Mesa Air Group Inc (MESA) 2005 Q4 法說會逐字稿

Good afternoon and welcome to the Mesa Air Group fourth-quarter and fiscal 2005 earnings release conference call.

At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS).

Today's conference is being recorded; if you have any objections please 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 all.

I've asked to read this forward-looking statement to begin the call.

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 statements are reasonably, it can give no assurance that such expectations will prove to be correct.

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

Should one or more of these risks 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 these forward-looking statements made in the call prior to the next filings with the Securities and Exchange Commission.

I know that I have a little responsibility to do that, but given the fact that we're in the airline industry you would think that most of that would have gone unsaid.

Anyway, let's go through today's call.

We had we think a pretty good quarter.

I want to thank you for taking your timeout to listen to our call and we always appreciate the interest that folks in the investment community have in our Company.

The Company is reporting fourth-quarter pro forma net income for the quarter up 14.7 million or $0.35 per share on revenues of 309.1 million. this compares to pro forma earnings of 11.5 million on revenues of 260 million or $0.27 per share for the comparable period in 2004.

On a GAAP basis our reported net income was 15 million or $0.36 per share as compared to 10.7 million or $0.25 per share for the same period.

The primary items of significant affecting the fourth quarter of 2005 were the following.

Total operating revenues for the fourth quarter of 2005 increased 49.1 million, primarily a result of 10.8% more available seat miles versus the same period in fiscal 2004 as well as an increase in certain reimbursable base costs such as fuel.

The increase in ASMs reflects the 15 additional CRJ-900 aircraft that were placed into service in September 2004.

Total operating expenses for ASM for the fourth quarter excluding fuel charges of 90.5 million or 0.3 cents per ASM, which are primarily reimbursable by the Company's major partners, decreased approximately 0.3 cents to 7.8 cents from $0.08 for the same quarter of 2004 and from 8.2 for the third quarter of 2005.

Our non-fuel unit costs improved primarily as a result of cost reduction initiatives implemented by the Company during the year; the addition of 15 CRJ-900 aircraft at September 30, 2004; reduced flying at Air Midwest, our 1900 operation which was offset by approximately 3 million in expenses relating to our transition of 59 regional jet aircraft out of US Airways Express and into United and our new partnership with Delta.

Year-to-date we have record pro forma net income of 55.1 million or $1.31 per share on operating revenues of 1.1 billion.

This compares to pro forma earnings of 39.1 million or $0.89 per share and 897 million from revenue for fiscal 2004.

On the fleet, during the quarter we took delivery of two 86 CRJ-900s for our America West Express operation.

The Company is contractually committed to delivering America West one more 86 regional seat aircraft and that was completed on October 28, 2005.

Our total fleet count at the end of the fiscal fourth quarter was 182 aircraft comprised of 92 50-Seat regional jets, 15 70-seat regional jets, and 37 regional jets.

The breakdown is 55 at America West, 36 at United, 49 at US Airways and 4 had transitioned to Delta at the end of the quarter.

In addition to the regional jet fleet of 144 aircraft Mesa operates 38 turboprops including 16 37-8 200s, 6 at America West and 10 at United, and 22 1900s of which 8 are Mesa independent operations and 14 are at US Airways.

The 22 1900s represent the net effect of 13 aircraft that have been leased to Gulfstream Airlines and Big Sky Airlines which we have previously announced.

This is down from 35 aircraft that we flew at the beginning of fiscal 2005 and down 100 aircraft on the button from the day we came here in 1998.

One additional aircraft was leased to Big Sky in October 2005.

But we also delivered one additional 86-passenger regional jet to America West in the first quarter of fiscal 2006 which I had previously mentioned.

As we discussed on our third-quarter conference call, we've completed the permanent financing on all 15 CRJ-900s that were on interim financing at the end of the third quarter.

Mesa has fulfilled its remaining committed CRJ-900 obligations for America West.

America West does have an option for 12 additional CRJ-900s which, if they choose to exercise, will begin delivering in mid to late 2006.

