MESA AIR GROUP INC - Annual Report: 2001 (Form 10-K)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For the Fiscal Year Ended September 30, 2001

Commission File Number 0-15495

Mesa Air Group, Inc.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      The aggregate market value of the voting stock held by non-affiliates of the Registrant as of December 11, 2001: Common Stock, no par value: $227.4 million.

      On December 11, 2001, the Registrant had outstanding 33,048,988 shares of Common Stock.

Documents Incorporated by Reference

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MESA AIR GROUP, INC.

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PART I

Forward-Looking Statements

      This Form 10-K contains certain statements including, but not limited to, information regarding the replacement, deployment, and acquisition of certain numbers and types of aircraft, and projected expenses associated therewith; costs of compliance with FAA regulations and other rules and acts of Congress; the passing of taxes, fuel costs, inflation, and various expenses to the consumer; the relocation of certain operations of Mesa; the resolution of litigation in a favorable manner and certain projected financial obligations. These statements, in addition to statements made in conjunction with the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions, are forward-looking statements within the meaning of the Safe Harbor provision of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These statements relate to future events or the future financial performance of Mesa and only reflect Management’s expectations and estimates. The following is a list of factors, among others, that could cause actual results to differ materially from the forward-looking statements: changing business conditions in certain market segments and industries; changes in Mesa’s code sharing relationships; the inability of either America West or US Airways to pay its obligations under the code share agreements; an increase in competition along the routes Mesa operates or plans to operate; material delays in completion by the manufacturer of the ordered and yet-to-be delivered aircraft; changes in general economic conditions; changes in fuel price; changes in regional economic conditions; Mesa’s relationship with employees and the terms of future collective bargaining agreements; and the impact of current and future laws, additional terrorist attacks; Congressional investigations, and governmental regulations affecting the airline industry and Mesa’s operations; bureaucratic delays; amendments to existing legislation; consumers unwilling to incur greater costs for flights; unfavorable resolution of negotiations with municipalities for the leasing of facilities; and risks associated with litigation outcomes. One or more of these or other factors may cause Mesa’s actual results to differ materially from any forward-looking statement. Mesa is not undertaking any obligation to update any forward - looking statements contained in this Form 10-K.

Item 1.     Business

      The terrorist attacks of September 11, 2001 had a significant impact on the operations of the Company. Following the attacks, the air transportation system was temporarily shut down, resulting in the cancellation of more than 3,300 Mesa Air Group flights. The cancelled flights and loss of consumer confidence in the airline industry resulted in lost revenue from these cancelled flights and lower load factors and revenue yield on flights operated. The Company was also impacted by certain costs that could not be avoided during the temporary shutdown.

      As a result of the large financial losses attributed to the terrorist attacks on the United States that occurred on September 11, 2001, the Senate and House of Representatives of the United States of America passed, and the President signed into law H.R. 2926, the Air Transportation Safety and System Stabilization Act (the “Airline Stabilization Act”). The intent of the Airline Stabilization Act is to preserve the continued viability of the United States air transportation system. This legislation included support to passenger airlines in the form of a $4.5 billion grant, $10 billion in loan guarantees, and assistance with increased insurance costs. The $4.5 billion grant provided assistance for direct losses incurred as a result of the temporary shut down of the air transportation system and for incremental losses incurred through December 31, 2001 as a direct result of the terrorist attacks. The loan guarantees will be made to air carriers for which credit is not reasonably available and the guarantees are subject to certain conditions. Pursuant to the Airline Stabilization Act, the federal government has the authority to guarantee credit instruments issued by air carriers in an amount up to $10 billion. The Airline Stabilization Act allows the government to take an equity stake in the airlines receiving federal loan guarantees as collateral. The federal government is providing insurance assistance because, as a result of September 11, aviation insurers have significantly reduced the maximum amount of insurance coverage available to commercial air carriers for war-risk coverage. In addition, the insurance carriers have significantly increased the premiums for this coverage as well as for aviation insurance in general.

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General

      Mesa Air Group, Inc. (“Mesa” or the “Company”) is a holding company whose principle subsidiaries operate as regional air carriers providing scheduled passenger and airfreight service, or as companies primarily in support of its operating airlines. The Company serves 153 cities in 38 states, the District of Columbia, Canada, and Mexico. At September 30, 2001, the Company operated a fleet of 116 aircraft and had approximately 832 daily departures.

      Approximately 97% of the Company’s consolidated passenger revenues for the fiscal year ended September 30, 2001, were derived from operations associated with code share agreements. The Company’s subsidiaries have code share agreements with America West Airlines, Inc. (“America West”), Midwest Express Airlines, Inc. (“Midwest Express”), Frontier Airlines, Inc. (“Frontier”) and five separate code share agreements with US Airways, Inc. (“US Airways”). These code share agreements allow use of the code share partner’s reservation system and flight designator code to identify flights and fares in computer reservation systems, permit use of logos, service marks, aircraft paint schemes and uniforms similar to the code share partners and provide coordinated schedules and joint advertising. Certain of these agreements also provide for generally favorable fixed fee and cost reimbursement terms that mitigate certain of the economic risks inherent in the Company’s airline’s operations.

      In addition to carrying passengers, the Company carries freight and express packages on its passenger flights and has interline small cargo freight agreements with many other carriers. The Company also has contracts with the U.S. Postal Service for carriage of mail to the cities it serves and occasionally operates charter flights when aircraft are not otherwise used for scheduled service.

      The Company’s airline operations are conducted by three airline subsidiaries:

      Unless the context indicates otherwise, the terms “Mesa,” “the Company,” “we,” “us,” or “our,” refer to Mesa Air Group, Inc. and its subsidiaries.

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Corporate Structure

      Mesa is a Nevada corporation, with its principal executive office in Phoenix, Arizona.

      In addition to its operating airline subsidiaries listed above, the Company also has the following other subsidiaries:

Aircraft in Operation

      The following table sets forth, as of September 30, 2001, the Company’s aircraft fleet (owned and leased) in operation by aircraft type.

      Historically, the key characteristics of the regional airline market have included:

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      In recent years, new arrangements, generally known as “Cost Plus Agreements,” have developed between regional and major airlines. These agreements provide that all passenger revenues go to the major airline partner. In return, the major airline agrees to pay predetermined fees to the regional airline for operating an agreed upon number of aircraft, usually without regard to the number of passengers onboard. In addition, these agreements generally provide that certain variable costs, such as fuel and airport landing fees, be reimbursed 100% by the major airline. These arrangements, when properly structured, can be attractive to the regional airline in that the majority of the economic risks are assumed by the major airline partner, leaving the regional airline with often more predictable costs and revenues than under the Prorate Agreements.

