e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period-ended
March 31, 2007
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 0-15495
Mesa Air Group, Inc.
(Exact name of registrant as
specified in its charter)
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Nevada
(State or other
jurisdiction of
incorporation or organization)
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85-0302351
(I.R.S. Employer
Identification No.)
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410 North 44th Street,
Suite 100,
Phoenix, Arizona
(Address of principal
executive offices)
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85008
(Zip
code)
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Registrants telephone number, including area code:
(602) 685-4000
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the last
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
On May 1, 2007, the registrant had outstanding
31,410,065 shares of Common Stock.
TABLE OF
CONTENTS
INDEX
2
PART 1. FINANCIAL
INFORMATION
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Item 1.
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Financial
Statements
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MESA AIR
GROUP, INC.
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Three Months Ended
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Six Months Ended
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March 31,
|
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March 31,
|
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|
March 31,
|
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|
March 31,
|
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|
|
2007
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|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
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|
|
|
(In thousands, except per share data)
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|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$
|
326,140
|
|
|
$
|
305,652
|
|
|
$
|
665,114
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|
|
$
|
621,066
|
|
Freight and other
|
|
|
10,291
|
|
|
|
6,412
|
|
|
|
18,930
|
|
|
|
14,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross operating revenues
|
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|
336,431
|
|
|
|
312,064
|
|
|
|
684,044
|
|
|
|
635,681
|
|
Impairment of contract incentives
|
|
|
(25,324
|
)
|
|
|
|
|
|
|
(25,324
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net operating revenues
|
|
|
311,107
|
|
|
|
312,064
|
|
|
|
658,720
|
|
|
|
635,681
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Flight operations
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|
|
95,107
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|
|
|
90,833
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|
|
|
191,829
|
|
|
|
180,697
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|
Fuel
|
|
|
105,103
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|
|
|
103,157
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|
|
|
222,901
|
|
|
|
208,006
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|
Maintenance
|
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|
72,684
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|
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|
47,606
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|
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|
136,088
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|
|
|
103,144
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|
Aircraft and traffic servicing
|
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|
23,914
|
|
|
|
18,310
|
|
|
|
45,289
|
|
|
|
34,520
|
|
Promotion and sales
|
|
|
1,807
|
|
|
|
882
|
|
|
|
3,380
|
|
|
|
1,654
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|
General and administrative
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|
16,208
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|
|
|
14,515
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|
33,670
|
|
|
|
32,906
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|
Depreciation and amortization
|
|
|
10,255
|
|
|
|
8,824
|
|
|
|
20,965
|
|
|
|
18,007
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|
Bankruptcy settlement
|
|
|
(1,473
|
)
|
|
|
|
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|
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(2,093
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)
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|
|
|
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Impairment of long-lived assets
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|
|
12,367
|
|
|
|
|
|
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|
12,367
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
335,972
|
|
|
|
284,127
|
|
|
|
664,396
|
|
|
|
578,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(24,865
|
)
|
|
|
27,937
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|
|
|
(5,676
|
)
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|
|
56,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
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|
(9,490
|
)
|
|
|
(8,710
|
)
|
|
|
(20,160
|
)
|
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|
(18,296
|
)
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Interest income
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|
|
3,902
|
|
|
|
2,600
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|
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|
8,446
|
|
|
|
5,598
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|
Other expense
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|
|
(8,108
|
)
|
|
|
(13,229
|
)
|
|
|
(7,972
|
)
|
|
|
(14,326
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(13,696
|
)
|
|
|
(19,339
|
)
|
|
|
(19,686
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)
|
|
|
(27,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(38,561
|
)
|
|
|
8,598
|
|
|
|
(25,362
|
)
|
|
|
29,723
|
|
Income tax (benefit) provision
|
|
|
(14,575
|
)
|
|
|
3,310
|
|
|
|
(9,389
|
)
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|
|
11,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(23,986
|
)
|
|
$
|
5,288
|
|
|
$
|
(15,973
|
)
|
|
$
|
18,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.75
|
)
|
|
$
|
0.15
|
|
|
$
|
(0.49
|
)
|
|
$
|
0.58
|
|
Diluted
|
|
$
|
(0.75
|
)
|
|
$
|
0.14
|
|
|
$
|
(0.49
|
)
|
|
$
|
0.48
|
|
See accompanying notes to condensed consolidated financial
statements.
3
MESA AIR
GROUP, INC.
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|
|
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|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
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Cash and cash equivalents
|
|
$
|
44,056
|
|
|
$
|
35,559
|
|
Marketable securities
|
|
|
141,495
|
|
|
|
186,764
|
|
Restricted cash
|
|
|
12,555
|
|
|
|
12,001
|
|
Receivables, net
|
|
|
60,136
|
|
|
|
47,382
|
|
Income tax receivable
|
|
|
539
|
|
|
|
615
|
|
Expendable parts and supplies, net
|
|
|
38,406
|
|
|
|
32,771
|
|
Prepaid expenses and other current
assets
|
|
|
157,908
|
|
|
|
139,563
|
|
Deferred income taxes
|
|
|
4,505
|
|
|
|
4,115
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
459,600
|
|
|
|
458,770
|
|
Property and equipment, net
|
|
|
673,432
|
|
|
|
669,912
|
|
Lease and equipment deposits
|
|
|
22,869
|
|
|
|
27,389
|
|
Equity method investments
|
|
|
10,241
|
|
|
|
12,510
|
|
Other assets
|
|
|
38,085
|
|
|
|
69,632
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,204,227
|
|
|
$
|
1,238,213
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
34,059
|
|
|
$
|
29,659
|
|
Short-term debt
|
|
|
|
|
|
|
123,076
|
|
Accounts payable
|
|
|
73,303
|
|
|
|
56,097
|
|
Air traffic liability
|
|
|
5,347
|
|
|
|
6,677
|
|
Accrued compensation
|
|
|
4,469
|
|
|
|
4,545
|
|
Income taxes payable
|
|
|
113
|
|
|
|
1,008
|
|
Other accrued expenses
|
|
|
43,794
|
|
|
|
42,001
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
161,085
|
|
|
|
263,063
|
|
Long-term debt, excluding current
portion
|
|
|
657,446
|
|
|
|
542,569
|
|
Deferred credits
|
|
|
101,315
|
|
|
|
101,723
|
|
Deferred income taxes
|
|
|
35,353
|
|
|
|
44,531
|
|
Other noncurrent liabilities
|
|
|
24,106
|
|
|
|
22,117
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
979,305
|
|
|
|
974,003
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock of no par value,
2,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
Common stock of no par value and
additional paid-in capital, 75,000,000 shares authorized;
30,705,950 and 33,904,053 shares issued and outstanding,
respectively
|
|
|
126,386
|
|
|
|
149,701
|
|
Retained earnings
|
|
|
98,536
|
|
|
|
114,509
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
224,922
|
|
|
|
264,210
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial
statements.
4
MESA AIR
GROUP, INC.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(15,973
|
)
|
|
$
|
18,280
|
|
Adjustments to reconcile (loss)
income to net cash flows provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,965
|
|
|
|
18,007
|
|
Impairment chargeS
|
|
|
37,691
|
|
|
|
|
|
Deferred income taxes
|
|
|
(9,568
|
)
|
|
|
8,265
|
|
Unrealized (gain) loss on
investment securities
|
|
|
4,776
|
|
|
|
962
|
|
Loss from equity metod investment
|
|
|
3,579
|
|
|
|
|
|
Amortization of deferred credits
|
|
|
(6,397
|
)
|
|
|
(5,688
|
)
|
Amortization of restricted stock
awards
|
|
|
707
|
|
|
|
589
|
|
Other
|
|
|
994
|
|
|
|
|
|
Gain (Loss) on Sale of Assets
|
|
|
(254
|
)
|
|
|
|
|
Stock option expense
|
|
|
662
|
|
|
|
1,450
|
|
Excess tax benefit from stock
compensation
|
|
|
|
|
|
|
(2,609
|
)
|
Provision for obsolete expendable
parts and supplies
|
|
|
|
|
|
|
(17
|
)
|
Provision for doubtful accounts
|
|
|
773
|
|
|
|
540
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Net (purchases) sales of investment
securities
|
|
|
40,493
|
|
|
|
(40,274
|
)
|
Receivables
|
|
|
(12,527
|
)
|
|
|
8,496
|
|
Income tax receivables
|
|
|
76
|
|
|
|
(505
|
)
|
Expendable parts and supplies
|
|
|
(5,610
|
)
|
|
|
1,911
|
|
Prepaid expenses and other current
assets
|
|
|
(18,345
|
)
|
|
|
(8,469
|
)
|
Contract incentive payments
|
|
|
|
|
|
|
(20,000
|
)
|
Accounts payable
|
|
|
17,206
|
|
|
|
(7,025
|
)
|
Income taxes payable
|
|
|
(895
|
)
|
|
|
(254
|
)
|
Other accrued liabilities
|
|
|
2,376
|
|
|
|
3,530
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
|
|
|
60,729
|
|
|
|
(22,811
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing
Activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(13,468
|
)
|
|
|
(9,164
|
)
|
Proceeds from sale of flight
equipment
|
|
|
24
|
|
|
|
16,034
|
|
Change in restricted cash
|
|
|
(554
|
)
|
|
|
(2,824
|
)
|
Equity method investment
|
|
|
(1,310
|
)
|
|
|
|
|
Change in other assets
|
|
|
4,694
|
|
|
|
1,147
|
|
Net returns (payments) of lease and
equipment deposits
|
|
|
4,520
|
|
|
|
1,356
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES
|
|
|
(6,094
|
)
|
|
|
6,549
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing
Activities:
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(27,444
|
)
|
|
|
(16,015
|
)
|
Proceeds from exercise of stock
options and issuance of warrants
|
|
|
148
|
|
|
|
5,565
|
|
Proceeds (payments) on financing
rotable inventory
|
|
|
|
|
|
|
(17,768
|
)
|
Tax benefit-stock compensation
|
|
|
|
|
|
|
2,609
|
|
Common stock purchased and retired
|
|
|
(24,831
|
)
|
|
|
(193
|
)
|
Proceeds from receipt of deferred
credits
|
|
|
5,989
|
|
|
|
1,917
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
|
|
|
(46,138
|
)
|
|
|
(23,885
|
)
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH
EQUIVALENTS
|
|
|
8,497
|
|
|
|
(40,147
|
)
|
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD
|
|
|
35,559
|
|
|
|
143,428
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF
PERIOD
|
|
$
|
44,056
|
|
|
$
|
103,281
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of
amounts capitalized
|
|
|
20,087
|
|
|
|
19,310
|
|
Cash paid for income taxes, net
|
|
|
1,000
|
|
|
|
6,618
|
|
SUPPLEMENTAL NON-CASH INVESTING AND
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Short-term debt permanently
financed 135,378 as long-term debt
|
|
|
135,378
|
|
|
|
|
|
Aircraft delivered under interim
financing
|
|
|
23,644
|
|
|
|
27,516
|
|
Conversion of convertible
debentures to common stock
|
|
|
|
|
|
|
62,278
|
|
Inventory and other credits
received in conjunction with aircraft financing
|
|
|
1,000
|
|
|
|
4,604
|
|
See accompanying notes to condensed consolidated financial
statements.
5
MESA AIR
GROUP, INC.
(UNAUDITED)
|
|
1.
|
Business
and Basis of Presentation
|
The accompanying unaudited, condensed consolidated financial
statements of Mesa Air Group, Inc. (Mesa or the
Company) have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the
instructions to
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States of America for a complete set of financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation of the results for the periods presented
have been made. Operating results for the three and six month
period ended March 31, 2007, are not necessarily indicative
of the results that may be expected for the fiscal year ending
September 30, 2007. These condensed consolidated financial
statements should be read in conjunction with the Companys
consolidated financial statements and notes thereto included in
the Companys annual report on
Form 10-K
for the fiscal year ended September 30, 2006.
The accompanying condensed consolidated financial statements
include the accounts of Mesa Air Group, Inc. and its
wholly-owned operating subsidiaries: Mesa Airlines, Inc.
(Mesa Airlines), a Nevada corporation and
certificated air carrier; Freedom Airlines, Inc.
(Freedom), a Nevada corporation and certificated air
carrier; Air Midwest, Inc. (Air Midwest), a Kansas
corporation and certificated air carrier; Air Midwest, LLC, a
Nevada limited liability company, MPD, Inc., a Nevada
corporation, doing business as Mesa Pilot Development; Regional
Aircraft Services, Inc. (RAS) a California company;
Mesa Air Group Airline Inventory Management, LLC
(MAG-AIM), an Arizona Limited Liability Company;
Ritz Hotel Management Corp., a Nevada Corporation; Nilchii, Inc.
(Nilchii), a Nevada corporation, Patar, Inc.
(Patar), a Nevada corporation, Ping Shan, SRL
(Ping Shan), a Barbados, West Indies based
investment company, and MAGI Insurance, Ltd. (MAGI),
a Barbados, West Indies based captive insurance company. Air
Midwest, LLC was formed for the purpose of a contemplated
conversion of Air Midwest from a corporation to a limited
liability company (which has not yet occurred). MPD, Inc.
provides pilot training in coordination with San Juan College in
Farmington, New Mexico and with Arizona State University in
Tempe, Arizona. RAS performs aircraft component repair and
overhaul services. MAG-AIM purchases, distributes and manages
the Companys inventory of rotable and expendable spare
parts. Ritz Hotel Management is a Phoenix area hotel property
that is used for
crew-in-training
accommodations. MAGI is a captive insurance company established
for the purpose of obtaining more favorable aircraft liability
insurance rates. Ping Shan was established to invest in a Joint
Venture in the Peoples Republic of China. Nilchii was
established to invest in certain airline related businesses.
Patar was established to invest in certain non-aviation related
businesses. All significant intercompany accounts and
transactions have been eliminated in consolidation.
New
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) ratified Emerging Issues Task Force Issue
No. 06-3
(EITF
06-3),
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation). EITF
06-3 applies
to any tax assessed by a governmental authority that is directly
imposed on a revenue-producing transaction between a seller and
a customer. EITF
06-3 allows
companies to present taxes either gross within revenue and
expense or net. If taxes subject to this issue are significant,
a company is required to disclose its accounting policy for
presenting taxes and the amount of such taxes that are
recognized on a gross basis. The Company adopted EITF
06-3 during
the second quarter of 2007 by continuing to present such taxes
on a net basis. These amounts are not material to the
Companys consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair
Value Measurements. This standard defines fair value,
establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America,
and expands disclosure about fair value measurements. This
pronouncement applies to other accounting standards that require
or permit fair value
6
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
measurements. Accordingly, this statement does not require any
new fair value measurement. This statement is effective for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company will be required
to adopt SFAS No. 157 in the first quarter of fiscal
year 2009. Management has not yet determined the impact of
adopting this statement.
In September, 2006, the FASB issued FASB Staff Position
(FSP) No. AUG AIR-1 Accounting for
Planned Major Maintenance Activities. This position amends
the existing major maintenance accounting guidance contained
within the AICPA Industry Audit Guide Audits of
Airlines and prohibits the use of the accrue in advance
method of accounting for planned major maintenance activities
for owned aircraft. The provisions of the announcement are
applicable for fiscal years beginning after December 15,
2006. Mesa currently uses the direct expense method of
accounting for planned major maintenance; therefore, the
adoption of FSP No. AUG AIR-1 will not have an impact on
the Companys consolidated financial statements.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in financial statements.
FIN 48 requires the impact of a tax position to be
recognized in the financial statements if that position is more
likely than not of being sustained by the taxing authority. Mesa
will be required to adopt FIN 48 in the first quarter of
fiscal year 2008. Management has not yet determined the impact
on the Companys consolidated financial statements.
Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information, requires disclosures related to components of
a company for which separate financial information is available
that is evaluated regularly by a companys chief operating
decision maker in deciding the allocation of resources and
assessing performance. The Company has three airline operating
subsidiaries, Mesa Airlines, Freedom Airlines and Air Midwest,
as well as various other subsidiaries organized to provide
support for the Companys airline operations. The Company
has aggregated these subsidiaries into three reportable
segments: Mesa Airlines/Freedom, Air Midwest/go!
and Other. Operating revenues in the Other segment are
primarily sales of rotable and expendable parts to the
Companys operating subsidiaries and ground handling
services performed by employees of RAS for Mesa Airlines.
Mesa Airlines and Freedom Airlines provide passenger service
under revenue-guarantee contracts with United Airlines, Inc.
(United), Delta Air Lines, Inc. (Delta)
and US Airways, Inc. (US Airways). As of
March 31, 2007, Mesa Airlines and Freedom Airlines operated
a fleet of 181 aircraft 61 CRJ 200s, 18 CRJ 700s, 38
CRJ 900s, 36 ERJ 120s and 28 Dash-8s.
