Mesa Air Group Inc (MESA) 2002 Q2 法說會逐字稿

Welcome to the Second Quarter Earnings Release conference call for Mesa Air Group. I would like to inform all parties that you will be able to listen-only until the question and answer session of the conference call and that today's call is being recorded at the request of Mesa Air Group.

I would now like to turn the meeting over to Mr. Jonathan Ornstein, Chairman and Chief Executive Officer.

Thank you very much. Thank you, everybody, for joining us today.

I've been asked by my lawyers- I guess this is sort of the process now days. This conference call will contain various forward-looking statements that are based on management's beliefs as well as assumptions made by information currently available to management. While the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties, and assumptions. Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected, or expected. The company does not intend to update these forward-looking statements made in this call prior to the next required filing with the SEC.

Okay. You know it's funny, last night I went to bed looking forward to this call given where our numbers were going to come out. And needless to say I have to say I may sound a bit subdued. I'm certainly more than surprised at the markets reaction to us exceeding Street expectations by over 70 percent especially given this environment.

With that, I'll go through a couple of the highlights. But I'm really anxious to get to the questions because, frankly, I'm not sure what more we can do or what more we can say. So let's go through some of the things that happened this quarter.

First off, we continued our regional jet expansion, added five RJs during the quarter, added two during April. We now have 62 RJs in service, the first time in Mesa's history we now operate more RJs than turboprops.

We began our service out of Denver as Frontier JetExpress, two aircrafts in February, two aircrafts in April, and one beginning in May. We continued our turboprop contraction with the retirement of nine Jetstream 32s at our CCAir subsidiary. We've now completely eliminated this fleet type.

There's been a lot of work done on the 1900 cost reductions, both with the engine manufacturer whom which we entered a previously announced agreement as well as with Raytheon Aircraft Corporation. In part due to these efforts we are reporting significantly narrow losses on our turboprop operations. We had a pre-tax loss of approximately 1.1 million versus 7 million in the December quarter. I'd also like to point out that of that 1.1 million 2.2 million was at CCAir. And I'll talk a little bit more about CCAir. Despite a very difficult revenue environment, Air Midwest, our 1900 operation, was profitable. And we believe it will be profitable for the remainder of the year, something we talked about in our last call.

At CCAir we have made significant strides. Primarily, we just had a new five-year contract signed by our CCAir pilots. They have approved a tentative agreement. We feel this will give us a real opportunity at CCAir to grow that business. I think that with the [Jets for Job] opportunity with US Air, which I also will talk about, that CCAir will provide a excellent platform for regional jet growth.

We continue to take preparations of our first delivery of CRJ-700 aircraft. We've announced our intent to establish a new subsidiary, Freedom Airlines, to operate the aircraft. We do believe that there is the Bombardier strike, that that delivery will be impacted. But frankly, when you look at that from an earnings standpoint, it will probably help earnings this year as opposed to hurt earnings as a result of the delay of some of the integration costs. We don't feel that it's significant. And again, with the new aircraft type coming online I think our feeling is that a delay of a month may, in fact, be a good thing.

We do again say that the impact will have a very minor impact on profitability due to the integration costs that will be delayed as well.

Due to our profitability this quarter we will again be paying restoration bonuses to all of our employees who took the pay cut subsequent to the events of 9/11. This is the second of four bonuses planned for the year. We're very proud of the fact that all of our employees with the exception I think we're down to 125 pilots have been recalled from furlough down from what was initial furlough of almost 700 people.

A couple other important things that happened during the quarter-first off, as you know, we have been and continue to be shareholders in US Air. We are delighted by the fact, and we're happy to see, that a very good friend of our, David Siegel, has become CEO. I can tell you that the relationship between Mesa and US Air has been strengthened considerably as a result. I think David would be the first person to tell you that he and I were very close friends at Continental. I talk to him every day. And I think that we feel that David's arrival is a strong positive for US Air and certainly very strong for Mesa. We think that our strategic investment in U-Fly has begun to pay dividends that are immeasurable.

