Mesa Air Group Inc (MESA) 2002 Q4 法說會逐字稿

Good afternoon, and welcome to the year-end and fourth quarter earnings release conference call for Mesa Air Group.

I would like to inform all participants that you will be able to listen only until the question and answer session of the conference.

Today's conference is also 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, sir.

You may begin.

Thank you very much for taking time out of your busy Monday morning.

We appreciate it.

I will start by just reading this, as you probably all are aware.

This conference call will contain various forward-looking statements that are based on management's beliefs, as well as assumptions made by and information currently available to management.

Although the company believes its expectations reflecting 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 (inaudible) materialize, which I know will come as a huge surprise to everyone in the airline industry, or should underlying assumptions prove incorrect, actual results may vary from these 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 Securities & Exchange Commission.

OK.

Now that we have that out of the way, let's talk about our press release today.

As you can tell, there's quite a bit going on, and there's even a number of things in the press release that we didn't report to you directly which we would like to go over.

It has been a very, very busy quarter for us here at Mesa airlines.

First off, let's talk a little bit about US Airways, which sort of has taken the highlight this quarter.

Despite the bankruptcy filing in August, we continued uninterrupted service under our key contract, including the 32 aircraft that -- our Mesajet (ph) contract.

US Airways has met all payment obligations since the bankrupt announcement.

We've worked closely with my good friend David Siegel (ph) there, who as many of you know, worked with me at Continental and then took over for me at Continental Express.

And opver the last few weeks, that relationship has now developed into what we think is going to be a tremendous opportunity for our company.

Subsequently, there have been a number of key events relating to our relationship with US Airways.

First, the bankruptcy court granted a motion to affirm the existing Mesa contract with US Airways, and that was done so without modification.

The existing contract was amended to add 20 regional jets, with delivery scheduled to occur during 2003.

More recently, last week a letter of intent was signed to add 50 additional regional jets with delivery expected to begin in 2003, and I think an important part of that is that may well include 30 70-seat regional jets.

In return, we agreed to issue 3 million warrants to US Airways.

All the additional regional jets will be subject to the Jets for Jobs provisions, as provided for and negotiated in the US Airways pilot contract program.

And as you can imagine, that continues to be a somewhat fluid situation.

I think it's fair to say that, with U.S.

Airways, as with all of our partners, we have taken a different approach than many other regional carriers.

Our new contracts are substantially similar to our old contracts.

We have taken an approach that, rather than attempting to garner the highest margins, we rather had what we view to be a sustainable and fair margins.

I think that, as a result of our approach, U.S.

Airways has come to us for this significant expansion -- as you can imagine, these jets will generate anywhere from $5 million to $7 million apiece in revenue.

This is a very significant increase in size for the company over the next few years.

At America West, we took delivery of our first CRJ-700 (ph) aircraft, which is a -- is configured in 64 seats, and in October received approval from the FAA for our new Freedom Airlines operating certificate.

As many of you know, Freedom became necessary as a result of the scope restriction at U.S.

Airways, which did not allow us to operate larger regional jets, even at America West, while at the same time operating as U.S. Air.

We are also not completely clear, but believe that that issue has also been resolved at this time.

Revenue service began in late October as America West Express.

As of today, We have three aircraft in service, with a fourth scheduled for early December.

We remain on schedule for the first delivery of our 80 CRJ-900 (ph) aircraft.

Revenue service is expected to begin in the America West system in early March.

That's a 90-seat aircraft that we will be - 86-seat aircraft that we will be configuring with 80 seats -- for those of you who have not had a chance to see our first class section, which is a first for us at Mesa, it is really quite a nice addition to the aircraft.

On an unfortunate note, we announced the shutdown of CCAIR, our Charlotte turboprop subsidiary.

The operations ceased as of November 4.

As a result, we took a fourth quarter after-tax charge of 12.2 million to recognize the shutdown and related costs, and they're (ph) also separately identifying 3.1 million in after-tax operating losses during the quarter.

CCAIR, we had struggled rather valiantly to try to save the company.

You know, the biggest weakness that CCAIR had was, other than being a prorate base and a turboprop business, the introduction of regional jets in a number of the key markets it served to other hubs by our competitors reduced traffic levels.

We had worked closely with the employees there in order to try to restructure some of the contracts there that would have allowed the company to grow to be able to be competitive for regional jet business with our partners.

Unfortunately, in spite of overwhelming approval by the pilots at the company, we were unable to get the final contract signed by ALPA (ph), and it left us really with very little choice but to close the company.

