Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and the other financial information included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward‑looking statements that involve risks and uncertainties such as our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere in this Annual Report on Form 10-K, particularly in the sections " Cautionary Notes Regarding Forward-Looking Statements " and Part I, Item 1A. " Risk Factors" above.
Overview
Mesa Airlines is a regional air carrier providing scheduled passenger service to 67 cities in 34 states, Cuba, and Mexico. All of our flights are operated as United Express flights pursuant to the terms of our Amended and Restated CPA with United. Prior to the voluntary wind-down of the DHL FSA on March 1, 2024, Mesa also operated flights as DHL Express flights pursuant to the terms of the FSA. Under the United CPA, we operated a fleet of 67 aircraft with approximately 265 daily departures as of September 30, 2024. We also leased two CRJ-700 aircraft to a third party during fiscal year 2024 and operated MPD, our pilot development program. As of September 30, 2024, all of our aircraft in scheduled service were operated for United. All of our operating revenue in our 2024, 2023, and 2022 fiscal years were derived from operations associated with our United CPA, DHL FSA, leases of aircraft to a third party, and MPD. Operating revenue in fiscal years 2023 and 2022 were also derived from operations associated with our American CPA prior to the wind-down and termination of such CPA on April 3, 2023.
Our long-term agreement with United provides us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour and flight actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying services on behalf of United. Our CPA also shelters us from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. In providing regional flying under our CPA, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of United. United controls route selection, pricing, seat inventories, marketing, and scheduling, and provides us with ground support services, airport landing slots and gate access.
Glossary of Airline Terms
Set forth below is a glossary of industry terms used in this Annual Report on Form 10-K:
" Available seat miles " or " ASMs " means the number of seats available for passengers multiplied by the number of miles the seats are flown.
" Average stage length " means the average number of statute miles flown per flight segment.
" Block hours " means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.
" CRASM " means contract revenue divided by ASMs.
" DOT " means the United States Department of Transportation.
" FAA " means the United States Federal Aviation Administration.
" FTE " means full-time equivalent employee.
" Load factor " means the percentage of aircraft seat miles actually occupied on a flight (RPMs divided by ASMs).
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" NMB " means the National Mediation Board.
" Pass-through and other revenue " means costs from our major partners under our agreements that we equally recognize as both a revenue and an expense, including passenger and hull insurance, aircraft property taxes, landing fees, catering and certain maintenance costs related to our E-175 aircraft.
" Revenue Passenger Miles " or " RPMs " means the number of miles traveled by paying passengers.
" TSA " means the United States Transportation Security Administration.
" Utilization " means the percentage derived from dividing (i) the number of block hours actually flown during a given month under a particular CPA by (ii) the maximum number of block hours that could be flown during such month under the particular CPA.
2024 Financial Highlights
For our fiscal year ended September 30, 2024, we had total operating revenues of $476.4 million, a 4.3% decrease, compared to $498.1 million for our fiscal year ended September 30, 2023. Net loss for our fiscal year ended September 30, 2024 was $91.0 million, or $2.21 per diluted share, compared to net loss of $120.1 million, or $3.04 per diluted share, for our fiscal year ended September 30, 2023.
During our fiscal year ended September 30, 2024, our completed block hours decreased by 12,711, or 6.7%, compared to our fiscal year ended September 30, 2023.
Industry Trends
We believe our operating and business performance is driven by various factors that typically affect regional airlines and their markets, including trends which affect the broader airline and travel industries, though the terms of our United CPA reduces our exposure to fluctuations in certain trends. The following key factors may materially affect our future performance.
Availability and Training of Qualified Pilots. On July 8, 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which, among other things, increased the required training time for new airline pilots from 250 hours to 1,500 hours of flight time. With these changes, the supply of qualified pilot candidates eligible for hiring by the airline industry was dramatically reduced. To address the diminished supply of qualified pilot candidates, regional airlines implemented significant pilot wage and bonus increases.
We launched the MPD Program to address the diminished supply of qualified pilots, provide a more affordable path for pilots to reach the 1,500 flight hours required to earn their Airline Transport Pilot certificate, and provide a pipeline of potential pilots at Mesa Airlines. As part of this program, we operate a fleet of 28 Pipistrel Alpha Trainer 2 aircraft. Currently, pilots pay out-of-pocket for the first 250 flight hours at a rate of $60 per hour. Subsequent flight costs of $75 per hour are financed by the Company at zero interest and, generally, require repayment of such financing over two years.
Although pilot attrition has returned to normal levels no assurance can be given that the measures we have taken or may take in the future will enable us to attract, hire and train pilots at a rate necessary to support our operations.
Pilot and Mechanic Attrition. In recent years, we have experienced significant volatility in our attrition as a result of pilot wage and bonus increases at other regional air carriers, the growth of cargo, low-cost and ultra-low-cost carriers, and the number of pilots at major airlines reaching the statutory mandatory retirement age of 65 years. If our actual pilot attrition rates are materially different than our projections, our operations and financial results could be materially and adversely affected. Although we target maintenance staffing levels above our projected needs in order to account for attrition, which is widespread in the industry, from time to time we have experienced attrition with our maintenance technicians, who have the option to seek employment at mainline airlines, which generally offer higher salaries and more extensive
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benefit programs than regional airlines are financially able to offer. Attrition of maintenance technicians has sometimes required us to supplement our staff with qualified temporary employees.
As discussed generally above, we implemented a new pay structure whereby as of September 15, 2022, we offer starting wages of $100 an hour for entry-level first officers, and $150 an hour for first-year captains while captains with 20 years of experience will be paid $215 an hour to remain competitive and attract and retain experienced, qualified pilots.
Economic Conditions, Challenges and Risks
Liquidity and Going Concern. During our fiscal year ended September 30, 2024, the decrease in scheduled flying activity associated with the transition of our operations with American to United, increased costs associated with pilot wages, together with increasing interest rates adversely impacted our financial results, cash flows, financial position, and other key financial ratios. Additionally, United has asked us to accelerate the removal of our CRJ-900 aircraft and transition the pilots to our E-175 fleet. These events will lead to increased costs and impact our block hour capabilities while these pilots are in training.
As a result of the decrease in scheduled flying activity for United, we produced less block hours to generate revenues. During the fiscal year ended September 30, 2024, these challenges resulted in a negative impact on the Company’s financial results highlighted by net loss of $91.0 million, primarily due to impairment expense of $73.7 million related to held for sale assets during the year. These conditions and events raised concerns about our ability to continue to fund our operations and meet our debt obligations over the next twelve months from the filing of this Form 10-K.
To address such concerns, management developed and implemented certain 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 following measures were implemented during the year ended September 30, 2024, and through the date of issuance of the financial statements.
• On April 4, 2025, the Company entered into the Three Party Agreement between United, Republic, and the Company, which provides for, among other things, the following, each subject to the completion of the Merger Agreement:
o Termination of the United CPA.
o The Company to sell or dispose of all remaining Eligible Assets (as defined in the Three Party Agreement).
o The Company to extinguish all remaining debt with cash and sale of assets. Any remaining debt will be assumed by the surviving corporation or forgiven by United.
o A three percent (3%) increase in CPA block hour rates, retroactive to January 1, 2025.
o The transfer of all of the Company's rights and obligations under its agreements with Archer (as discussed in Note 17).
• On April 4, 2025, we entered into the Sixth Amendment to the Third Amended and Restated Capacity Purchase Agreement with United which provides for the following:
o The extension of the CPA rate increases agreed upon in the January 2024 United CPA Amendments, retroactive to January 1, 2025, through March 31, 2026.
o The extension of incentives for achieving certain performance metrics, retroactive to July 1, 2024, through March 31, 2026.
• On April 4, 2025, we entered into the Sixth Amendment to Second Amended and Restated Credit and Guaranty Agreement providing for the waiver of an existing financial covenant default with respect to the period ended March 31, 2025, and a projected financial covenant default with respect to the periods ending June 30, 2025, September 30, 2025, December 31, 2025, and
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March 31, 2026, each relating to a minimum liquidity requirement under our United Revolving Credit Facility.
• On April 3, 2025, we entered into a purchase agreement with a third party which provides for the sale of 23 GE model CF34-8C engines to the third party for expected gross proceeds of $16.3 million, which will be used to pay down our UST Loan.
• On December 31, 2024, we entered into an Aircraft Purchase Agreement with United which provides for the sale of 18 E-175 aircraft to United for gross proceeds of $227.7 million and net proceeds of $84.7 million after the retirement of debt. Subsequently, we closed the sale of all 18 aircraft to United.
