S-1
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As filed with the Securities and Exchange Commission on July 13, 2018

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

MESA AIR GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada    4512    85-0302351

(State or other jurisdiction of

incorporation or organization)

   (Primary Standard Industrial
Classification Code Number)
   (I.R.S. Employer
Identification Number)

410 North 44th Street, Suite 700

Phoenix, Arizona 85008

(602) 685-4000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Jonathan G. Ornstein

Chairman and Chief Executive Officer

Mesa Air Group, Inc.

410 North 44th Street, Suite 700

Phoenix, Arizona 85008

(602) 685-4000

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gregory R. Hall

DLA Piper LLP (US)

2525 East Camelback Road, Suite 1000 Phoenix, Arizona 85016

(480) 606-5100

 

Brian S. Gillman

Executive Vice President, General Counsel and Secretary

Mesa Air Group, Inc.

410 North 44th Street, Suite 700

Phoenix, Arizona 85008

(602) 685-4000

 

Anna T. Pinedo

Mayer Brown LLP

1221 Avenue of the Americas

New York, New York 10020-1001

(212) 506-2275

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer       Accelerated filer  
Non-accelerated filer     (do not check if a smaller reporting company)   Smaller reporting company  
      Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 7(a)(2)(B) of the Securities Act.  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title Of Each Class Of

Securities To Be Registered

 

Amount

to be

Registered

 

Proposed
Maximum

Offering Price

Per Share

 

Proposed
Maximum

Aggregate
Offering Price(1)

 

Amount Of

Registration Fee

Common stock, no par value per share

          $150,000,000   $18,675

 

 

(1) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes the aggregate offering price of additional shares that the underwriters have the option to purchase.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 13, 2018.

             Shares

 

 

LOGO

Mesa Air Group, Inc.

Common Stock

 

 

This is the initial public offering of our common stock. We are offering                  shares.

We estimate that the initial public offering price per share will be between $        and $        . Currently, no public market exists for our common stock. We have applied to have our common stock listed on the Nasdaq Global Select Market under the symbol “MESA.”

 

 

We are an “emerging growth company” as defined under the federal securities laws, and, as such, we are subject to reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 15 to read about factors you should consider before buying shares of our common stock.

 

 

 

     Per
Share
     Total  

Initial public offering price

   $                   $                       

Underwriting discounts and commissions(1)

   $      $  

Proceeds to us (before expenses)

   $      $  

Proceeds to the selling shareholders (before expenses)

   $      $  

 

(1) See the “Underwriting” section beginning on page 145 for additional information regarding underwriting compensation.

The selling shareholders identified in this prospectus have granted the underwriters the right to purchase up to an additional                  shares of common stock at the initial public offering price, less underwriting discounts and commissions. The underwriters can exercise this option within 30 days from the date of this prospectus. We will not receive any of the proceeds from the sale of any shares by the selling shareholders if the overallotment option is exercised.

Neither the Securities and Exchange Commission, nor any state securities commission, nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to the purchasers on or about                 , 2018.

 

 

 

RAYMOND JAMES     BofA Merrill Lynch

 

Cowen   Stifel   Imperial Capital

Prospectus dated                 , 2018.


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LOGO

 

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TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     9  

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

     11  

RISK FACTORS

     15  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     37  

USE OF PROCEEDS

     38  

DIVIDEND POLICY

     39  

CAPITALIZATION

     40  

DILUTION

     42  

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

     44  

OPERATING DATA

     47  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     48  

INDUSTRY BACKGROUND

     79  

BUSINESS

     83  

MANAGEMENT

     99  

EXECUTIVE COMPENSATION

     109  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     125  

PRINCIPAL AND SELLING SHAREHOLDERS

     128  

DESCRIPTION OF CAPITAL STOCK

     132  

SHARES ELIGIBLE FOR FUTURE SALE

     137  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     141  

UNDERWRITING

     145  

LEGAL MATTERS

     153  

EXPERTS

     153  

WHERE YOU CAN FIND MORE INFORMATION

     153  

GLOSSARY OF AIRLINE TERMS

     154  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

We are responsible for the information contained in this prospectus or contained in any free writing prospectus prepared by or on behalf of us to which we have referred you. Neither we, the underwriters, nor the selling shareholders have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission and we take no responsibility for any other information that others may give you. We and the selling shareholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, operating results or financial condition may have changed since such date.

Until                     , 2018 (25 days after the date of this prospectus), all dealers that buy, sell, or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealer’s obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor any of the underwriters have taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

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We have obtained federal registration of the Mesa Airlines® trademark. American® and American Eagle® are trademarks of American Airlines, Inc. United® and United Express® are trademarks of United Airlines, Inc. All other trade names, trademarks, and service marks appearing in this prospectus are the property of their respective holders. We have omitted the ® and ™ designations, as applicable, for the trademarks used in this prospectus.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary sets forth the material terms of the offering, but does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully before making an investment decision, especially the risks of investing in our common stock described under “Risk Factors.” Unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “Mesa” refer to Mesa Air Group, Inc. and its predecessors, direct and indirect subsidiaries and affiliates. Our airline operations are conducted through our subsidiary, Mesa Airlines, Inc. (“Mesa Airlines”). Certain terms related to the airline industry are described under “Glossary of Airline Terms” at the end of this prospectus.

Our Company

Mesa Airlines is a regional air carrier providing scheduled passenger service to 110 cities in 38 states, the District of Columbia, Canada, Mexico and the Bahamas. All of our flights are operated as either American Eagle or United Express flights pursuant to the terms of capacity purchase agreements we entered into with American Airlines, Inc. (“American”) and United Airlines, Inc. (“United”) (each, our “major airline partner”). We have a significant presence in several of our major airline partners’ key domestic hubs and focus cities, including Dallas, Houston, Phoenix and Washington-Dulles. We have been the fastest growing regional airline in the United States over our last five fiscal years, based on fleet growth, with a cumulative increase in aircraft of 137%.

As of March 31, 2018, we operated a fleet of 145 aircraft with approximately 610 daily departures. We operate 64 CRJ-900 aircraft under our capacity purchase agreement with American (the “American Capacity Purchase Agreement”) and 20 CRJ-700 and 60 E-175 aircraft under our capacity purchase agreement with United (the “United Capacity Purchase Agreement”). Over the last five calendar years, our share of the total regional airline fleet of American and United has increased from 7% to 11% and from 4% to 15%, respectively. Driven by this fleet growth, our total operating revenues have grown by 55% from $415.2 million in fiscal 2013 to $643.6 million in fiscal 2017, respectively. We believe we have expanded our share with our major airline partners because of our competitive cost structure, access to pilots under our labor agreements and track record of reliable performance. All of our operating revenue in our 2017 fiscal year and the six months ended March 31, 2018 was derived from operations associated with our American and United Capacity Purchase Agreements.

Our long-term capacity purchase agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour and flight flown, and reimbursement of certain direct operating expenses, in exchange for providing regional flying on behalf of our major airline partners. Our capacity purchase agreements shelter us from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. In providing regional flying under our capacity purchase agreements, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major airline partners. Our major airline partners control route selection, pricing, seat inventories, marketing and scheduling, and provide us with ground support services, airport landing slots and gate access, allowing us to focus all of our efforts on delivering safe, reliable and cost-competitive regional flying.

Regional aircraft are optimal for short and medium-haul scheduled flights that connect outlying communities with larger cities and act as “feeders” for domestic and international hubs. In addition, regional aircraft are well suited to serve larger city pairs during off-peak times when load factors on larger jets are low. The lower trip costs and operating efficiencies of regional aircraft, along with the



 

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competitive nature of the capacity purchase agreement bidding process, provide significant value to major airlines. According to the Regional Airline Association, we were the fifth largest regional airline company in the United States in 2016, as measured by passenger enplanements, and our flights accounted for approximately 8.4% of all passengers carried on U.S. regional airlines.

Regional airlines play a daily, essential role in the U.S. air travel system. According to the Regional Airline Association, 42% of all scheduled passenger flights in the United States in 2016 were operated by regional airlines. Of all the U.S. airports with passenger airline service, 64% are served exclusively by regional airlines. Some of the most popular U.S. airports have more than half of all their flights on regional airlines, including New York-LaGuardia, Philadelphia, Washington-Dulles, Charlotte, Houston-Bush and Chicago-O’Hare.

Our Competitive Strengths

We believe that our primary strengths are:

Low-Cost Operator. We believe that we are among the lowest cost operators of regional jet service in the United States. There are several key elements that contribute to our cost efficiencies:

 

    Efficient Fleet Composition. We exclusively operate large regional aircraft with 70+ passenger seats on a single Federal Aviation Administration (the “FAA”) certificate. Operating large regional aircraft allows us to enjoy unit cost advantages over smaller regional aircraft. Larger regional aircraft require less fuel and crew resources per passenger carried, and may also have maintenance cost efficiencies.

 

    Cost Effective, Long-Term Collective Bargaining Agreements. Our pilots and flight attendants ratified new four-year collective bargaining agreements effective as of July 13, 2017 and October 1, 2017, respectively, which are among the longest in the regional airline industry and include labor rate structures through 2023 for our pilots and 2022 for our flight attendants. We believe that our collective bargaining agreements and favorable labor relationships are critical for pilot retention and will provide more predictable labor costs into 2023. We derive cost advantages from efficient work rules and the relatively low average seniority of our pilots.

 

    Low Corporate Overhead. Our general and administrative expenses per block hour have decreased by more than 35% over the five-year period ended September 30, 2017. We have significantly reduced our overhead costs by operating with a modest administrative and corporate team, offering cost-effective benefit programs and implementing automated solutions to improve efficiency.

 

    Competitive Procurement of Certain Operating Functions. We have long-term maintenance agreements with expirations extending from December 2020 to December 2027 with AAR Aircraft Services, Inc. (“AAR”), GE Engine Services, LLC (“GE”), StandardAero Limited (“StandardAero”), Aviall Services, Inc. (“Aviall”) and Bombardier Aerospace (“Bombardier”), respectively, to provide parts procurement, inventory and engine, airframe and component overhaul services. We expect that our long-term agreements with these and other strategic vendors will provide predictable high-quality and cost-effective solutions for most maintenance categories over the next several years. In prior periods, we also invested in long-term engine overhauls on certain aircraft, which we believe will reduce related maintenance obligations in future periods.

Advantages in Pilot Recruitment and Retention. We believe that we are well positioned to attract and retain qualified pilot candidates. Following the ratification of our collective bargaining agreements



 

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in July 2017, the average number of new pilot applications per month has increased by 45.3% compared to the six months prior to such ratification. In addition, our average pilot attrition has decreased by 16.2% over the same period.

The following chart presents our cumulative increase in new pilots who have completed training, net of attrition, from July 2017 through June 2018:

 

LOGO

We believe that the increased number of new pilot applications per month will continue with the introduction of our Career Path Program (“CPP”) with United. In addition to offering competitive compensation, bonuses and benefits, we believe the following elements contribute to our recruiting advantage:

 

    Career Path Program. We recently announced our CPP with United, which is designed to provide our qualified current and future pilots a path to employment as a pilot at United. We believe that our CPP will help us continue to attract qualified pilots, manage natural attrition and further strengthen our decades-long relationship with United.

 

    Modern, Large-Gauged Regional Jets. We exclusively operate large regional aircraft with advanced flight deck avionics. We believe that pilot candidates prefer advanced flight deck avionics because they are similar to those found in the larger commercial aircraft types flown by major airlines.

 

    Opportunities for Advancement. We believe that our career progression is among the most attractive in the regional airline industry. During fiscal 2017, our pilots had the opportunity to be promoted from first officer to captain in as little as 12 months.

 

    Stable Labor Relations. Throughout our long operating history, we believe that we have had constructive relationships with our employees and their labor representatives. We have never been the subject of a labor strike or labor action that impacted our operations.

 

    Enthusiastic and Supportive Culture. Our “pilots helping pilots” philosophy helps us attract, retain and inspire our next generation of pilots. Our team-oriented culture, as demonstrated by the mentorship of our senior pilots, is both encouraged and expected. We strive to create an environment for our personnel where open communication is customary and where we celebrate our successes together.


 

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Stable, Long-Term Revenue-Guarantee Capacity Purchase Agreements. We have long-term capacity purchase agreements with American and United that extend beyond 2020 for 94 of our 144 aircraft in scheduled service (with 34 aircraft expiring between June and December 2019 and 16 aircraft expiring between January and August 2020, if not extended prior to contract expiration). Both of our capacity purchase agreements are “capacity purchase,” rather than revenue sharing arrangements. This contractual structure provides us with a predictable revenue stream and allows us to increase our profit margin to the extent that we are able to lower our operating costs below the costs anticipated by the agreements. In addition, we are not exposed to price fluctuations for fuel, certain insurance expenses, ground operations or landing fees as those costs are either reimbursed under our capacity purchase agreements or paid directly to suppliers by our major airline partners.

Fleet Exclusively Comprised of Large, Efficient Regional Jets. We exclusively operate large regional aircraft with 70+ passenger seats. These aircraft are the highest in demand across the regional airline industry and provide us with best-in-class operating efficiencies, providing our major airline partners greater flexibility in route structuring and increased passenger revenues. As of March 31, 2018, we had 145 aircraft (owned and leased) consisting of the following:

 

     Embraer
Regional

Jet-175
(76  seats)
     Canadair
Regional

Jet-700
(70 seats)
     Canadair
Regional

Jet-900
(76-79  seats)
     Canadair
Regional

Jet-200
(50  seats)(1)
     Total  

American Eagle

     —          —          64        —          64  

United Express

     60        20        —          —          80  

Subtotal

     60        20        64        —          144  

Unassigned

     —          —          —          1        1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     60        20        64        1        145  

 

(1) CRJ-200 is an operational spare not assigned for service under our capacity purchase agreements.

Longstanding Relationships with American and United. We began flying for United in 1991 and American, through its predecessor entities, in 1992. Since 2013, we have added 26 aircraft to our American Capacity Purchase Agreement and 60 aircraft to our United Capacity Purchase Agreement.

Strong Recent Record of Operational Performance. In January 2018, the U.S. Department of Transportation (“DOT”) recognized us as the number one regional airline for on-time performance. In addition, we believe that we were the number one regional airline for on-time performance in 2016 and 2017 based on a comparison of our internal data to publicly available DOT data for reporting airlines. Under our capacity purchase agreements, we may receive financial incentives or incur penalties based upon our operational performance, including controllable on-time departures and controllable completion percentages.

Experienced, Long-Tenured Management Team. Our senior management team has extensive operating experience in the regional airline industry. Our Chief Executive Officer and President/Chief Financial Officer have served us in senior officer positions since 1998, and our management team has helped us navigate through and emerge successfully from bankruptcy in early 2011. From 2013 to September 30, 2017, we have significantly grown the business in the following ways:

 

    achieved revenue growth of 55%;

 

    expanded the number of aircraft flown under our American Capacity Purchase Agreement from 38 to 64;


 

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    expanded the number of aircraft flown under our United Capacity Purchase Agreement from 20 to 78;

 

    closed the first enhanced equipment trust certificate (“EETC”) financing by a regional airline; and

 

    improved our operating efficiencies and maintained our cost advantage.

Our Business Strategy

Our business strategy consists of the following elements:

Maintain Low-Cost Structure. We have established ourselves as a low-cost, efficient and reliable provider of regional airline services. We intend to continue our disciplined cost control approach through responsible outsourcing of certain operating functions, by flying large regional aircraft with associated lower maintenance costs and common flight crews across fleet types, and through the diligent control of corporate and administrative costs. Additionally, we expect our long-term collective bargaining agreements to protect us from significant labor cost increases over the next five years. These efficiencies, coupled with the low average seniority of our pilots, has enabled us to compete aggressively on price in our capacity purchase agreement negotiations.

Attractive Work Opportunities. We believe our employees have been, and will continue to be, a key to our success. Our ability to attract, recruit and retain pilots has supported our industry-leading fleet growth. We intend to continue to offer competitive compensation packages, foster a positive and supportive work environment and provide opportunities to fly state-of-the-art, large-gauged regional jets to differentiate us from other carriers and make us an attractive place to work and build a career.

Maintain a Prudent and Conservative Capital Structure. We intend to continue to maintain a prudent capital structure. We believe that the strength of our balance sheet and credit profile will enable us to optimize terms with lessors and vendors and, when preferred by our major airline partners, allow us to procure and finance aircraft on competitive terms. Also, once we complete this offering, our financial resources and publicly traded securities may allow us to take advantage of attractive acquisition opportunities should they arise. We may use a portion of the offering proceeds to purchase some of our leased aircraft. The purchase of leased aircraft would allow us to lower our operating costs and avoid lease-related use restrictions and return conditions.

Minimize Tail Risk. We have structured our aircraft leases and financing arrangements to minimize or eliminate, as much as possible, so-called “tail risk,” which is the amount of aircraft-related lease obligations or projected negative equity existing beyond the term of that aircraft’s corresponding capacity purchase agreement. As of March 31, 2018, we had 18 aircraft with leases extending past the term of their corresponding capacity purchase agreements with an aggregate exposure of less than $33.0 million and no financing arrangements with projected negative equity. We intend to continue to align the terms of our aircraft leases and financing agreements with the terms of our capacity purchase agreements in order to maintain low “tail risk.”

Our Growth Opportunities

During our last five fiscal years, our total operating revenues grew at a compounded annual rate of 11.6% and our fleet size increased from 59 to 140 regional aircraft, a cumulative growth rate of 137%. We believe that our cost discipline, strong operational performance and financial resources will provide additional opportunities to expand our operations, including:

Expand Flying With New and Existing Airline Partners. We enjoy strong relationships with our major airline partners and have significantly expanded our fleet size and flight operations with



 

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American and United over the last five years. As the demand for air travel among our major airline partners continues to grow, we expect to have the opportunity to increase our flight services for each major airline partner. In addition, over the next five years, we expect that capacity purchase agreements representing up to 300 aircraft currently flown by our competitors on behalf of major airlines will expire by their terms and be subject to rebidding or replacement by more desirable types of aircraft. We believe that our cost structure and operational efficiencies position us well to compete for this flying. Additionally, we intend to pursue opportunities to provide regional flying to other major airlines with hub cities that do not overlap with our existing major airline partners. In addition, if a market for regional flying on behalf of low-cost and ultra low-cost carriers materializes, we believe that we are well positioned to partner with them, as one of the lowest cost regional airlines in the United States.

Acquisitions of Other Regional Airlines. In the future, we may evaluate the strategic acquisition of other regional air carriers. The opportunity to make an acquisition may arise if, for example, a major airline makes a divestiture of a captive regional airline, as major airlines have done in the past.

Opportunities in the Air Cargo and Express Package Sector. We believe that our cost structure and business model may be successfully deployed in the burgeoning air cargo and express shipping sectors. Amazon.com, Inc. and several of the largest integrated logistics companies, including United Parcel Service, Inc., FedEx Corporation and DHL International GmbH, utilize contractual arrangements similar to our capacity purchase agreements with regional air cargo carriers to service outlying areas. We intend to explore future regional air cargo opportunities.

Regulatory Relief. We actively support the efforts of trade organizations, industry leaders, policymakers and other airlines to encourage regulatory reforms related to the current shortage of qualified pilots, lowering the cost of pilot training and providing access to air service for small communities. While the regulatory reform agenda and policies of the current administration are not fully known, it is possible that favorable regulatory changes may take place. We believe that favorable regulatory changes by the current administration, were they to occur, could increase the number of qualified pilots, lower our operating costs and create incremental opportunities for us with our existing and other potential future major airline partners.

Recent Developments

We acquired nine CRJ-900 aircraft for $76.5 million on June 28, 2018 and financed the purchase through a combination of new borrowings and a refinancing of existing debt on six CRJ-900 aircraft. All nine aircraft were previously part of our operating fleet and leased from GE Capital Aviation Services LLC under the GECAS Lease Facility (as defined below). We also mutually agreed with GE Capital Aviation Services LLC to terminate a warrant to purchase 100,000 shares of our common stock. In connection with the transaction, we expect to record non-cash lease termination expense of $15.1 million in our fiscal quarter ended June 30, 2018.

Risks Affecting Us

Our business is subject to numerous risks and uncertainties, including those highlighted in the section of this prospectus titled “Risk Factors” immediately following this prospectus summary. These risks include, but are not limited to:

 

    the supply and retention of qualified airline pilots;

 

    the volatility of pilot attrition;

 

    dependence on, changes to, or non renewal of, our capacity purchase agreements;


 

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    increases in our labor costs;

 

    reduced utilization under our capacity purchase agreements;

 

    the financial strength of our major airline partners;

 

    direct operation of regional jets by our major airline partners;

 

    limitations on our ability to expand regional flying within the flight systems of our major airline partners’ and those of other major airlines;

 

    our significant amount of debt and other contractual obligations;

 

    our compliance with ongoing financial covenants under our credit facilities; and

 

    our ability to keep costs low and execute our growth strategies.

Corporate Information

We are a Nevada corporation with our principal executive office in Phoenix, Arizona. We were founded in 1982 and reincorporated in Nevada in 1996. In addition to operating Mesa Airlines, we also wholly own Mesa Air Group—Airline Inventory Management, LLC, (“MAG-AIM”), an Arizona limited liability company, which was established to purchase, distribute and manage Mesa Airline’s inventory of spare rotable and expendable parts. MAG-AIM’s financial results are reflected in our consolidated financial statements.

Our principal executive offices are located at 410 North 44th Street, Suite 700, Phoenix, Arizona 85008, and our telephone number is (602) 685-4000. Our website is located at www.mesa-air.com. The information on, or accessible through, our website does not constitute part of, and is not incorporated into, this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), enacted in April 2012. An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

    being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

    not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

    reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

    exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such



 

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five-year period, including if we become a large accelerated filer, our annual gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.

We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our shareholders may be different than you might receive from other public reporting companies in which you hold equity interests.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.



 

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THE OFFERING

 

Common stock offered by us

                 shares.

 

Common stock to be outstanding after the offering

                 shares.

 

Underwriters’ option to purchase additional shares from the selling shareholders

The selling shareholders may sell up to             additional shares if the underwriters exercise their option to purchase additional shares.

 

Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $        million based on an assumed initial public offering price of $        per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and commissions and estimated expenses of this offering payable by us.

 

  We intend to use the net proceeds to be received by us from this offering to (i) repay approximately $        million of existing indebtedness under our                     , which is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commitments and Contractual Obligations” and (ii) to pay fees and expenses related to this offering, which we expect to be $        . We intend to use any remaining proceeds for general corporate purposes, which may include the repayment of indebtedness, working capital and capital expenditures, including flight equipment acquisitions and lease buyouts. See “Use of Proceeds.”

 

               are the selling shareholders in this offering. We will not receive any of the proceeds from the sale of any shares by the selling shareholders if the underwriters exercise their option to purchase additional shares. See “Principal and Selling Shareholders.”

 

Risk factors

See “Risk Factors” beginning on page 15 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed symbol

“MESA”

The number of shares of our common stock outstanding after this offering is based on 4,957,686 shares outstanding as of March 31, 2018, 4,356,362 shares issuable upon exercise of warrants with an exercise price of $0.01 per share, 100,000 shares issuable upon exercise of warrants with an exercise price of $8.00 per share and 78,893 issued but unvested shares under the Mesa Air Group, Inc. 2011 Stock Incentive Plan (the “2011 Plan”) and the Mesa Air Group, Inc. 2017 Stock Plan (the “2017 Plan”), accounted for under the treasury method, and excludes:

 

    an aggregate of 2,000,000 shares of common stock reserved for issuance under the Mesa Air Group, Inc. Amended and Restated Stock Appreciation Rights Plan (the “SAR Plan”), 846,664 of which were outstanding as of March 31, 2018, which settle in cash; and


 

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    an aggregate of 500,000 shares of common stock reserved for issuance under the Mesa Air Group, Inc. Restricted Phantom Stock Units Plan (the “RSU Plan”), 123,360 of which were issued as of March 31, 2018, and may be settled in cash, shares of common stock, or in a combination of cash and shares of common stock, at either our option or the holder’s option pursuant to the terms of the award agreement.

Except as otherwise indicated, information in this prospectus reflects or assumes the following:

 

    the filing and effectiveness of our second amended and restated articles of incorporation in Nevada and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the consummation of this offering;

 

    no exercise of the underwriters’ option to purchase up to additional shares of our common stock from the selling shareholders; and

 

    a              -for-one forward stock split, which will occur immediately prior to the completion of this offering.


 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following tables summarize the financial and operating data for our business for the periods presented. You should read this summary consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

The summary historical consolidated statement of operations data for our fiscal years ended September 30, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary historical consolidated balance sheet data for the six months ended March 31, 2018 has been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The summary historical consolidated statements of operations data for our fiscal years ended September 30, 2013, 2014 and 2015 have been derived from our consolidated financial statements that are not included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future, and results for the six months ended March 31, 2018 are not indicative of the results expected for the full year.

 

    Year Ended September 30,     Six Months Ended
March 31,
 
    2013(1)     2014(1)     2015     2016     2017     2017     2018  
   

(in thousands, except per share data)

 

Operating revenues:

             

Contract revenue

  $ 382,125     $ 407,408     $ 481,168     $ 569,373     $ 618,698     $ 309,711     $ 310,904  

Pass-through and other

    33,131       28,617       24,931       18,463       24,878       9,619       21,420  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    415,256       436,025       506,099       587,836       643,576       319,330       332,324  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Flight operations

    78,685       93,092       118,600       141,422       155,516       72,349       103,807  

Fuel

    13,531       6,092       1,017       753       766       400       198  

Maintenance

    102,473       123,506       142,643       225,130       210,729       117,422       105,756  

Aircraft rent

    77,243       80,942       69,083       71,635       72,551       36,060       36,582  

Aircraft and traffic servicing

    28,363       20,817       13,274       3,936       3,676       1,580       1,744  

Promotions and sales(2)

    5,406       2,795       11       —         —         —         —    

General and administrative

    31,598       34,501       39,940       42,182       38,996       20,676       21,267  

Depreciation and amortization

    32,945       33,425       42,296       46,020       61,048       29,600       31,598  

Asset impairment

    7,942       —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    378,186       395,170       426,864       531,078       543,282       278,087       300,952  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    37,070       40,855       79,235       56,758       100,294       41,243       31,372  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net:

             

Interest expense

    (9,043     (9,881     (16,984     (32,618     (46,110     (21,840     (27,474

Interest income

    71       14       21       325       32       15       19  

Other income (expense), net

    2,458       (475     975       381       (514     (394     (102
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    (6,514     (10,342     (15,988     (31,912     (46,592     (22,219     (27,557
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    30,556       30,513       63,247       24,846       53,702       19,024       3,815  

Income tax (benefit) expense

    (11,078     11,749       24,248       9,926       20,874       7,110       (21,181
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 41,634     $ 18,764     $ 38,999     $ 14,920     $ 32,828     $ 11,914     $ 24,996  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common shareholders:

             

Basic(3)

  $ 14.57     $ 6.32     $ 12.58     $ 3.90     $ 7.52     $ 2.76     $ 5.46  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(3)

  $ 4.52     $ 2.04     $ 4.04     $ 1.54     $ 3.51     $ 1.27     $ 2.65  

Pro forma net income per share attributable to common shareholders (unaudited)(4):

             

Basic

          $       $  
         

 

 

     

 

 

 

Diluted

          $       $  
         

 

 

     

 

 

 

Weighted-average common shares outstanding:

             

Basic

    2,858,466       2,970,066       3,099,866       3,823,214       4,367,610       4,313,106       4,577,163  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    9,211,984       9,193,314       9,664,774       9,706,770       9,349,846       9,363,285       9,424,379  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP financial data:

             

EBITDA(5)

  $ 72,473     $ 73,805     $ 122,506     $ 103,159     $ 160,828     $ 70,449     $ 62,868  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDAR(5)

  $ 149,716     $ 154,747     $ 191,589     $ 174,794     $ 233,379     $ 106,509     $ 99,450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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(1) Our operations data for our fiscal years ended September 30, 2013 and 2014 include results from our historical go! operations. We operated go! as an inter-island air carrier in Hawaii from 2006 to 2014.
(2) Promotion and sales primarily consists of reservations and marketing costs related to our historical go! operations. We do not pay promotion and sales expenses under our capacity purchase agreements.
(3) See Note 10 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted earnings per share.
(4) Pro forma net income per share attributable to common shareholders data is presented for our fiscal year ended September 30, 2017 and the six months ended March 31, 2018 to give effect to: (i) the issuance of              shares of our common stock pursuant to this offering, and our application of the net proceeds from this offering as set forth under “Use of Proceeds,” assuming an initial public offering price of $             per share (which is the mid-point of the estimated price range set forth on the cover page of this prospectus). This pro forma net income per share attributable to common shareholders data is presented for informational purposes only and does not purport to represent what our pro forma net income (loss) or net income (loss) per share attributable to common shareholders actually would have been had this offering been completed on October 1, 2016, or to project our net income or net income per share attributable to common shareholders for any future period.
(5) EBITDA is earnings before interest, income taxes, and depreciation and amortization. EBITDAR is earnings before interest, income taxes, depreciation and amortization and aircraft rent. EBITDA and EBITDAR are included as supplemental disclosure because our senior management believes that they are well recognized valuation metrics in the airline industry that are frequently used by companies, investors, securities analysts and other interested parties in comparing companies in our industry.

