Mesa Air Group Inc (MESA) 2004 Q2 法說會逐字稿

Good afternoon, and welcome to the Mesa Air Group's second quarter earnings conference call.

All participants will be in a listen-only mode until the question and answer session of the conference.

At that time if you would like to ask a question you may press star one.

To withdraw your question you may press star two.

This conference is being recorded.

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

I would now like to introduce your conference leader for today, Mr. Jonathan Ornstein, Chairman and Chief Executive Officer of Mesa Air Group.

Sir, you may begin.

Thank you very much.

Thank you all for taking time out of your day to meet with us and talk to us today.

I have to read our legal obligations here.

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

While the company believes that the expectations reflected in such forward-looking statements are reasonable it can give no assurance that such expectations will prove to have been correct.

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

Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actually results may vary materially from those anticipated, estimated or projected or expected.

The company does not intend to update these forward-looking statement made in this call prior to its next filing with the Securities and Exchange Commission.

Okay.

Let's get into the news.

Okay.

Before going into details of the quarter results I think that most of the questions we've heard from people already regard the decision to restate our prior earnings and I'd like to go into some amount of detail.

Clearly it's not something that we're happy to have done but I think once we take a minute to explain I think most folks will appreciate what the issue is far better.

I'm going to read this just because we don't want to make any mistakes, and then we can go into some more detail if you have questions afterwards.

Our restatement is a result of an assessment by the company in conjunction with its auditors of the accounting for manufacturing-provided interim financing for our past aircraft financing transactions.

This restatement only affects the interim financings under our recent purchase agreements and not our initial CRJ-200 purchase agreement.

Just to give you a little background.

The company has frequently taken delivery of aircraft prior to having permanent financing in place under an interim financing arrangement with the intent of ultimately financing the aircraft under long-term operating leases.

The company previously treated interim aircraft financings as leases which the CRJ-200 interim leases were, with payments to the manufacturer recorded as a lease expense.

We did this because our previous interim financing had been deemed interim lease financings in the agreements were short-term in nature, generally under six months, and we felt the financings met the guidelines contained in SFAS-144 regarding assets held for sale which eliminates the need to record depreciation.

Furthermore under our financing support agreement with the manufacturer we have the ability to insist on, and I quote, "a structure that will present no economic disadvantage to Mesa".

Therefore, had we thought it necessary at the time, we believe the financings could have been structured in such a way to attain lease treatment and are aware of several instances where other airlines have, in fact, structured their interim financings to do so.

Rest assured in the future our interim financings will be structured so as to be true leases.

I would also mention that the document under which the aircraft are leased is, in fact, called a lease agreement.

Nonetheless, we continue to believe that the logic would dictate accounting for the interim financings as we had.

After our detailed review we determined that the underlying interim financings should have been recorded as debt financing.

As a result we would have recorded debt and depreciation during the interim financing period which has given rise to the restatement.

I'd also mention at this point that the financings of these aircraft were all planned and were done at 100% of the purchase price no matter how long it took for the permanent financing to be put in place.

We estimate the restatement will have the following impact: The company will record a reduction in reported net income for fiscal years 2000 through 2003 by $200,000, $200,000, $1.8 million and $2.6 million respectively for a total of $4.8 million.

In addition, we will record aircraft and debt of approximately $242 million related to interim financings on the balance sheet as of September 30, 2003.

In the first quarter of 2004 the company will reduce its reported net income by $1.5 million and record approximately $144 million in aircraft and debt financing related to interim financings on its December 31, 2004 balance sheet.

It should be noted however, that if the aircraft are ultimately financed through long-term operating leases, the debt associated with the aircraft is removed from the balance sheet at the time of the sale and lease back.

The depreciation expense during the interim financing period is completely recaptured as a deferred gain on quote "sale of the aircraft" and recognized on a straight line basis over the life of the aircraft lease.

Of the 35 aircraft involved in the prior period restatements 30 of the aircraft were ultimately refinanced in this manner.

Therefore the company will be amortizing over a period of approximately 17 years of deferred gain of approximately $8.5 million for these aircraft or about $500,000 per year.

The remaining five aircraft were financed under a long-term basis through structured debt transaction that we have previously discussed.

Reflecting in the earnings that the company has reported this morning for the second quarter of fiscal 2004 is depreciation of approximately $200,000 for aircraft on interim financing.

The company has one aircraft on interim financing at the end of the quarter and will reflect approximately $25 million in aircraft and debt related to these financings on its March 31, 2004 balance sheet.

Now that we, I think given a more full explanation just go forward on the rest of the call.