Air Midwest and Mesa Airlines, operating as go!,
provide passenger service where revenue is derived from ticket
sales either independently or through pro-rate agreements. Air
Midwest provides passenger service under pro-rate contracts with
US Airways, and Midwest Airlines, as well as independently under
the brand name Mesa Airlines. As of March 31, 2007, Air
Midwest operated a fleet of 20 Beechcraft 1900D turboprop
aircraft. Mesa Airlines, operating as go!,
provides independent inter-island Hawaiian passenger
service. As of March 31, 2007, Mesas go!
operation operated a fleet of five CRJ-200 aircraft. Air
Midwest and Mesa, operating as go!, do not receive
contractually-guaranteed revenue for their operations. Air
Midwest LLC will be included in Air Midwest/go!
when the contemplated conversion to a limited liability
company occurs.
The Other reportable segment includes Mesa Air Group (the
holding company), RAS, MPD, MAG-AIM, MAGI, Shan Yue, Ping Shan,
Nilchii, Patar, and Ritz Hotel Management Corp. Activity in the
Other category consists primarily of sales of rotable and
expendable parts and ground handling services to the
Companys operating subsidiaries, but also includes all
administrative functions not directly attributable to any
specific operating company. These administrative costs are
allocated to the operating companies based upon specific
criteria including headcount, available seat miles
(ASMs) and other operating statistics.
7
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Mesa/
|
|
|
Air Midwest/
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 (000s)
|
|
Freedom
|
|
|
go!
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Total net operating revenues
|
|
$
|
292,141
|
|
|
$
|
20,362
|
|
|
$
|
65,538
|
|
|
$
|
(66,934
|
)
|
|
$
|
311,107
|
|
Depreciation and amortization
|
|
|
8,526
|
|
|
|
641
|
|
|
|
1,088
|
|
|
|
|
|
|
|
10,255
|
|
Operating income (loss)
|
|
|
(18,874
|
)
|
|
|
(6,040
|
)
|
|
|
9,298
|
|
|
|
(9,249
|
)
|
|
|
(24,865
|
)
|
Interest expense
|
|
|
(7,289
|
)
|
|
|
(0
|
)
|
|
|
(2,347
|
)
|
|
|
146
|
|
|
|
(9,490
|
)
|
Interest income
|
|
|
2,781
|
|
|
|
42
|
|
|
|
1,225
|
|
|
|
(146
|
)
|
|
|
3,902
|
|
Income (loss) before income tax
|
|
|
(27,688
|
)
|
|
|
(5,997
|
)
|
|
|
4,372
|
|
|
|
(9,248
|
)
|
|
|
(38,561
|
)
|
Income tax (benefit)
|
|
|
(10,465
|
)
|
|
|
(2,266
|
)
|
|
|
1,652
|
|
|
|
(3,496
|
)
|
|
|
(14,575
|
)
|
Total assets
|
|
|
1,395,118
|
|
|
|
19,441
|
|
|
|
536,066
|
|
|
|
(746,398
|
)
|
|
|
1,204,227
|
|
Capital expenditures (including
non-cash)
|
|
|
1,561
|
|
|
|
142
|
|
|
|
5,462
|
|
|
|
|
|
|
|
7,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Mesa/
|
|
|
Air Midwest/
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 (000s)
|
|
Freedom
|
|
|
go!
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
298,035
|
|
|
$
|
12,585
|
|
|
$
|
61,488
|
|
|
$
|
(60,044
|
)
|
|
$
|
312,064
|
|
Depreciation and amortization
|
|
|
7,897
|
|
|
|
31
|
|
|
|
896
|
|
|
|
|
|
|
|
8,824
|
|
Operating income (loss)
|
|
|
25,942
|
|
|
|
(1,298
|
)
|
|
|
11,504
|
|
|
|
(8,211
|
)
|
|
|
27,937
|
|
Interest expense
|
|
|
(6,395
|
)
|
|
|
|
|
|
|
(2,460
|
)
|
|
|
145
|
|
|
|
(8,710
|
)
|
Interest income
|
|
|
2,258
|
|
|
|
3
|
|
|
|
484
|
|
|
|
(145
|
)
|
|
|
2,600
|
|
Income (loss) before income tax
|
|
|
21,441
|
|
|
|
(1,905
|
)
|
|
|
(2,727
|
)
|
|
|
(8,211
|
)
|
|
|
8,598
|
|
Income tax (benefit)
|
|
|
8,233
|
|
|
|
(712
|
)
|
|
|
(1,050
|
)
|
|
|
(3,161
|
)
|
|
|
3,310
|
|
Total assets
|
|
|
1,343,416
|
|
|
|
7,425
|
|
|
|
413,218
|
|
|
|
(595,156
|
)
|
|
|
1,168,903
|
|
Capital expenditures (including
non-cash)
|
|
|
2,409
|
|
|
|
7
|
|
|
|
3,672
|
|
|
|
|
|
|
|
6,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Mesa/
|
|
|
Air Midwest/
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 (000s)
|
|
Freedom
|
|
|
go!
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Total net operating revenues
|
|
$
|
620,328
|
|
|
$
|
41,157
|
|
|
$
|
121,985
|
|
|
$
|
(124,750
|
)
|
|
$
|
658,720
|
|
Depreciation and amortization
|
|
|
17,575
|
|
|
|
1,181
|
|
|
|
2,209
|
|
|
|
|
|
|
|
20,965
|
|
Operating income (loss)
|
|
|
3,817
|
|
|
|
(9,436
|
)
|
|
|
16,765
|
|
|
|
(16,822
|
)
|
|
|
(5,676
|
)
|
Interest expense
|
|
|
(15,713
|
)
|
|
|
(0
|
)
|
|
|
(4,742
|
)
|
|
|
295
|
|
|
|
(20,160
|
)
|
Interest income
|
|
|
5,831
|
|
|
|
108
|
|
|
|
2,802
|
|
|
|
(295
|
)
|
|
|
8,446
|
|
Income (loss) before income tax
|
|
|
(9,859
|
)
|
|
|
(9,326
|
)
|
|
|
10,644
|
|
|
|
(16,821
|
)
|
|
|
(25,362
|
)
|
Income tax (benefit)
|
|
|
(3,457
|
)
|
|
|
(3,575
|
)
|
|
|
4,116
|
|
|
|
(6,473
|
)
|
|
|
(9,389
|
)
|
Total assets
|
|
|
1,395,118
|
|
|
|
19,441
|
|
|
|
536,066
|
|
|
|
(746,398
|
)
|
|
|
1,204,227
|
|
Capital expenditures (including
non-cash)
|
|
|
28,325
|
|
|
|
383
|
|
|
|
8,972
|
|
|
|
|
|
|
|
37,680
|
|
8
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Mesa/
|
|
|
Air Midwest/
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 (000s)
|
|
Freedom
|
|
|
go!
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
605,343
|
|
|
$
|
25,608
|
|
|
$
|
104,636
|
|
|
$
|
(99,906
|
)
|
|
$
|
635,681
|
|
Depreciation and amortization
|
|
|
15,374
|
|
|
|
57
|
|
|
|
2,576
|
|
|
|
|
|
|
|
18,007
|
|
Operating income (loss)
|
|
|
56,778
|
|
|
|
(2,504
|
)
|
|
|
16,123
|
|
|
|
(13,650
|
)
|
|
|
56,747
|
|
Interest expense
|
|
|
(12,680
|
)
|
|
|
|
|
|
|
(5,906
|
)
|
|
|
290
|
|
|
|
(18,296
|
)
|
Interest income
|
|
|
5,314
|
|
|
|
8
|
|
|
|
566
|
|
|
|
(290
|
)
|
|
|
5,598
|
|
Income (loss) before income tax
|
|
|
48,524
|
|
|
|
(3,105
|
)
|
|
|
(2,046
|
)
|
|
|
(13,650
|
)
|
|
|
29,723
|
|
Income tax (benefit)
|
|
|
18,682
|
|
|
|
(1,196
|
)
|
|
|
(788
|
)
|
|
|
(5,255
|
)
|
|
|
11,443
|
|
Total assets
|
|
|
1,343,416
|
|
|
|
7,425
|
|
|
|
413,218
|
|
|
|
(595,156
|
)
|
|
|
1,168,903
|
|
Capital expenditures (including
non-cash)
|
|
|
31,463
|
|
|
|
15
|
|
|
|
5,202
|
|
|
|
|
|
|
|
36,680
|
|
The Company has a cash management program which provides for the
investment of excess cash balances primarily in short-term money
market instruments, US Treasury securities, intermediate-term
debt instruments, and common equity securities of companies
operating in the airline industry.
SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, requires that all
applicable investments be classified as trading securities,
available for sale securities or
held-to-maturity
securities. The Company currently has $141.5 million in
marketable securities that include US Treasury notes, government
bonds and corporate bonds. These investments are classified as
trading securities during the periods presented and accordingly,
are carried at market value with changes in value reflected in
the current period operations. Unrealized losses relating to
trading securities held at March 31, 2007 and
September 30, 2006, were ($4.8) million and ($0.3) million,
respectively.
The Company has determined that investments in auction rate
securities (ARS) should be classified as short-term
investments. ARS generally have long-term maturities; however,
these investments have characteristics similar to short-term
investments because at predetermined intervals, generally every
28 days, there is a new auction process. As such, the
Company classifies ARS as short-term investments. The balance of
marketable securities at March 31, 2007 and
September 30, 2006 includes investments in ARS of $0 and
$17.4 million, respectively.
At March 31, 2007, the Company had $12.6 million in
restricted cash on deposit with two financial institutions. In
September 2004, the Company entered into an agreement with a
financial institution for a $9.0 million letter of credit
facility and to issue letters of credit for landing fees,
workers compensation insurance and other business needs.
Pursuant to the agreement and amounts held on deposit, the
Company had $11.5 million of outstanding letters of credit
at March 31, 2007. The Company also maintains
$5.0 million on deposit with another financial institution
to collateralize its direct deposit payroll obligations.
The Company has code-share agreements with Delta Air Lines, US
Airways and United Airlines. Approximately 98% of the
Companys consolidated passenger revenue for the three
month period ended March 31, 2007 was derived from these
agreements. Accounts receivable from the Companys
code-share partners were 42% and 45% of total gross accounts
receivable at March 31, 2007 and September 30, 2006,
respectively.
US Airways accounted for approximately 45% of the Companys
total passenger revenue in the three month period ended
March 31, 2007. A termination of the US Airways
revenue-guarantee code-share agreements would
9
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
have a material adverse effect on the Companys business
prospects, financial condition, results of operations and cash
flows.
United Airlines accounted for approximately 35% of the
Companys total passenger revenue in the three month period
ended March 31, 2007. A termination of the United agreement
would have a material adverse effect on the Companys
business prospects, financial condition, results of operations
and cash flows.
Delta Air Lines accounted for approximately 18% of the
Companys total passenger revenue in the three month period
ended March 31, 2007. A termination of the Delta agreement
would have a material adverse effect on the Companys
business prospects, financial condition, results of operations
and cash flows.
The Company is currently engaged in a dispute with US Airways
over fees payable pursuant to its Code Share and Revenue Sharing
Agreement (the Code Share Agreement). The
disagreement stems from payments due the Company from US Airways
with respect to reimbursable operating costs and expenses
relating to certain of the Companys CRJ-900 aircraft. The
disputed amount that has not been paid by US Airways is
$6.9 million. The balance due at March 31, 2007 is
$6.9 million and increases by $0.2 million per month
during the term of the Code Share Agreement that the dispute
remains unresolved. The Company believes that these reimbursable
costs and expenses are in accordance with the terms and
conditions of the Code Share Agreement and are immediately due
and payable. The Company is currently working to amicably
resolve this dispute in the near term prior to initiating
litigation. If an amicable resolution cannot be reached, the
Company is prepared to litigate its claim and believes it has a
reasonable probability of succeeding in any such proceedings,
although no assurances can be given in that regard.
In May 2005, the Company amended its code-sharing arrangement
with United to allow the Company to put up to an additional 30
50-seat regional jet aircraft into the United Express system.
The agreement with respect to the additional 30 50-seat regional
jet aircraft expires in April 2010. Additionally, the expiration
dates under the existing code-share agreement with respect to
certain aircraft were extended. In connection with the
amendment, the Company made three $10 million payments to
United in the first and second quarter of fiscal 2006. Amounts
paid were recorded as a deferred charge and included in other
assets on the balance sheet. The deferred charge was then being
amortized over the term of the code-share agreement as a
reduction of passenger revenue. The unamortized balance of these
deferred charges were written off in the second quarter of 2007.
See Note 14 regarding impairment.
Deferred credits consist of aircraft purchase incentives
provided by the aircraft manufacturers and deferred gains on the
sale and leaseback of interim financed aircraft. These
incentives include credits that may be used to purchase spare
parts, pay for training expenses or reduce other aircraft
operating costs. These deferred credits and gains are amortized
on a straight-line basis as a reduction of lease expense over
the term of the respective leases.
At September 30, 2006, the Company had $123.1 million
in notes payable to an aircraft manufacturer for five aircraft
on interim financing. During the second quarter of 2007, the
Company permanently financed these five aircraft as well as a
sixth aircraft delivered during the first quarter of 2007 with
$135.0 million in long-term debt. Under interim financing
arrangements, the Company takes delivery and title to the
aircraft prior to securing permanent financing and the
acquisition of the aircraft is accounted for as a purchase with
debt financing. Accordingly, the Company reflects the aircraft
and debt under interim financing on its balance sheet during the
interim financing period. After taking delivery of the aircraft,
it is the Companys intention to permanently finance the
aircraft as an operating lease through a sale and leaseback
transaction with an independent third-party lessor. Upon
permanent financing, the proceeds are used to retire the notes
payable to the manufacturer. Any gain
10
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recognized on the sale and leaseback transaction is deferred and
amortized over the life of the lease. The current interim
financing agreement with the manufacturer provides for the
Company to have a maximum of 15 aircraft on interim financing at
a given time.
|
|
9.
|
Notes Payable
and Long-Term Debt
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Notes payable to bank,
collateralized by the underlying aircraft, due 2019
|
|
$
|
319,614
|
|
|
$
|
329,478
|
|
Senior convertible notes due June
2023
|
|
|
37,834
|
|
|
|
37,834
|
|
Senior convertible notes due
February 2024
|
|
|
100,000
|
|
|
|
100,000
|
|
Notes payable to manufacturer,
principal and interest due monthly through 2011, interest at
LIBOR plus 1.8% (7.2% at March 31, 2007), collateralized by
the underlying aircraft
|
|
|
76,078
|
|
|
|
79,290
|
|
Note payable to financial
institution due 2013, principal and interest due monthly at 7%
per annum through 2008 converting to 12.5% thereafter,
collateralized by the underlying aircraft
|
|
|
22,120
|
|
|
|
22,831
|
|
Notes payable to financial
institution, principal and interest due monthly through 2022,
interest at LIBOR plus 2.25% (7.6% at March 31, 2007),
collateralized by the underlying aircraft
|
|
|
119,954
|
|
|
|
|
|
Notes payable to financial
institution, principal and interest due monthly through 2012,
interest at 8.3% per anum, collateralized by the underlying
aircraft
|
|
|
14,920
|
|
|
|
|
|
Note payable to manufacturer,
principal due semi-annually, interest at 7% due quarterly
through 2007
|
|
|
|
|
|
|
1,792
|
|
Mortgage note payable to bank,
principal and interest at 7
1/2%
due monthly through 2009
|
|
|
860
|
|
|
|
882
|
|
Other
|
|
|
125
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
691,505
|
|
|
|
572,228
|
|
Less current portion
|
|
|
(34,059
|
)
|
|
|
(29,659
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
657,446
|
|
|
$
|
542,569
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for earnings per share in accordance with
SFAS No. 128, Earnings per Share. Basic
net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the
periods presented. Diluted net income per share reflects the
potential dilution that could occur if outstanding stock options
and warrants were exercised. In addition, dilutive convertible
securities are
11
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
included in the denominator while interest on convertible debt,
net of tax, is added back to the numerator. A reconciliation of
the numerator and denominator used in computing net income
(loss) per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
Share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares basic
|
|
|
31,999
|
|
|
|
34,304
|
|
|
|
32,825
|
|
|
|
31,459
|
|
Effect of dilutive outstanding
stock options and warrants
|
|
|
|
|
|
|
1,258
|
|
|
|
|
|
|
|
1,430
|
|
Effect of restricted stock
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
Effect of dilutive outstanding
convertible debt
|
|
|
|
|
|
|
10,705
|
|
|
|
|
|
|
|
10,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares diluted
|
|
|
31,999
|
|
|
|
46,278
|
|
|
|
32,825
|
|
|
|
43,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(23,986
|
)
|
|
$
|
5,288
|
|
|
$
|
(15,973
|
)
|
|
$
|
18,280
|
|
Interest expense on convertible
debt, net of tax
|
|
|
|
|
|
|
1,018
|
|
|
|
|
|
|
|
2,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net (loss) income
|
|
$
|
(23,986
|
)
|
|
$
|
6,306
|
|
|
$
|
(15,973
|
)
|
|
$
|
20,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of converting the senior convertible notes into
10.7 million shares of common stock in the three and six
months ended March 31, 2007, respectively would have been
antidilutive to the per share calculation. Accordingly, those
convertible shares were excluded from the calculation of
dilution.
