Mesa Air Group Inc (MESA) 2003 Q2 法說會逐字稿

Good morning and welcome to the Mesa Air Group second earnings release conference call.

All lines have been placed on a listen-only mode until the question and answer segment of today's call and the call is being recorded.

If you do have any objections you may disconnect at this time.

I would now like to turn the call over to Mr. Jonathan Ornstein, Chairman* and CEO of Mesa Air Group.

Thank you, sir.

You may begin.

Thank you very much and thank you, everyone for taking time out of what is certainly a busy morning to listen to our earnings call today.

Before we start, we have our disclosure statement to read to you, courtesy of our attorney Mr. Gillman.

This conference call will contain various forward looking statements based on as well as assumptions made by information* and currently available to management.

Although the company believes these income reasonable and can give no assurance such expectations will prove to have been correct, such statements are subject to certain risks, uncertainties, and assumptions should one of more 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 the call prior to its required filing the securities examine exchange commission.

With that said we can now move forward with our call.

First off, I can say that we have been in the last couple quarters, you know, some have been on target, others have been disappointing.

We had a couple issues we told you we had to resolve.

Most notably the placement of some of our CRJ and ERJ aircraft, effectively smoothing of our engine expenses, and the fix that's still to some degree impacting us on our prorate business.

A significant part of that we've been able to fix, other parts we're still working on.

But with the addition of five more aircraft this quarter, as well as the placement in the service of additional aircraft that we had sort of been effectively warehousing for the U.S.

Air* deal, we are very pleased to see that the numbers finally seem to be moving in the right direction.

I will say that while we are pleased that we are able to post these numbers and exceed it looks like the street consensus, we still feel we have significant room* for improvement as we move forward.

Let me talk about what actually happened, and then answer any questions that you may have.

We continue our regional jet growth particularly with the largest 64 and ADC jets.

We took delivery of five regional aircraft including the first of our CRJ 900 aircraft which went into service on Sunday.

We took delivery of two 64 seat CRJ 700s from America west and two CRJ 200’s* from America first of 8 aircraft that we picked up from Kendall Airways which are now being leased by Mesa.

Kendall being an Operator in Australia.

Subject to the quarter we took delivery of four additional aircraft including the one CRJ 900 CRJ 700 and two of the Kendall 200s.

We now have 79 regional jets in our fleet.

On April 1, U.S.

Airways completes restructuring emerge from bankruptcy and February put five existing CRJ 200’s these are the ones I mentioned before this were effectively warehoused in service as us Airways in our new contract that adds 20 regional jets* to the 32 jets already under contract.

With the addition * four of the eight Kendall aircraft* we now have 40 regional jets being flown* for U.S.

Airways With 12# additional jets to be provided and we continue to discuss placing additional aircraft into service, both the CRJ 200s and potentially CRJ 700s.

They continue to tell us that they have a demand for aircraft and we continue to work with them to come to terms on additional aircraft.

During the quarter we are delighted to announce that our pilots represented by the airline pilots association ratified a new 54-month labor agreement.

We believe the agreement provides us with significant opportunities, both for the company and our pilots.

We believe it will give us one of if not the most effective cost structure in the industry, and allow us to * continue to pursue aggressively the growth plans with our existing partners as well as new partners.

We'd like it thank our pilots for their foresight in looking at what's happening in the industry and the conditions that exist today and come up with an agreement that is truly one of those really rare occasions where I think we can say it's a win/win for all parties.

We'd also like to thank the Airline Pilots Association as well as the NMB because we think clearly everyone needed to work together to get this done.

We were able to get it done in less than a year, which I think according to Apple is almost a record.

And we are very pleased to put this issue to bed for now, the next 54 months before the contract is reopened.

At the same time, as some of you may be aware in the previous quarter we extended our flight attendant contract.

So we are now from a labor perspective pretty much done for the next few years and we feel very strongly that we are all on the same page and working together.

During the quarter we also signed a letter of intent with United Airlines to operate 10 -8 aircraft as United Express out of Denver.

Obviously this is both a financially -- something very attractive to us as well as I should say emotionally if a corporation can have emotion because this brings us back into the United* family.