Our current contractual obligations require us to add one incremental 50-seat aircraft in fiscal 2006 which will be placed with United.

Given the current state of the industry and recent Chapter 11 filings, we feel confident that we can source this particular aircraft.

In addition, by 2010 Mesa is contractually committed to replace 15 of its 50-seat RJs at United with 70-seat RJs.

On the operational side the Company had a very good quarter in spite of weather and other issues.

We ran a controllable completion rate of 98.6%.

While we are satisfied with this performance and it far exceeds all of our contractual requirements, we continue to strive for operational excellence in order to provide our partners on time and reliable product.

I know that the last couple months in particular have been our best operating months here in Phoenix.

Given the Company's growth and operating challenges I would like to once again thank all of our employees and our employee leadership group for the continued success of the Company.

We really believe that if we can continue to communicate and work together, maintain our model of low-cost and high-quality service we can continue to move forward successfully.

At Air Midwest, again I'd like to just go through what happened at Air Midwest, which has been a drag on the Company in the past.

The Company entered an agreement to lease a total of 14 1900s operated by Air Midwest to Gulfstream and Big Sky.

These actions are further into the Company's vigorous pursuit of reducing unprofitable 19-seat fly (ph) in markets that do not have government subsidies through the intentional (ph) air service program.

As I mentioned, we are down to 21 1900s rather than our prior projection in February 2006.

From the 35 1900s operated at the end of 2004 we have leased 4 to Gulfstream and 9 to Big Sky and one additional placed in October.

As of September 30, 2005 Air Midwest operated only 18 lines of revenue service.

As previously expected, the 1900 leases with Gulfstream and Big Sky have positively impacted Air Midwest's profitability which in the fourth quarter was very close to breakeven.

We believe this reduction in 1900 capacity has positively impacted Air Midwest's profitability and, absent any further increases in fuel prices, we continue to expect Air Midwest to be able to get close to breakeven on an ongoing basis.

And as you know, fuel prices have in fact started to dip a little bit.

One other piece of good news is on the turboprop front.

DAS funding, while not yet officially published, it appears that Congress has not only authorized an 8 million increase in ASM funding to 110 million, but it has also authorized FA to transfer up to 10 million from other areas to pay for the increased fuel cost of existing DAS subsidies that would be of significant benefit to us as we did most of the service at much lower fuel prices.

And while technically there is a responsibility to make the difference, the money was not available.

Mesa projects ASMs at 9.2 billion for fiscal 2006.

Actual ASMs for 2006 will always be a function of final transition schedules for our aircraft moving from US Airways to United and Delta and the marketing schedules of our partners.

In our projections an estimated 1.5 reduction in system wide capacity for the fiscal year resulted in a play on USAir's transition.

However the transition plans changed from our current assumptions for these aircraft and our partner's schedules can impact that.

Our forecast summary and earnings guidance, we remain very comfortable with achieving First Call's estimates of $1.20 for fiscal 2006.

I do have to tell you, however, that our earnings could be impacted by a change in our partners’ marketing schedules, timing of maintenance, training events and emphasis again on the timing of our transition plan from US Airways, Delta and United during fiscal 2006.

I will go into some more detail on those issues in this call.

On our partners, I'd like to walk through on each of them where we stand.

As a result of the America West/USAir merger we are moving 16 of our CRJ-900 aircraft East into traditional US Airways hubs.

Currently there are 8 aircraft that operate East of the Mississippi with the balance to be transitioned by February 2006.

Obviously we will continue to do what we can to support the new combined America West/USAir operation moving forward.

I think you all know that that has gone extremely well and I think that their future obviously looks better and better as their transition plan in terms of their own combination has moved forward.

We continue to negotiate with our friends at the new USAir who were our old friends at America West.

We have ongoing negotiations for new aircraft.

We also expect that our transition plan could get modified, that would provide less cost to us as part of a transaction.

And again, while nothing has been finalized, I can tell you that it's something that we certainly would like to do and I think the requirement on their end for what I now believe is the most efficient large regional jet, the CRJ-900, is such that this is something where all parties have a reason to see something positive happen.

