Mesa Air Group Inc (MESA) 2007 Q1 法說會逐字稿

Good morning.

And welcome to the first quarter conference call for Mesa Air Group.

I'd like to inform everyone that you're in a listen-only during today's conference until the question-and-answer session.

The call is also being recorded, and if we have any objections, you may disconnect at this time.

I'd like to introduce Mr. Jonathan Ornstein, Mesa Air Group Chairman and CEO.

Thank you sir.

You may begin.

Thank you, Ed.

First I'd like to read this 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 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 the next filing with the Securities and Exchange Commission.

I'd like to welcome everyone to the call, in particular, my friend Carter Leake.

We'd like to go through our earnings.

The Company reported first quarter pro forma net income of $8.1 million, or $0.20 per share on revenues of $347.6 million.

This compares to pro forma earnings of $13.8 million on revenues of $323 million, or $0.32 per share for the comparable period of fiscal 2006.

On a GAAP basis, our reported net income was $8 million, or $0.20 per share, compared to $13 million, or $0.31 per share for the same period of last year.

The primary items of significance affecting the first quarter of 2007 were, total operating revenues the first quarter increased $24 million, primarily as a result of certain increase in certain reimbursable base costs, which include fuel.

Under our revenue guarantee co-chair agreement, these expenses are a direct pass-through to our partners, and as a result, any increase in the unit cost of these expenses results in a corresponding increase in revenues.

During the quarter, revenues were negatively impacted from two CRJ-900s we had in paint, and additional Air Midwest aircraft in maintenance.

On the expense side, during the quarter, we had 13 incremental C-check visits, as compared to the first quarter of 2006.

In addition, these checks were the heaviest checks in the normal C-check schedule, which contributed an additional $6.5 million in maintenance expense year-over-year.

We do anticipate that this will normalize going forward.

Interplane fuel costs in the fourth quarter increased 3% to an average of price of $2.07 from last year's $2.01.

However, this was a 12% decline from last quarter's average price of $2.35.

We are currently under $2 a gallon interplane.

We are hopeful that given the recent declines in crude oil prices, fuel prices will continue to decline.

Passenger-related costs were negatively impacted by a $2.5 million increase in certain expenses incurred due to the Company's northeast flying, as well as increased rent expenses.

The increased rent expense, however, was reimbursed by our partners.

This increase in costs is something that we are talking this is primarily with United.

And we've been doing a lot of work with United to mitigate this as well, going forward.

General administrative expense was positively impacted by reductions in property tax expenses, worker compensation expenses, which I'm thankful for, in particular, and lower medical expenses.

Depreciation and amortization expense increased slightly, due to the addition of three CRJ-700s in September and October of 2007, and the capitalization of aircraft enhancements associated with the placing of Delta JFK Dash 8s into service.

The increase in interest expense is due to the three additional CRJ-700s, and an increase in underlying variable interest rates from a year ago.

Operating statistics.

Year-over-year, we had an 11% increase in block hours and a 15% increase in departures.

However, due to a 9% reduction in average stage length, the total available seat miles for the first quarter of fiscal 2007 increased only marginally.

The decline in average stage length was driven largely from our go! operation, as well as the reduction of average stage length in our US Airways system.

We now have 16 CRJ-900s operating from eastern hubs.

Our fleet count at the end of fiscal first quarter was 200 aircraft comprised of 96 50-seat Regional Jets, 18 70-seat Regional Jets, 38 86-seat Regional Jets, of which 55 were at US Airway, 62 at United, and 30 transitioned to Delta.

And we have 5 CRJ-200s operating in Hawaii as go!

In addition to our Regional Jet fleet of 152 RJs, Mesa operates 48 turboprops, including 28 37 Dash 8s, 6 of which are America West, 10 at United, 12 at Delta.

And 20 1900s, 6 at Mesa Independent and 14 at US Airways.

For the fleet plan for this year, we've added the last two of our commitment of 12 Dash 8 100 aircraft to the Delta connection fleet during the quarter, with all the aircraft placed into service.

Also during the first quarter, we added 3 CRJ-700s, which operate in the United system as part of our commitment to transition 15 50-seat aircraft to the larger Regional Jets.

Currently, we have placed into revenue service all of our committed aircraft.

However, as many of you know, we remain extremely busy, as we have recently signed a deal with Shenzhen Airlines to start a 50-seat operation in China.

I will discuss with you in more depth later.

Operationally, we had a very good quarter, especially given at winter quarter our controllable completion rate was 99.1%.

Given the difficulty of operating environment due to adverse weather on the East Coast.

In particular, Denver was very tough this year.

