MESA AIR GROUP, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements, the accompanying notes, and the other financial information included elsewhere in this Quarterly Report on Form 10-Q. 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 these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections titled "Cautionary Notes Regarding Forward-Looking Statements" above and "Risk Factors" below. OverviewMesa Airlines is a regional air carrier providing scheduled flight service to 112 cities in 38 states, theDistrict of Columbia , 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 entered into withAmerican Airlines, Inc. ("American") andUnited Airlines, Inc. ("United"), and DHL Express pursuant to the terms of a Flight Services Agreement ("FSA") withDHL Network Operations (USA), Inc. (each, our "major airline partner"). We have a significant presence in several of our major airline partners' key domestic hubs and focus cities, includingDallas ,Houston ,Phoenix andWashington -Dulles. As ofMarch 31, 2021 , we operated, under the Capacity Purchase Agreements, FSA or as spare, a fleet of 163 aircraft with approximately 440 daily departures. We operate 45 CRJ-900 aircraft under our capacity purchase agreement with American (our "American Capacity Purchase Agreement") and 60 E-175 and 16 E-175LL aircraft under our capacity purchase agreement with United (our "United Capacity Purchase Agreement"). We operate 2 Boeing 737- F400 aircraft under the Flight Services Agreement with DHL Network Operations. For the three months endedMarch 31, 2021 , approximately 53% of our aircraft in scheduled service were operated for United, approximately 45% were operated for American and 2% were operated for DHL. All of our operating revenue in our six months endedMarch 31, 2021 was derived from operations associated with our American and United Capacity Purchase Agreements and DHL Flight Services Agreement. Our long-term capacity purchase agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour (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) and flight actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying on behalf of our major airline partners. Our capacity purchase 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, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major airline partners. Our major airline partners control route selection, pricing, seat inventories, marketing and scheduling, and provide us with ground support services, airport landing slots and gate access.
Components of Results of Operations
The following discussion summarizes the key components of our condensed consolidated statements of operations.
Operating Revenues
Our condensed consolidated operating revenues consist primarily of contract revenue as well as pass-through and other revenues.
Contract Revenue. Contract revenue consists of the fixed monthly amounts per
aircraft received pursuant to our capacity purchase agreements with our major
airline partners, along with the additional amounts received based on the number
of flights and block hours flown. Contract revenues we receive from our major
airline partners are paid and recognized by us on a weekly basis.
Pass-Through and Other. Pass-through and other revenue consists of passenger and
hull insurance, aircraft property taxes, and certain maintenance costs related
to our E-175 aircraft.
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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 service 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 airline partners. The fuel and related cost for flying under our FSA were directly paid and supplied by DHL. We do not record an expense or the related revenue for fuel supplied by American and United for flying under our capacity purchase agreements and DHL under our FSA. Maintenance. Maintenance expense includes routine repair and maintenance and heavy maintenance costs for airframes, engines, auxiliary power units and landing gears. 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.
Aircraft Rent. Aircraft rent includes costs related to leased engines and aircraft.
Aircraft and Traffic Servicing. Aircraft and traffic servicing includes expenses related to our capacity purchase agreements, including aircraft cleaning, passenger disruption reimbursements, international navigation fees and wages of airport operations personnel, a portion of which are reimbursable by our major airline 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 (Expenses) Income, Net
Interest Expense. Interest expense is interest on our debt incurred to finance purchases of aircraft, engines, equipment as well as debt financing costs amortization.
Interest Income. Interest income includes interest income on our cash and cash equivalent balances.
Other Expense. Other expense includes expense derived from activities not classified in any other area of the condensed consolidated statements of income, including write-offs of miscellaneous third-party fees.
Segment Reporting
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing operating performance. In consideration of ASC 280, "Segment
Reporting," we are not organized around specific services or geographic regions.
We currently operate in one service line providing scheduled flight services in
accordance with our capacity purchase agreements.
