REPUBLIC AIRWAYS HOLDINGS INC. 10-K

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 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 (‘CPA”) with American and United and a flight services agreement (“FSA”) with DHL. 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. During 2022, we committed to a formal plan to sell certain of our CRJ-900 and CRJ-200 aircraft. We classified 11 CRJ-900 and one (1) CRJ-200 aircraft as assets held for sale as of September 30, 2022. We also leased 20 CRJ-700 aircraft to a third party for majority of the fiscal year. During the fourth quarter of 2022, we committed to a formal plan to sell 18 of the 20 CRJ-700 aircraft and terminated the leases on these 18 aircraft. We completed the sale of 10 CRJ-700 aircraft and eight (8) remained as assets held for sale as of September 30, 2022. We operate 42 CRJ-900 aircraft under our American CPA; 20 E-175LL and 60 E-175 aircraft under our United CPA. We operate three (3) Boeing 737-400F aircraft under the DHL FSA. For our fiscal year ended September 30, 2022, approximately 34% of our aircraft in scheduled service were operated for American, 64% were operated for United, and 2% were operated for DHL. All our operating revenue in our 2022 and 2021 fiscal years were derived from operations associated with our American and United CPAs, DHL FSA, and from leases of aircraft to a third party. All our operating revenue in our 2020 fiscal year was derived from operations associated with our American and United CPAs. Our long-term agreements provide 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 on behalf of our major partners. Our capacity purchase and flight services agreements also shelter 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 capacity purchase agreements, and cargo flight services under our flight services agreement, 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. Under our DHL FSA, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo services. Ground support including fueling and airport fees are paid directly by DHL. 2022 Financial Highlights For our fiscal year ended September 30, 2022, we had total operating revenues of $531.0 million, a 5.4% increase, compared to $503.6 million for our fiscal year ended September 30, 2021. Net loss for our fiscal year ended September 30, 2022 was $182.7 million, or $(5.06) per diluted share, compared to net income of $16.6 million, or $0.43 per diluted share, for our fiscal year ended September 30, 2021. During our fiscal year ended September 30, 2022, our completed block hours decreased by 51,708, or 16.0%, compared to our fiscal year ended September 30, 2021. 37 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 our capacity purchase and flight services agreements reduce 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 has been dramatically reduced. To address the diminished supply of qualified pilot candidates, regional airlines implemented significant pilot wage and bonus increases. In more recent periods, our pilots continue to be recruited by other carriers, primarily the major carriers and heavy equipment cargo operators, which generally offer higher salaries and more extensive benefit programs. The magnitude of this attrition in fiscal 2022 created significant backlogs in training, further exacerbating an already challenging environment. These events have had, and continue to have a negative impact on pilot scheduling, work hours, and the number of pilots required to support our operations. In August 2022, we entered into a Letter of Agreement with the Airline Pilots Association (“ALPA”), which provided for increased overall hourly pay increases of nearly 118% for captains and 172% for new-hire first officers. While we remain engaged in negotiations with ALPA over other areas of our collective bargaining agreement with ALPA, we believe these pay increases will positively impact our ability to attract, hire, and retain pilots in future periods. To further address the diminished supply of qualified pilots, we recently launched the Mesa Pilot Development Program (“MPD”). As part of this program, on September 22, 2022, we purchased 29 Pipistrel Alpha Trainer 2 aircrafts, with the option to buy an additional 75 over the next year. This new fleet will be the backbone of the MPD program, with pilots being provided with the opportunity to accumulate up to 1,500 flight hours required to fly a commercial aircraft at Mesa Airlines. Flight 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 Airline Transport Pilot (“ATP”) certificate. As part of candidates’ commitment to flying for Mesa Airlines, flight costs will be repaid over three (3) years during the term of their employment. No assurance can be given that the measures we are currently taking 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 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 have announced a new pay structure whereby starting September 15, 2022, we will 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. 38 Economic Conditions, Challenges and Risks 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 capacity purchase agreements. If, however, any of our major partners 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 capacity purchase agreements, 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 capacity purchase agreements. 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, 2022, approximately 66.9% 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. While we remain engaged in negotiations with ALPA over other areas of our collective bargaining agreement with ALPA, we believe these pay increases will positively impact our ability to attract, hire, and retain pilots in future periods. 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 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. Impact of Pilot Shortage. During our fiscal year ended September 30, 2022, the severity of the pilot shortage, elevated pilot 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 pilot shortage and attrition, we produced less block hours to generate revenues and incurred penalties for operational shortfalls under our CPAs. These challenges resulted in a negative impact on the Company’s financial results highlighted by operating cash flows of $13.4 million and net loss of $182.7 million including a non-cash impairment charge related to the Company’s American asset group of $171.8 million. These conditions and events raised financial concerns about our ability to continue to fund our operations and meet debt obligation in the next twelve months To address the events that gave rise to such concerns, management developed and implemented the following material changes to its business designed to ensure the Company could continue to fund its operations and meet its debt obligations over the next 12 months. In addition to successfully implementing these effective measures, the Company expects to develop and implement additional measures aimed at addressing periods beyond the next 12 months ▪ In the fourth quarter, the Company reached an agreement with ALPA which increased overall pilot hourly pay by nearly 118% for captains and 172% for new-hire first officers. As a result of this agreement, we have experienced reduced attrition rates and attracted new pilots. ▪ The Company and American have agreed to terminate and complete a wind-down of the American CPA. This will ultimately eliminate financial penalties incurred under the American CPA. 