MESA AIR GROUP INC - Annual Report: 2002 (Form 10-K)

Table of Contents

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, 2002

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the voting stock held by non-affiliates of the Registrant as of December 6, 2002: Common Stock, no par value: $154.2 million.

      On December 6, 2002, the Registrant had outstanding 31,645,837 shares of Common Stock.

Documents Incorporated by Reference

Portions of the registrant’s proxy statement for the 2003 annual meeting of stockholders

Table of Contents

MESA AIR GROUP, INC.

TABLE OF CONTENTS

1

Table of Contents

PART I

Forward-Looking Statements

      This Form 10-K Report 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 Federal Aviation Administration 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; the inability of US Airways to successfully restructure and emerge from bankruptcy; 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; availability and cost of funds for financing new 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; satisfactory resolution of union contract negotiations with the Company’s pilots; 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.

      All references to “we,” “our,” “us,” or “Mesa” refer to Mesa Air Group, Inc., and its predecessors, direct and indirect subsidiaries, and affiliates.

Item 1.     Business

General

      Mesa Air Group, Inc. (“we,” “us,” “Mesa” or the “Company”) is a holding company whose principle subsidiaries operate as regional air carriers providing scheduled passenger and airfreight service, as well as subsidiaries primarily in support of its operating airlines. The Company serves 147 cities in 37 states, the District of Columbia, Canada, and Mexico. At September 30, 2002, the Company operated a fleet of 124 aircraft and had approximately 889 daily departures.

      Approximately 98% of our consolidated passenger revenues for the fiscal year ended September 30, 2002 were derived from operations associated with code-share agreements. Our subsidiaries have code-share agreements with America West Airlines, Inc. (“America West”), Frontier Airlines, Inc. (“Frontier”), Midwest Express Airlines, Inc. (“Midwest Express”), and 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.

      In addition to carrying passengers, we carry freight and express packages on our passenger flights and have interline small cargo freight agreements with many other carriers. We also have contracts with the

2

Table of Contents

      Our airline operations are conducted by the following 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.

Corporate Structure

      Mesa is a Nevada corporation that was originally formed in New Mexico, with its principal executive office in Phoenix, Arizona.

      In addition to operating the airline subsidiaries listed above, we also have the following other subsidiaries:

3

Table of Contents

Aircraft in Operation

      The following table sets forth our aircraft fleet (owned and leased) in operation by aircraft type as of September 30, 2002.

      The following table sets forth our aircraft fleet (owned and leased) in operation by aircraft type as of December 6, 2002.

Code-Share Agreements

      Our airline subsidiaries have agreements with America West, US Airways, Frontier, and Midwest Express to use those 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.

      The financial arrangement between us and our code-share partners involve either a revenue-guarantee or pro-rate arrangement. Both the America West code-share agreement and the US Airways regional jet code-share agreement are revenue-guarantee flying agreements. Under the terms of these flying agreements, the major carrier controls marketing, scheduling, ticketing, pricing and seat inventories. The Company receives a guaranteed payment based upon a fixed minimum monthly amount plus amounts related to departures and block hours flown plus direct reimbursement for expenses such as fuel, landing fees and insurance. Among other advantages, revenue-guarantee arrangements reduce the Company’s exposure to fluctuations in passenger traffic and fare levels, as well as fuel prices. The US Airways turboprop and the Frontier JetExpress code-share agreements are pro-rate agreements, for which the Company receives an allocated portion of the passengers’ fare and pays all of the costs of transporting the passenger.

4

Table of Contents

      The following table summarizes our available seat miles (“ASMs”) flown and revenue recognized under our code-share agreements for the year ended September 30, 2002:

     America West Code-Sharing Agreement

      We currently operate five CRJ-700s, 25 CRJ-200s, ten Dash-8s and three B1900D aircraft for America West under a code-sharing agreement. The code-share agreement provides for the Company to increase its fleet up to 25 CRJ-900s, 15 CRJ-700s, 25 CRJ-200s, 12 Dash-8s and five B1900Ds. The first CRJ-700 was placed into service in October 2002. In exchange for providing flights and all other obligations under the agreement, we receive a fixed monthly minimum amount plus certain additional amounts based upon the number of flights flown and block hours performed during the month. America West also reimburses us for certain costs on an actual basis, including fuel costs, aircraft ownership and financing costs, landing fees, passenger liability and hull insurance, and aircraft property taxes. We also receive a monthly payment from America West based on a percentage of revenue from flights that we operate under the code-share agreement. Under the code-share agreement, America West has the right to reduce the Dash-8, B1900, and combined CRJ fleets utilized under the code-share agreement by one aircraft in any six-month period; provided, however, America West must wait one year following the last scheduled delivery date of such aircraft to remove any CRJ-700 or CRJ-900 aircraft. In addition, America West may not reduce the Dash-8 aircraft to below a total of six. To date, America West has notified the Company of its intent to reduce the number of aircraft operated under the code-share agreement by (i) three CRJ-200s, (ii) two additional Dash-8 aircraft and (iii) three additional B1900D aircraft. The Company anticipates operating the removed aircraft under code-share agreements with the Company’s other partners. The code-share agreement terminates on the eighth anniversary of the date the last aircraft is added to the fleet under the agreement, which is currently anticipated to be 2012. The Company is currently in negotiations with America West on overall fleet composition.

     US Airways Code-Sharing Agreements

     Jet Code-Share Agreement

      We currently operate 32 Embraer regional jets for US Airways under a code-sharing agreement. The code-sharing agreement, as amended, provides that we will operate 52 regional jets as US Airways Express. The jet code-share agreement provides that we will provide US Airways Express service between US Airways hubs and cities designated by US Airways. In exchange for performing the flight services under the agreement, we receive from US Airways a fixed monthly minimum amount, plus certain additional amounts based upon the number of flights flown and block hours performed during the month. Additionally, certain costs incurred by Mesa in performing the flight services are “pass-through” costs, whereby US Airways agrees to reimburse us for the actual amounts incurred for these items: insurance, property tax per aircraft, fuel cost, oil cost, catering cost, and landing fees. We also receive a fixed profit margin based upon total costs under the agreement. On August 11, 2002, US Airways filed for Chapter 11 bankruptcy protection. On November 18, 2002, the U.S. Bankruptcy Court for the Eastern District of Virginia approved a motion filed by US Airways to continue the existing regional (i) jet code-share agreement and (ii) all amendments thereto, including the provisions for an additional 20 jets. The additional 20 jets must be in compliance with the ‘jets-for-jobs’ provisions in the US Airways pilot contract and requires the approval of the Company’s pilots. Additionally, on November 22, 2002, the Company signed a non-binding letter of intent with US Airways to provide an

5

Table of Contents

      Notwithstanding the foregoing, US Airways may terminate the code-share agreement at any time for cause upon 90 days notice and subject to our right to cure under any of the following conditions:

     Turboprop Code-Share Agreements

      Pursuant to three separate turboprop code-sharing agreements with US Airways, we currently operate 30 B1900D turboprop aircraft under a pro-rate revenue-sharing arrangement. We control scheduling, inventory and pricing subject to US Airways’ concurrence that such service does not adversely affect its other operations in the region. We are allocated a portion of each passenger’s fare based on a standard industry formula and are required to pay all the costs of transporting the passenger.

      US Airways may terminate the turboprop agreements at any time for cause upon not less than five days notice under any of the following conditions:

      The turboprop code-share agreements terminate in 2005 provided, however, most of the turboprop flying arrangements can be terminated by US Airways for any reason upon one hundred eighty (180) days prior advance written notice. Renewal of one code-share agreement with US Airways does not guarantee the renewal of the other code-share agreements with US Airways.

     Frontier Airlines, Inc. Jet Code-Sharing Agreement

      In September 2001, we entered into a five-year pro-rate revenue-sharing code-share agreement with Frontier Airlines, Inc. Under the terms of the agreement, we will market and sell flights operated by Mesa as Frontier JetExpress. This code-share began February 17, 2002 with service between Denver and selected cities. We currently operate four 50-seat CRJ-200 regional jet aircraft between Denver and the following cities: San Jose, San Diego, Ontario, Oakland and Wichita.

