<PAGE> 1
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 quarter ended June 30, 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 August 14, 1997 the Registrant had outstanding 28,294,584 shares of Common
Stock.
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PART I. FINANCIAL INFORMATION
Item 1.
MESA AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $ 126,823 $ 127,946 $ 368,735 $ 363,111
Freight and other 2,620 2,328 7,529 8,164
--------- --------- --------- ---------
Total operating revenues 129,443 130,274 376,264 371,275
--------- --------- --------- ---------
Operating expenses:
Flight operations 48,421 40,964 136,104 129,324
Maintenance 23,626 20,704 66,401 59,495
Aircraft and traffic servicing 21,305 18,410 63,111 55,283
Promotion and sales 20,066 19,851 55,642 56,000
General and administrative 5,682 7,039 18,418 21,665
Depreciation and amortization 8,571 5,978 25,596 16,356
Jet Return Provision -- 3,023 -- 3,023
--------- --------- --------- ---------
Total operating expenses 127,671 115,969 365,272 341,146
--------- --------- --------- ---------
Operating income 1,772 14,305 10,992 30,129
--------- --------- --------- ---------
Non-operating income (expenses):
Interest expense (7,025) (3,602) (20,618) (6,743)
Interest income 418 326 1,463 1,378
Other 742 (419) 1,019 11,647
--------- --------- --------- ---------
Total non-operating income (expenses) (5,865) (3,695) (18,136) 6,282
--------- --------- --------- ---------
Earnings (loss) before income taxes (4,093) 10,610 (7,144) 36,411
Income tax expense (benefit) (1,590) 4,085 (2,776) 14,147
--------- --------- --------- ---------
Net earnings (loss) $ (2,503) $ 6,525 $ (4,368) $ 22,264
========= ========= ========= =========
Average common and common equivalent
shares outstanding 28,295 28,970 28,269 31,122
========= ========= ========= =========
Net earnings (loss) per common and
common equivalent share $ (0.09) $ 0.23 $ (0.15) $ 0.72
========= ========= ========= =========
</TABLE>
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CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
June 30 September 30
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 44,956 $ 54,720
Marketable securities 3,899 5,300
Receivables, principally traffic 51,123 41,105
Expendable parts and supplies, net 29,325 26,956
Prepaid expenses and other current assets 10,454 6,394
-------- --------
Total current assets 139,757 134,475
Property and equipment, net 459,089 446,727
Lease and equipment deposits 10,901 10,889
Intangibles, net 49,663 53,538
Other assets 22,505 27,316
-------- --------
Total assets $681,915 $672,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases $ 17,013 $ 17,127
Accounts payable 19,219 13,811
Income taxes payable -- 3,708
Air traffic liability 4,326 4,789
Other accrued expenses 18,313 24,180
-------- --------
Total current liabilities 58,871 63,615
-------- --------
Long-term debt and capital leases, excluding current portion 357,024 338,278
Deferred credits and accrued liabilities 22,673 23,992
Deferred income taxes 22,253 22,394
Stockholder's equity:
Preferred stock of no par value, 2,000,000 shares -- --
authorized; no shares issued and outstanding
Common stock of no par value, 75,000,000 shares authorized; 101,347 100,876
28,294,584 in 1997 and 28,243,385 in 1996
Retained earnings 116,916 121,283
Unrealized gain on marketable securities, net 2,831 2,507
-------- --------
Total stockholders' equity 221,094 224,666
-------- --------
Total liabilities and stockholders' equity $681,915 $672,945
======== ========
</TABLE>
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended June 30
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (4,368) $ 22,264
Adjustments to reconcile net earnings (loss) to net cash flows from
operation activities:
Depreciation and amortization 25,596 16,356
Reserve for contingent liabilities -- 10,000
(Gain) Loss on sale of securities -- (22,008)
(Gain) Loss on disposal of property and equipment -- 631
Amortization of deferred credits (1,296) (1,903)
Stock bonus plan 349 720
Changes in assets and liabilities:
Receivables (10,018) (783)
Expendable parts and supplies (2,369) (4,078)
Prepaid expenses and other current assets (4,060) 1,383
Accounts payable 5,408 (5,565)
Other accrued liabilities (7,536) (393)
-------- --------
NET CASH FLOWS FROM OPERATING ACTIVITIES: 1,706 16,624
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,498) (20,446)
Proceeds from sale of property and equipment 1,803 7,565
Proceeds from sale of marketable securities 1,000 38,861
Intangibles -- --
Other assets 4,811 (2,689)
Lease and equipment deposits (888) 2,819
-------- --------
NET CASH FLOWS FROM INVESTING ACTIVITIES 1,228 26,110
