Mesa Air Group Inc (MESA) 2003 Q3 法說會逐字稿

Good afternoon, and thank you all for holding.

This is the operator.

And at this time I would just like to inform you that you are in a listen-only mode until we open for questions and answers.

Also this call is being recorded and at this time I would like to turn this call over to Mr. Jonathan G. Ornstein and thank you, sir, you may begin.

Thank very much.

Thank you for taking time.

I know it's a busy day and that's why we wanted to get started right away.

We do have to read our little blurb from our lawyers.

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

Although the company believes that those expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.

Such statements are subject to certain risks, uncertainties and assumptions should one or more of these risks and uncertainties materialize or should all our 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, (INAUDIBLE) with the Securities and Exchange Commission.

Okay.

Again, thank you very much for taking time out of -- I know it was a very busy day for everyone.

We were delighted to be able to bring to the -- our shareholders what we think to be -- was a nice quarter.

We feel that we have begun to navigate through what has been a very difficult period.

We've put together some very key events over the last three to six months which we now believe we're beginning to see the benefits of all the work that's been done by our people to put these things in place.

And I will go through each of those, but let me first start and just give you a quick update, regarding what is clearly the key part of our plan going forward, which is the continued growth of our regional jet fleet.

During the quarter we delivered 12 regional jets, which, you know, is quite an event in itself, to think that we put four aircraft on line per month.

This, in large part, was due to what has been tremendous effort by the people here, our training department, our pilots and certainly it was aided by the fact that we have a new pilot agreement which has vastly simplified our training.

This has allowed us to move a lot of people up and advance peoples' careers and at the same time provide us with the foundation to continue to grow our business.

We now have a total of 87 aircraft in our fleet, in our regional jet fleet.

Included in the deliveries were three 80-seat CRJ 900s, which are proving to be not only popular with our passengers, but also, you know, a very economical to our partners and at the same time a very profitable aircraft for us.

Three 64-seat CRJ 700s and six CRJ 200s which we had taken in as used aircraft from Kendall Airways in Australia.

Subsequent to the quarter end, we delivered three additional RJ's including two CRJ 700s and one CRJ 900.

We now have 90 RJs in the fleet comprised of 72 50-seaters, thirteen 70-seaters, and five of the larger 80-seat aircraft.

The thirteen 70 seaters we referred to are being operated as 64-seat aircraft, just to make that note.

For the reminder of the fiscal year, we expect to deliver two more CRJ 700s, one additional 900 and three CRJ 200s.

The latter aircraft are part of an LOI signed earlier this month and were also previously operated by Kendall.

By fiscal year end, we expect to have 96 regional jets in the fleet and that is what, you know, we believe we can achieve.

We have, in fact, I believe, signed an agreement for an additional three aircraft yesterday.

More used aircraft and we're working on the deliveries to see how fast we can actually get those.

But at this time, the appetite for all of our regional jet aircraft has become very significant, and right now, the only thing holding us back is our ability to acquire additional aircraft, finance those aircraft, find aircraft in the used market, but we are basically sucking up as much capacity as we can.

As, again, as I mentioned the demand from our partners certainly is exceeding our ability to supply them at this time.

We continue to diversify our partnership relationships.

We signed a letter of intent with United Airlines for 35 (INAUDIBLE) 25 additional regional jets under a long-term revenue guarantee agreement.

The 35 aircraft include 20 CRJ 700s and 50 CRJ 200s.

The first 700s will go in the line September of this year.

We are still in discussions with delivery positions with Bombardier.

We expect that the 15 of the aircraft will be in service by mid- 2004.

The remaining five 700's we expect to place in service sometime after that but prior to the end of 2005.

The first -- 2005 or 2004?

Excuse me.

George Peter Murnane, III: 2005.

Okay.

The first -- the first 50-seat aircraft is expected to be placed in service by November 1, and all 15 should be flying by the middle of 2004 fiscal year.

This week we signed a letter of intent for an additional, as I mentioned three CRJ 200s to be used toward meeting our United 50-seat commitment.

The first four dash-8 aircraft went into service for United in July.

I was hoping to tell you that since that service began we had had no cancellations, unfortunately, we had two cancellations yesterday, but otherwise it's been off to a tremendous start and our people did, again, an excellent job with that operation in Denver.

Two more aircraft are scheduled to be flying at United in September and four remaining aircraft are expected to be placed in service before December.

We followed that up very shortly thereafter with a letter of intent with U.S.

Airways for 25 CRJ 700 aircraft These aircraft will be provided by U.S.

Airways under an order they have placed directly with Bombardier.

Subject to finalizing the delivery schedule, the aircraft are expected to be in service by the end of calendar year 2004. 25 is the minimum number.

I think, again, the only thing that's holding us back there is our ability to train people and, you know, have the aircraft in service, the requirement is by the end of 2004 in the U.S.

Air agreement with its pilots.

They have the option to place another, up to 30 aircraft with us, and we are working with them very diligently at this time to see exactly what we can handle going forward.

We continue to meet our commitments under our existing U.S.

Airways agreement.

We now have in service 49 of the 52 aircraft under our 50-seat regional jet contract.

The remaining three will be put into service at the end of September.

We also have an agreement to add an additional four RJs.

Delivery is expected before the end of the calendar year, this was just a very quick amendment.

It hasn't been finalized but we think it will be today or tomorrow for an additional four 50-seat aircraft that we just have been able to make available.

We extended our agreement with Frontier until 2004 and have continued to work with them to make an orderly transition upon the expiration of that arrangement.

During the quarter, as many of you know, we strengthened our liquidity position.

In June we raised proceeds of $100 million through the issuance of a convertible note.

At the end of June our cash and marketable securities have grown to approximately $154 million.