During the quarter we continued to see rapid growth of our fleet related to the expansion of our revenue guarantee co-chair relationships with the major airlines serving hub networks primarily America West, United, and US Air.

We continue to see a significant amount of regional jet growth.

During the quarter we took delivery of 12 regional jets.

Included in the deliveries were six of the larger capacity CRJ-900s, six CRJ-200s, bringing the total number of RJ's at the quarter end to 116.

The 200s were part of the Midway acquisition and the deliveries reflect transition to the Mesa operating certificate.

We also took delivery of the first of four incremental Dash 8 being used for our United revenue guaranteed operation.

Subsequent to the quarter we took delivery of three additional CRJ-900s, one additional CRJ-200 and three Dash 8s.

We now have 120 RJ's in the fleet comprised of eighty-six 50-seaters, 1570-seaters and 1986-seaters.

For the remainder of the third quarter we expect to take delivery of four additional CRJ-900s and put into service four additional Midway aircraft and two 50-seat aircraft obtained from the used market.

The total aircraft put into service during the quarter is expected to be fourteen RJs and three Dash 8s.

Despite the significant number of aircraft being put into service our operation continues to run very efficiently and smoothly.

During the second quarter we ran a controlled [inaudible] completion rate of 98.7% despite all the demands being placed on our personnel.

I want to thank all of our people in particular the folks in our training department and our maintenance department who have made this possible as certainly as well as the folks out on the line who have done just a tremendous job through it has this rapid growth maintaining the operation as they have.

We also continue to run a significant of pilots through our training program.

During this quarter 347 pilots completed training and there are currently 343 pilots in various stages of training.

Given our growth we will be hiring more pilots than any other airline and more than Southwest and Jet Blue combined.

We'd like to thank all of our people and I can tell you that you can have tremendous confidence in their abilities and their dedication to making Mesa a success.

We continued to make progress in the financing of our aircraft.

During the quarter we completed a previously announced financing for five CRJ-700 and six CRJ-900s.

With the interim financing commitments we have from the manufacturer, we are assured of taking delivery of all the CRJ-900 deliveries currently scheduled through May of 2005.

From a financial standpoint we had a number of unusual items impacting numbers that we've highlighted in our press release.

And I'd like to go into some detail on regards to each of those.

As previously announced due to continuing losses in our prorate businesses we elected to park seven Beech 1900 aircraft at the end of the quarter and negotiate early termination of these leases.

These were our most expensive aircraft with lease rates above $30,000.

Our average cost on the other 1900s is a fraction of that.

This resulted when we did terminate these leases we took charge of $6.7 million.

On a go-forward basis retiring the aircraft will save us approximately $2.8 million in annual lease expense and these aircraft in fact had been taken out of service and were effectively parked anyway.

We also took a one-time charge of $2.4 million for payments made to our President, Mike Lotz and myself involving the restructuring of our employment agreements.

Basically our employment agreements contain certain early termination provisions which have resulted to payments to Mike and myself.

We continue to have a strong desire to work at Mesa and the board of directors supported the value of our continued employment especially in what are obviously difficult times.

As such the board proposed a restructuring of our employment agreements to remove our incentive to resign, reduce certain other benefits and extended the term for five years.

As part of the restructured employment agreements we accepted an incentive payment of cash and restricted stock that vests over three years and agreed to change our employment agreements to eliminate any benefit from resigning.

We also reflected the reversal of $800,000 in expenses previously recorded relating to the attempted merger with Atlantic Coast.

We originally recorded these expenses based on our best estimates and were subsequently successful in negotiating a reduction in those merger related costs and have adjusted our numbers accordingly.

During the quarter we also had a $400,000 investment gain.

To the business, we can discuss each of the piece of the business I think is some important items.

Our 1900 business, the losses in our prorate markets widened during the quarter to approximately $4.1 million on a pretax basis.

Although the March quarter is traditionally our weakest for the prorate revenues, as I stated earlier due to these continued losses we made the decision to park seven aircraft.

The good news is the revenue guarantee portion of our business represents 92% of passenger revenue during the quarter which minimized the impact of the prorate losses and will continue to do so going forward.

We also expect losses to narrow significantly during the second half of the year which has traditionally been stronger for prorate revenues and the result of the actions we have taken such as parking these seven aircraft.

This 1900 operation also has been impacted by our rapid growth given the fact that our pilots are moving up from the turbo props into the jets which has created some additional training expense.

In addition fuel prices during the quarter impacted the 1900 business by approximately $400,000 on both the quarter-over-quarter and year-over-your basis.

