Item 1. Business
ITEM 1. BUSINESS
General
Mesa Air Group, Inc. is the holding company of Mesa Airlines, Inc., a regional air carrier providing scheduled passenger service to 107 cities in 39 states, the District of Columbia, the Bahamas, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. All of our flights are operated as either American Eagle, United Express, or DHL Express flights pursuant to the terms of capacity purchase agreements (“ CPAs ”) entered into with American Airlines, Inc. (" American ") and United Airlines, Inc. (" United "), and pursuant to the terms of a Flight Services Agreement (“ FSA ”) with DHL Network Operations (USA), Inc. (“ DHL ”) (each, our " major partner "). We have a significant presence in several of our major partners' key domestic hubs and focus cities, including Dallas, Houston, Phoenix, and Washington-Dulles.
As of September 30, 2022, we operated under the CPAs and FSA, or maintained as operational spares, a fleet of 158 aircraft with approximately 306 daily departures. We also lease two (2) aircraft to a third party as of September 30, 2022. We operate 42 CRJ-900 aircraft under our capacity purchase agreement and as spares with American (the " American CPA "); 20 E-175LL, and 60 E-175 aircraft under our capacity purchase agreement with United (the " United CPA "), and three (3) Boeing 737-400F aircraft under our flight services agreement with DHL (the “ DHL FSA ”). For our fiscal year ended September 30, 2022, approximately 45% of our revenues were earned under the American CPA, approximately 48% were earned under the United CPA, approximately 5% were earned from leases of aircraft to a third party and approximately 2% were earned under the DHL FSA. All our operating revenue in our fiscal year 2022 and 2021 was derived from operations associated with our American and United CPAs, DHL FSA, or from leases of aircraft to a third party.
Our agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour (measured from takeoff to landing, including taxi time) and flight actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying on behalf of our major partners. Our agreements also shelter us, to an extent, 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 and cargo flight services under our agreements, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major partners. Our major partners control route selection, pricing, seat inventories, marketing, and scheduling, and provide us with ground support services, airport landing slots and gate access.
Regional aircraft are optimal for short- and medium-haul scheduled flights that connect outlying communities with larger cities and act as " feeders " for domestic and international hubs. In addition, regional aircraft are well suited to serve larger city pairs during off-peak times when load factors on larger jets are low. The lower trip costs and operating efficiencies of regional aircraft, along with the competitive nature of the capacity purchase agreement bidding process, provide significant value to major airlines.
Impact of Pilot Shortage and Attrition
During our fiscal year ended September 30, 2022, the severity of the pilot shortage and attrition and increasing costs associated with pilot wages adversely impacted our financial results, cash flows, financial position, and other key financial ratios. One of the primary factors contributing to the pilot shortage and attrition is the demand for pilots at major carriers, which are hiring at an accelerated rate to backfill the thousands of pilots whom they offered early retirements to at the beginning of the pandemic. These airlines now seek to increase their capacity to meet the growing demand for air travel as the global pandemic has moderated. A primary source of pilots for the major US passenger and cargo carriers are the US regional airlines. As a result of the pilot shortage and attrition, the Company has increased overall hourly pay by nearly 118% for captains and 172% for new-hire first officers.
In response to this pilot shortage and attrition, pilot wage increases and their negative impacts on our financial results, we have implemented and continue to put in place the following plans and initiatives:
▪
Working collaboratively with our major partners, we have and continue to address financial and operational impacts of pilot attrition, hiring and overall associated costs.
▪
We established the Mesa Pilot Development Program (the "MPD Program") to increase the pilot throughput. We have purchased 29 state-of-the-art Pipistrel Alpha Trainer 2 aircraft, with the option to buy an additional 75 over the next year. This new fleet will be the backbone of our MPD Program to help commercial pilots accelerate their accumulation of flight hours to reach the minimum flight hours required by FAA. As part of the program, pilots will be provided with the opportunity to accumulate up to 1,500 flight hours required to fly a commercial aircraft at Mesa Airlines. Flights costs of $25 per hour, per pilot, will be fully financed by us with zero interest, providing no upfront out-of-pocket expense for flight time while the candidate is accruing the required hours to earn their ATP certificate.
4
▪
We added flight training simulators and flight training instructors to expand our training capacity to backfill pilots lost to attrition.
▪
We increased the hourly pay for pilots to exceed the industry average in an effort to retain current pilots and attract new pilots.
▪
We expanded the United Aviate program participation to include all pilots flying for Mesa. Previously, pilots had to fly under the United Express contract for a minimum of two (2) years to qualify for the flow through to United Airlines. Now, all pilots regardless of contract, are eligible to flow through to United Airlines enhancing Mesa's ability to attract and retain pilots.
▪
We continue to evaluate other initiatives to increase pilot recruitment and accelerate training throughput.
▪
We formally listed 11 of our CRJ-900 aircraft and one (1) CRJ-200 aircraft for sale to raise capital and retire debt.
▪
We listed 18 CRJ-700 aircraft during the reporting period, of which 10 were sold. The approximate proceeds from the sale in the quarter was $50 million.
▪
We initiated discussions to refinance and defer repayment of our outstanding and drawn balance on our revolving credit facility with CIT Bank, N.A which is currently due in December 2022.
▪
We delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level of flight activity.
While these initiatives outlined above may alleviate pressure on financial performance, there is no guarantee these initiatives will come to fruition or otherwise achieve their desired objective. See the disclosure under Note 1 - Organizations and Operations - Impact of Pilot Shortage and Attrition" in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of the above initiatives that were implemented subsequent to our fiscal year ended September 30, 2022 and the disclosures under Note 18 - Subsequent Events in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of certain other agreements entered into subsequent to our fiscal year ended September 30, 2002, including an amendment to our American CPA to wind down our operations with American, an expansion of our United CPA to transition aircraft from the American CPA to operate under the United CPA, and certain other financial accommodations.
