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. OverviewMesa Airlines is a regional air carrier providing scheduled passenger service to 110 cities in 40 states, theDistrict of Columbia , theBahamas , andMexico as well as cargo services out ofCincinnati/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 withAmerican Airlines, Inc. ("American") andUnited Airlines, Inc. ("United"), and a Flight Services Agreement ("FSA") withDHL 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, includingDallas ,Houston ,Phoenix andWashington -Dulles. As ofMarch 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 ofMarch 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 endedMarch 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 endedMarch 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 overallU.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 toGoJet 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
We had operating loss of$44.8 million in our three months endedMarch 31, 2022 compared to operating income of$16.8 million in our three months endedMarch 31, 2021 . In our three months endedMarch 31, 2022 , we had net loss of$42.8 million compared to net income of$5.7 million in our three months endedMarch 31, 2021 . Our operating results for the three months endedMarch 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 endedMarch 31, 2022 , compared to$56.0 million during the three months endedMarch 31, 2021 . Operating Revenues Three Months Ended March 31, 2022 2021 Change Operating revenues ($ 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. 26
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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 endedMarch 31, 2022 as compared to our three months endedMarch 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 endedMarch 31, 2021 . The increase in rates compared to the three months endedMarch 31, 2021 is attributable to temporarily reduced rates from our major partners impacting the three months endedMarch 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 endedMarch 31, 2022 , decreased 11.3% compared to the three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 compared to our three months endedMarch 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 endedMarch 31, 2022 compared to our three months endedMarch 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 endedMarch 31, 2022 compared to our three months endedMarch 31, 2021 . 27
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The following table shows information regarding our maintenance costs during the three months ended
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 endedMarch 31, 2022 compared to our three months endedMarch 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 endedMarch 31, 2022 compared to our three months endedMarch 31, 2021 . The decrease is primarily due to a decrease in property taxes. For our three months endedMarch 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 endedMarch 31, 2022 compared to our three months endedMarch 31, 2021 . Lease Termination. Lease termination expense decreased$4.5 million , or 100.0%, to$0.0 million for our three months endedMarch 31, 2022 compared to our three months endedMarch 31, 2021 . This decrease is attributable to the termination expense recorded during our three months endedMarch 31, 2021 resulting from the purchase of a CRJ-900 aircraft, which was previously leased fromBombardier Capital . Impairment of Assets Held for Sale. Impairment of assets held for sale was$39.5 million for our three months endedMarch 31, 2022 compared to$0.0 for our three months endedMarch 31, 2021 . The increase is attributable to impairment charges on our CRJ aircraft classified as held for sale during the three months endedMarch 31, 2022 . Other Operating Expenses. Other operating expenses decreased$0.3 million , or 27.2%, to$0.7 million for our three months endedMarch 31, 2022 compared to our three months endedMarch 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 endedMarch 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 endedMarch 31, 2022 compared to our three months endedMarch 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 endedMarch 31, 2021 . There were no government grant funds received by the Company recognized as an offset to operating expense during the three months endedMarch 31, 2022 .
