Mesa Air Group Inc (MESA) 2006 Q3 法說會逐字稿

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Jonathan Ornstein, CEO of Mesa Air Group. Thank you sir, you may begin.

Hi, this is Jonathan Ornstein. Thank you very much for joining us this morning. We have quite a bit of information to go over, so we'll get started.

First, I'd like to read you our forward-looking statement. This conference call will contain various forward-looking statements that are based on management's beliefs as well as assumptions made by and information currently available to management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will be 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, and that underlying assumptions prove incorrect, actual results may vary materially from those anticipate, estimated, projected or expected. The Company does not intend to update these forward-looking statements made in this call prior to the next filing with the Securities Exchange Commission.

Again, thank you for taking time out. We have quite a bit to go over with you. Let me start with just a high level of earnings overview. The Company's reporting third quarter pro forma net income of $10.9 million or $0.26 per share and revenues of $339 million.

This compares with pro forma earnings of $16.5 million on revenues of $298.6 million or $0.39 per share for the comparable period fiscal 2005. On a GAAP basis, our reported net income was $10.9 million or $0.25 per share as compared to $17.1 million or $0.40 for the same period of last year.

There were a number of items affecting the third quarter of 2006. Total operating revenues for the third quarter increased $45 million, primarily the result of an increase in certain reimbursable base costs such as fuel.

Under our revenue agreement--certain expenses such as fuel are directly passed through to our partners as I think most of you know. As a result, any increase in the unit cost of expenses are ultimately corresponding to an increase of revenue.

Including the June 2006 quarter was a $9.7 million U.S. Airways bankruptcy settlement. Offsetting this gain was more $7.8 million in additional expenses and $2.4 million in reduced revenue due to the transition of the remaining 50 seat regional jets from U.S. Airways to Delta and United Airlines.

In addition, severe weather on the east coast during June impacted our overall completion rate, reducing revenue by $2 million and increasing operating costs by what we estimate to be a similar amount. In addition, we had over $2.5 million in Delta Dash 8 start-up costs, goal promotion and marketing expenses, a worker compensation true-up from 2003-04 and expenses related to a client engine upgrade that we discussed on last quarter's call.

Total ASMs for the third quarter of 2006 decreased 2.7% from the third quarter of 2005 primarily as a result of the transitioning aircraft out of the former U.S. Airway system into Delta connection United. These aircraft were on the ground for some period of time as well as the impact of June severe weather on the east coast. Specifically due to U.S. Airway's transition, ASMs for our 50 seat regional jets decreased 7.9% for the third quarter of 2005 and ASMs for all other aircraft increased 1.7%.

In addition, we experienced a 4% reduction in block hours flown for the quarter, again as a result of the transition and the weather. Our total fleet count at the end of fiscal third quarter was 185 aircraft comprised of 96 50 seat regional jets and 15 70-seat regional jets,38 86-seat regional jets, of which 56 are U.S. Airways America West, 62 at United, however we have two CRJs that are coming off lease in early '04 so they will have a total of 60 RJs in our United operation, 26 transition to Delta, four more on their way, and five CRJs operating in Hawaii for go.

In addition to our regional jet fleet of 149 RJs, Mesa operates 36 turbo props including 16 37 seat Dash 8, 6 at America West and United, 20 1900s at Mesa's--6 at Mesa's independent, 14 at U.S. Airways and as we mentioned, we have additional Dash 8s going into Delta.

We added five aircraft to the fleet during the quarter. These comprised of five X Independent CRJ 200s that have been operating in Hawaii. The fourth quarter we will be adding 12 Dash 8 100s flying for Delta in their JFK hub. We will add two to four Dash 8s per month with the 12 aircraft scheduled to be in service by late September. Mesa is contracted to placing an additional four 50-seat jets into the Delta operation and expects to do so in the first quarter of fiscal 2007.

Operational summary, I'd like to take some time to go over this because it did have a rather significant impact on us. For the quarter, our 2,000--our controllable completion rate was 98.6%. That was controllable.

Given the difficult operating environment due to weather and air traffic control issues on the east coast, we're satisfied with the performance, however, we continue to look at a couple of ways to improve things.

Primarily on the east coast, with United, we operate out of Chicago and Dulles hubs, but more importantly, we operate into the six worst air traffic control weather cities in the country. Including Boston, LaGuardia, Newark, JFK, Philadelphia, and Atlanta.

Of all the United Express carries, we fly approximately 1,330 times a month into those cities, the only other carrier there is 30 departures into Atlanta with one other United Express carriers, so we clearly have the heavy lifting to do in United operations.

Approximately in June alone, 10% of our flights were cancelled due to weather. Another 12% were delayed for an average of approximately 130 minutes. This is the kind of operational issues that we're working with United to solve together. Part of that is certainly due to the weather, but also part of it is due to the fact that United has an automated dispatching system.

We participate in that. That dispatching system is based on revenue, so you imagine we come to sort of the bottom of the heap. Which then puts a lot of pressure on us in that same period of time, United's cancellations were significantly less than us, they cancelled in those six cities approximately 0.44% of their flights.

So as you can see our cancellations were over 20 times higher than theirs. This is just a situation that for Mesa is very difficult. It clearly impacted our operations, it clearly impacted our revenue and our costs and we're working together very cooperatively with United to [emiliarate] these issues going forward.

We also have now split operations at Delta and US Airways. We had been serving all the Orlando hub with Delta. We have now moved aircraft into Atlanta, something that obviously we enjoy the opportunity to participate in Delta's largest hub, but it has some operational issues that have evolved as a result.

