rule also mandates stricter rules to minimize pilot fatigue.
Airport Access
Flights at three major domestic airports are regulated through allocations of landing and takeoff authority (i.e., "slots" and "operating authorizations") or similar regulatory mechanisms, which limit take-offs and landings at those airports. Each slot represents the authorization to land at or take off from the particular airport during a specified time period. In the United States, the FAA currently regulates the allocation of slots, slot exemptions, operating authorizations, or similar capacity allocation mechanisms at two of the airports we serve, Ronald Reagan Washington National Airport (DCA) in Washington, D.C., and New York's LaGuardia Airport (LGA). In addition, John Wayne Airport (SNA) in Orange County, California, has a locally imposed slot system. Our operations at these airports generally require the allocation of slots or analogous regulatory authorizations, which are obtained by our major partners.
Consumer Protection Regulation
The DOT also has jurisdiction over certain economic issues affecting air transportation and consumer protection matters, including unfair or deceptive practices and unfair methods of competition, lengthy tarmac delays, air carriers, airline advertising, denied boarding compensation, ticket refunds, baggage liability, contracts of carriage, customer service commitments, customer complaints, and transportation of passengers with disabilities. The DOT frequently adopts new consumer protection regulations, such as rules to protect passengers addressing lengthy tarmac delays, chronically delayed flights, CPA disclosure and undisclosed display bias, and is reviewing new guidelines to address the transparency of airline non-ticket fees and refunding baggage fees for delayed checked baggage. The DOT also has authority to review certain joint venture agreements, code-sharing agreements (where an airline places its designator code on a flight operated by another airline) and wet-leasing agreements (where one airline provides aircraft and crew to another airline) between carriers and regulates other economic matters such as slot transactions.
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Environmental Regulation
We are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are, and expect in the future to be, involved in various environmental matters and conditions at, or related to, our properties. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.
Other Regulations
Airlines are also subject to various other federal, state, local, and foreign laws and regulations. For example, the U.S. Department of Justice has jurisdiction over certain airline competition matters. Labor relations in the airline industry are generally governed by the RLA. The privacy and security of passenger and employee data is regulated by various domestic and foreign laws and regulations.
The U.S. government and foreign governments may consider and adopt new laws, regulations, interpretations, and policies regarding a wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws, regulations, interpretations, and policies might be considered in the future, nor can we judge what impact, if any, the implementation of any of these proposals or changes might have on our business.
Legal Proceedings
We are subject to certain legal actions which we consider routine to our business activities. As of September 30, 2023, our management believed the ultimate outcomes of other routine legal matters are not likely to have a material adverse effect on our financial position, liquidity, or results of operations.
Corporate Information
We are a Nevada corporation with our principal executive office located in Phoenix, Arizona. We were founded in 1982 and reincorporated in Nevada in 1996. In addition to operating Mesa Airlines, we also wholly own Mesa Air Group-Airline Inventory Management, LLC. ("MAG-AIM"), an Arizona limited liability company, which was established to purchase, distribute and manage Mesa Airlines' inventory of spare rotable and expendable parts. MAG-AIM's financial results are reflected in our consolidated financial statements.
Our principal executive offices are located at 410 North 44 th Street, Suite 700, Phoenix, Arizona 85008, and our telephone number is (602) 685-4000. Our website is located at www.mesa-air.com. The information on, or accessible through, our website does not constitute part of, and is not incorporated into, this Annual Report on Form 10-K.
Mesa Airlines, the Mesa Airlines logo and our other registered or common law trade names, trademarks, or service marks appearing in this Annual Report on Form 10-K are our intellectual property. This Annual Report on Form 10-K contains additional trade names, trademarks, and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies' trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us, by these companies. We have omitted the ® and designations, as applicable, for the trademarks used in this Annual Report on Form 10-K.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are filed with the Securities and Exchange Commission (the "SEC"). We are subject to the informational requirements of the Exchange Act, and we file or furnish reports, proxy statements and other information with the SEC. Such reports and other information we file with the SEC are available free of charge at http://investor.mesa-air.com/financial-information/sec-filings when such
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reports are available on the SEC's website. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. We periodically provide other information for investors on our corporate website, www.mesa-air.com, and our investor relations website, investor.mesa-air.com. This includes press releases and other information about financial performance, information on corporate governance and details related to our annual meeting of shareholders. The information contained on the websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.
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