Mesa Air Group Inc (MESA) 2007 Q4 法說會逐字稿

Welcome, and thank everyone for standing by.

(OPERATOR INSTRUCTIONS).

Also, at this time I would like to inform all participants that today's call is being recorded.

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

Now I would like to turn the call over to Mr.

Jonathan Ornstein.

Sir, you may begin.

Thank you everybody for taking time out from your day to meet with us.

We have to go through 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.

While the Company believes that these expectations reflected in such forward-looking statements are reasonable, they 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 correct, 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 the next filing with the SEC.

Again, I would like to welcome everybody on the call, and appreciate your interest, and the interest of the investment community in our Company.

Just give you a high-level earnings overview, on a pro forma basis net income was $2.2 million, or $0.08 per share.

This compared to $7 million or $0.17 per share in the fourth quarter of 2006.

Pro forma adjustments after-tax include the award against Mesa in the Hawaiian lawsuit and associated legal costs is $59 million, $3 million in China startup costs, and $1.7 million in remaining Dash-8 shutdown expenses.

In addition, the pro forma earnings exclude $6 million in losses at Air Midwest, since they will now report this division separately as discontinued operations.

We are exiting routes to Air Midwest and actively marketing the Beech 1900 aircraft.

The judgment against Mesa in the Hawaiian lawsuit certainly represents the largest financial impact on the Company.

We continue to believe that the judgment was wrong.

We filed an appeal, and that is primarily based on information gained late in the process that was not allowed into the trial.

According to every precedent we can find, both the ruling and the amount of the judgment were extraordinary, and in fact unprecedented.

Nonetheless the court system is such that we're required to post a $90 million bond subsequent to fiscal year end.

This is to cover $80 million in judgment, plus legal fees and interest.

Thus we're taking an $86.9 million pre-tax charge in the quarter.

Certainly that is the bulk of the bad news for the quarter.

We do have some good news in the quarter.

Our China joint venture, Kunpeng Airlines, began service.

This was only a short nine months after we signed our original agreement.

During the quarter we delivered two aircraft to Kunpeng, and continue to work on another two for delivery in the first quarter of '08.

One of those has been delivered, one is in fact on its way, I believe, now in the Soviet Union, or Russia I guess.

The cost of taking the aircraft out of service and performing major maintenance checks, along with legal costs and other China-related conformity items was $4.5 million pre-tax, net of maintenance and rent paid to us by Kunpeng.

Although the aircraft are operating for just a few days in the quarter, I feel comfortable reporting that they are operating reliably and have experienced increasing load factors on a month-to-month basis coming out of the Shenzhen Hub.

As we have said before, we plan to continue to grow the fleet in anticipation of the 2008 Olympic Games and growth in the Asian market.

Kunpeng recently announced major fleet orders of up to 100 ERJ-190s and 100 ARJ-121-700s.

The ARJ-121 is a new 90 seat aircraft manufactured by Chinese aircraft manufacturers.

We believe these orders reflect the strong demand for regional jets in China and the confidence of our partner, Shenzhen Airlines.

Also, in the quarter we took delivery of our first CRJ-900 aircraft for Delta Air Lines.

We now have two CRJ-900s in service from Delta, with a total of 14 to be put in service over the next year.

In addition, after celebrating the one year anniversary of our inter-island Hawaiian operation in go!, in June go!

posted a load factor in July of 82.7%.

That is up almost 6 points from the load factor in the fourth quarter the same year -- the prior year other.

In addition, after almost doubling the third quarter, go!'s frequent-flier membership increased another 20% in the fourth quarter.

On the operating results side, adjusting for the pro forma items, our earnings per share was down $0.09 from $0.17 in the fourth quarter of 2006 to $0.08 in the fourth quarter of '07.

Pro forma net income fell $4.8 million from $7 million to $2.2 million.

The primary items of significance affecting our fourth quarter results versus the year prior were a year-over-year variance of $5.3 million in bad debt.

This variance relates to credit in the fourth quarter '06 due to the receipt of US Airways receivable, previously characterized as bad debt, and an increase of the bad debt allowance in the fourth quarter of '07.

We also had year-over-year adjustments in workers' compensation of $1.9 million, and sales tax of $1.4 million.

These items total $8.6 million.

Other information, we reduced the fleet size of our fleet to cut back unprofitable flying.

We began to reduce our CRJ-200 flying at United in the fourth quarter, and have announced an agreement to take out eight CRJ-200s permanently in exchange for two more profitable and longer-term CRJ-700s.

In the fourth quarter we also grounded our Dash-8100 fleet operated at Delta and JFK.

In previous calls we identified these two contracts as unprofitable air service contracts.

Year-over-year our operating fleet decreased nine units from 191 aircraft to 182.

That is eight fewer CRJ-200s, six fewer Dash-8100s, offset by five more CRJ-700s.