Options to purchase 1,137,064 and 642,480 shares of common
stock were outstanding during the three and six months ended
March 31, 2007. Options to purchase 1,980,581 and
1,852,277 shares of common stock were excluded from the
calculation of dilutive earnings per share for the three and six
month periods ended March 31, 2007 because the
options exercise prices were greater than the average
market price of the common shares and, therefore, the effect
would have been antidilutive. The remaining options outstanding
during the three and six month periods ended March 31, 2007
of 419,425 and 459,280, respectively, were excluded from the
calculation of dilutive earnings per share because the Company
incurred a net loss during those periods and the effect of
including those options would also have been antidilutive.
|
|
11.
|
Stock
Repurchase Program
|
The Companys Board of Directors has authorized the Company
to purchase up to 19.4 million shares of the Companys
outstanding common stock. As of March 31, 2007, the Company
has acquired and retired approximately 13.7 million shares
of its outstanding common stock at an aggregate cost of
approximately $91.5 million, leaving approximately
5.7 million shares available for purchase under the current
Board authorizations. Purchases are made at managements
discretion based on market conditions and the Companys
financial resources.
The Company repurchased the following shares for
$20.6 million during the three months ended March 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Shares That
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Shares Purchased as
|
|
|
May yet be
|
|
|
|
of Shares
|
|
|
Paid per
|
|
|
Part of Publicly
|
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Announced Plan
|
|
|
the Plan
|
|
|
Mar-07
|
|
|
2,692,174
|
|
|
$
|
7.64
|
|
|
|
13,652,939
|
|
|
|
5,769,322
|
|
Subsequent to the end of the second quarter of 2007 Mesa
announced that its Board of Directors has authorized Mesa to
repurchase up to an additional 10 million shares of its
outstanding common stock. The 10.0 million shares
12
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subject to the newly authorized repurchase program are in
addition to the 5.7 million shares remaining under the
prior repurchase programs.
|
|
12.
|
Beechcraft
1900D Cost Reductions
|
In February 2002, the Company entered into an agreement with
Raytheon Aircraft Company (the Raytheon Agreement)
to, among other things, reduce the operating costs of the
Companys Beechcraft 1900D fleet. In connection with the
Raytheon Agreement and subject to the terms and conditions
contained therein, Raytheon agreed to provide up to
$5.5 million in annual operating subsidy payments to the
Company contingent upon the Company remaining current on its
payment obligations to Raytheon. The amount was subsequently
reduced to $5.3 million as a result of a reduction in the
Companys fleet of B1900D aircraft. Approximately
$1.3 million was recorded as a reduction to expense during
each of the three months ended March 31, 2007 and 2006. In
return, the Company granted Raytheon a warrant to purchase up to
233,068 shares of the Companys common stock at a per
share exercise price of $10. The Company recorded the issuance
of the warrant at a value of $0.4 million within
stockholders equity as a debit and credit to common stock.
The contra equity value of the warrant was amortized to expense
over the vesting period of three years. Raytheon must pay a
purchase price of $1.50 per common share underlying the warrant.
The warrant was exercisable at any time over a three-year period
following its date of purchase. Raytheon is completely vested in
the 233,068 shares of common stock underlying the warrant.
|
|
13.
|
Bankruptcy
Settlement
|
In the first half of fiscal 2007, the Company received
approximately 41,000 shares of US Airways common stock from
its bankruptcy claim against US Airways, Inc. prior to its
merger with America West (Pre-Merger US Airways).
The Company sold the stock and realized proceeds of
$2.1 million. In connection with an amendment to and
assumption of our existing Delta Connection Agreement, we
received a general unsecured claim of $35.0 million as part
of Deltas bankruptcy proceeding. The receipt of this
$35.0 million general unsecured claim is not included in
the consolidated financial statements for the quarter ended
March 31, 2007, but will be reflected in income in the
future at its fair market value.
|
|
14.
|
Impairment
of Long-Lived Assets
|
In accordance with FAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, the Company continually
considers events or changes in circumstances that indicate the
carrying amount of a long-term asset may not be recoverable.
During the second quarter of 2007 the Company evaluated two such
cases. In each instance the gross undiscounted cash flows
related to a long-term asset was computed and found to be less
than the carrying value of the long-lived asset. The fair market
value of the two assets was then determined and an impairment
charge, equal to the excess of the carrying value over fair
value, was recorded totaling $37.7 million.
The first impairment charge, totaling $31.7 million,
related to the unamortized balance of a $30.0 million
nonrefundable cash incentive (Incentive) paid to
United in the first and second quarter of fiscal 2006, upon
amending our code share agreement with United (the
Amendment). The Amendment primarily allowed us to
place 30 additional aircraft with United, bringing the total
aircraft in the United code share to 70, and to extend the
expiration dates under the existing code share agreement with
respect to certain of the other aircraft. The Incentive was
included in other assets and was being amortized as a reduction
to revenue over the term of the amended code share agreement.
Beginning with the second quarter of fiscal 2006 we began
experiencing declining margins related to this code share and
management initiated an operational analysis in the fourth
quarter of fiscal 2006, which was completed in the second
quarter of fiscal 2007. During the second quarter of fiscal 2007
the margins deteriorated further, resulting in management
concluding that the Company will incur operating losses over the
remaining term of the amended code share agreement. The analysis
determined that these losses were due primarily to increases in
(1) maintenance costs from certain contractual increases in
maintenance support agreements that went into effect in the
second quarter of fiscal 2007; (2) lower total completion
factors primarily attributable to the locations from
13
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which we operate the additional 30 aircraft added in the amended
code share agreement, resulting in higher operational costs and
higher labor costs resulting from employee turnover and;
(3) other underlying costs increasing at greater rates than
we had originally anticipated when we entered into the amended
code share agreement. In order to determine whether or not this
asset was impaired, we estimated the future gross undiscounted
cash flows related to this code share agreement and found them
to be less than the assets unamortized balance. The fair
value of the asset was determined to be zero. Accordingly, an
impairment charge was taken for $25.3 million. We expect
the negative cash flows experienced in the second quarter of
fiscal 2007 from this code share agreement to continue at this
level and could worsen in the future. The largest single item
affecting the cash flows from this code share agreement are the
30 incremental 50-seat regional jets the Company added in early
fiscal 2006. In addition, leasehold improvements related to
certain aircraft under the United code share agreement were
evaluated for recoverability and were determined to be impaired
and accordingly an impairment charge was taken for
$6.4 million. Management is evaluating various alternatives
to address the situation, however there can be no assurance that
we will be successful in our efforts.
The second impairment charge, totaling $6.0 million related
to the unamortized balance of leasehold improvements for 12 Dash
8-100 aircraft operating under one of our Delta code share
agreements. During the second quarter of fiscal 2007, Delta
exercised its right to reduce the number of aircraft in the code
share agreement by notifying us of its intention to remove all
12 aircraft from service by September 2007. In order to
determine whether or not this asset was impaired, we estimated
the future gross undiscounted cash flows related to these
aircraft and found them to be less than the leasehold
improvements unamortized balance. Accordingly, an
impairment charge of $6.0 million was taken. We expect the
negative cash flows experienced during the second quarter of
fiscal 2007 from this code share agreement to continue into the
third and fourth quarter of fiscal 2007 when the aircraft are
removed from service with Delta. At this time, unless
alternative uses can be found for the aircraft, the Company
anticipates that it will continue to incur the respective
aircrafts lease costs until the aircraft are scheduled to
be returned to their respective lessors in the first and second
quarters of fiscal 2008. In addition to the negative operational
cash flows we expect to incur additional costs for early
termination with the respective lessors. These costs will be
recognized when the aircraft are no longer in service.
Management is evaluating various alternative uses for the
aircraft, including additional flying or subleasing the aircraft
to other lessors, however there can be no assurance that we will
be successful in our efforts.
|
|
15.
|
Equity
Method Investment
|
In fiscal 2006, the Company participated with a private equity
fund in making an investment in the common stock and notes of a
closely held airline related business (the
Investee). The Company, through its subsidiary
Nilchii, invested $15 million, which represents
approximately 20% and 12% of the Investees common stock
and notes, respectively.
The Company accounts for its investment using the equity method
of accounting. Under the equity method, the Company adjusts the
carrying amount of its investment for its share of the earnings
or losses of the Investee subsequent to the date of investment
and reports the recognized earnings or losses in income. The
Companys share of the Investees losses subsequent to
the date of investment has exceeded the carrying value of the
common stock investment, which has been reduced to zero. In
accordance with EITF Issue
No. 99-10,
Percentage Used to Determine the Amount of Equity Method
Losses, the Company recognized equity method losses based
on the ownership level of the Investee common stock held by the
Company until the carrying value of its investment in the common
stock was reduced to zero, then by the ownership level of the
Investee notes held by the Company. During the second quarter of
fiscal 2007, the Company recorded equity method losses from this
investment of $3.6 million.
The Investee notes held by the Company bear interest at 17%. At
March 31, 2007, the Company has a receivable for and has
recorded interest income related to these notes in the amount of
$1.8 million.
14
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the second quarter of fiscal 2007 we placed
$1.3 million on deposit pursuant to a subscription
agreement in a limited partnership. Upon closing, the Company
will account for this investment using the equity method of
accounting.
|
|
16.
|
Stock-Based
Compensation
|
Stock based compensation expense is calculated by estimating the
fair value of stock options at the time of grant and amortized
over the stock options vesting period.
The following amounts were recognized for stock-based
compensation (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
General and administrative
expenses:
|
|
|
|
|
|
|
|
|
Stock options expense
|
|
$
|
310
|
|
|
$
|
662
|
|
Restricted stock expense
|
|
|
358
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
668
|
|
|
$
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
|
Commitments
and Contingencies
|
As of March 31, 2007, the Company had firm orders with
Bombardier Aerospace, Inc. for two CRJ-700 aircraft and two
CRJ-900 which can be converted to CRJ-700s. In conjunction with
this purchase agreement, Mesa had $16.0 million on deposit
with Bombardier Regional Aircraft Division that was included in
lease and equipment deposits at September 30, 2006. The
remaining deposits are expected to be returned upon completion
of permanent financing on each of the last four aircraft.
The Company accrues for potential income tax contingencies when
it is probable that a liability has been incurred and the amount
of the contingency can be reasonably estimated. The
Companys accrual for income tax contingencies is adjusted
for changes in circumstances and additional uncertainties, such
as amendments to existing tax law, both legislated and concluded
through the various jurisdictions tax court systems. At
March 31, 2007, the Company had an accrual for income tax
contingencies of approximately $2.9 million. If the amounts
ultimately settled are greater than the accrued contingencies,
the Company would record additional income tax expense in the
period in which the assessment is determined. To the extent
amounts are ultimately settled for less than the accrued
contingencies, or the Company determines that a liability is no
longer probable, the liability is reversed as a reduction of
income tax expense in the period the determination is made.
The Company also has long-term contracts for the performance of
engine maintenance and rotable spare parts. A description of
each of these contracts is as follows:
During the second quarter of fiscal 2007, the Company entered
into a memorandum of understanding (MOU) with
Deltas Technical Operations division (DTO) for
its previously uncovered General Electric Aircraft Engines
(GE) engines. The MOU requires a monthly payment
based upon the prior months flight hours incurred by the
covered engines. The hourly rate increases over time based upon
the engine overhaul costs that are expected to be incurred in
that year and is subject to escalation based on changes in
certain price indices. Maintenance expense is recognized based
upon the product of flight hours flown and the rate in effect
for the period.
In January 1997, the Company entered into a
10-year
engine maintenance contract with GE for certain of its CRJ-200
aircraft engines. The agreement was subsequently amended in the
first quarter of fiscal 2003. The amended contract requires a
monthly payment based upon the prior months flight hours
incurred by the covered engines. The hourly rate increases over
time based upon the engine overhaul costs that are expected to
be incurred in that year and is subject to escalation based on
changes in certain price indices. Maintenance expense is
recognized
15
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based upon the product of flight hours flown and the rate in
effect for the period. The contract also provides for a fixed
number of engine overhauls per year. To the extent that the
number of actual overhauls is less than the fixed number, GE is
required to issue to Mesa a credit for the number of events less
than the fixed number multiplied by an agreed upon price. To the
extent that the number of actual overhauls is greater than the
fixed number, Mesa is required to pay GE for the number of
events greater than the fixed number multiplied by the same
agreed upon price. Any adjustment payments or credits are
recognized in the period they occur.
In April 1997, the Company entered into a
10-year
engine maintenance contract with Pratt & Whitney
Canada Corp. (PWC) for its Dash-8 aircraft. The
contract requires Mesa to pay PWC for the engine overhaul upon
completion of the maintenance based upon a fixed dollar amount
per flight hour. The rate under the contract is subject to
escalation based on changes in certain price indices.
In April 2000, the Company entered into a
10-year
engine maintenance contract with Rolls-Royce Allison
(Rolls-Royce) for its ERJ aircraft. The contract
requires Mesa to pay Rolls-Royce for the engine overhaul upon
completion of the maintenance based upon a fixed dollar amount
per flight hour. The rate per flight hour is based upon certain
operational assumptions and may vary if the engines are operated
differently than these assumptions. The rate is also subject to
escalation based on changes in certain price indices. The
agreement with Rolls-Royce also contains a termination clause
and look back provision to provide for any shortfall between the
cost of maintenance incurred by the provider and the amount paid
up to the termination date by the Company and includes a 15%
penalty on such amount. The Company does not anticipate an early
termination under the contract.
In May 2002, the Company entered into a six-year fleet
management program with PWC to provide maintenance for the
Companys Beechcraft 1900D turboprop engines. The contract
requires a monthly payment based upon flight hours incurred by
the covered aircraft. The hourly rate is subject to annual
adjustment based on changes in certain price indices and is
guaranteed to increase by no less than 1.5% per year. Pursuant
to the agreement, the Company sold certain assets of its Desert
Turbine Services unit, as well as all spare PT6 engines to PWC
for $6.8 million, which approximated the net book value of
the assets. Pursuant to the agreement, the Company provided a
working capital loan to PWC for the same amount, which is to be
repaid through a reduced hourly rate being charged for
maintenance. The agreement covers all of the Companys
Beechcraft 1900D turboprop aircraft and engines. The agreement
also contains a termination clause and look back provision to
provide for any shortfall between the cost of maintenance
incurred by the provider and the amount paid up to the
termination date by the Company and provides for return of a
pro-rated share of the prepaid amount upon early termination.
The Company does not anticipate an early termination under the
contract.
In August 2005, the Company entered into a ten-year agreement
with AAR Corp. (the AAR Agreement) for the
management and repair of certain of the Companys CRJ-200,
-700, -900 and ERJ-145 aircraft rotable spare parts inventory.
Under the agreement, the Company sold certain existing spare
parts inventory to AAR for $39.6 million in cash and
$21.5 million in notes receivable (discounted to
$18.8 million) to be paid over four years. The AAR
agreement was contingent upon the Company terminating an
agreement for the Companys CRJ-200 aircraft rotable spare
parts inventory with GE Commercial Aviation Services
(GECAS) and including these rotables in the
arrangement. The Company terminated the GECAS agreement and
finalized the AAR agreement in November 2005. Upon entering into
the agreement, the Company received $22.8 million
($23.8 million less $1 million deposit that was
retained by AAR), which was recorded as a deposit at
September 30, 2005, pending the termination of the GECAS
agreement. An additional $15.8 million was received in the
quarter ended December 31, 2005. Under the agreement, the
Company is required to pay AAR a monthly fee based upon flight
hours for access to and maintenance and servicing of the
inventory. The agreement also contains certain minimum monthly
payments that Mesa must make to AAR. Based on this arrangement,
the Company accounts for the transaction as a service agreement
and an operating lease of rotable spare parts with AAR. The sale
of the rotable spare parts resulted in a gain of
$2.1 million, which has been deferred and is being
recognized over the term of the agreement. At termination, the
Company may elect to purchase the covered inventory at fair
value, but is not contractually obligated to do so.
16
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2006, the Company entered into a separate two-year
agreement with AAR for the management and repair of the
Companys CRJ-200 aircraft rotable spare parts inventory
associated with its go! operations. Under this
agreement, the Company transferred certain existing spare parts
inventory to AAR for $1.2 million in cash. AAR was required
to purchase an additional $2.9 million in rotable spare
parts to support the agreement. Under the agreement, the Company
is required to pay AAR a monthly fee based upon flight hours for
access to and maintenance of the inventory. At termination, the
Company has guaranteed the fair value of the underlying
rotables. Based on this arrangement, the Company accounts for
the transaction as a financing arrangement, thus recording both
the rotable spare parts inventory as an asset and the related
payable to AAR as a liability.
During the second quarter of fiscal 2007, the Company amended a
five-year heavy equipment maintenance agreement with a vendor.
The agreement provides a rebate based upon annual volumes up to
$10.0 million over the next five years. The agreement also
includes penalties in the event our annual volumes fall below
certain levels. The maximum penalty possible would be
$19.0 million if our annual volumes were zero for all five
years. Rebates of approximately $1.0 million have been
included in the current quarter.
In February 2006, Hawaiian Airlines, Inc. (Hawaiian)
filed a complaint against the Company in the United States
Bankruptcy Court for the District of Hawaii (the
Bankruptcy Court) alleging that the Company breached
the terms of a Confidentiality Agreement entered into in April
2004 with the Trustee in Hawaiians bankruptcy proceedings.