• On December 30, 2024, we received notice from United that $4.5 million of our Effective Date Revolving Loan balance under our United Revolving Credit Facility has been forgiven for achieving certain operational performance metrics outlined in the United CPA.
• On December 24, 2024, we entered into a purchase agreement with a third party which provides for the sale of 15 CRJ-900 airframes to the third party for expected gross proceeds of $19.0 million, which will be used to pay down our UST Loan. On April 3, 2025, the purchase agreement was amended to include an additional 14 CRJ-900 airframes to be sold to the third party for expected gross proceeds of $9.1 million. The total expected gross proceeds of $28.1 million will be used to pay down our UST Loan.
• On December 23, 2024, we entered into an agreement with the UST to lower the minimum CCR covenant to .99 to 1.0 effective as of November 22, 2024 through February 28, 2025. After such date, the CCR will revert to 1.55 to 1.0. The agreement also requires the Company to use its reasonable best efforts to cause counterparties to all Receivables (as defined in the Treasury Loan) (whether or not constituting “Eligible Receivables” (as defined in the Treasury Loan)) of the Company to be paid to the Eligible Receivables Account (as defined in the Treasury Loan). Receivables generated from the sale of assets that are not Collateral (as defined in the Treasury Loan) are excluded from the scope of the foregoing requirement. As a result of the lower CCR covenant, we are in compliance with this covenant as of September 30, 2024. Additionally, on March 18, 2025, we entered into a new CCR Modification Agreement with the UST to lower the minimum CCR covenant to .91 to 1.0 effective as of February 28, 2025 through the maturity date of the loan.
• On December 23, 2024, we entered into a Waiver to Second Amended and Restated Credit and Guaranty Agreement providing for the waiver of an existing financial covenant default with respect to the period July 1, 2024 to December 23, 2024 and a projected financial covenant default with respect to the period December 24, 2024 to December 31, 2024, each relating to a minimum liquidity requirement under our United Revolving Credit Facility.
• On December 23, 2024, we entered into the Fourth Amendment to our Third Amended and Restated United CPA which provides for the following:
o Amended certain scheduled exit dates for our E-175 and CRJ-900 Covered Aircraft (as defined in the United CPA).
o Added provisions relating to the reimbursement by United of up to $14.0 million of pilot training costs incurred by the Company with respect to its E-175 aircraft.
• On September 25, 2024, we reached an agreement with United which provides for, among other things, the commitment to buy our two CRJ-700 aircraft out of their lease with GoJet and to purchase such aircraft for total proceeds of $11.0 million, $4.5 million of which will pay down the outstanding obligations. Subsequent to September 30, 2024, we closed the sale of the two CRJ-700 aircraft to United.
• Based on the most recent appraisal value of our spare parts, we have $12.4 million of borrowing capacity under our United Revolving Credit Facility.
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• 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.
The Company believes the plans and initiatives outlined above have effectively alleviated the financial concerns 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 block hours, maintenance events, labor costs, and other relevant factors. Assumptions used in the forecast may change or not occur as expected.
As of July 16, 2024, the Company was not in compliance with a financial covenant related to a minimum liquidity requirement of $15.0 million of cash and cash equivalents associated with its Second Amended and Restated Credit and Guaranty Agreement with United. On December 23, 2024, the Company entered into a Waiver to Second Amended and Restated Credit and Guaranty Agreement providing for the waiver for the financial covenant default with respect to the period July 1, 2024 to December 23, 2024 and a projected financial covenant default with respect to the period December 24, 2024 to December 31, 2024. Further, on April 4, 2025, the Company entered into the Sixth Amendment to Second Amended and Restated Credit and Guaranty Agreement providing for the waiver of an existing financial covenant default with respect to the period ended March 31, 2025, and a projected financial covenant default with respect to the periods ending June 30, 2025, September 30, 2025, December 31, 2025, and March 31, 2026. As of the issuance of this Form 10-K, we are in compliance with all financial covenants.
As of September 30, 2024, the Company had $50.5 million of principal maturity payments on long-term debt due within the next twelve months. Additionally, all outstanding principal amounts of $113.7 million as of September 30, 2024, under our UST Loan are due and payable in a single installment on October 30, 2025. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, and 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. As of September 30, 2024, the Company is in compliance with all financial covenants.
Market Volatility. The airline industry is volatile and affected by economic cycles and trends. Consumer confidence and discretionary spending, spread of a virus, fear of terrorism or war, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, changes in governmental regulations on taxes and fees, weather and other factors have contributed to a number of reorganizations, bankruptcies, liquidations, and business combinations among major and regional airlines. The effect of economic cycles and trends may be somewhat mitigated by our reliance on our CPA. If, however, United experiences a prolonged decline in the number of passengers or is negatively affected by low ticket prices or high fuel prices, it may seek rate reductions in future CPAs, or materially reduce our scheduled flights in order to reduce its costs. Our financial performance could be negatively impacted by any adverse changes to the rates, number of aircraft or utilization under our CPA.
Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements. As of September 30, 2024, approximately 62.8% of our workforce was represented by the ALPA and AFA. In August 2022, we entered into a three-year Letter of Agreement with ALPA, which provided for increased overall hourly pay increases of nearly 118% for captains and 172% for new-hire first officers. These pay increases have positively impacted our ability to attract, hire, and retain pilots in fiscal years 2023 and 2024, and attrition levels have dropped to a pre-COVID level. In September 2022, we entered into a Letter of Agreement with AFA to extend the term of our agreement by two years. Our extension with AFA provided, among other things, an
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increase in compensation for our flight attendants. The terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. In addition, conflicts between airlines and their unions can lead to work slowdowns or stoppages. A strike or other significant labor dispute with our unionized employees may adversely affect our ability to conduct business.
Competition. The airline industry is highly competitive. We compete principally with other regional airlines. Major airlines typically award CPAs to regional airlines based on the following criteria: ability to fly contracted schedules, availability of labor resources including pilots, low operating cost, financial resources, geographical infrastructure, overall customer service levels relating to on-time arrival and flight completion percentages, and the overall image of the regional airline. Our ability to renew our existing agreement and earn additional flying opportunities in the future will depend, in significant part, on our ability to maintain a low-cost structure competitive with other regional air carriers.
Maintenance Contracts, Costs and Timing. Our employees perform routine airframe and engine maintenance along with periodic inspections of equipment at their respective maintenance facilities. We also use third-party vendors, such as AAR, Aviall, MHI, GE, and StandardAero, for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for our aircraft fleet. As of September 30, 2024, $52.3 million of parts inventory was consigned to us by AAR and Aviall under long-term contracts that is not reflected in our consolidated balance sheet.
The average age of our E-175, CRJ-900, and CRJ-700 type aircraft is approximately 8.7, 18.2, and 17.4 years, respectively. Due to the relatively young age of our E-175 aircraft, they require less maintenance now than they will in the future. In prior periods, we incurred relatively low maintenance expenses on our E-175 aircraft because most of the parts are under multi-year warranties and a limited number of heavy airframe checks and engine overhauls have occurred. As our E-175 aircraft age and these warranties expire, we expect that maintenance costs will increase in absolute terms and as a percentage of revenue. In addition, because our current aircraft were acquired over a relatively short period of time, significant maintenance events scheduled for these aircraft will occur at roughly the same intervals, meaning we will incur our most expensive scheduled maintenance obligations across our present fleet at approximately the same time. These more significant maintenance activities result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable for flying under our CPA.
We use the direct expense method of accounting for our maintenance of regional jet engine overhauls, airframe, auxiliary power units and landing gear for the majority of our fleets, with the exception of Mesa-owned E-175 aircraft. Heavy maintenance and major overhaul costs on our owned E-175 fleet are deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. Normal recurring maintenance is expensed when the maintenance work is completed, or over the repair period, if materially different. Our maintenance policy is determined by fleet when major maintenance is incurred. While we keep a record of expected maintenance events, the actual timing and costs of major engine maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify the costs or timing of future maintenance-related expenses for any significant period of time.
Aircraft Leasing and Finance Determinations. We have generally funded aircraft acquisitions through a combination of operating leases and debt financing. Our determination to lease or finance the acquisition of aircraft may be influenced by a variety of factors, including the preferences of our major partners, the strength of our balance sheet and credit profile and those of our major partners, the length and terms of the available lease or financing alternatives, the applicable interest rates, and any lease return conditions. When possible, we prefer to finance aircraft through debt rather than operating leases, due to lower operating costs, extended depreciation period, opportunity for aircraft equity, absence of lease return conditions and greater flexibility in renewing the aircraft under our CPA with our major partner after paying off the principal balance.