We believe the additional liquidity puts us in a better position to go after any opportunities that present themselves.

And as you know, there are certainly many at this time.

We're also in the process of finalizing our agreement with Logitech which would generate an additional, I believe, minimum of $25 million in cash, which should be done by the end of the year.

And while I'm not sure if we'll get there completely, our goal is, at some point in time in the next year, to be able to report our cash balances over $200 million and we think that we're well on our way to being able to achieve that.

In April, we completed permanent financing, which I know is a big concern for people with nine CRJ- 700 / 900 aircraft.

We have interim financing available for CRJ 700 / 900 (INAUDIBLE) through November and continue to work with the manufacturer and our financing sources to seek permanent financing for the aircraft that have already been delivered.

We do feel confident that we will be able to make that happen.

Certainly, nothing is finalized at this point, but all indications from the manufacturer are that, with the additional orders that we are seeking to make, that financing will be available and that we will continue to take delivery of aircraft.

We are also working on the financing of the remaining four ERJ 145 deliveries scheduled for November and December.

And again, while it is proven far more difficult than we would have expected, we do think that ultimately we should be able to come to some arrangement that is not entirely unsatisfactory to ourselves and our partners.

We do have a proposal for permanent financing on two additional 700s which we are currently evaluating.

We have had a fair amount of success in obtaining leased 50-seat aircraft for our United and U.S.

Airways expansion through the used market.

Rob Stone and Peter Murnan have been working hard on that.

I think they have done an excellent job allowing us to expand through difficult financing environment.

We have been able to find aircraft well within the price range that we need to make our contracts work.

And the fact is, that these agreements are shorter in term, which, in fact, suit both ourselves and our partners and make the aircraft very attractive to us.

Clearly the rate at which we can expand our United operation will depend upon our availability of delivery positions and financing.

And, again we continue to have meetings with Bombardier and discussions with them on effectively a daily basis.

Our losses in our pro rate markets were less than $1 million on a pretax basis which is a significant improvement over prior quarters.

I know that this has long been awaited.

We have, in fact, whittled down the 1900 operation and continue to develop our essential air service and other government subsidy operations.

The June quarter, however, is traditionally one of our better quarters for the turbo prop (INAUDIBLE) but we still remain concerned about the revenue environment headed into the winter months.

I will say that we have begun to beat our revenue forecasts however, and hopefully, we think that that will continue to bode well as we go forward.

Along with the fact that we have been awarded increases in EAS subsidies in approximately $1.5 million annually for existing and previously unsubsidized markets, which we continue to pursue additional opportunities in the essential air service.

Our view now being that the 1900s are probably not viable on an economic basis without some form of government subsidy.

With maybe a few exceptions, but for the most part, the government subsidy is, in fact, critical.

Our ASM guidance for 2000 remains unchanged with approximately 4.5 billion ASMs, or roughly a 30% increase over 2002.

For 2004, our guidance will be a function of our final delivery schedules with United and U.S. Airways.

With no additional aircraft beyond what we have on order, we are projecting ASMs of approximately 6.5 billion or roughly a 45% increase.

To pay on actual deliveries which, again, we actually have become a little bit more hopeful on, that number could grow to as much as 7.5 or even 8 billion ASMs in 2004 and we will provide further guidance as we get better visibility.

Earnings guidance, adjusting for the impact of interest on our convertible notes, we are certainly comfortable with the numbers that are out there for the next quarter.

And, again, we continue to see a positive momentum as we add the larger regional jets into the system, and continue to clean up the pro rate, business, which, in fact is acting better than we had anticipated just a few months ago.

During the quarter we completed our DOT audit of planes made under the Air Transportation Safety System Stabilization Act.

As a result of the audit, the DOT disallowed 4.1 million in claimed losses.

We took a $2.3 million charge to reverse the previously booked income.

We also recorded the receipt of 1.5 million receipts under the government's most recent assistance to the airline industry, the majority of which represents reimbursements of costs that would pass through to our partners.

Again, this money was money that had been part of the reimbursement from the government, and has a lot to do with negotiations with our partners as well.

And had always been -- numbers, which, you know we had always broken out for you in the past and hopefully will not come as any surprise to anyone.

One of the areas that we would like to talk about in this call, which may be somewhat unusual, but nonetheless I think important, is what is going on throughout the rest of the regional industry.

Because a number of analysts, frankly, have called us and asked to us specifically address some of the issues that have been brought up by other regional carriers regarding the future direction of these revenue guaranteed contracts.

We believe that this can create some additional opportunities for Mesa.

It's obviously a little early.

We continue to monitor the situation.

However, there have been a number of points made regarding what some folks believe to be negative aspects of the revenue guaranteed contracts.

And we feel it's important to address them because, obviously, this is the plan which we continue to be very much believers in and one that we will continue to use to grow our company.

First off, let me talk about some of the issues that were brought up, and I think it's important that we -- and, again, I'm going to address them fairly directly.

One of the issues brought up was the fact that the phasing out of aircraft prior to the end of aircraft leases.

Most of the new aircraft are done with terms anywhere from 14 to 17-year range, we have most of our contracts have ten-year agreements.

That does leave a tail, but the fact of the matter is, is that we have renegotiated contracts continuously and it was not that long ago that carriers took on agreements that were five years, and did not have the revenue guarantee.

So, you know, we think a ten-year outlook is certainly one that is long term.

We're not quite sure that it would be in anyone's interest to go out even beyond that.

So we still feel very comfortable that with ten-year terms, and that we continue to add aircraft, which then, in fact, increase that term, we feel comfortable and do not feel that that is a significant disadvantage to us.

We'd like to point out also it's not a new issue and this is one that is literally -- this has been here since the beginning of code sharing.

