UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30,
2003
Commission File Number 0-15495
Mesa Air Group, Inc.
(Exact name of registrant as specified in its charter)
Nevada | 85-0302351 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 410 North 44th Street, Suite 700, Phoenix, Arizona (Address of Principal Executive Offices) | 85008 (Zip Code) | |
Registrant's telephone number, including
area code:
(602) 685-4000
Securities registered pursuant to
Section 12(b) of the Act:
None
Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, No Par Value
(Title of Class)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes ☑ No o
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2). Yes ☑ No o
The aggregate market value of the voting stock
held by non-affiliates of the Registrant as of March 31,
2003: Common Stock, no par value: $153.3 million.
On December 8, 2003, the Registrant had
outstanding 31,721,724 shares of Common Stock.
Documents Incorporated by Reference
Portions of the registrant's proxy
statement for the 2004 annual meeting of stockholders
TABLE OF CONTENTS
| PART I | ||||||||
| Item 1. Business | ||||||||
| Item 2. Properties | ||||||||
| Item 3. Legal Proceedings | ||||||||
| Item 4. Submission of Matters to a Vote of Security Holders | ||||||||
| PART II | ||||||||
| Item 5. Market for Registrant's Common Equity and Related Stockholder Matters | ||||||||
| Item 6. Selected Financial Data | ||||||||
| Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
| Item 7A -- Quantitative and Qualitative Disclosures About Market Risk | ||||||||
| Item 8. Financial Statements and Supplementary Data | ||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | ||||||||
| PART III | ||||||||
| Item 10. Directors and Executive Officers of the Registrant | ||||||||
| Item 11. Executive Compensation | ||||||||
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | ||||||||
| Item 13. Certain Relationships and Related Transactions | ||||||||
| PART IV | ||||||||
| Item 15. Exhibits, Schedules and Reports on Form 8-K | ||||||||
| EX-5.2 | ||||||||
| EX-5.3 | ||||||||
| EX-5.4 | ||||||||
| EX-10.4 | ||||||||
| EX-10.5 | ||||||||
| EX-10.6 | ||||||||
| EX-10.13 | ||||||||
| EX-10.14 | ||||||||
| EX-21.1 | ||||||||
| EX-23.1 | ||||||||
Table of Contents
MESA AIR GROUP, INC.
2003 FORM 10-K REPORT
TABLE OF CONTENTS
| Page | ||||||
| No. | ||||||
| Part I | ||||||
Item 1. | Business | 2 | ||||
Item 2. | Properties | 12 | ||||
Item 3. | Legal Proceedings | 13 | ||||
Item 4. | Submission of Matters to a Vote of Security Holders | 15 | ||||
| Part II | ||||||
Item 5. | Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters | 16 | ||||
Item 6. | Selected Financial Data | 17 | ||||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||||
Item 7A. | Quantitative and Qualitative Disclosure about Market Risk | 32 | ||||
Item 8. | Financial Statements and Supplementary Data | 32 | ||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 65 | ||||
| Part III | ||||||
Item 10. | Directors and Executive Officers of the Registrant | 65 | ||||
Item 11. | Executive Compensation | 65 | ||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management | 65 | ||||
Item 13. | Certain Relationships and Related Transactions | 65 | ||||
Item 14. | Controls and Procedures | 65 | ||||
| Part IV | ||||||
Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 66 | ||||
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Table of Contents
PART I
Forward-Looking Statements
This Form 10-K Report contains certain
statements including, but not limited to, information regarding
the replacement, deployment, and acquisition of certain numbers
and types of aircraft, and projected expenses associated
therewith; costs of compliance with Federal Aviation
Administration regulations and other rules and acts of Congress;
the passing of taxes, fuel costs, inflation, and various
expenses to the consumer; the relocation of certain operations
of Mesa; the resolution of litigation in a favorable manner and
certain projected financial obligations. These statements, in
addition to statements made in conjunction with the words
"expect," "anticipate," "intend,"
"plan," "believe," "seek,"
"estimate," and similar expressions, are
forward-looking statements within the meaning of the Safe Harbor
provision of Section 27A of the Securities Act of 1933 as
amended and Section 21E of the Securities Exchange Act of
1934 as amended. These statements relate to future events or the
future financial performance of Mesa and only reflect
management's expectations and estimates. The following is a
list of factors, among others, that could cause actual results
to differ materially from the forward-looking statements:
changing business conditions in certain market segments and
industries; changes in Mesa's code-sharing relationships;
the inability of America West, US Airways or United Airlines to
pay their obligations under the code-share agreements; the
inability of United Airlines to successfully restructure and
emerge from bankruptcy; an increase in competition along the
routes Mesa operates or plans to operate; material delays in
completion by the manufacturer of the ordered and yet-to-be
delivered aircraft; availability and cost of funds for financing
new aircraft; changes in general economic conditions; changes in
fuel price; changes in regional economic conditions; Mesa's
relationship with employees and the terms of future collective
bargaining agreements; the impact of current and future laws,
additional terrorist attacks; Congressional investigations, and
governmental regulations affecting the airline industry and
Mesa's operations; bureaucratic delays; amendments to
existing legislation; consumers unwilling to incur greater costs
for flights; unfavorable resolution of negotiations with
municipalities for the leasing of facilities; and risks
associated with litigation outcomes. One or more of these or
other factors may cause Mesa's actual results to differ
materially from any forward-looking statement. Mesa is not
undertaking any obligation to update any forward-looking
statements contained in this Form 10-K.
| Item 1. | Business |
General
Mesa Air Group, Inc. ("we,"
"us," "Mesa" or the "Company") is
a holding company whose principle subsidiaries operate as
regional air carriers providing scheduled passenger and
airfreight service. The Company serves 163 cities in
40 states, the District of Columbia, Canada, Mexico and the
Bahamas. At September 30, 2003, the Company operated a
fleet of 150 aircraft and had approximately 943 daily departures.
Approximately 98% of our consolidated passenger
revenues for the fiscal year ended September 30, 2003 were
derived from operations associated with code-share agreements.
Our subsidiaries have code-share agreements with America West
Airlines, Inc. ("America West"), Frontier Airlines,
Inc. ("Frontier"), Midwest Airlines, Inc.
("Midwest Airlines"), United Airlines, Inc.
("United Airlines" or "United") and
US Airways, Inc. ("US Airways"). These code-share
agreements allow use of the code-share partners' flight
designator code to identify flights and fares in computer
reservation systems, permit use of logos, service marks,
aircraft paint schemes and uniforms similar to the code-share
partner and provide coordinated schedules and joint advertising.
The remaining passenger revenues are derived from Mesa's
independent operations.
In addition to carrying passengers, we carry
freight and express packages on our passenger flights and have
interline small cargo freight agreements with many other
carriers. We also have contracts with the U.S. Postal Service
for carriage of mail to the cities we serve and occasionally
operate charter flights when our aircraft are not otherwise used
for scheduled service.
2
Table of Contents
Our airline operations are conducted by the
following airline subsidiaries:
| • | Mesa Airlines, Inc. ("Mesa Airlines"), a Nevada corporation, operates regional jet and turboprop aircraft as America West Express under a code-share agreement with America West, primarily at America West's operations hub located in Phoenix; as US Airways Express under a code-share agreement with US Airways, primarily at US Airways' hubs on the East Coast; as United Express under a code-share agreement with United Airlines, primarily in Denver; and as Frontier JetExpress under a code-share agreement with Frontier in Denver, which expires December 31, 2003. | |
| • | Air Midwest, Inc. ("Air Midwest"), a Kansas corporation, operates Beechcraft 1900D 19-seat turboprop aircraft as US Airways Express under separate code-share agreements with US Airways at certain US Airways' hubs on the East Coast as well as Kansas City. Air Midwest's flights in Kansas City code-share with both Midwest Airlines and US Airways. Air Midwest operates as America West Express in Phoenix. Air Midwest also operates as Mesa Airlines in Albuquerque, New Mexico and in select Essential Air Service ("EAS") markets. The Albuquerque flights and certain EAS markets are "Independent Operations" and are not subject to a code- sharing agreement with a major carrier. | |
| • | Freedom Airlines, Inc. ("Freedom"), a Nevada corporation, operates CRJ-700 and CRJ-900 regional jets pursuant to the Company's code-share agreement with America West. Freedom Airlines began revenue flight operations on October 19, 2002. |
Unless the context indicates otherwise, the terms
"Mesa," "the Company," "we,"
"us," or "our," refer to Mesa Air Group,
Inc. and its subsidiaries.
Corporate Structure
Mesa is a Nevada corporation that was originally
formed in New Mexico, with its principal executive office in
Phoenix, Arizona.
