Mesa Air Group Inc (MESA) 2004 Q3 法說會逐字稿

--third quarter earnings conference call.

Everyone will be on a listen-only until the question-and-answer session of our conference call.

This call will be recorded.

I'd like to now turn the call over to Mr. Jonathan Ornstein.

You may begin, sir.

Thank you very much and thank you, all, for joining us this morning.

Let me start with our brief forward-looking statements.

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

Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will 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, actual results may vary materially from those anticipated, estimated, projected or expected.

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

I'd like to thank all of the trial lawyers for that.

So let's move forward and start off with our overview of our earnings.

The company reporting on a pro forma basis net income of $10.8m or approximately 28 cents per share, fully diluted.

Pro forma net income excluded impairment costs of $600,000 for the last two of the seven Beech 1900s that were part of the early lease termination disclosed last quarter and tax effects of half a million relating to the second quarter one-time compensation payments.

This compares to pro forma earnings of $7.8m on revenues of $154m or 24 cents per share for the comparable period of fiscal 2003.

Year-to-date earnings, including restated amounts for the first quarter of fiscal 2004, were $15.6m on revenues of $636m or 43 cents per share.

During the first nine months of fiscal 2003 the company reported net income of $15.5m or 49 cents per share.

Pro forma year-to-date net income for fiscal 2004 was $27.7m or 71 cents per share.

Pro forma net income excludes the costs to terminate the leases of the seven Beech 1900s of $7.3m, one-time compensation payments of $3.4m and reduced tax effects-- related tax effects, excuse me, net merger costs of $2.2m and investment income of $700,000.

This compares to pro forma earnings of $10.8m on revenues of $424m or 34 cents per share for the comparable period of fiscal 2003.

OK, just to give you a brief overview of the fleet and our forecast, we continue to see rapid expansion in our regional jet fleet related to the expansion of our business model, based on revenue guarantee code-share relationships.

As a result, we've added 11 aircraft to its fleet, including the deliveries of six CRJ 900s, two CRJ 200s and three Dash 8s.

Those aircraft went to USAir, excuse me, United Express and America West Express.

Our total fleet count at the end of the third quarter was 175 aircraft.

We have 87 50-seat, 15 70-seat, 22 86-seat RJs, 16 Dash 8s and 33 Beech 1900s.

With the exception of the 35 1900s, of which 15 are dedicated to essential air service subsidized markets, all of the remaining 140 aircraft are operated under revenue-guarantee contracts.

Fifty-six are with USAir, 46 with America West and 38 with United.

Since the end of the quarter we have taken one 50-seat RJ and one 86-seat RJ and plan to take deliver of another 86-seat RJ this Friday.

During the fourth quarter we expect to add seven aircraft to the fleet, including five 50-seat RJs, two of which will go United, three to USAir and two 86 RJs for America West.

As mentioned during our second quarter conference call, we continue to make progress in financing our regional jets and start to see some renewed interest in leveraged lease financing.

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

We expect to add one CRJ 900 in the first quarter of 2005, fiscal 2005, and increasing to approximately two per month through mid-year in fulfillment of our remaining committed CRJ 900 obligations for America West.

America West also has an option for 12 additional CRJ 900s which if they choose to exercise would begin delivering in late calendar 2005 and early 2006 and we are talking to them about that.

As we've mentioned during the last two quarters, we've added a total of about 20 regional jets and four Dash 8s, basically one aircraft per week.

I'm not sure if it's a record, but it's close to one.

Despite the additional requirement of putting so many aircraft into our certificate, Mesa's operational performance ran at 98.4% controllable completion rate, slightly below our internal target of 98.5%, but we are nonetheless pleased result-- of these results, given what has been tremendous growth.

That being said, we've taken steps to continue to improve our performance and expect our operational performance to handily beat our internal targets in the not-too-distant future.

We've also been in close contact with our airline partners to see what things they can do to help us in terms of improving scheduling, giving us a little more flexibility on overnight maintenance and some significant improvements in some of our airport operations at our hubs.

In terms of headcount, one of the reasons we've been successful in adding aircraft has been our ability to train the necessary pilots.

During the quarter we had 266 pilots complete training.

This is a record for us.

There were an additional 183 additional pilots in various stages of training.