Hawaiians complaint alleges, among other things, that the
Company breached the Confidentiality Agreement by (a) using
the evaluation material to obtain a competitive advantage over
Hawaiian, through the development and implementation of a
business plan to compete with Hawaiian in the inter-island
market, and (b) failing to return or destroy any evaluation
materials after being notified by Hawaiian on or about
May 12, 2004 that the Company had not been selected as a
potential investor for a transaction with Hawaiian. Hawaiian, in
its complaint, seeks unspecified damages, requests that the
Company turn over to Hawaiian any evaluation material in the
Companys possession, custody or control (the
Turnover Claim), and an injunction preventing the
Company from providing inter-island transportation services in
the State of Hawaii for a period of two years from the date of
such injunctive relief.
The Company vigorously denies Hawaiians allegations and
requests for relief contained in its complaint. The Company
filed both an answer and an antitrust counterclaim against
Hawaiian in response to its complaint. In May 2006, the Company
filed a motion to dismiss the Turnover Claim contained in
Hawaiians complaint, but the Bankruptcy Court denied that
motion. On December 8, 2006 the Bankruptcy Court, based on
constitutional access to the courts, also granted
Hawaiians motion for summary judgment against the Company
on its antitrust counterclaim. The Company does not believe that
either of these decisions has a material impact on the
Companys position in the lawsuit. Finally, in October
2006, the Bankruptcy Court denied Hawaiians effort to
enjoin the Companys go! operation from
selling tickets claiming that go!s entry
into the inter-island air transport business was based on trade
secrets furnished to Mesa during the Hawaiian bankruptcy. The
Court found no such misuse of confidential information and
rejected Hawaiians motion for a preliminary injunction.
In June 2006, Hawaiian requested a preliminary injunction to
prevent the Company from issuing new airline tickets for the
Hawaiian inter-island market for a period of one year. In this
request, Hawaiian alleges that initial discovery conducted
reveals that the Company breached the Confidentiality Agreement.
The Court has recently denied Hawaiians request for a
preliminary injunction. The case will be tried in September 2007.
On October 13, 2006, Aloha Airlines filed suit against Mesa
Air Group and two of its Hawaii based employees (individual
defendants subsequently dismissed without prejudice). The
complaint was filed in State Court in Hawaii and contains 11
counts and seeks damages and injunctive relief. The Company
believes the purpose of the complaint is to blunt Mesas
entry into the Hawaii inter-island market segment. Aloha alleges
that Mesas inter-island air fares are below cost and that
Mesa is, therefore, violating specific provisions of Hawaii
antitrust and unfair competition law. Aloha also alleges breach
of contract and fraud by Mesa in connection with two
confidentiality agreements, one in 2005 and the other in 2006.
17
MESA AIR
GROUP, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 1992, The Supreme Court of the United States decided
Morales v. TWA, in which it construed the Airline
Deregulation Act as prohibiting any state court, under any state
law legal theory, from adjudicating issues which implicated an
air carriers pricing (or other service) practices.
Accordingly, an airlines pricing decisions can be attacked
only under federal laws. In response to the complaint, Mesa
filed a motion on December 8, 2006 seeking dismissal of all
claims based upon Hawaii Statutory Law that rest on Mesas
alleged below-cost pricing. Following the filing of Mesas
Motion to Dismiss, Aloha, on January 10, 2007, voluntarily
chose to dismiss the action filed in State Court, and
simultaneously filed a new complaint in the United States
District Court for the District of Hawaii (filed on
January 9, 2007). Alohas federal complaint abandoned
claims regarding below-cost pricing under Hawaiis
Statutory Law and instead asserted claims under contract and
federal antitrust law. On March 19, 2007, the US District
Court denied Mesas motion to dismiss the contract claims
under the authority of Morales and its progeny. Mesa has asked
the District Court to certify that ruling for immediate
appellate review.
Mesa denies any improper use of the data furnished by Aloha
while Mesa was considering a bid for Aloha during its
bankruptcy. The case is in its early stages and has been set for
trial in April 2008.
The Company is also involved in various legal proceedings and
FAA civil action proceedings that the Company does not believe
will have a material adverse effect upon its business, financial
condition or results of operations, although no assurance can be
given to the ultimate outcome of any such proceedings.
18
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The following discussion and analysis provides information which
management believes is relevant to an assessment and
understanding of the Companys results of operations and
financial condition. The discussion should be read in
conjunction with the Consolidated Financial Statements and the
related notes thereto, and the Selected Financial Data and
Operating Data contained elsewhere herein.
Forward-Looking
Statements
This Quarterly Report on
Form 10-Q
contains certain statements including, but not limited to,
information regarding the replacement, deployment, and
acquisition of certain numbers and types of aircraft, and
projected expenses associated therewith; costs of compliance
with Federal Aviation Administration regulations and other rules
and acts of Congress; the passing of taxes, fuel costs,
inflation, and various expenses to the consumer; the relocation
of certain operations of Mesa; the resolution of litigation in a
favorable manner and certain projected financial obligations.
These statements, in addition to statements made in conjunction
with the words expect, anticipate,
intend, plan, believe,
seek, estimate, and similar expressions,
are forward-looking statements within the meaning of the Safe
Harbor provision of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements relate to
future events or the future financial performance of Mesa and
only reflect managements expectations and estimates. The
following is a list of factors, among others, that could cause
actual results to differ materially from the forward-looking
statements: changing business conditions in certain market
segments and industries; changes in Mesas code-sharing
relationships; the inability of Delta Air Lines, US Airways or
United Airlines to pay their obligations under the code-share
agreements; an increase in competition along the routes Mesa
operates or plans to operate; material delays in completion by
the manufacturer of the ordered and
yet-to-be
delivered aircraft; availability and cost of funds for financing
new aircraft; changes in general economic conditions; changes in
fuel price; changes in regional economic conditions; Mesas
relationship with employees and the terms of future collective
bargaining agreements; the impact of current and future laws;
additional terrorist attacks; Congressional investigations, and
governmental regulations affecting the airline industry and
Mesas operations; bureaucratic delays; amendments to
existing legislation; consumers unwilling to incur greater costs
for flights; our ability to operate our new Hawaiian airline
service profitably; unfavorable resolution of legal proceedings
involving Hawaiian Airlines and Aloha Airlines regarding our
Hawaiian operation; unfavorable resolution of negotiations with
municipalities for the leasing of facilities; and risks
associated with the outcome of litigation. One or more of these
or other factors may cause Mesas actual results to differ
materially from any forward-looking statement. Mesa is not
undertaking any obligation to update any forward-looking
statements contained in this
Form 10-Q.
All references to we, our,
us, or Mesa refer to Mesa Air Group,
Inc. and its predecessors, direct and indirect subsidiaries and
affiliates.
GENERAL
The following discussion and analysis provides information which
management believes is relevant to an assessment and
understanding of the Companys results of operations and
financial condition. The discussion should be read in
conjunction with the Condensed Consolidated Financial Statements
and the related notes thereto, contained elsewhere in this
Form 10-Q.
Executive
Overview and Summary Financial Results
The second quarter of fiscal year 2007 was a difficult quarter
for us resulting in a loss of $24.0 million or $0.54 per
diluted share compared with net income of $5.3 million and
$0.14 per diluted share in the second quarter of fiscal 2006.
Total gross revenue increased $24.4 million or 7.8% to
$336.4 million on 3.8% more capacity over the same period
in the preceding year. Due to certain impairment charges
reflected against revenue discussed below, our
19
net revenues were $311.1 million for the second fiscal
quarter representing a decrease of $1.0 million or 0.3%
below that of the preceding year. Our fleet has grown from 180
as of March 31, 2006, to 201 as of March 31, 2007. The
results for the second quarter of fiscal 2007 reflected a number
of significant non-cash charges totaling $45.7 million
comprised of impairment charges ($37.7 million), unrealized
losses on investment securities ($4.5 million), and equity
method losses ($3.6 million). These amounts were partially
offset by $12.2 million debt conversion costs taken in the
second quarter of fiscal 2006. The impairment charges are
discussed below.
Excluding the impairment charges associated with certain assets
related to the Delta and United code share agreements,
operational challenges associated with the effects of inclement
weather and air traffic control in our United Express operations
resulted in a total completion factor well below that of our
other operations, adversely affecting operating income as
revenue was reduced and many of our expenses were not fully
reimbursed. These operational challenges had the greatest effect
on Mesas 50-seat United Express operations.
Our maintenance expenses increased during the quarter on a year
over year and sequential basis due primarily to a new
power-by-the-hour
engine memorandum of understanding covering all of our
previously uncovered General Electric engines, contractual
increases in our existing
power-by-the-hour
engine agreement with General Electric, and increased volume due
to higher than anticipated usage in our United Express
operations as well as contractual increases in our auxiliary
power unit (APU) overhauls.
During the current quarter, United assumed responsibility for a
portion of our United Express fuel purchases. As a result going
forward, our revenues, as well as our fuel expenses related
thereto, will be reduced by approximately 4.3 million
gallons of fuel per quarter. Due to the pass-through feature of
our contracts, this will not impact our income from operations.
In accordance with FAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, the Company continually
considers events or changes in circumstances that indicate the
carrying amount of a long-term asset may not be recoverable.
During the second quarter of 2007 the Company evaluated two such
cases. In each instance the gross undiscounted cash flows
related to a long-term asset was computed and found to be less
than the carrying value of the long-lived asset. The fair market
value of the two assets was then determined and an impairment
charge, equal to the excess of the carrying value over fair
value, was recorded totaling $37.7 million.
The first impairment charge, totaling $31.7 million,
related to the unamortized balance of a $30.0 million
nonrefundable cash incentive (Incentive) paid to
United in the first and second quarter of fiscal 2006 upon
amending our code share agreement with United (the
Amendment). The Amendment primarily allowed us to
place 30 additional aircraft with United, bringing the total
aircraft in the United code share to 70, and to extend the
expiration dates under the existing code share agreement with
respect to certain of the other aircraft. The Incentive was
included in other assets and was being amortized as a reduction
to revenue over the term of the amended code share agreement.
Beginning with the second quarter of fiscal 2006 we began
experiencing declining margins related to this code share and
management initiated an operational analysis in the fourth
quarter of fiscal 2006, which was completed in the second
quarter of fiscal 2007. During the second quarter of fiscal 2007
the margins deteriorated further, resulting in management
concluding that the Company will incur operating losses over the
remaining term of the amended code share agreement. The analysis
determined that these losses were due primarily to increases in
(1) maintenance costs from certain contractual increases in
maintenance support agreements that went into effect in the
second quarter of fiscal 2007; (2) lower total completion
factors primarily attributable to the locations from which we
operate the additional 30 aircraft added in the amended code
share agreement, resulting in higher operational costs and
higher labor costs resulting from employee turnover and;
(3) other underlying costs increasing at greater rates than
we had originally anticipated when we entered into the amended
code share agreement. In order to determine whether or not this
asset was impaired, we estimated the future gross undiscounted
cash flows related to this code share agreement and found them
to be less than the assets unamortized balance of
$25.3 million. The fair value of the asset was determined
to be zero. Accordingly, an impairment charge was taken for
$25.3 million. We expect the negative cash flows
experienced in the second quarter of fiscal 2007 from this code
share agreement to continue at this level and could worsen in
the future. The largest single item affecting the cash flows
from this code share agreement are the 30 incremental 50-seat
regional jets the Company added in early fiscal 2006. In
addition, leasehold improvements related to certain aircraft
under the United code share agreement were evaluated for
recoverability and were determined to be impaired and
accordingly an impairment charge was taken for
20
$6.4 million. Management is evaluating various alternatives
to address the situation, however there can be no assurance that
we will be successful in our efforts.
The second impairment charge, totaling $6.0 million related
to the unamortized balance of leasehold improvements for 12 Dash
8-100 aircraft operating under one of our Delta code share
agreement. During the second quarter of fiscal 2007, Delta
exercised its right to reduce the number of aircraft in the code
share agreement by notifying us of its intention to remove all
12 aircraft from service by September 2007. In order to
determine whether or not this asset was impaired, we estimated
the future gross undiscounted cash flows related to these
aircraft and found them to be less than the leasehold
improvements unamortized balance of $6.0 million.
Based on the nature of these leasehold improvements the fair
value of the leasehold improvements was determined to be zero.
Accordingly, an impairment charge was taken for
6.0 million. We expect the negative cash flows experienced
during the second quarter of fiscal 2007 from this code share
agreement to continue into the third and fourth quarter of
fiscal 2007 when the aircraft are removed from service with
Delta. At this time, unless alternative uses can be found for
the aircraft, the Company anticipates that it will continue to
incur the respective aircrafts lease costs until the
aircraft are scheduled to be returned to their respective
lessors in the first and second quarters of fiscal 2008. In
addition to the negative operational cash flows we expect to
incur additional costs for early termination with the respective
lessors. These costs will be recognized when the aircraft are no
longer in service. Management is evaluating various alternative
uses for the aircraft, including additional flying or subleasing
the aircraft to other lessors, however there can be no assurance
that we will be successful in our efforts.
Our gross operating revenues were $684.0 million for the
six months ended March 31, 2007, an increase of
$48.4 million or 7.6% over the same period in the preceding
year. Due to certain impairment charges reflected against
revenue discussed above, our net revenues were
$658.7 million for the six months ended March 31, 2007
representing an increase of $23.0 million or 3.6% above
that of the preceding year. The net loss for the first six
months of fiscal 2007 was $16.0 million or $0.49 per
diluted share compared with net income of $18.3 million and
$0.48 per diluted share in the first six months of fiscal 2006.
The year over year variances for the first six months of 2007
versus 2006 are largely explained above, except for a
$2.1 million decrease in operating costs resulting from a
bankruptcy settlement in the first half of fiscal 2007.
The new CRJ-900s are expected to begin service in November 2007.
We began removing the twelve Dash-8 aircraft in April 2007 and
expect to have all twelve Dash-8s removed from service by
August 2007.
Our joint venture agreement with Shenzhen Airlines to operate
regional jets throughout China is progressing, with plans to
send the initial aircraft by the end of summer.
Code-Share
Agreements
The Company has reached an agreement with Delta Air Lines
(Delta) under its Delta Connection Agreements
(DCA) to remove twelve Dash-8 aircraft operated
under the DCA by Mesas subsidiary Freedom Airlines.
Mesas recently announced expanded code share agreement
with Delta to operate 14 CRJ-900 regional jet aircraft
(Expansion DCA) will remain in place. After service
begins pursuant to the Expansion DCA and the amended DCA, the
Mesa regional jet fleet flying for Delta will consist of 14
CRJ-900s and 36 ERJ-145s.
21
Fleet
Aircraft in operation at March 31, 2007:
|
|
|
|
|
Type of Aircraft
|
|
|
|
|
CRJ-200/100 Regional Jet
|
|
|
61
|
|
CRJ-700 Regional Jet
|
|
|
18
|
|
CRJ-900 Regional Jet
|
|
|
38
|
|
Embraer 145 Regional Jet
|
|
|
36
|
|
Beechcraft 1900D
|
|
|
20
|
|
Dash-8
|
|
|
28
|
|
|
|
|
|
|
Total
|
|
|
201
|
|
|
|
|
|
|
Approximately 98% of our consolidated passenger revenues for the
quarter ended March 31, 2007 were derived from operations
associated with code-share agreements. Our subsidiaries have
code-share agreements with US Airways, Delta Air Lines, Midwest
Airlines and United Airlines. The remaining passenger revenues
are derived from our independent operations, go! and Mesa
Airlines.
