Mesa Air Group Inc (MESA) 2005 Q2 法說會逐字稿

Good afternoon and welcome to the Mesa Air Group second quarter 2005 earnings conference call. [Operator Instructions] Today's conference is being recorded.

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

I would now like to introduce Mr. Jonathan Ornstein, Chairman and CEO of Mesa Air Group.

Sir, you may begin.

Thank you very much.

Appreciate everyone taking time out of their busy day for our conference call.

First I need to read you the following statement - this conference call will contain various forward-looking statements that are based on management beliefs as well as assumptions made by information currently available to management.

Although the Company believes the expectations reflected in such forward-looking statements are reasonable, they 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 statements prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected.

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

In addition, I ask that any re-recording of this presentation be made only with express permission of Mesa Airlines.

Thank you again very much.

We're pleased to announce, I believe what is our 14th consecutive quarter of profitability on a pro forma basis.

Our net income for the quarter of 13.4 million on a pro forma basis or $0.28 per share was achieved on revenues of 268 -- 263.8 million of revenue.

The pro forma net income excluded $600 thousand settlement of a claim with a vendor and a net investment loss of 1.6 million.

This compares to pro forma earnings of 9.6 million or revenues of 209 million or $0.22 per share for the comparable period of fiscal 2004.

For the quarter our reported net income was 10.8 million or $0.26 per share on a fully diluted basis.

Net income was 1.8 million or $0.05 per share for the same period fiscal 2004.

Last year's second quarter included, among other extraordinary items, 6.7 million in return costs for 7 of our Beech 1900s.

The primary items of significance affecting the the second quarter of 2005 - we had total operating revenues for the second quarter increase 54.2 million or 25.8% primarily the result of a 24.6% increase in available seat miles.

The increase in ASMs reflects the addition of 48 regional Jet aircraft that were placed into service since March 31, 2004.

Total operating expenses [inaudible] for the second quarter excluding fuel charges, which were primarily reimburseable by the Company's major partners, of 65.2 million or $0.033 cents per ASM -- or is that 3.3 cents?

That's 3.3 cents.

3.3 cents per ASM, excuse me.

Decreased approximately 7.5% to 8.6 cents from 9.3 cents for the same quarter in 2004.

Again, primarily a result of cost reduction and issues implemented by the Company, the addition of 22 regional Jets and increase in average stage length.

During the second quarter we added three 86 seat RJs for America West Flying and an additional 3 RJs in April during the balance of 2005 we will be adding 6 more 86 RJs to our fleet.

Right now we have 92 50-seat RJs.

That's 18 at America West, 15 at United, 59 at USAir; 15 70-seat RJs, those are all at United. 29 86-seat RJs, those are all at America West; 16 Dash 8s, 6 at America West, 10 at United.

And then we have 26 1900s that are operating primarily in essential air service markets. 10 are independent, 16 are under the USAir brand.

The 26 1900 represents the net effect of aircraft that were subleased to Gulfstream Airlines and Big Sky that we had previously announced.

This is down from 35 aircraft that we flew at the beginning of fiscal 2005.

As I mentioned in our first quarter conference call we continue to make progress in financing our regional jets and started to see renewed interest in leverage leases.

During the remainder of fiscal 2005 the Company is contractually committed to delivering to America Midwest 9 86-seat regional jets, three of which already been delivered, with interim financing committed for 3 of the 6 remaining CRJ-900.

Delivery financing now in place for all scheduled through the end of June.

The Company is currently in negotiations to lock in delivery financing in all remaining committed aircraft and is evaluating proposals together which would finance the balance of our order position.

Again, this will fulfill our remaining committed CRJ-900 obligations for America West.

America West also has an option for 12 additional CRJ-900s if they choose to exercise, which would begin delivery in early 2006.

From an operational standpoint, we are running the best operation we have in our history.

For the quarter ending March 31 we ran a 99.2% controllable completion rate.

While we are satisfied with our quarter -- this performance, we continue to strive, obviously, for operational excellence and providing our partners with both on time and reliable products.

I would like to thank our employees in the field as well as the folks here in Phoenix who make this all happen.

I can tell you that you would not see these kinds of numbers without the complete support from our people and again, I want to thank them and it makes us very happy to be able to provide this level of service, not only to our customers, but as well as to our passengers.

Air Midwest as you know continues to be something of a thorn in our side, it continued to lose money this quarter, every time we seem to think we're ahead of the game, something else comes up.

Now, of course, its the fuel prices where we do not have the protection from our partners.

Let me just read this -- the Company has entered into agreements to lease a total of 15 1900 of aircraft to Gulfstream International and Big Sky.