Obviously, given the reduction in aircraft deliveries over the 6 to 12 months, this should afford Mesa the opportunity to reduce some of our training costs.

We think that this will impact our CASM quite nicely in terms of its reduction on a steady-state basis.

Going forward, we expect the level of training costs to decline by approximately $1m on a quarterly basis from current levels.

Again, I cannot emphasize the value of the provision in our new pilot contract giving the company the ability to control the expenses incurred training our pilots, especially in a growth stage.

Our analysis shows that on an annualized basis the company has saved somewhere in the neighborhood of $7m in training expenses that we would otherwise had to have incurred under so-called normal contracts.

Given that there is a defined path for flight crew promotions, the requirement to consistently bump and roll flight crew members has been cut down significantly and we're able to move our pilots up more rapidly as we take deliveries faster than we otherwise would have.

Given all the growth and operating challenges, I'd certainly like to thank all of our employees and our employee leadership group for their continued efforts.

Our ability to add 20 aircraft between January and April is a testament to the hard work and professionalism of our folks.

We're confident we can continue to execute on these plans and while certainly we have our challenges ahead, I think we all feel very strongly that we've got the right people in the right place and we are going to be able to make it happen.

Other financial items of interest from the standpoint of our financial results for the third quarter, while I've given you a high-level overview, there are several items we'd like to highlight.

First, I'd like to point out with the exception of the last remnants of terminating the leases of our seven leased 1900s, there were no unusual items impacting our earnings.

Second, I'd like to point out our improved unit costs.

Even with fuel at current levels, our cost per ASM declined 5.1% for the quarter and 8.6% for the nine months.

As I mentioned earlier, with the projected reduction in future training expenses, we'd expect further improvement in our unit costs.

As a result, our operating margin improved from 9% to 10% for the third quarter.

Another reason for our improved operating margin was a significant improvement in our 1900 operations.

While our 1900s still operate at a loss, we made significant strides in minimizing these losses on an operating basis have decreased versus the prior year.

Year-over-year 1900 unit revenue increased 14.5% on a 16% decline in capacity and unit costs, taking out of the effect of increased fuel and training cost due to our regional jet growth, declined marginally.

On a steady-state basis, our 1900 operations lost less than $1m this quarter.

Approximately the same last year, which in an environment of higher fuel prices and the transition of some of our out-sourced maintenance work to in-house, was particularly satisfying.

Going forward, we continue to explore alternatives for our 1900 operation, up to and including the sale of the entire operation.

We've gotten out of a number of unprofitable markets which, combined with the return of the seven leased 1900s which were most expensive aircraft, we think that we will see continued improvement in the operating results.

For the fourth quarter we project an approximately $1m improvement over last year's results.

We continue to make progress in winning additional essential air service.

Subsequent to the third quarter, our Air Midwest subsidiary has been selected by the DOT to provide essential air service to Lancaster, Pennsylvania, Brookings and Huron, South Dakota, and Pueblo, Colorado.

Fulfilling these contracts will result in Air Midwest gaining an annual subsidy rate of approximately $4.2m, which I think, combined with our other business with essential air service, is approximately $20m.

That's up from about $6m just a few short years when we mentioned and discussed the fact that we were going to be more aggressive in pursuing essential air service business.

While we're on the subject of the 1900s, let me take a moment just to explain the impairment charge that we noted in our press release.

During our second quarter conference call we announced that we were taking a charge on the return of seven leased 1900s.

Unfortunately, given the new FASB rules, you're only able to reserve against costs that are known and committed.

The disposal of the last two 1900s weren't fully committed to until the end of the second quarter and, therefore, the reason for the additional $600,000 of expense.

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

Based on what we have on contract currently, we are projecting ASMs of approximately 6.8 billion.

For 2005 we project an increase to 9.5 billion.

In terms of our forecast, based on what we know today, we are comfortable with the current FirstCall range for the year.

There are a lot of things, however, that can impact that, including the delivery schedule for aircraft, the timing of maintenance and training events and, clearly, you know, I was remiss not to point out that the conditions of our partners and what happens there, which, of course, is the subject that is much discussed throughout the industry, could impact us significantly.

But I think overall we feel pretty good moving forward.

The numbers came in as we had hoped and expected and we think we can continue to do that, going forward.

Also, just a couple other items of interest.