In addition to operating the airline subsidiaries
listed above, we also have the following other subsidiaries:
| • | MPD, Inc., a Nevada corporation, doing business as Mesa Pilot Development and MPD - ASU, operates our training program for new pilots in conjunction with San Juan College in Farmington, New Mexico and Arizona State University in Tempe, Arizona. | |
| • | Regional Aircraft Services, Inc., a California corporation, performs aircraft component repair and overhaul services. | |
| • | MAGI Insurance, Ltd., a Barbados, West Indies based captive insurance company, was established for the purpose of obtaining more favorable aircraft liability insurance rates. | |
| • | Ritz Hotel Management Corp., a Nevada Corporation, was established to facilitate the Company's acquisition and management of a Phoenix area hotel property used for crew accommodations in training. | |
| • | Mesa Air Group - Aircraft Inventory Management, LLC ("MAG - AIM"), an Arizona Limited Liability Company, was established to purchase, distribute and manage Mesa's inventory of spare rotable and expendable parts. |
3
Table of Contents
Aircraft in Operation
The following table sets forth our aircraft fleet
(owned and leased) in operation by aircraft type as of
September 30, 2003.
| Canadair | Canadair | Canadair | Embraer | ||||||||||||||||||||||||||
| Regional | Regional | Regional | Regional | ||||||||||||||||||||||||||
| Jet-200 | Jet-700 | Jet-900 | Jet-145 | Beechcraft | DeHavilland | ||||||||||||||||||||||||
| (CRJ-200) | (CRJ-700) | (CRJ-900) | (ERJ-145) | 1900D | Dash 8-200 | TOTAL | |||||||||||||||||||||||
US Airways Express | 20 | - | - | 32 | 26 | - | 78 | ||||||||||||||||||||||
America West Express | 18 | 10 | 6 | - | 3 | 6 | 43 | ||||||||||||||||||||||
United Express | - | 5 | - | - | - | 6 | 11 | ||||||||||||||||||||||
Frontier JetExpress | 5 | - | - | - | - | - | 5 | ||||||||||||||||||||||
Mesa Airlines | - | - | - | - | 8 | - | 8 | ||||||||||||||||||||||
Spares/idle | - | - | - | - | 5 | - | 5 | ||||||||||||||||||||||
Total | 43 | 15 | 6 | 32 | 42 | 12 | 150 | ||||||||||||||||||||||
Code-Share Agreements
Our airline subsidiaries have agreements with
America West, US Airways, United Airlines, Frontier, and Midwest
Airlines to use those carriers' designation codes (commonly
referred to as a "code-share agreements"). These
code-share agreements allow use of the code-share partner's
flight designator code to identify flights and fares in computer
reservation systems, permit use of logos, service marks,
aircraft paint schemes and uniforms similar to the code-share
partner's and provide coordinated schedules and joint
advertising. The Company's passengers traveling on flights
operated pursuant to code-share agreements receive mileage
credits in the respective frequent flyer programs of the
Company's code-share partners, and credits in those
programs can be used on flights operated by the Company.
The financial arrangement with our code-share
partners involves either a revenue-guarantee or pro-rate
arrangement. The America West (regional jet and Dash-8), United
(regional jet and Dash-8), Frontier (regional jet), and
US Airways (regional jet) code-share agreements are
revenue-guarantee flying agreements. Under the terms of these
flying agreements, the major carrier controls marketing,
scheduling, ticketing, pricing and seat inventories. The Company
receives a guaranteed payment based upon a fixed minimum monthly
amount plus amounts related to departures and block hours flown
plus direct reimbursement for expenses such as fuel, landing
fees and insurance. Among other advantages, revenue-guarantee
arrangements reduce the Company's exposure to fluctuations
in passenger traffic and fare levels, as well as fuel prices.
The US Airways, Midwest Airlines and America West B1900
turboprop code-share agreements are pro-rate agreements, for
which the Company receives an allocated portion of the
passengers' fare and pays all of the costs of transporting
the passenger.
4
Table of Contents
The following table summarizes our available seat
miles ("ASMs") flown and revenue recognized under our
code-share agreements for the years ended September 30,
2003 and 2002:
| Fiscal 2003 | Fiscal 2002 | |||||||||||||||||||||||||||||||
| Passenger | Passenger | |||||||||||||||||||||||||||||||
| In thousands | ASM's | Revenue | ASM's | Revenue | ||||||||||||||||||||||||||||
America West (Revenue-Guarantee) | 2,012,185 | 45 | % | $ | 252,181 | 44 | % | 1,494,469 | 43 | % | $ | 193,173 | 40 | % | ||||||||||||||||||
US Airways (Revenue-Guarantee) | 1,778,365 | 40 | % | 218,457 | 38 | % | 1,281,181 | 37 | % | 166,387 | 35 | % | ||||||||||||||||||||
Frontier (Revenue-Guarantee) | 154,544 | 3 | % | 19,199 | 3 | % | - | - | - | - | ||||||||||||||||||||||
United (Revenue-Guarantee) | 20,487 | 1 | % | 6,101 | 1 | % | - | - | - | - | ||||||||||||||||||||||
America West (Pro-rate) | 5,790 | - | 1,017 | - | - | - | - | - | ||||||||||||||||||||||||
US Airways (Pro-rate) | 295,726 | 7 | % | 63,205 | 11 | % | 439,515 | 13 | % | 96,608 | 20 | % | ||||||||||||||||||||
Frontier (Pro-rate) | 91,746 | 2 | % | 8,129 | 1 | % | 185,071 | 5 | % | 15,736 | 3 | % | ||||||||||||||||||||
Mesa Airlines | 94,864 | 2 | % | 9,293 | 2 | % | 59,191 | 2 | % | 8,922 | 2 | % | ||||||||||||||||||||
Total | 4,453,707 | $ | 577,582 | 3,459,427 | $ | 480,826 | ||||||||||||||||||||||||||
| America West Code-Sharing Agreement |
| Revenue-Guarantee |
As of September 30, 2003, we operated six
CRJ-900, ten CRJ-700, 18 CRJ-200, and six Dash-8 aircraft for
America West under a revenue-guarantee code-sharing agreement.
The code-share agreement, as amended, provides for the Company
to increase its fleet up to 38 CRJ-900s and eliminate the
CRJ-700 aircraft. In addition, America West has an option to
increase its CRJ-900 fleet size to 50 aircraft. In exchange for
providing flights and all other obligations under the agreement,
we receive a fixed monthly minimum amount plus certain
additional amounts based upon the number of flights flown and
block hours performed during the month. America West also
reimburses us for certain costs on an actual basis, including
fuel costs, aircraft ownership and financing costs, landing
fees, passenger liability and hull insurance, and aircraft
property taxes. We also receive a monthly payment from America
West based on a percentage of revenue from flights that we
operate under the code-share agreement. Under the amended
code-share agreement, America West has the right to reduce the
combined CRJ fleets utilized under the code-share agreement by
one aircraft in any six-month period commencing in January 2007.
In addition, beginning in February 2007, America West may
eliminate the Dash-8 aircraft upon 180 days prior written
notice. The code-share agreement terminates on June 30,
2012 unless America West elects to extend the contract for two
years or exercises options to increase fleet size. The
code-share agreement is subject to termination prior to that
date in various circumstances including:
| • | If our flight completion factor falls below a specified percentage for a specified period of time, subject to notice and cure rights; | |
| • | If either America West or we become insolvent, file for bankruptcy or fail to pay our debts as they become due, the non-defaulting party may terminate the agreement; | |
| • | Failure by us or America West to perform the covenants, conditions or provisions of the code-sharing agreement, subject to 15 days notice and cure rights; | |
| • | If we or America West fails to make a payment when due, subject to ten business days notice and cure rights; or | |
| • | If we are required by the FAA or the DOT to suspend operations and we have not resumed operations within three business days, except as a result of an emergency airworthiness directive from the FAA affecting all similarly equipped aircraft, America West may terminate the agreement. |
5
Table of Contents
| Pro-Rate |
Pursuant to a turboprop code-sharing agreement
with America West, we operated three B1900D turboprop aircraft
in the Phoenix hub under a pro-rate revenue-sharing arrangement
as of September 30, 2003. We control scheduling, inventory
and pricing. We are allocated a portion of each passenger's
fare based on a standard industry formula and are required to
pay all costs of transporting the passenger. The pro-rate
agreement terminates on March 31, 2012 unless America West
elects to extend the contract for successive one-year periods.
The pro-rate agreement could also be terminated prior to the
termination under similar circumstances as the revenue-guarantee
agreement.
| US Airways Code-Sharing Agreements |
| Revenue-Guarantee |
As of September 30, 2003, we operated 52
50-seat regional jets for US Airways under a code-sharing
agreement, with an additional four 50-seat regional jets added
in December 2003. Under the jet code-share agreement, we provide
US Airways Express service between US Airways hubs and
cities designated by US Airways. In exchange for performing
the flight services under the agreement, we receive from US
Airways a fixed monthly minimum amount, plus certain additional
amounts based upon the number of flights flown and block hours
performed during the month. Additionally, certain costs incurred
by Mesa in performing the flight services are
"pass-through" costs, whereby US Airways agrees
to reimburse us for the actual amounts incurred for these items:
insurance, property tax per aircraft, fuel and oil cost,
catering cost, and landing fees. We also receive a fixed profit
margin based upon certain costs reimbursements under the
agreement. Twenty-four of the fifty-six jets must be in
compliance with the ‘jets-for-jobs' provisions in the
US Airways pilot contract. ‘Jets-for-jobs' is an
agreement between Mesa, US Airways and their respective
pilot unions in which furloughed US Airways Pilots receive
an agreed upon number of captain and first officer positions on
certain aircraft added to the agreement. Additionally, on
November 22, 2002, the Company signed a non-binding letter
of intent with US Airways to provide up to an additional 50
70-seat regional jets. The additional aircraft, which will also
be subject to ‘jets-for-jobs,' are expected to be
delivered beginning in mid-fiscal 2004. Mesa and US Airways
continue to discuss the terms of the Letter of Intent, but no
definitive agreement has been reached and no assurance can be
made that a definitive agreement will be reached that is
mutually acceptable to both parties. The code-share agreement
for (i) the initial 32 ERJ-145s terminates on
December 31, 2008, unless US Airways elects to exercise its
option to extend the term for three years upon 12 months
notice; and (ii) the additional 24 jets terminates in
January 2013, unless US Airways elects to exercise its option to
extend the term for two years upon 12 months notice.
Further, on November 19, 2003, the Company signed a Seventh
Amendment to the US Airways code-share agreement in which the
number of additional aircraft was increased from 24 jets to 27
jets. These aircraft are expected to be placed in service
beginning in the second quarter of fiscal 2004.
Notwithstanding the foregoing, US Airways may
terminate the code-share agreement at any time for cause upon
90 days notice and subject to our right to cure under any
of the following conditions:
| • | If we fail to retain or utilize the aircraft in the manner required under the jet code-share agreement. | |
| • | If we admit liability or are found liable for serious safety infractions by the Federal Aviation Administration ("FAA"), a finding which leads to the suspension or revocation of Mesa's operating certificate. |
| Pro-Rate |
Pursuant to a turboprop code-sharing agreement
with US Airways, we operated 26 B1900D turboprop aircraft
under a pro-rate revenue-sharing arrangement as of
September 30, 2003. We control scheduling, inventory and
pricing subject to US Airways' concurrence that such
service does not adversely affect its other operations in the
region. We are allocated a portion of each passenger's fare
based on a standard industry formula and are required to pay all
the costs of transporting the passenger. Additionally, we are
required to pay certain franchise, marketing and reservation
fees to US Airways.