EBITDA and EBITDAR have limitations as analytical tools. Some of the limitations applicable to these measures include: (i) EBITDA and EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; (ii) EBITDA and EBITDAR do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (iii) EBITDA and EBITDAR do not reflect changes in, or cash requirements for, our working capital needs; (iv) EBITDA and EBITDAR do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; (v) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future; and (vi) EBITDA and EBITDAR do not reflect any cash requirements for such replacements and other companies in our industry may calculate EBITDA and EBITDAR differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, EBITDA and EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, EBITDAR should not be viewed as a measure of overall performance because it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. For the foregoing reasons, each of EBITDA and EBITDAR has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

The following table presents the reconciliation of net income to EBITDA and EBITDAR for the periods presented below:

 

     Year Ended September 30,     Six Months
Ended March 31,
 
     2013     2014     2015     2016     2017     2017     2018  
     (in thousands)  

Reconciliation:

              

Net income

   $ 41,634     $ 18,764     $ 38,999     $ 14,920     $ 32,828     $ 11,914     $ 24,996  

Interest expense

     9,043       9,881       16,984       32,618       46,110       21,840       27,474  

Interest income

     (71     (14     (21     (325     (32     (15     (19

Income tax expense (benefit)

     (11,078     11,749       24,248       9,926       20,874       7,110       (21,181

Depreciation and amortization

     32,945       33,425       42,296       46,020       61,048       29,600       31,598  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     72,473       73,805       122,506       103,159       160,828       70,449       62,868  

Aircraft rent

     77,243       80,942       69,083       71,635       72,551       36,060       36,582  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDAR

     149,716       154,747       191,589       174,794       233,379       106,509       99,450  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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The following table presents our historical balance sheet data as of March 31, 2018:

 

     As of March 31, 2018  
     Actual      Pro Forma(1)  
     (in thousands)  

Balance Sheet Data:

     

Cash and cash equivalents

   $ 52,699     

Total assets

     1,342,638     

Long-term debt, including current portion

     929,029     

Shareholders’ equity

     248,705     

 

(1) The unaudited adjusted pro forma consolidated balance sheet gives effect to the receipt of the estimated net proceeds by us from the sale of shares of our common stock offered by us (based on an assumed initial public offering price of $                     per share, the mid-point of the price range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds received by us.


 

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OPERATING DATA

The following table summarizes certain operating data that we believe are useful indicators of our operating performance for our fiscal years ended September 30, 2013, 2014, 2015, 2016 and 2017, respectively, and the six months ended March 31, 2017 and 2018. The definitions of certain terms related to the airline industry used in the table can be found under “Glossary of Airline Terms” at the end of this prospectus.

 

    Year Ended September 30,     Six Months Ended
March 31,
 
    2013(1)     2014(1)     2015     2016     2017     2017     2018  

Operating Data

             

Block hours

    206,431       225,720       308,681       368,468       395,083       199,303       195,559  

Departures

    134,805       140,165       172,033       208,399       221,990       109,419       107,043  

Passengers

    7,872,574       8,520,917       10,632,903       12,497,424       13,005,844       6,393,651       6,332,521  

Available seat miles—ASMs (thousands)

    4,283,272       4,932,516       7,356,450       8,823,595       9,471,911       4,828,892       4,621,380  

Revenue passenger miles—RPMs (thousands)

    3,703,837       4,103,834       6,019,316       7,019,586       7,392,688       3,759,481       3,640,092  

Contract revenue per available seat mile—CRASM (in cents)

  ¢ 8.92     ¢ 8.26     ¢ 6.54     ¢ 6.45     ¢ 6.53     ¢ 6.41     ¢ 6.73  

Operating cost per available seat mile—CASM (in cents)

  ¢ 8.83     ¢ 8.01     ¢ 5.80     ¢ 6.02     ¢ 5.74     ¢ 5.76     ¢ 6.51  

Average stage length (miles)

    452       475       565       557       561       580       567  

Regional aircraft

             

Owned

    23       40       47       64       66       66       66  

Leased

    48       37       37       37       37       37       37  

Leased from United

    —         7       30       30       37       30       42  

Total aircraft

    71       84       114       131       140       133       145  

E-175

    0       7       30       46       55       48       60  

CRJ-900

    47       57       63       64       64       64       64  

CRJ-700

    20       20       20       20       20       20       20  

CRJ-200

    5       1       1       1       1       1       1  

Employees (FTE)

    1,819       2,186       2,766       3,102       3,132       3,073       3,229  

 

(1) Our operations data for our fiscal years ended September 30, 2013 and 2014 include results from our historical go! operations. We operated go! as an inter-island air carrier in Hawaii from 2006 to 2014.


 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. The risks and uncertainties described below may not be the only ones we face. If any of these risks should occur, our business, results of operations, financial condition or growth prospects could be adversely affected. In those cases, the trading price of our common stock could decline and you may lose all or part of your investment.

Risks Related to Our Business

The supply of pilots to the airline industry is limited and may negatively affect our operations and financial condition.

In July 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which increased the required training time for new airline pilots (the “FAA Qualification Standards”). The FAA Qualification Standards, which became effective in August 2013, require first officers to hold an Airline Transport Pilot (“ATP”) certificate, requiring 1,500 hours total flight time as a pilot. Previously, first officers were required to have only a commercial pilot certificate, which required 250 hours of flight time. The rule also mandates stricter rules to minimize pilot fatigue. The FAA Qualification Standards (and associated regulations) have dramatically reduced the supply of qualified pilot candidates and has had a negative effect on pilot scheduling, work hours and the number of pilots required to be employed for our operations. To address the diminished supply of qualified pilot candidates, regional airlines, including us, implemented significant pilot wage and bonus increases. The impact of the FAA Qualification Standards (and associated regulations) has substantially increased our labor costs and may continue to negatively impact our operations and financial condition.

In prior periods, the FAA Qualification Standards have negatively impacted our ability to hire pilots at a rate sufficient to support required utilization levels under our American Capacity Purchase Agreement, and, as a result, we have issued credits to American pursuant to the terms of the American Capacity Purchase Agreement. For our fiscal year ended September 30, 2017, and the six-month period ended March 31, 2018, we issued credits of approximately $6.0 million and $3.9 million, respectively, under the American Capacity Agreement. Also, in February 2018, we mutually agreed with United to temporarily remove two aircraft from service under our United Capacity Purchase Agreement. In July 2018, we were able to fully staff flight operations and these aircraft were placed back into service under our United Capacity Purchase Agreement. See “Business—Capacity Purchase Agreements.” If we are unable to maintain a sufficient number of qualified pilots to operate our scheduled flights, we may need to request reduced flight schedules with our major airline partners and incur monetary performance penalties under our capacity purchase agreements.

In addition, our operations and financial condition may be negatively impacted if we are unable to train pilots in a timely manner. Due to the industry-wide shortage of qualified pilots, driven by the increased flight hours requirements under the FAA Qualification Standards and attrition resulting from the hiring needs of other airlines, pilot training timelines have significantly increased and stressed the availability of flight simulators, instructors and related training equipment. As a result, the training of our pilots may not be accomplished in a cost-efficient manner or in a manner timely enough to support our operational needs.

 

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Pilot attrition may continue to negatively affect our operations and financial condition.

In recent years, we have experienced significant volatility in our attrition as a result of pilot wage and bonus increases at other regional air carriers, the growth of cargo, low-cost and ultra low-cost carriers and the number of pilots at major airlines reaching the statutory mandatory retirement age of 65 years. Following the ratification of our new collective bargaining agreement in July 2017, our average pilot attrition per month has decreased by 16.2% compared to the six months prior to the ratification. We believe that we will maintain our pilot attrition rates at this level during our 2018 fiscal year. However, if our actual pilot attrition is materially different than our projections, our operations and financial results could be materially and adversely affected.

We are highly dependent on our agreements with our major airline partners.

We derive all of our operating revenue from our capacity purchase agreements with our major airlines partners. As of March 31, 2018, the American Capacity Purchase Agreement accounted for 54% of our total revenue and the United Capacity Purchase Agreement accounted for 46% of our total revenue. In addition, as of March 31, 2018, all of our aircraft available for scheduled service were operating under a capacity purchase agreement with either American or United.

Our American Capacity Purchase Agreement expires with respect to different tranches of aircraft between 2021 and 2025, unless otherwise extended or amended. In addition, our American Capacity Purchase Agreement is subject to termination prior to expiration, subject to our right to cure, in various circumstances including if our controllable flight completion factor falls below certain levels for a specified period of time.

Our United Capacity Purchase Agreement expires between June and December 2019 with respect to 34 CRJ-700 and E-175 aircraft, between January and August 2020 with respect to 16 E-175 aircraft, and between 2021 and 2028 with respect to 30 of our E-175 aircraft. We are currently in negotiations with United with respect to the 20 CRJ-700 aircraft expiring between August and December 2019. We cannot predict the outcome of these negotiations and there can be no assurance that we will be able to extend these aircraft at acceptable rates, on acceptable terms, or at all. United is also permitted, subject to certain conditions, to terminate the agreement early in its discretion by giving us notice of 90 days or more. Our United Capacity Purchase Agreement is also subject to termination prior to expiration, subject to our right to cure, in various circumstances including if our controllable flight completion factor or departure performance falls below certain levels for a specified period of time.

If our capacity purchase agreements with American or United were terminated or not renewed, we would be significantly impacted and likely would not have an immediate source of revenue or earnings to offset such loss. Neither American nor United are under any obligation to renew their respective capacity purchase agreements with us. A termination or expiration of either of these agreements would likely have a material adverse effect on our financial condition, cash flows, ability to satisfy debt and lease obligations, operating revenues and net income unless we are able to enter into satisfactory substitute arrangements for the utilization of the affected aircraft by other major airline partners, or, alternatively, obtain the airport facilities, gates, ticketing and ground services and make the other arrangements necessary to fly as an independent airline. We may not be able to enter into substitute capacity purchase arrangements, and any such arrangements we might secure may not be as favorable to us as our current agreements. Operating an airline independently from our major airline partners would be a significant departure from our business plan and would likely require significant time and resources, which may not be available to us at that point.

 

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Increases in our labor costs, which constitute a substantial portion of our total operating costs, may adversely affect our business, results of operations and financial condition.

Our business is labor intensive, with labor costs representing approximately 28%, 30% and 34% of our total operating costs for the fiscal years ended September 30, 2016 and 2017 and the six months ended March 31, 2018, respectively. We are responsible for our labor costs above certain pre-determined reimbursement levels, and we may not be entitled to receive increased payments under our capacity purchase agreements if our labor costs increase above the reimbursement levels. As a result, a significant increase in our labor costs above the reimbursement levels could result in a material reduction in our earnings.

As a result of the 2013 FAA Qualification Standards, the supply of qualified pilots has been dramatically reduced. This shortage of pilots has driven up our pilot salaries and sign-on bonuses and resulted in a material increase in our labor costs. A continued shortage of pilots could require us to further increase our labor costs, which would result in a material reduction in our earnings.

Reduced utilization levels of our aircraft under our capacity purchase agreements would adversely impact our financial results.

Historically, our major airline partners have utilized our flight operations at levels at or near the maximum capacity of our fleet allocations under our capacity purchase agreements, but there can be no assurance that they will continue utilizing our aircraft at that level. If our major airline partners schedule the utilization of our aircraft below historical levels (including taking into account the stage length and frequency of our scheduled flights), we may not be able to maintain operating efficiencies previously obtained, which would negatively impact our operating results and financial condition.

Our American Capacity Purchase Agreement establishes minimum levels of flight operations. In prior periods, the FAA Qualification Standards have negatively impacted our ability to hire pilots at a rate sufficient to support required utilization levels, and, as a result, we have issued credits to American pursuant to the terms of the American Capacity Purchase Agreement. For our fiscal year ended September 30, 2017, and the six-month period ended March 31, 2018, we issued credits of approximately $6.0 million and $3.9 million, respectively, under the American Capacity Agreement.

The United Capacity Purchase Agreement does not require United to schedule any specified minimum level of flight operations for our aircraft. Additionally, United may remove aircraft from the United Capacity Purchase Agreement with 90 days’ prior notice to us. While United pays us a fixed monthly revenue amount for each aircraft under contract, a significant reduction in the utilization levels of our fleet in the future or removal of aircraft from the United Capacity Purchase Agreement at United’s election could reduce our revenues based on the number of flights and block hours flown for United. In February 2018, we mutually agreed with United to temporarily remove two aircraft from service under the United Capacity Purchase Agreement. In July 2018, we were able to fully staff flight operations and these aircraft were placed back into service under our United Capacity Purchase Agreement. See “Business—Capacity Purchase Agreements.”

Continued challenges with hiring, training and retaining replacement pilots may lead to reduced utilization levels of our aircraft and additional penalties under our capacity purchase agreements and our operations and financial results could be materially and adversely terminated. Additionally, our major airline partners may change routes and frequencies of flights, which can negatively impact our operating efficiencies. Changes in schedules may increase our flight costs, which could exceed the reimbursed rates paid by our major airline partners. Reduced utilization levels of our aircraft or other changes to our schedules under our capacity purchase agreements would adversely impact our financial results.

 

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If our major airline partners experience events that negatively impact their financial strength or operations, our operations also may be negatively impacted.

We may be directly affected by the financial and operating strength of our major airline partners. Any events that negatively impact the financial strength of our major airline partners or have a long-term effect on the use of our major airline partners by airline travelers would likely have a material adverse effect on our business, financial condition and results of operations. In the event of a decrease in the financial or operational strength of any of our major airline partners, such partner may seek to reduce, or be unable to make, the payments due to us under their capacity purchase agreement. In addition, in some cases, they may reduce utilization of our aircraft. Although we receive guaranteed monthly revenue for each aircraft under contract and a fixed fee for each block hour or flight actually flown, there are no minimum levels of utilization specified in the capacity purchase agreements. If any of our other current or future major airline partners become bankrupt, our capacity purchase agreement with such partner may not be assumed in bankruptcy and could be terminated. This and other events, which are outside of our control, could have a material adverse effect on our business, financial condition and results of operations. In addition, any negative events that occur to other regional carriers and that affect public perception of such carriers generally could also have a material adverse effect on our business, financial condition and results of operations.

Our major airline partners may expand their direct operation of regional jets thus limiting the expansion of our relationships with them.

We depend on our major airline partners electing to contract with us instead of operating their own regional jets or operating their own “captive” regional airlines through wholly owned subsidiaries. Currently, the captive regional airlines include Endeavor Air, Inc. (“Endeavor”) (owned by Delta), Envoy Air Inc. (“Envoy”) (owned by American), PSA Airlines, Inc. (“PSA”) (owned by American), Piedmont Airlines (“Piedmont”) (owned by American) and Horizon Air Industries, Inc. (“Horizon”) (owned by Alaska Air Group, Inc.). These major airlines possess the financial and other resources to acquire and operate their own regional jets, create or grow their own captive regional airlines or acquire other regional air carriers instead of entering into contracts with us. In particular, American, which procures approximately 40% of its regional flying from its wholly owned regional subsidiaries, has expressed a goal of increasing their share to a majority of American’s regional flying over time. We have no guarantee that in the future our major airline partners will choose to enter into contracts with us, or renew their existing agreements with us, instead of operating their own regional jets, allocating flying to their captive regional airlines or entering into relationships with competing regional airlines. A decision by American or United to phase out or limit our capacity purchase agreements or to enter into similar agreements with our competitors could have a material adverse effect on our business, financial condition or results of operations.

We may be limited from expanding our flying within our major airline partners’ flight systems and there are constraints on our ability to provide services to airlines other than American and United.

Additional growth opportunities within our major airline partners’ flight systems are limited by various factors, including a limited number of independent regional aircraft that each such major airline partner can operate in its regional network due to “scope” clauses in the current collective bargaining agreements with their pilots that restrict the number and size of regional jets that may be operated in their flight systems not flown by their pilots. Except as contemplated by our existing capacity purchase agreements, we cannot be sure that our major airline partners will contract with us to fly any additional aircraft.

We may not have additional growth opportunities, or may agree to modifications to our capacity purchase agreements that reduce certain benefits to us in order to obtain additional aircraft, or for other

 

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reasons. Given the competitive nature of the airline industry, we believe limited growth opportunities may result in competitors accepting reduced margins and less favorable contract terms in order to secure new or additional capacity purchase operations. Even if we are offered growth opportunities by our major airline partners, those opportunities may involve economic terms or financing commitments that are unacceptable to us. Additionally, our major airline partners may reduce the number of regional jets in their system by not renewing or extending existing flying arrangements with regional operators or transitioning those flying arrangements to their own captive regional carriers. Any one or more of these factors may reduce or eliminate our ability to expand our flight operations with our existing major airline partners.

Additionally, our capacity purchase agreements limit our ability to provide regional flying services to other airlines in certain major airport hubs of American and United. These restrictions may make us a less attractive partner to other major airlines whose regional flying needs do not align with our geographical restrictions.

We have a significant amount of debt and other contractual obligations and that could impair our liquidity and thereby harm our business, results of operations and financial condition.

The airline business is capital intensive and, as a result, we are highly leveraged. As of March 31, 2018, we had approximately $942.3 million in total long-term debt including $10.3 million of capital lease obligations. Substantially all of our long-term debt was incurred in connection with the acquisition of aircraft and aircraft engines. We also have significant long-term lease obligations primarily relating to our aircraft fleet. These leases are classified as operating leases and are therefore not reflected in our consolidated balance sheets. During our fiscal years ended September 30, 2016 and 2017 and the six months ended March 31, 2018, our principal debt service payments totaled $75.5 million, $153.0 million and $110.8 million, respectively, and our principal aircraft lease payments totaled approximately $70.0 million, $107.0 million and $20.4 million, respectively.

We have significant lease obligations with respect to our aircraft, which aggregated to approximately $316.1 million and $295.6 million at September 30, 2017 and March 31, 2018, respectively. At March 31, 2018, we had 37 aircraft under lease (excluding aircraft leased from United), with an average remaining term of 4.25 years. As of March 31, 2018, future minimum lease payments due under all long term operating leases were approximately $307.0 million and debt service obligations were $1,156.4 million, respectively, including capital lease obligations.

We are subject to various financial covenants under our financing agreements and leases with, among others, CIT Bank, N.A. (“CIT”), Export Development Canada (“EDC”) and RASPRO Trust 2005, a pass-through trust, (“RASPRO”) that are typical for credit facilities and leases of this size, type, and tenor. Our ability to make additional borrowings under our credit facility depends upon satisfaction of these covenants. Our ability to comply with these covenants and requirements may be affected by events beyond our control. Our failure to comply with obligations under our credit facility could result in an event of default under the facilities. A default, if not cured or waived, could prohibit us from obtaining further loans under our credit facilities and permit the lenders thereunder to accelerate payment of their loans. In addition, the lenders would have the right to proceed against the collateral we granted to them, which consists of substantially all of our assets. If our debt is accelerated, we cannot be certain that we will have funds available to pay the accelerated debt or that we will have the ability to refinance the accelerated debt on terms favorable to us, or at all. If we could not repay or refinance the accelerated debt, we could be insolvent and could seek to file for bankruptcy protection. Any such default, acceleration, or insolvency would likely have a material and adverse effect on our business. See “We are required to comply with certain ongoing financial and other covenants under certain credit facilities, and if we fail to meet those covenants or otherwise suffer a default thereunder, our lenders may accelerate the payment of such indebtedness” for a discussion of our financial and other covenants.

 

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We cannot assure you that our operations will generate sufficient cash flow to make our required payments, or that we will be able to obtain financing to acquire additional aircraft or make other capital expenditures necessary for expansion. Our ability to pay the high level of fixed costs associated with our contractual obligations will depend on our operating performance, cash flow and our ability to secure adequate financing, which will in turn depend on, among other things, the success of our current business strategy, the U.S. economy, availability and cost of financing, as well as general economic and political conditions and other factors that are, to some extent, beyond our control. The amount of our fixed obligations could have a material adverse effect on our business, results of operations and financial condition and could:

 

    require that a substantial portion of our cash flow from operations be used for operating lease and maintenance reserve payments, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

    limit our ability to obtain additional financing to support our expansion plans and for working capital and other purposes on acceptable terms or at all;

 

    make it more difficult for us to pay our other obligations as they become due during adverse general economic and market industry conditions because any related decrease in revenues could cause us to not have sufficient cash flows from operations to make our scheduled payments; and

 

    reduce our flexibility in planning for, or reacting to, changes in our business and the airline industry and, consequently, place us at a competitive disadvantage to our competitors with lower fixed payment obligations.

Additionally, a failure to pay our operating leases, debt or other fixed cost obligations or a breach of our contractual obligations could result in a variety of further adverse consequences, including the exercise of remedies by our creditors and lessors. In such a situation, it is unlikely that we would be able to cure our breach, fulfill our obligations, make required lease payments or otherwise cover our fixed costs, which would have a material adverse effect on our business, results of operations and financial condition.

We are required to comply with certain ongoing financial and other covenants under certain credit facilities, and if we fail to meet those covenants or otherwise suffer a default thereunder, our lenders may accelerate the payment of such indebtedness.

As of March 31, 2018, we had $924.7 million of long-term secured debt, including capital lease obligations, comprised of the following: (i) the CIT Revolving Credit Facility (as defined below); (ii) the Spare Engine Facility (as defined below); (iii) the EDC 2015 Credit Facility (as defined below), the EDC January 2016 Credit Facility (as defined below) and the EDC June 2016 Credit Facility (as defined below) (and, together with the EDC 2015 Credit Facility and the EDC January 2016 Credit Facility, the “EDC Credit Facilities”); (iv) the MidFirst Credit Facility (as defined below) and (v) the Aircraft Notes (as defined below). This amount consisted of $778.4 million in notes payable related to owned aircraft used in continuing operations, $110.3 million of notes payable related to spare engines and engine kits, $25.7 million of our working capital line of credit and $10.3 million of capital lease obligations. The obligations under these credit facilities are secured primarily by a first priority lien on certain engines, equipment, spare parts and related collateral, including engine warranties and proceeds of the foregoing, and the aircraft acquired with the proceeds of such indebtedness. As of March 31, 2018, we had $17.6 million of long-term unsecured debt.

Under (i) the CIT Revolving Credit Facility (as defined below), we are required to comply with a minimum consolidated interest and rental coverage ratio at the end of each fiscal quarter during the term of such credit facility, (ii) the EDC January 2016 Credit Facility, we are required to comply with a

 

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minimum fixed charge coverage ratio at the end of each fiscal quarter during the term of such credit facility, and (iii) the Lease Agreement, dated as of September 23, 2005, between RASPRO and Mesa Airlines, we are required to comply with minimum current ratio and debt ratio covenants and a minimum available cash covenant until all amounts outstanding thereunder have been paid in full.

Failure to comply with the terms of these credit facilities and financing arrangements and the ongoing financial and other covenants thereunder would result in an event of default (as defined in the applicable credit facility and financing agreement) and, to the extent the applicable lenders so elect, an acceleration of our existing indebtedness following the expiration of any applicable cure periods, causing such debt to be immediately due and payable. Acceleration of such indebtedness would also trigger cross-default clauses under our other indebtedness. It could also result in the termination of all commitments to extend further credit under our CIT Credit Facility. We currently do not have sufficient liquidity to repay all of our outstanding debt in full if such debt were accelerated. If we are unable to pay our debts as they come due, or obtain waivers for such payments, our secured lenders could foreclose on any of our assets securing such debt. These events could materially adversely affect our business, results of operations and financial condition.

The residual value of our owned aircraft may be less than estimated in our depreciation policies.

As of March 31, 2018, we had approximately $1,182.8 million of property and equipment and related assets, net of accumulated depreciation, of which, $1,001.6 million relates to owned aircraft. In accounting for these long lived assets, we make estimates about the expected useful lives of the assets, the expected residual values of certain of these assets, and the potential for impairment based on the fair value of the assets and the cash flows they generate. Factors indicating potential impairment include, but are not limited to, significant decreases in the market value of the long lived assets, a significant change in the condition of the long lived assets and operating cash flow losses associated with the use of the long lived assets. In the event the estimated residual value of any of our aircraft types is determined to be lower than the residual value assumptions used in our depreciation policies, the applicable aircraft type in our fleet may be impaired and may result in a material reduction in the book value of applicable aircraft types we operate or we may need to prospectively modify our depreciation policies. An impairment on any of our aircraft types we operate or an increased level of depreciation expense resulting from a change to our depreciation policies could result in a material negative impact to our financial results.

The amounts we receive under our capacity purchase agreements may be less than the corresponding costs we incur.

Under our capacity purchase agreements with American and United, a portion of our compensation is based upon pre-determined rates typically applied to production statistics (such as departures and block hours flown). The primary operating costs intended to be compensated by the pre-determined rates include labor costs, including crew training costs, certain aircraft maintenance expenses and overhead costs. During the year ended September 30, 2017 and the six months ended March 31, 2018, approximately $24.5 million and $21.5 million, or 4.2% and 6.7%, of our operating costs under our capacity purchase agreements were pass-through costs, excluding fuel which is paid directly to suppliers by our major airline partners. If our operating costs for labor, aircraft maintenance and overhead costs exceed the compensation earned from our pre-determined rates under our revenue-guarantee arrangements, our financial position and operating results will be negatively affected.

 

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Strikes, labor disputes and increased unionization of our workforces may adversely affect our ability to conduct our business and reduce our profitability.

As of March 31, 2018, approximately 76.7% of our workforce was represented by labor unions, including the Air Line Pilots Association, International (“ALPA”) and the Association of Flight Attendants (“AFA”). On July 13, 2017, our pilots, represented by the ALPA, ratified a new four-year collective bargaining agreement. Similarly, on October 1, 2017, our flight attendants, represented by the AFA, ratified a new four-year collective bargaining agreement. The terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. In addition, if we are unable to reach agreement with any of our unionized work groups in future negotiations regarding the terms of their collective bargaining agreements, we may be subject to work interruptions, stoppages or shortages. We may also become subject to additional collective bargaining agreements in the future as non-unionized workers may unionize. We are also subject to various ongoing employment disputes outside of the collective bargaining agreements. We consider these to not be material, but any current or future dispute could become material.

Relations between air carriers and labor unions in the United States are governed by the Railway Labor Act (“RLA”). Under the RLA, collective bargaining agreements generally contain “amendable dates” rather than expiration dates, and the RLA requires that a carrier maintain the existing terms and conditions of employment following the amendable date through a multi-stage and usually lengthy series of bargaining processes overseen by the National Mediation Board (“NMB”). This process continues until either the parties have reached agreement on a new collective bargaining agreement, or the parties have been released to “self-help” by the NMB. In most circumstances, the RLA prohibits strikes; however, after release by the NMB, carriers and unions are free to engage in self-help measures such as lockouts and strikes.

Any strike, labor dispute or increased unionization among our employees could disrupt our operations, reduce our profitability or interfere with the ability of our management to focus on executing our business strategies. For example, if a labor strike were to continue for several consecutive days, United may have cause to terminate the United Capacity Purchase Agreement. As a result, our business, results of operations and financial condition may be materially adversely affected.

We face tail risk in that we have aircraft lease commitments that extend beyond our existing capacity purchase agreement contractual term on certain aircraft.

As of March 31, 2018, we had 18 aircraft with leases extending past the term of their corresponding capacity purchase agreement with an aggregate exposure of less than $33.0 million. We may not be successful in extending the flying contract terms on these aircraft with our major airline partners. In that event, we intend to pursue alternative uses for those aircraft over the remaining portions of their leases including, but not limited to, operating the aircraft with another major airline under a negotiated capacity purchase agreement, subleasing the aircraft to another operator or marketing them for sale. Additionally, we may negotiate an early lease return agreement with an aircraft’s lessor. In connection with this, we may incur cash and non-cash early lease termination costs that would negatively impact our operations and financial condition. Additionally, if we are unable to extend a flying contract with an existing major airline partner, but reach an agreement to place an aircraft into service with a different major airline partner, we likely will incur inefficiencies and incremental costs, such as changing the aircraft livery, which would negatively impact our financial results.

