MESA AIR GROUP INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)


The following discussion and analysis of our financial condition and results of
operations should be read together with our condensed consolidated financial
statements, the accompanying notes, and the other financial information included
elsewhere in this Quarterly Report on Form 10-Q. The following discussion
contains forward­looking statements that involve risks and uncertainties such as
our plans, estimates, and beliefs. Our actual results could differ materially
from those discussed in the forward-looking statements below. Factors that could
cause or contribute to these differences include those discussed below and
elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections
titled "Cautionary Notes Regarding Forward-Looking Statements" above and "Risk
Factors" below.

Overview

Mesa Airlines is a regional air carrier providing scheduled passenger service to
110 cities in 40 states, the District of Columbia, the Bahamas, and Mexico as
well as cargo services out of Cincinnati/Northern Kentucky International
Airport. All of our flights are operated as either American Eagle, United
Express, or DHL Express flights pursuant to the terms of capacity purchase
agreements ("CPAs") entered into with American Airlines, Inc. ("American") and
United Airlines, Inc. ("United"), and a Flight Services Agreement ("FSA") with
DHL Network Operations (USA), Inc. ("DHL") (each, our "major partner"). We have
a significant presence in several of our major partners' key domestic hubs and
focus cities, including Dallas, Houston, Phoenix and Washington-Dulles.

As of March 31, 2022, our fleet consisted of 168 aircraft which we operated
under our CPAs and FSA, leased to a third party, held for sale or maintained as
spares, with approximately 349 daily departures. We operate 40 CRJ-900 aircraft
under our American CPA and 60 E-175 and 20 E-175LL aircraft under our United
CPA. We operate 2 Boeing 737-400F aircraft under our DHL FSA. As of March 31,
2022, approximately 65% of our aircraft in scheduled service were operated for
United, approximately 33% were operated for American and 2% were operated for
DHL. All of our operating revenue in our three and six months ended March 31,
2022 was derived from operations associated with our American and United CPAs,
DHL FSA, and from leases of aircraft to a third party.

Our long-term CPAs provide us guaranteed monthly revenue for each aircraft under
contract, a fixed fee for each block hour (the number of hours during which the
aircraft is in revenue service, measured from the time of gate departure before
take-off until the time of gate arrival at the destination) and flights actually
flown, and reimbursement of certain direct operating expenses in exchange for
providing regional flying on behalf of our major partners. Our CPAs also shelter
us from many of the elements that cause volatility in airline financial
performance, including fuel prices, variations in ticket prices, and
fluctuations in number of passengers. In providing regional flying under our
CPAs, we use the logos, service marks, flight crew uniforms and aircraft paint
schemes of our major partners. Our major partners control route selection,
pricing, seat inventories, marketing and scheduling, and provide us with ground
support services, airport landing slots and gate access.

Under our DHL FSA, we receive a fee per block hour with a minimum monthly block
hour guarantee in exchange for providing cargo flight services. Ground support
including fueling and airport fees are paid directly by DHL.

Impact of the COVID-19 pandemic

The rapid spread of COVID-19 and the related travel restrictions and social
distancing measures implemented throughout the world significantly reduced
demand for air travel beginning in the quarter ended March 31, 2020. This
reduction in demand had an unprecedented and materially adverse impact on our
revenues and financial position in both fiscal 2020 and 2021 that has continued
into fiscal 2022. While there was a moderate increase in demand for air travel
beginning in fiscal 2021, we continue to be impacted by the direct and indirect
effects of the virus, including increased employee attrition and employee
absence rates, and a decrease in the supply of qualified pilots. The exact
timing and pace of the recovery is uncertain given the significant impact of the
pandemic on the overall U.S. and global economy, as well as the uncertainty of
certain factors outside of our control including current or future travel
restrictions, vaccination effectiveness, vaccine mandates, and future variants
of the virus. Since a portion of our revenue is fixed due to the structure of
our CPAs, the impact to Mesa from the COVID-19 pandemic has been partially
mitigated. In addition, our exposure to fluctuations in passenger traffic,
ticket and fuel prices is limited.

Components of operating results

The following discussion summarizes the main components of our condensed consolidated statements of earnings.

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operating income

Our operating revenues consist primarily of contract revenues as well as indirect and other revenues.

Contract Revenue. Contract revenue consists of the fixed monthly amounts per
aircraft received pursuant to our CPAs and FSA with our major partners, along
with the additional amounts received based on the number of flights and block
hours flown, and rental revenue for aircraft leased to GoJet Airlines LLC.
Contract revenues we receive from our major partners are paid and recognized
over time consistent with the delivery of service under our CPAs and FSA.

Pass-Through and Other Revenue. Pass-through and other revenue consists of
passenger and hull insurance, aircraft property taxes, landing fees, and other
aircraft and traffic servicing costs received pursuant to our agreements with
our major partners, as well as certain maintenance costs related to our E-175
aircraft.

Operating Expenses

Our operating expenses consist of the following items:

Flight Operations. Flight operations expense includes costs related to salaries,
bonuses and benefits earned by our pilots, flight attendants, and dispatch
personnel, as well as costs related to technical publications, lodging of our
flight crews and pilot training expenses.