      The Company’s airline subsidiaries have agreements with America West and US Airways to use those major carriers’ designation codes (commonly referred to as a “code share”). These code share agreements allow use of the code share partner’s reservation system and flight designator code to identify flights and fares in computer reservation systems, permit use of logos, service marks, aircraft paint schemes and uniforms similar to the code share partners and provide coordinated schedules and joint advertising. The Company’s passengers traveling on flights operated pursuant to code share agreements receive mileage credits in the respective frequent flyer programs of the Company’s code share partners, and credits in those programs can be used on flights operated by the Company. Approximately 97% of the Company’s consolidated passenger revenues for the year ended September 30, 2001, were derived from operations associated with code share agreements. The Company’s subsidiaries have a code share agreements with America West, Midwest Express Airlines, Frontier Airlines and US Airways.

      Both the America West code share agreement and the US Airways regional jet code share agreements are cost plus agreements. Under the terms of these cost plus agreements, the major carrier controls marketing, scheduling, ticketing, pricing and seat inventories. The Company receives a guaranteed payment for each departure operated and each mile flown, with certain costs, and reimbursement for expenses such as fuel and landing fees. Among other advantages, cost plus arrangements reduce the Company’s exposure to fluctuations in passenger traffic and fare levels, as well as fuel prices.

      For the fiscal year ended September 30, 2001, Mesa’s America West Express operations, all of which were operated pursuant to cost plus agreements, represented approximately 44% of the Company’s available seat mile capacity and 38% of its consolidated passenger revenue. For this same period, US Airways Express regional jet operations, all of which were also operated pursuant to a cost plus agreement, represented approximately 33% of the Company’s available seat mile capacity and 27% of its consolidated passenger revenue. In total, operations under cost plus agreements accounted for approximately 77% of capacity, based on available seat miles, and approximately 65% of passenger revenues on a consolidated basis.

      The Company’s six US Airways turboprop code share agreements are prorate agreements, in which the Company is allocated a portion of each passenger’s fare based on a standard industry formula and which require the Company to pay all the costs of transporting the passenger. For the fiscal year ended September 30, 2001, US Airways Express turboprop operations represented approximately 20% of the Company’s available seat mile capacity and 32% of its consolidated passenger revenue.

      Renewal of one code share agreement with US Airways does not guarantee the renewal of the other code share agreements with US Airways. Code share agreements provide for remaining terms of eleven years for America West, and from one to seven years for US Airways. Although the provisions of the code share agreements vary from contract to contract, generally each agreement is subject to cancellation should the applicable Company subsidiary fail to meet certain operating performance standards, breach of other contractual terms and conditions and, in the case of the US Airways code share agreements (other than the regional jet service agreement and the Kansas City code share agreement described below), upon six months notice by either party. The code share agreements contain provisions allowing the Company’s code share partners to terminate the agreements upon certain potential operational or “change in control” events. The

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      The various code share agreements are summarized as follows:

     ERJ Program

      In January 2000, Mesa entered into an agreement with Empresa Brasiliera de Aeronautica SA (“Embraer”) to acquire 36 50-passenger Embraer ERJ-145 regional jets. Deliveries began late in the third quarter of fiscal 2000 and will continue into early 2003. Mesa introduced the ERJ-145 aircraft into revenue service in the third quarter of fiscal 2000 as USAirways Express. Mesa has moved several of the CRJ regional jets currently flying as USAirways Express to America West Express and replaced them with ERJ-145’s as

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     CRJ Program

      In August 1996, the Company entered into an agreement with Bombardier Regional Aircraft Division (“BRAD”) to acquire 16 CRJ 50-passenger jet aircraft. The agreement also granted the Company an option to acquire an additional 16 jet aircraft and provided for additional rolling options to acquire a third block of 16 aircraft. In fiscal 1997, the Company exercised options to purchase 16 of the 32 CRJ aircraft reserved under the option provisions of the BRAD purchase agreement. In connection with the 32 CRJ aircraft, all are currently under permanent financing as operating leases with terms of 16 1/2 to 18 1/2 years. In fiscal 1998, BRAD canceled the third block of rolling options.

      In May 2001, the Company entered into an agreement with BRAD to acquire 20 64-seat CRJ-700s, and 20 84-seat CRJ-900s. Deliveries of the CRJ-700 and CRJ-900 will commence in the third quarter of fiscal 2002 and the second quarter of fiscal 2003, respectively. Mesa will be the launch customer of the CRJ-900. In addition to the firm orders, Mesa has an option to acquire an additional 80 CRJ-700 and CRJ-900 regional jets. In conjunction with this purchase agreement, Mesa has $8.3 million on deposit with BRAD, which is included with lease and equipment deposits.

      The following summarizes the Company’s jet fleet status and current fleet expansion plans for the periods indicated:

     Beechcraft 1900D

      In fiscal 1999, the Company announced its intention to dispose of 30 excess 1900D aircraft. As of September 30, 2001, the Company had disposed of 17 of such aircraft. During the second quarter of fiscal 2001, the Company continued its turboprop restructuring plan by announcing a plan to retire an additional eight B1900 aircraft. Under an agreement with Raytheon Aircraft Corporation (“RAC”), the Company has the right to return 15 B1900D aircraft, ten of which may be returned immediately and five no earlier than October 2002. The Company is seeking proposals for the disposition of the remaining six B1900 aircraft. Mesa further reduced its fleet by returning two aircraft to the lessor upon expiration of their leases in the second quarter of fiscal 2001.

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Marketing

      The Company’s flight schedules are structured to facilitate the connection of its passengers with flights of its code share partners at their hub airports and to maximize local and connecting service to other carriers in Albuquerque.

      Under the Company’s US Airways Express turboprop operations, the Company’s market selection process follows an in-depth analysis on a route-by-route basis and is followed by a review and approval process in a joint effort with US Airways regarding the level of service and fares. The Company believes that this selection process enhances the likelihood of profitability in a given market.

