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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
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period-ended December 31, 2004 |
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or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-15495
Mesa Air Group, Inc.
(Exact name of registrant as specified in its charter)
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Nevada
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85-0302351 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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410 North
44th Street,
Suite 700, Phoenix, Arizona
(Address of principal executive offices) |
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85008
(Zip code) |
Registrants telephone number, including area code:
(602) 685-4000
Indicate by checkmark 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 checkmark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
On February 1, 2005, the registrant had outstanding
30,395,074 shares of Common Stock.
TABLE OF CONTENTS
INDEX
1
PART 1. FINANCIAL INFORMATION
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Item 1. |
Financial Statements |
MESA AIR GROUP, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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Three Months Ended | |
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December 31, | |
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December 31, | |
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2004 | |
|
2003 | |
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| |
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| |
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(Unaudited) | |
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(In thousands, except per | |
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share amounts) | |
Operating revenues:
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Passenger
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$ |
256,388 |
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$ |
181,323 |
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Freight and other
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|
8,416 |
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|
6,230 |
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Total operating revenues
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264,804 |
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187,553 |
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Operating expenses:
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Flight operations
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79,223 |
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64,684 |
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Fuel
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67,113 |
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35,932 |
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Maintenance
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48,606 |
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36,694 |
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Aircraft and traffic servicing
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16,777 |
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13,824 |
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Promotion and sales
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1,346 |
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1,648 |
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General and administrative
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15,533 |
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17,091 |
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Depreciation and amortization
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|
9,173 |
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|
6,083 |
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Impairment and restructuring charges (credits)
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(1,257 |
) |
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Total operating expenses
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236,514 |
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175,956 |
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Operating income
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28,290 |
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11,597 |
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Other income (expense):
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Interest expense
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(8,741 |
) |
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(5,484 |
) |
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Interest income
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|
593 |
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|
|
217 |
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Other income (expense)
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2,349 |
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|
703 |
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|
|
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Total other expense
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(5,799 |
) |
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(4,564 |
) |
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Income before income taxes
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22,491 |
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7,033 |
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Income taxes
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8,615 |
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2,896 |
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Net income
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$ |
13,876 |
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$ |
4,137 |
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Income per common share:
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Basic
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$ |
0.47 |
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$ |
0.13 |
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Diluted
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$ |
0.32 |
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$ |
0.12 |
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See accompanying notes to condensed consolidated financial
statements.
2
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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December 31, | |
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September 30, | |
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2004 | |
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2004 | |
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(Unaudited) | |
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(In thousands, except | |
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share amounts) | |
ASSETS |
Current assets:
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Cash and cash equivalents
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$ |
222,025 |
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$ |
220,885 |
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Marketable securities
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20,788 |
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10,747 |
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Restricted cash
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9,715 |
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9,484 |
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Receivables, primarily traffic, net
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18,496 |
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30,744 |
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Income tax receivable
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|
1,511 |
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|
|
1,466 |
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Expendable parts and supplies, net
|
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|
32,922 |
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34,790 |
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|
Prepaid expenses and other current assets
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|
44,027 |
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43,907 |
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Deferred income taxes
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8,823 |
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8,855 |
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Total current assets
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358,307 |
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360,878 |
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Property and equipment, net
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720,076 |
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697,425 |
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Lease and equipment deposits
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26,903 |
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31,342 |
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Deferred income taxes
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5,342 |
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Other assets
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35,242 |
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26,550 |
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Total assets
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$ |
1,140,528 |
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$ |
1,121,537 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities:
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Current portion of long-term debt
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$ |
27,248 |
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$ |
21,850 |
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Short-term debt
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130,193 |
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230,969 |
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Accounts payable
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|
46,082 |
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46,821 |
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Air traffic liability
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2,582 |
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|
|
2,585 |
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Accrued compensation
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|
6,975 |
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|
7,284 |
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Income taxes payable
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|
410 |
|
|
|
456 |
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Other accrued expenses
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|
|
27,507 |
|
|
|
34,867 |
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|
|
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|
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Total current liabilities
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|
|
240,997 |
|
|
|
344,832 |
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|
Long-term debt, excluding current portion
|
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|
657,181 |
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550,613 |
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Deferred credits
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|
70,810 |
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|
71,451 |
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Deferred income tax liability
|
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|
3,273 |
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|
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Other noncurrent liabilities
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|
26,818 |
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|
|
25,737 |
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|
|
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|
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Total liabilities
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|
999,079 |
|
|
|
992,633 |
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Stockholders equity:
|
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Preferred stock of no par value, 2,000,000 shares
authorized; no shares issued and outstanding
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Common stock of no par value and additional paidin
capital, 75,000,000 shares authorized; 29,761,259 and
30,066,777 shares issued and outstanding, respectively
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|
106,548 |
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|
108,173 |
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Retained earnings
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|
37,551 |
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|
|
23,675 |
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Unearned compensation on restricted stock
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(2,650 |
) |
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|
(2,944 |
) |
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Total stockholders equity
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|
141,449 |
|
|
|
128,904 |
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|
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Total liabilities and stockholders equity
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|
$ |
1,140,528 |
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|
$ |
1,121,537 |
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|
See accompanying notes to condensed consolidated financial
statements.
3
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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|
|
|
|
Three Months Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
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|
(Unaudited) | |
|
|
(In thousands) | |
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
13,876 |
|
|
$ |
4,137 |
|
Adjustments to reconcile net income to net cash flows provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
9,173 |
|
|
|
6,083 |
|
|
Tax benefit-stock compensation
|
|
|
45 |
|
|
|
83 |
|
|
Impairment and restructuring charges (credits)
|
|
|
(1,257 |
) |
|
|
|
|
|
Deferred income taxes
|
|
|
8,614 |
|
|
|
2,469 |
|
|
Unrealized (gain) loss on investment securities
|
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|
(3,322 |
) |
|
|
510 |
|
|
Amortization of deferred credits
|
|
|
(1,740 |
) |
|
|
(1,649 |
) |
|
Amortization of restricted stock awards
|
|
|
294 |
|
|
|
|
|
|
Provision for obsolete expendable parts and supplies
|
|
|
300 |
|
|
|
300 |
|
|
Provision for doubtful accounts
|
|
|
1,340 |
|
|
|
696 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Net (purchases) sales of investment securities
|
|
|
(6,719 |
) |
|
|
1,972 |
|
|
|
Restricted cash
|
|
|
(231 |
) |
|
|
(9,268 |
) |
|
|
Receivables
|
|
|
10,908 |
|
|
|
1,701 |
|
|
|
Income tax receivables
|
|
|
(45 |
) |
|
|
|
|
|
|
Expendable parts and supplies
|
|
|
1,568 |
|
|
|
(2,283 |
) |
|
|
Prepaid expenses and other current assets
|
|
|
1,006 |
|
|
|
6,806 |
|
|
|
Accounts payable
|
|
|
(739 |
) |
|
|
1,384 |
|
|
|
Income taxes payable
|
|
|
(13 |
) |
|
|
(896 |
) |
|
|
Other accrued liabilities
|
|
|
(5,334 |
) |
|
|
(4,710 |
) |
|
|
|
|
|
|
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|
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
27,724 |
|
|
|
7,335 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
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|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(21,279 |
) |
|
|
(10,561 |
) |
Acquisition of Midway assets, net
|
|
|
|
|
|
|
(9,160 |
) |
Proceeds from sale of rotable and expendable inventory
|
|
|
|
|
|
|
385 |
|
Change in other assets
|
|
|
(1,972 |
) |
|
|
218 |
|
Net returns (payments) of lease and equipment deposits
|
|
|
3,313 |
|
|
|
1,129 |
|
|
|
|
|
|
|
|
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|
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
(19,938 |
) |
|
|
(17,989 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(6,075 |
) |
|
|
(3,244 |
) |
Proceeds from exercise of stock options
|
|
|
227 |
|
|
|
373 |
|
Common stock purchased and retired
|
|
|
(1,897 |
) |
|
|
|
|
Proceeds from receipt of deferred credits
|
|
|
1,099 |
|
|
|
464 |
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
(6,646 |
) |
|
|
(2,407 |
) |
|
|
|
|
|
|
|
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|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
1,140 |
|
|
|
(13,061 |
) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
220,885 |
|
|
|
152,547 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$ |
222,025 |
|
|
$ |
139,486 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
9,967 |
|
|
$ |
7,268 |
|
|
Cash paid for income taxes, net
|
|
|
155 |
|
|
|
1,265 |
|
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Aircraft delivered under interim financing
|
|
$ |
26,578 |
|
|
$ |
25,295 |
|
|
Aircraft and debt permanently financed as operating leases
|
|
|
|
|
|
|
122,592 |
|
|
Long-term debt assumed in Midway asset purchase
|
|
|
|
|
|
|
24,109 |
|
(Concluded)
See accompanying notes to condensed consolidated financial
statements.
4
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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-month period ended December 31, 2004,
are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2005.
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, 2004.
The accompanying condensed consolidated financial statements
include the accounts of Mesa Air Group, Inc. and its
wholly-owned operating subsidiaries (collectively
Mesa or the Company): 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; MPD, Inc., a Nevada
corporation, doing business as Mesa Pilot Development; Regional
Aircraft Services, Inc. (RAS) a Pennsylvania
corporation; Mesa Leasing, Inc., a Nevada corporation; Mesa Air
Group Aircraft Inventory Management, LLC
(MAG-AIM), an Arizona Limited Liability Company;
Ritz Hotel Management Corp., a Nevada Corporation; and MAGI
Insurance, Ltd. (MAGI), a Barbados, West Indies
based captive insurance company. MPD, Inc. provides pilot
training in coordination with a community college in Farmington,
New Mexico and with Arizona State University in Tempe, Arizona.
RAS performs aircraft component repair and overhaul services.
MAGI is a captive insurance company established for the purpose
of obtaining more favorable aircraft liability insurance rates.
All significant intercompany accounts and transactions have been
eliminated in consolidation.
SFAS 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 and various other subsidiaries
organized to provide support for the Companys airline
operations. The Company has aggregated these operating
subsidiaries into three reportable segments: Mesa, Air Midwest/
Freedom and Other. Mesa Airlines operates all of the
Companys regional jets and Dash-8 aircraft. Air Midwest
and Freedom operate the Companys Beech 1900 turboprop
aircraft. The Other reportable segment includes Mesa Air Group,
RAS, MPD, MAG-AIM, MAGI, Mesa Leasing, Inc. and Ritz Hotel
Management Corp., all of which support Mesas operating
subsidiaries. Prior to October 2004, the Company operated
regional jets in both Mesa and Freedom. In October 2004, the
Company completed its transition of regional jets from Freedom
into Mesa and transferred a B1900D aircraft from Air Midwest
into Freedom. As such, the Company has reagreggated Freedom with
Air Midwest beginning in the first quarter of fiscal 2005.
Operating revenues in the Other segment are primarily sales of
rotable and expendable parts to the Companys operating
subsidiaries.
Mesa Airlines provides passenger service with regional jets
under revenue-guarantee contracts with America West, United and
US Airways. Mesa Airlines code-share agreement with
Frontier terminated on December 31, 2003. Mesa Airlines
also provides passenger service with Dash-8 aircraft under
revenue-guarantee contracts with United and America West. As of
December 31, 2004, Mesa Airlines operated a fleet of 148
aircraft 96 CRJs, 36 ERJs and 16 Dash-8s.