Fleet Plans and Aircraft Manufacturer Relationships

     ERJ Program

      In June 1999, we entered into an agreement with Empresa Brasiliera de Aeronautica SA (“Embraer”) to acquire 36 Embraer ERJ-145 50-passenger regional jets. Mesa introduced the ERJ-145 aircraft into revenue service in the third quarter of fiscal 2000 as US Airways Express. As of September 30, 2002, we have taken delivery of 32 ERJ-145’s, which have been financed as operating leases. We have the right to cancel the

6

Table of Contents

     CRJ Program

      In August 1996, we entered into an agreement (the “1996 BRAD Agreement”) with Bombardier Regional Aircraft Division (“BRAD”) to acquire 16 CRJ-200 50-passenger regional jet aircraft. The 1996 BRAD Agreement also granted the Company an option to acquire an additional 16 regional jet aircraft. In fiscal 1997, we exercised our option to purchase the additional 16 CRJ aircraft reserved under the option provisions of the 1996 BRAD Agreement. The Company has received all 32 CRJ-200 aircraft under the 1996 BRAD Agreement. The aircraft are currently under permanent financing as operating leases with initial terms of 16.5 to 18.5 years.

      In May 2001, the Company entered into a second agreement with BRAD to acquire 20 50-seat CRJ-200s, 20 64-seat CRJ-700s and 20 80-seat CRJ-900s (the “2001 BRAD Agreement”). Under the 2001 BRAD Agreement, we have the right to convert up to five CRJ-700 aircraft to CRJ-900 aircraft and to cancel our CRJ-200 order. We have notified BRAD of our intention to convert to CRJ-900s. The total number of firm aircraft currently on order is 15 CRJ-700s and 25 CRJ-900s. The transaction includes standard product support provisions, including training support, preferred pricing on initial inventory provisioning, maintenance support and technical publication support. Deliveries of the CRJ-700 commenced in July 2002, with revenue service commencing in October. We are the launch customer of the CRJ-900 and expect to take delivery of the first aircraft in the first calendar quarter of 2003. In addition to the firm orders, Mesa has an option to acquire an additional 80 CRJ-700 or CRJ-900 regional jets. In conjunction with the 2001 BRAD Agreement, Mesa has $8.8 million on deposit with BRAD, which is included with lease and equipment deposits at September 30, 2002.

      The following table summarizes our jet fleet status and current fleet expansion plans currently under contract for the periods indicated:

     Beechcraft 1900D

      As of September 30, 2002, we owned 39 and leased seven Beechcraft 1900D aircraft. In fiscal year 2002, we returned 12 Beechcraft 1900D aircraft. We are currently in the process of returning excess aircraft to the manufacturer and anticipate operating 43 aircraft during fiscal 2003. We anticipate returning the remaining three aircraft in the second quarter of fiscal 2003.

7

Table of Contents

Marketing

      Our flight schedules are structured to facilitate the connection of our passengers with the flights of our code-share partners at their hub airports and to maximize local and connecting service to other carriers.

      Under our US Airways Express turboprop and Frontier JetExpress 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 or Frontier regarding the level of service and fares. We believe that this selection process enhances the likelihood of profitability in a given market.

      Under the America West code-share agreement and the US Airways regional jet agreement, market selection, pricing and yield management functions are performed by America West and US Airways, respectively. Our role is simply to operate our fleet in the safest and most reliable manner in exchange for fees paid under a generally fixed payment schedule. We intend to expand our operations performed pursuant to these revenue-guarantee agreements.

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

      Our pro-rate agreements and Independent Operation flights are promoted through, and our 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. We participate in shared advertising with resort and rental property operators and ski areas in leisure markets in which we operate. Our independent and Frontier JetExpress operations utilize SABRE, a computerized reservation system widely used by travel agents, corporate travel offices and other airlines. The reservation systems of our code-share partners are also utilized in each of our other operations through their respective code-share agreements. We also pay 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. We believe that we have good relationships with the travel agents serving our passengers.

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.

      We believe that the Airline Deregulation Act facilitated our entry into scheduled air service markets and allows us to compete on the basis of service and fares, thus causing major carriers to seek out further contractual agreements with carriers like us 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 our markets.

      We believe our code-share agreements provide a significant competitive advantage in hub airports where our 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, we compete with other airlines by offering frequent flights, flexible schedules and numerous fare levels.

