Mesa Air Group Inc (MESA) 2007 Q3 法說會逐字稿

Welcome and thank you all for standing by.

At this time all parties will be in a listen-only mode until the question and answer portion of today's call.

The call is being recorded.

If anyone has an objection you may disconnect your line at this time.

I would now like to turn the call over to Mr Jonathan Ornstein.

Sir, you may begin.

Hi, everybody, and thank you very much for joining us this morning.

I'd like to start by reading a 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 its expectations reflect in such forward-looking statements are reasonable can give no assurances 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 this call prior to filing the next Securities and Exchange Commission.

I would also like to add that we own no mortgage-backed securities.

Good morning, again, and we'd like it start with today's call.

On a pro forma basis net income was $5.1 million or $0.15 per share.

This compares to $11.5 million or $0.26 per share in the third quarter of 2006.

Pro forma net income excluded noncash investment losses of $700,000, cost associated with the early return of Dash 8 aircraft of $1.4 million, and $1.7 million related to a contract settlement with a vendor and $100,000 in certain start up costs associated with our Chinese venture.

This compares to pro forma earnings we mentioned before, $11.5 million or $0.26 a share for the comparable period in 2006.

The primary items of significance affecting our third quarter results were the following -- Our underlying growth in our fleet, which has grown from 185 aircraft in June 30, 2006 to 199 on June 30, 2007; Total operating revenue for the third quarter increased $16.9 million or 5%.

While we experienced growth in our underlying fleet, as mentioned in last quarter's earnings call, revenue growth was partially offset by United Airlines assumption of responsibility of a portion of our United Express fuel purchases.

As a result going forward the Company's quarterly revenues as well as fuel expenses were reduced by approximately 4.6 million gallons, which represents about $10.6 million in the third quarter.

We are now benefiting from new engine maintenance agreement covering maintenance and repair of our entire General Electric engine fleet not previously covered.

As we discussed last call we expect to save over $100 million during the 12 year term.

The Company saw approximately $1.9 million lower engine repair costs in the quarter as a result of the agreement as compared to what we would have experienced otherwise without the agreement.

The Company also negotiated lower rate for maintenance for its Embraer regional jets' auxiliary power units resulting in quarterly savings of approximately $0.25 million.

The Company revised its spare parts maintenance agreement with AAR to settle the prior billing dispute as previously discussed and a cap on certain previously uncapped costs was put in place.

We have amended the terms of our current GE Power-by-the-hour engine agreement in order to mitigate a large portion of the effects of this year's contractual increases as well as to eliminate the variability of certain future costs.

As previously disclosed, this agreement expires in December, 2008 at which point these engines will be covered under the new, lower cost Delta agreement.

Passenger related costs impacted us negatively due to certain increase in costs in the Company's United Express flying, which as you know has had its share of disruptions during the quarter as a result of weather, ATC, and United's core system.

Also there was an increase in rent expense, however the increased rent is reimbursed by our partners.

General administrative expense when compared to last year's third quarter increased primarily due to a $5.5 million reversal in 2006 of a U.S.

Airways bad debt provision.

Depreciation and amortization expense increased $1.2 million due to the addition of three CRJ-700's in September and October of 2007.

These three aircraft were subsequently refinanced to a sale lease back transaction.

The increase in interest expense is due to three previously mentioned CRJ and an increase in underlying interest rates from a year ago.

Actions taken during the third quarter.

Company took delivery of the two 700s, placed them into service for United Airlines in June swapping them for two 50 CRJ.

In addition, the Company removed two additional 50 CRJs further reducing the Company's exposure to less profitable 50 CRJ flying at United.

Given the high profitability and better operating environment, we have much less core impact on our larger aircraft, the Company's ordered ten additional 700s with an option to replace 200s and also we optioned one additional aircraft.

The Company and Delta have begun implementing their joint plan to eliminate JFK Dash 8 operations and three Dash 8s were removed from line service in the third quarter.

The remaining nine aircraft removed from service this month.

In addition we returned one aircraft from lease early and have reached a tentative agreement for the early return of another five aircraft in the fourth quarter.

The Company continues to prepare actively for the launch of its Chinese joint venture, KunPeng Airline.

In June 2007 three CRJ 200 aircraft began the conformity process for sublease to the joint venture.

Operations are still on track for a mid to late September 2007 start up.

As we say last time we planned up to 20 50-seaters in operation in time for the 2008 Olympic games.

This opportunity, we believe, has significant upside for Mesa and according to our Chinese partners could represent demand up to 100 aircraft.

It is interesting to note that in the country of almost 1.4 billion people there are only 70 regional aircraft currently in service, less than that which serve the Chicago hub for United Airlines.

Okay.

I think we cannot emphasize how important this issue is both to our Company, our people, our passengers.