Maintenance. Maintenance expense includes costs related to engine overhauls,
airframe, landing gear and normal recurring maintenance, which includes
pass-through maintenance costs related to our E-175 aircraft. Heavy maintenance
and major overhaul costs on our owned E-175 fleet are deferred and amortized
until the earlier of the end of the useful life of the related asset or the next
scheduled heavy maintenance event. All other maintenance costs are expensed as
incurred, except for certain maintenance contracts where labor and materials
price risks have been transferred to the service provider and require payment on
a utilization basis, such as flight hours. Costs incurred for maintenance and
repair for utilization maintenance contracts where labor and materials price
risks have been transferred to the service provider are charged to maintenance
expense based on contractual payment terms. As a result of using the direct
expense method for heavy maintenance on the majority of our fleets, the timing
of maintenance expense reflected in the financial statements may vary
significantly from period to period.

Aircraft rental. Aircraft rental expense includes costs related to leased engines and aircraft.

General and Administrative. General and administrative expense includes
insurance and taxes, the majority of which are pass-through costs,
non-operational administrative employee wages and related expenses, building
rents, real property leases, utilities, legal, audit and other administrative
expenses.

Depreciation and amortization. Depreciation expense is a periodic non-cash expense primarily related to the depreciation of aircraft, engines and equipment. Amortization expense is a periodic non-cash charge related to our customer relationship intangible asset.

Impairment of Assets Held for Sale. Impairment of assets held for sale includes
charges for impairments of our assets held for sale, including changes in the
fair value of assets held for sale.

Other Operating Expenses. Other operating expenses primarily consists of fuel
costs for flying we undertake outside of our CPAs and FSA (including aircraft
re-positioning and maintenance) as well as costs for aircraft and traffic
servicing, such as aircraft cleaning, passenger disruption reimbursements,
international navigation fees and wages of airport operations personnel, a
portion of which are reimbursable by our major partners. All aircraft fuel and
related fueling costs for flying under our CPAs and FSA are directly paid and
supplied by our major partners. Accordingly, we do not record an expense or
pass-through revenue for fuel supplied by American and United for flying under
our CPAs or DHL under our FSA.

Other income (expenses), net

Interest Expense. Interest expense is interest on our debt incurred to finance
purchases of aircraft, engines, and equipment, including amortization of debt
financing costs and discounts.

Interest income. Interest income includes interest income on our cash and cash equivalent balances.


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Investment loss, net. Investment loss includes net losses on our equity investments resulting from changes in the fair value of equity securities.

Other expenses. Other expenses include expenses arising from activities that are not classified elsewhere in the condensed consolidated statements of earnings.

Sector reports

Operating segments are defined as components of an enterprise about which
discrete financial information is available that is evaluated regularly by the
chief operating decision maker ("CODM") in deciding how to allocate resources
and in assessing operating performance. In consideration of ASC 280, Segment
Reporting, we are not organized around specific services or geographic regions.
We currently operate in one service line providing scheduled flight services in
accordance with our capacity purchase agreements and flight services agreement.

While we operate under two separate capacity purchase agreements and one flight
services agreement, we do not manage our business based on any performance
measure at the individual contract level. Additionally, our CODM uses
consolidated financial information to evaluate our performance, which is the
same basis on which he communicates our results and performance to our Board of
Directors. The CODM bases all significant decisions regarding the allocation of
our resources on a consolidated basis. Based on the information described above
and in accordance with the applicable literature, management has concluded that
we are organized and operated as one operating and reportable segment.

Operating results

Three months completed March 31, 2022 Compared to the three months ended March 31, 2021

We had operating loss of $44.8 million in our three months ended March 31, 2022
compared to operating income of $16.8 million in our three months ended March
31, 2021. In our three months ended March 31, 2022, we had net loss of $42.8
million compared to net income of $5.7 million in our three months ended March
31, 2021.

Our operating results for the three months ended March 31, 2022 reflect
impairment charges of $39.5 million on certain of our CRJ aircraft classified as
held for sale, as described in Note 6 to the condensed consolidated financial
statements. Additionally, there were no government grant funds utilized as an
offset to operating expenses during the three months ended March 31, 2022,
compared to $56.0 million during the three months ended March 31, 2021.

Operating Revenues

                                             Three Months Ended March 31,
                                                2022                2021                  Change
Operating revenues ($ in thousands):
Contract                                   $       111,988       $    81,712     $   30,276          37.1 %
Pass-through and other                              11,225            15,568         (4,343 )       (27.9 )%
Total operating revenues                   $       123,213       $    97,280     $   25,933          26.7 %

Operating data:
Available seat miles-ASMs (thousands)            1,616,896         1,771,498       (154,602 )        (8.7 )%
Block hours                                         65,613            73,942         (8,329 )       (11.3 )%
Revenue passenger miles-RPMs (thousands)         1,305,159         1,148,498        156,661          13.6 %
Average stage length (miles)                           671               690            (19 )        (2.8 )%
Contract revenue per available seat
mile-CRASM
  (in cents)                               ¢          6.93       ¢      4.61     ¢     2.32          50.3 %
Passengers                                       1,921,635         1,684,043        237,592          14.1 %



“Available Seat Miles” or “ASM” means the number of seats available to passengers multiplied by the number of miles flown by the seats.