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 the American CPA. ▪ In December 2022, we entered into the Third Amended and Restated Capacity Purchase Agreement with United which amended and restated the existing United CPA. This agreement increases block hour revenues to cover increased wages agreed to with ALPA and adds CRJ 900 aircraft currently operating under the American 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 Third Amended and Restated United CPA. 39 ▪ We entered into an agreement with United to sell 18 CRJ-700 aircraft during the reporting period, of which 10 were sold. The approximate net proceeds from the sale in the quarter was $ 36.8 million after retirement of debt. The remaining eight (8) are expected to close in early January 2022. The approximate net proceeds from the sale and after retirement of debt is $8 million. ▪ We entered into an agreement with a third party to sell eleven (11) of our CRJ-900 aircraft and one CRJ-200 aircraft to raise capital and retire debt. The approximate net proceeds from the sale are expected to be $8.2 million after retirement of debt. ▪ We have entered into an agreement to sell 30 spare engines to United to raise capital and retire debt. The approximate gross proceeds from the sale is expected to be $80 million and will retire debt of $26.4 million. ▪ We established a new line of credit totaling $25.5 million to draw upon when needed. 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 the line of credit and amount drawn upon subsequently. ▪ We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on all seven aircraft for the period of January 2023 through December 2024, providing up to $14 million of liquidity. Additionally, the junior noteholder MHIRJ agreed to reduce its loan amount by approximately $5 million. ▪ We entered into an agreement with RASPRO Trust, reducing the buyout pricing on all 15 aircraft at lease termination by a total of $25 million. ▪ We established the Mesa Pilot Development Program (the "MPD Program") to increase the pilot supply to Mesa.. We have entered into an agreement to purchase up to 29 state-of-the-art Pipistrel Alpha Trainer 2 aircraft. 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 and then be hired by Mesa. 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. ▪ We added flight training simulators and flight training instructors to expand our training capacity to backfill pilots lost to attrition. ▪ We have 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 have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level of flight activity. These plans and initiatives outlined above have effectively alleviated pressure on financial performance. While we continue implement and monitor our plans and initiatives, there is no guarantee that these will continue to be effective and achieve their desired objectives. As of September 30, 2022, the Company has $97.2 million of short-term debt due within the next twelve months. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, as well as the liquidity we have achieved as outlined above. Competition . The airline industry is highly competitive. We compete principally with other regional airlines. Major airlines typically award capacity purchase agreements 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 agreements 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, 2022 , $ 50.6 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. 40 The average age of our E-175, CRJ-900 , Boeing 737, and CRJ-700 type aircraft is approximately 6.9 , 16 .0 , 29 . 0 , and 1 7 . 5 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 capacity purchase agreements. 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 capacity purchase agreements with our major partners after paying off the principal balance. 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, 2022, we had 82 aircraft in our fleet under lease, including 62 E-175 aircraft owned by United and leased to us at nominal amounts and three (3) Boeing 737 cargo jets subleased to us by DHL at nominal amounts. 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. All of our aircraft leases have been classified as operating leases, which 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. 41 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). " 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 capacity purchase agreement by (ii) the maximum number of block hours that could be flown during such month under the particular capacity purchase agreement. Components of Our Results of Operations The following discussion summarizes the key components of our consolidated statements of operations and comprehensive (loss) income. 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 capacity purchase agreements and flight services agreement with our major partners, along with the additional amounts received based on the number of flights and block hours flown, and rental revenue for aircraft leased to a third party. Contract revenues we receive from our major partners are paid on a weekly basis and recognized over time consistent with the delivery of service under our agreements. Pass-Through and Other Revenue. Pass-through and other revenue consists of passenger and hull insurance, aircraft property taxes, landing fees, and other aircraft and traffic servicing costs received pursuant to our agreements with our major partners, as well as certain maintenance costs related to United owned E-175 aircraft. 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. 42 Fuel. Fuel expense includes fuel and related fueling costs for flying we undertake outside of our capacity purchase agreements and flight services agreement , including aircraft repositioning and maintenance. All aircraft fuel and related fueling costs for flying under our capacity purchase agreements were directly paid and supplied by our major partners. 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 by American and United for flying under our capacity purchase agreements or DHL under our flight services agreement except fuel costs incurred for controllable ferry flights for A merican and United . 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 capacity purchase agreements and flight services agreement, 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 and Amortization. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine, and equipment depreciation. Amortization expense is a periodic non-cash charge related to our customer relationship intangible asset. 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. Loss on Investments, Net. Loss on investments consists of losses on our investments in equity securities. 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 capacity purchase agreements and flight services agreement. While we operate under two (2) separate capacity purchase agreements and one (1) flight services agreement, 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 (1) operating and reportable segment. 43 Results of Operations Comparison of our Fiscal Years Ended September 30, 2022 and 2021 We had an operating loss of $189.7 million in our year ended September 30, 2022 compared to operating income of $63.2 million in our year ended September 30, 2021. In our year ended September 30, 2022, we had a net loss of $182.7 million compared to net income of $16.6 million in our year ended September 30, 2021. Our operating results for the year ended September 30, 2022 reflect an increase in flight operations expense resulting from increased pilot training as well as a decrease in maintenance expense mainly as a result of fewer C-checks. Additionally, there were no government grant funds utilized as an offset to operating expenses during the year ended September 30, 2022, compared to $119.5 million during the year ended September 30, 2021. Lastly, we recorded impairment charges of $62.1 million on certain of our CRJ aircraft that were classified as held for sale and $109.7 million on certain long-lived and ROU assets in our year ended September 30, 2022. Operating Revenues Year Ended September 30, 2022 2021 Change Operating revenues ($ in thousands): Contract $ 478,482 $ 