Edgar Filing: MESA AIR GROUP INC

e10-q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period-ended March 31, 2002

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-15495

Mesa Air Group, Inc.

(Exact name of registrant as specified in its charter)






Nevada		85-0302351
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)





410 North 44th Street, Suite 700, Phoenix, Arizona		85008
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code:

(602) 685-4000

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes x No o

On May 8, 2002 the registrant had outstanding 32,968,729 shares of Common Stock.

TABLE OF CONTENTS


INDEX
PART 1. FINANCIAL INFORMATION
	Item 1.
		CONSOLIDATED STATEMENTS OF INCOME
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Submission of Matters to vote for Security Holders.
	Item 5. Other Matters
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES

INDEX


		Page No.





PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)




	Consolidated Statements of Income		3




	Consolidated Balance Sheets		4




	Consolidated Statements of Cash Flows		5




	Notes to Consolidated Financial Statements		6




Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10




PART II — OTHER INFORMATION




Item 1.	Legal Proceedings		18




Item 2.	Changes in Securities and Use of Proceeds		19




Item 3.	Quantitative and Qualitative Disclosures about Market Risk		19




Item 4.	Submission of Matters to vote for Security Holders		19




Item 5.	Other Matters		19




Item 6.	Exhibits and Reports on Form 8-K		19




Signatures			20

PART 1. FINANCIAL INFORMATION

Item 1.

MESA AIR GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME



			Three Months Ended						Six Months Ended

			March 31,			March 31,			March 31,			March 31,
			2002			2001			2002			2001


			(Unaudited)
			(in thousands, except per share amounts)




Operating revenues:
	Passenger		$	116,063		$	124,652		$	223,824		$	254,478
	Freight and other			3,512			3,793			6,985			7,243

		Total operating revenues		119,575			128,445			230,809			261,721

Operating expenses:
	Flight operations			62,496			64,536			121,520			132,123
	Maintenance			19,452			23,170			41,447			47,917
	Aircraft and traffic servicing			11,228			14,125			21,607			27,899
	Promotion and sales			3,189			6,377			6,436			12,415
	General and administrative			11,834			11,042			21,016			18,545
	Depreciation and amortization			2,658			3,489			5,347			7,258
	Impairment of long-lived assets			—			22,739			—			22,739

		Total operating expenses		110,857			145,478			217,373			268,896

	Operating income (expense)			8,718			(17,033	)		13,436			(7,175	)

Other income (expense):
	Interest expense			(2,641	)		(3,920	)		(4,784	)		(8,030	)
	Interest income			525			622			730			1,082
	Other income (expense)			2,697			(929	)		7,441			2,291

		Total other income (expense)		581			(4,227	)		3,387			(4,657	)

Income (loss) before income taxes and minority interest				9,299			(21,260	)		16,823			(11,832	)
Income taxes (benefit)				3,673			(8,398	)		6,645			(4,678	)

Income (loss) before minority interest				5,626			(12,862	)		10,178			(7,154	)
Minority interest				(441	)		—			(1,327	)		—

Net income (loss)			$	5,185		$	(12,862	)	$	8,851		$	(7,154	)

Income (loss) per common share:
	Basic		$	0.16		$	(0.40	)	$	0.27		$	(0.22	)
	Diluted		$	0.15		$	(0.40	)	$	0.26		$	(0.22	)

See accompanying notes to consolidated financial statements

MESA AIR GROUP, INC.

CONSOLIDATED BALANCE SHEETS


			March 31,			September 30,
			2002			2001


			(Unaudited)
			(in thousands except share amounts)

ASSETS




Current Assets:
	Cash and cash equivalents		$	53,280		$	74,504
	Marketable securities			28,791			8,793
	Receivables, primarily traffic, net			22,000			29,449
	Expendable parts and supplies, net			26,690			31,449
	Aircraft and parts held for sale			65,239			63,161
	Prepaid expenses and other current assets			31,495			16,392
	Deferred income taxes			11,194			17,264

		Total current assets		238,689			241,012
	Property and equipment, net			117,785			122,431
	Lease and equipment deposits			13,364			21,277
	Deferred income taxes			23,591			23,600
	Aircraft held for sale			13,100			13,100
	Other assets			3,374			2,566

		Total assets	$	409,903		$	423,986





LIABILITIES AND STOCKHOLDERS’ EQUITY




Current liabilities:
	Current portion of long-term debt		$	51,841		$	52,927
	Note payable - bank			—			20,000
	Accounts payable			31,175			45,193
	Air traffic liability			3,376			3,506
	Accrued compensation			4,578			3,893
	Other accrued expenses			33,744			31,597

		Total current liabilities		124,714			157,116
	Long-term debt, excluding current portion			116,503			117,950
	Deferred credits			49,633			45,155
	Other noncurrent liabilities			525			639

		Total liabilities		291,375			320,860

Minority interest				6,024			—

Stockholders’ equity:
	Common stock of no par value, 75,000,000 shares authorized; 32,937,713 and 32,863,263 shares issued and outstanding, respectively			119,914			119,387
	Retained earnings			(7,410	)		(16,261	)

		Total stockholders’ equity		112,504			103,126

		Total liabilities, minority interest and stockholders’ equity	$	409,903		$	423,986

See accompanying notes to consolidated financial statements.