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and
obligations under capital leases (13,050) (5,767)
Proceeds from issuance of common stock 122 1,510
Stock buyback program -- (53,931)
Proceeds from deferred credits 230 975
-------- --------
NET CASH FLOWS FROM FINANCING ACTIVITIES (12,698) (57,213)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (9,764) (14,479)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 54,720 53,675
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,956 $ 39,196
======== ========
</TABLE>
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended June 30
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
Cash paid during the period for: 1997 1996
------ ------
<S> <C> <C>
Interest $20,618 $3,094
Income taxes 1,286 5,701
</TABLE>
Mesa purchased fixed assets during the periods ended June 30 upon which debt
was assumed or incurred as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Assets purchased $37,040 $279,656
Debt assumed or incurred 35,915 262,000
Equipment deposits 1,125 13,377
------- --------
Cash utilized $ 0 $ 4,279
======= ========
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended June 30,
1997 are not necessarily indicative of the results that may be expected
for the year ending September 30, 1997.
These financial statements should be read in conjunction with the
Company's consolidated financial statements and footnotes included in
the annual report for the year ended September 30, 1996.
2. The consolidated financial statements include the accounts of Mesa Air
Group, Inc. and its wholly owned subsidiaries Mesa Airlines, Inc.,
WestAir Holding, Inc., Air Midwest, Inc., Mesa Leasing, Inc., MAGI
Insurance, Ltd., MPD, Inc., and FCA, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
3. Income tax expense (benefit) is based upon Mesa's annual effective tax
rate of 38.6 percent.
4. Legal Proceedings:
See Part II. Item 1.
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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 186 aircraft as America West
Express, Mesa Airlines, United Express and USAirways 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 three 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 much
of its 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.
The following tables set forth year-to-year comparisons for the periods
indicated below:
OPERATING DATA
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1997 1996 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Passengers 1,748,216 1,646,792 4,866,198 4,806,925
Available seat miles (000) 642,527 598,170 1,832,185 1,840,996
Revenue passenger miles (000) 359,644 341,041 1,015,334 1,022,765
Load factor 56.0% 57.0% 55.4% 55.6%
Yield per revenue passenger mile 35.3(cent) 37.5(cent) 36.3(cent) 35.5(cent)
Operating cost per available seat mile 19.9(cent) 19.4(cent) 19.9(cent) 18.5(cent)
Revenue per available seat mile 20.1(cent) 21.8(cent) 20.5(cent) 20.2(cent)
Average stage length (miles) 170 167 170 167
Number of aircraft in fleet 186 173 186 173
Gallons of fuel consumed (000) 19,299 17,612 55,956 52,253
Block hours flown 147,747 136,029 424,370 408,420
Departures 156,473 152,778 450,940 468,299
</TABLE>
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FINANCIAL DATA
Three Months Ended June 30, 1997 Versus Three Months Ended June 30, 1996
<TABLE>
<CAPTION>
Three Months Ended June 30
---------------------------------------------------------------------------
1997 1996
---------------------------------------------------------------------------
Cost per Percent of total Cost per Percent of total
ASM operating revenues ASM operating revenues
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Flight operations 7.6(cent) 37.4% 6.8(cent) 36.2%
Maintenance 3.7(cent) 18.2% 3.5(cent) 15.9%
Aircraft and traffic servicing 3.3(cent) 16.5% 3.1(cent) 14.1%
Promotion and sales 3.1(cent) 15.5% 3.0(cent) 15.2%
General and administrative .9(cent) 4.4% 1.2(cent) 5.4%
Depreciation and amortization 1.3(cent) 6.6% 1.0(cent) 4.6%
Jet return provision -- -- 0.5(cent) 2.3%
------------------------------ ------------------------------
Total operating expenses 19.9(cent) 98.8% 19.4(cent) 89.0%
Interest expense 1.1(cent) 5.4% 0.6(cent) 2.8%
</TABLE>
OPERATIONS
Operating Revenues:
Passenger revenues decreased by 0.9% to $126.8 million and average fare
decreased by 6.6% to $72.54. Passengers carried increased by 6.2% to 1,748,216
while available seat miles (ASMs) increased 7.4% and revenue passenger miles
(RPMs) increased 5.5%. Revenue per available seat mile decreased 1.7(cent)to
20.1(cent). The decrease in average fare is primarily due to a reinstatement
of the 10% excise tax on airline tickets and introductory fares in new markets.