434,518 $ 43,964 10.1 % Pass-through and other 52,519 69,073 (16,554 ) (24.0 )% Total operating revenues $ 531,001 $ 503,591 $ 27,410 5.4 % Operating data ( 1) : Available seat miles—ASMs (thousands) 6,674,748 7,851,798 (1,177,050 ) (15.0 )% Block hours 271,511 323,219 (51,708 ) (16.0 )% Revenue passenger miles— RPMs (thousands) 5,549,595 5,893,195 (343,600 ) (5.8 )% Average stage length (miles) 509 661 (152 ) (23.0 )% Contract revenue per available seat mile—CRASM (in cents) ¢ 7.18 ¢ 5.53 ¢ 1.65 29.8 % Passengers 8,083,870 8,881,431 (797,561 ) (9.0 )% (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 increased by $27.4 million, or 5.4%, during our fiscal year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. Contract revenue increased by $44.0 million, or 10.1%, primarily due to normalized contractual rates from our major partners and recognition of higher deferred revenue, partially offset by reduced block hours flown and partner utilization penalties compared to the twelve months ended September 30, 2021. The increase in rates compared to the twelve months ended September 30, 2021 is attributable to temporarily reduced rates from our major partners impacting the twelve months ended September 30, 2021 as a result of lower labor costs due to government assistance received during the same period . Our pass-through and other revenue decreased during our fiscal year ended September 30, 2022 by $16.6 million, or 24.0%, primarily due to an increase in pass-through maintenance related to our E-175 fleet . 44 Operating Expenses Year Ended September 30, 2022 2021 Change Operating expenses ($ in thousands): Flight operations $ 177,038 $ 162,137 $ 14,901 9.2 % Maintenance 201,930 217,646 (15,716 ) (7.2 )% Aircraft rent 36,989 39,345 (2,356 ) (6.0 )% General and administrative 43,966 49,855 (5,889 ) (11.8 )% Depreciation and amortization 81,508 82,847 (1,339 ) (1.6 )% Lease termination 233 4,508 (4,275 ) (94.8 )% Asset impairment 171,824 — 171,824 100.0 % Government grant recognition — (119,479 ) 119,479 (100.0 )% Other operating expenses 7,238 3,536 3,702 104.7 % Total operating expenses $ 720,726 $ 440,395 $ 280,331 63.7 % Operating data: Available seat miles—ASMs (thousands) 6,674,748 7,851,798 (1,177,050 ) (15.0 )% Block hours 271,511 323,219 (51,708 ) (16.0 )% Average stage length (miles) 509 661 (152 ) (23.0 )% Departures 137,625 160,019 (22,394 ) (14.0 )% Flight Operations. Flight operations expense increased by $14.9 million, or 9.2%, to $177.0 million for our fiscal year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. The increase was primarily driven by an increase in pilot training costs . Maintenance. Aircraft maintenance expense decreased $15.7 million, or 7.2%, to $201.9 million for our fiscal year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. This decrease was primarily driven by a decrease in C-check expense, Engine overhaul expense, and pass-through maintenance on our E-175 fleet due to overall fewer maintenance events. This decrease was partially offset by an increase in labor and other costs. Total pass-through maintenance expenses reimbursed by our major partners decreased by $8.1 million during fiscal year 2022, compared to fiscal year 2021. The following table presents information regarding our aircraft maintenance costs during our fiscal years ended September 30, 2022 and 2021: Year Ended September 30, 2022 2021 Change Engine overhaul $ 1,924 $ 14,598 $ (12,674 ) (86.8 )% Pass-through engine overhaul 21,710 16,815 4,895 29.1 % C-check 18,910 30,593 (11,683 ) (38.2 )% Pass-through C-check 3,173 20,549 (17,376 ) (84.6 )% Component contracts 26,223 25,890 333 1.3 % Rotable and expendable parts 26,967 26,741 226 0.8 % Other pass-through 20,358 15,963 4,395 27.5 % Labor and other 82,665 66,497 16,168 24.3 % Total $ 201,930 $ 217,646 $ (15,716 ) (7.2 )% Aircraft Rent. Aircraft rent expense decreased by $2.4 million, or 6.0%, to $37.0 million for our fiscal year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. This decrease was primarily attributable to a decrease in engine rent due to fewer leased engines as well as a decrease in rent expense from aircraft leases due to the Company’s purchase of a previously leased aircraft in March 2021. General and Administrative. General and administrative expense decreased by $5.9 million, or 11.8%, to $44.0 million for our fiscal year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. This decrease was primarily due to a decrease in property taxes. For our fiscal years ended September 30, 2022 and 2021, $8.2 million and $15.1 million, respectively, of our insurance and property tax expenses were reimbursed by our major partners. 45 Depreciation and Amortization. Depreciation and amortization expense decreased by $ 1.3 million, or 1.6 %, to $ 81.5 million for our fiscal year ended September 30, 202 2 , compared to our fiscal year ended September 30, 2021 . The decrease is primarily attributable to a portion of our fleet being classified as held for sale during the twelve months ended September 30, 2022, offset by an increase in rotable part s and spare engine depreciation expense as well as amortization of deferred heavy maintenance. Asset Impairment. Asset impairment expenses were $62.1 million and $109.7 million for our assets held for sale and long-lived and ROU assets, respectively, for our year ended September 30, 2022 compared to zero and zero for our year ended September 30, 2021. The increase is attributable to impairment charges on certain CRJ aircraft, both held for sale and held for use, and intangible assets of customer relationship during the year ended September 30, 2022. Lease Termination . Lease termination expense decreased by $4.3 million, or 94.8%, to $0.2 million for our fiscal year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. We incurred a lease termination expense for a CRJ-900 aircraft purchased in March 2021 that was previously leased from Bombardier Capital. Other Operating Expenses. Other operating expenses increased by $3.7 million, or 104.7%, to $7.2 million for our fiscal year ended September 30, 2022 compared to our fiscal year ended September 30, 2021. The increase is primarily due to the loss associated with derecognition of lease incentive assets when the Company terminated the leases of CRJ-700 aircraft to GoJet during the fiscal year ended September 30, 2022. Government Grant Recognition. Government grant funds decreased by $119.5 million, or 100%, to zero for our fiscal year ended September 30, 2022 compared to our fiscal year ended September 30, 2021. Under the Consolidated Appropriations Act, the government provided the Company with a grant of $56.0 million in payroll support for the period of December 2020 through March 2021, and an additional $52.2 million in payroll support under the American Recovery Plan Act for the period of April 2021 through September 2021. We also received a total of $95.2 million under the CARES Act during the period April 2020 through October 2020, $83.8 million of which was utilized during fiscal 2020 and $11.4 million of which was utilized and recognized as an offset to operating expenses during the first quarter of fiscal year 2021. These government grant programs were no longer available during our fiscal year ended September 30, 2022. Other Expense Other expense increased by $4.2 million, or 10.2%, to $44.9 million for our fiscal year ended September 30, 2022, compared to our fiscal year ended September 30, 2021. The increase is primarily a result of an increase in loss on investments in equity securities of $6.9 million as a result of a reduction in the market price of our investments in common stock and warrants of Archer Aviation, Inc. See Note 8 – “ Balance Sheet Information ” in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our investments in equity securities. Income Taxes In our fiscal year ended September 30, 2022, our effective tax rate was 22.2% compared to 26.0% in our fiscal year ended September 30, 2021. 