Mesa's Recovery Plan- United Deal and Asset Sales Key

United Airlines has thrown a lifeline to its struggling regional subsidiary Mesa Airlines. Increasing block-hour rates, reducing debt obligations, and selling excess aircraft and engines should give Mesa some extra breathing space but the situation remains challenging. Mesa has faced a difficult financial situation for some time. The airline reported a $-47.6 million net loss for Q3 and had $566.3 million in net debt on June 30, primarily with aircraft and engines. The company still hasn’t filed its 10-K document for the nine months of 2023 and has not complied with regulations. In an SEC filing on Thursday, Mesa said it had “identified an approximately $30 million factual balance sheet misstatement associated with the classification of debt on the condensed consolidated balance sheet as of June 30, 2023. As a result, the $30 million should have been classified as current debt on the face of the balance sheet as opposed to long-term debt.” The airline’s management acknowledged that “a material weakness exists in the Company’s internal control over financial reporting and that the Company’s disclosure controls and procedures were not effective.” This situation is being corrected as quickly as possible. Revised capacity purchase agreement To improve the financial situation, Mesa has agreed on a revised capacity purchase agreement with United. This retroactively increases block-hours from October 1 last year until December 31, 2024, generating $63.5 million in additional revenues. United has also revised a credit facility. In December 2022, United took a 10 percent share in Mesa after the company terminated its CPA with American Airlines. Mesa had been making a $5 million monthly loss on the agreement with American. Complimentary to the shares, United also provided a $41.2 million credit facility that allowed Mesa to refinance its own credit facility. Under the revised agreement, United has agreed to reduce the outstanding balance of the facility by $2.1 million. United will also relieve the full $10.5 million bridge loan to Mesa in exchange for Mesa’s share in Swedish startup Heart Aerospace, which is developing a hybrid-electric aircraft. In July 2021, Mesa acquired a stake in Heart for $5.0 million and said it would place an order for 100 ES-19 aircraft. Since then, Heart has upsized the model to the ES-30. Mesa continues to have a minor share in Heart, consisting of 222.222 unvested warrants for $0.01 each. Also part of the elimination of the bridge loan is Mesa’s equity investment in Archer Aerospace, which has now been released as collateral. Since February 2021, Mesa has 2.27 million vested and 1.17 million unvested warrants for $0.01 in the eVTOL maker. Selling assets to lower debt Mesa will pay down $174.3 million in debt from the gross proceeds of $198 million from selling Mitsubishi CRJ-900s and General Electric CF34 engines. Three CRJ-900 NextGen aircraft were sold in the September quarter, followed by four more a little later. This generated $71.2 million in proceeds, of which $63.2 million was used for retiring a loan with the Export Development Bank of Canada and repaying Mitsubishi Heavy Industries RJ Aviation Group. Another $21 million in gross proceeds came from selling another seven CRJ-900s earlier during Q4. Later during the quarter, Mesa sold 15 CRJ-900s and 65 engines for $105.8 million, which reduced debt and lease obligations by $89.8 million and bolstered liquidity by $18.2 million. Mesa says that the transactions helped it to reduce debt from $701.3 million in Q1 to an estimated $539.7 million by the end of Q4. This should come down to $310.3 million by the end of 2024 when proceeds of $225.4 million from the sale of more aircraft and engines are completed. “Of the $310.3 million debt balance, $158.8 million is attributable to Embraer E-175 aircraft that are pass-through to United Airlines under Mesa’s CPA; $110.7 million is U.S. Treasury debt collateralized primarily by 31 CRJ-900s; $35.6 million is United Airlines debt collateralized with aircraft parts; and $9.2 million is attributable to future lease obligations,” Mesa says in a media statement. Challenging situation In the statement, CEO Jonathan Ornstein says that new agreements will enable his airline to substantially improve its revenues and margins. “While the situation remains challenging, this stability is critical as we continue to restore our pilot capabilities, drive increased fleet utilization, and step up block-hour production.” “Without a doubt, the past twelve months concluded a year of restructuring for Mesa’s operations and finances, culminating with the significantly improved agreement with United. We appreciate United’s support, and we are very thankful and proud of our pilots, flight attendants, mechanics, dispatchers, financial personnel, and support staff for their patience and diligent work to facilitate this complex process. I am confident we have the dedicated people to be a strong regional operation for United and for the over six million passengers we safely flew last year.”

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