Operating Expenses:
Flight Operations:
Flight operations expense increased by 18.2% to $48.4 million in the June, 1997
quarter from $41.0 million in the June, 1996 quarter. The primary causes of this
increase were a $3.0 million increase in pilot salaries and benefits resulting
from the new pilot contract executed in December, 1996 with the Air Line Pilots
Association, $1.5 million in increased dispatch and training costs relating to
the increased requirements of operating under Federal Aviation Regulation (FAR)
Part 121, a $1.0 million dollar increase in pilot temporary living costs
associated with the new contract and FAR Part 121 conversion, and a $3.1 million
increase in the cost of fuel. Of the $3.1 million increase in fuel costs, $1.8
million was due to a nine cent per gallon increase in fuel prices to an average
of $.89 per gallon in the June, 1997 quarter from $.80 cents in the June, 1996
quarter. A 1.6 million increase in gallons used accounted for the additional
$1.3 million increase in fuel costs. Increases in flight operations expense were
partially offset by a $4.4 million decrease in aircraft lease expense caused by
the purchase of 69 aircraft in May, 1996 previously financed by operating
leases.
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Maintenance Expense:
Maintenance expense increased by $2.9 million for the current quarter to
3.7(cent)per ASM from 3.5(cent) per ASM in the June, 1996 quarter. This increase
was primarily due to the timing of scheduled overhauls.
Aircraft and Traffic Service Expense:
Aircraft and traffic servicing expense of $21.3 million increased by $2.9
million over the June, 1996 quarter. An increase in customer service wages
comprises approximately $1.5 million of the increase. The number of customer
service representatives has increased due to additional markets and to increased
staffing levels, which is responsible for approximately $800,000 of the $1.5
million increase. The remaining $700,000 was due to an average 8.6% wage
increase to customer service representatives in an effort to attract and retain
qualified individuals.
Promotion and Sales:
Promotion and sales expense increased to $20.1 million from $19.9 million. The
increase was due to promotional activity in the Fort Worth - Houston market for
the new CRJ operation. (See, Liquidity and Capital Resources)
General and Administrative Expense:
General and administrative expense declined by 19.3% to $5.7 million. This
decline was primarily a result of reduction in the management incentive bonus.
Depreciation, Amortization and Interest Expense:
Depreciation and amortization increased by $2.6 million to $8.6 million and
interest expense increased by $3.4 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 financing of 22 new Beechcraft aircraft with debt rather than
lease financing.
Nine Months Ended June 30, 1997 Versus Nine Months Ended June 30, 1996
<TABLE>
<CAPTION>
Nine Months Ended June 30
1997 1996
---------------------------------------------------------------------------
Cost per Percent of total Cost per Percent of total
ASM operating revenues ASM operating revenues
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
Flight operations 7.4(cent) 36.2% 7.0(cent) 34.8%
Maintenance 3.6(cent) 17.6% 3.2(cent) 16.0%
Aircraft and traffic servicing 3.5(cent) 16.8% 3.0(cent) 14.9%
Promotion and sales 3.0(cent) 14.8% 3.0(cent) 15.1%
General and administrative 1.0(cent) 4.9% 1.2(cent) 5.8%
Depreciation and amortization 1.4(cent) 6.8% .9(cent) 4.4%
Jet return provision -- -- .2(cent) 0.8%
------------------------------ ------------------------------
Total operating expenses 19.9(cent) 97.1% 18.5(cent) 91.9%
Interest expense 1.1(cent) 5.5% .4(cent) 1.8%
</TABLE>
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OPERATIONS
Operating Revenues:
During the nine months ended June 30, 1997, passenger revenues increased to
$368.7 million from $363.1 million for the June 30, 1996 quarter, an increase of
approximately $5.6 million (1.5%). ASMs declined in the nine-month period by
0.5% to 1.832 billion, and RPMs declined 0.7% to 1.015 billion, resulting in a
decrease in load factor to 55.4% for the nine-month period from 55.6% in the
comparable period for the previous year. Average fare increased from $75.54 in
the nine-month period of the prior year to $75.77 for the nine-month period
ended June 30, 1997.