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Table of Contents
US Airways may terminate the turboprop
agreement at any time for cause upon not less than five days
notice under any of the following conditions:
| • | If we fail to utilize the aircraft as specified in the agreements. | |
| • | If we fail to achieve specified levels of operating performance in completion factors and on-time arrival performance. | |
| • | If we fail to comply with the trademark license provisions of the agreement. | |
| • | If we fail to perform the material terms, covenants or conditions of the code-sharing agreement. | |
| • | Upon a change in our ownership or control without the written approval of US Airways. |
The turboprop code-share agreement terminates in
October 2006 provided, however, most of the turboprop flying hub
markets can be terminated by US Airways for any reason upon
180 days prior advance written notice.
| United Code-Sharing Agreement |
As of September 30, 2003, we operated five
CRJ-700 and six Dash-8 aircraft for United under a code-sharing
arrangement. The code-share agreement, which has not been
executed by the parties, provides for the Company to increase
its fleet to 30 70-seat regional aircraft (15 of which
would be replacements for 15 CRJ-200s), 15 CRJ-200s
and 10 Dash-8 aircraft. In exchange for performing the
flight services under the agreement, we receive from United a
fixed monthly minimum amount, plus certain additional amounts
based upon the number of flights flown and block hours performed
during the month. Additionally, certain costs incurred by Mesa
in performing the flight services are "pass-through"
costs, whereby United agrees to reimburse us for the actual
amounts incurred for these items: insurance, property tax per
aircraft, fuel cost, oil cost, catering cost, and landing fees.
We also receive a profit margin based upon certain reimbursable
costs under the agreement as well as our operational
performance. The code-share agreement for (i) the ten
Dash-8 aircraft terminates in July 2013 unless terminated by
United Airlines by giving notice six months prior to the fifth
anniversary, (ii) the 15 50-seat CRJ-200s terminates in
July 2008, which can be accelerated up to two years at
Mesa's discretion, (iii) the 15 70-seat regional jets
(to be delivered upon the withdrawal of the 50-seat regional
jets) terminates ten years from delivery date, and (iv) the
remaining 15 70-seat regional jets terminates in three
tranches between December 31, 2011 and December 31,
2013. The code-share agreement is subject to termination prior
to these dates in various circumstances including:
| • | If certain operational performance factors fall below a specified percentage for a specified time, subject to notice and cure rights; | |
| • | Failure by us to perform the material covenants, agreements, terms or conditions of the code-share agreement or similar agreements with United, subject to thirty (30) days notice and cure rights; | |
| • | If either United or we become insolvent, file bankruptcy or fail to pay debts when due, the non-defaulting party may terminate the agreement. |
| Frontier Jet Code-Sharing Agreement |
In September 2001, we entered into a five-year
pro-rate revenue-sharing code-share agreement with Frontier
which was converted to a revenue-guarantee contract in March
2003. As of September 30, 2003, we operated five CRJ-200
aircraft for Frontier under a revenue-guarantee agreement that
expires December 31, 2003.
Fleet Plans and Aircraft Manufacturer
Relationships
| ERJ Program |
In June 1999, we entered into an agreement with
Empresa Brasiliera de Aeronautica SA ("Embraer") to
acquire 36 Embraer ERJ-145 50-passenger regional jets. Mesa
introduced the ERJ-145 aircraft into revenue
7
Table of Contents
service in the third quarter of fiscal 2000 as US Airways Express. As of September 30, 2003, we have taken delivery of 32 ERJ-145s, which have been financed as operating leases with initial terms of 16.5 to 18 years. The last four ERJ-145 aircraft were delivered in December 2003. In conjunction with this purchase agreement, Mesa had $4.2 million remaining on deposit with Embraer, which was included with lease and equipment deposits at September 30, 2003. The remaining deposit was returned to us upon the delivery of the last four aircraft. We also have options for 45 additional aircraft. In October 2003, our contract with Embraer was amended to extend the option exercise date to May 2004.
| CRJ Program |
In August 1996, we entered into an agreement (the
"1996 BRAD Agreement") with Bombardier Regional
Aircraft Division ("BRAD") to acquire 32 CRJ-200
50-passenger regional jet aircraft. The 32 aircraft have been
delivered and are currently under permanent financing as
operating leases with initial terms of 16.5 to 18.5 years.
In May 2001, the Company entered into a second
agreement with BRAD (the "2001 BRAD Agreement") under
which we are now committed to purchase a total of
15 CRJ-700s and 25 CRJ-900s. The transaction includes
standard product support provisions, including training,
preferred pricing on initial inventory provisioning, maintenance
and technical publications. The Company has accepted delivery of
all 15 CRJ-700s on order under the 2001 BRAD Agreement. We
are the launch customer of the CRJ-900 and as of
September 30, 2003, have taken delivery of six CRJ-900
aircraft. In addition to the firm orders, Mesa has an option to
acquire an additional 80 CRJ-700 or CRJ-900 regional jets.
In conjunction with the 2001 BRAD Agreement, Mesa had
$15.0 million on deposit with BRAD, which was included with
lease and equipment deposits at September 30, 2003.
In 2003, the Company acquired 11 used CRJ-200
aircraft in order to meet required deliveries under its
code-share agreements. The aircraft are financed as operating
leases. The Company continues to actively pursue used 50-seat
regional jet aircraft.
The following table summarizes our jet fleet
status and fleet expansion plans currently under contract with
aircraft manufacturers for the periods indicated:
| CRJ-700 | CRJ-900 | ERJ-145 | |||||||||||||||||||||||||||||||
| Firm | Firm | CRJ-700 | CRJ-900 | Firm | ERJ-145 | Cumulative | |||||||||||||||||||||||||||
| CRJ-200 | Orders | Orders | Options | Options | Orders | Options | Total | ||||||||||||||||||||||||||
Delivered: | |||||||||||||||||||||||||||||||||
At 9/30/2003 | 43 | 15 | 6 | - | - | 32 | - | 96 | |||||||||||||||||||||||||
Scheduled deliveries: | |||||||||||||||||||||||||||||||||
Fiscal 2004 | - | - | 19 | - | - | 4 | - | 119 | |||||||||||||||||||||||||
Fiscal 2005 | - | - | - | - | - | - | - | 119 | |||||||||||||||||||||||||
Fiscal 2006 | - | - | - | 3 | 3 | - | 8 | 133 | |||||||||||||||||||||||||
Fiscal 2007 | - | - | - | 12 | 12 | - | 10 | 167 | |||||||||||||||||||||||||
Fiscal 2008 | - | - | - | 5 | 5 | - | 12 | 189 | |||||||||||||||||||||||||
Fiscal 2009 and Beyond | - | - | - | 20 | 20 | - | 15 | 244 | |||||||||||||||||||||||||
Total | 43 | 15 | 25 | 40 | 40 | 36 | 45 | ||||||||||||||||||||||||||
| Beechcraft 1900D |
As of September 30, 2003, we owned 35 and
leased seven Beechcraft 1900D aircraft. The seven leased
aircraft have leases expiring between October 31, 2004 and
October 1, 2005.
| Dash-8 |
As of September 30, 2003, we operated 12
leased Dash-8 aircraft. The Company is negotiating to lease four
additional Dash-8 aircraft to be used in its United Airlines
operations.
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Marketing
Our flight schedules are structured to facilitate
the connection of our passengers with the flights of our
code-share partners at their hub airports and to maximize local
and connecting service to other carriers.
Under our B1900 turboprop operations, the
Company's market selection process follows an in-depth
analysis on a route-by-route basis and is followed by a review
and approval process in a joint effort with US Airways or
America West, as the case may be, regarding the level of service
and fares. We believe that this selection process enhances the
likelihood of profitability in a given market.
Under the America West, US Airways and United
revenue-guarantee code-share agreements, market selection,
pricing and yield management functions are performed by our
respective partners. Our role is simply to operate our fleet in
the safest and most reliable manner in exchange for fees paid
under a generally fixed payment schedule. We intend to expand
our operations performed pursuant to these revenue-guarantee
agreements.
Under our code-share agreements, the code-share
partner coordinates advertising and public relations within
their respective systems. In addition, our traffic is impacted
by the major airline partners' advertising programs in
regions outside those served by us, with the major
partners' customers becoming our customers as a result of
through fares. Under pro-rate code-share arrangements, our
passengers also benefit from through fare ticketing with the
major airline partners and greater accessibility to our flights
on computer reservation systems and in the Official Airline
Guide.
Our pro-rate agreements and independent flights
are promoted through, and our revenues are generally believed to
benefit from, listings in computer reservation systems, the
Official Airline Guide and through direct contact with travel
agencies and corporate travel departments. Our independent
operations utilize SABRE, a computerized reservation system
widely used by travel agents, corporate travel offices and other
airlines. The reservation systems of our code-share partners are
also utilized in each of our other operations through their
respective code-share agreements. We also pay booking fees to
owners of other computerized reservation systems based on the
number of independent and pro-rate passengers booked by travel
agents using such systems. We believe that we have good
relationships with the travel agents serving our passengers.
Competition
The airline industry is highly competitive and
volatile. Airlines compete in the areas of pricing, scheduling
(frequency and timing of flights), on-time performance, type of
equipment, cabin configuration, amenities provided to
passengers, frequent flyer plans, and the automation of travel
agent reservation systems. Further, because of the Airline
Deregulation Act, airlines are currently free to set prices and
establish new routes without the necessity of seeking
governmental approval. At the same time, deregulation has
allowed airlines to abandon unprofitable routes where the
affected communities will not be left without air service.
We believe that the Airline Deregulation Act
facilitated our entry into scheduled air service markets and
allows us to compete on the basis of service and fares, thus
causing major carriers to seek out further contractual
agreements with carriers like us as a way of expanding their
respective networks. However, the Airline Deregulation Act makes
the entry of other competitors possible, some of which may have
substantial financial resources and experience, creating the
potential for intense competition among regional air carriers in
our markets.