We may incur substantial maintenance costs as part of our leased aircraft return obligations.

Our aircraft lease agreements contain provisions that require us to return aircraft airframes and engines to the lessor in a specified condition or pay an amount to the lessor based on the actual return

 

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condition of the equipment. These lease return costs are recorded in the period in which they are incurred, and may be materially different than our projections. Any unexpected increase in maintenance return costs may negatively impact our financial position and results of operations.

We may become involved in litigation that may materially adversely affect us.

From time to time, we may become involved in various legal proceedings relating to matters incidental to the ordinary course of our business, including employment, commercial, product liability, class action, whistleblower and other litigation and claims, and governmental and other regulatory investigations and proceedings. Such matters can be time-consuming, divert management’s attention and resources, cause us to incur significant expenses or liability and/or require us to change our business practices. Because of the potential risks, expenses and uncertainties of litigation, we may, from time to time, settle disputes, even where we believe that we have meritorious claims or defenses. Because litigation is inherently unpredictable, we cannot assure you that the results of any of these actions will not have a material adverse effect on our business, results of operations and financial condition.

Disagreements regarding the interpretation of our capacity purchase agreements with our major airline partners could have an adverse effect on our operating results and financial condition.

To the extent that we experience disagreements regarding the interpretation of our capacity purchase or other agreements, we will likely expend valuable management time and financial resources in our efforts to resolve those disagreements. Those disagreements may result in litigation, arbitration, settlement negotiations or other proceedings. Furthermore, there can be no assurance that any or all of those proceedings, if commenced, would be resolved in our favor or that we would be able to exercise sufficient leverage in any proceeding relative to our major airline partner to achieve a favorable outcome. An unfavorable result in any such proceeding could have adverse financial consequences or require us to modify our operations. Such disagreements and their consequences could have an adverse effect on our operating results and financial condition.

We rely on third-party suppliers as the sole manufacturers of our aircraft and aircraft engines.

We depend upon Bombardier and Embraer S.A. (“Embraer”) as the sole manufacturers of our aircraft and GE as the sole manufacturer of our aircraft engines. Our operations could be materially and adversely affected by the failure or inability of Bombardier, Embraer or GE to provide sufficient parts or related maintenance and support services to us in a timely manner, or the interruption of our flight operations as a result of unscheduled or unanticipated maintenance requirements for our aircrafts or engines.

Maintenance costs will likely increase as the age of our regional jet fleet increases.

The average age of our E-175, CRJ-900 and CRJ-700 type aircraft is approximately 2.4, 11.5 and 14.2 years, respectively. We have incurred relatively low maintenance expenses on our E-175 aircraft because most of the parts are under multi-year warranties and a limited number of heavy airframe checks and engine overhauls have occurred. Our maintenance costs will increase significantly, both on an absolute basis and as a percentage of our operating expenses, as our fleet ages and the E-175 warranties expire. In addition, because our current aircraft were acquired over a relatively short period of time, significant maintenance events scheduled for these aircraft will occur at roughly the same intervals, meaning we will incur our most expensive scheduled maintenance obligations across our present fleet at approximately the same time. These more significant maintenance activities result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable for

 

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flying under our capacity purchase agreements. Any unexpected increase in our maintenance costs as our fleet ages or decreased revenues resulting from out-of-service periods could have an adverse effect on our cash flows, operating results and financial condition.

If we face problems with any of our third-party service providers, our operations could be adversely affected.

Our reliance upon others to provide essential services on behalf of our operations may limit our ability to control the efficiency and timeliness of contract services. We have entered into agreements with contractors to provide various facilities and services required for our operations, including aircraft maintenance, ground facilities and IT services, and expect to enter into additional similar agreements in the future. In particular, we rely on AAR and Aviall to provide fixed-rate parts procurement and component overhaul services for our aircraft fleet and GE to provide engine support. Our agreement with AAR, and other service providers, are subject to termination after notice. If our third-party service providers terminate their contracts with us, or do not provide timely or consistently high-quality service, we may not be able to replace them in a cost-efficient manner or in a manner timely enough to support our operational needs, which could have a material adverse effect on our business, financial condition and results of operations. In addition, our operations could be materially and adversely affected by the failure or inability of AAR, Aviall or GE to provide sufficient parts or related maintenance and support services to us in a timely manner.

Regulatory changes or tariffs could negatively impact our business and financial condition.

We import a substantial portion of the equipment we need. For example, the sole manufacturers of our aircraft, Bombardier and Embraer, are headquartered in Canada and Brazil, respectively. We cannot predict the impact of potential regulatory changes or action by U.S. regulatory agencies, including the potential impact of tariffs or changes in international trade treaties on the cost and timing of parts and aircraft. Our business may be subject to additional costs as a result of potential regulatory changes, which could have an adverse effect on our operations and financial results.

The issuance of operating restrictions applicable to one of the fleet types we operate could negatively impact our business and financial condition.

We rely on a limited number of aircraft types, including CRJ-700s, CRJ-900s and E-175s. The issuance of FAA or manufacturer directives restricting or prohibiting the use of the aircraft types we operate could negatively impact our business and financial results.

If we have a failure in our technology or security breaches of our information technology infrastructure our business and financial condition may be adversely affected.

The performance and reliability of our technology, and the technology of our major airline partners, are critical to our ability to compete effectively. Any internal technological error or failure or large scale external interruption in the technological infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our internal network. Any individual, sustained or repeated failure of our technology or that of our major airline partners could impact our ability to conduct our business, lower the utilization of our aircraft and result in increased costs. Our technological systems and related data, and those of our major airline partners, may be vulnerable to a variety of sources of interruption due to events beyond our control, including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues.

In addition, as a part of our ordinary business operations, we collect and store sensitive data, including personal information of our employees and information of our major airline partners. Our information

 

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systems are subject to an increasing threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to our systems or information through fraud or other means of deception. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving, and may be difficult to anticipate or to detect for long periods of time. We may not be able to prevent all data security breaches or misuse of data. The compromise of our technology systems resulting in the loss, disclosure, misappropriation of, or access to, employees’ or business partners’ information could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business and financial condition.

Our business could be materially adversely affected if we lose the services of our key personnel.

Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial and operating personnel. In particular, we depend on the services of Jonathan G. Ornstein, our Chairman and Chief Executive Officer, and Michael J. Lotz, our President and Chief Financial Officer. Competition for highly qualified personnel is intense, and the loss of any executive officer, senior manager, or other key employee without an adequate replacement, or the inability to attract new qualified personnel, could have a material adverse effect on our business, results of operations and financial condition.

We are subject to various environmental and noise laws and regulations, which could have a material adverse effect on our business, results of operations and financial condition.

We are subject to increasingly stringent federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment and noise, including those relating to emissions to the air, discharges (including storm water discharges) to surface and subsurface waters, safe drinking water and the use, management, disposal and release of, and exposure to, hazardous substances, oils and waste materials. We are or may be subject to new or proposed laws and regulations that may have a direct effect (or indirect effect through our third-party specialists or airport facilities at which we operate) on our operations. In addition, U.S. airport authorities are exploring ways to limit de-icing fluid discharges. Any such existing, future, new or potential laws and regulations could have an adverse impact on our business, results of operations and financial condition.

Similarly, we are subject to environmental laws and regulations that require us to investigate and remediate soil or groundwater to meet certain remediation standards. Under certain laws, generators of waste materials, and current and former owners or operators of facilities, can be subject to liability for investigation and remediation costs at locations that have been identified as requiring response actions. Liability under these laws may be strict, joint and several, meaning that we could be liable for the costs of cleaning up environmental contamination regardless of fault or the amount of wastes directly attributable to us.

Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.

As of September 30, 2017, we had aggregate federal and state net operating loss carryforwards of approximately $299.8 million and $172.3 million, which expire in 2027-2036 and 2018-2037, respectively, with approximately $20.1 million of state net operating loss carryforwards expiring in 2018. Our unused losses generally carry forward to offset future taxable income, if any, until such unused losses expire. We may be unable to use these losses to offset income before such unused losses expire. In addition, if a corporation undergoes an “ownership change” (generally defined as a

 

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greater than 50-percentage-point cumulative change in the equity ownership of certain shareholders over a rolling three-year period) under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset future taxable income or taxes may be limited. We have experienced ownership changes in the past and may experience ownership changes in connection with this offering or as a result of future changes in our stock ownership (some of which changes may not be within our control). This, in turn, could materially reduce or eliminate our ability to use our losses or tax attributes to offset future taxable income or tax and have an adverse effect on our future cash flows.

We may not be able to successfully implement our growth strategy.

Our growth strategy includes, among other things, providing regional flying to other major airlines and/or entering into the cargo and express shipping business. We face numerous challenges in implementing our growth strategy, including our ability to:

 

    provide regional flying to other major airlines with hub cities that overlap with our existing major airline partners; and

 

    enter into relationships with third-parties to carry their cargo on terms that are acceptable to us.

Our capacity purchase agreements limit our ability to provide regional flying services to other airlines in certain major airport hubs of American and United. These restrictions may make us a less attractive partner to other major airlines whose regional flying needs do not align with our geographical restrictions.

The potential benefits of entering the air cargo and express shipping sector will depend substantially on our ability to enter into relationships with integrated logistics companies and transition our existing business strategies into a new sector. We may be unsuccessful in entering into relationships with integrated logistics companies to carry cargo on terms that are acceptable to us. Additionally, our ability to transition our existing business strategies into a new sector may be costly, complex and time-consuming, and our management will have to devote substantial time and resources to such effort. Should we transition into this new sector, we may experience difficulties or delays in securing gate access and other airport services necessary to operate in the air cargo and express shipping sector. Our inability to successfully implement our growth strategies, could have a material adverse effect on our business, financial condition and results of operations and any assumptions underlying estimates of expected cost savings or expected revenues may be inaccurate.

We may not be able to make opportunistic acquisitions should we elect to do so as part of our growth strategy.

If we elect to pursue an acquisition, our ability to successfully implement this transaction would depend on a variety of factors, including the approval of our acquisition target’s major airline partners, obtaining financing on acceptable terms and compliance with the restrictions contained in our debt agreements. If we need to obtain our lenders’ consent prior to an acquisition, they may refuse to provide such consent or condition their consent on our compliance with additional restrictive covenants that limit our operating flexibility. Acquisition transactions involve risks, including those associated with integrating the operations or (as applicable) separately maintaining the operations, financial reporting, disparate technologies and personnel of acquired companies; managing geographically dispersed operations; the diversion of management’s attention from other business concerns; unknown risks; and the potential loss of key employees. We may not successfully integrate any businesses we may acquire in the future and may not achieve anticipated revenue and cost benefits relating to any such transactions. Strategic transactions may be expensive, time consuming and may strain our resources. Strategic

 

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transactions may not be accretive to our earnings and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, one-time write-offs of goodwill and amortization expenses of other intangible assets. In addition, strategic transactions that we may pursue could result in dilutive issuances of equity securities.

Our ability to obtain financing or access capital markets may be limited.

There are a number of factors that may limit our ability to raise financing or access capital markets in the future, including our significant debt and future contractual obligations, our liquidity and credit status, our operating cash flows, the market conditions in the airline industry, U.S. and global economic conditions, the general state of the capital markets and the financial position of the major providers of commercial aircraft financing. We cannot assure you that we will be able to source external financing for our planned aircraft acquisitions or for other significant capital needs, and if we are unable to source financing on acceptable terms, or unable to source financing at all, our business could be materially adversely affected. To the extent we finance our activities with additional debt, we may become subject to financial and other covenants that may restrict our ability to pursue our business strategy or otherwise constrain our growth and operations.

Negative publicity regarding our customer service could have a material adverse effect on our business, results of operations and financial condition.

Our business strategy includes the implementation of our major airline partners’ brand and product in order to increase customer loyalty and drive future ticket sales. In addition, we also receive certain amounts under our United Capacity Purchase Agreement based upon the results of passenger satisfaction surveys. However, we may experience a high number of passenger complaints related to, among other things, our customer service. These complaints, together with delayed and cancelled flights, and other service issues, are reported to the public by the DOT. If we do not meet our major airline partners’ expectations with respect to reliability and service, our and our major airline partners’ brand and product could be negatively impacted, which could result in customers deciding not to fly with our major airline partners or with us. If we are unable to provide consistently high-quality customer service, it could have an adverse effect on our relationships with our major airline partners.

Risks associated with our presence in international emerging markets, including political or economic instability, and failure to adequately comply with existing legal requirements, may materially adversely affect us.

Some of our target growth markets include countries with less developed economies, legal systems, financial markets and business and political environments are vulnerable to economic and political disruptions, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets, trafficking and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by us now or in the future and the resulting instability may have a material adverse effect on our business, results of operations and financial condition.

We emphasize compliance with all applicable laws and regulations and have implemented and continue to implement and refresh policies, procedures and certain ongoing training of our employees, third-party specialists and partners with regard to business ethics and key legal requirements; however, we cannot assure you that our employees, third-party specialists or partners will adhere to our code of ethics, other policies or other legal requirements. If we fail to enforce our policies and procedures properly or maintain adequate recordkeeping and internal accounting practices to record our transactions accurately, we may be subject to sanctions. In the event we believe or have reason to believe our employees, third-party specialists or partners have or may have violated applicable laws or

 

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regulations, we may incur investigation costs, potential penalties and other related costs which in turn may materially adversely affect our reputation and could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to Our Industry

The airline industry is highly competitive and has undergone a period of consolidation and transition leaving fewer potential major airline partners.

The airline industry is highly competitive. We compete primarily with other regional airlines, some of which are owned by or operated by major airlines. In certain instances, our competitors are larger than us and possess significantly greater financial and other resources than we do. The airline industry has undergone substantial consolidation, including the mergers between Alaska Airlines and Virgin America Inc. in 2016, American and US Airways in 2013, Southwest Airlines and AirTran in 2011, United and Continental Airlines in 2010 and Delta and Northwest Airlines in 2008. Any additional consolidation or significant alliance activity within the airline industry could further limit the number of potential partners with whom we could enter into capacity purchase agreements.

We are subject to significant governmental regulation.

All interstate air carriers, including us, are subject to regulation by the DOT, the FAA and other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service. The FAA requires operating, air worthiness and other certificates; approval of personnel who may engage in flight, maintenance or operation activities; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. We cannot predict whether we will be able to comply with all present and future laws, rules, regulations and certification requirements or that the cost of continued compliance will not have a material adverse effect on our operations. We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of our aircraft for any reason may have a material adverse effect on our operations. In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect our operations and require that we incur substantial on-going costs.

Airlines are often affected by factors beyond their control including: air traffic congestion at airports; air traffic control inefficiencies; adverse weather conditions, such as hurricanes or blizzards; increased security measures; new travel related taxes or the outbreak of disease, any of which could have a material adverse effect on our business, results of operations and financial condition.

Like other airlines, our business is affected by factors beyond our control, including air traffic congestion at airports, air traffic control inefficiencies, increased security measures, new travel-related taxes and fees, adverse weather conditions, natural disasters and the outbreak of disease. Factors that cause flight delays frustrate passengers and increase operating costs and decrease revenues, which in turn could adversely affect profitability. The federal government singularly controls all U.S. airspace, and airlines are completely dependent on the FAA to operate that airspace in a safe, efficient and affordable manner. The air traffic control system, which is operated by the FAA, faces challenges in managing the growing demand for U.S. air travel, U.S. and foreign air-traffic controllers often rely on outdated technologies that routinely overwhelm the system and compel airlines to fly inefficient, indirect routes resulting in delays. In addition, there are currently proposals before Congress that could potentially lead to the privatization of the United States’ air traffic control system, which could adversely affect our business. Further, implementation of the Next Generation Air Transport System by the FAA

 

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would result in changes to aircraft routings and flight paths that could lead to increased noise complaints and lawsuits, resulting in increased costs. There are additional proposals before Congress that would treat a wide range of consumer protection issues, including, among other things, proposals to regulate seat size, which could increase the costs of doing business.

Adverse weather conditions and natural disasters, such as hurricanes, winter snowstorms or earthquakes, can cause flight cancellations or significant delays. Cancellations or delays due to adverse weather conditions or natural disasters, air traffic control problems or inefficiencies, breaches in security or other factors may affect us to a greater degree than other, larger airlines that may be able to recover more quickly from these events, and therefore could have a material adverse effect on our business, results of operations and financial condition to a greater degree than other air carriers. Any general reduction in airline passenger traffic could have a material adverse effect on our business, results of operations and financial condition.

Terrorist activities or warnings have dramatically impacted the airline industry, and will likely continue to do so.

The terrorist attacks of September 11, 2001 and their aftermath have negatively impacted the airline industry in general, including our operations. If additional terrorist attacks are launched against the airline industry, there will be lasting consequences of the attacks, which may include loss of life, property damage, increased security and insurance costs, increased concerns about future terrorist attacks, increased government regulation and airport delays due to heightened security. We cannot provide any assurance that these events will not harm the airline industry generally or our operations or financial condition in particular.

The occurrence of an aviation accident involving our aircraft would negatively impact our operations and financial condition.

An accident or incident involving our aircraft could result in significant potential claims of injured passengers and others, as well as repair or replacement of a damaged aircraft and its consequential temporary or permanent loss from service. In the event of an accident, our liability insurance may not be adequate to offset our exposure to potential claims and we may be forced to bear substantial losses from the accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our operational and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause a public perception that our operations are less safe or reliable than other airlines.

An outbreak of a disease or similar public health threat could have a material adverse impact on our business, financial position and results of operations.

An outbreak of a disease or similar public health threat that affects travel demand, travel behavior, or travel restrictions could have a material adverse impact on our business, financial condition and results of operations.

Risks Related to Owning Our Common Stock

The market price of our common stock may be volatile, which could cause the value of an investment in our stock to decline.

Prior to this offering, there has been no public market for shares of our common stock, and an active public market for these shares may not develop or be sustained after this offering. We and the representatives of the underwriters determined the initial public offering price of our common stock

 

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through negotiation. This price does not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the market price of our common stock may fluctuate substantially due to a variety of factors, many of which are beyond our control, including:

 

    announcements concerning our major airline partners, competitors, the airline industry or the economy in general;

 

    strategic actions by us, our major airline partners, or our competitors, such as acquisitions or restructurings;

 

    media reports and publications about the safety of our aircraft or the aircraft type we operate;

 

    new regulatory pronouncements and changes in regulatory guidelines;

 

    announcements concerning the availability of the type of aircraft we use;

 

    significant volatility in the market price and trading volume of companies in the airline industry;

 

    changes in financial estimates or recommendations by securities analysts or failure to meet analysts’ performance expectations;

 

    sales of our common stock or other actions by insiders or investors with significant shareholdings, including sales by our principal shareholders; and

 

    general market, political and other economic conditions.

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies. Broad market fluctuations may materially adversely affect the trading price of our common stock.

In the past, shareholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert management’s attention and resources and have a material adverse effect on our business, results of operations and financial condition.

If securities or industry analysts do not publish research or reports about our business or publish negative reports about our business, our stock price and trading volume could decline.

The trading market for our common stock depends in part on the research and reports that securities and industry analysts may publish about us or our business. If one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, the trading price of our common stock would likely decline. If one or more of these analysts ceases to cover our company or fails to publish reports on us regularly, demand for our stock could decrease, which may cause the trading price of our common stock and the trading volume of our common stock to decline.

Purchasers of our common stock in this offering will experience immediate and substantial dilution in the tangible net book value of their investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur an immediate dilution of $        in net tangible book value per share from the price you paid. The vesting of our restricted stock awards and warrants will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution” elsewhere in this prospectus.

 

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The value of our common stock may be materially adversely affected by additional issuances of common stock by us or sales by our principal shareholders.

Any future issuances or sales of our common stock by us will be dilutive to our existing common shareholders. We had 4,957,686 shares of common stock outstanding as of March 31, 2018. All of the shares of common stock sold in this offering will be freely tradeable without restrictions or further registration under the Securities Act. The holders of     % of our outstanding shares of our common stock have signed lock-up agreements with the underwriters of this offering, under which they have agreed, subject to certain exceptions, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of our common stock or securities convertible into or exchangeable or exercisable for shares of our common stock, enter into a transaction which would have the same effect, without the prior written consent of certain of the underwriters, for a period of 180 days after the date of this prospectus. Sales of substantial amounts of our common stock in the public or private market, a perception in the market that such sales could occur, or the issuance of securities exercisable or convertible into our common stock, could adversely affect the prevailing price of our common stock.

The value of our common stock may be materially adversely affected by additional issuances of common stock underlying our outstanding warrants.

As of March 31, 2018, we had outstanding warrants to purchase an aggregate of 4,456,362 shares of our common stock, 4,356,362 of which were originally issued to non-U.S. citizens who were claimholders in our bankruptcy proceedings in order to maintain compliance with restrictions imposed by federal law on foreign ownership of U.S. airlines. Any future warrant exercises by our existing warrant holders will be dilutive to our existing common shareholders. All of the shares of common stock issuable upon exercise of our warrants will be freely tradeable without restrictions or further registration under the Securities Act. The holders of     % of our outstanding warrants have signed lock-up agreements with the underwriters of this offering, under which they have agreed, subject to certain exceptions, not to offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any of our common stock or securities convertible into or exchangeable or exercisable for shares of our common stock, enter into a transaction which would have the same effect, without the prior written consent of certain of the underwriters, for a period of 180 days after the date of this prospectus. Sales of substantial amounts of our common stock in the public or private market, a perception in the market that such sales could occur, or the issuance of securities exercisable or convertible into our common stock, could adversely affect the prevailing price of our common stock.

Provisions in our charter documents might deter acquisition bids for us, which could adversely affect the price of our common stock.

Our articles of incorporation and bylaws contain provisions that, among other things:

 

    authorize our Board of Directors, without shareholder approval, to designate and fix the voting powers, designations, preferences, limitations, restrictions and relative rights of one or more series of preferred stock and to issue shares of one or more series of preferred stock so designated, or rights to acquire such preferred stock, that could dilute the interest of, or impair the voting power of, holders of our common stock and could also have the effect of discouraging, delaying or preventing a change of control;

 

    establish advance notice procedures that shareholders must comply with in order to nominate candidates to our Board of Directors and propose matters to be brought before an annual or special meeting of our shareholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company;

 

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    authorize a majority of our Board of Directors to appoint a director to fill a vacancy created by the expansion of our Board of Directors or the resignation, death or removal of a director, which may prevent shareholders from being able to fill vacancies on our Board of Directors;

 

    restrict the number of directors constituting our Board of Directors to within a set range, and give our Board of Directors exclusive authority to increase or decrease the number of directors within such range, which may prevent shareholders from being able to fill vacancies on our Board of Directors; and

 

    restrict the ability of shareholders to call special meetings of shareholders.

Our corporate charter includes provisions limiting ownership by non-U.S. citizens.

To comply with restrictions imposed by federal law on foreign ownership of U.S. airlines, our second amended and restated articles of incorporation to be in effect immediately prior to the consummation of this offering restrict the ownership and voting of shares of our common stock by people and entities who are not “citizens of the United States” as that term is defined in 49 U.S.C. § 40102(a). That statute defines “citizen of the United States” as, among other things, a U.S. corporation, of which the president and at least two-thirds of the board of directors and other managing officers are individuals who are citizens of the United States, which is under the actual control of citizens of the United States and in which at least 75% of the voting interest is owned or controlled by persons who are citizens of the United States. Our second amended and restated articles of incorporation prohibit any non-U.S. citizen from owning or controlling more than 24.9% of the aggregate votes of all outstanding shares of our common stock or 49.0% of the total number of outstanding shares of our capital stock. The restrictions imposed by the above-described ownership caps are applied to each non-U.S. citizen in reverse chronological order based on the date of registration on our foreign stock record. At no time may shares of our capital stock held by non-U.S. citizens be voted unless such shares are reflected on the foreign stock record. The voting rights of non-U.S. citizens having voting control over any shares of our capital stock are subject to automatic suspension to the extent required to ensure that we are in compliance with applicable law. In the event any transfer or issuance of shares of our capital stock to a non-U.S. citizen would result in non-U.S. citizens owning more than the above-described cap amounts, such transfer or issuance will be void and of no effect.

As of March 31, 2018, there were 4,356,362 outstanding warrants to purchase shares of our common stock, with an exercise price of $0.01 per share and 100,000 outstanding warrants to purchase shares of our common stock with an exercise price of $8.00 per share. The warrants are not exercisable in violation of the ownership restrictions described above. We are currently in compliance with all applicable foreign ownership restrictions. See “Business—Foreign Ownership” and “Description of Capital Stock—Anti-Takeover Provisions of Our Articles of Incorporation, Bylaws and Nevada Law—Limited Ownership and Voting by Foreign Owners.”

Our corporate charter limits certain transfers of our stock, which limits are intended to preserve our ability to use our net operating loss carryforwards, and these limits could have an effect on the market price of our common stock.

To reduce the risk of a potential adverse effect on our ability to use our net operating loss carryforwards for federal income tax purposes, our second amended and restated articles of incorporation to be in effect immediately prior to the consummation of this offering prohibit the transfer of any shares of our capital stock that would result in (i) any person or entity owning 4.75% or more of our then-outstanding capital stock, or (ii) an increase in the percentage ownership of any person or entity owning 4.75% or more of our then-outstanding capital stock. These transfer restrictions expire upon the earliest of (i) the repeal of Section 382 of the Code or any successor statute if our Board of Directors determines that such restrictions are no longer necessary to preserve our ability to use our

 

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net operating loss carryforwards, (ii) the beginning of a fiscal year to which our Board of Directors determines that no net operating losses may be carried forward or (iii) such other date as determined by our Board of Directors. These transfer restrictions apply to the beneficial owner of the shares of our capital stock. The clients of an investment advisor are treated as the beneficial owners of stock for this purpose if the clients have the right to receive dividends, if any, the power to acquire or dispose of the shares of our capital stock, and the right to proceeds from the sale of our capital stock. Certain transactions approved by our Board of Directors, such as mergers and consolidations meeting certain requirements set forth in our articles of incorporation, are exempt from the above-described transfer restrictions. Our Board of Directors also has the ability to grant waivers, in its discretion, with respect to transfers of our stock that would otherwise be prohibited. Any transfer of common stock in violation of these restrictions will be void and will be treated as if such transfer never occurred.

The transfer restrictions contained in our second amended and restated articles of incorporation may impair or prevent a sale of common stock by a shareholder and may adversely affect the price at which a shareholder can sell our common stock. In addition, this limitation may have the effect of delaying or preventing a change in control of the Company, creating a perception that a change in control cannot occur or otherwise discouraging takeover attempts that some shareholders may consider beneficial, which could also adversely affect the market price of the our common stock. We cannot predict the effect that this provision in our second amended and restated articles of incorporation may have on the market price of the our common stock.

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We have not historically paid dividends on shares of our common stock and do not expect to pay dividends on such shares in the foreseeable future. Additionally, our Investor Rights Agreement, RASPRO Lease Facility and GECAS Lease Facility (each as defined below) contain restrictions that limit our ability to or prohibit us from paying dividends to holders of our common stock. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend on our results of operations, financial condition, capital requirements, restrictions contained in current or future leases and financing instruments, business prospects and such other factors as our Board of Directors deems relevant, including restrictions under applicable law. Consequently, your only opportunity to achieve a positive return on your investment in us will be if the market price of our common stock appreciates.

We have broad discretion over the use of the net proceeds from this offering and we may not use them effectively.

We cannot specify with any certainty the particular uses of the net proceeds that we will receive from this offering. Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. The failure by our management to apply these proceeds effectively could adversely affect our business, results of operations, and financial condition. Pending their use, we may invest our proceeds in a manner that does not produce income or that loses value. Our investments may not yield a favorable return to our investors and may negatively impact the price of our common stock.

 

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We are an “emerging growth company,” and the reduced disclosure and regulatory requirements applicable to “emerging growth companies” may make our common stock less attractive to investors.

We qualify as an “emerging growth company” as defined in the JOBS Act, and therefore we may take advantage of reduced disclosure and regulatory requirements that are otherwise generally applicable to public companies. As an emerging growth company:

 

    We may present only two years of audited financial statements and related Selected Financial Data and Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

    We are not required to obtain an attestation and report from our independent registered public accounting firm on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act;

 

    We may present reduced disclosure regarding executive compensation in our periodic reports and proxy statements; and

 

    We are not required to hold nonbinding advisory shareholder votes on executive compensation or golden parachute arrangements.

