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Organization and Operations | 12 Months Ended
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Sep. 30, 2023
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Organization and Operations | 1. Organization and Operations The Company Headquartered in Phoenix, Arizona, Mesa Air Group, Inc. ("Mesa", the "Company", "we", "our", or "us") is the holding company of Mesa Airlines, a regional air carrier providing scheduled passenger service to 86 cities in 36 states, the District of Columbia, Canada, Cuba, and Mexico as well as cargo services out of Cincinnati/Northern Kentucky International Airport. Under the United CPA and DHL FSA, Mesa operated or maintained as operational spares a fleet of 120 aircraft with approximately 296 daily departures and 2,303 employees as of September 30, 2023. Mesa’s fleet were conducted under the Company’s Capacity Purchase Agreements (“CPAs”) and Flight Services Agreement (“FSA”), leased to a third party, held for sale or maintained as operational spares. Mesa operates all of its flights as either United Express or DHL Express flights pursuant to the terms of the CPA entered into United Airlines, Inc. (“United”) and FSA with DHL Network Operations (USA), Inc. (“DHL”) (each, our “major partner”). Prior to the wind-down and termination of the Company's CPA with American Airlines, Inc. ("American") on April 3, 2023, Mesa also operated flights as American Eagle. All of the Company’s consolidated contract revenues for the twelve months ended September 30, 2023 and September 30, 2022 were derived from operations associated with the American CPA prior to April 3, 2023, the United CPA, FSA, and leases of aircraft to a third party. The United CPA involves a revenue-guarantee arrangement whereby United pays fixed-fees 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. United also pays certain expenses directly to suppliers, such as fuel, ground operations and landing fees. Under the terms of the CPA, United controls route selection, pricing, and seat inventories, reducing our exposure to fluctuations in passenger traffic, fare levels, and fuel prices. Under our FSA with DHL, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo flight services. Ground support expenses including fueling and airport fees are paid directly by DHL. Impact of Pilot Shortage and Attrition During our fiscal year ended September 30, 2023, the severity of the pilot shortage and attrition and increasing costs associated with pilot wages adversely impacted our financial results, cash flows, financial position, and other key financial ratios. These conditions and events raised substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. One of the primary factors contributing to the pilot shortage and attrition is the demand for pilots at major carriers, which are hiring at an accelerated rate to backfill the thousands of pilots whom they offered early retirements to at the beginning of the pandemic. These airlines now seek to increase their capacity to meet the growing demand for air travel as the global pandemic has moderated. A primary source of pilots for the major US passenger and cargo carriers are the US regional airlines. As a result of the pilot shortage and attrition, the Company has increased overall hourly pay of nearly 118% for captains and 172% for new-hire first officers. As a result of pilot shortage and attrition, we produced less block hours to generate revenues and incurred penalties for operational shortfalls under our CPAs. During the twelve months ended September 30, 2023, these challenges resulted in a negative impact on the Company’s financial results highlighted by cash flows used in operations of $24.1 million and net loss of $120.1 million including a non-cash impairment charge of $54.3 million related to the Company designating 14 CRJ-900 aircraft as held for sale and our customer relationship intangible asset. These conditions and events raised substantial doubt about our ability to continue to fund our operations and meet our debt obligations over the next twelve months. To address such concerns, management developed and implemented several material changes to our business designed to ensure the Company could continue to fund its operations and meet its debt obligations over the next twelve months. The Company implemented the following measures during the year ended September 30, 2023, and through the date of the issuance of the financial statements. • We have 15 aircraft under the RASPRO finance lease with a buyout obligation of $50.3 million at the end of March 2024. We entered into purchase agreements with two separate parties to purchase the RASPRO aircraft and related engines. One agreement is for 30 engines for a total of $19.5 million. The second agreement is for 15 airframes (without engines) for a total of $18.8 million. Both of these transactions are expected to be completed by the end of March 2024, with net cash from these transactions expected to be approximately $(12.1) million. • We entered into an agreement to sell 11 CRJ-900 aircraft to a third party. The Company has closed