COVID-19 Pandemic
Beginning in fiscal 2020, COVID-19 surfaced in nearly all regions around the world and resulted in travel restrictions and business slowdowns or shutdowns in affected areas. The COVID-19 pandemic negatively affected our revenue and operating results during fiscal 2022, 2021, and 2020. Any similar outbreaks in the future may have a material impact on our financial condition, liquidity, and results of operations in future periods. See “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for discussion regarding the impact of the COVID-19 pandemic on our financial results. Also, see “Part I. Item 1A. Risk Factors” for discussion of the risks and uncertainties associated with the COVID-19 pandemic.
Our Business Strategy
Our business strategy consists of the following elements:
5
Maintain Low-Cost Structure
We have established ourselves as a low cost, efficient and reliable provider of regional airline and cargo flight services. We intend to continue our disciplined cost control approach through responsible outsourcing of certain operating functions, by flying large regional aircraft with associated lower maintenance costs and common flight crews across fleet types, and through the diligent control of corporate and administrative costs by implementing company-wide efforts to improve our cost structure.
Attractive Work Opportunities
We believe our employees have been, and will continue to be, a key to our success. Our ability to attract, recruit, and retain pilots has supported our industry-leading fleet growth. We intend to continue to offer competitive compensation packages, foster a positive and supportive work environment and provide opportunities to fly state-of-the-art, large-gauged regional jets to differentiate us from other carriers and make us an attractive place to work and build a career.
Maintain a Prudent and Conservative Capital Structure
We intend to continue to maintain a prudent capital structure, including with respect to the amount of debt we carry. We believe that our balance sheet and credit profile will enable us to optimize terms with lessors and vendors.
Minimize Tail Risk
We have structured our aircraft leases and financing arrangements to minimize or eliminate, as much as possible, so-called " tail risk, " which is the amount of aircraft-related lease obligations or projected negative equity existing beyond the term of that aircraft's corresponding capacity purchase or flight services agreement. We intend to continue to align the terms of our aircraft leases and financing agreements with the terms of our capacity purchase agreements and flight services agreement to maintain low " tail risk. "
Aircraft Fleet
We fly only large regional jets manufactured by Bombardier Aerospace (“Bombardier”) and Embraer S.A. (" Embraer "), as well as 737 cargo jets manufactured by Boeing. Mitsubishi Heavy Industries (“MHI”), who acquired the CRJ business from Bombardier, and Embraer are the primary manufacturers of regional jets operated in the United States, which allows us to enjoy operational, recruiting and cost advantages over other regional airlines that operate smaller regional aircraft from less prominent manufacturers.
As of September 30, 2022, we had 158 aircraft (owned and leased) consisting of the following:
Embraer
Regional
Jet-175
(70-76 seats)
Canadair
Regional
Jet-700
(50-70 seats)
Canadair
Regional
Jet-900
(76-79
seats) ( 1)
Canadair
Regional
Jet-200
(50 seats)
Boeing 737 (Cargo)
Total
American Eagle
—
—
42
—
—
42
United Express
80
—
—
—
—
80
DHL Express
—
—
—
—
3
3
Held for sale
—
8
11
1
—
20
Leased to third party
—
2
—
—
—
2
Subtotal
80
10
53
1
3
147
Unassigned
—
—
11
—
—
11
Total
80
10
64
1
3
158
(1)
As of September 30, 2022, the Company is utilizing 11 spare aircraft to support our American CPA. Additionally, the Company classified 11 CRJ-900 aircraft as assets held for sale during the year ended September 30, 2022.
6
The following table lists the aircraft we own and lease as of September 30, 2022 and the passenger capacity of such aircraft:
Type of Aircraft
Owned
Leased
Total
Passenger
Capacity
E-175 Regional Jet
18
62
( 2 )
80
70-76
CRJ-900 Regional Jet
49
15
64
76-79
CRJ-700 Regional Jet
8
2
10
50-70
CRJ-200 Regional Jet
1
—
1
50
Boeing 737 Cargo Jet
—
3
( 3 )
3
Total
76
82
158
(2)
All 62 of these E-175 aircraft are owned by United and leased to us at nominal amounts.
(3)
Two (2) of these Boeing 737 aircraft are subleased to us by DHL at nominal amounts and the third aircraft is leased to us by a third party.
MHI and Embraer regional jets are among the quietest commercial jets currently available and offer many of the amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, overhead and under seat storage, lavatories and in-flight snack and beverage service. The speed of MHI and Embraer regional jets is comparable to larger aircraft operated by major airlines, and they have a range of approximately 1,600 miles and 2,100 miles , respectively. We do not currently have any existing arrangements with MHI or Embraer to acquire additional aircraft.
Capacity Purchase and Flight Services Agreements
Our agreements consist of the following:
▪
Operation of CRJ-900 aircraft under our American CPA;
▪
Operation of E-175 aircraft under our United CPA;
▪
Operation of Boeing 737 aircraft under our DHL FSA.
The financial arrangements between the Company and its major partners include a revenue-guarantee arrangement. Under these revenue-guarantee provisions, our major partners pay us a fixed minimum monthly amount per aircraft under contract, plus additional amounts related to departures and block hours flown. We also receive direct reimbursement of certain operating expenses, including insurance. Other expenses, including fuel and ground operations are directly paid to suppliers by our major partners. We believe we are in material compliance with the terms of our capacity purchase agreements and flight services agreement with our major partners.