5
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Air Midwest and Freedom provide passenger service with
Beechcraft 1900D aircraft under pro-rate contracts with America
West, US Airways and Midwest Airlines as well as independent
operations as Mesa Airlines. As of December 31, 2004, Air
Midwest and Freedom operated a fleet of 33 Beechcraft 1900D
turboprop aircraft.
The Other category consists of Mesa Air Group (holding company),
RAS, MPD, MAG-AIM, MAGI, Mesa Leasing, Inc. and Ritz Hotel
Management Corp. Mesa Air Group performs 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. MPD operates pilot training programs
in conjunction with San Juan College in Farmington, New
Mexico and Arizona State University in Tempe, Arizona. Graduates
of these training programs are eligible to be hired by the
Companys operating subsidiaries. RAS primarily provides
repair services to the Companys operating subsidiaries.
MAGI is a captive insurance company located in Barbados. MAG-AIM
is the Companys inventory procurement company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Air Midwest/ | |
|
|
|
|
|
|
December 31, 2004 (000s) |
|
Mesa | |
|
Freedom | |
|
Other | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
240,809 |
|
|
$ |
21,797 |
|
|
$ |
80,466 |
|
|
$ |
(78,268 |
) |
|
$ |
264,804 |
|
Depreciation and amortization
|
|
|
8,175 |
|
|
|
72 |
|
|
|
926 |
|
|
|
|
|
|
|
9,173 |
|
Operating income (loss)
|
|
|
28,747 |
|
|
|
(1,439 |
) |
|
|
13,414 |
|
|
|
(12,432 |
) |
|
|
28,290 |
|
Interest expense
|
|
|
(6,122 |
) |
|
|
|
|
|
|
(2,763 |
) |
|
|
144 |
|
|
|
(8,741 |
) |
Interest income
|
|
|
586 |
|
|
|
3 |
|
|
|
148 |
|
|
|
(144 |
) |
|
|
593 |
|
Income (loss) before income tax
|
|
|
27,185 |
|
|
|
(1,466 |
) |
|
|
9,204 |
|
|
|
(12,432 |
) |
|
|
22,491 |
|
Income tax (benefit)
|
|
|
10,412 |
|
|
|
(562 |
) |
|
|
(1,235 |
) |
|
|
|
|
|
|
8,615 |
|
Total assets
|
|
|
1,063,349 |
|
|
|
17,372 |
|
|
|
427,346 |
|
|
|
(367,540 |
) |
|
|
1,140,528 |
|
Capital expenditures (including non-cash)
|
|
|
27,179 |
|
|
|
|
|
|
|
20,678 |
|
|
|
|
|
|
|
47,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Mesa/ | |
|
|
|
|
|
|
|
|
December 31, 2003 (000s) |
|
Freedom | |
|
Air Midwest | |
|
Other | |
|
Eliminations | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
165,079 |
|
|
$ |
21,160 |
|
|
$ |
81,463 |
|
|
$ |
(80,149 |
) |
|
$ |
187,553 |
|
Depreciation and amortization
|
|
|
5,221 |
|
|
|
176 |
|
|
|
686 |
|
|
|
|
|
|
|
6,083 |
|
Operating income (loss)
|
|
|
20,803 |
|
|
|
(2,697 |
) |
|
|
6,364 |
|
|
|
(12,873 |
) |
|
|
11,597 |
|
Interest expense
|
|
|
(3,802 |
) |
|
|
(42 |
) |
|
|
(1,640 |
) |
|
|
|
|
|
|
(5,484 |
) |
Interest income
|
|
|
65 |
|
|
|
2 |
|
|
|
150 |
|
|
|
|
|
|
|
217 |
|
Income (loss) before income tax
|
|
|
17,742 |
|
|
|
(2,671 |
) |
|
|
4,835 |
|
|
|
(12,873 |
) |
|
|
7,033 |
|
Income tax (benefit)
|
|
|
6,104 |
|
|
|
(1,101 |
) |
|
|
3,197 |
|
|
|
(5,304 |
) |
|
|
2,896 |
|
Total assets
|
|
|
53,639 |
|
|
|
15,105 |
|
|
|
338,895 |
|
|
|
(264,241 |
) |
|
|
643,398 |
|
Capital expenditures (including non-cash)
|
|
|
27,857 |
|
|
|
44 |
|
|
|
7,955 |
|
|
|
|
|
|
|
35,856 |
|
The Company has a cash management program which provides for the
investment of excess cash balances primarily in short-term money
market instruments, 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 $20.8 million in marketable
securities that include common equity
6
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
securities of companies operating in the airline industry, US
treasury notes and corporate bonds. These investments are
classified as trading securities and accordingly, are carried at
market value with changes in value reflected in the current
period operations.
In the past, the Company has entered into short positions on
common equity securities when management believed that the
Company could capitalize on downward moves in particular
securities and as a hedge against its investment in common
stocks of other airlines. Furthermore, by taking a short
position in other airlines common stock, the Company
effectively hedged against downturns in the airline industry.
Unlike traditional investing where the investors risk is
limited to the amount of their investment, when stocks are sold
short, there is no limit to the potential price appreciation of
the stock thus there is no limit to the investors loss.
The Company marks short positions to market at each reporting
period with the associated gain or loss in value reflected in
other income (expense) in the statement of operations. As
of December 31, 2004, the Company had no liabilities
related to short positions. Unrealized gains (losses) relating
to trading securities held at December 31, 2004 and
September 30, 2004, were $1.9 million and
($1.7) million, respectively.
At December 31, 2004, the Company had $9.7 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, $4.4 million of outstanding
letters of credit at December 31, 2004 are collateralized
by amounts on deposit. The Company also maintained
$5.3 million on deposit with another financial bank to
collateralize its direct deposit payroll obligations.
|
|
5. |
Accounts Receivable from Code-Share Partners |
The Company has code-share agreements with America West, US
Airways, United and Midwest Airlines. Approximately 99% of the
Companys consolidated passenger revenue for the three
months ended December 31, 2004, were derived from these
agreements. Accounts receivable from the Companys
code-share partners were 65% and 59% of total gross accounts
receivable at December 31, 2004 and September 30,
2004, respectively.
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 December 31, 2004 and September 30, 2004, the
Company had $130.2 million and $231.0 million,
respectively, in notes payable for aircraft on interim
financing. 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. These interim financings agreements are eleven months in
length and provide for monthly interest only payments at LIBOR
plus three percent for six months. The Company must also make
$75,000 principal payments in months seven through ten and the
balance is due after 11 months. Should the Company not
permanently finance the aircraft
7
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
at maturity, the maturity date may be extended without default
and the manufacturer shall purchase, or arrange for another
party to purchase, the portion of the debt not held by the
manufacturer until such time as acceptable permanent financing
is obtained. The Companys interim financing agreement with
the manufacturer provides for the Company to have a maximum of
15 aircraft on interim financing at a given time. After taking
delivery of the aircraft, it is the Companys intention to
subsequently enter into a sale-leaseback transaction with an
independent third-party lessor when market lease rates permit.
Upon permanent financing as a lease, the proceeds from the
sale-leaseback transaction are used to retire the notes payable
to the manufacturer. Any gain recognized on sale-leaseback
transactions is deferred and amortized over the life of the
lease.
During the quarter ended December 31, 2004, the Company
placed five aircraft on permanent financing as debt with a bank,
resulting in $118.0 million being recharacterized from
short-term debt to long-term debt. The Company had five aircraft
on interim financing at December 31, 2004.
As of December 31, 2004, our growth strategy involves the
acquisition of 13 more Bombardier regional jets during the
remainder of fiscal 2005. As of December 31, 2004, we had
permanently financed 35 of the 40 CRJ-700 and CRJ-900 aircraft
delivered under the 2001 BRAD agreement; the remaining aircraft
are subject to interim financing. We may utilize interim
financing provided by the manufacturer and have the ability to
fund up to 15 aircraft at any one time under this facility. Our
ability to obtain additional interim financing is contingent
upon obtaining permanent financing for the aircraft already
delivered. As of December 31, 2004, we are obligated under
our code-share agreements to place an additional 13 CRJ 900
regional jets over the next 9 months. As of
December 31, 2004, we have firm orders with Bombardier for
an additional 20 regional jets.
8
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
8. |
Notes Payable and Long-Term Debt |
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
September 30, | |
|
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Notes payable to bank, collateralized by the underlying
aircraft, due 2019
|
|
$ |
362,135 |
|
|
$ |
248,135 |
|
Senior convertible notes due June 2023
|
|
|
100,112 |
|
|
|
100,112 |
|
Senior convertible notes due February 2024
|
|
|
100,000 |
|
|
|
100,000 |
|
Notes payable to manufacturer, principal and interest due
monthly through 2011 at variable rates of interest ranging from
2.91% to 7.15% at December 31, 2004, collateralized by the
underlying aircraft
|
|
|
92,729 |
|
|
|
93,900 |
|
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
|
|
|
25,307 |
|
|
|
25,758 |
|
Note payable to manufacturer, principal due semi-annually,
interest at 7% due quarterly through 2007
|
|
|
2,971 |
|
|
|
3,363 |
|
Mortgage note payable to bank, principal and interest at
71/2%
due monthly through 2009
|
|
|
951 |
|
|
|
961 |
|
Other
|
|
|
224 |
|
|
|
234 |
|
|
|
|
|
|
|
|
Total debt
|
|
|
684,429 |
|
|
|
572,463 |
|
Less current portion
|
|
|
(27,248 |
) |
|
|
(21,850 |
) |
|
|
|
|
|
|
|
Long-term debt
|
|
$ |
657,181 |
|
|
$ |
550,613 |
|
|
|
|
|
|
|
|
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 included in the denominator while interest on
convertible debt, net of tax, is added back to the
9
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
numerator. A reconciliation of the numerator and denominator
used in computing income per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
Share calculation:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
29,779 |
|
|
|
31,743 |
|
Effect of dilutive outstanding stock options and warrants
|
|
|
543 |
|
|
|
1,864 |
|
Effect of restricted stock
|
|
|
428 |
|
|
|
|
|
Effect of dilutive outstanding convertible debt due 2023 and 2024
|
|
|
16,933 |
|
|
|
10,011 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
47,683 |
|
|
|
43,618 |
|
|
|
|
|
|
|
|
Adjustments to net income:
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
13,876 |
|
|
$ |
4,137 |
|
Interest expense on convertible debt, net of tax
|
|
|
1,524 |
|
|
|
1,008 |
|
|
|
|
|
|
|
|
Adjusted net income
|
|
$ |
15,400 |
|
|
$ |
5,145 |
|
|
|
|
|
|
|
|
In September 2004, the Emerging Issues Task Force
(EITF) reached a consensus on EITF Issue
No. 04-08, The Effect of Contingently Convertible
Debt on Diluted Earnings per Share. EITF Issue
No. 04-08 requires shares of common stock issuable upon
conversion of contingently convertible debt instruments to be
included in the calculation of diluted earnings per share
whether or not the contingent conditions for conversion have
been met, unless the inclusion of these shares is anti-dilutive.
Previously, shares of common stock issuable upon conversion of
contingently convertible debt securities were excluded from the
calculation of diluted earnings per share. The Company adopted
the provisions of EITF Issue No. 04-08 in the current
period, and as such, included our 3.625% senior convertible
notes due 2024 in the calculation of dilutive earnings per
share. EITF Issue No. 04-08 requires the restatement of
prior period diluted earnings per share amounts. Our
3.625% senior convertible notes due 2024 were issued in
February 2004, thus diluted earnings per share amounts for the
quarter ended December 31, 2003 did not need to be
restated. We will restate our previously reported diluted
earnings per share for the second, third and fourth quarters of
fiscal 2004 to include the dilutive impact of the
3.625% senior convertible notes.