the sale of seven of the aircraft which generated $21.0 million in gross proceeds and approximately $1.5 million in net proceeds after partial debt reduction on the UST Loan. Subsequent to September 30, 2023, we closed the sale of the remaining four CRJ-900 aircraft to the third party for gross proceeds of $12.0 million. Net proceeds from the sale of all four aircraft was $6.5 million after partial debt reduction of our UST Loan. • We entered into an agreement with Export Development Bank of Canada (EDC), reducing debt and interest payments on seven CRJ-900 aircraft which began January 2023 through December 2024, providing approximately $14.0 million of liquidity. Additionally, the junior noteholder, MHIRJ, agreed to forgive approximately $5.0 million in principal contingent upon the repayment of $4.2 million in principal by December 31, 2023. • We entered into an agreement to sell seven surplus CRJ-900 aircraft to American. The Company has closed the sale of three of the aircraft which generated approximately $29.7 million in gross proceeds and approximately $2.4 million in net proceeds after partial debt reduction. Subsequent to September 30, 2023, the Company closed the sale of the remaining four CRJ-900 aircraft to American for gross proceeds of $41.5 million. Net proceeds from the sale of all four aircraft was $5.7 million after the retirement of the EDC Loan and MHIRJ junior note. $0.6 million in proceeds from the sale of each aircraft was repaid to MHIRJ for a total of $4.2 million, and we achieved approximately $5.0 million of forgiveness on the MHIRJ junior note. • We established and drew upon a new line of credit with United totaling $25.5 million. The United line of credit contains an additional deemed prepayment of $15 million with potential forgiveness upon the achievement of a certain number of block hours flown as well as maintaining a 99.3% controllable completion factor ("CCF") over any rolling four-month period from April 2023 through December 2024. As of November 2023, the foregoing milestones have been achieved for such rolling four-month period. As a result, $9 million of the $15 million will be deemed prepaid one business day following the repayment of the Effective Date Bridge Loan discussed elsewhere herein. We consider it likely that we will achieve additional forgiveness in fiscal year 2024. Subsequently, this facility was amended to permit the Company to re-draw approximately $7.9 million of the Effective Date Bridge Loan previously repaid and increased the amount of Revolving Commitments from $30.7 million to $50.7 million. See Note 10 for a discussion of the line of credit and amount drawn as well as discussion on the deemed prepayment. • On January 11, 2024 and January 19, 2024, we entered into the First Amendment to our Third Amended and Restated United CPA and the Second Amendment to our Third Amended and Restated United CPA (the "January 2024 United CPA Amendments"), respectively. The January 2024 United CPA Amendments provide additional liquidity and certain other amendments described below o Increased CPA rates, retroactive to October 1, 2023 through December 31, 2024, which are projected to generate approximately $63.5 million in incremental revenue over the next twelve months. o Amended certain notice requirements for removal by United of up to eight CRJ-900 Covered Aircraft (as defined in the United CPA) from the United CPA. o Extended United's existing utilization waiver for the Company's operation of E-175 and CRJ-900 Covered Aircraft (as defined in the United CPA) to June 30, 2024. • On January 11, 2024 and January 19, 2024, we entered into Amendment No. 4 to our Second Amended and Restated Credit and Guaranty Agreement, Amendment No. 1 to Stock Pledge Agreement and Limited Waiver of Conditions to Credit Extension United and Waiver and Amendment No. 5 to our Second Amended and Restated Credit and Guaranty Agreement (collectively, the "January 2024 Credit Agreement Amendments"), respectively. The January 2024 Credit Agreement Amendments provide for the following: o The repayment in full of the Company's $10.5 million Effective Date Bridge Loan obligations, and the prepayment (and corresponding reduction) of approximately $2.1 million in Revolving Loans (as defined therein), with the proceeds from the sale, assignment, or transfer of the Company's vested investment in Heart Aerospace Incorporated. o As a result of the repayment of the Effective Date Bridge Loan and pay down of the Revolving Loans, the shares of capital stock of Archer Aviation, Inc. held by the Company are being released as collateral for the United credit facility, subject to certain conditions. o The waiver of certain financial covenant defaults with respect to the fiscal quarters ended June 30, 2023, September 30, 2023, and December 31, 2023 and the waiver of projected financial covenant defaults with respect to the fiscal quarter ending March 31, 2024. o An increase in the Applicable Margin (as defined in the United credit facility) during a specified period of time for borrowings under the Credit Agreement. o Loan prepayment requirements in connection