In June the company finally -- and I know we've been talking about this for a while -- finalized our agreement with LogisTechs, an affiliate of GE Capital, for the sale, management and repair of CRJ 200 spare parts, rotable spare parts.

Under the agreement, LogisTechs will purchase approximately $25m in existing and future spare parts inventory to support our 200 fleet.

The company also has agreement with LogisTechs to negotiate similar agreements for up to $43m of spare parts on Mesa's current and to-be-delivered fleet of Bombardier 700/900s, as well as Embraer 145 aircraft.

I think that this is going to be a real ground-breaking transaction.

We think it's going to add a fairly significant amount of cash to our balance sheet.

I think by the end of the year-- Peter, what we are looking at?

Two hundred seventy-five.

No, but I'm saying the cash from the LogisTechs.

Oh, well, you'd be at about $60m.

We expect to have that done by the end of the year or end of next year?

End of next year-- mid next year.

Mid next year.

So I think that, you know, from that standpoint we feel good going forward in our cash position.

As some of you are aware, we raised a little bit of cash this year.

We expect the year end to be approximately--

Two hundred seventy--

Two hundred seventy, $275m in cash, and again, we feel that we are well prepared to weather this current storm and certainly are doing everything we can to plan for our future.

There have been a lot of rumors floating around concerning Mesa's potential operation of narrow bodies.

I can tell that at this point in time we have shelved those plans.

There is a fair amount of risk associated with operating these aircraft in the startup.

We also had had some preliminary discussions with some of our employee groups.

We did not feel at this time it was worth pursuing.

As a result, at this point, again, and it's certainly subject to change, but at this point we are really focusing on the continued expansion and potential opportunities that might exist with new partners on our CRJ and ERJ flying.

We continue to develop contingency plans, looking forward, based on whatever outcome may occur at our partners.

As you know, America West is doing much better.

United is still working it's way through bankruptcy.

USAir's situation, while it was nice to see them report a profit, I think clearly they have a way to go.

We are cognizant of the risks involved in this business and are doing everything we can to mitigate those risks going forward.

I think at this point, you know, our view of the industry is that, you know, when you look at fuel prices -- now I think we're up to $43 a barrel today -- clearly that, the impact of low-cost carriers on the legacy carriers, the continuing impact of 9/11 in terms of traffic and softness of the business travel, there is no doubt that things are tough and I think it's being reflected in the stock prices of all these carriers.

I do feel that Mesa has been particularly hard hit as a result of some of our relationships.

I do feel, though, that under scenario we feel that the company will do well and that a longer-term view is one that, at least we feel, is required and I think we continue to be confident that Mesa's future is bright.

With that, I'd like to just ask if there's any questions.

I'd be happy to answer them as best possible.

Yes, thank you.

At this time we will go the question-and-answer session.

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

You will be prompted to record your name.

To withdraw your question, press star-two.

And our first question is coming from Ray Neidl.

Please state your company, sir.

Hi.

It's Blaylock Partners.

Hi, Ray, how are you?

Good.

Hey, every time I see Peter I ask this question and I guess it's appropriate to ask it again in light of USAir's analyst conference call held yesterday.

I had talked to them, asked them the question and I said, ``Are you going to go back to your regional partners for further concessions, being that you have to look over the whole system and get costs down drastically or face bankruptcy again?'' And the answer was, ``We're going to be looking at everything.''

And I guess the question is, has USAir approached you yet about lowering your margins or is that a concern on your part?

I know before Peter said we're already the low-cost guy, but is that a further threat going down the road?

Well, I mean-- that's a good question, Ray.

I mean, no, they haven't approached us at all.

In fact, you know, the only discussions we've had has been, you know, on how to potentially expand our relationship.

You know, I imagine if they go into bankruptcy they will do everything they can, as they said, to lower their costs.

I think, you know, my point would be, as soon as you get all your other costs at anywhere within range of market, I'd be happy to talk to you.

Our costs are the lowest in the industry.

Our margins are certainly well within what a company would expect to earn a return on, given the amount of risk we're taking.

And, you know, given the fact that they have other costs that, you know, frankly are probably, you know, 100% above market, I would think that they have better places to look for costs rather than trying to squeeze a few pennies out of our margin.

You know, a couple percent, 3%, you know, you're talking about a few million dollars.