Again, we found this to be most unfortunate.

The folks out there did a very good job, tried as best they could, and in fact, you know, came around to our way of thinking in terms of growth.

Unfortunately, we just weren't able to finally put it all together, and had to choose to close the company.

We do expect to offer all the folks at CCAIR jobs at Mesa.

You know, we are growing.

We think there will be opportunities for all those people, and we are anxious to have them come and join us at Mesa Airlines, Air Midwest, or Freedom.

We completed the return of 12 of our 1,900 aircraft to Raytheon.

That allowed us to remove 37.2 million of debt from our balance sheet.

Our outstanding debt balance is now down to under $130 million compared to slightly over 170 million a year ago.

As part of the return process, we determined the cost of meeting the return conditions were slightly more than expected, and we had an additional after-tax charge of 2.2 million.

The three remaining aircraft will be returned by the end of the March quarter.

That should, in fact, put us at the point where our beach (ph) fleet is appropriately sized.

Dependent on what goes on in essential (ph) air service, which I will touch on later, we could in fact potentially be looking at maybe even adding a few aircraft down the road.

We are delighted to be able to announce that we reached a new agreement with our flight attendant union.

It's a four-year contract.

The negotiations were done in five weeks.

It provided for some nice benefits to the flight attendants, at the same time providing us with a cost structure that was acceptable to our partners.

We have a very good relationship with our flight attendants here.

And we are pleased we can put this out to a vote.

I believe the vote was almost 90 percent in favor of the new contract.

So we think that was a real plus for everybody.

And it, again, pushes out these negotiations for another four years, something that, if nothing else, takes management time.

So we are pleased we were able to get that done.

I want to thank all the people at AFA, and in particular our local people here, whom I've known for over a decade for doing a wonderful job working with us to get this together.

The financial results - stripping out the one-time item, the company earned 14 cents per share on an ongoing basis.

The quarterly results were impacted by - let me just tell you -- give you a little color into what happened.

Continued revenue weakness in our prorate business.

Certainly the turboprops were underperformed.

Frontier Jet Express had significant losses of almost 1.5 million pretax for the quarter.

This was the result of a number of issues, not the least of which was what we feel to be some confusion on our parts coordinating with Frontier on Internet fares and what was going on in the marketplace with the new America West pricing initiative.

We have restructured that operation fairly significantly now.

We've gone from five aircraft down to four.

One of the aircraft was placed in service with Wichita, which provided revenue guarantee.

And we feel that those numbers will improve -- well, not feel; we are certain, having looked at the results so far this quarter, will be significantly better.

I won't say that they will be at a break even, but I think we will be -- I think it would be fair to say that we expect to lose less money in the quarter than we did in a month.

And given it's wintertime in Denver, you can see that we felt there's a big improvement.

But still, one that we are going to monitor very closely.

And frankly, if in the end we determine that we don't feel the operation can be profitable on an annualized basis, we now have a home for those aircraft if necessary.

Our Air Midwest operations continue to be impacted by the overall industry environment, as well as some decline in revenue due to the US Airways bankruptcy filing.

We had about a $1.2 million pretax loss at Air Midwest.

As you know, we continue to significantly expand our essential air service opportunities.

At the end of the quarter we began our new Dallas service, which effectively doubled our subsidy from roughly $12 million to $13 million -- excuse me, $6 million to $12 million.

We feel that the aircraft that funded those operations came out of loss-making operations elsewhere.

So we think that Air Midwest, on an annualized basis, will do significantly better as we continue to expand that essential air service.

Also something that is important to note -- we had higher than expected engine maintenance due to premature removals as a result of component failures which, again, while we are paying, you know, by the hour, pulling the aircraft off and generating these events, impacted us about $3.1 million which was not planned.

That would not have been there if it had not been for theissues within the engines, the manufacturers, both manufacturers were affected by this, both GE and Rolls Royce.

Different items, but basically the same issue.

For example, on the Rolls-Royce engine, it is not scheduled to come off until it gets to 6,500 hours.

We had to take engines off at 4,500.

The GE engine is not supposed to come off until 15,000; we had to take them off at 11,500.

And while this is a timing issue, it certainly impacted our numbers $3.1 million pretax this quarter.

Also of note, the company incurred approximately 1 million in unreimbursed expenses related to the introduction of the CRJ-700 and the establishment of the Freedom Airlines certificate.

We feel that, regardless of the outcome of Freedom, we felt that having an additional certificate gives us a certain amount of operational flexibility that is well worth the expense.