MESA AIR GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



			Six Months Ended

			March 31,			March 31,
			2002			2001


			(Unaudited)
			(in thousands)




CASH FLOWS FROM OPERATING ACTIVITIES:




Net income (loss)			$	8,851		$	(7,154	)




Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:




	Depreciation and amortization			5,347			7,258




	Deferred income taxes			6,079			(4,678	)




	Amortization of deferred credits			(2,368	)		(1,568	)




	Impairment of long-lived assets			—			22,739




	Provision for obsolete inventory			—			(500	)




	Provision for doubtful accounts			1,000			201




	Minority interest			1,327			—




	Unrealized (gain) loss on investment securities			(3,471	)		558




	Changes in assets and liabilities:




		Net (purchases) sales of investment securities		(16,830	)		(3,953	)




		Receivables		6,449			(1,420	)




		Inventories		2,291			(3,661	)




		Prepaid expenses and other current assets		(13,291	)		(18,481	)




		Accounts payable		(10,231	)		(6,702	)




		Other accrued liabilities		4,610			8,192

	NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:			(10,237	)		(9,169	)

CASH FLOWS FROM INVESTING ACTIVITIES:




	Capital expenditures			(6,022	)		(12,580	)




	Costs to return aircraft held for sale			(2,022	)		(11,552	)




	Change in other assets			(808	)		1,744




	Lease and equipment deposits			7,392			4,957




	Proceeds from sale of assets held for sale			633			—

	NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:			(827	)		(17,431	)

CASH FLOWS FROM FINANCING ACTIVITIES:




	Principal payments on long-term debt			(2,533	)		(4,586	)




	Net borrowings on line of credit			(20,000	)		10,412




	Proceeds from issuance of common stock			527			3,096




	Common stock purchased and retired			—			(5,904	)




	Change in deferred credits			6,846			(263	)




	Contribution from minority interest of consolidated subsidiary			5,000			—

	NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:			(10,160	)		2,755

NET CHANGE IN CASH AND CASH EQUIVALENTS				(21,224	)		(23,845	)




CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD				74,504			26,403

CASH AND CASH EQUIVALENTS AT END OF PERIOD			$	53,280		$	2,558

SUPPLEMENTAL CASH FLOW INFORMATION:




	Cash paid for interest, net of amounts capitalized		$	6,644		$	4,110




	Cash paid for income taxes			440			541

See accompanying notes to consolidated financial statements

MESA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Business and Basis of Presentation

The accompanying unaudited consolidated financial statements of Mesa Air Group, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for a complete set of financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the unaudited three and six-month periods have been made. Operating results for the three and six-month period ended March 31, 2002, are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2002. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2001.

The consolidated financial statements include the accounts of Mesa Air Group, Inc. and its wholly owned subsidiaries, Mesa Airlines, Inc., WestAir Holdings, Inc., Air Midwest, Inc., CCAIR, Inc., Mesa Leasing, Inc., MAGI Insurance, Ltd., Regional Aircraft Services, Inc., MPD, Inc. and Freedom Airlines, Inc. as well as the accounts of UFLY, LLC, a 50% owned subsidiary of which the Company is able to exercise significant influence. All significant intercompany balances and transactions have been eliminated in consolidation.

2. Minority Interest

In September 2001, the Company entered into an agreement to form UFLY, LLC (“UFLY”), for the purpose of making strategic investments in US Airways, Inc. In September 2001, UFLY began making investments in US Airways common stock on behalf of the Company and the other investors. In October 2001, UFLY was formally established and was capitalized with $5.0 million from the Company and $5.0 million from the other members. The Company owns 50% of UFLY. Jonathan Ornstein, the Company’s Chairman and CEO, is a minority shareholder/owner and the managing member of UFLY. Mr. Ornstein receives no additional renumeration or compensation in connection with his role as managing member of UFLY, LLC. At September 30, 2001, the Company had a receivable of $2.6 million from the other investors for such purchases. Amounts included in the consolidated statements of income as minority interest reflect the after-tax portion of earnings of UFLY that are applicable to the minority interest partners.

3. Segment Reporting

The Company has adopted SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information.” The statement requires disclosures related to components of a company for which separate financial information is available that is evaluated regularly by a company’s chief operating decision maker in deciding the allocation of resources and assessing performance. The Company is engaged in one line of business, the scheduled and chartered transportation of passengers, which constitutes nearly all of its operating revenues.

4. Marketable Securities

The Company has a cash management program that provides for the investment of excess cash balances primarily in short-term money market instruments, intermediate-term debt instruments and common equity securities of companies operating in the airline industry.

MESA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

From time-to-time, the Company enters into short positions on common equity securities when management believes that the Company may capitalize on downward moves in particular securities or to hedge long positions in those securities or related securities. The Company marks short positions to market at each reporting period with changes in value reflected in current period earnings. Included in marketable securities are liabilities related to short positions on common equity securities of $4.6 and $3.5 million at March 31, 2002 and September 30, 2001, respectively. Unrealized gains and (losses) relating to trading securities held at March 31, 2002 and September 30, 2001 were $3.5 million and ($8.0) million, respectively.

SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” requires that all applicable investments be classified as trading securities, available for sale securities or held to maturity securities. All of the Company’s investments are classified as trading securities during the periods presented and accordingly, are carried at market value with changes in value reflected in current period operations.

5. Aircraft and Parts Held For Sale

Aircraft and parts held for sale consists of aircraft and parts that the Company has deemed to be surplus to its operating needs. Included in this account are 21 B1900D aircraft that have been written down to fair market value. Under an agreement with Raytheon Aircraft Corporation (“RAC”), the Company has the right to return 15 B1900D aircraft to RAC at a fixed price. The Company anticipates returning all 15 of these aircraft in fiscal 2002. The Company is seeking proposals for the disposition of the remaining six B1900D aircraft. Also include in this account is excess rotable inventory valued at net realizable value, less costs to sell.