We may take advantage of these reduced requirements until we are no longer an “emerging growth company,” which will occur upon the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the first fiscal year in which our annual gross revenue is $1.07 billion or more, (iii) the date on which we have, during the previous rolling three-year period, issued more than $1.0 billion in non-convertible debt securities and (iv) the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Investors may find our common stock less attractive or our company less comparable to certain other public companies because we will rely on these reduced requirements.

In addition, the JOBS Act permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards. This effectively permits the delayed adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are electing to “opt out” of such extended transition period and, as a result, we will comply with new or revised accounting standards on the dates for which compliance is required for non-emerging growth companies. This election is irrevocable.

The requirements of being a public company may strain our resources, increase our operating costs, divert management’s attention and affect our ability to attract and retain qualified board members or executive officers.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the listing requirements of the Nasdaq Global Select Market, and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight

 

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may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. We will need to hire additional employees or engage outside consultants to comply with these requirements, increasing our costs and expenses.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may suffer.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors, particularly to serve on our board committees, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could suffer, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition and results of operations.

We will be required to assess our internal control over financial reporting on an annual basis, and any future adverse findings from such assessment could result in a loss of investor confidence in our financial reports, result in significant expenses to remediate any internal control deficiencies and have a material adverse effect on our business, results of operations and financial condition.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the closing of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting, provided that our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the Securities and Exchange Commission (“SEC”) following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Exchange Act, or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. We will be required to disclose changes made in our internal control and procedures on a quarterly basis. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. We are beginning the

 

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costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing, and any required remediation in a timely fashion or at all.

In future periods, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the regulatory investigations, civil or criminal sanctions and litigation, any of which would have a material adverse effect on our business, results of operations and financial condition.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

    the supply and retention of qualified airline pilots;

 

    the volatility of pilot attrition;

 

    dependence on, and changes to, or non renewal of, our capacity purchase agreements;

 

    increases in our labor costs;

 

    reduced utilization under our capacity purchase agreements;

 

    the financial strength of our major airline partners;

 

    direct operation of regional jets by our major airline partners;

 

    limitations on our ability to expand regional flying within the flight systems of our major airline partners’ and those of other major airlines;

 

    our significant amount of debt and other contractual obligations;

 

    our compliance with ongoing financial covenants under our credit facilities;

 

    our ability to keep costs low and execute our growth strategies; and

 

    other risk factors included under “Risk Factors” in this prospectus.

In addition, in this prospectus, the words “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to our company, business or management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward-looking statements.

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Further, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date of this prospectus. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable law. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $        million, based on an assumed initial public offering price of $        per share (the mid-point of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Pursuant to an overallotment option, the selling shareholders have offered up to                  shares of our common stock for sale in this offering. We will not receive any proceeds from the sale of shares by the selling shareholders.

We intend to use the net proceeds from this offering to (i) repay approximately $        million of existing indebtedness under our                                         , which is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commitments and Contractual Obligations” and (ii) pay the unpaid fees and expenses related to this offering, which we estimate to be $        . As of March 31, 2018, our                                          had an outstanding balance of $         million, which drawn amounts bear interest at the London InterBank Offered Rate (“LIBOR”) plus a margin of                                         % and matures on                 .

We intend to use any remaining proceeds for general corporate purposes, which may include the repayment of indebtedness, working capital and capital expenditures, including flight equipment acquisitions and lease buyouts. Currently, we do not know the amounts that we intend to use for each of these general corporate activities. Accordingly, our management will have broad discretion over the uses of the net proceeds in this offering.

Each $1.00 increase (decrease) in the assumed public offering price of $        per share would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $         million. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $        million, assuming that the assumed offering price stays the same. We do not expect that a change in the offering price or the number of shares by these amounts would have a material effect on our intended uses of the net proceeds from this offering, although it may impact the amount of time prior to which we may need to seek additional capital.

 

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DIVIDEND POLICY

We have never paid cash dividends on our common stock and we do not presently anticipate paying cash dividends after the completion of this offering. In addition, our Investor Rights Agreement, RASPRO Lease Facility and GECAS Lease Facility (each as defined below) contain negative covenants prohibiting us from paying dividends to our shareholders and future financing arrangements may similarly restrict us from paying dividends. Any future determination as to the declaration and payment of dividends, if any, will be at the discretion of our Board of Directors and will depend on then existing conditions, including our financial condition, operating results, contractual restrictions, covenant compliance, capital requirements, business prospects and other factors our Board of Directors may deem relevant, including restrictions imposed under applicable law.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, current maturities of long-term debt and capitalization as of March 31, 2018:

 

    on an actual basis; and

 

    on a pro forma basis to give effect to this offering, the         -for-one forward stock split and the application of the net proceeds we will receive.

You should read this capitalization table together with our financial statements and the related notes appearing at the end of this prospectus, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, and other financial information included in this prospectus.

 

     As of March 31, 2018  
     Actual      Pro
Forma(1)

(2)
 
(in thousands, except per share data)       

Cash and cash equivalents

   $ 52,699      $               
  

 

 

    

 

 

 

Long-term debt, including current portion

     929,029     

Shareholders’ equity:

     

Preferred stock, no par value, 2,000,000 shares authorized; no shares issued and outstanding

     —          —    

Common stock, no par value, 15,000,000 shares of common stock authorized, 4,957,686 shares issued and outstanding and 4,456,362 warrants issued and outstanding;                 shares of common stock authorized pro forma,                  shares issued and outstanding pro forma and                  warrants issued and outstanding pro forma

     115,275     

Additional paid-in capital

     —       

Retained earnings

     133,430     

Accumulated other comprehensive income

     
  

 

 

    

 

 

 

Total shareholders’ equity

     248,705     
  

 

 

    

 

 

 

Total capitalization

   $ 1,177,734      $  
  

 

 

    

 

 

 

 

(1) The unaudited pro forma capitalization table gives effect to the receipt of the estimated net proceeds by us from the sale of shares of our common stock offered by us (based on an assumed initial public offering price of $        per share, the mid-point of the price range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds received by us.
(2)

Each $1.00 increase or decrease in the assumed initial public offering price of $        per share would increase or decrease, respectively, the amount of cash and cash equivalents, additional paid-in capital, total shareholders’ equity and total capitalization by $        million (assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase or decrease of 1,000,000 in the number of shares we are offering would increase or decrease, respectively, the amount of cash and cash equivalents, shareholders’ equity and total capitalization by approximately $        million (based on an assumed initial public offering price of $        per share, the mid-point of the price range as set forth on the cover page of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated

 

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  offering expenses payable by us. The pro forma information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.

The number of shares of our common stock outstanding after this offering is based on 4,957,686 shares outstanding as of March 31, 2018, 4,356,362 shares issuable upon exercise of warrants with an exercise price of $0.01 per share, 100,000 shares issuable upon exercise of warrants with an exercise price of $8.00 per share and 78,893 issued but unvested shares under the 2011 Plan and the 2017 Plan, accounted for under the treasury method, and excludes:

 

    an aggregate of 2,000,000 shares of common stock reserved for issuance under the SAR Plan, 846,664 of which were outstanding as of March 31, 2018, which settle in cash; and

 

    an aggregate of 500,000 shares of common stock reserved for issuance under the RSU Plan, 123,360 of which were issued as of March 31, 2018, and may be settled in cash, or in a combination of cash and shares of common stock, at either our option or the holder’s option pursuant to the terms of the award agreement.

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock immediately after the offering.

The historical net tangible book value (deficit) of our common stock as of March 31, 2018 was $236.8 million, or $47.76 per share on an outstanding shares basis and $25.12 per share on a fully-diluted basis. Historical net tangible book value per share is determined by dividing the net tangible book value by the number of shares of outstanding common stock. If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock.

After giving effect to our issuance of shares of common stock at an assumed initial public offering price of $        per share of common stock, the mid-point of the range of the estimated initial offering price of between $        and $        as set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and estimated offering expenses payable by us, our pro forma net tangible book value as adjusted as of March 31, 2018 would have been approximately $        million, or approximately $        per pro forma share of common stock. This represents an immediate increase in pro forma net tangible book value of $        per share to our existing shareholders and an immediate dilution of $        per share to new investors in this offering.

The following table illustrates this dilution on a per share basis to new investors, after giving effect to the completion of the         -for-one forward stock split:

 

Assumed initial public offering price

   $      $                   

Historical net tangible book value per share as of March 31, 2018

     47.76     

Pro forma decrease in net tangible book value per share

     
  

 

 

    

 

 

 

Pro forma net tangible book value per share as of March 31, 2018

     

Increase in pro forma net tangible book value per share attributable to this offering

     
  

 

 

    

 

 

 

Pro forma net tangible book value per share, as adjusted(1)

     
  

 

 

    

 

 

 

Dilution in pro forma net tangible book value per share to new investors in this offering

     
  

 

 

    

 

 

 

 

(1) Pro forma net tangible book value per share, as adjusted, gives effect to this offering.

Each $1.00 increase or decrease in the assumed public offering price of $        per share, the mid-point of the price range set forth on the cover page of this prospectus, would increase or decrease, respectively, our pro forma net tangible book value, as adjusted to give effect to this offering, by $        million, or $        per share, and the dilution per share to investors participating in this offering by $        per share (assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. At the assumed public offering price per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, an increase of 1,000,000 in the number of shares we are offering would increase our pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $        million, or $        per share, and decrease the dilution per share to investors participating in this offering by $        per share, and a decrease of 1,000,000 in the number of shares we are offering would decrease our pro forma net

 

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tangible book value, as adjusted to give effect to this offering, by approximately $        million, or $        per share, and increase the dilution per share to investors participating in this offering by $        per share. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing. We will not receive any of the proceeds from the sale of any shares by the selling shareholders if the overallotment option is exercised; accordingly, there is no dilutive impact as a result of these sales.

The table below summarizes as of March 31, 2018, on a pro forma as adjusted basis described above, the number of shares of our common stock, the total consideration and the average price per share (i) paid to us by existing shareholders, and (ii) to be paid by new investors purchasing our common stock in this offering at an assumed initial public offering price of $        per share (in thousands except per share and percentage data).

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing shareholders

                       $                                $           

New investors

                       $                       $  

Total

                       $                       $  

The outstanding share information in the table above is based on 4,957,686 shares outstanding as of March 31, 2018, and includes an aggregate of 4,456,362 shares of common stock reserved for issuance under outstanding warrants. To the extent any of these warrants are exercised, new investors would experience dilution.

If the underwriters exercise in full their option to purchase additional shares of our common stock from the selling shareholders, our existing shareholders would own     % and our new investors would own     % of the total number of shares of our common stock outstanding upon completion of this offering. The total consideration paid by our existing shareholders would be approximately              $ million, or     %, and the total consideration paid by investors purchasing shares in this offering would be $        million, or     %.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

You should read the following selected consolidated historical financial and operating data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements, related notes and other financial information included in this prospectus. The selected consolidated financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the financial statements and related notes included in this prospectus.

The selected consolidated statement of operations data for our fiscal years ended September 30, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data for the six months ended March 31, 2018 has been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. The selected consolidated statements of operations data for our fiscal years ended September 30, 2013, 2014 and 2015 have been derived from our consolidated financial statements that are not included in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future, and results for the six months ended March 31, 2018 are not indicative of the results expected for the full year.

 

    Year Ended September 30,     Six Months Ended
March 31,
 
    2013(1)     2014(1)     2015     2016     2017     2017     2018  
   

(in thousands, except per share data)

 

Operating revenues:

             

Contract revenue

  $ 382,125     $ 407,408     $ 481,168     $ 569,373     $ 618,698     $ 309,711     $ 310,904  

Pass-through and other

    33,131       28,617       24,931       18,463       24,878       9,619       21,420  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    415,256       436,025       506,099       587,836       643,576       319,330       332,324  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Flight operations

    78,685       93,092       118,600       141,422       155,516       72,349       103,807  

Fuel

    13,531       6,092       1,017       753       766       400       198  

Maintenance

    102,473       123,506       142,643       225,130       210,729       117,422       105,756  

Aircraft rent

    77,243       80,942       69,083       71,635       72,551       36,060       36,582  

Aircraft and traffic servicing

    28,363       20,817       13,274       3,936       3,676       1,580       1,744  

Promotions and sales(2)

    5,406       2,795       11       —         —         —         —    

General and administrative

    31,598       34,501       39,940       42,182       38,996       20,676       21,267  

Depreciation and amortization

    32,945       33,425       42,296       46,020       61,048       29,600       31,598  
             

Asset impairment

    7,942       —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    378,186       395,170       426,864       531,078       543,282       278,087       300,952  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    37,070       40,855       79,235       56,758       100,294       41,243       31,372  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income, net:

             

Interest expense

    (9,043     (9,881     (16,984     (32,618     (46,110     (21,840     (27,474

Interest income

    71       14       21       325       32       15       19  

Other income (expense), net

    2,458       (475     975       381       (514     (394     (102
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    (6,514     (10,342     (15,988     (31,912     (46,592     (22,219     (27,557
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    30,556       30,513       63,247       24,846       53,702       19,024       3,815  

Income tax (benefit) expense

    (11,078     11,749       24,248       9,926       20,874       7,110       (21,181
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 41,634     $ 18,764     $ 38,999     $ 14,920     $ 32,828     $ 11,914     $ 24,996  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common shareholders:

             

Basic(3)

  $ 14.57     $ 6.32     $ 12.58     $ 3.90     $ 7.52     $ 2.76     $ 5.46  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(3)

  $ 4.52     $ 2.04     $ 4.04     $ 1.54     $ 3.51     $ 1.27     $ 2.65  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Year Ended September 30,     Six Months Ended
March 31,
 
    2013(1)     2014(1)     2015     2016     2017     2017     2018  
   

(in thousands, except per share data)

 

Pro forma net income per share attributable to common shareholders (unaudited)(4):

             

Basic

          $       $  
         

 

 

     

 

 

 

Diluted

          $       $  
         

 

 

     

 

 

 

Weighted-average common shares outstanding:

             

Basic

    2,858,466       2,970,066       3,099,866       3,823,214       4,367,610       4,313,106       4,577,163  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    9,211,984       9,193,314       9,664,774       9,706,770       9,349,846       9,363,285       9,424,379  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP financial data:

             

EBITDA(5)

  $ 72,473     $ 73,805     $ 122,506     $ 103,159     $ 160,828     $ 70,449     $ 62,868  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDAR(5)

  $ 149,716     $ 154,747     $ 191,589     $ 174,794     $ 233,379     $ 106,509     $ 99,450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Our operations data for our fiscal years ended September 30, 2013 and 2014 include results from our historical go! operations. We operated go! as an inter-island air carrier in Hawaii from 2006 to 2014.
(2) Promotion and sales primarily consists of reservations and marketing costs related to our historical go! operations. We do not pay promotion and sales expenses under our capacity purchase agreements.
(3) See Note 10 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted earnings per share.
(4) Pro forma net income per share attributable to common shareholders data is presented for our fiscal year ended September 30, 2017 and the six months ended March 31, 2018 to give effect to the issuance of              shares of our common stock pursuant to this offering, and our application of the net proceeds from this offering as set forth under “Use of Proceeds,” assuming an initial public offering price of $                 per share (which is the mid-point of the estimated price range set forth on the cover page of this prospectus). This pro forma net income per share attributable to common shareholders data is presented for informational purposes only and does not purport to represent what our pro forma net income (loss) or net income (loss) per share attributable to common shareholders actually would have been had this offering been completed on October 1, 2016, or to project our net income or net income per share attributable to common shareholders for any future period.
(5) EBITDA is earnings before interest, income taxes, and depreciation and amortization. EBITDAR is earnings before interest, income taxes, depreciation and amortization and aircraft rent. EBITDA and EBITDAR are included as supplemental disclosure because our senior management believes that they are well recognized valuation metrics in the airline industry that are frequently used by companies, investors, securities analysts and other interested parties in comparing companies in our industry.

EBITDA and EBITDAR have limitations as analytical tools. Some of the limitations applicable to these measures include: (i) EBITDA and EBITDAR do not reflect the impact of certain cash charges resulting from matters we consider not to be indicative of our ongoing operations; (ii) EBITDA and EBITDAR do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (iii) EBITDA and EBITDAR do not reflect changes in, or cash requirements for, our working capital needs; (iv) EBITDA and EBITDAR do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; (v) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future; and (vi) EBITDA and EBITDAR do not reflect any cash requirements for such replacements and other companies in our industry may calculate EBITDA and EBITDAR differently than we do, limiting its usefulness as a comparative measure. Because of these limitations, EBITDA and EBITDAR should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, EBITDAR should not be viewed as a measure of overall performance because it excludes aircraft rent, which is a normal, recurring cash operating expense that is necessary to operate our business. For the foregoing reasons, each of EBITDA and EBITDAR has significant limitations which affect its use as an indicator of our profitability. Accordingly, you are cautioned not to place undue reliance on this information.

 

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The following table presents the reconciliation of net income to EBITDA and EBITDAR for the periods presented below:

 

     Year Ended September 30,     Six Months
Ended March 31,
 
     2013     2014     2015     2016     2017     2017     2018  
     (in thousands)  

Reconciliation:

              

Net income

   $ 41,634     $ 18,764     $ 38,999     $ 14,920     $ 32,828     $ 11,914     $ 24,996  

Interest expense

     9,043       9,881       16,984       32,618       46,110       21,840       27,474  

Interest income

     (71     (14     (21     (325     (32     (15     (19

Income tax expense (benefit)

     (11,078     11,749       24,248       9,926       20,874       7,110       (21,181

Depreciation and amortization

     32,945       33,425       42,296       46,020       61,048       29,600       31,598  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     72,473       73,805       122,506       103,159       160,828       70,449       62,868  

Aircraft rent

     77,243       80,942       69,083       71,635       72,551       36,060       36,582  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDAR

     149,716       154,747       191,589       174,794       233,379       106,509       99,450  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents our historical balance sheet data as of March 31, 2018:

 

     As of March 31, 2018  
     Actual      Pro Forma(1)  
     (in thousands)  

Balance Sheet Data:

     

Cash and cash equivalents

   $ 52,699     

Total assets

     1,342,638     

Long-term debt, including current portion

     929,029     

Shareholders’ equity

     248,705     

 

(1) The unaudited adjusted pro forma consolidated balance sheet gives effect to the receipt of the estimated net proceeds by us from the sale of shares of our common stock offered by us (based on an assumed initial public offering price of $                 per share, the mid-point of the price range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds received by us.

 

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OPERATING DATA

The following table summarizes certain operating data that we believe are useful indicators of our operating performance for our fiscal years ended September 30, 2013, 2014, 2015, 2016 and 2017, respectively, and the six months ended March 31, 2017 and 2018. The definitions of certain terms related to the airline industry used in the table can be found under “Glossary of Airline Terms” at the end of this prospectus.

 

    Year Ended September 30,     Six Months Ended
March 31,
 
    2013(1)     2014(1)     2015     2016     2017     2017     2018  

Operating Data

             

Block hours

    206,431       225,720       308,681       368,468       395,083       199,303       195,559  

Departures

    134,805       140,165       172,033       208,399       221,990       109,419       107,043  

Passengers

    7,872,574       8,520,917       10,632,903       12,497,424       13,005,844       6,393,651       6,332,521  

Available seat miles—ASMs (thousands)

    4,283,272       4,932,516       7,356,450       8,823,595       9,471,911       4,828,892       4,621,380  

Revenue passenger miles—RPMs (thousands)

    3,703,837       4,103,834       6,019,316       7,019,586       7,392,688       3,759,481       3,640,092  

Contract revenue per available seat mile—CRASM (in cents)

  ¢ 8.92     ¢ 8.26     ¢ 6.54     ¢ 6.45     ¢ 6.53     ¢ 6.41     ¢ 6.73  

Operating cost per available seat mile—CASM (in cents)

  ¢ 8.83     ¢ 8.01     ¢ 5.80     ¢ 6.02     ¢ 5.74     ¢ 5.76     ¢ 6.51  

Average stage length (miles)

    452       475       565       557       561       580       567  

Regional aircraft

             

Owned

    23       40       47       64       66       66       66  

Leased

    48       37       37       37       37       37       37  

Leased from United

    —         7       30       30       37       30       42  

Total aircraft

    71       84       114       131       140       133       145  

E-175

    0       7       30       46       55       48       60  

CRJ-900

    47       57       63       64       64       64       64  

CRJ-700

    20       20       20       20       20       20       20  

CRJ-200

    5       1       1       1       1       1       1  

Employees (FTE)

    1,819       2,186       2,766       3,102       3,132       3,073       3,229  

 

(1) Our operations data for our fiscal years ended September 30, 2013 and 2014 include results from our historical go! operations. We operated go! as an inter-island air carrier in Hawaii from 2006 to 2014.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations in conjunction with the annual consolidated financial statements, condensed consolidated interim financial statements and the notes thereto included elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

We are a regional air carrier providing scheduled passenger service to 110 cities in 38 states, the District of Columbia, Canada, Mexico and the Bahamas. All of our flights are operated as either American Eagle or United Express flights pursuant to the terms of capacity purchase agreements we entered into with American and United. We have a significant presence in several of our major airline partners’ key domestic hubs and focus cities, including Dallas, Houston, Phoenix and Washington-Dulles.

As of March 31, 2018, we operated a fleet of 145 aircraft with approximately 610 daily departures. We operate 64 CRJ-900 aircraft under our American Capacity Purchase Agreement and 20 CRJ-700 and 60 E-175 aircraft under our United Capacity Purchase Agreement. For the six months ended March 31, 2018, approximately 55% of our aircraft in scheduled service were operated for United and approximately 45% were operated for American. All of our operating revenue in our 2017 fiscal year and the six months ended March 31, 2018 was derived from operations associated with our American and United Capacity Purchase Agreements.

Our long-term capacity purchase agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour and flight actually flown, and reimbursement of certain direct operating expenses in exchange for providing regional flying on behalf of our major airline partners. Our capacity purchase agreements also shelter us from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. Our major airline partners control route selection, pricing, seat inventories, marketing and scheduling, and provide us with ground support services, airport landing slots and gate access.

Trends and Uncertainties Affecting Our Business

We believe our operating and business performance is driven by various factors that typically affect regional airlines and their markets, including trends which affect the broader airline and travel industries, though our capacity purchase agreements reduce our exposure to fluctuations in certain trends. The following key factors may materially affect our future performance:

Availability and Training of Qualified Pilots. On July 8, 2013, as directed by the U.S. Congress, the FAA issued more stringent pilot qualification and crew member flight training standards, which, among other things, increased the required training time for new airline pilots from 250 hours to 1,500 hours of flight time. With these changes, the supply of qualified pilot candidates eligible for hiring by the airline industry has been dramatically reduced. To address the diminished supply of qualified pilot candidates, regional airlines implemented significant pilot wage and bonus increases.

In prior periods, these factors caused our pilot attrition rates to be higher than our ability to hire and retain replacement pilots and we have been unable to provide flight services at or exceeding the

 

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minimum flight operating levels expected by our major airline partners. See “Business—Capacity Purchase Agreements.” However, on July 13, 2017, we reached a new four-year collective bargaining agreement with our pilots that provides increases in our pilots’ wages, premium pay for flying on scheduled days off and competitive signing bonuses for prospective new pilots. See “Business—Employees.” Following the ratification of our new collective bargaining agreement in July 2017, the average number of new pilot applications per month has increased by 45.3%.

We believe that our average number of new pilot applications per month will continue to exceed pilot attrition during our 2018 fiscal year. However, we face a significant training backlog for our new pilot candidates before we are able to resume flight services at or exceeding the minimum flight operating levels expected by our major airline partners. We are carefully optimizing pilot scheduling and providing premium pay to incentivize our pilots to fly on scheduled days off to maintain the flight schedules expected by our major airline partners. We have also negotiated increased access to flight simulators with our vendors and hired additional instructors to streamline our backlog of pilot training, but our results of operations may be negatively impacted if we are unable to hire and train our pilots in a timely manner.

Pilot Attrition. In recent years, we have experienced significant volatility in our attrition as a result of pilot wage and bonus increases at other regional air carriers, the growth of cargo, low-cost and ultra low-cost carriers and the number of pilots at major airlines reaching the statutory mandatory retirement age of 65 years. Following the ratification of our new collective bargaining agreement in July 2017, our average pilot attrition per month has decreased by 16.2%. If our actual pilot attrition rates are materially different than our projections, our operations and financial results could be materially and adversely affected.

Labor. The airline industry is heavily unionized. The wages, benefits and work rules of unionized airline industry employees are determined by collective bargaining agreements. As of March 31, 2018, approximately 76.7% of our workforce was represented by the ALPA and AFA. Our pilots and flight attendants ratified new four-year collective bargaining agreements during calendar 2017. The agreements include rate increases for three years and two years, respectively, after the amendable dates. The new agreements are amendable following their four-year term and include labor rate structures for two years (flight attendants) and three years (pilots), respectively, after the amendable dates. The terms and conditions of our future collective bargaining agreements may be affected by the results of collective bargaining negotiations at other airlines that may have a greater ability, due to larger scale, greater efficiency or other factors, to bear higher costs than we can. In addition, conflicts between airlines and their unions can lead to work slowdowns or stoppages. A strike or other significant labor dispute with our unionized employees may adversely affect our ability to conduct business.

Competition. The airline industry is highly competitive. We compete principally with other regional airlines. Major airlines typically award capacity purchase agreements to regional airlines based on the following criteria: ability to fly contracted schedules, availability of labor resources, including pilots, low operating cost, financial resources, geographical infrastructure, overall customer service levels relating to on-time arrival and flight completion percentages and the overall image of the regional airline. We expect that, over the next five years, capacity purchase agreements representing up to 300 aircraft currently flown by our competitors on behalf of our major airline partners will expire by their terms and be subject to rebidding. In addition, our United Capacity Purchase Agreement expires with respect to 50 aircraft between June 2019 and August 2020. Our ability to renew our existing agreements and earn additional flying opportunities in the future will depend, in significant part, on our ability to maintain a low-cost structure competitive with other regional air carriers. See “Business—Competition.”

Market Volatility. The airline industry is volatile and affected by economic cycles and trends. Consumer confidence and discretionary spending, fear of terrorism or war, weakening economic conditions, fare

 

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initiatives, fluctuations in fuel prices, labor actions, changes in governmental regulations on taxes and fees, weather and other factors have contributed to a number of reorganizations, bankruptcies, liquidations and business combinations among major and regional airlines. The effect of economic cycles and trends may be somewhat mitigated by our reliance on capacity purchase agreements. If, however, any of our major airline partners experiences a prolonged decline in the number of passengers or is negatively affected by low ticket prices or high fuel prices, it may seek rate reductions in future capacity purchase agreements, or materially reduce our scheduled flights in order to reduce its costs. Our financial performance could be negatively impacted by any adverse changes to the rates, number of aircraft or utilization under our capacity purchase agreements.

Maintenance Contracts, Costs and Timing. Our employees perform routine airframe and engine maintenance along with periodic inspections of equipment at their respective maintenance facilities. We also use third-party vendors, such as AAR, Aviall, Bombardier, GE and StandardAero, for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for our aircraft fleet. As of March 31, 2018, $58.9 million of parts inventory was consigned to us by AAR and Aviall under long-term contracts that is not reflected on our balance sheet.

The average age of our E-175, CRJ-900 and CRJ-700 type aircraft is approximately 2.4, 11.5 and 14.2 years, respectively. Due to the relatively young age of our E-175 aircraft, they require less maintenance now than they will in the future. Over the past five years, we have incurred relatively low maintenance expenses on our E-175 aircraft because most of the parts are under multi-year warranties and a limited number of heavy airframe checks and engine overhauls have occurred. As our E-175 aircraft age and these warranties expire, we expect that maintenance costs will increase in absolute terms and as a percentage of revenue. In addition, because our current aircraft were acquired over a relatively short period of time, significant maintenance events scheduled for these aircraft will occur at roughly the same intervals, meaning we will incur our most expensive scheduled maintenance obligations across our present fleet at approximately the same time. These more significant maintenance activities result in out-of-service periods during which aircraft are dedicated to maintenance activities and unavailable for flying under our capacity purchase agreements.