Operating Expenses:
Flight Operations:
Flight operations expense increased by $6.8 million to $136.1 million for the
nine-month period ended June 30, 1997, from $129.3 million for the nine months
ended June 30, 1996. Fuel costs increased by $8.9 million during the current
period as compared to the prior period. Of that increase $6.7 million is a
result of a 12(cent) per gallon increase in the average price of fuel with
increased usage accounting for the balance. Pilot costs increased by $9.0
million during the period, due primarily to the costs associated with the new
pilot contract which became effective in December, 1996. Dispatch costs
increased by $1.9 million in the 1997 period due to the requirements of
operation under FAR Part 121. These cost increases were partially offset by a
$17.7 million reduction in aircraft lease costs during the nine-month period
ended June 30, 1997, which resulted from the purchase of 69 aircraft previously
financed by operating leases in May, 1996.
Maintenance Expense:
Maintenance expense increased by $6.9 million to $66.4 million for the
nine-month period ended June 30, 1997, from $59.5 million for the nine-month
period ended June 30, 1996. Cost per ASM increased to 3.6(cent)in the 1997
period from 3.2(cent)for the comparable period of 1996. The requirements of
operating under FAR Part 121, new training requirements related to the FAA
consent order and a new maintenance base for the Fort Worth CRJ operation
resulted in an increase in the number of mechanics retained by the Company. In
September, 1996 mechanics received an increase in hourly wage of approximately
12% to attract and retain qualified individuals. The timing of aircraft engine
overhauls, development and implementation of a centralized maintenance program
under FAR Part 121 and implementation of the consent order with the Federal
Aviation Administration (FAA) (see Liquidity and Capital Resources) also
contributed to the increase in maintenance expense.
Aircraft and Traffic Servicing:
Aircraft and traffic servicing costs increased by $7.8 million to $63.1 million
for the nine months ended June 30, 1997, from $55.3 million for the nine months
ended June 30, 1996. Wages for customer service representatives increased by
$4.4 million during the period with approximately $2.0 million related to
increased staffing levels. The balance of the increase in wages was due to wage
and benefit increases instituted to attract and retain qualified individuals.
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Promotion and Sales
Promotion and sales expenses decreased to $55.6 million in the period ended June
30, 1997, from $56.0 for the period ended June 30, 1996, due to a slight
decrease in reservation booking fees.
General and Administrative:
General and administrative expenses declined by $3.3 million to $18.4 million
for the quarter ended June 30, 1997 from $21.7 million for the quarter ended
June 30, 1996. Over half of the decline was due to a decrease in the management
incentive bonus.
Depreciation, Amortization and Interest Expense:
Depreciation and amortization increased by $9.2 million to $25.6 million and
interest expense increased by $13.9 million to $20.6 million as a result of the
purchase in May, 1996 of 69 aircraft which were previously financed under
operating leases, and the financing of 22 new Beechcraft aircraft with debt
rather than operating leases.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and marketable securities at June 30, 1997 were $49 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. Total working capital available increased to $81
million at June 30, 1997 from $71 million at September 30, 1996.
Receivables of $51 million at June 30, 1997 consist primarily of amounts due
from code-sharing partners United and USAirways. Under the terms of the
code-share agreements with United and US Airways, Mesa receives a substantial
portion of its revenues for the previous month through the Airline
Clearinghouse, Inc. at the end of each month.
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 June 30, 1997, the Company had aggregate indebtedness of $374 million
payable to various parties under promissory notes issued in connection with the
purchase of 110 aircraft. The notes have interest rates ranging from 6.8 percent
to 7.8 percent, maturities ranging through 2009 and require monthly principal
installments aggregating approximately $1.4 million.
The Company ceased operation of its two Fokker 70 aircraft on July 6, 1997. Two
Canadair CRJ 200LR, 50 passenger regional jet aircraft (CRJs) began serving the
markets previously served by the Fokker 70 aircraft on July 7, 1997. One Fokker
70 aircraft is to be returned to the lessor prior to the end of August, 1997,
the other by the end of September, 1997. Neither aircraft will remain a
financial obligation of the Company.