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Subsequent to the initial acquisition of an aircraft, we may also refinance the aircraft or convert one form of financing to another (e.g., replacing an aircraft lease with debt financing). The purchase of leased aircraft allows us to lower our operating costs and avoid lease-related use restrictions and return conditions.
As of September 30, 2024, we had 47 aircraft in our fleet under lease, including 42 E-175 aircraft owned by United and leased to us at nominal amounts and five CRJ-900 aircraft on short-term leases owned by a third party. We also have two CRJ-700 aircraft that are leased to us by a third party. In order to determine the proper classification of our leased aircraft as either operating leases or finance leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a finance lease. Our aircraft leases classified as operating leases results in rental payments being charged to expense over the terms of the related leases.
We are also subject to lease return provisions that require a minimum portion of eligible flight time for certain components remain when the aircraft is returned at the lease expiration. We estimate the cost of maintenance lease return obligations and accrue such costs over the remaining lease term when the expense is probable and can be reasonably estimated.
See "Risk Factors" for a discussion of these factors and other risks.
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.
Components of Our Results of Operations
The following discussion summarizes the key components of our consolidated statements of operations and comprehensive loss.
Operating Revenues
Our consolidated operating revenues consist of contract revenue as well as pass-through and other revenue.
Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to our United CPA, along with the additional amounts received based on the number of flights and block hours flown, rental revenue for aircraft leased to a third party, and revenue received from pilots in the MPD program. Contract revenues we receive from United are paid on a weekly basis and recognized over time consistent with the delivery of service under our CPA.
Pass-Through and Other Revenue. Pass-through and other revenue consists of passenger insurance, aircraft property taxes, landing fees, and other aircraft and traffic servicing costs received pursuant to our United CPA, as well as certain maintenance costs related to the United owned E-175 aircraft.
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Operating Expenses
Our operating expenses consist of the following items:
Flight Operations. Flight operations expense includes costs related to salaries, bonuses and benefits earned by our pilots, flight attendants, and dispatch personnel, as well as costs related to technical publications, lodging of our flight crews, and pilot training expenses.
Fuel. Fuel expense includes fuel and related fueling costs for flying we undertake outside of our CPA, including aircraft repositioning and maintenance. All aircraft fuel and related fueling costs for flying under our CPA were directly paid and supplied by United. The fuel and related cost for flying under our DHL FSA were directly paid and supplied by DHL. Accordingly, we do not record an expense or the related revenue for fuel supplied United for flying under our CPA or DHL under our FSA except fuel costs incurred for controllable ferry flights for United. Fuel expenses relating to MPD are paid by the Company.
Maintenance. Maintenance expense includes costs related to engine overhauls, airframe, landing gear and normal recurring maintenance, which includes pass-through maintenance costs related to our E-175 aircraft. Heavy maintenance and major overhaul costs on our owned E-175 fleet are deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. All other maintenance costs are expensed as incurred, except for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment terms. As a result of using the direct expense method for heavy maintenance on the majority of our fleets, the timing of maintenance expense reflected in the financial statements may vary significantly from period to period.
Aircraft Rent. Aircraft rent expense includes costs related to leased engines and aircraft.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expense includes expenses related to our CPA and FSA, including aircraft cleaning, passenger disruption reimbursements, international navigation fees and wages of airport operations personnel, a portion of which are reimbursable by our major partners.
General and Administrative. General and administrative expense includes insurance and taxes, the majority of which are pass-through costs, non-operational administrative employee wages and related expenses, building rents, real property leases, utilities, legal, audit and other administrative expenses.
Depreciation. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine, aircraft improvement, and equipment depreciation.
Impairment. Impairment expense is a non-recurring, non-cash charge related to the reduction in value of aircraft and related parts, primarily upon reclassification to held for sale.
Other Income (Expense), Net
Interest Expense. Interest expense is interest on our debt to finance purchases of aircraft, engines, and equipment, including amortization of debt financing costs and discounts.
Interest Income. Interest income includes interest income on our cash and cash equivalent balances.
Gain on Investments, Net. Gain on investments, net consists of gains on the sale or transfer of our investments in equity securities to another party.
Unrealized (Loss)/Gain, Net. Unrealized (loss)/gain on investments, net consists of losses or gains due to changes in the value of our investments in equity securities.
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Gain on extinguishment of debt. Gain on extinguishment of debt relates to the settlement of a loan for an amount less than the outstanding principal balance.
Gain on debt forgiveness. Gain on debt forgiveness consists of gains resulting from the forgiveness earned on our deemed prepayment associated with our United Revolving Credit Facility for the achievement of certain performance metrics.
Other Expense. Other expense includes expense derived from activities not classified in any other area of the consolidated statements of income.
Segment Reporting
Operating segments are defined as components of an enterprise about which discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing operating performance. In consideration of ASC 280, Segment Reporting, we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled flight services in accordance with our CPA.
While we operate under a CPA, we do not manage our business based on any performance measure at the individual contract level. Additionally, our CODM uses consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our Board of Directors. The CODM bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operated as one operating and reportable segment.
Results of Operations
Comparison of our Fiscal Years Ended September 30, 2024 and 2023
We had an operating loss of $65.8 million in our year ended September 30, 2024, compared to an operating loss of $84.3 million in our year ended September 30, 2023. In our year ended September 30, 2024, we had a net loss of $91.0 million compared to a net loss of $120.1 million in our year ended September 30, 2023.
Our operating results for the fiscal year ended September 30, 2024 improved as a result of decreases in operating expenses due to (i) decreases in flight operations expense as a result of decreased pilot training and lower pilot wages; (ii) decreases in maintenance expense, primarily due to a decrease in pass-through engine overhaul on our E-175 fleet; (iii) decreases in general and administrative expenses, primarily due to a decrease in pass-through property tax; and (iv) decreases in depreciation expense, primarily due to the retirement and sale of several aircraft. These decreases were partially offset by (i) impairment expense of $73.7 in our fiscal year ended September 30, 2024 compared to impairment expense of $54.3 million in our fiscal year ended September 30, 2023; and (ii) a decrease in contract revenue due to reduced block hours flown, fewer aircraft under contract, and the wind-down of the DHL FSA, partially offset by an increased United block hour compensation rate.
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Operating Revenues/Statistics
Year Ended September 30,
2024
2023
Change
Operating revenues ($ in thousands):
Contract
$
404,322
$
421,298
$
(16,976
)
(4.0
)%
Pass-through and other
72,087
76,767
(4,680
)
(6.1
)%
Total operating revenues
$
476,409
$
498,065
$
(21,656
)
(4.3
)%
Operating data:
Available seat miles—ASMs (thousands)
3,898,559
4,235,413
(336,854
)
(8.0
)%
Block hours
176,236
188,947
(12,711
)
(6.7
)%
Revenue passenger miles—RPMs
(thousands)
3,261,349
3,541,712
(280,363
)
(7.9
)%
Average stage length (miles)
538
552
(14
)
(2.5
)%
Contract revenue per available seat
mile—CRASM (in cents)
¢
10.37
¢
9.95
¢
0.42
4.2
%
Passengers
5,980,033
6,310,730
(330,697
)
(5.2
)%
(1) The definitions of certain terms related to the airline industry used in the table can be found under "Glossary of Airline Terms" above.
Total operating revenue decreased by $21.7 million, or 4.4%, to $476.4 million during our fiscal year ended September 30, 2024 as compared to our fiscal year ended September 30, 2023. Contract revenue decreased by $17.0 million, or 4.0%, to $404.3 million during our fiscal year September 30, 2024, primarily driven by reduced block hours flown, fewer aircraft under contract, and the wind-down of the DHL FSA compared to our fiscal year ended September 30, 2023, partially offset by an increased United block hour compensation rate. Our block hours flown during our fiscal year ended September 30, 2024 decreased 6.7% as compared to our fiscal year ended September 30, 2023 due to a decrease in scheduled flying on our CRJ fleet. Our pass-through and other revenue decreased by $4.7 million, or 6.1%, to $72.1 million compared to our fiscal year ended September 30, 2023 due to a decrease in pass-through maintenance related to our E-175 fleet.