with the sale of four specified aircraft engines and the addition of such engines as collateral for the United credit facility for a specified period of time. • On December 1, 2023, we entered into an agreement with a third party to sell 12 surplus GE model CF34-8C aircraft engines and related parts. The gross proceeds of $56.0 million will be used to retire approximately $40.0 million in associated debt and provide additional liquidity to fund operations and current debt obligations as they come due. The transaction is expected to close by the end of March 2024. • Subsequent to September 30, 2023, we entered into a purchase agreement with a third party which provides for the sale of 23 engines for gross proceeds of $11.5 million which will be used to pay down our UST Loan. The transaction is expected to close by the end of December 2024. • In addition to already executed agreements to sell aircraft, the Company is actively seeking arrangements to sell other surplus assets primarily related to the CRJ fleet including aircraft, engines, and spare parts to reduce debt and optimize operations. • We have delayed and/or deferred major spending on aircraft and engine maintenance to match the current and projected level of flight activity. The Company believes the plans and initiatives outlined above have effectively alleviated the substantial doubt and will allow the Company to meet its cash obligations for the next twelve months following the issuance of its financial statements. The forecast of undiscounted cash flows prepared to determine if the Company has the ability to meet its cash obligations over the next twelve months was prepared with significant judgment and estimates of future cash flows based on projections of CPA and FSA block hours, maintenance events, labor costs, and other relevant factors. Assumptions used in the forecast may change or not occur as expected. As of September 30, 2023, the Company has $163.6 million of principal maturity payments on long-term debt due within the next twelve months. We plan to meet these obligations with our cash on hand, ongoing cashflows from our operations, as well as the liquidity created from the additional measures identified above. If our plans are not realized, we intend to explore additional opportunities to create liquidity by refinancing and deferring repayment of our principal maturity payments that are due within the next twelve months. The Company continues to monitor covenant compliance with its lenders as any noncompliance could have a material impact on the Company’s financial position, cash flows and results of operations. Correction of Immaterial Misstatement Subsequent to the issuance of the Company's 2022 consolidated financial statements, management determined that there was an error regarding the classification of a $4.7 million gain on sale of assets for the year ended September 30, 2022. The gain on sale of assets was previously reported as a non-operating gain when it should have been reported as part of operations. We have now reported the prior year gain on sale of assets as part of operations, consistent with the current period classification. The error had no effect on the Company's previously reported net income, earnings per share, or net cash flows from operating, investing, or financing activities for the year ended September 30, 2022. Management evaluated the error considering both quantitative and qualitative factors and concluded it was immaterial to previously issued financial statements. Correction of Error (Unaudited) Subsequent to the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, and in connection with the preparation of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, the Company identified an approximately $30.6 million balance sheet error associated with the classification of debt on the condensed consolidated balance sheet as of June 30, 2023. The error was due to certain covenant requirements that were not met under our Second Amended and Restated Credit and Guaranty Agreement dated as of June 30, 2022, with United. The debt covenants consisted of the 12-month rolling consolidated interest and rental coverage ratio covenants for the quarter ended June 30, 2023. As a result, approximately $30.6 million should have been classified as current portion of long-term debt and finance leases on the condensed consolidated balance sheet as opposed to long-term debt and finance leases, excluding current portion. In addition, the Company incorrectly stated in the going concern disclosures within the footnotes to our financial statements included in the 3 rd Quarter 10-Q that, as of June 30, 2023, the Company was in compliance with all of its debt covenants. Except as discussed above, the error had no impact on the Company's condensed consolidated balance sheet as of June 30, 2023. The error also had no impact on the Company's condensed consolidated statements of operations, stockholders' equity, and cash flows for the three-month and nine-month periods ended June 30, 2023. The following table shows the original reported balances and restated balances reflecting the correction.