      Under the America West Express Contract Agreement and the US Airways Express regional jet Contract Agreement, market selection, pricing and yield management functions are performed by America West and US Airways, respectively. The Company’s role is simply to operate its fleet in the safest and most reliable manner in exchange for fees paid under a generally fixed payment schedule. The Company intends to expand its operations performed pursuant to these Contract Agreements.

      Under the Company’s code share agreements, the code share partner coordinates advertising and public relations within their respective regions. In addition, the Company’s prorate traffic is impacted by the major airline partners’ advertising programs in regions outside those served by the Company, with the major partners’ customers becoming customers of the Company as a result of through fares. Under Prorate code share arrangements, the Company’s passengers also benefit from through fare ticketing with the major airline partners and greater accessibility to the Company’s flights on computer reservation systems and in the Official Airline Guide.

      The Company’s Prorate Agreement and Independent Operation flights are promoted through, and the Company’s revenues are generally believed to benefit from, listings in computer reservation systems, the Official Airline Guide and through direct contact with travel agencies and corporate travel departments. The Company participates in shared advertising with resort and rental property operators and ski areas in leisure markets in which it operates. The Company’s non-code share operation utilizes SABRE, a computerized reservation system widely used by travel agents, corporate travel offices and other airlines. The reservation systems of the Company’s code share partners are also utilized in each of the Company’s other operations through their respective code share agreements. The Company also pays booking fees to owners of other computerized reservation systems based on the number of independent and prorate passengers booked by travel agents using such systems. The Company believes that it has good relationships with travel agents serving its passengers.

Fares and Contract Agreement Flying

      The Company has increasingly relied on Contract Agreements with its code share partners to generate revenue. All of the Company’s America West Express and US Airways Express regional jet operations are on a contract basis. The percentage of revenue generated under Contract Agreements is expected to increase in future years as the Company continues to add regional jets to its America West Express and US Airways Express operations and reduce the number of Beech 1900D and Jetstream Super 31 aircraft in operation. In fiscal 2001, the Company generated approximately 65% of its total passenger revenue pursuant to Contract Agreements.

Competition

      The airline industry is highly competitive and volatile. Airlines compete in the areas of pricing, scheduling (frequency and timing of flights), on-time performance, type of equipment, cabin configuration, amenities provided to passengers, frequent flyer plans, travel agent commissions and the automation of travel agent reservation systems. Further, because of the Airline Deregulation Act, airlines are currently free to set prices and establish new routes without the necessity of seeking governmental approval. At the same time, deregulation has allowed airlines to abandon unprofitable routes where the affected communities will not be left without air service.

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      The Company believes that the Airline Deregulation Act facilitated the Company’s entry into scheduled air service markets and allows it to compete on the basis of service and fares, thus causing major carriers to seek out further contractual agreements with carriers such as the Company as a way of expanding their respective networks. However, the Airline Deregulation Act makes the entry of other competitors possible, some of which may have substantial financial resources and experience, creating the potential for intense competition among regional air carriers in the Company’s markets.

      The Company believes its code share agreements provide a significant competitive advantage in hub airports where its major partner has a predominant share of the market. The ability to control connecting passenger traffic by offering superior service creates difficulty for other regional airlines wishing to compete at such hubs. In addition to enhanced competitiveness offered by the code share agreements, the Company competes with other airlines by offering frequent flights, flexible schedules and numerous fare levels.

Fuel

      Historically, the Company has not experienced problems with the availability of fuel, and believes that it will be able to obtain fuel in quantities sufficient to meet its existing and anticipated future requirements at competitive prices. Standard industry contracts generally do not provide protection against fuel price increases, nor do they ensure availability of supply. However, the Company’s code share agreement with America West and the regional jet service agreement with US Airways allow fuel used in the performance of the agreements to be billed to the code share partner, thereby reducing the Company’s exposure to fuel price fluctuations. In fiscal 2001, approximately 75% of the Company’s fuel was associated with the Company’s America West code share and US Airways regional jet service agreements. A substantial increase in the price of jet fuel, to the extent the Company’s fuel costs are not reimbursed, or the lack of adequate fuel supplies in the future may have a material adverse effect on the Company’s business, financial condition, results of operations and liquidity.

Maintenance of Aircraft and Training

      All mechanics and avionics specialists employed by the Company have the appropriate training and experience and hold the required licenses issued by the Federal Aviation Administration (“FAA”). Using a combination of FAA-certified maintenance vendors and its own personnel and facilities, the Company maintains its aircraft on a scheduled and “as-needed” basis. The Company emphasizes preventive maintenance and inspects its aircraft engines and airframes as required. The Company also maintains an inventory of spare parts specific to the aircraft types it flies. The Company provides periodic in-house and outside training for its maintenance and flight personnel and also takes advantage of factory training programs that are offered when acquiring new aircraft.

Insurance

      The Company carries types and amounts of insurance customary in the airline industry, including coverage for public liability, passenger liability, property damage, product liability, aircraft loss or damage, baggage and cargo liability and workers’ compensation.

      As a result of the terrorist attacks on September 11, 2001, aviation insurers have significantly reduced the maximum amount of insurance coverage available to commercial air carriers for war-risk coverage. In addition, the insurance carriers have significantly increased the premiums for this coverage as well as for aviation insurance in general. Under the terms of the Company’s code share agreement with America West, and its regional jet service agreement with US Airways, insurance costs are reimbursed. Given the significant increase in insurance costs, the federal government is providing insurance assistance under the Air Transportation Safety and System Stabilization Act. In addition, the federal government has issued war-risk coverage to U.S. air carriers for renewable 30-day periods. However, the availability of aviation insurance is not guaranteed and the inability of the Company to obtain such coverage may result in the grounding of its aircraft.

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Employees

      As of September 30, 2001, the Company employed approximately 2,800 employees. The Company’s continued success is partly dependent on its ability to continue to attract and retain qualified personnel. Historically, the Company has had no difficulty attracting qualified personnel to meet its requirements. The Company believes that relations with its employees are favorable.

      Pilot turnover at times is a significant issue among regional carriers when major carriers are hiring experienced commercial pilots away from regional carriers. The addition of aircraft, especially new aircraft types, can result in pilots upgrading between aircraft types and becoming unavailable for duty during the extensive training periods required. No assurances can be made that pilot turnover and unavailability will not again be a significant problem in the future, particularly if major carriers expand their operations. Similarly, there can be no assurance that sufficient numbers of new pilots will be available to support any future growth.

