Mesa Air Group Inc (MESA) 2008 Q2 法說會逐字稿

Welcome to the Mesa Air Group second quarter earnings conference call.

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

(OPERATOR INSTRUCTIONS).

This conference is being recorded.

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

I would now like to turn the meeting over to your host for today's conference, Mr.

Jonathan Ornstein.

Sir, your may begin.

Thank you very much and thank you everybody for taking the time out of your day to meet with us regarding this earnings statement.

Let me start with our forward-looking statements.

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

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.

Such statements are subject to certain risks, uncertainties and assumptions.

Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected.

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

Okay, good morning everybody and again we appreciate your interest.

Let me go through this.

It is a fairly long presentation and I will just go through it and we will get the questions at the end.

I

On a consolidated basis, we posted net income of $17.5 million or $0.51 per diluted share from continuing operations on operating revenues of $320.3 million.

On a pro forma basis, however, the net loss from continuing operations was $4.1 million or $0.15 per share on that same basis.

This compares to a $5.9 million gain and $0.16 per share in the second quarter of fiscal 2007.

Pro forma adjusted on an after-tax basis were the following.

$21.0 million benefited as the result of negotiated settlement with Hawaiian Airlines, $4.5 million gain on the repurchase of convertible notes, $1.9 million gain on securities, lease return costs of $3.3 million.

$2.9 million of that are (inaudible) lease return for engine overhauls of (inaudible) aircraft and a $400,000 economic settlement on one of those aircraft.

Startup costs associated with the Chinese joint venture of $900,000, legal costs of $600,000 at go!

and $1.1 million in other expenses that were pro [forma'd] out.

As we stated in the prior call (technical difficulty) Air Midwest operations have discontinued operations thus the previously stated financial results exclude Air Midwest.

Air Midwest lost $8 million after-tax in the second quarter of 2008.

We will go into some more detail on that also.

Delta events during the quarter, obviously we had a very busy quarter.

Delta accounted for approximately 22.6% of our total passenger revenue this quarter.

A loss of the ERJ-145 flying would be detrimental to our current financial condition specifically our cash flows.

As you know Delta had pursued a strategy to cancel our contract.

Fortunately, as most folks know, we went to court and we were granted a preliminary injunction against Delta that effectively prohibits them from terminating the connection agreement which covers our ERJ-145 fleet before a full trial takes place.

A trial date has not been set and Delta appealed the court's decision on the issuance of a preliminary injunction.

We are in ongoing discussions with Delta regarding the 145 Delta Connection Agreement.

Prior to the court's ruling, Delta planned to remove a (inaudible) portion of aircraft from service in early June and the remaining aircraft in June or July or later, excuse me -- in July or later.

Delta did not immediately reverse its plans based upon the court's ruling.

If Delta takes the position that the connection agreement is not obligated to keep the aircraft in service on a full-time basis, we will incur significant costs associated with a fleet of ERJ-145 aircraft.

However, we believe that Delta is obligated to keep the aircraft in service and required to compensate us accordingly.

We have communicated this position to Delta and have been in discussions with them regarding the connection agreement.

As always we would hope to come to an amicable solution.

On April 30, 2008 the Company reached a settlement with its suit of Hawaiian -- in its suit with Hawaiian.

Under the terms of the agreement and without admitting any wrongdoing, Mesa received $37.5 million from the bonded it had previously posted with the Bankruptcy Court in the District of Hawaii and Hawaiian Airlines retained the remaining collateral of $52.5 million.

The settlement did not restrict in any way go!'s ability to continue service in the Hawaiian interisland market.

As a result of the settlement, the Company adjusted its contingent liability recorded in fiscal 2007 and recorded a gain of $34.1 million on March 31 to reflect the amount ultimately paid.

Air Midwest in the fourth quarter of fiscal 2007, we committed to a plan to sell Air Midwest or certain assets thereof.

Air Midwest consists of turboprop operations including our Mesa independent operations and Midwest Airlines' co-chair as well as co-chair operation with US Air operating the 1900-D 19-passenger aircraft.

In connection with this decision the Company began soliciting bids for its sale of 20 Beechcraft aircraft, an operation that began to take the necessary steps to exit the essential air service program which these aircraft serve markets in which we receive subsidies.

We intended to be out of all EAS markets by June 30, 2008.

All assets and liabilities, results of operations and other finance operational data associated with those assets have been presented in the accompanying consolidated financial statements as discontinued operations separating from continued operations unless otherwise noted.

For all periods presented we reclassified operating results of Air Midwest turboprop operations and loss from discontinued operations.

On the operating results, as previously discussed, pro forma net income fell $10 million from $5.9 million into a negative $4.1 million.

Primary items in regular operations affecting our second quarter results versus the year prior, I would like to go through that.

