On 9/25 Mesa closed at .88, a 42% drop since written, and now sits below a dollar- day one below a dollar )
Mesa Air Group: Unattractive Or Speculative Buy?
Aug. 22, 2023 1:45 PM ETMesa Air Group, Inc. (MESA)AAL, UAL7 Comments
Dhierin Bechai
Investing Group Leader
https://seekingalpha.com/article/4630320-mesa-air-group-unattractive-or-speculative-buy
Summary
Mesa Air Group has experienced a significant decline in stock value due to continued pilot shortages and a transition period.
The company is still losing money despite transitioning to a profitable agreement with United Airlines.
Mesa Air Group is focused on reducing debt and improving liquidity through the sale of aircraft and engines.
In a previous report, I said that Mesa Air Group (NASDAQ:MESA) remained infused with risk, and it was not a buy due to an uncertain ramp up trajectory in the flights for United Airlines. Perhaps that was an understatement because the stock lost almost a third of its value since then. In this report, I will be revisiting the rating for Mesa Air Group and put a price target on the name.
A Turn Around Year For Mesa Air Group
I could spend various paragraphs discussing the most recent results, but right now the reality for Mesa is that despite transitioning from a loss-making capacity purchase agreement with American Airlines (AAL) to a profitable one for United Airlines (UAL), the business was still losing money.
Total contract revenues decreased by 20.6% on a 28.6% decrease in block hours. So, the contract revenue per block hour did improve by around 11% excluding pass through revenues, which in some way shows the better revenue structure for the flight activity for United Airlines. The operating expenses increased by 15.5% or $20.737 million, but this was driven by $30.5 million in asset impairments. Excluding the asset impairment and gains on sale, the operating income would have dropped from a $213,000 profit to a $16.5 million loss, mostly reflecting lower contract revenues.
So, while initially the transition from flying for American Airlines to United Airlines was presented as swapping loss-making block hours for profitable ones, the reality is that due to the ramp up and a somewhat conservative scheduling from United, the business has become even more loss making. That is also driven by the continued pilot shortage. Perhaps the positive is that Mesa needs another 150 pilots to allow the company to get to the targeted utilization, which will generate margins of 7 to 10 percent, which the company expects to achieve in fiscal year 2024.
Mesa’s Focus On Debt And Liquidity
As Mesa transitions the business and improves utilization, the company has to rightsize in more than one aspect. Currently, the company has a surplus of 36 airplanes and has associated debts on the books. So, the key right now is to sell those assets, take out the associated debt and improve liquidity. The company has $48.3 million in cash and burns $13.8 million in operations quarterly. So, while the company won’t run out of cash imminently, it has to do something to keep liquidity at acceptable levels to run the business because the company also has $24 million maturing this year and $122.2 million maturing in the next fiscal year. So, the position is far from comfortable with $577.5 million in gross debt.
The company intends to sell aircraft and engines to improve liquidity and efficiency and reduce debt:
14 CRJ-900s will be sold, saving the company $3 million per quarter.
15 CRJ-900s are currently subject to negotiations, which will yield $2 million in savings per quarter.
Seven CRJ-900s are not subject of negotiations, but could result in $2 million in savings per quarter.
The sale of 12 engines held for sale will also result in $2 million in cost savings.
Overall, shaving excess capacity would result in $15 million in savings, but that is not the most important element, in my view, as these quarterly savings are largely non-cash. The important part is the debt reduction associated with the sales. The 14 CRJ-900s will reduce debt by $74.3 million and provide $18 million in cash. The debt reduction will be around 13% of the outstanding debt, while the cash would cover a quarter of the operational cash burn. We don’t know what the other 22 airplanes will do to the debt profile once sold, but scaling it to the 14 sold jets, it would mean $116.7 million in debt reduction and $28.3 million in cash. If we scale that to the quarterly savings, the numbers would be closer to $77.8 million and $18.9 million.
Is MESA Stock A Buy?
