Executive Summary / Key Takeaways

• Strategic Transformation Underway: Mesa Air Group is undergoing a profound strategic pivot, culminating in a proposed merger with Republic Airways, aimed at creating a leading regional airline and solidifying its position within the United Airlines ecosystem.
• Deepened United Partnership: The company has transitioned from a loss-making American Airlines contract to an exclusive, profitable Capacity Purchase Agreement with United , backed by significant financial support and a strategic equity stake from United .
• Aggressive Pilot Pipeline Development: Mesa is tackling the industry-wide pilot shortage through innovative programs like Mesa Pilot Development, a restructured United Aviate program, and direct-entry captain incentives, crucial for restoring aircraft utilization.
• Financial Turnaround in Sight: While recent nine-month results show substantial losses due to asset disposals and impairments, the latest quarter indicates a significant operational improvement, with management targeting 7-10% pretax margins at full utilization by the end of fiscal year 2024.
• High-Stakes Execution: The investment thesis hinges on successful integration of the Republic merger, effective resolution of pilot supply constraints, and sustained operational execution to translate strategic realignments into consistent profitability.

A Pivotal Transformation in Regional Aviation

Mesa Air Group, Inc. (MESA), a long-standing regional air carrier founded in 1982, is at the precipice of a significant transformation. Historically, Mesa has operated under Capacity Purchase Agreements (CPAs) with major airlines, providing scheduled passenger services that are critical for connecting smaller communities to larger hubs. The company's business model, where the major airline controls route selection, pricing, and fuel costs, insulates Mesa from certain market volatilities but ties its fortunes closely to its partners.

The regional airline industry is a complex ecosystem, characterized by intense competition and high barriers to entry due to regulatory hurdles and substantial capital requirements. Mesa operates alongside larger, more diversified regional players like SkyWest (SKYW), as well as low-cost carriers such as Allegiant (ALGT) and Frontier (ULCC), and full-service airlines like JetBlue (JBLU). While Mesa's established partnerships and aircraft leasing expertise offer competitive advantages, its smaller scale and dependence on a few partners present vulnerabilities compared to the broader operational efficiencies and market reach of its larger counterparts.

Mesa is also strategically positioning itself for the future of aviation through co-investments with United Airlines in electric aircraft partnerships, including Archer for eVTOL aircraft and Heart Aerospace for fully electric models. These initiatives, while not current revenue drivers, represent a forward-looking "technological differentiation" aimed at eco-friendly aviation. For instance, eVTOLs like Archer (ACHR)'s Midnight, unveiled in November, are designed for short-distance trips between regional airports and city centers, potentially offering a sustainable and efficient mode of transport. This proactive stance aims to secure a foothold in emerging markets, potentially enhancing Mesa's long-term competitive moat in environmentally sensitive regions like Europe, where its FLYHT joint venture is also pursuing an operating certificate.

Strategic Realignment and the Republic Merger

The company's current strategic narrative is defined by a decisive pivot from a period of significant operational and financial distress. By the fiscal fourth quarter of 2022, Mesa's contract with American Airlines had become a "loss-making operation," incurring approximately $5 million per month due to uncompensated pilot wage increases and utilization penalties. This untenable situation prompted a strategic realignment, culminating in the wind-down of the American Airlines contract by April 2023.

Concurrently, Mesa deepened its long-standing relationship with United Airlines . A new five-year CPA with United , finalized in December 2022, now covers up to 38 CRJ-900s, effectively transferring the flying previously performed for American (AAL). This new CPA is structured to be profitable, with United agreeing to compensate Mesa for higher pilot wage rates. United 's commitment was further underscored by substantial financial support, including a $41.2 million liquidity facility, the purchase of 30 spare engines for $80 million (generating over $50 million in net cash proceeds), and a $25 million loan (with $15 million forgivable upon performance targets). United also acquired a 10% equity stake and a seat on Mesa's Board, signaling a deeply integrated strategic alliance.

A pivotal development occurred on April 4, 2025, when Mesa entered into a definitive Merger Agreement with Republic Airways Holdings, Inc. This all-stock transaction, where each Republic share converts into 584.90 Mesa shares, aims to combine the two entities to create a "leading publicly-traded regional airline company." A concurrent Three Party Agreement with United and Republic outlines asset disposals, liability extinguishments, and a primary issuance of Mesa Common Stock, further solidifying the strategic and financial underpinnings of the combined entity. This merger is a critical move to achieve greater scale, operational synergies, and a more robust competitive posture in the regional aviation sector.

Operational Focus: Tackling the Pilot Shortage

Mesa's operational strategy is laser-focused on overcoming the persistent industry-wide pilot shortage, particularly the "captain crunch" caused by an imbalance of captains and first officers. This shortage, exacerbated by the 1,500-hour rule, has severely constrained Mesa's aircraft utilization, with the company flying at approximately 70% of its full capacity in Q3 2023.

To address this, Mesa has implemented a multi-pronged approach to pilot development and retention:

• Mesa Pilot Development (MPD) Program: This program, launched in Inverness, Florida, and expanding to a second Arizona location, offers a "cost creative path" for pilots to accumulate the 1,500 flight hours required for regional airline qualification. It has successfully graduated initial cohorts, feeding directly into Mesa's training pipeline.
• United Aviate Program: This program has been restructured to require pilots to have two years of captain experience before transitioning to United , ensuring a steady supply of upgradable first officers for Mesa. With approximately 85% of Mesa's pilots enrolled in Aviate, this provides a clear career path and strong retention incentive.
• Direct-Entry Captain Program: Mesa offers a compelling package for qualified candidates, including a $110,000 sign-on bonus and a 24-month flow to United Airlines .