      During December 1996, the Company reached a five-year agreement, expiring in December 2001, with the Air Line Pilots Association (“ALPA”) for a single pilot contract for MAI and Air Midwest. The Company expects to commence contract negotiations with pilots for MAI and Air Midwest in early 2002. Air Midwest mechanics are represented by the International Association of Machinists (“IAM”). The current agreement with the IAM is amendable on March 31, 2002. MAI’s flight attendants are represented by the Association of Flight Attendants (“AFA”). The AFA contract is amendable on June 13, 2003.

      CCAIR has three organized employee groups. ALPA represents the pilots, AFA represents the flight attendants and the International Brotherhood of Teamsters (“Teamsters”) represents the mechanics and stock clerks. The ALPA agreement was renewed on November 6, 1998, and becomes amendable on October 31, 2002. The AFA agreement was renewed on May 16, 1996, and becomes amendable on June 13, 2003. The Teamsters mechanics contract was ratified on July 15, 1998, and becomes amendable on December 31, 2001. The Teamsters stock clerks contract was ratified July 31, 2000 and becomes amendable on December 31, 2003.

      No other Mesa subsidiaries are parties to any other collective bargaining agreement or union contracts.

      Approximately 60% of the Company’s workforce is subject to collective bargaining agreements.

Essential Air Service Program

      The Essential Air Service program administered by the United States Department of Transportation (“DOT”) guarantees a minimum level of air service in certain communities, predicated on predetermined guidelines set forth by Congress. Based on these guidelines, the DOT will subsidize air service to communities that might not otherwise have air service. The Company services 15 such cities for an annual subsidy of approximately $6.6 million. Funding for this program is currently being evaluated in Congress and there is no guarantee that the Company will continue to receive subsidies for the cities it serves. If the funding under this program is terminated for any of the cities served by the Company, there is no assurance that the Company would continue to fly in these markets, and as a result, the Company would be forced to find alternative uses for the aircraft affected.

Regulation

      As an interstate air carrier, the Company is subject to the economic jurisdiction, regulation and continuing air carrier fitness requirements of the DOT. Such requirements include minimum levels of financial, managerial and regulatory fitness. The DOT is authorized to establish consumer protection regulations to prevent unfair methods of competition and deceptive practices, to prohibit certain pricing practices, to inspect a carrier’s books, properties and records, and to mandate conditions of carriage. The DOT also has the power to bring proceedings for the enforcement of air carrier economic regulations, including the assessment of civil penalties, and to seek criminal sanctions.

      The Company is subject to the jurisdiction of the FAA with respect to its aircraft maintenance and operations, including equipment, ground facilities, dispatch, communication, training, weather observation,

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      Effective March 1997, the FAA required that regional airlines with aircraft of 10 or more passenger seats operating under FAR Part 135 rules to begin operating those aircraft under FAR Part 121 regulations. The Company, as one of the largest regional airlines operating under FAR Part 135 regulations, completed the transition to Part 121 within the FAA’s deadline. These requirements have resulted in a significant increase in the Company’s costs, affecting the Company’s ability to profitably serve certain markets. Such increased costs are primarily related to additional training, dispatch and maintenance procedures. The Company continues to attempt to minimize the cost of these new operating procedures while fully complying with FAR Part 121 operating requirements.

      The Company is subject to various federal and local laws and regulations pertaining to other issues of environmental protocol. The Company believes it is in compliance with all governmental laws and regulations regarding environmental protection.

      The Company is also subject to the jurisdiction of the Federal Communications Commission with respect to the use of its radio facilities and the United States Postal Service with respect to carriage of United States mail. Local governments in certain markets have adopted regulations governing various aspects of aircraft operations, including noise abatement and curfews.

Item 2.     Properties

      The Company’s primary property consists of the aircraft used in the operation of its flights. The following table lists the aircraft owned and leased by the Company as of September 30, 2001.

      See “Business — Airline Operations” and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources” for a discussion regarding the Company’s aircraft fleet commitments.

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      In addition to aircraft, the Company has office and maintenance facilities to support its operations. The facilities are as follows:

      The Company leases ticket counters, check-in and boarding and other facilities in the passenger terminal areas in the majority of the airports it serves and staffs those facilities with Company personnel. America West and US Airways also provide facilities, ticket handling and ground support services for the Company at certain airports.

      The Company’s Administration/ Dispatch facility is leased pursuant to a ten-year lease that commenced November 1, 1998. The Flight Operations/ Training/ Admin space is subject to a 89 month lease that commenced on June 1, 2001.

      The Company believes its facilities are suitable and adequate for its current and anticipated needs.

Item 3.     Legal Proceedings

      In March 2001, the Company reached agreement with United Airlines, Inc. to extend the current Mesa/ US Airways regional jet contract by an additional two years, to December 31, 2010 contingent upon completion of the proposed merger between United and US Airways. Under the agreement, Mesa and United agreed to drop all outstanding litigation between the two parties. On July 27, 2001, United and US Airways terminated their proposed merger.

      In May 2001, the Company filed a complaint in Arizona state court against the law firm of Beus Gilbert P.L.L.C. (“Beus Gilbert”) arising out of Beus Gilbert’s representation of the Company in a suit against United Airlines (“UAL litigation”) that was settled in March 2001. The suit seeks a judgment voiding the fee arbitration provision (the “arbitration provision”) of a contingency fee agreement between the Company and Beus Gilbert. The provision purports to require that all disputes as to attorneys’ fees payable to Beus Gilbert be submitted to arbitration for final determination. Notwithstanding the requirement to arbitrate, the provision further purports to grant Beus Gilbert the right, “in its sole and absolute discretion,” to reject the decision of the arbitrator, impose an award in the amount equal to five times the aggregate hourly rate of all attorneys and paralegals who worked on the legal matter (plus costs and expenses), and enforce that award as though it were a civil judgment. Relying on the arbitration provision, following the settlement of the UAL Litigation, Beus Gilbert demanded in excess of $16 million, which it claims to have computed by applying a 5X multiplier in the arbitration provision to fees that allegedly accrued in excess of $3 million.