As reported in the Form 10-Q for the quarter ended March 31, 1997, on April 23,
1997 the Company gave notice to Bombardier, Inc. of its decision to cancel
delivery of 13 Dash 8-200 aircraft on order. Bombardier and Mesa are presently
completing negotiations which both parties believe will provide a commercially
satisfactory resolution of the cancellation. Management believes the resolution
will result in no penalty to the Company and that there will be no negative
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
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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. As of June 30, 1997 long-term financing for all
12 Dash 8-200 aircraft delivered and in service had been completed.
In January, 1997 the Company and Bombardier executed an agreement to acquire 16
CRJs worth approximately $320 million. The Company deposited $8.3 million with
Bombardier for this order. Deliveries of the CRJ began in March, 1997 and are
being delivered at the rate of one aircraft per month. As of June 30, 1997 the
Company had received four CRJ aircraft. The Company will trade in 12 Embraer 120
Brasilia aircraft for the 16 CRJ aircraft on order. Bombardier will participate
as needed to provide financing for the CRJ aircraft to be acquired. The Company
has options for an additional 32 CRJ aircraft.
Costs approximating $0.9 million, excluding ongoing operating costs, were
incurred during the quarter ended June 30, 1997 to establish an independent jet
operation in Fort Worth, Texas. The Company commenced scheduled service between
Fort Worth and Houston, Texas on May 5, 1997 with 11 round trips per day
utilizing two aircraft. In September, the Company plans to initiate service
between Fort Worth and San Antonio, Texas. The schedule will be adjusted in
September to provide six round trips each between Fort Worth and Houston and
Fort Worth and San Antonio utilizing two aircraft. Passenger loads in the Forth
Worth to Houston market have been increasing, but at a slower pace than
anticipated by management. In late July a promotional campaign with ticket sales
at a discounted fare was commenced resulting in a substantial increase in the
number of passengers carried. Management believes demand for the service exists
and marketing activities are being intensified to develop awareness of the
service in the Fort Worth, Houston and San Antonio communities. There is no
assurance that profitability can be achieved in the Ft. Worth market.
Management's belief that demand for independent jet service exists in the Fort
Worth market is a forward looking statement. Actual results could differ
materially from the forward looking statement, including, among other factors,
airport convenience, fares offered by competitors, advertising and promotional
activity of competitors, the accuracy of market studies, and general economic
conditions in the region.
Mesa Airlines, Inc. is continuing the process of centralizing its operations in
order to comply with the September, 1996 consent order signed with the Federal
Aviation Administration (FAA) and to operate more efficiently under Part 121 of
the Federal Aviation Regulations (FARs). Mesa Airlines, Inc. completed its
transition to operation under FAR Part 121 in March, 1997. The Company's two
other certificated airlines, WestAir Commuter Airlines, Inc. and Air Midwest
Airlines, Inc. completed the transition to FAR Part 121 prior to March, 1997.
Although some additional transition costs are expected to be incurred by Mesa
Airlines, Inc. in the fourth fiscal quarter, management believes the consent
order program will be essentially complete before September 30, 1997.
Under its consent order with the FAA, Mesa Airlines, Inc. agreed to adopt
several operational standards which exceed the requirements of FAR Part 121.
Mesa Airlines, Inc. is presently in compliance with the timetable providing for
implementation of the provisions of the consent order. The FAA has scheduled a
review of Mesa Airlines, Inc.'s operations in late August, 1997 to determine
whether Mesa Airlines, Inc. has complied with all of the provisions of the
consent order. If the FAA determines that Mesa Airlines, Inc. is in compliance
with the provisions of the consent order, $250,000 of a $500,000 compromise
civil penalty will be waived. The Company believes the FAA will find that Mesa
Airlines, Inc. has complied with the provisions of consent order and that the
$250,000 unpaid balance of the compromise civil penalty will be waived.
Company management is monitoring the extent of new costs imposed on its 19 and
30 seat aircraft operations by implementation of the additional operating
procedures required by FAR Part 121 and the consent order. Efforts will be made
to minimize the cost of these new operating procedures while fully meeting the
new operating requirements. Management expects to complete its analysis of the
cost increase by the Fall of 1997.
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The cost to comply with FAR 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.
