MESA AIR GROUP, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements, the accompanying notes, and the other financial information included elsewhere in this Annual Report on Form 10-K. The following discussion contains forwardlooking statements that involve risks and uncertainties such as our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements below. Factors that could cause or contribute to those differences in our actual results include, but are not limited to, those discussed below and those discussed elsewhere in this Annual Report on Form 10-K, particularly in the sections "Cautionary Notes Regarding Forward-Looking Statements" and Part I, Item 1A. "Risk Factors" above.
Overview
Mesa Airlines is a regional air carrier providing scheduled passenger service to 129 cities in 39 states, theDistrict of Columbia , theBahamas , andMexico , as well as cargo services out ofCincinnati/Northern Kentucky International Airport . All of our flights are operated as either American Eagle, United Express, or DHL Express flights pursuant to the terms of capacity purchase agreements with American and United and a flight services agreement with DHL. We have a significant presence in several of our major partners' key domestic hubs and focus cities, includingDallas ,Houston ,Phoenix , andWashington -Dulles. As ofSeptember 30, 2021 , we operated under the CPAs and FSA, or maintained as operational spares, a fleet of 153 aircraft with approximately 507 daily departures. We also lease 14 aircraft to a third party. We operate 40 CRJ-900 aircraft under our American CPA and 20 E-175LL and 60 E-175 aircraft under our United CPA. We operate two Boeing 737-400F aircraft under the DHL FSA. For our fiscal year endedSeptember 30, 2021 , approximately 33% of our aircraft in scheduled service were operated for American, 65% were operated for United, and 2% were operated for DHL. All our operating revenue in our 2021 fiscal year was derived from operations associated with our American and United CPAs, DHL FSA, or from leases of aircraft to a third party. All our operating revenue in our 2020 and 2019 fiscal years was derived from operations associated with our American and United CPAs. Our long-term agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour and flight actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying on behalf of our major partners. Our capacity purchase and flight services agreements also shelter us from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. In providing regional flying under our capacity purchase agreements, and cargo flight services under our flight services agreement, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major partners. Our major partners control route selection, pricing, seat inventories, marketing, and scheduling, and provide us with ground support services, airport landing slots and gate access. Under our DHL FSA, we receive a fee per block hour with a minimum block hour guarantee in exchange for providing cargo services. Ground support including fueling and airport fees are paid directly by DHL.
Impact of the COVID-19 Pandemic
The unprecedented and rapid spread of COVID-19 and the related travel restrictions and social distancing measures implemented throughout the world significantly reduced demand for air travel beginning in our fiscal year 2020. This reduction in demand had an unprecedented and materially adverse impact on our revenues and financial position in the prior year that continued into fiscal year 2021. However, we experienced improvement in our operating results in fiscal year 2021 resulting from lessening of travel and gathering restrictions inthe United States , particularly in the second half of our fiscal year. Since a portion of the consideration we receive under our capacity purchase agreements is fixed, the impact to us 41
-------------------------------------------------------------------------------- from the COVID-19 pandemic was partially mitigated. In addition, we have limited exposure to fluctuations in passenger traffic, ticket, and fuel prices under the terms of our capacity purchase agreements with American and United. While our fixed contract consideration was mostly unchanged, our variable revenue based on number of block hours flown was significantly impacted in 2020 resulting in a material decline in revenues. Beginning inMarch 2020 , we experienced capacity reductions resulting in a material decline in demand in block hours from our major partners and operated at significantly lower block hours in the second half of fiscal year 2020 and first half of fiscal year 2021. The funds we received under the Payroll Support Program (and related extensions) and our Loan and Guarantee Agreement with theU.S. Treasury , coupled with diligent cost saving measures during fiscal year 2020, have helped to partially offset the negative impacts of COVID-19 on our business. In response to the COVID-19 pandemic, we implemented various measures to protect our employees as they have continued to provide safe and reliable transportation to the passengers of American and United under our CPAs and cargo flight services under our FSA with DHL. The safety of our employees and passengers remains our primary focus and, to that end, measures that we have taken include but are not limited to:
? Both on our own, and in coordination with our major partners, we have
taken steps to ensure that high touch areas used by both employees and
customers are routinely and comprehensively cleaned and disinfected to
prevent transmission of the virus on surfaces. To assist our crewmembers
in keeping the aircraft clean and disinfected, we have increased the
supply of sanitizing wipes onboard.
? Mandated face covering for all employees working onboard aircraft, at
corporate and training facilitates and locations where social distancing
cannot be maintained.
? In coordination with our major partners (and to satisfy the federal mask
mandate), we've implemented a policy that requires all crewmembers to
wear face coverings while on duty. We have provided, and continue to
resupply, our employees with personal protective equipment (PPE)
consisting of gloves and face coverings for use whenever socialdistancing cannot be maintained or when working with our customers. All
employees have been directed to self-monitor their temperature before
reporting for duty and twice daily.
? Based on recommendations from the Centers for Disease Control and
Prevention (CDC ), we increased facility cleaning and disinfection
protocols at all of our facilities and have implemented social
distancing measures including extending our current remote working
policy for many of our corporate personnel. We also enhanced a previous
protocol to increase physical distance between workers who remain
working at our corporate facilities.
? Enhanced protocols that exceed CDC guidance for the handling ofemployees who are positive for, or suspected of, COVID-19 to ensure that
they have the necessary time off. Additionally, we have implemented
protocols to ensure that proper notification is made to any affected
employees. Protocols have also been put into place for the immediate
disinfection of any affected aircraft above and beyond routine cleaning
and disinfection protocols.
Balance Sheet, Cash Flow and Liquidity. As ofSeptember 30, 2021 , our cash and cash equivalents totaled$120.5 million . Beginning in the prior year we took the following actions to increase liquidity and strengthen our financial position.
? Drew
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? In April 2020 , we were granted $92.5 million in emergency relief through
the Payroll Support Program of the CARES Act, which was received as of
September 30, 2020 . In September 2020 , we were notified that, based onfunding availability, recipients that were currently in compliance with
signed payroll support program agreements would receive an approximate
2% increase in their award amount. As a result, we received an
additional $2.7 million in October 2020 for a total grant of $95.2
million under this program. We utilized $83.8 million of these proceeds
to offset payroll expenses in the year ended September 30, 2020 and the
remaining $11.4 million was utilized in the first quarter of fiscal
2021. During fiscal 2021, we received aggregate proceeds of $56.0
million and
and PSP3, respectively, all of which was utilized and recognized as an
offset to payroll expenses in the current fiscal year. Additionally, as
described in Note 3: "Contract Revenue and Pass-through and Other
Revenue", a portion of the Company's reduced labor costs resulting from
government assistance was passed on to our major partners in the form of
temporary rate reductions during the 2021 fiscal year.
? The CARES Act also provided for up to
the airline industry. In
five-year Loan and Guarantee Agreement (the "Loan Agreement") with the
Company with a secured loan facility of up to
30, 2020, the Company borrowed
further borrowings are available under the Loan Agreement. All principal
amounts outstanding under the Loan Agreement are due and payable in a
single installment on October 30, 2025 (the "Maturity Date") and all
accrued interest is payable in arrears on the first business dayfollowing the 14th day of each March, June, September and December
(beginning
the first twelve months was paid-in-kind by increasing the principal
amount of the loan by the amount of such interest due on an interest
payment date. The obligations under the Loan Agreement are guaranteed by
the Company and Mesa Air Group Inventory Management and secured by
certain assets of the Company. The proceeds were used for general
corporate purposes and operating expenses, to the extent permitted by
the CARES Act. Prior to the November 13, 2020 funding of the $152.0
million portion of the Treasury Loan, the Company also repaid $167.7 million in existing aircraft debt as described in Note 9: "Long-Term
Debt, Finance Leases, and Other Borrowings".
The actions above, combined with cost saving initiatives implemented in fiscal 2020 by the Company in response to the pandemic, enabled the Company to respond to the increase in flight operations and maintenance costs during the latter half of fiscal 2021 associated with the increase in demand for air travel.
2021 Financial Highlights
For our fiscal year endedSeptember 30, 2021 , we had total operating revenues of$503.6 million , a 7.6% decrease, compared to$545.1 million for our fiscal year endedSeptember 30, 2020 . Net income for our fiscal year endedSeptember 30, 2021 was$16.6 million , or$0.43 per diluted share, compared to net income of$27.5 million , or$0.78 per diluted share, for our fiscal year endedSeptember 30, 2020 .
During our
Industry Trends
We believe our operating and business performance is driven by various factors
that typically affect regional airlines and their markets, including trends
which affect the broader airline and travel industries, though our capacity
purchase and flight services agreements reduce our exposure to fluctuations in
certain trends. The following key factors may materially affect our future
performance.
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Availability and Training of Qualified Pilots. On July 8, 2013 , as directed by
the U.S. Congress , the FAA issued more stringent pilot qualification and crew
member flight training standards, which, among other things, increased the
required training time for new airline pilots from 250 hours to 1,500 hours of
flight time. With these changes, the supply of qualified pilot candidates
eligible for hiring by the airline industry has been dramatically reduced. To
address the diminished supply of qualified pilot candidates, regional airlines
implemented significant pilot wage and bonus increases.
In prior periods, these factors caused our pilot attrition rates to be higher
than our ability to hire and retain replacement pilots and resulted in being
unable to provide flight services at or exceeding the minimum flight operating
levels expected by our major partners. However, in July 2017 , we reached a new
four-year collective bargaining agreement with our pilots that provided
increases in our pilots' wages, premium pay for flying on scheduled days off,
and competitive signing bonuses for prospective new pilots. Our results of
operations may be negatively impacted if we are unable to hire and train our
pilots in a timely manner.
Pilot and Mechanic Attrition. In recent years, we have experienced significant
volatility in our attrition as a result of pilot wage and bonus increases at
other regional air carriers, the growth of cargo, low-cost and
ultra-low-cost carriers, and the number of pilots at major airlines reaching the
statutory mandatory retirement age of 65 years. If our actual pilot attrition
rates are materially different than our projections, our operations and
financial results could be materially and adversely affected. Although we target
maintenance staffing levels above our projected needs in order to account for
attrition, which is widespread in the industry, from time to time we have
experienced attrition with our maintenance technicians, who have the option to
seek employment at mainline airlines, which generally offer higher salaries and
more extensive benefit programs than regional airlines are financially able to
offer. Attrition of maintenance technicians has sometimes required us to
supplement our staff with qualified temporary employees.