You know, I don't see it as a big risk.

I think the other point is, and I'll be-- you know, state it clearly.

I mean, we just say no and, you know, then what happens.

I mean, we're generating probably, at Mesa, somewhere in the neighborhood of, if I just had to guess, $500m or $600m of revenue.

I don't think that-- it's like, sort of, you know, we're the-- almost like the fuelers.

There's a few people in this business you really have to pay and I think we're one of them.

OK.

And, Jonathan, I think you said during your presentation you've given up on the idea of buying USAir assets, which I think they said yesterday are not for sale and you'd given up the idea of maybe going into the wide bodies because of employee objections or something along those lines?

Well, I wouldn't say employee objections.

There was definitely objections by representatives of our employees.

I would suggest that if it was a vote of our employees, I think the response would be fairly overwhelming in favor of doing something.

The fact is, is that at this point there's just a lot of risk involved.

I think that we would rather take a wait-and-see approach.

Whether or not USAir at some point down the road decides to sell assets, I think there's plenty of time.

You know, conventional wisdom, of course, is running against USAir and I'm generally one that does not follow the conventional wisdom.

And I am, becoming more hopeful.

I think that their management team there is facing their problems head on.

Mr. Lakefield has been, I think, remarkably candid and direct with the employees and I think they know what to do and ultimately will make a rational decision.

Unfortunately, it oftentimes takes a fair amount of time to get there, which they don't have, but hopefully they'll be able to move quickly.

So our view is, you know, our view is, there will be opportunities.

Right now we feel that there are still some very significant opportunities on the regional jet side and that is what we are currently pursuing.

OK.

And Atlantic Coast's Independence now has begun their transformation.

Mesa did have an interest in them at one time.

If they do stumble in this transformation, is there still interest on the part of Mesa?

I think it'll depend what the demand for regional jet aircraft.

I mean, at this point I think that, you know, Independence-- we are-- we currently signed a standstill that runs through 'til March with them which, frankly, would probably be just about the right time to take another look at them and I think our view would be, depending upon what the demand for regional jet aircraft is, because that will, in fact, be what, in our mind, would have the value at Atlantic Coast.

Jonathan, as an industry veteran, do you think in the next year or so we're going to see major consolidation in this sector?

Are you talking about the regionals?

The regionals, yes.

You know, people have been calling for that for some time, but, you know, there's so many obstacles to overcome, just between fleet ties, labor agreements, partners.

You know, we all have now-- so many of the public companies have diverse partnerships, it makes it a little bit, you know, more difficult.

But I certainly could see it happening.

There are a couple of us out that are reasonably strong financially, that have the wherewithal and the desire to do it.

You know, I think, though, that most people, given the uncertainty at the partner level, are sort of taking a wait-and-see approach and either they're going to buy something in a fire sale or they're going to wait to see things improve.

OK, great.

Good.

Thanks a lot, Jonathan.

Sure.

Thank you.

Thank you.

And our next one is coming from Jamie Baker.

Please state your company.

Oh, hi.

It's J.P. Morgan.

Hi, Jonathan, how are you?

Hi, Jamie, great.

You answered my planned question regarding potential independent flying.

That must mean, you know, instead, that you see several years of unfettered regional jet opportunity and, you know, this certainly runs counter to what at least some of the manufacturers believe.

It certainly goes against what we see, but that's neither here nor there.

Are you specifically modeling for continued industry growth or should we be thinking that your strategy is one of planned share-shift, displacing current operators within current franchises on the basis of your costs?

I think, you know, we are just looking at-- You know, those are good points.

And, you know, Jamie, I have no opinion in terms of what's going to happen industry-wide.

I know that Mesa is now-- has a number of specific opportunities in front of us that if they come to fruition give us what I think is handsome growth for the next few years.

So to that extent, that's why we're pursuing those opportunities.

I also think that there is going to be some level of growth within our existing partnerships.

America West has expressed an interest on additional CRJ 900s.

United has told us we are, you know, in the queue as they further develop their plan.

And so I do believe that there will be opportunities within our existing partnerships.

But I also think that we may have some opportunities with new partners, as a result of our cost structure, that could be very attractive and provide us with, you know, another 18 months of what I think is a good growth plan.