8

Table of Contents

Fuel

      Historically, we have not experienced problems with the availability of fuel, and believe that we will be able to obtain fuel in quantities sufficient to meet our 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 2002, approximately 76% 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 our 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 us have the appropriate training and experience and hold the required licenses issued by the FAA. Using a combination of FAA-certified maintenance vendors and our own personnel and facilities, the Company maintains its aircraft on a scheduled and “as-needed” basis. We emphasize preventive maintenance and inspect our aircraft engines and airframes as required. We also maintain an inventory of spare parts specific to the aircraft types we fly. We provide periodic in-house and outside training for our maintenance and flight personnel and also takes advantage of factory training programs that are offered when acquiring new aircraft.

Insurance

      We carry 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, while at the same time, significantly increasing the premiums for this coverage as well as for aviation insurance in general. 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 that is generally renewable for 60-day periods. However, the availability of aviation insurance is not guaranteed and our inability to obtain such coverage at affordable rates may result in the grounding of our aircraft. Insurance costs are reimbursed under the terms of our code-share agreement with America West, and our regional jet service agreement with US Airways.

Employees

      As of September 30, 2002, we employed approximately 3,100 employees. Approximately 2,300 of our employees are represented by various labor organizations. Our continued success is partly dependent on our ability to continue to attract and retain qualified personnel. Historically, we have had no difficulty attracting qualified personnel to meet our requirements.

      Our five-year agreement with the Air Line Pilots Association (“ALPA”) for a single pilot contract for MAI and Air Midwest expired in December 2001. We are currently in contract negotiations with the pilots of MAI and Air Midwest for a new collective bargaining agreement. In July 2002, ALPA filed suit against the Company under the Railway Labor Act alleging (i) violation of the duty to bargain in good faith; (ii) attempting to undermine ALPA as the collective bargaining representative of pilots; and (iii) failure to refrain from making changes to status quo rates of pay, rules or working conditions. For more information regarding this matter, see the disclosure under the caption “Item 3 — Legal Proceedings” below.

9

Table of Contents

      MAI’s flight attendants are represented by the Association of Flight Attendants (“AFA”). On October 18, 2002, the Company and the AFA amended the terms of the agreement and extended the term through June 2006.

      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 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.

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

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. We service 20 such cities for an annual subsidy of approximately $14.0 million. There is no guarantee that we will continue to receive subsidies for the cities we serve. If the funding under this program is terminated for any of the cities served by the Company, in all likelihood we would not continue to fly in these markets, and as a result, we would be forced to find alternative uses for the Beechcraft 1900D 19-seat turboprop aircraft affected.

Regulation

      As an interstate air carrier, we are 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.

      We are subject to the jurisdiction of the FAA with respect to its aircraft maintenance and operations, including equipment, ground facilities, dispatch, communication, training, weather observation, flight personnel and other matters affecting air safety. To ensure compliance with its regulations, the FAA requires airlines to obtain an operating certificate, which is subject to suspension or revocation for cause, and provides for regular inspections.

      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 our costs, adversely affecting our ability to profitably serve certain markets. Such increased costs are primarily related to additional training, dispatch and maintenance procedures. We continue to work to minimize the cost of these new operating procedures while fully complying with FAR Part 121 operating requirements.

      We are subject to various federal and local laws and regulations pertaining to other issues of environmental protocol. We believe we are in compliance with all governmental laws and regulations regarding environmental protection.

      We are 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.

10

Table of Contents

Available Information

      We maintain a website where additional information concerning our business can be found. The address of that website is www.mesa-air.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the SEC.

Item 2.     Properties

      Our primary property consists of the aircraft used in the operation of our flights. The following table lists the aircraft owned and leased by the Company as of September 30, 2002.

      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.

      In addition to aircraft, we have office and maintenance facilities to support our operations. Our facilities are summarized in the following table:

      We lease ticket counters, check-in and boarding and other facilities in the passenger terminal areas in the majority of the airports we serve and staff those facilities with our personnel. America West, US Airways and Frontier also provide facilities, ticket handling and ground support services for the Company at certain airports.

      Our corporate headquarters facility is leased pursuant to a ten-year lease that commenced November 1, 1998. In October 2002, we entered into an amendment to increase the total square footage to 26,000 and

11

Table of Contents

      We believe our facilities are suitable and adequate for our current and anticipated needs.