Other expenses
Other expense increased$1.2 million , or 13.4%, to$10.4 million for our three months endedMarch 31, 2022 , compared to our three months endedMarch 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. 28
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Income taxes
Our effective tax rate (ETR) from continuing operations was 22.4% for the three months endedMarch 31, 2022 and 24.9% for the three months endedMarch 31, 2021 . Our ETR during the three months endedMarch 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 endedMarch 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 ofSeptember 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
We had operating loss of$48.7 million in our six months endedMarch 31, 2022 compared to operating income of$43.7 million in our six months endedMarch 31, 2021 . In our six months endedMarch 31, 2022 , we had net loss of$57.1 million compared to net income of$19.8 million in our six months endedMarch 31, 2021 . Our operating results for the six months endedMarch 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 endedMarch 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 endedMarch 31, 2022 , compared to$67.3 million during the six months endedMarch 31, 2021 . Operating Revenues Six Months Ended March 31, 2022 2021 Change Operating revenues ($ 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 endedMarch 31, 2022 as compared to our six months endedMarch 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 endedMarch 31, 2021 . The increase in rates compared to the six months endedMarch 31, 2021 is attributable to temporarily reduced rates from our major partners impacting the six months endedMarch 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 endedMarch 31, 2022 by$16.7 million , or 43.0%, to$22.1 million primarily due to a decrease in pass-through maintenance related to our E-175 fleet and pass-through property taxes. 29
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Functionnary costs
Six Months Ended March 31, 2022 2021 Change Operating expenses ($ 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
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 endedMarch 31, 2022 compared to our six months endedMarch 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 endedMarch 31, 2022 compared to our six months endedMarch 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$10.4 million during our six months endedMarch 31, 2022 compared to our six months endedMarch 31, 2021
The following table shows information regarding our maintenance costs during our six months ended
Six Months Ended March 31, 2022 2021 Change Engine overhaul$ 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 endedMarch 31, 2022 compared to our six months endedMarch 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 endedMarch 31, 2022 compared to our six months endedMarch 31, 2021 . The decrease is primarily due to a decrease in pass-through property taxes. For our six months endedMarch 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. 30 -------------------------------------------------------------------------------- Depreciation and Amortization. Depreciation and amortization expense increased$0.6 million , or 1.5%, to$41.8 million for our six months endedMarch 31, 2022 compared to our six months endedMarch 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 endedMarch 31, 2022 . Lease Termination. Lease termination expense decreased$4.5 million , or 100.0%, to$0.0 million for our six months endedMarch 31, 2022 compared to our six months endedMarch 31, 2021 . This decrease is attributable to the termination expense resulting from the purchase of a CRJ-900 aircraft during our six months endedMarch 31, 2021 , which was previously leased fromBombardier Capital . Impairment of Assets Held for Sale. Impairment of assets held for sale was$39.5 million for our six months endedMarch 31, 2022 compared to$0.0 million for our six months endedMarch 31, 2021 . The increase is attributable to impairment charges on our CRJ aircraft classified as held for sale during the three months endedMarch 31, 2022 . Other Operating Expenses. Other operating expenses increased$0.4 million , or 19.0%, to$2.7 million for our six months endedMarch 31, 2022 compared to our six months endedMarch 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 endedMarch 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 endedMarch 31, 2022 compared to our six months endedMarch 31, 2021 . During the six months endedMarch 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 endedMarch 31, 2022 .
Other expenses
Other expense increased$7.6 million , or 44.1%, to$24.8 million for our six months endedMarch 31, 2022 compared to our six months endedMarch 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 endedMarch 31, 2022 as compared to a tax expense of$6.7 million for the six months endedMarch 31, 2021 . The effective tax rate was 22.4% for the six months endedMarch 31, 2022 compared to 25.3% for the six months endedMarch 31, 2021 . Our ETR during the six months endedMarch 31, 2022 was different from theU.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 endedMarch 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 EndedMarch 31 ,
Semester completed
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
related to the repayment of certain aircraft debt during our six months ended
(2) Includes an adjustment for lease termination costs of
our three and six months ended
The CRJ-900 aircraft that was previously leased to
(3) Includes adjustment for impairment charges of$39.5 million during our three and six months endedMarch 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 endedMarch 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. 32
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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 endedMarch 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 ofMarch 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 ofMarch 31, 2022 . As ofMarch 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 ofMarch 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 ofMarch 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,$3.4 million of outstanding letters of credit are required to be collateralized by amounts on deposit. 33
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Cash flow
The following table presents information regarding our cash flows for each of the six months ended
Six Months Ended March 31, 2022 2021 Net cash provided by operating activities$ 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
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 endedMarch 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 endedMarch 31, 2022 . During our six months endedMarch 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 endedMarch 31, 2021 .
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
During our six months endedMarch 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.
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
During our six months endedMarch 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 endedSeptember 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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