“Average Leg Length” means the average number of statute miles flown per flight segment.

"Block hours" means the number of hours during which the aircraft is in revenue
service, measured from the time of gate departure before take-off until the time
of gate arrival at the destination.


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“CRASM” means Contract Revenue divided by ASMs.

“RPM” means the number of miles flown by paying passengers.

Total operating revenue increased by $25.9 million, or 26.7%, to $123.2 million
for our three months ended March 31, 2022 as compared to our three months ended
March 31, 2021. Contract revenue increased by $30.3 million, or 37.1%, to $112.0
million primarily due to normalized contractual rates from our major partners,
partially offset by reduced block hours flown compared to the three months ended
March 31, 2021. The increase in rates compared to the three months ended March
31, 2021 is attributable to temporarily reduced rates from our major partners
impacting the three months ended March 31, 2021 as a result of lower labor costs
due to government assistance received during the same period. Our block hours
flown during our three months ended March 31, 2022, decreased 11.3% compared to
the three months ended March 31, 2021 due to a decrease in scheduled flying for
our major partners across all fleets. Our pass-through and other revenue
decreased during our three months ended March 31, 2022 by $4.3 million, or
27.9%, to $11.2 million primarily due to a decrease in pass-through maintenance
on our E-175 fleet.

Operating Expenses

                                             Three Months Ended March 31,
                                                2022                2021                  Change
Operating expenses ($ in thousands):
Flight operations                          $        42,410       $    37,403     $    5,007          13.4 %
Maintenance                                         47,357            51,773         (4,416 )        (8.5 )%
Aircraft rent                                        9,434             9,992           (558 )        (5.6 )%
General and administrative                           7,860            11,164         (3,304 )       (29.6 )%
Depreciation and amortization                       20,747            20,705             42           0.2 %
Lease termination                                        -             4,508         (4,508 )      (100.0 )%
Impairment of assets held for sale                  39,475                 -         39,475         100.0 %
Other operating expenses                               685               941           (256 )       (27.2 )%
Government grant recognition                             -           (55,967 )       55,967        (100.0 )%
Total operating expenses                   $       167,968       $    80,519     $   87,449         108.6 %

Operating data:
Available seat miles-ASMs (thousands)            1,616,896         1,771,498       (154,602 )        (8.7 )%
Block hours                                         65,613            73,942         (8,329 )       (11.3 )%
Average stage length (miles)                           671               690            (19 )        (2.8 )%
Departures                                          31,983            35,270         (3,287 )        (9.3 )%



Flight Operations. Flight operations expense increased $5.0 million, or 13.4%,
to $42.4 million for our three months ended March 31, 2022 compared to our three
months ended March 31, 2021. The increase was primarily driven by an increase in
pilot and flight attendant wages and lodging expenses and pilot training-related
costs.

Maintenance. Aircraft maintenance expense decreased $4.4 million, or 8.5%, to
$47.4 million for our three months ended March 31, 2022 compared to our three
months ended March 31, 2021. This decrease was primarily driven by a lower
volume of airframe C-checks and engine overhauls, partially offset by increases
in parts, labor, and other maintenance expenses. Total pass-through maintenance
expenses reimbursed by our major partners decreased by $1.9 million during our
three months ended March 31, 2022 compared to our three months ended March 31,
2021.


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The following table shows information regarding our maintenance costs during the three months ended March 31, 2022 and 2021 (in thousands):

                                  Three Months Ended March 31,
                                    2022                 2021                 Change
Engine overhaul                $          118       $        4,709     $ (4,591 )     (97.5 )%
Pass-through engine overhaul            4,644                2,173        2,471       113.7 %
C-check                                 4,216                8,506       (4,290 )     (50.4 )%
Pass-through C-check                      489                5,603       (5,114 )     (91.3 )%
Component contracts                     6,587                6,370          217         3.4 %
Rotable and expendable parts            7,682                5,064        2,618        51.7 %
Other pass-through                      4,379                3,658          721       (19.7 )%
Labor and other                        19,242               15,690        3,552        22.6 %
Total                          $       47,357       $       51,773     $ (4,416 )      (8.5 )%




Aircraft Rent. Aircraft rent expense decreased $0.6 million, or 5.6%, to $9.4
million for our three months ended March 31, 2022 compared to our three months
ended March 31, 2021. The decrease is attributable to a decrease in engine rent
due to fewer leased engines as well as a decrease in aircraft rent due to the
purchase of a CRJ-900 aircraft during fiscal 2021 that was previously under
lease.

General and Administrative. General and administrative expense decreased $3.3
million, or 29.6%, to $7.9 million for our three months ended March 31, 2022
compared to our three months ended March 31, 2021. The decrease is primarily due
to a decrease in property taxes. For our three months ended March 31, 2022 and
2021, $0.1 million and $2.9 million, respectively, of our insurance and property
tax expenses were reimbursed by our major partners.