However due again due to the benefits of our revenue guarantee business, 91% of our fuel costs are effectively hedged through these contracts.

As I mentioned training expenses also increased as a result of the rapid expansion.

It was approximately increased approximately $600,000 versus the quarter the year prior.

Most of this training is again a result of our regional jet growth and will not have been occurring on a stand-alone basis.

We should also point out that our new pilot agreement has curtailed the amount of training and these numbers are actually lower than they would have been in years past as a result of the way pilots now move up without, they move up into higher paying jobs as captains but they do not move sideways into other first officer positions.

We also recently awarded $1.3 million in subsidies for [EAS] line.

We continue to pursue all [EAS] markets that come due.

We have stepped up efforts to continue the reduction in flying and we are looking at any and all options to ultimately exit from the 1900 business.

We are currently down to 35 aircraft.

That's down from 122 back when we first joined the company and we have approximately 29 lines of flight.

Okay.

Overall the regional jet operation continues to generate very strong results despite the cost associated with preparing for growth.

Company-wide training costs were up $1.2 million compared to the December quarter and $4.1 million compared to the second quarter of last year.

Our current expectation is these costs will start to level off for the second half of the year as the introduction of new aircraft slows.

Our ASMs for 2004 will be a function of final delivery schedules for our partners.

Based on what we've contract currently we are projecting ASMs of approximately $6.9 billion.

Earnings guidance.

One of the items impacting our projections is our effective tax rate.

Our accountants are now projecting a rate for the year of 41.2 despite this increase from our prior guidance of 38.3.

Based on what we know today we are nonetheless comfortable with our current First Call earnings range for the year.

However as always our earnings can be impacted by the delivery schedule for the aircraft, the timing and maintenance and training events.

Certainly it could be impacted by any situation of our partners changing dramatically.

We would like to talk a little bit about the comments that were made in the press release and talk a little bit about each of our partners.

First off, you know, we're delighted with the progress that America West has made.

The leadership that has been in place, Doug Parker and Scott Kirby have done a wonderful job.

Their operations person, people are doing just a great job over there.

They continue to aggressively take the CRJ-900 aircraft.

We understand from them that the aircraft has worked very well in the markets where they've placed them.

They do have an option to take additional aircraft and we have been, as we have been for sometime in discussions regarding additional CRJ-900s potentially for the America West operation.

United, we continue to add aircraft into United.

The situation there clearly they've been, you know, thoughtfully working their way through their bankruptcy.

We have seen some good results from our contract with them as well as from an operational standpoint.

I think we've done a terrific job and I'm told that our numbers are always, you know, very much, you know, leading numbers and from an operational standpoint I think United has been quite happy and, of course, given our history with them, that is very important for us.

Clearly I think the big question mark out there is US Air.

We have approximately 57 aircraft with them now.

We have contracted with them to increase that to 65.

We continue to be very supportive of their efforts to reduce their costs.

I think it is very clear what needs to be done there.

Logic would dictate that the parties involved would come to a sensible solution.

You know, it does not take a lot of math to figure out that someone, one of the analysts made a comment to me and I have no independent verification of this, but I trust the work done by our friends on Wall Street that if US Air had labor costs equal to Jet Blue it would have been the most profitable airline in the world last year.

So, you know, we don't want to necessarily pick on any one group but clearly the company has to come together and folks there have just got to come to the right decision in order to see that company survive and potentially prosper in the future.

We continue to be supportive of that.

At the same time, we recognize that this industry is one of those crazy industries where what appears should happen doesn't always happen, and as a result we are looking at various alternatives.

We are looking at a number of different strategies whereby we would potentially either partner with another carrier, begin operation ourselves independently, move into potentially larger aircraft, purchase assets from US Air if they were to become available in order to make some of those things happen, and, in fact, looking at potentially partnering with a financial partner also to achieve some of those goals.

So I think that we have a lot on the table.

Our first choice, of course, is to do nothing and to see US Air continue to operate successfully with the restructured cost structure.

But, again, we have to be prepared, and I think Mesa, we have been a company that has been quick on our feet in the past and I don't see any reason why we won't continue to be so.

We raised a fairly significant amount of money over the last 18 months.

Our cash balance is, I think, 230, $240 million.

We project that that balance will be higher in the 275 to $300 million range by the end of the year so we do feel that we are very well capitalized going forward.

I also would mention that our RJ fleet, you know, one of US Air's concerns through the last three or four years is that they need more RJs.

