Mesa Air enters new terms with United Airlines, gives update on CRJ-900 program

Mesa Air (MESA) announced agreements with United Airlines (UAL) to amend its capacity purchase agreement and certain credit agreements between the parties to significantly improve Mesa’s operating income and liquidity over the next twelve months. The company also issued an update on its efforts to sell excess CRJ-900 assets to reduce debt and bolster liquidity. On January 11, Mesa entered into an agreement with United that significantly increased the block-hour rate under its CPA, covering the period from October 1, 2023 to December 31. The company expects this increase will provide Mesa approximately $63.5M in incremental revenue over the next twelve months and bolster liquidity. Mesa and United also agreed to amend certain notice requirements related to eight CRJ-900 aircraft covered under the CPA and to extend United’s waiver of utilization requirements for aircraft under contract until June 30. In conjunction with the CPA amendment, United agreed to reduce the outstanding balance on the revolving credit facility by $2.1M and relieve the full $10.5M principal amount of the bridge loan it previously issued to Mesa, in exchange for Mesa’s investment in privately-held Heart Aerospace. Mesa originally purchased the stake in Heart for $5M and following this transaction, Mesa continues to hold 222,222 unvested warrants, each struck at a value of $0.01, in Heart. As a result of the bridge loan elimination, Mesa’s equity investment in Archer Aviation (ACHR) is released as collateral. Mesa currently owns 2.27M vested shares and 1.17M unvested warrants, each struck at a value of $0.01, in Archer common stock. During the September quarter, Mesa closed on the sale of three of the seven CRJ-900 NextGen aircraft that it previously agreed to sell to a third party. Subsequent to quarter end, Mesa closed on the sale of the remaining four aircraft. The sales of these seven CRJ-900s generated gross proceeds of approximately $71.2M, resulting in the elimination of approximately $63.2M of debt principal, approximately $27.3M of which was reflected in Mesa’s total debt balance as of September 30, 2023, and creating approximately $8M in additional liquidity. Using proceeds from the sales of the seven CRJ-900 NextGen aircraft, Mesa retired approximately $59M outstanding on its loan from Export Development Bank of Canada and repaid $4.2M of its junior note to MHI RJ Aviation Group, which together financed those assets. As a result of the partial repayment of the MHIRJ junior note, Mesa met the conditions for MHIRJ to forgive the remaining approximately $5M outstanding on the note. During the fourth quarter, Mesa also closed on the sales of three of seven CRJ-900s aircraft that it previously agreed to sell to a third party. Subsequent to quarter end, Mesa closed on the sale of the final four aircraft under this agreement. The sales of these seven CRJ-900s generated gross proceeds of approximately $21M, resulting in the elimination of approximately $10.8M in debt principal, approximately $5.3M of which was reflected in Mesa’s total debt balance as of September 30, 2023, and creating $10.2M in additional liquidity. Subsequent to quarter end, Mesa also entered into several new asset sale agreements to sell 15 CRJ-900 airframes and 65 CF34-8C5 engines for total proceeds of $105.8M. These transactions are anticipated to eliminate approximately $89.8M of debt and finance lease buyout obligations, creating approximately $16M of additional liquidity and meaningfully reducing the company’s go-forward cash interest expense, with the majority expected to close by March 2024. Mesa remains engaged in additional efforts to market and sell excess CRJ-900 assets. During fiscal full-year 2023, Mesa had a peak total debt balance of $701.3M at the end of Q1 2023. Over the subsequent three quarters, Mesa has reduced total debt by $161.6M to an estimated $539.7M balance at the end of Q4 2023 as a result of CRJ-related asset sales and scheduled principal repayments. For fiscal full-year 2024, the company expects the completion of CRJ-related asset sale agreements currently entered into and scheduled principal repayments through Q4 will reduce total debt by an additional $225.4M, for a projected total debt balance of $310.3M at fiscal year end. Of the $310.3M debt balance, $158.8M is attributable to E-175 aircraft that are pass-through to United Airlines under Mesa’s CPA; $110.7M is U.S. Treasury debt collateralized primarily by 31 CRJ-900s; $35.6M is United Airlines debt collateralized with aircraft parts; and $9.2M is attributable to future lease obligations.