Depreciation and Amortization. Depreciation and amortization expense increased
by less than $0.1 million, or 0.2%, to $20.7 million for our three months ended
March 31, 2022 compared to our three months ended March 31, 2021.

Lease Termination. Lease termination expense decreased $4.5 million, or 100.0%,
to $0.0 million for our three months ended March 31, 2022 compared to our three
months ended March 31, 2021. This decrease is attributable to the termination
expense recorded during our three months ended March 31, 2021 resulting from the
purchase of a CRJ-900 aircraft, which was previously leased from Bombardier
Capital.

Impairment of Assets Held for Sale. Impairment of assets held for sale was $39.5
million for our three months ended March 31, 2022 compared to $0.0 for our three
months ended March 31, 2021. The increase is attributable to impairment charges
on our CRJ aircraft classified as held for sale during the three months ended
March 31, 2022.

Other Operating Expenses. Other operating expenses decreased $0.3 million, or
27.2%, to $0.7 million for our three months ended March 31, 2022 compared to our
three months ended March 31, 2021. The decrease is primarily due to lower
aircraft cleaning expenses partially offset by higher fuel costs and charges
related to the abandonment of a leased facility during the three months ended
March 31, 2022.

Government Grant Recognition. Recognition of payroll support funds decreased
$56.0 million, or 100.0%, to $0.0 million for our three months ended March 31,
2022 compared to our three months ended March 31, 2021. Under the Consolidated
Appropriations Act of 2021, the government provided the Company with a grant of
$56.0 million in payroll support for which was recognized as an offset to
operating expense during the three months ended March 31, 2021. There were no
government grant funds received by the Company recognized as an offset to
operating expense during the three months ended March 31, 2022.

Other expenses

Other expense increased $1.2 million, or 13.4%, to $10.4 million for our three
months ended March 31, 2022, compared to our three months ended March 31, 2021.
The increase is primarily attributable to net losses on investments in equity
securities of $2.3 million, partially offset by a decrease in interest expense
of $0.6 million due to lower interest rates on our Treasury Loan and a decrease
in outstanding aircraft principal balances.


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Income taxes

Our effective tax rate (ETR) from continuing operations was 22.4% for the three
months ended March 31, 2022 and 24.9% for the three months ended March 31, 2021.
Our ETR during the three months ended March 31, 2022 decreased from the prior
year tax rate primarily as a result of certain permanent tax differences, state
taxes, and changes in the valuation allowance against state net operating
losses. For the three months ended March 31, 2022, we used the year-to-date
effective tax rate method to determine the interim income tax benefit because a
reliable estimate of the annual effective tax rate could not be made.

We continue to maintain a valuation allowance on a portion of our net state operating losses in jurisdictions where carryforward periods are shortened or in jurisdictions where our operations have declined significantly from years periods in which the net operating losses were generated.

As of September 30, 2021, the Company had aggregate federal and state net
operating loss carryforwards of $541.3 million and $235.7 million, respectively,
which expire in 2027-2038 and 2022-2041, respectively. Approximately $1.2
million of state net operating loss carryforwards are expected to expire in the
current year.

Semester completed March 31, 2022 Compared to the half-year ended March 31, 2021

We had operating loss of $48.7 million in our six months ended March 31, 2022
compared to operating income of $43.7 million in our six months ended March 31,
2021. In our six months ended March 31, 2022, we had net loss of $57.1 million
compared to net income of $19.8 million in our six months ended March 31, 2021.

Our operating results for the six months ended March 31, 2022 reflect an
increase in flight operations expense due to higher pilot and flight attendant
wages, lodging, and training expenses. We also recognized impairment charges of
$39.5 million on certain of our CRJ aircraft classified as held for sale during
the six months ended March 31, 2022, as described in Note 6 to the condensed
consolidated financial statements. Additionally, there were no government grant
funds utilized as an offset to operating expenses during the six months ended
March 31, 2022, compared to $67.3 million during the six months ended March 31,
2021.

Operating Revenues
                                             Six Months Ended March 31,
                                                2022              2021                  Change
Operating revenues ($ in thousands):
Contract                                   $      248,882      $   208,870     $    40,012          19.2 %
Pass-through and other                             22,088           38,781         (16,693 )       (43.0 )%
Total operating revenues                   $      270,970      $   247,651     $    23,319           9.4 %

Operating data:
Available seat miles-ASMs (thousands)           3,721,517        3,442,441         279,076           8.1 %
Block hours                                       151,692          143,189           8,503           5.9 %

Passenger Revenue Miles-RPM (thousands) 3,069,320 2,319,909

        749,411          32.3 %
Average stage length (miles)                          656              664              (8 )        (1.2 )%
Contract revenue per available seat
mile-CRASM
  (in cents)                               ¢         6.69      ¢      6.07     ¢      0.62          10.2 %
Passengers                                      4,615,103        3,513,757       1,101,346          31.3 %


Total operating revenue increased by $23.3 million, or 9.4%, to $271.0 million
for our six months ended March 31, 2022 as compared to our six months ended
March 31, 2021. Contract revenue increased by $40.0 million, or 19.2%, to $248.9
million primarily due to an increase in block hours flown and normalized
contractual rates from our major partners compared to the six months ended March
31, 2021. The increase in rates compared to the six months ended March 31, 2021
is attributable to temporarily reduced rates from our major partners impacting
the six months ended March 31, 2021 as a result of lower labor costs due to
government assistance received during the same period. Our pass-through and
other revenue decreased during our six months ended March 31, 2022 by $16.7
million, or 43.0%, to $22.1 million primarily due to a decrease in pass-through
maintenance related to our E-175 fleet and pass-through property taxes.