I also think that, you know, if we can just consolidate what we've done right now, as you can see, going forward, and I'm not-- you know, we are trading at something in the neighborhood of 6 or 7 times earnings.

There's probably some fairly good potential here for some financial engineering, as well.

OK.

Well, that's helpful.

And just as a quick followup, the 9.5 billion ASMs for fiscal '05, that's significantly below what we were earlier thinking and I believe what you may have earlier guided to, though I could be mistaken on that.

Is this, in fact, a net reduction in your planned growth rate or had we just goofed by assuming something higher.

You goofed, Jamie.

OK.

Peter's shaking his head that this is not-- that it is consistent with what we've been saying.

I can tell you that we have not changed any plans, per se.

What did you have, Jamie?

Well, the 9.5 would imply a growth rate of about 28%-29%, year-on-year.

We were up something closer to 40%.

No.

We were-- what we had been guiding people at was mid-30s.

OK.

All right.

Fair enough.

I still think--

Still in the ballpark there.

I think maybe we-- you know, everybody wants to be a little conservative at this point in time and I think that's probably where we are.

Sure.

OK.

Thanks a lot, Jonathan, Peter, Rob [ph], everybody.

Thank you, sir.

And our next question is coming from Jim Parker.

Please state your company, sir.

It's Raymond James.

Good afternoon, guys.

Hi, Jim.

Jonathan, how much more investment do you have in the-- on the books on the 1900s?

I mean, how much more is there to write off?

Well, I guess it depends on if we were to write off all the aircraft.

I mean, every time we dispose of an aircraft, it costs us somewhere between $700,000 and $1m.

But at this point we've written off the leased aircraft.

We now operate the other 35.

As we mentioned, the last quarter was, you know, a much better quarter for us, in spite of the high fuel prices.

In the 1900 operation we do pay for fuel.

We just picked up this $4.2m of additional EAS business.

We are swapping out of some losing-- you know, some less-profitable, you know, in fact unprofitable markets.

So we actually are seeing things on the 1900s start to improve.

I also would point out that on that, you know, $1m, roughly, a little bit less than that loss, we book about $350,000 a month of corporate overhead.

There's a lot of training expense that runs through that because we're upgrading people into the jet.

And so if you looked at the 1900s on a sort of stand-alone basis, it actually is not a bad business.

And because of that, you know, especially when you add in the effects of this EAS business, we think that, you know, we are looking at other ways to potentially further reduce our 1900 exposure through the possible sale of some of those assets.

OK.

And then just regarding all of the new aircraft that you have coming on, what is your treatment for the maintenance honeymoon on these aircraft?

How do you account for the maintenance?

Is it flat over-- throughout the life of the contract or what can you tell us about that?

Peter?

It's flat throughout the life of the contract, Jim, but we typically try and enter into power-by-the-hour contracts so that we don't-- aren't affected as much by swings in maintenance costs.

So the amount that you're receiving from your major airline partners is a flat rate over the life of the contract?

Right.

OK.

Thanks.

Thank you.

And our next one is coming from Michael Linenberg.

Please state your company, sir.

Yeah, Merrill Lynch.

I guess just a couple.

Peter, you had mentioned something about $270m to $275m of cash at year end.

Is that fiscal year end or is that calendar year end?

Fiscal.

Right.

Just some questions on some of the line items.

I noticed that your G&A expense was up about 50% year-over-year.

What's driving that?

Well, on the-- from a year-- Are you looking at it from a year standpoint or a quarter standpoint?

From a year ago but for the quarter.

June quarter '04 versus June quarter '03.

That is-- first of all, we increased some reserves in terms of receivable reserves.

Our passenger liability insurance is in G&A.

That increased substantially due to the growth in the aircraft.

Health insurance went up, not only because of increased headcount, but, obviously, you know, health care costs have gone up.

A little bit of increased wages -- not as much as you'd think.

I would have thought it was all Sarbanes-Oxley, Peter.

That's the bulk of the remainder.

But just to give you an idea, quarter versus quarter, reserve, passenger liability and health insurance were $3m of the $4.9m increase.

So looking-- going forward a good run rate is sort of this $15m, $16m?

Obviously, as you grow, that's going to grow with your fleet?

Yes.

OK.

And just my last question, how much turbo-prop exposure do you have to Pittsburgh?

Only because, as you're well aware, they are scaling that back.