Something that --- we had hoped to be able to do, given what's happened with us in the past.

Service is expected to begin in July.

The schedule is already in the computer.

We think that there is a tremendous opportunity with United to expand our relationship with them, something I can tell you we are working very hard to do.

In March we converted our prate* agreement* with Frontier* airlines to a revenue* guaranteed agreement starting with 4 original jets we are adding a 5th jet* on May one.

I want to remind everybody it the agreement is to expire* on July 1 and we discussing an extension of that agreement.

In March --- the company completed financing -- I know this has been a * hot topic for everybody, rightfully so, two CRJ 700 aircraft.

This week we completed permanent financing for* an additional seven# CRJ 700s and two CRJ 900 aircraft.

At this point all aircraft which we have taken delivery of we have permanently financed and we have interim financing arrangements in place to # assure our delivery stream through met pretty much the end of the year which will include an additional* 15 or 16 aircraft ; is that correct? 13, 14 aircraft --- beyond what we currently have in service.

We also have the four additional Kendall aircraft coming in to service and we're working with Embrair (ph).

We have four additional aircraft with Embrair(ph) that we are firm orders.

We've extended the financing arrangements and we feel that we're going to continue to use the words four* aircraft as well.

There can be no assurances that will come to terms to*finalize on those aircraft.

While it is tough through a lot of hard work by our finance department, Rob stone and Peter ---, we have been able to continue to finance aircraft in this incredibly difficult environment.

Beyond this year, however, I think it is fair to say that it's open game and we will certainly have our challenges as we go forward.

I would imagine, in fairness, that if we still can't get financing in a year from now, we probably don't want the aircraft anyway* that would mean the industry conditions continue to be as poor as they are today.

On the negative side we continue to see across the board weakness in the prorate markets.

We did lose almost $4 million pretax in the quarter in the prorate business which is frankly, you know, unacceptable.

I would note that approximately $1.3 million in that loss was related to our frontier operation which * had been converted to a revenue guarantee in March which will eliminate frontier losses going forward.

But that still $2.7 million in the turbo prop business.

The losses on that were improving.

I will tell you on a pretax basis, the losses were approximately a million dollars in the first two months, a million dollars each month on the prorate turbo prop

business and in March it was down to $500,000.

We continue to do analysis on whether we should continue to operate the turbo props to the extent we do.

Some people ask why don't you just shut thank you them down.

Well, the fact is the crazy world of airline economics, sometimes it pays to fly aircraft on a pull up* up basis and lose money incrementally they are in fact contributing to overhead and we're doing that analysis now to determine what is the proper mix.

I will say we have considered the early termination of I believe 7 leased aircraft that are expensive aircraft.

They are expected to come out of service in December.

We are awaiting some news from the DOT in regards to a number of essential* air service markets, and if we get a satisfactory result from that, we'll probably keep the aircraft in service.

If we don't, there is a chance that we would park those aircraft and retire them upwards to well, you know, about a year prior to when they expect to come off lease, which is December of '04.

The prorate revenue environment continues to be difficult.

The company makes good strides towards reducing cost.

We experienced significant reduction in engine related expenses which impacted our results from the prior two quarters as well as reduction in crew costs associated with our planning growth in both U.S.

Airways and America West systems.

Contributing to 5% reduction on a* quarter over quarter base I. Let me tell you in advance --- that I think that is sustainable because I think again the engine expenses were one that we wrestled with.

We had a bunch of premature engine failures we mentioned before in the last quarterly call.

That has for the most part been eliminated* due to smoothing we've now been able to implement as well as the fact we had warehoused along with aircraft a number of crews.

I believe it was over 100 crew members knowing that we had this expansion coming which has allowed us to put * all this aircraft into service so quickly.

We believe --- good hands el on and we would expect that with the addition of the especially the larger regional jets that trend certainly is sustainable.

And to the extent it can continue obviously we're going to work* hard to try to make that happen.

We also have seen a not insignificant reduction in fuel costs.

Fuel costs were where they were today [If] over the last three --- months, the first quarter, that would have been impacted I would say somewhere in the neighborhood of 600 to $900,000 on just the prorate business alone.