I think it would be fair to say that any other carrier that was looking at the various US Air operations would come to the same conclusion and I can tell you that not only is Mesa's cost again, I think, the lowest cost in the industry but our actual lease rates on our aircraft are, I think, the lowest in the industry as well.

I think we have a lot to offer in any scenario that involves US Air as we move forward.

I also touched on the fact that we are looking to further reduce our 1900 exposure.

We are, in fact, in the process of having a number of discussions with interested parties in regards to parts and pieces of the 1900 operation and think that as we move forward this, while not our highest priority, will, in fact, we will see some of those things come to fruition over the next six to 12 months.

That certainly would be our plan.

You know, overall we thought the numbers were actually pretty good.

Netting out the unusual, the items, you know, we earned 25 cents, you know, the regional jet business margins are excellent.

We feel that we've got a reasonably good handle on the 1900 situation at this point.

We've added a lot of aircraft, there's been a lot of costs associated with the additional aircraft, we're going to start to see the benefits of that as we move forward.

Some of the revenue benefit as well as the net income benefit without some of those additional costs, so, you know, we feel that everything from our perspective is going to plan.

Clearly we understand the challenges that may lay ahead.

We're taking steps necessary to do that and also I'd mention at the same time we continue to pursue other opportunities with regional jets with other major carriers and feel that it is not totally out of the realm of possibility that we could, in fact, see some expansion opportunities with other major airlines using new aircraft as well.

So with that, I'd like to open up to any questions you may have, and please feel free to ask me anything you like.

Thank you very much.

Thank you, sir.

At this time we'd like to begin the formal question-and-answer session of the conference.

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

You will be announced prior to asking your question.

To withdraw your question you may press star two.

You will be prompted to record your first and last name.

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

The first question comes from Mr. Jim Parker with Raymond James.

Sir, you may ask your question.

Jonathan, hi.

Just want to follow-up on the executive compensation and what I'm interested in is some of the details.

How much was the total amount in the contract, and then how much was the pretax amount that you agreed to and actually took?

Okay.

You know, I don't think I have the exact amounts, but I can give you order of magnitude how it was structured.

Basically, Mike and I had the option of basic retiring and receiving payments over three years that were effectively double what we were paid in this one lump sum.

We then, as part of our incentive going forward, we were given restricted stock grants that vest over three years.

Okay.

So the original amounts sounds like it was something like $8 million, and if the after-tax amount is 2.4, then the pretax was probably something like 4.2, and double that would be $8 million, is that correct?

No, I think that's too high.

The number that I have here pretax was 3.3.

3.3.

Correct.

And it resulted in a payment of 2.4.

After-tax.

Okay.

All right, thanks.

Okay.

The next question comes from Mr. Tony Cristello with BB&T.

You may ask your question.

Jonathan, I guess I just wanted to get a little bit better understanding, with US Airways, looks like it's going to be about 35% of your mix at year-end, I think according to what you put in your press release.

Can we assume now that the profit contribution is about the same as that, or are there contracts that they're operating under now give either a higher or lower percentage of profitability?

It varies from month to month but by very little, and I would say certainly over a period of a year, they're all very close within 1% of each other.

The larger aircraft, obviously, are a little more profitable, but on a, you know, per-seat basis, they're all, I would say, I think it's fair to say they're all very close.

Okay.

And looking at, then, I guess the utilization of the 700s you have and the 900s in your system, has there been any change in the level over the last few months and can you just kind of give me what you're seeing in terms of on a per-day basis the difference between those two aircraft right now?

You know, I don't have that detail available to me.

I will tell you that you that United in particular has done a rather remarkable job scheduling the aircraft.

In fact, I believe we're the first carrier that now flies a CRJ coast to coast.

We fly an airplane from San Francisco to Austin and Austin to Dulles, or it's Austin, right?

Yeah, and that actually is a transcon flight.

I could get the exact detail but I can tell you that it's not my understanding that the numbers have changed significantly other than the fact that United has been able to introduce the CRJs into somewhat longer haul flying which would probably act to enhance their utilization.

I guess in the pro forma section you had an item for a gain on involuntary conversion of aircraft last year, and can you just remind me what that was for?

Yeah, that was a result of our accident in January.

Okay.

And then one last question.

What is your average rate now on the 1900 debt on the balance sheet?

Per aircraft?

Yes.

The total is about $95 million.

What is the average interest rate on that?

The average interest rate is --

Probably around 4%.

About 4%.

Tony, it's a spread over one-month LIBOR.

Thank you.

Sure.

The next question comes from Mr. Michael Linenberg with Merrill Lynch.