In addition, as we had not announced officially but we confirmed in the press, we are having conversations with United Airlines potential to operate turboprops and regional jets. It is very clear as to why they're talking to us. We have significantly lower costs and significantly lower margins than all of their existing carriers in which they have partnerships.

We feel that, like Southwest, this is a commodity business. Our costs in the end will become the deciding factor in terms of who people will do business with in the future. We're also, as a result of the fact that not only do we have our low cost but also we have continued to be ranked by all the manufacturers as being top one or two operators in terms of reliability of regional jets.

Our belief is that really we could not envision a scenario right now given the macroeconomic picture that could be a whole lot better for Mesa Airlines. Even in the potential scenario where people have talked about the viability of our partners we feel that-and, as some of the analysts have pointed out on more than one occasion-even under any scenario that one could envision that the regional jets become that much more valuable, become that much more critical, and the ability for the partners to utilize these jets will probably expand in any kind of scenario that may be adverse to that carrier such as a bankruptcy.

So I think we feel very good. We feel that our numbers this quarter were terrific. We felt that, frankly, they even surprised us to a degree. We feel that this trend will continue going forward. We see nothing that would tell us anything differently in terms of our ability to expand our operations both with US Air and with America West.

Our Freedom operation continues. We're running very strong load factors. We are obviously going to be working on the Frontier partnership, which we think has tremendous upside in terms of its potential. And I feel that now that we've gotten the real leverage piece, which is our turboprop operations, back on track, I think that once we now have begun to focus on potentially continuing to improve that now from just a break-even or small profit but, as we expand our turboprop business with profitable EAS flying, which is made possible by the good efforts of Regional Aviation Partners, which increases subsidies offered by the [Central Air Service] I think our subsidy increase was up-what-3-1/2 million annual we were given by the government as well as a bunch of new markets that are now being made available for EAS we feel that we'll see continued improvement in the turboprop.

So we think that it was a great quarter. We're sorry that the market seems to feel differently. I frankly don't know what more we could do. We think the future looks terrific. We think the trends will continue in terms of our numbers. We see, quite frankly, some great things happening with our America West Express operation as we add these 700s. We are beyond delighted by the fact that David Siegel is now at US Air. And we are very hopeful that our conversations with United, which, of course, has its back very much up against the wall in terms of costs, will look to us as a low cost, high quality provider for regional services in the hopefully not too distant future.

So with that, like I said, we're happy to hear from you because we're sort of lost for words after that.

I think we may be having some technical difficulties, if people can still hear us.

Mr. Ornstein?

Yeah?

You were ready to take questions, sir?

Yeah.

Well, our first question comes from Mr. Jamie Baker from JP Morgan. You may ask your question.

Hey, Jonathan, Jamie Baker-how are you? Well, never mind.

You know, US Airways recently achieved a moderate level of scope relief yet we've seen no new order activity on the part of Mesa, which is obviously currently their largest partner. What's your option book with Embrair look like today? What sort of additional growth do you think your infrastructure can support going forward? What sort of peak growth rates do you think Mesa could operate at?

Well, I mean, right now based on the numbers just forgetting about anything with US Air, I think our growth rate for next year is close to 35 to 40 percent. Clearly we feel we can add on that because we've got, you know, I believe it's 120 pilots still on furlough. I mean, that's 12 aircraft worth of flying we could do very quickly.

You know, we have been in very serious discussion- you know, you have to realize, when I'm talking to David Siegel, it's not a negotiation, it's a discussion. It's a whole different way of doing business for Mesa and US Air, a far cry from what it had been before. And I think that, you know, what David and I are trying to achieve is to figure out what the best mix is where US Air has the maximum potential opportunity and at the same time Mesa has the opportunity to grow as well.