So you can see that that is a significant improvement just on fuel costs and we should see coming out of the prorate business.

Our ASM guidance remains relatively unchanged for 2003 ASMs of approximately 4.5 billion# 30% year over year increase. 2004 ASMs expected to grow 45 to 50 #percent.

However we want it remind everyone that growth is subject to availability of both aircraft and financing ---.

Which is certainly something that is subject to speculation at this time.

Earning* guidance, we continue to believe the turmoil in the industry it is difficult to give quarter to quarter guidance*.

Given the current first call range of 45 to 65 cents# for fiscal 2003, based on what we know now we continue to be, I would say very comfortable in that range.

Overall, it's nice to see what appears to be at least some up-tick in the business.

We are seeing some improvements, both in traffic and yields.

Our average fare at [Airbid West] prorate business is up a few dollars which we're quite thankful for.

It seems in our discussions with our industry partners that while things haven't improved significantly, certainly there is an air of confidence I should say that things are beginning to get better.

We are hopeful that we continue to see that trend as we enter into the summer.

Certainly the assistance that we're seeing from sort of the end of the turmoil in regards to international situation seems to be helping and we do look forward to further improvement as we move forward.

In terms of additional aircraft with our partners, as I mentioned, we continue to discuss with literally all of our partners our fleet plan, the situation is extremely fluid right now, both America west -- excuse me, U.S. air, our new partner United*, has indicated that their plans call for a significant increase in regional jets.

It's a competitive market tout there, but we believe that we are the lowest cost Operator of regional jets and feel that we are well positioned to take advantage of that.

To the extent that we can do that and be profitable and continue to maintain the kind of margins that we feel are reasonable*, we'll do that.

I'll say we do not intend to speculate at all in terms of aircraft --- deliveries, and that we will not take deliveries of aircraft unless we have a firm contract in which to place them that we feel is secure.

With that, I'm happy to answer any questions that you may have.

So please feel free to ask.

Thank you, sir.

At this time if you'd like to ask a question, you may press star 1 on your touch tone phone.

Again, star 1 to ask a question.

And star 2 to withdraw your question.

One moment, please.

Jamie Baker*, you may ask your question and please state your company name.

Hi, this is actually Becky Edder (ph) on behalf of Jamie.

He is traveling today.

Has United indicated when it* expects to respond to your RJ bid?

I'm sorry, could you repeat the question?

Has united indicated when it expects to respond to your RJ bid?

No.

And frankly, the answer is no, but we are subject to a confidentiality agreement.

So we really can't talk too much about it.

We have made an offer.

I think our offer is extremely competitive.

It is, in fact, in line with the business -- the book of business that we currently have.

And based on United's own documents that they filed in the bankruptcy, it would be significantly below their current cost.

That's not to say that our competitors will not sharpen their pencils which I'm sure they will.

They come up with new numbers.

But I do think that from our perspective, that, you know, the extent that we will bid will be based on what our partners that are currently paying if that's the kind of numbers we would be looking for.

If I could follow* up, what is your level of confidence that your on the low end of United’s bid?

I don't know.

It's just not information they've shared with us.

I can only relate to the documentation that they've put forward in their bankruptcy filings as to where we are versus their existing carriers.

Thank you.

Thank you.

James Higgins, you may ask your question and please state your company name.

Yes, hi, Jim Higgins with CSFB.

John, can you give us your latest available cash position?

I know that had been a bit of a concern.

Yeah.

The last I looked yesterday was about 35, $36 million.

And --

That was after we made a couple of big* payments.

Lease payments.

We actually made one for I believe like, what, 6 or $9 million? $10 million, just a few days ago.

And I think there was some money owed to you from U.S. Airways.

Is that included in that 35 to 36?

Yes.

Okay.

Everybody is pretty much current with us at this point.

Great.

And also I think there has been talk of an additional 50 RJs with U.S. air was.

Clearly you're sort of talking around that issue.

What's happening with that?

Well, it's a good question.

I mean, basically we signed the letter of intent

with them.

We continue to work with them in terms of what the mike of aircraft might be.

You know, there is issue now of course of our ability to deliver 50 aircraft.

And we don't want to over promise, but it's just something that's been sort of ongoing.