10
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
10. |
Stock Repurchase Program |
In December 1999, the Companys Board of Directors
authorized the Company to repurchase up to approximately
3.4 million shares of the outstanding common stock of the
Company. In January 2001, October 2002 and October 2004, the
Companys Board amended the original plan and authorized
the repurchase of one million, two million and two million
additional shares of common stock, respectively. As of
December 31, 2004, the Company has acquired and retired
approximately 6.6 million shares of its outstanding common
stock at an aggregate cost of approximately $38.5 million
leaving approximately 1.8 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 $1.9 million during
the three months ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of | |
|
Maximum Number of | |
|
|
|
|
|
|
Shares Purchased as | |
|
Shares that May Yet | |
|
|
Total Number of | |
|
Average Price | |
|
Part of Publicly | |
|
Be Purchased Under | |
Period |
|
Shares Purchased | |
|
Paid per Share | |
|
Announced Plans | |
|
the Plan | |
|
|
| |
|
| |
|
| |
|
| |
October 2004
|
|
|
346,851 |
|
|
$ |
5.57 |
|
|
|
346,851 |
|
|
|
1,809,705 |
|
November 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
346,851 |
|
|
$ |
5.57 |
|
|
|
346,851 |
|
|
|
1,809,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. |
Beechcraft 1900D Cost Reductions |
On February 7, 2002, the Company entered into an agreement
with Raytheon Aircraft Credit Company (the Raytheon
Agreement) to reduce the operating costs of its 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 satisfying
certain spending requirements and, among other things, 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
the three months ended December 31, 2004 and 2003.
In return, the Company granted Raytheon an option to purchase up
to 233,068 warrants at a purchase price of $1.50 per
warrant. Each warrant entitles the holder to purchase one share
of common stock at an exercise price of $10.00 per share.
Each of the warrants is exercisable at any time over a
three-year period following its date of purchase. At
December 31, 2004, Raytheon has vested in and exercised its
option to purchase all 233,068 warrants.
|
|
12. |
Impairment of Long-Lived Assets |
The Company took a charge for $3.6 million in fiscal 2002
to accrue for the remaining lease payments of two Shorts 360
aircraft and the future costs of returning these aircraft to the
lessor. These leases expire in March 2005.
Subsequent to December 31, 2004, the Company entered into
an agreement with the lessor for the early return of these two
aircraft. The agreement included the elimination of the aircraft
return conditions. As a result, the Company reduced its reserve
for the costs to return these aircraft to the agreed upon amount
at December 31, 2004. At December 31, 2004, the
Company had $1.0 million of accrued aircraft return costs
and $0.3 million of accrued aircraft lease payments
recorded with respect to this impairment.
11
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The changes in the impairment and restructuring charges for the
periods ended December 31, 2004 and 2003 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve | |
|
Non | |
|
|
|
Reserve | |
|
|
Oct. 1, | |
|
Cash | |
|
Cash | |
|
Dec. 31, | |
Description of Charge |
|
2003 | |
|
Utilized | |
|
Utilized | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other
|
|
$ |
(548 |
) |
|
$ |
|
|
|
$ |
44 |
|
|
$ |
(504 |
) |
Costs to return aircraft
|
|
|
(2,217 |
) |
|
|
|
|
|
|
|
|
|
|
(2,217 |
) |
Aircraft lease payments
|
|
|
(1,188 |
) |
|
|
129 |
|
|
|
36 |
|
|
|
(1,023 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(3,953 |
) |
|
$ |
129 |
|
|
$ |
80 |
|
|
$ |
(3,744 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve | |
|
Reversal | |
|
Non | |
|
|
|
Reserve | |
|
|
Oct. 1, | |
|
of | |
|
Cash | |
|
Cash | |
|
Dec. 31, | |
Description of Charge |
|
2004 | |
|
Charges | |
|
Utilized | |
|
Utilized | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs to return aircraft
|
|
$ |
(2,217 |
) |
|
$ |
1,187 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,030 |
) |
Aircraft lease payments
|
|
|
(450 |
) |
|
|
70 |
|
|
|
77 |
|
|
|
36 |
|
|
|
(267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
(2,667 |
) |
|
$ |
1,257 |
|
|
$ |
77 |
|
|
$ |
36 |
|
|
$ |
(1,297 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The reserve balance of $1.3 million above is included in
accrued expenses on the accompanying consolidated balance sheets.
|
|
13. |
Other Income (Expense) |
Other income includes investment income (losses) from the
Companys portfolio of aviation related securities of
approximately $3.3 million for the three months ended
December 31, 2004.
The Company applies the provision of APB Opinion No. 25 and
related interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been
recognized for awards made pursuant to its fixed stock option
plans. Had the compensation cost for the Companys four
fixed stock-based compensation plans been determined consistent
with the measurement provision of SFAS No. 148,
12
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Accounting for Stock-Based Compensation-Transition and
Disclosure, the Companys net income and net income
per share would have been as indicated by the pro forma amounts
indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Net income as reported
|
|
$ |
13,876 |
|
|
$ |
4,137 |
|
Stock-based employee compensation cost, net of tax
|
|
|
(149 |
) |
|
|
(128 |
) |
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
13,727 |
|
|
$ |
4,009 |
|
|
|
|
|
|
|
|
Interest expense on convertible debt, net of tax
|
|
$ |
1,524 |
|
|
$ |
1,008 |
|
|
|
|
|
|
|
|
|
Adjusted pro forma net income
|
|
$ |
15,251 |
|
|
$ |
5,017 |
|
|
|
|
|
|
|
|
Net income per share Basic:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.47 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.46 |
|
|
$ |
0.13 |
|
|
|
|
|
|
|
|
Net income per share Diluted:
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
0.32 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
0.32 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
15. |
Commitments and Contingencies |
In May 2001, the Company entered into an agreement with
Bombardier Regional Aircraft Division (BRAD) under
which the Company committed to purchase a total of 15 CRJ-700s
and 25 CRJ-900s. The transaction includes standard product
support provisions, including training, preferred pricing on
initial inventory provisioning, maintenance and technical
publications. As of December 31, 2004, the Company has
taken delivery of all the aircraft. In addition to the firm
orders, Mesa has an option to acquire an additional 80 CRJ-700
and CRJ-900 regional jets. In January 2004, the Company
exercised its option to convert options on 20 CRJ-900 aircraft
to firm orders (seven of which can be converted to CRJ-700s). In
addition to the firm orders, Mesa has an option to acquire an
additional 60 CRJ-700 and CRJ-900 regional jets. In conjunction
with this purchase agreement, Mesa had $15.0 million on
deposit with BRAD that was included in lease and equipment
deposits at December 31, 2004. The remaining deposits are
expected to be returned upon completion of permanent financing
on each of the last five aircraft ($3.0 million per
aircraft).
On January 8, 2003, US Airways Express Flight 5481,
operated by Air Midwest, crashed shortly after takeoff from
Charlotte Douglas International Airport en route to Greenville/
Spartanburg, S.C. The Company has cooperated fully with all
federal, state and local regulatory and investigatory agencies
to ascertain the cause of the accident. The Company is unable to
predict the amount of claims, if any, which may ultimately be
made against it and how those claims might be resolved. The
Company maintains substantial insurance coverage and, at this
time, management has no reason to believe that such insurance
coverage will not be sufficient to cover any claims arising from
the crash. Therefore, the Company believes that the resolution
of any claims will not have a material adverse effect on its
financial position, results of operations or cash flows. The
Company is unable to predict the extent of any adverse effect on
its revenues, yields or results of operations which may result
from the public perception of the accident of Flight 5481.
The Company is also involved in various other legal proceedings
and FAA civil action proceedings that the Company does not
believe will have a material adverse effect upon the
Companys business, financial
13
MESA AIR GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
condition or results of operations, although no assurance can be
given to the ultimate outcome of any such proceedings.
|
|
16. |
New Accounting Pronouncement |
On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued SFAS No. 123R,
Share-Based Payment, requiring all share-based
payments to employees, including grants of employee stock
options, to be recognized as compensation expense in the
consolidated financial statements based on their fair values.
This standard is effective for periods beginning after
June 15, 2005 and includes two transition methods. Upon
adoption, we will be required to use either the modified
prospective or the modified retrospective transition method.
Under the modified prospective method, awards that are granted,
modified, or settled after the date of adoption should be
measured and accounted for in accordance with SFAS 123R.
Unvested equity-classified awards that were granted prior to the
effective date should continue to be accounted for in accordance
with SFAS 123 except that amounts must be recognized in the
income statement. Under the modified retrospective approach, the
previously-reported amounts are restated (either to the
beginning of the year of adoption or for all periods presented)
to reflect the SFAS 123 amounts in the income statement. We
are currently evaluating the impact of this standard and its
transitional alternatives.
Certain 2004 amounts previously reported have been reclassified
to conform with the 2005 presentation.
14
|
|
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 our 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 Form 10-Q Report 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 America West, US Airways or United Airlines to
pay their obligations under the code-share agreements; the
inability of United Airlines and/or US Airways to successfully
restructure and emerge from bankruptcy; the ability of US
Airways to reject our code-share agreements in bankruptcy; 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;
unfavorable resolution of negotiations with municipalities for
the leasing of facilities; and risks associated with litigation
outcomes. 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-K.
All references to we, our,
us, or Mesa refer to Mesa Air Group,
Inc. and its predecessors, direct and indirect subsidiaries and
affiliates.
Investors should read the risks identified under Risk
Factors below for a more detailed discussion of these and
other factors.
GENERAL
Mesa Air Group, Inc. and its subsidiaries (collectively referred
to herein as Mesa or the Company) is an
independently owned regional airline serving 177 cities in
41 states, the District of Columbia, Canada, Mexico and the
Bahamas. At December 31, 2004, Mesa operated a fleet of 181
aircraft with over 1,000 daily departures.
Mesas airline operations are conducted by three regional
airline subsidiaries primarily utilizing hub-and-spoke systems.
Mesa Airlines, a wholly owned subsidiary of Mesa, operates as
America West Express under a code-share and revenue sharing
agreement with America West Airlines, Inc. (America
West), as United Express under a code-share and revenue
guarantee agreement with United Airlines, Inc. (United
Airlines or United) and as US Airways Express
under a code-share and revenue guarantee agreement with US
Airways, Inc. (US Airways). Air Midwest, Inc.
(Air Midwest), a wholly owned subsidiary of Mesa,
operates as US Airways Express under a code-share agreement with
US Airways, as America West Express
15
under a code-share agreement with America West, and also
operates an independent division, doing business as Mesa
Airlines, from Albuquerque, New Mexico and Dallas, Texas. Air
Midwest also has a code-share agreement with Midwest Airlines
(Midwest) in Kansas City on flights operated as US
Airways Express. In addition, Freedom Airlines, Inc., a wholly
owned subsidiary of the Company, operates as America West
express under a code-share agreement with America West.
