Mesa Air Group Inc (MESA) 2006 Q1 法說會逐字稿

Good morning and thank you for standing by.

I'd like to remind all participants your line will be in a listen-only mode throughout the presentation. (OPERATOR INSTRUCTIONS) This call is being recorded.

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

I would now like to introduce your host for today's call, Mr. Jonathan Ornstein, Chairman and CEO of Mesa Air Group with the first-quarter 2006 earnings call.

Sir, you may begin.

Thank you very much, operator.

We'd like to start the call with our forward-looking statement so if you could bear with me.

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

While the Company believes that these expectations reflecting 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 these forward-looking statements made in the call prior to its next filing with the Securities and Exchange Commission.

Okay, thank everybody for joining us a little bit earlier because we have to jump on a plane shortly and head back east.

We'd like to thank you of course for your interest in our Company.

The Company reported first-quarter pro forma net income for the quarter of $13.8 million or $0.32 per share on revenues of 323.6 million.

This compares to pro forma earnings of 12 million on revenues of 264.8 million or $0.28 per share for the comparable period in fiscal 2005.

On a GAAP basis, our reported net income was 13 million or $0.31 per share as compared to 13.9 million or $0.32 per share for the same period of last year.

The primary items of significant affecting the first quarter of 2006 were total operating revenues for the quarter increased 22.2% or 58.8 million primarily due to a 64.1 million increase in contract revenue offset by a 5.3 million reduction in revenue at Air Midwest.

Contract revenue increased as a result of the operation of an additional 13 CRJ 900 aircraft and Air Midwest revenue decreased through reductions in capacity as a result of leasing an additional Beech 1900 D aircraft Big Sky and reductions in the number of the (technical difficulty) markets served and the removal from service of a damaged aircraft that hit a coyote actually in upper state New York.

Total operating expenses increased 58.3 million or 24.6% for the quarter ending December 31 primarily due to the following.

Rent expense increased from refinancing 15 CRJ 900 aircraft through a sale leaseback transaction.

These aircraft were previously on interim financing.

As a result, their ownership cost was previously reported as depreciation interest.

Fuel expense increased 37.7 million or 56.2 due to a 7.3% increase in volume as a result of the increased number of regional jets flown and a 46% increase in the cost of fuel, $1.39 in the first quarter versus $2.03 in the first quarter of '06.

Maintenance expenses increased from a significantly higher number of ERJ 145 engine removals.

We had a total of 12 engine events in the quarter as opposed to our forecast of six and this is often just a timing matter.

Total operating expenses for ASM excluding fuel however decreased approximately 3.7% for the first quarter of 2006 to $0.082 from $0.085 for the same quarter of 2005.

Primary contributors is a decrease in our nonfuel CASM was the edition of the 900 that we mentioned before Mesa and the reduction of the higher cost for ASM turboprops at Air Midwest.

Just to give you a quick summary of the fleet, as it has moved around over the over the last couple of years it's a little easier to follow now.

During the quarter the Company took delivery of 186-seat CRJ 900 for our America West Express operations and now US Air operations bringing the total to 38 aircraft.

Our total fleet count at the end of the fiscal first-quarter was 181 aircraft comprised of 92 50-seat regional jets, 15 70-seat regional jets and 38 86 regional jets.

That division was 56 America West; 58 at United; 19 remain at US Airways and 12 having transition to Delta.

In addition to our regional jet fleet of 145 RJs, Mesa currently operates 36 turboprops which include 16 37-seat Dash 8s, and the remainder are the 1900s.

The 20 1900s represent the net effect of the 14 aircraft that are previously leased to Gulfstream and Big Sky as we previously announced, and is down from 35 aircraft that we began at the beginning of our fiscal 2005.

And again, we did lose one aircraft in a run-in with a coyote.

Mesa has now fulfilled all its remaining contractual commitments to America West for aircraft.

As with all our partners, we remain in discussions with America West, US Air for additional aircraft which they have an option for additional CRJ-900s.

If they choose to exercise, we'd begin to deliver in late 2006.

In addition, our current contractual obligations with our other partners require us to add one incremental 50-seat aircraft in 2006, which will be placed with United.

Mesa is also contractually committed to replacing 15 of its 45 50-seat aircraft at United with 15 70-seat RJs by 2010.

We're also actively working to source up to eight 50-seat aircraft which would be used in our Hawaiian operation, which we anticipate to be flying in the latter half of the first quarter or more probably the early part of the second quarter.