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Functionnary costs

                                             Six Months Ended March 31,
                                                2022              2021                 Change
Operating expenses ($ in thousands):
Flight operations                          $       90,008      $    74,367     $  15,641          21.0 %
Maintenance                                       106,338          104,637         1,701           1.6 %
Aircraft rent                                      19,020           20,040        (1,020 )        (5.1 )%
General and administrative                         20,438           24,237        (3,799 )       (15.7 )%
Depreciation and amortization                      41,775           41,175           600           1.5 %
Lease termination                                       -            4,508        (4,508 )      (100.0 )%
Impairment of assets held for sale                 39,475                -        39,475         100.0 %
Other operating expenses                            2,657            2,232           425          19.0 %
Government grant recognition                            -          (67,278 )      67,278        (100.0 )%
Total operating expenses                   $      319,711      $   203,918  

$115,793 56.8%

Operating data:
Available seat miles-ASMs (thousands)           3,721,517        3,442,441       279,076           8.1 %
Block hours                                       151,692          143,189         8,503           5.9 %
Average stage length (miles)                          656              664            (8 )        (1.2 )%
Departures                                         75,430           70,614         4,816           6.8 %




Flight Operations. Flight operations expense increased $15.6 million, or 21.0%,
to $90.0 million for our six months ended March 31, 2022 compared to our six
months ended March 31, 2021. The increase was primarily driven by an increase in
pilot and flight attendant wages and lodging expenses as well as pilot
training-related costs.

Maintenance. Aircraft maintenance expense increased $1.7 million, or 1.6%, to
$106.3 million for our six months ended March 31, 2022 compared to our six
months ended March 31, 2021. This increase was primarily driven by an increase
parts, component contracts, labor and other expenses. This increase was
partially offset by a decrease in engine overhaul and C-check expense. Total
pass-through maintenance expenses reimbursed by our major partners decreased by
$10.4 million during our six months ended March 31, 2022 compared to our six
months ended March 31, 2021

The following table shows information regarding our maintenance costs during our six months ended March 31, 2022 and 2021 (in thousands):

                                 Six Months Ended March 31,
                                    2022               2021               Change
Engine overhaul                $        1,647       $    9,462     $  (7,815 )     (82.6 )%
Pass-through engine overhaul            8,425           11,806        (3,381 )     (28.6 )%
C-check                                13,322           11,464         1,858        16.2 %
Pass-through C-check                      489           12,741       (12,252 )     (96.2 )%
Component contracts                    14,249           12,157         2,092        17.2 %
Rotable and expendable parts           15,441           10,382         5,059        48.7 %
Other pass-through                     11,999            6,770         5,229        77.2 %
Labor and other                        40,766           29,855        10,911        36.5 %
Total                          $      106,338       $  104,637     $   1,701         1.6 %




Aircraft Rent. Aircraft rent expense decreased $1.0 million, or 5.1%, to $19.0
million for our six months ended March 31, 2022 compared to our six months ended
March 31, 2021. The decrease is attributable to a decrease in engine rent due to
fewer leased engines and decrease in aircraft rent due to the purchase of a
CRJ-900 aircraft during fiscal 2021 that was previously under lease.

General and Administrative. General and administrative expense decreased $3.8
million, or 15.7%, to $20.4 million for our six months ended March 31, 2022
compared to our six months ended March 31, 2021. The decrease is primarily due
to a decrease in pass-through property taxes. For our six months ended March 31,
2022 and 2021, $3.3 million and $7.4 million, respectively, of our insurance and
property tax expenses were reimbursed by our major partners.


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Depreciation and Amortization. Depreciation and amortization expense increased
$0.6 million, or 1.5%, to $41.8 million for our six months ended March 31, 2022
compared to our six months ended March 31, 2021. The increase is primarily
attributable to an increase in rotable part and spare engine depreciation
expense as well as amortization of deferred heavy maintenance, partially offset
by a decrease in aircraft depreciation expense as a result of a portion of our
fleet being classified as held for sale during the six months ended March 31,
2022.

Lease Termination. Lease termination expense decreased $4.5 million, or 100.0%,
to $0.0 million for our six months ended March 31, 2022 compared to our six
months ended March 31, 2021. This decrease is attributable to the termination
expense resulting from the purchase of a CRJ-900 aircraft during our six months
ended March 31, 2021, which was previously leased from Bombardier Capital.

Impairment of Assets Held for Sale. Impairment of assets held for sale was $39.5
million for our six months ended March 31, 2022 compared to $0.0 million for our
six months ended March 31, 2021. The increase is attributable to impairment
charges on our CRJ aircraft classified as held for sale during the three months
ended March 31, 2022.

