Mesa Air Group Inc (MESA) 2003 Q1 法說會逐字稿

Good morning and welcome to the first quarter's 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 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.

Sir, you may begin.

Hi, everybody.

This is Jonathan Ornstein.

Thank you very much for joining us for this quarter's earnings report.

To make the lawyers happy, I need to read you the following.

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 that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will be proven correct.

Such statements are subject to certain risks, uncertainties and assumptions.

Should one or more of these risks or uncertainties 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 its next required filing with the Securities and Exchange Commission.

And with all those above caveats, we can move forward now into our call.

First off, as you can well imagine, we're somewhat disappointed with the numbers this quarter.

Digging into them, however, I think we feel a lot better than I was when I first saw the numbers.

That's for sure.

There were a number of planned and unplanned events that led to the earnings shortfall.

First off, the planned events were clearly the significant expenses associated with the [Inaudible] growth at US Airways primarily related to the cost of carrying crews in preparation for the expansion and the cost of aircraft being transitioned from elsewhere in the Mesa system of about $1.1 million.

We had hoped to start that up sooner.

In fact it was delayed during the quarter.

We did put five aircraft into operation on February 9.

We had expected to do that earlier, which would have had some real benefit in terms of revenue if those aircraft had been in service.

They had supposedly - they were scheduled to go in December.

We did, however, feel that it was more important to put to bed our pilot contract and get that resolved rather than to leave that open as we put aircraft into service without a firm agreement.

You know we've seen the experience of other carriers that have moved forward without an agreement in hand, and the results have been oftentimes less than attractive, and we've just decided that we would sacrifice the near-term in order to ensure the long term.

There were also startup costs related to the introduction of the new CRJ700 aircraft, was over $1m also (ph) primarily related to the cost of training and wages for the crews required for the planned ramp up in activity, and aircraft delivered but not in service.

This was again, over a million dollars.

We originally planned to start by September 4th, like most startups, especially with a new certificate, the delays were primarily a result of just regulatory issues, just, you know, the certificates always take longer than anticipated, and you know we had about-- that's a way (ph) of about a month and a half, which also, as we mentioned, cost us about a million dollars.

I'm very happy to tell you, though, that we do have the CRJ700 up and flying now.

I believe we have six in service, seven, excuse me, in service, and they are doing a wonderful job.

The unplanned events which we talked a little bit about in the previous quarter, continue to be unexpected premature removal of aircraft engines that resulted in maintenance expense that was not in our plan of about $3 1/2 million.

This was both in the GE engine, which had a coating problem, and the Rolls Royce engine, both of those engines did not perform up to expectations.

The GE engine was coming off the wings at 10, 11,000 hours as opposed to 15,000 hours, which would have been, you know, two years out, and the Rolls Royce engine, which has been--had significant difficulty, had been coming off the wings I believe at approximately 2,500 hours, and we're planning to off wing closer to, I believe at 6 or 7,000 hours.

So you can see that we had a lot of expense that ran into the quarter as a result of that.

Now, we do have a new contract with GE, which will allow us to smooth out those expenses moving forward.

We just felt that it was important that we were able to better predict these numbers.

I think I may have mentioned back some time ago that we could always tell how good our numbers were just by counting the number of engine events we had in every quarter, and that was certainly the case this quarter.

We are also in discussions with Rolls Royce, and again, their engine has been, as I mentioned, highly problematic.

They have been in fact, providing us with a fair amount of service and backup so that from an operational standpoint it has not been an issue, but just the reliability just needs to have something done.

We are working on a similar arrangement with Rolls Royce to smooth out those expenses, to make them more predictable, and I believe we'll be successful.

But to give you an idea, we are in fact now at the point of making warranty claims on the Rolls Royce engines, which you know, is really a safety net on the contract, but nonetheless, the performance is then at the level where we are in fact beginning to make some rather significant claims as a result of the reliability issue on the engine.

We continue to see across-the-board weakness in prorate markets.

We left approximately $3.1 million on the prorate side, which is about $800,000 worse than planned.

I will mention this, and this is very important to note, we have addressed the issue of the jets operating under Frontier JetExpress, and just this week we signed a new agreement that will begin in March, that will put those aircraft where we are - we will no longer be losing money.

It is effectively the same type of agreement we have in our other contracts.

I will tell you that is it is not a long-term agreement, but is one that we hope will bridge us to a long-term agreement which both parties have expressed as strong desire to enter into.

To break that out, on the Frontier side, of that 3.1 million, the loss was approximately about 1.1 million, or about a third of the loss.

We continue to take steps towards realizing the significant growth plan over the next two years.

We took delivery this quarter of four additional CRJ 700 regional aircraft.

Subsequently two additional CRJ 700s were delivered, bringing the total in the fleet to eight, of which seven are in service currently.

Subsequent to the quarter we took delivery of the first CRJ 900.

That is the largest of the CRJ family.

We are the only operators of the first aircraft to be delivered.

I was just on the airplane two days ago.

It is a wonderful aircraft which I am sure is going to meet with the same kind of satisfaction from our passengers that we've seen with the CRJ 700 with the two-class service.

The company suite of regional jets now stands at 73.