We can talk a little bit more about what's going on with the partners once we just get through the rest of the script here.

During the first quarter, we transitioned a total of 23 aircraft from the former US Airways to our United and Delta operations.

Twelve of our 30 RJs have currently been placed with Delta.

Aircraft will be phased into revenue service at the rate of about two to three per month, and we will have all 30 in service by July of 2006.

In our United operation which has moved a bit quicker, we put 22 of the 30 incremental aircraft into service.

And by early 2006, all 30 should be in service with United Express.

Also, as a result of the America West/US Air merger, we are moving 16 of our CRJ 900 aircraft east into traditional US Airways hubs.

Currently, we have 13 900 aircraft operating east of the Mississippi, with the balance transitioning by February 2006.

As always, we will continue to do what we can to support the new combined entity moving forward.

While we are discussing the transition, I'd like to mention that the costs of the transition are in line with our forecast of approximately $10 million.

That has been spread out over the three quarters of the current fiscal year.

During the fourth quarter of 2005, we incurred approximately 3 million of transition expense.

First quarter we incurred approximately another 2 million, and the majority of the remaining will be hit during the second quarter of this year.

On an operational basis, the Company continues to operate very well.

Our controllable completion rate was 98.4%.

While we're satisfied with our performance to date, we continue to strive for operational excellence in order to provide our partners with an on-time and reliable product.

We are pleased particularly with the startup of our Delta ERJ operation which since its startup has run at 99.7% controllable completion rate.

There are many factors, obviously, that affect controllable completion.

When we operate in one hub like we do in Phoenix and Orlando our numbers are generally higher than when we are spread out all across the country which unfortunately is the case where our partners have found and have told us that Mesa is one of their if not their most flexible partner and uses us to affectedly fill in gaps in their system.

Given the Company's growth and operating challenges as a result of that I'd like to again thank our employees and employee leadership group for their continued success in the Company.

We're looking at a number of we feel adds in the technology area to further enhance our effectiveness.

One of the things we've been working on with our pilot group is a preferential bidding system which we think is a win-win for everybody and we look forward to getting that implemented to further improve the efficiencies of our operations and make our pilot's lives that much more predictable.

We are confident we can continue to execute on our plan going forward as a result of all this hard work and effort.

As many of you already know we have focused on mitigating exposure on our 1900 fleet.

I remember when we first came back to Mesa, we had 122 1900s; we are now down to 20.

Our strategy of working to place all the aircraft we operate in a central air service markets and leased 14 aircraft to our friends at Big Sky and Gulfstream gives us the ability to reduce our unprofitable flying and allows Air Midwest to operate at a net loss of less than 750,000 during the first quarter.

Absent large increases in the price of fuel, we expect Air Midwest to post similar quarterly results for the remainder of 2006.

And again as a result of our coyote strike, Air Midwest now operates only 17 lines of revenue service.

I will mention that we had said in previous calls that we thought Air Midwest we had hoped to get it to break even or profitability.

I haven't done the math but I can tell you that I think it's fair to say that if fuel prices where they were last year, Air Midwest would in fact be profitable today.

Mesa projects ASMs of 9.1 billion for fiscal 2006; actually ASMs for 2006 will be a function of final transition schedules of our aircraft moving from US Airways to United and Delta.

The marketing schedules that they require supply our projections continue to reflect an estimated 3.8% increase in systemwide capacity for the fiscal year as a result of full-year impact of flying the CRJ 900.

Should the transition plane changed, our current assumptions and/or our partners scheduled change, actually ASMs may be impacted.

We continue to remain comfortable achieving the previous -- first call -- the annual estimate from first call $1.20 to $1.30 for fiscal 2006.

There are some additional expenses.

Clearly we are going to have a little bit -- we think that there will be some additional expenses in the startup of our Hawaiian operation although we feel that we will be able to contain those pretty well.

We also where we (indiscernible) about certainly some expense as a result of the new option expensing rules per quarter that's going to run into several hundreds of thousands of dollars per quarter.

Also our earnings could be impacted by a change in our partners marketing schedule and timing of maintenance and training events with the emphasis again on the timing of our transitional plan from US Airways, Delta, United.

However, I think it's fair to say that at this point we have a very good handle on that and we do not expect to see any significant changes that we have not already put into our budget.

The startup for Hawaii continues to move forward.

As we previously stated our plan is to serve four major markets out of Honolulu initially with the 50-seat RJs transitioning to larger RJs or in fact equipment larger than larger RJs as the market demands.

