MAIR Holdings 10-Q 2006
Washington, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
For the quarterly period ended September 30, 2006
o TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE
For the transition period from to
Commission File No: 0-17895
MAIR HOLDINGS, INC.
Incorporated under the laws of Minnesota
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filing and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q of MAIR Holdings, Inc. (MAIR or the Company) under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are forward-looking and are based upon information currently available to the Company. The Company, through its officers, directors or employees, may also from time to time make oral forward-looking statements. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that a variety of material risks and uncertainties could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company. Many important factors that could cause such a difference are described under the caption Risk Factors in Item 1A of Part II of this Quarterly Report on Form 10-Q.
Undue reliance should not be placed on the Companys forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond the Companys control. The Companys forward-looking statements are based on the information currently available and speak only as of the date on which this report was filed with the United States Securities and Exchange Commission (SEC). Over time, actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by the Companys forward-looking statements, and such differences might be significant and materially adverse to the Companys shareholders.
All subsequent written or oral forward-looking statements attributable to the Company or persons acting on the Companys behalf are expressly qualified by the factors described above. The Company assumes no obligation, and disclaims any obligation, to update information contained in this Quarterly Report on Form 10-Q, including forward-looking statements, as a result of facts, events or circumstances after the date of this report, except as required by law in the normal course of its public disclosure practices.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HOLDINGS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MAIR HOLDINGS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MAIR HOLDINGS, INC. AND
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
HOLDINGS, INC. AND SUBSIDIARIES
The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC. The information furnished in the condensed consolidated financial statements includes normal recurring adjustments, unless otherwise noted, and reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of such condensed consolidated financial statements. The Companys business is seasonal and, accordingly, interim results are not indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2006, and the notes thereto, included in the Companys Annual Report on Form 10-K filed with the SEC on June 27, 2006.
1. Basis of Presentation, Corporate Organization and Business
The condensed consolidated financial statements include the accounts of MAIR and its wholly-owned subsidiaries, Big Sky Transportation Co. (Big Sky) and Mesaba Aviation, Inc. (Mesaba) until Mesabas bankruptcy filing on October 13, 2005 (the Petition Date). All intercompany transactions and balances have been eliminated in consolidation. As discussed below, the accounts of Mesaba have been deconsolidated from the Companys condensed consolidated financial statements effective as of the Petition Date. Since the Petition Date, intercompany balances between MAIR and Mesaba have not been eliminated.
As discussed in Note 2, Mesaba filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code) in the United States Bankruptcy Court for the District of Minnesota (the Bankruptcy Court) on the Petition Date. Mesaba is operating its business as a debtor-in-possession pursuant to the Bankruptcy Code. Mesabas financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of postpetition liabilities in the ordinary course of business.
Due to Mesabas bankruptcy and the uncertainties surrounding the nature, timing, and specifics of the bankruptcy proceedings, MAIR deconsolidated Mesabas financial results under the equity method of accounting effective as of the Petition Date. As a result, Mesabas assets and liabilities have been removed from the Companys condensed consolidated balance sheets as of the Petition Date and through September 30, 2006 (see Note 2). Mesabas results of operations have been removed from the Companys condensed consolidated results of operations and cash flows since the Petition Date, but continue to be included in such condensed consolidated financial statements for periods prior to the Petition Date.
MAIR has accounted for Mesabas financial results under the equity method of accounting since the Petition Date. In accordance with APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, at March 31, 2006, MAIR evaluated whether its investment in Mesaba had experienced an other-than-temporary impairment. MAIRs evaluation utilized a market and income approach, including a discounted cash flow analysis. After analyzing Mesabas actual losses in fiscal 2006, Mesabas projected losses in fiscal 2007 as it transitions to a Saab-only operation, Mesabas five-year Saab business plan and Mesabas liabilities subject to compromise as of March 31, 2006, MAIR concluded that its remaining investment in Mesaba had experienced an other-than-temporary impairment. Accordingly, effective March 31, 2006, MAIR recorded an $8.9 million impairment charge to write off its remaining equity investment in Mesaba.
During the six months ended September 30, 2006 Mesaba reported a net loss of $9.0 million. MAIR continues to believe that its investment in Mesaba remains other-than-temporarily impaired at September 30, 2006 due to the continued uncertainty of Mesabas bankruptcy and the significant losses Mesaba projects over the remainder of fiscal 2007.
The provisions of Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, (SOP 90-7), apply to Mesabas financial statements while Mesaba operates under the provisions of Chapter 11. SOP 90-7 does not change the application of GAAP in the preparation of financial statements. However, SOP 90-7 does require that the financial statements, for periods including and subsequent to the filing of the Chapter 11 petition, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. See Note 12 for the condensed financial statements of Mesaba presented in accordance with SOP 90-7 on a stand-alone basis as of September 30, 2006 and March 31, 2006 and for the three and six months ended September 30, 2006 and 2005.
Mesaba operates as a regional carrier providing scheduled passenger service as Mesaba Airlines/Northwest Airlink and Mesaba Airlines/Northwest Jet Airlink under a ten-year omnibus Airline Services Agreement (ASA) with Northwest Airlines, Inc. (Northwest) dated August 29, 2005. The ASA governs Mesabas operation of Avro RJ85 regional jets (Avros), Saab 340 jet-prop aircraft (Saabs), and Canadair regional jets (CRJs). As of September 30, 2006, Mesaba was operating nine Avros, 49 Saabs and one CRJ, all of which are subleased from Northwest. Neither Mesaba nor Northwest has assumed or rejected the ASA in its respective bankruptcy proceedings, and Mesaba is continuing to operate under the terms of the ASA (see Note 2 regarding Northwest filing for Chapter 11 bankruptcy protection on September 14, 2005 and the effect of such filing on the ASA). As of September 30, 2006, Mesaba served 88 cities in the United States and Canada from Northwests hub airports located in Minneapolis/St. Paul, Detroit and Memphis.