Also, very importantly, with the rest of the industry in certain level labor turmoil, we were very pleased to reach a tentative agreement with ALPA on a new pilot agreement that has duration of 54 months.

The agreement, I believe, is a win-win for all parties.

It allows us to grow the company with Jets-for-Jobs, and more importantly, it insures that we have advantion (ph) opportunities for our people for the next three years that are unparalleled in the industry, and that allows us to maintain what we believe to be the best cost structure in the industry as well.

I wanted to thank all the folks who worked on that while at time, obviously, it was tough.

The fact is, we were able to get the deal done in approximately nine months, which I am not sure if that is record time, but it certainly one of the fastest ALPA contracts negotiated that I am aware of.

We believe that this provides a foundation, again, for our growth and as well as maintaining the cost structure which makes us so attractive to our partners.

The company put five additional CRJ 200s into service in the U.S.

Airway's express system under the recently expanded Jets' agreement.

The five RJs are already part of the MESA fleet.

We have signed an MRU for eight aircraft previously operated by Kendall Airways which will be part of the nine additional aircraft we intend to put in U.S.

Airways by the end of the fiscal year, all of which will be incremental aircraft to MESA.

We have a summary fleet plan.

We expect that by the end of the fiscal year, we will be at 97 regional jets; 42 CRJ 200s, 33 ERJ 145s, although we are in discussion with Embraer to push those deliveries up, which we would very much like to do.

We have four aircraft remaining on our order that have firm financing in place.

Fourteen CRJ 700s and eight of the CRJ 900s.

I will tell you that like all the other regional carriers, financing is difficult.

I think we are in better shape than most as a result of the fact that we have an equity commitment from GE on the first 20 CRJ 700s and 900s.

The four ERJs are also - we have commitments on in terms of equity guarantees, so we feel that we will not have a problem with those aircraft, but certainly I would be remiss if I did not mention that moving forward, the environment is in fact very difficult.

I do not say it's impossible, and certainly any kind of good news from the economy or resolution toward the issues in the Middle East, I think would be very helpful, but unfortunately, with the situation being what it is, while there are lenders out there who would normally be in this market, and would be active, I think everyone has taken a wait-and-see attitude at this time until the situation becomes a little more clear.

I will say that there is no doubt from any of the folks that we've seen, and certainly in our mind, that the regional jet value is one that is strong, that the asset itself is going to be value in terms of the whole industry restructuring, and as you can see all the major carriers, as they move forward in their own restructuring plans, continue to highlight the regional jets as an instrumental part of that restructuring.

Also very big news this week, in fact I was surprised myself that it got done as quickly as it did and the impact that it'll have on Mesa is just really probably greater than anything we could do ourselves, but the fact that my friend Mr. Siegel and his co-workers at US Air have managed to get their company now into the final steps of what will be one of the biggest and most successful restructurings in my mind in the industry, and they received the approval for the $1 billion loan package from the ATSB, which I think insures their future for quite some time.

What David is able to do out there since he's been at the company is really remarkable.

His ability to get the labor turned around and get the fleet restructured, enter into the agreement that we have with him, I think is going to be in the long term going to put US Air in a position of strength where it had been in the past, always one of weakness.

We feel very good about what's going on at US Air now that that loan is in place, we feel that the risk associated with our operation there has become, I won't say diminished, but certainly far less than it was just a few weeks ago.

We shut down CC Air (ph) subsidiary on November 4th, during its final month of its operation, the company lost $1 million after tax, which has been excluded from the company's pro forma results.

CC Air (ph) unfortunately, you know, at the, stuck in the milieu of turbo-prop operations, which as we know now, is very difficult.

I'm not aware of any turbo-prop operator now that is currently profitable.

We did everything we could and probably more than we should have, in order to try to get the airline into the 21st century.

But unfortunately were not successful for a number of reasons and decided to end operations there.

We are growing rapidly, so we are delighted that we will be able to offer all the folks at CC Air (ph) jobs moving forward, and in fact part of our pallet agreement will integrate those pallets into Mesa over time.

On the EES (ph) front we were re-awarded our up-state New York essential air service markets, which now, about 1.3 million was important to the company.

It was of critical importance to me, because one of the cities that we serve, Macina (ph) , was my mother's hometown and she would be most disappointed if I wasn't able to keep that service there.

Moving forward, I think that we have a lot on our plate.

We are doing the best we can to balance the demands and requirements of all of our partners.

We have moved aircraft around the system.

I think we'll probably see more of that.

US Air has indicated an appetite for RJ's (ph) as fast as possible.

America West has looked at the potential of, potentially downsizing some of its 50-seat operations in favor of the larger regional jets.

We also are in discussions with a number of other carriers.

As you can imagine, I can't go into real specifics, but feel that Mesa's been able to offer a high quality product now over the last few years at what I believe is the most attractive pricing in the market.

And given the financial distress that most of these major carriers are currently under, having a low cost provider like ourselves would seem to make a lot of sense at least to us, and hopefully we're - we've gone at least a part of the way in convincing them, as well.

There is a point, though, that we just cannot do things just for no other reason than we can't get aircraft fast enough.