And of that, I think two or three are in the essential air service program.

Sorry, Jonathan, you cut out.

That's all right.

We have about eight aircraft in Pittsburgh now and I believe at least a couple of those aircraft, maybe three, are providing EAS service.

And are those-- is it likely that those planes, the remaining, you know, five or six shells will move into other markets as Pittsburgh scales back or are those markets you try to make on your own?

No, those markets actually do OK.

We actually just replaced, for example, a Dash 8, you know, in Hagerstown.

Which, you know, replaced with a 1900 is not bad, even with the reduced schedule.

OK.

Thank you very much.

Also, Mike, one of the things I'd point out on the increased health care costs.

Yeah?

Unlike most companies, Mesa has not increased its premiums to its employees for, I believe, we're not in our third year.

OK.

OK.

Very good, then.

Thank you.

Thank you, sir.

And our next question is coming from Robert Ashcroft.

Please state your company.

UBS.

Hi, you guys.

How much stock did you buy back over the last quarter?

Peter, do we--?

Robert, we can't-- We'll disclose that in our 10-Q filing.

But let's just-- Robert, I think it's a good question, but we have been buyers of the stock.

We have a buy back program and it has been active.

Thanks.

Thank you, sir.

Again, if anyone has any questions, please press star-one on your Touch-Tone phones.

And our next question is coming from Helene Becker [ph].

Thank you very much, operator.

Hi, Jonathan and Peter.

So, Jonathan, is Peter the acting CFO or are-- what are you doing about replacing Rob?

How is that going to work going forward?

Well, Peter has been CFO now since he joined the company, actually.

Oh, OK.

He was moved over to VP of Finance.

OK.

And his responsibilities are being picked up by Ed Wegel, who joined us as VP of Planning.

Right.

We also, probably, will hire someone else to help us on the aircraft acquisition side, which is what Rob was focusing on.

OK.

In terms of just searching out-- you know, he's been doing a good job finding used aircraft around the world for us because, believe it or not, even in this environment, you just cannot get regional jets.

There's just none on the market right now.

I mean, when I say, ``none,'' there may be four or five, but there's just no supply of regional jets.

OK.

And then my other question is on, you know, I think Ray might have asked the question before about, you know, mergers and consolidation among the legacy carriers and everything like that, but with the stock so depressed, maybe it makes some sense for you to take your company private or, barring that, is there any opportunity that you see out there with, you know, buying another regional airline?

Well, you know, that, you know, clearly prices have, you know, clearly prices have gotten very depressed.

I mean, I'm--

Very sad.

Right.

And it's depressed all of us, as well.

And I can tell you, the last time I felt this concerned was when the stock traded back to $4, you know, back a few years ago and then-- you know, and I was almost ready to throw the towel in and the stock traded at $16 within six months.

But, you know, the problem now is that with the stock price this low, as you know, we like to do things with equity.

You know, we're not going to give up stock in a transaction at $6.

OK.

So that sort of makes it a little bit tougher.

We do have a fair amount of cash and, you know, we would certainly look at opportunities where, you know, given the relative stock prices, you know, there might be something to do because there are other things.

And we're keeping a close eye on the market place right now.

But, again, unless it's a fire sale, I think most people are taking a wait-and-see just to see-- determine what happens with all the partners at this point.

OK.

Did you say what your cash was?

Yeah, I mean, we project the cash to be somewhere in the $270m to $275m by the end of the fiscal year.

Oh, OK.

We reported it at where this quarter?

Just under $220m.

Right.

OK.

All right.

I heard you say that.

I just didn't know what that number was attached to.

Thank you.

Sure.

Thank you.

And our next question is coming from Tony Cristello.

Please state your company.

Yeah, it's BB&T.

Hi, Jonathan.

Hi, Peter.

Hi.

I guess one question, with respect to the EAS pro rate, you said you narrowed the loss down to close to $1m.

Is that correct for the quarter?

It was actually a little bit below $1m.

OK.

Is this going to be the best quarter of the year or do we think that's going to be sort of a run rate going forward given the efficiencies and the new business you're going to start to see coming on?

I think this quarter will be a little bit better, but I think the next couple quarters-- you know, because we are-- we have revenue risk, will probably get a little bit softer.