As I'm sure many of you are already aware this operation represents a very small part of our total business, less than 2% of our total ASMs.

However, as we move closer to beginning our Hawaiian operations, I can tell you personally I'm gaining more and more confidence that this operation will be a very successful piece of our business moving forward.

We have been warmly welcomed in Hawaii.

Some of the concerns that folks have had about operating there, we have just not found that to be the case.

We also feel that we have put in our plan very conservative numbers and again I want to remind everybody that in spite of our enthusiasm if we prove to be entirely incorrect, we are talking about an initial startup of four to six aircraft.

This is a very, very small part of our business.

On another note, a small piece of financial engineering.

Holders of 12 million in aggregate principal amount due to maturity.

It's a 4.8 million book value; the company's senior convertible notes due 2023 converted the notes into approximately 477,000 shares for the Company's common stock.

Subsequent to quarter end, an additional 131.8 million additional principal amount or 52.4 million book value or effectively face value in terms of a $100 million note that we issued of those notes was converted by note owners into approximately 5,237,000 shares.

These conversions represent approximately 57% of the aggregate outstanding principal amount of the notes due at maturity.

As you may remember, these notes were originally issued at a discount resulting in gross proceeds to the Company of 100 million.

So these conversions represent an [equidization] of approximately 57.2 million of our convertible debt.

As the shares of these stock underlying the notes had previously been included in the calculation of diluted earnings per share, these conversions will not have any effect to reported diluted earnings per share in the future.

What we really did here was effectively force the conversion to in order to prepay the notes so that that liability is effectively extinguished with the shares being issued.

In closing, we continue to believe that our earnings demonstrate the success of our business model; reflect the commitment of our employees; and the continued support of our airline partners.

We feel that this year is going to present a number of opportunities to us.

Mesa is confident that we can offer our customers and our airline customers the highest quality of product at the lowest cost.

It takes time.

All the carriers now are looking to save money.

We think that this frankly is a very advantageous for carriers like Mesa.

As we've mentioned in the past, when you look over the last few years at the amount of new business offered by the major carriers to independent regional partners, Mesa has garnered almost half of that business.

We've been able to continue to grow our Company successfully.

We're very proud of the fact that none of our employees are on furlough, have had pay cuts.

Our advancement opportunities are second to none.

We're upgrading our jet captains three times faster than any other carrier that I'm aware at.

We feel that as a result of this growth and efficiency that we can continue to operate as the lowest cost carrier and as such, we're looking at opportunities with all of our partners and as you can imagine, we certainly are looking to diversify our business further and talk to some of the other carriers who may have an interest in lowering their costs and provide regional jet service, high-quality regional jet service to their passengers.

So with that I would like to again thank everyone and open it up to any questions you may have.

(OPERATOR INSTRUCTIONS) Jamie Baker.

Good morning, everybody.

Can you hear me, Jonathan?

Yes.

No problem.

Great.

The Northwest RFP which I think you've already told your workforce that you bid on, it seems somewhat risky to me; tenured deal but with an (indiscernible) provision starting in the fourth year, no margin on fuel and I see there are also asking for a significant pay cash payment up front in exchange for an allocation.

I'm far less familiar with the Continental RSP.

Is it safe to assume that it is generally similar to Northwest?

No, all these RFPs are subject to confidentiality agreements.

And the Northwest one, I'm sure the Continental one is.

I'd prefer not to comment.

I will say specifically -- I will say it when we talk to other carriers there are certainly things that folks want.

And there are certainly things that we can and can't do.

I think that we have a pretty good history of sort of we're not ones to bid on the [come].

We're not going to enter into a transaction that we think is high risk.

We, for example, passed on an opportunity to do something in a bigger way with America West, USAir which may or may not have been a good decision but at the time we felt that it was just too risky.

I can tell one thing, we're very satisfied with our existing book of business.

And feel that we can continue to grow the Company just with our existing partners if necessary.

But we're not going to enter into a deal just to do a deal.

And if we kind of continue to earn the kind of margins that we feel are reasonable given the risks associated with what we're doing and that -- there's a lot of variables there too.

I mean there is the level of risk that you would assume if you are on the hook for the aircraft and you might be willing to take a somewhat lower margin if you're not on the hook for the aircraft.

It's all as my good friend David Bonderman told me, it's all in the structure.