There was a discussion about the requirement to make commitments on the timing and lease rates for aircraft.

To date, we have been successful in financing at or below all the rates.

There is arrangement, particularly with United where there's risk sharing above certain levels of costs and also benefits.

We believe that this will work to our advantage, as we continue to be able to lease aircraft below or at the numbers in which we committed.

And, again, there are triggers that give us an ability to -- to benefit from that.

Our agreements with all the carriers have some type of guideline, but generally, we do not need to make deliveries if financing is not available, which, frankly, gives us outs regardless.

The inability to reset costs every year and the inadequacy of cost increases tied to CPI.

Well, this type of contract may be new to some carriers, but it's something that's been contained in the Mesa contracts for sometime and something that we are comfortable with in our ability to manage.

I believe that this quarter's earnings would lend credence to that.

For instance our contract with our pilots, which is our largest labor group, was recently amended.

We now have over 40 years to run an already contains restrictions on annual increases.

Our new deal with United is adequately structured to recover all of our future pilot costs and, in fact our other agreements have always done that.

We also believe the CPI increases are adequate to cover process relations for the life of our contract.

And I would like to point out, that most of the big items in that are maintenance, where we have long-term contracts in place, for all of our maintenance costs, primarily engines and overhauls, and that we feel extremely comfortable that we will recapture all of our maintenance costs going forward without any difficulty.

In regards to maintenance costs, something that I would like to specifically point out is that there is no doubt that costs associated of new aircraft are less than costs associated with mature aircraft, something that some folks on Wall Street may not be as familiar with as we are, but the fact is, is that all of our long-term agreements are set, are structured to be able for us to capture costs of mature aircraft.

In addition, the CRJs, particularly in the United agreement are mature aircraft already and our rates reflect that back.

And, again, now that we have almost eight years of operating CRJs we feel very comfortable that we understand how these aircraft need to be costed in these agreements.

We also feel that the annual rate setting that had been a part of the old United contracts, which we were familiar with because we had had discussions with United back, quite sometime ago in regards to potentially operating as a partner.

We do not particularly like those because we felt it was a double-edged sword and, in fact, you can see now with what's going on in the current environment, that those costs, which I think most of the regional carriers had assumed would only go one direction, can now go two directions and in our contracts that is not possible and we feel that that is, again, an advantage to us.

The inability to recapture non-controllable costs.

Again, this is not a new issue to Mesa.

We believe our contract with United as well as our other partners addresses any major concerns we have in this area.

There was another issue brought up regarding the switch to airport handling to another carrier.

Certainly we would not want to have to furlough any of our employees but, again our strong belief is that, as long as we continue to provide low cost there'd be no motivation by anyone to change out the handling situation.

In fact, if anything, we see things moving in the other direction where we are taking on more responsibility in terms of handling and ground.

We do, for example, all the handling on our dash-8's with United.

But to that point, we currently only operate two stations under our U.S.

Airways Jet contract so that is not a particularly large issue to us.

There's a force major clause that allows United, in the event of certain catastrophic events to ask for reductions in margin paid to the regional carrier.

Personally, in my feeling was that that is not unreasonable.

It does allow us, in fact, to recoup that when the situations improves but in no time does our margin go to zero.

And given the events of 9/11, where Mesa, in fact came to the table at the request of our partners and gave them significant cash flow relief and help, we feel that benefited us tremendously going forward and resulted in the new contracts, both the United contract and the U.S.

Air contract.

People took note of that, and, again, you know, our feeling is that this was nothing unusual to us, and something that, in our opinion, made sense.

In general, we strongly disagree with the precept that the revenue guarantee contracts do not have a future.

We feel that to be able to generate the kind of margins that you now see we're able to generate and that was in spite, frankly of after proximately -- you know a loss in our pro rate business, our margins will be even better.

We feel that to be able to generate margins that are basically at the level of those of the most successful carrier, long-term carrier like a Southwest, it's certainly something that's not unattractive to us.

We think that, you know, a 7 or 8, or 9% margin is one that's sustainable, one that we continue to think that we can improve upon, just by our own internal cost controls.

We have not seen, for example, overhead increase at the same rate and as we grow our company, it's our belief that our margins certainly will not be reduced but, in fact, will continue to move in the direction that you see they have in this quarter and potentially expand as we go forward and continue to add, in particular, the larger regional jets which have proven to be very successful.

With that, I'm happy to answer any questions anyone might have and, again, I want to thank you for taking the time to talk to us about our earnings this quarter.

Our people have done a wonderful job out there.

There's been a lot of moving pieces.

I mean we've talked about this in a staff meeting yesterday.

The things that we have done over the last six months, I think, you know, our people deserve a tremendous amount of credit.

You know, an extension of our flying contracts and the new pilot contract, a new agreement with United Airlines for turbo props and additional new agreement with United for jets, significant expansion of our U.S.

Air agreement, the creation of a new certificate for Freedom, the addition of now, you know, almost 25 aircraft over the last six months.

You know, just a huge amount.

Pieces are moving.

Putting on certificates for the larger aircraft, being the first in the world to launch CRJ 900.

Again, I really think that we're starting to see all of the pieces come into place and I would like to thank my management and the folks in the field and the people in the office who have done just a wonderful job be to make all of this happen.

Sometimes we, sort of, lose ourselves and become frustrated but when you take a step back and look at what, I think, these folks have done, it's really something that is remarkable.

And the fact that we're trading not just in an airline for today, but one that's going to have real go forward capability and sustainability to me is just a remarkable achievement and I want to thank all of our people for doing that.

So, with that, if there's any questions, I'd be happy to answer them.

Thank you.

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

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

One moment, please for the first question.