|  | June 30, 2023 (Unaudited) |
|  | Reported |  | Adjustment |  | Restated |
Current liabilities: |  |  |  |  |  |  |
Current portion of long-term debt and finance leases |  | $ | 124,341 |  | $ | 30,630 |  | $ | 154,971 |
Total current liabilities |  |  | 222,114 |  |  | 30,630 |  |  | 252,744 |
Noncurrent liabilities: |  |  |  |  |  |  |
Long-term debt and finance leases, excluding current portion |  | $ | 441,941 |  | $ | (30,630 | ) | $ | 411,311 |
Total noncurrent liabilities |  |  | 511,990 |  |  | (30,630 | ) |  | 481,360 |
Total liabilities |  |  | 734,104 |  |  | — |  |  | 734,104 |
American Capacity Purchase Agreement In December 2022, we entered into Amendment No. 11 (the “American Amendment”) to the American CPA. The American Amendment provided for the termination and wind-down of the American CPA by April 3, 2023 (the “Wind-down Period”), at which time all Covered Aircraft (as defined in the American CPA) were removed from the American CPA. In March 2023, we began to transition aircraft operated under the American CPA to the United CPA. The American CPA was previously set to expire by its terms on December 31, 2025. Under the terms of the American Amendment, during the Wind-down Period (i) we continued to receive a fixed minimum monthly amount per aircraft covered by the American CPA, plus additional amounts based on the number of flights and block hours flown during each month, subject to adjustment based on the Company’s controllable completion rate and certain other factors, and (ii) American agreed not to exercise certain termination or withdrawal rights under the American CPA if we failed to meet certain operational performance targets for the three consecutive month period ending January 31, 2023. No Material Breach (as defined in the American CPA) occurred that would have required the payment of liquidated damages. Pursuant to the American Amendment, as no material breaches occurred during the wind-down period, American agreed to waive Mesa’s failure to meet certain past operational performance targets and other requirements, which triggered termination and withdrawal rights for American pursuant to the terms of American CPA. All CCF targets were met during the Wind-down Period, and there were no penalties associated with that performance metric. The parties executed a written mutual release of all claims and acknowledgment that no Material Breaches occurred. United Capacity Purchase Agreement Under the United CPA, we have the ability to fly up to 80 aircraft for United. The aircraft can be a mix of any number of E-175 or CRJ-900 aircraft so long as the number of aircraft operating at any given time does not exceed 80. As of September 30, 2023 we operated 54 E-175 and 26 CRJ-900 aircraft under our Third Amended and Restated CPA with United dated December 27, 2022, which amended and restated the Second Amended and Restated CPA dated November 4, 2020 (as amended, the “United CPA” or the "Amended and Restated United CPA"). Under the United CPA, United owns 42 of our 60 E-175 aircraft. The E-175 aircraft owned by United and leased to us have terms expiring between 2024 and 2028, and the 18 E-175 aircraft owned by us have terms expiring in 2028. Additionally, United leased 20 E-175LL aircraft to us at nominal amounts during the year ended September 30, 2023. The E-175LL aircraft were removed from the CPA beginning in February 2023, with the last E-175LL aircraft being removed in April 2023. In exchange for providing flight services under our United CPA, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United. United reimburses us on a pass-through basis for certain costs related to heavy airframe and engine maintenance, landing gear, auxiliary power units ("APUs") and component maintenance for the aircraft owned by United. Our United CPA permits United, subject to certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove aircraft from service, by giving us notice of 90 days or more. If United elects to terminate our United CPA in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected aircraft leased from United at no cost to us. In addition, if United removes any of our 18 owned E-175 aircraft from service at its direction, United would remain obligated, at our option, to assume the aircraft ownership and associated debt with respect to such aircraft through the end of the term of the United CPA. On December 27, 2022, we entered into the Amended and Restated United CPA, which provides, among other things, for the following amended terms: • The addition of up to 38 CRJ-900 aircraft to be operated by the Company on behalf of United under the Amended and Restated United CPA, dependent on the number of E-175 aircraft the Company is operating. As of September 30, 2023, we operated 24 CRJ-900 aircraft under our Amended and Restated United CPA; • An increase in rates to cover the Company’s pilot pay increases instituted in September 2022, effective through September 2025; • United to be responsible for all costs associated with converting the CRJ-900 aircraft for operation in United’s network; • Terms providing that United may remove the CRJ-900 aircraft from the scope of the United CPA, subject to certain notice and other requirements; • United’s existing utilization waiver for the Company’s