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 (benefit) provision of $(52.0) million and $5.8 million for the fiscal years ended September 30, 2022 and 2021, respectively. The income tax provision for our fiscal year ended September 30, 2022 resulted in an effective tax rate of 22.2%, 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 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, 2021 resulted in an effective tax rate of 26.0%, 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 state net operating losses, expired state attributes, disallowed unrealized losses, and changes in state apportionment and statutory rates. 46 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, 2022, we had aggregate federal and state net operating loss carryforwards of approximately $591.4 million and $247.0 million, which expire in 2027-2038 and 2022-2042, respectively, with approximately $1.1 million of state net operating loss carryforwards that expired in 2022. Approximately $180.9 million of our federal NOL carryforwards are not subject to expiration. See Note 13 - " Income Taxes " in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Results of Operations Comparison of our Fiscal Years Ended September 30, 2021 and 2020 Operating Revenues Year Ended September 30, 2021 2020 Change Operating revenues ($ in thousands): Contract $ 434,518 $ 506,590 $ (72,072 ) (14.2 )% Pass-through and other 69,073 38,480 30,593 79.5 % Total operating revenues $ 503,591 $ 545,070 $ (41,479 ) (7.6 )% Operating data ( 1) : Available seat miles—ASMs (thousands) 7,851,798 7,581,506 270,292 3.6 % Block hours 323,219 313,110 10,109 3.2 % Revenue passenger miles— RPMs (thousands) 5,893,195 5,128,875 764,320 14.9 % Average stage length (miles) 661 597 64 10.7 % Contract revenue per available seat mile—CRASM (in cents) ¢ 5.53 ¢ 6.68 ¢ (1.15 ) (17.2 )% Passengers 8,881,431 8,500,072 381,359 4.5 % (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 $41.5 million, or 7.6%, during our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. Contract revenue decreased by $72.1 million, or 14.2%, primarily due to temporary reductions in rates provided to our major partners as a result of lower labor costs from government assistance received during such period, and flying fewer covered aircraft under the American CPA. Our block hours flown during our fiscal year ended September 30, 2021 increased 3.2% compared to our fiscal year ended September 30, 2020, due to an increase in demand for air travel and loosening of certain travel restrictions particularly during the second half of the year, and block hours flown under our DHL Flight Services Agreement which commenced in fiscal 2021. Our pass-through and other revenue increased during our fiscal year ended September 30, 2021 by $30.6 million, or 79.5%, primarily due to an increase in pass-through maintenance related to our E-175 fleet. 47 Operating Expenses Year Ended September 30, 2021 2020 Change Operating expenses ($ in thousands): Flight operations $ 162,137 $ 169,242 $ (7,105 ) (4.2 )% Fuel 898 672 226 33.6 % Maintenance 217,646 192,123 25,523 13.3 % Aircraft rent 39,345 48,802 (9,457 ) (19.4 )% Aircraft and traffic servicing 2,638 3,356 (718 ) (21.4 )% General and administrative 49,855 52,246 (2,391 ) (4.6 )% Depreciation and amortization 82,847 82,296 551 0.7 % Lease termination 4,508 — 4,508 100.0 % Government grant recognition (119,479 ) (83,834 ) (35,645 ) 42.5 % Total operating expenses $ 440,395 $ 464,903 $ (24,508 ) (5.3 )% Operating data: Available seat miles—ASMs (thousands) 7,851,798 7,581,506 270,292 3.6 % Block hours 323,219 313,110 10,109 3.2 % Average stage length (miles) 661 597 64 10.7 % Departures 160,019 166,776 (6,757 ) (4.1 )% Flight Operations. Flight operations expense decreased $7.1 million, or 4.2%, to $ 162.1 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. The decrease was primarily driven by a decrease in pilot and flight attendant wages and related expenses due to lower departures as well as lower pilot training costs. Fuel. Fuel expense increased $ 0.2 million, or 33.6%, to $0.9 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. The increase was primarily driven by fuel expense related to C-checks and ferry flights. All fuel costs related to flying under our capacity purchase agreements and flight services agreement during our fiscal years ended September 30, 2021 and 2020 were directly paid to suppliers by our major partners. Maintenance. Aircraft maintenance expense increased $25.5 million, or 13.3%, to $217.6 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. This increase was primarily driven by an increase in C-check expense, labor, rotable and expendable parts, and pass through maintenance on our E-175 fleet due to more maintenance events at higher costs. This increase was partially offset by a decrease in engine overhauls and component contracts. Total pass-through maintenance expenses reimbursed by our major partners increased by $30.0 million during fiscal year 2021, compared to fiscal year 2020. The following table presents information regarding our aircraft maintenance costs during our fiscal years ended September 30, 2021 and 2020: Year Ended September 30, 2021 2020 Change Engine overhaul $ 14,598 $ 33,472 $ (18,874 ) (56.4 )% Pass-through engine overhaul 16,815 7,048 9,767 138.6 % C-check 30,593 16,279 14,314 87.9 % Pass-through C-check 20,549 7,194 13,355 185.6 % Component contracts 25,890 31,105 (5,215 ) (16.8 )% Rotable and expendable parts 26,741 23,302 3,439 14.8 % Other pass-through 15,963 9,075 6,888 75.9 % Labor and other 66,497 64,648 1,849 2.9 % Total $ 217,646 $ 192,123 $ 25,523 13.3 % 48 Aircraft Rent. Aircraft rent expense decreased $9.5 million, or 19.4%, to $39.3 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. This decrease was primarily attributable to a decrease in engine rent due to fewer leased engines as well as a decrease in rent expense from aircraft leases due to the Company’s purchase of a previously leased aircraft in March 2021. Aircraft and Traffic Servicing. Aircraft and traffic servicing expense decreased $0.7 million, or 21.4%, to $2.6 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. This decrease was primarily due to a decrease in interrupted trip expense, partially offset by an increase in pass-through legal fees related to our leases of CRJ-700 aircraft to a third party. For our fiscal years ended September 30, 2021 and 2020, 53.0% and 31.4%, respectively, of our aircraft and traffic servicing expenses were reimbursed by our major partners. General and Administrative. General and administrative expense decreased $2.4 million, or 4.6%, to $49.9 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. This decrease was primarily due to a decrease in general and administrative wages and related expenses, and a decrease in property taxes. For our fiscal years ended September 30, 2021 and 2020, $15.1 million and $17.5 million, respectively, of our insurance and property tax expenses were reimbursed by our major partners. Depreciation and Amortization. Depreciation and amortization expense increased $0.6 million, or 0.7%, to $82.8 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. The increase is primarily attributable to an increase in aircraft, rotable parts, deferred heavy maintenance, and spare engine depreciation expense, partially offset by a decrease in amortization of intangible assets. Lease Termination . Lease termination expense increased $ 4.5 million, or 100.0%, to $4.5 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. We incurred a lease termination expense for a CRJ-900 aircraft purchased in March 2021 that