Delta is also working very cooperatively with us to solve this and I think that given some of the plans we have with Delta going forward, I think that issue should be resolved satisfactorily.

US Airways, we have moved approximately 18 CRJ 900s to the east coast. That has presented some difficulties. We've had to move crews. We are, in fact, working with them to make sure we have adequate (inaudible) coverage going forward now that the operation is split.

There is a benefit with the 900s operating there because the revenue generated on those aircraft is a little bit better than it is in Phoenix, which does help us and offset some of those expenses.

We would like to talk a little bit about Air Midwest. Air Midwest was of course our 1900 operation. We're now down to 20 aircraft with about 17 lines of revenue service. Our strategy of working to place all those aircraft into central air service program has worked out reasonably well.

The loss in that quarter was 700,000 versus, I believe, it was about 1.8 million in the last year for the same period. We have leased 14 of our aircraft out to other operators and our EAS subsidies will be increased this year. We just won five additional markets worth about $5.6 million annually.

We are projecting that the total of Central Air Service revenue for next year will be approximately $24 million. That's up from about $6 million five years ago. So we are seeing some improvement in our markets and what we're doing with the 1900s.

Of course there, we do not have the benefit of pass through on the fuel. I would suggest that if fuel had been anywhere near where it'd been over the last few years with the EAS markets, the 1900 operation would be solidly profitable right now. We project about $2.4 billion ASMs in the fourth quarter.

Actual ASMs for the remainder of fiscal 2006 will be a function of placing additional aircraft into Delta, as well as marking schedules our partners require us to fly our current projections reflect an estimated 4% increase in system wide capacity for the fourth quarter. As a result of some minor changes in transition to Dash 8 aircraft in the Delta operation as well as the increased capacity due to our go operation.

Should our partners schedule change versus today, actual ASMs may be impacted. Again, on this particular subject, I would suggest that the changes we're talking to our partners about would help rather than hurt, primarily because we're hoping that we can see some improvement on the east coast flying that we do for United right now.

We'd also like to talk about--give you some idea of where we stand on the labor front. We did begin negotiations with the flight attendants just this week. This obviously is a long process.

Most of these contracts frankly take far too long in the period--sometimes years to get done. We were able to get a flight attendant contract done, our first contract, rather quickly. We certainly hope we'll be able to do the same.

I would hope that the flight attendant union, our flight attendants are represented by AFA, will appreciate the fact that I believe Mesa may be the only carrier that is representation as AFA that has not furloughed a flight attendant nor cut anyone's pay. We currently employ about 1,100 flight attendants, we just hired another 100.

I think that we would like to think that we can make this happen rather quickly and painlessly. Our pay is also certainly well within industry average. In fact, it was pointed out to me by one of our partners that for the first five years, our pay is actually higher than their pay for their flight attendants. So we do not view this as a problem. We've always had very good relationship with our flight attendant and the flight attendant union.

In fact, in the eight years that I've been at Mesa, we have never had a grievance from a flight attendant go to arbitration. Something that is just literally unheard of in the industry. We've always been able to solve the problems very quickly and easily.

On the pilot side, we don't have--we have another year or so before we even begin negotiations with them, so that takes some time. We recently had a change in the ALPA leadership here at the company with some folks that were brought who I think have taken a far more productive approach.

These people come by and stop in the office all the time, call us. We also feel that their view is they would like to represent the interest of Mesa pilots. They are--seem to me to be less concerned with what that impact has on the rest of the industry in terms of the fact that Mesa has won a lot of business away from other ALPA carriers.

We do have a lower cost structure, we have been very successful in that, we also have no one on furlough, no pay cuts, we have been advancing our pilots much more rapidly than the rest of the industry.

For example, we have folks who are upgrading to regional jet captain within three years. At most other carriers, that's normally about ten years. So our people--while our pay scales may be a little bit lower, their compensation is in fact significantly higher as a result of their opportunity to move forward with the Company.

I'd also like just to point out that over the almost 25 year history of Mesa, we have never had a five year first officer, only one who's chosen to be a first officer. We've always had these growth opportunities and this now is something that's become decades long and we think we'll be able to continue, so we're hopeful through there that we can have talks when they begin down the road, but something else that we need to be aware of is in fact coming and at some point we will deal with that.

Hopefully ALPA will take a productive approach. Clearly I think that they've seen that some of the contracts they've done in the past have in fact not served their members well. In fact, a lot of business has recently been taken away from ALPA carriers by non-ALPA carriers, Republic and Sky West.

We are sort of one of the few ALPA carriers that has in fact garnered additional business over the last few years and hopefully that track record will have meaning in our negotiations. As far as forecasting summary for our earnings guidance, which I know is important to everyone.

We do expect fourth quarter results will come in below the current first call estimates of $0.35 with revenue increasing slightly from third quarter levels and operating margins in the mid to high single digits, while the U.S. Airways transition is now officially behind us, there will be some few lingering items affecting the fourth quarter, such as additional incremental seat checks that we did during the transition which will be about $1.6 million, timing of certain engine expenses resulting of the return of some aircraft, and the cost of relocating personnel.

As always, our earnings which could be impacted by a change in our partner's marketing schedule and timing of maintenance and training events with the emphasis again being on the timing of Hawaii and Delta Dash 8 start-up expenses. During the third quarter, we transitioned an additional eight aircraft so that as I mentioned, that is complete. We do expect that all the aircraft will be in revenue service by the middle of September.