Right now the situation is somewhat limited because of the fact that Mesa is the only CRJ operator in the family, and their only aircraft available are CRJs. The availability of ERJs is very limited. We have about I think six or seven more coming, which are slated to go- at least I think the next three or four are firm going into US Air. And then beyond that, you know, if you talk to Embrair, their availability for aircraft start at about, you know, one a month in March. So, you know, clearly I think that, when US Air is looking to expand its regional jet operations, I mean, I have very little doubt in my mind that Mesa will play a very major role in that going forward.

So, you know, the question in our mind is how fast can we do it; where do the airplanes come from. I mean, one of the things that we're talking about is potentially moving some additional CRJs out of the America West operation because they would like to see larger aircraft there upping our order for 700s and 900s and taking some of those airplanes over immediately to US Air. These are all things that are in the mix, but, you know, I mean, they haven't even finalized their deal with the pilots at this point. So, you know, I think we need to let that happen.

You know, David and I, like I said, are having conversations daily. And I feel very confident that once his deal is finalized that we will sit down and figure out the best route to take. I personally feel that at this point in time given the timing that exists that the Canada regional jet is probably the more likely candidate just because of availability.

Fair enough. And secondly, you know, there's some skepticism out there that United may be talking to you, you know, just to gain leverage with their existing albeit higher cost partners. After all they've got a scope problem. And I think some out there think it's unlikely that they'd really want the headache of taking on an additional partner.

Has United provide you with any interpretation of their scope issue that may be different than the prevailing conventional wisdom? And I know you're sort of loath to put words in United's mouth, but have they given you any guidance that is encouraging on the scope front?

No, in fact, you know, I mean, clearly I know that there are scope issues I'm not fully understanding. But I think some of the things that we are talking to United about are, in fact, very creative that may, in fact, help them in that area. There are a number of things that, you know- I mean, for example, US Air utilizing [Jets for Job] concept, I would like to think that over the last few years people have appreciated the fact that Mesa has been very innovative. And of course, you know, we know that that will by an issue. And hopefully we would come up with some kind of strategy that would allow that to happen.

Again, that being said, you know, I think United is serious about the fact that it wants to have lower costs-it's losing, you know, $5 million a day at this point-and that saving money is a high priority for them.

What we learned at Mesa back in 1997 is that we had- unfortunately, for better or worse, if there's a will, there's a way. And I think that, you know, that's a lesson that we learned and one that, you know, when United comes and calls us and we can sit down and, again, have friendly conversations, certainly exploratory in nature, but it's not the first time. As you know, we talked to them after our lawsuit was settled. But they've come back to us as a result of our cost structure. And they've made that point very clear.

So, you know, is it leverage? I'm sure that they probably get the collateral benefit of that. However, I don't think that they would be spending the time that it would appear to me that they're spending, and the people, and the traveling, if they didn't feel at least it was an option that was clearly worth exploring.

Okay. That's helpful. Thank you very much.

If you wish to ask a question at this time, please press Star 1 on your touch-tone phone. You will be announced prior to asking your question.

Our next question comes from Brian Harris of Salomon Smith Barney. You may ask your question.

Hi, Jonathan. Can you give any kind of color at all regarding your general discussions with Dave Siegel as far as, you know, factors that will weigh into, you know, who receives the regional jets that they can get now or perhaps some comment regarding timing of when a decision would be made?

Well, I mean, I don't feel uncomfortable at all saying that David realizes, just like they've realized in the past, that they should have multiple providers. I mean, we all see what happens when carriers rely on one carrier to provide it. You know, we all saw what happened to Comair, for example. David is smart enough that he's never going to let that happen.

However, with 70 aircraft I can assure you that I feel highly confident that we will get as many airplanes that we feel we could comfortably handle that will still fit within any game plan that David has regarding the rest of those because, frankly, if he came to us and said can you do 70 airplanes, the answer is no. I mean, it's going to take anybody at least three years to spool 70 aircraft up from an operational perspective. And that assumes the aircraft are available. And I'm saying point blank that they aren't. And Embrair right now is having significant amount of difficulty just financing aircraft.