Operating Expenses
Year Ended September 30,
2024
2023
Change
Operating expenses ($ in thousands):
Flight operations
$
184,472
$
216,748
$
(32,276
)
(14.9
)%
Maintenance
184,725
199,648
(14,923
)
(7.5
)%
Aircraft rent
7,797
6,200
1,597
25.8
%
General and administrative
44,248
48,765
(4,517
)
(9.3
)%
Depreciation and amortization
40,041
60,359
(20,318
)
(33.7
)%
Asset impairment
73,709
54,343
19,366
35.6
%
Loss/(Gain) on sale of assets
682
(7,162
)
7,844
(109.5
)%
Other operating expenses
6,555
3,510
3,045
86.8
%
Total operating expenses
$
542,229
$
582,411
$
(40,182
)
(6.9
)%
Operating data:
Available seat miles—ASMs
(thousands)
3,898,559
4,235,413
(336,854
)
(8.0
)%
Block hours
176,236
188,947
(12,711
)
(6.7
)%
Average stage length (miles)
538
552
(14
)
(2.5
)%
Departures
97,618
103,675
(6,057
)
(5.8
)%
Flight Operations. Flight operations expense decreased by $32.3 million, or 14.9%, to $184.5 million for our fiscal year ended September 30, 2024, compared to our fiscal year ended September 30, 2023. The decrease was primarily driven by decreased pilot training expense and lower pilot wages as a result of fewer block hours flown and decreases in headcount.
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Maintenance. Aircraft maintenance expense decreased $14.9 million, or 7.5%, to $184.7 million for our fiscal year ended September 30, 2024, compared to our fiscal year ended September 30, 2023. This decrease was primarily driven by a decrease in pass-through engine overhaul and rotable and expendable parts, partially offset by an increase in other pass-through costs and C-check maintenance expenses. Total pass-through maintenance expenses reimbursed by our major partners decreased by $3.1 million during our fiscal year ended September 30, 2024 compared to our fiscal year ended September 30, 2023.
The following table presents information regarding our aircraft maintenance costs during our fiscal years ended September 30, 2024 and 2023:
Year Ended September 30,
2024
2023
Change
Engine overhaul
$
(477
)
$
444
$
(921
)
(207.4
)%
Pass-through engine overhaul
23,490
31,911
(8,421
)
(26.4
)%
C-check
6,639
6,451
188
2.9
%
Pass-through C-check
16,263
16,926
(663
)
(3.9
)%
Component contracts
19,129
20,102
(973
)
(4.8
)%
Rotable and expendable parts
17,645
20,566
(2,921
)
(14.2
)%
Other pass-through
22,373
16,431
5,942
36.2
%
Labor and other
79,663
86,817
(7,154
)
(8.2
)%
Total
$
184,725
$
199,648
$
(14,923
)
(7.5
)%
Aircraft Rent. Aircraft rent expense increased by $1.6 million, or 25.8%, to $7.8 million for our fiscal year ended September 30, 2024, compared to our fiscal year ended September 30, 2023. This increase was due to several short-term CRJ-900 airframe and engine leases during the fiscal year ended September 30, 2024.
General and Administrative. General and administrative expense decreased by 4.5 million, or 9.3%, to $44.2 million for our fiscal year ended September 30, 2024, compared to our fiscal year ended September 30, 2023. This decrease was primarily driven by decreases in pass-through property taxes and pass-through insurance costs.
Depreciation and Amortization. Depreciation and amortization expense decreased by $20.3 million, or 33.7%, to $40.0 million for our fiscal year ended September 30, 2024, compared to our fiscal year ended September 30, 2023. The decrease is primarily due to aircraft in our fleet being sold or classified as non-depreciable assets held for sale.
Asset Impairment. Asset impairment of $73.7 million was recorded for our fiscal year ended September 30, 2024 primarily related to eight CRJ-900 aircraft, 26 CRJ-900 airframes (without engines), and 77 model CF34-8C engines being designated as held for sale. There was $54.3 million of asset impairment recorded for our fiscal year ended September 30, 2023 related to the write-off of our customer relationship intangible asset and 14 CRJ-900 aircraft being designated as held for sale.
Loss/(Gain) on sale of assets. Loss on sale of assets of $0.7 million was recorded for our fiscal year ended September 30, 2024 related to the sale of certain engines. A gain on the sale of assets of $7.2 million was recorded for our fiscal year ended September 30, 2023 related to a 30-engine sale agreement.
Other Operating Expenses. Other operating expenses increased by $3.0 million, or 86.8%, to $6.6 million for our fiscal year ended September 30, 2024 compared to our fiscal year ended September 30, 2023. The increase is primarily attributable to interrupted trip costs during the fiscal year ended September 30, 2024.
54
Other Expense
Other expense decreased by $19.8 million, or 44.6%, to $24.7 million for our fiscal year ended September 30, 2024, compared to our fiscal year ended September 30, 2023. The decrease is primarily attributable to realized gains on investments in equity securities of $8.0 million, gain on extinguishment of debt of $3.0 million, gain on debt forgiveness of $10.5 million, and decreases on interest expense. The decrease is partially offset by $6.1 million in unrealized losses on investments in equity securities for our fiscal year ended September 30, 2024 compared to $5.4 million in unrealized gains on investments in equity securities for our fiscal year ended September 30, 2023.
Income Taxes
In our fiscal year ended September 30, 2024, our effective tax rate was (0.6)% compared to 6.9% in our fiscal year ended September 30, 2023. Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our state net operating losses.
We recorded an income tax provision of $0.5 million and an income tax benefit of $8.7 million for the fiscal years ended September 30, 2024 and 2023, respectively.
The income tax provision for our fiscal year ended September 30, 2024 resulted in an effective tax rate of (0.6)%, which differed from the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against federal and state net operating losses, expired state attributes, disallowed unrealized losses, and changes in state apportionment and statutory rates.
The income tax provision for our fiscal year ended September 30, 2023 resulted in an effective tax rate of 6.9%, which differed from the U.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against federal and state net operating losses, expired state attributes, disallowed unrealized losses, and changes in state apportionment and statutory rates.
We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.
As of September 30, 2024, we had aggregate federal and state net operating loss carryforwards of approximately $511.7 million and $226.9 million, which expire in 2027-2038 and 2024-2044, respectively, with approximately $4.0 million of state net operating loss carryforwards that expired in 2024.
See Note 12 - "Income Taxes" in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Cautionary Statement Regarding Non-GAAP Measures
We present Adjusted EBITDA and Adjusted EBITDAR in this Annual Report on Form 10-K, which are not recognized financial measures under accounting principles generally accepted in the United States of America ("GAAP"), as supplemental disclosures because our senior management believes that they are well-recognized valuation metrics in the airline industry that are frequently used by companies, investors, securities analysts, and other interested parties in comparing companies in our industry.
Adjusted EBITDA. We define Adjusted EBITDA as net income or loss before interest, income taxes, depreciation and amortization, adjusted for gains and losses on investments, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees.
55
Adjusted EBITDAR. We define Adjusted EBITDAR as net income or loss before interest, income taxes, depreciation and amortization, and aircraft rent, adjusted for gains and losses on investments, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees.
You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA and Adjusted EBITDAR, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA and Adjusted EBITDAR. Gains and losses on investments, which are presented as adjustments to EBITDA and EBITDAR because they are non-cash gains and losses driven by changes in stock prices and other valuation techniques and are not reflective of our core operations, will occur in periods where the Company has investments in equity securities with readily determinable fair values. Our presentation of Adjusted EBITDA and Adjusted EBITDAR should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA or Adjusted EBITDAR and any such modification may be material.
Adjusted EBITDA and Adjusted EBITDAR have limitations as analytical tools. Some of the limitations applicable to these measures include: (i) Adjusted EBITDA and Adjusted EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; (ii) Adjusted EBITDA and Adjusted EBITDAR do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (iii) Adjusted EBITDA and Adjusted EBITDAR do not reflect changes in, or cash requirements for, our working capital needs; (iv) Adjusted EBITDA and Adjusted EBITDAR do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; (v) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future; (vi) Adjusted EBITDA and Adjusted EBITDAR do not reflect gains and losses on investments, which are non-cash gains and losses but will occur in periods when there are changes in the value of the Company’s investments in equity securities; and (vii) Adjusted EBITDA and Adjusted EBITDAR do not reflect any cash requirements for such replacements and other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDAR differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, Adjusted EBITDA and Adjusted EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, Adjusted EBITDAR should not be viewed as a measure of overall performance because it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. For the foregoing reasons, each of Adjusted EBITDA and Adjusted EBITDAR has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.