During the fourth quarter we began transitioning our aircraft from US Airways at 50-seaters both United and Delta.

We currently have 8 CRJ-145s at Delta.

It has been a quite remarkable transition to the new hub for Delta in Orlando.

We only take three controllable cancellations for the first six weeks.

Again, I want to thank our operational people, our front line employees for doing just a fabulous job and our new partner seems to be delighted at this point in time with their relationship with Mesa from an operational perspective.

Aircraft will be phased into revenue service at the rate of 2 to 3 per month we put all 30 into service at the latest July 2006.

And again, we are working on a number of plans that would potentially move some of those dates forward in order to lessen the impact of the transition plan on us here at Mesa.

It should also be noted that as a result of the Delta filling we no longer have any financial obligations with regard to the FRJ aircraft that were part of our original agreement with Delta.

Clearly that was a bet we made and, fortunately, at this point in time it appears to have paid off.

In our United operation we put 22 of 30 incrementals, we contracted 50-seat regional jets into service by 2006, early 2006.

All 30 aircraft should be in service with United Express.

Additionally, let me just talk a little bit about some of the plans that we are discussing and hopefully some of the things we're looking to do.

There's a lot going on in the industry, as you know, both at Delta, at USAir/America West and with United.

We continue to have discussions with Delta on how we may have the opportunity to expand our operations with them.

Again, I've become a big believer in the large regional jets.

The CRJ-900 in particular having a significantly lower fuel burn than other large regional jets I think has become on a relative basis that much more attractive.

And given the ability to increase the seating from 86 now up to 90 seats, the numbers on that aircraft are truly outstanding.

And we are hopeful that as plans become clearer both at USAir/America West, also at Delta, that we may have some additional opportunities there.

At United, they also are looking for replacement aircraft on one front in particular in the mountain states providing lift into their ski markets and we continue to have discussions with them on how Mesa may play a role there as well.

And again, we've come to you in the past over the years and said well, we have lots of things cooking, nothing is really firm and certainly there's nothing firm at this point, but I can tell you as I have in the past that given our leading -- industry-leading cost structure and our strong financial position now I am confident that we will see some additional opportunities come our way this year.

I would also like to just discuss quickly while we're talking about the transition that the costs are certainly in line with our previous forecast of approximately 10 million and in fact we have seen some improvement in our existing plan and are hoping that with our discussions with all of our partners that we can further improve upon that.

During the fourth quarter we incurred approximately 3 million in transition expenses and the majority of the remaining transition expenses should hit in the first and second quarters of 2006.

In other news, as many of you know, we announced a new venture to begin independent operation in the interisland Hawaiian market.

Planned startup is currently in the latter half of the fiscal second quarter or -- which is the first calendar quarter with 50-seat RJ's.

Our plan is to serve the major markets out of Honolulu.

With our cost structure we feel we can be extremely competitive in the marketplace.

We have announced our fare structure which is approximately half of the fares that are currently being charged.

We have done a lot of homework on this.

Mesa has been around the Hawaiian market since the days of discovery back in 1992.

We looked very carefully at both Loa and Hawaiian in their bankruptcy.

We think that the interisland market in particular is a very interesting opportunity for us.

We are well aware of the limitations of 50-seat aircraft and it would be our plan as we develop market share there to replace those with more efficient larger regional jets.

Again, we feel confident that this is an opportunity that is going to be very exciting for Mesa.

What's nice is we continue to have a small independent operation so we have much of the infrastructure already in place and I think that it's our view --.

Please stand by.

Your conference will resume momentarily.

Please stand by.

Please stand by.

Mr. Ornstein, you may continue.

Sorry, we had a little technical glitch here.

I apologize.

Basically on Hawaii, I'll just finish up with Hawaii.

We think it provides an excellent opportunity for us.

We have infrastructure in place that allows us to move to an independent operation rather quickly.

We think that we will again garner support for this potentially from our partners and we think that in the end the interisland market is one that Mesa's large regional jets and the type of operational we have is particularly well-suited.