      The suit against Beus Gilbert alleges that the arbitration provision is void as a matter of law because it is illusory and lacks mutual consideration; that it is also void because it violates a public purpose: a fair and

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      The Company is also party to various legal proceedings and claims arising in the ordinary course of business. Although the ultimate outcome of pending lawsuits cannot be determined, the Company believes, based upon currently available information, that the ultimate outcome of all the proceedings and claims pending against the Company will not have a material adverse effect on the Company’s financial position. The Company’s statement regarding the outcome of all pending proceedings and claims is a forward-looking statement.

Item 4.     Submission of Matters to a Vote of Security Holders

      The registrant held its annual meeting of shareholders on April 5, 2001. The shareholders elected the following Board of Directors to serve until the next annual meeting of shareholders or until their successors are duly elected and qualified:

      The shareholders ratified a proposal to amend the Company’s Outside Directors’ Stock Option Plan by a vote of 20,436,667 for and 8,409,776 against, with 704,943 shares abstaining. The shareholders ratified a proposal to amend the Company’s Key Officer Stock Option Plan by a vote of 18,518,506 for and 10,328,271 against, with 704,609 shares abstaining. The shareholders ratified the appointment of Deloitte & Touche LLP as independent auditors for fiscal year 2001 by a vote of 29,499,552 for and 28,868 against, with 22,966 shares abstaining. The shareholders rejected a shareholder proposal to adopt cumulative voting by a vote of 9,715,190 for and 12,877,826 against, with 103,201 shares abstaining. The shareholders also rejected a shareholder proposal to adopt confidential shareholder voting by a vote of 11,789,655 for and 10,810,059 against, with 95,963 shares abstaining and 6,855,709 broker non-votes (abstaining and broker non-votes count against).

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PART II

Item 5.     Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

Market Price of Common Stock

      The following table sets forth, for the periods indicated, the high and low price per share of Mesa common stock for the two most recent fiscal years, as reported by NASDAQ. Mesa’s common stock is traded on the NASDAQ National Market System under the symbol “MESA.”

      On December 11, 2001, the Company had 1,272 shareholders of record. The Company has never paid cash dividends on its common stock. The payment of future dividends is within the discretion of the Company’s board of directors and will depend upon the Company’s future earnings, if any, its capital requirements, bank financing, financial condition and other relevant factors.

Item 6.     Selected Financial Data

Selected Financial Data and Operating Statistics

      The selected financial data as of and for each of the five years ended September 30, 2001, are derived from the Consolidated Financial Statements of the Company and its subsidiaries and should be read in conjunction with the Consolidated Financial Statements included elsewhere in this Form 10-K and the related notes thereto and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.” The Consolidated Financial Statements of the Company for the fiscal years ended September 30, 2001 and 2000, have been audited by Deloitte & Touche LLP, independent auditors. The Consolidated Financial Statements of the Company for the fiscal years ended September 30, 1999, 1998 and 1997, have been audited by KPMG LLP, independent auditors.

      In thousands of dollars except per share data and average fare amounts and as otherwise indicated.

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      The Company’s June 9, 1999 acquisition of CCAIR was accounted for as a pooling of interests and, accordingly, the Company’s consolidated financial statements have been restated to include the results of

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The following discussions and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s results of operations and financial condition. The discussion should be read in conjunction with the Consolidated Financial Statements and the related notes thereto, and the Selected Financial Data and Operating Data contained elsewhere herein.

Results of Operations

     General

      The Company operates as a regional air carrier providing scheduled passenger service. The Company serves 153 cities in 38 states, the District of Columbia, Canada and Mexico.

      The Company’s airline operations are conducted by three airline subsidiaries using hub-and-spoke route systems. Mesa Airlines, Inc. operates regional jet and turboprop aircraft as America West Express under a code share agreement with America West Airlines, and regional jets as US Airways Express under a code share agreement with US Airways. Mesa Airlines has significant hub operations in Phoenix and Columbus as America West Express, and in Philadelphia, Pennsylvania, Washington D.C. (DCA) and Charlotte as US Airways Express. Air Midwest operates Beechcraft 1900D 19-seat turboprops as US Airways Express under code sharing agreements with US Airways out of hub operations in Pittsburgh, Philadelphia, Kansas City and Tampa. Certain Air Midwest flights in Kansas City also code share with Midwest Express under a dual code share program. Air Midwest also operates as Mesa Airlines from a hub in Albuquerque. The Albuquerque operation does not have a code share agreement with a major carrier. CCAIR operates turboprops as US Airways Express under a code share agreement with US Airways. CCAIR’s operations are based from a hub in Charlotte.

      The following tables set forth selected operating and financial data of the Company for the years indicated below. All financial and operating data has been restated to reflect the Company’s June 9, 1999 acquisition of CCAIR which was accounted for as a pooling of interest.

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Operating Expense Data

Fiscal 2001 Versus Fiscal 2000

     General

      During fiscal 2001, the Company continued the expansion of its regional jet fleet by taking delivery of 13 additional ERJ regional jets. The Company deployed the additional regional jet aircraft in performing operations under its code share agreement with US Airways. The deployed aircraft replaced CRJs that were redeployed into the America West system.

      Also in fiscal 2001, the Company continued to downsize its turboprop fleet. During the second quarter, the Company continued its turboprop restructuring plan by announcing a plan to retire an additional eight B1900 aircraft. Under a tentative agreement with RAC, the Company has the right to return 15 B1900D aircraft, ten of which may be returned immediately and five no earlier than October 2002. The Company is seeking proposals for the disposition of the remaining six B1900 aircraft. Mesa further reduced its fleet by returning two B1900 aircraft to the lessor upon expiration of their leases in the second quarter, returning five Jetstream Super 31 aircraft to the lessor in the fourth quarter, and announced a plan to retire the remaining nine Jetstream Super 31’s in fiscal 2002.

      The terrorist attacks of September 11, 2001 had a significant impact on the Company. Following the attacks, the air transportation system was temporarily shut down, resulting in the cancellation of more than 3,300 Mesa Air Group flights. The cancelled flights and loss of consumer confidence in the airline industry resulted in lost revenue from these cancelled flights and lower load factors and revenue yield on flights operated since Sept. 11. The Company was also impacted by certain costs incurred during the temporary shutdown that could not be avoided, the write down of receivables related to the Company’s code share partners as well as the resulting impairment and restructuring charges.