6. Deferred Credits

Deferred credits include the value of lease incentives, such as consumable and rotable inventory received at lease inception, and are amortized over the life of the related lease. In May 2001, Mesa restructured various past contractual claims it had against Bombardier Regional Aircraft Division. Under this restructuring, Mesa received $25.2 million and will continue to receive $1.1 million per month through May of 2003 to resolve these claims. Amounts received have been classified as deferred credits and are being amortized over 14 years, the remaining weighted average life of the aircraft leases.

7. Notes Payable and Long-Term Debt

At March 31, 2002, Mesa has 21 surplus Beech 1900D aircraft classified as held for sale. Of the 21, the Company has a put option to return 15 to the manufacturer. Unpaid debt totaling $44.9 million associated with the put aircraft is classified as a current liability in the accompanying consolidated balance sheet.

The Company also has a $35 million line of credit with Fleet Capital that is collateralized by the Company’s inventory and receivables. There was $20 million outstanding on the line at September 30, 2001. All amounts outstanding on the line were paid off at March 31, 2002.

8. Stockholders’ Equity

MESA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Each of the warrants is exercisable at any time over a three-year period following its date of purchase. Absent an event of default by the Company in which case vesting is accelerated, the option to purchase the warrants vests concurrently with Raytheon’s payment of the related annual operating subsidy for the following periods or January 15 of each year, whichever comes first. The warrants vest according to the following schedule: 13,401 warrants for a portion of 2001; 116,534 warrants for fiscal year 2002; 58,267 warrants for fiscal year 2003 and 44,866 warrants for fiscal year 2004. As of March 31, 2002, Raytheon has exercised its option to purchase the 2001 warrants.

9. Weighted Average Shares Outstanding



	Three Months				Six Months Ended
	Ended March 31,				March 31,

	2002		2001		2002		2001


	(in thousands)
Weighted average shares — basic		32,840		32,051		32,818		31,985
Weighted average shares — diluted		34,037		32,051		33,545		31,985

10. Impairment of Long-Lived Assets

In the second quarter of fiscal 2001, the Company recognized a charge of approximately $22.7 million on 21 B1900 aircraft the Company either intends to return to the manufacturer or actively market. The charge is comprised of an impairment loss to write the aircraft down to the contractual selling price (market) less the estimated costs to prepare the aircraft for return to the manufacturer.

Due to the economic slowdown and the effects of the terrorist attacks in the fourth quarter of fiscal 2001, the Company performed an asset impairment test under the provisions of SFAS 121 related to its B1900 turboprop aircraft. Upon discerning impairment, the Company wrote off approximately $40.7 million related to its B1900 fleet. The charge is comprised of an impairment loss of $37.3 million related to 30 B1900D aircraft the Company is planning to continue to fly and an additional market impairment of $3.1 million on six aircraft the Company is holding for sale, but does not have the contractual right to return to the vendor at a specified price. The assets were written down to their estimated fair market value based upon appraisals.

In the fourth quarter of fiscal 2001, the Company made a decision to discontinue operating Jetstream Super 31 aircraft at its Charlotte hub. As a result of this decision, the Company took a $4.9 million charge at September 30, 2001. The charge is comprised of $3.6 million related to the present value of the remaining lease payments on nine Jetstream Super 31 aircraft, $1.2 million related to the costs to buyout the remaining term of the maintenance contract associated with these aircraft and $.1 million related to costs to return the aircraft. Effective April 18, 2002, the Company discontinued flying the Jetstream aircraft and commenced satisfying return condition obligations.

The Company also elected to accelerate the disposition of excess rotable inventory. During the fourth quarter of fiscal year 2001, the Company hired an independent consulting firm to determine its inventory needs and to value its surplus inventory. Prior to September 11th, the Company had been selling off surplus inventory on a passive basis as opportunities arose. Subsequent to September 11th, the Company made the decision to use third party inventory brokers to sell its excess inventory. As a result of this decision, the Company took a $3.2 million charge to reduce its surplus inventory to net realizable value, less costs to sell.

MESA AIR GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The changes in the impairment and restructuring charges for the period ended March 31, 2002 are included below:


	Reserve								Reserve					Reserve					Reserve
	Oct. 1,								Sept. 30,					Dec. 31,					Mar. 31,
Charge	2000			Provision			Utilized		2001			Utilized		2001			Utilized		2002

Restructuring:




Severance and other	$	(236	)	$	—		$	236	$	—		$	—	$	—		$	—	$	—




Costs to return aircraft		(2,202	)		(16,136	)		13,623		(4,715	)		208		(4,507	)		1,953		(2,554	)




Jetstream Super 31 lease payments		—			(3,610	)		—		(3,610	)		—		(3,610	)		69		(3,541	)




Cancellation of maintenance agreement		—			(1,200	)		—		(1,200	)		—		(1,200	)		—		(1,200	)




Market value reserve for surplus inventory		—			(3,233	)		3,233		—			—		—			—		—




Impairment:




Impairment of aircraft		—			(47,421	)		47,421		—			—		—			—		—




Writeoff of Goodwill		—			(9,253	)		9,253		—			—		—			—		—

Total	$	(2,438	)	$	(80,853	)	$	73,766	$	(9,525	)	$	208	$	(9,317	)	$	2,022	$	(7,295	)

11. Contingency

The Company is in discussions with various lessors regarding the cost of operating of its Dash 8-100 aircraft. While these discussions have been ongoing, the Company has not made payments on the leases associated with these aircraft and is currently in default under those lease agreements. The Company has accrued approximately $3.1 million related to past due amounts on these leases, which are included in other accrued expenses at March 31, 2002.