We benefit from our capacity purchase agreements, flight services agreement, and revenue guarantees because we are sheltered, to an extent, from some of the elements that cause volatility in airline financial performance, including variations in ticket prices, fluctuations in number of passengers and fuel prices. However, we do not benefit from positive trends in ticket prices (including ancillary revenue programs), the number of passengers enplaned, or reductions in fuel prices. Our major partners retain all revenue collected from passengers carried on our flights. In providing regional flying under our capacity purchase agreements, and cargo flying under our flight services agreement, we use the logos, service marks and aircraft paint schemes of our major partners.
The following table summarizes our available seat miles (" ASMs ") flown and contract revenue recognized under our capacity purchase agreements for our fiscal years ended September 30, 2022 and 2021, respectively:
Year Ended September 30, 2022
Year Ended September 30, 2021
Available
Seat Miles
Contract
Revenue
Contract
Revenue
per ASM
Available
Seat Miles
Contract
Revenue
Contract
Revenue
per ASM
(in thousands)
(in cents)
(in thousands)
(in cents)
American
2,668,953
$
234,184
¢
8.77
3,271,841
$
221,986
¢
6.78
United
4,005,795
$
207,003
¢
5.17
4,579,957
$
198,212
¢
4.33
Other
—
$
37,295
—
—
$
14,320
—
Total
6,674,748
$
478,482
¢
7.17
7,851,798
$
434,518
¢
5.53
7
American Capacity Purchase Agreement
As of September 30, 2022, we operated 42 CRJ-900 aircraft for American under our American CPA. In exchange for providing flight services under our American CPA, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departures and controllable completion percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes, all as set forth in our American CPA. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions, as well as airport-related facilities and gates at American hubs and cities where we operate.
On November 19, 2020, we entered into an Amended and Restated American Capacity Purchase Agreement (the “ Amended and Restated American CPA ” or the “ American CPA ”) which was effective as of January 1, 2021 and amended and restated the Code Share and Revenue Sharing Agreement dated as of March 20, 2001 (as amended, supplemented, and modified, the “ Existing CPA ”), between Mesa Airlines and American. The Amended and Restated American CPA covers 40 CRJ-900 aircraft and provides for a new five-year term ending December 31, 2025. The Amended and Restated American CPA is subject to termination prior December 31, 2025, subject to our right to cure, in various circumstances including:
▪
If either American or we become insolvent, file for bankruptcy, or fail to pay our debts as they become due , the non-defaulting party may terminate the agreement;
▪
Failure by us or American to perform the covenants, conditions, or provisions of our American CPA, subject to certain notice and cure rights;
▪
If our FAA or DOT certification used in connection with our scheduled flights is for any reason suspended, revoked or materially impaired or otherwise not in full force and effect and we have not resumed operations, except as a result of an emergency airworthiness directive from the FAA affecting all similarly equipped aircraft , American may terminate the CPA;
▪
If our controllable flight completion rate or our controllable on time departures fall below certain levels for a specified period of time, subject to our right to cure;
▪
Upon the occurrence of a force majeure event (as defined in the American CPA) that lasts for a specified period of consecutive days and affects our ability to operate scheduled flights, including a future epidemic or pandemic;
▪
If a labor dispute affects our ability to operate over a specified number of days or we operate in violation of any existing American collective bargaining agreement; or
▪
Upon a change in our ownership or control without the written approval of American.
Under the American CPA, American has the option in its sole discretion to withdraw up to: (i) 10 aircraft during calendar year 2021, (ii) five (5) aircraft during each of calendar years 2022 and 2023, and (iii) during the period from January 1, 2024 to July 31, 2024, American can remove the first 20 aircraft to the extent not otherwise removed in 2021 – 2023, and thereafter American has the right to remove the last 20 aircraft. American also has the right and option to withdraw one (1) aircraft upon each occurrence of the following: (i) if our controllable flight completion factor (“CCF”) falls below certain levels for a specified period of time, (ii) if our controllable on time departures (“CD0”)fall below certain levels for a specified period of time, and (iii) if we fail to meet certain cabin interior and refurbishment requirements as defined in the American CPA.
During fiscal year 2021, we entered into amendments to the American CPA. The amendments reflect the following:
▪
The addition of CRJ-900 aircraft to the American CPA (collectively, the “Incremental Aircraft”) in accordance with the following schedule: (i) three (3) aircraft, from January 5, 2021 to March 3, 2021, (ii) increasing to a total of five (5) aircraft, from March 4, 2021 to May 5, 2021, (iii) decreasing to a total of three (3) aircraft, from May 6, 2021 to June 2, 2021, and (iv) increasing to a total of five (5) aircraft, from June 3, 2021 to August 17, 2021.
▪
A temporary reduction in certain rates for the period December 2020 through September 2021.
▪
The waiver of the operational performance metrics for the month of August 2021, and extension of the deadline for completing certain cabin interior and refurbishment requirements as defined in the American CPA to December 31, 2021.
▪
Increases to incentive and penalty compensation under the American CPA, effective beginning in October 2021.
8
On June 10, 2022, we amended our American CPA, pursuant to Amendment No. 8 thereto, to modify certain commercial terms thereunder. On June 20, 2022, we amended our American CPA, pursuant to Amendment No. 9 thereto, which amended and restated Schedule 1 (Covered Aircraft) to the American CPA and set forth certain equipment modification requirements with respect to Covered Aircraft added to such Schedule.