Item 3.     Legal Proceedings

      In March 2001, we 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, we 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 $23.0 million, which it claims to have computed by applying a 5X multiplier in the arbitration provision to fees that allegedly accrued in excess of $4.0 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 equitable resolution of the parties’ fee dispute by an impartial arbitrator; and that it is unenforceable because it circumvents the legal and ethical requirements that attorneys’ fees be reasonable. The Company seeks a determination by the Court of the fee dispute between the parties. On November 27, 2001, the court granted Beus Gilbert’s motion to compel arbitration to resolve the dispute and ordered the arbitrator to decide whether the fee resulting from a 5X multiplier would be reasonable. On July 9, 2002, the arbitrator awarded Beus Gilbert $5.8 million which is included in other accrued expenses at September 30, 2002. The Company has appealed the arbitrator’s decision.

      The Company and/or its subsidiaries is also involved in a lawsuit involving the Air Line Pilots Association, International (“ALPA”), the union that represents the Mesa Airlines and Air Midwest pilots.

     Alpa v. Mesa Airlines, Inc., et al.,

      The proceeding brought by ALPA, Case No. CV-02-1333-PHX-PGR (D. Ariz.) names as defendants the Company, our Mesa Airlines subsidiary and our Chairman in his individual capacity. It asserts three claims under the Railway Labor Act: (1) violation of the duty to bargain in good faith; (2) attempting to undermine ALPA as the collective bargaining representative of the Mesa Airlines pilots; and (3) failure to refrain from making changes to status quo rates of pay, work rules or working conditions prior to exhausting the statute’s mediation procedures. The latter two counts are based primarily on our announcement that we intend to establish a new subsidiary, Freedom Airlines, to perform flying for America West Airlines using CRJ-700 and CRJ-900 aircraft. We deny that we have violated the statute in any fashion and plan a vigorous defense against ALPA’s suit. The complaint was filed in July 2002. We filed a motion to dismiss in September 2002. Oral arguments are scheduled in January 2003.

      We are also involved in various other legal proceedings and FAA civil action proceedings that the Company does not believe will have a material adverse effect upon our business, financial condition or results of operations, although no assurance can be given to the ultimate outcome of any such proceedings.

12

Table of Contents

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

      None.

Executive Officers of the Registrant

      The following table sets forth the names and ages of the executive officers of the Company and certain additional information:

      Jonathan G. Ornstein was appointed President and Chief Executive Officer of Mesa Air Group, Inc. effective May 1, 1998. Mr. Ornstein relinquished his position as President of the Company in June 2000. From April 1996 to his joining the Company as Chief Executive Officer, Mr. Ornstein served as President and Chief Executive Officer and Chairman of Virgin Express S.A./ N.V., a European airline. From 1995 to April 1996, Mr. Ornstein served as Chief Executive Officer of Virgin Express Holdings, Inc. Mr. Ornstein joined Continental Express Airlines, Inc., as President and Chief Executive Officer in July 1994 and, in November 1994, was named Senior Vice President, Airport Services at Continental Airlines, Inc. Mr. Ornstein was previously employed by the Company from 1988 to 1994, as Executive Vice President and as President of the Company’s WestAir Holding, Inc., subsidiary.

      Michael J. Lotz, President and Chief Operating Officer, joined the Company in July 1998. In January 1999, Mr. Lotz became Chief Operating Officer. In August 1999, Mr. Lotz became the Company’s Chief Financial Officer and in January 2000 returned to the position of Chief Operating Officer. On June 22, 2000, Mr. Lotz was appointed President of the Company. Prior to joining the Company, Mr. Lotz served as Chief Operating Officer of Virgin Express, S.A./ N.V., a position he held from October 1996 to June 1998. Previously, Mr. Lotz was employed by Continental Airlines, Inc., most recently as Vice President of Airport Operations, Properties and Facilities at Continental Express.

      George Murnane III, Executive Vice President, was appointed Executive Vice President of the Company effective December 2001. Mr. Murnane has served as a director of the Company since June 1999. Mr. Murnane has served as the President of Barlow Management, Inc. since 1998. From 1996 to December 2001, Mr. Murnane was a Director and Executive Vice President of International Airline Support Group, Inc., a leading redistributor of aftermarket commercial aircraft spare parts and lessor and trader of commercial aircraft and engines, most recently as its Chief Operating Officer. From 1995 to 1996, Mr. Murnane served as Executive Vice President and Chief Operating Officer of Atlas Air, Inc., an air cargo company. For 1986 to 1996, he was an investment banker with the New York investment banking firm of Merrill Lynch & Co., most recently as a Director in the firm’s Transportation Group. Mr. Murnane currently serves on the Board of Directors of International Airline Support Group, Inc. and North-South Airways, Inc.