Approximately 99% of our consolidated passenger revenues for the
three months ended December 31, 2004 were derived from
operations associated with code-share agreements. Our
subsidiaries have code-share agreements with America West,
Midwest Airlines, United Airlines and US Airways. These
code-share agreements allow use of the code-share partners
reservation system and flight designator code to identify
flights and fares in computer reservation systems, permit use of
logos, service marks, and aircraft paint schemes and uniforms
similar to the code-share partners and provide coordinated
schedules and joint advertising.
In addition to carrying passengers, we carry freight and express
packages on our passenger flights and have interline small cargo
freight agreements with many other carriers. We also have
contracts with the U.S. Postal Service for carriage of mail
to the cities we serve and occasionally operate charter flights
when our aircraft are not otherwise used for scheduled service.
The following tables set forth quarterly comparisons for the
periods indicated below:
OPERATING DATA
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
Passengers
|
|
|
3,082,610 |
|
|
|
2,101,600 |
|
Available seat miles (000s)
|
|
|
1,986,457 |
|
|
|
1,456,787 |
|
Revenue passenger miles (000s)
|
|
|
1,419,478 |
|
|
|
990,939 |
|
Load factor
|
|
|
71.5 |
% |
|
|
68.0 |
% |
Yield per revenue passenger mile (cents)
|
|
|
18.7 |
|
|
|
18.9 |
|
Revenue per available seat mile (cents)
|
|
|
13.3 |
|
|
|
12.9 |
|
Operating cost per available seat mile (cents)
|
|
|
11.9 |
|
|
|
12.1 |
|
Average stage length (miles)
|
|
|
373 |
|
|
|
374 |
|
Number of operating aircraft in fleet
|
|
|
181 |
|
|
|
158 |
|
Gallons of fuel consumed
|
|
|
48,032,153 |
|
|
|
36,183,273 |
|
Block hours flown
|
|
|
139,448 |
|
|
|
114,316 |
|
Departures
|
|
|
96,760 |
|
|
|
80,871 |
|
CONSOLIDATED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
|
| |
|
| |
|
|
Costs per | |
|
% of Total | |
|
Costs per | |
|
% of Total | |
|
|
ASM (cents) | |
|
Revenues | |
|
ASM (cents) | |
|
Revenues | |
|
|
| |
|
| |
|
| |
|
| |
Flight operations
|
|
|
4.0 |
|
|
|
29.9 |
% |
|
|
4.4 |
|
|
|
34.5 |
% |
Fuel
|
|
|
3.4 |
|
|
|
25.3 |
% |
|
|
2.5 |
|
|
|
19.2 |
% |
Maintenance
|
|
|
2.4 |
|
|
|
18.4 |
% |
|
|
2.5 |
|
|
|
19.6 |
% |
Aircraft and traffic servicing
|
|
|
0.8 |
|
|
|
6.3 |
% |
|
|
0.9 |
|
|
|
7.4 |
% |
Promotion and sales
|
|
|
0.1 |
|
|
|
0.5 |
% |
|
|
0.1 |
|
|
|
0.9 |
% |
General and administrative
|
|
|
0.8 |
|
|
|
5.9 |
% |
|
|
1.2 |
|
|
|
9.1 |
% |
Depreciation and amortization
|
|
|
0.5 |
|
|
|
3.5 |
% |
|
|
0.4 |
|
|
|
3.2 |
% |
Impairment and restructuring charges (credits)
|
|
|
(0.1 |
) |
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11.9 |
|
|
|
89.3 |
% |
|
|
12.1 |
|
|
|
93.8 |
% |
Interest expense
|
|
|
0.4 |
|
|
|
3.3 |
% |
|
|
0.4 |
|
|
|
3.1 |
% |
Note: numbers in table may not recalculate due to rounding
16
FINANCIAL DATA BY OPERATING SEGMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2004 (000s) | |
|
|
| |
|
|
|
|
Air Midwest | |
|
|
|
|
Mesa | |
|
/Freedom | |
|
Other | |
|
Elimination | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
240,809 |
|
|
$ |
21,797 |
|
|
$ |
80,466 |
|
|
$ |
(78,268 |
) |
|
$ |
264,804 |
|
Total operating expenses
|
|
|
212,062 |
|
|
|
23,236 |
|
|
|
67,052 |
|
|
|
(65,836 |
) |
|
|
236,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
28,747 |
|
|
|
(1,439 |
) |
|
|
13,414 |
|
|
|
(12,432 |
) |
|
|
28,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2003 (000s) | |
|
|
| |
|
|
Mesa/ | |
|
Air | |
|
|
|
|
Freedom | |
|
Midwest | |
|
Other | |
|
Elimination | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Total operating revenues
|
|
$ |
165,079 |
|
|
$ |
21,160 |
|
|
$ |
81,463 |
|
|
$ |
(80,149 |
) |
|
$ |
187,553 |
|
Total operating expenses
|
|
|
144,276 |
|
|
|
23,858 |
|
|
|
75,098 |
|
|
|
(67,276 |
) |
|
|
175,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
20,803 |
|
|
|
(2,698 |
) |
|
|
6,365 |
|
|
|
(12,873 |
) |
|
|
11,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RESULTS OF OPERATIONS
|
|
|
For the three months ended December 31, 2004 versus
the three months ended December 31, 2003 |
In the quarter ended December 31, 2004, operating revenue
increased by $77.3 million, or 41.2%, from
$187.6 million to $264.8 million. The increase in
revenue is primarily attributable to a $78.1 million
increase in revenue associated with the operation of 28
additional regional jets flown by Mesa compared to the quarter
ended December 31, 2003. Offsetting this increase was a net
decrease in revenue of approximately $1.8 million at Air
Midwest and Freedom. The decrease in revenue at Air Midwest and
Freedom was primarily comprised of a $3.0 million decrease
in passenger revenue, which was offset by a $1.3 million
increase in Essential Air Program subsidies. The decrease in
passenger revenue was due to a reduction of 9 Beechcraft 1900D
aircraft from 42 in December 2003 to 33 in December 2004.
In the quarter ended December 31, 2004, flight operations
expense increased $14.5 million, or 22.5%, to
$79.2 million from $64.7 million for the quarter ended
December 31, 2003. On an ASM basis, flight operations
expense decreased 9.1% to 4.0 cents per ASM in the quarter ended
December 31, 2004 from 4.4 cents per ASM in the quarter
ended December 31, 2003. The increase in expense is
consistent with the increased capacity from the regional jets
added to Mesa and Freedoms fleet since last year. The
decrease on an ASM basis is due to the addition of larger
regional jets at Mesa and the reduction in turboprop aircraft at
Air Midwest and Freedom.
In the quarter ended December 31, 2004, fuel expense
increased $31.2 million, or 86.8%, to $67.1 million
from $35.9 million for the quarter ended December 31,
2003. On an ASM basis, fuel expense increased 36.0% to 3.4 cents
per ASM in the quarter ended December 31, 2004 from 2.5
cents per ASM in the quarter ended December 31, 2003.
Into-plane fuel cost increased 40% per gallon, resulting in
a $14.4 million unfavorable price variance and consumption
increased 33% resulting in a $16.5 million unfavorable
volume variance (excluding fuel used in other operations). The
increase in volume was due to the additional regional jets added
to the fleet. In the quarter ended December 31, 2004,
approximately 93% of our fuel costs were reimbursed by our
code-share partners.
17
In the quarter ended December 31, 2004, maintenance expense
increased $11.9 million, or 32.5%, to $48.6 million
from $36.7 million for the quarter ended December 31,
2003. On an ASM basis, maintenance expense decreased 4.0% to 2.4
cents per ASM in the quarter ended December 31, 2004 from
2.5 cents per ASM in the quarter ended December 31, 2003.
Mesas maintenance expense increased $14.4 million
primarily as a result of increases in the number of aircraft in
their fleet, repair costs on certain rotable parts, headcount
and engine overhaul expenses. This increase was offset by a
$0.5 million decrease at Air Midwest and Freedom as a
result of reductions in its fleet. The decrease on an ASM basis
is due to the lower maintenance costs associated with adding new
jets into the Companys fleet.
|
|
|
Aircraft and Traffic Servicing |
In the quarter ended December 31, 2004, aircraft and
traffic servicing expense increased by $3.0 million, or
21.4%, to $16.8 million from $13.8 million for the
quarter ended December 31, 2003. On an ASM basis, aircraft
and traffic servicing expense decreased 11.1% to 0.8 cents per
ASM in the quarter ended December 31, 2004 from 0.9 cents
per ASM in the quarter ended December 31, 2003. The
increase in expense is primarily related to a 19.6% increase in
regional jet departures. The decrease on an ASM basis is due to
the efficiencies attained by adding additional regional jets at
Mesa and the reduction in turboprop aircraft at Air Midwest and
Freedom.
In the quarter ended December 31, 2004, promotion and sales
expense decreased $0.3 million, or 18.3%, to
$1.3 million from $1.6 million for the quarter ended
December 31, 2003. On an ASM basis, promotion and sales
expense remained flat at 0.1 cents per ASM in the quarters ended
December 31, 2004 and 2003. The decrease in expense is due
to a decline in booking and franchise fees paid by Air Midwest
and Freedom under the Companys pro-rate agreements with
its code-share partners, caused by a decline in passengers
carried under these agreements. The Company does not pay these
fees under its regional jet revenue-guarantee contracts.
|
|
|
General and Administrative |
In the quarter ended December 31, 2004, general and
administrative expense decreased $1.6 million, or 9.1%, to
$15.5 million from $17.1 million for the quarter ended
December 31, 2003. On an ASM basis, general and
administrative expense decreased 33.3% to 0.8 cents per ASM in
quarter ended December 31, 2004 from 1.2 cents per ASM in
the quarter ended December 31, 2003. The decrease in
expense includes a reduction of $5.3 million in costs
associated with the failed merger with Atlantic Coast Airlines,
Inc., offset by a $0.6 million increase in bad debt expense
as the Company increased its allowance for doubtful accounts by
$1.4 million, a $0.7 million increase in passenger
liability insurance associated with increases in the
Companys fleet, a $0.6 million increase in property
taxes associated with increases in the Companys fleet and
a $0.6 million increase in administrative wages and
benefits as a result of increased headcount.
|
|
|
Depreciation and Amortization |
In the quarter ended December 31, 2004, depreciation and
amortization expense increased $3.1 million, or 50.8%, to
$9.2 million from $6.1 million for the quarter ended
December 31, 2003. On an ASM basis, depreciation expense
increased 25.0% to 0.5 cents per ASM in quarter ended
December 31, 2004 from 0.4 cents per ASM in the quarter
ended December 31, 2003. The increase in expense is
primarily due to the purchase of 11 regional jets in 2004, the
acquisition of two CRJ200 aircraft acquired as part of the
purchase of Midway assets, depreciation of aircraft on interim
financing and an increase in rotable aircraft inventory at
MAG-AIM.
18
|
|
|
Impairment and Restructuring Charges (Credits) |
In the quarter ended December 31, 2004, the Company
reversed $1.3 million in reserves for lease and lease
return costs related to two Shorts 360 aircraft the Company
returned to the lessor in January 2005.
In the quarter ended December 31, 2004, interest expense
increased $3.2 million, or 59.4%, to $8.7 million from
$5.5 million for the quarter ended December 31, 2003.
On an ASM basis, interest expense remained flat at 0.4 cents per
ASM in the quarters ended December 31, 2004 and 2003. The
increase in interest expense is primarily comprised of
$0.9 million in interest on the senior convertible notes
that were issued in February 2004 and an increase of
$1.3 million in interest on interim and permanently
financed aircraft debt.
