Mesa Air Group Inc (MESA) 2008 Q1 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.

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

Now, I will turn the meeting over to Mr.

Jonathan Ornstein, you may may begin.

Thank you very much, operator.

Let me start by reading our forward-looking statements.

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

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will be proven to be 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 the next filing of the Securities and Exchange Commission.

With that, I'd like to thank everybody for joining us as always, we appreciate you taking the time out of your busy day to hear our conference call.

On a pro forma basis, we will just go for the high level earnings overview and we can go into some more detail.

On a pro forma basis the net loss from continuing operations was $100,000 or approximately breakeven on a per share basis.

This compares to a $9 million and $0.22 per share diluted in the first quarter of fiscal 2007.

Pro forma adjustments after tax include the following, $3.7 million cost associated with return of aircraft to lessors, $0.5 million for legal expenses, a $6 million loss from equity method investments, excuse me, $0.6 million loss from equity methods and a $4.2 million gain on marketable securities.

As we stated in the prior call we have now designated Air Midwest operations in discontinued ops and thus the previously stated financial results exclude Air Midwest, Air Midwest was $1.4 million after tax in the first quarter.

During the quarter, we had the following events that we think are of note.

We had the first of two, the first two of 14 76 seat CR J900s entered service for Delta Airlines, very pleased that that happened without a hitch, three additional CRJ 900s have been delivered and will be placed into service for Delta this quarter and the remaining nine over the next 15 months and that schedule has been jiggled a little bit from the last time we spoke to you.

The Company also delivered two additional CRJ 200 aircraft to Kunpeng Airlines, our Chinese joint venture.

At the end of the first quarter Kunpeng was subleasing a total of four aircraft from Mesa.

As you know, Kunpeng operates regional services with the Peoples Republic of China utilizing a modern fleet of CRJ 250 seat regional aircraft.

go!

the Company's line operation celebrated the 1 millionth customer after just 17 months of service and in addition, an agreement was signed permitting Alaska airlines to sell go!

tickets as direct connection to Alaska Airline flights.

go!

also signed a contract with U.S.

government designating go!

as its preferred interisland carrier.

The Company appealed the judgment of the Hawaii bankruptcy court with respect to go!

operations, we continue to aggressively defend our position and believe that it will be reversed in the appellate courts.

The Company returned three CRJ 200 aircraft to lessors as the grows with larger CRJ aircrafts 700s and 900s, the Company is shrinking its 50 seat regional jet fleet through subleases and lease returns.

We have seven additional 50 seat CRJ reductions this year, (inaudible) and one at U.S.

Air and we'll be adding two additional CRJ 700s, besides the aforementioned 900s to Delta.

The six CRJ 200s are the last in the eight for two swap that we talked about where we are taking on long-term 700s and we have one CRJ 200 coming out at U.S.

Air.

As previously discussed, the pro forma net results fell 9.1 million from 9 million to negative 1 million, the primary items of significance affecting the first quarter versus the prior year were the following, total operating revenue decreased $6.9 million or 2.1%, revenue was reduced due to the elimination of the Delta-8, Operation JFK, and reduced CRJ 200 flying, partially offset by two additional CRJ 700s and two CRJ 900s at Delta.

Other revenue increased primary due to sublease revenue for an other building to our Chinese joint venture.

Fuel expense increased 1.7 million or 1.8%, fuel cost per gallon increased $0.73 to $2.80 in the quarter, up from $2.07.

The cost per gallon increase resulted in the 30.3 million unfavorable price variance.

The price variance, however, was almost entirely offset by a decrease in the gallons of fuel purchased due to less flying and new direct supply from United and its three large stations.

However we did see an increase in fuel prices at our Air Midwest operation and go!

operations which we were not able to offset.

Maintenance costs increased $14.1 million from first quarter '07 to first quarter '08.

This includes $5.3 million in maintenance cost for three CRJ lease returns and 2.7 in maintenance cost for the line aircraft due to heavy check and engine visits that all hit in that quarter.

Approximately $6 million of the year-over-year increase is due to increase in engine visits associated with the CRJ 200, 700 and 900 fleet.

Operating statistics, year-over-year, we reduced our operating fleet from 200 to 183, a reduction of 17 aircraft, nine 50 seat aircraft, 12, 27 seat turbo props offset by delivering the two 66 seat and two 76 seat jets.

As of December 31, 2007, Mesa's total operating fleet of 183 was comprised of 87 50 seat aircraft, 38 86 seat aircraft, 20 66 seat and two 76 seat regional jets, 20, 19 seat turbo props of which we fly 11 and 16 seat 37 seat turbo props.

Excluding Air Midwest, reduced block hours by 11% and available seat miles by 8%.

The 2007, 2008 fleet plan as of the first quarter we placed in service the first two as I mentioned of the CRJ and we have terminated the leases of five of the 11-8100 aircraft previously in service with Delta.

The remaining six will be returned this year.

Also, of important to note is we are currently in discussion and have come to a tentative agreement with United for an additional swap of one CRJ 700s for 4 CRJ 200s.

As you know, these aircraft are coming out of our last 30 aircraft deal with United which we have unfortunately experienced a lack of profitability in that last 30 aircraft.