We are satisfied with our quarter to date performance.

However, that being said, we continue to strive for operational excellence in order to provide our partners with an on time and reliable product.

Mesa's controllable completion rate this year was the highest that we have seen since we began following these statistics.

In addition, Mesa's Phoenix operation, where we handle our hub with our own personnel, may well have been the most on time performing hub operation in the country.

Air Midwest.

As many of you know, we've focused on mitigating exposure to our Beech 1900 fleet, and are down to a net exposure of just 20 aircraft and 17 lines of revenue service.

Our strategy working to place all of the 1900 aircraft into essential air service combined with leasing 14 of our 1900s to other operators and continued focus on cost reductions has allowed us to reduce unprofitable flying.

We are very encouraged as quarter-over-quarter revenue has seen a 5.2% increase in revenue, while departures increased 3%.

However, most of this quarter's revenue gains were offset by a 10.5% increase year-over-year in our fuel expense to $2.35.

We did add five new ES markets as well, with a guaranteed minimum revenue.

And while Air Midwest lost a small amount of money this quarter, we project that it will be profitable for the remainder of the year.

Mesa projects ASMs of 2.3 billion for the first fiscal second quarter.

Actual ASMs for fiscal 2007 will be a function of the marketing schedules our partners require supply, as well as planned maintenance events.

The reduction in our planned ASMs during the second quarter is driven mainly from the result of pulling aircraft out of service to accommodate paint schedules to change our CRJ-900s from America West to the new US Airways delivery.

Obviously, to the extent we are awarded any incremental flying from our existing new partners, our ASM forecast could change considerably.

Should our partners schedules change versus today, actual ASMs may be impacted.

Looking forward to the second quarter, we expect our results to show modest improvement over our first quarter results.

For the full year, absent the award of additional business and current unforeseen events, results should reflect steady improvement quarter by quarter.

As always, our earnings could be impacted by a change in our partners' marking schedule and the timing of other maintenance and training events.

Just to give you an update around our operation.

As I'm sure many of you are interested in the results of our go!

Operation, I'm happy to say that results are in line with our forecast.

Our load factor is slightly lower than we forecasted, 64.2%.

However, this has been offset with better than forecasted operational reliability.

The operation is just doing a wonderful job out there.

I think we've cancelled less than a dozen flights since we began service.

As I previously indicated, in this operation represents a very small part of our total business, with less than 2% of our total ASMs.

As you know, we have five aircraft in Hawaii, four lines of flying.

We are contemplating additional capacity for this summer season, which we will unfold those plans in the not too distant future.

Lower load factors are primarily a result of additional capacity being added by Hawaiians since we entered the market.

We don't believe this situation will continue, as we continue to penetrate the market and continue to add passengers, both locally and coming from the mainland.

At Delta, as we previously mentioned, Mesa provided a very aggressive response to Delta's RFP.

As you know, Delta's bankruptcy proceedings remain ongoing.

In connection with such proceedings, we continue to have an ongoing dialogue with Delta as well regarding our co-chair agreement with them, and possible strengthening of that relationship in the future.

Based on those discussions, we remain optimistic that if the proposed Delta/US Airways merger does not occur, our co-chair agreement with Delta will be affirmed, and that we believe we will have the opportunity to further develop our relationship with Delta.

However, no assurances can be made in this regard, and clearly, if the US Air merger was to go through, or any other merger, for that matter, I would say it's safe to say that all bets are off.

Currently, we have 42 aircraft, all 30 ERJs in service, and 12 Dash 8 aircraft.

At United, we have a current fleet of 72 aircraft.

We've converted three of our CRJ-200s to CRJ-700s.

We also have worked very closely with United on our operational performance there.

They have taken some steps, reformatting their slot allocation model, that had previously disadvantaged the smaller aircraft.

They've also helped spread some of the flying in some of the tougher East Coast congested cities to some of the other regional carriers.

We [have] in the past flown 100% of that flying.

I think we're now down to about 80% of that flying.

We have taken some steps internally here that have been very helpful to us that United has helped us through, in terms of our dispatch and communications, and managing our crew resources.

So all together, we've seen some very nice improvement in the United operation.

At US Airways, we have a current fleet of 61 aircraft.

US Air has exercised its right to move one CRJ in December, and four additional CRJs during 2007.

These aircraft have all been redeployed with our partners, and we are, in fact, still short 50 seat Regional Jets given our current plans, and retirements as aircraft come off lease.

Other highlights.

During the quarter, we continued our stock repurchase program by repurchasing roughly 530,000 shares at an average price of $8.03.

This follows the over 2.2 million shares we purchased last quarter.

