Mesa Air Group Inc (MESA) 2007 Q2 法說會逐字稿

Welcome and thank you for standing by.

At this time, all participants are in a listen only mode.

(OPERATOR INSTRUCTIONS) Today's conference is being recorded.

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And now I'll turn the meeting over there Mr.

Jonathan Ornstein.

You may begin.

Thank you very much and thanks everyone for joining us today.

We have a lot to go over as you may have noticed.

The conference call will contain various forward looking statements that are based on Management's beliefs as well as assumptions made by any information currently available to Management.

Although the Company believes that the expectations reflected in such forward looking statements are reasonable, we 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 anticipate, exhumate, projected or expected.

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

Again, good morning to everyone, and we'll get right into the earnings.

First, let me start to say we are clearly not happy with the report this morning.

We know that we're below street expectations and something that Mesa we are very focused on.

As many of our competitors have reported, the second quarter was a tough quarter for most of the regional operators, particularly those operating with United as a result of the weather and air traffic control predicaments that we faced throughout the quarter.

On a pro forma basis net income fell to $4.5 million from $12.9 million in the second quarter of 2006 or $0.13.

Given the very special charges we took this quarter on a GAAP basis we reported net loss of $24 million as it compared to net income of $5.3 million for the same period of last year.

The special charges totalled $37.7 million and were comprised of a $25.3 million write-off relating to a $30 million contract incentive payment we made to United Airlines in 2005, a $6.4 million write-off of related lease hold improvements to our United fleet, and a $6 million write-off related to lease hold improvements made to our Delta Dash-8, who's value now that we are ending this contract early will not be realized.

[In this] we had other pro forma adjustments primarily related to our investments.

From an operating standpoint, operationally the second quarter was quite challenging.

As we mentioned previously, we continue to be negatively affected by our 50-seat United operation and our Delta Dash-8 operation at JFK.

Again this is due primarily to weather, ATC, and United's core system, which is a slot allocation system.

I will tell you that we are very proud of our how employees dealt with the considerable operating challenge and continue to be optimistic about the prospects for the Company going forward.

The primary items of significance affecting the second quarter were the underlying growth in our fleet, total operating revenues for the second quarter increased $24.4 million or 7.8%.

Our fleet has grown from 180 aircraft as of March 31, 2006, to 199 as of March 31, 2007.

Beginning in January, revenue growth however was partially offset by United assuming its assumed responsibility for a portion of Mesa's United Express fuel purchases.

As a result going forward, the Company's revenue-- quarterly revenue as well as its fuel expenses will be reduced by approximately 4.3 million gallons which represents about $8.4 million for the quarter.

Also in the second quarter, revenues were written down about for the $25 million and remaining-- of the remainder of $30 million contract incentive payment made to United in 2005, which remanded our coach agreement to add the 30 50-seat regional jets.

As the incentive payments have previously been amortized against our ongoing revenue stream, the impairment charge was also taken against revenue.

Adverse weather condition, air traffic control, and our United Express operations reduced overall activity and resulted in total completion factor that was approximately 3% below that of our other operations.

As a result, revenues were below plan and many of our expenses were not fully reimbursed.

The operational challenges had the greatest effect on Mesa's 50-seat operations again due to weather, ATC and ULA's core slot allocation model.

It resulted in a reduction of operating profit of approximately $4.7 million.

On the expense side, maintenance expenses increased significantly year-over-year and versus plan.

This increase was primarily a result of we entered into new power-by-the-hour engine memorandum of understanding covering all our previously owned cover GE engines which resulted in $3 million more expense during the quarter than Mesa had paid for the covered maintenance at the time of the event-- if it had paid for maintenance at the time of the event.

I would like to point out that that will also flip and have a reduction of approximately $10 million in the following two quarters.

Contractually increases our existing power-by-the-hour engine agreement with GE increased costs $1.1 million.

This is basically due to the increase in the price of precious metals, which are part of the engine overhaul expense.

Increased volume due to higher than anticipated usage in our United Express operations as well as contractual increases in our APU overhauls resulted in about $1.1 million in expenses more than Mesa had planned.

We find that our APUs are running about twice as much in United on average and in our other operations.

Our Air Midwest subsidiary saw an 11% reduction in average fare combined with higher than expected fuel expenses, Air Midwest posted operating earnings $1.3 million below plan.

Mesa's Delta Dash-8 operation continued to experience higher costs resulting in $700,000 below planned performance.

