Is Mesa Air Flying Under The Radar?

Mesa Air Group, Inc. (NASDAQ:MESA) which owns Mesa Airlines has regular flights to 86 cities across 36 U.S. states, including Washington D.C., and it also flies to Canada, Cuba, and Mexico. Its fleet has 145 planes that take off around 610 times every day but all that volume hasn’t translated to much of anything positive for shareholders.

The regional airline grew rapidly on one key dimension over the past five financial years, reporting a total growth of 137% in its fleet size. But the share price has struggled substantially, creating real worries about whether bankruptcy lies in the future, and whether the stock can one day bounce back?

Operational Struggles and Pilot Shortage

Mesa shareholders have hit a lot of turbulence as the share price fell by 56% over the past 52 weeks. Serious growth concerns in the most recent earnings report reveal just cause for the decline.

In the quarter ending on September 30, 2023, the company’s financial situation was negatively affected by a big pilot shortage as many pilots left. Rising costs to pay pilots hurt the company’s expenditures, cash levels, and overall financial health. As big airlines launched campaigns to attract pilots and have the capacity to pay more, the wave of departures accelerated. Larger airlines like United and American are primarily regarded as the source of primary competition.

Due to the shortfall in pilot numbers, the company made the decision to raise how much money it pays per hour by about 118% for captains and 172% for first officers.

Those increases translated to spending of $24.1 million on operating activities and $120.1 million in overall losses, raising questions over whether the company can keep financing its activities and pay back its debts.

Selling Planes To Stay Afloat

To alleviate the financial strains, management made a deal to sell 11 CRJ-900 airplanes to a third party. The company has already sold seven of those planes and received $21 million, leaving $1.5 million in the coffers after paying some of the UST Loan debt.

It also made a deal with the Export Development Bank of Canada to decrease liabilities on seven CRJ-900 airplanes. This initiative began in January 2023 and will continue until December 2024, providing about $14 million in available funds. Moreover, the subordinate debt holder MHIRJ has consented to waive about $5 million of the main amount.

Mesa also made a deal to sell seven extra CRJ-900 airplanes to American Airlines. The company completed the sale of three planes, and this brought in around $29.7 million in total before costs and about $2.4 million after paying off some of the debt.

By September 30, 2023, the company had finished selling off its last four CRJ-900 airplanes to American and received a total of $41.5 million from it.

Mesa, besides having deals in place for selling airplanes, is now looking to sell more extra things, mainly from the CRJ fleet. This includes planes, engines, and spare parts. It wants to do this to lower its debt and make its operations better.

Even with the financial manoeuvres to pay off debts, it’s not clear if the company will grow. Selling assets and making deals to lower debt might help for now, but in order to really succeed over time, there needs to be a plan for growth that lasts longer than these quick fixes.

In spite of the financial gymnastics, Mesa faces other issues too.

NASDAQ Compliance Failures Threaten Confidence

Beyond operational struggles, management has other fish to fry too, so to speak. On November 3, 2023, Mesa got a letter from NASDAQ Qualifications Staff. Because Mesa share price closed for more than 30 days under $1 per share, the company failed to meet Rule 5450(a)(1) creating a compliance issue.

Mesa has mentioned that the company is not certain if it can meet again the required standards for listing on NASDAQ. If the company does not maintain the minimum price needed per share, ordinary shares might be removed from being listed.

Additionally, Mesa reported on February 23 that it got a message from the Listing Qualifications Department of The Nasdaq Stock Market stating that the company did not follow Nasdaq Listing Rule 5250(c)(1) because it was late in submitting to the SEC the Form 10-Q Quarterly Report for the quarter ending December 31, 2023.

Moreover, on January 9, the company made another announcement that it got a notice on January 4, 2024, from The Nasdaq Stock Market’s Listing Qualifications Department. This notice again said that the company is not following the Nasdaq Listing Rule 5250(c)(1) because it did not submit its Annual Report on Form 10-K for the time ending September 30, 2023, to the Securities and Exchange Commission when it was supposed to.