For the months of May and June 2022, we did not meet the CCF or CD0 minimum performance levels under the American CPA. The failure to meet the CCF or CD0 minimum performance levels for two (2) consecutive months under the terms of the American CPA gives American the right to remove two (2) additional aircraft from the CPA, one (1) aircraft for not meeting the CCF minimum performance level for two (2) consecutive months and one (1) aircraft for not meeting the CD0 minimum performance level for two (2) consecutive months. The Company's failure to meet the CCF or CD0 minimum performance levels for three (3) consecutive months gives American the right to terminate the CPA upon 90 days' notice and to provide a wind-down schedule. Subsequent to June 30, 2022, we entered into Amendment No. 10 to our American CPA which, among other things, reset the CCF and CD0 3-month measurement periods for purposes of American's termination rights to commence August 2022. In addition to the foregoing, our block hour utilization has fallen below required levels in prior months, which also gives American the right to withdraw certain aircraft, subject to complying with applicable notice requirements under the American CPA.
For the months of August, September, and October 2022, we did not meet the CD0 minimum performance levels under the American CPA. As noted above, the failure to meet such performance levels for two (2) consecutive months under the terms of the American CPA gives American the right to remove one (1) additional aircraft from the CPA for not meeting the CD0 minimum performance levels for two (2) consecutive months. The Company’s failure to meet the CD0 minimum performance levels for three (3) consecutive months gives American the right to terminate the CPA upon 90 days’ notice and to provide a wind-down schedule.
In December 2022, we entered into Amendment No.11 to our American CPA. See the disclosure under Note 18 – “Subsequent Events” in the notes to the audited consolidated financial statements included in this Annual Report on Form 10-K for a discussion of Amendment No. 11 which includes among other things, disclosure regarding the wind-down of our operations with American and the termination of American CPA.
United Capacity Purchase Agreement
As of September 30, 2022, we operated 20 E-175LL and 60 E-175 aircraft for United under our United CPA. United owns 42 of the 60 E-175 aircraft and all of the E-175LL aircraft and leases them to us at nominal amounts. The E-175 aircraft owned by United and leased to us have terms expiring between 2024 and 2028, and 18 E-175 aircraft owned by us have terms expiring in 2028. The E-175LL aircraft have terms expiring 2032 and 2033.
In exchange for providing flight services under our United CPA, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United.
United reimburses us on a pass-through basis for certain costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units (" APUs ") and component maintenance for the aircraft owned by United. Our United CPA permits United, subject to certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove aircraft from service, by giving us notice of 90 days or more. If United elects to terminate our United CPA in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected aircraft leased from United at no cost to us. In addition, if United removes any of our 18 owned E-175 aircraft from service at its direction, United would remain obligated, at our option, to assume the aircraft ownership and associated debt with respect to such aircraft through the end of the term of the United CPA.
On November 26, 2019, we amended and restated our United CPA to, among other things, incorporate the terms of the 14 prior amendments to that Agreement and to extend the term thereof through the addition of 20 new Embraer E-175LL aircraft to the scope of such Agreement. Under this amendment and restatement, t hese new aircraft were to be financed and owned by us and operated for a period of 12 years from the in-service date. Deliveries of the new E-175LL aircraft were scheduled to begin in May 2020. In March 2020, the deliveries of the new E-175LL aircraft were negotiated between United and Embraer to begin in September 2020 and be completed by the quarter ended June 30, 2021. Commencing five (5) years after the actual in-service date, United has the right to remove the E-175LL aircraft from service by giving us notice of 90 days or more, subject to certain conditions, including the payment of certain wind-down expenses plus, if removed prior to the 10-year anniversary of the in-service date, certain accelerated margin payments.
9
On November 4, 2020, we amended and restated our United CPA to, among other things, amend th e ownership by United, in lieu of Mesa Airlines, of the 20 new E175LL aircraft. Under this amendment, t hese aircraft were financed by United and leased to the Company to operate for a period of 12 years from the aircraft acceptance and in-service date . We agreed to a djusted rates to account for the change in ownership of the E175LL aircraft , granted United relief from certain provisions related to minimum utilization until December 31, 2021 and the additional right to remove one (1) or more E - 175LL aircraft in the event that we fail to meet certain financial covenants . We also agreed to a one-time provision for United to prepay $8 1 . 5 million under the United CPA for our future performance (the “ Prepayment ”) and the application of certain discounts to certain payment obligations of United under the United CPA . Weekly payments under the United CPA were discounted following the Prepayment , with $65.1 million of the Prepayment earned during our first and second quarters of fiscal 2021 and the remaining $16.4 million repaid to United during the second quarter of fiscal 2021 . The terms of the Prepayment also include d affirmative and negative covenants and events of default customary for transactions of this type. Proceeds from the Prepayment were used to retire debt on certain airframes and engines that now serve as collateral under the term loan facility provided to Mes a Airlines by the U.S. Department of the Treasury .
In September 2021, we amended our United CPA to, among other things, adjust certain rates to account for the change in ownership of the E-175LL aircraft, and provide for temporary reduced rates during periods in which the Company receives government assistance.
Pursuant to the United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine (9) years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement. During August of 2022, we committed to a formal plan to sell 18 of our CRJ-700 aircraft and subsequently terminated the leases on such aircraft.