We use the direct expense method of accounting for our maintenance of regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein we recognize the expense when the maintenance work is completed, or over the repair period, if materially different. While we keep a record of expected maintenance events, the actual timing and costs of major engine maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify the costs or timing of future maintenance-related expenses for any significant period of time. For more information, see “Critical Accounting Policies—Maintenance” elsewhere in this prospectus.

Aircraft Leasing and Finance Determinations. We have generally funded aircraft acquisitions through a combination of operating leases and debt financing. Our determination to lease or finance the acquisition of aircraft may be influenced by a variety of factors, including the preferences of our major airline partners, the strength of our balance sheet and credit profile and those of our major airline partners, the length and terms of the available lease or financing alternatives, the applicable interest rates, and any lease return conditions. When possible, we prefer to finance aircraft through debt rather than operating leases, due to lower operating costs, extended depreciation period, opportunity for aircraft equity, absence of lease return conditions and greater flexibility in renewing the aircraft under our capacity purchase agreements with our major airline partners after paying off the principal balance.

Subsequent to the initial acquisition of an aircraft, we may also refinance the aircraft or convert one form of financing to another (e.g., replacing an aircraft lease with debt financing). The purchase of leased aircraft allows us to lower our operating costs and avoid lease-related use restrictions and return conditions.

 

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As of March 31, 2018, we had 79 aircraft in our fleet under lease, including 42 E-175 aircraft owned by United and leased to us at nominal amounts. In order to determine the proper classification of our leased aircraft as either operating leases or capital leases, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases.

We are also subject to lease return provisions that require a minimum portion of the “life” of an overhaul remain on the engine at the lease return date. We estimate the cost of maintenance lease return obligations and accrue such costs over the remaining lease term when the expense is probable and can be reasonably estimated. Additionally, operating leases are not reflected on our consolidated balance sheet and, accordingly, neither a lease asset nor an obligation for future lease payments is reflected in our consolidated balance sheets. See “Recent Accounting Pronouncements” below for a discussion of a new accounting standard that is likely to have an impact on our aircraft lease accounting beginning in our 2020 fiscal year.

Seasonality. Our results of operations for any interim period are not necessarily indicative of those for the entire year, since the airline industry is subject to seasonal fluctuations and general economic conditions. Our operations are somewhat favorably affected by increased utilization of our aircraft, historically occurring in the summer months, and are unfavorably affected by increased fleet maintenance during the months from November through January and by inclement weather which occasionally results in cancelled flights, principally during the winter months.

Key Components of Consolidated Statements of Operations

The following discussion summarizes the key components of our consolidated statements of operations and consolidates historical components.

Operating Revenues

Our consolidated operating revenues consist primarily of contract revenue flight services as well as pass-through and other revenues.

Contract Revenue. Contract revenue consists of the fixed monthly amounts per aircraft received pursuant to our capacity purchase agreements with our major airline partners, along with the additional amounts received based on the number of flights and block hours flown. Contract revenues we receive from our major airline partners are paid and recognized by us on a weekly basis.

Pass-Through and Other. Pass-through and other revenue consists of passenger and hull insurance, aircraft property taxes, landing fees, catering and certain maintenance costs related to our E-175 aircraft that we equally recognize as both a revenue and expense.

Operating Expenses

Our operating expenses consist of the following items:

Flight Operations. Flight operations expense includes costs related to salaries, bonuses and benefits earned by our pilots, flight attendants, and dispatch personnel, as well as costs related to technical publications, lodging of our flight crews and pilot training expenses.

 

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Fuel. Fuel expense includes fuel and related fueling costs for flying we undertake outside of our capacity purchase agreements, including aircraft repositioning and maintenance. As of March 31, 2018, all aircraft fuel and related fueling costs for flying under our capacity purchase agreements were directly paid and supplied by our major airline partners. Accordingly, we do not record an expense or the related revenue for fuel supplied by American and United for flying under our capacity purchase agreements.

Maintenance. Maintenance includes costs related to engine overhauls, airframe, landing gear and normal recurring maintenance, which includes pass-through maintenance costs related to our E-175 aircraft, as well as maintenance lease return obligations on our leased aircraft when the expense is probable and can be reasonably estimated. We record these expenses using the direct expense method of accounting, wherein the expense is recognized when the maintenance work is completed, or over the repair period, if materially different. As a result of using the direct expense method, the timing of maintenance expense reflected in the financial statements may vary significantly period to period.

Aircraft Rent. Aircraft rent includes costs related to leased engines and aircraft.

Aircraft and Traffic Servicing. Aircraft and traffic servicing includes expenses related to our capacity purchase agreements, including aircraft cleaning, passenger disruption reimbursements, international navigation fees and wages of airport operations personnel, a portion of which are reimbursable by our major airline partners.

General and Administrative. General and administrative expense includes insurance and taxes, non-operational administrative employee wages and related expenses, building rents, real property leases, utilities, legal, audit and other administrative expenses.

Depreciation and Amortization. Depreciation expense is a periodic non-cash charge primarily related to aircraft, engine and equipment depreciation. Amortization expense is a periodic non-cash charge related to our customer relationship intangible asset.

Other Expense

Interest Expense. Interest expense is related to interest on our debt to finance purchases of aircraft, engines, equipment as well as debt financing costs amortization.

Interest Income. Interest income includes interest income on our cash and cash equivalent balances.

Other Income (Expense). Other income includes income derived from activities not classified in any other area of the consolidated statements of income, including write-offs of miscellaneous third-party fees.

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” we are not organized around specific services or geographic regions. We currently operate in one service line providing scheduled passenger services in accordance with our capacity purchase agreements.

While we operate under two separate capacity purchase agreements, we do not manage our business based on any performance measure at the individual contract level. Additionally, our chief operating

 

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decision maker uses consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our Board of Directors. He bases all significant decisions regarding the allocation of our resources on a consolidated basis. Based on the information described above and in accordance with the applicable literature, management has concluded that we are organized and operated as one operating and reportable segment.

Results of Operations

Six Months Ended March 31, 2017 Compared to Six Months Ended March 31, 2018

We had operating income of $41.2 million in our six months ended March 31, 2017 compared to operating income of $31.4 million in our six months ended March 31, 2018. Our operating results for the six months ended March 31, 2018 reflected an increase in contract revenue primarily related to the addition of 10 E-175 aircraft under our United Capacity Purchase Agreement, which was partially offset by reduced flying in our CRJ fleet. We also experienced an increase in flight operations expense driven by an increase in pilot training and related expenses and an increase in premium pilot pay to incentivize pilots to fly additional routes until additional pilots complete their training.

Our maintenance expense decreased due to the timing of significant maintenance events, including engine overhauls, which occurred more frequently during the six months ended March 31, 2017 than during the six months ended March 31, 2018.

In our six months ended March 31, 2017, we had net income of $11.9 million compared to net income of $25.0 million in our six months ended March 31, 2018. Our six months ended March 31, 2018 results reflected an increase in net income of $13.1 million primarily related to income tax benefits resulting from changes in tax laws.

Operating Revenues

 

     Six Months Ended March 31,               
     2017      2018      Change  

Operating revenues:

          

Contract

   $ 309,711      $ 310,904      $ 1,193       0.4

Pass-through and other

     9,619        21,420        11,801       122.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating revenues

   $ 319,330      $ 332,324      $ 12,994       4.1
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating data:

          

Available seat miles—ASMs (thousands)

     4,828,892        4,621,380        (207,512     (4.3 )% 

Block hours

     199,303        195,559        (3,744     (1.9 )% 

Revenue passenger miles—RPMs (thousands)

     3,759,481        3,640,092        (119,389     (3.2 )% 

Average stage length (miles)

     580        567        (13     (2.2 )% 

Contract revenue per available seat mile—CRASM (in cents)

   ¢ 6.41      ¢ 6.73      ¢ 0.32       5.0

Passengers

     6,393,651        6,332,521        (61,130     (1.0 )% 

Total operating revenue increased by $13.0 million, or 4.1%, from our six months ended March 31, 2017 to our six months ended March 31, 2018. Contract revenue increased by $1.2 million, or 0.4%, primarily due to an increase in flying with our expanded E-175 fleet and higher block hour compensation from our major airline partners, partially offset by reduced flying in our CRJ fleet and the net impact of incentives earned and credits given to our major airline partners based on contractual utilization levels. Our block hours flown during our six months ended March 31, 2018 decreased 1.9% compared to the six months ended March 31, 2017 due to reduced flight schedules caused by

 

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increased pilot training times. Our pass-through and other revenue increased during our six months ended March 31, 2018 by $11.8 million, or 122.7%, primarily due to pass-through maintenance costs related to our E-175 fleet.

Operating Expenses

 

     Six Months Ended March 31,               
     2017      2018      Change  

Operating expenses ($ in thousands):

          

Flight operations

   $ 72,349      $ 103,807      $ 31,458       43.5

Fuel

     400        198        (202     (50.5 )% 

Maintenance

     117,422        105,756        (11,666     (9.9 )% 

Aircraft rent

     36,060        36,582        522       1.4

Aircraft and traffic servicing

     1,580        1,744        164       10.4

General and administrative

     20,676        21,267        591       2.9

Depreciation and amortization

     29,600        31,598        1,998       6.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

   $ 278,087      $ 300,952      $ 22,865       8.2
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating data:

          

Available seat miles—ASMs (thousands)

     4,828,892        4,621,380        (207,512     (4.3 )% 

Block hours

     199,303        195,559        (3,744     (1.9 )% 

Revenue passenger miles—RPMs (thousands)

     3,759,481        3,640,092        (119,389     (3.2 )% 

Average stage length (miles)

     580        567        (13     (2.2 )% 

Departures

     109,419        107,043        (2,376     (2.2 )% 

Operating cost per available seat mile—CASM (in cents)

   ¢ 5.76      ¢ 6.51      ¢ 0.75       13.0

Flight Operations. Flight operations expense increased $31.5 million, or 43.5%, to $103.8 million for our six months ended March 31, 2018 compared to the prior year period. The increase was primarily driven by an increase in pilot training related expenses, an increase in premium pilot pay to incentivize pilots to fly additional routes until additional pilots complete their training, additional pilot wages and a one-time, $2.5 million non-cash vacation accrual related to our new collective bargaining agreements.

Fuel. Fuel expense decreased $0.2 million, or 50.5%, to $0.2 million for our six months ended March 31, 2018 compared to the prior year period. The decrease was primarily driven by a smaller number of ferry flights and maintenance fuel in our Phoenix hub. All fuel costs related to flying under our capacity purchase agreements during our six months ended March 31, 2017 and 2018 were directly paid to suppliers by our major airline partners.

Maintenance. Aircraft maintenance costs decreased $11.7 million, or 9.9%, to $105.8 million for our six months ended March 31, 2018 compared to the prior year period. This decrease was primarily driven by a decrease in engine overhaul events and expenses and partially offset by an increase in C-check expense. During our six months ended March 31, 2018, $5.2 million of engine overhaul expenses were reimbursable by our major airline partners. Total pass-through maintenance expenses reimbursed by our major airline partners increased by $12.1 million during our six months ended March 31, 2018.

 

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The following table presents information regarding our maintenance costs during our six months ended March 31, 2017 and 2018:

 

     Six Months Ended March 31,         
           2017                  2018            Change  
     (in thousands)         

Engine overhaul

   $ 45,111      $ 27,939      $ (17,172      (38.1 )% 

Pass-through engine overhaul

     0        5,201        5,201        0.0

C-check

     9,710        7,804        (1,906      (19.6 )% 

Pass-through C-check

     483        5,711        5,228        1082.4

Component contracts

     16,473        15,275        (1,198      (7.3 )% 

Rotable and expendable parts

     14,704        11,690        (3,014      (20.5 )% 

Other pass-through

     2,120        3,765        1,645        77.6

Labor and other

     28,821        28,371        (450      (1.6 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 117,422      $ 105,756      $ (11,666      (9.9 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Aircraft Rent. Aircraft rent expense increased $0.5 million, or 1.4%, to $36.6 million from $36.1 million for our six months ended March 31, 2018, compared to the prior year period. The increase is attributable to a $0.5 million increase in engine rent.

Aircraft and Traffic Servicing. Aircraft and traffic servicing expense increased $0.1 million, or 10.4%, to $1.7 million from $1.6 million for our six months ended March 31, 2018, compared to the prior year period. The increase is primarily due to an increase in pass-through regulatory charges and partially offset by lower interrupted trip expense. For our six months ended March 31, 2017 and 2018, 41.8% and 53.5%, respectively, of our aircraft and traffic servicing expenses were reimbursed by our major airline partners.

General and Administrative. General and administrative expense increased $0.6 million, or 2.9%, to $21.3 million from $20.7 million for our six months ended March 31, 2018, compared to the prior year period. The increase is primarily related to legal expenses associated with preparing for this offering and partially offset by a decrease in wages and employee related expense.

Depreciation and Amortization. Depreciation and amortization expense increased $2.0 million, or 6.8%, to $31.6 million from $29.6 million for our six months ended March 31, 2018, compared to the prior year period. The increase is attributable to a $2.0 million increase in depreciation expense related to our purchase of spare engines.

Other Expense

Other expense increased $5.4 million, or 24.0%, to $27.6 million from $22.2 million for our six months ended March 31, 2018, compared to the prior year period. The increase is primarily due to an increase in interest expense of $2.7 million related to the financing of 23 spare engines, $0.3 million in costs related to refinancing nine aircraft and higher LIBOR rates. Our expenses related to debt financing amortization were also higher by $1.4 million, attributable to legal and commitment fees incurred in connection with our aircraft engine financing and aircraft debt refinancing. The remainder of the increase is primarily due to an increase in interest expenses related to our line of credit with CIT, a deferment of certain payments under our RASPRO Lease Facility and engine overhaul financing.

Income Taxes

In our six months ended March 31, 2017, our effective tax rate was 37.4% compared to (555.2)% in our six months ended March 31, 2018. Our tax rate can vary depending on changes in tax laws, adoption of

 

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accounting standards, the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our state net operating losses.

We recorded an income tax provision of $7.1 million and an income tax benefit of $21.2 million for the six months ended March 31, 2017 and 2018, respectively.

The income tax provision for the six months ended March 31, 2017 results in an effective tax rate of 37.4%, which differs from the U.S. federal statutory rate of 35% primarily due to state taxes, changes in the valuation allowance against state net operating losses, expired state attributes, and the benefit resulting from changes in state apportionment and statutory rates.

The income tax provision for the six months ended March 31, 2018 results in an effective tax rate of (555.2)%, which differs from the U.S. federal statutory rate of 35% through December 31, 2017 and 21% as of January 1, 2018 primarily due to a remeasurement of our net deferred tax liability due to federal tax law changes and the adoption of Accounting Standards Update (ASU) 2016-09. Other factors include changes in the valuation allowance against state net operating losses, expired state attributes and state apportionment and statutory rates.

On December 22, 2017, the President signed into law the legislation colloquially known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act incorporates several new provisions that will have an impact on our financial statements. Most notably, the Tax Act decreased the federal statutory rate to 24.5% for the year ending September 30, 2018, and 21% for the years ending September 30, 2019 and forward. The decrease in federal statutory rate resulted in a net tax benefit due to the remeasurement of our net deferred tax liability. The change in our future effective tax rate is not anticipated to have an effect on our taxes until all of our U.S. federal net operating losses and credits have been utilized.

Additional provisions of the Tax Act that may impact our financial statements include 100% expensing of qualified property placed in service after September 27, 2017 and before January 1, 2023, refundable minimum tax credits over a four year period, net interest expense deductions limited to 30% of earnings before interest, taxes, depreciation, and amortization through 2021 and of earnings before interest and taxes thereafter, and net operating losses incurred in tax years beginning after December 31, 2017 are only allowed to offset up to 80% of a taxpayer’s taxable income. These net operating losses are allowed to be carried forward indefinitely.

We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.

Fiscal Year 2016 Compared to Fiscal Year 2017

We had operating income of $56.8 million in our 2016 fiscal year compared to operating income of $100.3 million in our 2017 fiscal year. In our 2016 fiscal year, we had net income of $14.9 million compared to net income of $32.8 million in our 2017 fiscal year. Our 2017 fiscal year results reflected an increase in contract revenue primarily related to the addition of seven E-175 aircraft under our United Capacity Purchase Agreement, along with a reduction in maintenance expense due to the timing of significant maintenance events, including engine overhauls, which occurred less frequently in our 2017 fiscal year than in our 2016 fiscal year.

Our 2017 fiscal year financial results reflect the execution of our strategy to add additional aircraft pursuant to our capacity purchase agreements while maintaining cost discipline. In fiscal year 2017 we were able to increase our block hour compensation from our partners and add seven E-175 aircraft to our fleet. We also ratified a new four-year collective bargaining agreement, which allows us to maintain competitive labor costs, which are consistently among our largest expenses.

 

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Operating Revenues

 

     Year Ended September 30,                
     2016      2017      Change  

Operating revenues ($ in thousands):

           

Contract

   $ 569,373      $ 618,698      $ 49,325        8.7

Pass-through and other

   $ 18,463      $ 24,878      $ 6,415        34.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating revenues

   $ 587,836      $ 643,576      $ 55,740        9.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating data:

           

Available seat miles—ASMs (miles in thousands)

     8,823,595        9,471,911        648,316        7.3

Block hours

     368,468        395,083        26,615        7.2

Revenue passenger miles—RPMs (miles in thousands)

     7,019,586        7,392,688        373,102        5.3

Average stage length (miles)

     557        561        4        0.7

Contract revenue per available seat mile—CRASM (in cents)

   ¢ 6.45      ¢ 6.53      ¢ 0.08        1.2

Passengers

     12,497,424        13,005,844        508,420        4.1

Total operating revenue increased by $55.7 million, or 9.5%, from our 2016 fiscal year to our 2017 fiscal year. Contract revenue increased by $49.3 million, or 8.7%, primarily due to the addition of seven new E-175 aircraft to our fleet in 2017 and higher block hour compensation, primarily driven by the aircraft added to our fleet. In addition, we added 16 E-175 aircraft to our fleet between our second and fourth quarters of our 2016 fiscal year, which more directly impacted our contract revenue during our 2017 fiscal year. Our block hours flown during our fiscal 2017 increased 7.2% over our 2016 fiscal year, primarily due to the additional E-175 aircraft. Likewise, our pass-through and other revenue increased during our fiscal 2017 by $6.4 million, or 34.7%, primarily due to pass-through maintenance costs related to our E-175 fleet.

Operating Expenses

 

     Year Ended September 30,               
     2016      2017      Change  

Operating expenses ($ in thousands):

          

Flight operations

   $ 141,422      $ 155,516      $ 14,094       10.0

Fuel

     753        766        13       1.7

Maintenance

     225,130        210,729        (14,401     (6.4 )% 

Aircraft rent

     71,635        72,551        916       1.3

Aircraft and traffic servicing

     3,936        3,676        (260     (6.6 )% 

General and administrative

     42,182        38,996        (3,186     (7.6 )% 

Depreciation and amortization

     46,020        61,048        15,028       32.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expenses

   $ 531,078      $ 543,282      $ 12,204       2.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating data:

          

Available seat miles—ASMs (miles in thousands)

     8,823,595        9,471,911        648,316       7.3

Block hours

     368,468        395,083        26,615       7.2

Average stage length (miles)

     557        561        4       0.7

Departures

     208,399        221,990        13,591       6.5

Operating cost per available seat mile—CASM (in cents)

   ¢ 6.02      ¢ 5.74      ¢ (0.28     (4.7 )% 

Flight Operations. In our 2017 fiscal year, flight operations expense increased $14.1 million, or 10.0%, to $155.5 million from $141.4 million for our 2016 fiscal year. The increase is primarily driven by

 

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$11.5 million in additional wages, taxes, and benefits under our new collective bargaining agreements and an increase in our block hours flown.

Fuel. Fuel expense remained relatively consistent from our 2016 fiscal year to our 2017 fiscal year. In our 2016 fiscal year and our 2017 fiscal year, all fuel costs related to flying under our capacity purchase agreements were directly paid to suppliers by our major airline partners.

Maintenance. Aircraft maintenance costs decreased by $14.4 million, or 6.4%, from our 2016 fiscal year to our 2017 fiscal year. This decrease was primarily driven by a $26.9 million decrease in engine overhaul expense, due to the timing of significant maintenance events, including engine overhauls, which occurred less frequently in our 2017 fiscal year than in our 2016 fiscal year. That decrease was partially offset by an increase of $9.5 million related to performing more “C” maintenance checks than in our 2016 fiscal year. Total pass-through maintenance expense reimbursed by our major airline partners increased by $7.4 million from our 2016 fiscal year to our 2017 fiscal year.

The following table presents information regarding our maintenance costs during our 2016 and 2017 fiscal years:

 

     Year Ended September 30,                
(in thousands)          2016                  2017            Change  

Engine overhaul

   $ 90,890      $ 63,719      $ (27,171)        (29.9)%  

Pass-through engine overhaul

     —          270        270         0.0%   

C-check

     13,185        17,755        4,570         34.7%   

Pass-through C-check

     —          4,889        4,889         0.0%   

Component contracts

     31,702        31,671        (32)         (0.1)%  

Rotable and expendable parts

     27,160        26,098        (1,062)        (3.9)%  

Other pass-through

     3,728        6,003        2,275         61.0%   

Labor and other

     58,464        60,324        1,860         3.2%   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 225,130      $ 210,729      $ (14,401)        (6.4)%  
  

 

 

    

 

 

    

 

 

    

 

 

 

Aircraft Rent. In our 2017 fiscal year, aircraft rent expense increased $0.9 million, or 1.3%, to $72.6 million from $71.6 million for our 2016 fiscal year. The increase is attributable to a $1.5 million manufacturer lease credit that expired in December 2015, which was partially offset by a $0.6 million increase in engine rent.

Aircraft and Traffic Servicing. In our 2017 fiscal year, aircraft and traffic servicing expense decreased by $0.3 million, or 6.6%, to $3.7 million from $3.9 million for our 2016 fiscal year. The decrease is primarily due to a reduction in interrupted trip expenses and international navigation fees as compared to our 2016 fiscal year. For our fiscal years ended September 30, 2016 and 2017, 42.6% and 46.5% respectively, of our aircraft and traffic servicing expense were reimbursed by our major airline partners.

General and Administrative. In our 2017 fiscal year, general and administrative expense decreased $3.2 million, or 7.6%, to $39.0 million from $42.2 million for our 2016 fiscal year. The decrease is primarily related to a decrease in insurance costs of $1.1 million and a decrease in wages and employee related expense of $2.1 million.

Depreciation and Amortization. Depreciation and amortization expense increased by $15.0 million, or 32.7%, from our 2016 fiscal year to our 2017 fiscal year. This increase was due to an increase of $9.8 million in aircraft depreciation due to placing 16 E-175 aircraft into service during 2016, which resulted in partial depreciation in 2016. The increase is also attributable to also an increase of $4.4 million in spare engine depreciation due to purchasing additional spare engines during our 2017 fiscal year.

 

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Other Expense

Other expense increased by $14.7 million, or 46.1%, from $31.9 million in our 2016 fiscal year to $46.6 million in our 2017 fiscal year due to an increase in aircraft interest expense of $7.3 million related to the financing of 16 E-175 aircraft between the second and fourth quarter of 2016, along with an increase in interest expense of $5.5 million related to the financing of 20 spare engines. Expenses related to debt financing amortization was also higher, by $0.8 million, for legal and commitment fees incurred in connection with the financing of aircraft engines and acquisition of E-175 aircraft.

Income Taxes

In our 2017 fiscal year, our effective tax rate was 38.9% compared to 40.0% in our 2016 fiscal year. Our tax rate can vary depending on the amount of income we earn in each state and the state tax rate applicable to such income, as well as any valuation allowance required on our state net operating losses.

We recorded an income tax provision of $20.9 million and an income tax provision of $9.9 million for the years ended September 30, 2017 and 2016, respectively.

This income tax provision for the year ended September 30, 2017 results in an effective tax rate of 38.9%, which differs from the U.S. federal statutory rate of 35% primarily due to state taxes, changes in the valuation allowance against state net operating losses, expired state attributes, and the benefit from changes in state apportionment and statutory rates.

This income tax provision for the year ended September 30, 2016 results in an effective tax rate of 40.0%, which differs from the U.S. federal statutory rate of 35% primarily due to state taxes, changes in the valuation allowance against state net operating losses, expired state attributes, and the benefit resulting from changes in state apportionment and statutory rates.

We continue to maintain a valuation allowance on a portion of our state net operating losses in jurisdictions with shortened carryforward periods or in jurisdictions where our operations have significantly decreased as compared to prior years in which the net operating losses were generated.

On December 22, 2017, the President signed into law the legislation colloquially known as the Tax Act. The Tax Act incorporates several new provisions that will have an impact on our financial statements going forward. Most notably, the Tax Act will decrease the federal statutory rate to 24.5% for the year ending September 30, 2018, and 21% for years ending September 30, 2019 and forward. This decrease in federal statutory rate will result in a net tax benefit due to the remeasurement of our net deferred tax liability. The change in our future effective tax rate is not anticipated to have an effect on our cash tax until all of our U.S. federal net operating losses and credits have been utilized.

Additional provisions of the Tax Act that may impact our financial statements include 100% expensing of qualified property placed in service after September 27, 2017 and before January 1, 2023, refundable minimum tax credits over a four year period, net interest expense deductions limited to 30% of earnings after interest, taxes, depreciation, and amortization through 2021 and of earnings before interest and taxes thereafter, and net operating losses incurred in tax years beginning after December 31, 2017 are only allowed to offset up to 80% of a taxpayer’s taxable income. These net operating losses are allowed to be carried forward indefinitely.

See Note 12: “Income Taxes” in the notes to the audited consolidated financial statements included elsewhere in this prospectus.

Quarterly Results of Operations and Operating Statistics

The following table sets forth our unaudited quarterly condensed consolidated statements of operations data for each of the 10 quarters ended March 31, 2018. In management’s opinion, the data below have

 

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been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus, and reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results of historical periods are not necessarily indicative of the results to be expected for a full year or any future period. The following quarterly financial data should be read in conjunction with our audited financial statements and related notes included elsewhere in this prospectus.

Our financial results can vary materially from quarter to quarter due to the timing of engine overhauls and major airframe inspections and maintenance events. Our quarterly results may also be favorably impacted by higher rates of flight activity and utilization in the June and September calendar quarters compared to the December and March calendar quarters. During our fiscal 2018, we expect that our June and September calendar quarters will benefit from relatively low levels of engine and airframe maintenance costs.

 

     Year Ending September 30, 2018  
     First
Quarter
     Second
Quarter
 
     (in thousands)  

Operating revenues:

     

Contract

   $ 154,389      $ 156,515  

Pass-through and other

     10,295        11,125  
  

 

 

    

 

 

 

Total operating revenues

     164,684        167,640  
  

 

 

    

 

 

 

Operating expenses:

     

Engine overhaul

     17,181        10,758  

Engine overhaul pass-through

     2,327        2,874  

All other

     130,151        137,659  
  

 

 

    

 

 

 

Total operating expenses

     149,661        151,291  
  

 

 

    

 

 

 

Total other (expense) income

     (14,188      (13,369

Income tax (benefit) expense

     (21,789      608  
  

 

 

    

 

 

 

Net income

   $ 22,624      $ 2,372  
  

 

 

    

 

 

 

Net income per share attributable to common shareholders:

     

Basic(1)

   $ 5.01      $ 0.51  
  

 

 

    

 

 

 

Diluted(1)

   $ 2.40      $ 0.25  
  

 

 

    

 

 

 

Weighted-average common shares outstanding:

     

Basic

     4,518        4,637  
  

 

 

    

 

 

 

Diluted

     9,424        9,425  
  

 

 

    

 

 

 

Operating data:(2)

     

Block hours

     97,705        97,853  

Departures

     55,364        51,679  

Passengers

     3,311,007        3,021,514  

Available seat miles—ASMs (thousands)

     2,308,312        2,313,068  

Revenue passenger miles—RPMs (thousands)

     1,833,459        1,806,633  

Contract revenue per available seat mile—CRASM (in cents)

   ¢ 6.69      ¢ 6.77  

Operating cost per available seat mile—CASM (in cents)

   ¢ 6.48      ¢ 6.54  
(1)  See Note 10 to our quarterly condensed consolidated statements of operations data included elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted earnings per share.

 

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(2)  The definitions of certain terms related to the airline industry used in the table can be found under “Glossary of Airline Terms” at the end of this prospectus.