12. Subsequent Event

In April, the CCAir pilots, represented by the Air Line Pilots Association International (ALPA), overwhelmingly (72%) voted in favor of ratifying a new five-year labor agreement. The agreement, however, in accordance with ALPA bylaws, still requires execution by the national President of ALPA. The new labor agreement includes an agreement to add regional jet aircraft at CCAir if the Company is awarded flying under the recently approved “Jets for Jobs” initiative at US Airways. CCAir is currently in negotiations with US Airways for such additional aircraft.

13. Reclassifications

Certain 2001 amounts previously reported have been reclassified to conform with the 2002 presentation.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains certain statements including, but not limited to, information regarding the replacement, deployment, and acquisition of certain numbers and types of aircraft, and projected expenses associated therewith; costs of compliance with FAA regulations and other rules and acts of Congress; the passing of taxes, fuel costs, inflation, and various expenses to the consumer; the relocation of certain operations of Mesa; the resolution of litigation in a favorable manner and certain projected financial obligations. These statements, in addition to statements made in conjunction with the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions, are forward-looking statements within the meaning of the Safe Harbor provision of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements relate to future events or the future financial performance of Mesa and only reflect Management’s expectations and estimates. The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements: changing business conditions in certain market segments and industries; changes in Mesa’s code sharing relationships; the inability of either America West or US Airways to pay its obligations under the code share agreements; the ability of Mesa to successfully retire portions of its turboprop fleet; an increase in competition along the routes Mesa operates or plans to operate; delays in completion by the manufacturer of the ordered and yet-to-be delivered aircraft; changes in general and regional economic conditions; changes in fuel price; the increased cost and reduced availability of insurance Mesa’s relationship with employees and the terms of future collective bargaining agreements; and the impact of current and future laws, additional terrorist attacks; Congressional investigations, and governmental regulations affecting the airline industry and Mesa’s operations; bureaucratic delays; amendments to existing legislation; consumers unwilling to incur greater costs for flights; unfavorable resolution of negotiations with municipalities for the leasing of facilities; and risks associated with litigation outcomes. One or more of these or other factors may cause Mesa’s actual results to differ materially from any forward-looking statement. Mesa is not undertaking any obligation to update any forward -looking statements contained in this Form 10-Q.

GENERAL

Mesa Air Group, Inc. and its subsidiaries (collectively referred to herein as “Mesa”) is an independently owned regional airline serving 150 cities in 36 states, Canada and Mexico. Mesa operates a fleet of 120 aircraft and has approximately 879 daily departures.

Mesa’s airline operations are currently conducted by three regional airlines utilizing hub-and-spoke systems. Mesa Airlines, Inc. (“MAI”), a wholly owned subsidiary of Mesa, operates as America West Express under a code sharing agreement with America West Airlines, Inc. (“America West”), as US Airways Express under code sharing agreements with US Airways, Inc. (“US Airways”) and as Frontier Jet Express under a code sharing agreement with Frontier Airlines, Inc. (“Frontier). Air Midwest, Inc., a wholly owned subsidiary of Mesa, also operates under a code sharing agreement with US Airways and flies as US Airways Express and also operates an independent division, Mesa Airlines, from a hub in Albuquerque, New Mexico. Air Midwest also has a code sharing agreement with Midwest Express in Kansas City on flights operated as US Airways Express. CCAIR, Inc. (“CCAIR”), a wholly owned subsidiary of Mesa, operates under a code share agreement with US Airways that permits CCAIR to operate under the name US Airways Express and to charge their joint passengers on a combined basis with US Airways. In addition, Freedom Airlines, Inc., a wholly owned subsidiary of Mesa Air Group, Inc., has applied for and received a certificate of public convenience and necessity issued by the DOT pursuant to 49 U.S.C. 41102. Freedom is in the process of obtaining an air carrier operating certificate issued by the FAA under Part 121 of the Federal Aviation Regulations.

For the quarter ended March 31, 2002, approximately 75% of Mesa’s passenger revenues were derived from cost plus agreements. All of MAI’s America West Express operations and US Airways Express jet operations are on a cost plus basis. The percentage of revenue generated under cost plus agreements is expected to increase beyond the current fiscal year as Mesa adds additional regional jets to its America West Express operation. The Company’s code sharing agreement with America West expires in 2012. The Company’s code sharing agreements with US Airways expire on various dates from 2003 through 2005, with the regional jet agreement expiring in 2008. Mesa derives the remainder of its passenger revenues from a combination of local fares, through fares and joint fares.

During fiscal 2002 several significant events have occurred:

The Company reached an agreement with General Electric Capital Corporation to enter into leveraged lease transactions with respect to 10 64-seat Bombardier CRJ-700 and 10 84-seat CRJ-900 aircraft. Deliveries of these aircraft are currently scheduled to begin late in the third quarter of fiscal 2002. Mesa has orders for 40 of the CRJ-700/900 aircraft to be operated under a contract with America West Airlines. The aircraft are larger versions of the CRJ-200, which MAI currently operates.

In January, America West Airlines, one of the Company’s major code share partners, closed a term loan in the amount of $429 million and completed arrangements for more than $600 million in concessions, financing and financial assistance following final approval by the Air Transportation Stabilization Board of approximately $380 million in loan guarantees.

In February, the Company took delivery of two Bombardier CRJ-200 aircraft under short-term operating leases. These aircraft are being utilized in the Company’s Frontier Jet Express System. On May 1, 2002, Mesa was operating five CRJ-200 jet aircraft as Frontier Jet Express flying from Denver to the following cities: Houston, San Jose, St. Louis, Ontario, San Diego and Minneapolis.