These actions are in furtherance of the Company's vigorous pursuit of reducing unprofitable 19-seat flying.

It does not have government subsidies through the EAS program.

Per our latest fleet plan we will be down to 21 1900s by February '06.

We are currently operating 26 and will deliver 5 remaining 1900s between now and February 2006.

As of June 2005 Air Midwest will only be flying 18 lines of revenue service.

Just to put that in perspective, that's down from 122 when we first arrived here in April of 1998.

While air Midwest continues to be unprofitable, generating a net loss of 2 million in the second quarter we believe the consolidation will positively impact Air Midwest's profitability and improve our ability to provide the best service to the remainder of our turboprop network.

We continue to expect Air Midwest to be able to break even once these consolidations or efforts are complete, and of course that will be dependent on the price of fuel.

For the balance of 2005 Mesa projects ASMs of of 4.7 billion.

This number is down slightly from previous guidance due to some delivery delays and includes only the 9 incremental CRJ-900 aircraft we are obligated delivery to America West.

ASMs for 2005 is a function of the final delivery schedules for our ordered aircraft and the marketing schedules our partners require us to fly.

Should delivery dates of the aircraft slip or city pairs change versus 8, ASMs may be impacted.

Based on what we know today, and of course that changes on a daily basis, we remain comfortable with the current first call earning range of $1.10 to $1. 19 as well as the quarterly estimates comprising these earnings.

However, our earnings could be impacted by numerous items, not the least of which is delivery schedule, our partners marketing schedule, timing of maintenance, training events and other industry changes.

Company announced today that it increased the share of its -- the size of its repurchase authorization by 1 million shares.

Company has bought back approximately 7.7 million shares of common under previously approved repurchase plans.

Currently 684,335 shares remain outstanding under the previous announced plan and are in addition to the 1 million shares authorized.

As I mentioned in our press release, it is our belief that our stock does not reflect the underlying long-term value of the Company and we continue to monitor our stock price and purchase shares when market conditions create what we believe to be a buying opportunity.

Since the end of the quarter, we have purchased just over 1.125 million shares at a average price of 6.29.

Okay.

I am certain there are a lot of questions regarding items in the news.

Certainly the proposed merger of America West and USAir and with that I would be happy to answer any questions they have and turn this over into a question and answer period.

Like to thank you all again for taking the time out of your day and I look forward to answering any questions you may have.

Thank you, sir.

At this time we would like to begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Mike Linenberg from Merrill Lynch.

Sir, you may ask your question.

Good afternoon.

Just a couple Jonathan.

This is a bigger picture one.

You do a lot of business with U.S. Airways.

You do a lot of business with America West.

The news is out there about the potential merger.

I mean what opportunities do you see from your prospective; and then just the to throw it out into the mix U.S.

Airways is one of the few carriers that does allow 90 seat RJs or 97 seat in the case of Embraer, but 90-seat CRJ-900s --you with your large CRJ-900 fleet seems like it would be a perfect fit for a combined entity.

If you could just elaborate on that.

Sure.

As you can imagine we're talk to go a lot of people at this point, and we continue to review the situation at America West and USAir which I think anyone would admit is a very difficult situation far all parties.

I don't think anyone expected fuel price would be hung up here at $54 a barrel, and I think that clearly something has to happen.

We have all said for awhile something has to give.

We are continuing to look at opportunities with them and do believe that the 900s are particularly well suited.

We had hoped to put additional 900s into America West and USAir.

There are some scope restrictions which will will unfortunately again artificially restrict the demand levels for the aircraft.

Something we have been opposed to and frankly have expressed our concerns to America West at the time and to USAir, but, you know, that could have a dampening effect on our ability to do something there.

In addition, I think it is important to note that we're not sure where things are going to shake out here.

There are still a lot of questions.

Mergers are difficult things to accomplish.

I think that -- our view is, and again we try to send that indicate to people we have confidence, is that while we don't know quite how things are going to shake out, we do think that it will work out for Mesa.

We think that we will have homes for all of our aircraft.

I know that a number of people including some of the analysts -- you may yourself -- had questions about that.

We actually feel pretty confident that we've got most of our bases covered at this point.

You can never be sure.

Certainly things can change as we all know.

Literally on a daily basis, but we think there is interesting opportunities out there right now, and I think Mesa, as the lowest cost -- we believe to be the lowest cost producer of regional jet ASMs -- that there are opportunities both for us within that deal as well as opportunities outside of that deal with potentially other carriers which, in an effort to further diversify our risk we think makes sense.