We don't feel we're quite at that point right now, so we do still have some opportunities available to us and we have been looking at a number of what we think would be very exciting future growth plans not only with our existing partners, but with potentially other new partners, as well.

From the standpoint of guidance, as you can imagine with all the things that are going on right now, it makes it somewhat difficult to give quarter-to-quarter earnings guidance.

But given the current First Call (ph) range of 70 - 85 cents for the full year, based on what we know now and, again, subject to all the things I said in the beginning of the call, we are comfortable in that range.

I would say that we are probably more comfortable at the low end of the range, but again, if a few things come together like we think they could, you know, we feel that that range from 70 to 85 cents is a number that we feel comfortable with.

With that, I would be happy to answer any questions anyone might have.

Thank you.

At this time, we are ready to begin the question-and-answer session.

If you would like to ask a question, please press star, one.

You will be announced prior to asking your question.

If you would like to withdraw your question, press star, two.

Once again, to ask a question, please star, one.

One moment, please.

Our first question comes from Mr. Michael Linenberg (ph) with Merrill Lynch.

Sir, you may ask your question.

Yes, hey, good morning, guys.

I guess just a couple questions - Jonathan, I - you talked about, you know, America West.

And I think you said that they were looking maybe to downsize 50-seaters in favor of large aircraft, and I just wanted to clarify that.

You - I think you meant upsizing, right?

Yes, yes, I meant that they might reduce the number of 50-seat aircraft in order to make room for maybe potentially some additional 70 and 90-seat aircraft.

We haven't come to any agreement there, but we appreciate the fact that they've had some flexibility because similar demand of our partners, primarily US Air, potentially Frontier, potentially some other carriers may require us have some aircraft available and being able to maybe swap some aircraft or borrow some aircraft for a period of time could be helpful to us.

You know, America West is, you know, with the [Inaudible] shut down, they did eliminate their other regional partner and they do have a few aircraft - not very many - that they have to redeploy.

But they are working with us; we're working with them.

Anything we do with them would probably just be sort of a bridge in order to provide some aircraft in the near term, and then see where we'd go from there with them - maybe some follow-on deliveries later on with the larger aircraft.

As you can imagine in the somewhat lower yield environment in Phoenix, the larger aircraft and the economics associated with those are obviously more attractive.

And load factors out here continue to be very strong.

OK, my second question - I noticed, you know, on your operational metrics, I mean I think it's very good that you guys are very helpful in providing it in your monthly traffic releases; however, I've noticed that the completion factor has come in a bit I think in, like, the month of January, I think it was like a 96.2 percent completion factor, and is that--you know, is that function of the problems that you're having with--with these engines, and you know, even now, you know, I guess you may get a spare from GE, the fact is, when you go through an engine change, I mean, is the plane on the ground for a day or two?

I mean, can you just--is it that, is it weather?

Sure.

There are two--two main--well, three reasons I could give you.

One, the single largest reason was undoubtedly following the crash in Charlotte, we went through a number of inspections on the 1900s.

Air Midwest actually ran a 92.4 percent completion rate for the month of January.

Because of the inspections, and we pulled airplanes down and you know, we did things voluntarily, you know, trying to stay ahead of the curve in terms of you know, making sure that all the aircraft were operating properly.

That's the first thing.

Second, there is no doubt that we just went through a program to fix these engines, and for example, in the GE, every aircraft, basically, had to have an engine swapped, parts in that engine swapped out, so the aircraft were down.

So that definitely impacted us, and, most recently because of the demands by our partners for more regional jet flying, we had been operating the systems without spares.

Something that I think most carriers will tell you somewhat unheard of, but at Mesa, you know, this Company started with Lyle Rizlo (ph) and he's always had a can-do attitude, and so at the request of our partners we did operate without spares for part of the quarter, which also impacted us to some degree as well.

So as we, you know, move into February, I mean, are we seeing some improvement in those numbers?

Yeah, I think you'll definitely see some improvement going forward.

Okay good.

And my last question is, on the Frontier, you know, you briefly touched on that, and you said that the structure that's going to be affected this spring is similar to I guess the contracts that you have in place with some of the other carriers.

Can you, you know, maybe elaborate on that?

And you know, we know this, that this last (ph) 1.1 million, this last quarter, I mean, what sort of, you know, target operating, or even pretax margin, should we be looking at when we model in this operation?

Well, the--as I mentioned, the agreement that we signed is basically a bridge.

We wanted to get something done quickly because, basically, our point was, the losses that we had were just unacceptable, so we started down the path of this quick agreement, then in our discussions it became clear that there might--you know, there was a requirement for in fact a longer-term agreement with more (ph) aircraft, and so we're now in the throes of negotiating that.

So it may be a little premature for me to say where I think that will end up, but I would imagine that it will be no less than any of our other agreements, because you know, at this point in time, we have so much demand for the aircraft that you know, I think that we would not accept anything less than what we're receiving at our other--at our--with our other partners.

Okay, so then just, it's probably safe to assume that as we--this quarter we--or well, the quarter that it starts, I guess it's next quarter, it should be profitable then?

Yes, I think that in March, the--it begins in March, so we will get at least one month of this--the benefit of this new agreement.