The following tables set forth quarterly comparisons for the
periods indicated below:
OPERATING
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
31-Mar-07
|
|
|
31-Mar-06
|
|
|
31-Mar-07
|
|
|
31-Mar-06
|
|
|
Passengers
|
|
|
3,970,948
|
|
|
|
3,441,501
|
|
|
|
7,952,239
|
|
|
|
6,930,917
|
|
Available seat miles (000s)
|
|
|
2,267,858
|
|
|
|
2,185,602
|
|
|
|
4,618,546
|
|
|
|
4,493,686
|
|
Revenue passenger miles
(000s)
|
|
|
1,675,132
|
|
|
|
1,599,381
|
|
|
|
3,387,796
|
|
|
|
3,254,882
|
|
Load factor
|
|
|
73.90
|
%
|
|
|
73.20
|
%
|
|
|
73.40
|
%
|
|
|
72.40
|
%
|
Yield per revenue passenger mile
(cents)
|
|
|
20.2
|
|
|
|
19.5
|
|
|
|
20.3
|
|
|
|
19.5
|
|
Revenue per available seat mile
(cents)
|
|
|
14.9
|
|
|
|
14.3
|
|
|
|
14.9
|
|
|
|
14.1
|
|
Operating cost per available seat
mile (cents)
|
|
|
14.3
|
|
|
|
13
|
|
|
|
14.2
|
|
|
|
12.9
|
|
Operating cost per available seat
mile, excluding fuel (cents)
|
|
|
9.7
|
|
|
|
8.3
|
|
|
|
9.3
|
|
|
|
8.3
|
|
Average stage length (miles)
|
|
|
361
|
|
|
|
403
|
|
|
|
365
|
|
|
|
405
|
|
Number of operating aircraft in
fleet
|
|
|
199
|
|
|
|
180
|
|
|
|
199
|
|
|
|
180
|
|
Gallons of fuel consumed
|
|
|
53,011,214
|
|
|
|
50,359,903
|
|
|
|
109,817,761
|
|
|
|
101,713,317
|
|
Block hours flown
|
|
|
156,457
|
|
|
|
135,408
|
|
|
|
313,797
|
|
|
|
277,599
|
|
Departures
|
|
|
109,991
|
|
|
|
91,533
|
|
|
|
219,794
|
|
|
|
186,964
|
|
22
CONSOLIDATED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
31-Mar-07
|
|
|
31-Mar-06
|
|
|
31-Mar-07
|
|
|
31-Mar-06
|
|
|
|
Costs per
|
|
|
% of Total
|
|
|
Costs per
|
|
|
% of Total
|
|
|
Costs per
|
|
|
% of Total
|
|
|
Costs per
|
|
|
% of Total
|
|
|
|
ASM (cents)
|
|
|
Revenues
|
|
|
ASM (cents)
|
|
|
Revenues
|
|
|
ASM (cents)
|
|
|
Revenues
|
|
|
ASM (cents)
|
|
|
Revenues
|
|
|
Flight operations
|
|
|
4.2
|
|
|
|
31.00
|
%
|
|
|
4.2
|
|
|
|
29.10
|
%
|
|
|
4.2
|
|
|
|
29.12
|
%
|
|
|
4.0
|
|
|
|
28.40
|
%
|
Fuel
|
|
|
4.6
|
|
|
|
34.00
|
%
|
|
|
4.7
|
|
|
|
33.10
|
%
|
|
|
4.8
|
|
|
|
33.84
|
%
|
|
|
4.6
|
|
|
|
32.70
|
%
|
Maintenance
|
|
|
3.2
|
|
|
|
23.00
|
%
|
|
|
2.2
|
|
|
|
15.30
|
%
|
|
|
2.9
|
|
|
|
20.66
|
%
|
|
|
2.3
|
|
|
|
16.20
|
%
|
Aircraft and traffic servicing
|
|
|
1.1
|
|
|
|
8.00
|
%
|
|
|
0.8
|
|
|
|
5.90
|
%
|
|
|
1.0
|
|
|
|
6.88
|
%
|
|
|
0.8
|
|
|
|
5.40
|
%
|
Promotion and sales
|
|
|
0.1
|
|
|
|
1.00
|
%
|
|
|
|
|
|
|
0.30
|
%
|
|
|
0.1
|
|
|
|
0.51
|
%
|
|
|
|
|
|
|
0.30
|
%
|
General and administrative
|
|
|
0.7
|
|
|
|
5.00
|
%
|
|
|
0.7
|
|
|
|
4.70
|
%
|
|
|
0.7
|
|
|
|
5.11
|
%
|
|
|
0.7
|
|
|
|
5.20
|
%
|
Depreciation and amortization
|
|
|
0.5
|
|
|
|
3.00
|
%
|
|
|
0.4
|
|
|
|
2.80
|
%
|
|
|
0.5
|
|
|
|
3.18
|
%
|
|
|
0.4
|
|
|
|
2.80
|
%
|
Bankruptcy settlement
|
|
|
(0.1
|
)
|
|
|
0.00
|
%
|
|
|
|
|
|
|
(0.20
|
)%
|
|
|
|
|
|
|
(3.2
|
)%
|
|
|
|
|
|
|
0.00
|
%
|
Impairment and restructuring
charges (credits)
|
|
|
0.5
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
0.00
|
%
|
|
|
0.3
|
|
|
|
1.88
|
%
|
|
|
|
|
|
|
0.00
|
%
|
Total operating expenses
|
|
|
14.8
|
|
|
|
108.00
|
%
|
|
|
13.0
|
|
|
|
91.00
|
%
|
|
|
14.4
|
|
|
|
100.36
|
%
|
|
|
12.9
|
|
|
|
91.10
|
%
|
Interest expense
|
|
|
(0.4
|
)
|
|
|
(3.00
|
)%
|
|
|
0.4
|
|
|
|
2.80
|
%
|
|
|
(0.4
|
)
|
|
|
(3.06
|
)%
|
|
|
0.4
|
|
|
|
2.90
|
%
|
Interest income
|
|
|
0.2
|
|
|
|
1.00
|
%
|
|
|
0.1
|
|
|
|
1.00
|
%
|
|
|
0.2
|
|
|
|
1.28
|
%
|
|
|
0.1
|
|
|
|
0.88
|
%
|
Other income (expense)
|
|
|
(0.4
|
)
|
|
|
(3.00
|
)%
|
|
|
(0.6
|
)
|
|
|
(0.40
|
)%
|
|
|
(0.2
|
)
|
|
|
(1.21
|
)%
|
|
|
(0.3
|
)
|
|
|
(2.25
|
)%
|
Note: numbers in table may not recalculate due to rounding
FINANCIAL
DATA BY OPERATING SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007 (000s)
|
|
|
|
|
|
|
Air Midwest
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/Freedom
|
|
|
/go!
|
|
|
Other
|
|
|
Elimination
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
292,141
|
|
|
$
|
20,362
|
|
|
$
|
65,538
|
|
|
$
|
(66,934
|
)
|
|
$
|
311,107
|
|
Total operating expenses
|
|
|
311,016
|
|
|
|
26,402
|
|
|
|
56,240
|
|
|
|
(57,686
|
)
|
|
|
335,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(18,875
|
)
|
|
$
|
(6,040
|
)
|
|
$
|
9,298
|
|
|
$
|
(9,248
|
)
|
|
$
|
(24,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 (000s)
|
|
|
|
|
|
|
Air Midwest
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/Freedom
|
|
|
/go!
|
|
|
Other
|
|
|
Elimination
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
298,035
|
|
|
$
|
12,585
|
|
|
$
|
61,488
|
|
|
$
|
(60,044
|
)
|
|
$
|
312,064
|
|
Total operating expenses
|
|
|
272,093
|
|
|
|
13,883
|
|
|
|
49,984
|
|
|
|
(51,833
|
)
|
|
|
284,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
25,942
|
|
|
$
|
(1,298
|
)
|
|
$
|
11,504
|
|
|
$
|
(8,211
|
)
|
|
$
|
27,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2007 (000s)
|
|
|
|
|
|
|
Air Midwest
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/Freedom
|
|
|
/go!
|
|
|
Other
|
|
|
Elimination
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
620,328
|
|
|
$
|
41,157
|
|
|
$
|
121,985
|
|
|
$
|
(124,750
|
)
|
|
$
|
658,720
|
|
Total operating expenses
|
|
|
616,512
|
|
|
|
50,593
|
|
|
|
105,221
|
|
|
|
(107,930
|
)
|
|
|
664,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
3,816
|
|
|
$
|
(9,436
|
)
|
|
$
|
16,764
|
|
|
$
|
(16,820
|
)
|
|
$
|
(5,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended March 31, 2006 (000s)
|
|
|
|
|
|
|
Air Midwest
|
|
|
|
|
|
|
|
|
|
|
|
|
Mesa/Freedom
|
|
|
/go!
|
|
|
Other
|
|
|
Elimination
|
|
|
Total
|
|
|
Total operating revenues
|
|
$
|
605,343
|
|
|
$
|
25,608
|
|
|
$
|
104,636
|
|
|
$
|
(99,906
|
)
|
|
$
|
635,681
|
|
Total operating expenses
|
|
|
548,565
|
|
|
|
28,112
|
|
|
|
88,513
|
|
|
|
(86,256
|
)
|
|
|
578,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
56,778
|
|
|
$
|
(2,504
|
)
|
|
$
|
16,123
|
|
|
$
|
(13,650
|
)
|
|
$
|
56,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
RESULTS
OF OPERATIONS
For
the three months ended March 31, 2007 versus the three
months ended March 31, 2006
Operating
Revenues
In the three months ended March 31, 2007, gross operating
revenue increased by $24.3 million or 7.8% from
$312.1 million in the three months ended March 31,
2006 to $336.4 million. The increase in revenue is
primarily attributable to a $19.4 million increase in
contract revenue at Mesa/Freedom, driven by higher
activity-based revenue as a result of the increased number of
aircraft in service with our code-share partners. In addition,
Air Midwest/go! revenue increased $7.8 million primarily
due to a $4.5 million increase in prorate revenue and a
$2.0 million increase in Essential Air Service revenue. Due
to certain impairment charges reflected against revenue
discussed above, our net revenues were $311.1 million for
the second fiscal quarter representing a decrease of
$0.9 million or .3% below that of the preceding year.
Operating
Expenses
Flight
Operations
In the three months ended March 31, 2007, flight operations
expense increased $4.3 million, or 4.7%, to
$95.1 million from $90.8 million for the three months
ended March 31, 2006. On an ASM basis in the three months
ended March 31, 2007, flight operations expense of $0.042
per ASM remained unchanged from the three months ended
March 31, 2006. The increase is due primarily to
incremental aircraft leases associated with additional Delta
Dash-8s at Mesa/Freedom and CRJ-200s at go!
and increased lodging expenses due to the startup of our
Delta Dash-8 operation in JFK.
Fuel
In the three months ended March 31, 2007, fuel expense
increased $1.9 million, or 1.9%, to $105.1 million
from $103.2 million for the three months ended
March 31, 2006. On an ASM basis, fuel expense decreased
1.8% to $0.046 per ASM in the three months ended March 31,
2007 compared to $0.047 per ASM in the three months ended
March 31, 2006. Overall consumption of fuel increased by
2.7 million gallons or 5.3% in the three months ended in
March 31, 2007 to 53.0 million gallons from
50.3 million gallons in the three months ended
March 31, 2006; resulting in a $5.3 million expense
increase due to volume. The additional fuel expense was mainly
driven by the addition of go! and the increase in
flights flown for Delta. These increases were offset by a 3.2%
reduction in our into-plane fuel cost in the three
months ended March 31, 2007 to $1.98 per gallon from $2.05
per gallon in the three months ended March 31, 2006.
However, total gallons would have increased more in line with
the increase in block hours, which increased 15.5% in the three
months ended March 31, 2007, except that United, beginning
in January 2007 in the Chicago OHare station, began
purchasing its own fuel which reduced Mesas fuel expense
and revenue by 4.25 million gallons or approximately
$8.4 million, respectively.
Maintenance
Expense
In the three months ended March 31, 2007, maintenance
expense increased $25.1 million, or 52.7%, to
$72.7 million from $47.6 million for the three months
ended March 31, 2006. Maintenance expense increased
primarily due to (1) higher engine overhaul costs driven by
a new
power-by-the-hour
engine agreement covering all of our previously uncovered GE
engines and contractual rate increases, (2) high costs
related to airframe checks which did not occur in the three
months ended March 31, 2006, and (3) increased
material/repair services expense primarily for engine components
and landing gear overhauls. Maintenance expense at Air
Midwest/go! increased $2.0 million year over
year. On an ASM basis, maintenance expense increased 47.1% to
$0.032 per ASM in the three months ended March 31, 2007
from $0.022 per ASM in the three months ended March 31,
2006.
Aircraft
and Traffic Servicing
In the three months ended March 31, 2007, aircraft and
traffic servicing expense increased by $5.6 million, or
30.6%, to $23.9 million from $18.3 million for the
three months ended March 31, 2006. On an ASM basis,
aircraft and traffic servicing expense increased 25.9% to $0.011
per ASM in the three months ended March 31, 2007 from
24
$0.008 per ASM in the three months ended March 31, 2006.
Aircraft and traffic servicing expense in the Mesa/Freedom
segment increased $3.1 million, which included a
$1.3 million increase in station rents and a
$2.2 million increase in passenger related costs, primarily
landing fees. These increases were primarily a result of moving
into higher cost East Coast cities for United and Delta. These
costs are reimbursed by our code-share partners. Aircraft and
traffic servicing expense in the Air Midwest/ go! segment
increased $2.5 million primarily due to the start up of
go!
Promotion
and Sales
In the three months ended March 31, 2007, promotion and
sales expense increased by $0.9 million, or 105%, to
$1.8 million from $0.9 million for the three months
ended March 31, 2006. The increase is primarily due to
promotional expenses at go!.
General
and Administrative
In the three months ended March 31, 2007, general and
administrative expense increased $1.7 million, or 11.7%, to
$16.2 million from $14.5 million for the three months
ended March 31, 2006 due primarily to increased workers
compensation costs.
Depreciation
and Amortization
In the three months ended March 31, 2007, depreciation and
amortization expense increased $1.4 million, or 16.2%, to
$10.3 million from $8.8 million for the three months
ended March 31, 2006. The increase is primarily due to the
addition of 3 CRJ-700 aircraft during the second quarter of
2007. Depreciation and amortization for Air Midwest /go!
increased $0.6 million primarily due to the launch
of go! and the depreciation of certain assets
acquired to support go!s operations.
Bankruptcy
Settlement
In the three months ended March 31, 2007, the Company
received approximately 28,000 shares which it sold for
$1.5 million. This benefit was recorded as a settlement of
its US Airways related bankruptcy claim. There were no such
settlements in the three months ended March 31, 2006.
Interest
Expense
In the three months ended March 31, 2007, interest expense
increased $0.8 million, or 9.0%, to $9.5 million from
$8.7 million for the three months ended March 31,
2006. The net increase in interest expense is primarily due to
additional debt associated with the addition of 3 CRJ-700
aircraft during the second quarter of 2007.
Interest
Income
In the three months ended March 31, 2007, interest income
increased $1.3 million to $3.9 million from
$2.6 million for the three months ended March 31,
2006. The increase is due to increases in the rates of return on
our cash and marketable securities portfolio.
Other
Expense
In the three months ended March 31, 2007, other expense
decreased $5.1 million or 38.7% to $8.1 million from
$13.2 million for the three months ended March 31,
2006. This decrease is due primarily to a $12.2 million
reduction in debt conversion costs offset by increases of
$4.6 million in unrealized losses on investment securities
and $3.5 million from equity method losses. The equity
method losses were due primarily to the investee recording
noncash accounting charges.
25
Income
Taxes
In the second quarter of fiscal 2007 we recorded a tax benefit
of $14.6 million compared to income tax expense of
$3.3 million in the second quarter of fiscal 2006. The
effective tax rates of 37.8% and 38.5%, respectively, are higher
than the statutory rate due to varying state income tax rates
and non-deductible permanent differences.
RESULTS
OF OPERATIONS
For
the six months ended March 31, 2007 versus the six months
ended March 31, 2006
Operating
Revenues
In the six months ended March 31, 2007, gross operating
revenue increased by $48.3 million or 7.6% from
$635.7 million in the six months ended March 31, 2006
to $684.0 million. The increase in revenue is primarily
attributable to a $40.3 million increase in contract
revenue for Mesa/Freedom, driven primarily by higher
activity-based revenue as a result of the increased number of
aircraft in service with our code-share partners. Air
Midwest/go! revenue increased $15.5 million
primarily due to a $10.9 million increase in prorate
revenue and a $3.3 million increase in Essential Air
Service revenue due to additional EAS cities. Due to certain
impairment charges reflected against revenue as discussed above,
our net revenues were $658.7 million for the six months
ended March 31, 2007 representing an increase of
$23.0 million or 3.6% above that of the preceding year.
Operating
Expenses
Flight
Operations
In the six months ended March 31, 2007, flight operations
expense increased $11.1 million, or 6.2%, to
$191.8 million from $180.7 million for the six months
ended March 31, 2006. On an ASM basis in the six months
ended March 31, 2007, flight operations expense increased
3.3% to $0.042 per ASM compared to $0.040 per ASM in the six
months ended March 31, 2006. The increase is primarily due
to increased aircraft lease expenses associated with additional
Delta Dash-8s at Mesa/Freedom and CRJ-200s at go!
and increased lodging expenses due to the startup of our
Delta Dash-8 operation in JFK.
Fuel
In the six months ended March 31, 2007, fuel expense
increased $14.9 million, or 7.2%, to $222.9 million
from $208.0 million for the six months ended March 31,
2006. On an ASM basis, fuel expense increased 4.3% to $0.048 per
ASM in the six months ended March 31, 2007 compared to
$0.046 per ASM in the six months ended March 31, 2006. This
increased volume was mainly driven by the addition of go!
and the increase in flights flown for Delta by
Mesa/Freedom. These increases were partially offset by a slight
reduction in our into-plane fuel cost in the six
months ended March 31, 2007 versus that of the proceeding
year. However, total gallons would have increased more in line
with the increase in block hours, which increased 13.0% in the
six months ended March 31, 2007, except that United,
beginning in January 2007 in the Chicago OHare airport,
began purchasing its own fuel and reduced Mesa/Freedoms
fuel expense and revenue by 4.25 million gallons or
$8.4 million, respectively.