On February 7, 2002, the Company finalized an agreement with Raytheon Aircraft Company (the “Raytheon Agreement”) to, among other things, reduce the operating costs of its Beechcraft 1900D fleet. In connection with the Raytheon Agreement and subject to the terms and conditions contained therein, Raytheon agreed to provide up to $5.5 million in annual operating subsidy payments to the Company contingent upon the Company remaining current on its payment obligations to Raytheon. Approximately $3.1 million (which included $1.9 million relating to fiscal 2001 and the first quarter of fiscal 2002) was recorded as a reduction to flight operations and maintenance expense during the quarter ended March 31, 2002. In return, the Company granted Raytheon an option to purchase up to 233,068 warrants at a purchase price of $1.50 per warrant. Each warrant entitles the holder to purchase one share of Common Stock at an exercise price of $10.00 per share. Each of the warrants is exercisable at any time over a three-year period following its date of purchase. Absent an event of default by the Company in which case vesting is accelerated, the option to purchase the warrants vests concurrently with Raytheon’s payment of the related annual operating subsidy for the following periods or January 15 of each year, whichever comes first. The warrants vest according to the following schedule: 13,401 warrants for a portion of 2001; 116,534 warrants for fiscal year 2002; 58,267 warrants for fiscal year 2003 and 44,866 warrants for fiscal year 2004. As of March 31, 2002, Raytheon has exercised its option to purchase the 2001 warrants.

The Company signed a memorandum of understanding with Pratt & Whitney Canada to enter into a new fleet management program covering the maintenance of Beech 1900D engines. Pursuant to the agreement, the Company will sell certain assets of its Desert Turbine Services unit, as well as all spare PT6 engines. The tentative agreement with Pratt & Whitney Canada covers 58 Beech 1900Ds and 116 engines. Finalization of the fleet management program is subject to definitive documentation.

The following tables set forth quarterly and year to date comparisons for the periods indicated below:

OPERATING DATA



	Three Months Ended				Six Months Ended

	March 31,		March 31,		March 31,		March 31,
	2002		2001		2002		2001

Passengers		1,179,380		1,086,176		2,311,450		2,308,537
Available seat miles (000’s)		835,976		817,121		1,587,076		1,629,917
Revenue passenger miles (000’s)		444,235		406,864		856,270		857,624
Load factor		53.1%		49.8%		54.0%		52.6%
Yield per revenue passenger mile (cents)		26.9		31.6		27.0		30.5
Revenue per available seat mile (cents)		14.3		15.7		14.5		16.1
Operating cost per available seat mile (cents)*		13.3		15.0		13.7		15.1
Average stage length (miles)		292.1		274.0		284.6		269.8
Number of operating aircraft in fleet		120		127		120		127
Gallons of fuel consumed		22,183,738		21,408,862		42,276,178		42,827,427
Block hours flown		87,623		96,688		169,728		197,351
Departures		71,204		79,940		140,331		163,779


	*	Excludes second quarter 2001 non-recurring impairment charge

FINANCIAL DATA



	Three Months Ended										Six Months Ended


	March 31, 2002					March 31, 2001					March 31, 2002					March 31, 2001

	Costs per		% of total			Costs per		% of total			Costs per		% of total			Costs per		% of total
	ASM(cents)		Revenues			ASM(cents)		Revenues			ASM(cents)		Revenues			ASM(cents)		Revenues

Flight operations		7.48		52.3	%		7.90		50.2	%		7.66		52.6	%		8.11		50.5	%
Maintenance		2.33		16.3	%		2.84		18.0	%		2.61		18.0	%		2.94		18.3	%
Aircraft and traffic servicing		1.34		9.4	%		1.73		11.0	%		1.36		9.4	%		1.71		10.7	%
Promotion and sales		0.38		2.7	%		0.78		5.0	%		0.41		2.8	%		0.76		4.7	%
General and administrative		1.42		9.9	%		1.35		8.6	%		1.32		9.1	%		1.14		7.1	%
Depreciation and amortization		0.32		2.2	%		0.43		2.7	%		0.34		2.3	%		0.45		2.8	%
Impairment of long-lived assets		0.00		0.00	%		2.78		17.7	%		0.00		0.0	%		1.40		8.7	%

Total operating expenses		13.26		92.7	%		17.80		113.3	%		13.70		94.2	%		16.50		102.7	%
Interest expense		0.32		2.2	%		0.48		3.1	%		0.30		2.1	%		0.49		3.1	%

RESULTS OF OPERATIONS


	*Operating Revenues:*

In the quarter and six months ended March 31, 2002, operating revenues decreased by $8.9 million (6.9%), and $30.9 million (11.8%), respectively, as compared to the quarter and six months ended March 31, 2001. This decrease was due primarily to the Company’s decision to accelerate planned reductions in turboprop flying capacity.


	*Operating Expenses*


	Flight Operations

In the quarter ended March 31, 2002, flight operations expense decreased 3.2% to $62.5 million (7.48 cents per ASM) from $64.5 million (7.90 cents per ASM) for the comparable period in 2001. In the six months ended March 31, 2002, flight operations expense decreased 8.0% to $121.5 million (7.66 cents per ASM) from $132.1 million (8.11 cents per ASM) from the comparable period in 2001. The overall decrease in expense is primarily attributable to the reduction in turboprop flying as well as cost reduction initiatives related to the turboprop operation, which included $0.6 million associated with the Raytheon agreement. The decrease in cost per ASM is a result of an increase in the proportion of ASMs generated by regional jets, which have a lower cost per ASM, and the turboprop initiatives.


	Maintenance Expense

In the quarter ended March 31, 2002, maintenance expense decreased 16.0% to $19.5 million (2.33 cents per ASM) from $23.2 million (2.84 cents per ASM) for the comparable period in 2001. In the six months ended March 31, 2002, maintenance expense decreased 13.5% to $41.4 million (2.61 cents per ASM) from $47.9 million (2.94 cents per ASM) for the comparable period in 2001. The overall decrease in maintenance costs is primarily the result of $2.0 million in benefits received as part of the cost reduction agreement reached with Raytheon Aerospace, and a reduction in turboprop flying. The decrease in cost per ASM is a result of an increase in the proportion of regional jet ASMs and turboprop cost reductions.