The ASA provides for incentive payments from Northwest to Mesaba based on achievement of certain operational goals on a semi-annual basis. Such incentives totaled $0.2 million and $0.8 million for the three months ended September 30, 2006 and 2005, respectively. Incentives totaled $1.5 million and $2.2 million for the six months ended September 30, 2006 and 2005, respectively, and are included in passenger revenues in Mesabas condensed statements of operations (see Note 12).
Approximately $19.4 million, or 85.8%, and $25.7 million, or 88.1%, of the respective September 30, 2006 and March 31, 2006 net accounts receivable balances in Mesabas condensed balance sheets were due from Northwest and were not collateralized (see Note 12). Approximately 94.0% and 95.4% of Mesabas operating revenue recognized for the three months ended September 30, 2006 and 2005, respectively, was from Northwest. Approximately 94.4% and 95.5% of Mesabas operating revenue recognized for the six months ended September 30, 2006 and 2005, respectively, was from Northwest. Accounts payable owed to Northwest by Mesaba, primarily for ground handling, was insignificant as of September 30, 2006 and $0.1 million as of March 31, 2006. Mesaba paid Northwest $5.8 million and $3.6 million for ground handling and other services for the three months ended September 30, 2006 and 2005, respectively. Mesaba paid Northwest $11.2 million and $6.9 million for ground handling and other services for the six months ended September 30, 2006 and 2005, respectively.
In connection with the ASA, and pursuant to its separate agreement with Northwest, MAIR made a capital contribution of approximately $31.7 million to Mesaba in September 2005, just prior to Northwest filing for bankruptcy (see Note 2).
There are other significant related party transactions and balances between Northwest and Mesaba disclosed throughout the Notes to Condensed Consolidated Financial Statements. Loss of Mesabas business relationship with Northwest or Northwests failure to make timely payment of amounts owed to Mesaba would have a material adverse effect on Mesabas operations, financial position and cash flows.
Big Sky operates as a regional air carrier based in Billings, Montana, providing scheduled passenger, freight, express package and charter services. As of September 30, 2006, Big Sky provided scheduled air service to 18 communities in Montana, Colorado, Idaho, Oregon, Washington and Wyoming. Big Sky operates daily scheduled flights providing interline and online connecting services and local market services. Big Sky also has code-sharing agreements with Alaska Airlines, Horizon Air, US Air and Northwest, where its services are marketed jointly with those air carriers for connecting flights.
Big Sky participates in the Essential Air Service (EAS) program with the Department of Transportation (DOT). The EAS program subsidizes air carriers to provide air service to designated rural communities throughout the United States that could not otherwise economically justify that service based on their passenger traffic. The DOT pays EAS subsidies for each departure in a covered market. Big Sky recognized revenue from EAS subsidies of $2.1 million for each of the three months ended September 30, 2006 and 2005. During the six months ended September 30, 2006 and 2005, Big Sky recognized revenue from EAS subsidies of $4.3 million and $4.0 million, respectively.
On July 12, 2006, Big Sky entered into an agreement with Flying Boat, Inc., d/b/a Chalks International Airlines (Chalks), to operate up to two Beechcraft 1900D aircraft for Chalks for one year. Under the agreement, Big Sky will initially operate the aircraft between Florida and the Bahamas. The agreement provides compensation to Big Sky for a minimum monthly level of flying and contains two one-year optional extensions. Under the terms of the agreement, Big Sky will not assume any risk associated with revenue or fuel expense. As a result of delays in Chalks obtaining governmental approvals, Big Sky is scheduled to begin this operation on November 9, 2006.
On October 16, 2006, Big Sky announced it will begin service between Abraham Lincoln Capital Airport in Springfield, Illinois and Midway Airport in Chicago, Illinois in December 2006. This operation is being provided under a revenue guaranty program with the Abraham Lincoln Capital Airport.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. The most significant uses of estimates relate to the allowance for doubtful accounts, accrued maintenance expenses, aircraft property and equipment lives, inventory obsolescence reserves, valuation of intangible assets, and accounting for income taxes. Ultimate results could differ from those estimates.
Certain amounts within accounts receivable previously reported in the accompanying condensed consolidated balance sheet as of March 31, 2006 have been reclassified to conform to the fiscal 2007 presentation. The reclassification had no effect on previously reported total current assets.
2. Northwest and Mesaba Bankruptcy Filings
Northwest Bankruptcy Filing
On September 12, 2005, Northwest failed to make a payment of approximately $18.7 million due to Mesaba for services provided by Mesaba to Northwest from August 15 to August 31, 2005. Subsequently, on September 14, 2005, Northwest filed in the Southern District of New York for bankruptcy protection under Chapter 11 of the Bankruptcy Code. In the weeks following its bankruptcy filing, Northwest made additional payment adjustments such that Northwest did not pay for services provided by Mesaba to Northwest prior to the date of Northwests bankruptcy filing.
At the time of Northwests bankruptcy filing on September 14, 2005, Mesaba estimated that Northwest owed Mesaba approximately $31.9 million under the ASA and related agreements, net of amounts that Mesaba owed to Northwest under these agreements. After analyzing the collectibility of the prepetition receivables due to Mesaba from Northwest, the Company concluded that it was necessary to establish a reserve of $31.9 million for amounts that Mesaba may not ultimately collect from Northwest. As of March 31, 2006, Mesaba updated its reserve balance to $29.1 million, based on revised estimates of $36.4 million owed by Northwest to Mesaba and $7.3 million owed by Mesaba to Northwest. Although Mesaba maintained the above reserve as of September 30, 2006, Mesaba will continue to actively seek reimbursement through the bankruptcy process and any other means, including any future discussions Mesaba may have with Northwest regarding the ASA.
