Republic Airways - 10-Q quarterly report FY

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period-ended December 31, 2001
OR
		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)

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           No

On February 8, 2002 the registrant had outstanding 33,088,017 shares of Common Stock.

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INDEX

PART I — FINANCIAL INFORMATION

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PART 1. FINANCIAL INFORMATION
Item 1.

MESA AIR GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)

See accompanying notes to consolidated financial statements.

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MESA AIR GROUP, INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands except share amounts)

See accompanying notes to consolidated financial statements.

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MESA AIR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

See accompanying notes to consolidated financial statements.

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MESA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Form 10-Q contains certain statements including, but not limited to, information regarding the replacement, deployment, and acquisition of certain numbers and types of aircraft, and projected expenses associated therewith; costs of compliance with FAA 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 Management’s 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 Mesa’s code sharing relationships; the inability of either America West or US Airways to pay its obligations under the code share agreements; an increase in competition along the routes Mesa operates or plans to operate; material delays in completion by the manufacturer of the ordered and yet-to-be delivered aircraft; changes in general economic conditions; changes in fuel price; changes in regional economic conditions; Mesa’s relationship with employees and the terms of future collective bargaining agreements; and the impact of current and future laws, additional terrorist attacks; Congressional investigations, and governmental regulations affecting the airline industry and Mesa’s 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 Mesa’s actual results to differ materially from any forward-looking statement. Mesa is not undertaking any obligation to update any forward-looking statements contained in this Form 10-Q.

GENERAL

Mesa Air Group, Inc. and its subsidiaries (collectively referred to herein as “Mesa”) is an independently owned regional airline serving 153 cities in 38 states, the District of Columbia, Canada and Mexico. Mesa operates a fleet of 117 aircraft and has approximately 832 daily departures.

Mesa’s airline operations are conducted by three regional airlines utilizing hub-and-spoke systems. Mesa Airlines, Inc. (“MAI”), a wholly owned subsidiary of Mesa, operates as America West Express under a code sharing agreement with America West Airlines, Inc. (“America West”), as USAirways Express under code-sharing agreements with USAirways, Inc. (“USAirways”) and as Frontier JetExpress with Frontier Airlines, Inc. Air Midwest, Inc., a wholly owned subsidiary of Mesa, also operates under a code-sharing agreement with USAirways and flies as USAirways Express and also operates an independent division, Mesa Airlines, from a hub in Albuquerque, New Mexico. CCAIR, Inc. (“CCAIR”), a wholly owned subsidiary of Mesa, operates under a code-share agreement with USAirways that permits CCAIR to operate under the name USAirways Express and to charge their joint passengers on a combined basis with USAirways.

For the quarter ended December 31, 2001, approximately 75% of Mesa’s airline revenues were derived from cost plus agreements. All of MAI’s America West Express operations and USAirways Express jet operations are on a cost plus basis. The percentage of revenue generated under cost plus agreements is expected to increase beyond the current fiscal year as Mesa adds additional regional jets to its America West Express and USAirways Express operations. The Company’s code-sharing agreement with America West expires in 2012. The Company’s code-sharing agreements with USAirways expire on various dates from 2003 through 2005, with the regional jet

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agreement expiring in 2008. Mesa derives the remainder of its passenger revenues from a combination of local fares, through fares and joint fares.

During fiscal 2002 several significant events have occurred:

The Company reached an agreement with lessors to provide financing for up to 20 64-seat Bombardier CRJ-700 and 80-seat 900 aircraft to be delivered late in the third quarter of fiscal 2002. Mesa has orders for 40 of the CRJ-700/900 aircraft to be operated under a contract with America West Airlines. The aircraft are larger versions of the CRJ-200, which Mesa currently operates.

America West Airlines, one of the Company’s major code-share partners, received approval for $440 million in government backed financing, dramatically improving its liquidity position.

On February 13th the Company entered into short-term operating leases on two Bombardier CRJ-200 aircraft and anticipates delivery on Friday, February 15th, subject to final closing procedures and documentation. The additional aircraft will increase the Company's near-term capacity and provide additional flexibility to its code share partners.

The following tables set forth quarterly and year to date comparisons for the periods indicated below:

OPERATING DATA

FINANCIAL DATA

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RESULTS OF OPERATIONS

Operating Revenues:

In the quarter ended December 31, 2001, operating revenues decreased by $22.0 million (16.5%), as compared to the quarter ended December 31, 2000. This decrease was primarily due to the 7.6% decrease in capacity, as measured by available seat miles (“ASM’s”) and the 7.4% decrease in passenger traffic system wide. These decreases were primarily a result of contractions in frequencies in the Company’s jet operations and the decline of prorate traffic as a result of the events of September 11th.

Operating Expenses

Flight Operations

In the quarter ended December 31, 2001, flight operations expense decreased 12.7% to $59.0 million (7.9 cents per ASM) from $67.6 million (8.3 cents per ASM) from the comparable period in 2000. The decrease is primarily attributable to the reduction in flying as a result of the terrorist attacks of September 11th. The decrease, on an ASM basis, was primarily due to the decrease in the price of fuel.

Maintenance Expense

In the quarter ended December 31, 2001, maintenance expense decreased 11.1% to $22.0 million (2.9 cents per ASM) from $24.7 million (3.0 cents per ASM) for the comparable period in 2000. The decrease in maintenance costs is primarily the result of the timing of certain scheduled engine overhauls that were postponed until the second quarter and the overall decrease in capacity (ASM’s).

Aircraft and Traffic Service Expense

In the quarter ended December 31, 2001, aircraft and traffic servicing expense decreased by 24.6% to $10.4 million (1.4 cents per ASM) from $13.8 million (1.7 cents per ASM) during the first quarter of fiscal 2001. The decrease in aircraft and traffic service expense is primarily due to the decreased number of departures and, as a result, headcount required as a result of the events of September 11th.

Promotion and Sales

In the quarter ended December 31, 2001, promotion and sales expense decreased 46.2% to $3.2 million (0.4 cents per ASM) from $6.0 million (0.7 cents per ASM) from the prior year’s comparable quarter. The decrease is primarily a result of the decrease in booking fees and franchise fees paid to the Company’s Code Share partners as a result of the decrease in passenger traffic. Also, Mesa’s contract with America West and our Jet Contract with USAirways eliminates booking fees and travel agency commissions being charged directly to Mesa and as such, these costs per ASM are expected to decline as the America West Express and USAirways jet operations grow.

General and Administrative Expense

In the quarter ended December 31, 2001, general and administrative expense increased 22.4% to $9.2 million (1.2 cents per ASM) from $7.5 million (0.9 cents per ASM) during the comparable quarter of the previous fiscal year. The increase in the quarter is primarily due to higher passenger liability insurance premiums as a result of the events of September 11th and increases in property taxes associated with the additional jets added to Mesa’s fleet since the first quarter of fiscal 2001.

Depreciation and Amortization

In the quarter ended December 31, 2001, depreciation and amortization decreased 28.7% to $2.7 million (0.4 cents per ASM) as compared to $3.8 million (0.5 cents per ASM) for the quarter ended December 31, 2000. The decrease is primarily due to the cessation of depreciation on aircraft held for sale and reduced depreciation expense on the

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aircraft that were impaired at September 30, 2001. The Company also is no longer incurring goodwill amortization expense as all remaining goodwill was written off at September 30, 2001.

Interest Expense

The decrease in interest expense of $2.0 million from $4.1 million in the first quarter of fiscal 2001 to $2.1 million in the first quarter of fiscal 2002 is due to reduced interest rates as majority of the Company’s B1900D fleet is financed at variable interest rates.

Other Income

In the quarter ended December 31, 2001, other income increased 47.3% to $4.7 million as compared to $3.2 million for the quarter ended December 31, 2000. Amounts included in other income primarily represent investment gains and losses in the period.

Minority Interest

Amounts included in minority interest reflects the after tax portion of earnings of UFLY, LLC. that are applicable to the minority interest partners. In the quarter ended December 31, 2001, UFLY had realized and unrealized gains of $2.9 million.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2001, Mesa’s cash and cash equivalents and marketable securities totaled $95.9 million, compared to $83.3 million at September 30, 2001. During the period, the Company received $5 million from the Minority Interest partners of UFLY, had investment gains totaling $4.6 million and received deposits back from aircraft manufacturers of $3.6 million. These cash inflows were offset by the purchase of aircraft parts and equipment totaling approximately $4.0 million. Mesa’s cash and cash equivalents and marketable securities are intended to be used for working capital, capital expenditures and acquisitions. In addition, the Company has a $35 million line of credit facility with Fleet Capital. There was $20 million outstanding on the line as of December 31, 2001. On January 29, 2002, the Company repaid $5.0 million of the $20 million drawn on the line of credit.

Mesa had receivables of approximately $39.4 million at December 31, 2001, which consisted primarily of amounts due from code-sharing partners America West and USAirways and passenger ticket receivables due through the Airline Clearing House. Under the terms of the USAirways agreement, Mesa receives a substantial portion of its revenues through the clearinghouse.

Management believes that the Company will have adequate cash flow to meet its operating needs. This is a forward-looking statement. Actual cash flows could materially differ from this forward looking statement as a result of many factors, including the termination of one or more code share agreements; the inability of a code-share partner to meet its obligations to Mesa when due; failure to sell, dispose of, or redeploy excess aircraft in a timely manner; a substantial decrease in the number of routes allocated to the Company under its code share agreements with its code share partners; reduced levels of passenger revenue, additional taxes or costs of compliance with governmental regulations; fuel cost increases; increases in competition; additional terrorist attacks; increases in interest rates; general economic conditions and unfavorable settlement of existing litigation.

In December 1999, the Company’s Board of Directors authorized the Company to repurchase up to 10%, approximately 3.4 million shares, of the outstanding shares of its Common Stock. In January 2001, the Board approved the repurchase by the Company of up to an additional one million shares of its Common Stock. The Company did not repurchase any stock during the quarter ended December 31, 2001. As of December 31, 2001, the Company has acquired approximately 3.0 million shares (approximately 8.3%) of its outstanding Common Stock at an aggregate cost of approximately $17.6 million leaving approximately 1.4 million shares available for repurchase under the current Board authorizations. Purchases are made at management’s discretion based on market conditions and the Company’s financial resources.

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AIRCRAFT

The following table lists the aircraft owned and leased by Mesa for scheduled operations as of December 31, 2001:

PENDING DEVELOPMENTS

ERJ Program

In June 1999, Mesa entered into an agreement with Empresa Brasiliera de Aeronautica SA (“Embraer”) to acquire 36 50-passenger Embraer ERJ-145 regional jets. Deliveries began late in the third quarter of fiscal 2000 and will continue into early 2003. Mesa introduced the ERJ-145 aircraft into revenue service in the third quarter of fiscal 2000 as USAirways Express. Mesa has moved several of the CRJ regional jets currently flying as USAirways Express to America West Express and replaced them with ERJ-145’s as deliveries took place. The Company also intends to move several CRJ regional jets currently flying as USAirways Express to Frontier JetExpress and replace them with ERJ-145’s as well. As of December 31, 2001, the Company had taken delivery of 23 ERJ-145’s, which have been financed as operating leases. In conjunction with this purchase agreement, Mesa has $8.8 million on deposit with Embraer, which is included with lease and equipment deposits.

CRJ Program

In August 1996, the Company entered into an agreement with Bombardier Regional Aircraft Division (“BRAD”) to acquire 16 CRJ 50-passenger jet aircraft. The agreement also granted the Company an option to acquire an additional 16 jet aircraft and provided for additional rolling options to acquire a third block of 16 aircraft. In fiscal 1997, the Company exercised options to purchase 16 of the 32 CRJ aircraft reserved under the option provisions of the BRAD purchase agreement. In connection with the 32 CRJ aircraft, all are currently under permanent financing as operating leases with terms of 16 1/2 to 18 1/2 years. In fiscal 1998, BRAD canceled the third block of rolling options.

In May 2001, the Company entered into an agreement with BRAD to acquire 20 64-seat CRJ-700s, and 20 84-seat CRJ-900s. Deliveries of the CRJ-700 and CRJ-900 will commence in the third quarter of fiscal 2002 and the second quarter of fiscal 2003, respectively. Mesa will be the launch customer of the CRJ-900. In addition to the firm orders, Mesa has an option to acquire an additional 80 CRJ-700 and CRJ-900 regional jets. In conjunction with this purchase agreement, Mesa has $11.6 million on deposit with BRAD, which is included with lease and equipment deposits.

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The following table summarizes the Company’s jet fleet status and current fleet expansion plans for the periods indicated:

Beechcraft 1900D

In fiscal 1999, the Company announced its intention to dispose of 30 excess 1900D aircraft. As of December 31, 2001, the Company had disposed of 17 of such aircraft. During the second quarter of fiscal 2001, the Company continued its turboprop restructuring plan by announcing a plan to retire an additional eight B1900 aircraft. Under an agreement with Raytheon Aircraft Corporation (“RAC”), the Company has the right to return 15 B1900D aircraft. The Company anticipates returning all 15 in fiscal 2002. The Company is seeking proposals for the disposition of the remaining six B1900 aircraft. Mesa further reduced its fleet by returning two aircraft to the lessor upon expiration of their leases in the second quarter of fiscal 2001.

On February 7, 2002, the Company finalized an agreement with Raytheon Aircraft Company (the “Raytheon Agreement”) to, among other things, 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 the Company remaining current on its payment obligations to Raytheon. 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 Mesa Common Stock at an exercise price of $10.00 per share.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

         Mesa Air Group, Inc., and Westair Commuter Airlines, Inc. v. Beus Gilbert P.L.L.C.

Item 2. Changes in Securities and Use of Proceeds

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

         There have been no material changes in the Company’s market risk since September 30, 2001.

Item 4. Submission of Matters to vote for Security Holders

         There were no matters submitted to vote for Security Holders.

Item 5. Other Matters

         Not applicable

Item 6. Exhibits and Reports on Form 8-K

         (A)  Exhibits:

         (B)  Reports on form 8-K

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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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INDEX TO EXHIBITS