So as you can see, there has been a lag between the time that the aircraft had come out of service and the aircraft go back into service, something that we can't just avoid with paint schedules and seat check that we're doing.

As you know, we started revenue service on June 9th for Go!, our independent line operation with three aircraft, we doubled our schedule on June 30th when we added two additional aircraft. Currently we have a total of 64 flights a day in four markets. The operation is going much better than expected.

Load factor was well above forecasted 82.5% of the seats filled in June. We've been very well-received by the local market and our bookings are clearly exceeding our expectations.

Also, I've indicated the operation represents a very small part of our business, less than 2% of our total ASMs, however, given the success of the operation, we are now in negotiations and hope to place into service by the end of next year larger regional jets. Although these aircraft are inexpensive by 50 seat standards, because we got them at pretty good prices, clearly the operating economics, it's a great sort of path finder aircraft market to build--aircraft to build a market share, but the 90 seat or larger aircraft are the ones that really will make things happen.

The fact is, if we could maintain these load factors, which I think we'll be able to do, and even with the average fares where there are today, the 90 seat aircraft would be profitable at this moment. I think for us able to say that with only two months of operating history is pretty remarkable, and I feel that we will continue to grow the operation in terms of its passenger base.

As yet today, we have yet to put a single passenger from a tour operator on any of our aircraft. We are now concluding an number of agreements with tour operators that represent a big chunk of the pricing we're able to get from them is excellent.

It is far below what they were paying before, but in terms of our average fare is actually a very good piece of business for us. So I think that there's really opportunity there for it to grow our business.

We're also looking at the Company as a travel company as much it is an airline, modeling it after a couple of other successful carriers that have used the web as a tool, not only to sell air transportation but to sell other related products. And in Hawaii, where such a large percentage of the travel is in fact leisure related, we think there's significant opportunities to do that.

I can point to Ryanair for example, might be considered the most successful airline in the world. They have some of the best margins, but 25% of their revenue is coming from non-airline ticket sales, which means that the airline, if you look at, is effectively a loss leader.

We don't think we're going to have to be quite that extreme, but we think the opportunity to sell our passengers additional products such as tours, hotels, cars, is excellent. We've already had very good experience on car rentals and the percentage increased through these incremental sales on an average ticket price that's in the mid-40s as you can imagine is really significant.

So we're very excited about Go!, we continue to feel that it could be a platform for other growth opportunities. We talked a little bit about what we're doing overseas. We think that we can operate a remote operation like this now successfully.

We've made very good progress on our discussions on the international front and hopefully we can see some developments there before the end of the year, which again would be a lot faster than our initial timetable had suggested to us.

We continue to talk to all the other carriers, there's lots of business out there that needs to be done as the lowest cost operator of regional jets. We think that those opportunities could be fruitful for us, but we are going to enter into agreements we feel are in the best long-term interest of the Company and not just chase business for business' sake.

We have a good strong platform of business now. We think that we continue to fine tune it, work with our partners to provide the best product. We think that the Company taking a little break at this point is not the world's worst thing, but when we talk about a little break at Mesa, that means we're not adding four or five airplanes a month, we're still adding aircraft into Delta, we have four more regional jets to go there, we've got the 12 Dash 8, we feel that we will be expanding Go!.

We also are looking at additional opportunities with new carriers that again we hope will come to fruition before the end of the year. In close, we'd like to believe that our earnings demonstrate the success of our business model and reflect the commitment of our employees in continued support of our airline partners.

We certainly have challenges, this quarter particularly has been a challenging one operationally. In large part due to the weather and some of the movement of our aircraft. But I think that our people have just done a remarkable job.

I can't tell you how proud I am of the work that's been done by our people in the field as well as all the people here in the office. Everyone worked together to move--almost half of our fleet has been displaced and moved across the country over the last 12-18 months. I think if you talk to other airline folks to that kind of endeavor is just about unheard of and I think our people really rose to the occasion and did a terrific job.

I know some of you may be a little bit disappointed with the earnings this quarter. Mesa's had a long track record of meeting expectations. This quarter, there obviously were some issues that were out of our control.

There are some issues where some expenses exceeded our initial expectations, but nonetheless, we certainly think things are on track and we continue to be optimistic about the future and the future opportunities. We just have to continue to keep a very close eye on our cost structure, which is ultimately how this business is doled out. And I think with the people that we have involved and the continued cooperation of our employee leaders as well as management, I think we're well-positioned to do that.

With that, I'd like to open up the floor to any questions anyone may have.

[OPERATOR INSTRUCTIONS]

Our first question comes from Ray Neidl, your line is open.

Good morning, Jonathan. I just want to verify something that you were saying there. The Company is slowing down right now, looks like the fourth quarter is going to slow down. How about next year as far as ASM growth goes?

And if we're trending out next year from this year, are we going to get more back to more normal type of margins and operations? It sounds like the third quarter got hit pretty bad with the weather, and that's something that shouldn't be repeated on a regular basis.

Ray, it's hard for us to talk about next year in term of growth, because obviously a lot of it depends on--we have got proposals into a number of carriers right now, some of which I think we're in the lead on, some of which we're probably less in the lead on.

The question really becomes, what new business do we win. It also depends on how fast we continue to ramp-up the Go! operation. So it's kind of hard to say. There's a couple of big pieces of business out there as I'm sure you know, and things could change really dramatically overnight depending on how some of our bids are.