Other Operating Expenses. Other operating expenses increased $0.4 million, or
19.0%, to $2.7 million for our six months ended March 31, 2022 compared to our
six months ended March 31, 2021. The increase is primarily due to higher fuel
costs and charges related to the abandonment of a leased facility, partially
offset by lower aircraft cleaning expenses during the six months ended March 31,
2022.

Government Grant Recognition. Recognition of payroll support funds decreased
$67.3 million, or 100.0%, to $0.0 million for our six months ended March 31,
2022 compared to our six months ended March 31, 2021. During the six months
ended March 31, 2021, we recognized $67.3 million in payroll support from the
Payroll Support Program and its extension as an offset to operating expense.
There were no government grant funds received by the Company recognized as an
offset to operating expense during the six months ended March 31, 2022.

Other expenses

Other expense increased $7.6 million, or 44.1%, to $24.8 million for our six
months ended March 31, 2022 compared to our six months ended March 31, 2021. The
increase is primarily attributable to net losses on investments in equity
securities of $8.7 million, partially offset by a decrease in interest expense
of $1.8 million due to lower interest rates on our Treasury Loan and a decrease
in outstanding aircraft principal balances.

Income taxes

The income tax benefit totaled $16.5 million for the six months ended March 31,
2022 as compared to a tax expense of $6.7 million for the six months ended March
31, 2021. The effective tax rate was 22.4% for the six months ended March 31,
2022 compared to 25.3% for the six months ended March 31, 2021. Our ETR during
the six months ended March 31, 2022 was different from the U.S. federal
statutory rate of 21% primarily due to vesting of stock compensation, state
taxes, changes in the valuation allowance against state net operating losses,
and changes in state statutory rates. For the six months ended March 31, 2022,
we used the year-to-date effective tax rate method to determine the interim
income tax benefit because a reliable estimate of the annual effective tax rate
could not be made.

We continue to maintain a valuation allowance on a portion of our net state operating losses in jurisdictions where carryforward periods are shortened or in jurisdictions where our operations have declined significantly from years periods in which the net operating losses were generated.

Caution Regarding Non-GAAP Measures

We present Adjusted EBITDA and Adjusted EBITDAR, which are not recognized
financial measures under GAAP, in this Quarterly Report on Form 10-Q as
supplemental disclosures because our senior management believes that they are
well-recognized valuation metrics in the airline industry that are frequently
used by companies, investors, securities analysts and other interested parties
in comparing companies in our industry.

Adjusted EBITDA. We define Adjusted EBITDA as net profit or loss before interest, income taxes and depreciation and amortization, adjusted for gains and losses on investments, lease termination costs, impairment charges and gains or losses on the extinguishment of debt, including the write-off of associated financing costs.

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Adjusted EBITDAR. We define Adjusted EBITDAR as net profit or loss before interest, income taxes, depreciation and amortization and aircraft rental, adjusted for gains and losses on investments, lease termination costs, expenses impairment and gains or losses on debt extinguishment, including write-off. associated financing costs.

Adjusted EBITDA and Adjusted EBITDAR have limitations as analytical tools. Some
of the limitations applicable to these measures include: (i) Adjusted EBITDA and
Adjusted EBITDAR do not reflect the impact of certain cash charges resulting
from matters we consider not to be indicative of our ongoing operations; (ii)
Adjusted EBITDA and Adjusted EBITDAR do not reflect our cash expenditures, or
future requirements, for capital expenditures or contractual commitments; (iii)
Adjusted EBITDA and Adjusted EBITDAR do not reflect changes in, or cash
requirements for, our working capital needs; (iv) Adjusted EBITDA and Adjusted
EBITDAR do not reflect the interest expense, or the cash requirements necessary
to service interest or principal payments, on our debts; (v) although
depreciation and amortization are non-cash charges, the assets being depreciated
and amortized will often have to be replaced in the future; (vi) Adjusted EBITDA
and Adjusted EBITDAR do not reflect gains and losses on investments, which are
non-cash gains and losses but will occur in periods when there are changes in
the value of our investments in equity securities; and (vii) Adjusted EBITDA and
Adjusted EBITDAR do not reflect any cash requirements for such replacements and
other companies in our industry may calculate Adjusted EBITDA and Adjusted
EBITDAR differently than we do, limiting its usefulness as a comparative
measure. Because of these limitations, Adjusted EBITDA and Adjusted EBITDAR
should not be considered in isolation or as a substitute for performance
measures calculated in accordance with GAAP. In addition, Adjusted EBITDAR
should not be viewed as a measure of overall performance because it excludes
aircraft rent, which is a normal, recurring cash operating expense that is
necessary to operate our business. For the foregoing reasons, each of Adjusted
EBITDA and Adjusted EBITDAR has significant limitations which affect its use as
an indicator of our profitability. Accordingly, you are cautioned not to place
undue reliance on this information.