While we operate under two separate capacity purchase agreements and one flight
services agreement, we do not manage our business based on any performance
measure at the individual contract level. Additionally, our chief operating
decision maker ("CODM") uses condensed consolidated financial information to
evaluate our performance, which is the same basis on which he communicates our
results and performance to our Board of Directors. The CODM bases all
significant decisions regarding the allocation of our resources on a
consolidated basis. Based on the information described above and in accordance
with the applicable literature, management has concluded that we are organized
and operated as one operating and reportable segment.
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Cautionary Statement Regarding Non-GAAP Measures
We present Adjusted EBITDA and Adjusted EBITDAR in this Quarterly Report on Form 10-Q, which are not recognized financial measures under 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, and depreciation and amortization, adjusted for the impact of revaluation of liability awards, 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 the impact of revaluation of liability awards, lease termination costs, loss on extinguishment of debt, and write-off of associated financing fees. 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; and (vi) 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.
Results of Operations
Three Months Ended
We had operating income of$16.8 million in our three months endedMarch 31, 2021 compared to operating income of$13.9 million in our three months endedMarch 31, 2020 . In our three months endedMarch 31, 2021 , we had net income of$5.7 million compared to net income of$1.9 million in our three months endedMarch 31, 2020 . Our operating results for the three months endedMarch 31, 2021 reflected a decrease in contract revenue due to reduced rates to partners related to PSP2 and lower flying on our CRJ-900, CRJ-700, and E-175 fleet due to the impact of COVID-19. Flight operations expense decreased in the three months endedMarch 31, 2021 due to lower pilot and flight attendant wages and pilot training expenses. Our maintenance expense decreased primarily due to fewer heavy engine maintenance events and lower component contracts, parts, and labor expense, offset by higher c-check expense and pass-through maintenance. Aircraft rent expense decreased primarily due fewer leased engines. In addition, general and administrative expense decrease as a result of lower pass-through property taxes. Lastly, we recognized the Federal Grant received through the Payroll Support Agreement under the CARES Act with theU.S. Department of the Treasury . 27
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Operating Revenues
Three Months Ended March 31,
2021 2020 Change
Operating revenues ($ in thousands):
Contract $ 81,712 $ 165,781 $ (84,069 ) (50.7 )%
Pass-through and other 15,568 14,115 1,453 10.3 %
Total operating revenues $ 97,280 $ 179,896 $ (82,616 ) (45.9 )%
Operating data:
Available seat miles-ASMs (thousands) 1,771,498 2,611,940 (840,442 ) (32.2 )%
Block hours 73,942 108,305 (34,363 ) (31.7 )%
Revenue passenger miles-RPMs (thousands) 1,148,498 1,785,153 (636,655 ) (35.7 )%
Average stage length (miles) 690 619 71 11.5 %
Contract revenue per available seat
mile-CRASM
(in cents) ¢ 4.61 ¢ 6.35 ¢ 1.74 (27.4 )%
Passengers 1,684,043 2,838,412 (1,154,369 ) (40.7 )%
"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.
"RPM" means the number of miles traveled by paying passengers.