Again, we are going to make bids that are in the long-term interest of the Company. Some carriers out there are looking to do deals that frankly we just wouldn't do. And I think that that reality is sort of starting to firm up there.

There had been a belief for example that 50 seat aircraft were--the market was going to drop out. I can tell you that we leased six aircraft on Hawaii at probably the best price that has been offered, but I don't think you'll see those prices right now.

I know we're out looking for a significant number of additional aircraft right now and we're having a tough time finding airplanes even below $100,000 per month on 50 seaters. There was a significant weather impact. We are talking to United about lessening the impact on Mesa.

As I mentioned, we're the only United Express carrier actually that flies to these carriers with any substance, there are 30 departures into Atlanta, but other than that, we are very, very severely impacted when the weather goes down. It creates multiple problems for us. It impacts our maintenance flow, our crews.

We had a real problem with our crews in terms of junior assignments and the impact that had because of the weather. And I think that United is very cognizant of it.

Certainly there are things that we can do better, internally, which we're going to work on, but again, I think when we're flying into those cities and we've had the first full quarter of that as the aircraft of transition to United, it's become clear that the impact was--when the weather is bad, far greater than I think either ourselves or United anticipated.

Okay. So the core business is solid going forward, when we're looking at next year, I think is what you're saying. But you did say something, where, are there some competitors out there that are kind of destroying the pricing model, they're underbidding what they should be doing and could it hurt everybody long-term as far as lowering pricing goes?

I don't think so. In fact, we've been accused of that and I still think we're probably the lowest bidder in most deals. We view a mid-single digit margin is acceptable. We believe our costs are the lowest in the industry.

There's different reasons why different carriers win business. Mesa has been very successful over the years. Up until this last order from Continental, that Republic one, we'd received half of all the new business issued by major carriers to Independent Regionals.

I don't think that trend is--I think that trend will continue and I think when you look at it now, the market's become even narrower because there's only Sky West and Republic and ourselves who I think are even in a position to finance new aircraft. We clearly have some issue that we need to deal with internally in order to maintain our cost structure.

As I mentioned, we've got some labor contracts that come up over the next couple of years, but again, hopefully, I think our people have understood that our low costs allow us to provide opportunity and stability and job security and if we continue to do what we're doing that we've done over the last eight years, I think we feel pretty confident going forward that our growth will remain in tact and the core business is in fact fine. We did move a lot of aircraft to the east coast over the last six months.

Jonathan, what did you say the acceptable margin was? I didn't catch that.

We look at margins in sort of the high single digits.

Okay, fine.

That was significantly below some of the old contracts that were in sort of the high teens but we think if we can get a margin between 6% and 9%, I think we're doing fine.

That's operating margin, right?

Yes.

Okay, great, thank you.

Our next question comes from Jamie Baker, your line is open.

Good morning, Jonathan. As it relates to airports and congestion and cancellations, and what have you, I would think the Delta flying albeit a reasonably small chunk of flying, but flying nonetheless at JFK could be problematic.

Is the contract there any different in terms of any cancellation protection that it might afford you. I know Express Jet had some unique language baked into their contract at one time.

No, but in the Delta contract it's a little bit different. There are certain requirements that we have. And because of--in JFK, our operating performance numbers that are required are--we feel, we're very comfortable there.

Some of the numbers that we have to achieve to get additional money is adjusted based on hubs. We did not expect to have the kind of issues that we did at United, but again, this is more of a United issue specific because of this automated dispatching system that they put into place during ATC.

We give our slots that the FAA doles out during the severe weather situations whee they have these, they call programs in LaGuardia, for example, in June, there were I think 90 programs during the month, so three a day.

We the get our flights reallocated based on revenue. Effectively what happened, is not only are we dealing with our weather problems, but we were dealing with United's weather problems. Don't have the same impact at Delta so we don't think it will be as severe.

Again, and we're not suggesting for a second that it's not a good program for United to do because the 767 clearly has more impact than a 50-seat. But on the other hand, we can't be in a position where we bear the brunt of that to the extent we have because there are additional costs for example, on interrupted trip expense.

You pay the interrupted trip expense when our flights get cancelled. And I think those are the things we sort of figured out over these last few months with this transition to the east coast, United is absolutely helping us on this and we think that we'll resolve this satisfactorily with a lot of work on our part.

Because I said, clearly there's things that we need to do better, but also some assistance from United that will allow us to operate more effectively into these severe airports, where when the weather goes down, the impact is very significant.

Okay, well, that's helpful. And as a follow-up to an earlier question. With U.S. Air having just allocated a large RJ operation to a carrier other than Mesa, I was hoping you could shed some light, some color on how those negotiations went? I realize it may be a touchy subject, but the fact of the matter is you weren't chose, I would be curious to hear your reasons why.

Well, Republic had the benefit of having put together the Continental deal, which I think was a deal that made sense for them, and it gave them the flexibility to take 50 seaters out.

We just did not have that level of flexibility to do that, and clearly, U.S. Air did make a choice in regards to aircraft as well. We have offered them the larger--the ERJs, yes, it would not have been a natural transaction for us and we had focused on the CRJs and for whatever reason, we weren't as competitive nor could we take out the aircraft, and without knowing what the details of their deal is, I don't know what kind of margins they were willing to accept.