They continue to tell us that they have a demand for basically all the aircraft we can get.

I mean within limits obviously and within reason.

However, you know, again, you know our relationship with U.S. air is a very close one.

David Seagal is a good friend of mine.

I don't want him to put a fleet plan together based on something we cannot deliver.

So it's going to be 50 airplanes?

Maybe we'll start do incrementally do another 20.

I don't know where it's going to end up but I can tell you that at this point it seems like the only thing really slowing us down is the ability to get aircraft.

Great.

And the ability to get aircraft is primarily slowed down by the ability to get financing?

Right.

That's why we're out in the marketplace, you know, taking on these used aircraft from Kendall which by the way we thought came at a very attractive price and we continue to negotiate with some European operators where we're -- we look -- we feel reasonably confident we may be able to wrestle* some airplanes out of Europe.

There have been a couple bankruptcy situations over there.

The issue becomes, you know, how fast can you get them converted to U.S. specs and any modifications you have to do is what the cost of that is.

Thank you very much.

Thank you.

Jim Parker you may ask your question and please state your company name.

It's Jim Parker with Raymond James.

Jonathan, if you get -- if you're selected to be one of the RJ operators for united, where will you get these aircraft?

Well, you know, again, we are out there scraping around for ones and twos and threes.

We currently have an offer out for five more aircraft.

We have potentially the opportunity to pull some aircraft out of America west express with the idea that they would take maybe delivery of larger aircraft down the road as a way to, one, help us put together a new partnership which obviously would be attractive to us, diversify our risk.

At the same time allow them to pull down some capacity which I think would not be something that they would be opposed to at this point.

So it would be a combination of within the existing operation as well as new aircraft.

To the extent that we can get new aircraft in the marketplace -- I mean if we had a new partner united or anyone else, we would not want to say gee we can't do it because we can't find airplanes.

We'd probably scrape them up from existing aircraft with some arrangement to replace them down the road.

I will say on the 50-seat aircraft, it seems like U.S. air has a large *appetite, and there the issue really becomes --- how many aircraft do we find out in the marketplace versus do we pull some of those aircraft from existing operations.

And that really is just a question of what suits everyone.

You know, we want to work with America west.

They find that in the lower yield environment ---, I think they're very anxious on the CRJ 900s which seem to work very well, the first one just being put into service.

They think the numbers are going to be very attractive.

And frankly, if we did a deal where we pulled some 50-seaters out to put some additional 900s in down the road, that would not be unattractive to us.

Okay.

And tell me, now, --- about just continuing on this financing thing, you said everything that you have in fleet right now is financed with permanent financing is that correct?

That's correct.

And are there higher --- rates, and in fact are those higher rates to get this financing being absorbed by your major -- your airline partners?

The rates are not higher because we committed to a certain rates with our partners ---, you know.

That was based on the commitments we had from the manufacturers in terms of this financing support * --- so the rates are not higher.

I'm not saying the marketplace would not have made the rates higher, but I can tell you the rates we're paying are not higher so we did not have to pass along any additional costs to our partners within the range that we gave them.

Now, obviously when we negotiate those deals, we're very careful that, again, we do not over promise so we have some flexibility there.

Okay.

And you are -- your intent to use both CRJs and ERJs* for U.S. Airways?

We are currently doing that.

But is that kind of the game plan.

Yes.

Long term?

Yes.

The fleet* size is going to be large enough.

With both it will not pose a problem to us.

Right, okay.

Thanks.

Thank you.

Ray Neidl, you may ask your question and please state your company name.

Raymond Neidl from Blaylock & Partners*.

Jonathan, do you have any numbers available to update us on percent of your system that's pro-rata vs. cost plus now and what you expect it to be at the end of the year?

And then in the cost plus area do you have a breakdown between your different clients*?

New sure. 85 percent of our business now is under the revenue guarantee arrangement.

I hesitate to say cost plus because the bottom line is we are required to control our costs.

We just can't pass those through.

But under the revenue guarantee arrangements it's about 85 percent.

That will

probably go up -- average 85 for the year and by the run rate in September it’ll be about 88%* By the run rate by September, Rob is saying it will be about 88 percent.