The fact that two of our partners may merge obviously consolidates that risk to some degree, which is something that we feel is important for us - that we continue to look at efforts to diversify our risk.

Okay.

Jonathan, on your comment where you said that you will have homes for all of the aircraft or you feel pretty confident that you will find homes for the aircraft.

Should we just assume from that that when you talk homes you're maybe talking about North America or could you be considering maybe moving airplanes to Latin America or over seas?

Is that one option?

I did my time over seas.

Okay.

I have been paroled, and I don't think that in all likelihood I think anything we talk about is going to be done here.

And again, let me make sure people are aware.

The environment is tough.

There is a belief, which I am not sure is accurate, that there is this over supply of 50-seat aircraft I would say to people that maybe there will be down the road but if you go out and try to get 50-seaters today it is not as easy as you would think, certainly not to get a bulk of them.

In fact a couple of deals have been done recently on new aircraft , which maybe somewhat surprising to some people, but I think that from our view, you know, again, we would like to work something out with USAir and America West that makes sense.

But again, we're not going to do something we don't think is in our shareholders long-term interest.

We do feel that there are other opportunities for us that are worth pursuing, and we're going to continue to look at all of our options to determine what is the best use of our aircraft, and again, while we feel confident that there is things to do, things can change and who knows where this shakes out.

I will tell you that we feel very confident that no matter how things shake out that Mesa's -- will come out of this very much intact and ability to go forward and continue to pursue the kind of plans that we've had since I have been at this Company since 1988.

So we've dealt with these issues before.

We're pretty confident we have a good handle on what we're going to do over the next six months.

Good.

Thank you very much.

Our next question comes from Jamie Baker with J.P.

Morgan Chase.

You may ask your question.

Jonathan, two questions actually.

And again echoing what you said earlier that the plan seems to change on a daily basis.

Last I spoke with America West management they suggested that a combined entity would require fewer regional jets in total than what are currently operating in the stand alone U.S.

Airways network.

What level of financing -- what appetite for financing do you have as it relates to this proposed transaction in order to keep all your airplanes up and flying in the pro forma network?

You know, that's kind of things we're discussing with them at this point.

I have to be convinced more than anything else that it's a workable deal.

Putting your money into a deal that ultimately may not work, you know, the worst case scenario is we find homes for the aircraft there and six months later we're right back in the thick of it less a couple hundred million dollars.

That would be the last thing we would want to have happen.

I think at this point we're still evaluating what we think of is the likelihood the deal can be successful long-term, and at this point we have not come to any conclusion.

I can tell you that we are very aggressively pursuing a program of diversification which in our minds would make a lot of sense at this point.

Okay.

That's helpful.

A second question.

United recently awarded some flying to one of your competitors, said competitor suggesting to the market they gave up nothing in return all is right with their world, et cetera, the other regionals that I have spoken with that bid and failed to receive an allocation from United suggested that United's appetite for concessions was material to say the least.

Could you comment, as to how you found the RFP process to go with United and what United's appetite if any for concessions actually was.

Let me put it like this.

We believe that we are the lowest cost operator of those jets, and we made an offer to them that was lower than anything we have done in the past.

So we would be hard pressed to see how that was not an extremely competitive process that would have had, like I said for us, we didn't win and I know what we bid.

So I -- it is a competitive process.

Was United expecting any cash up front as a --

Every deal has its own aspects to it.

I can tell that you we're not going to do something that we feel doesn't make sense for our company long-term.

Don't get me wrong.

We're looking very closely at the United -- excuse me, at the USAir, America West combination to see whether that makes sense.

Under any circumstance we will have exposure there because of the America West plan.

But the question in our mind is what do we assess a likelihood of long-term success there.

I don't think that we're going to invest money just to buy homes for aircraft because -- and I am saying this as bluntly as I can -- we believe we have alternatives.

Now, they may or may not come to fruition, but we do believe we have alternatives.

Okay.

Thanks Jonathan.

That's very helpful.

I appreciate it.

No problem.

Our next question comes from Ray Neidl with Calyon Securities.

Sir, you may ask your question.

Hi, Jonathan.

A couple years ago I asked you a question why didn't you just shut down or sell or spin off your Midwest if it was causing such a problem.

At that time you said you needed the market mass of that operation.

Now it seems to be much smaller part of your operation.

Is there any restrictions for you to just shut it down or spin it off or sell off the pieces?

No, and I think that's a great question and I will tell you, the -- we're now down to say call it 26 aircraft.

The problem that we have with just shutting it down is the book value on these aircraft is only about a $1.5 million and we think we could easily sell the aircraft at that price.