Revenue net operating income increased $24 million or 8.1% over the same period in 2007 which had been impacted by a $25.3 million write-off [contract incentive payment].

Total gross revenue decreased $1.3 million or 0.4%.

Revenue was reduced due to the elimination of the Delta Dash-8 operation at JFK and reduced CRJ-200 flying partially offset by two additional CRJ-700 under United and 5 CRJ-900's at Delta.

Freight and other revenue increased primarily due to sublease revenue and other billings to our Chinese joint venture.

Fuel expense increased $17.8 million or 17.6% over the second quarter of 2007.

Fuel cost per gallon increased by $0.94 from $2.03 to $2.97.

The increase in price resulted in a $37.7 million unfavorable price variance.

Reduction of volume of fuel contributed to a $20 million offset to the price variance.

This was a result of one (inaudible) direct supply station during the quarter and a reduction in overall flying.

Maintenance (inaudible) costs increased $2.2 million from the second quarter of '07 to '08.

It was primarily due to a $10.3 million increase in engine maintenance of which $6.2 million is related to power by the hour maintenance contracts and $2 9 million for go!

engines and $1.4 million in lease returns related maintenance.

The increase was partially offset by a $4.9 million decrease in airframe maintenance due to reduced [seat] check volume and a decrease in contract and nonroutine maintenance.

For the quarter, go!

segment reported a pretax loss of $8.3 million which includes $2.9 million in lease return expense and pretax $900,000 in legal expense.

Operating statistics -- total available seat miles for the second quarter of fiscal '08 decreased 10.4% from the second quarter of '07 and block hours decreased 15.1%.

These decreases were primarily due to a decrease in the number of aircraft flown from 2001 to 178.

As our operating fleet comprised of 8450 passenger regional jets 4186 and 2 76 passenger regional jets sold as the CRJ-900's operated by Delta and 2066 CRJ-700's operated at United.

1637 seat turboprops and the remaining 15 1900's.

The CRJ program during the quarter ending March 31, 2008 we took delivery of three more CRJ-900's also on lease from Delta with nine more -- also to be leased from Delta scheduled for delivery through January 2009 in connection with our co-chair agreement with Delta.

So we now have a total of seven CRJ's currently in service with Delta under the 900 program.

On the ERJ program as of March 31 we operated 34 (inaudible) 145 aircraft and had two subleased to Transtate Airlines.

On the 1900's as of March 31 we owned 34 Beechcraft 1900's, operating 15 while leasing 14.

As I mentioned that operation now has been discontinued and all the aircraft are currently parked.

As previously discussed we intend to sell 20 Beechcraft 1900's that were not leased to third parties as of March 31, 2008.

After Big Sky announced that it was shutting down operations, the Company took possession of all 10 of their Beechcraft 1900 (technical difficulty) aircraft.

On May 6, 2008 the Company sold 14 aircraft of its 34 Beechcraft 1900's to Raytheon Credit and Raytheon Aircraft Credit Corporation pursuant to an agreement between the parties regarding these aircraft.

As of March 31, 2008 we had Dash 8's; 10 with United and six with US Air.

On our senior convertible notes, in the event that the holders of the Company's senior convertible due through February 2024 exercise their rights to require the Company to purchase the notes at the [58340] the Company could be obligated to pay up to $77.8 million in fiscal 2009.

The Company may pay the purchase price of such notes in cash, common stock or a combination thereof subject to compliance with the applicable NASDAQ shareholder approval requirements (inaudible) respected issuance of shares of common stock in excess of 20% of the Company's then outstanding capital stock.

Just a review of the Aloha situation, in January of last year Aloha Airlines filed a suit against us in Hawaii.

They alleged that our interisland fares are below cost and that we are in violation of the Sherman Act.

They also alleged breach of contract and fraud by us in connection with the two confidentiality agreements, one in 2005 and the other in 2006.

With only 8% of the capacity in the marketplace at the time we denied any attempt at monopolization of the interisland market and further deny any improper use of data furnished by Aloha while we consider (inaudible) during its bankruptcy.

The case is in the early stage of discovery and a confirmed trial date is not yet been scheduled.

As go!, we mentioned earlier, I will just restate it; as we previously mentioned the go!

segment lost a -- reported a pretax loss of $8.3 million.

The cost of fuel obviously impacted us that quarter.

That did include approximately $3.9 million of expenses regarding the return of aircraft and legal fees.

And I would mention that that is -- this quarter was before Aloha ceased operations.

It's been a tough environment both financially and operationally.

I would like to take a moment to thank our employees who continue to do a remarkable job in the field given the challenges they face.

In particular, our employees at Freedom where the numbers there at Freedom have been actually from an operational standpoint really excellent in spite of what has been happening and I think that their dedication is such that it certainly gives us here a lot of confidence moving forward.