Okay, great.

Roughly what is apartment breakdown between that and your different customers?

It's probably pretty close to split between U.S. air and America west and then you know, we'll start adding the dash 8s for United, but that won't happen pretty much until the next year.

I mean the first aircraft goes into service in July ---.

So really the last quarter.

And then it will be small because it will just be some turbo props.

Okay.

Right, about four to 5 percent [inaudible].

I'll also mention at stake would be dependent is not downsizing 1900 operation further which is not an unlikely scenario.

Okay, great.

And just a industry type of question from your viewpoint, with the big airlines now cutting back salaries for the main land pilots there are some analysts up there that are saying that the RJ is going to become a lot less worthwhile for the big airlines to work with.

I was just wondering your thoughts on that.

And also your thoughts on the economics of -- and the regional area, if the regional airlines are going to move more and more now to the 70, 90-seaters now that the scope clause restrictions seem to be breaking down.

Clearly the delta a that had existed is narrowed.

But still, it is a pretty big delta.

If you look at U.S. air for example they lowered their rates but they basically shot the first 15 years of seniority out of their list.

So I would argue that even with their lower rate their average pilot block our cost is higher than it was.

So in the case of U.S. air was, even though they're flyer some RJs with their own pilots at lower rates you still can do it more economically is that what you're saying?

I'm saying in terms of narrow body aircraft, U.S. air basically furloughed everybody who had been there under 15 years.

So the most junior pilot is a 16 year --

I got you on that.

How about on the part of what U.S.

Airways those though where they are using regional jets at lower pay scales?

Are you competitive with that or is that --

I would say without a doubt.

I mean again, take nothing away from our partners.

But I know what it costs them to operate dash 8s and I have a tough time coming to grips with how they're going to operate regional jets more*effectively than they operate dash 8s and they're nowhere near our cost structure.

What are your thoughts on the big RJs, the 70, 90 seats, are they going to become more popular do you think?

Maybe.

I think 90 seater is probably the better airplane because if the economics are such.

The 70 seater I think is marginally better than the 50 seater but not the sort of quantum leap of the 900.

And the problem with the 900 is that still there are scope restrictions out there which is a shame because I think these aircraft could be very powerful in helping build a hub and restoring profitability to the main line air carriers.

The 70 seaters I think work.

Right now I think it -- if it was up to me and it had been my decision I probably would have been 70 seats in them not 64 seats.

Because having the first class I'm not sure is really revenue positive.

I know -- think about it.

It's 10 percent efficiency that you lose.

And I think maybe the industry may come around to that.

But for the most part I have to tell you interestingly the demand that we see from U.S. air and United, even from Frontier, everybody still likes the 50 seaters quite a bit.

We're not hearing any issues on the 50 seater economics at this point.

Okay, good.

Thank you.

Thank you.

Mike Linenberg* please ask your question* and state your company name.

Mike Linenberg Merrill Lynch, hey Jonathan.

I guess I'm a couple questions here.

The aircraft that you're bringing in from Kendall, how are you financing those aircraft?

And also are there any sort of induction costs related to the fact that maybe it's a different aircraft configuration?

What's the cost associated with those planes?

[inaudible] will answer that.

These aircraft, we're leasing them under an operating lease. --- so we didn't have to actually go source financing.

The induction costs were the responsibility of the leasor.

Okay.

Then I guess those were planes* that were --- sitting there not being used.

Is it fair to say you probably got pretty decent rates on the leases?

Yes.

Jonathan made that comment.

We got rates that we found and our partners found acceptable.

What was nice from our perspective is it's a five- year deal.

So that we don't have this tail on the aircraft to figure out what to do with our agreement.

Our agreement actually lasts longer than the lease does which is a nice place to be.

My second question, Jonathan, you did move over I guess to the revenue guarantees with frontier in March.

I think you said something about eliminating losses.

Can you, you know, I don't know how much information you have, maybe us know, one month does not a trend make*.

But give us a sense of maybe -- whether you're break even with Frontier or maybe profitable.

And what sort of margins I guess operating margins do you expect to see on that type of business?

In the quarter, we told you we had about $4 million pretax loss on the turbo prop and the jet business.