Working with United the Company has made significant progress in improving Mesa's United Express flight schedules.

The restructuring of Mesa's July United Express flight schedules already led to measurable operating improvements with a controllable completion factor and on time performance of 99.3% and 76.1% respectively for the month of July and that compares to 97.5% and only 58% respectively for the July period 2006.

I really cannot emphasize how significant that improvement is in terms of its impact on our people, in terms of reducing things like junior assignments and reassignments for our pilots and flight attendance.

The maintenance people have the aircraft on a regular basis at the correct times and certainly, a big impact on our passengers, which is a result of this improved performance, obviously gets to their destination in time with their bags more frequently.

We also earned higher incentives with this improved performance.

We continue to pursue a number of different options with respect to our Air Midwest subsidiary.

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

We are currently down to only 20 1900s that we operate, which continue to generate significant losses.

The Company celebrated its one year anniversary of inter-island service in Hawaii.

Load factor in June was 72% up from 63%.

We also saw the highest average fare for calendar 2007 in that month.

In addition during the third quarter, go!

frequent flyer membership almost doubled.

I will tell you that load factors in July will be significantly higher than those in June.

Work commenced for adding the first of 14 76 CRJ 900 regional aircraft on Mesa's Freedom certificate to be operated at Delta as Delta Connection.

The first of the CRJ 900s expected to be in operation in November, 2007.

On the operating side, as we mentioned before, we have added 14 aircraft, 11 37-seat props and 5 60-seat jets, offset by a reduction of two 50-seaters.

We had a 10.5% increase in block hours and 16% increase in departures.

However given most of that increase was attributable to our small aircraft, total ASMs for the quarter increased only 1.7% and our average stage length fell 10.9% from 403 to 359 miles.

Fleet summary.

Our fleet count is at 199, comprised of 94 50-seaters, 20 60-seat regional jets and 38 86-seat regional jets.

That breaks down to 53 US Airways, 58 at United, 33 transitioned to Delta, 5 CRJ 200s in Hawaii and three are preparing for delivery to our Chinese joint venture.

In addition to our regional jet fleet of 152 aircraft, we operate 47 turbo props, including 27 37-seat Dash 8 and as we mentioned the 20 1900s.

At the end of the quarter we announced we had reached an agreement to expand our relationship with Delta with the addition of 6 CRJ 145s and the 900s we previously discussed.

Currently we have put three of the six into service and we are transitioning the remaining three during this quarter.

Operational summary.

For the quarter ending June 30th our controllable completion rate was 98.6% total.

The jet controllable completion rate was 98.7%.

While I'm generally pleased with this performance, as I mentioned we are working with our partners to develop schedules which can better handle a regular operations.

For example, in the third quarter, United Express total completion rates was only 91%.

But in July, with the improved schedule, it was 97.3% That will clearly have a significant impact on us, again, our people and certainly our passengers.

We'd like to thank the folks at United for their efforts with us, this is something we have been working on for the better part of a year.

And we are nice to see these results improve so significantly.

On our forecast, we project ASMs of 2.2 billion for the fourth quarter in 2007, down slightly from 2.3 in the third quarter, due to the elimination of Delta's Dash 8s in the quarter and the transition of some aircraft to China joint venture.

Of course those numbers will start to build once we begin adding the CRJ 900s for Delta and the aircraft into Chinese operation.

Other highlights.

I would like to talk about just from a financial perspective.

We continued to aggressively repurchase stock.

We repurchased approximately 2.3 million shares of common stock.

Under our previously announced share repurchase program the Company is authorized to purchase an additional 13.5 million common shares.

I'd also like to send out a special thanks to all our people.

Given the Company's growth and operating challenges, I would like to once again thank everyone both our line employees, our people who are in the office, our leadership group for their continued success of the Company.

We are confident we continue to execute our plan going forward and working together, I think there are many opportunities in front of us.

In close, we have taken a number of actions since the last call and have already seen some significant improvements.

These actions, coupled with the ramp up of the China joint venture and the expansion of our coach here with Delta to the 900, we believe we are making significant strides to achieve positive earnings growth going forward.

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

Once again, I would like to thank all of you taking time out of your busy schedule to join us for this call and I would like to open it up for any questions you may have.

Thank you.

(OPERATOR INSTRUCTIONS) First question from Mike Linenberg with Merrill Lynch.

Sir, your line is open

Yes.

Hi, Jonathan, good morning.

Hi.

How are you.

I guess a couple of questions.

First, I noticed in your comments that I don't think you made any mention of pilot attrition.

And I know that's been an issue in the industry.

What are you guys seeing and how has that attrition rate changed?

Have you started seeing it improve?

Any color on that would be great.

Sure.

I would be happy to give you some information on that.

We clearly had a spike in the early part of the year and saw attrition rates that we had not seen for some time.