So, you know, I have to say that I feel very comfortable, again, as being the only CRJ operator in the group and with CRJ deliveries coming. Remember, we have 20 CRJ-700s and 900s that are already financed. We believe that we have the ability to finance more aircraft as a result of our relationship with GE. And again, given the fact that David understands the importance of this structure that allows him to have multiple providers, I'm very confident that, when you add up the 40 aircraft that we have going to America West and whatever number of additional aircraft we have going to US Air, that Mesa's growth rate will be, you know, probably the highest in the industry.

Okay. Do you have a sense as to, you know, if Dave will sort this out over the next, what do you think, two months or so?

I mean, the aircraft that are available are going to be gone. I would suggest that this will get solved in a matter of weeks and potentially days. I don't think this is a monthly- I mean David knows that he has to move quickly. And I think this is something that will happen sooner rather than later. That's just, you know, my guess and the feeling I get talking to the folks at US Air.

Okay. Thanks very much.

Our next question comes from Michael Linenberg of Merrill Lynch. You may ask your question.

Yeah, hey Jonathan, I have two questions, 1) if you can talk about how the Frontier operation has been ramping up and maybe even just elaborate on how profitable maybe some of the segments are, I mean, realizing that you've only been in that market for a few months.

Sure. We've only actually been since, what, like six weeks, February 16th. So we're sort of beginning to get a feel.

Load factors are very strong. You know, we're running load factors close to 60 percent. This is right now- you know, April is potentially one of the two weakest months of the year. So, you know, we feel very comfortable. March was actually slightly profitable. April we'll probably lose a little bit of money. And that's primarily just yield driven in one market where we share the market with Frontier, and they have control of the pricing. That's in Houston. And I think that issue also will be resolved fairly soon. Our advanced booking numbers just continue to go up, so we feel very confident about the acceptance of the product and how fast we were able to fill the airplanes. I mean, to give you an example, our 28-day advanced booking a week ago was about 38 percent. A week later our 28-day advanced booking is now close to 42 percent, which is just a huge jump in one week. So I think we feel pretty good in terms of the direction things are going. We continue to see it spooling up. And remember, all these markets except for Houston, which, in fact, is our sort of problem market, are all brand new markets that we've been in for literally a matter of days.

We are starting service in San Diego and Minneapolis. We are adding another trip into Ontario. So, I mean, I think we feel, you know, very good going forward that the numbers are continuing to improve and that even, again, in April, which is a mud season in Denver, a poor month, the numbers in our opinion are still good.

Okay. And then I guess with regard to bringing in the 700s this year I know you've talked about how on one hand a delay would actually be helpful as a result of the integration costs. Can you maybe give us a sense of what level of cost we should be looking for and how you will account for them? And what I'm getting at-will you expense these as the costs are incurred?

Yeah, they'll be expensed. In our numbers we've always expensed them.

And the thing that's nice about it is, if it gets delayed, it gives us an opportunity to get crews spooled up and ready so that maybe instead of putting on, you know, one airplane and then another airplane we can put on two or three at the same time. So again, we don't see it as a huge negative by any stretch. And in fact, getting a little breathing room in terms of we had a very tight schedule with the FAA we think is probably going to be attractive to us.

Okay. I mean, just further on that, what it costs to induct a new aircraft type, I mean, is that several million dollars spread out over a 12-month period? Do you have a sense on that?

No. I think it's probably less than a million because, remember, the 700 is a variant of the 200, meaning it's the same type rating. You know, even if we're putting it on a different significant we have all the manuals, we have all the experience, we have all the people who know how to do it. We don't think it's a really huge cost item.

Okay, good, and thanks, and a very good quarter.

Thank you.

Our next question comes from Jim Parker, Raymond James. You may ask your question.

Jonathan, with regard to turboprops you said that the loss in the quarter was 1.1 or 1.2 million, but 2.2 million came from CCAir. Is that correct?