	Aircraft and Traffic Service Expense

In the quarter ended March 31, 2002, aircraft and traffic servicing expense decreased by 20.5% to $11.2 million (1.34 cents per ASM) from $14.1 million (1.73 cents per ASM) during the second quarter of fiscal 2001. In the six months ended March 31, 2002, aircraft and traffic servicing expense decreased by 22.6% to $21.6 million (1.36 cents per ASM) from $27.9 million (1.71 cents per ASM) for the corresponding period in 2001. The decrease in aircraft and traffic service expense is primarily due to the reduction in turboprop flying. The reduction in cost per ASM is a result of an increase in the proportion of regional jet ASMs.


	Promotion and Sales

In the quarter ended March 31, 2002, promotion and sales expense decreased 50.0% to $3.2 million (0.38 cents per ASM) from $6.4 million (0.78 cents per ASM) from the prior year’s comparable quarter. In the six months ended March 31, 2002, promotion and sales expense decreased 48.2% to $6.4 million (0.41 cents per ASM) from $12.4 million (0.76 cents per ASM) from the prior year’s comparable period. The decrease is primarily a result of the decrease in booking fees and franchise fees paid to the Company’s Code Share partners as a result of the decrease in passenger traffic. Also, the Company’s contract with America West and its Jet Contract with US Airways eliminates booking fees and travel agency commissions being charged directly to the Company and as such, these costs per ASM are expected to decline as the America West Express and US Airways jet operations grow.


	General and Administrative Expense

In the quarter ended March 31, 2002, general and administrative expense increased 7.2% to $11.8 million (1.42 cents per ASM) from $11.0 million (1.35 cents per ASM) during the comparable quarter of the previous fiscal year. In the six months ended March 31, 2002, general and administrative expense increased 13.3% to $21.0 million (1.32 cents per ASM) from $18.5 million (1.14 cents per ASM) during the comparable period of the previous fiscal year. The increase in the quarter is primarily due to higher passenger liability insurance premiums as a result of the events of September 11th and increases in property taxes associated with the additional jets added to Mesa’s fleet since the first quarter of fiscal 2001.


	Depreciation and Amortization

In the quarter ended March 31, 2002, depreciation and amortization decreased 23.8% to $2.7 million (0.32 cents per ASM) as compared to $3.5 million (0.43 cents per ASM) for the quarter ended March 31, 2001. In the six months ended March 31, 2002, depreciation and amortization decreased 26.3% to $5.3 million (0.34 cents per ASM) as compared to $7.3 million (0.45 cents per ASM) for the quarter ended March 31, 2001. The decrease is primarily due to the cessation of depreciation on aircraft and parts held for sale and reduced depreciation expense on the aircraft that were impaired at September 30, 2001. The Company also is no longer incurring goodwill amortization expense as all remaining goodwill was written off at September 30, 2001.


	Interest Expense

The decrease in interest expense of $1.3 million from $3.9 million in the second quarter of fiscal 2001 to $2.6 million in the second quarter of fiscal 2002 and the decrease in interest expense of $3.2 million from $8.0 million in the six months ending March 31, 2001 to $4.8 million in the six months ending March 31, 2002 is due to reduced interest rates as the majority of the Company’s B1900D fleet is financed at variable interest rates.


	Other Income

In the quarter ended March 31, 2002, other income increased 390.3% to $2.7 million as compared to $(1.0) million for the quarter ended March 31, 2001. In the six months ended March 31, 2002, other income increased 224.8% to $7.4 million as compared to $2.3 million for the six months ended March 31, 2001. The increase in other income is primarily attributable to an increase in investment gains from the Company’s portfolio of aviation related securities.


	Minority Interest

Amounts included in minority interest reflects the after-tax portion of earnings of UFLY, LLC that are applicable to the minority interest partners. In the six months ended March 31, 2002 UFLY had realized and unrealized gains of $4.4 million.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2002, Mesa’s cash and cash equivalents and marketable securities totaled $82.1 million, compared to $83.3 million at September 30, 2001. Mesa’s operating activities for the six months ended March 31, 2002 (excluding investment activity) provided net cash of $10.1 million, which included reductions in accounts payable of $10.2 million. The Company also repaid $20 million outstanding under its bank line of credit. Offsetting these cash outflows were the receipt of $6.8 million in government grant monies and $7.4 million of net deposits received from aircraft manufacturers. The Company’s cash and cash equivalents and marketable securities are intended to be used for working capital, capital expenditures and acquisitions.

In addition, the Company has a $35 million line of credit facility with Fleet Capital, which expires on December 7, 2003. The line of credit is secured by certain of the Company’s inventory and receivables, and the amount available varies from time to time based on the then current value of the collateral. As of March 31, 2002, the Company had approximately $26.1 million available under the line of credit. Including $6.6 million pledged against various letters of credit issued on behalf of the Company, the net availability under the line was $19.5 million. There were no other amounts outstanding as of March 31, 2002.

The Company had receivables of approximately $22.0 million at March 31, 2002, which consisted primarily of amounts due from code sharing partners America West and US Airways and passenger ticket receivables due through the Airline Clearing House. Under the terms of its pro-rate code share agreements, the Company receives a substantial portion of its revenues through the clearinghouse.