As many of you know, we are in the process of taking Mesa on a more global scale, and signed a joint venture agreement with Shenzhen Airlines to operate Regional Jets throughout China.

I had the pleasure of entertaining the Shenzhen people here in Phoenix last night for dinner, and we are anxiously looking forward to moving that project forward.

The venture will initially operate 20 50-seat Regional Jets.

We expect to have those on line before the Olympics in 2008 in Beijing, and we expect the potential to grow to over 100 aircraft.

The current plan is to begin operations in the next 12 months, and we have already begun to put together a team on the operational side to make that happen.

I believe it is an opportunity that has a lot of upside for Mesa.

There are currently only 70 Regional Jets in the entire country, and with 1.3 billion population, you can imagine we think there is real opportunity there for an integrated operation with a partner like Shenzhen to expand the Regional Jet operations there.

I'd like to put out a particular thank you to our employees.

The growth and operating challenges as we've moved much of our operations to the East Coast has been tremendous.

We've had very good response from our people, who have worked very hard to put on what I think has been a great operation this year.

In spite of that, it's been a tough environment.

We're operating in some of the toughest airports in the country in Chicago, in JFK, Newark, Philadelphia.

Our people really deserve a lot of credit for the job that they have done.

In close, we believe the quarter has laid the foundation both to pursue opportunities and to continue to operate effectively and efficiently.

We continue to believe that our results demonstrate the success of our business model, reflect the commitment of our employees, and continued support of our airline partners.

Once again, I'd like to thank all of you for taking the time out of your busy schedules to join us in the call, and I would like to open this call up to questions.

Thank you sir. [OPERATOR INSTRUCTIONS] Our first question comes from Ray Neidl.

State your affiliation please, sir.

Calyon Securities.

Hi Jonathan.

Hi.

How are you, Ray?

Good.

I had the privilege of sampling your go!

Product when I was out in Hawaii a couple weeks ago.

Very nice.

Your employees were fantastic, the operation's run very smoothly.

And it was a nice experience especially with the smaller aircraft, going between the islands.

But I'm wondering, it looks like everybody's losing money in that market.

Aloha, Hawaii, go!, I'm assuming.

And you've got five airplanes now, and I guess you're going to put in a sixth aircraft.

I know you mentioned there's going to be seasonality.

But why would you want to put another aircraft in that market if everybody's losing money right now?

Well, there's twofold.

One, we do think that given where the lows are today in the off-season, that we will have the requirement for additional capacity.

We are also looking at some additional markets within the island that would require another aircraft, as well.

Express Jet released their results yesterday, and they're embarking on a diversification program as well as you are, but in a different direction.

They're going to be doing more independent flying in the 48 states.

I'm just wondering what you think of that, and if that's a possibility for Mesa down the road, especially if we do have industry consolidation, where we may have surplus 50 CRJs?

That is not first on our list for expansion plans.

Even our operation in China is a partnership that gives us some very strong financial guarantees, in terms of how that will operate.

There may be some opportunities, but anything we do, for example, like in Hawaii, we did very small, 2% of our ASMs, four aircraft in service.

It's not something that we would pursue aggressively at this point.

And in particular, with the industry having turned, there may have been some opportunities when some of the carriers had been in financial condition, not what they are today.

I think that the opportunity has come and gone, in terms of, effectively, startups for independent carriers now.

And then, finally, are you still a candidate for some new Northwest business?

I guess they're going to be awarding their contracts there pretty soon.

Well, I'd certainly like to think that we're a candidate.

We certainly have done everything we can to pursue additional business opportunities, whether it be at Northwest and United and Delta.

I really couldn't say at this point whether we're a candidate or not.

We certainly have thrown our hat in the ring.

And we'll see how that goes.

We do believe that we offer a very high quality product at, we believe, the best price.

But as you know, that's not always the determination, in terms of what happens.

So as always, it's one of those things that we just have to wait and see.

Okay.

Great.

Do you think next year you might throw your annual party in China?

Interesting idea.

Thanks a lot.

Thank you very much.

Next question comes from Mike Linenberg.

Your line is open, state your affiliation, please.

Mike Linenberg with Merrill.

Jonathan, on the Chinese operation, can you give us some additional color on what the capital commitment may be, and maybe just talk about with governance and some of the foreign ownership restrictions.

I don't know if it's 25% or 49%.

What sort of influence you'll be able to have in this JV.

That's a good question, Mike.

The current rule is 25% can be owned by one foreign carrier.

And it cannot be more than 49% for any foreigners.

In other words, a company [has] remaining control of a Chinese company.