It was about a million and a half dollars -- [inaudible] doesn't add up.

Anyway*, it was about -- it was significantly more on the Frontier and the turbo props.

And by eliminating that in the third month, in March, our loss on that business went, you know, basically down to a million dollars.

Now, part of that was due to Frontier, obviously.

And part of that was due to improvement in the turbo prop business. --- so, you know, the numbers are such that with Frontier, it is clearly no worse than a break even.

I can tell you there is a margin in frontier.

I think it ramps a little bit.

And it was -- I think we said look since you're converting* on short notice we'd let them break even on the first month and then it ramps up a little bit.

But the key for us was just eliminating those losses.

You know, while it's really nice for us to add these regional jet and each jet is profitable, makes X amount of dollars, I can tell you if you look at the turbo prop business and assume we can get that thing to break even which again I can't believe is such a huge number, I mean we would have added 10 cents a share, you know, to our earnings if we were able to do that.

This is my last question, Jonathan.

I know you indicated that, you know, you believe you do have some or maybe the lowest * costs among the regional jet operators.

Is there any advantage that you have with your ERJs versus your CRJs or vice versa?

I mean have you cost out the different types and just seeing where the advantage lies?

Actually, you know what?

I can't say that I have done that.

But from all indications it seems like the aircraft are pretty close in terms of actual costs.

Mike, do you have any --

They're about the same.

A lot of our contracts are powered by the hour and everything is done by some guarantee metric so we basically have them both fitting against each other so they're all reasonably close.

We do have the advantage in the market place -- in the secondary market look for both aircraft types.

That does give us still the flexibility more than most of our competitors.

In fact all of our competitors.

Right.

Because we're operating for CRJs and ER Js.

That's I goods point.

Listen, very good quarter, guys.

Thank you very much.

Once again, if you would like to ask a question press star 1 on your touch tone phone.

Again star 1 to ask questions and star 2 to withdraw.

Elaine Becker (ph) you may ask your question and state your company name.

Thank you very much Operator, I’m with Buckingham Research.

Hi, Jonathan.

You talk fast so I kind of missed a couple of numbers.

You said that there was 30 -- handout, you said 32 and a half or so# million.

And then you said to Jim# Higgins --- that you had about $35 million it said $35.4 million as of the end of March.

And you said that you paid $10 million.

So does that mean you have $25 million or does that mean you have $35 million?

5 million (ph) is inclusive of our payment.

Okay.

Now, is there a number in the back of your mind that you would like to have in terms of cash?

Or are you okay at $35 million?

$400 million.

No, if I was a magician* I should just make you guess the number in my mind.

No, I think that 35 million in my mind is still too low.

Okay.

I would like to have more cash.

We think that the operations will be cash flow positive going forward, but, you know, I would feel -- what number do we project at end of year we think we'll be around $70 million by the end of year. --- I think that would be a number that would be a lot more come comfortable*.

Frankly if someone -- if I could beat $100 million, we all would feel comfortable at that number.

We'll have to see how the -- how things look.

You know, we've been making good strides and if things continue to trend obviously we'll be comfortable if we hit that $70 million as long* as we keep making those numbers I think we'll be pretty happy.

Yeah, you did.

When you look at your margins, you did fairly well in the quarter, you know, sequentially.

And year on year.

Yeah.

Again, we always knew, although I think Mike and Peter and Rob will tell you that occasionally I had my doubts, but they were confident that the contracts were working.

And that was one of my big concerns, is like are we sure we priced everything correctly?

Is there anything we're missing?

And they were confident that we were.

But unfortunately as we talked about in the last quarter, we had all of a sudden you have 12 engine * over halls that come due. 15,000 hours coming off at 9,000 hours.

It impacted us.

Do you get reimbursed for that?

Not when engines come off early.

Now we've smoothed the engine expense.

You know, we had five spare aircraft for example that we had warehoused for U.S. air deal.

Right.

That was $750,000 a month.

We had over 100 excess pilots.

That was over a million dollars.

That was going to be my next question.

But now we are running tight.

We actually have put probably -- how many pilots in training in the last 90 days, 150?

Yeah, between 100 and 150 pilots.