Economic Conditions, Challenges and Risks
Market Volatility. The airline industry is volatile and affected by economic cycles and trends. Consumer confidence and discretionary spending, spread of a virus, fear of terrorism or war, weakening economic conditions, fare initiatives, fluctuations in fuel prices, labor actions, changes in governmental regulations on taxes and fees, weather and other factors have contributed to a number of reorganizations, bankruptcies, liquidations, and business combinations among major and regional airlines. The effect of economic cycles and trends may be somewhat mitigated by our reliance on capacity purchase agreements. If, however, any of our major partners experiences a prolonged decline in the number of passengers or is negatively affected by low ticket prices or high fuel prices, it may seek rate reductions in future capacity purchase agreements, or materially reduce our scheduled flights in order to reduce its costs. Our financial performance could be negatively impacted by any adverse changes to the rates, number of aircraft or utilization under our capacity purchase agreements. Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements. As ofSeptember 30, 2021 , approximately 74.1% of our workforce was represented by the ALPA and AFA. Our pilots and flight attendants most recently ratified new four-year collective bargaining agreements during calendar 2017 which became amendable inJuly 2021 andOctober 2021 , respectively. The agreements include rate increases for three years and two years, respectively, after the amendable dates. The agreements are amendable following their four-year term and include labor rate structures for two years (flight attendants) and three years (pilots), respectively, after the amendable dates. The terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. In addition, conflicts between airlines and their unions can lead to work slowdowns or stoppages. A strike or other significant labor dispute with our unionized employees may adversely affect our ability to conduct business. Competition. The airline industry is highly competitive. We compete principally with other regional airlines. Major airlines typically award capacity purchase agreements to regional airlines based on the following criteria: ability to fly contracted schedules, availability of labor resources including pilots, low 44 -------------------------------------------------------------------------------- operating cost, financial resources, geographical infrastructure, overall customer service levels relating to on-time arrival and flight completion percentages, and the overall image of the regional airline. Our ability to renew our existing agreements and earn additional flying opportunities in the future will depend, in significant part, on our ability to maintain a low-cost structure competitive with other regional air carriers. Maintenance Contracts, Costs and Timing. Our employees perform routine airframe and engine maintenance along with periodic inspections of equipment at their respective maintenance facilities. We also use third-party vendors, such as AAR,Aviall , MHI,GE , andStandardAero , for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for our aircraft fleet. As ofSeptember 30, 2021 ,$59.8 million of parts inventory was consigned to us by AAR andAviall under long-term contracts that is not reflected in our consolidated balance sheet. The average age of our E-175, CRJ-900, Boeing 737, and CRJ-700 type aircraft is approximately 4.8, 15.0, 26.9, and 17.7 years, respectively. Due to the relatively young age of our E-175 aircraft, they require less maintenance now than they will in the future. In prior periods, we incurred relatively low maintenance expenses on our E-175 aircraft because most of the parts are under multi-year warranties and a limited number of heavy airframe checks and engine overhauls have occurred. As our E-175 aircraft age and these warranties expire, we expect that maintenance costs will increase in absolute terms and as a percentage of revenue. In addition, because our current aircraft were acquired over a relatively short period of time, significant maintenance events scheduled for these aircraft will occur at roughly the same intervals, meaning we will incur our most expensive scheduled maintenance obligations across our present fleet at approximately the same time. These more significant maintenance activities result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable for flying under our capacity purchase agreements. We use the direct expense method of accounting for our maintenance of regional jet engine overhauls, airframe, auxiliary power units and landing gear for the majority of our fleets, with the exception of Mesa-owned E-175 aircraft. Heavy maintenance and major overhaul costs on our owned E-175 fleet are deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. Normal recurring maintenance is expensed when the maintenance work is completed, or over the repair period, if materially different. Our maintenance policy is determined by fleet when major maintenance is incurred. While we keep a record of expected maintenance events, the actual timing and costs of major engine maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify the costs or timing of future maintenance-related expenses for any significant period of time.Aircraft Leasing and Finance Determinations. We have generally funded aircraft acquisitions through a combination of operating leases and debt financing. Our determination to lease or finance the acquisition of aircraft may be influenced by a variety of factors, including the preferences of our major partners, the strength of our balance sheet and credit profile and those of our major partners, the length and terms of the available lease or financing alternatives, the applicable interest rates, and any lease return conditions. When possible, we prefer to finance aircraft through debt rather than operating leases, due to lower operating costs, extended depreciation period, opportunity for aircraft equity, absence of lease return conditions and greater flexibility in renewing the aircraft under our capacity purchase agreements with our major partners after paying off the principal balance. Subsequent to the initial acquisition of an aircraft, we may also refinance the aircraft or convert one form of financing to another (e.g., replacing an aircraft lease with debt financing). The purchase of leased aircraft allows us to lower our operating costs and avoid lease-related use restrictions and return conditions. As ofSeptember 30, 2021 , we had 81 aircraft in our fleet under lease, including 62 E-175 aircraft owned by United and leased to us at nominal amounts and two Boeing 737 cargo jets subleased to us by DHL at nominal amounts. In order to determine the proper classification of our leased aircraft as either operating leases or finance leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to 45 -------------------------------------------------------------------------------- be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a finance lease. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. We are also subject to lease return provisions that require a minimum portion of eligible flight time for certain components remain when the aircraft is returned at the lease expiration. We estimate the cost of maintenance lease return obligations and accrue such costs over the remaining lease term when the expense is probable and can be reasonably estimated.
See "Risk Factors" for a discussion of these factors and other risks.
Seasonality
Our results of operations for any interim period are not necessarily indicative of those for the entire year since the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased utilization of our aircraft in the summer months and are unfavorably affected by increased fleet maintenance and by inclement weather during the winter months.
Glossary of Airline Terms
Set forth below is a glossary of industry terms used in this Annual Report on Form 10-K:
"Available seat miles" or "ASMs" means the number of seats available for passengers multiplied by the number of miles the seats are flown.
"Average stage length" means the average number of statute miles flown per flight segment.
"Block hours" means the number of hours during which the aircraft is in revenue service, measured from the time of gate departure before take-off until the time of gate arrival at the destination.
"CRASM" means contract revenue divided by ASMs.
"DOT" means the
"FAA" means the
"FTE" means full-time equivalent employee.
"Load factor" means the percentage of aircraft seat miles actually occupied on a flight (RPMs divided by ASMs).
"NMB" means the
"Pass-through and other revenue" means costs from our major partners under our agreements that we equally recognize as both a revenue and an expense, including passenger and hull insurance, aircraft property taxes, landing fees, catering and certain maintenance costs related to our E-175 aircraft.
"Revenue Passenger Miles" or "RPMs" means the number of miles traveled by paying passengers.
"TSA" means the
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"Utilization" means the percentage derived from dividing (i) the number of block
hours actually flown during a given month under a particular capacity purchase
agreement by (ii) the maximum number of block hours that could be flown during
such month under the particular capacity purchase agreement.
Components of Our Results of Operations
The following discussion summarizes the key components of our consolidated statements of operations.
Operating Revenues
Our consolidated operating revenues consist of contract revenue as well as pass-through and other revenue.
Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to our capacity purchase agreements and flight services agreement with our major partners, along with the additional amounts received based on the number of flights and block hours flown, and rental revenue for aircraft leased to a third party. Contract revenues we receive from our major partners are paid on a weekly basis and recognized over time consistent with the delivery of service under our agreements. Pass-Through and Other Revenue. Pass-through and other revenue consists of passenger and hull insurance, aircraft property taxes, landing fees, and other aircraft and traffic servicing costs received pursuant to our agreements with our major partners, as well as certain maintenance costs related to our E-175 aircraft. Operating Expenses
Our operating expenses consist of the following items:
Flight Operations. Flight operations expense includes costs related to salaries, bonuses and benefits earned by our pilots, flight attendants, and dispatch personnel, as well as costs related to technical publications, lodging of our flight crews, and pilot training expenses. Fuel. Fuel expense includes fuel and related fueling costs for flying we undertake outside of our capacity purchase agreements and flight services agreement, including aircraft repositioning and maintenance. All aircraft fuel and related fueling costs for flying under our capacity purchase agreements were directly paid and supplied by our major partners. The fuel and related cost for flying under our DHL FSA were directly paid and supplied by DHL. Accordingly, we do not record an expense or the related revenue for fuel supplied by American and United for flying under our capacity purchase agreements or DHL under our flight services agreement. Maintenance. Maintenance expense includes costs related to engine overhauls, airframe, landing gear and normal recurring maintenance, which includes pass-through maintenance costs related to our E-175 aircraft. Heavy maintenance and major overhaul costs on our owned E-175 fleet are deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. All other maintenance costs are expensed as incurred, except for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours. Costs incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment terms. As a result of using the direct expense method for heavy maintenance on the majority of our fleets, the timing of maintenance expense reflected in the financial statements may vary significantly from period to period.
Aircraft Rent. Aircraft rent expense includes costs related to leased engines and aircraft.
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Aircraft and Traffic Servicing. Aircraft and traffic servicing expense includes
expenses related to our capacity purchase agreements and flight services
agreement, including aircraft cleaning, passenger disruption reimbursements,
international navigation fees and wages of airport operations personnel, a
portion of which are reimbursable by our major partners.
General and Administrative. General and administrative expense includes
insurance and taxes, the majority of which are pass-through costs,
non-operational administrative employee wages and related expenses, building
rents, real property leases, utilities, legal, audit and other administrative
expenses.
Depreciation and Amortization. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine, and equipment depreciation. Amortization expense is a periodic non-cash charge related to our customer relationship intangible asset.
Other Income (Expense), Net
Interest Expense. Interest expense is interest on our debt to finance purchases of aircraft, engines, and equipment, including amortization of debt financing costs and discounts.
Interest Income. Interest income includes interest income on our cash and cash equivalent balances.
Loss on Investments, Net. Loss on investments consists of losses on our investments in equity securities.