We do have, in our agreement, some-- what we think is a good agreement that will ensure that the operation is run with the standards that we would expect and I want to say that Shenzhen would expect, as well.

Also, on the financial side, because we have turned over effectively the market to them, they have made some financial guarantees in terms of revenue that we feel makes it a very attractive deal, given our lack of knowledge of the market.

Our whole thrust in China will be to operate the best company at the lowest possible price, and Shenzhen will be then developing these markets.

They have extensive knowledge, they have almost 50 aircraft in service now.

They are a privately held company, the largest privately held airline, so they move very quickly.

And I think that the partnership-- the spirit of both the companies is very similar.

I feel that for taking on this kind of project, which clearly has risks, I think that I would be hard pressed to say that we could have done a better job in terms of how we structured this deal.

Moving on to another topic, I know you commented about go!

And you said it was only about 2% of ASMs.

But when we sort of think about contribution or lack thereof, is it a big number-- I shouldn't say a big number.

When I sort of look at your margins and I realize you did have this big maintenance expense, or you had a lot more C-checks, heavy C-checks in the quarter than a year ago.

But if we were to pull go! out and get a sense of what the Mesa core operation looked like, what are we talking about?

An operating margin that's 100 basis higher?

What I'm getting at is not maybe just the go! ops, but I know there's some lawsuits there and some legal bills.

Maybe they show up in SG&A.

I'm just trying to look at Mesa standalone X, anything related to go!

Here's what I can say Mike, and I don't want to-- I'm happy to tell you that clearly, we've been there for, now, seven months.

The operation does lose some money.

Our view is that it's well within the number we thought, and that given the fact we are against entrenched competitors who have been in the market for over half a century, we are getting more than our market share would dictate.

We are about 8% of capacity, we carry about 10% of the traffic.

We feel that this is an operation that will ultimately be very profitable.

And I would also suggest that again, we are not flying the most efficient aircraft there.

We had thought about putting 900s in for this summer.

However, the supply of 900s is somewhat limited, given some of the plans that are out there with some of the major carriers, and instead, we'll probably just add additional 50-seat capacity.

Without that, I mean, Peter can run some numbers.

He'd be happy to go through it with you.

But clearly, there are some losses there, but, as I said, nothing that was outside of our plan.

If I may add one last quick one.

I know you mentioned that you are still short aircraft.

What are we looking at here, maybe half a dozen 50-seaters that you need to finalize your commitments?

I think that we have aircraft that we were fortunate that Peter and Mike did a very good job, in terms of structuring our leases so that we had quite a few short-term leases.

We are actually short a few aircraft, but we actually think that there may be some demand for some additional 50-seaters from some of our partners.

And as a result, we're out looking for aircraft.

And surprisingly, you'd see that it's not quite the glut that everyone sort of expected, as did we.

The aircraft are sort of hard to find right now.

Now, that may change over the next few months, but right now, today, finding aircraft has been fairly difficult, certainly on a short-term lease.

Okay, great.

Thanks.

Next question would come from Helane Becker.

Your line is open.

Thanks, Operator.

It's Benchmark Company.

Hi, guys.

Hi, Helane.

Just, I think, one easy question here.

I don't know how much you can comment on this lawsuit, but where do they stand?

When's the next court date?

How far down are they?

Do they get dismissed?

Can you make any comments about that at all?

It may be hard to, but...

Okay, yes.

Brian Gillman, our general counsel, just informed me that the trials are in discovery and we expect the trial to be sometime in late fall, for Hawaiian.

So late fall of '07.

Yes.

Okay.

I guess that was really it.

The other questions I had, I think you answered, in terms of the share.

And then, in terms of the China operation.

You guys are providing 50-seat aircraft to that operation, or you're in charge of finding the planes?

How does that work?

We're in charge of finding them.

And again, we've been also working-- GE is one of our largest creditors.

I think we're their largest regional credit.

We have over $1 billion with GE.

They have been instrumental, frankly, in focusing our attention on China, because we are looking at opportunities to place aircraft that GE has come to us with.

A lot of those aircraft, former Atlantic Coast aircraft, are already placed.

We're also contemplating-- the Chinese are building their own Regional Jets that'll be available in 2010, 2011. they will have GE engines on them.

We are contemplating ordering those aircraft as well for the operation.

And therefore, the challenge that we have now is finding the interim aircraft for three or four years to fly until such time as we can potentially order those new Chinese aircraft.

And then my last question is, with respect to your pilots, they seem so vocal recently, for negotiations that don't really start for another few months.

And I'm going to assume some of it is positioning.

But what do you think about that?

What do I think about it?

You have a good idea of what I think about it.

Well, they've been very vocal.