Generally, collection of all amounts that Northwest owed to its creditors at the time of its filing was stayed by the bankruptcy filing. Mesabas claims relating to such prepetition amounts are unsecured claims. At any time during Northwests bankruptcy proceedings, Northwest has the option to assume or reject the ASA and related agreements, subject to approval of the bankruptcy court. If Northwest assumes the ASA, prepetition amounts owed to Mesaba would become an administrative claim and Mesaba could receive payment in full. If Northwest rejects the ASA and related contracts, then prepetition amounts owed to Mesaba would remain an unsecured claim, and Mesaba would likely receive only a percentage of the amounts owed to it, and even then would only receive such amounts after Northwests plan of reorganization is approved by its bankruptcy court. Mesaba believes that, even if Northwest intends to continue its relationship with Mesaba, Northwest will attempt to renegotiate the ASA with Mesaba rather than seek to assume the ASA. This renegotiation could include a negotiation of the amount that Northwest will ultimately pay Mesaba in settlement of the net prepetition amounts that Northwest owes to Mesaba. However, the exact nature of Mesabas future relationship with Northwest may not be known until such time as Northwest and Mesaba adopt their respective bankruptcy reorganization plans.
Since its bankruptcy filing, Northwest has also proposed and implemented various changes to Mesabas fleet. As of September 30, 2006, Northwest had removed a total of 26 Avros, 14 Saabs and one CRJ from Mesabas fleet. Northwest intends to terminate all the remaining aircraft, other than 49 Saabs, by December 31, 2006, subject to final lease negotiations between Northwest and its lessors. As of September 30, 2006, Mesaba was operating nine Avros, 49 Saabs and one CRJ pursuant to the ASA.
MAIRs and Mesabas Proofs of Claim Against Northwest
On August 16, 2006, MAIR and Mesaba each filed their respective proofs of claim in Northwests bankruptcy proceedings. MAIR filed a proof of claim for approximately $31.7 million, plus other unliquidated amounts. The amount of MAIRs claim reflects the capital contribution Northwest required MAIR to make to Mesaba prior to Northwests bankruptcy and certain costs MAIR has incurred due to Northwests missed payments to Mesaba and Mesabas subsequent bankruptcy. Mesaba filed a proof of claim for approximately $250 million. Mesabas proof of claim is based on breach of contract with respect to the ASA. Neither MAIR nor Mesaba has recorded any amount within its respective financial statements related to the claims due to the significant uncertainty as to what amount, if any, might ultimately be collected from Northwest.
Mesaba Bankruptcy Filing
Northwests missed payments to Mesaba and Northwests actions regarding its fleet and schedule changes adversely affected Mesaba. Specifically, Mesaba determined that due to Northwests failure to make the September 12, 2005 payment, the deductions taken by Northwest against subsequent payments and the reduced revenues Mesaba would receive because of the fleet and schedule changes dictated by Northwest, Mesaba could not sustain its operations outside of court protection under Chapter 11 of the Bankruptcy Code. As a result, on the Petition Date, Mesaba filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code. Mesaba continues to operate its business as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. In general, as a debtor-in-possession, Mesaba is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.
All of Mesabas vendors are being paid for all goods furnished and services provided to Mesaba after the Petition Date in the ordinary course of business. However, under Section 362 of the Bankruptcy Code, actions to collect most of Mesabas prepetition liabilities are automatically stayed, except for liabilities relating to certain qualifying aircraft, aircraft engines and other aircraft-related equipment that are leased or subject to a security interest or conditional sale contract.
As Northwest receives approval from its bankruptcy court for rejection of aircraft head leases, Mesaba has made a similar request for approval from its Bankruptcy Court to reject the corresponding subleases. Northwest has negotiated agreements with its head lessors to provide for the orderly return to the head lessors of the remaining Avro aircraft by December 31, 2006. With the Bankruptcy Courts approval, Mesaba has executed similar agreements with Northwest to allow for those same Avro aircraft to be returned to Northwest. Mesaba anticipates that by December 31, 2006, Mesaba will be left with a fleet of 49 aircraft (the 49 Saab B+ models currently subleased from Northwest).
Under Section 365 of the Bankruptcy Code, Mesaba may assume, assume and assign, or reject certain executory contracts and unexpired leases, including leases of real property, subject to the approval of the Bankruptcy Court and certain other conditions. Mesabas original Section 365 deadline related to real estate leases was December 12, 2005, which was later extended to the earlier of confirmation of a reorganization plan or December 10, 2006. In general, if Mesaba rejects an executory contract or unexpired lease, it is treated as a prepetition breach of the lease or contract in question and, subject to certain exceptions, relieves Mesaba of performing any future obligations. However, such a rejection entitles the lessor or contract counterparty to a prepetition general unsecured claim for damages caused by such deemed breach and, accordingly, the counterparty may file a claim against Mesaba for such damages. As a result, liabilities subject to compromise of $59.0 million reported in Mesabas condensed balance sheet as of September 30, 2006 (see Note 12) are likely to change in the future as a result of damage claims created by Mesabas rejection of various aircraft leases, executory contracts and unexpired leases. Generally, if Mesaba assumes an aircraft financing agreement, executory contract or unexpired lease, Mesaba is required to cure existing defaults under such contract or lease as a condition to such assumption.
The bar date for non-governmental entities to file proofs of claim against Mesaba was February 28, 2006 (the Bar Date). Proofs of claim aggregating $217.0 million were filed as of September 30, 2006. Mesabas management and bankruptcy counsel have reviewed and assessed these proofs of claim to eliminate duplicative claims and claims without merit, as well as to adjust the amounts of certain proofs of claim based on managements estimate of the likelihood that the claim will be allowed by the Bankruptcy Court. As of September 30, 2006, Mesaba estimated the value of the allowable claims at $59.0 million. As a result of Mesaba reaching tentative agreements with its unions in late October 2006 (see below), Mesaba expects that the unions will file additional claims totaling $22.7 million based on the present value of the wages and benefits concessions contained within the tentative agreements. See Note 12 for further discussion of Mesabas liabilities subject to compromise.