was previously leased from Bombardier Capital. Government Grant Recognition. Government grant funds increased $35.6 million, or 42.5%, to $119.5 million for our fiscal year ended September 30, 2021 compared to our fiscal year ended September 30, 2020. Under the Consolidated Appropriations Act, the government provided the Company with a grant of $56.0 million in payroll support for the period of December 2020 through March 2021, and an additional $52.2 million in payroll support under the American Recovery Plan Act for the period of April 2021 through September 2021. We also received a total of $95.2 million under the CARES Act during the period April 2020 through October 2020, $83.8 million of which was utilized during fiscal 2020 and $11.4 million of which was utilized and recognized as an offset to operating expenses during the first quarter of fiscal 2021. Other Expense Other expense decreased $2.4 million, or 5.5%, to $40.8 million for our fiscal year ended September 30, 2021, compared to our fiscal year ended September 30, 2020. The decrease is primarily a result of a decrease in interest expense of $9.4 million due to a decrease in outstanding aircraft principal balances and lower interest rates resulting from the Loan and Guarantee Agreement with the U.S. Treasury, offset by losses on investments in equity securities of $6.8 million as a result of a reduction in the market price of our investments in common stock and warrants of Archer Aviation, Inc. See Note 8 - "Balance Sheet Information" in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our investments in equity securities. Income Taxes In our fiscal year ended September 30, 2021, our effective tax rate was 26.0% compared to 25.8% in our fiscal year ended September 30, 2020. 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 $5.8 million and $9.5 million for the fiscal years ended September 30, 2021 and 2020, respectively. The income tax provision for our fiscal year ended September 30, 2021 resulted in an effective tax rate of 26.0%, 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 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, 2020 resulted in an effective tax rate of 25.8%, which differed from the U.S. federal statutory rate of 21% primarily due to the impact of state taxes and permanent 49 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 state net operating losses, expired state attributes, 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, 2021, we had aggregate federal and state net operating loss carryforwards of approximately $541.3 million and $235.7 million, which expire in 2027-2038 and 2022-2042, respectively, with approximately $0.7 million of state net operating loss carryforwards that expired in 2021. See Note 13 - " 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. 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. 50 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: Year Ended September 30, 2022 2021 2020 (in thousands) Reconciliation: Net (loss) income $ (182,678 ) $ 16,588 $ 27,464 Income tax expense (51,990 ) 5,828 9,531 Income before taxes $ (234,668 ) $ 22,416 $ 36,995 Adjustments ( 1)(2)(3)(4)(5) 170,918 3,558 — Loss on investments, net ( 6) 13,715 6,816 — Adjusted income before taxes $ (50,035 ) $ 32,790 $ 36,995 Interest expense 35,289 34,730 44,120 Interest income (139 ) (365 ) (105 ) Depreciation and amortization 81,508 82,847 82,296 Adjusted EBITDA 66,623 150,002 163,306 Aircraft rent 36,989 39,345 48,802 Adjusted EBITDAR $ 103,612 $ 189,347 $ 212,108 (1) Our financial results include a loss of $3.2 million from write off of lease incentive assets for the fiscal year ended September 30, 2022, related to termination of the CRJ-700 leases to GoJet. Additionally, we recognized a lease termination expense of $0.2 million and $4.5 million for the fiscal year ended September 30, 2022 and 2021. (2) Our financial results include a (loss) gain on debt extinguishment of $(0.4) million and $1.0 million related to repayment of the Company’s aircraft debts during the fiscal year ended September 30, 2022 and 2021, respectively. (3 ) Our financial results include impairment charges of $62.1 million during our year ended September 30, 2022, related to certain of our aircraft which were classified as held for sale. (4) Our financial results include impairment charges of $109.7 million during our year ended September 30, 2022, related to our long-lived asset group for our CRJ-900 fleet. ( 5 ) Our financial results include a gain of $4.7 million on sale of 10 CRJ-700 aircraft during the fiscal year ended September 30, 2022. ( 6 ) Our financial results reflect losses on our investments in stock of $13.7 million and $6.8 million for the fiscal year ended September 30, 2022 and 2021, respectively. Liquidity and Capital Resources As of September 30, 2022, the Company has $99.1 million of principal maturity payments on long-term debt due within the next twelve months. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, as well as the liquidity created from our plans to sell the remaining eight (8) CRJ-700 aircraft, the 11 CRJ-900 aircraft, and one (1) CRJ-200 aircraft, refinance our revolving credit facility with CIT, and further amend our CPAs. If our plans are not realized, we will be required 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 April 9, 2020, the Company entered into a letter amendment with lender, Export Development Canada (“EDC”), which provided for the deferral of scheduled principal payments beginning on March 19, 2020 through September 30, 2020. In November 2020, the Company repaid $164 million of existing debt, which included repayment of $19.9 million of the previously deferred principal payments owed to EDC as of September 30, 2020. In June 2020, the Company amended its RASPRO aircraft agreement to defer a $4.0 million lease payment otherwise due in June 2020. Per the amended agreement dated June 5, 2020, the Company is required to pay this amount over the period of September 2021 through March 2024. The Company made the accounting election available for COVID-19 related concessions provided by a lessor resulting in no change to the related lease accounting. In April 2020, we were granted $92.5 million in emergency relief through the Payroll Support Program of the CARES Act, which was received as of September 30, 2020. In September 2020 we were notified that, based on funding availability, recipients that were currently in compliance with signed payroll support program agreements would receive an approximate 2% increase in their award amount. As a result, we were granted an additional $2.7 million for a total grant of $95.2 million, 51 which was received in October 2020. Of this amount, $83.8 million was utilized to offset payroll expenses in the year ended September 30, 2020 and the remainder was utilize d in the first quarter of fiscal year 2021 . In February 2021, the Company was granted $48.7 million in financial assistance by the U.S. Department of the Treasury under the Payroll Support Program Extension (“PSP2”) under the Consolidated Appropriations Act of 2021. In March 2021, the Company was notified that, based on funding availability, recipients that were currently in compliance with executed PSP agreements would receive an additional award amount. As a result, the Company received an additional $7.3 million through PSP2 in April 2021 for a total grant of $56.0 million. PSP2 funding was required to be used exclusively for the continuation of payment of employee wages, salaries, and benefits and is conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs from the date of the extension agreement through March 2021. Other conditions include prohibitions on share repurchases and dividends through March 2022 and certain limitations on executive compensation until October 