We are aware of the fact that there is strong incumbent to competition, but are also mindful of the fact that their requirements to subsidize unprofitable transpacific line with the interisland marketing is going to be advantages for us.

We signed a new ten-year contract with AR to manage our inventory for all of our regional jets.

As part of the transaction they purchased approximately $50 million of inventory form us, we'll subsequently manage the repairs of these components.

This is an example of ways we are looking to do things differently in order to become more efficient and reduce our overall cost structure.

That cash comes in over time to us.

I believe we received slightly less than half of that already.

Another highlight I am very proud of this year and, again, most of you are aware, but something we worked very hard towards is being named regional airline of the year by Air Transport World.

We think this is a testament of the hard work of all of our people and the great service they provide both to our airline partners and on the front line to our customers.

In closing, we continue to believe our earnings demonstrates the success of our business model and reflects the commitment of our employees and the continued support of our airline partners.

Furthermore, given the Company's strong financial results and future prospects, we continue to believe our share price has a compelling value.

We remained active in our share repurchase program during fiscal 2005; we purchased almost 1.8 million shares including over 115,000 shares during the fourth quarter.

Over the last five years we have purchased 8 million shares.

We just got the Board to authorize a repurchase of up to an additional 10 million shares.

And again, the timing of that is at our discretion and we will certainly continue to monitor the price of our stock versus what we perceive to be the value.

Again, I'd like to thank all of you who have taken the timeout.

I apologize for the interruption and would like to answer any questions you may have at this time.

(OPERATOR INSTRUCTIONS).

Jamie Baker, JPMorgan Chase.

This is Pakhi Eder on behalf of Jamie.

I have two questions.

First of all, has Northwest solicited a bid for regional service?

And second, do any of your contracts with existing partners have a most favorable nation clause?

Thanks.

I will not say that Northwest solicited a bid.

We're always in discussions with everybody around the industry, as you can imagine, but they have not solicited a bid from us for any flying at this time.

We had had some discussions with them some months back where they had solicited a bid, but not recently.

In terms of most favored nations clause, I am not aware of any of our contracts containing most favored nations clauses.

Thank you.

Helane Becker, Benchmark.

Hi, Jonathan.

Just a question on the earnings outlook actually.

Don't you think that when you buy back stock here the earnings outlook is actually being a bit conservative for '06?

I would think your earnings would actually be up year-on-year as your share base shrinks?

I guess that would obviously depend upon whether we were to buy stock at these levels.

Again, we have traditionally bought stock at lower prices and we will just monitor what we believe our prospects are and determine what we think is the right price to pay and that price has changed.

There was a time when I bought stock back when it was under 5, this last quarter I actually bought stock back close to 8.

We feel that our earnings will -- this quarter -- I mean this year for example we said we're comfortable with the numbers that are out there.

We feel that there are some initiatives that we are going to take internally that will help things.

And again, as we've said in the past and unfortunately we can't say anything firm at this point, but we do feel reasonably confident that there will be opportunities for us to continue to expand as a result of our low-cost which we still believe are the lowest in the industry and what we believe to be an excellent product that we can offer our partners.

I can assure you, for example, that Delta who has truly terrific partners and has done a wonderful job in their commuter operations, did a lot of due diligence on Mesa before they asked us to put 30 aircraft into service on their behalf.

So while we don't have anything in hand, we are talking to just about everybody.

We are also in discussions with what I would consider to be maybe some non-traditional type carriers that you might not expect would potentially operate regional jets, but the opportunities that we think are very interesting.

And you also know that we are fairly conservative about how we approach the business.

We're pleased that we have -- closed the quarter with the most cash we've ever had.

We think next year we'll be significantly cash flow positive.

And I think that from an earnings standpoint we would certainly want to continue to provide positive earnings as we move forward on a year-over-year basis.

Great, okay.

Could I just ask one follow-up question then?

On the Hawaii service, can you just say -- well, let me ask you this.

Did you start taking reservations for the flights yet or have you not made a firm announcement on a date?