OTHER EVENTS
United Airlines, Inc:
The Company operates 82 of its fleet of 186 aircraft as United Express under a
code share contract with United Airlines, Inc. (UAL). The United Express
operation represents approximately 45% of the available seat mile (ASM) capacity
generated by the Company. The United Express ASMs are distributed approximately
as follows:
<TABLE>
<S> <C>
Denver system 45%
Pacific Northwest system 13%
California system 42%
</TABLE>
United Express is operated under two separate code sharing contracts with UAL.
One code share contract, which covers the Denver operation and approximately 24%
of operations on the West Coast, is with Mesa Airlines, Inc., and expires in
2005. The second contract, with WestAir Commuter Airlines, Inc. (WestAir),
expires in May, 1998.
Operations in the Denver system have been incurring substantial operating losses
and negative cash flows. The Denver system is unprofitable because of a
substantial increase in operating costs at the new Denver International Airport
combined with an approximate 20% decrease in the average connecting fare.
Efforts are being made to minimize expenses in the Denver system, but management
believes that the Denver operation will not attain profitability and positive
cash flow without an increase in connecting fares received from UAL or
adjustments to the level of service. Such connecting fares are determined by UAL
under the "agreed rate pro-rate" provisions of the code share contract. Should
UAL not assist in the effort to return the Denver system to profitability,
Company management may reduce the system to minimize losses and will evaluate
whether a provision to recognize impairment of the Denver system intangible
asset of $26.4 million is necessary under generally accepted accounting
principles. Aircraft removed from the Denver system, if any, could be
transferred to other markets or parked. There is no assurance that UAL will
agree to any increase in connecting fares or to a sufficient increase to return
the Denver system to profitability. There is no assurance that sufficient
aircraft can be removed from the Denver system, if any, to return the Denver
system to profitability or that aircraft removed from the Denver system can be
transferred to other profitable markets. Management's belief that attainment of
profitability can be achieved with an increase in connecting fares received from
UAL or adjustments to the level of service are forward looking statements.
Actual results could differ materially from the forward looking statements,
including, among other factors, unanticipated costs increases at the Denver
International Airport, additional taxes or costs of compliance with governmental
regulations, fuel cost increases, increase in competition on routes served by
the Company, lack of available routes for excess aircraft and general economic
conditions.
Under code sharing agreements with UAL, most markets provide revenue sharing
based on an allocation of fares between UAL and the Company ("pro-rate
markets"). However, an increasing portion of routes in the Pacific Northwest and
Los Angeles have become fee per departure markets. These fee per departure
markets may be terminated upon 90 days notice by either UAL or Mesa/WestAir. If
a significant number of fee per departure markets were terminated, it could have
a material adverse impact on the Company.
In June, 1997 the Company received notice from UAL terminating its right to
eight markets in the Los Angeles, California hub under the WestAir contract,
effective October 1, 1997. These markets were being operated on a "fee per
departure" contract and utilized eight aircraft. On July 22, 1997 UAL issued a
press release that such markets were awarded to Skywest Airlines, effective
October 1, 1997.
The Company does not believe that UAL has the right to terminate WestAir's right
to operate in these markets and award them to another carrier, and believes that
the termination is a breach of contract. In
13
<PAGE> 14
June, 1997 UAL filed a declaratory judgment in US District Court in Chicago to
seek court interpretation of the contract. Subsequent to June 1997, UAL granted
WestAir the right to operate the eight aircraft to be displaced in Los Angeles
in new markets within California as United Express, effective October 1, 1997.
However, the Company will not be compensated on a fee per departure basis in
these new markets and there is no assurance that such markets will be
profitable. The Company believes there will be no material cost of transition to
the new markets.
The Company continues to negotiate with UAL for a solution to the unprofitable
Denver hub and for favorable resolution of the termination of its markets in Los
Angeles.
US Airways, Inc.:
As reported in the Form 10-Q for the quarter ended March 31, 1997, US Airways,
Inc. notified the Company that the service agreements between Mesa and US
Airways and Air Midwest and US Airways may be amended to decrease the Company's
share of joint fares by approximately three percent. An alternative proposal has
been discussed with US Airways which may result in no decrease in US Airways
Express revenue. Negotiations are continuing between the Company and US Airways
to resolve the issue.