For the quarter ending -- on operational summary, for the quarter ending December 31, our controllable completion factor was 98.2% and our on time performance was 70.5.

Given the shift of our operations into the highly congested ATC and weather operations on the East Coast, I think these numbers were quite good.

Mesa operated 2.1 billion available seat models for the first fiscal quarter 2008 down 8% from the 2.3 billion flown in the quarter of 2007.

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

Just to give you an update on Air Midwest we have now filed to exit all of the the essential air service markets except for our service in Prescott, and Kingman in Arizona which we fly out of Phoenix and Las Vegas.

The form of transportation is solicited bids for these markets and we'll proceed to award them to a replacement carrier.

We are currently operating 11 lines of flying and we continue to discuss the sale or lease of the beach 1900 aircraft operated Air Midwest with a number of interested parties.

In addition, on the aircraft at Air Midwest, I believer now two-thirds of them are subject to hold in.

As a result, we would expect to have a break even situation there where the DOT holds us in and pays us additional money so that we do not in fact lose money while we are being held into those markets.

Stock repurchase and cash liquidity.

Under our previously announced share repurchase, 1.3 million shares of stock in the first quarter for approximately $4.8 million, the Company has authorized to purchase an additional 12.2 million.

In the current quarter the Company purchased an additional 700,000 shares for approximately $1.9 million.

As of December 31, the Company's cash and marketable securities debt investments were approximately $188.2 million, it was important to note that approximately $90 million of that is associated with the Hawaiian judgment and was put up in collateral for the bond given that judgment against us.

We believe the Company will be able to meet these financial, all of our financial requirements through a combination of additional liquidity, operational cash flows and refinancing of some type of capital or some type of capital market transaction.

EBITDA was a positive $12.3 million from operations this last quarter.

As always, we would like to give a very big thank you to our employees, particularly during these winter months where operations are far more challenging.

In particular, operating on the East Coast and in Chicago with weather being what it was this winter has been difficult.

I think our people have done a terrific job rising to the occasion to address this.

We are confident that we will continue to exit our plan operationally going forward.

We are faced with a number of challenges, not the least of which has been an industry ride.

Pilot shortage, but nonetheless, we seem to be doing our best to stay ahead of that and doing everything we can both to retain our existing pilots as well as recruit new pilots.

We currently have about 270 pilots in training.

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

These actions coupled with the ramp up of the China joint venture and the expansion of our cochair agreement with Delta to begin CRJ 900 service, we believe moving in the right direction.

We continue to believe that the strategy will work.

We reflect our commitment both to our shareholders and our employees.

We want to thank our existing airline partners for their continuing support.

Clearly, it has been a difficult situation for us with this judgment and the ensuing attention that we've had to pay but nonetheless we believe that we are on the right track and ultimately will be successful.

With that, I would like to open up to any questions that you may have.

(OPERATOR INSTRUCTIONS) Michael Linenberg of Merrill Lynch, ask your question.

Jonathan, I have a couple of questions here.

First off, in the press release, the amount of the cash bond, the $90 million, as I recall, maybe I may have the wrong numbers but it seemed like in a prior press release the number was lower than that.

So, sort of, part A of the question is are the, is the number actually a bigger number today than maybe what it was when you put out results?

Let me say on that, Mike it was an $80 million judgment and it includes interest and, which we of course were earning interest at the same time and legal fees.

So maybe there may have been a number out of $87 million, and that may not have included certain other costs, but the total judgment was $90 million.

The total amount of the bond is $90 million.

But Jonathan you are not at any sort of risk that if for some reason you were to say lose the appellate process it could be a bigger number because you are still competing against them in Hawaii today in and the meter is actually running or is that not the case?

I am just trying to get clarity on that.

Sure.

Well, from every lawyer that we have talked to, the answer is no.

Okay.

Then just my second question is because of the, the fact that the fleet is shrinking, you hear airlines talk about the pilot situation, you indicated that it looks like you may be ahead of the curve on that, what maybe, where are you on call it attrition rates and have you seen improvement from the last quarter, and maybe it is being helped by the fact that more airplanes are going out than coming in?

No, that's a good question.

In the last month, in January, we looked at the stats, the attrition had dropped fairly significantly.

I don't know if that's a trend or if it was one month but the number was down I would say close to 40%.

We did have some problems in the training pipeline which has definitely impacted the operation.

Over the last couple of months.

Because unfortunately, there was just not enough sim time out there for everybody.

Yes.

Even though we own our own simulators, we still did not have enough time.

We also had an issue to some degree with our own training pilots we just had so many people coming through the training we didn't have enough airmen.

So it has impacted us but we think that situation should improve dramatically over the next few months.

We are pulling down some flying, in particular at United.

Yes.

With these swaps which is will be very helpful because again, we are losing flying that is significantly unprofitable and adding back flying which is in fact nicely profitable.

We have not had quite the same problem in our Freedom operation where we had pretty good luck both from the retention standpoint and also from the training because again, it is a smaller fleet, we have been able to sort of stay ahead of it with the ERJs in terms of the sim, so we just haven't had the same issues there.