We also completed a previously announced 4.4 million share repurchase program, average price being about $5.75 cents.

And we've announced a new program to repurchase an additional 2 million shares.

That program had been ongoing for a number of years, both pre-9/11 and post-9/11.

One of the questions that has been asked, we want to just review our order book.

We have 60 aircraft available to us that we have one form of financing or another.

They include four ERJ 50-seat aircraft, 20 CRJ-200 aircraft, and the balance of our 40, which is I believe 36 of our CRJ-700s and -900s, we have flexibility in terms of what type of aircraft we take in that order.

But all those aircraft have financing basically in place and provide us with some opportunity - both flexibility in terms of moving aircraft between the different subsidiaries that we have in order to accommodate the requirements of our partners, and at the same time, allowing us to pursue the traditional business opportunities, such as this new opportunity with US Air.

I also would like to mention that we continue to aggressively pursue a diversification of our portfolio in terms of partners.

We feel that we have had -- we continue to have ongoing conversations with a number of other major airlines, and again, having these aircraft available to us and some, you know, good working relationship with our partners giving us some additional flexibility would allow us to pursue, potentially, other opportunities with other new airline partners.

We are also in discussions with partners not only about regional jets, but I should also mention that there has been some discussions in regard to turboprops as well, in particular in areas where operationally turboprops are better suited as a result of their performance capabilities.

With that, I think that we can open up for questions, and be happy to go forward.

I have with me Mike Lotz, our President;

Peter Murnane, our EVP, and Rob Stone, our Chief Financial Officer, and Jeff Poeschl, our all-important VP of Finance and Controller.

So, if there's any questions, please feel free to ask any of us; we will be happy to answer them as best we can

Thank you.

At this time, if you would like to ask a question, please press star one on your touch-tone phone.

You will be announced prior to asking your question. once again, to ask a question, please press star one.

Our first question comes from Michael Leninberg (ph).

Your line is open.

Please state your company name.

Mike Leninberg, Merrill Lynch.

Good morning.

I guess a couple of questions.

The 70-seaters, I think you mentioned, Jonathan, that you there may be an opportunity to put 70-seaters in at US Airways.

Anything that - you know, if you can shed some light on that, I think, you know, when US Airways did announce that they were going to be able to fly 70-seaters, that they would go into mid-Atlantic only and they would be flown by former US Airways pilots who are now out on furlough.

If there's anything that you can update on that, that would be great

As US Air, I believe, disclosed that they were in discussions with other outside carriers -- affiliated carriers for 70-seat aircraft.

We, in fact, have had those discussions.

This order does include 70-seat aircraft.

But again, that is again subject to their negotiating an appropriate Jets for Jobs contract with their pilots.

So, while we look forward to that potential expansion, I would be remiss if I didn't say that there are certainly some hurdles that have to overcome.

But nonetheless, I think the intention is to see if we can work something out.

And again, while I would like to credit that to the fine job that Mesa has done or my relationship with David Siegel, and what it would mean for US Air, I think it probably has as much to do with the fact that we have aircraft available.

OK.

Jonathan, on the Jets for Jobs program, I know that you have to get the approval of your own pilots in order for you to pursue that type of business.

Have you guys taken a vote, and are you now ready to go?

No, they haven't taken a vote, no rare we ready to go.

Okay.

We continue to be in negotiations with our pilots at Mesa.

What we are trying to do, as you may know, we have a contract that has been in negotiation for -- not a long time, since March.

And again, you know, this is not always the easiest issue that we face as airline executives.

But we are hoping that we might be able to wrap up everything at once to put the contract to bed, put a long-term contract into place, and put the Jets for Jobs protocol to bed as well.

We have made, you know, I think, a lot of progress over the last few weeks in doing that, but there are certainly still hurdles that we need to overcome, not the least of which being the Jets for Jobs.

However, I think that, you know, there have been folks at Mesa who have been intimately involved in the creation of Jets for Jobs, so I think that we stand a reasonably good chance of being able to put that to bed.

We have looked at a couple of proposals that would fall short of putting an entire contract together, which would be our preference, but, you know, that would address this Jets or Jobs.

And again, depending on the timing, we will just have to continue to monitor to see whether that would be maybe a more expedition way to go forward.

But while, you know, it's not done, I don't think we would be going to this extent in terms of putting together this contract with US Air if we did not feel that we had a pretty strong likelihood we will put that together.

Okay, and just my last question.

Just on your cash position, I think at the end of the June quarter, your cash and marketable securities and I think short-term investments, that was over 70 million.