Adjusted EBITDA and Adjusted EBITDAR
The following table presents a reconciliation of net (loss) income to Adjusted EBITDA and Adjusted EBITDAR for the period presented:
56
Year Ended September 30,
2024
2023
2022
Reconciliation:
Net loss
$
(91,015
)
$
(120,116
)
$
(182,678
)
Income tax benefit
519
(8,745
)
(51,990
)
Loss before taxes
(90,496
)
(128,861
)
(234,668
)
Gain on investments, net
(8,032
)
—
—
Unrealized loss/(gain) on investments, net
6,145
(5,408
)
13,715
Adjustments (1)(2)(3)(4)(5)(6)(7)(8)(9)(10)(11)(12)
69,469
48,357
170,918
Adjusted loss before taxes
(22,914
)
(85,912
)
(50,035
)
Interest expense
38,455
49,921
35,289
Interest income
(68
)
(146
)
(139
)
Depreciation and amortization
40,041
60,359
81,508
Adjusted EBITDA
$
55,514
$
24,222
$
66,623
Aircraft rent
7,797
6,200
36,989
Adjusted EBITDAR
$
63,311
$
30,422
$
103,612
(1) $0.2 million of lease termination expense during the fiscal year ended September 30, 2022.
(2) $3.2 million loss from the write off of lease incentive assets during the fiscal year ended September 30, 2022.
(3) $109.7 million impairment loss related to our long-lived asset group for our CRJ-900 fleet during the fiscal year ended September 30, 2022.
(4) $1.6 million, $1.2 million and $0.4 million loss on deferred financing costs related to the retirement of debts during the during the fiscal years ended September 30, 2024, 2023, and 2022, respectively.
(5) $0.7 million loss, $7.2 million gain, and $4.7 million gain on the sale of aircraft, engines, and other assets during the fiscal years ended September 30, 2024, 2023, and 2022, respectively.
(6) $77.4 million, $46.9 million and $58.6 million impairment loss on held for sale accounting treatment during the fiscal years ended September 30, 2024, 2023, and 2022, respectively.
(7) $3.7 million gain, $3.7 million loss, and $3.5 million loss on impairment fair value adjustments during the fiscal years ended September 30, 2024, 2023, and 2022, respectively.
(8) $3.7 million impairment loss on intangible assets during the fiscal year ended September 30, 2023.
(9) $6.0 million in third party costs associated with non-recurring transactions during the fiscal year ended September 30, 2024.
(10) $10.5 million gain on debt forgiveness during the fiscal year ended September 30, 2024.
(11) $3.0 million gain on extinguishment of debt during the fiscal year ended September 30, 2024.
(12) $0.9 million loss for early payment fees on the retirement of debt during the fiscal year ended September 30, 2024.
Liquidity and Capital Resources
As of September 30, 2024, the Company has $50.5 million of principal maturity payments on long-term debt due within the next twelve months. Additionally, all outstanding principal amounts, $113.7 million as of September 30, 2024, under our UST Loan are due and payable in a single installment on October 30, 2025. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, and 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.
On October 30, 2020, the Company entered into a Loan and Guarantee Agreement with the U.S Treasury under the CARES Act. The loan agreement provides for a secured term loan facility of up to $200.0 million (the “Treasury Loan” or "UST Loan"). On October 30, 2020, the Company borrowed $43.0 million under the Treasury Loan and on November 13, 2020, the Company borrowed an additional $152.0 million. No additional sums are available for borrowing under the Treasury Loan. The obligations under the Treasury Loan are secured by certain aircraft, aircraft engines, accounts receivable, ground service equipment, and tooling (collectively, the “Collateral”). All principal amounts outstanding under the Treasury Loan are due and payable in a single installment on October 30, 2025 (the "Maturity Date") and all accrued interest is payable in arrears on the first business day following the 14th day of March, June, September, and December (beginning with December 15, 2020), and on the Maturity Date. For the first 12 months, interest was paid in-kind by increasing the principal amount of the loan by the amount of such interest due on an interest payment date. The obligations under the Treasury Loan are guaranteed by the Company and Mesa Air Group Inventory Management. Voluntary prepayments of loans under the Treasury Loan may
57
be made, in whole or in part, without premium or penalty, at any time. Amounts prepaid may not be reborrowed. Mandatory prepayments of amounts outstanding under the Treasury Loan are required, without premium or penalty, to the extent necessary to comply with the covenants discussed below, certain dispositions of the Collateral, certain debt issuances secured by liens on the Collateral and certain insurance payments related to the Collateral. In addition, if a “change of control” (as defined in the Treasury Loan) occurs with respect to Mesa Airlines, Mesa Airlines will be required to repay the loans outstanding under the Treasury Loan.
The Treasury Loan requires the Company, under certain circumstances, including within one business day prior to the last business day of March and September of each year, beginning March 2021, to appraise the value of the Collateral and recalculate the collateral coverage ratio. If the calculated collateral coverage ratio is less than 1.55 to 1.0, Mesa Airlines will be required either to provide additional Collateral (which may include cash collateral) to secure its obligations under the Treasury Loan or repay the term loans under the Treasury Loan, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Collateral or repayment, is at least 1.55 to 1.0. On September 23, 2024, we entered into the CCR Modification Agreement to reduce our required minimum CCR to 1.44 to 1.0 through November 22, 2024, after which, the required minimum CCR will revert back to 1.55 to 1.0.
The Treasury Loan contains two financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Treasury Loan also contains customary negative and affirmative covenants for credit facilities of this type, including, among others: (a) limitations on dividends and distributions; (b) limitations on the creation of certain liens; (c) restrictions on certain dispositions, investments and acquisitions; (d) limitations on transactions with affiliates; (e) restrictions on fundamental changes to the business, and (f) restrictions on lobbying activities. Additionally, the Company is required to comply with the relevant provisions of the CARES Act, including limits on employment level reductions after September 30, 2020, restrictions on dividends and stock buybacks, limitations on executive compensation, and requirements to maintain certain levels of scheduled service.
Sources and Uses of Cash
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, aircraft and engine pre-delivery payments, maintenance, aircraft rent and debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events. Our principal sources of liquidity are cash on hand, cash generated from operations, proceeds from the sale of assets, and funds from external borrowings. In the near term, we expect to fund our primary cash requirements through cash generated from operations, cash and cash equivalents on hand, and proceeds from the sale of assets.
As discussed above, we entered into the Treasury Loan on October 30, 2020 pursuant to which we borrowed an aggregate of $195.0 million.
We believe that the key factors that could affect our internal and external sources of cash include:
▪ Factors that affect our results of operations and cash flows, including the impact on our business and operations as a result of changes in demand for our services, competitive pricing pressures, and our ability to achieve further reductions in operating expenses; and
▪ Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing, and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.
Our ability to service our long-term debt obligations, including our equipment notes, to remain in compliance with the various covenants contained in our debt agreements and to fund our working capital, capital expenditures and business development efforts will depend on our ability to generate cash from
58
operating activities, which is subject to, among other things, our future operating performance, as well as to other factors, some of which may be beyond our control.
If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us.
We believe that cash flow from operating activities coupled with existing cash and cash equivalents, existing credit facilities, financing arrangements, and anticipated asset sales, will be adequate to fund our operating and capital needs, as well as enable us to maintain compliance with our various debt agreements, through at least the next 12 months. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.
During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect the current market conditions and our projected demand. Our capital expenditures, which includes purchases of spare engines, aircraft, inventory, tools, vehicles, equipment and miscellaneous projects for the year ended September 30, 2024 were approximately 4.3% of annual revenues. We expect to continue to incur capital expenditures to support our business activities. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.
As of September 30, 2024, our principal sources of liquidity were cash and cash equivalents of $15.6 million. In addition, we had restricted cash of $3.0 million as of September 30, 2024. Restricted cash includes certificates of deposit that secure letters of credit issued for particular airport authorities as required in certain lease agreements. Furthermore, as of September 30, 2024, we also had $310.5 million in secured indebtedness incurred primarily in connection with our financing of aircraft. Our primary uses of liquidity are capital expenditures, operating lease payments, and debt repayments. As of September 30, 2024, we had $48.7 million of short-term debt, excluding finance leases, and $259.4 million of long-term debt excluding finance leases.
Sources of cash for our fiscal year ended September 30, 2024 were primarily cash flows provided by operations of $34.2 million and proceeds from the sale of assets of $169.3 million.
Debt and Other Obligations
As of September 30, 2024, we had $363.6 million of long-term debt (including principal and projected interest obligations) and finance lease obligations (including current maturities). This amount consists of $247.7 million in notes payable principal payments related to owned aircraft used in continuing operations, $25.3 million in notes payable principal payments related to spare engines and engine kits, $4.7 million in finance lease obligations, $37.5 million in principal outstanding under our working capital line of credit, and an aggregate of $48.4 million in projected interest costs through our fiscal 2027.