Other Expense. Other expense includes expense derived from activities not classified in any other area of the consolidated statements of income.
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Results of Operations
Comparison of our Fiscal Years Ended
Operating Revenues
Year Ended September 30,
2021 2020 Change
Operating revenues ($ in thousands):
Contract $ 434,518 $ 506,590 $ (72,072 ) (14.2 )%
Pass-through and other 69,073 38,480 30,593 79.5 %
Total operating revenues $ 503,591 $ 545,070 $ (41,479 ) (7.6 )%
Operating data(1):
Available seat miles-ASMs (thousands) 7,851,798 7,581,506 270,292 3.6 %
Block hours 323,219 313,110 10,109 3.2 %
Revenue passenger miles-
RPMs (thousands) 5,893,195 5,128,875 764,320 14.9 %
Average stage length (miles) 661 597 64 10.7 %
Contract revenue per available seat
mile-CRASM (in cents) ¢ 5.53 ¢ 6.68 ¢ (1.15 ) (17.2 )%
Passengers 8,881,431 8,500,072 381,359 4.5 %
(1) The definitions of certain terms related to the airline industry used in the
table can be found under "Glossary of Airline Terms" above.
Total operating revenue decreased by $41.5 million , or 7.6%, during our fiscal
year ended September 30, 2021 , compared to our fiscal year ended September 30,
2020 . Contract revenue decreased by $72.1 million , or 14.2%, primarily due to
temporary reductions in rates provided to our major partners as a result of
lower labor costs from government assistance received during the current year,
and flying fewer covered aircraft under the American CPA. Our block hours flown
during our fiscal year ended September 30, 2021 increased 3.2% compared to our
fiscal year ended September 30, 2020 , due to an increase in demand for air
travel and loosening of certain travel restrictions particularly during the
second half of the year, and block hours flown under our DHL Flight Services
Agreement which commenced in fiscal 2021. Our pass-through and other revenue
increased during our fiscal year ended September 30, 2021 by $30.6 million , or
79.5%, primarily due to an increase in pass-through maintenance related to our
E-175 fleet.
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Operating Expenses
Year Ended September 30,
2021 2020 Change
Operating expenses ($ in thousands):
Flight operations $ 162,137 $ 169,242 $ (7,105 ) (4.2 )%
Fuel 898 672 226 33.6 %
Maintenance 217,646 192,123 25,523 13.3 %
Aircraft rent 39,345 48,802 (9,457 ) (19.4 )%
Aircraft and traffic servicing 2,638 3,356 (718 ) (21.4 )%
General and administrative 49,855 52,246 (2,391 ) (4.6 )%
Depreciation and amortization 82,847 82,296 551 0.7 %
Lease termination 4,508 - 4,508 100.0 %
Government grant recognition (119,479 ) (83,834 ) (35,645 ) 42.5 %
Total operating expenses $ 440,395 $ 464,903 $ (24,508 ) (5.3 )%
Operating data:
Available seat miles-ASMs (thousands) 7,851,798 7,581,506 270,292 3.6 %
Block hours 323,219 313,110 10,109 3.2 %
Average stage length (miles) 661 597 64 10.7 %
Departures 160,019 166,776 (6,757 ) (4.1 )%
Flight Operations. Flight operations expense decreased $7.1 million , or 4.2%, to
$162.1 million for our fiscal year ended September 30, 2021 , compared to our
fiscal year ended September 30, 2020 . The decrease was primarily driven by a
decrease in pilot and flight attendant wages and related expenses due to lower
departures as well as lower pilot training costs.
Fuel. Fuel expense increased $0.2 million , or 33.6%, to $0.9 million for our
fiscal year ended September 30, 2021 , compared to our fiscal year ended
September 30, 2020 . The increase was primarily driven by fuel expense related to
C-checks and ferry flights. All fuel costs related to flying under our capacity
purchase agreements and flight services agreement during our fiscal years ended
September 30, 2021 and 2020 were directly paid to suppliers by our major
partners.
Maintenance. Aircraft maintenance expense increased $25.5 million , or 13.3%, to
$217.6 million for our fiscal year ended September 30, 2021 , compared to our
fiscal year ended September 30, 2020 . This increase was primarily driven by an
increase in C-check expense, labor, rotable and expendable parts, and pass
through maintenance on our E-175 fleet due to more maintenance events at higher
costs. This increase was partially offset by a decrease in engine overhauls and
component contracts. Total pass-through maintenance expenses reimbursed by our
major partners increased by $30.0 million during fiscal year 2021, compared to
fiscal year 2020.
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The following table presents information regarding our aircraft maintenance
costs during our fiscal years ended
Year Ended September 30,
2021 2020 Change
Engine overhaul $ 14,598 $ 33,472 $ (18,874 ) (56.4 )%
Pass-through engine overhaul 16,815 7,048 9,767 138.6 %
C-check 30,593 16,279 14,314 87.9 %
Pass-through C-check 20,549 7,194 13,355 185.6 %
Component contracts 25,890 31,105 (5,215 ) (16.8 )%
Rotable and expendable parts 26,741 23,302 3,439 14.8 %
Other pass-through 15,963 9,075 6,888 75.9 %
Labor and other 66,497 64,648 1,849 2.9 %
Total $ 217,646 $ 192,123 $ 25,523 13.3 %
Aircraft Rent. Aircraft rent expense decreased $9.5 million , or 19.4%, to
$39.3 million for our fiscal year ended September 30, 2021 , compared to our
fiscal year ended September 30, 2020 . This decrease was primarily attributable
to a decrease in engine rent due to fewer leased engines as well as a decrease
in rent expense from aircraft leases due to the Company's purchase of a
previously leased aircraft in March 2021 .
Aircraft and Traffic Servicing. Aircraft and traffic servicing expense decreased
$0.7 million , or 21.4%, to $2.6 million for our fiscal year ended September 30,
2021 , compared to our fiscal year ended September 30, 2020 . This decrease was
primarily due to a decrease in interrupted trip expense, partially offset by an
increase in pass-through legal fees related to our leases of CRJ-700 aircraft to
a third party. For our fiscal years ended September 30, 2021 and 2020, 53.0% and
31.4%, respectively, of our aircraft and traffic servicing expenses were
reimbursed by our major partners.
General and Administrative. General and administrative expense decreased
$2.4 million , or 4.6%, to $49.9 million for our fiscal year ended September 30,
2021 , compared to our fiscal year ended September 30, 2020 . This decrease was
primarily due to a decrease in general and administrative wages and related
expenses, and a decrease in property taxes. For our fiscal years ended
September 30, 2021 and 2020, $15.1 million and $17.5 million , respectively, of
our insurance and property tax expenses were reimbursed by our major partners.
Depreciation and Amortization. Depreciation and amortization expense increased
$0.6 million , or 0.7%, to $82.8 million for our fiscal year ended September 30,
2021 , compared to our fiscal year ended September 30, 2020 . The increase is
primarily attributable to an increase in aircraft, rotable parts, deferred heavy
maintenance, and spare engine depreciation expense, partially offset by a
decrease in amortization of intangible assets.
Lease Termination. Lease termination expense increased $4.5 million , or 100.0%,
to $4.5 million for our fiscal year ended September 30, 2021 , compared to our
fiscal year ended September 30, 2020 . We incurred a lease termination expense
for a CRJ-900 aircraft purchased in March 2021 that was previously leased from
Bombardier Capital .
Government Grant Recognition. Government grant funds increased $35.6 million , or
42.5%, to $119.5 million for our fiscal year ended September 30, 2021 compared
to our fiscal year ended September 30, 2020 . Under the Consolidated
Appropriations Act, the government provided the Company with a grant of $56.0
million in payroll support for the period of December 2020 through March 2021 ,
and an additional $52.2 million in payroll support under the American Recovery
Plan Act for the period of April 2021 through September 2021 . We also received a
total of $95.2 million under the CARES Act during the period April 2020 through
October 2020 , $83.8 million of which was utilized during fiscal 2020 and $11.4
million of which was utilized and recognized as an offset to operating expenses
during the first quarter of fiscal 2021.
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Other Expense
Other expense decreased$2.4 million , or 5.5%, to$40.8 million for our fiscal year endedSeptember 30, 2021 , compared to our fiscal year endedSeptember 30, 2020 . The decrease is primarily a result of a decrease in interest expense of$9.4 million due to a decrease in outstanding aircraft principal balances and lower interest rates resulting from the Loan and Guarantee Agreement with theU.S. Treasury , offset by losses on investments in equity securities of$6.8 million as a result of a reduction in the market price of our investments in common stock and warrants of Archer Aviation, Inc. See Note 7: "Balance Sheet Information" in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our investments in equity securities.
Income Taxes
In our fiscal year endedSeptember 30, 2021 , our effective tax rate was 26.0% compared to 25.8% in our fiscal year endedSeptember 30, 2020 . Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our state net operating losses.
We recorded an income tax provision of
The income tax provision for our fiscal year endedSeptember 30, 2021 resulted in an effective tax rate of 26.0%, which differed from theU.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against state net operating losses, expired state attributes, disallowed unrealized losses, and changes in state apportionment and statutory rates. The income tax provision for our fiscal year endedSeptember 30, 2020 resulted in an effective tax rate of 25.8%, which differed from theU.S. federal statutory rate of 21% primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against state net operating losses, expired state attributes, and changes in state apportionment and statutory rates.
We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.
As ofSeptember 30, 2021 , we had aggregate federal and state net operating loss carryforwards of approximately$541.3 million and$235.7 million , which expire in 2027-2038 and 2021-2041, respectively, with approximately$0.7 million of state net operating loss carryforwards that expired in 2021.