Total operating revenue decreased by$82.6 million , or 45.9%, to$97.3 million for our three months endedMarch 31, 2021 as compared to our three months endedMarch 31, 2020 . Contract revenue decreased by$84.1 million , or 50.7%, to$81.7 million primarily due to a decrease in flying on our CRJ-900, CRJ-700, and E-175 fleet as a result of the impact of COVID-19, temporary reduced rates to our partners and flying fewer aircraft under the American CPA. Our block hours flown during our three months endedMarch 31, 2021 , decreased 31.7% compared to the three months endedMarch 31, 2020 due to decreased flying on all our fleets. Our pass-through and other revenue increased during our three months endedMarch 31, 2021 by$1.5 million , or 10.3%, to$15.6 million primarily due to pass-through maintenance revenue related to our E-175 fleet. In addition, the decrease is attributable to reduced rates to partners related to PSP2 and fewer aircraft operating under the Amended and Restated American Purchase Agreement 28
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Operating Expenses
Three Months Ended March 31,
2021 2020 Change
Operating expenses ($ in thousands):
Flight operations $ 37,403 $ 52,891 $ (15,488 ) (29.3 )%
Fuel 198 188 10 5.3 %
Maintenance 51,773 64,335 (12,562 ) (19.5 )%
Aircraft rent 9,992 12,285 (2,293 ) (18.7 )%
Aircraft and traffic servicing 743 1,336 (593 ) (44.4 )%
General and administrative 11,164 14,500 (3,336 ) (23.0 )%
Depreciation and amortization 20,705 20,469 236 1.2 %
Lease termination 4,508 - 4,508 100.0 %
Government grant recognition (55,967 ) - (55,967 ) 100.0 %
Total operating expenses $ 80,519 $ 166,004 Operating data: Available seat miles-ASMs (thousands) 1,771,498 2,611,940 (840,442 ) (32.2 )% Block hours 73,942 108,305 (34,363 ) (31.7 )% Average stage length (miles) 690 619 71 11.5 % Departures 35,344 55,435 (20,091 ) (36.2 )% Flight Operations. Flight operations expense decreased$15.5 million , or 29.3%, to$37.4 million for our three months endedMarch 31, 2021 compared to the same period in 2020. The decrease was primarily driven by a decrease in pilot and flight attendant wages due to lower block hours as well as pilot training related costs. Fuel. Fuel expense increased$0.01 million , or 5.3%, to$0.2 million for our three months endedMarch 31, 2021 compared to the same period in 2020. The increase was primarily driven by fuel expense related to c-checks. All fuel costs related to flying under our capacity purchase agreements during our three months endedMarch 31, 2021 and 2020 were directly paid to suppliers by our major airline partners. Maintenance. Aircraft maintenance costs decreased$12.6 million , or 19.5%, to$51.8 million for our three months endedMarch 31, 2021 compared to the same period in 2020. This decrease was primarily driven by a decrease in engine overhaul, component contracts, parts, and labor and other expense. This decrease was partially offset by an increase in c-check, pass-through c-check, and pass-through engine overhaul expense. Total pass-through maintenance expenses reimbursed by our major airline partners increased by$2.3 million during our three months endedMarch 31, 2021 .
The following table presents information regarding our maintenance costs during
the three months ended
Three Months Ended March 31,
2021 2020 Change
Engine overhaul $ 4,709 $ 13,794 $ (9,085 ) (65.9 )%
Pass-through engine overhaul 2,173 704 1,469 208.7 %
C-check 8,506 6,640 1,866 28.1 %
Pass-through C-check 5,603 3,873 1,730 44.7 %
Component contracts 6,370 9,395 (3,025 ) (32.2 )%
Rotable and expendable parts 5,064 7,461 (2,397 ) (32.1 )%
Other pass-through 3,658 4,511 (853 ) (18.9 )%
Labor and other 15,690 17,957 (2,267 ) (12.6 )%
Total $ 51,773 $ 64,335 $ (12,562 ) (19.5 )%
Aircraft Rent. Aircraft rent expense decreased $2.3 million , or 18.7%, to $10.0
million for our three months ended March 31, 2021 compared to the same period in
2020. The decrease is attributable a $2.3 million decrease in engine rent due to
fewer leased engines.