As of September 30, 2024, we had variable rate debt representing 69.0% of our total long-term debt. Actual interest commitments will change based on the actual variable interest.
Operating Leases
We have significant long-term operating lease obligations primarily relating to our aircraft fleet, as well as leases of office and hangar space. As of September 30, 2024, we had five airframes and 21 engines on operating leases (excluding aircraft leased at nominal amounts from United). The five airframes are short-term operating leases that will be returned when the airframes are removed from the United CPA by the end of February 2025. The engines have remaining lease terms of up to 2.2 years. Future minimum lease payments due under all long-term operating leases were approximately $10.5 million as of September 30, 2024.
Finance Leases
On June 1, 2022, Mesa Airlines, as lessee, entered into two agreements for the lease of two CRJ-700 aircraft (the “Aircraft Leases”). Basic rent on this lease is paid monthly and at the end of the lease term.
59
The Company has the option to purchase both aircraft for a total of $1.5 million at the end of the lease term. On May 30, 2024, we amended the finance lease agreements providing for the revision of the lease term from June 22, 2031 to May 29, 2027. We paid initial payments totaling approximately $1.8 million. Subsequent to September 30, 2024, we entered into an agreement with United to buy the aircraft out of their lease with the third party and to purchase them for $11.0 million, $4.5 million of which will pay down the outstanding obligations under the associated finance leases.
The Company had previously leased 15 aircraft from RASPRO Trust as an operating lease. In December 2022, the Company entered into an agreement with RASPRO Trust, reducing the buyout pricing on all 15 aircraft at lease termination by a total of $25 million. Under the terms of the new agreement, the Company reclassified these leases as finance leases. During the fiscal year ended September 30, 2024, the Company purchased all 15 aircraft and completely paid off the RASPRO obligation.
As of September 30, 2024, we had two aircraft on finance leases with remaining lease terms of up to 2.7 years. Future minimum lease payments due under all long-term finance leases were approximately $4.7 million as of September 30, 2024.
Working Capital Line of Credit
In August 2016, we, as guarantor, our wholly owned subsidiaries, Mesa Airlines and MAG-AIM, as borrowers, CIT, as administrative agent, and the lenders party thereto (the “CIT Lenders”), entered into the CIT Revolving Credit Facility, pursuant to which the CIT Lenders committed to lend to Mesa Airlines and MAG-AIM revolving loans in the aggregate principal amount of up to $35.0 million. The borrowers' and guarantor's obligations under the CIT Revolving Credit Facility are secured primarily by a first priority lien on certain engines, spare parts, and related collateral, including engine warranties and proceeds of the foregoing. The CIT Revolving Credit Facility contains affirmative, negative, and financial covenants that are typical in the industry for similar financings, including, but not limited to, covenants that, subject to exceptions described in the CIT Revolving Credit Facility, restrict our ability and the ability of Mesa Airlines and MAG-AIM and their subsidiaries to: (i) enter into, create, incur, assume or suffer to exist any liens; (ii) merge, dissolve, liquidate, consolidate or sell or transfer substantially all of its assets; (iii) sell assets; (iv) enter into transactions with affiliates; (v) amend certain material agreements and organizational documents; (vi) make consolidated unfinanced capital expenditures; or (viii) maintain a consolidated interest and rental coverage ratio above the amount specified in the CIT Revolving Credit Facility. The CIT Revolving Credit Facility also includes customary events of defaults, including but not limited to: (i) payment defaults; (ii) breach of covenants; (iii) breach of representations and warranties; (iv) cross-defaults; (v) certain bankruptcy-related defaults; (vi) change of control; and (vii) revocation of instructions with respect to certain controlled accounts.
On September 25, 2019, the Company extended the term on its $35.0 million working capital draw loan by three years, which now terminates in December 2022. Interest is assessed on drawn amounts at one-month SOFR plus 3.75%. In June 2020, $23.0 million was drawn to cover operational needs. As of September 30, 2022, $15.6 million remained outstanding under the working capital draw loan.
On December 27, 2022, in connection with entering into the Amended and Restated United CPA, (i) United agreed to purchase and assume all of First Citizens’ rights and obligations as a lender under the Existing Facility pursuant to an Assignment and Assumption Agreement, (ii) United and CIT Bank agreed to amend the Existing Facility pursuant to an Amendment No. 1, dated December 27, 2022 (“Amendment No. 1”), and an Amendment No. 2, dated January 27, 2023 (“Amendment No. 2”; the Existing Facility as amended by Amendment No. 1 and Amendment No. 2, the "Amended Facility"), and (iii) Wilmington Trust, National Association agreed to assume all of CIT Bank’s rights and obligations as Administrative Agent pursuant to an Agency Resignation, Appointment and Assumption Agreement, dated as of January 27, 2023. Amendment No. 1, among other things, extends the Maturity Date from the earlier to occur of November 30, 2028, or the date of the termination of the Amended and Restated United CPA; provides for a revolving loan of $10.0 million plus fees and expenses, which was due January 31, 2024, subject to certain mandatory prepayment requirements; provides for Revolving Commitments equal to $30.7 million plus the original principal amount of the $10 million revolving loan; amortization of the obligations
60
outstanding under the existing CIT Agreement commencing quarterly until March 31, 2025; and a covenant capping Restricted Payments (as defined in the Amended Facility) at $5.0 million per fiscal year, a consolidated interest and rental coverage ratio of 1.00 to 1.00 covenant, and a Liquidity (as defined in the Amended Facility) requirement of not less than $15.0 million at the close of any business day. Interest assessed under the Amended Facility is 3.50% for Base Rate Loans and 4.50% for Term SOFR Loans (as such terms are defined in the Amended Facility). Amendment No. 2, among other things, amends the definition of Controlled Account (as defined in the Amended Facility). Amounts borrowed under this Amended Facility are secured by a collateral pool consisting of a combination of expendable parts, rotable parts and engines and a pledge of the Company’s stock in certain aviation companies. United funded $25.5 million as of the closing date of Amendment No. 1, to be used for general corporate purposes.
On September 6, 2023, the Company amended the existing United Credit Facility to (i) permit the Company to re-draw approximately $7.9 million of the Effective Date Bridge Loan (as defined in the United Credit Facility) previously repaid; (ii) increased the amount of Revolving Commitments (as defined in the United Credit Facility) from $30.7 million to $50.7 million, in each case, plus the original principal amount of the Effective Date Bridge Loan and subject to the Borrowing Base (as defined in the United Credit Facility); and (iii) amended the calculation of the Borrowing Base. Amounts borrowed under this facility bear interest at 3.50% for Base Rate Loans and 4.50% per annum for Term SOFR Loans. Amounts borrowed under the Amended Credit Facility are secured by a collateral pool consisting of a combination of expendable parts, rotable parts and engines, a pledge of certain of the Company’s bank accounts and a pledge of the Company’s stock in certain aviation companies.
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 ("Amendment No. 4") 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:
• 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.
• 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 were released as collateral for the United credit facility.
• 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.
• 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.
• 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.
Electric Aircraft Forward Purchase Commitments
As described in Note 7, in February 2021, the Company entered into a forward purchase contract with Archer Aviation, Inc. (“Archer”) for a number of electrically-powered vertical takeoff and landing aircraft (“eVTOL aircraft”). The aggregate base commitment for the eVTOL aircraft is $200.0 million, with an option to purchase additional aircraft. The Company’s obligation to purchase the eVTOL aircraft is subject to the Company and Archer first agreeing in the future to a number of terms and conditions, which may or may not be met.
61
As described in Note 7, in July 2021, the Company entered into a forward purchase contract with Heart Aerospace Incorporated (“Heart”) for a number of fully electric aircraft. The maximum aggregate base commitment for the aircraft is $1,200.0 million, with an option to purchase additional aircraft. The Company’s obligation to purchase the aircraft is subject to the Company and Heart first agreeing in the future to a number of terms and conditions, which may or may not be met.
Maintenance Commitments
In August 2005, we entered into a ten-year agreement with AAR for the maintenance and repair of certain of our CRJ-200, CRJ-700, and CRJ-900 aircraft. The agreement has since been amended to include a term extending through 2025, and to provide certain E-175 aircraft rotable spare parts with a term through December 2027. Under the agreements, we pay AAR a monthly access fee per aircraft for certain consigned inventory as well as a fixed "cost per flight hour" fee on a monthly basis for repairs on certain repairable parts during the term of the agreement, which fees are subject to annual adjustment based on increases in the cost of labor and component parts.