But that being said, again, you know, I have to look further into-- this essential air service business just became available to us just a few weeks ago.

We need to rerun our projections based on where we think that'll be.

I know right now we are still projecting fairly significant losses, but, again, those numbers are subject to change, not only as a result of the essential air service, we are pulling out some unprofitable markets and, you know, again, the question of what price are you going to project fuel to be, because we are subject to swings in the fuel price.

We do not hedge on the 1900 operation.

OK.

And I guess one-- another question I have, if you look across-- I guess you talked about USAir coming back to you, potentially, your opinion on asking for concessions on cost side of things, but what about with United or America West?

Are they doing anything or approaching you about maybe trying to get some more efficiency or is the new deal that you're operating under with United causing you to have to operate a little differently than you had in the past?

Or are there any changes that you can comment on?

No, I think, you know, America West seems to be delighted with the operation of the 900 and I think there is not a carrier-- major carrier out there that if it did not have the ability-- that ability denied them as a result of restrictive scope clauses would be operating the 900.

It is a very flexible and efficient aircraft and, you know, we are hopeful that America West will choose to expand that operation and exercise those 12 aircraft.

United operationally has been challenging only because, you know, initially when we went into the agreement we were told we were going to be flying in LA and Denver and now we're flying in, you know, Dulles and Chicago with a little bit in Denver.

And we just had to move a lot of people.

We just opened up two new crew bases.

And what's happened, I think, just as a result of our relationship with the folks at United, which I think is very good, we have been sort of used throughout the system to sort of plug all the holes and so it's sort of spread our operation out where, in fact, we were flying and still flying, you know, a route where we started an airplane in San Francisco, it went to San Antonio and then on to Dulles -- we were doing a transcon, basically, in a regional jet -- and then on to Philadelphia.

That's a lot of territory for an aircraft to cover and it does strain your operation.

But in terms-- from a financial perspective, you know, I think United is very pleased.

America West, you know, is very happy with the operation of the CRJ 900.

As you know, we were able to accommodate them and move the 700s out of America West and over to United.

It was a win/win for both partners.

And, again, the big question mark just continues to be USAir, but I see a lot of things happening there, but one of the things I do not think is going to be a significant renegotiation of our agreement with them, in terms of lowering the costs because, like I said, our costs are, you know, the best in the business.

Our margins are not out of line, by any stretch.

In fact, they're significantly below some of the other carriers' margins and, you know, I think that they view the business that we bring to them as very valuable and would not want to jeopardize that.

There's one partner-- I mean, does United differ with respect to the utilization that you're seeing now than they did, you know, six or 12 months ago or America West?

And how does that utilization differ across your partners?

Well, the only thing we've seen is we have seen a fairly significant in utilization at America West as they've added some night flying into Las Vegas and the 900s having better unit costs, they've done more of that.

And so we're up from, call it 9-1/2 hours of utilization average, you know, a year ago.

We're close to 11 hours now on-- on the fleet at America West.

Which is good, because the more they fly, the more money we make.

And we're delighted that they have found the aircraft that flexible that they can put it into a low-yield market like Las Vegas and still find it to be attractive to them.

But as far as United goes, no.

The only difference is just that we're flying out of new hubs and, you know, we've had to move crew bases and maintenance, which has been operationally challenging.

But, you know, fortunately now it's pretty much behind us.

Great.

Thank you.

Sure.

Thank you and our final question is coming from Dan McKenzie.

Please state your company, sir.

Yeah, thanks, operator.

Smith Barney.

Jonathan, expanding on, you know, your last thoughts there, with respect to the capacity plans going forward of your major partners, you know, talking about the back half of this year and even 2005, what are you hearing from them?

Are you having conversations along the lines that they're looking to develop new markets?

Are you having conversations along the lines that, you know, they're looking to replace mainline flying with RJ flying?

Or, you know, or both or neither?

I'm wondering if you can just elaborate a little bit further?

Sure.

Well, you know, it obviously varies by partner, but let me just say, for example, at America West/United all they tell us is we have a demand for aircraft.

We do not discuss markets and, frankly, I don't even know.

You know, just because of the way our business model operates, we, as management, don't get involved in, you know, even a discussion of that.

So I don't know if United intends to replace mainline flying or if they intend to just expand their operation.

I know they just added, you know, a huge number of flights to Dulles.