See Note 12: "Income Taxes" in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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Comparison of our Fiscal Years Ended
Operating Revenues
Year Ended September 30,
2020 2019 Change
Operating revenues ($ in thousands):
Contract $ 506,590 $ 682,834 $ (176,244 ) (25.8 )%
Pass-through and other 38,480 40,523 (2,043 ) (5.0 )%
Total operating revenues $ 545,070 $ 723,357 $ (178,287 ) (24.6 )%
Operating data(1):
Available seat miles-ASMs (miles in
thousands) 7,581,506 10,863,623 (3,282,117 ) (30.2 )%
Block hours 313,110 456,247 (143,137 ) (31.4 )%
Revenue passenger miles-RPMs (miles in
thousands) 5,128,875 8,587,223 (3,458,348 ) (40.3 )%
Average stage length (miles) 597 579 18 3.1 %
Contract revenue per available seat mile-
CRASM (in cents) ¢ 6.68 ¢ 6.29 ¢ 0.39 6.2 % Passengers 8,500,072 14,664,441 (6,164,369 ) (42.0 )%
(1) The definitions of certain terms related to the airline industry used in the
table can be found under "Glossary of Airline Terms" above.
Total operating revenue decreased by $178.3 million , or 24.6%, during our fiscal
year ended September 30, 2020 , compared to our fiscal year ended September 30,
2019 . Contract revenue decreased by $176.2 million , or 25.8%, primarily due to a
decrease in flying on our CRJ-900, CRJ-700, and E-175 fleets as a result of
COVID-19. Our block hours flown during our fiscal year September 30, 2020
decreased 31.4% compared to our fiscal year ended September 30, 2019 , due to
decreased flying with our E-175, CRJ-900 and CRJ-700 fleets. Our pass-through
and other revenue decreased during our fiscal year ended September 30, 2020 by
$2.0 million , or 5.0%, primarily due to a reduction in pass-through maintenance
costs related to our E-175 fleet.
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Operating Expenses
Year Ended September 30,
2020 2019 Change
Operating expenses ($ in thousands):
Flight operations $ 169,242 $ 210,879 $ (41,637 ) (19.7 )%
Fuel 672 588 84 14.3 %
Maintenance 192,123 196,514 (4,391 ) (2.2 )%
Aircraft rent 48,802 52,206 (3,404 ) (6.5 )%
Aircraft and traffic servicing 3,356 3,972 (616 ) (15.5 )%
General and administrative 52,246 50,527 1,719 3.4 %
Depreciation and amortization 82,296 77,994 4,302 5.5 %
Lease termination - 9,540 (9,540 ) (100.0 )%
Government grant recognition (83,834 ) - (83,834 ) 100.0 %
Total operating expenses $ 464,903 $ 602,220 $ (137,317 ) (22.8 )%
Operating data:
Available seat miles-ASMs (miles
in thousands) 7,581,506 10,863,623 (3,282,117 ) (30.2 )%
Block hours 313,110 456,247 (143,137 ) (31.4 )%
Average stage length (miles) 597 579 18 3.1 %
Departures 166,776 246,634 (79,858 ) (32.4 )%
Flight Operations. Flight operations expense decreased $41.6 million , or 19.7%,
to $169.2 million for our fiscal year ended September 30, 2020 , compared to our
fiscal year ended September 30, 2019 . The decrease was primarily driven by a
decrease in pilot and flight attendant wages and pilot training expense due to
less flying.
Fuel. Fuel expense increased $0.1 million , or 14.3%, to $0.7 million for our
fiscal year ended September 30, 2020 , compared to our fiscal year ended
September 30, 2019 . The increase was primarily driven by an increased number of
ferry flights for maintenance events and maintenance fuel in our Phoenix hub.
All fuel costs related to flying under our capacity purchase agreements during
our fiscal years ended September 30, 2020 and 2019 were directly paid to
suppliers by our major partners.
Maintenance. Aircraft maintenance expense decreased $4.4 million , or 2.2%, to
$192.1 million for our fiscal year ended September 30, 2020 , compared to our
fiscal year ended September 30, 2019 . This decrease was primarily driven by a
decrease in component contracts, rotable and expendable parts, and labor and
other expense. This decrease was partially offset by an increase in engine and
pass-through engine and pass-through C-check expense. During fiscal year 2020,
$7.0 million of engine overhaul expenses were reimbursable by our major
partners. Total pass-through maintenance expenses reimbursed by our major
partners increased by $4.1 million during our fiscal 2020, compared to fiscal
year 2019.
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The following table presents information regarding our aircraft maintenance
costs during our fiscal years ended
Year Ended September 30,
2020 2019 Change
(in thousands)
Engine overhaul $ 33,472 $ 24,077 $ 9,395 39.0 %
Pass-through engine overhaul 7,048 5,960 1,088 18.3 %
C-check 16,279 16,807 (528 ) (3.1 )%
Pass-through C-check 7,194 396 6,798 1,716.7 %
Component contracts 31,105 37,572 (6,467 ) (17.2 )%
Rotable and expendable parts 23,302 29,853 (6,551 ) (21.9 )%
Other pass-through 9,075 12,885 (3,810 ) (29.6 )%
Labor and other 64,648 68,964 (4,316 ) (6.3 )%
Total $ 192,123 $ 196,514 $ (4,391 ) (2.2 )%
Aircraft Rent. Aircraft rent expense decreased $3.4 million , or 6.5%, to $48.8
million for our fiscal year ended September 30, 2020 , compared to our fiscal
year ended September 30, 2019 . This decrease was primarily attributable to $9.9
million decrease in aircraft lease expense due to the purchase of ten CRJ-700
aircraft, previously leased under the GECAS Lease Facility in June 2019 . This
decrease was partially offset by an increase in engine rent expense.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expense decreased
$0.6 million , or 15.5%, to $3.4 million for our fiscal year ended September 30,
2020 , compared to our fiscal year ended September 30, 2019 . This decrease was
primarily due to a decrease in pass-through regulatory charges. For our fiscal
years ended September 30, 2020 and 2019, 31.4% and 52.6%, respectively, of our
aircraft and traffic servicing expenses were reimbursed by our major partners.
General and Administrative. General and administrative expense increased $1.7
million , or 3.4%, to $52.2 million for our fiscal year ended September 30, 2020 ,
compared to our fiscal year ended September 30, 2019 . This increase was
primarily due to an increase in pass-through property tax, partially offset by a
decrease in share-based compensation expense. For our fiscal year ended
September 30, 2020 and 2019, $17.5 million and $15.7 million , respectively, of
our insurance and property tax expenses were reimbursed by our major partners.
Depreciation and Amortization. Depreciation and amortization expense increased
$4.3 million , or 5.5%, to $82.3 million for our fiscal year ended September 30,
2020 , compared to our fiscal year ended September 30, 2019 . This increase was
primarily attributable to an increase in aircraft depreciation expense related
to the purchase of ten CRJ-700 aircraft, previously leased under the GECAS Lease
Facility in June 2019 .
Lease Termination. Lease termination expense decreased $9.5 million , or 100.0%,
for our fiscal year ended September 30, 2020 , compared to our fiscal year ended
September 30, 2019 . We incurred a lease termination expense for the ten CRJ-700
aircraft purchased in June 2019 that were previously leased under the GECAS
facility.
Government Grant Recognition. Government grant funds increased $83.8 million , or
100.0%, to $83.8 million for our fiscal year ended September 30, 2020 compared
to our fiscal year ended September 30, 2019 . Under the CARES Act, the Company
was granted $95.2 million in payroll support for the period of April through
September 2020 , of which $83.8 million was recognized as of September 30, 2020 .
Other Expense
Other expense decreased$14.7 million , or 25.4%, to$43.2 million for our fiscal year endedSeptember 30, 2020 , compared to our fiscal year endedSeptember 30, 2019 . The decrease is primarily a 55 -------------------------------------------------------------------------------- result of a decrease in outstanding aircraft principal balances, a decrease in interest expense related to our Spare Engine Facility, and a one-time extinguishment of debt expense of$3.6 million related to the repayment of our Spare Engine Facility recorded in 2019. Additionally, interest income decreased by$1.4 million in the year endedSeptember 30, 2020 , compared to the same period in 2019.
Income Taxes
In our fiscal year endedSeptember 30, 2020 , our effective tax rate was 25.8% compared to 25.0% in our fiscal year endedSeptember 30, 2019 . Our tax rate can vary depending on changes in tax laws, adoption of accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our state net operating losses.
We recorded an income tax provision of
The income tax provision for our fiscal year endedSeptember 30, 2020 resulted in an effective tax rate of 25.8%, which differed from theU.S. federal statutory rate of 21%, primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against state net operating losses, expired state attributes, and changes in state apportionment and statutory rates. The income tax provision for our fiscal year endedSeptember 30, 2019 resulted in an effective tax rate of 25.0%, which differed from theU.S. federal statutory rate of 21% primarily due to the impact of state taxes and permanent differences between financial statement and taxable income. In addition to the state effective tax rate impact, other state impacts include changes in the valuation allowance against state net operating losses, expired state attributes, and changes in state apportionment and statutory rates.
We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.
As ofSeptember 30, 2020 , we had aggregate federal and state net operating loss carryforwards of approximately$512.4 million and$223.9 million , which expire in 2027-2038 and 2021-2040, respectively, with approximately$3.1 million of state net operating loss carryforwards that expired in 2020.
See Note 12: "Income Taxes" in the notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K
Cautionary Statement Regarding Non-GAAP Measures
We present Adjusted EBITDA and Adjusted EBITDAR in this Annual Report on Form 10-K, which are not recognized financial measures under accounting principles generally accepted inthe United States of America ("GAAP"), as supplemental disclosures because our senior management believes that they are well-recognized valuation metrics in the airline industry that are frequently used by companies, investors, securities analysts, and other interested parties in comparing companies in our industry. Adjusted EBITDA. We define Adjusted EBITDA as net income or loss before interest, income taxes, depreciation and amortization, adjusted for gains and losses on investments, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees.
Adjusted EBITDAR. We define Adjusted EBITDAR as net income or loss before interest, income taxes, depreciation and amortization, and aircraft rent, adjusted for gains and losses on investments, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees.
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You are encouraged to evaluate these adjustments and the reasons we consider
them appropriate for supplemental analysis. In evaluating Adjusted EBITDA and
Adjusted EBITDAR, you should be aware that in the future we may incur expenses
that are the same as or similar to some of the adjustments in our presentation
of Adjusted EBITDA and Adjusted EBITDAR. Gains and losses on investments, which
are presented as adjustments to EBITDA and EBITDAR because they are non-cash
gains and losses driven by changes in stock prices and other valuation
techniques and are not reflective of our core operations, will occur in periods
where the Company has investments in equity securities with readily determinable
fair values. Our presentation of Adjusted EBITDA and Adjusted EBITDAR should not
be construed as an inference that our future results will be unaffected by
unusual or non-recurring items. There can be no assurance that we will not
modify the presentation of Adjusted EBITDA or Adjusted EBITDAR and any such
modification may be material.