And I think you ended this quarter, I want to say, in the mid-50s.

As we look out, I know you have a decent amount of aircraft that are coming in.

What sort of cash position are you targeting?

Okay.

Let me get to the first part of that.

First off, over the quarter the decrease in cash was due to a number of different issues.

Certainly cap ex involving the introduction of the 700.

There was also some amount of stock buyback that was done; when the stock was trading below $4 we were fairly aggressive.

And, you know, which finished off the four - the initial - and also, we had a very significant July lease payment, I believe it's about $20 million, where, you know, we have one payment, a big payment a couple of times a year.

And that payment hit in July.

And that's why, you know, we were down at that number.

In terms of our cash going forward, we think that that number has gone up.

It has gone up.

We just recently, for example, received a nice payment from Raytheon.

Also, we have four additional ERJs to finance and those -- once those are done, we have a pretty significant deposit still on hand with EmberAir (ph), which could be used towards additional aircraft.

The fact, though, remains is that I think the manufacturers realize exactly what our ability is at this point to make deposits.

And if they are going to sell aircraft, I think everyone has to have some degree of flexibility in that regard.

But we feel comfortable with our current cash position.

And I think that that is something that we just have to continue to monitor as we go forward.

I think, John, at one point on the aircraft that you were talking about coming in that are financing, we don't need additional cash deposits.

We don't have to put up additional deposits, which is what I think Mike might have been ...

Mike, did you hear - that was Peter.

That's actually very helpful, because I know you have a lot of planes coming in.

Maybe I didn't understand it completely.

I'm sorry.

Thanks, and congrats on getting the expanded US Airways opportunities.

Thanks very much.

Our next question comes from Jim Parker (ph).

Your line is open.

You may ask your question, and please state your company name.

Good morning, guys.

Jim Parker with Raymond James.

How did Leninberg get in in front of you?

I don't know.

I have to check on that, Jonathan.

Although Mike does a pretty good job, you know.

So let me ask you - why, if you have these incremental orders with Airways and you've got aircraft over at Frontier that are not making money, why don't you move them over to Airways?

You know, a couple reasons why we don't do it immediately.

First off, again, I would be - I have to be frank; we were, I wouldn't say taken by surprise, but there was a big change in Denver that we were not up to speed with over this last quarter, which resulted in that loss.

You know, and we saw load factors in August that were below load factors in November.

So in other words, part of that loss in Denver was clearly self-inflicted.

We think that, with the restructuring and, you know, potentially additional downsizing, you know, that could occur in the Denver hub, that there could continue to be an opportunity there.

We feel that any loss that we have this quarter would be more than offset on an annual basis with profitability in the third and fourth quarters, which are historically strong quarters in Denver.

As you know, we are fairly familiar with operations in Denver.

We also feel that having a presence in Denver strategically is just something that has value to us and that we continue to have that opportunity, potentially, to expand, depending on what happens in that hub there.

But. all that being said, if after this quarter we don't see any find of improvement that we anticipate, and that is very significant -- I won't say it would be a break even this quarter, but we expect it to be close to break even, that we would not seriously consider moving those aircraft to US Air in the very near future.

On Frontier, I think we have become (ph) good friends with them.

They have been very helpful.

They, in fact, have been understanding because it has been a tough operational situation up there with only four, five aircraft.

But nonetheless, as they are aware, you know, we can't be providing service in markets where we lose money and generate fees.

So something there will have to give if the numbers don't improve rather significantly in the very near future.

Jonathan, will you review the financing of the RJs now?

As I understand it, of your 36 ERJs, 32 of them are US Airways, you have four coming for which you have commitments.

Is that correct?

That is correct.

Okay.

And then, out of the 700s and the 900s, the 40, you have 20 of those for which financing is committed; is that correct?

Excuse me, Peter?

Permanent financing on the 20.

We have back up financing on the additional 20 from the manufacturer.

Okay?

What about ...

And then we have an additional 20 CRJ 200s, which also have that backup financing.

Is that correct, Rob?

I don't want to misspeak.

Is that correct?

(AUDIO GAP)

And, you know, as you are probably well aware, financing regional jets, even for the strongest carriers, is becoming problematic as lenders have been shy to do -- to have anything to do with anything that even sounds like an airplane.

Yes.

So, Jonathan, you have incremental orders here of 50 plus 20.

There's 70.

Maybe you can -- I can see where you can get 11 of them.

But where do you go - then you've actually then 20 additional CRJs, you're saying, for which you have commitments?