I don't know what the scope and what the depth is in terms of their plans and where they're going to put aircraft.

America West clearly has used the 900 to open up some new markets.

We're doing some flying out of Los Angeles, international flying down to Mexico and to Canada, which I understand is working quite well for America West.

They view it as a profitable business for them.

You know, they will also, I'm sure, continue to build their hub here in Phoenix.

USAir has told me that they feel that on the-- still on the RJ side that they're capacity constrained, you know, and I think we're taking a position with them, which is, we have commitments to you.

We're going to live up to our commitments in terms of aircraft and, you know, beyond that, we'll sort of see how things go and determine to what degree we can continue to expand our operations based on the company's financial performance.

OK.

Thanks very much.

Thank you, sir.

We've had a few more come in.

Our next one is coming from David Hulme.

Please state your company, sir.

Advent Capital.

My question is, I jumped on the call slightly late, so you may have already said this, but I'm wondering what operating cash flow was for the quarter?

Also capital expenditure?

OK.

Peter will take that.

Hold on one second.

From a cash flow standpoint we had for the quarter -- and I'll define this as EBITDAR, earnings before interest, tax, depreciation, amortization and rental expense -- just under $75m.

Our capital expenditures for the quarter were approximately $22m.

And can you also tell me what you ended-- what debt you ended the quarter with?

I'm sorry, what?

Debt.

What was the debt?

What was the total debt at the end of the quarter?

Sorry.

Total debt we had $200m in short-term debt and remember about $180m of that is interim financing for aircraft.

And then approximately $550m of long-term debt.

Again, almost all of that long-term debt is associated--

Secured debt with the aircraft.

Right.

And where do you think you'll end up the calendar year at in terms of those numbers?

The calendar year, I would expect the short-term-- the-- call it the $200m in short-term debt to go away as we refinance the interim aircraft.

And then it will depend on what type of financing we do on these deliveries, whether it's a pure lease or whether we mortgage finance the aircraft.

We actually have found some fairly attractive structures on the mortgage finance side which we have pursued on the last 10 or 11 aircraft and we would continue to pursue those because we find them to be, in fact, possibly more attractive from a, you know, just a purely economic standpoint, not taking into account what it makes the balance sheet look like, but in terms of an economic standpoint, the mortgage financing has become very attractive.

Right.

And just one last question on who you finance your aircraft.

Do you 100% financing or do you have to put a certain amount of equity actually into each aircraft?

If it's a lease, a leveraged lease transaction which is the bulk of our aircraft, it is basically 100%.

If we do the debt financing, which we, like I said, have found fairly attractive as a result of how we're able to structure-- it's a fairly complex structure that we've utilized, but one that, again, we find attractive, then we do put down some amount of cash.

I think-- we put down 10%?

Less than 10%.

Less than 10% cash.

OK.

Thank you very much.

Sure.

Thank you, sir.

And our final question is coming from Michael Linenberg.

Your line is open, sir.

Yeah.

You guys, just one quick accounting.

The-- I think I know where you took the one-timer related to the Beech 1900, but the other one-timer in the corner, the one-time compensation and related tax effect, where-- which line item was that in?

That, Michael, is just the tax effect of the fact that for this year our effective tax rate is 41% as opposed to a standard 38.3%.

OK.

It's in the income tax line.

Perfect.

Thank you.

Thank you, sir.

I show no further questions at this time.

I'd like to turn it back over to you.

OK.

Thank you very much.

And, again, thank you, everybody, for joining us.

You know, we think it's been a banner year for the company.

The growth has been outstanding.

Our operational performance has kept up with the growth.

Our numbers have been terrific.

We've gone out and raised some additional capital to, you know, weather any storm and potentially take advantage of some opportunities.

We understand people's concern and clearly, as I stated before, we certainly have our challenges ahead of us, but I will say that I think that maybe some of that concerns are somewhat overdone at this point.

We feel that under any circumstances we can work our way through any issues.

And, again, you know, we think that the company continues to perform well and we are working very hard and will do whatever we can to see to it that our shareholders are, you know, rewarded for their patience and their support.

So, again, we'd like to thank everyone.

If you have any other additional questions, please feel free to contact myself or Peter via phone or e-mail and we'll always be happy to answer your questions.

Thanks again and have a great week.

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