Adjusted EBITDA and Adjusted EBITDAR have limitations as analytical tools. Some
of the limitations applicable to these measures include: (i) Adjusted EBITDA and
Adjusted EBITDAR do not reflect the impact of certain cash charges resulting
from matters we consider not to be indicative of our ongoing operations;
(ii) Adjusted EBITDA and Adjusted EBITDAR do not reflect our cash expenditures,
or future requirements, for capital expenditures or contractual commitments;
(iii) Adjusted EBITDA and Adjusted EBITDAR do not reflect changes in, or cash
requirements for, our working capital needs; (iv) Adjusted EBITDA and Adjusted
EBITDAR do not reflect the interest expense, or the cash requirements necessary
to service interest or principal payments, on our debts; (v) although
depreciation and amortization are non-cash charges, the assets being depreciated
and amortized will often have to be replaced in the future; (vi) Adjusted EBITDA
and Adjusted EBITDAR do not reflect gains and losses on investments, which are
non-cash gains and losses but will occur in periods when there are changes in
the value of the Company's investments in equity securities; and (vii) Adjusted
EBITDA and Adjusted EBITDAR do not reflect any cash requirements for such
replacements and other companies in our industry may calculate Adjusted EBITDA
and Adjusted EBITDAR differently than we do, limiting its usefulness as a
comparative measure. Because of these limitations, Adjusted EBITDA and Adjusted
EBITDAR should not be considered in isolation or as a substitute for performance
measures calculated in accordance with GAAP. In addition, Adjusted EBITDAR
should not be viewed as a measure of overall performance because it excludes
aircraft rent, which is a normal, recurring cash operating expense that is
necessary to operate our business. For the foregoing reasons, each of Adjusted
EBITDA and Adjusted EBITDAR has significant limitations which affect its use as
an indicator of our profitability. Accordingly, you are cautioned not to place
undue reliance on this information.
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Adjusted EBITDA and Adjusted EBITDAR
The following table presents a reconciliation of net income to Adjusted EBITDA and Adjusted EBITDAR for the period presented:
Year Ended September 30,
2021 2020 2019
(in thousands)
Reconciliation:
Net income $ 16,588 $ 27,464 $ 47,580
Income tax expense 5,828 9,531 15,706
Income before taxes $ 22,416 $ 36,995 $ 63,286
Adjustments(1)(2) 3,558 - 13,156
Loss on investments, net(3) 6,816 - -
Adjusted income before taxes $ 32,790 $ 36,995 $ 76,442
Interest expense 34,730 44,120 55,717
Interest income (365 ) (105 ) (1,501 )
Depreciation and amortization 82,847 82,296 77,994
Adjusted EBITDA 150,002 163,306 208,652
Aircraft rent 39,345 48,802 52,206
Adjusted EBITDAR $ 189,347 $ 212,108 $ 260,858 (1) Our financial results include lease termination expense of
related to our purchase of one CRJ-900 aircraft (2021) previously leased
from Bombardier Capital and ten CRJ-700 aircraft (2019) which were
previously leased under our GECAS Lease Facility.
(2) Our financial results reflect loss on extinguishment of debt of
related to repayment of the Company's Spare Engine Facility for the year
ended
financing fees. We also recorded a gain on debt extinguishment of
million related to repayment of the Company's aircraft debts during the
fiscal year ended
(3) Our financial results reflect losses on our investments in stock and
warrants of
Liquidity and Capital Resources
OnApril 9, 2020 , the Company entered into a letter amendment with lender,Export Development Canada ("EDC"), which provided for the deferral of scheduled principle payments beginning onMarch 19, 2020 throughSeptember 30, 2020 . InNovember 2020 , the Company repaid$164 million of existing debt, which included repayment of$19.9 million of the previously deferred principal payments owed to EDC as ofSeptember 30, 2020 . InJune 2020 , the Company amended its RASPRO aircraft agreement to defer a$4.0 million lease payment otherwise due inJune 2020 . Per the amended agreement datedJune 5, 2020 , the Company is required to pay this amount over the period ofSeptember 2021 throughMarch 2024 . The Company made the accounting election available for COVID-19 related concessions provided by a lessor resulting in no change to the related lease accounting. InApril 2020 , we were granted$92.5 million in emergency relief through the Payroll Support Program of the CARES Act, which was received as ofSeptember 30, 2020 . InSeptember 2020 we were notified that, based on funding availability, recipients that were currently in compliance with signed payroll support program agreements would receive an approximate 2% increase in their award amount. As a result, we were granted an additional$2.7 million for a total grant of$95.2 million , which was received inOctober 2020 . Of this amount,$83.8 million was utilized to offset payroll expenses in the year endedSeptember 30, 2020 and the remainder was utilized in the first quarter of fiscal year 2021. 58 -------------------------------------------------------------------------------- InFebruary 2021 , the Company was granted$48.7 million in financial assistance by theU.S. Department of the Treasury under the Payroll Support Program Extension ("PSP2") under the Consolidated Appropriations Act of 2021. InMarch 2021 , the Company was notified that, based on funding availability, recipients that were currently in compliance with executed PSP agreements would receive an additional award amount. As a result, the Company received an additional$7.3 million through PSP2 inApril 2021 for a total grant of$56.0 million . PSP2 funding was required to be used exclusively for the continuation of payment of employee wages, salaries, and benefits and is conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs from the date of the extension agreement throughMarch 2021 . Other conditions include prohibitions on share repurchases and dividends throughMarch 2022 and certain limitations on executive compensation untilOctober 2022 . TheDepartment of Transportation also has the authority untilMarch 1, 2022 to require airlines that received payroll support program funds to maintain scheduled air service deemed necessary to any point served by the airline beforeMarch 1, 2020 . OnApril 15, 2021 , the Company was notified by theU.S. Department of the Treasury that it was eligible to receive funds under the third Payroll Support Program ("PSP3"), which was created under the American Recovery Plan Act of 2021 ("ARP"), enacted onMarch 11, 2021 . PSP3 provides additional funding for passenger air carriers and contractors that received financial assistance under PSP2. The funding must be used exclusively for the continuation of payment of employee wages, salaries, and benefits. The Company was granted$52.2 million and received the first PSP3 installment of$26.1 million inApril 2021 and the second installment of$26.1 million inMay 2021 . These payments are conditioned on our agreement to refrain from conducting involuntary employee layoffs or furloughs throughSeptember 2021 . Other conditions include prohibitions on share repurchases and dividends throughSeptember 2022 and certain limitations on executive compensation untilApril 2023 . OnOctober 30, 2020 , the Company entered into a Loan and Guarantee Agreement with theU.S Treasury under the CARES Act. The loan agreement provides for a secured term loan facility of up to$200.0 million (the "Treasury Loan"). OnOctober 30, 2020 , the Company borrowed$43.0 million under the Treasury Loan and onNovember 13, 2020 , the Company borrowed an additional$152.0 million . No additional sums are available for borrowing under the Treasury Loan. The obligations under the Treasury Loan are secured by certain aircraft, aircraft engines, accounts receivable, ground service equipment, and tooling (collectively, the "Collateral"). All principal amounts outstanding under the Treasury Loan are due and payable in a single installment onOctober 30, 2025 (the "Maturity Date") and all accrued interest is payable in arrears on the first business day following the 14th day of each March, June, September and December (beginning withDecember 15, 2020 ), and on the Maturity Date. For the first 12 months, interest was paid-in-kind by increasing the principal amount of the loan by the amount of such interest due on an interest payment date. The obligations under the Treasury Loan are guaranteed by the Company andMesa Air Group Inventory Management. The proceeds may be used for general corporate purposes and operating expenses, to the extent permitted by the CARES Act. Voluntary prepayments of loans under the Treasury Loan may be made, in whole or in part, without premium or penalty, at any time. Amounts prepaid may not be reborrowed. Mandatory prepayments of amounts outstanding under the Treasury Loan are required, without premium or penalty, to the extent necessary to comply with the covenants discussed below, certain dispositions of the Collateral, certain debt issuances secured by liens on the Collateral and certain insurance payments related to the Collateral. In addition, if a "change of control" (as defined in the Treasury Loan) occurs with respect toMesa Airlines ,Mesa Airlines will be required to repay the loans outstanding under the Treasury Loan. The Treasury Loan requires the Company, under certain circumstances, including within ten (10) business days prior to the last business day of March and September of each year, beginningMarch 2021 , to appraise the value of the Collateral and recalculate the collateral coverage ratio. If the calculated collateral coverage ratio is less than 1.6 to 1.0,Mesa Airlines will be required either to provide additional Collateral (which may include cash collateral) to secure its obligations under the Treasury Loan or repay the term loans under the Treasury Loan, in such amounts that the recalculated collateral coverage ratio, after giving effect to any such additional Collateral or repayment, is at least 1.6 to 1.0.
The Treasury Loan contains two financial covenants, a minimum collateral coverage ratio and a minimum liquidity level. The Treasury Loan also contains customary negative and affirmative covenants for
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credit facilities of this type, including, among others: (a) limitations on
dividends and distributions; (b) limitations on the creation of certain liens;
(c) restrictions on certain dispositions, investments and acquisitions;
(d) limitations on transactions with affiliates; (e) restrictions on fundamental
changes to the business, and (f) restrictions on lobbying activities.
Additionally, the Company is required to comply with the relevant provisions of
the CARES Act, including limits on employment level reductions after September
30, 2020 , restrictions on dividends and stock buybacks, limitations on executive
compensation, and requirements to maintain certain levels of scheduled service.
The CARES Act provides for deferred payment of the employer portion of social
security taxes through the end of 2020. The Company deferred approximately $5.5
million of such taxes, with 50% of the deferred amount to be repaid on December
31, 2021 and the remaining 50% to be repaid on December 31, 2022 .
These aforementioned forms of relief provided by the CARES Act and other
legislation, combined with cost saving initiatives implemented by the Company
during the prior fiscal year, provided liquidity during the current and prior
year periods.