Sir, you may ask your question.

Two questions.

Jonathan, the Beechcraft 1900s, I think you said you were left with 35 now doing 29 lines of flying.

Are all 35 of those on balance sheet or any of those still subject to lease?

Those are all on balance sheet now.

The aircraft Mike, that we got rid of were the off-balance sheet financed aircraft that were upwards in the 32, $33,000 range.

The other aircraft currently cost in the $12,000 range so we clearly were taking a hit on those aircraft, they were excess to our requirements.

We've really consolidated the 1900 flying.

And while clearly the 1900 numbers are unattractive as I mentioned there are some issues there in the fact that there is some training going on.

The 1900 operation does carry a fair amount of corporate overhead, so I'm not sure all that would just necessarily go away but I think our feeling is at this point is that with as much regional jet growth as we have, operating 29 lines of flying for 1900 that has spread so much around the country is just that our energy could probably be put elsewhere with better results.

And following up on that, Jonathan, I think on Tony's earlier question, when he was asking about, I think you threw out $95 million was that the debt on the balance sheet related to the 1900 Ds, or did I mishear that?

Yes.

That's the debt on the balance sheet related to the 1900 Ds.

So if they continue to post, let's call it a sizable level of losses going forward, could we see that being written down?

I mean, is that a possibility here?

That's the debt.

Apparently I'm being told by our VP of Finance that the assets are already written down.

Okay.

Then just my second question, earlier when you talked through the issues related to the accounting and the adjustments, et cetera, because you had been, you know, expensing them as leases rather than incurring D&A will you be able to recapture any taxes that you may have overpaid over the past couple of years?

That's would we have been told.

And you know Mike, on that subject again, I mean, it's written in the agreement that we could have structured this differently if it had a negative impact on us.

So, I mean, this is not something that we hadn't looked at.

We thought we had this structured properly, and, you know, in the end, we've had to now take this.

This is, you know, clearly we could have structured this, because most of the other operators take the aircraft exactly the same way we do.

You know, I understand what happened here is Bombardier came to us and asked to restructure the latter agreement in order to help them on their tax treatment of the asset upon sale.

We did not have to agree to this structure.

It was only after we looked at it and felt comfortable that it met all of our requirements that we did agree that.

That will change.

But, you know, we're just certainly we appreciate why this happened.

Again, the logic seems to be somewhat counter intuitive because the asset is held for sale, we always have financed it at 100% of purchase price, there is never any concern that there is depreciation but nonetheless, in today's world we went with an interpretation that I guess between our accounting department and our auditors felt was the most conservative and that's why we decided to do this.

It sounds like it's not going to be an issue going forward.

No, the only issue is that we do get a pickup of about half a million dollars a year going forward.

That's right.

That's right.

Well, thank you, thank you very much.

The next question comes from Miss Helene Becker with Benchmark.

Ma'am, you may ask your question.

Thank you very much, operator.

Hi, Jonathan.

Hi, Helene, how are you?

I'm okay.

So this is my question then.

Can you just tell us, you had 20 aircraft that came between January and April, I think.

How many are you scheduled to get now for the rest of the year, and can you do that by quarter?

Okay.

Let me pull some numbers.

And what was the last question?

I'm sorry.

If we could have the quarterly numbers going forward.

Okay.

Rob?

Actually we're scheduled Helene to add 14 in the June quarter, total, and six in the September quarter.

Those are all RJs, and on top of that during the June quarter there were three Dash 8s.

But you already took those in April, I thought I saw.

Some of those.

For the remainder of the quarter I think we'd indicated that we've got another ten RJs, actually, another 11 RJs the rest of this quarter and the Dash 8s we have already taken, correct.

Right.

Okay.

And you're all set in terms of the training on these, for these, didn't you say that?

Yeah, the training has gone just remarkably well.

Our people have done a terrific job.

As you know we set up a training facility here at what used to be the Williams Air Force base in conjunction with ASU, and we have two simulators there, one CRJ, one Embraer, they are literally operating 20 hours a day but it has allowed us to have this growth.

The foresight, and I mean this, the foresight of our pilot leadership allowing us to really have an unconventional approach to training has allowed to us expand so much more rapidly allowing more of our people to get to the jet captain positions.

I have done some math.

One of the pilots came in and we talked about it.

We looked back when we first got here in 1998, and just to give you some idea about what that expansion has meant for our people, if you were a pilot at Mesa in 1998, and you had joined the company five years prior to that, and you stayed with us, your wages have gone up almost 125%.