During the second quarter, we did resolve a number of significant issues.

However I think it's very fair to say that there remains to be many challenges to overcome both here at Mesa and within the industry.

We are going to do everything we can to continue.

Mesa is almost a 26 year tradition and we know that certainly for those of you involved with us it's been from a stock perspective, also as large shareholder it's been particularly difficult as well.

But again I want you to know that everyone here in management is going to doing everything we can to see this through and to work our way out of the current situation.

With that, I would like to thank all of you for your patience as well and open the floor up to any questions that anyone might have.

It is difficult situation with lots of moving pieces so it may be hard for me answer them as specifically as I might like to given the current environment.

But I will do my best to give you as much information as possible.

With that, I would like to open it any questions anyone might have.

(OPERATOR INSTRUCTIONS) [John Harnish, Acquity Capital].

Just a couple of questions for you.

First, of the $102.8 million of restricted cash that you provided in your earnings release, what is that actually earmarked for?

(multiple speakers) $90 million, it was restricted for the bond that was set up for the Hawaiian litigation.

(multiple speakers) $12.8 million is outstanding letters of credit.

And then just kind of along the same lines, as of basically today, how much cash is on your balance sheet?

We're not disclosing that at this point as a result of the fact that you know it would -- we're just -- I guess not.

Okay, can you like generally -- is it above, below?

Can you give us any color into this or are you just not going to answer any questions on that?

I am being told by my legal staff that if we did we would have to refile and put out an 8-K and -- another press release.

And so at this point we're just not.

Obviously the number moves around quite a bit.

You know we don't want to give anyone an inaccurate view at this time.

Okay, you kind of alluded to it on the call for the 2024 maturities, about $78 million would become due in February.

How many bonds for the 2023 issue are still outstanding?

I'm sorry.

We had done a little modification and I had dropped that off and I apologize.

We were going to go through that.

There is $23.2 million in aggregate remaining on the principal amount of the notes due in 2023.

So when they become (inaudible) again you would owe $23.2 million to fully retire the issue?

That's correct.

And then, I guess I have another question regarding the Delta injunction.

Can you just kind of provide us with the timeline with regard to when this trial would start?

You know, if you were to lose the trial is there ability to appeal?

Can you sue for damages?

Can you kind of give some color on that please?

We haven't really -- you know, I would like to be able to give you as accurate information as we can in terms of the trial.

There's no trial date set.

There's an issue of whether it would become expedited or not.

You know, obviously we did get the order signed by the judge in terms of the injunction which we think was a big step forward last week.

And we continue as a mentioned to discuss let's just say more amicable solutions with Delta which we do have an ongoing relationship with them on the 900's.

I think that at this point in time all we can say is that we are in discussions and we're going to work through this issue as best we can.

In terms of what the aircraft are going to do and when they will do it I think is probably a little premature at this point to comment on that.

Now how are they (inaudible) contract before they try to walk away?

Are they kind of performing up to the standards set under the contract or is it still kind of under what you thought it would be?

You know, again some of that is subject to interpretation and I think our view at this point is we still have some -- a way to go in our discussions with them.

I guess just maybe for some color, in terms of cash flow is it kind of as it was before the issue arose or is it under (multiple speakers)

No, I think the issue is that we still have incurred significant expense (multiple speakers) significant liability as a result of their action, you know, in terms of crew costs and a lot of the other just overhead costs and again that's the kind of issues that we are in discussions with them now (multiple speakers) how those other issues (inaudible) resolved.

Because an airline has a lot more expenses than for example just the rent payment.

So that is what's under discussion and again, we're hoping that there is an amicable solution here (multiple speakers) resolved.

And then just finally, you know, without Delta what is the cost of operating this ERJ fleet?

Well, I mean in terms of what's the cost of the fleet if it was parked or --?

Exactly.

I mean roughly -- again roughly it's about $5 million of lease expense a month.

All right.

Thank you very much.

Sure.

(OPERATOR INSTRUCTIONS) Jamie Baker, JPMorgan.

Could you remind us what your aircraft lease expiration schedule looks like over the next few years and what number of ERJ's you own outright?

Well it's a fair amount of detail.

Mike would be happy to call you and just walk you through it because it's an (multiple speakers) we have got a fleet plan which as you can imagine has been fairly fluid right now.

But suffice to say we do have a number CRJ-200's that roll off in the next couple of years just natural that we took on short-term lease.

(technical difficulty) some that start coming out, the longer-term ones in 2012 and then the ERJ's are longer-term as are the 700's and 900's.

But, we do have some flexibility early on here in regards to 200's.

But I would like to have Mike walk you through (multiple speakers) specifically.

Okay, I would welcome that.

And secondly -- and I'm not sure if you have disclosed this.