We believe our code-share agreements provide a
significant competitive advantage in hub airports where our
major partner has a predominant share of the market. The ability
to control connecting passenger traffic by offering superior
service creates difficulty for other regional airlines wishing
to compete at such hubs. In addition to enhanced competitiveness
offered by the code-share agreements, we compete with other
airlines by offering frequent flights, flexible schedules and
numerous fare levels.
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Fuel
Historically, we have not experienced problems
with the availability of fuel, and believe that we will be able
to obtain fuel in quantities sufficient to meet our existing and
anticipated future requirements at competitive prices. Standard
industry contracts generally do not provide protection against
fuel price increases, nor do they ensure availability of supply.
However, the Company's revenue-guarantee code-share
agreements with America West, Frontier, United and US Airways
(regional jet) allow fuel used in the performance of the
agreements to be billed to the code-share partner, thereby
reducing the Company's exposure to fuel price fluctuations.
In fiscal 2003, approximately 84% of the Company's fuel was
associated with the Company's America West, Frontier,
United and US Airways (regional jet) code-share agreements. A
substantial increase in the price of jet fuel, to the extent our
fuel costs are not reimbursed, or the lack of adequate fuel
supplies in the future may have a material adverse effect on the
Company's business, financial condition, results of
operations and liquidity.
Maintenance of Aircraft and Training
All mechanics and avionics specialists employed
by us have the appropriate training and experience and hold the
required licenses issued by the FAA. Using a combination of
FAA-certified maintenance vendors and our own personnel and
facilities, the Company maintains its aircraft on a scheduled
and "as-needed" basis. We emphasize preventive
maintenance and inspect our aircraft engines and airframes as
required. We also maintain an inventory of spare parts specific
to the aircraft types we fly. We provide periodic in-house and
outside training for our maintenance and flight personnel and
also take advantage of factory training programs that are
offered when acquiring new aircraft.
Insurance
We carry types and amounts of insurance customary
in the regional airline industry, including coverage for public
liability, passenger liability, property damage, product
liability, aircraft loss or damage, baggage and cargo liability
and workers' compensation.
As a result of the terrorist attacks on
September 11, 2001, aviation insurers have significantly
reduced the maximum amount of insurance coverage available to
commercial air carriers for war-risk coverage, while at the same
time, significantly increasing the premiums for this coverage as
well as for aviation insurance in general. Given the significant
increase in insurance costs, the federal government is providing
insurance assistance under the Air Transportation Safety and
System Stabilization Act. In addition, the federal government
has issued war-risk coverage to U.S. air carriers that is
generally renewable for 60-day periods. However, the
availability of aviation insurance is not guaranteed and our
inability to obtain such coverage at affordable rates may result
in the grounding of our aircraft. Insurance costs are reimbursed
under the terms of our code-share agreement with America West,
United Airlines and our regional jet service agreement with
US Airways.
Employees
As of September 30, 2003, we employed
approximately 3,600 employees. Approximately 2,100 of our
employees are represented by various labor organizations. Our
continued success is partly dependent on our ability to continue
to attract and retain qualified personnel. Historically, we have
had no difficulty attracting qualified personnel to meet our
requirements.
Mesa Airline's flight attendants are
represented by the Association of Flight Attendants
("AFA"). Mesa Airline's contract with the AFA
expires in June 2006. Freedom is currently in negotiations with
the AFA. As Freedom aircraft are transferred to Mesa Airlines,
the affected flight attendants became assimilated into the
existing Mesa Airlines/ AFA contract. The Company's pilots,
which are represented by Air Line Pilot Association
("ALPA") ratified a 54-month contract effective
March 19, 2003. This contract covers the pilots from Air
Midwest, Freedom and Mesa Airlines.
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Although not currently observing high turnover,
pilot turnover at times is a significant issue among regional
carriers when major carriers are hiring experienced commercial
pilots away from regional carriers. The addition of aircraft,
especially new aircraft types, can result in pilots upgrading
between aircraft types and becoming unavailable for duty during
the extensive training periods required. No assurances can be
made that pilot turnover and unavailability will not be a
significant problem in the future, particularly if major
carriers expand their operations. Similarly, there can be no
assurance that sufficient numbers of new pilots will be
available to support any future growth.
No other Mesa subsidiaries are parties to any
other collective bargaining agreement or union contracts.
Essential Air Service Program
The Essential Air Service ("EAS")
program administered by the United States Department of
Transportation ("DOT") guarantees a minimum level of
air service in certain communities, predicated on predetermined
guidelines set forth by Congress. Based on these guidelines, the
DOT subsidizes air service to communities that might not
otherwise have air service. At September 30, 2003, we
provided service to 27 such cities for an annual subsidy of
approximately $17.0 million. EAS rates are normally set for
two-year contract periods for each city. There is no guarantee
that we will continue to receive subsidies for the cities we
serve. The DOT may request competitive proposals from other
airlines at the end of the contract period for EAS service to a
particular city. Proposals, when requested, are evaluated on,
among other things, level of service provided, subsidy
requested, fitness of the applicant and comments from the
communities served. If the funding under this program is
terminated for any of the cities served by the Company, in all
likelihood we would not continue to fly in these markets, and as
a result, we would be forced to find alternative uses for the
Beechcraft 1900D 19-seat turboprop aircraft affected.
Regulation
As an interstate air carrier, we are subject to
the economic jurisdiction, regulation and continuing air carrier
fitness requirements of the DOT. Such requirements include
minimum levels of financial, managerial and regulatory fitness.
The DOT is authorized to establish consumer protection
regulations to prevent unfair methods of competition and
deceptive practices, to prohibit certain pricing practices, to
inspect a carrier's books, properties and records, and to
mandate conditions of carriage. The DOT also has the power to
bring proceedings for the enforcement of air carrier economic
regulations, including the assessment of civil penalties, and to
seek criminal sanctions.
We are subject to the jurisdiction of the FAA
with respect to its aircraft maintenance and operations,
including equipment, ground facilities, dispatch, communication,
training, weather observation, flight personnel and other
matters affecting air safety. To ensure compliance with its
regulations, the FAA requires airlines to obtain an operating
certificate, which is subject to suspension or revocation for
cause, and provides for regular inspections.
Effective March 1997, the FAA required that
regional airlines with aircraft of ten or more passenger seats
operating under FAR Part 135 rules to begin operating those
aircraft under FAR Part 121 regulations. The Company, which at
one time was one of the largest regional airlines operating
under FAR Part 135 regulations, completed the transition to
Part 121 within the FAA's deadline. These requirements
have resulted in a significant increase in Air Midwest's
costs, adversely affecting our ability to profitably serve
certain markets. Such increased costs are primarily related to
additional training, dispatch and maintenance procedures. We
continue to work to minimize the cost of these new operating
procedures while fully complying with FAR Part 121
operating requirements.
We are subject to various federal and local laws
and regulations pertaining to other issues of environmental
protocol. We believe we are in compliance with all governmental
laws and regulations regarding environmental protection.
We are also subject to the jurisdiction of the
Federal Communications Commission with respect to the use of its
radio facilities and the United States Postal Service with
respect to carriage of United States mail.
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Local governments in certain markets have adopted regulations governing various aspects of aircraft operations, including noise abatement and curfews.
Available Information
We maintain a website where additional
information concerning our business can be found. The address of
that website is www.mesa-air.com . We make available free
of charge on our website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports, as soon as
reasonably practicable after we electronically file or furnish
such materials to the SEC.
| Item 2. | Properties |
Our primary property consists of the aircraft
used in the operation of our flights. The following table lists
the aircraft owned and leased by the Company as of
September 30, 2003.
| Number of Aircraft | |||||||||||||||||||||
| Operating on | Passenger | ||||||||||||||||||||
| Type of Aircraft | Owned | Leased | Total | Sept. 30, 2003 | Capacity | ||||||||||||||||
CRJ-200 Regional Jet | - | 43 | 43 | 43 | 50 | ||||||||||||||||
CRJ-700 Regional Jet | - | 15 | 15 | 15 | 64 | ||||||||||||||||
CRJ-900 Regional Jet | - | 6 | 6 | 6 | 90 | ||||||||||||||||
Embraer Regional Jet | - | 32 | 32 | 32 | 50 | ||||||||||||||||
Beechcraft 1900D | 35 | 7 | 42 | 42 | 19 | ||||||||||||||||
Dash 8-200 | - | 12 | 12 | 12 | 37 | ||||||||||||||||
Embraer EMB-120 | - | 6 | 6 | - | 30 | ||||||||||||||||
Total | 35 | 121 | 156 | 150 | |||||||||||||||||
See "Business - Airline
Operations" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Resources" for
a discussion regarding the Company's aircraft fleet
commitments.
In addition to aircraft, we have office and
maintenance facilities to support our operations. Our facilities
are summarized in the following table:
| Approximate | ||||||||||
| Type | Location | Ownership | Square Feet | |||||||
Headquarters | Phoenix, AZ | Leased | 31,000 | |||||||
Training/ Administration | Phoenix, AZ | Leased | 27,000 | |||||||
Hangar | Grand Junction, CO | Leased | 22,500 | |||||||
Hangar | Farmington, NM | Leased | 30,000 | |||||||
Hangar | Phoenix, AZ | Leased | 20,000 | |||||||
Hangar/ Office | Phoenix, AZ | Leased | 21,425 | |||||||
Engine Shop | Phoenix, AZ | Leased | 3,240 | |||||||
Hangar/ Office | Wichita, KS | (1 | ) | 30,000 | ||||||
Hangar/ Office | Dubois, PA | Leased | 23,000 | |||||||
Hangar | Reading, PA | (1 | ) | 56,250 | ||||||
Office (East Coast) | Charlotte, NC | Leased | 3,000 | |||||||
Hangar | Charlotte, NC | Leased | 30,000 | |||||||
| (1) | Building is owned, underlying land is leased. |
We lease ticket counters, check-in and boarding
and other facilities in the passenger terminal areas in the
majority of the airports we serve and staff those facilities
with our personnel. America West, US Airways and
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Frontier also provide facilities, ticket handling and ground support services for the Company at certain airports.
