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Organization and Operations | 12 Months Ended
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Sep. 30, 2021
Organization Consolidation And Presentation Of Financial Statements [Abstract] |
Organization and Operations |
1. | Organization and Operations
The Company Mesa Air Group, Inc. ("Mesa" or the "Company") is a holding company whose principal subsidiary operates as a regional air carrier, providing scheduled passenger service and cargo flight service. As of September 30, 2021, the Company served 129 cities in 39 states, the District of Columbia, the Bahamas, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport, and operated under the Company’s Capacity Purchase Agreements, Flight Services Agreement or as operational spares, a fleet of 153 aircraft with approximately 507 daily departures. As of September 30, 2021, Company also leased 14 aircraft to a third party. The Company's operations are conducted by its regional airline subsidiary, Mesa Airlines, Inc. ("Mesa Airlines"), providing passenger flight services to major air carriers under capacity purchase agreements and cargo flight services under a flight services agreement. Mesa Airlines operates as American Eagle under a capacity purchase agreement with American Airlines, Inc. ("American"), as United Express under a capacity purchase agreement with United Airlines, Inc. ("United"), and as DHL Express under a flight services agreement with DHL Network Operations (USA), Inc. (“DHL”). All of the Company's consolidated contract revenues for the fiscal years ended September 30, 2021, 2020 and 2019 were derived from operations associated with these two capacity purchase agreements, flight services agreement, and leases of aircraft to a third party. The financial arrangements between the Company and its major partners involve a revenue-guarantee arrangement (i.e. a "capacity purchase agreement") whereby the major partner pays a monthly guaranteed amount for each aircraft under contract, departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time), and reimbursement of certain direct operating expenses in exchange for providing flight services. The major partners also pay certain expenses directly to suppliers, such as fuel, ground operations and certain landing fees. Under the terms of these capacity purchase agreements, the major partner controls route selection, pricing, and seat inventories, thereby reducing the Company's exposure to fluctuations in passenger traffic, fare levels, and fuel prices. On August 8, 2018, the Company filed its Second Amended and Restated Articles of Incorporation, which, among other things: (i) effected a 2.5-for-1 stock split of its common stock; and (ii) increased the authorized number of shares of its common and preferred stock to 125,000,000 and 5,000,000, respectively. All references to share and per share amounts in the Company's consolidated financial statements have been retrospectively revised to reflect the stock split and increase in authorized shares. On August 14, 2018, the Company completed an initial public offering ("IPO") of its common stock, in which it issued and sold 9,630,000 shares (the "Firm Shares") of common stock at a public offering price of $12.00 per share, resulting in gross proceeds to the Company of approximately $115.6 million. Additionally, in connection with the IPO, the Company granted the underwriters an option to purchase up to an additional 1,444,500 shares of common stock at the same price. On September 11, 2018, the Company closed the sale of 1,344,500 shares ("Option Shares") of its common stock, in connection with the partial exercise of the overallotment option granted to the underwriters in its IPO. Of the 1,344,500 Option Shares sold, 723,985 were purchased directly from the Company and the remaining 620,515 shares were purchased directly from the selling shareholders. The Firm Shares and Option Shares were sold to the public for a price of $12.00 per share. The sale of these shares raised gross proceeds of approximately $124,247,820. The Company did not receive any proceeds from the sale of the Option Shares by the selling shareholders. As part of the IPO, stock appreciation rights ("SARs") previously issued under the Mesa Air Group, Inc. Amended and Restated Stock Appreciation Rights Plan (the "SAR Plan"), which settled only in cash, were cancelled and exchanged for an aggregate of 1,266,034 shares of restricted common stock under the Company's 2018 Equity Incentive Plan (the "2018 Plan") (see Note 13: "Share-Based Compensation"), of which 966,022 were fully vested upon issuance and are included in the number of shares of common stock outstanding after the IPO. Of the 966,022 fully vested shares, 314,198 shares were retained by the Company to satisfy tax withholding obligations, resulting in a net issuance