In the quarter ended December 31, 2004, other income
(expense) increased $1.6 million, or 234.1%, to
$2.3 million from $0.7 million for the quarter ended
December 31, 2003. In the quarter ended December 31,
2004, other income is primarily comprised of investment income
of $3.3 million related to the Companys portfolio of
aviation related securities, $2.4 million in insurance
proceeds on the Companys EMB120 aircraft offset by
$4.1 million in lease return costs on the EMB120s.
In the quarter ended December 31, 2003, other income is
primarily comprised of investment income of $0.8 million
related to the Companys portfolio of aviation related
securities.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had cash, cash equivalents, and
marketable securities (including restricted cash) of
$252.5 million, compared to $241.1 million at
September 30, 2004. 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 included $37.5 million provided from
operations and $3.3 million in returned security deposits.
Uses of cash included capital expenditures of $21.3 million
attributable to the expansion of our regional jet fleet and
related provisioning of rotable inventory to support the
additional jets, $6.1 million in principal payments on
long-term debt and $1.9 million in purchases of the
Companys outstanding common stock.
As of December 31, 2004, we had receivables of
approximately $18.5 million (net of an allowance for
doubtful accounts of $8.0 million), compared to receivables
of approximately $30.7 million (net of an allowance for
doubtful accounts of $7.1 million) as of September 30,
2004. The amounts due consist primarily of receivables due from
our code-share partners and passenger ticket receivables due
through the Airline Clearing House. The decrease is primarily a
result of collection of amounts due from Raytheon and
collections from our code-share partners. Accounts receivable
from our code-share partners was 65% of total gross accounts
receivable at December 31, 2004.
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 December 31, 2004, we
leased 130 aircraft with remaining lease terms ranging from 1 to
17 years. Future minimum lease payments due under all
long-term operating leases were approximately $2.0 billion
at December 31, 2004.
19
|
|
|
Interim and Permanent Aircraft Financing
Arrangements |
At December 31, 2004, we had $130.2 million, in notes
payable for aircraft on interim financing. Under interim
financing arrangements, we 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, we reflect the aircraft and debt
under interim financing on our balance sheet during the interim
financing period. These interim financings agreements are eleven
months in length and provide for monthly interest only payments
at LIBOR plus three percent for six months. The Company must
also make $75,000 principal payments in months seven through ten
and the balance is due after 11 months. Should the Company
not permanently finance the aircraft at maturity, the maturity
date may be extended without default and the manufacturer shall
purchase, or arrange for another party to purchase, the portion
of the debt not held by the manufacturer until such time as
acceptable permanent financing is obtained. The Companys
interim financing agreement with the manufacturer provides for
the Company to have a maximum of 15 aircraft on interim
financing at a given time. After taking delivery of the
aircraft, it is our intention to subsequently enter into a
sale-leaseback transaction with an independent third-party
lessor when market lease rates permit. Our ability to obtain
additional interim financing is contingent upon obtaining
permanent financing for the aircraft already delivered. There
are no assurances that we will be able to obtain permanent
financing for future aircraft deliveries.
|
|
|
Other Indebtedness and Obligations |
At December 31, 2004, the Company had $9.7 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, $4.4 million of outstanding
letters of credit were collateralized by amounts on deposit at
December 31, 2004. The Company also maintained
$5.3 million on deposit with another financial bank to
collateralize its direct deposit payroll.
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.
Our Board of Directors has authorized us to repurchase up to
8.4 million shares of our outstanding common stock
(including 2.0 million shares authorized on
October 22, 2004). As of December 31, 2004, we
acquired and retired approximately 6.6 million shares of
our outstanding common stock at an aggregate cost of
approximately $38.5 million, leaving approximately
1.8 million shares available for repurchase under the
existing Board authorizations. The timing of repurchases and the
actual number of shares repurchased will depend on market
conditions, alternative uses of capital and other considerations.
Contractual Obligations
As of December 31, 2004, we had $684.4 million of
long-term debt (including current maturities). This amount
consisted of $454.9 million in notes payable related to
owned aircraft, $200.1 in aggregate principal amount of our
senior convertible notes due 2023 and 2024 and
$29.4 million in other miscellaneous debt.
20
The following table sets forth our cash obligations as of
December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period | |
|
|
| |
Obligations |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
In thousands: | |
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable related to CRJ700s and 900s(2)
|
|
$ |
28,321 |
|
|
$ |
37,587 |
|
|
$ |
37,383 |
|
|
$ |
37,179 |
|
|
$ |
36,949 |
|
|
$ |
343,882 |
|
|
$ |
521,301 |
|
Senior convertible debt notes 2.4829% (assuming no
conversions)
|
|
|
3,129 |
|
|
|
6,257 |
|
|
|
6,257 |
|
|
|
6,257 |
|
|
|
|
|
|
|
100,112 |
|
|
|
122,012 |
|
|
Senior convertible debt notes 2.115% (assuming no
conversions)
|
|
|
3,625 |
|
|
|
3,625 |
|
|
|
3,625 |
|
|
|
3,625 |
|
|
|
1,813 |
|
|
|
100,000 |
|
|
|
116,313 |
|
|
Notes payable related to B1900Ds
|
|
|
7,441 |
|
|
|
9,921 |
|
|
|
9,921 |
|
|
|
9,921 |
|
|
|
9,921 |
|
|
|
61,887 |
|
|
|
109,012 |
|
|
Note payable related to CRJ200s(2)
|
|
|
2,425 |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
20,952 |
|
|
|
35,377 |
|
|
Note payable to manufacturer
|
|
|
445 |
|
|
|
870 |
|
|
|
1,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,139 |
|
|
Mortgage note payable
|
|
|
82 |
|
|
|
109 |
|
|
|
109 |
|
|
|
109 |
|
|
|
109 |
|
|
|
1,036 |
|
|
|
1,554 |
|
|
Other
|
|
|
57 |
|
|
|
61 |
|
|
|
25 |
|
|
|
25 |
|
|
|
25 |
|
|
|
75 |
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
45,525 |
|
|
|
61,430 |
|
|
|
62,144 |
|
|
|
60,116 |
|
|
|
51,817 |
|
|
|
627,944 |
|
|
|
908,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to manufacturer interim financing(1)(2)
|
|
|
7,532 |
|
|
|
10,095 |
|
|
|
9,894 |
|
|
|
9,707 |
|
|
|
9,491 |
|
|
|
168,578 |
|
|
|
215,297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash aircraft rental payments(2)
|
|
|
155,200 |
|
|
|
191,726 |
|
|
|
183,842 |
|
|
|
168,898 |
|
|
|
166,583 |
|
|
|
1,133,452 |
|
|
|
1,999,701 |
|
|
Lease payments on equipment and operating facilities
|
|
|
654 |
|
|
|
844 |
|
|
|
679 |
|
|
|
703 |
|
|
|
705 |
|
|
|
2,450 |
|
|
|
6,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease payments
|
|
|
155,854 |
|
|
|
192,570 |
|
|
|
184,521 |
|
|
|
169,601 |
|
|
|
167,288 |
|
|
|
1,135,902 |
|
|
|
2,005,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future aircraft acquisition costs(3)
|
|
|
325,000 |
|
|
|
175,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
533,911 |
|
|
$ |
439,095 |
|
|
$ |
256,559 |
|
|
$ |
239,424 |
|
|
$ |
228,596 |
|
|
$ |
1,932,424 |
|
|
$ |
3,630,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Represents the principal and interest on notes payable to the
manufacturer for interim financed aircraft. These notes payable
have a six-month maturity. For purposes of this schedule, the
Company has assumed that aircraft on interim financing are
converted to permanent financing as debt upon the expiration of
the notes with future maturities included on this line. |
|
(2) |
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. |
|
(3) |
Represents the estimated cost of commitments to acquire CRJ-700
and CRJ-900 aircraft in the future. |
Critical Accounting Estimates and Judgments
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
21
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 further
discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated
Financial Statements in Form 10-K, which contains
accounting policies and other disclosures required by accounting
principles generally accepted in the United States of America.
The America West, United and the US Airways 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 Mesa in performing flight services.
These costs, known as pass-through costs, may
include aircraft ownership cost, passenger and hull insurance,
aircraft property taxes as well as, fuel, landing fees and
catering. In addition, the Companys code-share partners
also provide, at no cost to Mesa, certain ground handling and
customer service functions, as well as airport-related
facilities and gates at their hubs and other cities. The
contracts also include a profit component that may be determined
based on a percentage of profits on the Mesa flown flights, a
profit margin on certain reimbursable costs as well as a profit
margin based on certain operational benchmarks. The Company
primarily recognizes revenue under its 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. The Company performs
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
America West, US Airway and United, 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 amounts deemed to be
rental income during the quarters ended December 31, 2004
and 2003 were $56.3 million and $38.1 million,
respectively, and has been included in passenger revenue on the
Companys statements of income.
The America West, US Airways, and Midwest Airlines turboprop
code-share agreements are pro-rate agreements. Under a pro-rate
agreement, the Company receives a percentage of the
passengers fare based on a standard industry formula that
allocates revenue based on the percentage of transportation
provided. Revenue from the Companys pro-rate agreements
and the Companys independent operation is recognized when
transportation is provided. Tickets sold but not yet used are
included in air traffic liability on the consolidated balance
sheets.
The Company also receives 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. Essential Air Service
(EAS) rates are normally set for two-year contract
periods for each city.
22
|
|
|
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, the Company periodically
reviews amounts past due and records a reserve for amounts
estimated to be uncollectible. The allowance for doubtful
accounts was $8.0 million and $7.1 million at
December 31, 2004 and September 30, 2004,
respectively. If the Companys 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.
|
|
|
Accrued Health Care Costs |
The Company is currently self-insured 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. The
Companys estimate of this reserve is based upon historical
claim experience and upon the recommendations of its health care
provider. At December 31, 2004 and September 2004, the
Company accrued $2.4 million and $2.2 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 reserves for future
health care 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.
|
|
|
Valuation Allowance for 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. The Company
periodically reviews these assets for realizability based upon
expected taxable income in the applicable taxing jurisdictions.
To the extent the Company believes some portion of the benefit
may not be realizable, an estimate of the unrealized portion is
made and an allowance is recorded. At December 31, 2004,
the Company had no valuation allowance for deferred tax assets
as it believes it will generate sufficient taxable income in the
future to realize its recorded deferred tax assets. This belief
is based upon the Company having had pretax income in fiscal
2004, 2003 and 2002 (excluding impairment charges) and as the
Company has 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 recorded deferred tax assets will
be realized. If the ultimate realization of these deferred tax
assets is significantly different from the Companys
expectations, the value of its deferred tax assets could be
materially overstated.