A lot of it was due to the fact that you had some of the low cost carriers hiring.

The bulk of our people who we lost went to places like JetBlue and AirTran and Frontier, when they began a Dash 8 operation in where we were particularly vulnerable in Denver.

However, I will tell you that in the last month our attrition has gone back to not quite too last year's levels, but far closer to last year's levels than they were to the prior few months.

I will tell you that unlike maybe some other carriers have experienced, we have not had a problem recruiting people.

We have had to work at it and we have made some changes in order to do that more effectively.

But I believe at this point in time we have over 250 people in training.

So I can tell you we are well ahead of the curve in terms of attrition in regard to the pilots in particular, which is clearly the one with the longest lead time.

Unfortunately, we did have some shortages earlier, because frankly, when you have an 11-day average notice, and it takes you approximately 90 days to train, there is that lag.

But we are ahead of that lag at this point and we do not see this as a problem going forward.

Now, that obviously could change.

But at this point in time, we think we've got the situation pretty well under control.

In the other work groups, we have not had the same issue.

And in fact I will say, I think given to some of the very strong efforts of our people in HR, for example, one of the chronically short places that we have is the ramp in Phoenix here particularly in the summer.

I can tell you that we are now above our staffing levels in Phoenix.

Okay.

That's good.

Then my second question is relating to the Chinese JV.

So it sounds like you're going to have three airplanes that maybe start over there late in September.

Over the next 12 months, what is that -- how many airplanes are over there?

And then it sounds like I think you indicated -- you gave us some guidance for the September quarter.

What sort of gross should we use next year?

It sounds like you are going to consolidate, but maybe not.

And any guidance on whether it's going to be consolidated or if you are going to account for it under the equity method.

And then I realize this is like a two or three part question.

You did have a small start up cost associated with the Chinese JV in this quarter.

How does that ramp?

And how big does that get over the next couple of quarters?

Okay.

I think a lot will depend in terms of growth, not a lot, but we clearly have the 900s coming on.

I'll let Peter talk about that.

A lot depends on one, where we source the 50-seaters from.

We would not be opposed to pulling some 50-seaters out of some of our existing arrangements to move to China, where we think there may be a greater opportunity.

Also, it will be dependent upon what is the final disposition of Air Midwest and if there is a disposition of Air Midwest.

So I think those are two things that we have to, three things that we are going to have to take into consideration.

Peter, do you want to talk about how we are going to account for sales?

Yes.

It will be on the equity method.

It will not be consolidated, Mike.

Okay.

Okay.

So just to get it clear, though.

Okay, so it will show up in your non-op area but then your operational statistics, like ASM?

That will not reflect it either.

Okay, good.

That makes sense then.

Okay.

Thank you.

Our next question from Ray Neidl with Calyon.

Sir, your line is open.

Good morning, everyone.

Good morning.

Okay.

I just want to verify what is going on in China here now.

Three aircraft are starting in September.

And then over what period will it be up to, what was the number of aircraft, 49 or whatever?

We'd like to be up to 20 by the Olympics, which is in July of '08.

Okay.

As far as the equipment types you are using over there, it is going to be various-sized aircraft I think you just said.

Are you going to pretty much stick with the Canadian Bombardier aircraft or are you looking for other manufacturers, possible Embraer?

We are going to start with the CRJ 50s because A, they're available to us and B, we are getting a lot of support from GE on this venture and then I think we are going to be looking at other aircraft to supplement those aircraft.

Larger gauge airplanes as we go down the road and we are looking at all the manufacturers, including in fact the Chinese manufacturer in terms of future aircraft for larger displacement regional jets.

That is interesting.

Now as these aircraft come in, you are going to do this on an equity basis you said.

But as the aircraft come in, can we expect to see you financing them and your interest expense going up?

No.

It will be financed by the joint venture.

Oh, okay, fine Okay, good.

Coming in though we'll be taking -- we intend to supply at least a, we'd like to think, a chunk of the aircraft going in initially, coming from Mesa.

Oh, okay.

Okay.

Fine.

And then finally, your problem child there, the at-risk flying.

I think you were hinting that you want to get out of that as fast as possible.

Can't you just drop that service?

Is there restrictions on the time parameters that you have to keep doing that?

No, I mean yes.

I say no and yes.

There is some restriction.

You can drop it.

It just takes some time.

But the fact is is that we've got 20 aircraft that we have obligations on.

And at this point it still makes sense to continue to fly them as opposed to just parking them.

Now, we are in discussions with Raytheon and in fact have exchanged some proposals that may allow us to exit the aircraft.

This also would be a nice source of crews and other qualified people, mechanics, dispatchers, if we were to do that.

We certainly see opportunities for all of our Air Midwest personnel, no matter what happens at Air Midwest, given the addition of the 14 CRJ 900s coming in.

But I think that is something we are still working on.