I don't want to put words in your mouth but is it correct that you've suggested internally that you did bid on Northwest and intend to bid on Continental?

Jamie, I wish I could comment but I really cannot comment on it publicly.

And I may or may not have said something on one of my employee hotlines.

I hope I didn't say anything that's going to get me into trouble.

Okay, thanks a lot.

I appreciate it.

Jim Parker of Raymond James.

Jonathan, good morning.

Regarding your Hawaii business.

You're doing very well in your mainline business.

And Hawaii at least the history is that no airline there has made any money.

And you've got a couple that are either in bankruptcy or just got out and seem to never go away.

Just kind of a one, two, three on why Mesa would do so much better than those carriers have done in the past?

First off, again I want to just remind you that this is a very small part of our business.

We also feel that we can go into that market with what is a high unit cost aircraft no doubt, but they will be less expensive because one of the reasons why we're -- I have to say we have struggled a little bit is and I went to touch on this -- there has been a lot talk about how the CRJ market was going to fall out of bed.

We have anxiously waited for that to happen in order to source these aircraft.

And frankly it's just not happening.

We do feel they will be somewhat less expensive but not I would say not nearly what people would expect the market to be or have thought the market would be.

But we will do something and there I think ultimately that will be very creative.

I wish I could go into more detail on that but all I can say is that I think Mesa has had a pretty good history of coming up with things that makes sense.

And again, we feel that the opportunity is there whereby we could do something creative, provide again a small independent operation but one that may ultimately we think prove to be extremely profitable.

If you look at the inter-island business, and remember we do have the benefit of looking at both Aloha and Hawaii when they were in bankruptcy.

We feel pretty strongly that the inter-island business can be successful for a low-cost carrier.

Now ultimately again we know if the 50-seater is not ultimately where we want to be.

But I can tell you that with a larger aircraft like a CRJ 900 or potentially something larger than that we feel pretty comfortable that with our cost structure it can work out very well.

And again, I would suggest that we're going to be very careful about how we do this and I think we're going to be very creative and I think that that will result in something that I think people on the street will find very unattractive.

Jonathan, it appears that there are 89 50-seat CRJs that are parked.

You are suggesting that the lease rates or values have not come down much?

Is that correct?

I'm not sure they haven't come down.

Sometimes when you see a lot of inventory in the real estate market the prices haven't come down because the sellers haven't figured out that the prices are lower.

But at this point I can tell you that we're not getting calls every day offering up airplanes at $60,000 a month.

Okay.

Regarding your turboprops you're down to 20 or 19 and you say you lost less than 750,000 in the first quarter.

Just what was that in the prior year?

What was the loss in the prior year first quarter?

Something probably north of one million.

And again the fuel prices are -- unfortunately that operation is impacted by fuel prices.

And fuel prices were up what -- close to 50% year-over-year.

Right.

Okay, thanks.

Mike Linenberg of Merrill Lynch.

Good morning.

With respect to I just want to make sure I heard you when you talked about the ASM forecast for 2006 of 9.1 billion.

If we look -- you did 2.3 billion in the December quarter.

To get to the 9.1 billion for the year it seems like that your absolute ASMs would drop in the makes quarter and then in the second half of your fiscal year they would actually be down.

Is that, if my math is correct is that -- that may be airplanes that are being moved east in the (multiple speakers).

Well, the way it is quarterly let me just tell you what we have quarterly.

Okay, that will be helpful.

Hopefully these numbers will add up.

We did 2.3 million in the first quarter.

We're estimating 2.150 million in the second; 2.250 million and 2.350 million.

Is that stage length, Jonathan?

Is that planes coming out of America West on the West Coast and going into shorter markets on the east --?

Some of that is that for sure.

Although I think it more importantly is just aircraft in transition being out of service for a week here and there.

I see.

So have you actually calculated as you move airplanes around what that net effect is to your fleet given the size of your fleet?

I mean is that like operating with three or four spares?

I'm sorry, Mike, that is what this projection is.

In other words that is what we calculated.

I think it's actually fairly conservative.

But we'd rather be conservative on this.

Okay.

My second question, Jonathan, I think I heard you correctly.

You did mention that you're going to put the CRJ 200s into Hawaii and if there's an opportunity to add bigger RJs and then I think you actually said airplanes bigger than RJs which you know the CRJ 900s which I read that as I don't know if that's narrow bodies like 7-3s, and Airbuses, 717s what of that like.

If that's what you were hinting at, what sort of restrictions do you have with your current co-chair relationships that maybe would preclude you from flying narrow body equipment?