The Bankruptcy Code provides special treatment for collective bargaining agreements (CBAs). In particular, Section 1113(c) of the Bankruptcy Code permits Mesaba to move to reject its CBAs if Mesaba first satisfies a number of statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Courts approval of the rejection or the expiration of the statutorily prescribed time period. After bargaining in good faith and sharing relevant information with its unions, a debtor must make proposals to modify its existing CBAs based on the most complete and reliable information available at the time. The proposed modifications must be necessary to permit the reorganization of a debtor and must provide that all the affected parties are treated fairly and equitably. Ultimately, rejection of the CBAs is appropriate if the unions refuse to agree to a debtors necessary proposal without good cause and the Bankruptcy Court determines that the balance of the equities favors rejection.
In February 2006, Mesaba commenced Section 1113(c) proceedings with unions for its pilots, flight attendants and mechanics. On July 14, 2006, the Bankruptcy Court granted Mesabas motion to reject its CBAs. Although that order was later reversed and remanded, on October 16, 2006, after taking additional evidence, the Bankruptcy Court again authorized Mesaba to reject its CBAs. Additionally, on October 23, 2006, the Bankruptcy Court enjoined the unions from striking or engaging in other work stoppages after Mesaba imposes new contract terms. In late October 2006, Mesaba reached tentative agreements with its pilots, flight attendants and mechanics. Each union must now vote to ratify its respective agreement. The ratification process is expected to conclude by the end of November 2006. Assuming ratification occurs, the new pay rates would take effect on December 1, 2006.
Pursuant to Mesabas request for debtor-in-possession financing, Mesaba received a commitment letter from Marathon Structured Finance Fund, L.P. (Marathon) to provide debtor-in-possession financing. On September 20, 2006, the Bankruptcy Court entered an order authorizing the debtor-in-possession financing with Marathon. Under the terms of the financing, Mesaba may not receive funds from Marathon unless certain conditions are met, including that of a labor resolution (whether through consensual agreements or through Mesaba imposing new contract terms) between Mesaba and its unions. If Mesaba is unable to satisfy the conditions to obtain debtor-in-possession financing or otherwise generate sufficient cash, Mesaba could be forced into liquidation. MAIR has no obligation to fund Mesabas operations but may consider investing in Mesaba once Mesaba develops a plan of reorganization.
To successfully emerge from Chapter 11, in addition to obtaining exit financing if needed, the Bankruptcy Court must confirm a plan of reorganization, the filing of which will depend on the timing and outcome of numerous ongoing matters in the Chapter 11 process and potentially including the outcome of Northwests Chapter 11 case.
Mesaba intends to file a plan of reorganization as soon as it is able to do so, but there can be no assurance that the Bankruptcy Court will confirm a plan of reorganization or that any such plan will be implemented successfully. The reorganization plan will determine the rights and claims of various creditors and security holders. At this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on Mesabas business, nor can Mesaba make any predictions concerning how the various creditor claims and interests of security holders will be determined in the bankruptcy proceedings.
3. Intangible Assets
The Company purchased Big Sky in December 2002. The excess of the Big Sky purchase price over the fair market value of the net assets acquired was allocated to certain identifiable intangible assets, including Big Skys pilot labor contract and its air carrier certificate, and to goodwill. Goodwill and the intangible assets are evaluated for impairment annually, at a minimum, or on an interim basis if events or circumstances indicate a possible inability to realize the carrying amounts. Based on the results of an interim test performed at September 30, 2005, the Company determined that all of its goodwill was impaired and recorded an impairment charge of $2.5 million in the second quarter of fiscal 2006.
Intangible assets and related accumulated amortization were as follows, in thousands:
The amortizable intangible asset is being amortized over its estimated period of benefit. Based on the current amount of intangible assets subject to amortization, estimated amortization expense for each of the succeeding four fiscal years will be $0.4 million per year. During the fourth quarter of fiscal 2006, the Company completed its annual impairment test of intangible assets and determined that no additional impairment charge was necessary.
Investments consist principally of government, agency, certificates of deposit, corporate and taxable municipal securities and are classified as available-for-sale. Fair value of investments is determined based on quoted market prices. The Company classifies investments with an original maturity of more than 90 days that mature within one year as short-term and investments with an original maturity greater than one year as long-term.
As of September 30, 2006 and March 31, 2006, cash, cash equivalents, short-term and long-term investments totaled $94.3 million (excluding $13.1 million in restricted cash for the letter of credit supporting MAIRs guaranty of Mesabas obligations for the hangar at the Cincinnati/Northern Kentucky International Airport) and $110.7 million, respectively.
Amortized cost, gross unrealized gains and losses and fair value of short- and long-term investments classified as securities available for sale were as follows, in thousands:
For the three and six months ended September 30, 2006 and 2005, the Companys gross realized gains and losses were insignificant.
At September 30, 2006 and March 31, 2006, Mesabas amortized cost and fair value of short- and long-term investments classified as securities available for sale was $13.7 million and $10.0 million, respectively, of which $4.7 million and $4.5 million, respectively, was pledged as collateral for letters of credit. For the three and six months ended September 30, 2006 and 2005, Mesabas gross unrealized gains and losses were insignificant.
5. Nonoperating Income
In the first quarter of fiscal 2006, the Company recognized $1.8 million as nonoperating income as a result of a favorable arbitration settlement with a former investment advisor.
6. Income Taxes
SFAS No. 109, Accounting for Income Taxes, requires all available evidence, both positive and negative, to be considered to determine whether, based on the weight of that evidence, a valuation allowance for its deferred tax assets is needed. Future realization of the deferred tax assets for existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward periods available under the tax law.