We expect to meet our cash needs for the next twelve months with cash and cash
equivalents, financing arrangements, and cash flows from operations. As of
September 30, 2021 , we had $120.5 million in unrestricted liquidity. Though our
financial and operating results reflect the recovery in air travel demand during
the second half of our 2021 fiscal year, we continue to monitor the longer-term
impact of the pandemic, including its adverse effect on customer demand for air
travel, the general economy, and our major partners. Should the effects of
COVID-19, variants thereof or a similar pandemic continue long-term, our capital
requirements and sources of capital may be adversely impaired. See "Part II,
Item 1A, Risk Factors" for additional discussion.
Sources and Uses of Cash
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, aircraft and engine pre-delivery payments, maintenance, aircraft rent and debt service obligations, including principal and interest payments. Our cash needs vary from period to period primarily based on the timing and costs of significant maintenance events. Our principal sources of liquidity are cash on hand, cash generated from operations and funds from external borrowings. In the near term, we expect to fund our primary cash requirements through cash generated from operations and cash and cash equivalents on hand.
As discussed above, we entered into the Treasury Loan on
We believe that the key factors that could affect our internal and external sources of cash include:
? Factors that affect our results of operations and cash flows, including
the impact on our business and operations as a result of changes in
demand for our services, competitive pricing pressures, and our ability
to achieve further reductions in operating expenses; and
? Factors that affect our access to bank financing and the debt and equitycapital markets that could impair our ability to obtain needed financing
on acceptable terms or to respond to business opportunities and
developments as they arise, including interest rate fluctuations,
macroeconomic conditions, sudden reductions in the general availability
of lending from banks or the related increase in cost to obtain bank
financing, and our ability to maintain compliance with covenants under
our debt agreements in effect from time to time.
Our ability to service our long-term debt obligations, including our equipment
notes, to remain in compliance with the various covenants contained in our debt
agreements and to fund our working capital, capital expenditures and business
development efforts will depend on our ability to generate cash from operating
activities, which is subject to, among other things, our future operating
performance, as well as to other factors, some of which may be beyond our
control.
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If we fail to generate sufficient cash from operations, we may need to raise
additional equity or borrow additional funds to achieve our longer-term
objectives. There can be no assurance that such equity or borrowings will be
available or, if available, will be at rates or prices acceptable to us.
We believe that cash flow from operating activities coupled with existing cash
and cash equivalents, existing credit facilities, financing arrangements, and
government assistance, will be adequate to fund our operating and capital needs,
as well as enable us to maintain compliance with our various debt agreements,
through at least the next 12 months. To the extent that results or events differ
from our financial projections or business plans, our liquidity may be adversely
impacted.
During the ordinary course of business, we evaluate our cash requirements and,
if necessary, adjust operating and capital expenditures to reflect the current
market conditions and our projected demand. Our capital expenditures, net of
purchases of rotable spare parts and aircraft and spare engines for the year
ended September 30, 2021 were approximately 0.4% of annual revenues. We expect
to continue to incur capital expenditures to support our business activities.
Future capital expenditures may be impacted by events and transactions that are
not currently forecasted.
As of September 30, 2021 , our principal sources of liquidity were cash and cash
equivalents of $120.5 million . In addition, we had restricted cash of
$3.4 million as of September 30, 2021 . Restricted cash includes certificates of
deposit that secure letters of credit issued for particular airport authorities
as required in certain lease agreements. Furthermore, as of September 30, 2021 ,
we also had $665.8 million in secured indebtedness incurred primarily in
connection with our financing of aircraft. Our primary uses of liquidity are
capital expenditures, operating lease payments, and debt repayments. As of
September 30, 2021 , we had $109.4 million of short-term debt, excluding finance
leases, and $556.4 million of long-term debt excluding finance leases.
Sources of cash for our fiscal year ended September 30, 2021 were primarily cash
flows from operations of $132.9 million . The positive cash flow from operations
was driven by receipts from performance under our capacity purchase agreements
and flight services agreement and receipt of funds under the Payroll Support
Program and related extensions, partially offset by operating expenses including
payroll and related costs, aircraft maintenance, rent, interest, and general and
administrative costs.
Debt and Other Obligations
As of September 30, 2021 , we had $824.5 million of long-term debt (including
principal and projected interest obligations) and finance and operating lease
obligations (including current maturities). This amount consists of $548.5
million in notes payable principal payments related to owned aircraft used in
continuing operations, $94.3 million in notes payable principal payments related
to spare engines and engine kits, $4.6 million in finance lease obligations,
$22.9 million in principal outstanding under our working capital line of credit,
and an aggregate of $84.2 million in projected interest costs through our fiscal
2028. As of September 30, 2021 , we also had $70.0 million of operating lease
obligations through fiscal 2026 primarily related to aircraft flown under our
capacity purchase agreements, as well as office and hangar space, and other
facilities.
As of
Operating Leases
We have significant long-term lease obligations primarily relating to our
aircraft fleet, as well as leases of office and hangar space. As of
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A majority of our leased aircraft are leased through trusts formed for the sole
purpose of purchasing, financing, and leasing aircraft to us. Because these are
single-owner trusts in which we do not participate, we are not at risk for
losses and we are not considered the primary beneficiary. We believe that our
maximum exposure under the leases are the remaining lease payments and any
return condition obligations.
RASPRO Lease Facility. On September 23, 2005 , Mesa Airlines , as lessee, entered
into the RASPRO Lease Facility, with RASPRO as lessor, for 15 of our CRJ-900
aircraft. The obligations under the RASPRO Lease Facility are guaranteed by us,
and basic rent is paid quarterly on each aircraft. On each of March 10, 2014 ,
June 5, 2014 , and December 8, 2017 , the RASPRO Lease Facility was amended to
defer certain payments of basic rent (the "Deferred Amounts"). Until the
principal of and accrued interest on the Deferred Amounts are paid in full: (i)
we and Mesa Airlines are prohibited from paying any dividends to holders of our
common stock, (ii) we are prohibited from repurchasing any of our warrants or
other equity interests, (iii) Mesa Airlines must maintain a minimum of
$35.0 million of cash, cash equivalents and availability under lines of credit,
(iv) Mesa Airlines must provide RASPRO with periodic monthly, quarterly and
annual reports containing certain financial information and forecasted engine
repair costs and (v) we must maintain a minimum debt-to-assets ratio.
In June 2020 , the Company amended its RASPRO aircraft lease agreement to defer a
$4.0 million lease payment otherwise due in June 2020 . Per the amended agreement
dated June 5, 2020 , the Company is required to pay this amount over the period
of September 2021 through March 2024 . The Company made the accounting election
available for COVID-19 related concessions provided by a lessor. This event is
not a lease modification and requires no changes to current accounting
treatment. As of September 30, 2021 , we were in compliance with the covenants in
the RASPRO Lease Facility.
Finance Leases
On February 7, 2018 , Mesa Airlines , as lessee, entered into two agreements for
the lease of two spare aircraft engines (the "Engine Leases"). Basic rent on the
engines is paid monthly and at the end of the lease term. At the end of the
lease term, Mesa Airlines will have the option to purchase the engines for $0.9
million . The Engine Leases are reflected as finance lease obligations of $4.6
million on our consolidated balance sheet as of September 30, 2021 . The Engine
Leases set forth specific redelivery requirements and conditions, but do not
contain operational or financial covenants.
Working Capital Line of Credit
InAugust 2016 , we, as guarantor, our wholly owned subsidiaries,Mesa Airlines and MAG-AIM, as borrowers, CIT, as administrative agent, and the lenders party thereto (the "CIT Lenders"), entered into the CIT Revolving Credit Facility, pursuant to which the CIT Lenders committed to lend toMesa Airlines and MAG-AIM revolving loans in the aggregate principal amount of up to$35.0 million . The borrowers' and guarantor's obligations under the CIT Revolving Credit Facility are secured primarily by a first priority lien on certain engines, spare parts, and related collateral, including engine warranties and proceeds of the foregoing. The CIT Revolving Credit Facility contains affirmative, negative, and financial covenants that are typical in the industry for similar financings, including, but not limited to, covenants that, subject to exceptions described in the CIT Revolving Credit Facility, restrict our ability and the ability ofMesa Airlines and MAG-AIM and their subsidiaries to: (i) enter into, create, incur, assume or suffer to exist any liens; (ii) merge, dissolve, liquidate, consolidate or sell or transfer substantially all of its assets; (iii) sell assets; (iv) enter into transactions with affiliates; (v) amend certain material agreements and organizational documents; (vi) make consolidated unfinanced capital expenditures; or (viii) maintain a consolidated interest and rental coverage ratio above the amount specified in the CIT Revolving Credit Facility. As ofSeptember 30, 2021 , we were in compliance with the financial covenants under the CIT Revolving Credit Facility. The CIT Revolving Credit Facility also includes customary events of defaults, including but not limited to: (i) payment defaults; (ii) breach of covenants; (iii) breach of representations and warranties; (iv) cross-defaults; (v) certain bankruptcy-related defaults; (vi) change of control; and (vii) revocation of instructions with respect to certain controlled accounts. 62
-------------------------------------------------------------------------------- OnSeptember 25, 2019 , the Company extended the term on its$35.0 million working capital draw loan by three years, which now terminates inSeptember 2022 . Interest is assessed on drawn amounts at one-month LIBOR plus 3.75%. InJune 2020 ,$23.0 million was drawn to cover operational needs. As ofSeptember 30, 2021 ,$22.9 million remained outstanding under the working capital draw loan.
Engine Purchase Commitments
OnFebruary 26, 2021 , the Company and General Electric Company ("GE"), acting through itsGE-Aviation business unit, entered into an Amended and Restated Letter Agreement No. 13-3. The Company agreed to purchase and take delivery of ten (10) new CF34-8C5 or CF34-8E5 engines with delivery dates starting fromJuly 1, 2021 throughNovember 1, 2022 . During the quarter endedMarch 31, 2021 , a$7.0 million non-refundable purchase deposit was made for the first five engines to be delivered in calendar 2021. The Company has options to purchase an additional ten (10) similar engines beyond 2022. The total purchase commitment related to these ten (10) engines is approximately$52.2 million . As ofSeptember 30, 2021 , the Company had completed the purchase of one engine. If the Company fails to accept delivery of the spare engines when duly tendered, the Company may be assessed a minimum cancellation charge based on the engine price determined as of the date of scheduled engine delivery to the Company.