We have a total of 60 aircraft that we feel we have financing safely available for that haven't been delivered yet.

You've got equity and debt.

Are these going to be leveraged leases?

Yes.

Okay.

That will take care of it.

Thanks.

And they may not be enough to cover all of our needs.

So we may well be back into the marketplace - in fact, I just got off the phone with Bombardier.

We're also talking to EmberAir.

There is a new government in Brazil right now, a very labor friendly government that clearly is going to put a big emphasis on exports.

So, I mean, we clearly have to be back in the mix in terms of looking at aircraft.

But we have some flexibility with our partners to move aircraft around right now.

And we think, at least in the short-term, we're not going to have an issue.

That will become a bigger issue if we are successful, for example, in garnering business from another major carrier, which of course is our hope.

Okay, thanks.

Our next question comes from Brian Harris (ph).

Your line is open.

Please state your company name.

Hi.

It's Brian Harris at Salomon Smith Barney.

Assuming all goes well, can you comment as far as how many of the 50 aircraft new order we would anticipate in 2003?

I assume those comments in the press release were calendar year basis.

And then, the balance in the out years?

Yeah, it was calendar year.

Peter, you want to go through where we think ...

Well, the 20 initial that we talked about earlier would all be in calendar '03.

Now, probably would be talking about half of the additional 20 200s in the latter part of '03, and the 700s would be in '03 and '04.

Any sense of the 700s, how many would be a range for '03 at this point, or when the first ones will be coming in, kind of?

It probably would again be about half and half between '03 and '04.

As Jonathan said, it's very flexible right now in terms of working out exactly where and when.

Okay.

And then, can you just comment on just the Jets for Jobs program that you have set up with US Airways and how (ph) with the CCAIR and your existing pilots thing?

Can you talk a little bit about, you know, are you going to be able to satisfy the demand for all three of those parties, or how that kind of can shake out?

The CCAIR - the Jets for Job protocol that I am aware of basically states that 50 percent of the pilots come from the furloughed mainline pilots.

We are in a fortunate position of being able to offer jobs to furloughed pilots both through our existing operations, including the expansion that we are seeing in Freedom, which frankly we have had quite a large interest from furloughed mainline pilots coming to, as well as through the expansion of these 70 aircraft through US Air.

We think that this opportunity in fact is helpful in that it puts, for lack of a better word, pressure on everybody to make something happen because, without a deal, there are no jobs.

So what we are trying to do is put together the Jets for Job protocol, as I mentioned before, as part of a final contract so that we can sort of put the labor issues to bed for the next five years and sort of wrap everything up.

Our pilots, while I can't imagine our -- I wouldn't use the word delighted with Jets for Jobs, do understand that it is additional opportunities and that for the time -- for the foreseeable future, with the opportunities as limited as they are, they are certainly very valuable.

You know, how that will shake out, I don't know.

But I think that we feel reasonably confident that there are just too many good things in this for everybody that this would not happen in a -- fairly expeditiously.

Okay.

And then CCAIR, how many pilots are involved with that, and how do they impact ...

Well, at CCAIR, I think there's approximately about 120 pilots.

And, you know, let's not forget, there are also another few hundred employees there.

We certainly will do everything we can to offer them employment with Mesa.

One of the thoughts has been that putting a contract together at Mesa, we could take that same contract and put it at CCAIR, potentially keep the operations separate just because, again, we like the diversification of certificates from a regulatory standpoint.

But again, we have not finalized any thoughts in that regard.

We will just have to sort of see how things play out.

You know, we had hoped to do something at CCAIR with regional jets.

Their contract at the time was uncompetitive.

US Air, frankly, did not have a big interest in putting jets into a high cost structure company.

We had made significant changes to a new contract.

That contract was ratified by the pilots.

Unfortunately, it was not, in fact, signed off by ALPA, which left us little choice but to shut the company down.

We feel that the CCAIR pilots did everything they could to make the right thing happen, and as such, we would like to respond in kind.

Okay, thank you.

Our next question comes from Ray Naidul (ph).

Your line is open.

Please state your company name.

Ray Naidul, Blaylock & Partners (ph).

Jonathan, how are you doing?

Fine.

How are you, Ray?

Good.

I just want to kind of summarize and make sure I understand everything that has been talked about here so far regarding US Airways.

There's 32 RJs, 20 more coming in.

Another possible 50 beginning in 2003 for a total of 102.

But that's subject to the Jets for Jobs, where US Air pilots may have to fly them.