If you actually joined us in 1998, your wages have increased versus the first 12 months of your employment, your wages have increased 272%, an average compound annual growth rate of almost 40%, and that's really the result of our ability to grow, expand our operations, and move our people up into the higher paying regional jet captain positions.

So we feel that all this, you know, ability to work together gives us the kind of platform that allows us to continue to grow.

And with the challenges that we have ahead, there may be additional opportunities for our people as well, given what, you know, is happening out on the East Coast.

Right.

And I actually wanted to ask you a question about when you said you were looking at going into larger planes maybe, not that this is something you were doing, are you talking about, you know, a 90-seat aircraft or are you talking about a 737-type aircraft?

And if it's the latter, have you gone to the FAA to ask them to amend your certificate or do you have to do that?

That's good question.

We are currently exploring possibilities whereby we would potentially place a larger than 90-seat aircraft on one of our operating certificates.

And we have begun to take the steps necessary to do that.

Okay.

That's really all I had.

I would just say just make sure I'm never on a CRJ going from San Francisco to Dulles over Austin.

I don't know if I could handle that.

Well, the 700s have nice first class.

We'll make sure you get up-front.

Okay.

Thanks.

The next question comes from Mr. Peter Martin with Presidio.

Sir, you may ask your question.

Just wanted to expand on the last question.

What are the steps required to put the larger aircraft on one of your certificates and what would be the kind of the timing or milestones involved?

Well, you know, to put an aircraft on a certificate, you know, whether it's a 737 or Airbus or even our CRJs take some time, you know, our timeframe, we feel comfortable that under the timeframe that we've set up we would be in a position to operate a larger aircraft by late summer.

And, again, just getting a little more specific what are the steps that you have to do to make that happen by late summer?

Well, I mean, you have to notify the FAA, you have to begin to prepare all your maintenance documents, your training documents, all of your procedures, you have to lease an aircraft, or have an aircraft available, you have to go through all of the, you know, the pre-operational test flights, you have to train your pilots and your mechanics and ground people, and those are all things that we have, in fact, put on a time line that give us comfort that late summer would be a target that we could achieve.

Okay.

And that's what I was looking for.

You do have this on a time line to hit a late-summer execution?

Yes.

And then final question.

Have you discussed with the board the possibility of the environment or the street doesn't view the industry in the right valuation that you'd take the company private?

Given today's reactions, I think that that's something that we certainly will discuss.

I mean, I think there's a real belief that there's value at Mesa.

We think that in spite of what might happen with our partners, that we could respond and, in fact, potentially create what could be a big opportunity for us.

It's certainly not an opportunity that we want, but nonetheless one that we would, I think, very effectively exploit.

You know, we are, by indication of our extension of our agreements, you know, not interested in sailing off into the sunset.

This is my second tour of duty with Mesa.

I've been here since 1998 when the company, as most of you know, was on the verge of bankruptcy.

You know, we've come a long way, we're very proud of our people and the work we've achieved, and at some point, if it doesn't come to fruition that other people come to that same conclusion, then I think we do have to look at alternative ownership structures.

Thank you for your candor.

Thank you.

Next question comes from Mr. John Bell with Standard Pacific Capital.

Sir, you may ask your question.

My questions have already been answered.

Just a comment then.

As a suffering shareholder I think taking $2.5 million incentive comp when your stock is down 45% on the year is infuriating, so please earn it.

Thank you.

Okay.

Well, I appreciate your comment.

However, you know, I would mention to you that this is a contract that was done five years ago, it had an early termination.

At the time when these discussions began, in fact, the stock was at 14, and in spite of the fact that our stock is at $7.03 as of now I would argue that we, on a relative basis are still one of the best performing airline stocks over five-year, two-year, and one-year period.

Your next question comes from Miss Hildago Hildreth with Deephaven Capital.

Ma'am, you may ask your question.

Yes, I have several.

The pro forma items, could you tell us what line item on the income statement those are in?

Certainly.

Which items are you interested in?

Well, like the Beech return costs, the merger costs, the executive compensation.

It would all be in operating expenses.

Right, but there are many different operating expenses.

It's almost primarily in G&A.

Let me just, and you also have an impairment line.

Right.

The investment income is below the line.

Right.

So the reversal of certain charges of CC Air would be an impairment.

The Beech 1900 would be impairment.

Merger-related expenses is in G&A, and the executive comp is in G&A.

Let's see.

How much debt did you have at the end of the quarter?

It was approximately $605 million.

And does that now include $145 million that was put on the balance sheet with the accounting change?