Okay, hey thanks a lot.

Yes.

Our next question comes from Mr. Brian Harris (ph) with Salomon Smith Barney.

Sir, you may ask your question.

Hey Jonathan, I was wondering if you could comment given, you know, there seems to be about 27 new ERJ-XRs (ph) that could be on the market over the next 18 months or so, is that an aircraft type that you'd be interested in?

And do you have any interest in picking up some of those orders?

Yeah, we actually--it would be nice if Rolls could get the engine situation squared away, because the aircraft itself, and working with the folks at Embraer has been actually very nice.

They are very dedicated.

They are good engineers.

The aircraft itself has operated very well for us.

And we would be very interested in doing that because there is a certain amount of attractiveness of keeping [Inaudible] all the ERJs on the east coast, and keeping CRJs out here.

Right now, we have in fact, move CRJs back, and with the demand from U.S.

Air, I imagine that will continue even if we were to pick up additional ERJs.

The problem with Embraer is that without the support from Rolls Royce much the same way that Bombardier has support from GE, the aircraft have become exceptionally difficult to finance.

And you know, in the past, the export-import bank (ph) , the business banked (ph) on the - had been participating - we're not quite sure where they stand at this point.

I am not sure anyone knows.

And I think that our concern with the Embraer product is not that we don't like the product in spite of the engines, but that the financing market has affectively dried up.

And I know they are working on it.

They are certainly aware of the fact that they are in the business to sell aircraft.

There has been a change in the government down there which I think would be supportive of any homegrown industry, and maybe that will open up some financing channels again.

Peter, any thoughts on that at all?

Not that I know of any.

We got [Inaudible] .

Right, we - yes, Peter, Renee (ph) , who has been in charge of our aircraft acquisitions with Rob Stone said we had - we have calls into them this morning, and certainly we're talking to them, and we'd be very interested in acquiring additional aircraft.

OK, and then to extend your cost runs, you commented on your new pay rates on the tentative agreement, how they compare in general to Com Air (ph) , Air Wisconsin, or Atlantic Coast?

The contract is in the process of being voted on.

What I would prefer to say, if it's OK, is that we feel that we will continue to have a very attractive cost structure.

There are some improvements in the contract.

They are primarily in issues other than wages.

But there are also some significant operational features from our perspective.

For example, in regards to training that we feel will offset that bulk of those cost increases.

In the past, a pilot could bid - become a first officer in the 1900, he could become a 1900 captain from there.

He could then become a freight (ph) captain.

He could then become a CRJ [Inaudible] and then he could become a ERJ captain.

And believe me, there are a number of folks there who have made all those transitions.

Under the new agreement, a pilot who enters into service as a ERJ - as a 1900 FO has the option of becoming a 1900 captain, and then a jet captain.

A Dash-8 FO becomes a Dash-8 captain or a jet captain.

An ERJ FO becomes a jet captain.

And a CRJ FO becomes a jet captain.

They cannot - as a CRJ or ERJ FO, for example, bid into a turboprop captain position.

So, with training events costing in the neighborhood of $20,000 apiece, you can imagine that - which in some cases, for an FO amounts to a very big amount of his salary cost.

That - those silos, we call them in training, well be very helpful.

What we tried to do is make the contract a little more employee friendly.

I think we have succeeded in that by adding things like the commuter policy, call me first - call me last for reserve - a 24-hour reserve callout.

Things that we would normally do anyway if we were a smaller company, just because it is a nice way to run your business.

But now that we are able to formalize, which we think, from a [Inaudible] life standpoint would be important to them.

On the wages, I think it's fair to say that no we will not be in the league of Com Air (ph) or ASA or even some of the independent regionals, but again, because of our advancement opportunities, which we feel will continue to lead the industry, the argument that we've made to our people is coming to work at Mesa over the, you know, five years of your employment, you will actually receive more compensation than you would anywhere else, because the fact is, even today, we have jet captains who are entering their third year of service with the company.

We think with the growth that we have planned, that that trend of three-year jet captains will continue and that we could make the argument our people that everyone who's employed at Mesa today who votes on this contract, even the most recent new hire, will be a jet capital within a very short period of time, three, three-and-a-half years, probably on the outside, based on the plans that we currently have.

If you compare that to other carriers where becoming a jet captain, for example at American Eagle, can take up to eight or nine years there's no way that you can make that up in higher pay rates as a first officer.

Mesa Airlines, I'm very proud to tell you for example, has never had a five-year first officer other than someone who chose not to upgrade.

So when, you know, I get some folks point out what a five-year FO makes at an Allegheny or Com Air (ph) , my response is well a five-year FO at Mesa is a unicorn, it's a mythical creature.

And we've been fortunate, we've been able to grow and that's allowed our people to advance and clearly that advancement is what drives higher wages and benefits and makes it more attractive.

I'd like to think that it's the same program that has been so successful become part of the culture at Southwest where the wages are not necessarily the highest, but the opportunity to be highly compensated is available to people and available over a long period of time.

Well, thanks, very complete answer.

Thank you.

Our next question comes from Mr. Jim Higgins (ph) with Credit Suisse First Boston.