Adjusted EBITDA and Adjusted EBITDAR

The following table provides a reconciliation of net earnings (loss) to Adjusted EBITDA and Adjusted EBITDAR (in thousands):

                                            Three Months Ended March 31,    

Semester completed March, 31st,

                                              2022                 2021               2022               2021
Reconciliation:
Net income (loss)                        $       (42,783 )     $       5,689     $      (57,057 )     $   19,807
Income tax expense (benefit)                     (12,382 )             1,890            (16,494 )          6,711
Income (loss) before taxes               $       (55,165 )     $       7,579     $      (73,551 )     $   26,518
Loss on investments, net                           2,261                   -              8,723                -
Adjustments(1)(2)(3)(4)                           39,843               4,508             39,843            3,558
Adjusted income (loss) before taxes              (13,061 )            12,087            (24,985 )         30,076
Interest expense                                   8,120               8,755             16,050           17,837
Interest income                                      (42 )               (79 )              (93 )           (205 )
Depreciation and amortization                     20,747              20,705             41,775           41,175
Adjusted EBITDA                          $        15,764       $      41,468     $       32,747       $   88,883
Aircraft rent                                      9,434               9,992             19,020           20,040
Adjusted EBITDAR                         $        25,198       $      51,460     $       51,767       $  108,923


(1) Includes an adjustment for gain on extinguishment of debt of $1.0 million

related to the repayment of certain aircraft debt during our six months ended

March 31, 2021.

(2) Includes an adjustment for lease termination costs of $4.5 million during

our three and six months ended March 31, 2021 related to the purchase of

The CRJ-900 aircraft that was previously leased to Bombardier Capital.


    (3) Includes adjustment for impairment charges of $39.5 million during our
        three and six months ended March 31, 2022 related to certain of our
        aircraft which are classified as held for sale.

(4) Includes adjustment for impairment of right-of-use operating leases

        charges of $0.4 million during our three and six months ended March 31,
        2022 related to the abandonment of one of our leased facilities.

Cash and capital resources

We believe that cash flow from operating activities coupled with existing cash
and cash equivalents, existing credit facilities, and financing arrangements
will be adequate to fund our operating and capital needs, as well as enable us
to maintain compliance with our various debt and other contractual agreements,
through at least the next 12 months. To the extent that results or events differ
from our financial projections or business plans, our liquidity may be adversely
impacted.


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Sources and uses of species

We require cash to fund our operating expenses and working capital requirements,
including outlays for capital expenditures, aircraft pre-delivery payments,
maintenance, aircraft rent, and debt service obligations, including principal
and interest payments. Our cash needs vary from period to period primarily based
on the timing and costs of significant maintenance events. Our principal sources
of liquidity are cash on hand, cash generated from operations and funds from
external borrowings.

We believe that the main factors that could affect our internal and external sources of cash include:

• Factors that affect our results of operations and cash flow, including

the impact on our business and operations due to changing demand

        for our services, competitive pricing pressures, and our ability to
        achieve further reductions in operating expenses; and

• Factors that affect our access to bank financing and debt and equity

financial markets which could affect our ability to obtain necessary financing

on acceptable terms or to respond to business opportunities and

changes as they occur, including changes in interest rates,

macroeconomic conditions, sudden reductions in the general availability of

loans from banks or the related increase in the cost of obtaining

funding and our ability to maintain compliance with commitments under our

debt agreements in effect from time to time.


Our ability to service our long-term debt obligations, including our equipment
notes, to remain in compliance with the various covenants contained in our debt
agreements and to fund working capital, capital expenditures and business
development efforts will depend on our ability to generate cash from operating
activities, which is subject to, among other things, our future operating
performance, as well as other factors, some of which may be beyond our control.

If we fail to generate sufficient cash from operations, we may need to raise
additional equity or borrow additional funds to achieve our longer-term
objectives. There can be no assurance that such equity or borrowings will be
available or, if available, will be at rates or prices acceptable to us.

During the ordinary course of business, we evaluate our cash requirements and,
if necessary, adjust operating and capital expenditures to reflect the current
market conditions and our projected demand. Our capital expenditures are
primarily directed toward our aircraft fleet and flight equipment including
spare engines. Our capital expenditures, net of purchases of rotable spare parts
and aircraft and spare engine financing for the six months ended March 31, 2022
were approximately 0.9% of our revenue during the same period. We expect to
incur capital expenditures to support our business activities. Future capital
expenditures may be impacted by events and transactions that are not currently
forecasted.

As of March 31, 2022, our principal sources of liquidity were cash and cash
equivalents of $75.9 million. In addition, we had restricted cash of $3.4
million as of March 31, 2022. As of March 31, 2022, we had $648.5 million in
secured indebtedness incurred primarily in connection with our financing of 84
total aircraft and related equipment. As of March 31, 2022, we had
$108.2 million of current debt, excluding finance leases, and $540.3 million of
long-term debt excluding finance leases.

Restricted cash

As of March 31, 2022, we had $3.4 million in restricted cash. We have an
agreement with a financial institution for a letter of credit facility and to
issue letters of credit for particular airport authorities, worker's
compensation insurance, property and casualty insurance and other business needs
as required in certain lease agreements. Pursuant to the term of this agreement,
$3.4 million of outstanding letters of credit are required to be collateralized
by amounts on deposit.