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-------------------------------------------------------------------------------- Aircraft and Traffic Servicing. Aircraft and traffic servicing expense decreased$0.6 million , or 44.4%, to$0.7 million for our three months endedMarch 31, 2021 compared to the same period in 2020. The decrease is primarily due to a decrease in interrupted trip expense and pass-through regulatory charges. For our three months endedMarch 31, 2021 and 2020, 49.9% and 32.0%, respectively, of our aircraft and traffic servicing expenses were reimbursed by our major airline partners. General and Administrative. General and administrative expense decreased$3.3 million , or 23.0%, to$11.2 million for our three months endedMarch 31, 2021 compared to the same period in 2020. The decrease is primarily due to a decrease in pass-through property tax. For our three months endedMarch 31, 2021 and 2020,$2.9 million and$4.9 million , respectively, of our insurance and property tax expenses were reimbursed by our major airline partners. Depreciation and Amortization. Depreciation and amortization expense increased$0.2 million , or 1.2%, to$20.7 million for our three months endedMarch 31, 2021 compared to the same period in 2020. The increase is primarily attributable to an increase in rotable inventory and spare engines depreciation expense, partially offset by a decrease in amortization of intangibles expense. Lease Termination. Lease termination expense increased$4.5 million , or 100.0%, to$4.5 million for our three months endedMarch 31, 2021 compared to the same period in 2020.This increase is attributable to the termination expense resulting from the purchase of CRJ-900 aircraft, which were previously leased fromBombardier Capital . Government grant recognition. Payroll Support Government Plan funds increased$56.0 million , or 100.0%, to$56.0 million for our three months endedMarch 31, 2021 compared to the same period in 2020. Under the CARES Act, the government provided the Company with a grant of$56.0 million in payroll support for the period ofDecember 2020 throughMarch 2021 .
Other Expense
Other expense decreased$1.5 million , or 14.2%, to$9.2 million for our three months endedMarch 31, 2021 , compared to the same period in 2020. The decrease is primarily a result of a decrease in interest expense due to lower interest rates on our loan agreement withU.S. Department of Treasury and a decrease in outstanding aircraft principal balances.
Income Taxes
The Company's effective tax rate (ETR) from continuing operations was 24.9% for the three months endedMarch 31, 2021 and 40.9% for the three months endedMarch 31, 2020 . The Company's ETR during the three months endedMarch 31, 2021 was different from theU.S. federal statutory rate of 21% primarily due to permanent book and tax deductible expense differences, vesting of stock compensation where the tax deduction differed from the book expense, state taxes, changes in the valuation allowance against state net operating losses, and changes in state apportionment and state 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. The Company's current year effective tax rate increased compared to the prior year tax rate as a result of a decrease to the forecast for the current fiscal year, as the Company's permanent differences between book and taxable income therefore have a larger impact on the Company's effective tax rate. In addition, the Company's rate varied from the prior year's as a result of the vesting of stock compensation where the tax deduction differed from the book expense, state taxes, changes in the valuation allowance against state net operating losses, and changes in state statutory rates. As ofSeptember 30, 2020 , the Company had aggregate federal and state net operating loss carryforwards of$512.4 million and$223.9 million , respectively, which expire in 2027-2038 and 2021-2040, respectively. Approximately$0.7 million of state net operating loss carryforwards are expected to expire in the current year.
Six Months Ended
We had operating income of$43.7 million in our six months endedMarch 31, 2021 compared to operating income of$41.1 million in our six months endedMarch 31, 2020 . In our six months endedMarch 31, 2021 , we had net income of$19.8 million compared to net income of$12.7 million in our six months endedMarch 31, 2020 . Our operating results for the six months endedMarch 31, 2021 reflected a decrease in contract revenue due to reduced rates to partners related to PSP2 and lower flying on our CRJ-900, CRJ-700, and E-175 fleet due to the impact of COVID-19 and an increase in pass-through and other revenues primarily due to an increase in E-175 maintenance pass-through expense. 30 -------------------------------------------------------------------------------- Flight operations expense decreased in the six months endedMarch 31, 2021 due to lower pilot and flight attendant wages and pilot training expenses. Our maintenance expense decreased primarily due to fewer c-checks and heavy engine maintenance events and lower component contracts, parts, and labor expense, offset by higher pass-through maintenance. Aircraft rent expense decreased primarily due fewer leased engines. In addition, general and administrative expense decreased as a result of lower pass-through property taxes. Lastly, we recognized the Federal Grant received through the Payroll Support Agreement under the CARES Act with theU.S. Department of the Treasury . Six Months Ended March 31, 2021 2020 Change Operating revenues ($ in thousands): Contract$ 208,870 $ 337,580 $ (128,710 ) (38.1 )% Pass-through and other 38,781 26,351 12,430 47.2 % Total operating revenues$ 247,651 $ 363,931
Operating data: Available seat miles-ASMs (thousands) 3,442,441 5,347,325 (1,904,884 ) (35.6 )% Block hours 143,189 223,866 (80,677 ) (36.0 )% Revenue passenger miles-RPMs (thousands) 2,319,909 3,936,747 (1,616,838 ) (41.1 )% Average stage length (miles) 664 595 69 11.6 % Contract revenue per available seat mile-CRASM (in cents) ¢ 6.07 ¢ 6.31 ¢ (0.24) (3.8 )% Passengers 3,513,757 6,535,550 (3,021,793 ) (46.2 )%
"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.