Or is just Hawaii viewed as a completely separate market and you can get away with operating bigger airplanes if the opportunity presented itself?

We don't have any restrictions per se other than Delta has a scope clause that says we have to operate on a different certificate which is why we have the 900s on the Mesa certificate and all the Delta flying on the Freedom certificate.

But it's not saying that would be an issue.

I would hesitate -- as a bigger problem we don't have a rate to fly a narrow body aircraft and while I think our pilots would be very anxious to do so, I'm not so sure how anxious ALPA would be for us to do so.

And that might be a bigger issue.

But that being said I still think it would be doable because I think our people here would not want to miss that opportunity and would make their voices heard to make sure that could get done.

On that line about rate, Jonathan, with the pilots.

You do have a -- do you contract amenable date coming up in the summer of '06?

No.

That maybe -- maybe that's the flight attendants.

That's the flight attendants.

Strike that.

We've had some preliminary discussions with the flight attendants.

We have I would say probably one of the best relationships in the industry with our flight attendants.

We've had a contract now for almost five years and in that five years we've never had a grievance that's gone to arbitration, not one.

We've been able to solve everything just internally which is a nice feeling.

We feel pretty comfortable we're going to be able to do something with the flight attendants pretty quickly.

Okay, good.

Great, thank you very much.

Also I want to mention out of Hawaii I would say all of our partners, I don't think I am speaking out of school when I say this, but all of our partners have talked to us about co-chairing opportunities.

And in fact just yesterday we got inquiries from two other large jet operators to co-chair on our Hawaiian operations.

We think we're going to be able to start that operation not only with the local market -- I think will be enthusiastic, but also with -- we could potentially have three, four, or five co-chairs on those flights as well.

We feel pretty strongly that we're going to have a real opportunity there and be able to fill up these aircraft pretty quickly.

Ray Neidl of Calyon Securities.

Jonathan, was that 9.1 billion forecast for ASM through the fiscal year, was that down from your previous forecast?

Peter seems to feel that it may have been down a little bit but not noticeable.

Okay.

The other thing is more of a general question.

Are you seeing industry trends now where some of the partners or some of the new contracts you are seeking or maybe for some of the current contracts where the larger airline wants the regional to take more risks such as the risk for fuel prices and some other basically not controllable items?

Do you think that is a trend of the future in this industry?

No.

We haven't seen that at all.

I think it's kind of interesting because everyone has been talking about this.

I find sort of a very opposite thing happening.

And that is as it's become harder to finance aircraft and it costs money, there are fewer and fewer of us who can do it.

If anything I'm wondering which way the leverage is going.

You can count on one hand the number of carriers that can finance large regional jet aircraft.

Right now to finance a CRJ 900 it's going to require a 4 or $5 billion down payment.

You've got Republic, Skywest, I would probably argue that Skywest has got its hands full and ourselves.

Pinnacle and Mesaba are -- got their own issues to deal with.

ExpressJet clearly.

Continental has made it clear that their costs are not market rate.

I'm not quite sure how many guys are out there that can do the kinds of things that people like ourselves and Republic can do.

I think that if anything we're going back to partners and saying, we appreciate that this is what you want but this is what we can do.

And if we're going to make significant investments in new equipment, we expect reasonable rates of return for taking on that risk.

And given the fact that all of our partners have been in bankruptcy at one point or another, there is a significant bankruptcy risk that these contracts are not being issued to AAA credit.

Like all industries, when those risks are assigned, different rates of returns are required.

And I don't think ourselves or Republic or Skywest or any other carrier is going to go out and look to do a contract at a 2% margin and take on a lot of additional risk.

You can just say, we pass.

And when two or three guys pass and there is not many other people to do it, I think that you are going to see normal business economics apply to the industry.

What is a fair rate of return in this kind of business particularly when you're putting your own capital to work.

Not to put words into your mouth, but it sounds like you are kind of looking at the industry the same way that I am that eventually it may boil down to just the Big Three?

You mean in terms of the regional industry?

Right.

I had always sort of questioned the model of the major carrier owning its partner.

In fact I used to joke around that if you already own your partner with your code, go buy somebody else's partner.

And I think that clearly now when you see what's going on with Comair and ASA and you see it now at Pinnacle and Mesaba, it's a very -- and now ExpressJet as well, these stories have just not worked in the sense of the relationship they have.

And they've got to have a diversified book a business.