Our corporate headquarters facility is leased
pursuant to a ten-year lease that commenced November 1,
1998. In October 2002, we entered into an amendment to increase
the total square footage to 31,000 and extend the term to
August 31, 2012. Our Phoenix Training/ Administration
facility is subject to an 89-month lease that commenced on
June 1, 2001.
We believe our facilities are suitable and
adequate for our current and anticipated needs.
| Item 3. | Legal Proceedings |
We are also involved in various other legal
proceedings and FAA civil action proceedings that the Company
does not believe will have a material adverse effect upon our
business, financial condition or results of operations, although
no assurance can be given to the ultimate outcome of any such
proceedings.
On October 6, 2003, the Company announced
that it had made an unsolicited proposal to the board of
directors of Atlantic Coast Airlines Holdings, Inc.
("Atlantic Coast") to acquire all the outstanding
stock of Atlantic Coast whereby the Company would issue 0.9 of a
share of its common stock for each Atlantic Coast share. In
connection with such proposal, the Company, on October 15,
2003, filed with the SEC the necessary documents to commence a
shareholder consent solicitation to replace Atlantic
Coast's current board of directors with independent
directors who we believe will give fair consideration to our
proposal and announced its intention to make an exchange offer
for all the outstanding shares of common stock of Atlantic Coast
subject to certain conditions. We believe that our nominees, if
elected, would take such action, to the event that it is in the
best interest of the Atlantic Coast stockholders to
(i) remove the impediments to the consideration of the
Company's exchange offer/merger proposal and any
alternative proposals arising pursuant to that certain Rights
Agreement dated as of January 27, 1999 between Atlantic
Coast and Continental Stock Transfer & Trust Company, and
(ii) exempt the Company's exchange offer/merger
proposal, or any other alternative transaction from the
restrictions of Section 203 of the Delaware General
Corporation Law. We also intended to file with the SEC a
Registration Statement on Form S-4 with respect to the
issuance of our common stock in connection with the offer to
exchange Mesa shares directly with Atlantic Coast shareholders.
In connection with our proposal, several lawsuits
have been filed. On October 27, 2003, Atlantic Coast filed
a complaint against Mesa in the United States District Court for
the District of Columbia alleging that Mesa has made materially
false and misleading statements and omissions in violation of
the federal securities laws in connection with its proposed
consent solicitation and potential exchange offer. Atlantic
Coast's complaint alleges, among other things, that
(i) Mesa failed to disclose Untied Airlines as a
participant in its consent solicitation and proposed
transaction; (ii) Mesa's bid to acquire all of
Atlantic Coast's outstanding stock is motivated by its
desire to use Atlantic Coast's cash on hand to resolve
Mesa's difficulties in obtaining financing for additional
aircraft purchases; (iii) Mesa CEO Jonathan Ornstein and
other Mesa insiders sold a substantial number of Mesa shares in
September 2003, shortly before Mesa announced its takeover bid
of Atlantic Coast; (iv) other stock transactions produced
short-swing profits subject to Section 16(b) of the
Securities Exchange Act of 1934, as amended, which requires a
corporate insider to disgorge any profit from such transactions;
(v) Mesa's directors, who have determined that an
acquisition of Atlantic Coast would be in Mesa's best
interest and are proposing a transaction in which the
stockholders of Atlantic Coast would receive shares of Mesa
common stock, are not sufficiently independent and have engaged
in self-dealing; and (vi) several of Mesa's nominees
to Atlantic Coast's board of directors are subject to
conflicts of interest that would impair their ability to fulfill
their fiduciary obligations to Atlantic Coast. Atlantic Coast in
its complaint seeks injunctive relief with respect to its
allegations. Atlantic Coast in its complaint seeks to
(i) obtain a declaration that Mesa's consent statement
as well as its other statements in conjunction with its proposed
consent solicitation violate Section 14(a) of the Exchange
Act and SEC Rule 14a-9; (ii) obtain a declaration that
Mesa's consent statement as well as its other statements in
conjunction with its proposed consent solicitation and exchange
offer violate Section 14(e) of the Exchange Act;
(iii) require Mesa to correct any alleged material
misstatements and omissions; (iv) enjoin Mesa from
disseminating its consent statement; and (v) enjoin Mesa
from making a proxy consent solicitation and/or tender offer to
Atlantic Coast's stockholders.
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On October 29, 2003, Mesa filed a lawsuit in
the Court of Chancery of the State of Delaware seeking to
require the Atlantic Coast Board to comply with the proper
procedures under Delaware law and the Atlantic Coast by-laws
with respect to fixing a record date for the consent
solicitation and commencing the 60-day solicitation period. The
lawsuit alleges that the action taken by the Atlantic Coast
board to set a record date of October 23, 2003 impedes
Atlantic Coast's shareholders' ability to exercise
their voting rights and right to receive superior value for
their shares. Mesa is seeking from the Court, among other
things, an order for declaratory and injunctive relief declaring
that the October 23, 2003 record date is invalid; declaring
that the consent solicitation has not yet commenced; and
enjoining Atlantic Coast from fixing a record date or declaring
that the consent solicitation has commenced.
On November 25, 2003 and December 2,
2003, Atlantic Coast announced respectively (i) that the
consent it received had been revoked and (ii) the
cancellation of the record date previously set in connection
with Mesa's consent solicitation.
On November 26, 2003, Atlantic Coast amended
its complaint. The amended complaint, in addition to the
allegations contained in its initial complaint filed on
October 27, 2003, claims that (i) United Airlines and
Mesa acted in concert and conspired in violation of
Section 1 of the Sherman Antitrust Act and
(ii) Mesa's attempt to acquire Atlantic Coast is in
violation of Section 7 of the Clayton Act. Atlantic Coast
simultaneously filed a motion for a preliminary injunction that
would, among other things, prohibit Mesa from commencing our
consent solicitation and from taking any other action to attempt
to acquire control of Atlantic Coast or its board of directors.
On November 30, 2003, Mesa filed a
counterclaim against Atlantic Coast. Mesa's counterclaim
alleges that Atlantic Coast's preliminary proxy statement
and other public statements made in connection with Mesa's
consent solicitation and Atlantic Coast's business model of
becoming an independent low-fare airline are materially false
and misleading, in violation of Section 14(a) of the
Exchange Act.
On December 8, 2003, the Corporation Counsel
for the District of Columbia initiated an antitrust
investigation to determine whether Mesa's proposed
acquisition of Atlantic Coast violates Section 1 of the
Sherman Act or Section 7 of the Clayton Act or the District
of Columbia Antitrust Act. Mesa intends to fully comply with
this inquiry.
On December 18, 2003, the United States
District Court for the District of Columbia enjoined us from
proceeding with our consent solicitation and our exchange offer
pending final resolution of Atlantic Coast's antitrust
claims against Mesa. On December 19, 2003, the United
States Department of Justice initiated an antitrust
investigation to determine whether Mesa's proposed
acquisition of Atlantic Coast violates Section 1 of the
Sherman Act or Section 7 of the Clayton Act. Mesa intends
to fully comply with this inquiry. On December 23, 2003,
Mesa announced that it would not be moving forward with either
its proposed consent solicitation or exchange offer for Atlantic
Coast.
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Table of Contents
| Item 4. | Submission of Matters to a Vote of Security Holders |
None.
Executive Officers of the Registrant
The following table sets forth the names and ages
of the executive officers of the Company and certain additional
information:
| Name | Age | Position | ||||
Jonathan G. Ornstein | 46 | Chief Executive Officer | ||||
Michael J. Lotz | 43 | President and Chief Operating Officer | ||||
George Murnane III | 45 | Executive Vice President and Chief Financial Officer | ||||
Michael Ferverda | 59 | Senior Vice President - West Coast Operations and President - Freedom Airlines, Inc. | ||||
Brian S. Gillman | 34 | Vice President, General Counsel and Secretary | ||||
F. Carter Leake | 41 | Senior Vice President, US Airways Express | ||||
Robert B. Stone | 47 | Senior Vice President and Treasurer | ||||
Jonathan G. Ornstein was appointed President and Chief
Executive Officer of Mesa Air Group, Inc. effective May 1,
1998. Mr. Ornstein relinquished his position as President
of the Company in June 2000. From April 1996 to his joining the
Company as Chief Executive Officer, Mr. Ornstein served as
President and Chief Executive Officer and Chairman of Virgin
Express S.A./ N.V., a European airline. From 1995 to April 1996,
Mr. Ornstein served as Chief Executive Officer of Virgin
Express Holdings, Inc. Mr. Ornstein joined Continental
Express Airlines, Inc., as President and Chief Executive Officer
in July 1994 and, in November 1994, was named Senior Vice
President, Airport Services at Continental Airlines, Inc.
Mr. Ornstein was previously employed by the Company from
1988 to 1994, as Executive Vice President and as President of
the Company's WestAir Holding, Inc., subsidiary.
Michael J. Lotz ,
President and Chief Operating Officer, joined the Company in
July 1998. In January 1999, Mr. Lotz became Chief Operating
Officer. In August 1999, Mr. Lotz became the Company's
Chief Financial Officer and in January 2000 returned to the
position of Chief Operating Officer. On June 22, 2000,
Mr. Lotz was appointed President of the Company. Prior to
joining the Company, Mr. Lotz served as Chief Operating
Officer of Virgin Express, S.A./ N.V., a position he held from
October 1996 to June 1998. Previously, Mr. Lotz was
employed by Continental Airlines, Inc., most recently as Vice
President of Airport Operations, Properties and Facilities at
Continental Express.
George Murnane III ,
Executive Vice President and Chief Financial Officer, was
appointed Executive Vice President of the Company effective
December 2001 and Chief Financial Officer in January 2003.