operation of E-175LL Covered Aircraft (as defined in the United CPA) to be extended to December 31, 2023; • The extension of existing monthly operational performance incentives; and • An agreement by the Company to not enter into new regional air carrier service agreements, excluding the Company’s existing agreement with DHL, and provided that this restriction shall not apply from and after the earlier to occur of (i) January 1, 2026 and (ii) the Company's satisfaction of certain Performance Milestones (as defined in the Amended and Restated United CPA). Additionally, in January 2023, in consideration for entering in the Amended and Restated United CPA and providing the revolving line of credit, discussed in Note 10, the Company (i) granted United the right to designate one individual to the Company's board of directors (the "United Designee"), which occurred effective May 2, 2023 with the appointment of Jonathan Ireland and (ii) issued to United 4,042,061 shares of the Company’s common stock equal to approximately 10% of the Company’s issued and outstanding capital stock on such date (the "United Shares"). United's board designee rights will terminate at such time as United's equity ownership in the Company falls below five percent (5%) of the Company's issued and outstanding stock. United was also granted pre-emptive rights relating to the issuance of any equity securities by the Company and certain registration rights, set forth in a definitive registration rights agreement with United, granting United customary demand registration rights in respect of publicly registered offerings of the Company, subject to usual and customary exceptions and limitations. See also Note 18 for a discussion regarding the amendment to the Company's bylaws as it relates to the Amended and Restated United CPA. Pursuant to the United CPA, we agreed to lease our CRJ-700 aircraft to another United Express service provider for a term of nine years. We ceased operating our CRJ-700 fleet in February 2021 in connection with the transfer of those aircraft into a lease agreement. During August of 2022, we committed to a formal plan to sell 18 of our CRJ-700 aircraft and terminated the leases on the 18 CRJ-700 aircraft, which have all subsequently been sold. Our United CPA is subject to early termination prior to its expiration in various circumstances including: • If certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances; • If we fail to perform the material covenants, agreements, terms or conditions of our United CPA or similar agreements with United, subject to 30 days' notice and cure rights; • If either United or we become insolvent, file bankruptcy, or fail to pay debts when due, the non-defaulting party may terminate the agreement; • 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; and • If United elects to terminate our United CPA in its entirety or permanently remove aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us. DHL Flight Services Agreement On December 20, 2019, we entered into a FSA with DHL (the “DHL FSA”). Under the terms of the DHL FSA, we operate four Boeing 737 aircraft to provide cargo air transportation services as of September 30, 2023. In exchange for providing cargo flight services, we receive a fee per block hour with a minimum block hour guarantee. We are eligible for a monthly performance bonus or subject to a monthly penalty based on timeliness and completion performance. Ground support expenses including fueling and airport fees are paid directly by DHL. Under our DHL FSA, DHL leases two Boeing 737-400F aircraft and one 737-800F 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 life limited parts (“LLPs”), landing gear overhauls and LLPs, thrust reverser overhauls, and APU overhauls and LLPs. Certain items such as fuel, de-icing fluids, landing fees, aircraft ground handling fees, en-route navigation fees, and custom fees are paid directly to suppliers by DHL or otherwise reimbursed if incurred by us. A third Boeing 737-400F aircraft is leased to us under an operating lease by a third party. The DHL FSA expires five 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 the following termination rights prior to its expiration: • If either party fails to comply with the obligations, warranties, representations, or undertakings under the DHL FSA, subject to certain notice and cure rights; • If either party is declared bankrupt or insolvent; • If we are unable to legally operate the aircraft under the DHL FSA for a specified number of days; • At any time after the first anniversary of the commencement date of the first aircraft placed in service with 90 days' written notice. • If we fail to comply with performance standards for three consecutive measurement periods. • If we are subject to a labor incident that materially and adversely affects our ability to perform services under the DHL FSA for a specified number of days; • Upon a change in control or ownership of the Company; and • DHL may terminate the agreement for a specific aircraft if it is subject to a total loss and the Company does not provide alternate services at our expense, or if the aircraft becomes unavailable for more than 30 days due to unscheduled maintenance.

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