The Company has performed such an analysis, and a full valuation allowance was provided at the end of fiscal 2006. The Company continues to record a full valuation allowance against its deferred tax assets due to the uncertainty regarding the ultimate realization of those assets. Therefore, the Companys net loss for the three and six months ended September 30, 2006 was not reduced by any tax benefit. The Company recorded a tax provision of $0.3 million in the current period as a result of finalizing the Companys fiscal 2006 tax return. The Company will continue to evaluate the realizability of the deferred tax assets on a quarterly basis.
Mesaba performed an analysis of the recoverability of its deferred tax assets in accordance with SFAS No. 109, and a full valuation allowance was provided at the end of fiscal 2006. Mesaba continues to record a valuation allowance against its deferred tax assets due to the uncertainty regarding the ultimate realization of those assets. Mesabas net loss for the three months ended September 30, 2006 was not reduced by any tax benefit. A tax provision of $0.3 million was recorded in the current period to reflect the federal alternative minimum tax assessed in prior periods from a net operating loss carryback to prior years. Mesaba will continue to evaluate the realizability of the deferred tax assets on a quarterly basis.
In the event that Mesaba experiences a change in ownership, as defined by Internal Revenue Code Section 382, upon emergence from bankruptcy the annual usage of the remaining tax attributes, primarily net operating losses that were generated prior to the change in ownership, could be substantially limited. The amount of limitation, if any, will be determined at the time of Mesabas emergence from bankruptcy.
7. Stock-Based Compensation
Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, Share-Based Payment, (SFAS 123R), using the modified prospective transition method. Under that transition method, compensation expense that the Company recognizes beginning on that date will include expense associated with the fair value of all awards granted on and after April 1, 2006, and expense for the unvested portion of previously granted awards outstanding on April 1, 2006. Results for prior periods have not been restated.
Under SFAS 123R, forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate. Under SFAS 123 and APB 25, the Company elected to account for forfeitures when awards are actually forfeited, at which time all previous pro forma expense will be reversed to reduce pro forma expense for that period.
Stock Option Plans
The Company has approved stock option plans for key employees, directors, consultants and advisors to the Company. Options have been granted and are presently outstanding under the Companys 1994 Stock Option Plan, 1996 Director Stock Option Plan and 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan has a provision that automatically increases the authorized shares available for grant on September 1 of each year by the lesser of 300,000 or 1% of the then outstanding common shares. Under the plans, the compensation committee of the board of directors grants the options and determines the vesting and exercise periods at the time of the award. The purchase price of the stock for non-qualified and incentive stock options is determined at the time of the award and is equal to the fair market value at the time of the award.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate, stock price volatility and expected life. The Company establishes the risk-free interest rate using the U.S. Treasury yield curve as of the grant date. The estimated expected term is consistent with the simplified method identified in SEC Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, for share-based awards granted during the quarter and six months ended September 30, 2006. The simplified method calculates the expected term as the average of the vesting and contractual terms of the award. The expected volatility assumption is set based primarily on historical volatility. The expected life assumption is set based on past exercise behavior of option holders. For options granted, the Company amortizes the fair value on a straight-line basis over the vesting period of the options.
For the three months ended September 30, 2006, SFAS 123Rs fair value method has resulted in additional expense in the amount of $0.1 million related to stock options. For the six months ended September 30, 2006, the adoption of SFAS 123Rs fair value method resulted in additional expense in the amount of $0.2 million related to stock options. These amounts are included in the Wages and benefits caption in the accompanying condensed consolidated statements of operations for the three and six months ended September 30, 2006. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required prior to SFAS 123R. As the Company currently has no excess tax benefits related to SFAS 123R, its adoption has not affected the Companys condensed consolidated statement of cash flows. The impact of adopting SFAS 123R on future results will depend on, among other things, levels of stock options granted in the future, actual forfeiture rates and the timing of option exercises.
A summary of stock option activity since the Companys most recent fiscal year end is as follows:
The aggregate intrinsic value of options outstanding at September 30, 2006 was zero. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying option and the market price of the common stock for the options that had exercise prices that were lower than the $5.71 market price of the Companys common stock at September 30, 2006.
The Company used the following assumptions to estimate the fair value of the options granted during the second quarter of fiscal 2007:
During fiscal 2004, Mesaba approved a stock appreciation rights (SAR) plan for key employees and directors. The exercise price of each SAR is equal to the fair market value of the Companys common stock on the date of the award. Cash is paid based on the difference between the fair market value at the date of grant and the date the SAR is exercised. The SARs vest over four years and have a ten-year term.
For the three months ended September 30, 2006, SFAS 123Rs fair value method has resulted in a reduction to expense of $0.1 million related to the SARs. For the six months ended September 30, 2006, the adoption of SFAS 123Rs fair value method has resulted in an insignificant expense related to the SARs. These amounts have been included in the Wages and benefits caption in Mesabas condensed statements of operations for the three and six months ended September 30, 2006. The impact of adopting SFAS 123R on future results will depend on, among other things, levels of SARS granted in the future, actual forfeiture rates and the timing of SAR exercises.
Upon adoption on April 1, 2006, in accordance with SFAS 123R, Mesaba also recorded $0.5 million for the cumulative effect of a change in accounting principle during the first quarter of fiscal 2007 as a result of valuing SARs under the fair value method.
A summary of Mesabas SAR activity since March 31, 2006 is as follows:
The aggregate intrinsic value of SARs outstanding at September 30, 2006 was zero. The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying SARs and the market price of the common stock for the SARs that had exercise prices that were lower than the $5.71 market price of the Companys common stock at September 30, 2006.
Mesaba used the following assumptions to estimate the fair value of the SARs:
As of September 30, 2006, the Company had $0.5 million of total unrecognized compensation cost related to non-vested stock option compensation arrangements granted under all equity compensation plans. Total unrecognized compensation will be adjusted for future changes in estimated forfeitures. The Company expects to recognize the cost over a weighted average period of two years.