Market conditions NOI primarily as a result of added capacity by our competitors resulted in lower yields and the result of those operating profits were approximately $650,000 below plan.

Revenues were also negatively impacted by the lack of flying undertaken by four CRJ-200 that were undergoing heavy maintenance and two CRJ-900s that were in paint for US Airways Interplane fuel costs for Mesa for the second quarter fell 3.2% from $2.05 to $1.98.

Overall consumption of fuel increased 5.3%.

Passenger-related costs continue to be negatively impacted by an increase in certain expenses incurred in the Company's United Express line as a result of interruption of trips, as well as increased rent expense the increased rent expense however will be reimbursed by our partners.

General and administrative expense increased primarily due to $1.5 million of higher workers compensation expense and legal expenses of approximately $700,000.

The increase in interest expense is due to the three additional CRJ-700s and also in our Beechcraft debt financing, it is -- interest rates have moved up and that is a variable rate loan.

As I mentioned, we took a total of $38 million impairment charges during the second quarter, $31 million were related to what we now believe is unprofitable flying at United.

As most of you know we had paid United $30 million as an incentive for firming our previous contract and operating 30 incremental 50-seat aircraft.

While we've always expected this line to be less profitable than our existing operation, given the operational challenges we experienced with these aircraft in the United system, we now project this flying will be unprofitable.

This will necessitate the write-off of the unamortized portion of inducement payment and leasehold improvements associated with the United fleet.

The additional $6 million relates to the write-down of unamortized portion of the refurbished cost of Dash-8 aircraft at Delta.

That operation has not been probable proving much more problematic than initially expected and we now have a plan with Delta to eliminate the operation by September.

The Company's taking numerous steps to address our financial and operational challenges.

First I think and foremost, we are in discussions with our partners, particularly United, to reduce the impact of our regular operations.

Certainly there can be no assurance that we will be successful in these areas, but I believe United is very much aware of the issues and agreed that its regional operators cannot operate in the 95% total completion rate area long term.

Second, we've developed a plan with Delta to eliminate the JFK Dash-8 operation.

The agreement we now have reached with Delta calls for service include by August 21.

Mesa's currently value no other potential uses for the aircraft, including additional flying subleasing to other carriers, and returning the aircraft to leasers earlier.

There can be no assurance, however, that this will be successful in these efforts.

I will say that the operation began very difficult in JFK Our people have worked remarkably hard and the operation at this point is actually running much better in terms of reliability, but the costs are in fact still higher than anticipated.

Third, we are pursuing a number of different options with respect to our Air Midwest subsidiary.

As you know, when we first came to the property, there were about 122 aircraft there.

We now operate, I believe 17, but still remains unprofitable.

Such options would effectively significantly reduce our exposure to at-risk flying.

Furthermore, when combined with the planned exit from the Delta Dash-8 100 operations, this could provide a significant number of qualified employees necessary to support Mesa's growth over the next six to 18 months.

Fourth, we previously announced our MRU with Delta Tech ops to covering our maintenance and repair of our entire General Electric engine fleet currently not covered.

As a result of this new agreement, we expect to save $100 million during the 12 year term and give our-- and given our current projections for the remainder of fiscal 2007, as I mentioned before we expect to save $10 million from what we would otherwise have spent on time and material basis.

We have entered into discussions with GE to amend the terms of our current power-by-the-hour agreement in order to mitigate the effects of last year's contractual increases.

While the outcome of these discussions are currently unknown, this agreement expires in December of 2008 ,at which point these engines will be covered under the lower cost Delta agreement.

We also have recently negotiated lower rates with respect to APU overalls and that should reduce APU future overall costs and also in discussions that if successful is expected to reduce APU usage in our United Express operations.

On the operating statistic basis, year-over-year we've added 19 aircraft which include the 12 37-seat props, four 50-seat jets and three 60-seat jets.

We've had 16% increase in block hours and a 20% increase in departures.

However, given that most the increase was attributed to our small aircraft, total ASMs for the second quarter increased only 4%.

Our total fleet count at the end of fiscal second quarter was 199 aircraft comprised of 95 50-seat jets, 18 60-seat regional jets 38 86-seat regional jets, of which 55 are at US Airways, 60 at United, 31 in transition to Delta, 5 CRJs operating in Hawaii for go.

In addition to our regional jet fleet of 151 RJs, Mesa operates 48 turbo props, including 28 37 Dash-8, six at America West, 10 at United, 12 at Delta.