As I said, we do need to make a minimal margin. I'm not suggesting that Republic didn't get that. They've had excellent margins, a company, Brian is a very smart guy, I don't have any doubt that it was a good deal, but you win some, you lose some. We won 30 aircraft a at Delta not too long ago, which we viewed as very valuable. We just have to continue to be competitive and hope that we can keep our business on track that way.

Okay, thanks a lot, Jonathan. Appreciate it as always.

Our next question comes from Michael Linenberg, your line is open.

Yeah, hey, Jonathan. I guess just a quick question here on the numbers. When you read through the press release and you highlighted the $7.8 million of additional expense related to the U.S. Airways transition, where's the Hawaii piece? Is that baked into that as well?

No, this is Peter.

Okay.

No, that's not baked in at all.

Just so you know, the Hawaii number was less than $1 million.

No, I'm sorry, Peter do you want to just--

The net result was less than $1 million.

But it's not in those numbers at all.

Because I think last quarter on the call you threw out a number of like $3.5 to $4 million was--I think that was the anticipated transition cost for both Airways and Hawaii.

I know this number is a bit bigger. Does this maybe reflect some of the operational issues that occurred through the period? I'm trying to reconcile the two.

Mike, it's almost entirely things like additional pilot training, moving crews from one certificate to another, safety checks that had to be done because we had to place aircraft from one certificate to another and conform them. It's things like that. Hawaii isn't in that number at all.

Okay, perfect. Perfect.

My second question, Continental is out there, they've been pretty public in saying that they're studying a large turbo prop operation and I believe there is an RFP out there for a bunch of airplanes, I think maybe 20-24 airplanes. Is that something that you guys would look at, just giving your familiarity with the Dash 8 platform?

Well, there are in fact a couple RFPs out there for large turbo props and we're very familiar, obviously operating the Dash 8s and we are interested. And I think the question is, can you do a deal on Dash 8 400s?

I think the concern that we have is if we're going to do a deal, because the concern of technology sort of moving forward or the price of fuel going back down, you don't want to be stuck with a large turbo prop and have a ten year lease on a five year contract. So I think any deal we would do would require us to match up the lease to the term.

Okay, and then just lastly, this is just a quick one. Your CRJ 900s in the press release, I saw 86 seats, the airplanes in U.S. Airways, are they 86? I know you were talking about going to maybe 89 or 90.

No, the ones that we have are 86 seats, we are talking to U.S. Airways about modifying them. Any additional aircraft that when we talk to them--when we were in discussions with them to add aircraft, we were going to be 90 seat aircraft and if we expand the Hawaii operation in all likelihood, if we operated the 900s, obviously they would be 90 seat also.

Okay, great, thank you.

Our next question comes from Helane Becker, your line is open.

Hi, thank you very much. Hi, guys.

I think most of my questions have been explained. I just have two clarifications. So this line item here, that's other expense of $3.7 million, that's where all of these added costs are showing up? Is that what we're supposed to think about? What comprised that number?

I think, Peter, that was the --

Where are you looking?

On the income statement, you have blah, blah and then it goes interest expense, interest income, other expense, $3.668 million. And I want to make sure I understand what's included in that expense?

Okay, in that is some of the investment gains and losses from our marketable security portfolio.

Okay. So the cost that Jonathan was talking about then in terms of moving crews around--

That's all above the line.

Okay. That's all in the flight ops and stuff like that?

Exactly, no operating expense in that other line.

Okay. So then, as we're thinking ahead with some of these costs moderating a bit, the almost 19% increase in flight ops won't be as severe in the fourth and first quarters, or--

Right.

That's how we should think about that?

yeah.

Okay, and then, Jonathan, you've always done a really good job of keeping your costs down so we're assuming this is kind of a blip with what's been going on and that things are back on track now. Are you talking to United about--especially August, when we could have pretty bad weather on the east coast with thunderstorms?

Helane, let me just give you some numbers. It's kind of remarkable, we did not fully understand the impact going to the east coast. That was probably our single biggest mistake. But to give you an example, we represent about 20% of all of United's flying in terms of United Express.

But in June, we were 60% of all weather cancellations and delays. We just can't bear that burden and operate effectively. You can also appreciate the fact that that has a very significant impact on their passengers and the whole perception of United Express.

And clearly, there are ways that we can improve that. Both internally through somewhat better preparedness and also United doing some things that can help us significantly as well. When you cancel that many flights due to weather and the impact that has down the line, which often times two or three times the amount. We had an average delay of 1 hour and 40 minutes, a weather delay in those six cities.

There is a big impact. I think now that we've identified it and it's taken some time to do that, I think we will see some improvement. Will we have to put some additional resources to work? Absolutely. We've committed to do that and there's things we're going to do going forward.

Some of the other things that can fix this will more than offset in our mind those expenses as well as the loss of revenue. We, for example, in the past at United had very good performance in terms of what we were paid in our bonuses effectively.

Obviously, that gets impacted with these kinds of numbers. We just have to work cooperatively with our partners to identify this. They've been very helpful.

I don't think--I think it's fair to say that no one quite understood the magnitude of this issue and it didn't really, because May actually was a very good operating month. May was one of our best operating months that we've had in the Company's history. But what happened with June really identified some issues that we need to work on together going forward.

Okay, two other quick questions. The tax rate going up to 39.2%, is that because more of your operations are here in the east coast in higher tax states?

It is a function of the higher tax states, yes.

Okay, and then Jonathan, I know that or I thought there was a share repurchase program in place, but you haven't really acted on it with developing Hawaii and some of these other things. Can you update us on the board's thought about that now?