And I guess the first question is, if US Air pilots fly some of these aircraft Jets for Jobs, will they be flying for a US Air subsidiary, or can Mesa hire those pilots and meet the qualifications for the Jets for Jobs?

And then secondly, the $3 million warrants to Sierra, how does that come into play here with this agreement?

And then the third part, the $4.3 million payment that you were looking for, I guess you are just giving up on that as part of this overall agreement?

Okay.

First off, let me address the issue.

Yes, Mesa can operate under Jets for Jobs.

We would give half their pilots jobs.

They come in, by the way, as first-year captains.

And again, those rates -- those costs are pass-throughs.

There is, in fact, a benefit derived by Mesa because, by taking in US Air pilots, it does significantly reduce our training cost exposure.

So we are --from our standpoint, there are some very attractive aspects of Jets for Jobs.

I will also add that there was some concern - and not to say that -- this is somewhat anecdotal, but nonetheless I think it's worthy of comment, that bringing in mainline guys into a regional operation, how is that going to impact you?

Is that a negative?

We have, in fact, at this point, already hired a number of US Air furloughed pilots who have come to work primarily at Freedom.

And what we found is, in fact, a much different attitude than one might expect, but one that says, hey, you know what?

Maybe there was something at US Air that caused us to be furloughed, and they sort of rethought the whole process under which they have a relationship with the company, with management.

In fact, they have become incredibly supportive of what we are doing.

So our initial reticence as management was, what's it going to be like to bring in mainline pilots who have to get accustomed to a much different way of life as a regional pilot?

At least initially, we have found that to be less of an issue than we had anticipated.

The second issue regarded the warrants, and basically US Air came to us, and again, this is a very friendly conversation between myself and Dave Siegel, was, John, we are ready to give you a slew of business.

We'd like to have some upside in that business.

We will give you what we feel and you feel is a fair contract, which they did.

I think they did an excellent job.

Bruce Ashby was very much involved in that and was very helpful in putting this together, along with Dave Siegal and our old friend Andrew Nocella (ph), who came over from America West.

And, you know, my view was, if we are really going to go from 30 aircraft to 100, which is probably going to be close to 400 million of additional revenue, almost doubling the size of the company, to offer these guys some warrants struck at the time with (ph) our stock was lower, at a price significantly higher than the market, you know, that to me was not an unfair trade off, and one which I think we can build on because, you know, US Air, you like doing business with people who are flexible, who are easy to do business with.

And I think US Air has come to the feeling that Mesa is one of those carriers that can sit down and hammer something out.

And in fact, we put both of these deals together.

Once they determined to do a deal, I flew back to Washington.

And I won't say we did it in a few hours, but it certainly -- the genesis of the deal and how it occurred happened very quickly.

So, in that regard, we feel that that's, you know, something that in our mind gets everybody on the same page and we are all on the same side.

The last thing on the 4.3 -- what is that?

Oh, yeah.

Mike Lotz pointed out we had completed our stock buyback at some reasonably good prices over the last few weeks.

So we felt a little more comfortable about doing that.

On the last piece, the $4.3 million payment, why don't I have either Rob or Peter just address that, because I don't want to ...

It had nothing to do with the 20 aircraft or the additional 50 aircraft.

That was from 9/11 payments which, when we were working out the bankruptcy approval of our existing contract, was something that was part of that.

Jonathan, to build on this now, to look at the possible downside, what is your backup plan if, in fact, the bankruptcy plan at US Airways doesn't work out and they have to either liquidate or, after January 31, they lose exclusive right to reorganize?

Would these contracts still be good if some other management party came in there to reorganize?

Then, of course, if they liquidated, what would be your backup plan for growth in these aircraft?

Well, a couple of items.

One, yeah, the contract -- now that it has been approved by the bankruptcy court, it's done, so anyone in the bankruptcy organization would inherit those contracts.

My plan, if in fact the bankruptcy as it is currently stated is not successful, I actually believe -- and maybe it's contrary to what most of you believe, but nonetheless I think that there is a lot that can be done at US Air before this company necessarily has to be liquidated.

Its cost structure is still stubbornly high, and there still continues to be opportunity, in my opinion, to -- that that can be fixed.

And, you know, someone like David Siegal is certainly the best person to do that.

As has been reported, again, depending upon what was to happen in the bankruptcy, Mesa is not opposed, nor have we been unwilling to work with bankrupt carriers in the past in terms of helping them in their reorganization.

As many of you know, Mesa participated pretty significantly in the America West reorganization, which resulted not only in us garnering the vast majority of their turbo -- their regional business, but also a $47 million profit from the sale of stock that we acquired during that bankruptcy.