"RPM" means the number of miles traveled by paying passengers
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-------------------------------------------------------------------------------- Total operating revenue decreased by$116.3 million , or 32.0%, to$247.7 million for our six months endedMarch 31, 2021 as compared to our six months endedMarch 31, 2020 . Contract revenue decreased by$128.7 million , or 38.1%, to$208.9 million primarily due to a decrease in flying on our CRJ-900, CRJ-700, and E-175 fleet as a result of the impact of COVID-19, temporary reduced rate to our partners and flying fewer aircraft under the American CPA. Our block hours flown during our six months endedMarch 31, 2021 decreased 36.0% compared to the six months endedMarch 31, 2020 primarily due to decreased flying on our CRJ-900, CRJ-700, and E-175 fleets. Our pass-through and other revenue increased during our six months endedMarch 31, 2021 by$12.4 million , or 47.2%, to$38.8 million primarily due to pass-through maintenance revenue related to our E-175 fleet. In addition, the decrease is attributable to reduced rates to partners related to PSP2 and fewer aircraft operating under the Amended and Restated American Purchase Agreement. Six Months Ended March 31, 2021 2020 Change Operating expenses ($ in thousands): Flight operations$ 74,367 $ 105,535 $ (31,168 ) (29.5 )% Fuel 588 358 230 64.2 % Maintenance 104,637 122,430 (17,793 ) (14.5 )% Aircraft rent 20,040 23,614 (3,574 ) (15.1 )% Aircraft and traffic servicing 1,644 2,400 (756 ) (31.5 )% General and administrative 24,237 27,496 (3,259 ) (11.9 )% Depreciation and amortization 41,175 41,021 154 0.4 % Lease termination 4,508 - 4,508 100.0 % Government grant recognition (67,278 ) - (67,278 ) 100.0 % Total operating expenses$ 203,918 $ 322,854
Operating data: Available seat miles-ASMs (thousands) 3,442,441 5,347,325 (1,904,884 ) (35.6 )% Block hours 143,189 223,866 (80,677 ) (36.0 )% Average stage length (miles) 664 595 69 11.6 % Departures 182,557 118,160 64,397 54.5 % Flight Operations. Flight operations expense decreased$31.2 million , or 29.5%, to$74.4 million for our six months endedMarch 31, 2021 compared to the same period in 2020. The decrease was primarily driven by a decrease in pilot and flight attendant wages due to lower block hours as well as pilot training related costs. Fuel. Fuel expense increased$0.2 million , or 64.2%, to$0.6 million for our six months endedMarch 31, 2021 compared to the same period in 2020. The increase was primarily driven by fuel expense related to the delivery of the new E-175 aircraft. All fuel costs related to flying under our capacity purchase agreements during our six months endedMarch 31, 2021 and 2020 were directly paid to suppliers by our major airline partners. Maintenance. Aircraft maintenance costs decreased$17.8 million , or 14.5%, to$104.6 million for our six months endedMarch 31, 2021 compared to the same period in 2020. This decrease was primarily driven by a decrease in engine overhaul expense, component contracts, parts, and labor and other expense. This decrease was partially offset by an increase in pass-through engine overhaul and pass-through c-check expense. Total pass-through maintenance expenses reimbursed by our major airline partners increased by$14.8 million during our six months endedMarch 31, 2021 . 32