Sir, you may ask your question.

Yes, thanks very much.

Couple of questions.

The numbers you're giving on those planned one-time and unplanned costs, were those pre-tax or after tax?

Those are pre-tax numbers.

OK, and in talking about aircraft financing, will US Airs emergence from Chapter 11 change the picture in and of itself or is it just a bigger environmental kind of issue?

No, I think it will certainly help, I mean, with GE for example, GE had expressed some reticence in regards to our expansion with US Air for example.

They finally were able to get their deal put to bed.

The bankruptcy, we just had a call with them yesterday, clearly will make an impact.

You know, I don't know, I don't think I could, you know, say what that will be, other than the fact that they've told us and the other people we've spoken to in the financing community, that that would improve the picture significantly.

And if for some reason you're not able to finance any more aircraft for some period of time, when do you run out of growth basically?

What - at what point does that [Inaudible] ?

Well, I think no matter how you look at it, if we can finance no additional aircraft - now, I would say that we certainly have - I would say we're fairly confident on the 20 aircraft that we have lined up with GE Equity - those aircraft plus the four.

So, you know, we have eight aircraft coming from Kendall (ph) , so I mean I think would it be fair to say that most of this year's growth is basically accounted for?

[Inaudible]

You think we may get into next year's growth a little bit.

So, at least for this year, we feel reasonably confident.

Now, I would caveat that also by saying that we clearly still have a hurdle in terms of putting the debt in place on these leveraged leases for the GE air - you know, the CRJs (ph) which we have the GE equity.

However, most people will find that the equity is the tough part and it's just a question of coming up with a structure that makes the debt work.

We have had firm offers to finance these aircraft under a single investor (ph) lease which, from a book accounting, would be basically the same as the aircraft that we have now.

The cash is somewhat less attractive to us, so we're continuing to pursue traditional leveraged lease opportunities.

OK, great.

Thank you very much.

Our next question comes from Mr. Jim Parker (ph) with Raymond James.

Sir, you may ask your question.

Good morning to all.

Jonathan, I joined a little bit late, but do you - do you have a proposal out there with your pilots regarding this contract that's written and in their hands yet?

Yes, the roadshow that ALPA (ph) is leading and we're very thankful we have the support of the MEC (ph) that voted on the - on the contract and voted to support it, I had some of their folks in going over some of the details just the other day, you know, to qualify, you know, some of their presentation just basically regarding, you know, things like company history and things like that.

But their roadshow, I believe, starts within the next week and should be done - I believe they have it scheduled to be done by the end of February.

Right.

OK, and can you tell us anything about the terms of that contract - the annual increases in pay and so forth?

I prefer not to talk about it because it's out for a vote, but again as I mentioned before, we feel that the agreement has, you know, a lot of attractive aspects for both parties.

From our standpoint, it will allow us to continue to grow with US Air, it will also continue to provide us with what we believe is to be extremely competitive cost structure, and I think we'll set a model for any other, you know, labor agreements that we come to in Mesa, we feel that we were able to, you know, like I said, over a short period of time come up with an agreement that will work for everybody and will be from our standpoint very attractive.

You know, we do have the ability in some of our revenue guarantee contracts with America West and US Air to pass through wage increases.

Obviously we can't pass through if we would offer a 15 percent wage increase, that could not happen.

But wage increases, you know, less than that and some benefit increases are covered, so we don't feel that when you look at the contract as a whole that it's going to penalize us.

In fact, we think that there are some benefits from the trading (ph) side which will offset any of those penalties.

So, we feel very good about the agreement.

We think that the pilots, you know, have chosen to support it - the MEC (ph) , and we just look forward to getting the vote completed and moving forward with what we think are very exciting opportunities for all of our people.

OK, thanks.

OK.

Once again, if you would like to ask a question, please press star, one.

Our next question comes from Mr. Tony Cristella (ph) with BBT Capital Markets (ph) .

Sir, you may ask your question.

Thank you.

Just a couple questions I guess related to the cost side of things.

The last two quarters, now, there've been some issues where unexpected costs have surfaced, particularly with the engines and the overhauls.

And now, I guess with the timing there of bringing up crew for US Airways, are we done with sort of the overhaul engine side of things, or are there other maintenance expenses that won't fall under the new GE contract that we can look forward to, any major service checks coming up?

And then secondly, will the crew cost continue to be higher as the jets--more aircraft are operated under the Jets for Jobs program?

No, good question, let me just say, first off, the GE contract will in fact smooth out those expenses so they will become completely predictable to us.

We are looking to do the same thing with Rolls Royce, and feel that there is a--frankly, and I'll speak pretty bluntly, that we've had enough difficulty with their engine that they're going to do something, and we feel pretty confident that we will come to an agreement with them as well, because the situation as it is today is in fact unacceptable to us.

As I mentioned before, we are already dipping into warranty on the reliability, which is basically unheard of, and to that extent, we feel that they're going to want to get something done as well.

In terms of what we have going forward, I mean, we could always be subject to something unplanned, you know, a FAA directive, you know, obviously we had the situation following the incident in Charlotte, which drove you know, over 100 inspections, but we don't feel that in terms of ongoing expenses, that there should be anything that we have now not gotten our arms around.