2022. The Department of Transportation also has the authority until March 1, 2022 to require airlines that received payroll support program funds to maintain scheduled air service deemed necessary to any point served by the airline before March 1, 2020. On April 15, 2021, the Company was notified by the U.S. Department of the Treasury that it was eligible to receive funds under the third Payroll Support Program (“PSP3”), which was created under the American Recovery Plan Act of 2021 (“ARP”), enacted on March 11, 2021. PSP3 provides additional funding for passenger air carriers and contractors that received financial assistance under PSP2. The funding must be used exclusively for the continuation of payment of employee wages, salaries, and benefits. The Company was granted $52.2 million and received the first PSP3 installment of $26.1 million in April 2021 and the second installment of $26.1 million in May 2021. These payments are conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs through September 2021. Other conditions include prohibitions on share repurchases and dividends through September 2022 and certain limitations on executive compensation until April 2023. 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”). 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 each 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. The proceeds may be used for general corporate purposes and operating expenses, to the extent permitted by the CARES Act. Voluntary prepayments of loans under the Treasury Loan may 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 days 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 1.6 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 1.6 to 1.0. The Treasury Loan contains two (2) 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. 52 The CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020. The Company deferred approximately $ 5.5 million of such taxes, with 50% of the deferred amount to be repaid on December 31, 2021 and the remaining 50% to be repaid on December 31, 2022. These aforementioned forms of relief provided by the CARES Act and other legislation, combined with cost saving initiatives implemented by the Company during the prior fiscal year, provided liquidity during the current and prior year periods. We expect to meet our cash needs for the next twelve months with cash and cash equivalents, financing arrangements, and cash flows from operations. As of September 30, 2022, we had $57.7 million in unrestricted liquidity. Though our financial and operating results reflect the recovery in air travel demand during the second half of our 2021 fiscal year, we continue to monitor the longer-term impact of the pandemic, including its adverse effect on customer demand for air travel, the general economy, and our major partners. Should the effects of COVID-19, variants thereof or a similar pandemic continue long-term, our capital requirements and sources of capital may be adversely impaired. See “Part II, Item 1A, Risk Factors” for additional discussion. 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 and funds from external borrowings. In the near term, we expect to fund our primary cash requirements through cash generated from operations and cash and cash equivalents on hand. 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 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 government assistance, 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, 2022 were approximately 8.5% 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. 53 As of September 30, 2022 , our principal sources of liquidity were cash and cash equivalents of $ 57.7 million . In addition, w e had restricted cash of $3. 3 million as of September 30, 2022 . 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, 2022 , we also had $ 615.3 million in secured indebtedness incurred primarily in co nnection with our financing of aircraft. Our p rimary uses of liquidity are capital expenditures , operating lease payments, and debt repayments. As of September 30, 2022 , we had $ 94. 5 million of short-term debt, excl uding finance leases, and $ 487. 2 million of long-term debt excluding finance leases. Sources of cash for our fiscal year ended September 30, 2022 were primarily cash flows from operations of $13.4 million. The positive cash flow from operations was driven by receipts from performance under our capacity purchase agreements and flight services agreement and receipt of funds under the Payroll Support Program and related extensions, partially offset by operating expenses including payroll and related costs, aircraft maintenance, rent, interest, and general and administrative costs. Debt and Other Obligations As of September 30, 2022, we had $720.7 million of long-term debt (including principal and projected interest obligations) and finance lease obligations (including current maturities). This amount consists of $471.1 million in notes payable principal payments related to owned aircraft used in continuing operations, $110.6 million in notes payable principal payments related to spare engines and engine kits, $18.0 million in finance lease obligations, $15.6 million in principal outstanding under our working capital line of credit, and an aggregate of $105.4 million in projected interest costs through our fiscal 2027. As of September 30, 2022, we had variable rate debt representing 73.7% 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, 2022, we had 16 aircraft on operating leases (excluding aircraft leased at nominal amount from United and DHL) with remaining lease terms of up to 3.8 years. Future minimum lease payments due under all long-term operating leases were approximately $37.2 million as of September 30, 2022. A majority of our leased aircraft are leased through trusts formed for the sole purpose of purchasing, financing, and leasing aircraft to us. Because these are single-owner trusts in which we do not participate, we are not at risk for losses and we are not considered the primary beneficiary. We believe that our maximum exposure under the leases are the remaining lease payments and any return condition obligations. RASPRO Lease Facility . On September 23, 2005, Mesa Airlines, as lessee, entered into the RASPRO Lease Facility, with RASPRO as lessor, for 15 of our CRJ-900 aircraft. The obligations under the RASPRO Lease Facility are guaranteed by us, and basic rent is paid quarterly on each aircraft. On each of March 10, 2014, June 5, 2014, and December 8, 2017, the RASPRO Lease Facility was amended to defer certain payments of basic rent (the " Deferred Amounts "). Until the principal of and accrued interest on the Deferred Amounts are paid in full: (i) we and Mesa Airlines are prohibited from paying any dividends to holders of our common stock, (ii) we are prohibited from repurchasing any of our warrants or other equity interests, (iii) Mesa Airlines must maintain a minimum of $35.0 million of cash, cash equivalents and availability under lines of credit, (iv) Mesa Airlines must provide RASPRO with periodic monthly, quarterly and annual reports containing certain financial information and forecasted engine repair costs and (v) we must maintain a minimum debt-to-assets ratio. In June 2020, the Company amended its RASPRO aircraft lease agreement to defer a $4.0 million lease payment otherwise due in June 2020. Per the amended agreement dated June 5, 2020, the Company is required to pay this amount over the period of September 2021 through March 2024. The Company made the accounting election available for COVID-19 related concessions provided by a lessor. This event is not a lease modification and requires no changes to current accounting treatment. As of September 30, 2022, we were in compliance with the covenants in the RASPRO Lease Facility. 