That's correct. And on CCAir, Jim-and, if I jump ahead of you, just interrupt-the fact is CCAir is now down- you know, we've pulled out the Jetstreams. We've pulled down the flying- they had at the beginning of the quarter I believe six Dash8s flying. They had nine Jetstreams. So obviously that accounted for a large part of the loss. We are now down I believe to three or four Dash8s flying. And clearly our intention is once we've been able to put a cost structure in place that is competitive we would like to use that as a platform for regional jet growth. So you know, in fact, part of their contract is that, you know, with the passing of this contract that we agree to put half of the jets we get from US Air under the [Jets for Job] into CCAir.

You know, we have moved a number of 1900s to cover the flying that's being done in Charlotte where Mesa's turboprop cost structure was significantly lower than CCAir's by getting out of the Jetstream fleet, which was an oddball fleet. We currently have one Dash8 there flying. If there's any additional Dash8 flying that we feel is profitable, we will figure out a way to cover that or, if, in fact, the Dash8 flying is unprofitable, we'll either turn it over to US Air or cease operating.

So I think it is a fairly good assumption that the losses at CCAir, given the fact that that operation is now literally probably 20 percent of what it was before, are going to be significantly smaller or, you know-what's the word I'm looking for-insignificant, because the operation is just so small at this point.

Okay. Jonathan, what were the revenues year-to-year in the turboprop side of the business?

Let's see if we can pull those numbers.

Yeah, bear with me just a second.

While he's doing that, Jonathan, let me ask you another question. In the US Airways contract with the pilots-or maybe it isn't a contract yet-the agreement for 70 more RJs, didn't they remove the scope clause restriction on affiliated parties operating aircraft for others, meaning, why do you need to set up Freedom?

No, there's no doubt that from our read of the contract it appears that that restriction is no longer a concern of ours. That would put us in a position where we would not have to spin-off the operation once it began to operate 90-seat aircraft.

Our view is that we will continue to go forward with Freedom for a number of different reasons, not the least of which is the fact that having multiple certificates just from a FAA issue point is a good thing. It gives us more options. It gives us clearly more flexibility. It allows us to isolate fleet types. I mean, there's just some very good things that we see by setting up Freedom and giving us that additional flexibility.

You know, one of the issues too is obviously these are larger aircraft and, you know, I think that everybody is aware of the fact that with the CRJ-900s that there seems to be some degree of controversy regarding the 900s as to whether or not they're "regional aircraft" or not regional aircraft on the part of some of our union friends. By setting this up separately like that we sort of take that argument sort of out of the conversation, which is something that we feel we have to do right now.

Okay, the revenue year-to-year on the turboprop?

Quarter-over-quarter, Jim, it was 42 million in the second quarter of last year, about 27 million this year.

Okay, great. Okay, thanks, guys.

Our next question comes from Helene Becker from Buckingham Research. You may ask your question.

Thanks very much, operator. Hi, Jonathan.

Hello, Helene. How are you? I haven't heard from you in a while.

I'm okay. I actually have a few questions.

I mean, we could probably try to quantify it. But again, I think the issue for us at this point is that we expected that the CRJs in the third calendar quarter, the 700s, would actually lose money as a result of the startup expenses. So we think that at least near term that the impact of the CRJs being delayed will be positive.

Right. So when they do- does that imply that, when they do come into service, at whatever quarter they come in we can expect a loss in that operation?

I think that- let me think that through. Clearly, if we delay that out, there will be training expenses that would be delayed to such time as that aircraft is in operation. That's correct.

Okay. Then my other question is are you- I assume that you're in touch with Bombardier every day, maybe even several times. Have they talked to you about whether they're currently negotiating and if they're close in what their status is? Do you have any sense what the timing is?

In terms of the strike there?

The strike, yes.

No. In fact, that's a good point. I have not done that only because the assurances that we have been getting from our salespeople is that, while it may be a delay, their view at this point is that the delay is being measured in terms of weeks but not in terms of months. Given the fact that we're putting a new aircraft on certificate, like I said, I mean, from our view it may not be that bad to give us a little extra time to make sure that we've got the FAA all squared away.