      In September 2001, the Company recorded as non-operating income $14.7 million associated with amounts claimed under the Airline Stabilization Act. As of September 30, 2001, the Company received $5.8 million and the remaining $8.9 million is included in accounts receivable. The amount recorded as

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     Operating Revenues

      In fiscal 2001, operating revenues increased by $51.8 million (11.0%) to $523.4 million, compared to $471.6 million in fiscal 2000. The increase was primarily due to the addition of 13 regional jets employed under cost plus contracts with America West and US Airways.

      Capacity, measured by ASMs, increased by 11.5% to 3,289 million in fiscal 2001, compared to 2,951 million in fiscal 2000. The increase in capacity was comprised of a 31% increase in jet ASMs, offset by a 16% decrease in turboprop ASMs. Passenger traffic is measured by revenue passenger miles (“RPMs”), which represent one revenue passenger carried one mile. RPMs increased by 15.1% to 1,796 million in fiscal 2001 as compared to 1,561 million fiscal 2000. The increase in ASMs and RPMs was attributable to the additional regional jet aircraft added in fiscal 2001. Passenger load factor increased to 54.6% in fiscal 2001 from 52.9% in fiscal 2000; however, the majority of the Company’s revenue is derived from cost plus contracts with its major airline partners, and hence, loads are irrelevant to the profitability of the majority of the Company’s revenue.

     Operating Expenses

     Flight Operations

      In fiscal 2001, flight operations expense increased 22.1% to $270.8 million (8.2 cents per ASM) from $221.8 million (7.5 cents per ASM) in fiscal 2000. The $49.0 million increase was primarily due to increased fuel costs of approximately $18.1 million, increased lease costs of approximately $21.6 million and increased pilot wages of approximately $9.0 million. These increases were the result of adding additional regional jets in fiscal 2001.

     Maintenance Expense

      In fiscal 2001, maintenance expense increased 20.7% to $100.3 million (3.0 cents per ASM) from $83.1 million (2.8 cents per ASM) in fiscal 2000. Increased maintenance expenditures are primarily due to the increased number of activity based or time sensitive maintenance events and the expiration of the warranty period on many of the Company’s CRJ aircraft.

     Aircraft and Traffic Servicing Expense

      In fiscal 2001, aircraft and traffic servicing expense decreased 0.5% to $53.2 million (1.6 cents per ASM) from $53.5 million (1.8 cents per ASM) in fiscal 2000. The relative stability of aircraft and traffic servicing expense is due to the Company serving approximately the same number of cities in 2001 as in 2000, 118 versus 120, respectively.

     Promotion and Sales

      In fiscal 2001, promotion and sales expense decreased 16.3% to $22.2 million (0.7 cents per ASM) from $26.5 million (0.9 cents per ASM) in fiscal 2000. The decrease is primarily due to the Company’s continued downsizing of its B1900D fleet and the resulting decrease in prorate flying. Given the Company’s continued expansion of flights performed pursuant to contract agreements, whereby America West and US Airways assume the responsibility for promoting and selling seats on flights operated by the Company, the Company expects this expense to continue to decrease.

     General and Administrative Expense

      In fiscal 2001, general and administrative expense increased 81.0% to $52.9 million (1.6 cents per ASM) from $29.2 million (1.0 cents per ASM) in fiscal 2000. The $23.7 million increase is primarily due to

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     Depreciation and Amortization

      In fiscal 2001, depreciation and amortization expense decreased 12.5% to $13.7 million (0.4 cents per ASM) from $15.6 million (0.5 cents per ASM) in fiscal 2000. The decrease is primarily due to the cessation of depreciation on B1900D aircraft held for sale.

     Impairment and Restructuring Charges

      In the second quarter of fiscal 2001, the Company recognized a charge of approximately $22.7 million on 21 B1900 aircraft the Company either intends to return to the manufacturer or actively market. The charge is comprised of an impairment loss to write the aircraft down to the contractual selling price (market) plus the estimated costs to prepare the aircraft for return to the manufacturer.

      Due to the economic slowdown and the effects of the terrorist attacks in the fourth quarter of fiscal 2001, the Company performed an asset impairment test under the provisions of SFAS 121 related to its goodwill and B1900 turboprop aircraft. Upon discerning impairment, the Company wrote off the unamortized value of the goodwill associated with certain B1900 route systems totaling $9.3 million. The Company also took an additional charge of approximately $40.7 million related to its B1900 fleet. The charge is comprised of an impairment loss of $37.3 million on the value of 30 B1900D aircraft the Company is planning to continue to fly, an additional market impairment of $3.1 million on six aircraft the Company is holding for sale, but does not have the contractual right to return to the vendor at a specified price. The assets were written down to their estimated fair market value based upon appraisals.

      In the fourth quarter of fiscal 2001, the Company made a decision to discontinue operating Jetstream Super 31 aircraft from its Charlotte hub. As a result of this decision, the Company took a $4.9 million charge that is included in other accrued liabilities and other non-current liabilities at September 30, 2001. The charge is comprised of $3.6 million related to the present value of the remaining lease payments on nine Jetstream Super 31 aircraft, $1.2 million related to the costs to buyout the remaining term of the maintenance contract associated with these aircraft and $.1 million related to costs to return the aircraft.

      The Company also elected to accelerate the disposition of excess inventory. During the fourth quarter, the Company hired an independent consulting firm to determine its inventory needs and to value its surplus inventory. Prior to September 11th, the Company had been selling off surplus inventory on a passive basis as opportunities arose. Subsequent to September 11th, the Company made the decision to use third party inventory brokers to sell its excess inventory. As a result of this decision, the Company took a $3.2 million charge to reduce its surplus inventory to net realizable value, less costs to sell. The surplus inventory is carried on the balance sheet under the heading of aircraft and parts held for sale.

     Other Income and Expense

      Included in other income is $14.7 million related to amounts received and to be received under the Air Transportation Safety and Stabilization Act. This amount is offset by $3.7 million in net investment related losses (unrealized losses of $8.0 million offset by realized gains of $4.3 million).

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Fiscal 2000 Versus Fiscal 1999

     Operating Revenues

      In fiscal 2000, operating revenues increased by $67.0 million (16.6%) to $471.6 million, compared to $404.6 million in fiscal 1999. The increase was primarily due to additional revenues from the Company’s expanded use of regional jets pursuant to cost plus contracts with America West and US Airways.