Our United CPA is subject to early termination prior to its expiration in various circumstances including :
▪
If certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances;
▪
If we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United, subject to 30 days' notice and cure rights;
▪
If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the CPA; or
▪
If we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling another air carrier;
▪
United, subject to certain conditions, including the payment of certain costs tied to aircraft type, may terminate the CPA in its discretion, or remove E-175 aircraft from service, by giving us notice of 90 days or more;
▪
If United elects to terminate our United CPA in its entirety or permanently remove certain aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us; and
▪
Commencing five (5) years after the actual in-serve date, United has the right to remove the E-175 aircraft from service by giving us notice of 90 days or more, subject to certain conditions, including the payment of certain wind-down expenses plus, if removed prior to the 10-year anniversary of the in-service date, certain accelerated margin payments..
In December 2022, we entered into the Third Amended and Restated Capacity Purchased Agreement with United which amended and restated the existing United CPA (the “Amended and Restated United CPA”). See the disclosure under Note 18 – “Subsequent Events” in the notes to the audited consolidated financial statement included in this Annual Report on Form 10-K for a discussion of the Amended and Restated United CPA which includes among others, disclosure regarding the transition of the aircraft operated under the American CPA to be operated under the Amended and Restated United CPA.
DHL Flight Services Agreement
On December 20, 2019, we entered into our DHL FSA. As of September 30, 2022, we operate three (3) Boeing 737-400F aircraft to provide cargo air transportation services to DHL. In exchange for providing such services, we receive a fee per block hour with a minimum block hour guarantee. We are also eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support including fueling and airport fees are paid directly by DHL.
Under our DHL FSA, DHL leases two (2) Boeing 737-400F aircraft and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine
10
maintenance and overhauls including Life Limited Parts ( LLPs ) , landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en -route navigation fees and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by us .
The DHL FSA expires five (5) years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL has the option to extend the agreement with respect to one (1) or more aircraft for a period of one (1) year with 90 days’ advance written notice.
Our DHL FSA is subject to termination rights prior to its expiration in various circumstances including:
▪
If either party fails to comply with the obligations, warranties, representations, or undertakings under the DHL FSA, subject to certain notice and cure rights;
▪
If either party is declared bankrupt or insolvent;
▪
If we are unable to legally operate the aircraft under the DHL FSA for a specified number of days;
▪
At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 days’ written notice;
▪
If we fail to comply with performance standards for three (3) consecutive measurement periods;
▪
If we are subject to a labor incident that materially and adversely affects our ability to perform services under the DHL FSA for a specified number of days;
▪
Upon a change in control or ownership of the Company; and
▪
DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and we do not provide alternate services at our expense, or if the aircraft becomes unavailable for more than 30 days due to unscheduled maintenance.
For the months of April, May, and June 2022, we did not meet the CCF and CA minimum performance levels under the DHL FSA. The failure to meet the minimum performance levels for three (3) consecutive months under the terms of the DHL FSA gives DHL the right to terminate the FSA. The Company has received a waiver arising out of the failure to meet the aforementioned CCF and CA performance levels.
Maintenance and Repairs
Airlines are subject to extensive regulation. We have a FAA mandated and approved maintenance program. Aircraft maintenance and repair consists of routine and non-routine maintenance, and work performed is divided into three (3) general categories: line maintenance, heavy maintenance, and component service. We also outsource certain aircraft maintenance and other operating functions. We use competitive bidding among qualified vendors to procure these services. We have long-term maintenance contracts with AAR to provide fixed-rate parts procurement and component overhaul services for our aircraft fleet. Under these agreements, AAR provides maintenance and engineering services on any aircraft that we designate during the term of the agreement, along with access to a spare parts inventory pool, in exchange for a fixed monthly fee.
Line maintenance consists of routine daily and weekly scheduled maintenance checks on our aircraft. Line maintenance is performed at certain locations throughout our system and represents the majority of and most extensive maintenance we perform. Major airframe maintenance checks consist of a series of more complex tasks that can take from one (1) to four (4) weeks to accomplish and typically are required approximately every 28 months, on average, across our fleet. Engine overhauls and engine performance restoration events are quite extensive and can take two (2) months. We maintain an inventory of spare engines to provide for continued operations during engine maintenance events. We expect to begin the initial planned engine maintenance overhauls on our new engine fleet approximately four (4) to six (6) years after the date of manufacture and introduction into our fleet, with subsequent engine maintenance every four (4) to six (6) years thereafter. Due to our current fleet size, we believe outsourcing all of our heavy maintenance, engine restoration, and major part repair is more economical than performing this work using our internal maintenance team.
Competition
We consider our primary competition to be U.S. regional airlines that currently hold or compete for capacity purchase agreements for passenger services with major airlines. Our competition includes, therefore, nearly every other domestic regional airline, including Air Wisconsin Airlines Corporation; Endeavor Air, Inc. (owned by Delta) (" Endeavor "); Envoy Air, Inc. (" Envoy "), PSA Airlines, Inc. (" PSA ") and Piedmont Airlines, Inc. (" Piedmont ") (Envoy, PSA and Piedmont are owned by American); Horizon Air Industries, Inc. (owned by Alaska Air Group, Inc.) (" Horizon "); SkyWest Inc., parent of SkyWest Airlines, Inc.; Republic Airways Holdings Inc.; and Trans States Airlines, Inc.
11
Major airlines typically offer capacity purchase arrangements to regional airlines on the basis of the following criteria: availability of labor resources; proposed contract economic terms; reliable and on-time flight operations; corporate financial resources including ability to procure and finance aircraft; customer service levels; and other factors.
Certain of our competitors are larger and have significantly greater financial and other resources than we do. Moreover, economic downturns, combined with competitive pressures, have contributed to a number of reorganizations, bankruptcies, liquidations, and business combinations among major and regional carriers. The effect of economic downturns is somewhat mitigated by our reliance on capacity purchase agreements with revenue-guarantee provisions, but the renewal and continued profitability of these partnerships with our major partners is not guaranteed.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year since the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased utilization of our aircraft in the summer months and are unfavorably affected by increased fleet maintenance and by inclement weather during the winter months.