 

     Year Ended September 30, 2017  
     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 
     (in thousands)  

Operating revenues:

        

Contract

   $ 155,502     $ 154,210     $ 157,411     $ 151,575  

Pass-through and other

     4,733       4,886       9,541       5,718  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     160,235       159,096       166,952       157,293  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Engine overhaul

     23,930       21,181       8,436       10,171  

Engine overhaul pass-through

     —         —         —         270  

All other

     115,467       117,510       122,156       124,161  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     139,397       138,691       130,592       134,602  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income

     (10,281     (11,938     (11,862     (12,511

Income tax (benefit) expense

     3,947       3,163       9,066       4,698  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,610     $ 5,304     $ 15,432     $ 5,482  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common shareholders:

        

Basic(1)

   $ 1.56     $ 1.21     $ 3.51     $ 1.23  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(1)

   $ 0.71     $ 0.57     $ 1.66     $ 0.58  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding

        

Basic

     4,237       4,389       4,397       4,447  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     9,364       9,363       9,289       9,384  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating data:(2)

        

Block hours

     100,784       98,519       100,671       95,109  

Departures

     55,373       54,046       57,054       55,517  

Passengers

     3,273,813       3,119,838       3,364,121       3,248,072  

Available seat miles—ASMs (thousands)

     2,452,657       2,376,234       2,384,960       2,258,060  

Revenue passenger miles—RPMs (thousands)

     1,930,489       1,828,991       1,875,934       1,757,274  

Contract revenue per available seat mile—CRASM (in cents)

   ¢ 6.34     ¢ 6.49     ¢ 6.60     ¢ 6.71  

Operating cost per available seat mile—CASM (in cents)

   ¢ 5.68     ¢ 5.84     ¢ 5.48     ¢ 5.96  

 

(1)  See Note 10 to our quarterly condensed consolidated statements of operations data included elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted earnings per share.
(2)  The definitions of certain terms related to the airline industry used in the table can be found under “Glossary of Airline Terms” at the end of this prospectus.

 

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     Year Ended September 30, 2016  
     First
Quarter
    Second
Quarter
    Third
Quarter
    Fourth
Quarter
 
     (in thousands)  

Operating revenues:

        

Contract

   $ 133,219     $ 137,598     $ 143,078     $ 155,478  

Pass-through and other

     4,432       4,346       4,713       4,972  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     137,651       141,944       147,791       160,450  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Engine overhaul

     20,883       16,115       28,724       25,169  

Engine overhaul pass-through

     —         —         —         —    

All other

     104,461       106,831       110,935       117,960  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     125,344       122,946       139,659       143,129  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income

     (5,832     (7,975     (8,222     (9,883

Income tax (benefit) expense

     2,404       4,140       (259     3,641  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,071     $ 6,883     $ 169     $ 3,797  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to common shareholders:

        

Basic(1)

   $ 1.15     $ 1.93     $ 0.04     $ 0.92  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted(1)

   $ 0.42     $ 0.71     $ 0.02     $ 0.39  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding

        

Basic

     3,539       3,573       4,043       4,138  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     9,762       9,752       9,632       9,682  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating data:(2)

        

Block hours

     87,911       87,737       93,050       99,771  

Departures

     50,329       49,610       52,416       56,044  

Passengers

     3,111,047       2,875,459       3,165,759       3,345,159  

Available seat miles—ASMs (thousands)

     2,070,485       2,102,082       2,229,331       2,421,697  

Revenue passenger miles—RPMs (thousands)

     1,693,066       1,618,158       1,788,910       1,919,453  

Contract revenue per available seat mile—CRASM (in cents)

   ¢ 6.43     ¢ 6.55     ¢ 6.42     ¢ 6.42  

Operating cost per available seat mile—CASM (in cents)

   ¢ 6.05     ¢ 5.85     ¢ 6.26     ¢ 5.91  

 

(1)  See Note 10 to our quarterly condensed consolidated statements of operations data included elsewhere in this prospectus for an explanation of the method used to calculate the basic and diluted earnings per share.
(2)  The definitions of certain terms related to the airline industry used in the table can be found under “Glossary of Airline Terms” at the end of this prospectus.

Liquidity and Capital Resources

Sources and Uses of Cash

We require cash to fund our operating expenses and working capital requirements, including outlays for capital expenditures, aircraft pre-delivery payments, maintenance, aircraft rent and to pay debt service obligations, including principal and interest payments. Our cash needs vary from period to

 

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period primarily based on the timing and costs of significant maintenance events. Our principal sources of liquidity are cash on hand, cash generated from operations and funds from external borrowings. In the near term, we expect to fund our primary cash requirements through cash generated from operations and cash and cash equivalents on hand. We also have the ability to utilize our CIT Revolving Credit Facility.

We believe that the key factors that could affect our internal and external sources of cash include:

 

    Factors that affect our results of operations and cash flows, including the impact on our business and operations as a result of changes in demand for our services, competitive pricing pressures, and our ability to achieve further reductions in operating expenses; and

 

    Factors that affect our access to bank financing and the debt and equity capital markets that could impair our ability to obtain needed financing on acceptable terms or to respond to business opportunities and developments as they arise, including interest rate fluctuations, macroeconomic conditions, sudden reductions in the general availability of lending from banks or the related increase in cost to obtain bank financing, and our ability to maintain compliance with covenants under our debt agreements in effect from time to time.

Our ability to service our long-term debt obligations, including our equipment notes and CIT Revolving Credit Facility, to remain in compliance with the various covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities, which is subject to, among other things, our future operating performance, as well as to other factors, some of which may be beyond our control.

If we fail to generate sufficient cash from operations, we may need to raise additional equity or borrow additional funds to achieve our longer-term objectives. There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us. We believe that cash flow from operating activities coupled with existing cash and cash equivalents, short-term investments and existing credit facilities will be adequate to fund our operating and capital needs, as well as enable us to maintain compliance with our various debt agreements, through at least the next 12 months. To the extent that results or events differ from our financial projections or business plans, our liquidity may be adversely impacted.

During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust operating and capital expenditures to reflect the current market conditions and our projected demand. Our capital expenditures are primarily directed toward our aircraft fleet and flight equipment. During 2016, we paid $490.1 million for capital expenditures, primarily related to the purchase of 18 E-175 aircraft and four spare engines, or $7.3 million net of aircraft and spare engine financing. In 2017 we paid $84.5 million in capital expenditures, primarily related to the purchase of 15 spare engines, or $7.6 million of capital expenditures net of aircraft and spare engine financing. In our six months ended March 31, 2018, we paid $17.0 million in capital expenditures primarily related to the purchase of three spare engines. Our capital expenditures for the six months ended March 31, 2018 were $1.6 million net of aircraft and spare engine financing. Our capital expenditures, net of aircraft and spare engine financing, have historically been approximately 1.2% of annual revenues and we expect to continue to incur capital expenditures to support our business activities. Future capital expenditures may be impacted by events and transactions that are not currently forecasted.

As of March 31, 2018, our principal sources of liquidity were cash and cash equivalents of $52.7 million. In addition, we had restricted cash of $3.8 million as of March 31, 2018. Restricted cash includes certificates of deposit that secure letters of credit issued for particular airport authorities as required in certain lease agreements. Furthermore, as of March 31, 2018, we also had $778.4 million in secured indebtedness incurred in connection with our financing of 65 total aircraft. Primary uses of

 

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liquidity are capital expenditures, aircraft pre-delivery payments and debt repayments. As of March 31, 2018, we had $143.4 million of short-term debt, excluding capital leases, and $788.6 million of long-term debt excluding capital leases.

Sources of cash for the six months ended March 31, 2018 were primarily cash flows from operations of $41.2 million. This positive cash flow was driven by receipts from performance under our capacity purchase agreements.

As of March 31, 2018, we had net receivables of approximately $17.0 million, compared to net receivables of approximately $8.9 million as of September 30, 2017. The amounts due consist primarily of receivables and reimbursable pass-through maintenance costs from our major airline partners under our capacity purchase agreements. Accounts receivable from our major airline partners were 71.6% and 81.8% of total gross accounts receivable at September 30, 2017 and March 31, 2018, respectively.

Restricted Cash

As of March 31, 2018, we had $3.8 million in restricted cash. We have an agreement with a financial institution for a $6.0 million letter of credit facility and to issue letters of credit for landing fees, worker’s compensation insurance and other business needs. Pursuant to the agreement, $3.8 million of outstanding letters of credit are required to be collateralized by amounts on deposit.

Cash Flows

The following table presents information regarding our cash flows during our two most recent fiscal years and for the six months ended March 31, 2017 and 2018:

 

     Year Ended September 30,      Six Months Ended March 31,  
     2016      2017      2017      2018  
    

(in thousands)

 

Net cash provided by operating activities

   $ 104,492      $ 74,727      $ 16,543      $ 41,208  

Net cash used in investing activities

     (491,127      (84,122      (66,026      (17,224

Net cash provided by (used in) financing activities

     365,848        28,497        37,067        (28,073
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (decrease) increase in cash and cash equivalents

     (20,787      19,102        (12,416      (4,089

Cash and cash equivalents at beginning of period

     58,473        37,686        37,686        56,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 37,686      $ 56,788      $ 25,270      $ 52,699  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Cash Flow Provided By Operating Activities

During our six months ended March 31, 2018, cash flow provided by operating activities of $41.2 million reflects our growth and execution of our strategic initiatives. We had net income of $25.0 million adjusted for the following significant non-cash items: depreciation and amortization of $31.6 million, amortization of stock-based compensation of $0.8 million, deferred income taxes of $(18.7) million, amortization of unfavorable lease liabilities and deferred credits of $(5.6) million and amortization of debt financing costs and accretion of interest on non-interest bearing subordinated notes of $2.6 million. We had net inflows of $5.1 million within other net operating assets and liabilities largely driven by the timing of aircraft lease payments during our six months ended March 31, 2018.

 

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During our six months ended March 31, 2017, cash flow provided by operating activities of $16.5 million reflects our growth and execution of our strategic initiatives. We had net income of $11.9 million adjusted for the following significant non-cash items: depreciation and amortization of $29.6 million, amortization of stock-based compensation of $0.6 million, deferred income taxes of $7.1 million, amortization of unfavorable lease liabilities and deferred credits of $(5.1) million and amortization of debt financing costs and accretion of interest on non-interest bearing subordinated notes of $0.7 million. We had net outflows of $(29.0) million within other net operating assets and liabilities largely driven by aircraft lease payments during our six months ended March 31, 2017.

During our 2017 fiscal year, cash flow provided by operating activities of $74.7 million reflects our growth and execution of our strategic initiatives. We had net income of $32.8 million adjusted for the following significant non-cash items: depreciation and amortization of $61.0 million, amortization of stock-based compensation of $1.3 million, deferred income taxes of $20.5 million, amortization of unfavorable lease liabilities and deferred credits of $(10.6) million and amortization of debt financing costs and accretion of interest on non-interest bearing subordinated notes of $2.7 million. We had net outflows of $33.9 million within other net operating assets and liabilities largely driven by aircraft leases payments and payments for acquired spare engines during our 2017 fiscal year.

During our 2016 fiscal year, net cash flow provided by operating activities was approximately $104.5 million driven by our growth, execution of strategic initiatives and improved credit position. We had net income of approximately $14.9 million adjusted for the following non-cash items: depreciation and amortization of $46.0 million, amortization of stock-based compensation of $1.5 million, deferred income taxes of $9.5 million, amortization of unfavorable lease liabilities and deferred credits of $(9.6) million and amortization of debt financing costs and accretion of interest on non-interest bearing subordinated notes of $2.0 million. We had a net increase of $39.1 million within other net operating assets and liabilities largely driven by timing of payments made on aircraft leases, engine repair work and other payables during our 2016 fiscal year.

Net Cash Flows Used In Investing Activities

During our six months ended March 31, 2018, net cash flow used in investing activities totaled $(17.2) million. We invested $17.0 million in three spare engines and aircraft improvements.

During our six months ended March 31, 2017, net cash flow used in investing activities totaled $(66.0) million. We invested $63.3 million in 12 spare engines and aircraft improvements, offset partially by returns of equipment deposits.

During our 2017 fiscal year, net cash flow used in investing activities totaled $(84.1) million. We invested $84.5 million in purchase of 15 spare engines and aircraft improvements, offset partially by returns of equipment deposits.

During our 2016 fiscal year, net cash flow used in investing activities totaled $(491.1) million. We invested $490.1 million in 18 E-175 aircraft, four spare engines and aircraft improvements.

Net Cash Flows Provided By Financing Activities

During our six months ended March 31, 2018, net cash flow used in financing activities was $(28.1) million. We received $85.4 million in proceeds from long-term debt primarily related to refinancing debt on aircraft, as well as spare aircraft engine and aircraft engine kit financing. We made $110.8 million of principal repayments on long-term debt during the year. We also incurred $2.7 million of costs related to debt financing.

 

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During our six months ended March 31, 2017, net cash flow provided by financing activities was $37.1 million. We received $127.7 million in proceeds from long-term debt primarily related to spare aircraft engine and aircraft engine kit financing. We made $87.8 million of principal repayments on long-term debt and incurred $2.3 million of costs related to debt financing during the six months ended March 31, 2017.

During our 2017 fiscal year, net cash flow provided by financing activities was $28.5 million. We received $185.9 million in proceeds from long-term debt primarily related to spare aircraft engine and aircraft engine kit financing. We made $153.0 million of principal repayments on long-term debt during the year. We also incurred $3.4 million of costs related to debt financing and $1.0 million of costs related to the repurchase of shares of our common stock.

During our 2016 fiscal year, net cash flow provided by financing activities was $365.9 million. We received $452.8 million in proceeds from long-term debt primarily related to aircraft financing. We made $75.5 million of principal repayments on long-term debt during the year. We also incurred $10.1 million of costs related to debt financing and $1.4 million of costs related to the repurchase of our stock.

Commitments and Contractual Obligations

As of September 30, 2017, we had $1,514.8 million of long-term debt (including principal and projected interest obligations) and operating lease obligations (including current maturities). This amount consisted of $994.5 million in notes payable related to owned aircraft used in continuing operations, $162.4 million of our notes payable related to spare engines and engine kits, and $28.8 million of our working capital line of credit. We also had $329.1 million of operating lease obligations primarily related to aircraft used under our capacity purchase agreements. Our long-term debt reflected below includes an aggregate of $221.7 million in projected interest costs through our 2028 fiscal year.

The following table sets forth our cash obligations as of September 30, 2017:

 

            Payment Due by Period  
     Total      Less than
1 Year
     1 - 3 Years      3 - 5 Years      More than
5 Years
 
            (in thousands)  

Aircraft notes

   $ 994,539      $ 146,325      $ 249,292      $ 211,277      $ 387,645  

Engine notes

     162,405        39,558        68,831        54,016        —    

Operating lease obligations

     329,121        97,185        121,297        82,359        28,280  

Working capital line of credit

     28,768        1,544        27,224        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,514,833      $ 284,612      $ 466,644      $ 347,652      $ 415,925  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Leases

We have significant long-term lease obligations primarily relating to our aircraft fleet. The leases are classified as operating leases and are therefore excluded from our consolidated balance sheets. At September 30, 2017, we have 37 aircraft on lease (excluding aircraft leased from United) with remaining lease terms ranging from approximately 2 to 6.5 years. Future minimum lease payments due under all long-term operating leases were approximately $329.1 million at September 30, 2017.

RASPRO Lease Facility. On September 23, 2005, Mesa Airlines, as lessee, entered into an aircraft lease facility with RASPRO as lessor, for 15 of our CRJ-900 aircraft (the “RASPRO Lease Facility”). The obligations under the RASPRO Lease Facility are guaranteed by us, and basic rent is paid quarterly on each aircraft. On each of March 10, 2014, June 5, 2014 and December 8, 2017, the

 

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RASPRO Lease Facility was amended to defer certain payments of basic rent (the “Deferred Amounts”). Until the principal of and accrued interest on the Deferred Amounts are paid in full, (i) we and Mesa Airlines are prohibited from paying any dividends to holders of our common stock, (ii) we are prohibited from repurchasing any of our warrants or other equity interests, (iii) Mesa Airlines must maintain available a minimum of $10 million of cash, cash equivalents and availability under lines of credit, (iv) Mesa Airlines must provide RASPRO with periodic monthly, quarterly and annual reports containing certain financial information and forecasted engine repair costs and (v) we must maintain a minimum debt-to-assets ratio.

Pursuant to the December 2017 amendment referenced above, we deferred $29.3 million of payments originally due in December 2017 through March 2018. The deferred amounts are charged 7.5% interest per annum and due for repayment in December 2021. As of March 31, 2018, we were in compliance with these covenants.

GECAS Lease Facility. On May 27, 2014, Mesa Airlines, as lessee, entered into an aircraft lease facility with Wells Fargo Bank Northwest, National Association, as owner trustee and lessor, governing the lease of 17 of our CRJ-700 and CRJ-900 aircraft (the “GECAS Lease Facility”). The obligations under the GECAS Lease Facility are guaranteed by us, and basic rent is paid monthly on each aircraft. In consideration for the lease, we issued to GE Capital Aviation Services LLC warrants to purchase 100,000 shares of our common stock with an exercise price of $8.00 per share and a five-year maturity (the “GE Warrant”), which we mutually agreed to terminate in connection with our purchase of nine CRJ-900 aircraft that we previously leased under the GECAS Lease Facility. The GECAS Lease Facility requires Mesa Airlines and us to maintain a balance of unrestricted cash of not less than $10 million and prohibits us from paying dividends to holders of our common stock prior to September 30, 2018 without the prior written consent of the GECAS Lease Facility parties. As of March 31, 2018, we were in compliance with these covenants.

As more fully described under “Aircraft Notes” below, on June 26, 2018, we purchased nine CRJ-900 aircraft, which were previously leased under the GECAS Lease Facility, for $76.5 million and terminated the GE Warrant.

Capital Leases

On February 7, 2018, Mesa Airlines, as lessee, entered into two agreements for the lease of two spare aircraft engines (the “Engine Leases”). Basic rent on the engines is paid monthly and at the end of the lease term, November 2022, Mesa Airlines has the option to purchase the engines for $935,230 each. The Engine Leases are reflected as debt obligations of $10.3 million on our balance sheet as of March 31, 2018. The Engine Leases set forth specific redelivery requirements and conditions, but do not contain operational or financial covenants.

Working Capital Line of Credit

In August 2016, we, as guarantor, our wholly owned subsidiaries, Mesa Airlines and MAG-AIM, as borrowers, CIT, as administrative agent, and the lenders party thereto (the “CIT Lenders”), entered into a credit and guaranty agreement (the “CIT Revolving Credit Facility”) pursuant to which the CIT Lenders committed to lend to Mesa Airlines and MAG-AIM revolving loans in the aggregate principal amount of up to $35.0 million. The borrowers’ and guarantor’s obligations under the CIT Revolving Credit Facility are secured primarily by a first priority lien on certain engines, spare parts and related collateral, including engine warranties and proceeds of the foregoing. The CIT Revolving Credit Facility contains affirmative, negative and financial covenants that are typical in the industry for similar financings, including, but not limited to, covenants that, subject to exceptions described in the CIT Revolving Credit Facility, restrict our ability and the ability of Mesa Airlines and MAG-AIM and their

 

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subsidiaries to: (i) enter into, create, incur, assume or suffer to exist any liens; (ii) merge, dissolve, liquidate, consolidate or sell or transfer substantially all of its assets; (iii) sell assets; (iv) enter into transactions with affiliates; (v) amend certain material agreements and organizational documents; (vi) make consolidated unfinanced capital expenditures; or (viii) maintain a consolidated interest and rental coverage ratio above the amount specified in the CIT Revolving Credit Facility. On April 27, 2018, we entered into an amendment to our CIT Revolving Credit Facility to lower the consolidated interest and rental coverage ratio through the end of the term of the agreement. As of March 31, 2018, we were in compliance with the financial covenants under the CIT Revolving Credit Facility. The CIT Revolving Credit Facility also includes customary events of defaults, including, but not limited to: (i) payment defaults; (ii) breach of covenants; (iii) breach of representations and warranties; (iv) cross-defaults; (v) certain bankruptcy-related defaults; (vi) change of control; and (vii) revocation of instructions with respect to certain controlled accounts.

The loan under the CIT Revolving Credit Facility matures on August 12, 2019. As of September 30, 2017, $25.7 million of borrowings were outstanding under this facility. Funds available under the CIT Revolving Credit Facility are subject to certain administrative and commitment fees, and funds drawn under the facility bear interest at LIBOR plus a margin of 4.25%.

Engine Notes

Spare Engine Facility. In December 2016, Mesa Airlines, as borrower, Obsidian Agency Services, Inc., as security trustee, Cortland Capital Market Services LLC, as administrative agent, and the lenders party thereto (the “Engine Financing Lenders”) entered into a credit agreement (the “Spare Engine Facility”) pursuant to which the Engine Financing Lenders committed to lend to Mesa Airlines term loans in the aggregate principal amount of up to approximately $99.1 million. In February 2018, the parties amended the Spare Engine Facility to increase the commitment of the Engine Financing Lenders by an additional aggregate principal amount of up to approximately $4.1 million.

Mesa Airline’s obligations under the Spare Engine Facility are secured primarily by a first priority lien on certain engines acquired with the proceeds of the Spare Engine Facility and related collateral, including engine warranties and proceeds of the foregoing. The Spare Engine Facility contains affirmative and negative covenants that are typical in the industry for similar financings, including, but not limited to, covenants that, subject to exceptions described in the Spare Engine Facility, restrict the ability of Mesa Airlines to: (i) enter into, create, incur, assume or suffer to exist any liens; and (ii) merge, dissolve, liquidate, consolidate or sell or transfer substantially all of its assets. As of March 31, 2018, we were in compliance with these covenants. The Spare Engine Facility also includes customary events of defaults, including, but not limited to: (i) payment defaults; (ii) breach of covenants; (iii) breach of representations and warranties; and (iii) material adverse changes.

The Spare Engine Facility consists of an Engine Acquisition Loan, a Delayed Draw Tranche B Loan, and a Delayed Draw Tranche C Credit Commitment. Funds drawn under each loan bear interest at the rate of 7.25% per annum plus the greater of (a) 0.5% or (b) the Eurodollar rate, and each loan matures on the date that is five years after such loan was drawn. The facility will be repaid periodically according to amortization schedules, with the entire remaining outstanding principal balance to be paid on the applicable maturity date. As of September 30, 2017, $93.0 million of borrowings were outstanding under this facility, and $94.7 million of Mesa Airline’s equipment is pledged under this facility.

EDC Credit Facilities. In August 2015, Mesa Airlines, as borrower, and EDC, as lender (the “EDC Lender”), entered into a credit and agreement (the “EDC 2015 Credit Facility”) pursuant to which the EDC Lender committed to purchase notes from Mesa Airlines from time to time in the aggregate principal amount of up to $11.0 million. The borrower’s obligations under the EDC 2015 Credit Facility

 

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are unsecured and guaranteed by us. The EDC 2015 Credit Facility contains affirmative and negative covenants that are typical in the industry for similar financings, including, but not limited to, covenants that, subject to exceptions described in the EDC 2015 Credit Facility, restrict the ability of Mesa Airlines and the Company to: (i) merge, dissolve, liquidate, consolidate or sell or transfer substantially all of its assets; or (ii) sell assets. The EDC 2015 Credit Facility also includes customary events of defaults, including, but not limited to: (i) payment defaults; (ii) breach of covenants; (iii) breach of representations and warranties; (iv) cross-defaults; (v) certain bankruptcy-related defaults of Mesa Airlines or of specified carriers; and (vi) termination or material adverse change in the terms of any code sharing agreement. Each note matures on the date that is five years after such note was issued. As of September 30, 2017, $6.4 million of borrowings were outstanding under this facility. As of March 31, 2018, we were in compliance with these covenants.

Funds drawn under the EDC 2015 Credit Facility are subject to certain arrangement and commitment fees, and funds drawn under the facility bear interest at (i) LIBOR plus a margin of 2.66% plus a margin benchmark of 0.41% or (ii) a fixed amount based on a swap rate of floating rate debt to fixed rate debt plus a margin of 2.66% plus a margin benchmark of 0.58%. Installment payments must be made on each note issued under this facility.

In January 2016, Mesa Airlines, as borrower, and the EDC Lender entered into a credit and agreement (the “EDC January 2016 Credit Facility”) pursuant to which the EDC Lender committed to purchase notes from Mesa Airlines from time to time in the aggregate principal amount of up to $37.0 million. The borrower’s obligations under the EDC January 2016 Credit Facility are secured by the underlying equipment and guaranteed by us. The EDC January 2016 Credit Facility contains affirmative and negative covenants that are typical in the industry for similar financings, including, but not limited to, covenants that, subject to exceptions described in the EDC January 2016 Credit Facility, restrict our ability to: (i) merge, dissolve, liquidate, consolidate or sell or transfer substantially all of its assets; or (ii) sell assets. The EDC January 2016 Credit Facility also contains a financial covenant that requires us to maintain a fixed charge coverage ratio at the end of each fiscal quarter above the amount specified in the agreement. As of March 31, 2018, we were in compliance with these covenants.

The EDC January 2016 Credit Facility also includes customary events of defaults, including, but not limited to: (i) payment defaults; (ii) breach of covenants; (iii) breach of representations and warranties; (iv) cross-defaults; (v) certain bankruptcy-related defaults of Mesa Airlines or of specified carriers; (vi) termination or material adverse change in the terms of any code sharing agreement; and (vii) breach or termination of our agreement with StandardAero. Each note matures on the date that is three to four years after such note was issued. As of September 30, 2017, $9.2 million of borrowings were outstanding under this facility.

Funds drawn under the EDC January 2016 Credit Facility are subject to certain arrangement and commitment fees, and funds drawn under the facility bear interest at (i) LIBOR plus a margin of, initially, 2.49% plus a margin benchmark of 0.47% or (ii) a fixed amount based on a swap rate of floating rate debt to fixed rate debt plus a margin of, initially, 2.49% plus a margin benchmark of 0.68%. Installment payments must be made on each note issued under this facility.

On April 30, 2018, Mesa Airlines and the EDC Lender amended the EDC January 2016 Credit Facility to, among other things, lower the required fixed charge ratio covenant through the end of the term of the agreement and provide for mandatory principal prepayments of $1 million per quarter over the next five fiscal quarters, beginning on September 30, 2018.

In June 2016, Mesa Airlines, as borrower, and the EDC Lender entered into a credit and agreement (the “EDC June 2016 Credit Facility”) pursuant to which the EDC Lender committed to purchase notes from Mesa Airlines from time to time in the aggregate principal amount of up to $25.0 million. The

 

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borrower’s obligations under the EDC June 2016 Credit Facility are unsecured and guaranteed by us. The EDC June 2016 Credit Facility contains affirmative and negative covenants and events of default that are typical in the industry for similar financings. Each note matures on the date that is two years after such note was issued. As of September 30, 2017, $18.5 million of borrowings were outstanding under this facility.

The EDC June 2016 Credit Facility contains an affirmative covenant that requires us to maintain a consolidated interest and rental coverage ratio above the amount specified in the agreement. As of March 31, 2018, we were in compliance with these covenants.

Funds drawn under the EDC June 2016 Credit Facility are subject to certain arrangement and commitment fees, and funds drawn under the facility bear interest at (i) LIBOR plus a margin of 2.81% plus a margin benchmark of 0.49% or (ii) a fixed amount based on a swap rate of floating rate debt to fixed rate debt plus a margin of 2.81% plus a margin benchmark of 0.71%. Installment payments must be made on each note issued under this facility.

Midfirst Engine Facility. In May 2015, Mesa Airlines, as borrower, and MidFirst Bank entered into a business loan agreement and accompanying promissory note (the “MidFirst Credit Facility”) pursuant to which MidFirst Bank committed to lend to Mesa Airlines the principal amount of $8.5 million. The borrower’s obligations under the MidFirst Credit Facility are guaranteed by us and are secured primarily by a lien on certain spare engines acquired with the proceeds of the MidFirst Credit Facility and related collateral. The MidFirst Credit Facility contains affirmative and negative covenants and events of default that are typical in the industry for similar financings. The promissory note matures on September 21, 2020. As of September 30, 2017, $5.0 million of borrowings were outstanding under this facility. As of March 31, 2018, we were in compliance with these covenants.

Funds drawn under the MidFirst Credit Facility bear interest at the rate of 5.163% per annum. Installment payments of principal must be made on the promissory note issued under this facility.