23
AIRCRAFT
The following table lists the aircraft owned and leased by the
Company for scheduled operations as of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating on | |
|
Passenger | |
Type of Aircraft |
|
Owned | |
|
Leased | |
|
Total | |
|
December 31, 2004 | |
|
Capacity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Canadair 200/100 Regional Jet
|
|
|
2 |
|
|
|
54 |
|
|
|
56 |
|
|
|
56 |
|
|
|
50 |
|
Canadair 700 Regional Jet
|
|
|
5 |
|
|
|
10 |
|
|
|
15 |
|
|
|
15 |
|
|
|
64 |
|
Canadair 900 Regional Jet
|
|
|
11 |
|
|
|
14 |
|
|
|
25 |
|
|
|
25 |
|
|
|
86 |
|
Embraer 145 Regional Jet
|
|
|
|
|
|
|
36 |
|
|
|
36 |
|
|
|
36 |
|
|
|
50 |
|
Beechcraft 1900D
|
|
|
35 |
|
|
|
|
|
|
|
35 |
|
|
|
33 |
|
|
|
19 |
|
Dash 8-200
|
|
|
|
|
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
53 |
|
|
|
130 |
|
|
|
183 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the Companys jet fleet
status and current fleet expansion plans, as well as options on
additional aircraft deliveries, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRJ-700 | |
|
CRJ-900 | |
|
CRJ- | |
|
|
|
|
|
|
|
|
|
|
Firm | |
|
Firm | |
|
700/900 | |
|
ERJ-145 | |
|
ERJ-145 | |
|
Cumulative | |
|
|
CRJ-200/100 | |
|
Orders | |
|
Orders | |
|
Options | |
|
Firm Orders | |
|
Options | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Delivered:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 12/31/2004
|
|
|
56 |
|
|
|
15 |
|
|
|
25 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
132 |
|
Scheduled deliveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
152 |
|
|
Fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
7* |
|
|
|
5 |
|
|
|
|
|
|
|
2 |
|
|
|
166 |
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
12 |
|
|
|
186 |
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
198 |
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
210 |
|
|
Fiscal 2010 and beyond
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
7 |
|
|
|
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
56 |
|
|
|
15 |
|
|
|
45 |
|
|
|
60 |
|
|
|
36 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
The Company has the right to convert a portion of these CRJ-900
aircraft to CRJ-700 aircraft at a later date. |
In August 1996, we entered into an agreement (the 1996
BRAD Agreement) with Bombardier Regional Aircraft Division
(BRAD) to acquire 32 CRJ-200 50-passenger regional
jet aircraft. The 32 aircraft have been delivered and are
currently under permanent financing as operating leases with
initial terms of 16.5 to 18.5 years.
In May 2001, we entered into a second agreement with BRAD (the
2001 BRAD Agreement) under which we committed to
purchase a total of 15 CRJ-700s and 25 CRJ-900s. In January
2004, the Company exercised options to purchase 20 CRJ-900
aircraft (seven of which can be converted to CRJ-700 aircraft)
reserved under the option provision of the 2001 BRAD Agreement.
The transaction includes standard product support provisions,
including training, preferred pricing on initial inventory
provisioning, maintenance and technical publications. We have
accepted delivery of 15 CRJ-700s under the 2001 BRAD Agreement.
We are the launch customer of the CRJ-900 and as of
September 30, 2004, have taken delivery of 25 CRJ-900
aircraft. In addition to the firm orders, we have an option to
acquire an additional 60 CRJ-700 or CRJ-900
24
regional jets. In conjunction with the 2001 BRAD Agreement, we
had $15.0 million on deposit with BRAD, which was included
with lease and equipment deposits at September 30, 2004.
In 2004, we leased nine used CRJ-200 and CRJ-100 aircraft in
order to meet required deliveries under our code-share
agreements. The aircraft are financed as operating leases.
Also in 2004, the Company acquired eight CRJ 200 aircraft
through the purchase of the assets of Midway. Of the eight
aircraft acquired, two are owned and six are leased.
As of December 31, 2004, we operated 36 Embraer 145
aircraft.
As of December 31, 2004, we owned 35 Beechcraft 1900D
aircraft and were operating 33 of these aircraft. In October
2004 the Company entered into an agreement to lease four of its
Beechcraft 1900D aircraft operated by Air Midwest to Gulfstream
International Airlines, a regional turboprop air carrier based
in Ft. Lauderdale, Florida. These aircraft and three other
Beech 1900s were taken out of the Companys Florida
operations in the first quarter. The Company also signed a
Letter of Intent to lease an additional ten Beechcraft 1900D
aircraft to Big Sky Transportation Co.
As of December 31, 2004, we operated 16 leased Dash-8
aircraft.
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Aircraft Financing Relationships with the Manufacturer |
It is customary business practice to enter into interim
financing with the manufacturer. Under interim financing
arrangements, the Company takes delivery and title of the
aircraft prior to securing permanent financing. After taking
delivery of the aircraft, it is the Companys intention to
subsequently enter into a sale-leaseback transaction with an
independent third-party lessor. Occasionally the Company will
permanently finance aircraft with long-term debt, but it is our
current intention to permanently finance aircraft as operating
leases rather than debt. The Company currently has five aircraft
on interim financing. These interim financings agreements are
eleven months in length and provide for monthly interest only
payments at LIBOR plus three percent for six months. The Company
must also make $75,000 principal payments in months seven
through ten and the balance is due after 11 months. Should
the Company not permanently finance the aircraft at maturity,
the maturity date may be extended without default and the
manufacturer shall purchase, or arrange for another party to
purchase, the portion of the debt not held by the manufacturer
until such time as acceptable permanent financing is obtained.
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.
Risk Factors
The following risk factors, in addition to the information
discussed elsewhere herein, should be carefully considered in
evaluating us and our business:
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Risks Related to Our Business |
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The negative impact of the September 11, 2001
terrorist attacks and the resulting government responses could
be material to our financial condition, results of operations
and prospects. |
The terrorist attacks of September 11, 2001 were highly
publicized. The impacts that these events will continue to have
on the airline industry in general, and on us in particular, is
not known at this time, but is expected to include a substantial
impact on our operations due to:
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a reduction in the demand for travel in the near and mid-term
until public confidence in the air transportation system is
restored; |
25
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an increase in costs due to enhanced security measures and
government directives in response to the terrorist attacks; |
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an increase in the cost of aviation insurance in general, and
the cost and availability of coverage for acts of war,
terrorism, hijacking, sabotage and similar acts of peril in
particular; and |
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an increase in airport rents and landing fees. |
In addition, we expect that the general increase in hostilities
relating to reprisals against terrorist organizations and the
continued threat of further terrorist attacks will continue to
negatively impact our revenues and costs in the near and
mid-term. The extent of the impact that the terrorist attacks
and their aftermath will have on our operations, and the
sufficiency of our financial resources to absorb this impact,
will depend on a number of factors, including:
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the adverse impact that terrorist attacks, and the resulting
government responses, will have on the travel industry and the
economy in general; |
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the potential increase in fuel costs and decrease in
availability of fuel if oil-producing countries are affected by
the aftermath of the terrorist attacks, including the
governments responses, and our ability to manage this risk
in connection with that part of our operations where our fuel
costs are not reimbursed by our code-share partners under the
terms of our code-share agreements; |
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our ability to reduce our operating costs and conserve financial
resources, taking into account the cost increases (including
significant increases in the cost of aviation insurance)
expected to result from the aftermath of the terrorist attacks
and the governments responses; |
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any resulting decline in the value of the aircraft in our fleet; |
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our ability to raise additional financing, if necessary, taking
into account our current leverage and the limitations imposed by
the terms of our existing indebtedness; |
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the number of crew members who may be called for duty in the
reserve forces of the armed services and the resulting impact on
our ability to operate as planned; and |
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the scope and nature of any future terrorist attacks. |
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We are dependent on our agreements with our code-share
partners. |
We depend on relationships created by our code-share agreements.
We derive a significant portion of our consolidated passenger
revenues from our revenue guarantee code-share agreements with
America West, United Airlines, and US Airways. Our code-share
partners have certain rights to cancel the applicable code-share
agreement upon the occurrence of certain events or the giving of
appropriate notice, subject to certain conditions. Although no
notice has been given to date that any party intends to cancel
these contracts, there can be no assurance that they will not
serve notice at a later date of their intention to cancel,
forcing us to stop selling those routes with the applicable
partners code and potentially reducing our traffic and
revenue. In addition, our code-share agreement with America West
allows America West, subject to certain restrictions, to reduce
the combined CRJ fleets utilized under the code-share agreement
by one aircraft in any six-month period commencing in January
2007. In addition, beginning in February 2007, America West may
eliminate the Dash-8 aircraft upon 180 days prior written
notice. America West has used this provision to reduce the
number of aircraft covered by the code-share agreement and there
can be no assurance that, commencing in January 2007, they will
not continue to further reduce the number of covered aircraft.
In addition, because a majority of our operating revenues are
currently generated under revenue-guarantee code-share
agreements, if any one of them is terminated, our operating
revenues and net income could be materially adversely affected
unless we are able to enter into satisfactory substitute
arrangements or, alternatively, fly under our own flight
designator code, including obtaining the airport facilities and
gates necessary to do so. For the quarter ended
December 31, 2004, our America West code-share agreement
accounted for 41% of our consolidated passenger revenues, our US
Airways code-share agreement accounted for 34% of our
consolidated passenger revenues and our United code-share
agreement accounted for 24% of
26
our consolidated passenger revenues. Any material modification
to, or termination of, our code-share agreements with any of
these partners could have a material adverse effect on our
financial condition, the results of our operations and the price
of our common stock. Should any of our revenue-guarantee
code-share agreements be terminated, we cannot assure you that
we would be able to enter into substitute code-share
arrangements, that any such arrangements would be as favorable
to us as the current code-share agreements or that we could
successfully fly under our own flight designator code.
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If our code-share partners or other regional carriers
experience events that negatively impact their financial
strength or operations, our operations also may be negatively
impacted. |
We are directly affected by the financial and operating strength
of our code-share partners. Any events that negatively impact
the financial strength of our code-share partners or have a
long-term effect on the use of our code-share partners by
airline travelers would likely have a material adverse effect on
our business, financial condition and results of operations. In
the event of a decrease in the financial or operational strength
of any of our code-share partners, such partner may seek to
reduce, or be unable to make, the payments due to us under their
code-share agreement. In addition, they may reduce utilization
of our aircraft. Although there are certain monthly guaranteed
payment amounts, there are no minimum levels of utilization
specified in the code-share agreements. UAL Corp., the parent of
our code-share partner United Airlines, has not emerged from
reorganization under Chapter 11 of the U.S. Bankruptcy
Code. Additionally, US Airways, which accounted for 34% of our
consolidated passenger revenue for the quarter ended
December 31, 2004, has filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. The financial
performance of US Airways and United could directly affect their
ability to perform under our code-share agreements with them.
Additionally, US Airways has not yet assumed our code-share
agreement in its bankruptcy proceeding and could choose to
terminate this agreement. If any of our other current or future
code-share partners become bankrupt, our code-share agreement
with such partner may not be assumed in bankruptcy and would be
terminated. This and other such events could have an adverse
effect on our business, financial condition and results of
operations. In addition, any negative events that occur to other
regional carriers and that affect public perception of such
carriers generally could also have a material adverse effect on
our business, financial condition and results of operations.
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Our code-share partners may expand their direct operation
of regional jets thus limiting the expansion of our
relationships with them. |
We depend on major airlines like America West, United Airlines
and US Airways electing to contract with us instead of
purchasing and operating their own regional jets. However, these
major airlines possess the resources to acquire and operate
their own regional jets instead of entering into contracts with
us or other regional carriers. We have no guarantee that in the
future our code-share partners will choose to enter into
contracts with us instead of purchasing their own regional jets
or entering into relationships with competing regional airlines.
A decision by America West, United Airlines, or US Airways to
phase out our contract-based code-share relationships or to
enter into similar agreements with competitors could have a
material adverse effect on our business, financial condition or
results of operations. In addition to Mesa Airlines, US Airways
and United Airlines have similar code-share agreements with
other competing regional airlines. Mesa Airlines is currently
America Wests only code-share partner.