I think there is a few of us that have been able to achieve that.

I think Mesa being one, Republic another, Skywest the other.

And I think that somehow with what's going on you will just see what I would consider to be sort of normal business practice.

Assume -- now when we had to pull 59 aircraft out of US Air, I think that, yes, we had to go and we put aircraft into United.

That may not have been as attractive as earlier.

And when we put the airplanes into Delta, we took a significant risk by taking on the Dornier Jet which was a risk that really has paid off for us now that that debt has gone away with the Delta bankruptcy.

But I can tell you going forward if we were to do business with another major carrier we think we will provide it at below his cost and the net affect will be very positive.

But I think it's fair to say that we're not going to do it for nothing.

I don't think anyone else will.

Obviously as I mentioned before, there is -- depends on how that structure is.

If we take on the risk of the aircraft we're going to require one return.

If the carrier takes on the risk of the aircraft and takes on the burden of early returns, then obviously we would work for something less.

It's just a risk adjusted rate of return.

I will tell you that I feel pretty comfortable that it is still a very good business.

There is tremendous opportunity and while some people are concerned about Mesa's growth and we've got one airplane to add this year which clearly is not much a growth plan.

But in our 24-year history we have never had a first officer remain a first officer for five years.

We're upgrading people now well within that time.

And that is the result of our growth.

I think that I'm very confident that I'll be able to tell people five years from now that we still do not have or never had a five-year first officer.

One last thing.

How did your plane ever hit a coyote?

Unfortunately a lot of these airfields do not have fences around them.

And a coyote was on the runway.

Okay, thanks guys.

What was amazing is that the coyote did not fare that well nor did the plane because the plane ended up being totaled.

Oh really?

It was covered by insurance of course though?

Yes.

And I will mention no one was injured.

It just damaged the gear and when the year gets tweaked and it can cause such damage that it's not worth repairing.

Okay, great.

Thanks, Jonathan.

Glenn Engel of Goldman Sachs.

Good morning.

A couple technical ones.

One is can you give us the fuel expense and fuel gallons in the quarter?

And also just whatever how your reliability is doing in whatever reliability measures you can give us?

Sure.

Peter said that he would like to call you back, Glenn, on the fuel question so he can break it out.

I do know as I said earlier I think our fuel expenses is up --

203 per gallon.

$2.03 per gallon up from $1.30.

So you can see it is up pretty significantly which impacted our -- it had two ways of impact.

A, it impacted our Air Midwest operation clearly.

Also because of the way our America West contract works, if fuel prices go up our margin effectively goes down although we earn the same amount of money.

If fuel prices are lower given the fact that we earn the same amount of money, our margin would go up.

So there is a little bit of an impact there as well.

I'll give you a call off line and go over --.

In terms of reliability.

We think the Company is operating very well in particular we focused on the Delta operation close to 99.7% controllable completion rate.

Given the amount of movement we have in our system, United began service with us in Los Angeles and Denver.

We then went to fill a plug, a hole, in Dulles.

We'd never operated there before, transitioned all of our equipment out to Dulles.

We're now adding airplanes into Chicago.

Chicago has been a challenging hub for United recently as they basically transitioned out of the Air Wisconsin handling agreement and now being handled by Mainline employees.

They're making a lot of progress but that certainly has been any transition can be tough.

The America West operation has run just fabulously particularly here in Phoenix we've been way above all our goals and I think we couldn't ask for a better job here in Phoenix.

The operation has been running very well and we do it with spare allocation levels that are half of those that most of our partners carry for themselves.

I'd think it is a really good indication of the fact that we're operating new equipment as well as -- and I will say I think it makes a significant difference.

We have a very young dedicated and motivated workforce.

Are all of your maintenance contracts passthrough where the revenues and the accruals are about the same?

Glenn, we --

I mean like a Skywest has the timing differences.

Yes we actually have tried to enter into probably a higher percentage of contracts where we actually pay on a power by the hour basis each month.

As opposed to I believe Skywest has a higher proportion while the block hour cost is known, they don't actually pay anything until an event happens.

We're actually, if you will, prepaying our vendors each month.

And finally, Jonathan, can you talk about what Delta is doing or thinking right now regarding its regional jets?

I mean Delta is certainly doing what they can to lower their own costs internally which they've had had Comair in particular has been a very high cost carrier.

They just as you probably know recently did a deal with their pilots to take out I guess what they project to be about $17 million worth of costs annually.