Excluding Air Midwest, our operating fleet count declined from 171 to 162.

Excluding Air Midwest, ASMs decreased 5.1% and block hours fell by 3.6%.

Total operating revenues for the fourth quarter '07 decreased year-over-year by $21 million or 6%.

Most of this decrease is due to the $20 million in lower fuel pass-through costs.

As mentioned in previous calls, beginning in January '07 revenue growth was partially offset by United Airlines assuming responsibility for a portion of Mesa's United Express fuel purchases.

United is currently purchasing the fuel at Chicago O'Hare, Denver and Dulles.

Overall our fuel expense fell due to the reduction in gallons purchased.

Systemwide the average interplay in fuel price was flat at 240.

Gallons consumed, however, decreased by 16% primarily due to United assuming responsibility for a portion of Mesa's fuel purchase.

Again, and total fuel expense fell by $20 million or 15.9%.

General administrative expenses increased due to unusual items that reduced costs in the fourth quarter of '06 and increase costs in the fourth quarter of '07.

$5.3 million, as previously mentioned, the year-over-year increase in G&A is due to bad debt, partially due to a credit from US Airways bad debt in the fourth quarter of '06 and partially due to an increase in the allowance in '07.

Year-over-year we also incurred adjustments to workers' comp and the aforementioned sales tax.

In addition, G&A in the fourth quarter included Hawaiian-related legal expenses of $1.9 million.

Air Midwest is now excluded from pro forma results due to its designation as discontinued operation.

The operation incurred net losses in the fourth quarter of $6 million dollars.

Air Midwest revenue continue to be disappointing.

Neither essential air service subsidy nor passenger per revenue kept up with cost trends.

Air Midwest continues to suffer from ongoing effects of federal regulations governing the operation of 19 turboprop aircraft.

These regulations have driven costs higher in maintenance and flight operations.

During the same period, fuel increased expenses increased year-over-year, and Air Midwest fuel increased $1.2 million, or 37%, with the price of fuel and going from 229 to an average of 313.

In the fourth quarter we continued to pull down flying in the Air Midwest subsidiary.

Aircraft lines of flying were down 2 year-over-year by the end of the quarter, with additional reductions over the past few months.

Further reductions require coordination with the Department of Transportation, which oversee the Essential Air Program.

Should the DOT continue to hold us in routes which we have filed exit, we will be receiving a higher subsidy.

We have negotiated, and these are called (technical difficulty) holding rates.

We continue to pursue opportunities related to Air Midwest, including the sale the of the leased Beech 1900 aircraft they operate.

We anticipate we will be out of this business before year-end fiscal 2008.

The operation statistics side, year-over-year we reduced our fleet by nine aircraft.

It includes the six-37 seat props, eight-50 seat jets, offset by the five-66.

And we have seen ASMs decline approximately 5.1%.

At the end of the fourth quarter we had 182 aircraft comprised of 88 50 seat regional jets, 20 66 regional jets -- passenger regional jets, and 38 86 seat regional jets.

Those are broken out 51 at US Airways, 54 United, 36 at Delta, 5 CRJ-200s operating in Hawaii for go!.

In addition, to our regional jet fleet of 146 aircraft, we operate 36 turboprops, including 16 37 seat Dash-8s, 6 at America West, 10 at United, and 20 1900s, 4 at our independent Mesa operation and 16 at USAir.

As I mentioned, that number has decreased in this last quarter as well.

At the end of the second quarter we announced that we had reached an agreement expanding our relationship with Delta with the addition of six CRJ-145s and the aforementioned CRJ-900s.

As of the fourth quarter, we placed into service all six of the ERJ-145s, and again took delivery of the first 900s.

Also of note is we currently have a tentative agreement with United for the swap of another two CRJ-700s in place of eight CRJ-200s.

From an operational standpoint, for the quarter ending September 30, 2007, our controllable completion rate was 98.2%, with a jet controllable completion rate of 98.8.

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

Clearly we still face some challenges on the East Coast, but as you can see, these numbers continue to improve.

On the pilot side, I know it has been of interest lately, pilot attrition has been higher than in earlier years.

But again, we see some moderation in that with the change from the age 65 rule, and we also as we look forward see the reduction of aircraft in assisting us in that regard as well.

We currently have approximately 250 pilots in training, as we speak.

Forecast summary, on the statistics Mesa operated ASMs of $2.2 billion for the first fiscal quarter 2008.

Flight was at 2,000 -- 2.2 billion ASMs flown in the fourth quarter of 2007.

We expect to fly about the same capacity in the current quarter.

In the fourth quarter of 2007 we temporarily suspended our stock repurchase program.

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

During the first quarter of '08, however, the Company purchased 1.5 million shares of common stock.

Interesting of note, on a fourth quarter comparison our average weighted shares last year were 35,032,000 and this year, 28,741,000.