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Cash flow

The following table presents information regarding our cash flows for each of the six months ended March 31, 2022 and 2021 (in thousands):

                                                            Six Months Ended March 31,
                                                             2022                2021
Net cash provided by operating activities               $        9,958       $      78,574
Net cash used in investing activities                          (30,004 )           (11,675 )
Net cash used in financing activities                          (24,574 )    

(18,522 ) Net increase (decrease) in cash, cash equivalents and restricted cash

                                                (44,620 )    

48,377

Cash, cash equivalents and restricted cash at
beginning of period                                            123,867      

102,841

Cash, cash equivalents and restricted cash, end of period

                                                  $       79,247      

$151,218

Net cash from operating activities

Our primary source of cash from operating activities is cash collections from
our major partners pursuant to our CPAs and FSA. Our primary uses of cash from
operating activities are for maintenance costs, personnel costs, operating lease
payments, and interest payments.

During our six months ended March 31, 2022, we had cash flow provided by
operating activities of $10.0 million. We had net loss of $57.1 million adjusted
for the following significant non-cash items: depreciation and amortization of
$41.8 million, stock-based compensation of $1.4 million, net losses on
investments in equity securities of $8.7 million, deferred income taxes of
$(16.7) million, amortization of deferred credits of $(0.4) million,
amortization of debt discount and financing costs and accretion of interest of
$6.6 million, and impairment of assets held for sale of $39.5 million. We had a
net change of $(14.8) million within other net operating assets and liabilities
largely driven by decreases in accrued expenses and other liabilities, deferred
revenue, and operating lease liabilities and an increase in accounts receivable,
partially offset by an increase in accounts payable during our six months ended
March 31, 2022.

During our six months ended March 31, 2021, we had cash flow provided by
operating activities of $78.6 million. We had net income of $19.8 million
adjusted for the following significant non-cash items: depreciation and
amortization of $41.2 million, stock-based compensation of $1.7 million,
deferred income taxes of $6.6 million, amortization of deferred credits of
$(2.3) million, amortization of debt discount and financing costs and accretion
of interest of $5.0 million, and loss on lease termination of $4.5 million. We
had a net change of $2.9 million within other net operating assets and
liabilities largely driven by increases in accounts payable and deferred
revenue, partially offset by a decrease in accrued expenses and other
liabilities during our six months ended March 31, 2021.

Net cash used in investment activities

Our investing activities generally consist of capital expenditures for aircraft
and related flight equipment, deposits paid or returned for equipment and other
purchases, and strategic investments.

During our completed six months March 31, 2022net cash used in investing activities totaled $30.0 million. We have invested $22.9 million in capital expenditure consisting primarily of spare engines, rotating parts and other equipment, and $6.9 million in equipment payments and other deposits. We invested in total $0.2 million in equity securities of a private company.

During our six months ended March 31, 2021, net cash flow used in investing
activities totaled $11.7 million. We invested $2.9 million in inventory, $1.6
million in aircraft purchases, $0.1 million in vehicles, $0.7 million in tools
and other equipment and miscellaneous projects and $6.9 million in payments of
equipment and other deposits offset by $0.5 million from the return of lease and
equipment deposits.

Net cash used in fundraising activities

Our financing activities generally consist of borrowings, principal repayments of debt, payment of debt financing costs, share repurchases, and proceeds received from the issuance of common shares in connection with our ESPP.

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During our completed six months March 31, 2022the net cash flow used in financing activities was $24.6 million. We received $30.8 million proceeds from long-term debt. We have done $53.1 million principal repayments on long-term debt and paid $2.4 million debt financing costs. We received $0.2 million proceeds from the issuance of common stock under our ESPP.

During our six months ended March 31, 2021, net cash flow used in financing
activities was $18.5 million. We received $195.0 million of proceeds from the
Treasury Loan. We made $212.0 million of principal repayments on long-term debt.
We paid $1.3 million of costs related to debt financing.

Critical accounting estimates

We prepare our condensed consolidated financial statements in accordance with
GAAP. In doing so, we must make estimates and assumptions that affect our
reported amounts of assets, liabilities, revenue and expenses, as well as
related disclosure of contingent assets and liabilities. To the extent that
there are material differences between these estimates and actual results, our
financial condition or results of operations would be affected. We base our
estimates on past experience and other assumptions that we believe are
reasonable under the circumstances, and we evaluate these estimates on an
ongoing basis. We refer to accounting estimates of this type as critical
accounting estimates.

The accompanying discussion and analysis of our financial condition and results
of operations is based upon our unaudited condensed consolidated interim
financial statements included elsewhere in this Form 10-Q. We believe certain of
our accounting estimates and policies are critical to understanding our
financial position and results of operations. There have been no material
changes to the critical accounting estimates as explained in Part 1, Item 7 of
our Annual Report on Form 10-K for the fiscal year ended September 30, 2021
under the heading "Critical Accounting Estimates."

Recently published accounting pronouncements

A description of recently issued accounting pronouncements that may potentially
impact our financial position and results of operations is disclosed in Note 3:
"Recent Accounting Pronouncements" to our unaudited condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q.

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