The following table lists the aircraft operated by Mesa as of June 30, 1997:
NUMBER OF AIRCRAFT
<TABLE>
<CAPTION>
Passenger
Type of Aircraft Owned Leased Total Capacity
<S> <C> <C> <C> <C>
Beechcraft 1900 108 10 118 19
Embraer Brasilia 2 27 29 30
BAe Jetstream 31 -- 21 21 19
Dash 8-200 -- 12 12 37
Fokker 70 -- 2 2 78
CRJ -- 4 4 50
--- --- ---
Total 110 76 186
--- --- ---
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In late June 1997, United Airlines ("United") filed a declaratory
judgment action in the U.S. District Court in Chicago, Illinois,
against Mesa Airlines, Inc. and WestAir Holdings, Inc., two of the
Company's subsidiaries. The action petitions the court to interpret the
existing code share agreements with United.
On July 22, 1997, United announced its decision to transfer eight of
the routes served out of the Los Angeles market to Skywest Airlines
effective October 1, 1997. The Company believes that Mesa Airlines,
Inc. and WestAir Commuter Airlines, Inc. each have exclusive
14
<PAGE> 15
rights to use of the United Express code in those markets. Mesa
believes the termination of service in the eight Los Angeles markets is
a breach of contract and intends to file an answer contesting the
interpretation of the contracts by United.
During 1994, seven shareholder class action complaints were filed in
the United States District Court for the District of New Mexico against
Mesa, certain of its present and former corporate officers and
directors, and certain underwriters who participated in Mesa's June
1993 public offering of common stock. These complaints have been
consolidated by court order, and, after the court granted in part a
motion to dismiss in May 1996, an amended consolidated complaint has
been filed alleging that during various periods the above-named
defendants and Mesa's independent auditor (which has been named as a
defendant in the current complaint) caused or permitted Mesa to issue
publicly misleading financial statements and other misleading
statements in annual and quarterly reports to shareholders, press
releases and interviews with securities analysts. The current complaint
alleges that these statements misrepresented Mesa's financial
performance and condition, its business, the status of its operations,
its earnings, its capacity to achieve profitable growth and its future
business prospects, all with the purpose and effect of artificially
inflating the market price of common stock of Mesa throughout the
relevant period. The complaint further alleges that certain officers
and directors of the Company illegally profited from sales of Mesa
common stock during these periods. The complaint seeks damages against
the defendants in an amount to be determined at trial (including
rescission and/or money damages as appropriate), disgorgement of all
insider trading profits earned by defendants in connection with the
sale of common stock of Mesa, and reasonable attorney, accountant and
expert fees. During October 1995, the court granted class certification
in the action.
Mesa and the corporate officers and directors deny the allegations made
against them in these lawsuits. Further, Mesa and the corporate
officers and directors believe they have substantial and meritorious
defenses against these allegations and intend to continue to defend
their position vigorously. However, should an unfavorable resolution of
this litigation occur, it is possible that Mesa's future results of
operations or cash flows could be materially affected in a particular
period.
In a related case, in September 1994, a shareholder derivative suit was
filed in the United States District Court for the District of New
Mexico, purportedly on behalf of Mesa. The derivative lawsuit was
dismissed by the Court on August 12, 1996.
Item 2. Change in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
15
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
None
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: August 14, 1997 /s/ W. Stephen Jackson
----------------------
W. Stephen Jackson
Chief Financial Officer
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS FOR THE THIRD FISCAL QUARTER.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 44,956
<SECURITIES> 3,899
<RECEIVABLES> 51,395
<ALLOWANCES> 272
<INVENTORY> 29,325
<CURRENT-ASSETS> 139,757
<PP&E> 546,886
<DEPRECIATION> 87,797
<TOTAL-ASSETS> 681,915
<CURRENT-LIABILITIES> 58,871
<BONDS> 0
0
0
<COMMON> 101,347
<OTHER-SE> 119,747
<TOTAL-LIABILITY-AND-EQUITY> 681,915
<SALES> 376,264
<TOTAL-REVENUES> 376,264
<CGS> 365,272
<TOTAL-COSTS> 365,272
<OTHER-EXPENSES> (1,019)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,155
<INCOME-PRETAX> (7,144)
<INCOME-TAX> (2,776)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,368)
<EPS-PRIMARY> 0
<EPS-DILUTED> $(.15)
</TABLE>