And as I mentioned before 20 1900s, of which there are 17 lines of flying, six are operated by Mesa independently and 14 at US Airways.

Fleet plan for the remainder of 2007, during this quarter, the third quarter, we plan on transitioning five additional ERJ-145s into service with Delta.

Also during the third quarter we're adding two CRJ-700s into the United Express system as part of our commitment to transition 15 50-seat aircraft to larger regional jets.

On March 13th Delta announced it would contract with Mesa for an additional 14 86-seat regional jets which expect to start service at approximately two per month this October.

Meanwhile, we continue preparations for launch of our Chinese joint venture in September and I'm pleased to report that that is moving forward both expeditiously and we believe efficiently.

And we believe we should be operating aircraft there prior to the end of the year with a launch date in September.

Operational summary for the quarter ended March 31,2007.

Our controllable completion rate was 98.1 with a jet controllable completion rate of 99.1.

Given the very difficult operating environment on our United Express system, we are pleased with this performance and Mesa is consistent with some of our better quarters we've had since monitoring these statistics.

However, that being said, factors outside of our control, weather, air traffic control, and again United's core system causes you have to have overall operational performance which is unacceptable in terms of total completion rate.

As I mentioned earlier we are working with our partners to develop schedules that can better handle irregular ops.

As on the side, and something I think is worth pointing out, Mesa's Phoenix operation, which is the only hub where we handle our own aircraft with our own personnel continues to be one of, according to the DOT, one of the if not the best hub operations in the entire country.

Mesa projects ASMs of 2.3 billion for the third quarter in 2007, roughly the same as the second quarter and 2.4 billion for fiscal fourth quarter.

Actual ASMs for the third and fourth quarter may be a function of marketing schedules of our partners requiring us to fly as well as plan maintenance event, weather, and other items out of our control.

On a forecasting summary, given the difficulties we've experienced over the last two quarters and the uncertainty of certain important components of our United Express fleet going forward, and other issues such as the wind-down of our Delta Dash-8 operation and Air Midwest to name a few, we frankly do not feel comfortable giving earnings guidance at this time.

Obviously, as things develop, we get better clarity, we'll update you accordingly.

Going through a few of the operations, I'm sure many of you interested in the results of go!, the load factors of the quarter at 61% was lower than we would have liked.

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

Last month we cancelled one flight all month, that one flight occurring on the last day of the month.

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

We have five aircraft with four lines of flying and we are in fact reviewing our capacity there with an eye towards increasing capacity potentially as soon as this summer.

Load factors are primarily a result of additional capacity being added by our competitors, most notably Hawaiian who at last count we believe added more capacity than the entire go!

operation.

At Delta the bankruptcy court affirmed our amended agreement for Mesa to continue to fly on behalf of Delta with no reduction to our operating margin and an addition of six additional 50-seaters for a total of 36.

As part of the amended agreement, we established a new code-share agreement to operate 14 76-seat CRJ-900 regional jet aircraft.

The aircraft will be purchased by Delta and be operated under our freedom certificate.

We expect these aircraft again to begin two a month in October.

We did receive a general unsecured claim of $35 million as part of our Delta bankruptcy proceeding.

As mentioned above, we worked out a phase out for our Dash-8 operations at JFK and we'll be out of this line completely by September.

[Recurrence] lead is 44 aircraft including the 33 ERJs and the 11 Dash-8s.

At United we are-- we have basically as I said working very hard, we have been -- it's probably been our single biggest focus as the operational issues at United.

Many of these, unfortunately, are out of our control in the areas that we can-- do what we can, I think we put a huge amount of focus.

I will say, however, that we are certainly dissatisfied with the financial performance of our CRJ-200s at United, and we'll continue to work together with United, who again is very cognizant of these issues, and is working with us together to address them.

US Airways, we have 59 aircraft there.

There they do have the right to reduce and exercise CRJ-200s.

They have a right to do that fleet by two during the second half of calendar 2007 and we believe that they will exercise that right.

One thing I would like to address, I know it's come up, has been on a lot of the other carriers, pilot attrition and flight cancellations.

We have in fact seen higher attrition, but at this point in time, we feel that with being proactive that we will be able to stay ahead of that curve.

Last month, for example, throughout our entire operations excluding United, we only canceled nine flights due to crews.

United it was significantly higher again, that less to do with lack of crews and more to do with just the disrupted operations which end up with things like crew misconnects and crews not being able to catch the flights that they were scheduled to be on.

