United Airlines will replace up to thirty-eight E175s in the United Express fleet with the same number of CRJ900s from its regional partner Mesa Airlines (YV, Phoenix Sky Harbor), which starts flying exclusively for United once its capacity provider agreement (CPA) with American Airlines ends on April 3, 2023.
This is according to an internal memo from United's senior vice president Bryan Quigley, seen by ch-aviation. It implied the arrangement was aimed at compliance with so-called scope clauses in United's labour agreement with pilot union Air Line Pilots Association, International (ALPA) that limits the number and size of aircraft that an airline's regional airline affiliate may fly. Under the United Pilot Agreement, United Express operations are limited to 37-seater turboprops, 50-seater aircraft, and a limited number of 70 and 76-seater aircraft.
"Mesa Airlines recently announced changes in its operation that mean we will replace up to 38 Embraer E175 aircraft in the United Express fleet with up to 38 of their Bombardier Aerospace CRJ900 aircraft. Mesa will begin to wind down their operation with American Airlines on March 1, 2023, and we will see them entering service as United Express aircraft at that time," reads the memo dated December 30, 2022. "It is important to note that there is no change to our scope provisions in the United Pilot Agreement. United will remove a corresponding number of Embraer E175 aircraft from its regional fleet."
According to Quigley, Mesa's CRJ900s would initially operate from United's hubs at Houston Intercontinental and Denver International this spring as capabilities allowed. They would help United grow service to small and mid-sized markets which have lost service due to a severe pilot shortage and feed traffic to United's growing mainline operation.
In its annual report filed on December 29, 2022, Mesa confirmed it would fly thirty-eight CRJ900s on behalf of United, starting in March of 2023, using all its crew and maintenance locations currently operated for American Airlines in Phoenix Sky Harbor, Dallas/Fort Worth, El Paso and Louisville International, as well as opening a CRJ900 crew base in Houston and a pilot base in Denver. This followed the finalisation on December 27, 2022, of an amendment and restatement of its CPA with United.
As part of this agreement, United will pay Mesa increased block-hour rates to cover pilot wage increases of 118% to 172% by Mesa from September 2022 through September 2025. United will receive 10% equity in Mesa and a seat on the Mesa board.
Mesa and United also finalised an agreement for a USD41.2 million liquidity facility, including the refinancing of USD15.7 million outstanding under a CIT Bank revolving credit facility maturing December 31, 2022, and an additional USD25.5 million term loan, of which USD15 million was forgivable if Mesa achieved certain aircraft utilisation thresholds. The collateral for the loan was a combination of aircraft parts and a pledge of Mesa's equity investment in Archer Aviation (Palo Alto) and Heart Aerospace Incorporated. United also agreed to purchase thirty General Electric GE-CF34-8 spare engines from Mesa for USD80 million in 1Q23.
For the fiscal year that ended September 30, 2022, Mesa reported a net loss of USD182.7 million, compared to a net income of USD16.6 million the year before. Still, total operating revenues of USD531 million represented a 5.4% increase compared to USD503.6 million ending September 30, 2021.
The airline blamed the pilot shortage and attrition plaguing the regional sector and increasing pilot wages for its financial results. "As a result of pilot shortage and attrition, we produced fewer block hours to generate revenues and incurred penalties for operational shortfalls under our CPAs. These challenges negatively impacted the company's financial results, highlighted by operating cashflows of USD13.4 million and a net loss of USD182.7 million, including a non-cash impairment charge related to the company's American asset group of USD171.8 million. These conditions and events raised financial concerns about our ability to continue to fund our operations and meet debt obligation in the next 12 months."
Measures to address the situation included:
- Pay hikes to reduce attrition and attract new pilots;
- Termination of the American Airlines CPA to eliminate financial penalties;
- The United CPA would increase block hour revenues to cover increased pilot wages and add CRJ900s currently operating under the American CPA;
- Mesa agreed with United to sell eighteen CRJ700s, 10 of which were sold for USD36.8 million after the retirement of debt. The remaining eight were to be sold for USD8 million in January 2023;
- The airline sold eleven CRJ900s and one CRJ200 to an unnamed third party to raise capital and retire debt. The net proceeds are expected to generate USD8.2 million by March 31, 2023, after the retirement of debt;
- Mesa agreed to sell 30 spare engines to United for USD80 million and would retire debt of USD26.4 million;
- The airline established a new line of credit totalling USD25.5 million to draw upon when needed;
- It agreed with the Export Development Bank of Canada (EDC) to reduce debt and interest payments on seven CRJ900s between January 2023 to December 2024, yielding USD14 million of liquidity;
- Junior noteholder Mitsubishi Regional Jets (MHIRJ) agreed to reduce its loan amount by USD5 million;
- RASPRO Trust 2005 agreed to reduce by USD25 million the buyout pricing of fifteen CRJ900s at lease termination;
- Major spending on aircraft and engine maintenance was delayed/deferred;
- The Mesa Pilot Development Programme is to increase the pilot supply to Mesa, which is to purchase up to 29 Pipistrel Aircraft (Ajdovščina) Alpha Trainer 2 aircraft to accelerate the Federal Aviation Administration's (FAA) 1,500 flight hour requirement;
- The United Aviate programme has been expanded to include all pilots flying for Mesa, enhancing the airline's ability to attract and retain pilots.
As of September 30, 2022, Mesa had USD599.7 million in total debt secured primarily with aircraft and engines. It had USD97.2 million in short-term debt due within the next 12 months. "We plan to meet these obligations with our cash on hand, ongoing cash flows from our operations, as well as the liquidity created from our plans to sell the remaining eight CRJ700 aircraft, the eleven CRJ900 aircraft, and one CRJ200 aircraft, refinance our revolving credit facility with CIT [Bank], and further amend our CPAs. If our plans are not realised, we will be required to explore additional opportunities to create liquidity by refinancing and deferring repayment of our principal maturity payments that are due within the next twelve months."
According to its financial report, the airline's fleet on September 30, 2022, comprised 158 aircraft making 306 daily departures. It also leased two aircraft to a third party as of September 30, 2022. The fleet makeup was as follows:
- CRJ900S: Forty-two CRJ900s under its CPA with American Airlines and eleven CRJ900s as operational spares;
- E175s: Twenty ERJ 170-200LLs and sixty E175s under its CPA with United Airlines. As part of its amended and restated United CPA, Mesa agreed to extend the term of forty-two E175s owned by United for an additional five years, which would expire between 2024 and 2028. United may extend the term of these aircraft for four additional three-year increments. In addition, 18 of the E175s owned by Mesa operating under its United CPA expire between January 2028 and November 2028. In the current period, Mesa added twenty E175LLs under the United CPA with a term of 12 years.
- B737 freighters: Three B737-400(F)s under its FSA with DHL Express;
- CRJ700s: Ten CRJ700s, eight classified as assets held for sale, and the remaining two aircraft are leased to a third party.
- CRJ200s: One CRJ200 classified as held for sale during the fiscal year 2022.
The CPA with American Airlines accounted for 45% of Mesa's total revenue for the fiscal years ending September 30, 2022 and 2021, respectively. The CPA with United Airlines accounted for 48% and 52% of its revenue during the same periods. About 5% was earned from aircraft leases to a third party and 2% from the DHL FSA.