Unfortunately the debt balance is about 2.5 million.

And while there may be some room for negotiation on that in order to pay it off, there has always been the question of do we want to take the cash hit and shut down the operation or do we just want to continue to operate it where, even in spite of the fact that it loses money on a fully allocated basis, it is contributing about a $1 million a quarter towards overhead here at Mesa and with the efforts we had if it hadn't been for fuel, you could clearly have construed a environment, a scenario where it was a cash contributor.

Unfortunately that continues to be elusive now primarily because of fuel, but one that -- we are looking at all of those options.

We couldn't just spin it off per say because we still have some responsibilities on the aircraft leases, but we have looked at potential combinations with other carriers to see what makes sense.

There are some other costs associated with that operation, for example some of the pilot training cost that could go away, there is some overhead that could go away where we think it could be a potential partner with another carrier under the right scenario.

But unfortunately the fuel hit now has to some degree lessened our ability to do that.

The question really becomes do we just shut it down and take the hit and -- on the debt, and that's really what had held us off in the past.

That sounds logical.

I think you said before also that aircraft financing is a bit easier now than it was say a year ago?

Yes, there is no doubt that there has been some improvement in the financing markets.

Okay.

Finally, Peter, can you give me the number of fully diluted shares that we should be using going forward?

You mean because of the share repurchase program?

Right.

And everything put together with the options and everything is there any significant change or is it pretty much the same?

Its pretty much the same.

Okay.

Good.

Thank you, guys.

Our next question comes from Sam Panella with Raymond James.

You may ask your question.

Good afternoon.

Do you still have the delivery positions for 7 additional CRJ-900 in fiscal 2006 and if so, what is the timing of those deliveries and what do you plan to do with them?

Yeah, we still have the positions, but we're actually meeting with Bombardier later today to talk about potential deliveries and how we would take them and where they would go.

Because as you can imagine, we have lots of variables at this point.

But we still have the positions and we have additional options as well.

The 900 has proven to be a very successful aircraft in terms of its economics, passenger appeal, on all accounts the aircraft worked out quite well.

It is unfortunate that you don't see it -- throughout the industry and again as a result of these artificial constraints by these labor contracts, but we do think that there are some opportunities potentially in the combined USAir America West operation to expand that.

We definitely appreciate some of their issues.

We think that clearly we have made some suggestions to USAir over the years which hopefully through this bankruptcy process we can seen enacted, not the least of which is the larger jets.

The bankruptcy process does give you some freedom to make some fairly significant changes and we're hoping that not all of them necessarily have to be negative for Mesa.

Okay.

What was the vendor dispute?

What was that about that you received the payment for in the quarter?

Hold on.

Let me ask real quick hold on one second.

It just involved what appeared to be an over charging by one of our vendors and through some reviewing of the records they agreed that we had been over charged so we just were repaid the money.

Okay.

Thank you.

Our next question comes from Helene Becker with Benchmark.

You may ask your question.

Thank you very much, operator.

Hi everybody.

Hi.

Jonathan this is my question.

Actually I have two.

One is, has the has the bankruptcy court this time around approved your or affirmed your contract and agreement with U.S. Airways?

No.

That's clearly what's open right now, and what's up for discussion.

So this is my follow-up question.

I read the bankruptcy documents over the weekend actually because I have no life, and saw that Republic and Air Wisconsin each have agreements with U.S.

Airways that it seemed to provide for awful lot of aircraft to them.

Is there a danger that because your agreement is non approved you could actually lose flying to them if they wind up putting capital up?

Could you talk a little bit about the understanding what we should have about where you guys are relative to where they are in the whole U.S.

Airways issue?

Yes, that's definitely the juxt of the matter.

Air Wisconsin bought themselves a put for $125 million a junior dip, which converts into equity, which allows them to put 70 aircraft to them at some level of cost.

At Republic they bought some assets for $100 million and in addition have a -- basically an option to put up another $125 million based on their approval of their business plan, which I think the way that works is that they have 35 aircraft there.

I think they voluntarily agreed to go down to 20 under certain circumstances.

USAir has been talking to us about similar type transactions.

At this point in time we have not come to an agreement.

We had early on made some fairly significant proposals, but could not come to an agreement.

At this point in time we feel that we continue to talk to them and see if there are some opportunities.

Certainly when it comes to some of the larger aircraft we're very well positioned in that we have the ability to deliver aircraft very quickly and very cost effectively because we have option aircraft under our launch customer status.

At the same time we are continuing to look at other opportunities which would allow us to effectively diversify our risk further.