Thank you, Jamie Baker, your line is open.

You may ask your question.

Please state your company name.

Good morning, Jonathan.

Jamie Baker at JP Morgan.

Mm-hmm.

Have you called United in the past 48 hours to ask what incremental role you might be able to play in their Dulles retaliation? [ LAUGHTER ]

Well, I don't think that - United has a successful operation in Dulles, which I know there has been discussion out there about how successful that operation is.

But it is successful.

I have been told that all aspects of their business, including their international business has improved.

I know it's important to them, and we clearly continue to have discussions with them to the extent that, you know, we can live up to our existing agreement, I would be very happy and clearly any incremental business would only be a bonus for us.

Again, while we are anxious to grow our business, we're also realistic about our ability to do so, but that being said, I will tell you that I do believe there continues to be significant opportunity to expand our business with all of our partners as we go forward.

Okay.

But just so I understand, and that was a very good no comment.

Just so I understand the dynamics, sort of regional / main line etiquette, I mean, this is the time when regionals should be calling United and offering to help, is it not?

Yeah, I mean --.

That's how it works, right?

Hey, you know, Tilton, we saw the news sorry.

How do we help?

Yeah, I mean, I think Jamie -- most of you guys know me well enough to realize that we are not sitting by and doing nothing.

The question is.

What's the best way to move forward.

We're looking at a number of alternatives in this regard.

We do believe that the business model makes sense.

I'll be very frank, I think that if other carriers had our cost structure it might make sense for them.

We feel that -- very comfortable with the numbers going forward, with the United agreement in particular, and, you know, we'd be very anxious to expand that agreement.

Okay.

Great.

Thanks a lot, Jonathan.

I appreciate it.

Thank you.

And our next question comes from Ray Neidl.

Your line is open.

Please state your company.

Ray Neidl from Blaylock & Partners.

Good afternoon gentlemen.

The overall thing is, you've got a lot on your plate here now with all the expansion with the different partners.

It's good that you're diversifying yourself, not depending upon any one airline.

But you're having trouble financing all the RJs that you need for various reasons.

Now, U.S.

Airways said the other day they have 90% of their RJs financed.

It appears that they are able to get the financing.

I don't know if they could do anything further.

But is there a chance that you could lean on them to help finance some of the aircraft that you are going to use, some of the additional aircraft that you are going it use to service them?

And have you been in talks with United and AmericaWest about doing the same thing with the RJs you're going to be using in connection with their operations?

Okay.

Let me say this.

The 25 700s that we are in negotiations with U.S.

Airways and that's the LOI, we can expect to have that completed within the next couple of weeks a final contract.

Those are aircraft that U.S.

Air had agreed to take and have financing with GE.

How the actual mechanism will work, I'm not sure.

But there is no doubt that we will garner benefit from the fact that those aircraft have, in fact been financed already by GE.

So we do not feel that there's any question regarding those aircraft and our ability to finance those aircraft.

There is issue as to how the structure will be, whether we will lease them directly, sublease them from U.S.

Air, again, this is sort of tied up in some of the negotiations with their pilots.

But, we do feel and have been assured by the financing parties that those aircraft will be available.

We have had difficulty, but certainly that's something that I think everyone can say -- it's one of the reasons why we decided to raise a little bit of money.

We have not yet missed a delivery for an inability to finance and, you know, frankly, I think we're all feeling more confident that we will not.

We are in discussions with Bombardier for a significant new aircraft order.

And I can assure you that that order will reflect our concerns regarding financing, and we think that we will be able to solve this problem as we continue to go forward.

As I mentioned, you know, we did finance nine aircraft this quarter.

We have a proposal for two more.

We think we will finalize something on the four ERJs.

So, you know, while it's difficult, it has not been impossible and, in fact, we think the environment is probably getting a little bit better right now.

Okay.

And how many -- if you said it, I missed, it how many turbo props do you have in the fleet now?

We currently have 43 -- 42 1900s.

Seven of those, by the way can be returned.

They are leased.

They come back out in 2005.

As I mentioned before in the last call, those are very expensive aircraft.

End of '04.

Excuse me, at the end of 2004.

They are our most expensive aircraft.

They cost us about $32,000 a month.

Our other aircraft cost us in the neighborhood of 10 to 12,000 a month.

So that would have a significant impact.

We are also continuing to operate 12 dash-8s and we will be expanding the Dash-8 fleets to accommodate the United requirements.

And, let me mention that, we are not opposed to operating turbo props but what we are saying is that for the 1900s, they need to be subsidized one way or another and the dash-8s that we are adding are all being added under some type of revenue guaranty agreement.

Okay great.

And percentage wise the revenue guarantee will be up over 80% by the end of the year?

I think it's up over 80% right now.

Okay.

Great.

And the last thing is, Frontier Airlines, did you say that that contract will probably be terminated after the 1st of the year?

You know, we had talked to them about how we could continue to operate the aircraft.

We do have some restrictions on our United contract.

We hoped that maybe we could become creative but at this point in time, it would appear -- they've expressed -- they're talking to other parties.

We will wait and see what they come up with at this point but at this point in time would appear that we will probably terminate that contract at that point and move those aircraft to United.

Okay.

Good.

Thank you very much.

Thank you and our next question comes from Jim Parker.

Your line is open.

Please state your company name.

It's Jim Parker with Raymond James.

Jonathan you have 98 aircraft coming over the next two years and you're hoping or maybe thinking about adding to that with additional aircraft from United, additional from U.S. Airways.

What are the chances that you may blow yourself up with too much growth? [ LAUGHTER ]

Well, I mean, there always is a chance, Jim and believe me, we are really redoubling our efforts on the operational side right now.