We are primarily seeing it in the CRJ.

The attrition again has been 90% plus is going to major carriers flying larger equipment.

Yes.

And I do believe, and I think that maybe you guys have a better feel for it but it would appear to me that that's slowing down not only because of the 865 rule but clearly there has been a significant change in outlook I would believe by the carriers in terms o their future growth at least over the next 12 months.

Yes.

And then just one last one, Jonathan, we have heard on several other calls from the regionals that they were starting to see Delta of all carriers push back on some utilization, maybe down close to the minimums per the contract.

But a lot of it had to do with 50 seats and as I recall, the stuff that you seem to be moving into or doing a lot more 70 seat type flying which I think is what Delta wants.

So are you seeing that at all or maybe you are not seeing it at all because of the shift mix of your business?

Well, there's a couple of things there.

No, Delta has definitely pushed down some utilization on the aircraft.

Yes.

We don't think that it impacts us that much.

We do have an agreement with them to pull some 50 seaters out as part of taking on the larger aircraft.

But Delta has been incredibly cooperative, we have worked on this together.

I was actually just in Atlanta not that long ago and we continue to look at additional opportunities with them.

Potentially to swap out additional 50 seaters for more of the 76 seat aircraft which is something we would like to do.

We have basically, in a lot of respects taken on a huge amount of costs to pull down these 50 seaters.

Yes.

Whether they're going to China, whether they went to Hawaii, whether we pulled them out and sublet them back to lessors.

We think that we are ahead of the game in terms of the other carriers who have still not taken those steps.

Because I think if you go and look at some of the other carriers, I don't think any of them to my knowledge have actually pulled down 50 seaters.

It is expensive.

When you transition aircraft, it is expensive.

We think that we are prepared for the future.

By pulling down these 50 seaters.

We want to put more airplanes into China, wer're looking at other opportunities for 50 seaters.

We have a significant number of aircraft on short term leases, I think it's close to 20 aircraft, short term leases that will be coming out of the fleet.

As we take those out, we are adding aircraft into United on ten-year deals.

If we were to do something with the new aircraft in any of our existing partnerships I would suggest to you that that would be the minimum term.

As opposed to two or three years that are remaining on these 50 seat aircraft.

So we are trying to get ahead of the game.

It has clearly been expensive, you can look at our numbers this quarter.

We are not happy obviously but we have got aircraft that we are pulling out.

We are determining that it is best in the long-term interest and we're absorbing those costs today.

Right.

Thanks a lot.

I appreciate it, Jonathan.

Duane Pfennigwerth of Raymond James, you may ask you question.

Hi, thanks for taking the question.

I wonder if you could tell us what operating cash flow and CapEx was in the quarter?

Sure.

CapEx is just under $10 million for the quarter and operating cash flow, we are just going to quote EBITDA for the quarter but you will see it in the queue when it comes out and do the math.

It will be filed this afternoon.

Okay.

What is your CapEx expectation for the year?

We with think it will be less than 5 million for the rest of the year.

Okay.

And then just as you look out over the next year, what are your debt principle repayments?

Well, we have the, both convertible notes that will come due.

Okay.

And--.

[$138] million.

Okay.

And then, I think on the last call you talked about raising cash from spare parts.

I wonder if you could update us on that process?

Sure.

As we mentioned before we have about $100 million worth of spares that we think are financeable.

We currently are in discussions with five different maintenance providers/parts suppliers.

And manufacturers to do that.

And financial institutions.

So we are shopping the deal to talk to people to see what deal we feel is going to be best for the Company.

Whether we want to tie it to a long-term maintenance agreement or just sell them outright.

Sell them back to a manufacturer potentially or just finance them.

And I think we feel that there is a high probability that we will be successful in financing those parts whether we sell if we can do it for $1.00 on the $1 I probably wouldn't suggest but we think that certainly looking at something in the neighborhood of $0.50 on the $1 is not unreasonable.

Thanks very much.

Sure.

(OPERATOR INSTRUCTIONS) [Jeffrey Marcus] of Citi Alternative Investments you may ask you question.

Hey, guys, thanks for taking my call.

Sure.

I just was wondering can you provide an update on the Aloha airlines case?

I know you had said last call that it had been delayed.

I was just wondering if anything has progressed on that front?

No, good question.

It has continued to be delayed and I think that -- at this point, given our experience in previous litigation I am a little reticent to comment in terms of ongoing litigation other than to say it has been delayed.

Okay.

All right.

Thank you very much.

Sure.

At this time, we have no further questions.

Okay.

Well, guys, I would like to just again thank you for taking the time.

You can rest assured that we are not particularly pleased with these results.

We continue to mover forward and sort of burn our way through these lease returns and transitioning aircraft.

All of these things are going be expensive, but again, we feel as we add the CRJ 900, we add the CRJ 700s and we continue to move forward with our Chinese joint venture, we continue to make operational and financial improvement in our operation in Hawaii that this is in fact going to be the best long-term alternative for the Company given what is clearly a difficult situation.

I would like to thank you for your interest and continuing support and as always, if you have any additional questions please feel free to call us here at the Company.

Thank you very much.