Do you know what I'm saying? If it got to the point where we were trying to take aircraft because we had commitments, you know, I think we'd have a different view. But from our perspective getting maybe a month's breathing room, I think we kind of feel it would be helpful to us.

Okay. Then switching gears here for a minute, was weather a factor in your quarter at all? Like could you say, you know, better weather around the country helped us by a 1/2 cent a share or something like that?

No, I think it was about what we planned.

No, our completion rate has been pretty steady. It's a little higher year-over-year, but not significantly. And I don't think it would have a major impact because, especially on the cost plus line, you know, the carriers are paying for the hull of the aircraft regardless of the completion rate. So it doesn't really impact us on a big chunk of our fly.

Okay. And then I guess you guys are in Denver for Frontier and that, from the press releases I've seen, has been working out pretty well for you. Maybe you can comment on some of those operations. And then where does United want you to fly, back on the West Coast with them, or Chicago, or Washington? I mean, I'm a little confused about where United actually wants you guys.

Well, as I said, first off, as far as United goes, our conversations with them have been you know, we know the folks over there. Greg Taylor, who just went over to United, you know, was my closest contact at US Air. You know, the folks that run the commuter operation we've known for quite some time. But we have not gotten into any detail in terms of where they might like to fly. I mean, we effectively are just trading information in terms of, you know, what's your cost structure, how do you achieve it, how does that different from, you know, your competitors, you know, what makes Mesa so much more attractive to us.

We obviously have a fair amount of flexibility as to where we put aircraft. However, I would say that given what we feel is a growing and a good relationship with Frontier, we'd be somewhat reticent to put regional jets, for example, into Denver where we're already flying regional jets with Frontier.

Now interestingly, their turboprop operations in Denver are, in fact, under a dual code share with Frontier. And that may, in fact, provide an opportunity just depending on what the outcome is with Great Lakes. And again, the situation with Great Lakes has been difficult for some time. My friend, Doug Voss, has shown truly remarkable ability in a very tough environment because, believe me, I can't understand how he can do it with 1900s because I think we would have long given up. So my hat's off to him. But the fact is, you know, for example, that would not be a conflict in Denver if we were to do something with turboprops because the two are already joint code sharing.

Okay. And then my last question is with respect to-actually two questions-with respect to D&A, the decline from 3.5 to 2.7, is that all explained by the goodwill?

I'm sorry, Helene, the drop ((crosstalk))...

Helene, that was because we wrote that all off.

Okay, just making sure. And then do you have any balance sheet information?

What would you like to know?

Cash, debt, equity, off balance sheet debt?

Cash is running, as we indicated in the press release, about 82 million. Debt is about where it was, around 167, 170 million. I'll make a comment that you will see that reduced over the next few months. We're fairly close to returning 15 aircraft to Raytheon. That will take off about $45 million in debt as we accomplish that. But there really hasn't been much change up to this point.

Okay. So when you say in the next couple months, you mean by the end of the June quarter or by the end of the fiscal year?

Most of it by the end of the June quarter, some of it may spill over into the next couple months beyond that.

Okay, great. Thank you.

Our next question comes from Jim [Allshell] of the Aviation Advisory Service.

JIM [ALLSHELL]: Good afternoon or good morning where you are. A couple of questions-you mentioned that Embrair was finding it difficult to finance their aircraft.

Yeah, I think that, you know, the environment- well, I don't want to pick on Embrair because Bombardier also is facing similar challenges. The difference right now is that Canada Air actually has a significant number of used aircraft on the market that already have financing on them.

JIM [ALLSHELL]: Okay. So that's the distinction.

Well that's one. But I will say that I think that it's become somewhat more difficult for Embrair just as a result of the fact that the BNDS Bank has taken a slightly different position. And as a result, I think it is a difficult process right now without the opportunity to place these aircraft into tax leveraged leases. And there's a financing available. The issue really becomes at what price.