We have put together a -- what I believe to be a very strong management team.

We have done some things that really help us on the addition of aircraft.

Let me give you some examples.

One, we now have two simulators both an ERJ and CRJ simulator in our own facility here in Phoenix.

The cost of which has been effectively cut in half over the contract that we previously had with Flight Safety.

Two, the pilot contract has vastly simplified our training mechanism.

In the past, one captain going into the position at a jet level resulted in five or six training events.

Now it can only -- the most it can cause is two.

That's as a result of what we put into effect, called silos where the training would only go from simply -- we simplified the training without getting technical.

Just greatly, vastly simplified the training which is why we've added four aircraft a month over the last few months.

We also find that, as you can well imagine, that the quality and the level of experience of our applicants has risen significantly.

As a result of the -- you know, over 10,000 pilots that have been furloughed throughout the industry.

You know, the Jet for Job program has been, in fact, very successful right now.

These folks have come on board, they've done a wonderful job in training.

Not a single pilot that has come through training on the Jets for Job had to get beyond, you know, any of the normal training or failed the training.

That made everyone's life a lot easier and, frankly, it gave us all comfort that we have some very qualified, good people, who by the way, there have been some concerns regarding, you know, coming from a major carrier to a regional carrier.

The attitude that these people have brought with them has been terrific.

They've expressed real pleasure to us, because of the fact that they have a job.

We are in contact with them almost daily.

I think they actually have enjoyed sort of the smaller feel of a regional airline, and, again, it's been a good program for us.

You know, on the maintenance side, we have taken a huge responsibility off of our company in terms of managing the rodeable spares and overhaul by doing this deal with Logitech which we believe will become the model of the industry, frankly.

And we have good partners in that business, including GE and, think that you know, by continuing to expand our technical capability, and we have been real mavens about updating our systems and keeping ourselves ahead of the pack with increased technology.

I think we're gonna be okay.

I will tell you, though that it will certainly not be without problems.

If you are moving the aircraft around that we have, we said to our partners, look, there will be times when we don't make certain dates.

There will be aircrafts that slip through the cracks that come to you painted white and don't have a paint job or, you know, that we have to delay.

Just this week we delayed by one week some deliveries as a result of a new program that Bombardier put on the aircraft that increases, you know, certain aspects of their reliability.

They asked us for some additional time and we granted it.

Those are things that we just have to deal with.

But, again, you know, we have a very strong operations department here.

Made up with some very senior people who have been around for a long time and some very, you know, young people who have been with Mesa, five, six, seven years who just have all the energy in the world to make this happen.

I think the fact that we have been able to put together the Freedom operation the way we did,on the timeline we did, is, again, evidence that we have the ability internally to do this.

Yep.

Jonathan, one more question, what was the DOT settlement all about?

And was a reversal of earnings in a prior year period?

And which period was it?

George Peter Murnane, III: Jim, it was in the fourth quarter of fiscal 2001.

And, you know, at that point if you go back to our 10-K, you will see the amount that we had actually taken into income.

Jim, it had been broken out before.

George Peter Murnane, III: Right.

And if you remember, the government funded 85% of your -- of your claimed losses up to a maximum depending on your ASMs.

We actually maxed out on the ASM basis.

The government came in and did an audit, and while we disagreed with their result, it was going on too long and we've settled with them.

And as you saw, the net after-tax effect was $2.6 million.

Okay.

Thank you.

Thank you.

And our next question comes from Tony Cristello.

Your line is open.

Please state your company.

BB & T.

Thanks.

Good quarter, guys and, you know, it looks like you are really doing a good job on the cost side.

Pilots, as you pointed out, and looking at, you know, -- maintenance, that seems to be falling into place.

Going forward, can we expect to see more, sort of, an attack on cost and is there any more you can get out of that or are we sort of comfortable with where you are at and are just going to see how things fall out?

Okay.

That's a very good question.

First off, a couple of things is that on the personnel side, as you grow, your unit costs go down because you are clearly moving people up into equipment that had a have less seniority.

So your average costs will go down.

It's one of the beauties of growth that you do get that benefit.

Additionally on G & A basis, we think that especially when we add these larger aircraft, I can't emphasize how much these aircraft help, it clearly drives down our G & A when we add these larger aircraft.

Our fleets on the 50-seaters are mature.

We think our maintenance costs reflect that of a mature fleet.

We do add some of the 700s to 900s which are helpful but, again, a lot of the maintenance is power by the hour and reflects a mature cost.

Do we think that there's more opportunity on the cost side?

I think that primarily that's going to come from running the business efficiently, continuing to utilize technology as we have and the growth, just by itself driving down unit costs.

There is no situation where, you know, we have a huge part of the fleet that's on some kind of warranty, or, you know we haven't done an engine overhaul.

All of our seat checks and heavy checks, you know, are very systemic at this point.

So none of those things are -- are -- will be a surprise to anyone.

We don't have any open labor contracts for years.

We think that the relationship with the rest of our employees is good.

We've been paying bonuses to the non-union work force, based on profitability that have been very significant.

The average worker has, you know, seen pay increases every year, as a result of those bonuses.

Our skill groups, for example the like dispatchers and mechanics, all received not only quarterly bonuses but stock options and with the stock at $10.50, I'm very pleased that all of their options are in the money and, they are you know they are very anxious over the success of the company as a result and it's amazing how it has impacted those work groups.

So I think that we'll see further improvement, but, again it will be driven mostly by the growth rather than necessarily anything that we do differently here.

We do believe we're the low cost operator, and we'll do everything that we can to continue to be able to make that statement.

What about the props being able to be retired at the end of the year?

If those are retired, does that mean at-risk flying then probably becomes less than 10% of the mix?