Mesa has significant long-term leveraged lease obligations, primarily relating to its aircraft fleet. These leases are classified as operating leases and therefore are not reflected as liabilities in the Company’s consolidated balance sheets. At March 31, 2002, Mesa had 106 leases with an average remaining term of approximately 11 years. Future minimum lease obligations due under all long-term leases were approximately $1.4 billion at March 31, 2002. At a 7.9% discount, these obligations would be approximately $821 million.

The Company is in discussions with various lessors regarding the cost of operating of its Dash 8-100 aircraft. While these discussions have been ongoing, the Company has not made payments on the leases associated with these aircraft and is currently in default under those lease agreements. The Company has accrued $3.1 million related to these leases, which is included in other accrued expenses at March 31, 2002.

In December 1999, the Company’s Board of Directors authorized the Company to repurchase up to 10%, approximately 3.4 million shares, of the outstanding shares of its Common Stock. In January 2001, the Board approved the repurchase by the Company of up to an additional one million shares of its Common Stock. The Company did not repurchase any stock during the quarter ended March 31, 2002. As of March 31, 2002, the Company has acquired approximately 3.0 million shares (approximately 8.3%) of its outstanding Common Stock at an average price of $5.87 per share with an aggregate cost of approximately $17.6 million leaving approximately 1.4 million shares available for repurchase under the current Board authorizations. Purchases are made at management’s discretion based on market conditions and the Company’s financial resources.

Management believes that the Company will have adequate cash flow to meet its operating needs. This is a forward-looking statement. Actual cash flows could materially differ from this forward looking statement as a result of many factors, including the termination of one or more code share agreements; the inability of a code share partner to meet its obligations to Mesa when due; failure to sell, dispose of, or redeploy excess aircraft in a timely manner; a substantial decrease in the number of routes allocated to the Company under its code share agreements with its code share partners; reduced levels of passenger revenue, additional taxes or costs of compliance with governmental regulations; fuel cost increases; increases in competition; additional terrorist attacks; increases in interest rates; general economic conditions and unfavorable settlement of existing litigation.

AIRCRAFT

The following table lists the aircraft owned and leased by Mesa for scheduled operations as of March 31, 2002:


							Operating on			Passenger
Type of Aircraft	Owned		Leased		Total		March 31, 2002			Capacity

Canadair Regional Jet		—		34		34		34			50
Embraer Regional Jet		—		27		27		27			50
Beechcraft 1900D		51		7		58		40			19
Jet Stream Super 31		—		9		9		2	(1)		19
Dash 8-100		—		7		7		5			37
Dash 8-200		—		12		12		12			37
Embraer EMB-120		—		6		6		—			30
		—		—		—		—
		51		102		153		120


(1)	At September 30, 2001, Management announced the decision to retire the Jet Stream Super 31 aircraft. On April 18, 2002, the Company discontinued operating the Jet Stream Super 31 aircraft.

OTHER DEVELOPMENTS


	*ERJ Program*

In June 1999, Mesa entered into an agreement with Empresa Brasiliera de Aeronautica SA (“Embraer”) to acquire 36 50-passenger Embraer ERJ-145 regional jets. Deliveries began late in the third quarter of fiscal 2000 and will continue into mid 2003. Mesa introduced the ERJ-145 aircraft into revenue service in the third quarter of fiscal 2000 as US Airways Express. In 2002, Mesa moved three of the CRJ regional jets currently flying as US Airways Express to Frontier Jet Express and replaced them with ERJ-145’s as deliveries took place. The Company also intends to move an additional four CRJ regional jets currently flying as US Airways Express to Frontier Jet Express and replace them with ERJ-145’s. As of March 31, 2002, the Company had taken delivery of 27 ERJ-145’s, which have been financed as operating leases. In conjunction with this purchase agreement, Mesa has $6.6 million on deposit with Embraer, which is included with lease and equipment deposits.


	*CRJ Program*

In August 1996, the Company entered into an agreement (the “1996 BRAD Agreement”) with Bombardier Regional Aircraft Division (“BRAD”) to acquire 16 CRJ-200 50-passenger, jet aircraft. The 1996 BRAD Agreement also granted the Company an option to acquire an additional 16 jet aircraft. In fiscal 1997, the Company exercised options to purchase 16 of the 32 CRJ aircraft reserved under the option provisions of the 1996 BRAD Agreement. The Company has received all 32 CRJ-200 aircraft under the 1996 BRAD Agreement. The entire 32 CRJ-200 aircraft fleet is currently under permanent financing as operating leases with initial terms of 16 1/2 to 18 1/2 years.

In May 2001, the Company entered into an agreement with BRAD to acquire 20 64-seat CRJ-700s and 20 84-seat CRJ-900s (the “2001 BRAD Agreement”). Deliveries of the CRJ-700 and CRJ-900 are scheduled to commence in the third quarter of fiscal 2002 and the second quarter of fiscal 2003, respectively. However, a labor dispute at Bombardier could result in delays in the delivery schedule. Mesa will be the launch customer of the CRJ-900. In addition to the firm orders, Mesa has an option to acquire an additional 40 CRJ-200 and 80 CRJ-700 and CRJ-900 regional jets. In conjunction with the 2001 BRAD Agreement, Mesa has $2.3 million on deposit with BRAD, which is included with lease and equipment deposits. In February 2002, the Company entered into short-term leases on an additional two CRJ-200s for its Frontier Jet Express operation.