As of September 30, 2006, Mesaba had $0.4 million of total unrecognized compensation cost related to non-vested SARs compensation arrangements granted under the SARs plans. Total unrecognized compensation will be adjusted for future changes in estimated forfeitures. Mesaba expects to recognize the cost over a weighted average period of two years.
Pro Forma Results
Prior to April 1, 2006, the Company accounted for share-based payments using the intrinsic value method prescribed by APB 25 and SFAS 123. Under APB 25, if the exercise price of the Companys employee stock options equaled the market price of the underlying stock on the date of the grant, no compensation expense was recognized. Because the Companys stock options were granted with exercise prices at the market price of the underlying stock on the date of grant, no compensation expense had been recognized under APB 25. The following table illustrates the effect on net income and earnings per share assuming the compensation costs for the Companys stock option plan had been recorded in the three and six months ended September 30, 2005 based on the fair value method under SFAS 123R, in thousands:
8. Earnings Per Share
Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of shares of common stock outstanding plus all additional common stock that would have been outstanding if potentially dilutive common shares related to stock options and warrants had been issued. Stock options and warrants with an exercise price exceeding the fair market value of the Companys common stock are considered antidilutive and are excluded from the calculation. Incremental shares related to dilutive securities have an anti-dilutive impact on earnings per share when a net loss is reported and, therefore, are not included in the calculation.
The following table reconciles the number of shares utilized in the condensed consolidated earnings (loss) per share calculations for the periods ended September 30, in thousands:
9. Consolidated Comprehensive Income
The following table presents the calculation of comprehensive income. The components of comprehensive income for the periods ended September 30 were as follows, in thousands:
10. Segment Information
The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes annual and interim reporting standards for an enterprises business segments and related disclosures about its products, services, geographic areas and major customers. The method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. Although Mesaba has been deconsolidated from the Companys condensed consolidated financial statements as of the Petition Date, the segment information presented below continues to include Mesaba in accordance with SFAS No. 131 and related guidance for equity-method investees. Mesabas results of operations after the Petition Date are included in the Eliminations column.
Operating segment information for Mesaba, Big Sky and MAIR were as follows, in thousands:
11. Commitments and Contingencies
Saab Leasing Litigation
In 2002, Fairbrook Leasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (Saab Leasing) filed a declaratory judgment action against Mesaba relating to 20 Saab 340A (340A) aircraft leased by Mesaba. In 2003, the District Court declared that the term sheet relating to the leases for the 340A aircraft was a binding preliminary agreement requiring Mesaba to negotiate in good faith toward the execution of long-term agreements for each of the 340A aircraft. Although Mesaba appealed this ruling, while the appeal was pending, Saab Leasing (relying on the District Courts declaratory judgment ruling) filed a separate action in the District Court alleging approximately $35 million in damages for past due and future aircraft lease obligations. While the damages action was pending, the U.S. Court of Appeals for the Eighth Circuit affirmed the District Courts declaratory judgment ruling. On July 6, 2006, the District Court in the damages action granted Mesabas motion for partial summary judgment, ruling that Saab Leasing is not eligible to receive damages for the majority of its claims against Mesaba. Because the potential damages for the remaining claim against Mesaba are not significant, Mesaba has not established any accrual with regard to this litigation within its condensed financial statements.
Creditors Committee Litigation
Pursuant to the Bankruptcy Code, Mesabas Creditors Committee initiated an investigation of transactions between MAIR and Mesaba, including the payment of dividends and management services fees from Mesaba to MAIR. In response to this investigation, and to end public speculation regarding the dividends and payments, MAIR filed a complaint with the Bankruptcy Court requesting a declaratory judgment that the dividends and fees paid by Mesaba to MAIR were wholly proper and appropriate under law. In its complaint, MAIR asserted facts to demonstrate that each payment and dividend MAIR received from Mesaba was appropriate under applicable law, occurred in the ordinary course of Mesabas business, that Mesaba was solvent at the time it made each payment and dividend, and that Mesaba remained solvent and able to pay its obligations after each payment or dividend to MAIR. On October 11, 2006, Mesabas Creditors Committee filed an answer and counterclaim against MAIR, alleging that certain payments from Mesaba to MAIR were fraudulent under Minnesota law and federal bankruptcy law. The Creditors Committees counterclaim asserted approximately $16 million in damages. Additionally, the Creditors Committee challenged MAIRs proof of claim filed in Mesabas bankruptcy proceedings and requested that it be disallowed or subordinated. The litigation is in the early stages, and MAIR cannot predict when it will conclude. MAIR has not established any accrual with regard to this litigation because MAIR believes it has valid defenses to the Creditors Committees claims.
Other Litigation Matters
Mesaba and Big Sky are also defendants in various lawsuits arising in the ordinary course of business. While the outcome of these lawsuits and proceedings cannot be predicted with certainty, it is the opinion of Mesabas and Big Skys management, based on current information and legal advice, that the ultimate disposition of these suits will not have a material adverse effect on the separate financial statements of Mesaba or Big Sky or the consolidated financial statements of the Company as a whole. Additionally, any lawsuit filed against Mesaba prior to the Petition Date is subject to the automatic stay. If and when these cases proceed, the amount of any damages award to the plaintiffs would be deemed unsecured prepetition claims against Mesaba.