We started back ten years ago with 122 aircraft, we are now down to 20.

Clearly, those 20 aircraft generate about the same amount of revenue as just 3 or 4 900s.

We would really rather focus our energy on the Delta operation and not have to focus on Air Midwest at this point.

Great.

Thank you, Jonathan.

Will Nasgovitz with Heartland Funds.

You may ask your question.

Good morning.

I was just curious if you could kind of give an update on Hawaii.

I guess you have been there for a year now.

Maybe just your trends and your performance there in terms of -- I don't even know if you are profitable there or not now or what the -- .

And maybe if you walk through the past 12 months and maybe what your goals are there through the remainder of this year and into next

Sure.

We continue to develop the business.

Again, this last month in June we reported our load factors were 72%.

I think that was the second highest load factor total that we have.

I would not be surprised if in July it was the highest load factor we have in our history.

I think it will be north of 80%.

We obviously had to do a lot of work in terms of understanding the market only in one year.

I think when you look at what we are carrying, I still believe we are carrying about double our share in terms of the local market, because we do not have any connecting, real connecting opportunities.

We don't co-chair with anyone, for example.

We have not relied on the wholesale business.

We really have focused on developing the local traffic, providing people in Hawaii the opportunity to visit friends and family reasonably.

What was nice was with our updated website and the promotions that we've done, we've done an excellent job in, for example, in this quarter alone, doubling the frequent flyers that we have in our program now.

I believe it is over 50,000 people, actually 55,000 people.

And so our view is we just keep chipping away.

We continue to move towards profitability.

This month will probably be our best operating month as well, in our history there.

I think that when I have looked at brand development, as I did when we were at Virgin, things take time.

But we continue to see the positive momentum of more people traveling on us and fuller aircraft.

I think we feel that we are still moving in the right direction.

We just began a very interesting program, web loyalty program, on our website where we will get paid a not insignificant amount of money for every passenger that is booked.

We are doing some additional advertising on our website.

We are doing some advertising on our aircraft.

These are all things that just take time to develop.

And I think we see good trends in terms of the auxiliary -- the ancillary revenue that we can generate as well.

Good.

Thank you.

Mike Schulten with Ingalls & Snyder, your line is open.

Hi, Jonathan.

Nice start to a turn around here.

My first question was can you give us like a financial impact of your completion rate going from 91% to 97% with United?

What kind of numbers are we talking about there when you -- ?

I would have to go back and sort of run the numbers to determine that.

But clearly, when we fly more we get paid more and there is certain things that we get paid when we don't fly at United's request during weather and ATC situations.

But still there is a lot of costs that are not covered.

So I would suggest that the impact is fairly significant.

I would even suggest that in the last 30 aircraft, which at United, as you know, we wrote off $30 million, that an improvement there has a very significant impact on those aircraft in particular.

Just the way the contract's structured, as well as -- for example, the payments that we have for interrupted trip expense.

If you can believe it, and I can tell you it is sometimes hard for me to fully understand, even though we don't touch any bags, when bags are mishandled as a result of weather and ATC, we pay for them.

I'm hopeful that the bag numbers at the Chicago and Dulles hubs could start to reflect close to the numbers that we would have at our, for example, where we handle bags in Phoenix, where the numbers here are probably a third of those in our other hubs.

So, it is significant.

I can't say that we put pen to pencil and say what that really is but -- .

Can you give me kind of a ballpark?

I can't.

I got a lot of people shaking their heads here.

I'm sorry, just because we just don't know.

We just know that it is better when we complete our flight.

We could go back and figure it out and certainly it's not something that -- we'd be happy to tell people.

If you want to call back Peter and talk to him, I'm sure we could give you some numbers.

Okay.

Great.

And sorry if this was a repeat of a prior one.

The three planes you are sending over to China in September, they are coming from your existing fleet, is that correct?

That's correct.

And then could you update us on your NOLs?

What net operating losses you have to shield yourself from income taxes?

I don't have the dollar amount, but it is disclosed in both our K and our Q.

Okay, it's in the Q.

Okay.

That's it.

Thanks very much.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Sir, I'm showing no further questions.

Okay.

Well again, everyone, I'd like to thank you for your interest.

We know we have some work cut out for us.

We had a, obviously a major challenge this year working on our just the operational piece.

We'd like to think that that is primarily behind us.

We think we are moving forward very aggressively and positively with our Chinese partners, who have just been fabulous to work with, and we are looking forward to adding the CRJ 900s at Delta next year.

Again with 13.5 million shares to buyback, we believe in what we are doing and we are going to continue to move forward with our buyback program.

Again I want to thank all of our employees, all of our investors and shareholders and our partners and we look forward to talking to you next quarter.

Thank you.

That does conclude today's call.

Thank you all for joining.

You may disconnect your lines at this time.