of 651,824 shares. Additionally, 983,113 shares of restricted common stock were issued to certain of its employees and directors under its 2018 Plan in exchange for the cancellation of 491,915 shares of existing unvested restricted phantom stock units and 491,198 shares of restricted stock under the 2011 and 2017 Plans, respectively. Impact of the COVID-19 Pandemic The unprecedented and rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world significantly reduced demand for air travel beginning in our fiscal year 2020. This reduction in demand had an unprecedented and materially adverse impact on our revenues and financial position in the prior year that continued into fiscal year 2021. The Company has seen increased demand for air travel in fiscal year 2021 resulting from lessening of travel and gathering restrictions in the United States, particularly in the second half of our fiscal year; however as the duration of the impact of the pandemic remains uncertain, the pandemic has continued to negatively impact demand for air travel. Since a portion of the consideration we receive under our capacity purchase agreements is fixed, the impact to Mesa from the COVID-19 pandemic was partially mitigated. In addition, we have limited exposure to fluctuations in passenger traffic, ticket, and fuel prices under the terms of our capacity purchase agreements with American and United. While our fixed contract consideration remained mostly unchanged, the variable revenue based on number of block hours was significantly reduced beginning in the last few weeks in March and during the remainder of fiscal year 2020, as well as the first half of fiscal year 2021. The funds the Company received under the Payroll Support Program (and related extensions) and its Loan and Guarantee Agreement with the U.S. Treasury, coupled with the Company’s diligent cost saving measures, helped to partially offset the negative impacts of COVID-19 on the Company’s business. Additionally, the Company introduced cost saving initiatives in the prior period which contributed to current period liquidity as the demand for air travel increased during fiscal 2021. As described in Note 3: “Contract Revenue and Pass-through and Other Revenue”, a portion of the Company’s reduced labor costs resulting from government assistance was passed on to our major partners in the form of temporary rate reductions during the 2021 fiscal year. Balance Sheet, Cash Flow and Liquidity. As of September 30, 2021, our cash and cash equivalents totaled $120.5 million. Beginning in the prior year, we took the following actions to increase liquidity and strengthen our financial position:
| ▪ | Drew $23.0 million from our previously undrawn revolving credit facility with CIT Bank, N.A.
| ▪ | In April 2020, we were granted $92.5 million in emergency relief through the Payroll Support Program of the CARES Act, which was received as of September 30, 2020. In September 2020, we were notified that, based on funding availability, recipients that were currently in compliance with signed payroll support program agreements would receive an approximate 2% increase in their award amount. As a result, we were granted an additional $2.7 million for a total grant of $95.2 million, which was received in October 2020. We utilized $83.8 million of these proceeds to offset payroll expenses in the year ended September 30, 2020 and the remaining $11.4 million was utilized in Q1 2021. During fiscal year 2021, we received aggregate proceeds of $56.0 million and $52.2 million under Payroll Support Program Extensions PSP2 and PSP3, respectively, all of which was utilized and recognized as an offset to payroll expenses in the current fiscal year.
| ▪ | The CARES Act also provided for up to $25 billion in secured loans to the airline industry. In October 2020, the Company entered into a five-year Loan and Guarantee Agreement (the “Treasury Loan”) with the U.S. Department of the Treasury which provided the Company with a secured loan facility to borrow up to $200.0 million under the CARES Act. On October 30,
|  | 2020, the Company borrowed $43.0 million under the Treasury Loan and on November 13, 2020, the C ompany borrowed an additional $152.0 million for a total of $195.0 million. No further borrowings are available under the Treasury Loan. All borrowings under the Treasury Loan bear interest at an annual rate based on Adjusted LIBO (as defined in the Loan Agreement) plus 3.5%. Accrued interest on the loans is payable in arrears on the first business day following the 14th day of each March, June, September and December (beginning with December 15, 2020), and on the maturity d ate. The proceeds were used for general corporate purposes and operating expenses, to the extent permitted by the CARES Act. As described in Note 9, the Treasury Loan is subject to certain financial and other covenants.