Mesaba currently leases a hangar facility at the Cincinnati/Northern Kentucky International Airport. MAIR has unconditionally guaranteed full and prompt payment of the ground lease and the bonds associated with the initial financing of the facility. In October 2005, following its bankruptcy filing, Mesaba vacated the facility due to the reduced number of Avros that will require maintenance in the future. As of September 30, 2006, Mesaba had not rejected the leases for this facility in its bankruptcy proceedings. In accordance with its guaranty, MAIR has been making the required ground and facilities lease payments of $0.1 million per month since November 2005. Additionally, on February 15, 2006, MAIR received notice that UMB Bank, N.A. (UMB), the trustee for the bondholders, declared MAIRs liability for all sums to be immediately due and payable. On April 18, 2006, MAIR entered into an agreement with UMB under which UMB agreed to forbear acceleration of MAIRs guaranty obligations in exchange for MAIR delivering a letter of credit in the amount of $13.1 million to secure the payment of the obligations owed by MAIR to UMB.
The letter of credit was issued by First Interstate Bank of Billings and is currently fully collateralized by MAIRs cash account held at First Interstate Bank. Under the agreement with UMB, MAIR is obligated to maintain the letter of credit until all obligations under the bonds are satisfied. MAIRs annual obligations with respect to the bonds and the ground lease for the facility total approximately $1.2 million, and those obligations will continue through July 2029 and will increase at scheduled intervals in accordance with the terms of the bond documents. The UMB agreement and the letter of credit provide that the amount of the letter of credit will automatically decrease each July in accordance with the redemption schedule for the bonds.
UMB may draw on the letter of credit upon the occurrence of an event of default under its agreement with MAIR, including if MAIR fails to make any payment when due to UMB, if MAIR fails to provide evidence that the letter of credit has been renewed annually (or if MAIR fails to renew the letter of credit), if UMB receives notice from First Interstate Bank of the banks intent not to renew the letter of credit, if the bonds become subject to mandatory redemption, if MAIR fails to comply with the terms of its agreement with UMB or if MAIR commits any event of default under its guaranty of Mesabas bond obligations. The cash supporting the letter of credit was classified as Restricted cash on the Companys consolidated balance sheet at September 30, 2006.
Because Mesaba vacated the hangar in October 2005 and MAIR is the guarantor of the facility, MAIR is currently seeking other sublessors to lease the facility. As of March 31, 2006, MAIR established a $4.8 million accrual related to this guaranty, which assumes that the facility will remain vacant through March 31, 2008, during which time MAIR will continue to make bond and lease payments, and that thereafter MAIR will be able to sublease the facility at a 20% discount. As of September 30, 2006, the balance of the accrual totaled $4.0 million. MAIR will reassess this reserve in future periods as material developments occur.
Mesaba has letters of credit to guarantee certain obligations, principally for workers compensation policies, airport leases and other obligations, which totaled $4.5 million and $4.1 million as of September 30, 2006 and March 31, 2006, respectively. There were no amounts drawn on these letters of credit during fiscal 2006 or 2005. As collateral for these letters of credit, Mesaba had $4.7 million and $4.5 million in cash held in an investment account as of September 30, 2006 and March 31, 2006, respectively. This amount is restricted and has been classified within Long-term investments in Mesabas condensed balance sheets.
In February 2005, Big Sky obtained a revolving line of credit in the principal amount of $0.3 million from First Interstate Bank of Billings. In March 2006, the principal amount available under the line increased to $0.4 million. The line of credit requires a variable interest rate based on the prime rate published in the Wall Street Journal. At September 30, 2006, the rate was 8.25%. The line of credit is collateralized by Big Skys inventory, accounts receivable and equipment and is scheduled to mature in January 2007.
MAIR Pledge for Big Sky
In August 2006, MAIR entered into a pledge agreement with U.S. Bank, pursuant to which MAIR pledged $0.8 million in exchange for U.S. Bank reducing the amount of funds that it holds back from Big Sky when credit card payments are processed. U.S. Bank processes payments for Big Sky tickets made with various credit cards. In the past, and consistent with industry practice, U.S. Bank held back a specified portion of those credit card payments until the tickets had been used. MAIR agreed to pledge its cash in lieu of the required hold back, which subsequently freed up those funds for Big Skys use. Under the pledge agreement, MAIR is free to request a release of its collateral at any time. Following such a request, U.S. Bank would again begin holding back amounts from Big Sky, and MAIRs collateral would be returned 90 days after the held back amounts total the requisite level pursuant to U.S. Banks credit card processing policies. Because MAIR has the right to request a release of its collateral and to terminate the pledge agreement, the amount of cash pledged is not recorded as restricted cash.
12. Financial Information of Mesaba
The following condensed financial statements of Mesaba have been prepared in conformity with SOP 90-7, which requires that the liabilities subject to compromise by the Bankruptcy Court be segregated from liabilities not subject to compromise and that all transactions directly associated with the reorganization be identified. Liabilities subject to compromise include prepetition unsecured claims that may be settled at amounts that differ from those recorded in Mesabas condensed financial statements.
The financial information is also prepared on a going concern basis, which contemplates the realization of assets and the liquidation of liabilities in the ordinary course of business. However, as a result of the bankruptcy filing, such realization of assets and liquidation of liabilities is subject to significant uncertainty.
(A) Liabilities Subject to Compromise
Liabilities subject to compromise in Mesabas condensed balance sheets at September 30, 2006 and March 31, 2006 refers to both secured and unsecured obligations that will be accounted for under a plan of reorganization, including claims incurred prior to the petition date. They represent the estimated amount expected to be allowed on known or potential claims to be resolved through the Chapter 11 bankruptcy process and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of any collateral securing claims, proofs of claim or other events.
Mesaba has endeavored to notify all of its known or potential creditors whose claims are subject to Mesabas Chapter 11 case. Subject to certain exceptions under the Bankruptcy Code, Mesabas Chapter 11 filing automatically stayed the continuation of any judicial or administrative proceedings or other actions against Mesaba or its property to recover, collect or secure a claim arising prior to the Petition Date. A proof of claim arising from the rejection of an executory contract or an expired lease must be filed by the later of the Bar Date or thirty days from the effective date of any authorized rejection.