The $145 million that was on the balance sheet at the end of the prior period was ultimately refinanced, so what's on the balance sheet for interim financing is approximately $25 million plus the $200 million in convertibles and about $280 million for the structured debt transactions that we did during the quarter.

Plus the aforementioned Beech 1900 debt of about $95 million.

And the 95 you said is on there, too.

And then so the year-end debt that's in the 10-K that we find.

Is that, we just add 145 on there for that interim financing?

Well --.

Does that include the Beech?

For September.

September year-end.

No, I'm sorry, December year-end.

What?

Yeah, but our fiscal year-end, you'd increase it by 242.

Our December year-end calendar year-end, which is our first quarter, you would increase it only by 145.

Okay.

And do both those numbers now include the 95?

Yes.

The total will include the 95.

So if you take what's on the balance sheet currently filed, and add 242 in September, and add 145 to the December number, you'll come up with the restated numbers.

Okay.

There's that $1.3 million subsidiary that you received.

What line item in the income statement does that appear in?

It's, that is a new essential air service subsidy that we received.

All of our essential air service revenue is put into --

It's put into a line called Freight and Other.

It's put into a line called Fright and Other as part of our revenue, and the total for the quarter was approximately $4.5 million total.

And that's all related to our 1900 flying that we do into these rural communities that are subject to essential air service.

The $1.3 million is an annual number.

Correct.

But you said the 4.5 is the first quarter?

Did I misunderstand?

Was the quarter amount.

Right.

The 1.3 is just a new award that we had received that's an annual award for a new market.

Okay.

And then for the accounting change, what is the changed lease amount?

Do you guys have that yet?

The lease, you know those of us who look at fixed charges, not just interest expense.

Well, --

Are you going to have that?

Leased expense versus interest, all we're doing is take one number and shifting it from lease to interest.

So it's exactly the same.

Exactly the same.

And then how much are you going to print like a revised operating lease schedule that would be in the footnote somewhere when you do your new financials?

Yes.

Okay.

And then are you guys giving guidance for the next quarter?

No.

I think the comment that I had made earlier was that we were comfortable with First Call estimates, and the company tries to take into consideration all of the variables, but, you know, we do the best we can and clearly there are some out there that are outside of our control but given the current environment we feel comfortable where we have been.

You know Mesa, I believe, now, I'm not sure what's the operating profit that we've had?

For which?

The stream.

[inaudible] 99 all but one quarter.

Since 1999 since we joined the company we've had operating profits in every quarter with the exception of September 11th.

Understood.

Thank you.

Your next question comes from Mr. David Hume with Advent.

Sir, you may ask your question.

Can you tell me what operating cash flow for the quarter was, please?

Bear with me a sec.

Sure, just bear with us for one second.

And also where the lease payments are recorded in the income statement.

Is it aircraft and traffic servicing, is it that line item?

It's in flight operations.

What was it for the quarter?

Total capital was $77 million but you deduct out the convertible, so it's minus 30 with heavy lease payments in this quarter.

So you want to just -- We had total cash flow for the quarter was positive $77 million but that included raising $100 million in the convertible note market so on an operating basis we're down about $23 million but this quarter is traditionally our heaviest quarter for lease payments.

The lease payments are not monthly but semi-annual on most of the leases, are semi-annual so the lease payments this quarter were pretty heavy.

It's a big quarter for us.

Right.

Okay.

And can you just clarify what you said about, you know, if things go wrong at US Airways you're going alone comments, does that mean a sort of Independence Air operation?

No, no.

Let me explain.

Independence Air, the concept was to take the wrong aircraft and compete with your partner.

Our concept is to take the right aircraft and aircraft that we have available to us some of which might be aircraft that we might use in those operations anyway to support and fill a void that would be created.

We haven't determined how we would do it, in what structure we would do it, whether we would do it with another airline partner or potentially a financial partner.

So there's a lot of questions here, but I think that there's a big difference in that we are doing this solely as a defensive measure, not because we have this strong desire to operate larger aircraft and, quote, "be independent".

We have talked to our existing partners, we've talked to other major carriers, we've talked to financial partners and we've looked, you know, within the company itself as to what the best structure might be going forward.

We do believe that with our cost structure, and what we could achieve operating costs on narrow body aircraft that would be significantly below the lowest cost operators today.

And when I say significantly I'm talking in the range of, you know, we believe between 15 and 20% lower than any other carrier.

Right.

Okay.

And could you also just clarify for me, with United Airlines when they exit from bankruptcy the current arrangements that you have in terms of contractual flying those won't be amended?