By the end of the year, with the growth that we have -- I haven't actually looked at the numbers but just if I had to rough it in my head -- at the end of this year we believe we'll be at 10% for the fourth quarter.

Okay.

Our belief is that if you -- if you look at the AmericaWest we've seen significant improvement this quarter and we expect to see the same, if not more, more next quarter.

If you were to pro forma those, just those seven airplanes alone, and you mark those leases to market, you are talking about an annual savings of close to $2 million, just on those seven aircraft alone.

So we think that there is clearly still some upside in the turbo prop business, and we continue to work very diligently on that.

Our Vice President of Planning has been tasked with that, Scott Lyons.

He's done a terrific job in terms of working with the essential air service program - involving increasing our subsidy and finding additional unsubsidized markets so that our aircraft can be subsidized.

So I think that, you know, again that's a trend that's moving in the right direction for us.

Okay.

One last thing.

Do you have the block hours for the quarter?

Peter.

Were they not included, Tony?

George Peter Murnane, III: Let me get -- why don't we take the next question and I will get you that in a minute.

Okay.

Thanks.

Thank you.

Our next question comes from Jim Higgins.

Your line is open.

Please state your company name.

Yes, Jim Higgins with CFSB.

Back on the Beech 1900s and that fleet, can you update us how many of are those in essential aircraft service?What your level of EAS revenues are?

What, sort of, potential falloff there could be if contracts are not successfully rebid in the EAS business?

Sure.

Right now I believe we receive approximately $16 million annually from the essential air service contracts that we have.

Our total revenue is about $100 million.

You know, so that -- clearly I don't want to under emphasize it because I believe it is very important.

There are markets, as I mentioned that do support 1900 operations without subsidies.

But nonetheless -- our direction is to get all the aircraft into some type of subsidies.

We will have some flexibility with the fleet, again, in that - these seven aircraft can go.

Again, if we were to do anything to continue to operate the level of aircraft that we currently have -- and we have about 37 aircraft actually lines of flight.

There's 42 aircraft total but we have spare aircraft for the maintenance and just operational spares.

But that, if we did anything to continue this level of service, or if we expanded it, again, it would be done with very short-term leases that would be tied to these contracts.

So I think that, you know our risk will become significantly lower at the end of 2004.

If we were to just park those aircraft, the charge at this point would be about $600,000 an airplane.

Again there's no reason to do so at this time but if for some reason that's probably the direction that we would go in that we would park those seven aircraft and return them earlier to the lessors.

Can any of those aircraft be put to Raytheon or you do not have that provision in any of these leases?

No, these were aircraft leased to third parties and not related to Raytheon.

Okay.

Are there any major EAS rebids coming up that you would be exposed to?

No.

I mean, there are always rebids but they're always in onesies and twosies.

There are a number of markets that we feel that we actually have quite a strong position in.

For example, right now we do not fly the Page, Arizona to Phoenix route which is, I believe, a subsidy over $1 million and clearly one that, in the past, we should have been on, but, frankly, we were, I think just too busy doing everything else to focus.

You know, also from Sholo.

These are markets where the AmericaWest card would be extremely powerful, but, you know, I think if anything our subsidy levels will go up from here not down.

We have been awarded -- in four or five markets they have just expanded and the direction is that we continue to maintain all the markets we have and we pick up markets from time to time that are new to us.

And then just finally on this similar subject, AirTrans has been pretty good at getting revenue guarantees from communities who wanted their service.

Is that something that you've looked at, attempted very much?

Any sense of what the reaction has been if you have attempted it?

Yeah, we just finalized a deal, for example, in Arizona with a number of the communities here where the local community is doing revenue guarantees, Lake Havasu is the most recent one.

We're in discussions with a number of others, Fort Wachuka.

Again, these are small pieces of puzzle.

It's very important because clearly getting that 1900 operation to profitability has a very big impact on our numbers throughout the rest of the fleet.

I will say, though, that that 1900 operation is becoming smaller and smaller every time we add a CRJ 900, if I'm correct, it effectively generates the amount of ASMs by eight 1900s.

So you can see that those 900s become very, very powerful.

That's great.

Good.

Thank you very much.

Thank you and our next question comes from Jim Altschul.

Your line is open.

Please state your company name.

Aviation Advisory Service.

Good morning, gentlemen.

A while back you had mentioned that you were looking at alternatives regarding Air Midwest.

Have you spoken with anybody about possibly selling or spinning off that -- the subsidiary?

We've looked at alternatives.

The problem that you have on the 1900 operators that exist is that financially most of them are, you know, in fairly difficult situations.

Not just from the general economic climate but also the fact that the 1900s have become expense to operate, and, you know the issue is can we find a carrier that has viability.

At this point in time, again, what we have focused on has been just to improve the operations there.

Their financial performance are the EAS.

We do think that there are potentially opportunities because given the financial condition of these other carriers, you know, we believe that it's probably only a matter of time before there's fewer of these carriers around, which would open up the five, six, seven, additional EAS markets, which would undoubtedly, in my mind at least, and I think, Peter, you would agree, that five or six or seven additional essential air service markets would clearly bring Air Midwest into the black.

And that's really what our focus has been on over the last few months.

We hadn't looked at other opportunities but, again, the biggest problem be that we got to was just the financial viability of any potential, you know, buyer.

Okay.

Thank you.

And can you elaborate a little on the Logitech arrangement to which you alluded in the beginning of call?

You mentioned you would be getting $25 million out of it.

Can you go into a little more detail about what that's all about?

I will ask our CFO to answer that.

George Peter Murnane, III: Hey, Jim.

Hi.

George Peter Murnane, III: I think it's -- I don't know if you saw the press release that we put out on it a couple of weeks ago.