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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 experienced high pilot turnover from time
to time 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.
27
At December 31, 2004, we had approximately 4,700 employees,
a significant number 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 becomes amendable in June
2006. The inability to negotiate acceptable contracts with
existing unions as agreements expire 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 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.
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Increases in our labor costs, which constitute a
substantial portion of our total operating costs, will cause our
earnings to decrease. |
Labor costs constitute a significant percentage of our total
operating costs, and we have experienced pressure to increase
wages and benefits for our employees. Under our code-share
agreements, our reimbursement rates contemplate labor costs that
increase on a set schedule generally tied to an increase in the
consumer price index or the actual increase in the contract. We
are responsible for our labor costs, and we may not be entitled
to receive increased payments under our code-share agreements if
our labor costs increase above the assumed costs included in the
reimbursement rates. As a result, a significant increase in our
labor costs above the levels assumed in our reimbursement rates
could result in a material reduction in our earnings.
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If new airline regulations are passed or are imposed upon
our operations, we may incur increased operating costs and
experience a decrease in earnings. |
Laws and regulations, such as those described below, have been
proposed from time to time that could significantly increase the
cost of our operations by imposing additional requirements or
restrictions on our operations. We cannot predict what laws and
regulations will be adopted or what changes to air
transportation agreements will be effected, if any, or how they
will affect us, and there can be no assurance that laws or
regulations currently proposed or enacted in the future will not
increase our operating expenses and therefore adversely affect
our financial condition and results of operations.
As an interstate air carrier, we are subject to the economic
jurisdiction, regulation and continuing air carrier fitness
requirements of the Department of Transportation, which include
required levels of financial, managerial and regulatory fitness.
The Department of Transportation is authorized to establish
consumer protection regulations to prevent unfair methods of
competition and deceptive practices, to prohibit certain pricing
practices, to inspect a carriers books, properties and
records, to mandate conditions of carriage and to suspend an air
carriers fitness to operate. The DOT also has the power to
bring proceedings for the enforcement of air carrier economic
regulations, including the assessment of civil penalties, and to
seek criminal sanctions.
We are also subject to the jurisdiction of the FAA with respect
to our aircraft maintenance and operations, including equipment,
ground facilities, dispatch, communication, training, weather
observation, flight personnel and other matters affecting air
safety. To ensure compliance with its regulations, the FAA
requires airlines to obtain an operating certificate, which is
subject to suspension or revocation for cause, and provides for
regular inspections.
We incur substantial costs in maintaining our current
certifications and otherwise complying with the laws, rules and
regulations to which we are subject. We cannot predict whether
we will be able to comply with all present and future laws,
rules, regulations and certification requirements or that the
cost of continued compliance will not significantly increase our
costs of doing business.
The FAA has the authority to issue mandatory orders relating to,
among other things, the grounding of aircraft, inspection of
aircraft, installation of new safety-related items and removal
and replacement of aircraft
28
parts that have failed or may fail in the future. A decision by
the FAA to ground, or require time-consuming inspections of, or
maintenance on, all or any of our turboprops or regional jets,
for any reason, could negatively impact our results of
operations.
In addition to state and federal regulation, airports and
municipalities enact rules and regulations that affect our
operations. From time to time, various airports throughout the
country have considered limiting the use of smaller aircraft,
such as Embraer or Canadair regional jets, at such airports. The
imposition of any limits on the use of our regional jets at any
airport at which we operate could interfere with our obligations
under our code-share agreements and severely interrupt our
business operations.
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|
Fluctuations in fuel costs could adversely affect our
operating expenses and results. |
The price and supply of jet fuel is unpredictable and fluctuates
based on events outside our control, including geopolitical
developments, regional production patterns and environmental
concerns. Although approximately 93% of our fuel costs for the
quarter ended December 31, 2004 was reimbursed by our
code-share partners, price escalations or reductions in the
supply of jet fuel will increase our operating expenses and, to
the extent such fuel costs are not reimbursed by our code-share
partners, could cause our operating results and net income to
decline.
|
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|
lf additional security and safety measures regulations are
adopted, we may incur increased operating costs and experience a
decrease in earnings. |
Congress recently adopted increased safety and security measures
designed to increase airline passenger security and protect
against terrorist acts. Such measures have resulted in
additional operating costs to the airline industry. The Aviation
Safety Commissions report recommends the adoption of
further measures aimed at improving the safety and security of
air travel. We cannot forecast what additional security and
safety requirements may be imposed on our operations in the
future or the costs or revenue impact that would be associated
with complying with such requirements, although such costs and
revenue impact could be significant. To the extent that the
costs of complying with any additional safety and security
measures are not reimbursed by our code-share partners, our
operating results and net income could be adversely affected.
|
|
|
If our operating costs increase as our aircraft fleet ages
and we are unable to pass along such costs, our earnings will
decrease. |
As our fleet of aircraft age, the cost of maintaining such
aircraft, if not replaced, will likely increase. There can be no
assurance that costs of maintenance, including costs to comply
with aging aircraft requirements, will not materially increase
in the future. Any material increase in such costs could have a
material adverse effect on our business, financial condition and
results of operations. Because many aircraft components are
required to be replaced after specified numbers of flight hours
or take-off and landing cycles, and because new aviation
technology may be required to be retrofitted, the cost to
maintain aging aircraft will generally exceed the cost to
maintain newer aircraft. We believe that the cost to maintain
our aircraft in the long-term will be consistent with industry
experience for these aircraft types and ages used by comparable
airlines.
We believe that our aircraft are mechanically reliable based on
the percentage of scheduled flights completed and as of
December 31, 2004 the average age of our regional jet fleet
is 2.8 years. However, there can be no assurance that such
aircraft will continue to be sufficiently reliable over longer
periods of time. Furthermore, any public perception that our
aircraft are less than completely reliable could have a material
adverse effect on our business, financial condition and results
of operations.
|
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|
Our fleet expansion program will require a significant
increase in our leverage and the financing we require may not be
available on favorable terms or at all. |
The airline business is very capital intensive and, as a result,
many airline companies are highly leveraged. For the quarter
ended December 31, 2004, our debt service payments totaled
$21.7 million and our lease payments totaled
$36.5 million. We have significant lease obligations with
respect to our aircraft and ground
29
facilities, which aggregated approximately $2.0 billion at
December 31, 2004. As of December 31, 2004, our growth
strategy involves the acquisition of 13 more Bombardier regional
jets during the remainder of fiscal 2005. As of
December 31, 2004, we had permanently financed 35 of the 40
CRJ-700 and CRJ-900 aircraft delivered under the 2001 BRAD
agreement; the remaining aircraft are subject to interim
financing. We may utilize interim financing provided by the
manufacturer and have the ability to fund up to 15 aircraft at
any one time under this facility. Our ability to obtain
additional interim financing is contingent upon obtaining
permanent financing for the aircraft already delivered. There
are no assurances that we will be able to obtain permanent
financing for future aircraft deliveries.
There can be no assurance that our operations will generate
sufficient cash flow to make such payments or that we will be
able to obtain financing to acquire the additional aircraft
necessary for our expansion. If we default under our loan or
lease agreements, the lender/lessor has available extensive
remedies, including, without limitation, repossession of the
respective aircraft and, in the case of large creditors, the
effective ability to exert control over how we allocate a
significant portion of our revenues. Even if we are able to
timely service our debt, the size of our long-term debt and
lease obligations could negatively affect our financial
condition, results of operations and the price of our common
stock in many ways, including:
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increasing the cost, or limiting the availability of, additional
financing for working capital, acquisitions or other purposes; |
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|
limiting the ways in which we can use our cash flow, much of
which may have to be used to satisfy debt and lease
obligations; and |
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adversely affecting our ability to respond to changing business
or economic conditions or continue our growth strategy. |
If we need funds and cannot raise them on acceptable terms, we
may be unable to realize our current plans or take advantage of
unanticipated opportunities and could be required to slow our
growth.
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We depend on Bombardier to supply us with the aircraft we
require to expand. |
As of December 31, 2004, we are obligated under our
code-share agreements to place an additional 13 CRJ 900 regional
jets over the next 9 months. As of December 31, 2004,
we have firm orders with Bombardier for an additional 20
regional jets. We also have options to acquire an additional 19
regional jets that are exercisable through 2007 and 40 regional
jets that are exercisable in 2010 and beyond.
We are dependent on Bombardier as manufacturer of these jets and
certain factors may limit or preclude our ability to obtain
these regional jets, including:
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Bombardier could refuse, or may not be financially able, to
perform its obligations under the applicable purchase agreement
for the delivery of the regional jets; and |
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a fire, strike or other event could occur that affects
Bombardiers ability to completely or timely fulfill its
contractual obligations. |
Any disruption or change in the delivery schedule of these
regional jets would affect our overall operations and our
ability to fulfill our obligations under our code-share
agreements.
Our operations could be materially adversely affected by the
failure or inability of Bombardier or any key component
manufacturers to provide sufficient parts or related support
services on a timely basis or by an interruption of fleet
service as a result of unscheduled or unanticipated maintenance
requirements for our aircraft.
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Reduced utilization levels of our aircraft under the
revenue-guarantee agreements would adversely impact our revenues
and earnings. |
Even though our revenue-guarantee agreements require a fixed
amount per month to compensate us for our fixed costs, if our
aircraft are underutilized (including taking into account the
stage length and frequency
30
of our scheduled flights) we will lose the opportunity to
receive a margin on the variable costs of flights that would
have been flown if our aircraft were more fully utilized.
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If we incur problems with any of our third-party service
providers, our operations could be adversely affected by a
resulting decline in revenue or negative public perception about
our services. |
Our reliance upon others to provide essential services on behalf
of our operations may result in the relative inability to
control the efficiency and timeliness of contract services. We
have entered into agreements with contractors to provide various
facilities and services required for our operations, including
aircraft maintenance, ground facilities, baggage handling and
personnel training. It is likely that similar agreements will be
entered into in any new markets we decide to serve. All of these
agreements are subject to termination after notice. Any material
problems with the efficiency and timeliness of contract services
could have a material adverse effect on our business, financial
condition and results of operations.
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We are at risk of losses and adverse publicity stemming
from any accident involving any of our aircraft. |
If one of our aircraft were to crash or be involved in an
accident, we could be exposed to significant tort liability.
On January 8, 2003, US Airways Express Flight 5481,
operated by Air Midwest, crashed shortly after takeoff from
Charlotte Douglas International Airport en route to Greenville/
Spartanburg, S.C. The estates of the passengers from Flight
5481, or the passengers, or their estates, of any other future
aircraft accident may seek to recover damages for death or
injury. Although we believe our present insurance coverage is
sufficient to cover any claims arising from the crash of Flight
5481, there can be no assurance that the insurance we carry to
cover damages arising from these or any future accidents will be
adequate. Accidents could also result in unforeseen mechanical
and maintenance costs. In addition, any accident involving an
aircraft that we operate could create a public perception that
our aircraft are not safe, which could result in air travelers
being reluctant to fly on our aircraft. To the extent a decrease
is associated with our operations not covered by our code-share
agreements, such a decrease could have a material adverse affect
on our business, financial condition or results of operations.