54 Finance Leases On February 7, 2018, Mesa Airlines, as lessee, entered into two (2) agreements for the lease of two (2) spare aircraft engines (the " Engine Leases "). Basic rent on the engines is paid monthly and at the end of the lease term. At the end of the lease term, Mesa Airlines will have the option to purchase both engines for a total of $1.8 million. The Engine Leases are reflected as finance lease obligations of $2.3 million on our consolidated balance sheet as of September 30, 2022. The Engine Leases set forth specific redelivery requirements and conditions, but do not contain operational or financial covenants. On April 20, 2022, Mesa Airlines, as lessee, entered into another agreement for the lease of one spare aircraft engine. Basic rent on this lease is paid monthly and at the end of the lease term. At the end of the lease term, Mesa Airlines will not have the option to purchase the engine. This lease is reflected as finance lease obligations of $0.6 million on our consolidated balance sheet as of September 30, 2022. On June 1, 2022, Mesa Airlines, as lessee, entered into two (2) 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. At the end of the lease term, Mesa Airlines will have the option to purchase both aircraft for a total of $1.5 million. The Aircraft Leases are reflected as finance lease obligations of $15.1 million on our consolidated balance sheet as of September 30, 2022. As of September 30, 2022, we had two (2) aircraft and three (3) engines on finance leases with remaining lease terms of up to 7.6 years. Future minimum lease payments due under all long-term operating leases were approximately $21.8 million as of September 30, 2022. 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. As of September 30, 2022, we were in compliance with the financial covenants under 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 LIBOR 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. Engine Purchase Commitments On February 26, 2021, the Company and General Electric Company (“GE”), acting through its GE-Aviation business unit, entered into an Amended and Restated Letter Agreement No. 13-3. The Company agreed to purchase and take delivery of 10 new CF34-8C5 or CF34-8E5 engines with delivery dates starting from July 1, 2021 through November 30 , 2022. During the quarter ended March 31, 2021, a $7.0 million non-refundable purchase deposit was made for the first five (5) engines to be delivered in calendar 2021. The Company has options to purchase an additional 10 similar engines beyond 2022. The total purchase commitment related to these 10 engines is approximately $52.2 million. As of September 30, 2022, we have purchased nine (9) of the engines pursuant to the Amended and Restated Letter Agreement No. 13-3 with delivery of the remaining three (3) engines expected to take place by the end of 2022 calendar year. If the Company fails to accept delivery of the spare engines when duly tendered, the Company may be assessed a minimum cancellation charge based on the engine price determined as of the date of scheduled engine delivery to the Company. 55 Electric Aircraft Forward Purchase Commitments As described in Note 8, 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. As described in Note 8, 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, 2022, $50.6 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, 2022, we had $3.3 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, $3.3 million and $3.4 million of outstanding letters of credit are required to be collateralized by amounts on deposit as of September 30, 2022 and 2021, respectively, which are classified as restricted cash. 56 Cash Flows The following table presents information regarding our cash flows for each of our fiscal years ended September 30, 2022, 2021, and 2020: Year Ended September 30, 2022 2021 2020 (in thousands) Net cash provided by operating activities $ 13,362 $ 132,871 $ 174,662 Net cash provided by (used in) investing activities 1,365 (33,471 ) (26,667 ) Net cash used in financing activities (77,569 ) (78,374 ) (117,655 ) Net increase (decrease) in cash, cash equivalents and restricted cash $ (62,842 ) $ 21,026 $ 30,340 Cash, cash equivalents and restricted cash at beginning of period 123,867 102,841 72,501 Cash, cash equivalents and restricted cash at end of period $ 61,025 $ 123,867 $ 102,841 Net Cash Flow Provided by Operating Activities Our primary source of cash from operating activities is cash collections from our major partners pursuant to our CPAs and FSA. Our primary uses of cash from operating activities are for maintenance costs, personnel costs, operating lease payments, and interest payments. 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. During our fiscal year ended September 30, 2021, we had cash flow provided by operating activities of $132.9 million. We had net income of $16.6 million adjusted for the following significant non-cash items: depreciation and amortization of $82.8 million, stock-based compensation expense of $3.1 million, deferred income taxes of $5.7 million, losses on investments in equity securities of $6.8 million, amortization of deferred credits of $(2.4) million, amortization of debt discount and issuance costs and accretion of interest of $11.4 million, gain on extinguishment of debt of $(1.0) million, and loss on lease termination of $4.5 million. We had net change of $4.8 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, 2021. During our fiscal year ended September 30, 2020, we had cash flow provided by operating activities of $174.7 million. We had net income of $27.5 million adjusted for the following significant non-cash items: depreciation and amortization of $82.3 million, stock-based compensation expense of $4.4 million, deferred income taxes of $9.2 million, amortization of deferred credits of $(3.7) million, and amortization of debt discount and issuance costs and accretion of interest of $4.2 million. We had net change of $50.4 million within other net operating assets and liabilities largely driven by increases in accrued liabilities and deferred revenue during our fiscal year ended September 30, 2020. Net Cash Flows Provided by (Used in) Investing Activities Our investing activities generally consist of 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, 2022, our net cash flow provided by investing activities was $1.4 million. We invested $16.7 million in spare engines, $1.3 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. During our fiscal year ended September 30, 2021, our net cash flow used in investing activities was $33.5 million. We invested $3.5 million in spare engines, $1.6 million in aircraft, $9.9 million in inventory, $2.1 million in tools, vehicles, equipment and other miscellaneous projects, and $6.3 million in net payments on equipment and other deposits. Additionally, we invested a total of $10.0 million in equity securities. 57 During our fiscal year ended September 30, 2020 , our net cash flow used in investing activities was $26.7 million. We invested $11.0 million in two (2) spare engines and $3.8 million in aircraft improvements, $9.4 million in inventory, and $2.5 million in tools and miscellaneous projects. 