Again, you know, the one thing I will tell you is that, as we did these engines, you know, they came off the wing earlier, but they're not done.

So it was as if, you know, we did get the benefit of that--those early removals in the agreement going forward.

And I think that, you know, that should in fact be very helpful over the next couple of years, now that such a--you know, a disproportionate chunk of engines are out of the way.

On the crew issue, we clearly could have, you know, in a 60 or 90 day period, we were clearly low on crews (ph) , I mean, for example, in our Charlotte base, we had 98 hard lines (ph) for pilots to bid on, basically.

We had 60 reserve lines.

Normally, we would have had 20.

But since we knew that we were about to enter into what is a significant expansion, rather than cause all of the, you know, discombobulation (ph) associated with a furlough, and especially for a short period of time, certainly something that we would like to avoid for a number of reasons, not the least of which being morale factors, our training expenses, bumping people around, moving people, we just decided to retain those people until such time that we have aircraft for them to fly.

That is changing dramatically now, and in fact, we are starting training classes as early as, I believe, today.

Okay, so we have training going at this point right now, for all these new aircraft that are coming.

So I think we have a much better handle on things.

There wasn't a way, on the Jets for Jobs, because we decided to hold off until we had our contract finalized, the pilots also, you know, wanted to see where things shook out, so we had agreements, it did cost us some money to delay it, but again, I think in the long term, that was the best--best decision.

Okay, thank you.

Sure.

Our next question comes from Mr. Ray Meadow (ph) with Blalock Partners (ph) .

Sir, you may ask your question.

Yes, just a couple of quick things I want to check on, statistics, is what percentage now of you revenues are at risk, versus cost plus?

Roughly.

It's 80-20.

80/20.

OK, great.

And the...

By the way, that's prior to Frontier, which will then bump that up probably to 85/15.

OK.

So the Frontier contract will be cost plus then?

Effectively, yes.

Effectively, yes.

OK, good.

Second thing, the engines, I think you said before, the engine charge was - that was pre-tax.

After tax, I guess that works out to be what, about $0.06 or $0.07?

Does that sound about right to you?

Yes.

Yes, OK.

Good.

And what is the number of shares now, in going forward?

I believe it is about 31.5 million.

OK, so that's not changes significantly then.

OK.

Atlantic Coast - Sky West, now there is some uncertainty with their contracts - with United.

As you know they tried to cut costs.

Are you seeing more competition out there with some of your customers as you try and get new business from Atlantic Coast and Sky West?

Have they shopped their product around?

I think that it would be fair to say that there is more competition, but I think that, in all frankness, we are the competition.

And I think with the cost structure that we are going to have going forward, it is going to be very tough for certainly the whole air (ph) carriers and some of the independents to match the cost structure that we are able to support long-term.

In particular, with new pilot contract in place, a new flight attendant contract in place we just signed six months ago, and the cost structure that we are able operate under at MESA.

OK, so you are able to out price them basically then, I guess, huh?

Scott you know, I can only say this.

We've looked at some of the forms filed with the FAA, and our cost structure based on the other regional jet operators that we've seen - now obviously we can't adjust for stage length, and there are some differences, but our cost structure has been as much as - as little as 10% lower and in some cases as much as 30% lower than some of our competitors.

OK.

Now the inverse side, though - on the good side, if United does decide to try and replace Atlantic Coast or Sky West, you probably wouldn't have enough - be able to get enough aircraft to meet that business, especially if U.S.

Air comes out of bankruptcy and uses all these extra RJs that they are using...

No.

That's absolutely true, and again, I don't think anyone's going to get replaced.

I think that maybe some of these contracts that, you know, may be renegotiated.

There may be pressure on some of the higher cost regionals to lower their costs which clearly they are - I think they will be able to do.

It may be difficult, but you know, frankly, David Siegel is able to do it in one of the toughest environments.

But I think that there is so much growth required under these regional jets that I can't imagine the situation where anyone was to lose business long-term.

I just can't imagine that, at least for what I can see in the next few years, that there will be a - there is such a big demand for regional jets right now.

OK.

And what are you projecting your growth this year, do you have an estimate by quarter?

Yes.

In the first quarter, the year-over-year increase in - is that FMs were 28%.

In the second quarter, it is 20%.

In the third quarter, 31%.

And the fourth quarter is 38%.

So for the year, it is about 30%.

OK.

And you said you felt comfortable with the consensus range for the year.

How about for the next quarter?

Can you give an opinion on that?

You know, at this point and time - you know, as much as I would like to, we've got so many things in the mix right now, that it is hard for us to do that.

And we just feel that we probably be - say - just comfortable that on the year, we're good.

You know, obviously we have to feel that we are reasonably close on all these numbers or else we couldn't make it all up in the last quarter.

That is not what we plan to do.

Right.

Yes, because you missed it by so much in the first quarter, the rest of the year, I guess, should be - we should be pretty much on target, is what you are saying, right?

Yes, I mean, I feel pretty confident moving forward that, now that, you know, there's a couple things that were very helpful.