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The following table presents information regarding our maintenance costs during
our six months ended
Six Months Ended March 31,
2021 2020 Change
Engine overhaul $ 9,462 $ 22,545 $ (13,083 ) (58.0 )%
Pass-through engine overhaul 11,806 2,555 9,251 362.1 %
C-check 11,464 12,692 (1,228 ) (9.7 )%
Pass-through C-check 12,741 5,093 7,648 150.2 %
Component contracts 12,157 19,082 (6,925 ) (36.3 )%
Rotable and expendable parts 10,382 14,866 (4,484 ) (30.2 )%
Other pass-through 6,770 8,848 (2,078 ) (23.5 )%
Labor and other 29,855 36,749 (6,894 ) (18.8 )%
Total $ 104,637 $ 122,430 $ (17,793 ) (14.5 )%
Aircraft Rent. Aircraft rent expense decreased $3.6 million , or 15.1%, to $20.0
million for our six months ended March 31, 2021 compared to the same period in
2020. The decrease is attributable to $3.6 million decrease in engine rent due
to fewer leased engines.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expense decreased
$0.8 million , or 31.5%, to $1.6 million for our six months ended March 31, 2021
compared to the same period in 2020. The decrease is primarily due to a decrease
in interrupted trip expense and pass-through regulatory charges, partially
offset by an increase in pass-through legal fees related to our GoJet lease. For
our six months ended March 31, 2021 and 2020, 54.7% and 36.5%, respectively, of
our aircraft and traffic servicing expenses were reimbursed by our major airline
partners.
General and Administrative. General and administrative expense decreased $3.3
million , or 11.9%, to $24.2 million for our six months ended March 31, 2021
compared to the same period in 2020. The decrease is primarily due to a decrease
in pass-through property taxes. For our six months ended March 31, 2021 and
2020, $7.4 million and $9.3 million , respectively, of our insurance and property
tax expenses were reimbursed by our major airline partners.
Depreciation and Amortization. Depreciation and amortization expense increased
$0.2 million , or 0.4%, to $41.2 million for our six months ended March 31, 2021
compared to the same period in 2020. The increase is primarily attributable to
an increase in spare engines depreciation expense, partially offset by a
decrease in amortization of intangibles expense.
Lease Termination. Lease termination expense increased $4.5 million , or 100.0%,
to $4.5 million for our six months ended March 31, 2021 compared to the same
period in 2020. This increase is attributable to the termination expense
resulting from the purchase the purchase of CRJ-900 aircraft, which was
previously leased from Bombardier Capital .
Government grant recognition. Payroll Support Government Plan funds increased
$67.3 million , or 100.0%, to $67.3 million for our six months ended March 31,
2021 compared to the same period in 2020. Under the CARES 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 . We also recognized $11.3 million of
the grant amount received for the period of April through October 2020 as of
December 31, 2020 .
Other Expense
Other expense decreased $6.4 million , or 26.9%, to $17.2 million for our six
months ended March 31, 2021 , compared to the same period in 2020. The decrease
is primarily a result of a decrease in interest expense due to lower interest
rates on our loan agreement with U.S. Department of Treasury and a decrease in
outstanding aircraft principal balances.