I guess I heard yesterday from somebody not in the industry that you are operating some of these flights out of an inconvenient terminal which didn't sound like something you would want to do.

I was just wondering if you could just explain that.

Sure, those are all good questions.

One, we had not announced a date yet and we are not taking reservations.

We are finalizing contracts with a reservations operation for our old reservations system.

We currently operate on Sabre and we are in discussions with a number of the res people to determine which system we will continue to use.

We have looked at a couple different terminals over there.

The fact that some people may have used -- one of the terminals we're looking at is the commuter terminal there.

Some people may think it's inconvenience I guess.

We've looked at it as potentially an interesting opportunity just because it would give us a lot more flexibility.

And given the fact that we're catering to the local passenger might in fact be more attractive.

Again, nothing has been finalized at this point.

And what was the third -- there was a third part of that question.

No, I think the first two were the date and the res which you answered as one.

I think that's fine.

Thank you.

Again I think we are -- as I said, we've done a lot of homework on this.

I know that some people have questioned some of the things that we're doing there.

They questioned the 50-seaters and they say, Jonathan, you're one of the outspoken people against 50-seaters in an independent operation.

There are a lot of 50-seaters that are going to be available out there right now.

As you can imagine, one of the pacing items for us is sourcing those aircraft.

We think we're going to be able to you that very inexpensively.

A big part of the operating cost on 50-seat aircraft are lease rates and if we can put together the kind of transaction that we're looking to do, that could become de minimus.

And at the same time we are talking about doing this whole operation and partnership with some financial partners and potentially some local Hawaiian partners so that I think that this is just a lot of upside with what I would like to believe is very little risk.

We'll just have to see how that goes at this point.

Thank you so much for your help.

Ray Neidl, Calyon Securities.

Good morning, gentlemen.

This is Christine Min standing in for Ray.

I have a question with regards to the new US Airways group.

They mentioned that they have recently signed a ten-year contract with their own pilots to fly 90-seat RJs at comparable pay scales.

And I was just wondering if this has an impact if any on Mesa's CRJ-900 aircraft with America West?

I'm sure that it could be.

I always like the word "comparable" because I'm not quite sure what that means.

It's either the same, less or more.

But the fact is we think we can operate less expensively than anyone else.

We continue to have a lot of discussions with them so I certainly don't like it has eliminated their appetite to discuss this with us.

But again, I think that will be something that we'll have to play out over time.

My understanding, for what it's worth, and of course things can change, is that the -- USAir is looking at operating the Embraer 190 product in-house and I don't know if they have plans at this point to operate the CRJ-900s in-house.

And again, that could all change, but I can only tell you that we continue to have what I believe to be is -- hopefully will be fruitful negotiations with them.

You guys also continue to improve on your operating margins and fourth quarter came in very nicely versus last year.

As you continue the expense of the transition cost in the fiscal first quarter and going forward do you expect margins to be more in line with your historical levels or to continue to improve at these levels?

We think that they will continue along the level they're at currently.

And again, as I mentioned, one of the things that we are discussing with all of our partners is a way to improve from our perspective the transition plan to reduce some of the cost that we had anticipated.

Already we have seen some improvement and we're hopeful that we can get -- make that even better.

As you can imagine, we've already transitioned now I believe 28 aircraft and almost half the aircraft and the cost that we booked for that was about $3 million.

So not to say it's completely linear, but I think that our belief is we'll do a little better than we anticipated and hopefully with a few tweaks to the plan we can do a lot better.

Okay, great.

Thank you.

(OPERATOR INSTRUCTIONS).

Glenn Engel, Goldman Sachs.

A couple questions.

One, have you put an ASM forecast for fiscal 2006?

Yes, in the call we talked about ASMs we believed for the quarter were going to be -- hold on a second -- I believe it was 9.2 billion and the quarterly forecast was 2.25, 2.35 and 2.4.

And us that include the Hawaii?

That does not include Hawaii.

And Hawaii will be what percentage of that size roughly, 5%?

No, much less than that.

The total number of aircraft that we expect to have in Hawaii in operation is 6.