Unfortunately, what really has happened, on the pilot leadership front, there's a couple folks who are very, I would suggest to you, confrontational.

They represent some of the pilots that were in our United operation, where, in Chicago, in Dulles, it was very difficult operationally, for lots of reasons.

The weather, for one, the slot allocation model that United had been utilizing.

And so [inaudible] sort of bore the brunt of some of the disruptions that we faced.

The actual MEC leadership, I think, has been actually quite reasonable with us, and come in and talked to us almost on a daily basis.

But clearly, we are one of the last ALPA carriers that is profitable, without having been through bankruptcy.

And I'm sure they view us as a potential ripe target.

And clearly, this is all part of a script towards leading up to negotiations.

However, we are one of the few carriers, ALPA carriers, that has continued to grow over the last five years.

We are one of the few carriers that has upgraded people.

We are currently upgrading people to captain inside of three years, that's probably a third of the industry average.

Our people make more money at Mesa than they would at any other carrier, because of that quick upgrade.

Average pilot wages at Mesa, the average pilot wage is up over 50% in the last three years as we've continued to grow our fleet and to move people up.

If you joined Mesa as a pilot-- and today we signed our last contract-- your wages have increased year-over-year a total of 350%.

I think most of our pilots on the line understand that, and they don't want to choke this goose to get the last golden egg.

They understand that our low costs drive growth, and that growth is in everyone's interest.

We've been through a very difficult period in the industry, and I think most of our pilots do appreciate the fact that what we have achieved at Mesa has been unparalleled, in my opinion, at any other ALPA carrier.

So what you hear in the press releases is one thing, what we hear privately is something else.

And I think what is actually happening on the line is also something entirely different.

So I think our operating results would tend to show that we're still getting terrific work from our people, and I think are very supportive of our efforts going forward.

We certainly appreciate the work that they've done for us.

Okay, great.

Thanks.

I guess with your operations moving east, you're not contemplating relocating east, are you?

I guess not, with Hawaii, right?

No.

As you know, Helane, I was brought up in New York, and I love New York.

And I'm sort of still a Knicks fan.

Not really, but if they were better, I would be.

But no, Phoenix is a wonderful place to be.

It's great to recruit executives here.

It's a very inexpensive city for a major city.

It's just a great place to be, and frankly I'm surprised there aren't more corporations out here.

So there is no intention for us to move the headquarters.

Okay.

Well, maybe you should send your pilots the New York Times article.

Thank you.

Thanks.

Our next question comes from Jim Parker.

Your line is open, state your affiliation, please.

Good morning.

It's Jim Parker with Raymond James.

Jonathan, looks like Regional Airline, unit growth in '07 is only going to be 1% and you're trying to develop some new markets offshore.

I'm curious if there are other businesses where you might use your cash to develop, say, non-passenger type of related businesses?

Because Regional Airlines, of course, generated a lot of cash.

And the growth opportunities aren't what they have been over the past several years.

We clearly have looked at other opportunities.

We have made strategic investments from time to time.

We do have a Vice President of Corporate Development that just came over from Phelps-Dodge who is looking at opportunities.

I think that while the overall growth for the industry may only be 1%, because of our cost structure and the relationships that we have, I still remain confident that our growth this year will exceed that by quite a multiple.

I also mentioned that-- Helane brought up the New York Times article.

In that article, we talked about the fact that we had looked at an acquisition pretty seriously.

We do continue to look at acquisitions.

We have a lot of cash.

There may be some [fits] that make sense for us, but those of you who know me know that in the past we've been very careful about our acquisitions.

They've always been additive.

And unless the opportunity was just right, maybe I'm getting conservative in my old age, but we would not pursue anything.

In terms of other businesses, there are other opportunities out there.

As yet, we haven't really found anything that we have found interesting enough, other than some strategic investments from time to time.

But we do have our eye out, and we do continue to look at opportunities as they become available.

Okay.

Thanks.

At this time, I show no further questions, sir.

Okay.

Well, thank you all very much.

We appreciate you taking time out of your busy day.

As you know, I am a fairly significant shareholder.

We have not been pleased with the price activity in the stock.

We look forward to this year to seeing some improvement as a result of improved financial performance.

We do intend to continue to move forward with our stock purchase program, and I think that there are some opportunities that we feel are relatively near-term that hopefully will come to fruition, which will also give Mesa-- return some of the luster that, unfortunately, the group has lost but that we intend to regain.

So I want to thank everyone for taking time out, and, as always, if you have any other questions, you can feel free to call us here in the office.

Bye bye.

At this time, that would conclude today's conference.

You may disconnect.

Thank you for your attendance.