Mr. Murnane served as a director of the Company from June
1999 until October 2003. Mr. Murnane has served as the
President of Barlow Management, Inc. from 1998 until October
2003. From 1996 to December 2001, Mr. Murnane was a
Director and Executive Vice President of International Airline
Support Group, Inc., a leading redistributor of aftermarket
commercial aircraft spare parts and lessor and trader of
commercial aircraft and engines, most recently as its Chief
Operating Officer. From 1995 to 1996, Mr. Murnane served as
Executive Vice President and Chief Operating Officer of Atlas
Air, Inc., an air cargo company. For 1986 to 1996, he was an
investment banker with the New York investment banking firm of
Merrill Lynch & Co., most recently as a Director in the
firm's Transportation Group.
Michael Ferverda ,
Senior Vice President - West Coast Operations and
President of Freedom Airlines, Inc. ("FAI"), joined
the Company in 1990. He was appointed President of Freedom
Airlines in May 2002 and Senior Vice President - West
Coast Operations in February 2003. Prior to the appointments,
Mr. Ferveda served as the Senior Vice President of
Operations for Mesa Airlines, Inc. Mr. Ferverda has
15
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served the Company in various capacities including pilot, Flight Instructor/ Check Airman, Assistant Chief Pilot, FAA Designated Examiner, FAA Director of Operations and Divisional Vice President. Mr. Ferverda was a pilot with Eastern Airlines from 1973 to 1989. Prior to joining Eastern Airlines, Mr. Ferverda served as an Aviator in the United States Navy. Mr. Ferverda is a graduate of Indiana University.
Brian S. Gillman ,
Vice President, General Counsel and Secretary, joined the
Company in February 2001. From July 1996 to February 2001, he
served as Vice President, General Counsel and Secretary of
Vanguard Airlines, Inc. in Kansas City, Missouri. From September
1994 to July 1996, Mr. Gillman was a corporate associate in
the law firm of Stinson, Mag & Fizzell, P.C., Kansas
City, Missouri. Mr. Gillman received his Juris Doctorate
and B.B.A. in Accounting from the University of Iowa in 1994 and
1991, respectively.
F. Carter Leake ,
Senior Vice President, US Airways Express, joined the Company in
2001. Mr. Leake served as Executive Vice-President of
CCAir, Inc., a former wholly-owned subsidiary of the Company in
January 2001 and was promoted to President of CCAir in October
2001. In February 2003, Mr. Leake was appointed to Senior
Vice President - US Airways Express. Prior to joining
the Company, Mr. Leake served as a Director of Sales for
Bombardier Regional Aircraft from November 1996 to January 2001.
Previously, Mr. Leake was an analyst with SH&E, an
aviation consulting firm in New York, and a US Air Force
military pilot.
Robert B. Stone ,
Senior Vice President and Treasurer, joined the Company in
January 2000 as Chief Financial Officer. Mr. Stone was
appointed to the position of Senior Vice President in January
2003. Prior to joining the Company, Mr. Stone was employed
by the Boeing Company for more than 20 years, most recently
as Vice President, Financial Planning and Analysis.
Mr. Stone obtained his MBA from Pacific Lutheran University
and his Bachelor of Arts in Business Administration at the
University of Washington.
PART II
| Item 5. | Market for Registrant's Common Equity and Related Stockholder Matters |
Market Price of Common Stock
The following table sets forth, for the periods
indicated, the high and low price per share of Mesa common stock
for the two most recent fiscal years, as reported by NASDAQ.
Mesa's common stock is traded on the NASDAQ National Market
System under the symbol "MESA."
| Fiscal 2003 | Fiscal 2002 | |||||||||||||||
| Quarter | High | Low | High | Low | ||||||||||||
First | $ | 7.09 | $ | 2.71 | $ | 7.89 | $ | 2.80 | ||||||||
Second | 4.97 | 3.00 | 11.43 | 7.51 | ||||||||||||
Third | 7.96 | 4.50 | 11.74 | 7.05 | ||||||||||||
Fourth | 13.20 | 8.42 | 10.49 | 3.62 | ||||||||||||
On December 8, 2003, we had approximately
1,213 shareholders of record. We have never paid cash dividends
on our common stock. The payment of future dividends is within
the discretion of our board of directors and will depend upon
our future earnings, if any, our capital requirements, bank
financing, financial condition and other relevant factors.
Recent Sales of Unregistered
Securities
On February 7, 2002, in connection with an
agreement entered into with Raytheon Aircraft Company
("Raytheon"), we granted Raytheon a warrant to
purchase up to 233,068 shares of our common stock at a per share
exercise price of $10.00. Raytheon must pay a purchase price of
$1.50 per share underlying the warrant. The warrant is
exercisable at any time over a three-year period following its
date of issuance. Absent a default by us under the agreement
with Raytheon in which case vesting is accelerated, the shares
underlying the warrant vest (and are therefore purchasable by
Raytheon) according to the following schedule: 13,401 shares in
fiscal year 2001; 116,534 shares in fiscal year 2002; 58,267
shares in fiscal year 2003 and 44,866 shares in
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fiscal year 2004. Raytheon has exercised its option to purchase the 2001, 2002 and 2003 warrants but has not yet exercised the warrant. The sale of the warrant and the shares underlying the warrant were made pursuant to an exemption from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.
In June 2003, the Company completed the private
placement of senior convertible notes due 2023. At maturity, the
principal amount of each note will be $1,000 and the aggregate
amount due will be $252 million. The notes are convertible
into shares of the Company's common stock at a conversion
rate of 39.727 shares per $1,000 in principal amount at maturity
of the notes which equals an initial conversion price of
approximately $10.00 per share. This conversion rate is subject
to adjustment in certain circumstances. Holders of the notes may
convert their notes only if: (i) the sale price of our
common stock exceeds 110% of the accreted conversion price for
at least 20 trading days in the 30 consecutive trading days
ending on the last trading day of the preceding quarter;
(ii) prior to June 16, 2018, the trading price for the
notes falls below certain thresholds; (iii) the notes have
been called for redemption; or (iv) specified corporate
transactions occur. The Company may redeem the notes, in whole
or in part, beginning on June 16, 2008, at a redemption
price equal to the issue price, plus accrued original issue
discount, plus any accrued and unpaid cash interest. The holders
of the notes may require the Company to repurchase the notes on
June 16, 2008 at a price of $397.27 per note plus accrued
and unpaid cash interest, if any, on June 16, 2013 at a
price of $540.41 per note plus accrued and unpaid cash interest,
if any, and on June 16, 2018 at a price of $735.13 per note
plus accrued and unpaid cash interest, if any.
| Item 6. | Selected Financial Data |
Selected Financial Data and Operating
Statistics
The selected financial data as of and for each of
the five years ended September 30, 2003, are derived from
the Consolidated Financial Statements of the Company and its
subsidiaries and should be read in conjunction with the
Consolidated Financial Statements included elsewhere in this
Form 10-K and the related notes thereto and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." The Consolidated
Financial Statements of the Company for the fiscal years ended
September 30, 2003, 2002, 2001 and 2000, have been audited
by Deloitte & Touche LLP, independent auditors. The
Consolidated Financial Statements of the Company for the fiscal
year ended September 30, 1999 have been audited by KPMG
LLP, independent auditors.
In thousands of dollars except per share data and
average fare amounts and as otherwise indicated.
| 2003(1) | 2002(2) | 2001(3) | 2000(4) | 1999(5) | |||||||||||||||||
Consolidated Statement of Operations Data: | |||||||||||||||||||||
Operating revenues | $ | 599,990 | $ | 496,783 | $ | 523,378 | $ | 471,612 | $ | 404,616 | |||||||||||
Operating expenses | $ | 547,179 | $ | 503,005 | $ | 594,020 | $ | 429,798 | $ | 402,487 | |||||||||||
Operating income (loss) | $ | 52,811 | $ | (6,222 | ) | $ | (70,642 | ) | $ | 41,814 | $ | 2,129 | |||||||||
Interest expense | $ | 5,890 | $ | 5,440 | $ | 13,469 | $ | 15,463 | $ | 19,096 | |||||||||||
Income (loss) before income taxes | $ | 45,326 | $ | (13,524 | ) | $ | (71,375 | ) | $ | 28,031 | $ | (12,815 | ) | ||||||||
Net income (loss) | $ | 27,961 | $ | (9,309 | ) | $ | (48,076 | ) | $ | 58,872 | $ | (13,412 | ) | ||||||||
Net income (loss) per share: | |||||||||||||||||||||
Basic | $ | 0.89 | $ | (.28 | ) | $ | (1.50 | ) | $ | 1.78 | $ | (0.40 | ) | ||||||||
Diluted | $ | 0.83 | $ | (.28 | ) | $ | (1.50 | ) | $ | 1.77 | $ | (0.40 | ) | ||||||||
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| 2003(1) | 2002(2) | 2001(3) | 2000(4) | 1999(5) | |||||||||||||||||
Consolidated Balance Sheet Data: | |||||||||||||||||||||
Working capital | $ | 177,051 | $ | 73,501 | $ | 80,646 | $ | 63,953 | $ | 33,040 | |||||||||||
Total assets | $ | 474,163 | $ | 352,343 | $ | 423,986 | $ | 386,594 | $ | 403,773 | |||||||||||
Long-term debt, excluding current portion | $ | 199,023 | $ | 110,210 | $ | 118,492 | $ | 136,127 | $ | 114,234 | |||||||||||
Stockholders' equity | $ | 116,971 | $ | 89,100 | $ | 103,126 | $ | 144,574 | $ | 96,435 | |||||||||||
Consolidated Operating Statistics: | |||||||||||||||||||||
Passengers carried | 6,444,459 | 5,118,839 | 4,789,180 | 4,457,989 | 4,255,696 | ||||||||||||||||
Revenue passenger miles (000) | 2,814,480 | 1,986,164 | 1,796,058 | 1,561,197 | 1,324,867 | ||||||||||||||||
Available seat miles ("ASM") (000) | 4,453,707 | 3,459,427 | 3,289,216 | 2,951,116 | 2,594,861 | ||||||||||||||||
Block hours | 393,335 | 352,323 | 383,310 | 395,446 | 367,362 | ||||||||||||||||
Average passenger journey in miles | 436 | 388 | 375 | 350 | 311 | ||||||||||||||||
Average stage length in miles | 337 | 298 | 268 | 250 | 225 | ||||||||||||||||
Load factor | 63.2 | % | 57.4 | % | 54.6 | % | 52.9 | % | 51.1 | % | |||||||||||
Break-even passenger load factor | 46.3 | % | 60.1 | % | 63.8 | % | 48.5 | % | 52.7 | % | |||||||||||
Revenue per ASM in cents | 13.4 | 14.4 | 15.9 | 16.0 | 15.3 | ||||||||||||||||
Operating cost per ASM in cents | 12.3 | 14.6 | 18.1 | 14.6 | 15.5 | ||||||||||||||||
Average yield per revenue passenger mile in cents | 21.3 | 25.0 | 28.8 | 30.2 | 30.1 | ||||||||||||||||
Average fare | $ | 89.44 | $ | 93.93 | $ | 106.18 | $ | 103.45 | $ | 93.59 | |||||||||||
Aircraft in service | 150 | 124 | 118 | 133 | 140 | ||||||||||||||||
Cities served | 163 | 147 | 153 | 120 | 138 | ||||||||||||||||
Number of employees | 3,600 | 3,100 | 2,820 | 3,480 | 3,423 | ||||||||||||||||
| (1) | Net income in fiscal 2003 includes the effect of impairment and restructuring charges of $1.1 million (pretax) and the reversal of CCAir impairment and restructuring charges of $12.0 million (pretax). |
| (2) | Net loss in fiscal 2002 includes the effect of impairment and restructuring charges of $26.7 million (pretax). |
| (3) | Net loss in fiscal 2001 includes the effect of impairment and restructuring charges of $80.9 million (pretax). |
| (4) | Net earnings in fiscal 2000 include the cumulative effect of the accounting change from the accrual method to the direct expense method for maintenance costs of $18.1 million (pretax) and the benefit of reversing a valuation allowance for deferred tax assets of $21.9 million. |
| (5) | Net loss in fiscal 1999 includes the effect of impairment and restructuring charges of $28.9 million (pre-tax) and the reversal of a previous charge for the cancellation of the UAL code share agreement of $14.0 million (pretax). |
Our June 9, 1999 acquisition of CCAir was
accounted for as a pooling of interests and, accordingly, our
consolidated financial statements for fiscal 1999 have been
restated to include the results of CCAir for the entire year.