We actually expanded it I think two quarters ago. We did repurchase some stock in the last quarter, but a limited amount. We're going to keep a close eye on things, we are confident of our long-term future. But on the same side, I have to say we're also very comfortable having nearly $300 million in cash and we're going to obviously weigh the benefits of stock repurchase with the benefit of redeploying some of that cash in growth opportunities.

We raised $200 million in convertible notes a couple years ago and ultimately never used the money. I don't even want to think about what our numbers would like if we hadn't done that, but I think we felt for the long-term it was still in the best interest of the Company to have that cash cushion. I'm not sure we would have had the ability to do some of the things that we did, not knowing that money was in the bank. But, that being said, we have purchased over the years how much stock, Peter?

$50 million worth of stock over the year. I think that given our views long-term I think that that program is available to us and when we sit down and sort of think where things are, that program could become active again.

Great, okay, thanks so much for your help.

[OPERATOR INSTRUCTIONS]

Our next question comes from Bob Poole, your line is open.

Hi, Jonathan and Peter. Jonathan, for the fourth quarter, just to be clear, you said $2.4 billion in ASMs and high single digit operating profit margin? Are those the two things that I was supposed to capture for Q4?

Mid- to high single digits.

Mid- to high single digits, okay. And just to clarify something regarding your comments about 6% to 9% operating profit margins today versus I think you said mid-teens, this is a few years back, if you look at the--if you compare those operating profit margins on a prefuel basis, how would you--what kind of numbers would you be talking about then? Because obviously much higher fuel costs have reduced those operating profit margins without impacting the profitability--the dollar profitability.

That really depends on the contract. And so I think, Bob, that's a fair amount of detail. Peter and I would be happy to go through it with you. But I think that net net, I don't think the impact is as great as some people would imagine.

There are caps on sort of the margins on some of the fuel, there's a number of different aspects to how the fuel is calculated, but I think that from our standpoint, Mesa never participated in the high digit returns.

So for us, this is sort of business as usual and frankly, if we can generate margins between 6% and 9%, 6% we think being sort of the bottom end, 9% being if we can perform well and continue to keep our costs down and continue to grow the business, I think we'll be very satisfied at those levels.

My concern is that when you talk about 6% to 9%, relative to mid-teens a number of year years ago sort of as the market, it would concern some of the people on this call, and I think they're not not apples to apples--comparing those two numbers, they're not apples to apples comparisons.

Compared, for example when you look at some of the margins, I'll give you an example, look at Atlantic Coast's margins with United, they were mid- to high teens.

Yeah, but they wouldn't have been with $75 fuel being passed through.

It wouldn't have impacted things, because they get a mark-up on their fuel.

Really, a markup on--okay.

Yes. Some of those contracts have been modified, there's caps, for example, but, no.

Do you get a mark-up on any of your fuel?

What's that?

Do you get a mark-up on any of your fuel?

It depends on the contract.

But there are some contracts where you get a mark-up on fuel?

Yes.

And that mark-up is a percentage of the fuel cost?

Yes.

Okay, thanks.

And we have a question from [Michael Scholten], your line is open.

Good morning, Jonathan, could you give us some more information about the profitability or lack there of of this Go! operation and kind of--I think we have ASMs and load factors, but can you for at least that one month, can you--

Sure, the (inaudible) generated was significantly above expectations, significantly. I mean mid-double digit better than we anticipated. I'll give you just a rough idea, I don't think there's anything, Peter, I can do this.

We generated revenue in excess of $1700 a flight and I can tell you that our break even is we believe, our fully allocated break even is less than $2,000 a flight. That number will probably in all--even though we doubled our levels of service, it's gotten better this month in July.

We are, frankly, very surprised that with 50 seat aircraft, which again are not ideally suited that we're doing as well as we're doing. Again, as I suggested earlier, that if we could maintain these load factors, which given the way the market operates on peaks, we think we probably could, and with the existing fare levels, the Company would be profitable with larger regional jets today.

We are not necessarily in a rush to get the larger aircraft because we like the fact that we can continue to build our business and as I said sign up some tour operators, for example. We see continued increase on our website activity. There's a lot of things that we need to develop.

We've only been operating for a couple months. I think that's--when we do introduce the larger aircraft which I would like to try to have in place before the beginning of the summer next year, certainly we'd like to hope that they'd be in by the end of the year. We think that the operation is going to work very, very well and that's assuming no changes in the market place from any of our competitors.

We already saw some movement by one of the carriers moving some capacity into other markets. We think that that trend may well continue. I think that we feel that this operation is going to prove to be a very successful long-term winner for the Company. We're very committed to it.

The response we've gotten has been entirely different than frankly we had anticipated. The local market, the local people have just welcomed us with open arms after the sense that I think as a result of the antitrust immunity that the two incumbent carriers had, fare levels had gone up so much. We reduced the fares by probably close to 50% and we have been, again very well received by the local market in spite of the fact we're a mainland company.

So you're only losing--even with the 50 seaters, and with all the promotions and everything thrown in, you're only losing $300 a flight?

That would not include--that's a run rate basis, that does not include our--yeah, on the fare promotions, yes, but it doesn't include the start-up expenses that we had for the first month, which clearly, we had five airplanes over there just parked for a period of time. But on a run rate basis with the five aircraft currently in service, I think those numbers, that's about right.

Okay. And yet, did I hear before your total operating loss on this in the quarter was less than $1 million?