JIM [ALLSHELL]: What does the change in BNDS's policy have to do with the availability of leveraged leases?

No, I'm saying that BNDS had been operating under a program with the government. I think that program has been changed. You know, they provided the debt portion of these leases. And then you compound that, as I said, with the lack of interest on the equity side for leveraged leases and it becomes a typical situation.

JIM [ALLSHELL]: On the equity, is that because tax equity is more cautious about aircraft in general, or are they particularly cautious about regional jets at this point?

No, no, just in general. I mean, we were talking, in fact, to some folks yesterday. And they say they're seeing exactly the same thing throughout the spectrum of potential investments.

JIM [ALLSHELL]: Okay. Now you also mentioned that you've added several RJs. Was it five in the quarter and then two more in April? Were they all CRJs or...?

They were actually five ERJs and two CRJs.

JIM [ALLSHELL]: And were they all on permanent financing, or have you had to take them on interim short or...?

Some were permanent. The CRJs I know were short-term just because they were operating leases. And we basically said to Bombardier we think we have some more business to do so maybe we ought to take some of these short-term and then wrap them into a bigger deal.

JIM [ALLSHELL]: Okay. One other thing to pick up on Helene's question with regard to your discussion with United on the turboprop side, if you were to do some turboprop flying with them, do you have aircraft available, or would you anticipate you have to go in the market and get some more? And have you got to the point of thinking what type of turboprops you'd want to fly for them?

No, I think that the conversations really have been quite general. There are literally- I don't want to say thousands, but I know there are hundreds of turboprops right now available. But our strong preference, and I think that, in fact, you know, when we've talked to United, the focus has really been far more on regional jets. The discussion about turboprops is just more an issue of we have some good turboprop feed; we'd like to protect it; we're concerned about some the financial viability of some of the carriers we currently operate with; is that something that you would be interested in.

JIM [ALLSHELL]: Okay. Thank you very much.

Okay, sure.

Once again, if you wish to ask a question, please press Star 1 on your touch-tone phone. You will be announced prior to asking your question.

Our next question comes from Will [Wrightson] of Wellington.

WILL [WRIGHTSON]: Two questions please-first, you talked about the restoration bonuses. Is that proportional to the pay rate? And, if it's not, what's kind of the average amount that a Mesa employee might have gotten under that plan?

Okay. Well, what we did was we went to all the employee groups and said-you know, it was right after 9/11-we'd like to put into place a 10 percent pay cut for the next 90 days. All of our employees who did that we then came back and said every time that the company's profitable going forward each quarter we will pay you your 10 percent back.

We expected to begin it in the first calendar because we didn't think we'd be profitable in the fourth quarter. But ultimately we were profitable, so we paid them back their 10 percent, which they'd given up in the previous 90 days. And now going forward they're getting an additional 10 percent of their pay for each quarter. So ultimately the result is for all of those employees who participated, assuming we're profitable for the next three quarters, which I think we feel very strongly that the answer is in the affirmative, they will result in a 7-1/2 percent pay increase.

We also issued them options. So unfortunately, all of our employees joined with the exception of our unionized employees. And the unions, in fact, did not want to participate, so we just moved on without them.

WILL [WRIGHTSON]: Yeah, no surprise there.

Second question on CCAir-I guess ultimately you suggested to them that, if they didn't come to the table, that you'd shut them down. If you can talk about it, what change got them to the point where they're interested in considering your offer? Is there anything you can talk about?

Well, I think the issue there was not a question of we'd shut them down. I mean, it's not as if we were looking for a lower cost operation so we can increase our profit. I mean, the fact of the matter is CCAir, you know, was insolvent. It was by the grace of God that some of their lessors would allow them to continue to operate aircraft. And Mesa had said quite some time ago, which I think I've relayed on a couple of these calls, that we were just not going to continue to make an investment in CCAir, and it would have to survive on its own.