It is going to be a challenge though, as the majors have begun to rehire, and I know it's something that we are very focused on.

During the quarter, we aggressively continued our stock repurchase program repurchasing approximately 2.7 million shares.

Under our previously announced share repurchase program, the Company is authorized to purchase an additional 5.7.

The Board of Directors has now authorized the Company repurchase an additional 10 million and we continue to expect to be in the marketplace repurchasing shares based on today's prices.

Our joint venture agreement with Shenzhen Airlines to operate regional jet throughout China is progressing.

We now have an ongoing presence in China preparing the start of operations.

We plan to send the initial aircraft before the end of the summer in order to be up and running by this fall, and we'd like to have 20 50-seat jets in operation by the time the 2008 Olympic games in Beijing.

We believe the opportunity has a tremendous amount of upside for Mesa and could represent demand for up to 100 aircraft.

Currently there are only 70 regional jets flying throughout the entire country.

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

We are confident we can continue to execute our plan going forward, and I can tell you that in particular with the weather being what it was, our people did a truly remarkable job.

I am always just amazed at the level of work that's done out in the field and the amount of dedication, in particular, given what had been very tough operating environment.

In close, although the quarter was very disappointing, we know that we have-- what we have to do and we plan -- we have a plan in place to improve our performance going forward.

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

Again I'd like to thank all of you for taking a moment to join us.

Again I know there's a lot going on right now and as a result, if there's any questions, we'd be happy to answer them as best we can.

[OPERATOR INSTRUCTIONS] Ray Neidl, your lines open and please state your company name.

It's Ray Neidl from Calyon Securities.

Jonathan, two quick things.

I got on a little bit late, so if you addressed this, you can skip by it.

I'm just wondering what the Aloha situation with the United partnership there and getting a member on their Board.

Does that effect your thinking on the Hawaiian operation at all?

Not particularly.

I think that United has had a long relationship with Aloha and I think the fact that they expanded their code-share agreement, I think obviously it's an important arrangement for them.

But our view is we have 8% of the capacity in the market, we are generating now about 10.5% of the total traffic.

We've done that without any code-shares.

We've done that without any other marketing agreements.

But I don't see any immediate change in our plans as a result of that, and feel that United's presence has always been there in form of a code-share.

Okay great.

And the second thing is more of a macro question.

A lot's going on with Regional Airlines right now.

There's a lot of changes going on with contracts and with different regionals doing different strategies such as independent flying and what you're doing in China and so forth.

With the stock prices lagging, could you tell me what the advantages and disadvantages might be about maybe going private entirely, doing an LBL?

Well I mean certainly we are not happy with our financial performance and as you said the lack luster results in terms of the stock.

And I would certainly not rule anything out.

We're very dedicated here.

We believe we have a good business plan.

We understand that there have been a couple things that are different, such as go!, but we truly believe and I can't emphasize enough, we think go!

will ultimately result in a very successful operation.

We feel that it has tremendous strategic value for us going forward.

We also believe that China is going to be just a remarkable opportunity.

We are putting a lot of resources there.

As I mentioned, we have people there now full-time, working every day with the CAC towards certification.

I think that we would not rule anything out and we certainly are looking at various different Corporate strategies to enhance shareholder value.

Great, thank you.

And thank you.

Our next question is from Jim Parker.

You may state your company name.

Jonathan good morning.

It's Jim Parker with Raymond James.

Regarding this $31.7 million incentive payment, that was -- you paid United that, I believe, when you signed a new contract with them and game plan was they would pay you back over life of the contract.

Now you're saying that they won't pay you, is that correct?

Or explain why you will not give that back.

First of all, it was $30 million and the idea was, yes, we made that payment in order to take the aircraft that were coming out of US Air, put them to work, have them reaffirm our existing contract.

But what we're saying now is we underestimated our expenses, we overestimated our completion rate.

Our United Express operation is running three points below the rest of the operations, we mentioned that that cost us about $4.7 million.

And as a result, we don't think that we will earn a return on the $30 million that we had anticipated.

Which then allow us to impair that payment and write it off.

Okay.

Now what is United doing?

You're suggesting that United is doing some things to help you to make the operation more reliable, but what are they doing?

What can we expect them to do so that your operation with United would be profitable, or will it be a loss going operation in the future?

Let me say, Jim, we are working very closely with United.

They understand the operational difficulties, a lot of which involves obviously the very difficult weather environment, ATC environment in Chicago.