We believe the Company will be able to meet our financial requirements through a combination of existing liquidity, operational cash flows, refinancing, or other types of Capital Market transactions.

As we like to do on all of our calls, given the Company's growth, operating challenges, certainly this has been a tough quarter for us.

I would like to again thank our employees, and the employee leadership group for their continued success with the Company.

This clearly has been one of our more challenging years.

But we're confident if we can continue to work together and execute our plan successfully, we can go forward successfully.

In closing, we have taken a number of actions that we have talked about since the last call.

These actions, coupled with the ramp up of the China joint venture operation, the expansion of our co-chair with Delta, the CRJ-200 service, hopefully demonstrate that we're making what we believe to be significant strides.

The shutdown of the Air Midwest, while may have been long overdue, is now moving forward and will be done by the end of the year.

We continue to believe that our strategy reflects the right model.

And the commitment of our employees and continued support of our airline partners is much appreciated.

Again, I would like to thank you for taking the time out of your busy schedule to join us in the call.

And with this, I would like to open it up for any questions you may have.

(OPERATOR INSTRUCTIONS).

Jim Parker.

How much cash do you need to run the business?

That is a good question in that, as you probably recall, before we had done the $200 million in converts, we used to run it on a pretty tight budget.

The Company was in fact significantly cash flow positive this last quarter.

I believe about $16 million.

The aircraft that are being delivered to us from Delta require their delivering the aircraft to us.

I would have to go back and look at what our cash flow requirements would be in terms of other deposits.

We do expect to take on additional CRJ-700s, but in the past we have been pretty nimble.

I don't see that as a big issue.

Also, I would point out that last we checked I believe we have about $100 million of unencumbered spare parts.

We have started to look at some potential opportunities with that.

But we just don't -- but in terms of your question, the Company being cash flow positive, I don't think there is a very big number.

We actually, up until the time prior to the Hawaiian payment, I never -- this is just from memory, if it serves me correct -- I don't believe we ever dipped below the $200 million mark in the past, and actually needed the $200 million we raised with the convertible issue, which I think it represented about 14 million shares that were diluted.

The filing of your 10-K, when do you think that is going to take place?

In terms of delay, I think it would be fair to say that our finance department with Peter's departure, has been working very hard to pull things together.

And clearly that was something of a setback for the department.

We are working to try to make these filings more timely in the future.

And that we feel that -- we also had to go back, and one of the reasons for the delay for this quarter was the discontinued operations took quite a bit of work.

Again, I think that we're going to work hard to try to improve upon the timeliness of our reporting.

In that context, if you don't file your 10-K within a certain period of time is there a threat of delisting?

There is some -- I know there that is some timetable.

We don't believe that is going to be an issue for us, given that we're going to file tomorrow.

Michael Linenberg.

This actually is Lily on behalf of Mike.

Could I ask you about how we should think about the China JV impact on the P&L going forward?

Can you suggest a runrate cost, and maybe a little bit more color on the revenue side.

Whatever you can help out on that front would be great.

Okay.

We are going to have to -- it will float, but it will be consolidated at an equity method.

I think probably the best way to answer that question would be to talk to Bill Hoke, because it is somewhat more technical, and I guess something above my pay grade.

So maybe after the call if you want to call and discuss it with him off-line, that would probably be the most best way to do it.

(inaudible) partners seem to be fairly enthusiastic.

In the last Board meeting they felt that the Company would be profitable in December.

I have not seen the numbers yet.

But I can only tell you that Shenzhen runs a pretty good operation.

It has been profitable.

I know that they are working very hard to ensure that Kunpeng will be profitable as well.

Second question is, did you mention about pilot attrition rate?

I heard you talk about you had 250 pilots in training.

Has the attrition rate calmed down right now, or what is the picture looking like right now?

The attrition jumped up probably back in November of last year.

It has clearly been higher than we anticipated.

We get -- frankly, the pilots tell us there is going to be a shortage every year.

This year it is in fact has been true.

About 90% of our pilots that leave are leaving to go to another airline to fly larger equipment.

We don't think there's a lot we can do to stop them.

If a pilot gets an offer from United or USAir, Delta or Southwest or Continental, AirTran or even JetBlue, they are going to -- for the most part that is a move that they view as an upward advancement.

As those guys stop hiring, you would see that attrition drop significantly.

We have begun to see some signs of that this month.

Also with the impact of the age 65 rule we think things have slowed down a little bit.

But again, Mesa in some respects, and this is something that some someone at the union actually mentioned to me, is a victim of our own success in that we upgrade people so quickly at Mesa, because of the growth in the past, that we have lots of captains who are prime targets for the major airlines who are young, with lots and lots of time as a pilot in command, and not that much overall seniority.

So it is easy for them to leave.

This is unlike maybe some of the other regionals where to become a captain can take you over 10 years.