American Capacity Purchase Agreement As of September 30, 2021, the Company operated 40 CRJ-900 aircraft for American under a capacity purchase agreement (the “American CPA”). In exchange for providing flight services under our American CPA, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance, including controllable on-time departures and controllable completion percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions, as well as airport-related facilities and gates at American hubs and cities where we operate. On November 19, 2020, we entered into an Amended and Restated American Capacity Purchase Agreement (the “Amended and Restated American CPA” or the “American CPA”) which was effective as of January 1, 2021 and amended and restated the Code Share and Revenue Sharing Agreement dated as of March 20, 2001 (as amended, supplemented and modified, the “Existing CPA”), between Mesa Airlines and American. The Amended and Restated American CPA included the following amendments to the Existing CPA:
| ▪ | Extended the American CPA for a five-year term, commencing January 1, 2021 to December 31, 2025;
| ▪ | Reduced the number of aircraft operated under the agreement to 40 CRJ-900 aircraft; and
| ▪ | Provided American the option in its sole discretion to withdraw up to: (a) 10 aircraft during calendar year 2021, (b) 5 aircraft during each of calendar years 2022 and 2023, and (c) during the period from January 1, 2024 to July 31, 2024, American can remove the first 20 aircraft to the extent not otherwise removed in 2021 – 2023, and thereafter American has the right to remove the last 20 aircraft.
During fiscal year 2021, we entered into amendments to the Amended and Restated American CPA. The amendments reflect the following:
| ▪ | The addition of CRJ-900 aircraft to the American CPA (collectively, the “Incremental Aircraft”) in accordance with the following schedule: (i) 3 aircraft, from January 5, 2021 to March 3, 2021, (ii) increasing to a total of 5 aircraft, from March 4, 2021 to May 5, 2021, (iii) decreasing to a total of 3 aircraft, from May 6, 2021 to June 2, 2021, and (iv) increasing to a total of 5 aircraft, from June 3, 2021 to August 17, 2021.
| ▪ | A temporary reduction in certain rates for the period December 2020 through September 2021.
| ▪ | The waiver of the operational performance metrics for the month of August 2021, and extension of the deadline for completing certain cabin interior and refurbishment requirements as defined in the American CPA to December 31, 2021.
| ▪ | Increases to incentive and penalty compensation under the American CPA, effective beginning in October 2021.
Our American CPA is subject to termination prior to its expiration, subject to our right to cure, in various circumstances including:
| ▪ | If either American or we become insolvent, file for bankruptcy, or fail to pay the debts as they become due, the non-defaulting party may terminate the agreement;
| ▪ | Failure by us or American to perform the covenants, conditions, or provisions of our American CPA, subject to 15 days' notice and cure rights;
| ▪ | If we are required by the FAA or the DOT to suspend operations and we have not resumed operations within three business days, except as a result of an emergency airworthiness directive from the FAA affecting all similarly equipped aircraft, American may terminate the agreement;
| ▪ | If our controllable flight completion factor (“CCF”) or controllable on time departures (“CD0”) fall below certain levels for a specified period of time, subject to our right to cure;
| ▪ | Upon the occurrence of a force majeure event (as defined in the American CPA) that lasts for a specified period of consecutive days and affects our ability to operate scheduled flights, including a future epidemic or pandemic;
| ▪ | If a labor dispute affects our ability to operate over a specified number of days or we operate in violation of any existing American collective bargaining agreement; or
| ▪ | Upon a change in our ownership or control without the written approval of American.
Our American CPA is also subject to withdrawal rights, in addition to the withdrawal rights discussed above, providing American with the right and option to withdraw one aircraft upon each occurrence of the following:
| ▪ | If our CCF falls below certain levels for a specified period of time;
| ▪ | If our CD0 falls below certain levels for a specified period of time; or
| ▪ | Failure to meet certain cabin interior and refurbishment requirements as defined in the American CPA.
