The new agreement between Mesa Airlines and United Airlines extends for five years and will see the regional carrier deploy up to 38 Bombardier/Mitsubishi CRJ900s with United Express in the coming March. United will get a ten percent share in Mesa and provide a credit facility to help it restructure its financials. Mesa reported a $-115.6 million Q4 loss on December 29 and is taking various initiatives to get back on track. United gets ten percent share of Mesa in five-year deal.
Mesa had to delay the publication of its Q4 and FY22 results by 2,5 weeks following its decision and that of American Airlines to end their partnership with American Eagle by April 3, 2023. American said it terminated the contract over concerns about the financial stability of Mesa. The regional carrier stated on December 19 that it had been suffering a $5 million monthly loss on its American Eagle operations and that continuing the capacity purchase agreement that was due in 2025 was unsustainable.
In Mesa’s earnings call, CEO Jonathan Ornstein stated that his airline had no choice but to end the partnership with American: “Unfortunately, while American initiated dramatic wage increases at their own subsidiaries, they were unwilling to make similar pay increases at our American Eagle operation, leaving is vulnerable to unprecedented pilot attrition. This led to an untenable situation and required us to take action.”
United was quick to help Mesa and induct the capacity that becomes available. It is offering increased block-hour rates to Mesa pilots that fly the CRJ900 and the Embraer E175 to cover incremental wage increases as instituted by Mesa this September through September 2025. United will take up to 38 CRJ900s from Mesa compared to 42 at American Eagle, but the exact number of Bombardiers that United Express plans to induct depends on the number of E175s that Mesa will operate for them. Currently, this number is eighty, of which eighteen are owned by Mesa and 62 are leased from United. Most leases expire between 2024 and 2028, but those for twenty E175LLs aren’t due until 2032-2033.
All crew and maintenance staff that currently operate for American in Phoenix, Dallas, El Paso, and Louisville will move to United Express, while a new CRJ900 crew base will be opened in Houston and a pilot base in Denver. More crew bases will potentially be added, said Ornstein, as United expressed its intention to increase services to smaller communities that have lost air connections as a result of the pilot shortage with regional carriers.
Ten percent share
Ornstein said the five-year capacity purchase agreement with United has been possible thanks to the strong relationship between the two airlines in the past thirty years. But it also sees United take a ten-percent equity position in Mesa Airlines and take a seat on its Board of Directors. United also provides a $41.2 million credit facility, which will allow Mesa to refinance its own $15.7 million outstanding revolving credit facility that matures on December 31.
The remaining $25.5 million in a term loan, of which $15 million will be forgivable if Mesa meets certain performance clauses on aircraft utilization in the purchase agreement. As collateral for the loan, United takes aircraft parts and a pledge of Mesa’s equity investment in Heart Aerospace with whom it has an order for 100 hybrid-electric aircraft plus 100 options. United also acquired thirty out of Mesa’s fifty General Electric CF-34 spare engines for $80 million which will result in at least $50 million in net cash proceeds in Q1 FY23. United will also cover all expenses for the rebranding and reconfiguration of the CRJ900s.
The new CPA with United is on a basis of exclusivity: Mesa is not allowed to enter into a new regional air carrier agreement, excluding the existing agreement with DHL.
Financial restructuring
Also part of its financial restructuring is an agreement with Export Development Canada to reduce debt service on seven CRJ900s for two years from January 1 until December 31, 2024. This will provide some $14 million in liquidity to Mesa. An agreement with RASPRO Trust 2005 reduces the effective purchase price prior to lease termination in March 2024 of fifteen CRJ900s by some $25 million. Mitsubishi Regional Jets (MHIRJ) will forgive fifty percent or $4.9 million of its outstanding note balance of the notes are fully repaid by the end of December 2023.
Following an agreement with the US Treasury, Mesa is allowed to sell aircraft and engines worth $24 million. United will purchase Mesa’s remaining eight CRJ700/550s in January, while eleven CRJ900s will be sold to a third party by coming March. Six spare engines will also be sold. Together, sales help reduce Mesa’s debt with the US Treasury by some $65 million.
Ornstein said that the agreement with United has had an immediate effect on pilot attrition and Mesa’s ability to attract qualified candidates: “We currently have approximately 400 pilots in our training pipeline.” The carrier will further expand its activities in United’s Aviate pilot program. “Once our operations are fully integrated with United, Mesa will be the most attractive career path in regional aviation for pilots as well as for all our other employed groups.”
Financial results
For Q4 FY22 which ended on September 30, Mesa reported a $-115.6 million net loss compared to $-7.5 million in the same quarter of FY21. This is predominantly the result of a $132.3 million impairment of assets, which pushed the operating income to $-141.2 million compared to $5.1 million in the previous years. Cash flow from operations was $13.4 million. Revenues were $125.6 million versus $130.8 million in FY21 and reflect fewer block hours during the quarter due to pilot shortages. Of the revenues, 48 percent came from operations for United, 45 percent from American, two percent from DHL, and five percent from leases.
The full-year loss ended at $-182.7 million compared to a $16.6 million profit in FY21. The operating loss was $-189.7 million versus $63.2 million, again the result of $171.8 million in impairments related to assets used for American over the year. Total revenues were $531 million versus 503.6 million. Mesa ended the year with $57.7 million in unrestricted cash and $599.7 million in debt ($36 million lower than in Q3), which is mainly secured against aircraft and engines. The announced sales transactions should reduce net debt by $84 million by March.
The focus is now fully on the transition from American Eagle to United Express, with American’s current schedule to be operated until February 28, with the wind-down period of the capacity purchase agreement lasting until April 3. The March schedule will be reduced by fifty percent but will see the introduction of nine lines for United. This should be 24 in May.