In July 2013, we entered into an engine maintenance contract with GE to perform heavy maintenance on certain CRJ-700, CRJ-900, and E-175 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance with GE's spare parts catalog for engines. The engine maintenance contract extends through 2024.
In 2014, we entered into a ten-year contract with Aviall to provide maintenance and repair services on the wheels, brakes and tires of our CRJ-700 and CRJ-900 aircraft. Under the agreement, we pay Aviall a fixed "cost per landing" fee for all landings of our aircraft during the term of the agreement, which fee is subject to annual adjustment based on increases in the cost of labor and component parts.
We entered into an engine maintenance contract with StandardAero, which became effective on June 1, 2015, to perform heavy maintenance on certain CRJ-700 and CRJ-900 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance with the GE's spare parts catalog for engines.
Our employees perform routine airframe and engine maintenance along with periodic inspections of equipment at their respective maintenance facilities. We also use third-party vendors, such as AAR, Ascent, Embraer, Aviall, and GE, for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for our aircraft fleet. As of September 30, 2024, $52.3 million of parts inventory was consigned to us by AAR and Aviall under long-term contracts that is not reflected on our balance sheet.
The Company accounts for heavy maintenance and major overhaul costs on its owned E-175 fleet under the deferral method whereby the cost of heavy maintenance and major overhaul is deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. For all other fleets, we use the direct expense method of accounting for our maintenance of regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein we recognize the expense when the maintenance work is completed, or over the repair period, if materially different, except for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment terms. Our maintenance policy is determined by fleet when major maintenance is incurred. While we keep a record of expected maintenance events, the actual timing and costs of major engine maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify the costs or timing of future maintenance-related expenses for any significant period of time.
Restricted Cash
As of September 30, 2024, we had $3.0 million in restricted cash. We have an agreement with a financial institution for a $6.0 million letter of credit facility and to issue letters of credit for landing fees, worker's compensation insurance and other business needs. Pursuant to such agreement, $3.0 million and $3.1 million of outstanding letters of credit are required to be collateralized by amounts on deposit as of September 30, 2024 and 2023, respectively, which are classified as restricted cash.
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Cash Flows
The following table presents information regarding our cash flows for each of our fiscal years ended September 30, 2024, 2023, and 2022:
Year Ended September 30,
2024
2023
2022
Net cash provided by (used in) operating activities
$
34,244
$
(24,091
)
$
13,362
Net cash provided by investing activities
148,788
142,285
1,365
Net cash used in financing activities
(200,474
)
(143,147
)
(77,569
)
Net decrease in cash, cash equivalents and restricted cash
(17,442
)
(24,953
)
(62,842
)
Cash, cash equivalents and restricted cash at beginning of period
36,072
61,025
123,867
Cash, cash equivalents and restricted cash at end of period
$
18,630
$
36,072
$
61,025
Net Cash Flow Provided by Operating Activities
Our primary source of cash from operating activities is cash collections from United pursuant to our CPA. Our primary uses of cash used in operating activities are for maintenance costs, personnel costs, operating lease payments, and interest payments.
During our fiscal year ended September 30, 2024, we had cash flow provided by operating activities of $34.2 million. We had net loss of $91.0 million adjusted for the following significant non-cash items: asset impairment of $73.7 million, depreciation of $40.0 million, stock-based compensation expense of $1.3 million, net unrealized losses on investments in equity securities of $6.1 million, net gains on investments of $(8.0) million, amortization of deferred credits of $(1.1) million, amortization of debt discount and issuance costs and accretion of interest of $8.3 million, gain on extinguishment of debt of $(3.0) million, gain on debt forgiveness of $(10.5) million, and $4.7 million in net other operating cash flow adjustments. We had net change of $13.5 million within other net operating assets and liabilities largely driven by accrued liabilities, accounts payable, and prepaid expenses, partially offset by deferred revenue during our fiscal year ended September 30, 2024.
During our fiscal year ended September 30, 2023, we had cash flow used in operating activities of $24.1 million. We had net loss of $120.1 million adjusted for the following significant non-cash items: asset impairment of $54.3 million, depreciation and amortization of $60.4 million, stock-based compensation expense of $2.3 million, deferred income taxes of $(9.3) million, net unrealized gains on investments in equity securities of $(5.4) million, amortization of deferred credits of $1.5 million, amortization of debt discount and issuance costs and accretion of interest of $6.3 million, loss on extinguishment of debt of $1.5 million, net gain on disposal of assets of $(7.2) million, and $2.2 million in net other operating cash flow adjustments. We had net change of $(10.7) million within other net operating assets and liabilities largely driven by accrued liabilities, accounts payable, deferred revenue, receivables, and operating leases during our fiscal year ended September 30, 2023.
During our fiscal year ended September 30, 2022, we had cash flow provided by operating activities of $13.4 million. We had net loss of $182.7 million adjusted for the following significant non-cash items: asset impairment of $171.8 million, depreciation and amortization of $81.5 million, stock-based compensation expense of $2.8 million, deferred income taxes of $(52.0) million, losses on investments in equity securities of $13.7 million, amortization of deferred credits of $(0.9) million, amortization of debt discount and issuance costs and accretion of interest of $9.7 million, loss on extinguishment of debt of $0.4 million, gain on disposal of assets of $(4.7) million, provision for obsolete expendable parts and supplies of $0.6 million, and loss on lease termination of $0.2 million. We had net change of $(26.8) million within other net operating assets and liabilities largely driven by accrued liabilities, accounts payable, deferred revenue, receivables, and operating leases during our fiscal year ended September 30, 2022.
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Net Cash Flows Provided by (Used in) Investing Activities
Our investing activities generally consist of the sale of assets, capital expenditures for aircraft and related flight equipment, deposits paid or returned for equipment and other purchases, and strategic investments.
During our fiscal year ended September 30, 2024, our net cash flow provided by investing activities was $148.8 million. We received a total of $158.3 million from the sale of aircraft and engines, net of transaction costs, $9.2 million from the sale of investments in equity securities, net of transaction costs, and $1.5 million in customer deposits. Additionally, we invested $1.2 million in aircraft, $6.1 million in depreciable inventory, $3.7 million in costs associated with transitioning CRJ-900 aircraft to United operations, $3.4 million in capitalized maintenance, and $5.8 million in tools, vehicles, equipment and other miscellaneous projects.
During our fiscal year ended September 30, 2023, our net cash flow provided by investing activities was $142.3 million. We invested $15.8 million in spare engines, $2.2 million in aircraft, $13.4 million in inventory, $2.6 million in costs associated with transitioning CRJ-900 aircraft to United operations, and $2.6 million in tools, vehicles, equipment and other miscellaneous projects. Additionally, we received a total of $178.6 million from the sale of aircraft and engines and received a $0.3 million in refunds on equipment and other deposits.
During our fiscal year ended September 30, 2022, our net cash flow provided by investing activities was $1.4 million. We invested $16.7 million in spare engines, $2.2 million in aircraft, $18.4 million in inventory, $4.4 million in tools, vehicles, equipment and other miscellaneous projects, and $7.6 million in net payments on equipment and other deposits. Additionally, we invested a total of $0.2 million in equity securities and received a total of $50.0 million from sale of 10 CRJ-700 aircraft.
Net Cash Flows Used in Financing Activities
Our financing activities generally consist of debt borrowings, principal repayments of debt, payment of debt financing costs, stock repurchases, and proceeds received from issuing common stock under our ESPP.
During our fiscal year ended September 30, 2024, our net cash flow used in financing activities was $200.5 million. We received $86.9 million of proceeds from long-term debt. We made $286.3 million of principal repayments on long-term debt during the period. We incurred $0.9 million in prepayment fees and made $0.1 million of payments of tax withholding for restricted stock units.
During our fiscal year ended September 30, 2023, our net cash flow used in financing activities was $143.1 million. We received $60.9 million of proceeds from long-term debt. We made $203.0 million of principal repayments on long-term debt during the period. We incurred $0.9 million of costs related to debt financing and $0.4 million of payments of tax withholding for restricted stock units. We received $0.3 million in proceeds from the issuance of common stock under our ESPP.
During our fiscal year ended September 30, 2022, our net cash flow used in financing activities was $77.6 million. We received $39.8 million of proceeds from borrowings under the Treasury Loan. We made $114.9 million of principal repayments on long-term debt during the period. We incurred $2.4 million of costs related to debt financing and $0.5 million of payments of tax withholding for restricted stock units. We received $0.4 million in proceeds from the issuance of common stock under our ESPP.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue, and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we
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believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.
The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 2 - "Summary of Significant Accounting Policies" to the consolidated financial statements.