We continue to talk to them about opportunities there because I know one thing for sure is they would clearly like the opportunity to fly larger regional jets.

I believe Jim Whitehurst made a comment publicly about the attractiveness of a 78-seat CRJ 900 to Delta.

As the only operator of CRJ 900s, obviously that would be of interest to us.

I can tell you that and I feel very confident in saying that they have been delighted with the service that Mesa has given them.

I get phone calls quite a bit from some of their management people who tell how working with Mesa has been a pleasure; that we've been so flexible.

You know they too have begun service.

They were going to put us in Boston and at the last, last minute, moved it to Orlando.

So I think our relationship with Delta is very good and again, we have to see how things shake out.

But clearly I believe that there is significant opportunity there because I just don't think that under any circumstance that a high-cost carrier even with the benefit of bankruptcy is going to get to the levels of costs that we do beyond just the aircraft costs which are costs that they could pass through to us anyway.

Just based on seniority for example, even if some of these carriers had an identical contract to Mesa, which again, I'm not sure they could achieve, the seniority of these other carriers is so much greater than Mesa's especially on an incremental basis, that alone could push their labor costs up 20% higher than ours.

So we'll just have to see how things develop.

They've been a very good partner to us.

I think we've done a great job.

Our people at Freedom have done a wonderful job and we're just going to continue to do that good job and hope like we were at United -- we know, we got rewarded with additional 30 aircraft of flying.

We're now United's second-largest partner.

I'm hoping that over time the same thing will happen with Delta.

Thank you.

Just so that nobody feels slighted on the fuel, I do have those numbers for you.

We had a fuel expense in this quarter of 104.3 million.

We burned 51.4 million gallons at an average price of $2.03.

That compares to the December quarter of last year where we had 66.9 million in expense burning 48 million gallons at an average price of $1.39.

Thank you very much.

Helane Becker of Benchmark.

Thank you very much operator.

Hi, Jonathan and Peter.

I have just a couple of questions.

The insurance gain on the coyote strike, is that in the numbers for the December quarter somewhere in here?

Helane, actually what we got from the insurance company was almost exactly what the aircraft was on our books for.

Oh okay.

And then on the balance sheet, is there any more temporary financing left or is everything on permanent financing now?

No, we have three aircraft, three 900s that are on interim financing.

But that's it.

Okay. so then as we're looking forward the numbers where interest expense came down so dramatically and interest and depreciation shifted up I guess to what aircraft run expense and flight ops, is that we what we should be thinking about?

Is that why there were so many differences?

Yes.

Yes, because although we took 15 aircraft, new aircraft, we also refinanced 15 of our 900s that had been on interim financing so that you've got this shift from interest plus depreciation to rental expense.

And obviously the interest expense is sort of below the line.

Right.

I just wanted to make sure that when we're thinking about that we think about that correctly.

And then going forward with the aircraft what aircraft are coming in in the current quarter?

Did you say that?

No, what Jonathan said was that we have one remaining 50-seat aircraft that we owe United during the remaining fiscal year.

Okay.

I wanted to get that clarified.

When you talked about '06, you're talking about fiscal '06, not calendar '06, right?

Is that right?

Yes.

Okay.

Great, those were my questions.

Thanks for your help.

[Jeremy Falk] of Morgan Stanley.

Good morning.

Focusing on the Hawaiian operations, when do you plan to start those operations?

We had planned on the latter of the first quarter.

I think in all likelihood we're finding that the biggest timing event now is just the creation of a fuel ladders to get the planes there.

We hoped we could stop at the Midway Airline but at Midway but unfortunately Midway is now apparently a bird sanctuary.

As a result, we will probably push the start from the end of the first quarter to somewhere in the beginning of the second quarter.

Also looking at Honolulu specifically, how many gates do you have available?

And also are you seeking additional gates?

No, I think we're planning to use a terminal that -- a computer terminal that's plenty of room for us.

And again, while we are going to have high frequency service just to going into these markets, we're only talking about initially -- will be four to six aircraft on the ground at one time.

We're going to be fine in terms of space.

How many aircraft ideally would you anticipate?

I think it's going to just depend on what happens with the other carriers, what their response is.

But I think ultimately we're going to be in the 8 to 10 range.

Great.

Thanks so much.

[Nate Redlane] of [Imperial Capital].

I just had another question in regards to the Hawaii operations.

Nobody in Hawaii it appears is using CRJ jets now and so in terms of the maintenance infrastructure to maintain the planes, are you going to be trying to outsource that to contractors that are already there?