It also has been reported - and I can say that, without - I think it's fair to say that we continue to have an ongoing interest in US Airways and would monitor the situation very closely to see whether or not another opportunity came up, which may well be the course of action that we would take if for no other reason than self-preservation.

I would say that the backup plan would be -- and we have had some discussions with other carriers even at this juncture, that under any circumstance, even in a breakup or in some kind of asset sale, the operation of regional jets is attractive.

It is certainly the best answer for a number of these hub operations.

And the fact is we feel that we offer our partners the lowest cost, and in some cases by a very significant margin, that there would be very little reason for us to fear that there would not be some use for these regional jets.

Again, having done some comparative numbers between other regional carriers, both publicly-traded as well as some of the wholly-owned carriers, we've exchanged some data, we feel highly confident that our cost structure is exceptionally competitive and these aircraft could be put to use rather quickly.

Okay.

And then, with your other bigger partner, America West, where you are putting in the larger RJs, you mentioned that this is going through according to schedule.

I'm just wondering, what is the action with your pilots, with ALPA?

You know, what's the status of your amendable (ph) contract, things of that nature, and is that playing a part with what is going on with the larger RJs?

I think it is, and it's a good question.

Clearly, ALPA would like to see Freedom rolled into Mesa, and we have said and continued to say that, well, first off, let's just remember that the reason why we started Freedom was because of a scope clause at US Air that we had nothing to do with that was supported by ALPA.

The fact is that scope, we believe - and again, you know, there seems to be a lot of fluidity in this situation, but assuming that scope clause issue has been fixed or will be fixed in the near future, we still have the thorny issue of coming to terms with ALPA on the large regional jets that make them financially viable and acceptable to our partners.

I think that we made very good progress with ALPA inclusive, and most importantly with the ALPA national people, who do have the final say, in terms of being able to make that happen.

And we have, at no time, said that we are opposed to wrapping all these things together.

We have discussed the idea internally here about potentially spinning off Freedom in order to give it some independence, but clearly that would be not the most attractive alternative for us.

We would rather operate them here.

We have no anti-union animus.

In fact, we voluntarily offered to accept ALPA as a bargaining agent for Freedom.

So we think that these things, while they continue to be problematic, certainly we feel that they are resolvable, because it makes so much sense for all the parties to make this -- to come to a quick resolution.

Okay.

And the final question is, as far as the write-downs go, are we through with the write-downs?

Have you taken a write-down for just about everything you can think of right now?

If nothing new develops, is this complete?

At this time it is our best estimate.

Yeah, I think -- and I've got everybody nodding their head here.

At this time, yeah, it's our best estimate.

You know, if someone said to me, John, what would be the worst case scenario in terms of this, I mean, we have a significant number of aircraft, for example, that are dedicated to essential air service.

If for some reason the government was to eliminate the essential air service program, we would probably have to park another dozen or 15 Beechcraft 1900s.

We'll mention those -- the direction that the government is going on this is in fact the opposite.

They basically doubled the subsidy out there last year, and then they renewed that increase again this year.

You know, we feel reasonably good on the 1900 operation, which was the source of most of our write-offs.

And so I would have to say at this point we feel reasonably confident that we are done.

I think what is disturbing for us is just that, you know, we would like to get these numbers so that they are clean.

We seem to - you know, unfortunately this quarter got hit with two issues on an operating basis, one being the losses in Denver, which we clearly did not anticipate, certainly not in the summertime in Denver.

And we can see that, through some schedule restructuring, some fixing of the whole revenue management system, that those numbers are going to come down very, very significantly.

Like I said, we already know where we are in October and November.

And secondly, this engine maintenance, you know, frankly, the GE engine had been a rock, very solid.

We had not had the issue of taking those aircraft engines before 15,000 hours.

I think we had, I think, believed six engines that we took off at, you know, average of 11,500 hours.

And those engines were not in our plan.

And again, while it's only a timing issue, for those of you - and that certainly includes all of us as well, looking at the numbers on a quarterly basis, that impact was rather significant this quarter to the tune of almost $3 million, which we could not have anticipated in the previous quarter.

Okay, great.

Thanks a lot, guys.

Our final question comes from Robert Ashcroft (ph).

Your line is open.

Please state your company name.

It's Robert Ashcroft at UBS Warburg.

Hey, Jonathan.

Hey, Rob.

The question is, the 50 aircraft allocation, can that be flown in Freedom?