Electric Aircraft Forward Purchase Commitments
As described in Note 7, inFebruary 2021 , the Company entered into a forward purchase contract with Archer Aviation, Inc. ("Archer") for a number of electrically-powered vertical takeoff and landing aircraft ("eVTOL aircraft"). The aggregate base commitment for the eVTOL aircraft is$200.0 million , with an option to purchase additional aircraft. The Company's obligation to purchase the eVTOL aircraft is subject to the Company and Archer first agreeing in the future to a number of terms and conditions, which may or may not be met. As described in Note 7, inJuly 2021 , the Company entered into a forward purchase contract withHeart Aerospace Incorporated ("Heart") for a number of fully electric aircraft. The maximum aggregate base commitment for the aircraft is$1,200.0 million , with an option to purchase additional aircraft. The Company's obligation to purchase the aircraft is subject to the Company and Heart first agreeing in the future to a number of terms and conditions, which may or may not be met. Maintenance Commitments InAugust 2005 , we entered into a ten-year agreement with AAR for the maintenance and repair of certain of our CRJ-200, CRJ-700, and CRJ-900 aircraft. The agreement has since been amended to include a term extending through 2025, and to provide certain E-175 aircraft rotable spare parts with a term throughDecember 2027 . Under the agreements, we pay AAR a monthly access fee per aircraft for certain consigned inventory as well as a fixed "cost per flight hour" fee on a monthly basis for repairs on certain repairable parts during the term of the agreement, which fees are subject to annual adjustment based on increases in the cost of labor and component parts. InJuly 2013 , we entered into an engine maintenance contract withGE to perform heavy maintenance on certain CRJ-700, CRJ-900, and E-175 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance withGE's spare parts catalog for engines. The engine maintenance contract extends through 2024. In 2014, we entered into a ten-year contract withAviall to provide maintenance and repair services on the wheels, brakes and tires of our CRJ-700 and CRJ-900 aircraft. Under the agreement, we payAviall a fixed "cost per landing" fee for all landings of our aircraft during the term of the agreement, which fee is subject to annual adjustment based on increases in the cost of labor and component parts. 63 -------------------------------------------------------------------------------- We entered into an engine maintenance contract withStandardAero , which became effective onJune 1, 2015 , to perform heavy maintenance on certain CRJ-700 and CRJ-900 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance with theGE's spare parts catalog for engines. Our employees perform routine airframe and engine maintenance along with periodic inspections of equipment at their respective maintenance facilities. We also use third-party vendors, such as AAR, Ascent, Embraer,Aviall , andGE , for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for our aircraft fleet. As ofSeptember 30, 2021 ,$59.8 million of parts inventory was consigned to us by AAR andAviall under long-term contracts that is not reflected on our balance sheet. The Company accounts for heavy maintenance and major overhaul costs on its owned E-175 fleet under the deferral method whereby the cost of heavy maintenance and major overhaul is deferred and amortized until the earlier of the end of the useful life of the related asset or the next scheduled heavy maintenance event. For all other fleets, we use the direct expense method of accounting for our maintenance of regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein we recognize the expense when the maintenance work is completed, or over the repair period, if materially different, except for certain maintenance contracts where labor and materials price risks have been transferred to the service provider and require payment on a utilization basis, such as flight hours . Costs incurred for maintenance and repair for utilization maintenance contracts where labor and materials price risks have been transferred to the service provider are charged to maintenance expense based on contractual payment terms. Our maintenance policy is determined by fleet when major maintenance is incurred. While we keep a record of expected maintenance events, the actual timing and costs of major engine maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify the costs or timing of future maintenance-related expenses for any significant period of time.
Restricted Cash
As ofSeptember 30, 2021 , we had$3.4 million in restricted cash. We have an agreement with a financial institution for a$6.0 million letter of credit facility and to issue letters of credit for landing fees, worker's compensation insurance and other business needs. Pursuant to the agreement,$3.4 million of outstanding letters of credit are required to be collateralized by amounts on deposit. Cash Flows
The following table presents information regarding our cash flows for each of
our fiscal years ended
Year Ended September 30,
2021 2020 2019
(in thousands)
Net cash provided by operating activities
(33,471 ) (26,667 ) (104,842 )
Net cash used in financing activities (78,374 ) (117,655 ) (81,467 )
Net increase (decrease) in cash, cash equivalents
and restricted cash $ 21,026 $ 30,340 $ (34,633 )
Cash, cash equivalents and restricted cash at
beginning
of period 102,841 72,501 107,134
Cash, cash equivalents and restricted cash at end
of period $ 123,867 $ 102,841 $ 72,501
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Net Cash Flow Provided by Operating Activities
During our fiscal year endedSeptember 30, 2021 , we had cash flow provided by operating activities of$132.9 million . We had net income of$16.6 million adjusted for the following significant non-cash items: depreciation and amortization of$82.8 million , stock-based compensation expense of$3.1 million , deferred income taxes of$5.7 million , losses on investments in equity securities of$6.8 million , amortization of deferred credits of$(2.4) million , amortization of debt discount and issuance costs and accretion of interest of$11.4 million , gain on extinguishment of debt of$(1.0) million , and loss on lease termination of$4.5 million . We had net change of$4.8 million within other net operating assets and liabilities largely driven by accrued liabilities, accounts payable, deferred revenue, receivables, and operating leases during our fiscal year endedSeptember 30, 2021 . During our fiscal year endedSeptember 30, 2020 , we had cash flow provided by operating activities of$174.7 million . We had net income of$27.5 million adjusted for the following significant non-cash items: depreciation and amortization of$82.3 million , stock-based compensation expense of$4.4 million , deferred income taxes of$9.2 million , amortization of deferred credits of$(3.7) million , and amortization of debt discount and issuance costs and accretion of interest of$4.2 million . We had net change of$50.4 million within other net operating assets and liabilities largely driven by increases in accrued liabilities and deferred revenue during our fiscal year endedSeptember 30, 2020 . During our fiscal year endedSeptember 30, 2019 , we had cash flow provided by operating activities of$151.7 million . We had net income of$47.6 million adjusted for the following significant non-cash items: depreciation and amortization of$78.0 million , stock-based compensation expense of$5.5 million , deferred income taxes of$15.5 million , amortization of unfavorable lease liabilities and deferred credits of$(10.8) million , amortization of debt discount and issuance costs and accretion of interest of$4.2 million , loss on extinguishment of debt of$3.6 million , and loss on lease termination of$9.5 million . We had net change of$(2.1) million within other net operating assets and liabilities largely driven by expendable parts, accounts receivable, and accounts payable during our fiscal year endedSeptember 30, 2019 .
Net Cash Flows Used in Investing Activities
During our fiscal year endedSeptember 30, 2021 , our net cash flow used in investing activities was$33.5 million . We invested$3.5 million in spare engines,$1.6 million in aircraft,$9.9 million in inventory,$2.1 million in tools, vehicles, equipment and other miscellaneous projects, and$6.3 million in net payments on equipment and other deposits. Additionally, we invested a total of$10.0 million in equity securities. During our fiscal year endedSeptember 30, 2020 , our net cash flow used in investing activities was$26.7 million . We invested$11.0 million in two spare engines and$3.8 million in aircraft improvements,$9.4 million in inventory, and$2.5 million in tools and miscellaneous projects. During our fiscal year endedSeptember 30, 2019 , our net cash flow used in investing activities was$104.8 million . We invested$125.4 million in capital expenditures on ten aircraft and seven spare engines and aircraft improvements, offset by proceeds of$20.1 million from net sales of investment securities, and$0.4 million in net returns on equipment deposits.
Net Cash Flows Used in Financing Activities
During our fiscal year endedSeptember 30, 2021 , our net cash flow used in financing activities was$78.4 million . We received$195.0 million of proceeds from borrowings under the Treasury Loan. We made$271.0 million of principal repayments on long-term debt during the period. We incurred$1.3 million of costs related to debt financing and$1.5 million of costs related to the repurchase of shares of our common stock. We received$0.5 million in proceeds from the issuance of common stock under our ESPP. During our fiscal year endedSeptember 30, 2020 , our net cash flow used in financing activities was$117.7 million . We drew$23.0 million from our$35.0 million working capital draw loan for operational needs. We made$138.3 million of principal repayments on long-term debt during the period. We incurred 65
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During our fiscal year endedSeptember 30, 2019 , our net cash flow used in financing activities was$81.5 million . We received$171.7 million in proceeds from long-term debt primarily related to purchasing ten aircraft, and spare aircraft engine and aircraft engine kit financing. We made$244.1 million of principal repayments on long-term debt during the period. We incurred$5.7 million of costs related to debt financing,$1.7 million of costs related to debt prepayments, and$1.9 million of costs related to the repurchase of shares of our common stock. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. In doing so, we must make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue, and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.
The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 2: "Summary of Significant Accounting Policies" to the consolidated financial statements.