We just had for example something that doesn't sound like much but really is the bread and butter of what makes these numbers work.

We just put two simulators on line right here in Phoenix.

Our previous simulator cost with flight safety was $600 an hour.

About.

About $600 an hour and we're currently now, you know, significantly below that.

I mean, those are the kind of things that just sort of help make these numbers work and we feel confident that as we go forward that the jets are on track and as we've said, we expect the jet margins to be between 6 and 9 percent.

And we just want to see these turbo props get back to the point where they're break even.

How many turbo props do you have now?

We currently operate 49, which include 12 dash 8 that are under a revenue guarantee agreement with U.S. air -- excuse me, with America west.

Three of which -- pardon me.

Three of which are at U.S.

Airways in prorate business.

They are moving to Denver to be under a cost plus arrangement with united.

So we have 37 lines of flying on the 1900s and as I mentioned before, those numbers may come down if we don't continue to see either improvement in our overall prorate business or some additional essential air service markets.

We have a number of bids that could* suck up five or six airplanes quickly.

Especially there are a number of cities that fly into Phoenix where our coach air * would be very attractive to the city so we feel we're in good position.

You take our five or six or 7 airplanes, that could change these numbers significantly to the better.

That's what we're looking to do.

Okay.

And then my only other question is with regard to capital spending, then, I'm going to assume that Kendall aircraft coming in from Kendall are now part of your CAPEX plan, right?

Right.

So when are you planning in terms of capital spending and does that include shall the number you give me will it include maintenance CAPEX?

We just finished a provisioning for the CRJ700 as well as the secondary provision for CRJ.

I would expect the rest of the year our section going to be 5 to 10 million, no more than that

Per quarter or for the whole year?

That's for the year.

What was it in Q1?

Q1 it was under 5 million.

And I think this last quarter it was around 10.

Okay, great.

Thank you for your help, gentlemen.

Thank you very much.

Thank you.

Brian Harris, you may ask your* question and please state your company name.

Yes, Brian Harris with Smith Barney.

Jonathan, can you comment -- I know your margins are lower than those in the rest of the industry.

But can you comment regarding what you think your underwriting cost structure, how that stands relative to the rest of the industry and let's just break it out, particularly for RJs?

Yeah.

I mean, you know, Brian, again, it's hard to make apples to apples comparison.

We're basing it on what numbers are publicly reported as well as the numbers that for example united distributed to their -- when they did their bankruptcy filing.

We think that we are significantly lower.

Why are we lower* I think there are a number of reasons.

One, we'd like to think we run a reasonably tight ship in terms of our general overhead, operating here in Phoenix, you know, we think that we have a low overhead structure.

We think that the aircraft -- our aircraft are financed at attractive terms.

Certainly all of our existing aircraft are, we think, at the low end of the spectrum.

You know, we have a young work force.

Our average seniority, you know, for a jet captain, is probably something in the neighborhood of four or five years.

That would compare to at another regional carrier, could be upwards of 14 or 15 years.

There is no doubt -- and this is what the explanation that it took us a year to come to an agreement, that our wages are in fact lower than a other carriers.

However, --- given the fact that we're able to upgrade people as quickly as we are, I would suggest that our people actually make more money in terms of our pilots make more money as a result of the fact that we are growing and they have the ability to upgrade.

You know, there's lots of -- one of the things my mentor in the business Larry recently told me, you never find a dollar in this business.

You real you have to search for pennies and we do that every day.

We restructured our engine agreements.

We restructured toured some of our maintenance outsourcing agreements.

We are constantly out there getting our seat check work re-bid.

We work very hard to control our costs.

And I think that as a result we're able to offer this with one a lower margin and two just overall costs.

Just as a thought here.

I think you guys have, what, five partners all together, which is more than anybody else.

How does that impact your costs or your economies of scale?

Well, I mean I think from the standpoint that it certainly adds complexity.

But the operations are disparate and the fact we have a big operation in Phoenix, there's never really any interaction with the operation on the East Coast.

So the bottom line is we don't really have the kind of problem that, even though Southwest talks about they have a single fleet type* and how advantageous it is.

Well, the fact Phoenix

airplanes operate in Phoenix* I can, they operate with the same maintenance base.