Mesa doesn’t quite sound attractive. The business has $48.3 million in cash, $13.8 million in operating cash burn and expected normalization of efficiency in FY2024. Apart from that, the company has $23.9 million in maturities in FY2023 and $122.2 million next year and one can really wonder where the money will be coming from since there is a negative cash flow and only $90 million in assets held for sale.
With FY2023 earnings in mind, Mesa Air Group stock without a doubt is a sell, but 2024 provides some upside with potentially even more upside in 2025. It should, however, be pointed out that the business needs to significantly increase its cash generation in the years to come. As it stands, by 2025, the company could actually be short of cash. However, it is not certain whether this will be the case as the company will be selling off assets, which could take out some principal maturities that are currently scheduled for 2025. Nevertheless, the Mesa Air Group stock does not seem attractive to buy at all.
Conclusion: Mesa Air Group Remains A High Risk Name
The only reason why one would or could consider buying Mesa Air Group is the upside it offers in the 2024-2025 timeframe and in that case buying the stock would be speculative. Just looking at this year’s expectations, the stock would be a sell, but we should point out that 2023 is a transition year and that transition will continue in 2024. Keeping the potential upside in mind as well as the challenges for the business, I would consider Mesa a hold for people looking to recover some of their losses.
"Then there was a woman, a lion of a woman."
Recent MESA News
- Form 10-Q - Quarterly report [Sections 13 or 15(d)] • Edgar (US Regulatory) • 05/24/2024 04:31:30 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 05/20/2024 02:16:18 PM
- Mesa Air Group Reports First Quarter Fiscal 2024 Results • GlobeNewswire Inc. • 05/20/2024 11:05:00 AM
- Mesa Air Group Discloses Notice from Nasdaq • GlobeNewswire Inc. • 05/17/2024 08:05:00 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 05/17/2024 08:00:21 PM
- Form NT 10-Q - Notification of inability to timely file Form 10-Q or 10-QSB • Edgar (US Regulatory) • 05/10/2024 08:00:04 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 05/06/2024 08:30:14 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 02/26/2024 05:32:19 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 02/26/2024 05:30:04 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 02/26/2024 05:27:32 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 02/26/2024 05:25:31 PM
- Form 4 - Statement of changes in beneficial ownership of securities • Edgar (US Regulatory) • 02/26/2024 05:21:38 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 02/23/2024 09:15:16 PM
- Mesa Air Group Discloses Notice from Nasdaq • GlobeNewswire Inc. • 02/23/2024 09:05:00 PM
- Form NT 10-Q - Notification of inability to timely file Form 10-Q or 10-QSB • Edgar (US Regulatory) • 02/09/2024 09:34:15 PM
- Form 10-K - Annual report [Section 13 and 15(d), not S-K Item 405] • Edgar (US Regulatory) • 01/26/2024 06:29:57 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 01/26/2024 02:24:55 PM
- Mesa Air Group Reports Fourth Quarter and Fiscal Full-Year 2023 Results • GlobeNewswire Inc. • 01/26/2024 02:22:17 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 01/18/2024 09:49:00 PM
- Mesa Air Group Enters New Agreements with United Airlines for Improved Operating and Financing Terms and Provides Update on CRJ-900 Asset Sale Program • GlobeNewswire Inc. • 01/18/2024 09:20:00 PM
- Form 8-K/A - Current report: [Amend] • Edgar (US Regulatory) • 01/10/2024 09:00:08 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 01/09/2024 09:17:12 PM
- Mesa Air Group Discloses Notice from Nasdaq • GlobeNewswire Inc. • 01/09/2024 09:15:00 PM
- Form 8-K - Current report • Edgar (US Regulatory) • 01/02/2024 11:11:29 AM
- Form NT 10-K - Notification of inability to timely file Form 10-K 405, 10-K, 10-KSB 405, 10-KSB, 10-KT, or 10-KT405 • Edgar (US Regulatory) • 12/14/2023 08:53:57 PM
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