Leases
EffectiveOctober 1, 2019 , we adopted ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02" or "ASC 842") which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases with terms of less than 12 months. From a lessee perspective, our leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income. We determine if an arrangement is a lease at inception. Our operating lease activities are recorded in operating lease right-of-use ("ROU") assets, current maturities of operating leases, and noncurrent operating lease liabilities in the consolidated balance sheets. Finance leases are included in property and equipment, net, current portion of long-term debt and finance leases, and long-term debt and finance leases, excluding current portion. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Variable lease payments are not included in the calculation of the right-of-use assets and lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. In addition to the aircraft we lease from United under our United CPA and from DHL under our DHL FSA, approximately 10% of our aircraft are leased from third parties. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. In the event that we or one of our major partners decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up, and other charges. Additionally, any remaining ROU assets and lease liabilities will be written off. 66 -------------------------------------------------------------------------------- As a lessee, we elected a short-term lease exception policy on all classes of underlying assets, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less). From a lessor perspective, our capacity purchase agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. A portion of the compensation in the capacity purchase agreements is designed to reimburse the Company for certain aircraft ownership costs of these aircraft. We account for the non-lease component of our capacity purchase agreements under ASC 606 and account for the lease component under ASC 842. We allocate the consideration in the contract between the lease and non-lease components based on their stated contract prices, which is based on a cost-basis approach representing our estimate of the stand-alone selling prices. The Company entered into lease agreements withGoJet Airlines LLC ("GoJet") to lease 14 CRJ-700 aircraft as ofSeptember 30, 2021 . The lease agreements are accounted for as operating leases and have a term of nine (9) years beginning on the delivery date of each aircraft. Under the lease agreements, GoJet pays fixed monthly rent per aircraft and variable lease payments for supplemental rent based on monthly aircraft utilization at fixed rates. Supplemental rent payments are subject to reimbursement following GoJet's completion of qualifying maintenance events defined in the lease agreements. Lease revenue for fixed monthly rent payments is recognized on a straight-line basis within contract revenue. Lease revenue for supplemental rent is deferred and recognized within contract revenue when it is probable that amounts received will not be reimbursed for future qualifying maintenance events over the lease term. The Company mitigates the residual asset risks through supplemental rent payments and by leasing aircraft and engine types that can be operated by the Company in the event of a default. Additionally, the operating leases have specified lease return condition requirements and the Company maintains inspection rights under the leases. As ofSeptember 30, 2021 , the Company recognized$12.4 million of lease incentive assets, net of amortization, and$9.7 million of related lease incentive obligations for reimbursement of certain aircraft maintenance costs defined within the lease agreements. Lease incentive assets are amortized on a straight-line basis and recognized as a reduction to lease revenue over the lease term.
Revenue Recognition
The Company recognizes revenue when the service is provided under its capacity
purchase agreements and flight services agreement. Under these agreements, the
major partners generally pay a fixed monthly minimum amount per aircraft, plus
certain additional amounts based upon the number of flights and block hours
flown. The contracts also include reimbursement of certain costs incurred by the
Company in performing flight services. These costs, known as "pass-through
costs," may include passenger and hull insurance as well as aircraft property
taxes and other flight service expenditures defined in our agreements with our
major partners. Additionally, for the E-175 aircraft owned by United, the
capacity purchase agreement provides that United will reimburse the Company for
heavy airframe and engine maintenance, landing gear, APUs and component
maintenance. The Company also receives compensation under its agreements for
heavy maintenance expenses at a fixed hourly rate or per aircraft rate for all
aircraft in scheduled service other than the E-175 aircraft owned by United. The
contracts also include a profit margin on certain reimbursable costs, as well as
a profit margin, incentives and penalties based on certain operational
benchmarks. The Company is eligible to receive incentive compensation upon the
achievement of certain performance criteria defined in the agreements. At the
end of each period during the term of an agreement, the Company calculates the
incentives achieved during that period and recognizes revenue attributable to
the agreement during the period accordingly, subject to the variable constraint
guidance under ASC 606. All revenue recognized under these contracts is
presented as the gross amount billed to the major partners.
Under the capacity purchase and flight services agreements, the Company has
committed to perform various activities that can be generally classified into
in-flight services and maintenance services. When evaluating these services, the
Company determined that the nature of its promise is to provide a single
integrated service, flight services, because its contracts require integration
and assumption of risk
67
-------------------------------------------------------------------------------- associated with both services to effectively deliver and provide the flights as scheduled over the contract term. Therefore, the in-flight services and maintenance services are inputs to that combined integrated flight service. Both services occur over the term of the agreement and the performance of maintenance services significantly affects the utility of the in-flight services. The Company's individual flights flown under the capacity purchase and flight services agreements are deemed to be distinct and the flight service promised in the capacity purchase and flight services agreements represents a series of services that is accounted for as a single performance obligation. This single performance obligation is satisfied over time as the flights are completed. Therefore, revenue is recognized when each flight is completed. In allocating the transaction price, variable payments (i.e. billings based on flights and block hours flown, pass-through costs, etc.) that relate specifically to the Company's efforts in performing flight services are recognized in the period in which the individual flight is completed. The Company has concluded that allocating the variability directly to the individual flights results in an overall allocation meeting the objectives in ASC 606. This results in a pattern of revenue recognition that follows the variable amounts billed from the Company to their customers. A portion of the Company's compensation under its capacity purchase agreements with American and United is designed to reimburse the Company for certain aircraft ownership costs. The Company has concluded that a component of its revenue under these agreements is deemed to be lease revenue, as such agreements identify the "right of use" of a specific type and number of aircraft over a stated period-of-time. The lease revenue associated with the Company's capacity purchase agreements is accounted for as an operating lease and is reflected as contract revenue on the Company's consolidated statements of operations. The Company recognized$170.2 million ,$208.9 million , and$219.0 million of lease revenue for the year endedSeptember 30, 2021 , 2020 and 2019, respectively. The Company has not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations because the use of the aircraft is not a separate activity of the total service provided. The Company's capacity purchase agreements and flight services agreement are renewable periodically and contain provisions pursuant to which the parties could terminate their respective agreements, subject to certain conditions, as described in Note 1. The capacity purchase agreements and flight services agreement also contain terms with respect to covered aircraft, services provided, and compensation as described in Note 1. The capacity purchase agreements and flight services agreement are amended from time to time to change, add, or delete terms of the agreements. The Company's revenues could be impacted by a number of factors, including amendment or termination of its capacity purchase agreements or flight services agreement, contract modifications resulting from contract renegotiations, its ability to earn incentive payments contemplated under applicable agreements, and settlement of reimbursement disputes with the Company's major partners. In the event contracted rates are not finalized at a quarterly or annual financial statement date, the Company evaluates the enforceability of its contractual terms and when it has an enforceable right, it estimates the amount the Company expects to be entitled subject to the variable constraint guidance under ASC 606. The Company's capacity purchase agreements and flight services agreement contain an option that allows its major partners to assume the contractual responsibility for procuring and providing the fuel necessary to operate the flights that it operates for them. The Company's major partners have exercised this option. Accordingly, the Company does not record an expense or revenue for fuel and related fueling costs for flying under its capacity purchase agreements or flight services agreement. In addition, the Company's major partners also provide, at no cost to the Company, certain ground handling and customer service functions, as well as airport-related facilities and gates at their hubs and other cities. Services and facilities provided by the Company's major partners at no cost are presented net in its consolidated financial statements; hence, no amounts are recorded for revenue or expense for these items. The Company records deferred revenue when cash payments are received or are due from our major partners in advance of the Company's performance. The deferred revenue balance as ofSeptember 30, 2021 of$34.5 million (current and non-current portion) represents our aggregate remaining performance 68
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obligations that will be recognized as revenue over the period in which the performance obligations are satisfied (as flights are completed over the remaining contract term).
Property and Equipment
The Company's property and equipment, which primarily consists of aircraft and related flight equipment, had a net book value of$1,151.9 million as ofSeptember 30, 2021 . The Company monitors for any indicators of impairment of its property and equipment and other long-lived assets whenever events or changes in circumstances indicate that the related carrying amount may be impaired. Factors which could be indicators of impairment include, but are not limited to: (i) significant adverse changes in the extent or manner in which an asset is being used, including permanently removing a long-lived asset or assets from operations; (ii) significant changes in the estimated useful life of an asset; (iii) significant changes in estimated future cash flows or a history of operating or cash flow losses; (iv) permanent and significant declines in market prices of an asset; and (v) changes to the regulatory environment or business climate. The Company records an impairment loss if (i) the undiscounted future cash flows are found to be less than the carrying amount of the asset or asset group, and (ii) the carrying amount of the asset or asset group exceeds its fair value. If an impairment loss has occurred, a charge is recorded to reduce the carrying amount of the asset to its estimated fair value. We group assets at the capacity purchase agreement, flight services agreement, and fleet-type level (i.e., the lowest level for which there are identifiable cash flows). If impairment indicators exist with respect to any of our asset groups, we estimate future cash flows based on projections of capacity purchase or flight services agreement, block hours, maintenance events, labor costs and other relevant factors. The Company's assumptions about future conditions important to its assessment of potential impairment of its long-lived assets, including the impact of the COVID-19 pandemic to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this
method, deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which these temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation
allowance is provided for those deferred tax assets for which we cannot conclude
that it is more likely than not that such deferred tax assets will be realized.
In determining the amount of the valuation allowance, estimated future taxable
income as well as feasible tax planning strategies for each taxing jurisdiction
are considered. If we determine it is more likely than not that all or a portion
of the remaining deferred tax assets will not be realized, the valuation
allowance will be increased with a charge to income tax expense. Conversely, if
we determine we are more likely than not to be able to utilize all or a portion
of the deferred tax assets for which a valuation allowance has been provided,
the related portion of the valuation allowance will be recorded as a reduction
to income tax expense.
We recognize and measure benefits for uncertain tax positions using a two-step
approach. The first step is to evaluate the tax position taken or expected to be
taken in a tax return by determining if the weight of available evidence
indicates that is it more likely than not that the tax positions will be
sustained upon audit, including resolution of any related appeals or litigation
processes. For tax positions that are more likely than not to be sustained upon
audit, the second step is to measure the tax benefit as the largest amount that
is more than 50% likely to be realized upon settlement. Our practice is to
recognize interest and/or penalties related to income tax matters in income tax
expense. Significant judgment is required to evaluate uncertain tax positions.
Evaluations are based upon a number of factors, including changes in
69
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facts or circumstances, changes in tax law, correspondence with tax authorities
during the course of tax audits and effective settlement of audit issues.
Changes in the recognition or measurement of uncertain tax positions could
result in material increases or decreases in income tax expense in the period in
which the change is made, which could have a material impact to our effective
tax rate. See Note 12: "Income Taxes" in the notes to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K for additional
information. See also "Management's Discussion and Analysis-Results of
Operations-Income Taxes" for additional information.
For a further listing and discussion of our accounting policies, see Note 2:
"Summary of Significant Accounting Policies" in the notes to our audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K.
Emerging Growth Company Status
We are an "emerging growth company" as defined in the Jumpstart Our Business Startups Act (the JOBS Act). The JOBS Act permits us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 4: "Recent Accounting Pronouncements" in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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