Clearly we could end up with a big goose egg.

There is no doubt.

I don't think that's likely.

I would probably say and don't think I am saying it in an inappropriate way.

I'd say I would not be, at least from my prospective, buying stock in if I felt that we were going to be in a situation where we were parking 59 aircraft, so I feel reasonably confident and sanguine about our prospects going forward with what I know today.

Again, that could change dramatically from day-to-day, but I think everything we look at is balanced between the risk associated, the reward and what is in the best long-term interest for Mesa shareholders.

On United they only awarded 30 or 40 of the 70 lines of flying that they had put out to bid.

Are you still talking to them?

Can you say if you're talk to go them actually?

United is a partner of ours.

We have been performing very well for United in terms of operationally.

Our people at United, because we regained our partnership with them, there has been just an incredible effort by our people here.

Many of them are senior staff members, our senior pilots who are up in Denver have done just an outstanding job.

I think our completion rate at United was something like 99.5% last month.

And we clearly are talking to them about potential opportunities, as well as other carriers about potential opportunities.

There is no doubt that the environment has changed, and I would say without any hesitation that the economics surrounding deals at this point in time are probably going to be different.

We have been in effectively a cocoon over the last four or five years posting up good numbers in spite of what's going on in the industry.

Yes, there will be some pressure.

But we feel that given our cost structure, that under any scenario we will continue to be able to operate aircraft profitably and that we will build on our existing relationships as well as hopefully develop new ones.

Thank you so much.

Our next question comes from Robert Ashcroft with UBS.

Sir, you may ask your question.

Thank you.

In the past you have given operating margin guidance which I think was somewhere around 9% for jet flying, and you've exceeded that for many quarters especially a few include or adjust for the effect of Air Midwest.

Do you want to take another stab at that?

Well you know we always try to be conservative, Robert and I guess we have been conservative in the past in spite of the fact that we have beaten all the estimates I think every quarter I can remember our stock is still trading near low so it doesn't seem to help much.

I think at this point in time given the state of flux, I think it is hard to do that.

We do feel that one of the reasons that we've instituted a stock buy back program is if in fact we enter into contracts that maybe do not generate the same level of profitability but still generate a -- what we believe is an adequate level of profitability that we could offset a chunk of that by buying back our stock at 5.50 a share or whatever price we deem appropriate at the time.

I think I would be hard pressed to say that we expect our margins to continue at these levels going forward.

Okay.

Let's move onto something else, then.

I think America West guidance shows the Dash-8s that you have there leaving their service sometime next year.

Do you have Dash-8 leases that are sort of co-terminus with the end of their service with America West or do you anticipate trying to find somewhere else for the Dash-8s to go?

We do have some short term leases right now we only have six aircraft remaining there.

Interestingly, the Dash-8 200 market which is what we have is literally tight as a drum.

Don't ask me why.

We have had to try to go out and get aircraft and have had difficulty when we had to fulfill our requirements to United.

We do have short term aircraft so it is not at this point in time something that we feel is going to be a big problem for us.

Okay.

And also I think that as of next year America West again has the ability to start pushing back 50-seat regional jets to you, is that correct?

I think it starts -- what year is it, Mike?

'07.

'07.

Thank you very much.

It's a limited number and again, one of the things we've done -- we do have, I think, about 17 of our CRJs have leases that come due within three years so we have some flexibility there.

We also, as you can imagine, are in discussion with manufacturers that may give us some opportunity to have additional flexibility within our fleet, especially if we were to order additional aircraft.

Again, we are fairly sanguine about our prospects in regard to aircraft lease terminations and as these contracts roll off.

I think we feel that there are enough options out there that we'll be covered.

Thank you very much.

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

Okay.

Well, again, I would like to thank everybody.

I know that the market likes certainty and unfortunately at this point I can't be as certain as I would like to.

But again, I would like to emphasize that while things change, we do have confidence that we're going to see our way through this successfully.

We think that we are very fortunate to have the support that we have from our employees which has been outstanding performing the way they have.

We also feel that we've gotten terrific support from our manufacturers and suppliers and financiers who are helping us work through this process together.

And at the same time we think that with the product we have to offer there is opportunity both within all of our existing partners as well as potentially new partners.

We would ask you to stay tuned because we do feel that all of these issues should get resolved in the coming weeks, so if anyone has any additional questions, please feel free to call myself or Peter or Mike and we would be happy to answers any questions you have.

Thank you again for taking time out of your busy day and we look forward to talking to you for the third quarter numbers.

This concludes the audio portion of today's call.

We thank you for your participation.

You may disconnect at this time.