Yes. And again, I said that our revenue was above $1,700 a flight in June and our costs were below $2,000 so it's--I don't even think it's fair to say that it's quite as much as you had thought.

Okay. Just in terms of our thoughts on this endeavor and other growth opportunities, we just see--it looks like the free cash flow yield on your stock is around 20% or possibly more and that kind of sets a pretty high hurdle for these kind of opportunistic investments and so we'd like to monitor very carefully, especially as you move away from your traditional business of being a very low-cost operator for the major carriers, we'd like to monitor closely the timing of your investments and when you think you're going to get a return on them.

Well, as I said, I think that in Hawaii--Mesa historically has, I'd like to think that ahead of the pack. For example, we were the first carrier that did a revenue guarantee model. I think that this could also be ahead of the pack.

We feel that there are clearly opportunities both domestically and around the world where these types of operations will work. I think there is some very good reason in particular in Hawaii. We are up against carriers that have a long tradition of operation in Hawaii.

But nonetheless, what are still high cost carriers, we're not in the way of our any of our existing partners, in fact, we've gotten support from some of our existing partners, United for example does our handling in the neighbor islands. We think that there are some very, very good strategic value here and given the fact that it's still less than 2% of or ASMs, a very low-risk way to grow the Company. And it's an enduring business.

We think that this operation, as I said, with the larger jets would be profitable today. It's a business that's not going to be subject to renewing a contract, it's not going to be subject to negotiation with a major carrier, it's an operation that we have control over. And one where, in this marketplace with almost 6 million passengers a year flying inner island, we think there's a huge upside.

And the terminal value of this we think could exceed the value of Mesa today, just based on our projections, the numbers in Hawaii are we think very exciting and again, we are trending above our expectations.

So we'll continue to monitor it very closely, I understand your concern. But again, I think that--I'd like to think that five years from now we'll look back and say Mesa was ahead of the pack as much the same way we were when we entered into the first revenue guarantee agreement with United Airlines in Los Angeles in 1992.

Well, we really hope you're proven right on that.

So do I.

We have a final question from Ray Neidl, your line is open.

Hey, Jonathan, on that 70 seat turbo prop, are you still in the running at Continental, or have they pretty much precluded that they're not going to use that aircraft?

First of all, all of these RFPs are subject to confidentiality agreements, so I don't think it's fair for me to say what's happening even if I knew or didn't know. But I will tell you there's a number of RFPs out for large turbo props, there's a similar RFPs out for 50 seaters, Mesa is involved in almost all of those things.

And again, our concern on the large turbo props is do we want to commit long-term to an aircraft is one, that while providing good operating numbers in today's environment, that could change, and would we insist on a lease that matches up to the term of the agreement. And I think as a result of that, that may or may not provide opportunities for us to provide that service.

Okay, great. And one of your earlier questioners was questioning you on your margins. You might want to clarify things for everybody, by saying the margins--explain how the margins are different whether you have ownership in the aircraft or whether your customer carrier has ownership in the aircraft.

Yeah, we own all of our own aircraft, and as a result, if we get--what we think is a decent margin. Frankly, if we were going to do a business with another carrier the way Continental had set up, where they were the going to own the aircraft, I think our margins would be--we would be happy to have lower margins, because clearly there's risk entailed to owning the aircraft and in today's environment, in particular, Ray, just to finance aircraft has changed dramatically from what it was five years ago.

Five years ago, you could effectively sign and fly. You would sign a leverage lease document, you had the aircraft. The requirement now is that you have to put a fair amount of money down in terms of equity. That may well lead to us as one of the few carriers that can finance aircraft t additional business opportunities. But again, this is all a very competitive environment.

There are some good competitors out there, Sky West, Republic, not to take anything away from any of the other carriers, but we have fortunately a pretty strong financing capability and I think that it's just a matter of time before we look at another piece of business. We are trying to expand our portfolio of partners. Clearly, I think we all feel that we lower our risk every time we can add a new partner and I think that's one of the focuses we have.

On the other hand, clearly there are partners that have demands and requirements now that we also would like to meet. We're going to do it in what's in the long-term interest of the Company. We're not just going to grow for growth's sake, but I think there are a couple of very good opportunities out there right now.

But you would do a deal if the deal was right where your partner, or your customer would own the aircraft? You're not locked into owning all your own aircraft?

Believe me, I would prefer to do a deal like that.

Okay, great, thanks.

We have another question from Bob Poole, your line is open.

Jonathan with all but--Northwest is still in bankruptcy, but with only Northwest and Delta in bankruptcy at this point, and with what you're saying are essentially shortages of 50 feet aircraft which are the aircraft of most concern, or have been the aircraft of most concern in the last year or so, why is it that the competition for these aircraft from the regional carriers is so intense?

One would think that the returns actually ought to have bottomed during the period where everybody was in bankruptcy or about to go in bankruptcy and that things ought to be firming up to some extent now. Why are you--why do you think we're seeing that the regional carriers are being so aggressive in bidding for this new business? Why don't you all just take a pass and in your case return money to shareholders as opposed to investing in these lower margin deals?

I think that's a very good point, Bob, and the fact is there's been a couple of reasons. I think it's a great question. First off, there has been an overhang concern.

Primarily, for example, with all the Atlantic Coast aircraft. There were 84 aircraft that were out in the marketplace. We were fortunate, we picked up a bunch at very good prices. Prices have in fact firmed on 50 seat aircraft.