The following table summarizes the Company’s jet fleet status and current fleet expansion plans, as well as options on additional aircraft deliveries, for the periods indicated:


							CRJ-700		CRJ-900
					CRJ-200		Firm		Firm		CRJ-700		CRJ-900		ERJ-145		ERJ-145		Cumulative
		CRJ-200			Options		Orders		Orders		Options		Options		Firm Orders		Options		Total

Delivered:




	At 3/31/2002.		34	*		—		—		—		—		—		27		—		61




Scheduled deliveries:




	Fiscal 2002		—			—		3		—		—		—		5		—		69




	Fiscal 2003		—			7		12		8		—		—		4		—		100




	Fiscal 2004		—			12		5		12		—		—		—		6		135




	Fiscal 2005		—			12		—		—		3		3		—		12		165




	Fiscal 2006		—			9		—		—		12		12		—		12		210




	Fiscal 2007		—			—		—		—		5		5		—		12		232

Total			34			40		20		20		20		20		36		42


*	Amount includes two CRJ-200s the Company is flying under short-term operating leases in the Frontier system.


	*Beechcraft 1900D*

In fiscal 1999, the Company announced its intention to dispose of 30 excess B1900D aircraft. As of December 31, 2001, the Company had disposed of 17 of such aircraft. During the second quarter of fiscal 2001, the Company continued its turboprop restructuring plan by announcing a plan to retire an additional eight B1900D aircraft. Under an agreement with Raytheon Aircraft Corporation (“RAC”), the Company has the right to return 15 B1900D aircraft at a fixed price. The Company anticipates returning all 15 in fiscal 2002. The Company is seeking proposals for the disposition of the remaining six B1900D aircraft. Mesa further reduced its fleet by returning two aircraft to the lessor upon expiration of their leases in the second quarter of fiscal 2001, and negotiated an early return of one additional aircraft to the lessor in March 2002.

* * *

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Mesa Air Group, Inc., and Westair Commuter Airlines, Inc. v. Beus Gilbert P.L.L.C.

In March 2001, the Company reached agreement with United Airlines, Inc. to extend the current Mesa/ US Airways regional jet contract by an additional two years, to December 31, 2010 contingent upon completion of the proposed merger between United and US Airways. Under the agreement, Mesa and United agreed to drop all outstanding litigation between the two parties. On July 27, 2001, United and US Airways terminated their proposed merger.

In May 2001, the Company filed a complaint in Arizona state court against the law firm of Beus Gilbert P.L.L.C. (“Beus Gilbert”) arising out of Beus Gilbert’s representation of the Company in a suit against United Airlines (“UAL litigation”) that was settled in March 2001. The suit seeks a judgment voiding the fee arbitration provision (the “arbitration provision”) of a contingency fee agreement between the Company and Beus Gilbert. The provision purports to require that all disputes as to attorneys’ fees payable to Beus Gilbert be submitted to arbitration for final determination. Notwithstanding the requirement to arbitrate, the provision further purports to grant Beus Gilbert the right, “in its sole and absolute discretion,” to reject the decision of the arbitrator, impose an award in the amount equal to five times the aggregate hourly rate of all attorneys and paralegals who worked on the legal matter (plus costs and expenses), and enforce that award as though it were a civil judgment. Relying on the arbitration provision, following the settlement of the UAL Litigation, Beus Gilbert demanded in excess of $16 million, which it claims to have computed by applying a 5X multiplier in the arbitration provision to fees that allegedly accrued in excess of $3 million.

The suit against Beus Gilbert alleges that the arbitration provision is void as a matter of law because it is illusory and lacks mutual consideration; that it is also void because it violates a public purpose: a fair and equitable resolution of the parties’ fee dispute by an impartial arbitrator; and that it is unenforceable because it circumvents the legal and ethical requirements that attorneys’ fees be reasonable. The Company seeks a determination by the Court of the fee dispute between the parties. On November 27, 2001, the court granted Beus Gilbert’s motion to compel arbitration to resolve the dispute and ordered the arbitrator to decide whether the fee resulting from a 5X multiplier would be reasonable. The Company is scheduled to arbitrate the dispute on May 30-31, 2002.

The Company is also involved in various other legal proceedings and FAA civil action proceedings that the Company does not believe will have a material adverse effect upon the Company’s business, financial condition or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings.

Item 2. Changes in Securities and Use of Proceeds

(A) None

(B) None

(D) None

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the Company’s market risk since September 30, 2001.

Item 4. Submission of Matters to vote for Security Holders.

The Company held its Annual Meeting of Stockholders, at which the stockholders re-elected nine directors, voted against confidential shareholder voting and ratified the appointment of Deloitte & Touche, LLP as the Company’s independent auditors for 2002. Abstentions and broker non-votes are included in the determination of the number of shares represented for a quorum and have the same effect as “no” votes in determining whether proposals are approved.

Results of the voting in connection with each issue was as follows:


Election of Directors	For		Withhold

Jonathan G. Ornstein		26,886,173		2,403,582
Daniel J. Altobello		26,886,297		2,403,458
Herbert A. Denton		26,886,297		2,403,458
Ronald R. Fogleman		26,886,249		2,403,506
Joseph Manson		26,880,777		2,408,978
Maurice Parker		26,886,297		2,403,458
George Murnane III		26,886,297		2,403,458
Julie Silcock		26,822,613		2,467,142
James E. Swigart		26,886,297		2,403,458

Proposal to adopt confidential shareholder voting:


For		Against		Abstain		Not Voted

	14,368,235		8,914,625		93,592		5,923,803

Ratification of Deloitte & Touche as the Company’s independent auditors:


For		Against		Abstain		Not Voted

	29,140,559		122,211		26,985		10,500

Item 5. Other Matters

Not applicable

Item 6. Exhibits and Reports on Form 8-K


	(A)	Exhibits:

		None


	(B)	Reports on form 8-K

		None

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MESA AIR GROUP, INC.


	By:	/s/ JEFF P. POESCHL



	Jeff P. Poeschl
	Vice President - Finance
	(Principal Accounting Officer)

Dated: May 13, 2002

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