But essentially the $25 million that Jonathan alluded to was their purchase of the majority of the CRJ 200 roteable inventory.

And the deal, other than the purchase, is their management of our roteable spare parts, inventory and repair.

So in essence, what we would do is pay them a certain amount per flight hour, and they would guarantee us availability of the required levels of inventory.

Now, the $25 million is only on the CRJ 200 inventory, but our letter of intent is actually to expand that to all of our aircraft.

And we believe we would generate how much additional?

George Peter Murnane, III: Well, at least another $20 million in cash to us in buying out existing inventory, but the nice thing is it would mean that we wouldn't have to fund an additional $40 million in parts requirements over the next couple of years.

So net/net, it's got approximately an $85 million positive cash flow implication.

And, again, as Jonathan has mentioned earlier in terms of our revenue guarantee contract, this is just one more way where we've locked in costs.

And so we are less at risk from changing cost levels.

Thank you very much.

One thing I wanted to get back on the block hours for Tony.

George Peter Murnane, III: Yeah, for the third quarter, Mesa, 65,536 block hours Air Midwest 26,175, and Freedom 8,955.

Thank you.

And our next question comes from Helene Becker.

Your line is open.

Please state your company.

Thank you very much, operator.

Hi, Jonathan.

Okay, so two questions.

One, in the past couple of days, a lot of airlines have talked about -- a lot of regionals have talked about the ability to grow is limited by the amount of aircraft they can get.

So do you come to a point where you start to really run up against each other and, you know, maybe makes more sense to start consolidating the industry?

And b, along with that, do you run into a situation where one of your code share agreements starts backing up against another code share agreement, you know, where a passenger has a choice to go over Denver or over Phoenix to get to their destination, either one on Mesa?

Where, you know -- I mean, is there one agreement that makes it more sense for you to go with one airline versus the other?

Well, first of all, clearly the demand level for aircraft now exceeds the supply.

And recent events of this week has exacerbated that situation.

We, in fact, have been in contact with carriers that we thought might have excess regional jets, and, you know, are continuing to pursue that.

And, frankly, you know, I will just be direct.

We talk about Atlantic Coast.

It is not without some envy that I see what they are doing.

The idea of being independent, and being the master of your own destiny is not unattractive in some respects.

You know, clearly when they look around at the industry and they see the value that's placed on other independent low-cost carriers, it obviously looks very attractive to them as well.

You know, in this industry, you know, I mean, we can see where -- you know, how our stock is valued with what our earnings are.

And I think that Atlantic Coast made a decision based on what they view to be in their best interests.

And I certainly, again, can say that I appreciate the decision they've made and given what the marketplace says about low-cost carriers versus regional carriers it is not a completely, you know -- you know, I -- I think it's -- it's certainly not one that is -- does not have reasoning behind it.

As far as the multiple carriers, there are markets today, at least there were, I'm not sure if it still exists, where we operate two aircraft with different marketing arrangements in the same market.

And there's no restrictions on our ability to do that.

There are some restrictions in the ability to flying into hubs, but the fact of the matter is, I know we were flying, for example, from Columbus to La Guardia, both as AmericaWest and U.S.

Air for a long time.

But, you know, we're like a vendor and I don't think it's any different than Boeing supplying aircraft to United and Delta.

We are providing a service to those and we view ourselves as vendors just the same way that Boeing or Airbus does.

So, at this point in time we have not had a problem.

We now serve, I think, we're up to 156 or 160 cities and, you know, you're going to come into contact with your other partners when you do that.

But at this point we don't think it's an issue.

Okay.

Are there markets in which you control your own gates where you are not subleasing?

In other words you are subleasing them direct from the airport and you are not getting them from the airline partner.

Most of the airports we have that arrangement.

You have the arrangement where you control the gates?

Yes that's correct.

Okay.

Well, thank you so much for your help.

A appreciate it.

Sure.

Thank you and our next question comes from Edward Orkine.

Your line is open.

Please state your company name.

Dickey Capital.

My questions have been answered.

Thank you.

Yes, sir.

I'm sorry, my questions have been answered.

Oh, okay.

Thank you.

Thank you.

Our next question comes from Michael Linenberg.

Your line is open.

Please state your company name.

Hi, gentlemen.

This is actually Lily from Merrill Lynch.

I just have a very quick question for you, regarding code share agreement with U.S. Airways.

Just wondering if there are any restrictions in that agreement regarding you flying for another partner out in the Washington, D.C. area?

No there is not.

Okay.

And I point out one other thing, also...

Mm-hmm.

Which, again is more of a touchy-feely rather than, you know, something that, you know, we could really nail down.

Mm-hmm.

I think people should remember that United and U.S.

Air are code share partners.

You know, United and U.S.

Air saw a lot of benefit in a merger not too long ago and the fact of the matter is, is that both of them are in somewhat similar financial situation right now and the relationship between the two companies is a good one.

And, again, I don't mean to -- I'm not trying to hint at anything, or say anything, but the fact of the matter is, is that us code sharing with United does not necessarily become a disadvantage to U.S.

Air and vice versa.

And I think that that's important to realize when you look at, for example, what is potentially happening in Washington or our operations on the East Coast, is that ultimately, if the agreement goes through to the fullest extent, the aircraft that we operate for United will also carry U.S.

Air code and vice versa.

So there is a lot of synergy there and not necessarily one that either carrier is particularly concerned about from, you know, a negative perspective.

I see.

Thank you very much.

Okay.

Thank you and just a reminder at this time if you would like to ask a question, please press star and then one on your touch-tone phone.

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

Thank you.

Edward Orkine.

Your line is open.

Please state your company.

I'm from Dickey Capital.