For example, if you were to try to find ERJ aircraft today, you are not looking at any number below $100,000. We know, because we've been out there trying to find some, we're short some aircraft right now.

I think there is though, the continuing concern, for example what's going to happen to Continental Express' 69 aircraft that they are retaining? I am hard pressed to find homes for those aircraft in my mind because of there were, I think we would have been out there with $75,000 aircraft filling them.

That concern continues to be out there. In terms of the larger regional jet, the margins on those aircraft have been reasonably stable and I have no doubt that the deals that Republic did are compensatory and will be good deals.

We just didn't win them. It's not to say we wouldn't have liked to, there are other deals out there now that we feel that we have a good shot on that I thing will be adequately compensatory that are worth Mesa making an investment.

One of the attractive things on 50 seaters is those aircraft are coming off someone else's lease and there are no real financing requirements. Right now, to take on a CRJ 900, you need to be prepared to write a check for somewhere between $3 and $4 million.

And the same probably goes true with the [Embrair] product, so as a result, I think that's where the business is heading. The larger jets clearly have better operating numbers and I think with the relaxation of the scope clauses, you're going to see more movement from the 50 seaters to the 70 seaters. But again, in spite of that, as I said, try to find a--you won't find a $75,000 50 seat aircraft anymore.

And there are some businesses that we do take a pass on, and just say that it's not attractive to us. We were willing to do a short deal with Delta more likely than not. We view totally as a strategic deal, one that helped Delta out.

We were able to take aircraft on that we have no ongoing exposure, the leases are matched up to the term of the deal, and that kind of thing we'll do for an existing partner or to get in the door, but we're not going to go out and take on CRJ 900s a 14 year lease for a five year deal. We're just not going to do it. And as you said, as a shareholder myself, I'd just as soon see the money go back to the shareholders and I completely agree with that analysis.

Okay, and Jonathan, one last question. At a 6% to 9% operating margin and that's obviously a pretty big spread, what kind of--when you look at putting some of your cash to work, pursuing deals that are priced at 6% to 9% operating profit margin, what kind of return on investment would you think that you would get that would correspond with that 6% to 9% operating margin?

That really, again is dependent on how the aircraft come to us. With a CRJ 200 that we go out and lease and we put two months rent down, you get a return that is in fact a lot better than if we had to put $4 million down on a CRJ 900.

Right, so it's a very high return because you don't have much of a cash requirement. What about the deals that you've seen out there today? What appears to be the market for--what kind of return is allowed in effect by the market on deals where you'll have to put cash--on one of those deals where you have to put $4 million in cash up?

I think that those margins are still there. Especially on the larger regional jets.

But can you help us for those of us who don't know the numbers exactly?

[Multiple speakers] we have not done that analysis.

Say that again.

I have not done the analysis in terms of return on investment. I mean, clearly we did not win some of these deals so apparently we needed more than someone else did. It also depends on your cost in the deal.

When we go into a deal, we are very careful about how we allocate costs. We do not want, for example, take sole advantage of a honeymoon period on warranty and find ourselves under water three years down the road. We're very careful about that.

Our CRJs are as profitable today as they were the day they went into service. Our 200s, which are all out of warranty and all going through normal maintenance cycles.

We don't want to be in a position where we buy the business by foregoing some of that benefit and end up down the road in a more difficult position. And again, I'm not saying that anyone has done that, but we will be the most aggressive bidder based an what we view to be a reasonable return.

Okay, well as an earlier caller said, if your cash flow, you get free cash flow yield to your stock is running now around 20%, that sets a pretty high bar on the kind of return you would have to get when you do deploy that cash to pursue these larger aircraft.

Would it be fair to say that you would have to be thinking you'd get something in excess of that 20% return and that's after tax. On these larger aircraft to actually pursue them and therefore not be pursuing growth just for growth's sake?

There's no question, Bob, that we are not just going to pursue growth for growth sake, and the calculation that you're talking about is a good one, but I have to say, it is not one that we have done in terms of--based on where we think the aircraft--we can get the aircraft from, because, frankly, that changes day to day also.

However, there are additional benefits for the growth that include the fact that we're going to amortize other overhead expenses that we can continue to move pilots up, for example.

The fact that we can move pilots up is one of the reasons--and they know that--is one of the reasons why I think we have the best contract in the regional industry, and one that compensates our people very well because of the fact that they've been able to move into the left seat so quickly. You have to put all that into the mix when you make those decisions.

Okay, fair enough. I think it's just important that shareholders in this industry, not just in your company, have confidence that the guys who are putting money to work in this industry are putting it to work at higher returns than the actual cost of that capital. So that's all. Thanks.

We have no further questions from the phone lines.

I want to thank everyone again for taking time out. I know this has been a little more complicated quarter, certainly not one that we are particularly happy with. But given the change that did occur and the transition and all the things that we had to accomplish, I certainly don't think it's bad.

Given the history of the industry, frankly, not entirely upset about the fact that we're still profitable. We do think that things will improve going forward, if for no other reason that we're going to have some of these issues addressed by ourselves and our partners. We continue to look at other opportunities.

As been pointed out on the call though, we are not going to grow just for growth's sake. We're going to be very careful about which opportunities we pursue and again we think that with your continued support, we can continue to grow the Company both successfully and profitably.

I want to thank everyone and hopefully we'll talk to you next quarter. We'll have a little bit better story to tell you and we appreciate your continuing support. Thank you very much.

That concludes today's conference. Thank you for participating. You may disconnect at this time.