Aircraft Fuel
Our capacity purchase and flight services agreements provide that our major partners source, procure, and directly pay third-party vendors for all fuel used in the performance of those agreements. Accordingly, we do not recognize fuel expenses or revenues for flying under our capacity purchase and flight services agreements and we face very limited exposure to fuel price fluctuations.
Insurance
We maintain insurance policies that we believe are of types customary in the airline industry and as required by the DOT, lessors and other financing parties, and our major partners under the terms of our capacity purchase and flight services agreements. The policies principally provide liability coverage for public and passenger injury; damage to property; loss of or damage to flight equipment; fire; auto; directors' and officers' liability; advertiser and media liability; cyber risk liability; fiduciary; workers' compensation and employer's liability; and war risk (terrorism). Although we currently believe our insurance coverage is adequate, we cannot assure you that the amount of such coverage will not be changed or that we will not be forced to bear substantial losses from accidents.
Human Capital Management
As of September 30, 2022, we employed approximately 2,454 employees, consisting of 851 pilots or pilot recruits, 791 flight attendants, 35 flight dispatchers, 478 maintenance employees and 299 employees in administrative or other roles. Our continued success is partly dependent on our ability to continue to attract and retain qualified personnel. We have never been the subject of a labor strike or labor action that materially impacted our operations.
FAA regulations require pilots to have an Airline Transport Pilot (" ATP ") license with specific ratings for the aircraft to be flown, and to be medically certified as physically fit to fly. FAA and medical certifications are subject to periodic renewal requirements including recurrent training and recent flying experience. Mechanics, quality-control inspectors, and flight dispatchers must be certificated and qualified for specific aircraft. Flight attendants must have initial and periodic competency training and qualification. Training programs are subject to approval and monitoring by the FAA. Management personnel directly involved in the supervision of flight operations, training, maintenance, and aircraft inspection must also meet experience standards prescribed by FAA regulations. All safety-sensitive employees are subject to pre-employment, random, and post-accident drug testing.
The airline industry has from time to time experienced a shortage of qualified personnel, particularly with respect to pilots and maintenance technicians. In addition, as is common with most of our competitors, we have faced considerable turnover of our employees. Regional airline pilots, flight attendants, and maintenance technicians often leave to work for larger airlines, which generally offer higher salaries and better benefit programs than regional airlines are financially able to offer. Should the turnover of employees, particularly pilots and maintenance technicians, sharply increase, the result will be significantly higher training costs than otherwise would be necessary, as well as a shortage in the required number of applicable personnel, and we may need to request a reduced flight schedule with our major partners, which may result in operational performance penalties under our capacity purchase agreements or flight services agreement. We cannot assure that we will be able to recruit, train and retain the qualified employees that we need to carry out our expansion plans or replace departing employees.
12
As of September 30, 2022 , approximately 66.9% of our employees were represented by labor unions under collective-bargaining agreements, as set forth below. No other employees of ours or our subsidiaries are parties to any other collective bargaining agreement or union contracts.
Employee Groups
Number of
Employees
Representative
Labor
Agreement
Amendable
As of
Pilots
851
Air Line Pilots Association
10/17/2022
Flight Attendants
791
Association of Flight Attendants
8/30/2022
Dispatchers
35
Maintenance Department
478
Administrative
299
The Railway Labor Act (" RLA ") governs our relations with labor organizations. Under the RLA, the collective bargaining agreements generally do not expire, but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, they must notify the other party in the manner agreed to by the parties. Under the RLA, after receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board (" NMB ") to appoint a federal mediator. The RLA prescribes no set timetable for the direct negotiation and mediation process. It is not unusual for those processes to last for many months, and even for a few years. If no agreement is reached in mediation, the NMB in its discretion may declare at some time that an impasse exists, and if an impasse is declared, the NMB proffers binding arbitration to the parties. Either party may decline to submit to arbitration. If arbitration is rejected by either party, a 30-day " cooling off " period commences. During that period (or after), a Presidential Emergency Board (" PEB ") may be established, which examines the parties' positions and recommends a solution. The PEB process lasts for 30 days and is followed by another " cooling off " period of 30 days. At the end of a " cooling off " period, unless an agreement is reached or action is taken by Congress, the labor organization may strike and the airline may resort to " self-help, " including the imposition of any or all of its proposed amendments and the hiring of new employees to replace any striking workers. Congress and the President have the authority to prevent " self-help " by enacting legislation that, among other things, imposes a settlement on the parties. The table above sets forth our employee groups and status of the collective bargaining agreements.
Refer to “Impact of COVID-19 Pandemic” included in “ Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” for information on human capital management actions taken by the Company in response to the COVID-19 pandemic.
Safety and Security
We are committed to the safety and security of our passengers and employees. We have taken many steps, both voluntarily and as mandated by governmental authorities, to increase the safety of our operations. Some of the safety and security measures we have taken with our major partners include aircraft security and surveillance, positive bag matching procedures, enhanced passenger and baggage screening and search procedures, and securing of cockpit doors. We are committed to complying with future safety and security requirements.
Our ongoing focus on safety relies on training our employees to proper standards and providing them with the tools and equipment they require so they can perform their job functions in a safe and efficient manner. Safety in the workplace targets several areas of our operation including dispatch, flight operations and maintenance.