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|
If we become involved in any material litigation or any
existing litigation is concluded in a manner adverse to us, our
earnings may decline. |
We are, from time to time, subject to various legal proceedings
and claims, either asserted or unasserted. Any such claims,
whether with or without merit, could be time-consuming and
expensive to defend and could divert managements attention
and resources. There can be no assurance regarding the outcome
of current or future litigation.
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Our business would be harmed if we lose the services of
our key personnel. |
Our success depends to a large extent on the continued service
of our executive management team. We have employment agreements
with certain executive officers, but it is possible that members
of executive management may leave us. Departures by our
executive officers could have a negative impact on our business,
as we may not be able to find suitable management personnel to
replace departing executives on a timely basis. We do not
maintain key-man life insurance on any of our executive officers.
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We may experience difficulty finding, training and
retaining employees. |
Our business is labor-intensive, we require large numbers of
pilots, flight attendants, maintenance technicians and other
personnel and we anticipate that our expansion plans will
require us to recruit, train and retain a significant number of
new employees over the next several years.
The airline industry has from time to time experienced a
shortage of qualified personnel, specifically pilots and
maintenance technicians. In addition, as is common with most of
our competitors, we have faced considerable turnover of our
employees. Although our employee turnover has decreased
significantly since
31
September 11, 2001, our pilots, flight attendants and
maintenance technicians often leave to work for larger airlines,
which generally offer higher salaries and better benefit
programs than regional airlines are financially able to offer.
Should the turnover of employees, particularly pilots and
maintenance technicians, sharply increase, the result will be
significantly higher training costs than otherwise would be
necessary. We cannot assure you that we will be able to recruit,
train and retain the qualified employees that we need to carry
out our expansion plans or replace departing employees. If we
are unable to hire and retain qualified employees at a
reasonable cost, we may be unable to complete our expansion
plans, which could have a material adverse affect our financial
condition, results of operations and the price of our common
stock.
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Risks Related to Our Industry |
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If competition in the airline industry increases, we may
experience a decline in revenue. |
Increased competition in the airline industry as well as
competitive pressure on our code-share partners or in our
markets could have a material adverse effect on our business,
financial condition and results of operation. The airline
industry is highly competitive. The earnings of many of the
airlines have historically been volatile. The airline industry
is susceptible to price discounting, which involves the offering
of discount or promotional fares to passengers. Any such fares
offered by one airline are normally matched by competing
airlines, which may result in lower revenue per passenger, i.e.,
lower yields, without a corresponding increase in traffic
levels. Also, in recent years several new carriers have entered
the industry, typically with low cost structures. In some cases,
new entrants have initiated or triggered price discounting. The
entry of additional new major or regional carriers in any of our
markets, as well as increased competition from or the
introduction of new services by established carriers, could
negatively impact our financial condition and results of
operations.
Our reliance on our code-share agreements with our major airline
partners for the majority of our revenue means that we must rely
on the ability of our code-share partners to adequately promote
their respective services and to maintain their respective
market share. Competitive pressures by low-fare carriers and
price discounting among major airlines could have a material
adverse effect on our code-share partners and therefore
adversely affect our business, financial condition and results
of operations.
The results of operations in the air travel business
historically fluctuate in response to general economic
conditions. The airline industry is sensitive to changes in
economic conditions that affect business and leisure travel and
is highly susceptible to unforeseen events, such as political
instability, regional hostilities, economic recession, fuel
price increases, inflation, adverse weather conditions or other
adverse occurrences that result in a decline in air travel. Any
event that results in decreased travel or increased competition
among airlines could have a material adverse effect on our
business, financial condition and results of operations.
In addition to traditional competition among airlines, the
industry faces competition from ground and sea transportation
alternatives. Video teleconferencing and other methods of
electronic communication may add a new dimension of competition
to the industry as business travelers seek lower-cost
substitutes for air travel.
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|
The airline industry is heavily regulated. |
Airlines are subject to extensive regulatory and legal
compliance requirements, both domestically and internationally,
that involve significant costs. In the last several years, the
FAA has issued a number of directives and other regulations
relating to the maintenance and operation of aircraft that have
required us to make significant expenditures. FAA requirements
cover, among other things, retirement of older aircraft,
security measures, collision avoidance systems, airborne wind
shear avoidance systems, noise abatement, commuter aircraft
safety and increased inspection and maintenance procedures to be
conducted on older aircraft.
We incur substantial costs in maintaining our current
certifications and otherwise complying with the laws, rules and
regulations to which we are subject. We cannot predict whether
we will be able to comply with all present and future laws,
rules, regulations and certification requirements or that the
cost of continued
32
compliance will not significantly increase our costs of doing
business, to the extent such costs are not reimbursed by our
code-share partners.
The FAA has the authority to issue mandatory orders relating to,
among other things, the grounding of aircraft, inspection of
aircraft, installation of new safety-related items and removal
and replacement of aircraft parts that have failed or may fail
in the future. A decision by the FAA to ground, or require time
consuming inspections of or maintenance on, all or any of our
aircraft, for any reason, could negatively impact our results of
operations.
In addition to state and federal regulation, airports and
municipalities enact rules and regulations that affect our
operations. From time to time, various airports throughout the
country have considered limiting the use of smaller aircraft at
such airports. The imposition of any limits on the use of our
aircraft at any airport at which we operate could interfere with
our obligations under our code-share agreements and severely
interrupt our business operations.
Additional laws, regulations, taxes and airport rates and
charges have been proposed from time to time that could
significantly increase the cost of airline operations or reduce
revenues. For instance, passenger bill of rights
legislation was introduced in Congress in 2001 which would have,
among other things, required the payment of compensation to
passengers as a result of certain delays and limited the ability
of carriers to prohibit or restrict usage of certain tickets. If
adopted, these measures could have had the effect of raising
ticket prices, reducing revenue and increasing costs.
Restrictions on the ownership and transfer of airline routes and
takeoff and landing slots have also been proposed. In addition,
as a result of the terrorist attacks in New York and
Washington, D.C. in September 2001, the FAA has imposed
more stringent security procedures on airlines. We cannot
predict what other new regulations may be imposed on airlines
and we cannot assure you that laws or regulations enacted in the
future will not materially adversely affect our financial
condition, results of operations and the price of our common
stock.
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|
The airline industry has been subject to a number of
strikes which could affect our business. |
The airline industry has been negatively impacted by a number of
labor strikes. Any new collective bargaining agreement entered
into by other regional carriers may result in higher industry
wages and add increased pressure on us to increase the wages and
benefits of our employees. Furthermore, since each of our
code-share partners is a significant source of revenue, any
labor disruption or labor strike by the employees of any one of
our code-share partners could have a material adverse effect on
our financial condition, results of operations and the price of
our common stock.
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Risks Related to Our Common Stock |
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|
Provisions in our charter documents might deter
acquisition bids for us. |
Our articles of incorporation and bylaws contain provisions
that, among other things:
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authorize our board of directors to issue preferred stock
ranking senior to our common stock without any action on the
part of the shareholders; |
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establish advance notice procedures for shareholder proposals,
including nominations of directors, to be considered at
shareholders meetings; |
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authorize a majority of our board of directors, in certain
circumstances, to fill vacancies on the board resulting from an
increase in the authorized number of directors or from vacancies; |
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restrict the ability of shareholders to modify the number of
authorized directors; and |
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restrict the ability of stockholders to call special meetings of
shareholders. |
In addition, Section 78.438 of the Nevada general
corporation law prohibits us from entering into some business
combinations with interested stockholders without the approval
of our board of directors. These provisions could make it more
difficult for a third party to acquire us, even if doing so
would benefit our stockholders.
33
|
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Our stock price may continue to be volatile and could
decline substantially. |
The stock market has, from time to time, experienced extreme
price and volume fluctuations. Many factors may cause the market
price for our common stock to decline following this
Form 10-Q, including:
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our operating results failing to meet the expectations of
securities analysts or investors in any quarter; |
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downward revisions in securities analysts estimates; |
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material announcements by us or our competitors; |
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public sales of a substantial number of shares of our common
stock following this Form 10-Q; |
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governmental regulatory action; or |
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adverse changes in general market conditions or economic trends. |
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Item 3. |
Qualitative and Quantitative Disclosure about Market
Risk. |
There have been no material changes in the Companys market
risk since September 30, 2004.
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Item 4. |
Controls and Procedures. |
As of the end of the period covered by this report, the Company
carried out an evaluation, under the supervision and with the
participation of its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Companys disclosure
controls and procedures. Disclosure controls and procedures are
designed to ensure that information required to be disclosed in
the periodic reports filed or submitted under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commissions rules and forms. Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective as of the end of the quarterly
period covered by this report but also noted certain weaknesses
in the control environment. These resulted from recent
turnover/advancement of accounting, inventory/purchasing and
internal audit personnel and the domination of management by a
small group. We continue to dedicate resources to correct these
issues and to implement the necessary corrections. Other than
these issues, there were no changes in the Companys
internal control over financial reporting known to the Chief
Executive Officer or the Chief Financial Officer that occurred
during the last fiscal quarter that have materially affected, or
are reasonably likely to materially affect the Companys
internal control over financial reporting.
* * *
PART II. OTHER INFORMATION
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|
Item 1. |
Legal Proceedings. |
We are involved in various other legal proceedings and FAA civil
action proceedings that the Company does not believe will have a
material adverse effect upon our business, financial condition
or results of operations, although no assurance can be given to
the ultimate outcome of any such proceedings.
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Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds. |
(A) None
(B) None
(C) On December 23, 1999, the Board of Directors
authorized the repurchase of 10%, or 3.4 million shares, of
the Companys outstanding shares of common stock at the
time. On January 4, 2001, October 24, 2002 and
October 12, 2004 the Board of Directors amended the
original plan and authorized the repurchase of one million, two
million and two million additional shares of common stock,
respectively. As of December 31,
34
2004, the Company has acquired and retired 6.6 million
shares of our outstanding common stock at an aggregate cost of
approximately $38.5 million, leaving 1.8 million
shares available for repurchase under the existing Board
authorizations, which is open ended. The Company repurchased the
following shares during the three months ended December 31,
2004:
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|
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|
Total Number of | |
|
Maximum Number of | |
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Shares Purchased as | |
|
Shares that may yet | |
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Total Number of | |
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Average Price | |
|
Part of Publicly | |
|
be Purchased under | |
Period |
|
Shares Purchased | |
|
Paid per Share | |
|
Announced Plans | |
|
the Plan | |
|
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| |
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| |
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| |
|
| |
October 2004
|
|
|
346,851 |
|
|
$ |
5.57 |
|
|
|
346,851 |
|
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|
1,809,705 |
|
November 2004
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December 2004
|
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|
|
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|
|
|
|
|
|
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|
|
|
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Total
|
|
|
346,851 |
|
|
$ |
5.57 |
|
|
|
346,851 |
|
|
|
1,809,705 |
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|
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Item 3. |
Defaults upon Senior Securities. |
Not applicable
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Item 4. |
Submission of Matters to vote for Security Holders. |
None
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Item 5. |
Other Information. |
None
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31 |
.1 |
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as Amended |
|
|
31 |
.2 |
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the
Securities Exchange Act of 1934, as Amended |
|
|
32 |
.1 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
|
|
32 |
.2 |
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
35
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
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By: |
/s/ GEORGE MURNANE III |
|
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|
George Murnane III |
|
Executive Vice President and CFO |
Dated: February 9, 2005
36
Index to Exhibits
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Exhibits: | |
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| |
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Exhibit 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 |
|
|
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 |
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
37