One, getting these five aircraft into service with US Air, and knowing that we've got, what another how many coming into service Mike (ph) in the next month or two?

Be, eight additional going into service with US Air, knowing that the Frontier contract, which had been, you know, bleeding us, you know, like I said, up over $1 million.

Knowing that the GE engines are now basically moved from by event to power by the hour, which will smooth this out, I think we feel a lot more confident moving forward with those issues out of the way as was, in particular, and again I can't, you know, even begin to, the impact of US air getting this loan approval is just so big in terms of our confidence factor going forward.

OK, you think they're really going to be up by April then?

Yes.

If we go as felt, and he continues to tell me as is everyone else there that they think that, you know, the second quarter is when they'll be out.

OK, good.

And CC Air (ph) , you took all the write-offs related to that this quarter.

There's nothing else in the works with CC Air (ph) write-offs?

No it's done.

OK, and that equipment is what pretty much going to be junked, you can't sell it?

No, it's returned to the lessers at this point.

OK, so you're free and clear of that?

Yes.

And final thing is Columbus America, West pulling out of Columbus, is there any opportunities for you or is Republic Air (ph) going to get all that new business that Delta's going to do there?

No, I mean, I think our view is that there's so much for us to do with US Air and you know, Frontier potentially as well, as a new partners, that we're going to focus on you know, three or four projects this year.

You know, we continue for example to spend a lot of time on the turbo-props on the 1900's, evaluating that.

You know, as the operation gets larger with the introduction of CRJ 900's, you know, we put three or four CRJ 900's in and frankly it generates almost as much revenue as you know, a big chunk of those turbo props.

You know, you have to, at some point come maybe make a very hard decision.

You know, Mesa was built on 1900's.

There's sort of a nostalgic value probably.

We've always enjoyed flying into smaller communities.

You know, I remember my early days flying into the Almagordo's (ph) and Las Cruces and Des Moines and those places, it's sort of an era gone by, unfortunately though the losses continue and we need to see some improvement there.

OK, and you're not going to be at a 100 percent cost plus in the foreseeable future, I guess is what you're saying, right?

No, I think that we will continue to operate turbo props for at least some period of time.

Remember now, about a third of our turbo prop, 1900 turbo props are under, what is effectively a cost plus agreement with the government in the essential air service.

We continue to be very aggressive in that area and you know, we'd like to try to push that number up a little bit.

And then just, you know, just continue to whittle away the 1900's.

We do have, I think what seven, 1900's that come up lease in about I think 15 months, so I imagine you'll see some downsizing if that happens.

By '04, Rob (ph) is just pointing out that we should be easily at 90 percent contract and only 10 percent under prorate.

Great.

Thanks Jonathan.

OK.

Our next question comes from Miss Helene Becker (ph) with Buckingham Research Group.

Ma'am, you may ask your question.

Thank you very much operator.

Hi gentlemen.

Hi.

So the bottom line on the engines, as I understand it is this is a thing in the past, because of all the issues you've already cited.

Yes, we still have some work to do with Rolls Royce.

So you know, we haven't got that finalized yet, but again, given the severity of the situation, I mean, you know, it's really, you know, in fact somewhat remarkable that these engines are only, you know, going to under 3,000 hours.

Right.

You know, that's the amount of time that you see on, you know, piston engine aircraft.

Right.

Exactly.

And something has to be done.

OK.

And my second question is really with respect to the outlooks for Frontier and for America West.

I don't know if you were surprised, but at Frontier I was surprised at their lack of revenue growth in the fourth quarter and somewhat concerned about their current cash position.

Are there contingencies for you in the event their loan from the government doesn't close quickly?

Yes.

The fact is that, you know, US Air has been very [Inaudible] we have been - they have been after us to move those aircraft.

And, you know, right now, we like the fact that it gives us some diversification.

You know, and certainly prior to the loan being approved for US Air, we felt that that diversification was important.

But the backup plan is obviously just to move the aircraft to US Air.

OK.

And frankly, if we can't come to an agreement that's long-term in nature with them that's satisfactory to us and to them as well, that's exactly what we plan to do.

How long are you giving it?

I think we'll know within the next few months.

OK.

And then the other question I had was really with respect to [Inaudible] .

The - there was a substantial increase in the quarter that just ended - 14 - almost 14 percent year-on-year.

Is that 314 - 15 kind of mile what we should be looking at on a go forward?

No, it will continue to go up and the reason for that is we continue to eliminate turbo props from the fleet and we continue to add the larger CRJ700s (ph) and 900s, both of which have greater range than the 200s and the mission profile for those aircraft is going to be longer haul as opposed to shorter haul.

OK.

And then my last question is with respect to the incident last month, are there any charges or provisions you have to make to account for that?

No, let me - that's a good point [Inaudible] .

We have about - we have exactly $300 million worth of liability insurance per incident.

I think it's safe to say that this will probably - this incident will probably run in the call it $90 to $100 million range.

So in that respect, we feel that we have certainly enough insurance to cover the expenses involved.

Now, there already have been some incidental expenses in regard to pulling aircraft offline and doing inspections.

And, you know, those are things that we don't have insurance for but, you know, again, in the big picture, those will not be significant.