      Capacity, measured by ASMs, increased by 13.7% to 2,951 million in fiscal 2000, compared to 2,595 million in fiscal 1999. RPMs increased by 17.8% to 1,561 million in fiscal 2000 as compared to 1,325 million fiscal 1999. The increase in ASMs and RPMs was primarily due to the Company’s expanded use of regional jets pursuant to fee per departure contracts with America West and US Airways. Passenger load factor increased to 52.9% in fiscal 2000 from 51.1% in fiscal 1999.

     Operating Expenses

     Flight Operations

      In fiscal 2000, flight operations expense increased 27.9% to $221.8 million (7.5 cents per ASM) from $173.4 million (6.7 cents per ASM) in fiscal 1999. The increase was primarily due to increased fuel costs of approximately $31.5 million, increased lease costs of approximately $10 million and increased pilot wages of approximately $3.4 million. These increases were the result of operating additional regional jets.

     Maintenance Expense

      In fiscal 2000, maintenance expense increased 8.9% to $83.1 million (2.8 cents per ASM) from $76.3 million (2.9 cents per ASM) in fiscal 1999. Increased maintenance expenditures are primarily due to the increased number of time sensitive maintenance events that occurred in fiscal 2000. Fiscal 2000 maintenance expense was reduced by $4.9 million as a result of the Company’s change in accounting method from the accrual method to the direct expense method for CRJ and Dash 8-200 aircraft.

     Aircraft and Traffic Servicing Expense

      In fiscal 2000, aircraft and traffic servicing expense decreased 3.9% to $53.5 million (1.8 cents per ASM) from $55.7 million (2.1 cents per ASM) in fiscal 1999. The decrease was primarily due to the Company’s continued down sizing of its B1900D fleet and the consequent reduction in flying under prorate agreements.

     Promotion and Sales

      In fiscal 2000, promotion and sales expense decreased 18.4% to $26.5 million (0.9 cents per ASM) from $32.6 million (1.3 cents per ASM) in fiscal 1999. The decrease is primarily due to the Company’s continued down sizing of its B1900D fleet and the continued expansion of flights performed pursuant to contract agreements, whereby America West and US Airways assume the responsibility for promoting and selling seats on flights operated by the Company.

     General and Administrative Expense

      In fiscal 2000, general and administrative expense decreased 7.7% to $29.2 million (1.0 cents per ASM) from $31.7 million (1.2 cents per ASM) in fiscal 1999. The decrease is due to merger expenses incurred in 1999 related to the acquisition of CCAIR as well as a decrease in legal expenses.

     Depreciation and Amortization

      In fiscal 2000, depreciation and amortization expense decreased 13.4% to $15.6 million (0.5 cents per ASM) from $18.1 million (0.7 cents per ASM) in fiscal 1999. The decrease is primarily due to the cessation of depreciation on parked 1900D aircraft being disposed.

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     Other Operating Items

      In fiscal 2000, other operating items were de minimis, while in the prior year, the Company recorded substantial adjustments related to the shut down of the UAL code sharing operation and the reversal of $14.0 million of previously established reserves which were considered to be excess.

Liquidity and Capital Resources

      The Company had cash, cash equivalents and marketable securities of $83.3 million at September 30, 2001, compared to cash, cash equivalents and marketable securities of $34.1 million at September 30, 2000. The Company primarily generated cash by extending the days outstanding in accounts payable as a result of the attacks on September 11th, receiving payment of $25.2 million as a result of restructuring various contractual claims the Company had with Bombardier and drawing $20.0 million on its line of credit at year end. During fiscal 2001, the Company invested approximately $33.5 million in aircraft parts and other fixed assets, spent $13.7 million preparing aircraft for return to the manufacturer and reduced long-term debt by $8.8 million. The Company also repurchased approximately $6.8 million of its common stock and realized $10.0 million in proceeds from exercise of stock options. The above factors, among others, resulted in a $48.1 million increase in cash, cash equivalents and marketable securities during fiscal 2001 which comprises the majority of the increase noted above.

      As of September 30, 2001, the Company had receivables of approximately $29.4 million (net of an allowance for doubtful accounts of $14.7 million), compared to $41.2 million (net of an allowance for doubtful accounts of $.5 million) at September 30, 2000. The amounts due consist primarily of receivables due from the Company’s code share partners, passenger ticket receivables due through the Airline Clearing House (“ACH”) and amounts due under the Airline Stabilization Act. The allowance for doubtful accounts was increased as a result of the impact of the attacks on September 11th and the impact that the decline in passenger traffic and softening economy have had on their code share partner’s ability to pay.

      During fiscal 2001, the Company had code share agreements with America West, US Airways and Midwest Express Airlines. Approximately 97%, 95% and 97% of the Company’s consolidated passenger revenue for the years ended September 30, 2001, 2000 and 1999, respectively, were derived from these agreements. Accounts receivable from the Company’s code share partners were 44% and 72% of total accounts receivable at September 30, 2001 and 2000, respectively.

      A reduction in business travel, a slowing economy and the terrorist attacks of September 11th, 2001 all have had a significant impact on the airline industry, including America West and US Airways. Continuing declines in the economy or an inability to receive government grants and loan guarantees could have a material adverse effect on the viability of either of these airlines. A termination of the America West or US Airways code share agreements (specifically the jet contracts) may have a material adverse effect on the Company’s business prospects, financial position, results of operations and cash flows.

      If a termination without renewal should occur, management believes they would be able to reduce costs quickly through reducing headcount or parking aircraft. Additionally management believes they could continue flying certain routes or transfer certain aircraft, particularly the regional jets, to new markets and new code share arrangements with other carriers. As of December 5, 2001, the Company had cash and marketable securities in excess of $100 million. Management believes additional proceeds of approximately $10 million could be generated through the cancellation of aircraft orders. Management believes these actions would provide sufficient working capital to meet its operating needs.

      In January 2000, the Company entered into an agreement with Embraer to acquire 36 50-passenger Embraer ERJ-145 regional jets at an aggregate list price of approximately $702 million. Deliveries began in April 2000 and are expected to continue through early 2003. The Company expects to finance the aircraft with long-term operating lease arrangements.

      The Company has significant long-term lease obligations primarily relating to its aircraft fleet. The leases are classified as operating leases and are therefore excluded from the Company’s consolidated balance sheets. At September 30, 2001, the Company leased 95 aircraft with remaining lease terms ranging from 1 to

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      The Company’s long-term debt was primarily incurred pursuant to the acquisition of 1900D aircraft. At September 30, 2001, the Company owned 51 1900D aircraft securing debt with maturities through 2011. Due to the September 11, 2001, terrorist attacks and ongoing negotiations with the debt holder, the Company ceased making principal and interest payments. On December 19, 2001, the Company entered into an agreement with RAC to pay 50% of past due amounts totaling $2.1 million immediately, with the remaining $2.1 million due in monthly installments through June 2003.