13

Table of Contents

      Rodena Turner-Bojorquez, Vice President of Human Resources, joined the Company in May 1998. From 1996 to 1998, Ms. Turner-Bojorquez served as a Director at Virgin Express, where she oversaw the customer service and flight crew administration departments. From 1994 to 1996, she was Senior Director of Human Resources at Continental Express. She holds a BA in accounting from California State University, Fresno.

      Michael Ferveda, President of Freedom Airlines, Inc. (“FAI”), was appointed President in May 2002. Prior to becoming President of FAI, Mr. Ferveda served as the Senior Vice President of Mesa Airlines, Inc. He joined the Company in September 1990. Mr. Ferverda has served the Company in several capacities including pilot, Flight Instructor/ Check Airman, Assistant Chief Pilot, FAA Designated Examiner, FAA Director of Operations and Divisional Vice President. Mr. Ferverda was a pilot with Eastern Airlines from 1973 to 1989. Prior to joining Eastern Airlines, Mr. Ferverda served as an Aviator in the United States Navy. Mr. Ferverda is a graduate of Indiana University.

      Brian S. Gillman, Vice President, General Counsel and Secretary, joined the Company in February 2001. From July 1996 to February 2001, he served as Vice President, General Counsel and Secretary of Vanguard Airlines, Inc. in Kansas City, Missouri. From September 1994 to July 1996, Mr. Gillman was a corporate associate in the law firm of Stinson, Mag & Fizzell, P.C., Kansas City, Missouri. Mr. Gillman received his Juris Doctorate and B.B.A. in Accounting from the University of Iowa in 1994 and 1991, respectively.

      Donald Harrison, Vice President of Maintenance of Mesa Airlines, Inc., joined in April 1999. Prior to joining the Company, Mr. Harrison was employed at Dimension Aviation from March 1997 to April 1999 as Vice President and General Manager. Prior to joining Dimension Aviation, Mr. Harrison was employed as an aviation consultant for Dee Howard from 1996 to March 1997.

      Robert Hornberg, Vice President and Chief Information Officer, joined the Company in July 1998 as Director of Information Services. Mr. Hornberg was appointed Vice President and Chief Information Officer in September 2000. For October 1994 to April 1998, Mr. Hornberg was Director of Information Services for Western Pacific Airlines.

      F. Carter Leake, President of CCAir, Inc., joined the Company as Executive Vice-President of CCAir, in January 2001. In October 2001, Mr. Leake was appointed President. Prior to joining the Company, Mr. Leake served as a Director of Sales for Bombardier Regional Aircraft from November 1996 to January 2001. Previously, Mr. Leake was an analyst with SH&E, an aviation consulting firm in New York, and a US Air Force military pilot.

      Mickey Moman, Vice President of Flight Operations of Mesa Airlines, Inc., joined Mesa Airlines in October 1987. Mr. Moman was appointed Vice President of Flight Operations with Mesa Airlines in May 2002. Prior to employment with Mesa, he served eight years with the FAA in various positions and prior to that served eight years in the U.S. Air Force. While at Mesa, Mr. Moman started as a line pilot in the Beech 99. Mr. Moman has served the Company in many capacities including pilot, Chief Pilot, Director of Operations and Vice President of Training.

      Jeff P. Poeschl, Vice President — Finance, joined the Company in December 2000. From 1988 to the date, Mr. Poeschl joined the Company, he was employed by Deloitte & Touche in Milwaukee, Wisconsin, most recently as Senior Manager. Mr. Poeschl obtained his Bachelor of Arts in Business Administration, double-majoring in Accounting and Finance, at the University of Wisconsin.

      Gregory Stephens, President of Air Midwest, Inc., joined Air Midwest in 1985 as a ground service worker, working his way up to station operations, customer service agent, crew scheduler and dispatcher. Mr. Stephens also held positions as Director of Planning and Pricing, Director of Safety and Vice-President and General Manager of Air Midwest. Mr. Stephens was appointed Vice President of Customer Service in 1998 of Mesa Airlines and appointed President of Air Midwest in December 1999.