The TSA and the U.S. Customs and Border Protection, each a division of the U.S. Department of Homeland Security, are responsible for certain civil aviation security matters, including passenger and baggage screening at U.S. airports, and international passenger prescreening prior to entry into or departure from U.S. international flights are subject to customs, border, immigration, and similar requirements of equivalent foreign governmental agencies. We are currently in compliance with all directives issued by such agencies. We maintain active, open lines of communication with the TSA at all of our locations to ensure proper standards for security of our personnel, equipment and facilities are exercised throughout our operations.
13
Facilities
In addition to aircraft, we have office and maintenance facilities to support our operations. Each of our facilities are summarized in the following table:
Type
Location
Ownership
Approximate
Square Feet
Corporate Headquarters
Phoenix, Arizona
Leased
33,770
Training Center
Phoenix, Arizona
Leased
23,783
Parts/Stores
Phoenix, Arizona
Leased
12,000
Hangar
Phoenix, Arizona
Leased
22,467
Office, Hangar and Warehouse
El Paso, Texas
Leased
31,292
Office, Hangar
Dallas, Texas
Leased
30,440
Parts Storage
Dallas, Texas
Leased
8,143
Hangar
Houston, Texas
Leased
74,524
Hangar
Louisville, Kentucky
Leased
26,762
Hangar
Dulles, Washington
Leased
28,451
Warehouse
Tucson, Arizona
Leased
10,590
Warehouse, Office
Erlanger, Kentucky
Leased
6,025
Our corporate headquarters and training facilities in Phoenix, Arizona are subject to long-term leases expiring on November 30, 2032 and May 31, 2025, respectively.
We believe our facilities are suitable and adequate for our current and anticipated needs.
Foreign Ownership
Under DOT regulations and federal law, we must be owned and controlled by U.S. citizens. The restrictions imposed by federal law and regulations currently require that at least 75% of our voting stock must be owned and controlled, directly and indirectly, by persons or entities who are U.S. citizens, as defined in the Federal Aviation Act, that our president and at least two-thirds of the members of our Board of Directors and other managing officers be U.S. citizens, and that we be under the actual control of U.S. citizens. In addition, at least 51% of our total outstanding stock must be owned and controlled by U.S. citizens and no more than 49% of our stock may be held, directly or indirectly, by persons or entities who are not U.S. citizens and are from countries that have entered into " open skies " air transport agreements with the U.S. which allow unrestricted access between the United States and the applicable foreign country and to points beyond the foreign country on flights serving the foreign country. We are currently in compliance with these ownership provisions.
Government Regulation
Aviation Regulation
The DOT and FAA have regulatory authority over air transportation in the United States and all international air service is subject to certain U.S. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries involved. The DOT has authority to issue certificates of public convenience and necessity, exemptions and other economic authority required for airlines to provide domestic and foreign air transportation. International routes and international code-sharing arrangements are regulated by the DOT and by the governments of the foreign countries involved. A U.S. airline's ability to operate flights to and from international destinations is subject to the air transport agreements between the United States and the foreign country and the carrier's ability to obtain the necessary authority from the DOT and the applicable foreign government.
The U.S. government has negotiated " open skies " agreements with many countries, which allow broad access between the United States and the applicable foreign country. With certain other countries, however, the United States has a restricted air transportation agreement. Our international flights to Mexico are governed by a recently implemented liberalized bilateral air transport agreement which the DOT has determined has all of the attributes of an " open skies " agreement. Our flights to Canada, Cuba and the Bahamas are governed by bilateral air transport agreements between the United States and such countries. Changes in U.S., Mexican, Canadian, Cuban, or Bahamian aviation policies could result in the alteration or termination of the corresponding air transport agreement, or otherwise affect our operations to and from these countries. In particular, there is still a degree of uncertainty about the future of scheduled commercial flight operations between the United States and Cuba as a result of changes in diplomatic relations between the two (2) governments, as well as travel and trade restrictions implemented by the U.S. government in 2017. We are largely sheltered from the economic impact changes to existing " open skies " agreements or volatility in U.S., Mexican, Canadian, Cuban, or Bahamian aviation polices because our major partners control route selection and scheduling under our capacity purchase agreements.
14
The FAA is responsible for regulating and overseeing matters relating to the safety of air carrier flight operations, including the control of navigable air space, the qualification of flight personnel, flight training practices, compliance with FAA airline operating certificate requirements, aircraft certification and maintenance requirements and other matters affecting air safety. The FAA requires each commercial airline to obtain and hold an FAA air carrier certificate. We currently hold an FAR-121 air carrier certificate. In July 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the " FAA Qualification Standards "). The FAA Qualification Standards, which became effective in August 2013, require first officers to hold an ATP certificate, requiring 1,500 hours total flight time as a pilot. Previously, first officers were required to have only a commercial pilot certificate, which required 250 hours of flight time. The rule also mandates stricter rules to minimize pilot fatigue.
Airport Access
Flights at three (3) major domestic airports are regulated through allocations of landing and takeoff authority (i.e., " slots " and " operating authorizations ") or similar regulatory mechanisms, which limit take-offs and landings at those airports. Each slot represents the authorization to land at or take off from the particular airport during a specified time period. In the United States, the FAA currently regulates the allocation of slots, slot exemptions, operating authorizations, or similar capacity allocation mechanisms at two (2) of the airports we serve, Ronald Reagan Washington National Airport (DCA) in Washington, D.C., and New York's LaGuardia Airport (LGA). In addition, John Wayne Airport (SNA) in Orange County, California, has a locally imposed slot system. Our operations at these airports generally require the allocation of slots or analogous regulatory authorizations, which are obtained by our major partners.