I think once it became clear to the employees, particularly the pilots who were talking to, that the company would not survive and that we would not put any additional money into the company until it had a competitive cost structure, I think they came to grips with the fact that things had to change. You know, prior to this new contract CCAir had probably one of the highest contracts, at least in terms of turboprops, in the industry. That was not a platform that we could grow. So by putting into place a competitive contract, which gives them now, I believe, a significant leg up, for example, over, you know, most of the other carriers in the industry and on par, for example, with Mesa, I think this bodes very well because I think you're going to look down the road, and these crews, who were very highly paid Dash8 pilots, are going to become moderately paid jet pilots and make 60 percent more.

And unfortunately this is one of the biggest problems that we have when we talk to our friends at the union is that they always focus on rates and where you are versus the industry rather than on compensation and how much does the actual guy earn. I mean, at Mesa Airlines, for example, our most junior captain flying a jet has got less than three years of seniority. And I can assure you that at carriers that have, for example, what you might call the best contracts, for example, some of the US Air owned carriers, that there's no such thing as a three-year jet captain because there are no jets, and there's certainly no such thing as even a three-year turboprop captain.

So you can't just compare the rates. And again, this is something that we've had to really educate people over time that just looking at the hourly rate at a certain year of seniority is meaningless, if, in fact, those people don't exist at a carrier. You know, I call them the unicorns in the industry. They're mythical creatures.

So, you know, we think that this is going to work out very well for the pilots at CCAir, for the rest of the employee groups. It allows us to breath some life into the company. And I think that, you know, by doing this it gives CCAir a very attractive competitive cost structure.

WILL [WRIGHTSON]: And do you think CCAir can be profitable if this contract is actually signed?

I'm certain of that.

WILL [WRIGHTSON]: On an ongoing basis?

There's no doubt about that. With the contracts that we have in place, you know, and assuming that our contract going forward with US Air bears some resemblance to one that we currently have, which is, of course, what our- that has been the premise, it'll be profitable just as if it was being flown by Mesa.

WILL [WRIGHTSON]: That's helpful. Thanks.

We have a follow-up question from Helene Becker of Buckingham Research. You may ask your question.

Thanks, operator. Jonathan, on the maintenance expense year-on-year, that's owing to the shift in mix in the fleet, right?

That's correct.

And then the other question is I think you said in the press release that you had gains from investments on marketable securities in the quarter.

Right.

I didn't see that number. Is that here somewhere?

It was about 1.2 million.

Well, it's 1.0 net of the distribution to the partnership, the minority interest, so after tax 1 million in gains, ((crosstalk)) prior to the minority distribution.

Okay.

Okay. And what was it last year?

Last year I think there was a $700,000 mark to market loss during the quarter.

Okay. So it's 1 million compares to minus 700?

That's correct.

Okay. And then- all right. I think that's all. Thank you very much.

I am currently showing no further questions.

Okay. Can I just conclude for a sec? Again I want to thank everybody for taking the time. I hope that maybe with this explanation people get a better idea of our business. You know, we are working very hard to do the things that we promised in the past. We hope to think that this quarter we started to show that, you know, we've got the turboprop operation squared away, which was our big drag before.

I want to thank the people here, Peter, and Mike, you know, Rob Stone, Brian Gillman, who did an excellent job on getting those contracts put into place. We feel that David Siegel coming online at US Air is just tremendous for both US Air and for ourselves. We are certainly pleased that United has taken the time to come and at least talk to us about potential opportunities. And I think that we feel, as I mentioned sort of in passing before, that the trends that we have seen in terms of our earnings will continue to improve at least through the end of this year, you know, where we feel confident with our visibility and feel very confident that we're solidly on the right track at this point.

So again I want to thank everybody. And, of course, if you have any questions at all that you feel were not answered, please feel free to call me directly, or Rob, or Peter. We'll be here in the office all day. So thank you all very much.

That does conclude today's conference call. You may disconnect at this time. Thank you.