Maintenance
Expense
In the six months ended March 31, 2007, maintenance expense
increased $33.0 million, or 31.9%, to $136.1 million
from $103.1 million for the six months ended March 31,
2006. Maintenance expense increased primarily due to
(1) high cost airframe checks, (2) increased material
repair/services, (3) increased base maintenance expense
related to increased costs to support our JFK and Dulles
operations, and (4) higher engine overhaul costs driven by
contractual rate increases and a new
power-by-the-hour
engine agreement covering all of our previously uncovered GE
engines. Maintenance expense at Air Midwest/go!
increased $3.3 million year over year. On an ASM
basis, maintenance expense increased 28.4% to $0.029 per ASM in
the six months ended March 31, 2007 from $0.023 per ASM in
the six months ended March 31, 2006.
26
Aircraft
and Traffic Servicing
In the six months ended March 31, 2007, aircraft and
traffic servicing expense increased by $10.8 million, or
31.2%, to $45.3 million from $34.5 million for the six
months ended March 31, 2006. On an ASM basis, aircraft and
traffic servicing expense increased 27.7% to $0.010 per ASM in
the six months ended March 31, 2007 from $0.008 per ASM in
the six months ended March 31, 2006. Aircraft and traffic
servicing expense in the Mesa/Freedom segment increased
$6.7 million, which included an increase in station rents
and an increase in passenger related costs, primarily landing
fees. These increases were primarily the result of moving into
higher cost East Coast cities for United and Delta. These costs
are largely reimbursed by our code-share partners. Aircraft and
traffic servicing expense in the Air Midwest/ go! segment
increased $4.2 million primarily due to the start up of
go!
Promotion
and Sales
In the six months ended March 31, 2007, promotion and sales
expense increased by $1.7 million, or 104.4%, to
$3.4 million from $1.7 million for the six months
ended March 31, 2006. The increase is primarily due to
promotional expenses at go!.
General
and Administrative
In the six months ended March 31, 2007, general and
administrative expense was comparable to the same period in 2006
increasing $0.8 million, or 2.3%, to $33.7 million
from $32.9 million due primarily to increases related to
workers compensation.
Depreciation
and Amortization
In the six months ended March 31, 2007, depreciation and
amortization expense increased $3.0 million, or 16.4%, to
$21.0 million from $18.0 million for the six months
ended March 31, 2006. The increase is primarily due to the
addition of 3 CRJ-700 aircraft during the second quarter of
2007. Depreciation and amortization for Air Midwest /go!
increased $1.3 million primarily due to the launch
of go! and the depreciation of certain assets
acquired to support go!s operations .
Bankruptcy
Settlement
In the six months ended March 31, 2007, the Company
received approximately 41,000 shares of US Airways stock
which it sold for $2.1 million. This benefit was recorded
as a settlement of its US Airways related bankruptcy claim.
There were no such settlements in the six months ended
March 31, 2006.
Interest
Expense
In the six months ended March 31, 2007, interest expense
increased $1.9 million, or 10.2%, to $20.2 million
from $18.3 million for the six months ended March 31,
2006. The net increase in interest expense is primarily due to
additional debt associated with the addition of 3 CRJ-700
aircraft during the second quarter of 2007.
Interest
Income
In the six months ended March 31, 2007, interest income
increased $2.8 million to $8.4 million from
$5.6 million for the six months ended March 31, 2006.
The increase is due to increases in the rates of return on our
cash and marketable securities portfolio.
Other
Expense
In the six months ended March 31, 2007, other expense
decreased $6.3 million or 44.4% to $8.0 million from
$14.3 million for the six months ended March 31, 2006.
This decrease is due primarily to a $12.2 million reduction
in debt conversion costs offset by increases of
$4.6 million in unrealized losses on investment securities
and $3.5 million from equity method losses. The equity
method losses were due primarily to the investee recording
noncash accounting charges.
27
Income
Taxes
In the six months ended March 31, 2007 we recorded a tax
benefit of $9.4 million compared to income tax expense of
$11.4 million in the six months ended March 31, 2006.
The effective tax rates of 37.0% and 38.5%, respectively differ
from the statutory rate due to varying state income taxes and to
non-deductible permanent differences.
LIQUIDITY
AND CAPITAL RESOURCES
Sources
and Uses of Cash
At March 31, 2007, we had cash, cash equivalents, and
marketable securities (including restricted cash) of
$198.1 million, compared to $234.3 million at
September 30, 2006. Our cash and cash equivalents and
marketable securities are intended to be used for working
capital, capital expenditures, acquisitions, and to fund our
obligations with respect to regional jet deliveries.
Sources of cash for the six months ended March 31, 2007
were due primarily to cash flow from operations before changes
in assets and liabilities of $38.0 million. Changes in
assets and liabilities added $22.7 million in positive cash
flow to obtain $60.7 million in cash provided by operating
activities. The $23.5 million was due primarily to proceeds
from sales of investment securities, and an increase in accounts
payable offset by an increase in receivables, prepaid expenses
and expendable parts.
Cash used in operating activities was $6.1 million due
primarily to capital expenditures of $13.5 million related
to the expansion of our regional jet fleet and related
provisioning of rotable inventory to support the additional jets
and an additional equity method investment of $1.3 million.
These amounts were offset by returns of deposits previously paid
on leases and equipment and a decrease in other assets.
Cash used in financing activities were $46.1 million due
primarily to net paydowns on long-term debt totaling
$27.4 million and $24.8 million in common stock
repurchased by the Company.
As of March 31, 2007, we had net receivables of
approximately $60.1 million (net of an allowance for
doubtful accounts of $1.8 million), compared to receivables
of approximately $47.4 million (net of an allowance for
doubtful accounts of $1.6 million) as of September 30,
2006. The amounts due consist primarily of receivables due from
our code-share partners, subsidy payments due from Raytheon,
Federal excise tax refunds on fuel, insurance proceeds,
manufacturers credits and passenger ticket receivables due
through the Airline Clearing House. Accounts receivable from our
code-share partners was 42.0% of total gross accounts receivable
at March 31, 2007.
Sources of cash for the six months ended March 31, 2006
were due primarily to cash flow from operations before changes
in assets and liabilities of $39.8 million. Changes in
assets and liabilities used $62.6 million in negative cash
flow to obtain $22.8 million in cash used by operating
activities. The $62.6 million was due primarily to
purchases of investment securities and incentive payments made
in connection with the United amendment. Cash provided by
investing activities was $6.5 million due primarily to
proceeds from the sale of flight equipment offset by capital
expenditures and an increase in restricted cash. Cash flows used
in financing activities totaling $23.9 million consisted
primarily of principal payments on long-term debt and payments
made to finance our rotable inventory.
Subsequent to the end of the second quarter of 2007 Mesa
announced that its Board of Directors has authorized Mesa to
repurchase up to an additional 10 million shares of its
outstanding common stock. The 10 million shares subject to
the newly authorized repurchase program are in addition to the
5.7 million shares remaining under the prior repurchase
programs.
Operating
Leases
We have significant long-term lease obligations primarily
relating to our aircraft fleet. These leases are classified as
operating leases and are therefore excluded from our
consolidated balance sheets. At March 31, 2007, we leased
157 aircraft with remaining lease terms ranging from one to
18.3 years. Future minimum lease payments due under all
long-term operating leases were approximately $2.1 billion
at March 31, 2007.
28
3.625%
Senior Convertible Notes due 2024
In February 2004, we completed the private placement of senior
convertible notes due 2024, which resulted in gross proceeds of
$100.0 million ($97.0 million, net). Cash interest is
payable on the notes at the rate of 2.115% per year on the
aggregate amount due at maturity, payable semiannually in
arrears on February 10 and August 10 of each year, beginning
August 10, 2004, until February 10, 2009. After that
date, we will not pay cash interest on the notes prior to
maturity, and the notes will begin accruing original issue
discount at a rate of 3.625% until maturity. On
February 10, 2024, the maturity date of the notes, the
principal amount of each note will be $1,000. The aggregate
amount due at maturity, including interest accrued from
February 10, 2009, will be $171.4 million. Each of our
wholly owned domestic subsidiaries guarantees the notes on an
unsecured senior basis. The notes and the note guarantees are
senior unsecured obligations and rank equally with our existing
and future senior unsecured indebtedness. The notes and the note
guarantees are junior to the secured obligations of our wholly
owned subsidiaries to the extent of the collateral pledged.
The notes were sold at an issue price of $583.40 per note and
are convertible into shares of our common stock at a conversion
rate of 40.3737 shares per note, which equals a conversion
price of $14.45 per share. This conversion rate is subject to
adjustment in certain circumstances. Holders of the notes may
convert their notes only if: (i) after March 31, 2004,
the sale price of our common stock exceeds 110% of the accreted
conversion price for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the
preceding quarter; (ii) on or prior to February 10,
2019, the trading price for the notes falls below certain
thresholds; (iii) the notes have been called for
redemption; or (iv) specified corporate transactions occur.
These notes are not yet convertible. We may redeem the notes, in
whole or in part, beginning on February 10, 2009, at a
redemption price equal to the issue price, plus accrued original
issue discount, plus any accrued and unpaid cash interest. The
holders of the notes may require us to repurchase the notes on
February 10, 2009 at a price of $583.40 per note plus
accrued and unpaid cash interest, if any, on February 10,
2014 at a price of $698.20 per note plus accrued and unpaid cash
interest, if any, and on February 10, 2019 at a price of
$835.58 per note plus accrued and unpaid cash interest, if any.
6.25%
Senior Convertible Notes Due 2023
In June 2003, we completed the private placement of senior
convertible notes due 2023, which resulted in gross proceeds of
$100.1 million ($96.9 million net). Cash interest is
payable on the notes at the rate of 2.4829% per year on the
aggregate amount due at maturity, payable semiannually in
arrears on June 16 and December 16 of each year, beginning
December 16, 2003, until June 16, 2008. After that
date, we will not pay cash interest on the notes prior to
maturity, and the notes will begin accruing original issue
discount at a rate of 6.25% until maturity. On June 16,
2023, the maturity date of the notes, the principal amount of
each note will be $1,000. The aggregate amount due at maturity,
including interest accrued from June 16, 2008, will be
$252 million. Each of our wholly owned domestic
subsidiaries guarantees the notes on an unsecured senior basis.
The notes and the note guarantees are senior unsecured
obligations and rank equally with our existing and future senior
unsecured indebtedness. The notes and the note guarantees are
junior to the secured obligations of our wholly owned
subsidiaries to the extent of the collateral pledged.
The notes were sold at an issue price of $397.27 per note and
are convertible into shares of our common stock at a conversion
rate of 39.727 shares per note, which equals a conversion
price of $10 per share. This conversion rate is subject to
adjustment in certain circumstances. Holders of the notes may
convert their notes only if: (i) the sale price of our
common stock exceeds 110% of the accreted conversion price for
at least 20 trading days in the 30 consecutive trading days
ending on the last trading day of the preceding quarter;
(ii) prior to June 16, 2018, the trading price for the
notes falls below certain thresholds; (iii) the notes have
been called for redemption; or (iv) specified corporate
transactions occur. These notes became convertible in 2003. The
Company may redeem the notes, in whole or in part, beginning on
June 16, 2008, at a redemption price equal to the issue
price, plus accrued original issue discount, plus any accrued
and unpaid cash interest. The holders of the notes may require
the Company to repurchase the notes on June 16, 2008 at a
price of $397.27 per note plus accrued and unpaid cash interest,
if any, on June 16, 2013 at a price of $540.41 per note
plus accrued and unpaid cash interest, if any, and on
June 16, 2018 at a price of $735.13 per note plus accrued
and unpaid cash interest, if any.
29
In fiscal 2006, holders of $156.8 million in aggregate
principal amount at maturity ($62.3 million carrying
amount) of these senior convertible notes due 2023 converted
their notes into shares of Mesa common stock. In connection with
these conversions, we issued an aggregate of 6.2 million
shares of Mesa common stock and also paid approximately
$11.3 million in debt conversion costs to these
noteholders. We also wrote off $1.8 million in debt issue
costs related to these notes.
Interim
and Permanent Aircraft Financing Arrangements
At September 30, 2006, the Company had an aggregate of
$123.1 million in notes payable to an aircraft manufacturer
for five aircraft on interim financing. During the second
quarter of 2007, the Company permanently financed these five
aircraft as well as a sixth aircraft delivered during the first
quarter of 2007 with $135.0 million in long-term debt.
Under interim financing arrangements, we take delivery and title
of the aircraft prior to securing permanent financing and the
acquisition of the aircraft is accounted for as a purchase with
debt financing. Accordingly, we reflect the aircraft and debt
under interim financing on our balance sheet during the interim
financing period. After taking delivery of the aircraft, it is
our practice and our intention to subsequently enter into a sale
and leaseback transaction with an independent third-party
lessor. Upon permanent financing, the proceeds from the sale and
leaseback transaction are used to retire the notes payable to
the aircraft manufacturer. Any gain recognized on the sale and
leaseback transaction is deferred and amortized over the life of
the lease. These interim financing agreements typically have a
term of six months and provide for monthly interest only
payments at LIBOR plus three percent. The current interim
financing agreement with the manufacturer provides for us to
have a maximum of 15 aircraft on interim financing at any one
time.
Other
Indebtedness and Obligations
In October 2004, the Company permanently financed five CRJ-900
aircraft with $118.0 million in debt. The debt bears
interest at the monthly LIBOR plus three percent and requires
monthly principal and interest payments.
In January and March 2004, the Company permanently financed five
CRJ-700 and six CRJ-900 aircraft with $254.7 million in
debt. The debt bears interest at the monthly LIBOR plus three
percent and requires monthly principal and interest payments.
In December 2003, we assumed $24.1 million of debt in
connection with our purchase of two CRJ-200 aircraft in the
Midway Chapter 7 bankruptcy proceedings. The debt, due in
2013, bears interest at the rate of 7% per annum through 2008,
converting to 12.5% thereafter, with principal and interest due
monthly.
As of March 31, 2007, we had $12.6 million in
restricted cash on deposit collateralizing various letters of
credit outstanding and the ACH funding of our payroll.
Contractual
Obligations
As of March 31, 2007, we had $691.5 million of
long-term debt (including current maturities). This amount
consisted of $552.7 million in notes payable related to
owned aircraft, $137.8 million in aggregate principal
amount of our senior convertible notes due 2023 and 2024 and
$1.0 million in other miscellaneous debt.
30
The following table sets forth our cash obligations (including
principal and interest) as of March 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
Obligations
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable related to CRJ700s and
900s(1)
|
|
$
|
23,310
|
|
|
$
|
46,086
|
|
|
$
|
45,206
|
|
|
$
|
44,320
|
|
|
$
|
43,395
|
|
|
$
|
297,553
|
|
|
$
|
499,870
|
|
2003 senior convertible debt notes
(assuming no conversions)
|
|
|
1,182
|
|
|
|
2,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,234
|
|
|
|
98,781
|
|
2004 senior convertible debt notes
(assuming no conversions)
|
|
|
1,813
|
|
|
|
3,625
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
171,409
|
|
|
|
178,660
|
|
Senior CR7 CR9
|
|
|
6,848
|
|
|
|
13,699
|
|
|
|
13,702
|
|
|
|
13,706
|
|
|
|
13,709
|
|
|
|
134,542
|
|
|
|
196,205
|
|
Subordinate CR7 CR9
|
|
|
1,359
|
|
|
|
2,719
|
|
|
|
2,719
|
|
|
|
2,719
|
|
|
|
5,698
|
|
|
|
3,619
|
|
|
|
18,833
|
|
Notes payable related to B1900Ds
|
|
|
5,969
|
|
|
|
11,938
|
|
|
|
11,938
|
|
|
|
28,858
|
|
|
|
24,978
|
|
|
|
8,965
|
|
|
|
92,646
|
|
Note payable related to CRJ200s(1)
|
|
|
1,500
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
14,952
|
|
|
|
28,452
|
|
Mortgage note payable
|
|
|
54
|
|
|
|
109
|
|
|
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
987
|
|
Other
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
25
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
42,061
|
|
|
|
83,565
|
|
|
|
79,226
|
|
|
|
92,627
|
|
|
|
90,805
|
|
|
|
726,299
|
|
|
|
1,114,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash aircraft rental payments(1)
|
|
|
101,200
|
|
|
|
216,084
|
|
|
|
192,163
|
|
|
|
185,402
|
|
|
|
190,281
|
|
|
|
1,244,395
|
|
|
|
2,129,524
|
|
Lease payments on equipment and
operating facilities
|
|
|
677
|
|
|
|
1,392
|
|
|
|
962
|
|
|
|
947
|
|
|
|
956
|
|
|
|
1,198
|
|
|
|
6,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments
|
|
|
101,877
|
|
|
|
217,476
|
|
|
|
193,124
|
|
|
|
186,349
|
|
|
|
191,237
|
|
|
|
1,245,593
|
|
|
|
2,135,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future aircraft acquisition costs(2)
|
|
|
50,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
50,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
100,000
|
|
Rotable inventory financing
commitments
|
|
|
291
|
|
|
|
563
|
|
|
|
540
|
|
|
|
2,241
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,634
|
|
|
|
|
(1) |
|
Aircraft ownership costs, including depreciation and interest
expense on owned aircraft and rental payments on operating
leased aircraft, of aircraft flown pursuant to our
guaranteed-revenue agreements are reimbursed by the applicable
code-share partner. |
|
(2) |
|
Represents the estimated cost of commitments to acquire CRJ-900
aircraft. |
Maintenance
Commitments
During the second quarter of fiscal 2007, the Company entered
into a memorandum of understanding (MOU) with
Deltas Technical Operations division (DTO) for
its previously uncovered General Electric Aircraft Engines
(GE) engines. The MOU requires a monthly payment
based upon the prior months flight hours incurred by the
covered engines. The hourly rate increases over time based upon
the engine overhaul costs that are expected to be incurred in
that year and is subject to escalation based on changes in
certain price indices. Maintenance expense is recognized based
upon the product of flight hours flown and the rate in effect
for the period.
In January 1997, the Company entered into a
10-year
engine maintenance contract with GE for certain of our CRJ-200
aircraft engines. The agreement was subsequently amended in the
first quarter of fiscal 2003. The amended contract requires a
monthly payment based upon the prior months flight hours
incurred by the covered engines. The hourly rate increases over
time based upon the engine overhaul costs that are expected to
be incurred in that year and is subject to escalation based on
changes in certain price indices. The contract also provides for
a fixed number of engine overhauls per year. To the extent that
the number of actual overhauls is less than the fixed number, GE
is required to issue a credit to us for the number of events
less than the fixed number multiplied by an agreed upon price.
To the extent that the number of actual overhauls is greater
than the fixed number, we are required to pay GE for the number
of events greater than the fixed number multiplied by the same
agreed upon price.
31
In April 1997, we entered into a
10-year
engine maintenance contract with Pratt & Whitney
Canada Corp. (PWC) for our Dash 8-200 aircraft. The
contract requires us to pay PWC for the engine overhaul upon
completion of the maintenance based upon a fixed dollar amount
per flight hour. The rate under the contract is subject to
escalation based on changes in certain price indices.
In April 2000, we entered into a
10-year
engine maintenance contract with Rolls-Royce Allison
(Rolls-Royce) for its ERJ aircraft. The contract
requires us to pay Rolls-Royce for the engine overhaul upon
completion of the maintenance based upon a fixed dollar amount
per flight hour. The rate per flight hour is based upon certain
operational assumptions and may vary if the engines are operated
differently than these assumptions. The rate is also subject to
escalation based on changes in certain price indices. The
agreement with Rolls-Royce also contains a termination clause
and look back provision to provide for any shortfall between the
cost of maintenance incurred by the provider and the amount paid
up to the termination date by us and includes a 15% penalty on
such amount. We do not anticipate an early termination under the
contract.
In May 2002, we entered into a new six-year fleet management
program with PWC to provide maintenance for our Beechcraft 1900D
turboprop engines. The contract requires a monthly payment based
upon flight hours incurred by the covered aircraft. The hourly
rate is subject to annual adjustment based on changes in certain
price indices and is guaranteed to increase by no less than 1.5%
per year. Pursuant to the agreement, we sold certain assets of
our Desert Turbine Services unit, as well as all spare PT6
engines to PWC for $6.8 million, which approximated the net
book value of the assets. Pursuant to the agreement, we provided
a working capital loan to PWC for the same amount, which is to
be repaid through a reduced hourly rate being charged for
maintenance. The agreement covers all of our Beechcraft 1900D
turboprop aircraft and engines. The agreement also contains a
termination clause and look back provision to provide for any
shortfall between the cost of maintenance incurred by the
provider and the amount paid up to the termination date by us
and provides for return of a pro-rated share of the prepaid
amount upon early termination. We do not anticipate an early
termination under the contract.
In August 2005, the Company entered into a ten-year agreement
with AAR Corp. (the AAR Agreement), for the
management and repair of certain of the Companys CRJ-200,
-700, -900 and ERJ-145 aircraft rotable spare parts inventory.
Under the agreement, the Company sold certain existing spare
parts inventory to AAR for $39.6 million in cash and
$21.5 million in notes receivable (discounted to
$18.8 million) to be paid over four years. The AAR
agreement was contingent upon the Company terminating an
agreement for the Companys CRJ-200 aircraft rotable spare
parts inventory with GE Capital Aviation Services
(GECAS) and including these rotables in the
arrangement. The Company terminated the GECAS agreement and
finalized the AAR agreement in November 2005. Upon entering into
the agreement, the Company received $22.8 million
($23.8 million less $1 million deposit that was
retained by AAR), which was recorded as a deposit at
September 30, 2005, pending the termination of the GECAS
agreement. An additional $15.8 million was received in the
quarter ended March 31, 2006. Under the agreement, the
Company is required to pay AAR a monthly fee based upon flight
hours for access to and maintenance and servicing of the
inventory. The agreement also contains certain minimum monthly
payments that Mesa must make to AAR. Based on this arrangement,
the Company accounts for the transaction as a service agreement
and an operating lease of rotable spare parts with AAR. The sale
of the rotable spare parts resulted in a gain of
$2.1 million, which has been deferred and is being
recognized over the term of the agreement. At termination, the
Company may elect to purchase the covered inventory at fair
value, but is not contractually obligated to do so.
In June 2006, the Company entered into a separate two-year
agreement with AAR for the management and repair of the
Companys CRJ-200 aircraft rotable spare parts inventory
associated with its go! operations. Under this
agreement, the Company transferred certain existing spare parts
inventory to AAR for $1.2 million in cash. AAR was required
to purchase an additional $2.9 million in rotable spare
parts to support the agreement. Under the agreement, the Company
is required to pay AAR a monthly fee based upon flight hours for
access to and maintenance of the inventory. At termination, the
Company has guaranteed the fair value of the underlying
rotables. Based on this arrangement, the Company accounts for
the transaction as a financing arrangement, thus recording both
the rotable spare parts inventory as an asset and the related
payable to AAR as a liability.
32
Critical
Accounting Policies and Estimates
The discussion and analysis of our financial condition and
results of operations is based upon our financial statements,
which have been prepared in accordance with accounting
principles generally accepted in the United States of America.
In connection with the preparation of these financial
statements, we are required to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue, and
expenses, and related disclosure of contingent liabilities. On
an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, the allowance for doubtful
accounts, medical claims reserve, valuation of assets held for
sale and costs to return aircraft and a valuation allowance for
certain deferred tax assets. We base our estimates on historical
experience and on various other assumptions that we believe are
reasonable under the circumstances. Such historical experience
and assumptions form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We have identified the accounting policies below as critical to
our business operations and the understanding of our results of
operations. The impact of these policies on our business
operations is discussed throughout Managements Discussion
and Analysis of Financial Condition and Results of Operations
where such policies affect our reported and expected financial
results. The discussion below is not intended to be a
comprehensive list of our accounting policies. For a detailed
discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated
Financial Statements for the year ended September 30, 2006,
which contains accounting policies and other disclosures
required by accounting principles generally accepted in the
United States of America.
Revenue
Recognition
The US Airways, United and Delta regional jet code-share
agreements are revenue-guarantee flying agreements. Under a
revenue-guarantee arrangement, the major airline generally pays
a fixed monthly minimum amount, plus certain additional amounts
based upon the number of flights flown and block hours
performed. The contracts also include reimbursement of certain
costs incurred by us in performing flight services. These costs,
known as pass-through costs, may include aircraft
ownership costs, passenger and hull insurance, aircraft property
taxes as well as, fuel, landing fees and catering. The contracts
also include a profit component that may be determined based on
a percentage of revenue on the Mesa flown flights, a profit
margin on certain reimbursable costs as well as a profit margin
based on certain operational benchmarks. We recognize revenue
under our revenue-guarantee agreements when the transportation
is provided. The majority of the revenue under these contracts
is known at the end of the accounting period and is booked as
actual. We perform an estimate of the profit component based
upon the information available at the end of the accounting
period. All revenue recognized under these contracts is
presented at the gross amount billed.
Under the Companys revenue-guarantee agreements with US
Airways, United and Delta, the Company is reimbursed under a
fixed rate per
block-hour
plus an amount per aircraft designed to reimburse the Company
for certain aircraft ownership costs. In accordance with
Emerging Issues Task Force Issue
No. 01-08,
Determining Whether an Arrangement Contains a Lease,
the Company has concluded that a component of its revenue under
the agreement discussed above is rental income, inasmuch as the
agreement identifies the right of use of a specific
type and number of aircraft over a stated period of time. The
amount deemed to be rental income during the quarters ended
March 31, 2007 and 2006 was $65.3 million and
$56.5 million, respectively, and has been included in
passenger revenue on the Companys consolidated statements
of operations.
In connection with providing service under the Companys
revenue-guarantee agreement with Pre-Merger US Airways, the
Companys fuel reimbursement was capped at $0.85 per
gallon. Under this agreement, the Company had the option to
purchase fuel from a subsidiary of US Airways at the capped
rate. As a result, amounts included in revenue for fuel
reimbursement and expense for fuel cost may not represent market
rates for fuel for the Companys Pre-Merger US Airways
flying. The Company purchased 9.4 million gallons of fuel
under this arrangement in the quarter ended March 31,
2006.This agreement ended May 31, 2006.
The US Airways and Midwest Airlines B1900D turboprop code-share
agreements are pro-rate agreements. Under a prorate agreement,
we receive a percentage of the passengers fare based on a
standard industry formula
33
that allocates revenue based on the percentage of transportation
provided. Revenue from our pro-rate agreements and our
independent operation is recognized when transportation is
provided. Tickets sold but not yet used are included in air
traffic liability on the condensed consolidated balance sheets.
We also receive subsidies for providing scheduled air service to
certain small or rural communities. Such revenue is recognized
in the period in which the air service is provided. The amount
of the subsidy payments is determined by the United States
Department of Transportation on the basis of its evaluation of
the amount of revenue needed to meet operating expenses and to
provide a reasonable return on investment with respect to
eligible routes. EAS rates are normally set for two-year
contract periods for each city.
Allowance
for Doubtful Accounts
Amounts billed by the Company under revenue guarantee
arrangements are subject to our interpretation of the applicable
code-share agreement and are subject to audit by our code-share
partners. Periodically our code-share partners dispute amounts
billed and pay amounts less than the amount billed. Ultimate
collection of the remaining amounts not only depends upon Mesa
prevailing under audit, but also upon the financial well-being
of the code-share partner. As such, we periodically review
amounts past due and record a reserve for amounts estimated to
be uncollectible. The allowance for doubtful accounts was
$1.8 million and $1.6 million at March 31, 2007
and September 30, 2006, respectively. If our actual ability
to collect these receivables and the actual financial viability
of its partners is materially different than estimated, the
Companys estimate of the allowance could be materially
understated or overstated. The Company is currently engaged in a
dispute with US Airways over fees payable pursuant to its Code
Share and Revenue Sharing Agreement (the Code Share
Agreement). The disagreement stems from payments due the
Company from US Airways with respect to reimbursable operating
costs and expenses relating to certain of the Companys
CRJ-900 aircraft. The disputed amount that has not been paid by
US Airways is $6.9 million. The balance due at
March 31, 2007 is $6.9 million and increases by
$0.2 million per month during the term of the Code Share
Agreement that the dispute remains unresolved. The Company
believes that these reimbursable costs and expenses are in
accordance with the terms and conditions of the Code Share
Agreement and are immediately due and payable. The Company is
currently working to amicably resolve this dispute in the near
term prior to initiating litigation. If an amicable resolution
cannot be reached, the Company is prepared to litigate its claim
and believes it has a reasonable probability of succeeding in
any such proceedings, although no assurances can be given in
that regard.
Aircraft
Leases
The majority of the Companys aircraft are leased from
third parties. In order to determine the proper classification
of a lease as either an operating lease or a capital lease, the
Company 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 capital lease. All of
the Companys aircraft leases have been classified as
operating leases, which results in rental payments being charged
to expense over the terms of the related leases. Additionally,
operating leases are not reflected in the Companys
condensed consolidated balance sheet and accordingly, neither a
lease asset nor an obligation for future lease payments is
reflected in the Companys condensed consolidated balance
sheet.
Accrued
Health Care Costs
We are self-insured up to a cap for health care costs and as
such, a reserve for the cost of claims that have not been paid
as of the balance sheet date is estimated. Our estimate of this
reserve is based upon historical claim experience and upon the
recommendations of our health care provider. At March 31,
2007 and September 30, 2006, we accrued $2.7 million
and $2.6 million, respectively, for the cost of future
health care claims. If the ultimate development of these claims
is significantly different than those that have been estimated,
the accrual for future health care claims could be materially
overstated or understated.
34
Accrued
Workers Compensation Costs
We are self-insured up to a cap for workers compensation
claims and as such, a reserve for the cost of claims that have
not been paid as of the balance sheet date is estimated. Our
estimate of this reserve is based upon historical claim
experience and upon the recommendations of our third-party
administrator. At March 31, 2007 and September 30,
2006, we accrued $3.3 million and $3.4 million,
respectively, for the cost of workers compensation claims.
If the ultimate development of these claims is significantly
different than those that have been estimated, the accrual for
future workers compensation claims could be materially
overstated or understated.
Long-lived
Assets, Aircraft and Parts Held for Sale
Property and equipment are stated at cost and depreciated over
their estimated useful lives to their estimated salvage values
using the straight-line method. Long-lived assets to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may be
impaired. Under the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the Company
records an impairment loss if the undiscounted future cash flows
are found to be less than the carrying amount of the asset. If
an impairment loss has occurred, a charge is recorded to reduce
the carrying amount of the asset to fair value. Long-lived
assets to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell see Note 14 on
impairments.
Valuation
of Deferred Tax Assets
The Company records deferred tax assets for the value of
benefits expected to be realized from the utilization of
alternative minimum tax credit carryforwards and state and
federal net operating loss carryforwards. We periodically review
these assets for realizability based upon expected taxable
income in the applicable taxing jurisdictions. To the extent we
believe some portion of the benefit may not be realizable, an
estimate of the unrealized portion is made and an allowance is
recorded. At March 31, 2007, we had a valuation allowance
of $0.6 million for certain state net operating loss
carryforwards because we believe we will not be able to generate
sufficient taxable income in these jurisdictions in the future
to realize the benefits of these recorded deferred tax assets.
We believe the Company will generate sufficient taxable income
in the future to realize the benefits of its other deferred tax
assets. This belief is based upon the Company having had pretax
income in fiscal 2006, 2005 and 2004 and we have taken steps to
minimize the financial impact of its unprofitable subsidiaries.
Realization of these deferred tax assets is dependent upon
generating sufficient taxable income prior to expiration of any
net operating loss carryforwards. Although realization is not
assured, management believes it is more likely than not that the
remaining, recorded deferred tax assets will be realized. If the
ultimate realization of these deferred tax assets is
significantly different from our expectations, the value of its
deferred tax assets could be materially overstated.
AIRCRAFT
The following table lists the aircraft owned and leased by the
Company for scheduled operations as of March 31, 2007:
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|
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|
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|
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|
|
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|
Number of Aircraft
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Operating on
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Interim
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|
Mar. 31,
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Passenger
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Type of Aircraft
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Owned
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Financing
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Leased
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Total
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2007
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Capacity
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CRJ-200/100 Regional Jet
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2
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59
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61
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|
61
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50
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|
|
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CRJ-700 Regional Jet
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8
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|
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10
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18
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18
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66
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CRJ-900 Regional Jet
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14
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24
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38
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38
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86
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Embraer 145 Regional Jet
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36
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36
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36
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50
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Beechcraft 1900D
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20
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20
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20
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19
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|
Dash-8
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28
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28
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|
28
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37
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Embraer EMB-120
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0
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|
|
0
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|
|
0
|
|
|
|
30
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|
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Total
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44
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|
|
0
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|
|
157
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|
201
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|
201
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35
Fleet
Plans
CRJ
Program
As of March 31, 2007, we operated 117 Canadair Regional
Jets (61 CRJ-200/100, 18 CRJ-700 and 38 CRJ-900s).
In January 2004, we exercised options to purchase 20 CRJ-900
aircraft (seven of which can be converted to CRJ-700 aircraft).
As of March 31, 2007, we have taken delivery of 13 CRJ-900
aircraft and three CRJ-700 aircraft. In April 2007, we accepted
delivery of two more CRJ-700 aircraft. The delivery dates for
the remaining two CRJ-900s (which can be converted to CRJ-700s)
has not been finalized.
ERJ
Program
As of March 31, 2007, we operated 36 Embraer 145 aircraft.
We acquired all 36 ERJ-145s through a June 1999 agreement with
Empresa Brasiliera de Aeronautica S.A. (Embraer). We
also have options for 25 additional aircraft. In September 2006,
our contract with Embraer was amended to extend the option
exercise date to August 2007 for deliveries beginning in January
2009.
Beechcraft
1900D
As of March 31, 2007, we owned 34 Beechcraft 1900D aircraft
and were operating 20 of these aircraft. We lease four of our
Beechcraft 1900D to Gulfstream International Airlines, a
regional turboprop air carrier based in Ft. Lauderdale, Florida
and lease an additional ten Beechcraft 1900D aircraft to Big Sky
Transportation Co., a regional turboprop carrier based in
Billings, Montana (Big Sky).
Dash-8
As of March 31, 2007, we operated 28 Dash-8
aircraft. In the fourth quarter of fiscal 2006,
we took delivery of four Dash-8 aircraft and placed them into
revenue service during the first quarter of fiscal 2007. As
discussed in Note 14 on impairment we will ground these
aircraft by September 2008. Losses will be incurred as each
aircraft is returned for early termination penalties, lease
settle up and other charges.
Aircraft
Financing Relationships with the Manufacturer
At September 30, 2006, the Company had $123.1 million
in notes payable to an aircraft manufacturer for five aircraft
on interim financing. During the second quarter of 2007, the
Company permanently financed these five aircraft as well as a
six aircraft delivered during the first quarter of 2007 with
$135.0 million in long-term debt. Under interim financing
arrangements, the Company takes delivery and title to the
aircraft prior to securing permanent financing and the
acquisition of the aircraft is accounted for as a purchase with
debt financing. Accordingly, the Company reflects the aircraft
and debt under interim financing on its balance sheet during the
interim financing period. After taking delivery of the aircraft,
it is the Companys intention to permanently finance the
aircraft as an operating lease through a sale and leaseback
transaction with an independent third-party lessor. Upon
permanent financing, the proceeds are used to retire the notes
payable to the manufacturer. Any gain recognized on the sale and
leaseback transaction is deferred and amortized over the life of
the lease. The current interim financing agreement with the
manufacturer provides for the Company to have a maximum of
15 aircraft on interim financing at a given time.
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Item 3.
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Qualitative
and Quantitative Disclosure about Market Risk.
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There were no material changes in the Companys market risk
from September 30, 2006 to March 31, 2007.
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Item 4.
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Controls
and Procedures.
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In accordance with
Rule 13a-15(b)
of the Securities Exchange Act of 1934 as amended (the
Exchange Act), as of the end of the period covered
by this Quarterly Report on
Form 10-Q,
the Companys management evaluated, with the participation
of the Companys principal executive officer and principal
financial officer, the effectiveness
36
of the design and operation of the Companys disclosure
controls and procedures (as defined in
Rule 13a-15(e)
or
Rule 15d-15(e)
under the Exchange Act). Disclosure controls and procedures are
defined as those controls and other procedures of an issuer that
are designed to ensure that the information required to be
disclosed by the issuer in the reports it files or submits under
the Act is recorded, processed, summarized and reported, within
the time periods specified in the Commissions rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed by an issuer in the reports
that it files or submits under the Act is accumulated and
communicated to the issuers management, including its
principal executive officer and principal financial officer, or
persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Based on their
evaluation of these disclosure controls and procedures, the
Companys chairman of the board and chief executive officer
and the Companys executive vice president and chief
financial officer have concluded that the disclosure controls
and procedures were effective as of the date of such evaluation
to ensure that material information relating to the Company,
including its consolidated subsidiaries, was made known to them
by others within those entities, particularly during the period
in which this Quarterly Report on
Form 10-Q
was being prepared. There were no changes in our internal
control over financial reporting during the quarter ended
March 31, 2007, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting except for certain turnover in senior
accounting and finance positions during the current quarter.
These positions were backfilled with a combination of permanent
employees, consultants and contractors.
* * *
37
PART II.
OTHER INFORMATION
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Item 1.
|
Legal
Proceedings.
|
In February 2006, Hawaiian Airlines, Inc. (Hawaiian)
filed a complaint against the Company in the United States
Bankruptcy Court for the District of Hawaii (the
Bankruptcy Court) alleging that the Company breached the
terms of a Confidentiality Agreement entered into in April 2004
with the Trustee in Hawaiians bankruptcy proceedings.
Hawaiians complaint alleges, among other things, that the
Company breached the Confidentiality Agreement by (a) using
the evaluation material to obtain a competitive advantage over
Hawaiian, through the development and implementation of a
business plan to compete with Hawaiian in the inter-island
market, and (b) failing to return or destroy any evaluation
materials after being notified by Hawaiian on or about
May 12, 2004 that the Company had not been selected as a
potential investor for a transaction with Hawaiian. Hawaiian, in
its complaint, seeks unspecified damages, requests that the
Company turn over to Hawaiian any evaluation material in the
Companys possession, custody or control (the
Turnover Claim), and an injunction preventing the
Company from providing inter-island transportation services in
the State of Hawaii for a period of two years from the date of
such injunctive relief.
The Company vigorously denies Hawaiians allegations and
requests for relief contained in its complaint. The Company
filed both an answer and an antitrust counterclaim against
Hawaiian in response to its complaint. In May 2006, the Company
filed a motion to dismiss the Turnover Claim contained in
Hawaiians complaint, but the Bankruptcy Court denied that
motion. On December 8, 2006 the Bankruptcy Court, based on
constitutional access to the courts, also granted
Hawaiians motion for summary judgment against the Company
on its antitrust counterclaim. The Company does not believe that
either of these decisions has a material impact on the
Companys position in the lawsuit. Finally, in October
2006, the Bankruptcy Court denied Hawaiians effort to
enjoin the Companys go! operation from
selling tickets claiming that go!s entry
into the inter-island air transport business was based on trade
secrets furnished to Mesa during the Hawaiian bankruptcy. The
Court found no such misuse of confidential information and
rejected Hawaiians motion for a preliminary injunction.
In June 2006, Hawaiian requested a preliminary injunction to
prevent the Company from issuing new airline tickets for the
Hawaiian inter-island market for a period of one year. In this
request, Hawaiian alleges that initial discovery conducted
reveals that the Company breached the Confidentiality Agreement.
The Court has recently denied Hawaiians request for a
preliminary injunction. The case will be tried in September 2007.
On October 13, 2006, Aloha Airlines filed suit against Mesa
Air Group and two if its Hawaii based employees (individual
defendants subsequently dismissed without prejudice). The
complaint was filed in state court in Hawaii and contains 11
counts and seeks damages and injunctive relief. The clear
purpose of the complaint is to blunt Mesas entry into the
Hawaii inter-island market segment. Aloha alleges that
Mesas inter-island air fares are below cost and that Mesa
is, therefore, violating specific provisions of Hawaii antitrust
and unfair competition law. Aloha also alleges breach of
contract and fraud by Mesa in connection with two
confidentiality agreements, one in 2005 and the other in 2006.
In 1992, The Supreme Court of the United States decided Morales
v. TWA, in which it construed the Airline Deregulation Act as
prohibiting any state court, under any state law legal theory,
from adjudicating issues which implicated an air carriers
pricing (or other service) practices. Accordingly, an
airlines pricing decisions can be attacked only under
federal laws. In response to the complaint, Mesa filed a motion
on December 8, 2006 seeking dismissal of all claims based
upon Hawaii Statutory Law that rest on Mesas alleged
below-cost pricing. Following the filing of Mesas Motion
to Dismiss, Aloha, on January 10, 2007, voluntarily chose
to dismiss the action filed in State Court, and simultaneously
filed a new complaint in the United States District Court for
the District of Hawaii (filed on January 9, 2007).
Alohas federal complaint abandoned claims regarding
below-cost pricing under Hawaiis Statutory Law and instead
asserted claims under contract and federal antitrust law. On
March 19, 2007, the US District Court denied Mesas
motion to dismiss the contract claims under the authority of
Morales and its progeny. Mesa has asked the District Court to
certify that ruling for immediate appellate review.
Mesa also denies any improper use of the data furnished by Aloha
while Mesa was considering a bid for Aloha during its
bankruptcy. The case is in its early stages and has been set for
trial in April 2008.
38
As part of Deltas bankruptcy, on March 13, 2007, the
Company announced that it reached an agreement with Delta for an
amendment to and assumption of its existing Delta Connection
Agreement (Amended DCA), as well as for a new code
share agreement to operate 14 CRJ-900 regional jet aircraft
(Expansion DCA). After service begins pursuant to
the Expansion DCA and the Amended DCA, the Mesa regional jet
fleet flying for Delta will consist of 14 CRJ-900s and 36
ERJ-145s.
Expansion DCA
The Expansion DCA authorizes Mesa to operate 14 CRJ-900 regional
jet aircraft as a Delta Connection Carrier for a term of up to
ten (10) years. This new service is expected to begin in
September 2007. The compensation structure for the Expansion DCA
will be similar to the structure in the existing Delta
Connection agreement, except in the following areas:
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*
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The CRJ-900 aircraft will be owned by Delta and leased to Mesa
for a nominal amount.
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*
|
No mark-up
or incentive compensation will be paid on fuel costs above a
certain level or on fuel provided by Delta.
|
Amended DCA
The Amended DCA provides for, among other things:
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*
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Adding six (6) additional ERJ-145 aircraft to the scope of
existing DCA for up to three (3) years beginning
immediately.
|
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*
|
Commencing in August 2008, the removal of eight (8) of the
original thirty (30) ERJ-145 aircraft at a rate of three
(3) aircraft per month.
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*
|
Mesa receiving a general unsecured claim of $35 million as
part of Deltas bankruptcy proceedings in connection with
the amendment. Such claim is in full and final satisfaction of
any and all claims Mesa may have against Delta for pre-petition
debt.
|
We are involved in various legal proceedings and FAA civil
action proceedings that the Company does not believe will have a
material adverse effect upon the Companys business,
financial condition or results of operations, although no
assurance can be given to the ultimate outcome of any such
proceedings.
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in
Part 1, Item 1A. Risk Factors in our
Annual Report on
Form 10-K
for the year ended September 30, 2006, which could
materially affect our business, financial condition or future
results. We caution the reader that these risk factors may not
be exhaustive. We operate in a continually changing business
environment and new risk facts emerge from time to time.
Management cannot predict such new risk factors, nor can we
assess the impact, if any, of such new risk factors, nor can we
assess the impact, if any, of such new risk factors on our
business or to the extent to which any factor or combination of
factors may impact our business. There have not been any
material changes during the quarter ended March, 2007 from the
risk factors disclosed in the above-mentioned
Form 10-K
for the year ended September 30, 2006 except as provide
below:
If we
experience a lack of labor availability or strikes, it could
result in a decrease of revenues due to the cancellation of
flights.
The operation of our business is significantly dependent on the
availability of qualified employees, including, specifically,
flight crews, mechanics and avionics specialists. Historically,
regional airlines have periodically experienced high pilot
turnover as a result of air carriers operating larger aircraft
hiring their commercial pilots. Further, the addition of
aircraft, especially new aircraft types, can result in pilots
upgrading between aircraft types and becoming unavailable for
duty during the required extensive training periods. There can
be no assurance that we will be able to maintain an adequate
supply of qualified personnel or that labor expenses will not
increase.
39
At March 31, 2007, we had approximately 5,124 employees,
approximately 2,813 of whom are members of labor unions,
including ALPA and the AFA. Our collective bargaining agreement
with ALPA becomes amendable in September 2007 and our collective
bargaining agreement with the AFA became amendable in June 2006
and the Company is in the early stages of negotiations with its
flight attendants. The inability to negotiate acceptable
contracts with existing unions as agreements become amendable or
with new unions could result in work stoppages by the affected
workers, lost revenues resulting from the cancellation of
flights and increased operating costs as a result of higher
wages or benefits paid to union members. We cannot predict
which, if any, other employee groups may seek union
representation or the outcome or the terms of any future
collective bargaining agreement and therefore the effect, if
any, on our business financial condition and results of
operations. If negotiations with unions over collective
bargaining agreements prove to be unsuccessful, following
specified cooling off periods, the unions may
initiate a work action, including a strike, which could have a
material adverse effect on our business, financial condition and
results of operations.
The Company is currently observing increased pilot turnover,
pilot turnover at times is a significant issue among regional
carriers when major carriers are hiring experienced commercial
pilots away from regional carriers. The addition of aircraft,
especially new aircraft types, can result in pilots upgrading
between aircraft types and becoming unavailable for duty during
the extensive training periods required. No assurances can be
made that pilot turnover and unavailability will not be a
significant problem in the future, particularly if major
carriers expand their operations. Similarly, there can be no
assurance that sufficient numbers of new pilots will be
available to support any future growth. Currently the Company is
observing an approximate 34.0% year over year increase in pilot
turnover. The Company is currently observing the highest
turnover among its pilots serving in the United Express system.
We believe the operational challenges unique to the United
Express system, particularly the schedules developed by United
and difficulties experienced during irregular operations are
driving this trend. While the Company is taking steps to address
increased turnover, no assurances can be made that adequate
replacement pilots can be retained and trained in a timely
manner or that the Company will have sufficient staffing to
cover Company flight operations.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
(A) None
(B) None
(C) The Companys Board of Directors authorized the
Company to purchase up to 19.4 million shares of the
Companys outstanding common stock. As of March 31,
2007, the Company has acquired and retired approximately
13.7 million shares of its outstanding common stock at an
aggregate cost of approximately $91.5 million, leaving
approximately 5.7 million shares available for purchase
under existing Board authorizations. Purchases are made at
managements discretion based on market conditions and the
Companys financial resources.
The Company repurchased the following shares for
$20.6 million during the three months ended March 31,
2007:
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Maximum
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Number of
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Total Number of
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Shares That
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Total Number
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Average Price
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Shares Purchased as
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May yet be
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of Shares
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Paid per
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Part of Publicly
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Purchased Under
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Period
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Purchased
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Share
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Announced Plan
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the Plan
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Mar-07
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2,692,174
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$
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7.64
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13,652,939
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5,769,322
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Item 3.
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Defaults
upon Senior Securities.
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Not applicable
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Item 4.
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Submission
of Matters to vote for Security Holders.
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The Company held its Annual Meeting of Stockholders on
February 6, 2007, at which the stockholders re-elected
eight directors, ratified the appointment of
Deloitte & Touche LLP as the Companys registered
independent public accountants for 2007, and ratified and
approved the Companys amended and restated Director
Incentive
40
Plan. Abstentions are included in the determination of the
number of shares represented for a quorum and have the same
effect as no votes in determining whether proposals
are approved. To the extent applicable for each individual
proposal, broker non-votes are counted for the purpose of
determining the presence of or absence of a quorum but are not
counted for determining the number of votes cast for or against
the proposal.
Results of the voting in connection with each issue were as
follows:
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Election of Directors
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For
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Withhold
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Jonathan G. Ornstein
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27,188,371
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3,304,804
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Daniel J. Altobello
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27,161,555
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3,331,620
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Robert Beleson
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29,038,581
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1,454,594
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Carlos Bonilla
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28,924,472
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1,568,703
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Joseph L. Manson
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17,501,181
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12,991,994
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Peter F. Nostrand
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28,924,980
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1,568,195
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Maurice A. Parker
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28,679,318
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1,813,857
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Richard R. Thayer
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29,033,312
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1,459,863
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Ratification of Deloitte & Touche LLP as the
Companys independent registered public accountants:
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For
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Against
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Abstain
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30,193,100
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283,770
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16,305
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Proposal to ratify and adopt the Companys amended and
restated Director Incentive Plan:
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For
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Against
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Abstain
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21,116,716
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1,636,387
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61,478
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Item 5.
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Other
Information.
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The Company has reached an agreement with Delta Air Lines
(Delta) under its Delta Connection Agreements
(DCA) to remove twelve Dash-8 aircraft operated
under the DCA by Mesas subsidiary Freedom Airlines.
Mesas recently announced expanded code share agreement
with Delta to operate 14 CRJ-900 regional jet aircraft
(Expansion DCA) will remain in place. After service
begins pursuant to the Expansion DCA and the amended DCA, the
Mesa regional jet fleet flying for Delta will consist of 14
CRJ-900s and 36 ERJ-145s.
The new CRJ-900s are expected to begin service in November 2007.
We began removing the twelve Dash-8 aircraft in April 2007 and
expect to have all twelve Dash-8s removed from service by
September 2007.
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Exhibit
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Number
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Description
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Reference
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10
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.1
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Amendment Number One to Delta
Connection Agreement dated as of March 13, 2007, between
Freedom Airlines, Inc. and Delta Air Lines, Inc.
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*
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10
|
.2
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Delta Connection Agreement dated
as of March 13, 2007 between Freedom Airlines, Inc. and
Delta Air Lines, Inc. (certain portions deleted pursuant to
confidentiality treatment request)
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*
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31
|
.1
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Certification Pursuant to
Rule 13a-
14(a)/15d-14(a)of the Securities Exchange Act of 1934, as Amended
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*
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31
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.2
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Certification Pursuant to
Rule 13a-14(a)/15d-14(a)
of the Securities Exchange Act of 1934, as Amended
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*
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32
|
.1
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Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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*
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32
|
.2
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Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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|
*
|
41
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MESA AIR GROUP, INC.
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By:
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/s/ GEORGE
MURNANE III
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George Murnane III
Executive Vice President and CFO
Dated: May 15, 2007
42
Index to
Exhibits
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Exhibits:
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Exhibit 10
|
.1
|
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Amendment Number One to Delta
Connection Agreement dated as of March 13, 2007, between Freedom
Airlines, Inc. and Delta Air Lines, Inc.
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|
Exhibit 10
|
.2
|
|
Delta Connection Agreement dated
as of March 13, 2007 between Freedom Airlines, Inc. and Delta
Air Lines, Inc. (certain portions deleted pursuant to
confidentiality treatment request)
|
|
Exhibit 31
|
.1
|
|
Certification Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Amended
|
|
Exhibit 31
|
.2
|
|
Certification Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Amended
|
|
Exhibit 32
|
.1
|
|
Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Exhibit 32
|
.2
|
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Certification Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|