At Mesa it takes three.

So by the time you're in your eighth year, you have been a captain for five years, and you become -- would become a very big target, because I think our people both high-quality, high-time, and have gone through for the most part excellent training, with most of our pilots coming through our own in-house Mesa Pilot Development at either -- at Arizona State or in Farmington, New Mexico at the program that began almost 15 years ago.

We have seen some things slow down a little bit.

We think that as the hiring slows down that will improve further.

Bob McAdoo.

A couple of things.

You talk about the 50 seniors coming out of United.

I'm not real clear as to where we are on that process.

Is there eight that have come out already and you have agreed to do eight more?

Is that what you are saying?

Yes and no.

We have agreed to do eight.

Only I believe one has come out so far.

This is the first batch of eight?

They are now telling me three have come out.

Two came out this month.

We have five more to go.

And we have a tentative agreement for another eight that would also come out over this 2008.

All those aircraft are not unprofitable, and are replaced by 700s that are in fact profitable and have a ten-year term, as opposed to a remaining only about 2.5 year life on the other aircraft.

That leaves you, what, 14 of the pigs that are still there?

We had already taken out two.

It would bring us down to 12.

When you get these two batches of eight, you'll have 12 left?

Right.

We have (technical difficulty) the agreement.

We have not yet signed the agreement, but it is our belief that that will be signed shortly.

Okay.

Or we will sign it shortly.

United has agreed.

On the China thing, are you still sending them airplanes that they are subleasing from you in terms of 50 seaters?

And how many more of those come before they actually start to get the E-190s?

Right now there are three in service, a fourth one on its way, and a fifth one scheduled to go over within the next 30 days, I believe.

They have a contract with us to take 20 aircraft.

And the Embraer 190s would not be available until, I believe, the end of this year.

And that is only a couple.

We are going to work with our Chinese partners.

We will see exactly how many 50 seaters are required.

As I mentioned, we do have a contract though for 20 of our aircraft to go over to China.

Can you take the planes that are coming out of United and send them over there?

Is that what is going on?

That is basically the concept.

I will say that it has been a little more challenging just because of getting approvals from the lessors.

The Chinese government has to approve it.

But so far we have remained reasonably on schedule in terms of getting aircraft over there.

We had hoped to have 12 prior to the Olympics.

I think the number probably will be eight or nine.

When it comes time to do the 190s, what is your participation in that next 100?

I assume you guys still own your X percent of the company, do you have to come up with any capital to help bring those airplanes on board, or are those all being financed by the Brazilian Export Organization, or what?

Yes, we look -- there would be a lot of different ways.

We have a capital commitment that we've made to Kunpeng.

We also have the ability to negotiate with the lessor -- with Embraer, and are getting more actively involved in that in order to ensure that the deals that the Chinese are doing look like the kind of deals that we would be accustomed to doing.

The banks have in fact been willing to finance quite a bit of the pre-deposit down payments, etc.

Again, we are working with our Chinese partners.

This is frankly why they asked us to be their partners was to help them on the regional jet side.

And we continue -- we want to be involved in that process and make sure that we match the fleet requirements up to the demand in the marketplace.

One last thing.

On the CRJ-900 project for Delta, are they financing those planes and you're just leasing them from them, or are you having to put capital in there, or what is going on with that one?

We do have to put capital in.

It is $1 a month.

$1 a month?

Yes.

That one I think we can handle.

You can do that, okay.

I will quit for now.

(OPERATOR INSTRUCTIONS).

Jeff Marcus.

I just had two quick questions.

First, in regards to your marketable securities balance, I was wondering if you could go into a little detail and actually tell us what makes that up?

Bill Hoke, our CFO, has asked me if he could call you back when he has the detail in front of him.

He would be happy to go through that with you.

That's great.

Then lastly, can you provide any update in terms of the Aloha Airlines case?

Did anything happen in the last quarter on that?

No.

The case has been delayed, and it is my understanding that they have asked for a further delay.

At this point there's really no update in terms of the Aloha case.

At this time I show no further participants.

Again, everybody, I can appreciate your feelings, because you can imagine they mirror ours.

We're not particularly pleased, in fact, significantly disappointed.

But we do feel that we have made some changes this quarter.

We are going to follow them through with additional changes as we move forward that will get the Company back on track.

We certainly have say something of a setback with this Hawaiian judgment, both just in the loss and uncertainly of the size of the loss.

Something that I think it is fair to say was not anticipated by anyone.

I think that we clearly need to just, as we have, focus on operations.

We continue to be cash flow positive.

We're going to continue to look for opportunities as they come to us.

I want to thank everyone for their continued interest.

As always, please feel free to give us a call if you have any additional questions.

With that, I can conclude the call.

Thank you very much.

This concludes today's conference call.

Thank you for your attendance and participation.

You may disconnect at this time.