So there will be 6 50-seaters out of 144 regional jets of which almost 40% are larger and so I think we think that ASMs on the Hawaiian line operation will represent about 2, 2.5% of total ASMs.

The nice thing about Hawaii, if I can use some military parlances force projection, a very small area and a very small operation that we can use what we believe to be the strength of our existing operations and financial ability to project into this very isolated market.

One that does not rub any of our partners the wrong way and in fact we think we can potentially garner some support from them and one that we feel ultimately will prove to be exceptionally profitable.

As you want to switch out of some of the 50-seaters into 70-seaters for your partners what do your lease expirations look like to make that easier?

We're fortunate in that first we are actually short one 50-seater right now and we have a number of aircraft that come off lease over the next few years, I believe it's 17 aircraft that come off lease.

So we feel pretty comfortable that as these aircraft -- we can time our deliveries at least out through 2010, 2011 so that we don't find ourselves long any the aircraft.

The six aircraft that we're looking for for Hawaii are also incremental.

We are also talking to the manufacturer as we take delivery of larger regional jets to have the right to put back 50-seat jets down the road which will also further enhance our flexibility with our fleet going forward.

Thank you very much.

Jim Parker, Raymond James.

Jonathan, just on this Hawaiian operation that you're planning, what are the average fares that you anticipate and for what trip length and what kind of cost per seat mile could we expect?

Let me just tell you this.

The average fare in the marketplace now is about $60.

We are anticipating average fares of about $46.

I can't tell you what the stage length is, although I can tell you it's small and we clearly know that it's going to be -- our costs will be higher and we've done a number of plans -- Peter just pointing out that the average trip length is about 110 miles.

What's interesting has been off of our original plan, once we had some folks on the ground some of the costs that we anticipated actually came in lower in terms of things like landing fees and rents that we felt a bit more confident.

Also in the past there's always been perceived resistance in Hawaii to a third carrier.

I can tell you that we have found that to be nonexistent and, in fact, we have been strongly encouraged by the local authorities all the way up through to the governor's office that they feel that this is something that will be very good for the state of Hawaii.

So unlike in the past where carriers had problems, we think that we've received a very warm aloha and that we will be in the position to do -- we think penetrate the market very quickly.

And Jonathan, also -- you may have done it, I might have missed it, but did you update us on the number of 50-seat RJs that you have coming off lease and are you going to be able to replace those with substantially lower cost -- lower lease cost RJs?

As I had mentioned before, we have 17 or 18 aircraft that come off lease.

We can replace those with lower cost regional jets.

Although I will say, for all the talk of the impending collapse of the 50-seat market we have not seen it yet.

I do know that the lessors have been taking a reasonably tough stance with some of the bankrupt carriers in terms of what those aircraft are worth.

I don't what the final result will be.

One of the pacing items for us on Hawaii has been the 50-seaters.

We have been patiently waiting to see these aircraft values come down.

We do have a number of aircraft that come off lease.

We do need an additional aircraft as it is.

And again, our requirement to swap out the aircraft with United is not until 2010 and I would imagine that any aircraft order we do for larger jets will include some type of ability to further enhance our flexibility with our fleet.

Okay, thanks.

Mr. Ornstein, at this time we show no further questions.

Okay.

Well, again, I'd like to thank you for taking time out of your day.

I'd like to thank all of our people, our customers, our airline partners.

This has been what we think has been a terrific year for us.

We've put a lot of growth behind us.

We feel we positioned ourselves to take advantage of what is certainly a tumultuous time in the industry but one that is nonetheless filled with tremendous opportunity.

I think that overall the industry itself is doing much better in spite of the fact that we still see so much of the domestic capacity in bankruptcy.

The fundamentals on the industry seem to be improving internally in terms of yield and passenger traffic.

And I think that we are looking at what could be a tremendous turn on the macro basis for the entire industry.

But I'm hopeful that Mesa will be able to participate to all extent possible.

So again, thank you very much.

Have a great week.

If you have any questions please feel free to call Peter or myself here in the office.

Bye-bye.

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