Leases
Effective October 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02" or “ASC 842”) which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases with terms of less than 12 months. From a lessee perspective, our leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. We determine if an arrangement is a lease at inception. Our operating lease activities are recorded in operating lease right-of-use (“ROU”) assets, current maturities of operating leases, and noncurrent operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of long-term debt and finance leases, and long-term debt and finance leases, excluding current portion.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
In addition to the aircraft we lease from United under our United CPA, approximately 7% of our aircraft are leased from third parties. Our aircraft operating leases are all short-term leases and result in rental payments being charged to rent expense immediately.
As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e., leases with terms of 12 months or less).
From a lessor perspective, our CPA identifies the "right of use" of a specific type and number of aircraft over a stated period-of-time. A portion of the compensation in the CPA is designed to reimburse the Company for certain aircraft ownership costs of these aircraft. We account for the non-lease component of our CPA under ASC 606 and account for the lease component under ASC 842. We allocate the consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost-basis approach representing our estimate of the stand-alone selling prices.
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The Company entered into lease agreements with GoJet Airlines LLC (“GoJet”) to lease CRJ-700 aircraft as of September 30, 2021. The lease agreements are accounted for as operating leases and had a term of nine years beginning on the delivery date of each aircraft. Under the lease agreements, GoJet pays fixed monthly rent per aircraft and variable lease payments for supplemental rent based on monthly aircraft utilization at fixed rates. Supplemental rent payments are subject to reimbursement following GoJet’s completion of qualifying maintenance events defined in the lease agreements. Lease revenue for fixed monthly rent payments is recognized on a straight-line basis within contract revenue. Lease revenue for supplemental rent is deferred and recognized within contract revenue when it is probable that amounts received will not be reimbursed for future qualifying maintenance events over the lease term. Subsequent to September 30, 2024 we entered into an agreement with United pursuant to which United agreed to buy the two aircraft out of their lease with GoJet and purchase the aircraft.
Revenue Recognition
The Company recognizes revenue when the service is provided under its CPA. Under the CPA, United generally pays a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of flights and block hours flown. The contract also includes reimbursement of certain costs incurred by the Company in performing flight services. These costs, known as "pass-through costs," may include passenger liability insurance as well as aircraft property taxes and other flight service expenditures defined in our agreement. Additionally, for the E-175 aircraft owned by United, the CPA provides that United will reimburse the Company for heavy airframe and engine maintenance, landing gear, APUs and component maintenance. The Company also receives compensation under its agreement for heavy maintenance expenses at a fixed hourly rate or per aircraft rate for all aircraft in scheduled service other than the E-175 aircraft owned by United. The contract also includes incentives and penalties based on certain operational benchmarks. The Company is eligible to receive incentive compensation upon the achievement of certain performance criteria defined in the agreement. At the end of each period during the term of an agreement, the Company calculates the incentives achieved during that period and recognizes revenue attributable to the agreement during the period accordingly, subject to the variable constraint guidance under ASC 606. All revenue recognized under the CPA is presented as the gross amount billed to United.
Under the United CPA, the Company has committed to perform various activities that can be generally classified into in-flight services and maintenance services. When evaluating these services, the Company determined that the nature of its promise is to provide a single integrated service, flight services, because its contracts require integration and assumption of risk associated with both services to effectively deliver and provide the flights as scheduled over the contract term. Therefore, the in-flight services and maintenance services are inputs to that combined integrated flight service. Both services occur over the term of the agreement and the performance of maintenance services significantly affects the utility of the in-flight services. The Company's individual flights flown under the CPA are deemed to be distinct and the flight service promised in the CPA represents a series of services that is accounted for as a single performance obligation. This single performance obligation is satisfied over time as the flights are completed. Therefore, revenue is recognized when each flight is completed.
In allocating the transaction price, variable payments (i.e., billings based on flights and block hours flown, pass-through costs, etc.) that relate specifically to the Company's efforts in performing flight services are recognized in the period in which the individual flight is completed. The Company has concluded that allocating the variability directly to the individual flights results in an overall allocation meeting the objectives in ASC 606. This results in a pattern of revenue recognition that follows the variable amounts billed from the Company to their customers.
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A portion of the Company's compensation under its CPAs with United and previously American is designed to reimburse the Company for certain aircraft ownership costs. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. The lease revenue associated with the Company's CPA is accounted for as an operating lease and is reflected as contract revenue on the Company's consolidated statements of operations and comprehensive loss. The Company recognized $123.0 million, $144.7 million, and $158.4 million of lease revenue for the fiscal years ended September 30, 2024, 2023, and 2022, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations and comprehensive loss because the use of the aircraft is not a separate activity of the total service provided.
The Company's CPA is renewable periodically and contain provisions pursuant to which the parties could terminate their respective agreements, subject to certain conditions, as described in Note 1. The CPA also contains terms with respect to covered aircraft, services provided, and compensation as described in Note 1. The CPA is amended from time to time to change, add, or delete terms of the agreements.
The Company's revenues could be impacted by a number of factors, including amendment or termination of its CPA, contract modifications resulting from contract renegotiations, its ability to earn incentive payments contemplated under applicable agreements, and settlement of reimbursement disputes with United. In the event contracted rates are not finalized at a quarterly or annual financial statement date, the Company evaluates the enforceability of its contractual terms and when it has an enforceable right, it estimates the amount the Company expects to be entitled subject to the variable constraint guidance under ASC 606.
The Company's CPA contains an option that allows United to assume the contractual responsibility for procuring and providing the fuel necessary to operate the flights that it operates for them. United has exercised this option. Accordingly, the Company does not record an expense or revenue for fuel and related fueling costs for flying under its CPA. In addition, United also provides, at no cost to the Company, certain ground handling and customer service functions, as well as airport-related facilities and gates at their hubs and other cities. Services and facilities provided by United at no cost are presented net in its consolidated financial statements; hence, no amounts are recorded for revenue or expense for these items.
The Company records deferred revenue when cash payments are received or are due from United in advance of the Company’s performance. The deferred revenue balance as of September 30, 2024 of $9.6 million (current and non-current portion) represents our aggregate remaining performance obligations that will be recognized as revenue over the period in which the performance obligations are satisfied (as flights are completed over the remaining contract term).
Property and Equipment
The Company’s property and equipment, which primarily consists of aircraft and related flight equipment, had a net book value of $426.4 million as of September 30, 2024. The Company monitors for any indicators of impairment of its property and equipment and other long-lived assets whenever events or changes in circumstances indicate that the related carrying amount may be impaired. Factors which could be indicators of impairment include, but are not limited to: (i) significant adverse changes in the extent or manner in which an asset is being used, including permanently removing a long-lived asset or assets from operations; (ii) significant changes in the estimated useful life of an asset; (iii) significant changes in estimated future cash flows or a history of operating or cash flow losses; (iv) permanent and significant declines in market prices of an asset; and (v) changes to the regulatory environment or business climate. The Company records an impairment loss if (i) the undiscounted future cash flows are found to be less than the carrying amount of the asset or asset group, and (ii) the carrying amount of the asset or asset group exceeds its fair value. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to its estimated fair value.
We group assets at the CPA level (i.e., the lowest level for which there are identifiable cash flows). If impairment indicators exist with respect to any of our asset groups, we estimate future cash flows based on projections of capacity purchase block hours, maintenance events, labor costs and other relevant factors. The Company’s assumptions about future conditions are important to its assessment of potential impairment of its long-lived assets. The Company will continue to monitor these conditions in future periods as new information becomes available and will update its analyses accordingly. If an asset group is
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impaired, the impairment loss recognized is the amount by which the asset group’s carrying amount exceeds its fair value. We estimate fair values of aircraft and related assets using published sources, appraisals, and bids received from third parties as available.
As a result of operating losses and the removal of CRJ-900 aircraft from the United CPA, we evaluated our fleet for impairment as of September 30, 2024, and determined that future cash flows from the operation of our fleet through the remaining useful life exceeded the carrying value of the fleet. As such, no impairment expenses were recorded to our fleet.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which we cannot conclude that it is more likely than not that such deferred tax assets will be realized.
In determining the amount of the valuation allowance, estimated future taxable income as well as feasible tax planning strategies for each taxing jurisdiction are considered. If we determine it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if we determine we are more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact to our effective tax rate. See Note 12 - "Income Taxes" in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. See also "Management's Discussion and Analysis—Results of Operations—Income Taxes" for additional information.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 4 - "Recent Accounting Pronouncements" in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
For a listing and discussion of our accounting policies, see Note 2 - "Summary of Significant Accounting Policies" in the notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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