You know, so in - I guess the answer to your question is we haven't made any reserves because we don't think we need to.

We do have adequate insurance to cover all the claims made in terms of the passengers and our employees.

OK.

And then my last question is with respect to balance sheet information, did you give us any of those, you know, cash long-term debt equity kind of numbers or could you if you didn't?

[Inaudible] the Q gets filed probably tomorrow ...

The Q will be filed tomorrow.

OK.

It will have all that information.

Great.

Thank you very much.

Sure.

Our next question comes from Mr. Mike Webber with Independence.

Sir you may aske your question.

Hi Jonathan, how are you?

Fine, and you?

Good, I had two things to talk about.

You had touched on, with the previous gentleman, the capacity as being the main competitor to someone, or the three regionals at United, and he had talked about the equipment, and it sounds like you guys are at capacity with the equipment.

Are you in a better position if the scope (ph) clauses get relaxed in the pilot contract at United, to provide some 70-seaters, or are those 70-seaters already spoken for?

Well, all the aircraft that we have are spoken for; however, if a new opportunity was to come our way, you know, especially with a partner that we think would be attractive over the long term, and again, you know there are a number of carriers out there that would fit that criteria, I think we would figure out a way to make room.

Because we do have some flexibility with aircraft in terms of what--you know, when they're going to be delivered to who.

And you know, one of the points that, you know, brought up too, is we do have some options, you know I think we have about 145 aircraft under option as well; however, that still begs the question of financing.

But our view would be, between the three partners that we currently have, and these deliveries that are--that we have financed and that are coming, we can find a way to make things happen for our existing partners or potentially new partners.

For example, you know we did go out and find these eight Pendal (ph) aircraft on the market.

We're in discussions now on two additional aircraft.

Aircraft will pop up from time to time, and you know, we feel pretty confident that we can be out there and satisfy the requirements.

Now, that doesn't mean that we don't move things around a little bit, but you know, we seem to have some flexibility, and our partners have been very helpful in that regard too.

Okay, and you had touched on that you, being the competitor, being in a position, not only with the--a lower cost structure than the other three that work for United currently with their contract, Air Wisconsin, ACA, SkyWest, so you're suggesting being a fourth instead replacement for one of the three?

Well, let me say that I'm not misquoted on that.

We never talked specifically about United Express carriers.

We talked about the fact that there are a number of publicly reporting carriers out there, all of whom report higher costs than we do.

And so, it's not just United Express carriers, but there are a number of other carriers as well.

So do you--are you suggesting that you're in a position, in a better cost position, not only because of the tentative agreement with your pilots, but also with the possible financing situation you have with your aircraft?

Yes.

Okay.

And I think that, you know, when we look at other opportunities, as I said, demands are so great for regional aircraft that you know, I think that as a result of that, you know, it gives us potentially some other avenues of growth; however, if we--if nothing comes up, okay?

We have our plate full just satisfying the requirements of our existing partners.

I understand, okay.

And the last thing, talking about your Denver operations, specifically Frontier, you said you were hemorrhaging cash in that operation, you have a short-term agreement going on there, was any part of that having to do with your performance, or was it just the fact that it just wasn't making business sense with the cost structure and the revenue?

Okay, again, let me clarify.

I did not say we were hemorrhaging cash.

Okay.

I said we were losing money.

About a million dollars a quarter, which certainly is not a small number, but you know, hemorrhaging cash is losing $10 million a day like some of the other folks that we talk to from now and--now and then.

I understand.

The fact is, is that we structured an agreement that we felt is the foundation for us to go forward, potentially put a larger agreement, and that you know, we felt that it was more important for us to put something in place very quickly, because we did not want to continue to lose money given the fact that we have opportunity to put those aircraft elsewhere, that would become immediately profitable.

So our performance there - I am not sure what you are referring to.

I know that in the month of January, our completion rate in Denver was 100%.

OK.

So, you know, the only thing that performance that was of our concern was our financial performance.

Understood.

Well, thank you very much.

Sure.

At this time, there are no further questions.

OK, well - again appreciate everyone.

You know, we are disappointed that we did not have better results for you here today, but none the less, given the environment, the fact that we can still operate profitably of course, for us, we are thankful for.

We feel more confident today than we have for quite some time in terms of our future.

In large part, through the good work being done by our partners, in particular, U.S.

Air under the just superb leadership of David Siegel and America West with Doug Parker.

They are doing both an excellent job.

We are very delighted that Frontier and MESA have been able to come together in - with this agreement that will eliminate all losses there in the very near future and provide some opportunity for growth, we believe.

And at the same time we want to thank all of our employees who through what has been a very difficult period for us this quarter, not only just from an operational - financial standpoint, but in large part due to the crash, which was the first in our company's history, and been particularly difficult for everyone.

I know for me, certainly the toughest moment that I have ever faced in the business, if not in my life.

We want to thank everybody for doing a great job.

I think you can look forward to seeing things continue to grow here and continue to improve financially, and hopefully all of us who own shares will be rewarded.

So thank you again.

We look forward to talking to you.

If you have any additional questions, please feel free to call us directly.

Thank you.