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, 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 m ade $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 costs related to the repurchase of shares of our common stock. We received $0.4 million in proceeds from the issuance of common stock under our ESPP. During our fiscal year ended September 30, 2021, our net cash flow used in financing activities was $78.4 million. We received $195.0 million of proceeds from borrowings under the Treasury Loan. We made $271.0 million of principal repayments on long-term debt during the period. We incurred $1.3 million of costs related to debt financing and $1.5 million of costs related to the repurchase of shares of our common stock. We received $0.5 million in proceeds from the issuance of common stock under our ESPP. During our fiscal year ended September 30, 2020, our net cash flow used in financing activities was $117.7 million. We drew $23.0 million from our $35.0 million working capital draw loan for operational needs. We made $138.3 million of principal repayments on long-term debt during the period. We incurred $1.8 million of costs related to debt financing and $0.6 million of costs related to the repurchase of shares of our common stock. 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 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 and from DHL under our DHL FSA, approximately 10% of our aircraft are leased from third parties. All of our aircraft leases have been classified as operating leases, which 58 results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major partners decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up , and other charges. Additionally, any remaining ROU assets and lease liabilities will be written off. 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 capacity purchase agreements identify 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 capacity purchase agreements is designed to reimburse the Company for certain aircraft ownership costs of these aircraft. We account for the non-lease component of our capacity purchase agreements 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. 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 have a term of nine (9) 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. During August of 2022, we committed to a formal plan to sell 18 of our CRJ-700 aircraft and subsequently terminated the leases on the 18 CRJ-700 aircraft. In September 2022, we sold 10 CRJ-700 aircraft for $50.0 million. We continue to be committed to selling the remaining eight (8) aircraft. Revenue Recognition The Company recognizes revenue when the service is provided under its capacity purchase agreements and flight services agreement. Under these agreements, the major partners generally pay a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of flights and block hours flown. The contracts also include reimbursement of certain costs incurred by the Company in performing flight services. These costs, known as " pass-through costs, " may include passenger and hull insurance as well as aircraft property taxes and other flight service expenditures defined in our agreements with our major partners. Additionally, for the E-175 aircraft owned by United, the capacity purchase agreement 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 agreements 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 contracts also include a profit margin on certain reimbursable costs, as well as a profit margin, 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 agreements. 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 these contracts is presented as the gross amount billed to the major partners. Under the capacity purchase and flight services agreements, 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 capacity purchase and flight services agreements are deemed to be distinct and the flight service promised in the capacity purchase and flight services agreements 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. 59 A portion of the Company's compensation under its capacity purchase agreements with American and United 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 capacity purchase agreements is accounted for as an operating lease and is reflected as contract re venue on the Company's consolidated statements of operations and comprehensive (loss) income . The Company recognized $ 15 8 . 4 million , $ 170.2 million , and $ 208.9 million of lease revenue for the year ended September 30, 202 2 , 20 2 1 , and 20 20 , respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations and comprehensive (loss) income because the use of the aircraft is not a separate activity of the total service provided. The Company's capacity purchase agreements and flight services agreement are 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 capacity purchase agreements and flight services agreement also contain terms with respect to covered aircraft, services provided, and compensation as described in Note 1. The capacity purchase agreements and flight services agreement are 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 capacity purchase agreements or flight services agreement, contract modifications resulting from contract renegotiations, its ability to earn incentive payments contemplated under applicable agreements, and settlement of reimbursement disputes with the Company's major partners. 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 capacity purchase agreements and flight services agreement contain an option that allows its major partners to assume the contractual responsibility for procuring and providing the fuel necessary to operate the flights that it operates for them. The Company's major partners have exercised this option. Accordingly, the Company does not record an expense or revenue for fuel and related fueling costs for flying under its capacity purchase agreements or flight services agreement. In addition, the Company's major partners also provide, 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 the Company's major partners 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 our major partners in advance of the Company’s performance. The deferred revenue balance as of September 30, 2022 of $24.1 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 $865.3 million as of September 30, 2022. 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 capacity purchase agreement, flight services agreement, and fleet-type 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 or flight services agreement, 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, including the impact of the COVID-19 pandemic to its business and impact of pilot shortage, are subject to uncertainty, and 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 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. 60 As a result of pilot shortage , we evaluated our fleet during fiscal year 2022 and determined that only the CRJ-900 fleet operat ing under the American CPA was impaired as discussed in Note 8 - “ Balance sheet information ” in the notes to our consolidated financial statements, because the future cash flows from the operation of other asset groups through the respective remaining useful life exceeded the carrying value. This resulted in total impairment charges of $ 1 09 . 7 m illion to the asset group for the CRJ-900 fleet operating under the American CPA , recorded in asset impairment on our consolidated statements of operations and comprehensive (loss) income . These charges were calculated using Level 3 fair value inputs based primarily upon recent market transactions and third-party bids, which were corroborated with published pricing guides and our assessment of existing market conditions based on industry knowledge . See Note 8 - " Balance sheet information " in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information . 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 13 - " 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. Emerging Growth Company Status We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the JOBS Act). The JOBS Act permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to " opt out " of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies. 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 consolidated financial statements included elsewhere in this Annual Report on Form 10-K. 61