Are you going to bring maintenance people with the operation or what are your thoughts on that?

Our thoughts at this point is we're going to do it ourselves.

Again, four to six aircraft does not require a huge amount of labor.

I mean you're talking the entire maintenance department may be 10 people.

A lot of the obviously back office administrative work will be done here.

And so I think that -- I will also tell you that when we've gone to out to the workforce to see who's interested in doing it, the response has been very positive.

So we feel pretty comfortable we can source people from here if in fact we have difficulty over there finding people who are trained and qualified.

There is in fact a tight labor market in Hawaii.

We're going to just have to figure out where people are going to come from.

We'd certainly like to get people there who know the ropes.

But if not, we certainly have people here who seem to be anxious to go.

Do you see co-chair relationships or a local commuter traffic as the primary drivers for this business in the future?

I'd think there is a lot of local business there.

The fare levels had risen significantly.

And our projections -- we're projecting an average fare which is close to 25%.

I think it's 23% below the current fare.

I think there will be some stimulation of local tropic.

But if we can put some major airline codes on it in spite of the fact that there is still significant service now to the outer -- the neighbor islands, we do believe that there is still a pretty fair amount of traffic that travels between the islands.

And you know co-chair with some of our partners could be very attractive for us.

Do you see that fare discount as sort of promotional to enter the market or as a long-term operation as the lower cost carrier?

The way we looked at it is in the first year it was clearly their promotional.

We did in our projections increase the fare levels over the next few years.

I will tell you that out three years we were still below where the fares are today.

But not by 23%.

Christine Min of Calyon Securities.

Good morning.

I have a question regarding your operating margins.

With margins having been strong in the past couple of quarters and taking into consideration the reasons for the dip in the first quarter that you've provided, what do you expect will be that range for the year, the normal long-term range for Mesa?

What is that, Peter?

We have said in the past that historically our margins should be in the 8 to 10% range.

And this quarter's margin was no different.

And we would expect to continue to see our margins in the 8 to 10% range.

I think what Jonathan mentioned was there are obviously some transition expenses that are onetime and atypical.

There will also be some Hawaii startup expenses.

But we still expect to see our margins in the 8 to 10% range where we have historically seen them.

Okay, great.

Thanks.

At this time we have no further questions.

I just wanted to wrap things up.

Again, I want you thank everyone for talking about it.

I know that I want to mention on Hawaii we got a bunch of questions on Hawaii which I'm pretty sure was interest there.

As I mentioned before, we are working on what I think are going to be some very creative plans.

I think that will -- I think allay a lot of people's concern about that.

I know that there was some earlier reports about relative costs; the data was entirely inaccurate.

But we feel confident having gone through this that this is going to work out and on the long-term basis become extremely profitable, a nice piece of business without a lot of risk.

We think all of our partners are anxious and are in discussions with us to further our relationships with them.

We feel confident with Delta, for example, where some people have pointed to the risk associated with the fact that they are in bankruptcy and our contract isn't reaffirmed.

We know where we are on a relative basis costwise to other carriers there.

And as a result, we feel very confident that we have a good contract with Delta.

And the relationship with them remains very strong and we continue to talk to them about other opportunities.

We think that United now coming out of bankruptcy will also be looking to do things maybe a little more aggressively than they had in the past once they return to profitability.

We are going to be replacing the 50-seaters there with 70-seaters which will in fact enhance our profitability.

And on the America West US Air side, as you know we have a long-standing relationship with America West that I think given what they like to do in terms of regional jets, particularly in the area of upstaging their regional jets, given the fact that we operate the 900s and this as a jet that they have publicly stated how much they like.

I think there is going to be some opportunities in that area for us too.

So again while I know that it is of some concern to people that we don't have anything on the books right now, I can tell you and as I'd said before, I think where pretty confident that there will be some good things happening this year that will continue to allow us to grow our business.

Whether we'll grow 60% a year like we have the last year or two, I don't know.

But frankly we have good margins, we have a strong business, we can continue to grow the business I believe easily double-digit.

And given that I think that we continue to have a lot of confidence in what's happening here.

I want to thank everyone again for their support.

Our stock has done a little bit better and I know that that's good news for you.

It is certainly good news for us.

And I just want you to know that we do appreciate who owns the Company and we're going to continue to operate it in their benefit.

Thank you very much.

Have a great week and we look forward to talking to you in the next quarter.