It involves some of the flying we do in Dalles where we were for a long time the only regional carrier flying into the highest ATC cities of Boston, LaGuardia, Newark, Philadelphia, Atlanta, and JFK.

For example, we used to fly into those cities 32 times a day.

It touched 40% of our lines of flying.

Today, we fly into those cities 26 times a day.

In the June schedule, that number will be cut in half.

It's those kind of things which we feel could have a positive impact on our operations so that we could run the operations in a more reliable fashion, completing more of our flights with less disruption and inherent less expense resulted and that's part of that disruption.

Okay, thanks.

Okay.

And thank you.

Our next question comes from [Brian Cornga], your lines open and state your company name.

Hi.

This is Brian from Falcon Fund.

Just a quick housekeeping item.

I wanted to get your current debt balance and maybe your shareholder's equity.

Okay, we're working on that.

Sure.

On the debt balance, we have a total debt of $691.5 million that includes $138 million in two converts.

The rest of that debt is all aircraft-related debt.

And on the balance sheet -- you wanted earnings or shareholders equity?

The equity line, please.

$224 million.

And what was your current share count at the end of the quarter?

The weighted average shares outstanding was 31.812 million.

Thank you very much.

And thank you.

[OPERATOR INSTRUCTIONS] And I'm showing no further questions at this time.

Okay.

Well, we again want to just thank everyone for taking a moment out of, I know it's a busy day.

Just reemphasize that we are not pleased with our report today.

I am-- although will say, I think we have made good progress understanding where the issues are coming from.

We are working closely with our partners, who's relationships we greatly value and we feel that as we move forward, we can execute on some of these items and hopefully present to you somewhat better reports in the future.

Excuse me, there was a couple last minute questions.

Would you like to take those at this time?

Sure.

Okay.

[Michael Rosenthal], your line is open.

Hi guys.

I'm sorry I also jumped on late, so I don't know if this was answered.

But could you talk about the current fare structure in the go!

operation?

I guess things got a little more promotional in the quarter and the promotional fare was lower than it had been.

Can you talk about that?

Our normal fare structure is from $39 to $79.

We sell seats at all those levels depending upon demand.

Occasionally we will run off peak sales anywhere from $29 or $19.

We haven't gotten to the point, like Ryanair, where we'll offer the fares for free, but given Ryanair's success maybe that's what we ought to think about doing.

But that fare structure is one that we basically had in place since inception and then we'll run some promotions from time-to-time depending upon demand.

Pricing the intersection of supply and demand, there's been a lot of supply put into the market by our competitors, which have put us in the position where we've been more aggressive in terms of fare sales.

All right.

I guess you had once mentioned that your average fare was about $50.

I wonder if you could give us the average for this past quarter?

A, I don't think we ever said that.

And B, we don't comment on it, so no, I would prefer not to.

Okay.

And then, I guess I heard that the lowest fare -- the fare promotional sale price of $19 is no longer in place, is that a reflection of improved booking pattern that you're seeing?

We run the sales from time-to-time, just based on what we believe is our demand levels.

Okay, I appreciate it.

Thank you.

Sure.

And thank you.

Our next question is from Roger Keane.

Please state your company name.

Hi, this is Roger Keane from Credit Suisse.

I'm a little slow here on the take because I didn't understand the $30 million cash pre-paid discount that you made about a year ago at United.

Like Mr.

Parker, I thought it was sort of like money that you'd be getting back from them as opposed to a discount on something.

Could you explain a little more?

We made -- This is Peter Murnane, our CFO.

We made a cash payment to them of $30 million.

From an accounting standpoint, instead of being able to expense it at the time we made that payment, it goes on your balance sheet and then gets amortized over the life of the credit -- over the life of the asset.

So that's why it was shown as an amortization.

Sure.

Now it's written off -- it's written off as a balance sheet item.

And how much was that amortization per quarter, Peter?

Maybe you can explain that.

It was in the $800,00 to $900,000 range and actually the way that the amortization was set up would get as high as about $1 million a quarter.

Okay.

So against that, there wasn't any obligation from-- any cash obligation to pay you back as with if it was a loan, but you felt that you'd make enough money in the business to have a good return on investment.

That's what you said, right?

That's correct.

Okay.

I just -- like Mr.

Parker, I was thinking it was a loan too back then, but I was wrong.

I apologize.

Yes.

And thank you.

This does conclude today's conference, and you may disconnect your lines.

Thank you very much.