The ongoing warnings from NASDAQ highlight more serious issues with how the company operates and follows regulations.

Being late to submit important financial documents reflects poorly on corporate governance and creates doubts about the financial stability of Mesa and whether it is managed properly.

Failure to meet the minimum bid price requirements may also decrease shareholder confidence. These problems require quick corrective measures to get back in line with regulations and regain the trust of those involved with the company.

Accounting Oversight and Reporting Errors

The story does not end here. After Mesa submitted the Form 10-Q Quarterly Report for the period that finished on June 30, 2023, and while getting ready its Annual Report on Form 10-K for the fiscal year that concluded September 30, 2023, the company found a mistake about $30.6 million in how debt was listed in the summarized consolidated balance sheet at June’s end of this same year.

The mistake occurred following Mesa’s failure to satisfy necessary conditions in its updated and second-time reconfirmed Credit and Guaranty Agreement with United, dated June 30, 2022. These debt conditions included covenants regarding combined interest and rent coverage ratios calculated over a period of twelve months for the quarter that finished on June 30, 2023.

As a result, around $30.6 million should have been categorized as the current part of long-term debt and finance leases on the summarized consolidated balance sheet rather than under long-term debt and finance leases, not including the current portion.

Furthermore, in Mesa’s financial statement footnotes that are a part of the 3rd Quarter 10-Q report, the company wrongly claimed that by June 30, 2023, it met all its debt agreements requirements.

Such discoveries show that there are more serious problems with how accurate the financial reports are and whether Mesa is following rules properly. This wrong categorization of debt comes from not fulfilling certain agreements and points to weaknesses in financial controls.

Revenues Falling Amid Operational Challenges

Operating revenues for the fourth quarter of 2023 reached $114.4 million, falling by $11.3 million or 9% compared to $125.6 million in the same period in 2022, while revenue from contracts went down by $16.0 million, representing a decrease of 14.4%.

The fall in numbers was mainly because there were fewer block hours for CRJ-900 and a smaller number of planes with contracts, but this was somewhat balanced by an increase in the amount United Airlines paid per block hour due to new pay scales for pilots.

Operating costs with adjustments, not counting losses from asset impairments, came to $131.2 million, including a rise of $8.4 million for maintenance costs, reaching $54.3 million.

Expenditures for flight operations went up by $8.3 million to $52.0 million, which mostly comes from pilots getting higher pay and more pilot training happening.

Falling revenues and rising costs led to a reported net loss of $28.3 million for Q4 2023, equating to $0.69 per diluted share. Adjusted EBITDA revealed a loss of $2.9 million in Q4 2023, a disappointing U-turn from the $13.8 million profit in the year prior.

For the full 2023 fiscal year, total revenues from operations reached $498.1 million, a reduction of $32.9 million or 6.2% compared to $531 million in 2022. Income from contracts fell by $57.2 million, representing a decrease of 12%.

The company also reported a net loss totaling $120.1 million, translating to a negative $3.04 per diluted share. Adjusted EBITDA stood at $24.2 million, in contrast with $66.6 million for the same period of the fiscal year 2022.

Additionally, at the end of the fourth quarter, Mesa had $32.9 million in unrestricted cash and equivalents. On September 30, 2023, the company’s total debt was $538.3 million, which was mainly backed by aircraft and engines as security.

Will Mesa Stock Recover?

The one analyst covering Mesa believes stock will recover to $2 per share, representing upside potential of 129%.

In spite of that, it is wise to be cautious about entering a position given the compliance and operational challenges. Profitability seems a ways off now with gross profit margin for the last 12 months at just 15.15%, 50.7% lower than the average for this industry at 30.72%.

Furthermore, its trailing-12-month EBITDA margin and the rate at which it turns over assets are a good deal below the sector average, sitting at 4.66% and 0.49x.

Until Mesa shows higher consistency and a more hopeful future, investors might choose to watch from a distance.

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