Income Taxes
The income tax expense totaled$6.7 million for the six months endedMarch 31, 2021 as compared to a tax expense of$4.8 million for the six months endedMarch 31, 2020 . The effective tax rate was 25.3% versus 27.6% in the prior year. The effective tax rate for the six months endedMarch 31, 2021 was impacted by vesting of stock compensation where the tax deduction differed from the book expense, state taxes, changes in the valuation allowance against state net operating losses, and changes in state statutory rates. 33 -------------------------------------------------------------------------------- We file income tax returns in the US and in various state jurisdictions with varying statutes of limitations. We are generally no longer subject to income tax examination by tax authorities for years prior to 2017 and 2016 for federal and state purposes, respectively, with the exception of the examination of our net operating losses. The balance of unrecognized tax benefits is not anticipated to fluctuate significantly from fiscal 2020 to fiscal 2021. It is our policy to recognize interest expense and penalties related to uncertain income tax matters as a component of income tax expense.
Adjusted EBITDA and Adjusted EBITDAR
The following table presents a reconciliation of net income to estimated Adjusted EBITDA and Adjusted EBITDAR for the period presented (in thousands):
Three Months Ended March 31, Six Months Ended March 31,
2021 2020 2021 2020
Reconciliation:
Net income $ 5,689 $ 1,885 $ 19,807 $ 12,670
Income tax expense 1,890 1,307 6,711 4,842
Income before taxes $ 7,579 $ 3,192 $ 26,518 $ 17,512
Adjustments(1)(2) 4,508 - 3,558 -
Adjusted income before taxes 12,087 3,192 30,076 17,512
Interest expense 8,755 11,673 17,837 24,300
Interest income (79 ) (36 ) (205 ) (94 )
Depreciation and amortization 20,705 20,469 41,175 41,021
Adjusted EBITDA $ 41,468 $ 35,298 $ 88,883 $ 82,739
Aircraft rent 9,992 12,285 20,040 23,614
Adjusted EBITDAR $ 51,460 $ 47,583 $ 108,923 $ 106,353 (1) Includes adjustment for gain on extinguishment of debt of
related to repayment of the Company's aircraft debts during our six months
ended
(2) Includes lease termination expense of
months ended
were previously leased from
Liquidity and Capital Resources
As a result of the COVID-19 pandemic, we have taken, and are continuing to take, certain actions to increase liquidity and strengthen our financial position. These actions include:
Working with our major partners and original equipment manufacturers ("OEM") to delay the timing of our future aircraft and spare engine deliveries.
InFebruary 2021 , the Company was granted$48.7 million in financial assistance by theDepartment of the Treasury under the Payroll Support Program Extension ("PSP2") under the Consolidated Appropriations Act of 2021. InMarch 2021 , we were 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 was granted an additional$7.3 million through the PSP2 for a total grant of$56.0 million . The additional$7.3 million was received inApril 2021 . OnApril 15, 2021 , the Company was notified by theU.S. Department of the Treasury we are 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 . The Company expects it will be eligible and estimates the amount is approximately$52.2 million . The Company received the first installment of$26.1 million onApril 23, 2021 .
Sources and Uses of Cash
We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, aircraft pre-delivery payments, maintenance, aircraft rent and to pay 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 the cash grant we received under the payroll support programs (PSP, PSP2, PSP3) and the Loan and Guarantee Agreement we entered into with theTreasury (the "US Treasury 34
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Loan Agreement"), each under the CARES Act, cash on hand, cash generated from operations and funds from external borrowings.