Consumer Protection Regulation
The DOT also has jurisdiction over certain economic issues affecting air transportation and consumer protection matters, including unfair or deceptive practices and unfair methods of competition, lengthy tarmac delays, air carriers, airline advertising, denied boarding compensation, ticket refunds, baggage liability, contracts of carriage, customer service commitments, customer complaints, and transportation of passengers with disabilities. The DOT frequently adopts new consumer protection regulations, such as rules to protect passengers addressing lengthy tarmac delays, chronically delayed flights, capacity purchase disclosure and undisclosed display bias, and is reviewing new guidelines to address the transparency of airline non-ticket fees and refunding baggage fees for delayed checked baggage. The DOT also has authority to review certain joint venture agreements, code-sharing agreements (where an airline places its designator code on a flight operated by another airline) and wet-leasing agreements (where one (1) airline provides aircraft and crew to another airline) between carriers and regulates other economic matters such as slot transactions.
Environmental Regulation
We are subject to various federal, state, local and foreign laws and regulations relating to environmental protection matters. These laws and regulations govern such matters as environmental reporting, storage and disposal of materials and chemicals and aircraft noise. We are, and expect in the future to be, involved in various environmental matters and conditions at, or related to, our properties. We are not currently subject to any environmental cleanup orders or actions imposed by regulatory authorities. We are not aware of any active material environmental investigations related to our assets or properties.
Other Regulations
Airlines are also subject to various other federal, state, local, and foreign laws and regulations. For example, the U.S. Department of Justice has jurisdiction over certain airline competition matters. Labor relations in the airline industry are generally governed by the RLA. The privacy and security of passenger and employee data is regulated by various domestic and foreign laws and regulations.
The U.S. government and foreign governments may consider and adopt new laws, regulations, interpretations, and policies regarding a wide variety of matters that could directly or indirectly affect our results of operations. We cannot predict what laws, regulations, interpretations, and policies might be considered in the future, nor can we judge what impact, if any, the implementation of any of these proposals or changes might have on our business.
15
Legal Proceedings
The Company is subject to two (2) putative class action lawsuits alleging federal securities law violations in connection with its initial public offering in August 2018 (“ IPO ”) — one (1) in the Superior Court of the State of Arizona and one (1) in U.S. District Court of Arizona. These purported class actions were filed in March and April 2020 against the Company, certain current and former officers and directors, and certain underwriters of the Company’s IPO. The state and federal lawsuits each make the same or similar allegations of violations of the Securities Act of 1933, as amended, for allegedly making materially false and misleading statements in, or omitting material information from, our IPO registration statement.
On March 2, 2022, the parties in the federal lawsuit attended a mediation and reached an agreement in principle to settle all claims asserted in that action for the sum of $5 million, which will be paid by the Company’s directors’ and officers’ insurance carriers. The settlement is subject to preliminary and final approval by the federal court. The motion for preliminary approval was filed on May 6, 2022, and no objections to the settlement were filed by the deadline for such objections. The parties are waiting for the Court to schedule a date for the preliminary approval hearing. If preliminary and final approval is obtained, the claims of all putative class members, whether asserted in the federal or state actions, will be extinguished, unless and only to the extent that a particular class member takes affirmative steps to have its claims excluded.
In addition, we are subject to certain legal actions which we consider routine to our business activities. As of September 30, 2022, our management believed the ultimate outcomes of other routine legal matters are not likely to have a material adverse effect on our financial position, liquidity or results of operations.
We are also involved in various legal proceedings (including, but not limited to, insured claims) and FAA civil action proceedings that we do not believe will have a material adverse effect upon our business, financial condition, or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings.
Corporate Information
We are a Nevada corporation with our principal executive office located in Phoenix, Arizona. We were founded in 1982 and reincorporated in Nevada in 1996. In addition to operating Mesa Airlines, we also wholly own Mesa Air Group-Airline Inventory Management, LLC. (" MAG-AIM "), an Arizona limited liability company, which was established to purchase, distribute and manage Mesa Airlines' inventory of spare rotable and expendable parts. MAG-AIM's financial results are reflected in our consolidated financial statements.
Our principal executive offices are located at 410 North 44 th Street, Suite 700, Phoenix, Arizona 85008, and our telephone number is (602) 685-4000. Our website is located at www.mesa-air.com . The information on, or accessible through, our website does not constitute part of, and is not incorporated into, this Annual Report on Form 10-K.
Mesa Airlines, the Mesa Airlines logo and our other registered or common law trade names, trademarks, or service marks appearing in this Annual Report on Form 10-K are our intellectual property. This Annual Report on Form 10-K contains additional trade names, trademarks, and service marks of other companies that are the property of their respective owners. We do not intend our use or display of other companies' trade names, trademarks, or service marks to imply a relationship with, or endorsement or sponsorship of us, by these companies. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this Annual Report on Form 10-K.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the " Exchange Act "), are filed with the Securities and Exchange Commission (the " SEC "). We are subject to the informational requirements of the Exchange Act, and we file or furnish reports, proxy statements and other information with the SEC. Such reports and other information we file with the SEC are available free of charge at http://investor.mesa-air.com/financial-information/sec-filings when such reports are available on the SEC's website. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov . We periodically provide other information for investors on our corporate website, www.mesa-air.com , and our investor relations website, investor.mesa-air.com. This includes press releases and other information about financial performance, information on corporate governance and details related to our annual meeting of shareholders. The information contained on the websites referenced in this Annual Report on Form 10-K is not incorporated by reference into this filing. Further, our references to website URLs are intended to be inactive textual references only.
16