Aircraft Notes

As of September 30, 2017, we had 65 aircraft in our fleet financed with debt (collectively, the “Aircraft Notes”):

 

    In fiscal year 2004, we permanently financed five CRJ-700 and six CRJ-900 aircraft with $254.7 million in debt and in our fiscal 2005, we permanently financed five CRJ-900 aircraft with $118 million in debt. The debt bears interest at the monthly LIBOR plus 3% (4.232% at September 30, 2017) and requires monthly principal and interest payments. As of September 30, 2017, we had $58.3 million outstanding under these notes.

 

    In fiscal year 2007, we permanently financed three CRJ-900 and three CRJ-700 aircraft for $120.3 million. The debt bears interest at the monthly LIBOR plus 2.25% (3.482% at September 30, 2017) and requires monthly principal and interest payments. As of September 30, 2017, we had $48.8 million outstanding under these notes.

 

    In fiscal year 2014, we permanently financed 10 CRJ-900 aircraft for $88.4 million. The debt bears interest at the monthly LIBOR, plus a spread ranging from 1.95% to 7.25% (3.182% to 8.482% at September 30, 2017) and requires monthly principal and interest payments. As of September 30, 2017, we had $64.8 million outstanding under these notes.

 

    In fiscal year 2014, we permanently financed eight CRJ-900 aircraft with $114.5 million in debt. The debt bears interest at 5% and requires monthly principal and interest payments. As of September 30, 2017, we had $82.8 million outstanding under these notes.

 

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    In fiscal year 2015, we financed seven CRJ-900 aircraft with $170.2 million in debt. The senior notes payable of $151 million bear interest at monthly LIBOR plus 2.71% (3.942% at September 30, 2017) and require monthly principal and interest payments. The subordinated notes payable are noninterest-bearing and become payable in full on the last day of the term of the notes. We have imputed an interest rate of 6.25% on the subordinated notes payable and recorded a related discount of $8.1 million, which is being accreted to interest expense over the term of the notes. As of September 30, 2017, we had $144.0 million outstanding under these notes.

 

    In fiscal year 2016, we financed 10 E-175 aircraft with $246 million in debt under an EETC financing arrangement. The debt bears interest ranging from 4.75% to 6.25% and requires semi-annual principal and interest payments. As of September 30, 2017, we had $226.4 million outstanding under these notes.

 

    In fiscal year 2016, we financed eight E-175 aircraft with $195.3 million in debt. The senior notes payable of $172 million bear interest at the three-month LIBOR plus a spread ranging from 2.20% to 2.32% (3.533% to 3.654% at September 30, 2017) and require quarterly principal and interest payments. The subordinated notes payable bear interest at 4.50% and require quarterly principal and interest payments. As of September 30, 2017, we had $181.1 million outstanding under these notes.

In December 2017, we refinanced $41.9 million of debt on nine CRJ-900 aircraft (due between 2019 and 2022) with $74.9 million of debt, resulting in net cash proceeds to us of $30.5 million after transaction related fees. The senior notes payable of $46.9 million bear interest at monthly LIBOR plus 3.5%. The subordinated notes payable bear interest at monthly LIBOR plus 4.5%. The refinanced debt requires quarterly payments of principal and interest through fiscal 2022.

On June 27, 2018, we refinanced $16.0 million of debt on six CRJ-900 aircraft (due in 2019), with $27.5 million of debt, resulting in net cash proceeds to us of $10.4 million after transaction related fees. The notes payable require quarterly payments of principal and interest through fiscal 2022 bearing interest at LIBOR plus 3.50%.

On June 28, 2018, we purchased nine CRJ-900 aircraft, which were previously leased under the

GECAS Lease Facility, for $76.5 million. We financed the aircraft purchase with $69.6 million in new debt and proceeds from the June 2018 aircraft refinancing. The notes payable of $69.6 million require quarterly payments of principal and interest through fiscal 2022 bearing interest at LIBOR plus a spread ranging from 3.50% to 7.50%. We recorded non-cash lease termination expense of $15.1 million in connection with the lease buyout. Also, as part of the transaction, we (i) received $4.5 million of future goods and services credits and $5.6 million of loan forgiveness for loans with a maturity date in 2027 from the aircraft manufacturer, and (ii) mutually agreed with GE Capital Aviation Services LLC to terminate the GE Warrant.

The Aircraft Notes are secured by the respective aircraft, which had a net book value of $1,023.8 million as of September 30, 2017. The weighted-average effective interest rate of the fixed and floating rate aircraft and equipment notes at September 30, 2017 and March 31, 2018, was 4.89% and 5.32%, respectively.

Maintenance Commitments

In August 2005, we entered into a ten-year agreement with AAR, for the maintenance and repair of certain of our CRJ-200, CRJ-700 and CRJ-900 aircraft. The agreement has been amended since with a term through 2021, also to include certain E-175 aircraft rotable spare parts with a term through December 2027. Under the agreements, we pay AAR a monthly access fee per aircraft for certain

 

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consigned inventory as well as a fixed “cost per flight hour” fee on a monthly basis for repairs on certain repairable parts during the term of the agreement, which fees are subject to annual adjustment based on increases in the cost of labor and component parts.

In July 2012, we entered into a heavy check maintenance contract with Bombardier, to perform heavy check maintenance on all CRJ-700 and CRJ-900 aircraft, which has been extended through November 2020. We are charged on a time and materials basis by Bombardier for the heavy check maintenance work performed under this agreement.

In July 2013, we entered into an engine maintenance contract with GE to perform heavy maintenance on certain CRJ-700, CRJ-900 and E-175 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance with GE’s spare parts catalog for engines. The engine maintenance contract extends through 2024.

In 2014, we entered into a ten-year contract with Aviall to provide maintenance and repair services on the wheels, brakes and tires of our CRJ-700 and CRJ-900 aircraft. Under the agreement, we pay Aviall a fixed “cost per landing” fee for all landings of our aircraft during the term of the agreement, which fee is subject to annual adjustment based on increases in the cost of labor and component parts.

We entered into an engine maintenance contract with StandardAero, which became effective on June 1, 2015, to perform heavy maintenance on certain CRJ-700 and CRJ-900 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance with the GE’s spare parts catalog for engines. The engine maintenance contract extends through 2020.

Our employees perform routine airframe and engine maintenance along with periodic inspections of equipment at their respective maintenance facilities. We also use third-party vendors, such as AAR, Aviall and GE, for certain heavy airframe and engine maintenance work, along with parts procurement and component overhaul services for our aircraft fleet. As of September 30, 2017, $57.8 million of parts inventory was consigned to us by AAR and Aviall under long-term contracts that is not reflected on our balance sheet.

We use the direct expense method of accounting for our maintenance of regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein we recognize the expense when the maintenance work is completed, or over the repair period, if materially different. While we keep a record of expected maintenance events, the actual timing and costs of major engine maintenance expense are subject to variables such as estimated usage, government regulations and the level of unscheduled maintenance events and their actual costs. Accordingly, we cannot reliably quantify the costs or timing of future maintenance-related expenses for any significant period of time.

Off-Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (i) made guarantees, (ii) a retained or a contingent interest in transferred assets, (iii) an obligation under derivative instruments classified as equity or (iv) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company.

We have no off-balance sheet arrangements of the types described in the four categories above that we believe may have material current or future effect on financial condition, liquidity or results of operations.

 

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A majority of our leased aircraft are leased through trusts formed for the sole purpose of purchasing, financing and leasing aircraft to us. Because these are single-owner trusts in which we do not participate, we are not at risk for losses and we are not considered the primary beneficiary. We believe that our maximum exposure under the leases are the remaining lease payments.

Quantitative and Qualitative Disclosure About Market Risk

We are subject to market risks in the ordinary course of our business. These risks include interest rate risk and, on a limited basis, commodity price risk with respect to foreign exchange transactions. The adverse effects of changes in these markets could pose a potential loss as discussed below. The sensitivity analysis provided does not consider the effects that such adverse changes may have on overall economic activity, nor does it consider additional actions we may take to mitigate our exposure to such changes. Actual results may differ.

Interest Rates. We are subject to market risk associated with changing interest rates on our variable rate long-term debt; the variable interest rates are based on LIBOR. The interest rates applicable to variable rate notes may rise and increase the amount of interest expense on our variable rate long-term debt. We do not purchase or hold any derivative instruments to protect against the effects of changes in interest rates.

As of September 30, 2017, we had $613.0 million of variable-rate debt including current maturities. A hypothetical 50 basis point change in interest rates would have affected interest expense by approximately $3.1 million in the year ended September 30, 2017. As of March 31, 2018, we had $603.5 million of variable-rate debt including current maturities. A hypothetical 50 basis point change in market interest rates would have affected interest expense by approximately $1.5 million in the six months ended March 31, 2018.

As of September 30, 2017, we had $343.9 million of fixed-rate debt, including current maturities. A hypothetical 50 basis point change in market interest rates would not impact interest expense or have a material effect on the fair value of our fixed-rate debt instruments as of September 30, 2017 or March 31, 2018.

Foreign Exchange. We have de minimis foreign currency risks related to our station operating expenses denominated in currencies other than the U.S. dollar, primarily the Canadian dollar. Our revenue is U.S. dollar denominated.

Unlike other airlines, our capacity purchase agreements largely shelter us from volatility related to fuel prices, which are directly paid and supplied by our major airline partners.

Inflation

We do not believe that inflation had a material effect on our business, financial condition, or results of operations in the last two fiscal years. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition, and results of operations.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in U.S. GAAP. In doing so, we have to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosure of contingent assets and liabilities. To the extent that there are material differences between these

 

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estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting estimates, which we discuss below.

We have identified the accounting policies discussed below as critical to us. The discussion below is not intended to be a comprehensive list of our accounting policies. Our significant accounting policies are more fully described in Note 2 to the consolidated financial statements.

Revenue Recognition

Under our capacity purchase agreements, our major airline partners generally pay a fixed monthly minimum amount per aircraft, plus certain additional amounts based upon the number of flights and block hours flown. The contracts also include reimbursement of certain costs that we incur in performing flight services. These costs, known as “pass-through costs,” may include passenger and hull insurance, aircraft property taxes, as well as landing fees and catering. Additionally, for the E-175 aircraft owned by United, the United Capacity Agreement provides that United will reimburse us for heavy airframe and engine maintenance, landing gear, auxiliary power units (“APU”) and component maintenance, which are treated as pass-through and will increase revenue (and expense for the same amount) upon completion of the work. We also receive compensation under our capacity purchase agreements for heavy maintenance expenses at a fixed hourly rate or per-aircraft rate for all aircraft in scheduled service, other than the E-175 aircraft owned by United. We record reimbursement of pass-through costs as other revenue in the consolidated statements of operations as service is provided. In addition, our major airline partners also provide, at no cost to us, certain ground handling and customer service functions, as well as airport-related facilities and gates at their hubs and other cities. Services and facilities provided by major airline partners at no cost to us are presented net in our consolidated financial statements; hence, no amounts are recorded for revenue or expense for these items. The contracts also include a profit margin on certain reimbursable costs, as well as a profit margin, incentives and penalties based on certain operational benchmarks. We recognize revenue under our capacity purchase agreements when the transportation is provided, including 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 as the gross amount billed to our major airline partners.

Under our capacity purchase agreements with American and United, we are reimbursed under a fixed rate per-block hour, plus an amount per aircraft designed to reimburse us for certain aircraft ownership costs.

We have concluded that a component of our revenue under our capacity purchase agreements is rental income, as these agreements identify the “right of use” of a specific type and number of aircraft over a stated period of time. We calculate the amount of rental income using the contractual ownership rates set forth in our capacity purchase agreements. The amount deemed to be rental income during our fiscal 2016, 2017 and the six months ended March 31, 2017 and 2018 were $190.1 million, $217.6 million, $108.6 million and $108.5 million, respectively, and has been included in contract revenue on our consolidated statements of income. We have not separately stated aircraft rental income and aircraft rental expense in the consolidated statements of operations because the use of the aircraft is not a separate activity of the total service provided.

Our capacity purchase agreements contain an option that allows our major airline partners to assume the contractual responsibility for procuring and providing the fuel necessary to operate the flights that we operate for them. Both airlines have exercised this option. Accordingly, we do not record an expense or revenue for fuel and related fueling costs for flying under our capacity purchase agreements.

 

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Our capacity purchase agreements contain provisions pursuant to which the parties could terminate their respective agreements, subject to certain conditions. Our revenues could be impacted by a number of factors, including amendment or termination of our capacity purchase agreements, contract modifications resulting from contract renegotiations and our ability to earn incentive payments contemplated under applicable agreements. In the event contracted rates are not finalized at a quarterly or annual financial statement date, we record that period’s revenues based on the lower of the prior period’s approved rates or our estimate of rates that will be implemented upon completion of negotiations. Also, in the event we have a reimbursement dispute with a major airline partner at a quarterly or annual financial statement date, we evaluate the dispute under established revenue recognition criteria and, provided the revenue recognition criteria have been met, we recognize revenue for that period based on our estimate of the resolution of the dispute. Accordingly, we are required to exercise judgment and use assumptions in the application of our revenue recognition policy. See “Recent Accounting Pronouncements” set forth below for a discussion of a new accounting standard that we anticipate implementing beginning in our 2019 fiscal year.

Maintenance

We operate under an FAA-approved continuous inspection and maintenance program. We use the direct expense method of accounting for our maintenance of regional jet engine overhauls, airframe, landing gear, and normal recurring maintenance wherein we recognize the expense when the maintenance work is completed, or over the repair period, if materially different. For leased aircraft, we are subject to lease return provisions that require a minimum portion of the “life” of an overhaul be remaining on the engine at the lease return date. We estimate the cost of maintenance lease return obligations and accrue such costs over the remaining lease term when the expense is probable and can be reasonably estimated.

Under our aircraft operating lease agreements and FAA operating regulations, we are obligated to perform all required maintenance activities on our fleet, including component repairs, scheduled air frame checks and major engine restoration events. We estimate the timing of the next major maintenance event based on assumptions including estimated usage, FAA-mandated maintenance intervals and average removal times as recommended by the manufacturer. The timing and the cost of maintenance are based on estimates, which can be impacted by changes in utilization of our aircraft, changes in government regulations and suggested manufacturer maintenance intervals. Major maintenance events consist of overhauls to major components.

Engine overhaul expense totaled $90.9 million, $64.0 million, for the years ended September 30, 2016 and 2017, respectively, of which $0 and $0.3 million was pass-through expense. Airframe C-check expense totaled $13.2 million and $22.6 million for the years ended September 30, 2016 and 2017, respectively, of which $0 and $4.9 million was pass-through expense.

Engine overhaul expense totaled $45.1 million and $33.1 million, for the six months ended March 31, 2017 and March 31, 2018, respectively, of which $0 and $5.2 million was pass-through expense. Airframe C-check expense totaled $10.2 million and $13.5 million for the six months ended March 31, 2017 and March 31, 2018, respectively, of which $0.5 million and $5.7 million was pass-through expense.

Aircraft Leases

In addition to the aircraft we receive from United, approximately 19% of our aircraft are leased from third parties. In order to determine the proper classification of a lease as either an operating lease or a capital lease, we must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making

 

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computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. All of our aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. Additionally, operating leases are not reflected in our consolidated balance sheets and accordingly, neither a lease asset nor an obligation for future lease payments is reflected in our consolidated balance sheets. In the event that we or one of our major airline partners decide to exit an activity involving leased aircraft, losses may be incurred. In the event that we exit an activity that results in exit losses, these losses are accrued as each aircraft is removed from operations for early termination penalties, lease settle up and other charges. See “Recent Accounting Pronouncements” set forth below for a discussion of a new accounting standard that is likely to have an impact on our aircraft lease accounting beginning in 2019.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which we cannot conclude that it is more likely than not that such deferred tax assets will be realized.

In determining the amount of the valuation allowance, estimated future taxable income, as well as feasible tax planning strategies for each taxing jurisdiction, are considered. If we determine it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if we determine it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.

We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that is it more likely than not that the tax positions will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Significant judgment is required to evaluate uncertain tax positions. Evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of tax audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense in the period in which the change is made, which could have a material impact to our effective tax rate. See Note 12: “Income Taxes” in the notes to our audited consolidated financial statements included elsewhere in this Form S-1 for additional information. See also “Management’s Discussion and Analysis—Results of Operations—Income Taxes” for additional information.

For a further listing and discussion of our accounting policies, see Note 2: “Summary of Significant Accounting Policies” in the notes to our audited consolidated financial statements included elsewhere in this prospectus.

 

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Accounting Methodology for Stock Appreciation Rights

We have historically accounted for compensation expense related to our liability-classified stock appreciation rights (“SARs”) using the intrinsic value method, as permitted by ASC 718 for nonpublic entities, with changes to the value of the SARs recognized as compensation expense at each quarterly reporting date. Upon becoming a public company, as defined in ASC 718, we are required to change our methodology for valuing the SARs. While the SARs will continue to be re-measured at each quarterly reporting date, the SARs are required to be accounted for prospectively at fair value using a fair value pricing model, such as Black-Scholes. We plan to record the impact of the change in valuation methods as a cumulative effect of a change in accounting principle, as permitted by ASC 250. The effect of the change will be to increase or decrease the SAR liability by the difference in compensation cost measured using the intrinsic value method and the fair value method with an equal and offsetting change to retained earnings in the consolidated balance sheet. Any changes in fair value after the initial adoption will be recorded as compensation expense in the consolidated statement of operations.

Emerging Growth Company Status

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The standard establishes a new recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. We may adopt the requirements of ASU 2014-09 using either of two acceptable methods: (i) retrospective adoption to each prior period presented with the option to elect certain practical expedients; or (ii) adoption with the cumulative effect recognized at the date of initial application and providing certain disclosures. In July 2015, the FASB approved a one-year deferral of the effective date of the new standard, making it effective for our reporting periods beginning October 1, 2018. We are currently evaluating the potential impact of the adoption of this new guidance on our financial position or results of operations, including the method of adoption to be used.

In August 2014, The FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Topic 205), which provides guidance on determining when and how to disclose going-concern uncertainties in the condensed consolidated financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the consolidated financial statements are issued. An entity must provide certain disclosure if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The update applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter. We adopted this ASU in fiscal year 2017, and the adoption did not have a material impact on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which provides guidance requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, with the exception of short-term leases. Leases will be

 

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classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of income. The guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the potential impact of the adoption of this new guidance on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting, which simplifies several areas of accounting for share-based compensation arrangements, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in the reporting period in which such awards vest. ASU 2016-09 also required a modified retrospective adoption for previously unrecognized excess tax benefits. The guidance in ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, including interim periods within those annual reporting periods. We adopted ASU 2016-09 in the first quarter of fiscal 2018 on a modified retrospective basis, recognizing all excess tax benefits previously unrecognized, as a cumulative-effect adjustment increasing deferred tax assets by $0.4 million, increasing income tax expense by $0.3 million, and increasing retained earnings by $0.7 million. Adoption of ASU 2016-09 did not have any other material effect on our results of operations, financial position or cash flows.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force), which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the impact that the standard will have on the consolidated statements of cash flows. Further, in November 2016, the FASB issued ASU No. 2016-18 that requires restricted cash and cash equivalents to be included with cash and cash equivalents on the statement cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We have restricted cash of $3.8 million as of March 31, 2018 and intend to adopt the new guidance in our 2019 fiscal year.

 

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INDUSTRY BACKGROUND

Overview of the Passenger Airline Industry

According to the FAA, the number of total paying passengers in the United States that traveled on scheduled domestic and international flights, commonly referred to as “total revenue passenger enplanements,” was 842.4 million in 2017, up 3.0% from 817.6 million in 2016, and enplanements in 2016 were up 3.95% from 786.5 million in 2015. Historically, airline passenger growth depends upon, but has occurred at a rate in excess of, GDP growth. The 2017 Current Market Outlook, a 20-year forecast of The Boeing Company, foresees average annual growth in North American enplanements of 3.0% per year over the 2017-2036 timeframe, assuming a 2.1% annual GDP growth rate.

As a result of a series of merger transactions between 2008 and 2016, there are currently five “major” airlines in the United States: American, Delta, United, Alaska and Southwest, which collectively control in excess of 85% of U.S. industry passenger capacity when including both flights operated themselves and flights operated under contract by their regional airline partners. The major airlines offer scheduled flights to many large cities within the United States and to cities in other parts of the world. These carriers benefit from wide name recognition and long operating histories. In recent years, major airlines have enjoyed sustained profitability achieved through scale efficiencies, disciplined capacity planning, profit-oriented management and increased passenger demand. The revenues of the U.S. regional airline sector are derived overwhelmingly from these financially strong major airlines, in particular American, Delta and United.

Most major airlines have adopted a “hub and spoke” system of operations. This arrangement permits travelers to fly from their point of origin to more destinations without switching airlines. Hub airports permit carriers to transport passengers between large numbers of destinations with substantially more frequent service than if each city-pair were served nonstop. The hub and spoke system also allows the airline to add service to a new destination from a large number of cities using only one or a limited number of aircraft. Regional airlines play a vital role in the major airlines’ hub and spoke networks by serving markets that would be too small for the major airline to serve economically with the major carrier’s larger aircraft. In addition, regional aircraft are well suited to serve larger city pairs during off-peak times when load factors on larger jets are low. Flights by regional airlines help build schedule density and “feed” passenger traffic to major airlines’ hub airports that is essential for the economic viability of the entire hub operation. Regional airlines have added importance to their major airline partners because the city pairs served by regional airlines often have traffic levels and other attributes that make them very difficult to contest by the low-cost airlines that otherwise compete with major carriers on much of their route networks.

“Low-cost” airlines, such as jetBlue Airways, typically offer fewer classes of service and have lower cost structures than major airlines, thus permitting them to offer flights to many of the same destinations as the major airlines, but at lower prices. “Ultra low-cost” airlines, including Allegiant Travel Company, Spirit Airlines and Frontier Airlines, expanded upon the low-cost airline model by adding a focus on increased aircraft utilization, increased seat density and the unbundling of revenue sources by charging fees for multiple products and services previously provided free to passengers. Some ultra low-cost airlines utilize a hub and spoke strategy, while others offer predominantly point-to-point service between designated city pairs, a strategy that increases efficiency and lowers fares, but often results in less convenient flight schedules and service to fewer markets. In recent years, the business models of ultra low-cost, low-cost and major airlines have become increasingly blurred, with major airlines offering inexpensive basic economy fares with fewer amenities to compete for price-sensitive travelers, and some low-cost carriers now offering premium seating and classes of service. At present, none of the business models of the ultra low-cost or low-cost airlines or Southwest Airlines include affiliation with regional air carriers, and there is no expectation that this will occur in the

 

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near term. However, if in the future we are invited to provide regional flying to new partners in this segment, we expect to experience incremental growth.

Regional airlines operate smaller aircraft, with seating for 50-76 passengers, that have far lower trip costs than the larger aircraft operated by the major, low-cost and ultra low-cost airlines, which typically have seating for 120 passengers or more. Independent regional airlines, such as us and SkyWest (as defined below), typically provide service to more than one major airline. Conversely, captive regional airlines, including Envoy (owned by American), Endeavor (owned by Delta), PSA (owned by American), Piedmont (owned by American) and Horizon (owned by Alaska), are wholly owned subsidiaries of major airlines and tend to fly exclusively in cooperation with their respective parent airlines. In contrast to low-cost and ultra low-cost airlines, regional airlines generally work cooperatively with major airlines and do not try to establish an independent route system or brand to compete with the major airlines. Regional airlines typically enter into capacity purchase agreements with one or more major airline partners under which the regional airline agrees to use its lower-cost aircraft to carry passengers booked and ticketed by the major airline between city pairs selected by the major airline partner. In exchange for such services, the regional airline is either paid a fixed-fee per flight by the major airline or receives a pro-rata portion of the total fare generated for a given passenger itinerary.

Regional Airline Industry

Regional airlines play a daily, essential role in the U.S. air travel system. According to the Regional Airline Association, 42% of all scheduled airline flights in the United States in 2016 were performed by regional airlines. Of all the U.S. airports with scheduled airline service, 64% of them are served exclusively by regional airlines. Some of the most popular U.S. airports have more than half of all their flights on regional airlines, including New York-LaGuardia, Philadelphia, Washington-Dulles, Charlotte, Houston-Bush and Chicago-O’Hare.

The regional airline industry grew rapidly from the mid-1990s until the 2007-2010 timeframe, driven by the introduction of “regional jet” aircraft, which were a significant aerospace advancement over previous regional aircraft and broadly adopted due to their high speed, range, cabin class comfort, and low noise levels. In the 2007-2010 timeframe, growth of the regional sector stalled due to a confluence of factors, including: bankruptcy filings by several U.S. major airlines that were large purchasers of regional airline capacity; rising fuel prices, which challenged the economics of small regional jet aircraft; the 2008 financial crisis; and a wave of major airline mergers that drove fleet rationalization and a reduction in the number of hub airports. These industry changes adversely affected the regional airline sector, and three of the then-largest regional airlines restructured under bankruptcy protection (us and Pinnacle Airlines) or sold their business under duress (ExpressJet Holdings).

In our case, we filed for protection under Chapter 11 of the federal bankruptcy laws on January 5, 2010 and successfully emerged from bankruptcy on March 1, 2011. We filed for protection under Chapter 11 primarily to address an excess of 50-seat CRJ-200 aircraft that were not extended by certain of our major airline partners under our prior capacity purchase agreements. The lease terms of the excess CRJ-200 aircraft extended four or more years beyond the expiration date of their related capacity purchase agreements. At the time of our Chapter 11 filing, higher fuel prices had caused the 50-seat CRJ-200 to be uneconomical for major airlines to fly, making it untenable for us to renew our capacity purchase agreements with respect to these aircraft or place them into service with other major airlines. Our restructuring did not seek to renegotiate the terms of our then-existing labor agreements, which we believe has contributed to our strong ongoing relationship with our employees and their labor representatives.

Since 2007, depending on the metric used, the overall size of the U.S. regional airline industry has been largely unchanged. The first reason for this relates to mergers, hub consolidation, and route

 

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network rationalization among the major airlines that were the primary purchasers of regional airline capacity: Delta’s combination with Northwest, United’s combination with Continental, American’s combination with US Airways, and US Airways’ previous combination with America West. The second reason has been a pilot shortage resulting from new federal regulations implemented in August 2013 which dramatically increased minimum pilot training time. According to the Regional Airline Association, from 2007 until 2016, U.S. regional air carriers collectively grew revenue passenger miles from 72.9 billion to 75.5 billion, though passenger enplanements declined from 160.2 million to 154.9 million over the same period. The industry has changed in important ways since 2007, including: growth in average aircraft size from 51 seats to 62 seats, growth in average passenger trip length from 456 miles to 488 miles, near complete elimination of aircraft under 50-seat capacity from U.S. scheduled airline service, attrition of many smaller carriers, and significant reductions in flight frequencies and served destinations for many small and medium-sized cities across the United States.

We believe the effects of the pilot shortage and major airline consolidation are now fully reflected in the structure and trade practices of the regional airline sector, and that our sector is poised to grow again as the significant recent increases in regional airline pilot compensation draw additional qualified individuals into the profession, and once again permit fleet expansion. For the 2018-2038 timeframe, the FAA has projected revenue passenger miles for U.S. regional carriers to grow by 2.1% per year, with average aircraft size continuing to climb to 75 seats per aircraft. We believe the intensity of competition among regional air carriers for capacity-purchase contracts has lessened in recent years, due to the scarcity of pilots, and we do not expect this competitive characteristic to change in the near term. See “Business—Our Growth Opportunities.”

Relationship Between Regional and Major Airlines

Regional airlines typically operate short- and medium-haul scheduled airline service, often connecting smaller cities with major airline hubs. Regional airlines generally enter into capacity purchase agreements with one or more major airline partners under which the regional airline uses the major airline’s logos, service marks and aircraft paint schemes in providing regional flying services. Under these agreements, the major airline typically controls route selection, marketing, scheduling, pricing and seat inventories, and provides the regional airline with ground support services, airport landing slots and gate access. The regional airline, in turn, provides flight crews, flight services, maintenance and other operational functions. In most cases, the regional airline itself owns or leases the aircraft used, but there are many instances where the major airline partner will provide the aircraft.

The commercial relationship between the regional airline and its major airline partner usually involves either a capacity purchase agreement or revenue sharing arrangement, as explained below. All of our revenues are derived under capacity purchase agreements, and the overwhelming majority of revenues for the regional airline sector today are from capacity purchase agreements rather than revenue sharing arrangements.

