Mesa Air Group Readies Plan For $161 Million IPO

Summary

• Mesa Air has filed proposed terms for its U.S. IPO.
• The firm is a major regional airline with United and American Airlines as primary customers.
• The firm is growing topline revenues, but at a decelerating rate; financial results have been uneven.
• This idea was first discussed with members of my private investing community, IPO Edge. To get an exclusive 'first look' at my best ideas, start your free trial today >>

Quick Take

Mesa Air Group (NASDAQ:MESA) intends to raise $161 million from the sale of its common stock, according to an amended S-1/A registration statement.

The firm operates as a large regional airline as part of United and American Airlines feeder systems.

MESA has produced uneven financial results despite utilizing the supposedly more predictable capacity purchase agreement structure.

Company & Customers

Phoenix, Arizona-based Mesa was founded in 1982 by a couple’s desire to run a flight company. Larry and Janie Risley started flying between Farmington and Albuquerque. The following year, the company tripled in size.

Management is now headed by President and CEO Jonathan G. Ornstein, who has been with the firm since 1998 and was previously Chairman and CEO at Virgin Express Airlines.

Mesa Air has raised $114 million in multiple equity financing rounds to-date.

Mesa Air plans to expand its relationships with new and existing flying partners to continue growing its operation. They’re also inclined to consider acquisitions of other regional airlines.

MESA currently operates 145 aircraft providing 610 flights per day as of March 31, 2018.

The firm’s existing route map is shown below:

MESA is primarily focused on providing service to southern U.S. routes that connect with the major hubs of Phoenix, Dallas, Houston and Dulles. The firm also serves Mexico and Central America.

The company operates larger regional aircraft, usually with 70+ seats and all aircraft are painted with either United Airlines or American Airlines colors.

Market & Competition

According to a 2017 market research report by Ibis World, the U.S. regional airline market generated $132 billion between 2012 and 2017, registering an annual growth of 1.5%.

The main factors driving market growth are consumer confidence, rising levels of per capita disposable income, and total corporate profit. In other words, people have more money to spend on such commodities.

In 2017, the top five players in the industry accounted for 79% of the total market share -- a substantial increase from 70% in 2012.

Major competitive vendors that are operating in the U.S. regional airline market include:

• Air Wisconsin Airlines
• Endeavor Air
• Envoy Air
• PSA Airlines
• Piedmont Airlines
• Horizon Air
• SkyWest (SKYW)
• Republic Airways
• Trans States Airlines

Financial Performance

MESA’s recent financial results can be summarized as follows:

• Growing but uneven operating revenue
• Increasing but fluctuating operating profit
• Uneven operating margin
• Uneven but positive cash flow from operations

Below are the company’s financial results for the past five and ½ years (Audited PCAOB for full years):

(Source: Mesa Air Group S-1)

Total Revenue ($)

• Six months ended Q1 2018: $332.3 million, 4.1% increase vs. prior
• 2017: $643.6 million, 9.5% increase vs. prior
• 2016: $587.8 million, 16.1% increase vs. prior
• 2015: $506.1 million

Operating Profit ($)

• Six months ended Q1 2018: $31.4 million
• 2017: $100.3 million
• 2016: $56.8 million
• 2015: $79.2 million

Operating Margin (%)

• Six months ended Q1 2018: 9.4%
• 2017: 15.6%
• 2016: 9.7%
• 2015:15.6%

Cash Flow from Operations ($)

• Six months ended Q1 2018: $41.2 million
• 2017: $74.7 million
• 2016: $104.5 million

As of March 31, 2018, the company had $52.7 million in cash and $1.1 billion in total liabilities.

IPO Details

MESA intends to sell 10.7 million shares of common stock at a midpoint price of $15.00 per share for gross proceeds of approximately $161 million.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s post-IPO market capitalization would be approximately $528 million, excluding the effects of underwriter over-allotment options.

Management plans to use the net proceeds as follows:

[i] repay all outstanding indebtedness under our CIT Revolving Credit Facility in the amount of $25.7 million;

[ii] repay from $20.0 to $40.0 million of existing indebtedness under our Spare Engine Facility and the Subordinated GECAS Notes; and

[iii] in connection with the repayment, refinance the remaining portion of indebtedness under our Spare Engine Facility and the Subordinated GECAS Notes. Our CIT Revolving Credit Facility permits revolving borrowings of up to $35.0 million and bears interest at LIBOR plus a margin of 4.25%. Following our repayment of funds drawn under our CIT Revolving Credit Facility, the $35.0 million commitment amount will remain available for future borrowing through the maturity date of August 12, 2019. As of March 31, 2018, $92.3 million of borrowings were outstanding under our Spare Engine Facility. Funds drawn under this facility bear interest at the rate of 7.25% per annum plus the greater of [a] 0.5% or [b] the Eurodollar rate. There are four tranches of debt under our Spare Engine Facility, which mature between January 2022 and February 2023. As of June 28, 2018, the date of issuance, we had an aggregate of $29.4 million of borrowings outstanding under our Subordinated GECAS Notes, each of which bear interest at LIBOR plus 7.50% and mature on February 1, 2022. We can give no assurance that we will be able to refinance the Spare Engine Facility or the Subordinated GECAS Notes at acceptable rates, on acceptable terms, or at all.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Raymond James, BofA Merrill Lynch, Cowen, Stifel and Imperial Capital.

Expected IPO Pricing Date: August 8, 2018.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.