As of June 30, 2025, Mesa operated a fleet of 60 Embraer 175 (E-175) aircraft under its United CPA, with a commitment to an entirely E-175 fleet by March 2025. United is reimbursing Mesa up to $14 million for transition expenses related to this fleet optimization. The company is also actively divesting surplus CRJ-900 airframes and engines, with recent sales generating proceeds used to pay down debt. While Mesa previously operated a cargo business for DHL (DPW), this Flight Services Agreement terminated in March 2024, as per the latest 10-Q filing.

Financial Performance and Liquidity: A Turnaround in Progress

Mesa's financial performance reflects a company in the midst of a significant, albeit challenging, transformation. For the three months ended June 30, 2025, Mesa reported an improved operating loss of $0.1 million, a substantial improvement from a $9.0 million operating loss in the prior year period. Net income for the quarter reached $20.9 million, a significant turnaround from a net loss of $19.9 million in Q3 fiscal 2024. This quarterly improvement was driven by decreased pilot training and wages (down 19.6% to $36.6 million), lower depreciation (down 65.3% to $3.4 million), and reduced asset impairment charges. Contract revenue, however, decreased 26.8% year-over-year to $69.9 million due to fewer aircraft under contract, partially offset by a 50.3% increase in pass-through and other revenue to $22.8 million.

Despite the positive quarterly shift, the nine months ended June 30, 2025, tell a more challenging story. The operating loss worsened to $168.2 million from $48.8 million in the prior year, and the net loss expanded to $152.3 million from $66.1 million. These year-to-date losses were primarily driven by a $54.4 million loss on the sale of 18 E-175 aircraft and $111.8 million in impairment charges related to held-for-sale assets and the write-down of 10 E-175 aircraft.

Comparing Mesa's latest TTM financial ratios to its competitors highlights the depth of its recent challenges. Mesa's TTM Gross Profit Margin of 12.32% significantly lags SkyWest's 22%, Allegiant's 62%, Frontier's 51%, and JetBlue's 50%. Similarly, Mesa's TTM Operating Profit Margin of -56.32% and Net Profit Margin of -43.66% demonstrate deep unprofitability, contrasting sharply with SkyWest's 14% operating and 9% net margins, and even the more volatile but generally less negative margins of Allegiant (ALGT), Frontier (ULCC), and JetBlue (JBLU). Mesa's TTM Debt/Equity ratio of -2.94 also signals a precarious financial structure, indicating negative equity, unlike its peers who maintain positive, albeit sometimes high, debt-to-equity ratios.

To address liquidity concerns, Mesa has secured crucial waivers for minimum liquidity requirements under its United Revolving Credit Facility through March 31, 2026. The company is actively reducing its debt burden through asset sales, including 23 GE CF34-8C engines for $16.3 million and, subsequent to Q3 2025, five CRJ-900 airframes and eight GE engines for $11.7 million, all directed towards paying down its UST Loan. With $84.7 million of principal debt payments due within the next twelve months, Mesa plans to meet these obligations through existing cash, ongoing operations, and further asset disposals. The auditor's decision not to issue a qualified opinion underscores confidence in these comprehensive restructuring efforts.

Outlook and Risks: A Path Fraught with Challenges and Opportunities

Mesa is not providing specific full-year financial guidance due to the ongoing uncertainties inherent in its transformation. However, management has outlined clear operational targets and expectations. The company aims to reach United 's target utilization by the end of fiscal year 2024, projecting pretax margins of 7-10% in its base business at that level, or 5-8% consistently when flying aircraft "north of 10, 10.5 hours a day." This ambitious goal requires approximately 150 more pilots, primarily captains, and is supported by projected sequential block hour increases of 4-6% per quarter in fiscal year 2024.

The path to achieving these targets is not without significant risks. The persistent pilot shortage, particularly the "captain crunch" and the impact of the 1,500-hour rule, remains a primary concern. While Mesa's pilot development programs are robust, the volatility of attrition and the time required for training new captains could delay the return to full utilization. The company's heavy dependence on the United CPA, which accounts for approximately 98% of its revenue, also presents a concentration risk. Any failure to meet operational performance targets or disputes over billed amounts could materially impact financial results.

Furthermore, the proposed merger with Republic Airways introduces integration risks, including the need for stockholder and regulatory approvals, and the potential for material breaches of covenants. While the merger promises scale and synergies, its successful execution is critical. Mesa's substantial debt obligations and the need to maintain covenant compliance, despite recent waivers, remain a financial overhang. Lastly, Mesa's commitments to electric aircraft partnerships are subject to future agreements and the successful transfer of obligations, highlighting the long-term, speculative nature of these investments.

Conclusion

Mesa Air Group stands at a critical juncture, having undertaken a bold and comprehensive transformation to address past financial and operational headwinds. The strategic pivot to an exclusive, deepened partnership with United Airlines , coupled with the proposed merger with Republic Airways, lays a foundational framework for future growth and stability. The company's aggressive investment in pilot development programs represents a crucial operational "technology" designed to unlock aircraft utilization and drive profitability.

While recent nine-month financial results underscore the significant costs of this transition, the latest quarterly performance and management's ambitious margin targets signal a potential turnaround. The success of this high-stakes endeavor hinges on Mesa's ability to effectively execute its pilot pipeline strategy, seamlessly integrate the Republic merger, and maintain the strong, supportive relationship with United (UAL). For discerning investors, Mesa represents a compelling, albeit high-risk, turnaround story, where strategic realignment and operational execution are paramount to realizing its long-term value proposition in a dynamic regional aviation landscape.