But what are the other performance thresholds that exist in the non-Delta contract or I should say the non-Delta ERJ contracts?

And are those thresholds based on controllable or noncontrollable factors?

Just sort of where are your current metrics within the other lines of flying that you do in relation to any thresholds trips that we might otherwise want to preoccupy ourselves with?

With both USAir and United, the completion rates are based on controllable completion rate and we are I think it's fair to say significantly above those requirements.

But there are some on-time numbers which we can argue are in or out of your control, for example.

But neither of those are an issue.

Mesa for example we measure by our Phoenix hub operations and Mesa has historically been one of the top three performing airlines in the Phoenix hub.

For a number of years in a row we were the number one on-time airline in Phoenix.

So that has not been an issue.

Clearly with the challenges that we face with Delta, we keep a very close eye on that.

As you can imagine we go through those numbers everyday.

But for the most part it's controllable completion rates.

There are some on-time numbers but again we feel pretty comfortable that those will not be an issue going forward.

[Robert Chuang, Hedgehog Capital].

I was wondering if you could talk about go!'s results in light of the Aloha bankruptcy and how that might have affected it?

Clearly with the reduction in capacity, we have seen improvement in terms of loads initially -- we added some capacity as well -- and fares.

Unfortunately, I think it's fair to say that fuel prices have continued their upward march and like every other airline, that has impacted us negatively.

I will say that it would be very fair to say -- and I don't think I'm going too far out on a limb -- that if when we entered the market and fuel prices were at the same level go!

would be significantly profitable today.

But unfortunately again, we have seen fuel prices effectively double since that time two years ago and that has impacted us negatively.

We do feel though that with the conditional capacity which has helped us spread our costs, the improvement in the operating environment in terms of load factor and fares, that the numbers are such that again, in a sort of normalized environment we would be feeling pretty good right now.

Again, it really is a question of you know what do feel about fuel and what's going to happen with fuel over the next six months.

But the.

Okay, is there any flexibility I guess to the upside on those fares?

Well, we have seen the fares increase.

We have actually I think basically followed in terms of what we have done there the rest of the industry just reflecting the higher fuel prices.

You know, the industry effectively needs to be compensatory at some point.

I think that in Hawaii, you know, we have seen increases.

We are -- just recently we proposed a bag charge for a second bag.

We continue to look at other revenue sources in terms of US mail.

We have increased our wholesale business with the tour operators.

They are all initiatives that we're taking to enhance revenue because frankly we are somewhat at the mercy of fuel otherwise.

We are looking at all of our costs there and potentially making some changes in terms of our cost structure and we're looking closely at our capacity.

But I think that in the main, the real driver is fuel.

Like I said, if fuel was -- I haven't run the numbers recently.

But again, if fuel was possibly where it was just a few months ago the operation would be a positive contributor to Mesa's profitability.

Unfortunately, when you see fuel go up 40% in a few months i'st just as hard to keep up with it.

Is there greater opportunity in terms of fares?

You know the fares have risen.

We have not seen a significant decrease in traffic at this point as a result of the higher fares.

But I will say that the fares have gone up but certainly, you know, they haven't gone up significantly in terms of total dollars.

So I still think that traffic is probably -- it's still a reasonable bargain in terms of getting around the island in terms of total dollars.

Remember the fare basis was pretty low to start with and has always been low.

So the increase percentagewise has not been bad but again the total dollars is not a significant amount of money to the extent that it has affected elasticity to a great extent.

Okay great, thank you.

I would now like to turn the meeting back over to Mr.

Ornstein.

Okay, thank you very much operator.

Again I would like to thank people who are on the call.

We know it's a very difficult time both at Mesa and for the rest of the industry.

Clearly you know we are doing what we can to prepare ourselves in this challenging environment.

We have been working closely with all of our constituents and I can tell you that personally this has been a difficult experience certainly but one where we think that if we keep our head down and continue to work in a positive fashion, that we will be able to see ourselves through this successfully.

Hopefully, the next couple of quarters, time will tell.

We would like to see a couple of things that are obviously out of our control moderate.

Fuel prices have had a significant impact both on us even with our small part of our operation that is exposed to fuel.

But certainly we feel the pressure everyday of these fuel prices on our partners.

I think a lot of the activity you have seen by some of our partners in regards to their regional partners has been dictated by the price of fuel.

And certainly if we got any relief there I think it would take a lot of pressure off not just Mesa but also the other regional airlines.

With that, we're going to continue to work hard, do the best we can and we look forward to talking to you next quarter.

We are -- Mike Lotz, our current CFO has now mentioned to me that we also want to let the investment community now that we're going to work hard, that next quarter we should be more timely in our filing.

So again I appreciate everyone's patience and as always, we are free and available.

If people have any follow-up calls, please feel free to call us.

Thank you very much.