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis provides
information which management believes is relevant to an
assessment and understanding of the Company's results of
operations and financial condition. The discussion should be
read in conjunction with the Consolidated Financial Statements
and the related notes thereto, and the Selected Financial Data
and Operating Statistics contained elsewhere herein.
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Critical Accounting Estimates and
Judgments
The discussion and analysis of our financial
condition and results of operations is based upon our financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. In connection with the preparation of these financial
statements, we are required to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenue, and
expenses, and related disclosure of contingent liabilities. On
an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, the allowance for doubtful
accounts, medical claims reserve, valuation of assets held for
sale and costs to return aircraft and a valuation allowance for
certain deferred tax assets. We base our estimates on historical
experience and on various other assumptions that we believe are
reasonable under the circumstances. Such historical experience
and assumptions form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We have identified the accounting policies below
as critical to our business operations and the understanding of
our results of operations. The impact of these policies on our
business operations is discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected
financial results. The discussion below is not intended to be a
comprehensive list of our accounting policies. For a detailed
discussion on the application of these and other accounting
policies, see Note 1 in the Notes to the Consolidated Financial
Statements, which contains accounting policies and other
disclosures required by accounting principles generally accepted
in the United States of America.
| Revenue Recognition |
The America West, United, Frontier and the US
Airways regional jet code-share agreements are revenue-guarantee
flying agreements. Under a revenue-guarantee arrangement, the
major airline generally pays a fixed monthly minimum amount,
plus certain additional amounts based upon the number of flights
flown and block hours performed. The contracts also include
reimbursement of certain costs incurred by Mesa in performing
flight services. These costs, known as "pass-through
costs," may include aircraft ownership cost, passenger and
hull insurance, aircraft property taxes as well as, fuel,
landing fees and catering. The contracts also include a profit
component that may be determined based on a percentage of
profits on the Mesa flown flights, a profit margin on certain
reimbursable costs as well as a profit margin based on certain
operational benchmarks. The Company primarily recognizes revenue
under its revenue-guarantee agreements when the transportation
is provided. The majority of the revenue under these contracts
is known at the end of the accounting period and is booked as
actual. The Company performs an estimate of the profit component
based upon the information available at the end of the
accounting period. All revenue recognized under these contracts
is presented at the gross amount billed.
The America West, US Airways, and Midwest
Airlines B1900D turboprop code-share agreements are pro-rate
agreements. Under a prorate agreement, the Company receives a
percentage of the passenger's fare based on a standard
industry formula that allocates revenue based on the percentage
of transportation provided. Revenue from our pro-rate agreements
and our independent operation is recognized when transportation
is provided. Tickets sold but not yet used are included in air
traffic liability on the consolidated balance sheets.
The Company also receives subsidies for providing
scheduled air service to certain small or rural communities.
Such revenue is recognized in the period in which the air
service is provided. The amount of the subsidy payments is
determined by the United States Department of Transportation on
the basis of its evaluation of the amount of revenue needed to
meet operating expenses and to provide a reasonable return on
investment with respect to eligible routes. EAS rates are
normally set for two-year contract periods for each city.
| Allowance for Doubtful Accounts |
Amounts billed by the Company under revenue
guarantee arrangements are subject to our interpretation of the
applicable code-share agreement and are subject to audit by our
code-share partners. Periodically our
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code-share partners dispute amounts billed and pay amounts less than the amount billed. Ultimate collection of the remaining amounts not only depends upon Mesa prevailing under audit, but also upon the financial well-being of the code-share partner. As such, the Company periodically reviews amounts past due and records a reserve for amounts estimated to be uncollectible. The allowance for doubtful accounts was $4.7 million and $12.8 million at September 30, 2003 and 2002, respectively. If the Company's actual ability to collect these receivables and the actual financial viability of its partners is materially different than estimated, the Company's estimate of the allowance could be materially understated or overstated.
| Accrued Health Care Costs |
The Company is currently self-insured for health
care costs and as such, a reserve for the cost of claims that
have not been paid as of the balance sheet date is estimated.
The Company's estimate of this reserve is based upon
historical claim experience and upon the recommendations of its
health care provider. At September 30, 2003 and 2002, the
Company accrued $1.8 million and $2.0 million,
respectively, for the cost of future health care claims. If the
ultimate development of these claims is significantly different
than those that have been estimated, the reserves for future
health care claims could be materially overstated or understated.
| Long-lived Assets, Aircraft and Parts Held for Sale |
Property and equipment are stated at cost and
depreciated over their estimated useful lives to their estimated
salvage values using the straight-line method. Long-lived assets
to be held and used are reviewed for impairment whenever events
or changes in circumstances indicate that the related carrying
amount may be impaired. Under the provisions of Statement of
Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," the
Company records an impairment loss if the undiscounted future
cash flows are found to be less than the carrying amount of the
asset. If an impairment loss has occurred, a charge is recorded
to reduce the carrying amount of the asset to fair market value.
Long-lived assets to be disposed of are reported at the lower of
carrying amount or fair value less cost to sell.
| Valuation Allowance for Deferred Tax Assets |
The Company records deferred tax assets for the
value of benefits expected to be realized from the utilization
of alternative minimum tax credit carryforwards and state and
federal net operating loss carryforwards. The Company
periodically reviews these assets for realizability based upon
expected taxable income in the applicable taxing jurisdictions.
To the extent the Company believes some portion of the benefit
may not be realizable, an estimate of the unrealized portion is
made and an allowance is recorded. At September 30, 2003 and
2002, the Company had a valuation allowance for certain deferred
tax assets not expected to be realized of $0.1 million and
$2.9 million, respectively. Realization of these deferred
tax assets is dependent upon generating sufficient taxable
income prior to expiration of any net operating loss
carryforwards. The Company believes it will generate sufficient
taxable income in the future to realize these net operating loss
carryforwards as the Company has had pretax income in fiscal
2003, 2002 and 2001 (excluding impairment charges) and as the
Company has taken steps to minimize the financial impact of its
unprofitable subsidiaries. Although realization is not assured,
management believes it is more likely than not that the recorded
deferred tax asset, net of the valuation allowance provided,
will be realized. If the ultimate realization of these deferred
tax assets is significantly different than those that have been
estimated, the valuation allowance for deferred tax assets could
be materially overstated or understated.
| Results of Operations |
| General |
Mesa Air Group, Inc. and its subsidiaries
(collectively referred to herein as "Mesa" or the
"Company") is an independent regional airline serving
163 cities in 40 states, Canada, the Bahamas and Mexico. At
September 30, 2003, Mesa operated a fleet of
150 aircraft and had approximately 943 daily departures.
Mesa's airline operations during fiscal year
2003 were primarily conducted by three regional airline
subsidiaries primarily utilizing hub-and-spoke systems. Mesa
Airlines, a wholly owned subsidiary of Mesa,
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operates as America West Express under a code-share and revenue-sharing agreement with America West Airlines, Inc., as US Airways Express under a code-sharing agreement with US Airways, Inc., as United Jet Express under a code-sharing agreement with United and as Frontier Jet-Express under a code-sharing agreement with Frontier. Air Midwest, Inc., a wholly owned subsidiary of Mesa, operates under a code-sharing agreement with US Airways and flies as US Airways Express and also operates an independent division, doing business as Mesa Airlines, from Albuquerque, New Mexico and Dallas, Texas. Air Midwest flights flown as Mesa Airlines in Phoenix operate under a code-sharing agreement with America West. Air Midwest also has a code-sharing agreement with Midwest Airlines in Kansas City on flights operated as US Airways Express. In addition, Freedom Airlines, Inc., a wholly owned subsidiary of Mesa Air Group began operating as America West Express pursuant to the code-share and revenue-sharing agreement with America West in October 2002. Prior to it ceasing operations on November 3, 2002, CCAir, a wholly owned subsidiary of Mesa, operated under a code-share agreement with US Airways that permitted CCAir to operate under the name US Airways Express and to charge their joint passengers on a combined basis with US Airways.