      Robert B. Stone, Chief Financial Officer and Treasurer, joined the Company in January 2000. Prior to joining the Company, Mr. Stone was employed by the Boeing Company for more than 20 years, most recently as Vice President, Financial Planning and Analysis. Mr. Stone obtained his MBA from Pacific Lutheran University and his Bachelor of Arts in Business Administration at the University of Washington.

14

Table of Contents

PART II

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 6, 2002, we had approximately 1,247 shareholders of record. We have never paid cash dividends on our common stock. The payment of future dividends is within the discretion of our board of directors and will depend upon our future earnings, if any, our capital requirements, bank financing, financial condition and other relevant factors.

Recent Sales of Unregistered Securities

      On February 7, 2002, in connection with an agreement entered into with Raytheon Aircraft Company (“Raytheon”), we issued a warrant to purchase shares of our common stock to Raytheon. This warrant allows Raytheon to purchase up to an aggregate of 233,068 shares of our common stock at a per share exercise price of $10.00. Raytheon paid a purchase price of $1.50 per share underlying the warrant. The warrant is exercisable at any time over a three-year period following its date of issuance. Absent a default by us under the agreement with Raytheon in which case vesting is accelerated, the shares underlying the warrant vest (and are therefore purchasable by Raytheon) according to the following schedule: 13,401 shares in fiscal year 2001; 116,534 shares in fiscal year 2002; 58,267 shares in fiscal year 2003 and 44,866 shares in fiscal year 2004. On March 12, 2002 and November 22, 2002, Raytheon exercised its option to purchase the 2001 shares and 2002 shares. The sale of the warrant and the shares underlying the warrant were made pursuant to an exemption from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended.

15

Table of Contents

Selected Financial Data and Operating Statistics

      The selected financial data as of and for each of the five years ended September 30, 2002, 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, 2002, 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 and 1998 have been audited by KPMG LLP, independent auditors.

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

16

Table of Contents

     Our June 9, 1999 acquisition of CCAir was accounted for as a pooling of interests and, accordingly, our consolidated financial statements have been restated to include the results of CCAir for all periods presented. The consolidated financial statements of CCAir for the 1998 fiscal year has not been restated to change CCAir’s audited year end to September 30.

      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.

Critical Accounting Estimates and Judgments

      The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. In connection with the preparation of these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the allowance for doubtful accounts, medical claims reserve, valuation of assets held for sale and costs to return aircraft and a valuation allowance for certain deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Such historical experience and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      We have identified the accounting policies below as critical to our business operations and the understanding of our results of operations. The impact of these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. The discussion below is not intended to be a comprehensive list of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements, which contains accounting policies and other disclosures required by accounting principles generally accepted in the United States of America.

      The financial arrangement between Mesa and their code-share partners involve either a revenue-guarantee or pro-rate arrangement. Under a revenue-guarantee arrangement, the major airline generally pays a monthly guaranteed amount. Both the America West code-share agreement and the US Airways regional jet code-share agreement are revenue-guarantee flying agreements. Under the terms of these flying agreements, the major carrier controls marketing, scheduling, ticketing, pricing and seat inventories. The Company receives a guaranteed payment based upon a fixed minimum monthly amount plus amounts related to departures and block hours flown plus direct reimbursement for expenses such as fuel, landing fees and insurance. Among other advantages, revenue-guarantee arrangements reduce the Company’s exposure to fluctuations in passenger traffic and fare levels, as well as fuel prices. The US Airways turboprop and the Frontier JetExpress code-share agreements are pro-rate agreements.

      As discussed above, amounts billed under revenue guarantee arrangements are subject to the interpretation of the applicable code-share agreement and are subject to audit by the code-share partner. Periodically our code-share partners dispute amounts billed and pay amounts less than those billed. Ultimate collection of the remaining amounts not only depends upon Mesa prevailing under audit, but also upon the financial well-being of the code-share partner. As such, the Company periodically reviews amounts past due and records a reserve for amounts estimated to be uncollectible. The allowance for doubtful accounts was $12.8 million and $14.7 million at September 30, 2002 and 2001, respectively. If the Company’s actual ability to collect these

17

Table of Contents

      The Company is currently self-insured for health care costs and as such, estimates a reserve for the cost of claims that have not been paid as of the balance sheet date. The Company’s estimate of this reserve is based upon historical claim experience and upon the recommendations of its health care provider. At September 30, 2002 and 2001, the Company has accrued $2.0 million and $1.4 million, respectively, for the cost of future health care claims. If the ultimate development of these claims is significantly different than those that have been estimated, the reserves for future health care claims could be materially overstated or understated.

      Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset. The Company determines the fair value based upon estimates of future cash flows, market value of similar assets and/ or independent appraisals.

      Long-lived assets to be disposed of and parts held for sale are reported at the lower of carrying amount or fair value less cost to sell. Aircraft and parts held for sale are comprised of aircraft the Company has identified as surplus as well as expendable and rotable inventory that is in excess of the Company’s needs. Aircraft currently identified as held for sale are under contract to return to the manufacturer and are valued at the contract price, less the cost to return the aircraft to meet the manufacturer’s return conditions. The Company estimates quantities of rotable and expendable inventory that are surplus to its needs by employing independent consultants who utilize mathematical models to determine optimum inventory levels based on such variables as size of fleet, number of maintenance bases and desired reliability. Quantities of rotable and expendable inventory that are surplus to the Company’s needs are valued at fair market value, less costs to sell. Fair market value is determined based upon the Company’s experience in selling similar assets and outside appraisals. If the actual value of these surplus parts is materially different than estimated, the Company’s estimate of fair market value could be materially understated or overstated.

      The Company periodically returns aircraft to the manufacturer or lessor that have been identified as excess. It is standard practice in the industry that aircraft returns must meet established contractual return conditions. The ultimate cost of completing the maintenance necessary to meet these return conditions is not known until all the work is completed and accepted by the manufacturer or lessor. As such, the Company estimates these costs at the time of the decision to the return aircraft. The Company’s estimates are based upon historical experience in performing this and similar maintenance; however, the ultimate cost cannot be readily determined until the aircraft or engine is opened and examined. At September 30, 2002 and 2001, the Company accrued $8.1 million and $4.7 million, respectively, for the cost to return aircraft. If the ultimate cost to return these aircraft is significantly different than what has been estimated, the reserves for the costs to return aircraft could be materially overstated or understated.

      The Company records deferred tax assets for the value of benefits expected to be realized from the utilization of alternative minimum tax credit carryforwards and state and federal net operating loss carryforwards. The Company periodically reviews these assets for realizability based upon expected taxable income in the applicable taxing jurisdictions. To the extent the Company believes some portion of the benefit may not be realizable, an estimate of the unrealized portion is made and an allowance is recorded. At September 30, 2002 and 2001, the Company had a valuation allowance for certain deferred tax assets not expected to be realized of $2.9 million and $2.2 million, respectively. If the ultimate realization of these deferred tax assets is significantly different than those that have been estimated, the valuation allowance for deferred tax assets could be materially overstated or understated.

18

Table of Contents

Results of Operations

      Mesa Air Group, Inc. and its subsidiaries (collectively referred to herein as “Mesa” or the “Company”) is an independently owned regional airline serving 147 cities in 37 states, Canada and Mexico. At September 30, 2002, Mesa operated a fleet of 124 aircraft and had approximately 889 daily departures.

      Mesa’s airline operations during fiscal year 2002 were conducted by three regional airline subsidiaries primarily utilizing hub-and-spoke systems. Mesa Airlines, a wholly owned subsidiary of Mesa, operates as America West Express under a code-share and revenue sharing agreement with America West Airlines, Inc., as US Airways Express under code-sharing agreements with US Airways, Inc. and as Frontier Jet Express under a code-sharing agreement with Frontier. Air Midwest, Inc., a wholly owned subsidiary of Mesa, also operates under a code-sharing agreement with US Airways and flies as US Airways Express and also operates an independent division, doing business as Mesa Airlines, from Albuquerque, New Mexico and Dallas, Texas. Air Midwest also has a code-sharing agreement with Midwest Express in Kansas City on flights operated as US Airways Express. Prior to it ceasing operations on November 4, 2002, CCAir, a wholly owned subsidiary of Mesa, operated under a code-share agreement with US Airways that permitted CCAir to operate under the name US Airways Express and to charge their joint passengers on a combined basis with US Airways. In addition, Freedom Airlines, Inc., a wholly owned subsidiary of Mesa Air Group, Inc. began operating as America West Express pursuant to the code-share and revenue sharing agreement with America West in October 2002.

      The following tables set forth selected operating and financial data of the Company for the years indicated below.

19

Table of Contents

Operating Expense Data