They were never going to be able to cross utilize for example personnel for our U.S. air East Coast operation.

So as long as they're a reasonable size I think we're okay.

You look at Frontier and the key at Frontier, I mean right now they are paying more per available seat model than any of their other partners because they only have five airplanes to operate into their maintenance base.

So for example they would see some significant benefits in costs if they were able to increase their fleet size which is something that we're discussing.

You know, most of those costs on the jets, if there is an inefficiency for example like there is at frontier are borne by the airline.

Thank you very much.

Thank you.

Michael Gritsmacher (ph) you may ask your question and please state your company name.

Hey guys, it's Michael Gritsmacher Goldman Sachs.

You alluded to it somewhat, but are --- tell me about what but have all the issues on your [Rolls] engines been resolved and tell me a little more about what [Rolls]has been able to do for you?*.

You want to answer that?

Peter Murnane# answer.

We are still discussing with rolls.

They've been very helpful in addressing the problems with their engines.

They've actually gotten the time on wing up.

We continue to address with them, though, changing the contract to be more like the GE contract on a power by the hour basis as opposed to as incurred.

Okay.

But you're still not there should yet?

No.

But do you think the second quarter maintenance is a good run rate?

Yes.

One more question about the financing market.

Has anything incrementally changed since U.S.

Airways came out of Chapter 11.

Not really.

I wouldn't say there's been any incremental change.

One thing I would like to comment on the Rolls Royce engines* is Rolls Royce may not like me saying this, those engines never stayed on the wing long anyway.

We were taken engines off pretty regularly in the past*.

That quarter is probably indicative.

What we're trying to do, anything that we do I think would -- Peter tell me if I'm wrong, would be an improvement from where we are toted. ---

Yes.

But I think your first point is those engines were never designed to stay on for a long amount of time.

All right.

Thank you very much.

Thank you.

And our last question comes from Raymond Neidl.

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

Yes, Raymond Neidl again from Blaylock.

Rob, I wanted to ask, I don't know if you mentioned it before, the cost, you allude to it, seems to be over the map by a quarter.

Going forward, the June quarter, the September quarter, third and fourth quarters, what do you think that maintenance expense might be --- for that time period?

Yeah, this is Jonathan.

Rob just basically said he feels this last quarter, and I think we all concur, that this last quarter will be indicative of what our run rate bb will be.

Okay, great.

The extraordinary engines and so forth, those problems are behind you permanently now?

Yeah.

Okay, greats.

Thanks, Jonathan.

Okay.

Are there any other questions?

At this time we are showing no further questions, sir.

Okay.

Just in conclusion, I tell you, we are pleased with the quarter but we still feel we have significant room for improvement.

We think that the environment is getting marginally better, but that our opportunities continue to expand as the demand for regional jet continues to grow.

Certainly within the existing universe of partners that we have.

I think that there continues to be significant up side in improving the turbo prop operations.

I know that that's been sort of a common theme, but we have seen a very nice improvement just month or month over month this last quarter in regards to our pro rate business --- partly due to frontier as well as improvement in the turbo props themselves.

The lower fuel price will impact us.

We are, in fact, at the point very close to hedging most of the that risk off right now which would have had, again, close to a $750,000 impact in the last quarter as current fuel prices.

So we feel we're on track.

We feel confident going forward.

And we think that on the financing front which is everyone's big issue, that while clearly looking out in the distance, it's problematic, we feel that we've got at least our financings through the end of the year done.

And that hopefully by then the situation will improve.

And again as I pointed out, if it hasn't been --- we probably don't like the airplanes anyway.

But I think -- we feel good.

For the first time I addressed a flight training class yesterday and I said in the first time in probably 18 months I think things are actually looking up and we may have the worst behind us.

I want to thank everyone out in the investment community for their support.

Certainly no one here is curling over our stock price at $5.85 or wherever it's trading.

I have to say on a relative basis we appreciate the support you've been because the stock has actually held up reasonably well and we want to thank everyone for that.

So, with that, I'd like to conclude.

And again look forward to talking to you all next quarter.

Thank you.

This concludes today's freedom conference call.

Have a nice day.