There was a comment in your press release saying you were hoping to work with these carriers which could be interpreted as saying that your contracts are negotiable to lower them.

They're post-petition and so they are not amendable in the current bankruptcy.

Okay.

And, of course, US Airways is the same at the moment as long as they don't go back into bankruptcy.

That's absolutely correct.

And you know if they went back into bankruptcy everything is fair game.

I would say we've had to deal with this issue before and our contracts were not modified in any significant way, certainly in terms of our return, our returns.

Also, you know, the fact is, is that we bring a lot more revenue to them than we take, because so many of our passengers connect, and, you know, without, you know, nothing is certain, but, you know, in the airline business there's a commentary that the fuelers always get paid, because without the fuel you can't fly your aircraft.

After the fuelers, I think we're the next party to get paid because we do bring in so much additional revenue that without that through-put revenue the system would be significantly impacted.

Okay.

Just finally, in terms of the competitive position against, I'm not exactly familiar with the competitive landscape of people like yourselves in terms of how you get expanded business from these big airlines.

Can you just talk a little bit about if it's become more competitive and who your main competitors are?

Sure.

You know, over the last 12 months Mesa has, you know, received additional aircraft orders from both US Air, United, and America West.

And we, in fact, regained United's confidence.

The business is basically determined around, you know, two specific points.

One is obviously your operating performance, which clearly they want to have good operators.

And, you know, probably more importantly is price.

We believe we're the lowest cost operator of regional jet equipment in the world and I think that is reflected in why when a lot of carriers are stagnant or not growing at all, or some of our partners have not even acquired regional jets for some of their own affiliates that we can offer them prices that are very attractive.

That's not to say, though, it's not competitive.

It is very competitive.

There are other independent carriers out there that do an excellent job and have low costs.

We compete with carriers like TransStates and Chautauqua all the time for new business and they are both excellent carriers.

The fact is, is that we feel that we do have some advantages not the least of which is that we have a lot of flexibility in regards to aircraft.

We operate both aircraft types, we operate the whole range of CRJs.

We're the only operator in the world to do so.

And that this gives us some advantages moving forward.

We also have the ability to finance aircraft which is something not a lot of the smaller carriers have the ability to do.

So it is competitive, and oftentimes the decisions are not made on, you know, on either of those two but there's a question of balance and the major carriers clearly would like to have a balance and be able to have a number of carriers support them just to avoid any potential interruption of service by one carrier.

We have been able to achieve a singular relationship with America West.

They had done business with other carriers in the past, they've chosen now to work with us exclusively, that's been their choice, certainly we're delighted with that decision but it is competitive environment out there.

Okay.

And I'm sorry to -- one final question.

United replacing Atlantic Coast Airlines.

Are you in the running for that, or have they awarded to someone else or is it still not decided?

Well, they ordered aircraft from us, you know, about a year ago, with the idea that a bunch of those aircraft potentially would go to Dulles, and, in fact, that's what appears is beginning to happen.

They also awarded additional business to all of their existing partners and they also hired Chautauqua and ordered some aircraft from them.

So it would probably be a combination of ourselves, Sky West, Air Midwest, excuse me, Air Wisconsin, and Chautauqua that would serve to replace ACA.

We have ordered from United now 45 firm aircraft.

40.

Forty firm aircraft, excuse me, and I think that was a healthy bit at the apple for us in terms of a starting point.

Thanks very much for answering all my questions.

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

One moment, please.

At this time, sir, there are no further questions.

Okay.

Thank you very much.

Well, everyone, I appreciate the difficulty that some of these numbers may have presented initially, and hope that our comments will serve to clear up any questions you may have had.

I know that these restatements are difficult.

I appreciate some of these extraordinary items also may have presented some concerns to people.

I hope we addressed those.

Mike and I, we're anxious to stay and we're pleased that we're able to put together new contracts.

We feel like we're move forward in continued restructured of the 1900s taking a big step with the parking of these seven aircraft and we think that our regional jet expansion, I honestly don't think could have gone any better.

And again, I'd like to thank all of our operational people across not just the training departments but also all of our folks out on the line, our mechanics, our station people, have done just a wonderful job expanding where in one month we've added as many as nine aircraft and I think that we can look forward to additional opportunities moving forward and the same time, we are cognizant of the difficulties the industry is facing and we believe taking a, you know, not unreasonable steps to protect our position moving forward if necessary.

As always, if you have any additional questions, comments or concerns, please feel free to call myself, Peter Murnane or Rob Stone.

And we'll be around most of today and certainly next week to answer any questions that you may have.

Thank you very much.