Capacity Purchase Agreements. Under a capacity purchase agreement (also referred to as a “revenue guarantee agreement,” “fixed fee contract” or “contract flying”), the major airline generally pays the regional airline a fixed fee for each departure, flight hour (measured from takeoff to landing, excluding taxi time) or block hour (measured from takeoff to landing, including taxi time) incurred, and an amount per aircraft in service each month with additional incentives based on completion of flights, on-time performance and other operating metrics. In exchange for that, the major airline keeps all of the revenue paid by the passengers travelling on that regional airline flight leg. Under these agreements the major airline bears the risk of changes in the price of fuel and certain other costs that are passed through dollar-for-dollar to the major airline partner. Regional airlines benefit from a capacity purchase agreement because they are sheltered from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of

 

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passengers. Correspondingly, regional airlines in capacity purchase agreements generally do not benefit from positive trends in ticket prices (including ancillary revenue programs), the number of passengers enplaned or fuel prices.

Revenue-Sharing Arrangements. Under a revenue-sharing arrangement (also referred to as “prorate flying”), the major airline and regional airline negotiate a passenger fare proration formula, pursuant to which the regional airline receives a percentage of the ticket revenues for those passengers traveling for one portion of their trip on the regional airline and the other portion of their trip on the major airline. Substantially all costs associated with the regional airline flight are borne by the regional airline. In a revenue-sharing arrangement, the regional airline may realize increased profits as ticket prices and passenger loads increase or fuel prices decrease and, correspondingly, the regional airline may realize decreased profits as ticket prices and passenger loads decrease or fuel prices increase.

We currently have capacity purchase agreements with United, where we operate under the United Express banner, and American, where we operate under the American Eagle banner.

 

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BUSINESS

Overview

Mesa Airlines is a regional air carrier providing scheduled passenger service to 110 cities in 38 states, the District of Columbia, Canada, Mexico and the Bahamas. All of our flights are operated as either American Eagle or United Express flights pursuant to the terms of capacity purchase agreements we entered into with American and United. We have a significant presence in several of our major airline partners’ key domestic hubs and focus cities, including Dallas, Houston, Phoenix and Washington-Dulles. We have been the fastest growing regional airline in the United States over our last five fiscal years, based on fleet growth, with a cumulative increase in aircraft of 137%.

As of March 31, 2018, we operated a fleet of 145 aircraft with approximately 610 daily departures. We operate 64 CRJ-900 aircraft under our American Capacity Purchase Agreement and 20 CRJ-700 and 60 E-175 aircraft under our United Capacity Purchase Agreement. Over the last five calendar years, our share of the total regional airline fleet of American and United has increased from 7% to 11% and from 4% to 15%, respectively. Driven by this fleet growth, our total operating revenues have grown by 55% from $415.2 million in fiscal 2013 to $643.6 million in fiscal 2017, respectively. We believe we have expanded our share with our major airline partners because of our competitive cost structure, access to pilots under our labor agreements and track record of reliable performance. All of our operating revenue in our 2017 fiscal year and the six months ended March 31, 2018 was derived from operations associated with our American and United Capacity Purchase Agreements.

Our long-term capacity purchase agreements provide us guaranteed monthly revenue for each aircraft under contract, a fixed fee for each block hour and flight flown, and reimbursement of certain direct operating expenses, in exchange for providing regional flying on behalf of our major airline partners. Our capacity purchase agreements shelter us from many of the elements that cause volatility in airline financial performance, including fuel prices, variations in ticket prices, and fluctuations in number of passengers. In providing regional flying under our capacity purchase agreements, we use the logos, service marks, flight crew uniforms and aircraft paint schemes of our major airline partners. Our major airline partners control route selection, pricing, seat inventories, marketing and scheduling, and provide us with ground support services, airport landing slots and gate access, allowing us to focus all of our efforts on delivering safe, reliable and cost-competitive regional flying.

Regional aircraft are optimal for short and medium-haul scheduled flights that connect outlying communities with larger cities and act as “feeders” for domestic and international hubs. In addition, regional aircraft are well suited to serve larger city pairs during off-peak times when load factors on larger jets are low. The lower trip costs and operating efficiencies of regional aircraft, along with the competitive nature of the capacity purchase agreement bidding process, provide significant value to major airlines. According to the Regional Airline Association, we were the fifth largest regional airline company in the United States in 2016, as measured by passenger enplanements, and our flights accounted for approximately 8.4% of all passengers carried on U.S. regional airlines.

Regional airlines play a daily, essential role in the U.S. air travel system. According to the Regional Airline Association, 42% of all scheduled passenger flights in the United States in 2016 were operated by regional airlines. Of all the U.S. airports with scheduled passenger service, 64% are served exclusively by regional airlines. Some of the most popular U.S. airports have more than half of all their flights on regional airlines, including New York-LaGuardia, Philadelphia, Washington-Dulles, Charlotte, Houston-Bush and Chicago-O’Hare.

 

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Our Competitive Strengths

We believe that our primary strengths are:

Low-Cost Operator. We believe that we are among the lowest cost operators of regional jet service in the United States. There are several key elements that contribute to our cost efficiencies:

 

    Efficient Fleet Composition. We exclusively operate large regional aircraft with 70+ passenger seats on a single FAA certificate. Operating large regional aircraft allows us to enjoy unit cost advantages over smaller regional aircraft. Larger regional aircraft require less fuel and crew resources per passenger carried, and may also have maintenance cost efficiencies.

 

    Cost Effective, Long-Term Collective Bargaining Agreements. Our pilots and flight attendants ratified new four-year collective bargaining agreements effective as of July 13, 2017 and October 1, 2017, respectively, which are among the longest in the regional airline industry and include labor rate structures through 2023 for our pilots and 2022 for our flight attendants. We believe that our collective bargaining agreements and favorable labor relationships are critical for pilot retention and will provide more predictable labor costs into 2023. We derive cost advantages from efficient work rules and the relatively low average seniority of our pilots.

 

    Low Corporate Overhead. Our general and administrative expenses per block hour have decreased by more than 35% over the five-year period ended September 30, 2017. We have significantly reduced our overhead costs by operating with a modest administrative and corporate team, offering cost-effective benefit programs and implementing automated solutions to improve efficiency.

 

    Competitive Procurement of Certain Operating Functions. We have long-term maintenance agreements with expirations extending from December 2020 to December 2027 with AAR, GE, StandardAero, Aviall and Bombardier, respectively, to provide parts procurement, inventory and engine, airframe and component overhaul services. We expect that our long-term agreements with these and other strategic vendors will provide predictable high-quality and cost-effective solutions for most maintenance categories over the next several years. In prior periods, we also invested in long-term engine overhauls on certain aircraft, which we believe will reduce related maintenance obligations in future periods.

Advantages in Pilot Recruitment and Retention. We believe that we are well positioned to attract and retain qualified pilot candidates. Following the ratification of our collective bargaining agreements in July 2017, the average number of new pilot applications per month has increased by 45.3% compared to the six months prior to the ratification. In addition, our average pilot attrition has decreased by 16.2% over the same period.

 

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The following chart presents our cumulative increase in new pilots who have completed training, net of attrition, from July 2017 through June 2018:

 

LOGO

We believe that the increased number of new pilot applications per month will continue with the introduction of our CPP with United. In addition to offering competitive compensation, bonuses and benefits, we believe the following elements contribute to our recruiting advantage:

 

    Career Path Program. We recently announced our CPP with United, which is designed to provide our qualified current and future pilots a path to employment as a pilot at United. We believe that our CPP will help us continue to attract qualified pilots, manage natural attrition and further strengthen our decades-long relationship with United.

 

    Modern, Large-Gauged Regional Jets. We exclusively operate large regional aircraft with advanced flight deck avionics. We believe that pilot candidates prefer advanced flight deck avionics because they are similar to those found in the larger commercial aircraft types flown by major airlines.

 

    Opportunities for Advancement. We believe that our career progression is among the most attractive in the regional airline industry. During fiscal 2017, our pilots had the opportunity to be promoted from first officer to captain in as little as 12 months.

 

    Stable Labor Relations. Throughout our long operating history, we believe that we have had constructive relationships with our employees and their labor representatives. We have never been the subject of a labor strike or labor action that impacted our operations.

 

    Enthusiastic and Supportive Culture. Our “pilots helping pilots” philosophy helps us attract, retain and inspire our next generation of pilots. Our team-oriented culture, as demonstrated by the mentorship of our senior pilots, is both encouraged and expected. We strive to create an environment for our personnel where open communication is customary and where we celebrate our successes together.

Stable, Long-Term Revenue-Guarantee Capacity Purchase Agreements. We have long-term capacity purchase agreements with American and United that extend beyond 2020 for 94 of our 144 aircraft in scheduled service (with 34 aircraft expiring between June and December 2019 and 16 aircraft expiring between January and August 2020, if not extended prior to contract expiration). Both of our capacity purchase agreements are “capacity purchase,” rather than revenue sharing arrangements. This contractual structure provides us with a predictable revenue stream and allows us to increase our profit margin to the extent that we are able to lower our operating costs below the costs

 

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anticipated by the agreements. In addition, we are not exposed to price fluctuations for fuel, certain insurance expenses, ground operations or landing fees as those costs are either reimbursed under our capacity purchase agreements or paid directly to suppliers by our major airline partners.

Fleet Exclusively Comprised of Large, Efficient Regional Jets. We exclusively operate large regional aircraft with 70+ passenger seats. These aircraft are the highest in demand across the regional airline industry and provide us with best-in-class operating efficiencies, providing our major airline partners greater flexibility in route structuring and increased passenger revenues. As of March 31, 2018, we had 145 aircraft (owned and leased) consisting of the following:

 

     Embraer
Regional

Jet-175
(76 seats)
     Canadair
Regional

Jet-700
(70 seats)
     Canadair
Regional

Jet-900
(76-79
seats)
     Canadair
Regional

Jet-200
(50  seats)(1)
     Total  

American Eagle

     —          —          64        —          64  

United Express

     60        20        —          —          80  

Subtotal

     60        20        64        —          144  

Unassigned

     —          —          —          1        1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     60        20        64        1        145  

 

(1) CRJ-200 is an operational spare not assigned for service under our capacity purchase agreements.

Longstanding Relationships with American and United. We began flying for United in 1991

and American, through its predecessor entities, in 1992. Since 2013, we have added 26 aircraft to

our American Capacity Purchase Agreement and 60 aircraft to our United Capacity Purchase

Agreement.

Strong Recent Record of Operational Performance. In January 2018, the DOT recognized us as the number one regional airline for on-time performance. In addition, we believe that we were the number one regional airline for on-time performance in 2016 and 2017 based on a comparison of our internal data to publicly available DOT data for reporting airlines. Under our capacity purchase agreements, we may receive financial incentives or incur penalties based upon our operational performance, including controllable on-time departures and controllable completion percentages.

Experienced, Long-Tenured Management Team. Our senior management team has extensive operating experience in the regional airline industry. Our Chief Executive Officer and President/Chief Financial Officer have served us in senior officer positions since 1998, and our management team has helped us navigate through and emerge successfully from bankruptcy in early 2011. From 2013 to September 30, 2017, we have significantly grown the business in the following ways:

 

    achieved revenue growth of 55%;

 

    expanded the number of aircraft flown under our American Capacity Purchase Agreement from 38 to 64;

 

    expanded the number of aircraft flown under our United Capacity Purchase Agreement from 20 to 78;

 

    closed the first EETC financing by a regional airline; and

 

    improved our operating efficiencies and maintained our cost advantage.

 

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Our Business Strategy

Our business strategy consists of the following elements:

Maintain Low-Cost Structure. We have established ourselves as a low cost, efficient and reliable provider of regional airline services. We intend to continue our disciplined cost control approach through responsible outsourcing of certain operating functions, by flying large regional aircraft with associated lower maintenance costs and common flight crews across fleet types, and through the diligent control of corporate and administrative costs implementing company-wide efforts to improve our cost position. Additionally, we expect our long-term collective bargaining agreements to protect us from significant labor cost increases over the next five years. These efficiencies, coupled with the low average seniority of our pilots, has enabled us to compete aggressively on price in our capacity purchase agreement negotiations.

Attractive Work Opportunities. We believe our employees have been, and will continue to be, a key to our success. Our ability to attract, recruit and retain pilots has supported our industry-leading fleet growth. We intend to continue to offer competitive compensation packages, foster a positive and supportive work environment and provide opportunities to fly state-of-the-art, large-gauged regional jets to differentiate us from other carriers and make us an attractive place to work and build a career.

Maintain a Prudent and Conservative Capital Structure. We intend to continue to maintain a prudent capital structure. We believe that the strength of our balance sheet and credit profile will enable us to optimize terms with lessors and vendors and, when preferred by our major airline partners, allow us to procure and finance aircraft on competitive terms. Also, once we complete this offering, our financial resources and publicly traded securities may allow us to take advantage of attractive acquisition opportunities should they arise. We may use a portion of the offering proceeds to purchase some of our leased aircraft. The purchase of leased aircraft would allow us to lower our operating costs and avoid lease-related use restrictions and return conditions.

Minimize Tail Risk. We have structured our aircraft leases and financing arrangements to minimize or eliminate, as much as possible, so-called “tail risk,” which is the amount of aircraft-related lease obligations or projected negative equity existing beyond the term of that aircraft’s corresponding capacity purchase agreement. As of March 31, 2018, we had 18 aircraft with leases extending past the term of their corresponding capacity purchase agreements with an aggregate exposure of less than $33.0 million and no financing arrangements with projected negative equity. We intend to continue to align the terms of our aircraft leases and financing agreements with the terms of our capacity purchase agreements in order to maintain low “tail risk.”

Our Growth Opportunities

During our last five fiscal years, our total operating revenues grew at a compounded annual rate of 11.6% and our fleet size increased from 59 to 140 regional aircraft, a cumulative growth rate of 137%. We believe that our cost discipline, strong operational performance and financial resources will provide additional opportunities to expand our operations, including:

Expand Flying With New and Existing Airline Partners. We enjoy strong relationships with our major airline partners and have significantly expanded our fleet size and flight operations with American and United over the last five years. As the demand for air travel among our major airline partners continues to grow, we expect to have the opportunity to increase our flight services for each major airline partner. In addition, over the next five years, we expect that capacity purchase agreements representing up to 300 aircraft currently flown by our competitors on behalf of major airlines will expire by their terms and be subject to rebidding or replacement by more desirable types of aircraft. We believe that our cost structure and operational efficiencies position us well to compete for

 

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this flying. Additionally, we intend to pursue opportunities to provide regional flying to other major airlines with hub cities that do not overlap with our existing major airline partners. In addition, if a market for regional flying on behalf of low-cost and ultra low-cost carriers materializes, we believe that we are well positioned to partner with them, as one of the lowest cost regional airlines in the United States.

Acquisitions of Other Regional Airlines. In the future, we may evaluate the strategic acquisition of other regional air carriers. The opportunity to make an acquisition may arise if, for example, a major airline makes a divestiture of a captive regional airline, as major airlines have done in the past.

Opportunities in the Air Cargo and Express Package Sector. We believe that our cost structure and business model may be successfully deployed in the burgeoning air cargo and express shipping sectors. Amazon.com, Inc. and several of the largest integrated logistics companies, including United Parcel Service, Inc., FedEx Corporation and DHL International GmbH, utilize contractual arrangements similar to our capacity purchase agreements with regional air cargo carriers to service outlying areas. We intend to explore future regional air cargo opportunities.

Regulatory Relief. We actively support the efforts of trade organizations, industry leaders, policymakers and other airlines to encourage regulatory reforms related to the current shortage of qualified pilots, lowering the cost of pilot training and providing access to air service for small communities. While the regulatory reform agenda and policies of the current administration are not fully known, it is possible that favorable regulatory changes may take place. We believe that favorable regulatory changes by the current administration, were they to occur, could increase the number of qualified pilots, lower our operating costs and create incremental opportunities for us with our existing and other potential future major airline partners.

Aircraft Fleet

We fly only large regional jets manufactured by Bombardier and Embraer. Operating large regional aircraft allows us to enjoy operational, recruiting and cost advantages over other regional airlines that operate smaller regional aircraft.

The following table lists the aircraft we own and lease as of March 31, 2018:

 

Number of Aircraft  
Type of Aircraft    Owned      Leased     Total      Passenger
Capacity
 

E-175 Regional Jet

     18        42 (1)      60        76  

CRJ-900 Regional Jet

     39        25       64        76/79  

CRJ-700 Regional Jet

     8        12       20        70  

CRJ-200 Regional Jet

     1        —         1        50  
  

 

 

    

 

 

   

 

 

    

Total

     66        79       145     
  

 

 

    

 

 

   

 

 

    

 

(1) These aircraft are owned by United and leased to us at nominal amounts.

The Bombardier and Embraer regional jets are among the quietest commercial jets currently available and offer many of the amenities of larger commercial jet aircraft, including flight attendant service, a stand-up cabin, overhead and under seat storage, lavatories and in-flight snack and beverage service. The speed of Bombardier and Embraer regional jets is comparable to larger aircraft operated by major airlines, and they have a range of approximately 1,600 miles and 2,100 miles, respectively. We do not currently have any existing arrangements with Bombardier or Embraer to acquire additional aircraft.

 

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Route Network

As of March 31, 2018, we served 110 airports throughout the United States, Canada, Mexico and the Bahamas. Our flight schedules are structured to facilitate the connection of our passengers with the flights of our major airline partners at their hub airports and to maximize local and connecting service to other carriers. Under the American and United Capacity Purchase Agreements, market selection, pricing and yield management functions are performed by our respective major airline partners.

Capacity Purchase Agreements

Our capacity purchase agreements consist of the following:

 

    Operation of CRJ-900 aircraft under the American Capacity Purchase Agreement; and

 

    Operation of CRJ-700 and E-175 aircraft under the United Capacity Purchase Agreement.

The financial arrangement underlying the American and United Capacity Purchase Agreements includes a revenue-guarantee arrangement. Under the revenue-guarantee provisions of our capacity purchase agreements, our major airline partners pay us a fixed minimum monthly amount per aircraft under contract, plus additional amounts related to departures and block hours flown. We also receive direct reimbursement of certain operating expenses, including landing fees and insurance. Other expenses, including fuel and ground operations are directly paid to suppliers by our major airline partners. We are in good standing under and in material compliance with the terms of our capacity purchase agreements and enjoy good relationships with our major airline partners.

We benefit from our capacity purchase agreements and revenue guarantees because we are sheltered, to an extent, from some of the elements that cause volatility in airline financial performance, including variations in ticket prices, fluctuations in number of passengers and fuel prices. However, we do not benefit from positive trends in ticket prices (including ancillary revenue programs), the number of passengers enplaned or reductions in fuel prices. Our major airline partners retain all revenue collected from passengers carried on our flights. In providing regional flying under our capacity purchase agreements, we use the logos, service marks and aircraft paint schemes of our major airline partners.

The following table summarizes our ASMs flown and passenger revenue recognized under our capacity purchase agreements for the years ended September 30, 2016 and 2017, and six months ended March 31, 2018, respectively:

 

    Year Ended September 30, 2016     Year Ended September 30, 2017     Six Months Ended March 31, 2018  
    Available
Seat Miles
    Contract
Revenue
    Contract
Revenue
per ASM
    Available
Seat Miles
    Contract
Revenue
    Contract
Revenue
per ASM
    Available
Seat Miles
    Contract
Revenue
    Contract
Revenue
per ASM
 
  (in thousands)     (in thousands)     (in thousands)  

American

    4,702,987     $ 366,911     ¢ 7.80       4,427,870     $ 354,614     ¢ 8.01       2,110,731     $ 175,204     ¢ 8.30  

United

    4,120,608     $ 202,462     ¢ 4.91       5,044,041     $ 264,084     ¢ 5.24       2,510,649     $ 135,700     ¢ 5.40  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    8,823,595     $ 569,373     ¢ 6.45       9,471,911     $ 618,698     ¢ 6.53       4,621,380     $ 310,904     ¢ 6.73  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

American Capacity Purchase Agreement

As of March 31, 2018, we operated 64 CRJ-900 aircraft for American under the American Capacity Purchase Agreement. In exchange for providing flight services under the American Capacity Purchase Agreement, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown during each month. In addition, we may also receive incentives or incur penalties based upon our operational performance,

 

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including controllable on-time departures and controllable completion percentages. American also reimburses us for certain costs on an actual basis, including passenger liability and hull insurance and aircraft property taxes, all as set forth in the American Capacity Purchase Agreement. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by American. In addition, American also provides, at no cost to us, certain ground handling and customer service functions, as well as airport-related facilities and gates at American hubs and cities where we operate.

Our American Capacity Purchase Agreement establishes minimum levels of flight operations. In prior periods, the FAA Qualification Standards have negatively impacted our ability to hire pilots at a rate sufficient to support required utilization levels, and, as a result, we have issued credits to American pursuant to the terms of the American Capacity Purchase Agreement. For our fiscal year ended September 30, 2017, and the six-month period ended March 31, 2018, we issued credits of approximately $6.0 million and $3.9 million, respectively, under the American Capacity Agreement.

The American Capacity Purchase Agreement will terminate with respect to different tranches of aircraft between 2021 and 2025, unless otherwise extended or amended. American has the option to unilaterally extend the term of the American Capacity Purchase Agreement up to three times for one year each (on the same terms) with respect to certain aircraft by providing us prior written notice. The American Capacity Purchase Agreement is subject to termination prior to that date, subject to our right to cure, in various circumstances including:

 

    If either American 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 American to perform the covenants, conditions or provisions of the American Capacity Purchase Agreement, subject to 15 days’ notice and cure rights;

 

    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, American may terminate the agreement;

 

    If our controllable flight completion factor falls below certain levels for a specified period of time, subject to our right to cure; or

 

    Upon a change in our ownership or control without the written approval of American.

In the event that American has the right to terminate the American Capacity Purchase Agreement, American may, in lieu of termination, withdraw up to an aggregate of 14 aircraft from service under the American Capacity Purchase Agreement. Upon any such withdrawal, American’s payments to us would be correspondingly reduced by the number of withdrawn aircraft.

As of March 31, 2018, American held 20.2% of our outstanding common stock (or 10.6% on a fully diluted basis), which interest American received in exchange for its claims in our bankruptcy proceeding. We entered into a Shareholders’ Agreement and an Investor Rights Agreement on March 1, 2011 with US Airways, Inc., which later assigned its rights and obligations thereunder by operation of law to American following the merger of US Airways, Inc. and American. See “Certain Relationships and Related Party Transactions—Shareholders’ Agreement” and “Description of Capital Stock—Registration Rights.

United Capacity Purchase Agreement

As of March 31, 2018, we operated 20 CRJ-700 and 58 E-175 aircraft for United under the United Capacity Purchase Agreement. In exchange for providing the flight services under the United Capacity

 

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Purchase Agreement, we receive a fixed monthly minimum amount per aircraft under contract plus certain additional amounts based upon the number of flights and block hours flown and the results of passenger satisfaction surveys. United also reimburses us for certain costs on an actual basis, including property tax per aircraft and passenger liability insurance. Other expenses, including fuel and certain landing fees, are directly paid to suppliers by United. We also receive a minimum profit margin based upon our operational performance. Under the United Capacity Purchase Agreement, United has purchased 42 of the 60 E-175 aircraft and leases them to us at nominal amounts. United reimburses us on a pass-through basis for all costs related to heavy airframe and engine maintenance, landing gear, APUs and component maintenance for the 42 E-175 aircraft owned by United.

The United Capacity Purchase Agreement permits United, subject to certain conditions, including the payment of certain costs tied to aircraft type, to terminate the agreement in its discretion, or remove aircraft from service, by giving us notice of 90 days or more. In February 2018, we mutually agreed with United to temporarily remove two aircraft from service under our United Capacity Purchase Agreement. In July 2018, we were able to fully staff flight operations and these aircraft were placed back into service under our United Capacity Purchase Agreement. During the temporary removal, we agreed to pay the lease costs associated with the two E-175 aircraft, which totaled $0.6 million as of March 31, 2018. If United elects to terminate the United Capacity Purchase Agreement in its entirety or permanently remove select aircraft from service, we are permitted to return any of the affected E-175 aircraft leased from United at no cost to us. In addition, if United removes any of our 18 owned E-175 aircraft from service at its direction, United would remain obligated to assume the debt with respect to such aircraft through the end of the term of the agreement.

Our United Capacity Purchase Agreement expires between June and December 2019 with respect to 34 CRJ-700 and E-175 aircraft, between January and August 2020 with respect to 16 E-175 aircraft, and between 2021 and 2028 with respect to 30 of our E-175 aircraft, subject to United’s early termination rights and right to extend (on the same terms) for a total of four additional two-year terms. We intend to work with United to extend the United Capacity Purchase Agreement with respect to these aircraft, but there can be no assurance that we will be able to extend the agreement at acceptable rates, on acceptable terms, or at all.

The United Capacity Purchase Agreement is subject to early termination under various circumstances including:

 

    By United if certain operational performance factors fall below a specified percentage for a specified time, subject to notice under certain circumstances;

 

    By United if we fail to perform the material covenants, agreements, terms or conditions of the United Capacity Purchase 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; or

 

    By United if we merge with, or if control of us is acquired by another air carrier or a corporation directly or indirectly owning or controlling another air carrier.

Maintenance and Repairs

A key element of our business and low-cost strategy is the responsible outsourcing of certain aircraft maintenance and other operating functions. We use competitive bidding among qualified vendors to procure these services on the best possible terms. In March 2014, August 2015 and January 2017, we entered into long-term maintenance contracts with AAR to provide fixed-rate parts procurement and component overhaul services for our aircraft fleet. Under these agreements, AAR provides

 

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maintenance and engineering services on any aircraft that we designate during the term of the agreement, along with access to spare parts inventory pool in exchange for a fixed monthly fee. Our agreements with AAR expire in 2026, unless earlier terminated for cause. We have not experienced difficulty obtaining spare parts on a timely basis for our aircraft fleet. As of September 30, 2017, $50.8 million of parts inventory was consigned to us by AAR under long-term contracts that is not reflected on our balance sheet.

In July 2012, we entered into a heavy check maintenance contract with Bombardier, to perform heavy check maintenance on our CRJ-700 and CRJ-900 aircraft, which extends through November 2020.

In July 2013, we entered into an engine maintenance contract with GE to perform heavy maintenance on certain CRJ-700 and CRJ-900 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance with GE’s spare parts catalog for engines. The engine maintenance contract extends through 2024.

In 2014, we entered into a ten-year contract with Aviall to provide maintenance and repair services on the wheels, brakes and tires of our CRJ-700 and CRJ-900 aircraft. Under the agreement, we pay Aviall a fixed “cost per landing” fee for all landings of our aircraft during the term of the agreement, which fee is subject to annual adjustment based on increases in the cost of labor and component parts. As of September 30, 2017, $7.0 million of parts inventory was consigned to us by Aviall under long-term contracts that is not reflected on our balance sheet.

We entered into an engine maintenance contract with StandardAero, which became effective on June 1, 2015, to perform heavy maintenance on certain CRJ-700 and CRJ-900 engines based on a fixed pricing schedule. The pricing may escalate annually in accordance with GE’s spare parts catalog for engines. The engine maintenance contract extends through 2020.

Apart from our outsourcing of certain maintenance functions, we have a FAA mandated and approved maintenance program. Our maintenance technicians undergo extensive initial and recurrent training. Aircraft maintenance and repair consists of routine and non-routine maintenance, and work performed is divided into three general categories: line maintenance, heavy maintenance and component service.

Line maintenance consists of routine daily and weekly scheduled maintenance checks on our aircraft. We categorize our line maintenance into four stations and each line maintenance station is categorized by the scope and complexity of work performed. Line maintenance is performed in Dallas, Houston, Phoenix and Washington, D.C. and represents the majority of and most extensive maintenance we perform.

Major airframe maintenance checks consist of a series of more complex tasks that can take from one to four weeks to accomplish and typically are required approximately every 28 months, on average across our fleet. Engine overhauls and engine performance restoration events are quite extensive and can take two months. We maintain an inventory of spare engines to provide for continued operations during engine maintenance events. We expect to begin the initial planned engine maintenance overhauls on our new engine fleet approximately four to six years after the date of manufacture and introduction into our fleet, with subsequent engine maintenance every four to six years thereafter. Due to our current fleet size, we believe outsourcing all of our heavy maintenance, engine restoration and major part repair, is more economical than performing this work using our internal maintenance team.

Competition

We consider our competition to be those U.S. regional airlines that currently hold or compete for capacity purchase agreements with major airlines. Our competition includes, therefore, nearly every other domestic regional airline, including Air Wisconsin Airlines Corporation (“Air Wisconsin”);

 

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