Well, at this point in time, no, because the Jets for Jobs protocol, I believe - and again, this is a fluid issue.

I think the Jets for Jobs protocol calls for the jets to be operated by ALPA carriers.

ALPA carriers.

I'm not certain, but right now Freedom is -- as a certificate, is -- does not after ALPA there.

Again, this is all part of the discussion, and we have no opposition to ALPA at Freedom.

So I don't think that this will ultimately be an issue that will prove to be a stumbling block.

Okay.

Next question.

The 50 aircraft deal, same basic economics as the 20 aircraft deal in the existing contract?

The 50 aircraft deal will have roughly the same as the 20 aircraft.

It actually got improved a little bit with the additional aircraft.

And remember, some of those aircraft may well be 70-seaters.

So there are still some numbers that need to be hashed out.

But the intent is that those -- the contract will provide returns that are a little bit better than what we agreed to under the 20-seat.

Now, how does that relate to the previous contract?

We think that they will be substantially similar.

However, they have tightened up a few things.

So we feel that, you know, we could well be within, say, one or two margin points.

If we are, less than the current contract.

We think there might be one or two margin points, potentially.

But that, we think, could also be offset with some upside that we have.

So that, we think, within a percentage or two, we are certainly safe when we say 2%.

We think we actually will be closer to that.

So ...

You are talking going, say, from -- if the number is 12% before, going down to 10%?

Is that what you're saying when you say two margin points?

Right.

Okay.

The timing of this deal, is this something that US Airways will be taking in front of a bankruptcy judge?

Yes.

They already did the 20 aircraft deal.

And, you know, their question at this point really has been, how fast can we do this?

One of the sticking points, for example, in our contract negotiations with the pilots is that we would like to simplify the trading events because, you know, we spend as much time to train a guy from going from a 1900 captain to dash (ph) as we do to train a CRJ captain.

And our argument is, look, guys, if we can take out the sideways movement, we can take delivery faster.

We actually have had some regional jets offered to us that we can speed up the process to get you guys into the left seat of a regional jet, which is where you make far bigger money.

Those are one of the things that is important to us because, at this point, we feel we can comfortably do 1.5 to two airplanes a month.

And what we'd really rather do is get up to three or four aircraft a month to make this process happen very, very quickly

Okay.

Last question.

About the engines.

These are not the first engines in your fleet to have got gotten up to this number of hours, or are they?

Is this ...

No, I think ...

Are these, like, the first - is this the -- you know, just the preview of coming attractions, say, or ...

No.

In particular, in both circumstances -- GE I know the story very well -- there was a problem on a batch of engines regarding coating of some internal engine parts.

Okay.

So, at first they thought that the issue was just a Mesa issue.

After further investigation, they found that that was not the case.

And so GE has come back with a fix.

So no, I don't think that's the case at all, but nonetheless, one that did impact us.

And we actually have brought all the engines, or are in the process of bringing them in and, at GE's expense, we are putting all new parts into the engines so that that will not happen.

Good.

Thank you very much.

Okay.

That concludes today's question and answer session.

I would like to turn the call back over to Mr. Ornstein.

Again, we would like to thank everyone very much for taking the time.

We are very excited about the opportunity to move forward with US Air.

We feel that we've got -- the company certainly is positioned now to take advantage of what everyone has asked us if we were going to be able to take advantage of, which is -- frankly, the situation that has occurred post-9/11 regarding all the restructuring.

US Air is the first company to have gone through this kind of significant restructuring.

We were there.

We worked out what we feel is a very fair deal, both for US Air as well as ourselves.

We did it in a very friendly and positive manner.

I just had the opportunity to spend the weekend with David Siegel, and it was nice to reacquaint not just our business relationship, but our friendship.

We feel that Mesa has come through and that the company will continue to be able to come through.

And we look forward to other opportunities as they unfold as additional major carriers restructure because we feel that Mesa, as a result of our low-cost structure, our willingness to be flexible, our ability to deliver aircraft, and I think the real can-do spirit of the people that work at this company that we can continue to provide our shareholders with those kind of growth opportunities which, as the situation sorts out and ultimately things get better, will prove to be exceedingly beneficial.

So, again, we would like to thank everyone for taking the time.

As always, if you have any additional questions, please feel free to give us a call.

We'd like to thank - I'd like to thank all my officers here with me, as well as all our hardworking employees who have done a great job through this - as we go into winter, and again, thank you all very much for your continued support

That concludes today's conference call.

Thank you for your participation, and you may disconnect at this time.