      In December 1999, the Company’s Board of Directors authorized the Company to repurchase up to 10%, approximately 3.4 million shares, of the outstanding shares of its Common Stock. In January 2001, the Board approved the repurchase by the Company of up to an additional one million shares of its Common Stock. As of September 30, 2001, the Company has acquired and retired approximately 3.0 million shares (approximately 8.3%) of its outstanding Common Stock at an aggregate cost of approximately $17.6 million leaving approximately 1.4 million shares available for repurchase under the current Board authorizations. Purchases are made at management’s discretion based on market conditions and the Company’s financial resources.

      The Company has negotiated 10-year engine maintenance contracts with General Electric Aircraft Engines for its CRJ aircraft, Rolls-Royce Allison for its ERJ aircraft and Pratt and Whitney, Canada Aircraft Services for its Dash 8-200 aircraft. The contracts provide for payment at the time of the repair event for a fixed dollar amount per flight hour, subject to escalation based on changes in certain price indices, for the number of flight hours incurred since the previous event.

      In December 2000, the Company reached an agreement with Fleet Capital for a $35 million revolving line of credit, secured by the Company’s inventory and receivables. The agreement, which expires in December 2003, has provisions which allow the expansion of available credit to $50 million by adding other lenders provided that there is additional collateral. The Company intends to use the facility for general working capital purposes. There was approximately $20 million outstanding on the line at September 30, 2001. Based upon available collateral, $.6 million remained available under the line at September 30, 2001.

      As of September 30, 2001, the Company had 15 ERJ-145s, 20 CRJ-700s and 20 CRJ-900s on firm order. It is the Company’s current plan to operate these aircraft under long-term operating leases with third-party lessors. The Company receives various financing support from the aircraft manufacturers and has not historically experienced significant difficulty obtaining lease financing. However, the financing markets have become more difficult subsequent to the attacks of September 11th, and there are no guarantees that financing will be available for future deliveries. The Company has recently obtained a financing commitment from a major lessor for one-half of the firm CRJ-700 and CRJ-900 deliveries, and currently believes it will be able to finance the remainder of its firm aircraft deliveries.

      Management believes that the Company will have adequate cash flow to meet its operating needs. This is a forward-looking statement. Actual cash flows could materially differ from this forward looking statement as a result of many factors, including the termination of one or more code share agreements; failure to sell, dispose of, or redeploy excess aircraft in a timely manner; a substantial decrease in the number of routes allocated to the Company under its code share agreements with its code share partners; reduced levels of passenger revenue, additional taxes or costs of compliance with governmental regulations; fuel cost increases; increases in competition; additional terrorist attacks; increases in interest rates; general economic conditions and unfavorable settlement of existing litigation.

Recent Accounting Pronouncements

      In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” SFAS No. 141 addresses financial accounting and reporting for business combinations. Under this statement, all business combinations are to be accounted for under one method — the purchase method. The provisions of this statement apply to all

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      In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets acquired individually or in a group of other assets at acquisition and subsequent to acquisition. The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001, with early adoption allowed. The Company adopted this statement effective October 1, 2001 and there was no impact on the Company’s financial position, results of operations and cash flows.

      In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement will supercede SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-lived Assets to be Disposed of.” SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (i) recognition and measurement of the impairment of long-lived assets to be held and used; and (ii) measurement of the impairment of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. Management has not yet determined the impact, if any, the adoption of SFAS No. 144 will have on the Company’s financial position, results of operations and cash flows.

Item 7A — Quantitative and Qualitative Disclosures About Market Risk

      The Company has exposure to market risk associated with changes in interest rates related primarily to its debt obligations and short-term marketable investment portfolio. The Company’s debt obligations are primarily variable in rate and therefore have exposure to changes in interest rates. A 10% change in interest rates would result in an approximately $1.4 million impact on interest expense. The Company also has investments in debt securities. If short-term interest rates were to average 10% more than they did in fiscal year 2001, there would be no material impact on the Company’s interest income. The Company’s investments in equity securities are subject to market risk related to fluctuations in share prices for those shares held. A 10% change in the price of trading securities held at the level of investment at September 30, 2001 would impact the results of the Company by approximately $.9 million.

      The Company has exposure to certain market risks associated with its aircraft fuel. Aviation fuel expense is a significant expense for any air carrier and even marginal changes greatly impact a carrier’s profitability. Standard industry contracts do not generally provide protection against fuel price increases, nor do they insure availability of supply. However, both the US Airways and America West contract code share agreements allow fuel costs to be reimbursed by the code share partner, thereby reducing Mesa’s overall exposure to fuel price fluctuations. In fiscal 2001, 75% of the Company’s fuel requirements were associated with these contracts. Each one cent change in the price of jet fuel amounts to a $.1 million change in annual fuel costs for that portion of fuel expense which cannot be passed on to either America West or US Airways.

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Item 8.     Financial Statements and Supplementary Data

Consolidated Financial Statements

      All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are not applicable, not required or the information has been furnished elsewhere.

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders

      We have audited the accompanying consolidated balance sheets of Mesa Air Group, Inc. and subsidiaries ( the “Company”) as of September 30, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2001 and 2000, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

      As discussed in Note 2 to the financial statements substantially all of the Company’s passenger revenue is derived from code share agreements with America West and US Airways.

      As discussed in Note 4 to the financial statements, effective October 1, 1999, the Company changed its method of accounting for certain maintenance costs.

DELOITTE & TOUCHE LLP

Phoenix, Arizona

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

      We have audited the accompanying consolidated statements of operations, stockholders’ equity and cash flows for the year ended September 30, 1999 of Mesa Air Group, Inc. and subsidiaries. This consolidated financial statement is the responsibility of the Company’s management. Our responsibility is to express an opinion on this consolidated financial statement based on our audit.

      We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statement referred to above presents fairly, in all material respects, the results of operations and cash flows for the year ended September 30, 1999 of Mesa Air Group, Inc. and subsidiaries, in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Phoenix, Arizona

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PART 1.     FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS OF OPERATIONS