Well, I'm back on again.

I'm just trying find out before this closes if you can comment on when you would expect to be free cash flow positive?

I mean, do you have any guidance on what expectations are for that?

Yeah, on an annual basis we are currently cash flow positive.

No, I mean free cash flow positive, I mean after Cap Ex.

Well, if you're talking about buying the aircraft, we have very little Cap Ex requirements.

In the past, the majority of our Cap Ex requirements have been for spare parts to support our operation.

Given the transaction that we are documenting with Logitech, that number goes down dramatically.

There will be -- because as I said, we are contemplating a significant order for additional regional jets and that will require a down payment, you know -- a deposit rather.

Not a down payment, but a deposit.

That deposit gets refunded to us when we deliver the aircraft but I would expect that that, you know, will not be an insignificant number.

Something well within our ability right now, -- obviously, but nonetheless there will be that requirement too.

That will be our single largest cash requirement going forward.

Alright.

Thank you.

Thank you.

And our next question comes from Bill Reid.

Your line is open.

Please state your company name.

Yes.

Deutsche Banc Securities.

I apologize for asking this question, 'cause I'm sure you've addressed it, and if you'd like me to go offline afterward, I will.

But I got on the call late.

The significant new order that's being referenced in headlines on Bloomberg with Bombardier.

You haven't given a number for that significant new order in terms of number of aircraft?

No.

It really is dependent upon a number of things, not the least of which being the deliveries, capabilities, and the financing that is available, and so, you know, again we contemplate a new order.

I hope that people are not jumping to conclusion, because I think that would be a -- a poor decision.

We clearly have demand for more aircraft.

Correct.

Our ability to get that done is going to be dependent upon a lot of issues that are, in some respects, out of our control.

Correct.

You know both the financing and the delivery capability.

Correct.

Is this -- but this is a order that would be contemplated that's unique to your demand profile and doesn't necessarily involve taking on the -- does it contemplate the events of this week or is this -- was -- would you be announcing this potential significant new order absent the other news that was out this week?

Yes.

Okay.

Great.

Thank you very much.

And let me make sure that there's an order of magnitude because, again, I don't want people to get too far ahead of this, and, you know -- significant to us is different than, say, significant to my friend David Siegle at U.S. Air.

Okay.

So -- who orders airplanes by the hundreds.

Okay.

I'm really happy to order them by the dozens.

Dozens.

So we should think of this as a range, perhaps, of 12 to 24 or something like that?

In that range, maybe slightly more than that.

A lot of it has to do also with exercise of options and orders that we've previously announced.

We know that there's a requirement for us to have some additional aircraft, primarily the 700s for United is I think where the focus should be.

There is some demand for additional CRJ 200s or ERJ, for that matter.

You know the problem be with Ember aircraft is just that they seem to be unable to finance them.

We are not opposed to taking additional aircraft.

It's really a financing issue.

So, between a mix of 200 and 700s.

We may also order potentially some other 900 aircraft, which would go towards potentially backfilling some 700s that may come out of the AmericaWest system to more rapidly spool up the United operation.

Great.

Thank you so much.

Okay.

Thank you.

And our final question comes from Robert Fay.

Your line is open.

Please state your company name.

Kellikut Capital.

I want to clarify again, the orders.

You're talking about significant order.

Is that related to the MOU that you have with United now for the 35 additional RJs?

That's correct.

So that's where the order - the demand is coming from?

On the CRJ 900s, given you're the only customer for that aircraft right now, are you having any particular difficulty getting any financing on that aircraft?

No.

At this point in time we've been able to finance them.

There's interim financing from the manufacturer.

We've begun to do the long-term financing on 700s.

Are we financing the 900s long-term?

Yes.

So no different than the 700s or the 900s.

The fact is the aircraft has become very popular.

I get comments about it both from our passengers and our crews, you know the positive aspect of it.

We think it's cost competitive with any of the 100 seat regional jets and, particularly with our cost structure, which we believe will be significantly lower than any other carrier to operate this size aircraft, we believe we can be competitive in any environment.

I will say that there's been a lot of talk recently about point-to-point flying with larger regional jets.

And I will tell you that, when we did not have these growth opportunities with U.S.

Air and United, we did look at that potential opportunity.

And we think, quite frankly, as do the manufacturers when they gave us their numbers, that those opportunities are, in fact, quite limited.

And believe that, by far, the best use of these aircraft is feeding these hubs and generating the additional hub revenue, rather than attempting to operate these aircraft in a low-cost environment, which they're not low cost, you know, and trying to generate incremental revenue with point-to-point service where we think that the likelihood of success would be, in fact, quite low.

The last question, Canadian government announced that they were going to add another $1.2 billion to potential financing for Bombardier customers.

Are you going to be able to access a piece of that?

I certainly would hope so.

Okay.

Thank you.

Okay.

Thank you.

Sir, I show no further questions.

Okay.

Again, if I could just conclude.

I want to thank everyone for taking their time.

I know this is a busy day for earnings calls.

We very much appreciate it.

We truly believe, for the first time probably, we got a sense of it last quarter and this quarter, that a lot of the energy and the efforts and the plans that we've laid are beginning to come to fruition.

We think Mesa is uniquely positioned as a low cost regional jet operator, providing what we'd like to think is the highest levels of service to our partners and providing our investors with a steady flow of predictable earnings that we feel will continue to grow as we both add aircraft and improve our operations.

So we look forward to next quarter's call with you.

We feel confident that we will continue to do the kind of job be that you have come to expect from us and, again, in final I would just like to thank all the people here at Mesa who have made this possible for us to have this call and be as upbeat as we have been.

So, again, thank you all very much for your time.

We greatly appreciate it.

Bye-bye.