Although Mesaba has estimated the value of the claims that will be allowed by the Bankruptcy Court at $59.0 million, the Bankruptcy Court will make the final determination regarding what portion of the $217.0 million in total proofs of claim filed will be deemed allowable claims. The determination of how those liabilities will ultimately be treated will not be known until the Bankruptcy Court approves a plan of reorganization and the claims resolution process is complete, which may occur well after a confirmation of a plan of reorganization. Mesaba will continue to evaluate the amounts of these liabilities through the remainder of the Chapter 11 process and recognize any additional amounts subject to compromise that it identifies in the future. As a result, the amounts of liabilities subject to compromise are likely to change.
Liabilities subject to compromise at September 30, 2006 and March 31, 2006 were as follows, in thousands:
(B) Reorganization Items
Reorganization items recorded from the Petition Date through September 30, 2006 consisted of transactions and events that were directly associated with the reorganization of Mesaba. The reorganization activity included aircraft impairment and other rejection charges, legal and professional fees to support the restructuring process and the reversal of maintenance accruals. The charge for damage claims results from estimated claims as a result of Mesabas rejection or renegotiation of certain aircraft and other leases and obligations as part of the bankruptcy process.
Net reorganization items for the three and six months ended September 30, 2006 were as follows, in thousands:
13. New Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the Company recognize in its financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The accounting provisions of FIN 48 will be effective for the Company beginning April 1, 2007. The Company is in the process of determining what effect, if any, the adoption of FIN 48 will have on its financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157), to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. SFAS No. 157 will be effective for the Company beginning April 1, 2008. The Company is assessing the impact the adoption of SFAS No. 157 will have on its financial statements.
In September 2006, the FASB issued FASB Staff Position AUG AIR-1, Accounting for Planned Major Maintenance Activities (the FSP), that reduces the number of acceptable methods of accounting for planned major maintenance activities. Under the FSP, Mesaba will be required to change its method of accounting for some planned maintenance activities for certain aircraft types. The FSP will be effective for the Company beginning April 1, 2007 and requires retrospective application to all financial statements presented unless doing so is impractical. The Company is assessing the impact the adoption of the FSP will have on its financial position and results of operations.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB No. 108). SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the financial statements are materially misstated. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006, or with respect to the Companys fiscal year ending March 31, 2007. The implementation of SAB No. 108 did not have a material impact on the Companys financial statements.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements. The Companys operations and financial results are subject to various risks and uncertainties associated with the airline industry. See Risk Factors in Item 1A of Part II.
Since Mesaba filed for bankruptcy on the Petition Date, it has been focused on restructuring its labor and non-labor expenses to calibrate its cost structure to a fleet of 49 Saabs, which Northwest has dictated via its own bankruptcy. Mesaba intends to use the bankruptcy process to return to profitability as a smaller, competitive low-cost supplier of regional flights. Specifically, it intends to:
· Downsize its operations to adjust to the smaller fleet;
· Reduce its labor expenses in order to be competitive versus other regional carriers; and
· Lower its fixed expenses by 43%.
Fleet Reduction. Following its bankruptcy filing, Northwest implemented various changes to Mesabas fleet. Since September 14, 2005, Northwest has removed multiple aircraft from Mesabas fleet, and Mesaba anticipates that Northwest will terminate all the remaining aircraft, other than 49 Saabs, by the end of calendar 2006, subject to final lease negotiations between Northwest and its lessors. As of September 30, 2006, Mesaba was operating nine Avros, 49 Saabs and one CRJ pursuant to the ASA.
Labor Costs Restructuring. Mesaba is working to achieve a reduction in annual labor costs sufficient to keep it competitive with other regional carriers through a combination of agreements negotiated with its employee labor groups and pay and benefit reductions from its management and hourly non-union employees. On January 31, 2006, the Bankruptcy Court approved the tentative agreement reached between Mesaba and its dispatchers for the necessary reductions for a portion of its labor expenses. Mesaba reached tentative agreements with its pilots, flight attendants and mechanics in late October 2006. Each of these unions will vote to ratify its respective agreement; the ratification process is expected to conclude by the end of November 2006. If the labor agreements are ratified, the new pay rates would become effective December 1, 2006. There is no guarantee that the unions will vote to ratify the new contract terms.
Non-labor Cost Restructuring. Mesaba plans to achieve non-labor cost reductions by eliminating excess facilities, eliminating Avro-related expenses, reducing vendor costs and reducing infrastructure to reflect the smaller fleet.
Big Sky has focused on growing its Beechcraft 1900D operation by bidding on additional EAS flying and seeking other opportunities to expand its fleet. Specifically, it has expanded its Boise operation, serving Billings, Bozeman and Missoula, Montana, Pocatello, Idaho, Walla Walla, Washington and Jackson Hole, Wyoming. It has also reached agreement to start a capacity purchase operation in Florida, beginning with two Beechcraft 1900D aircraft in the fall of 2006, and recently announced new service from Springfield, Illinois to Chicago Midway Airport starting in December 2006. Although higher fuel expenses have impacted its profitability, Big Sky will continue throughout the fiscal year to explore ways to expand its operation to become profitable.
Separately, MAIR will continue to explore additional growth opportunities in fiscal 2007 and will consider acquisitions to diversify both within and outside the airline industry.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2006 and 2005
The Company reported a consolidated net loss of $2.5 million or $0.12 per basic and diluted share for the quarter ended September 30, 2006, compared to a net loss of $25.5 million or $1.24 per basic and diluted share for the quarter ended September 30, 2005. To allow for a more direct and meaningful comparison, Mesabas results of operations have been analyzed for the three months ended September 30, 2006 and 2005 excluding the deconsolidation of Mesaba from the Companys consolidated financial statements as of the Petition Date. Mesabas condensed financial statements on a stand-alone basis are presented in Note 12 of the accompanying Notes to Condensed Consolidated Financial Statements.
Mesabas operating statistics for the three months ended September 30 were as follows: