<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d)
of Securities Exchange Act of 1934
For the quarter ended March 31, 1997
Commission File Number 0-15495
Mesa Air Group, Inc.
(Exact name of registrant as specified in its charter)
Nevada 85-0302351
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3753 Howard Hughes Parkway, Suite 200, Las Vegas 89109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (702) 892-3773
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No __
On May 14, 1997 the Registrant had outstanding 28,294,584 shares of Common
Stock.
<PAGE>
Item 2.
MESA AIR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
GENERAL
Mesa Air Group, Inc. (collectively referred to herein as "Mesa" or the
"Company") is the largest independently owned regional airline in the world
(based upon passenger enplanements), serving 182 cities in 30 states and the
District of Columbia. Mesa operates a fleet of 185 aircraft as America West
Express, Mesa Airlines, United Express and USAir Express.
Mesa's business strategy is to achieve sustained, profitable growth by utilizing
focused operating strategies to service routes not generally served by major air
carriers. Mesa implements its strategy by carefully evaluating market demand on
the routes it serves and utilizes its fleet of aircraft to meet that demand. In
addition, Mesa is able to expand the markets it serves under existing
code-sharing agreements with certain of the major air carriers to benefit from
the name recognition, reservation systems and marketing and promotional efforts
of these carriers. Mesa operates a fleet of new and efficient aircraft and
performs most maintenance and overhaul work at its own facilities. Mesa seeks to
maximize gross revenues by managing fares and flight schedules to increase
yields and by developing new markets.
THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996
The following tables set forth comparisons for the periods indicated below:
OPERATING DATA:
<TABLE>
<CAPTION>
Three Months Ended
March 31
1997 1996
----------------- ----------------
<S> <C> <C>
Passengers 1,557,497 1,549,865
Available seat miles (000) 600,517 613,407
Revenue passenger miles (000) 328,201 338,826
Load factor 54.7% 55.2%
Yield per revenue passenger mile 37.5(cent) 34.9(cent)
Operating cost per available seat mile 20.1(cent) 18.4(cent)
Revenue per available seat mile 20.9(cent) 19.7(cent)
Average stage length (miles) 170 168
Number of aircraft in fleet 185 174
Gallons of fuel consumed (000) 18,155 16,710
Block hours flown 140,217 135,422
Departures 148,400 151,465
</TABLE>
<PAGE>
FINANCIAL DATA:
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------------------------------------------------------
1997 1996
----------------------------------- --------------------------------------
Percent of total Percent of total
Cost per operating Cost per operating
ASM revenues ASM revenues
--------------- -------------------- ---------------- --------------------
Operating Expenses
<S> <C> <C> <C> <C>
Flight operations 7.5(cent) 36.3% 7.1(cent) 36.2%
Maintenance 3.6(cent) 17.1% 3.1(cent) 15.9%
Aircraft and traffic servicing 3.6(cent) 17.1% 3.2(cent) 16.4%
Promotion and sales 3.0(cent) 14.3% 3.0(cent) 14.9%
General and administrative 1.0(cent) 4.6% 1.2(cent) 5.9%
Depreciation and amortization 1.4(cent) 6.8% 0.8(cent) 3.9%
--------------- -------------------- ---------------- --------------------
Total operating expenses 20.1(cent) 96.2% 18.4(cent) 93.2%
Interest expense 1.1(cent) 5.5% 0.2(cent) 1.3%
</TABLE>
OPERATIONS
Operating Revenues:
Passenger revenues increased by 4.1% to $123.0 million, average fare increased
by 3.6% to $79.00 and passengers carried increased by 0.5% to 1.56 million.
Available seat miles (ASMs) declined by 2.1% to 600.5 million, while revenue per
available seat mile (RASM) increased by 6.1% to 20.9(cent).
Operating Expenses:
Flight Operations:
- ------------------
Flight operations expense increased to $45.7 million from $43.8 million in the
prior year. The primary causes of this increase were a $3.2 million increase in
the cost of fuel, a $4.0 million increase in pilot salaries, lodging and
training expense plus approximately $400,000 of expense incurred in the process
of centralizing dispatch and training facilities. These increases were partially
offset by a reduction in aircraft lease expense caused by purchasing 69 aircraft
previously financed by operating leases. Of the $4.0 million increase in pilot
costs, $1.5 million related to an increase in pilot salary and benefits granted
under the new pilot contract, $1.2 million related to an increase in the number
of pilots employed and $1.3 million was for pilot lodging and training expenses.
Maintenance Expense:
- --------------------
Maintenance expense increased by $2.2 million from $19.3 million to $21.5
million. Approximately $925,000 of the $2.2 million increase relates to an
increase in wages comprised of approximately $365,000 representing an increase
in the number of maintenance employees and approximately $560,000 related to an
increase in the average salaries of maintenance employees. The increase in
employees is primarily the result of additional maintenance personnel required
8
<PAGE>
by new Federal Aviation Regulations, to begin the CRJ operation in Fort Worth
and to service an increase in the number of aircraft in the fleet. The
percentage increase in average salary is the result of a wage increase granted
to the Company's mechanics.
Aircraft and Traffic Service Expense:
- -------------------------------------
Aircraft and traffic servicing expense increased to $21.4 million from $19.8
million. Of this $1.6 million increase, approximately $900,000 related to an
increase in the number of station agents employed and approximately $600,000
related to an 8.6% increase for station agents. Mesa has increased the number of
employees as well as their wages to improve customer service levels, primarily
in the Denver markets. The Company is currently evaluating these cost increases
and is working to standardize the number of employees necessary to provide
proper customer service.
General and Administrative Expense:
- -----------------------------------
General and administrative expense declined by $1.3 million to $5.8 million
primarily as a result of a reduction in the management incentive bonus accrual.
Depreciation, Amortization and Interest Expense:
- ------------------------------------------------
Depreciation and amortization increased by $3.8 million to $8.5 million and
interest expense increased by $5.4 million to $6.9 million. The increase in
interest expense, depreciation and amortization is primarily the result of the
purchase, in May 1996, of 69 aircraft which were previously financed under
operating leases, and an increase in the number of aircraft, in addition to the
69 aircraft previously mentioned, financed by debt.
SIX MONTHS ENDED MARCH 31, 1997 VERSUS SIX MONTHS ENDED MARCH 31, 1996
The following tables set forth comparisons for the periods indicated below:
OPERATING DATA:
<TABLE>
<CAPTION>
Six Months Ended
March 31
1997 1996
--------------- --------------
<S> <C> <C>
Passengers 3,117,982 3,160,133
Available seat miles (000) 1,189,657 1,242,825
Revenue passenger miles (000) 655,688 681,725
Load factor 55.1% 54.9%
Yield per revenue passenger mile 36.9(cent) 34.5(cent)
Operating cost per available seat mile 20.0(cent) 18.1(cent)
Revenue per available seat mile 20.7(cent) 19.4(cent)
Average stage length (miles) 170 167
Number of aircraft in fleet 185 174
Gallons of fuel consumed (000) 36,657 34,641
Block hours flown 276,380 272,391
Departures 294,467 315,521
</TABLE>
9
<PAGE>
FINANCIAL DATA:
<TABLE>
<CAPTION>
Six Months Ended
March 31
--------------------------------------------------------------------------
1997 1996
----------------------------------- --------------------------------------
Percent of total Percent of total
Cost per operating Cost per operating
ASM revenues ASM revenues
--------------- -------------------- ---------------- --------------------
<S> <C> <C> <C> <C>
Operating Expenses
Flight operations 7.4(cent) 35.5% 7.1(cent) 36.7%
Maintenance 3.6(cent) 17.3% 3.1(cent) 16.1%
Aircraft and traffic servicing 3.5(cent) 16.9% 3.0(cent) 15.3%
Promotion and sales 3.0(cent) 14.4% 2.9(cent) 15.0%
General and administrative 1.1(cent) 5.2% 1.2(cent) 6.1%
Depreciation and amortization 1.4(cent) 6.9% 0.8(cent) 4.3%
Total operating expenses 20.0(cent) 96.3% 18.1(cent) 93.4%
--------------- -------------------- ---------------- --------------------
Interest expense 1.1(cent) 5.5% 0.3(cent) 1.3%
</TABLE>
OPERATIONS
Operating Revenues:
Passenger revenues increased by 2.9% to $241.9 million, and average fare
increased by 4.3% to $77.59. Passengers carried increased by 1.3% to 3.2 million
with available seat miles (ASMs) decreasing 4.3% and revenue passenger miles
(RPMs) decreasing 3.8%. Revenue per available seat mile increased by 7.0% to
20.7(cent).
Operating Expenses:
Flight Operations:
- ------------------
Flight operations expense decreased slightly from $88.4 million to $87.7
million. An increase in fuel prices during the period caused a $5.7 million
increase in the cost of fuel. Pilot costs also increased during the period by
$5.4 million. Of the $5.4 million increase in pilot costs, approximately $1.8
million was related to an increase in pilot salary and benefits granted under
the new pilot contract, approximately $1.2 million related to an increase in the
number of pilots employed, approximately $1.3 million was for pilot lodging and
training expenses and approximately $400,000 of expense was incurred in the
process of centralizing dispatch and training facilities. These increases were
offset by a reduction in aircraft lease expense caused by purchasing 69 aircraft
previously financed by operating leases.
Maintenance Expense:
- --------------------
Maintenance expense increased by $4.1 million from $38.7 million to $42.8
million. Approximately $1.2 million of the increase relates to an increase in
wages. Approximately $810,000 of the $1.2 million increase represents an
increase in average salaries of maintenance employees and approximately $365,000
is a result of an increase in the number of maintenance employees. The number of
maintenance employees increased because additional maintenance personnel were
required by new Federal Aviation Regulations, needed for start-up of the CRJ
10
<PAGE>
operation in Fort Worth, and an increase in the number of aircraft in the fleet.
The rise in average salary is the result of a wage increase granted to the
Company's mechanics.
The breakdown of the remainder of the increase in maintenance expense is as
follows: Approximately $100,000 of the increase reflects costs to centralize
maintenance practices in accordance with Mesa's agreement with the FAA. An
additional $300,000 of the cost was incurred in the closure of two maintenance
bases in Arizona and Oregon. The closure of those bases was made possible as a
result of the transfer of pilots and flight equipment and is expected to save
approximately $350,000 of maintenance overhead expense per year. The balance of
the increase in maintenance expense was caused primarily by the increased
airframe maintenance costs, the timing of annual "C"-check maintenance
procedures on aircraft, and increased staffing levels to improve dispatch
reliability.
Aircraft and Traffic Servicing:
- -------------------------------
Aircraft and traffic servicing expense increased by $4.9 million over the
six-month period ended March 31, 1996. Approximately $1.4 million of the
increase was for hiring additional customer service representatives in the
Denver operation, and an additional $1.4 million was related to a pay raise
given to station customer service representatives in an effort to attract and
retain quality personnel. Non-completion costs increased by approximately
$440,000 over the prior six-month period as a result of severe weather
conditions causing a high percentage of cancellations throughout the system
during the winter months. Deicing expense also increased by approximately
$300,000.
General and Administrative Expense:
- -----------------------------------
General and administrative expense declined by $1.9 million to $12.7 million
primarily as a result of a reduction in the management incentive bonus accrual.
Depreciation, Amortization and Interest Expense:
- ------------------------------------------------
Depreciation and amortization increased by $6.6 million to $17.0 million and
interest expense increased by $10.5 million. The largest portion of the increase
in interest expense, depreciation and amortization is the result of the purchase
in May, 1996, of 69 aircraft which were previously financed under operating
leases, and the refinancing of new aircraft through debt rather than leasing.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and marketable securities at March 31, 1997 were $54 million
compared to $60 million at September 30, 1996. Cash, cash equivalents and
marketable securities are intended to be used for working capital, acquisitions
and capital expenditures.
Mesa had receivables of $50 million at March 31, 1997 which consist primarily of
amounts due from code-sharing partners United and USAir. Under the terms of the
United and USAir agreement, Mesa receives a substantial portion of its revenues
through the Airline Clearing House. Mesa has two codesharing agreements with
United: one for Mesa and one for WestAir. The code-sharing agreements governing
the West Coast and Pacific Northwest operations have different rates established
per a formula as agreed between the parties for each market ("pro-rate
markets"). An increasing portion of Mesa's routes in the Pacific Northwest and
Los Angeles have become "contract markets" which, unlike pro-rate markets, may
be terminated upon 90 days notice by either United or Mesa/WestAir. If a
significant number of contract markets were to be terminated, it could have a
material adverse impact on the Company.
11
<PAGE>
Mesa currently has a $20 million line of credit, renewable annually, of which
approximately $16 million is available. This line of credit is used primarily to
facilitate the issuance of letters of credit.
As of March 31, 1997, the Company had aggregate indebtedness of $378 million
payable to various parties under promissory notes issued in connection with the
purchase of 110 aircraft. The notes have interest rates ranging from 6.3 percent
to 7.9 percent, maturities ranging through 2009 and require monthly principal
installments aggregating approximately $1.5 million.
In addition, the Company has significant lease obligations on existing aircraft
operated by the Company. These leases are classified as operating leases and
therefore are not reflected as liabilities on the balance sheet. At March 31,
1997, 75 aircraft were leased by the Company with terms ranging up to 16 1/2
years. Aircraft lease expense for the quarter ended March 31, 1997 was $11.4
million. Future lease payments due under all aircraft operating leases were
approximately $260 million at March 31, 1997.
Mesa is planning to continue to operate its two Fokker 70 aircraft through July
7, 1997 at existing lease rates. In addition, Mesa has agreed to pay
time-related costs for use of the aircraft through the date of return.
Mesa had an aircraft order with Bombardier, Inc. to acquire 25 de Havilland Dash
8-200 aircraft worth $262.5 million with deliveries, which were scheduled to
begin in early 1996, through March 1998. Due to production delays, the delivery
schedule was not met and Mesa was granted an option to cancel up to five of the
25 aircraft on order. As of March 31, 1997, Mesa had taken delivery of 12 Dash
8-200 aircraft. The Dash 8-200 aircraft purchase agreement provides for a spare
parts supply program, which includes all parts to maintain the aircraft,
excluding engines and propellers, for a period of seven years. Mesa will pay a
fixed hourly charge per flight hour for this spare parts supply program.
On April 23, 1997 Mesa gave notice to Bombardier of its decision to exercise the
option to cancel five of the Dash 8-200 aircraft on order and also gave notice
of the cancellation of its order for the eight remaining undelivered Dash 8-200
aircraft. Bombardier and Mesa are engaged in discussions to arrange a commercial
resolution of this cancellation that management believes will result in no
penalty to Mesa. Mesa does not believe there will be a substantial impact on its
operations or aircraft fleet requirements as a result of these cancellations.
The potential impact on operations and fleet requirements due to cancellation of
a portion of the aircraft order is a forward-looking statement that involves a
number of risks and uncertainties which could cause actual results to differ
materially from the forward-looking statement including, among other factors,
the success of the CRJ on routes which might have been served by Dash 8-200
aircraft, and the availability of additional aircraft at affordable rates
presently used in other markets.
In January 1997, Mesa and Bombardier executed an agreement to acquire 16
Canadair Regional 50-passenger jet aircraft ("CRJs") worth approximately $320
million with deliveries to begin in February 1997. As of March 31, 1997, Mesa
had taken delivery of one CRJ aircraft. Mesa will trade in 12 Embraer Brasilia
aircraft for the 16 Canadair Regional jet aircraft on order. An $8.3 million
deposit has been made to Bombardier, Inc. related to this commitment, and
Bombardier will participate as needed to provide financing for the CRJs to be
acquired by Mesa. Mesa has options to acquire an additional 32 CRJ aircraft.
Costs approximating $1.0 million were incurred during the quarter ended March
31, 1997 to establish an independent jet service, originating out of Fort Worth,
Texas operating as "Mesa Airlines." Some additional costs related to the Forth
Worth, Texas operation will be incurred as the operation expands to include
additional markets. Mesa commenced scheduled service between Fort Worth and
Houston, Texas on May 5, 1997.
12
<PAGE>
Mesa is continuing the process of centralizing its operations. Mesa anticipates
incurring some additional costs in completing its centralization and expects the
process to be essentially complete by September 30, 1997.
During December 1995, the Federal Aviation Administration (FAA) announced
regulations which require commuter airlines with aircraft of 10 or more
passenger seats operating under Federal Aviation Regulations (FAR) Part 135
rules to begin operating those aircraft under FAR Part 121 regulations by the
end of March 1997. As of March 31, 1997, Mesa had completed the FAR Part 121
transition.
In anticipation of Mesa's conversion to FAR Part 121 and to address issues
raised in past inspections, the FAA had begun a special review of Mesa's
operations in June 1996. As a result of the special review by the FAA of Mesa's
operations, a consent order was signed in September 1996 assessing a compromise
civil penalty of $500,000. Mesa paid $250,000 of the compromise amount, and the
remaining $250,000 may be waived in September 1997 upon determination that Mesa
is in compliance with provisions of the consent order. Under the consent order,
Mesa has agreed to adopt operational standards that exceed the requirements of
the Federal Aviation Regulations. The consent order requires that control of
operational areas (maintenance, flight operations and training) be consolidated
under one central management team. The Company has until September 1997 to
complete the specified tasks. At present the Company is in compliance with all
items on the FAA's timetable. During any period of noncompliance, extensions of
time are available for a fee of $5,000 per item for each 30-day extension.
Mesa presently anticipates ongoing operational costs in order to comply with FAR
Part 121 rules and consent order of approximately $2.5 million per year. Mesa
management is also monitoring the extent of the new costs to be imposed on its
19- and 30-seat aircraft operations by implementation of additional operating
procedures required by FAR Part 121 which began in March 1997. Efforts will be
made to minimize the cost of these additional procedures while fully meeting the
new requirements.
The costs of compliance to comply with FAA Part 121 and ongoing operational
compliance costs are forward-looking statements that involve a number of risks
and uncertainties which could cause actual results to differ materially from the
forward-looking statements which include, among other factors, promulgation of
future FAA regulations, administrative rules, or informal requests by the FAA
requiring the hiring of additional personnel; the addition of new aircraft
mechanical equipment; the payment of additional fines; and the impact of future
laws or Congressional investigations which could have the effect of increasing
the costs of compliance.
In April 1997 Mesa and the Internal Revenue Service (IRS) reached a settlement
of the examination of its federal income tax returns for the years 1989 through
1992. No significant additional expense is expected to be recognized by Mesa as
a result of this settlement.
OTHER EVENTS
In March 1997, Mesa announced an internal reorganization and newly appointed
positions in order to provide greater efficiencies to its organization. The
former operating divisions of Desert Sun Airlines, FloridaGulf Airlines, Liberty
Express and Mountain West along with the marketing and customer service arms of
Air Midwest Airlines and WestAir Commuter Airlines were replaced with four new
divisions aligned with Mesa's code-sharing agreements, America West Express,
Independent, United Express and US Airways Express, divisions of Mesa Airlines,
Inc.
Effective March 1, 1997, in conjunction with these changes, Bob Dynan, formerly
President of Liberty Express, will become President for the United Express
division. Mike Lewis, formerly President of Mountain West Airlines, will become
the America West Express division President and Peter Otradovec,
13
<PAGE>
formerly Vice-President of Mesa's Fort Worth system, will take on the position
of President for the Independent division. A search is currently in progress to
select a president for the USAirways Express division.
US Airways has notified Mesa that the service agreement between Mesa and US
Airways may be amended to decrease Mesa's share of joint fares by approximately
3 percent. This proposed amendment to the USAirways Express service agreement is
currently being evaluated by Mesa. An alternative proposal has been discussed
with US Airways which may result in no decrease in US Airways Express revenue.
Mesa has received and is operating sufficient Dash 8-200 aircraft to provide the
proper capacity for its 1997 summer schedule. As a result, Mesa expects
operations there to improve. However, the high costs of operation at Denver
International Airport are of continuing concern to Mesa management. Therefore,
substantial efforts are currently in process to reduce and control costs of the
Denver system. Expected improvement and increased efficiency in the Denver
operation is a forward-looking statement which involves a number of risks and
uncertainties which could cause actual results to materially differ from the
forward-looking statement. The following is a list of factors, among others,
that could cause actual results to materially differ: changes in fuel price,
changes in FAA Part 121 regulations increasing pilot turnover or failure to
reduce the high costs of operation in the Denver system resulting in the
scheduling of fewer flights.
Should management's efforts to reduce costs in the Denver system not result in
acceptable operating margins, or should certain other operations become
unprofitable as a result of costs imposed by new Part 121 operating regulations,
service levels for unprofitable routes may be reduced and aircraft transferred
to more suitable opportunities or eliminated from the fleet.
The following table lists the aircraft operated by Mesa as of March 31, 1997:
<TABLE>
<CAPTION>
Number of Aircraft
-----------------------------------------------
Passenger
Type of Aircraft Owned Leased Total Capacity
- -------------------------- -------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Beechcraft 1900 108 10 118 19
Embraer Brasilia 2 31 30
29
Bae Jetstream 31 __ 21 19
21
Dash 8-200 __ 12 37
12
Dash 8-300 __ 1 50
1
Fokker 70 __ 2 78
2
CRJ __ 1 50
1
-------------- --------------- ----------------
Total 110 75 185
-------------- --------------- ----------------
</TABLE>
14
<PAGE>
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 duly
authorized undersigned.
MESA AIR GROUP, INC.
Registrant
Date: October 8, 1997 /s/ W. Stephen Jackson
----------------------
W. Stephen Jackson
Chief Financial Officer
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE>5
<CURRENCY>US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 55,095
<SECURITIES> 6,199
<RECEIVABLES> 42,112
<ALLOWANCES> 272
<INVENTORY> 25,941
<CURRENT-ASSETS> 140,201
<PP&E> 403,771
<DEPRECIATION> 68,679
<TOTAL-ASSETS> 701,744
<CURRENT-LIABILITIES> 63,184
<BONDS> 0
0
0
<COMMON> 101,346
<OTHER-SE> 124,747
<TOTAL-LIABILITY-AND-EQUITY> 701,744
<SALES> 121,412
<TOTAL-REVENUES> 121,412
<CGS> 116,762
<TOTAL-COSTS> 116,762
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,696
<INCOME-PRETAX> (1,431)
<INCOME-TAX> (556)
<INCOME-CONTINUING> (875)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (875)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