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 equity
capital 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 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. 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, short-term investments, existing credit facilities, financing arrangements and government assistance under the CARES Act, 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 are primarily directed toward our aircraft fleet and flight equipment. Our capital expenditures, net of purchases of rotable spare parts and aircraft and spare engine financing for the six months endingMarch 31,2021 is approximately 0.9% of annual revenue, which is lower compared to our historical expense as the Company is focusing on cost savings due to COVID 19 pandemic impact on the airline industry. We expect 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 ofMarch 31, 2021 , our principal sources of liquidity were cash and cash equivalents of$147.9 million . In addition, we had restricted cash of$3.4 million as ofMarch 31, 2021 . As ofMarch 31, 2021 , we also had$718.2 million in secured indebtedness incurred primarily in connection with our financing of aircraft. As ofMarch 31, 2021 , we had$101.8 million of short-term debt, excluding capital leases, and$618.0 million of long-term debt excluding capital leases. Restricted Cash As ofMarch 31, 2021 , we had$3.4 million in restricted cash. We have an agreement with a financial institution for letter of credit facility and to issue letters of credit for particular airport authorities, worker's compensation insurance, property and casualty insurance and other business needs as required in certain lease agreements. Pursuant to the term of this 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
the six months ended
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Six Months Ended March 31,
2021 2020
Net cash provided by operating activities $ 78,575 $ 65,202
Net cash used in investing activities (11,675 ) (24,773 )
Net cash used in financing activities (18,522 ) (57,090 )
Net increase (decrease) in cash and cash equivalents 48,378 (16,661 )
Cash and cash equivalents at beginning of period 102,841 72,501
Cash and cash equivalents at end of period$ 151,219 $ 55,840
Net Cash Flow Provided by Operating Activities
During our six months endedMarch 31, 2021 , we had cash flow provided by operating activities of$78.6 million . We had net income of$19.8 million adjusted for the following significant non-cash items: depreciation and amortization of$41.2 million , stock-based compensation of$1.7 million , deferred income taxes of$6.6 million , amortization of deferred credits of$(2.3) million , amortization of debt discount and issuance costs of$5.0 million , gain on extinguishment of debt of$(1.0) million , loss on contract termination of$4.5 million . We had a net change of$2.9 million within other net operating assets and liabilities largely driven by an increase in accounts payable, deferred revenue and decrease in accrued liabilities during our six months endedMarch 31, 2021 . During our six months endedMarch 31, 2020 , we had cash flow provided by operating activities of$65.2 million . We had net income of$12.7 million adjusted for the following significant non-cash items: depreciation and amortization of$41.0 million , stock-based compensation of$2.5 million , deferred income taxes of$4.5 million , amortization of deferred credits of$(2.0) million , amortization of debt financing costs and accretion of interest on non-interest bearing subordinated notes of$2.1 million and$0.5 million loss on disposal of assets. We had a net change of$3.9 million within other net operating assets and liabilities largely driven by an increase in accrued liability during our six months endedMarch 31, 2020 .
Net Cash Flows Used in Investing Activities
During our six months endedMarch 31, 2021 , net cash flow used in investing activities totaled$11.7 million . We invested$2.9 million in inventory,$1.6 million in aircraft purchases,$0.1 million in vehicles,$0.7 million in tools, equipment and miscellaneous projects and$6.4 million in net returns and payments on equipment and other deposits.
During our six months ended
Net Cash Flows Provided by Financing Activities
During our six months endedMarch 31, 2021 , net cash flow used in financing activities was$18.5 million . We received$195.0 million of proceeds from our US Treasury Loan Agreement. We made$212.0 million of principal repayments on long-term debt during the period. We incurred$1.3 million of costs related to debt financing.
During our six months ended
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is any transaction, agreement or other
contractual arrangement involving an unconsolidated entity under which a Company
has (i) made guarantees, (ii) a retained or a contingent interest in transferred
assets, (iii) an obligation under derivative instruments classified as equity or
(iv) any obligation arising out of a material variable interest in an
unconsolidated entity that provides financing, liquidity, market risk or credit
risk support to the Company, or that engages in leasing, hedging or research and
development arrangements with the Company.
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We did not have during the periods presented, and we do not currently have, any
off-balance sheet arrangements, as defined in the rules and regulations of the
Securities and Exchange Commission (the "SEC").
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.
Critical Accounting Policies and Estimates
We prepare our condensed 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 accompanying discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated interim financial statements included elsewhere in this Form 10-Q. We believe certain of our accounting policies are critical to understanding our financial position and results of operations. There have been no changes to the critical accounting policies as explained in Part 1, Item 7 of the 2020 Form 10-K under the heading "Critical Accounting Policies."
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2: "Summary of Significant Accounting Policies" to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
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