American had a 0.0%, 0.0% and 7.1% ownership interest in the Company, calculated on a fully diluted basis as of September 30, 2021, 2020 and 2019, respectively. The related party amounts presented on the consolidated statements of operations and comprehensive income pertain to American as of and for the year ended September 30, 2019. United Capacity Purchase Agreement As of September 30, 2021, we operated 20 E-175LL and 60 E-175 aircraft for United under our United Capacity Purchase Agreement (the “United CPA”). In exchange for providing flight services under our United CPA, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United. Under our United CPA, United owns 42 of the 60 E-175 and all of the E-175LL aircraft and leases them to us at nominal amounts. United reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs"), and component maintenance for the aircraft owned by United. On November 26, 2019, we amended and restated our United CPA to, among other things, incorporate the terms of the 14 prior amendments to the CPA and to extend the term thereof through the addition of twenty (20) new Embraer E-175LL aircraft to the scope of the CPA. These new aircraft were to be financed and owned by us and operated for a period of twelve (12) years from the in-service date. Deliveries of the new E-175LL aircraft were scheduled to begin in May 2020. In March 2020, the deliveries of the new E-175LL aircraft were negotiated between United and Embraer to begin in September 2020 and be completed by the quarter ended June 30, 2021. Deliveries of all twenty of the E-175LL aircraft took place during our fiscal year 2021. In addition to adding the 20 new E-175LL aircraft to the United CPA, we extended the term of our 42 E-175 aircraft leased from United for an additional five (5) years, which now expire between 2024 and 2028. The Company also owns 18 E-175 aircraft that expire in 2028. As part of the amended and restated United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine (9) years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement, and as of September 30, 2021, had entered into agreements to lease 14 of the 20 CRJ-700 aircraft. On November 4, 2020, we amended and restated our United CPA to, among other things, amend the ownership by United, in lieu of Mesa, of the 20 E-175LL aircraft. The new aircraft are financed by United and leased to the Company at nominal amounts to operate for a period of twelve (12) years from the aircraft acceptance and in-service date, expiring between November 2032 and June 2033. We agreed to adjusted rates to account for the change in ownership of the E-175LL aircraft, relief from certain provisions related to minimum utilization until December 31, 2021, and an additional right of United to remove one or more E-175LL aircraft in the event that Mesa fails to meet certain financial covenants. We also agreed to a one-time provision for United to prepay $81.5 million under the United CPA for future performance by Mesa (the “Prepayment”) and the application of certain discounts to certain payment obligations of United under the United CPA. Weekly payments under the United CPA were discounted following the Prepayment, with $65.1 million of the Prepayment earned during our first and second quarters of fiscal 2021 and the remaining $16.4 million repaid to United during the second quarter of fiscal 2021. The terms of the Prepayment also included affirmative and negative covenants and events of default customary for transactions of this type. Proceeds from the Prepayment were used to retire debt on certain airframes and engines that serve as collateral under the term loan facility provided to Mesa Airlines by the U.S. Treasury. In September 2021, we amended our United CPA to, among other things, adjust certain rates to account for the change in ownership of the E-175LL aircraft, and provide for temporary reduced rates during periods in which the Company receives government assistance. Our United CPA is subject to termination rights prior to its expiration, including:
| ▪ | By United if certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances;
| ▪ | By United if we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United, subject to thirty (30) days' notice and cure rights;
| ▪ | If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the agreement;
| ▪ | By United if we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling another air carrier;
| ▪ | United, subject to certain conditions, including the payment of certain costs tied to aircraft type, may terminate the agreement in its discretion, or remove E-175 aircraft from service, by giving us notice of 90 days or more;
| ▪ | If United elects to terminate our United CPA in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us; and
| ▪ | Commencing five (5) years after the actual in-service date, United has the right to remove the E-175 aircraft from service by giving us notice of 90 days or more, subject to certain conditions, including the payment of certain wind-down expenses plus, if removed prior to the ten (10) year anniversary of the in-service date, certain accelerated margin payments.
DHL Flight Services Agreement On December 20, 2019, the Company entered into a Flight Services Agreement (“FSA”) with DHL. Under the terms of this agreement, Mesa operates two Boeing 737-400F aircraft to provide cargo air transportation services to DHL. In exchange for providing such services, the Company receives a fee per block hour with a minimum block hour guarantee. The Company is eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support including fueling and airport fees are paid directly by DHL. Under our DHL FSA, DHL leases two Boeing 737-400F aircraft and subleases them to us at nominal amounts. DHL reimburses us on a pass-through basis for all costs related to heavy maintenance including C-checks, off-wing engine maintenance and overhauls including LLPs, landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by the Company. The DHL FSA expires five (5) years from the commencement date of the first aircraft placed into service, which was in October 2020. DHL has the option to extend the agreement with respect to one or more aircraft for a period of one year with 90 days’ advance written notice. Our DHL FSA is subject to following termination rights prior to its expiration:
| ▪ | At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 day’s written notice.
| ▪ | Failure to comply with performance standards for three consecutive measurement periods.
| ▪ | DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and the Company does not provide alternate services.

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