The majority of the Company's fleet of
Beechcraft 1900D aircraft is owned by Mesa Airlines. As such,
the associated aircraft and debt are recorded on the separate
company financial statements of Mesa Airlines. These aircraft
are operated by Air Midwest, and as a result, the depreciation
and interest associated with these aircraft are charged to Air
Midwest by Mesa. Any impairment charges related to these
aircraft are recorded on the separate company financial
statements of Mesa Airlines.
The following tables set forth selected operating
and financial data of the Company for the years indicated below.
| Operating Data | ||||||||||||
| Years Ended September 30, | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
Passengers | 6,444,459 | 5,118,839 | 4,789,180 | |||||||||
Available seat miles ("ASM")(000s) | 4,453,707 | 3,459,427 | 3,289,216 | |||||||||
Revenue passenger miles (000s) | 2,814,480 | 1,986,164 | 1,796,058 | |||||||||
Load factor | 63.2 | % | 57.4 | % | 54.6 | % | ||||||
Yield per revenue passenger mile (cents) | 21.3 | 25.0 | 28.8 | |||||||||
Revenue per ASM (cents) | 13.4 | 14.4 | 15.9 | |||||||||
Operating cost per ASM (cents) | 12.3 | 14.6 | 18.1 | |||||||||
Average stage length (miles) | 337 | 298 | 268 | |||||||||
Number of operating aircraft in fleet | 150 | 124 | 118 | |||||||||
Gallons of fuel consumed | 115,640,808 | 90,969,241 | 86,977,636 | |||||||||
Block hours flown | 393,335 | 352,323 | 383,310 | |||||||||
Departures | 296,921 | 285,680 | 323,675 | |||||||||
Operating Expense Data
Years Ended
September 30, 2003, 2002 and 2001
| 2003 | 2002 | 2001 | ||||||||||||||||||||||||||||||||||
| Percent | Cost | Percent | Cost | Percent | Cost | |||||||||||||||||||||||||||||||
| of Total | Per | of Total | Per | of Total | Per | |||||||||||||||||||||||||||||||
| Amount | Revenues | ASM | Amount | Revenues | ASM | Amount | Revenues | ASM | ||||||||||||||||||||||||||||
| (000s) | (Cents) | (000s) | (Cents) | (000s) | (Cents) | |||||||||||||||||||||||||||||||
Flight operations | $ | 222,265 | 37.0 | % | 5.0 | $ | 184,301 | 37.1 | % | 5.3 | $ | 175,650 | 33.6 | % | 5.3 | |||||||||||||||||||||
Fuel | 113,370 | 18.9 | % | 2.5 | 78,200 | 15.7 | % | 2.3 | 97,294 | 18.6 | % | 3.0 | ||||||||||||||||||||||||
Maintenance | 115,573 | 19.3 | % | 2.6 | 100,037 | 20.1 | % | 2.9 | 100,848 | 19.3 | % | 3.1 | ||||||||||||||||||||||||
Aircraft & traffic servicing | 50,053 | 8.3 | % | 1.1 | 46,057 | 9.3 | % | 1.3 | 53,776 | 10.3 | % | 1.6 | ||||||||||||||||||||||||
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| 2003 | 2002 | 2001 | ||||||||||||||||||||||||||||||||||
| Percent | Cost | Percent | Cost | Percent | Cost | |||||||||||||||||||||||||||||||
| of Total | Per | of Total | Per | of Total | Per | |||||||||||||||||||||||||||||||
| Amount | Revenues | ASM | Amount | Revenues | ASM | Amount | Revenues | ASM | ||||||||||||||||||||||||||||
| (000s) | (Cents) | (000s) | (Cents) | (000s) | (Cents) | |||||||||||||||||||||||||||||||
Promotion & sales | 7,966 | 1.3 | % | 0.2 | 12,663 | 2.5 | % | 0.4 | 22,243 | 4.2 | % | 0.7 | ||||||||||||||||||||||||
General & administrative | 37,982 | 6.3 | % | 0.9 | 44,140 | 8.9 | % | 1.3 | 49,676 | 9.5 | % | 1.5 | ||||||||||||||||||||||||
Depreciation & amortization | 10,927 | 1.8 | % | 0.2 | 10,932 | 2.2 | % | 0.3 | 13,680 | 2.6 | % | 0.4 | ||||||||||||||||||||||||
Impairment and restructuring charge | (10,957 | ) | (1.8 | )% | (0.2 | ) | 26,675 | 5.4 | % | 0.8 | 80,853 | 15.4 | % | 2.5 | ||||||||||||||||||||||
Total operating expenses | $ | 547,179 | 91.2 | % | 12.3 | $ | 503,005 | 101.2 | % | 14.6 | $ | 594,020 | 113.5 | % | 18.1 | |||||||||||||||||||||
Interest expense | $ | 5,890 | 1.0 | % | 0.1 | $ | 5,440 | 1.1 | % | 0.2 | $ | 13,469 | 2.6 | % | 0.4 | |||||||||||||||||||||
Other income (expense) | $ | (2,758 | ) | 0.5 | % | 0.1 | $ | (3,404 | ) | 0.7 | % | (0.1 | ) | $ | 10,914 | 2.1 | % | 0.3 | ||||||||||||||||||
Note: Numbers in the table above may not be
recalculated due to rounding
| Mesa/ | Air | |||||||||||||||||||||||
| Year Ended September 30, 2003 (000's) | Freedom | Midwest | CCAir | Other | Elimination | Total | ||||||||||||||||||
Total operating revenues | $ | 507,555 | $ | 86,142 | $ | 1,254 | $ | 175,956 | $ | (170,917 | ) | $ | 599,990 | |||||||||||
Total operating expenses | 467,046 | 92,687 | (10,556 | ) | 132,208 | (134,206 | ) | 547,179 | ||||||||||||||||
Operating income (loss) | 40,509 | (6,545 | ) | 11,810 | 43,748 | (36,711 | ) | 52,811 | ||||||||||||||||
| Mesa/ | Air | |||||||||||||||||||||||
| Year Ended September 30, 2002 (000's) | Freedom | Midwest | CCAir | Other | Elimination | Total | ||||||||||||||||||
Total operating revenues | $ | 372,370 | $ | 94,333 | $ | 24,335 | $ | 5,745 | $ | - | $ | 496,783 | ||||||||||||
Total operating expenses | 346,284 | 93,250 | 58,418 | 5,053 | - | 503,005 | ||||||||||||||||||
Operating income (loss) | 26,086 | 1,083 | (34,083 | ) | 692 | - | (6,222 | ) | ||||||||||||||||
| Mesa/ | Air | |||||||||||||||||||||||
| Year Ended September 30, 2001 (000's) | Freedom | Midwest | CCAir | Other | Elimination | Total | ||||||||||||||||||
Total operating revenues | $ | 320,766 | $ | 135,147 | $ | 61,069 | $ | 6,396 | $ | - | $ | 523,378 | ||||||||||||
Total operating expenses | 389,038 | 129,820 | 67,301 | 7,861 | - | 594,020 | ||||||||||||||||||
Operating income (loss) | (68,272 | ) | 5,327 | (6,232 | ) | (1,465 | ) | - | (70,642 | ) | ||||||||||||||
Fiscal 2003 Versus Fiscal 2002
| Operating Revenues |
In fiscal 2003, operating revenues increased by
$103.2 million (20.8%) to $600.0 million, from
$496.8 million in fiscal 2002. Mesa and Freedom revenue
increased $135.2 million. The primary reason for the
increase was the additional revenue derived from placing
30 regional jets into service in 2003. Offsetting this
increase, pro-rate revenue at Air Midwest decreased
$8.2 million and pro-rate revenue at CCAir decreased
$23.1 million. The decrease in pro-rate revenue was
primarily due to a 31% decrease in passengers carried by Air
Midwest and CCAir, the reduction of four turboprop aircraft in
service (as a result of the cessation of CCAir's
operations), as well as a nine percent decrease in the average
fare as a result of industry economic conditions. Under
revenue-guarantee contracts, we are substantially insulated from
industry passenger trends.
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| Operating Expenses |
| Flight Operations |
In fiscal 2003, flight operations expense
increased 20.6% to $222.3 million (5.0 cents per ASM)
from $184.3 million (5.3 cents per ASM) in fiscal
2002. Flight operations expense for Mesa and Freedom increased
$58.2 million due to the additional costs associated with
operating the 30 additional regional jets that were placed
into service in 2003, net of any purchase incentives received in
conjunction with the additional jets. This increase was offset
by a decrease of $14.2 million in flight operations expense
at CCAir, due to the cessation of its operations in November of
2002. The decrease on a cost per ASM basis for the year ended
September 30, 2003, is a result of the increase in both the
proportion of regional jets to turboprops, as well as the
addition of larger regional jets which, on a relative basis,
produce more ASMs per mile. Regional jets generally have lower
operating costs per ASM than turboprop aircraft.
| Fuel |
In fiscal 2003, fuel expense increased 45.0% to
$113.4 million (2.5 cents per ASM) from
$78.2 million (2.3 cents per ASM) in fiscal 2002. Fuel
expense at Mesa and Freedom increased $35.1 million due to
the addition of regional jets and fuel expense at Air Midwest
increased $2.6 million due to the additional flying assumed
by Air Midwest after the cessation of operations at CCAir. The
increase is also due to a 14% increase in the average price of
fuel, or 12 cents per gallon, due to the rising costs of
fuel in the past year primarily as a result of the war in Iraq.
These increases were offset by a decrease in fuel expense at
CCAir of $2.3 million due to the cessation of its
operations. The increase on an ASM basis is due to the 14%
increase in the average price of a gallon of fuel.