Mesa Air Group Inc (MESA) 2008 Q3 法說會逐字稿

Welcome to the Mesa Air Group's third quarter earnings conference call.

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

(Operator Instructions).

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

Jonathan Ornstein.

Sir, you may begin.

Thank you very much, Operator, and thank you very much for joining us.

Let me start by reading the forward-looking statements, please.

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

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

Okay.

Again I'd like to thank everyone for taking time out of your day to join us on this earnings call.

As always, we appreciate your interest and we will get to all of the information and then ask for any questions.

On a high-level earnings overview, on a consolidated basis we posted net income of $1.8 million or $0.07 per diluted share from continuing operations on operating revenues of approximately $353.9 million.

On a pro forma basis, net loss from continuing operations was $2.5 million or $0.09 a share.

The Company compares to a $6.9 million gain or $0.23 per diluted share in the third quarter of fiscal 2007.

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

A $4.5 million gain on extinguishment of debt which includes $3.6 million gain on the sale of 14 Beech 1900 aircraft to the lien holder and a $900,000 gain on convertible debt; $1.3 million gain from the settlement made with Big Sky on the return of aircraft; a $1.2 million gain on securities; and an $800,000 gain on investments [and a] $200,000 gain on disposal of assets.

Pro forma losses include $1.9 million from a settlement with a co-chair partner, legal expenses at go!

of $800,000 and $700,000 costs associated with the Chinese joint venture and $300,000 in lease return costs.

That's net lease return cost.

As we stated in a prior call, we have now designated our Air Midwest operations as discontinued operations, thus the approximate -- the previously stated financial results exclude Air Midwest.

Air Midwest lost $5.6 million after-tax in the third quarter of 2008.

Additionally as of June 30th, the Company's cash, cash equivalents and restricted stocks, marketable securities were approximately $60.1 million of which $46.7 million was unrestricted.

During the third quarter there was quite a bit going on.

On March 28, Delta notified the Company of its intent to terminate the Delta Connection Agreement regarding ERJ-145, alleging failure to maintain the specified completion rate with respect to its ERJ-145 Delta connection flight during three months of the six-month period ending February 2008.

Following Delta's termination notification, the Company filed a complaint on April 7, 2008, in the United States District Court of Northern District of Georgia seeking declaratory and injunctive relief.

An evidentiary hearing was held -- and May 27 through May 29th.

Following the hearing the court ruled in the Company's favor and issued a preliminary injunction against Delta.

The effect of this ruling is to prohibit Delta from terminating the Delta Connection Agreement and pending a final trial at a date to be determined by the court.

On June 27, 2008, Delta filed a notice of appeal.

On July 15, 2008, Delta filed a motion requesting that the appeal be heard on an expedited basis.

The Company has responded to Delta's motion in the courts with the applicable rules.

The outcome of Delta's motion will determine the timing of subsequent deadlines.

Prior to the court's ruling, Delta planned to remove from service a significant portion of the aircraft in early [June] 2008 and all aircraft in July 2008 and forward.

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

Following the Court's ruling, the Company and Delta reached an interim financial understanding subject to the mutual reservation of rights in which Delta will reimburse the Company per certain costs and the majority of the ERJ-145 aircraft remain out of service until October 2008.

On August 5, 2008, the Company issued a press release announcing that on August 1 Delta had notified become the of its election to immediately terminate the Delta Connection Agreement for CRJ 900 aircraft dated March 13, 2007.

This notice states that Delta is terminating the 900 agreement as a result of Freedom's alleged failure to maintain specified on time arrival rate and completion rate with respect to the Delta connection flights during the four months of March, April, May and June in 2008.

And those issued by Delta's company by a proposed temporary agreement pursuant to which Freedom will continue to provide 900 flying while the parties discuss the terms of a transition agreement.

As of August 2008, the Company operated seven 900s per Delta pursuant to the agreement.

Different from all of our other co-chair agreements, Mesa did not own or have any long-term lease agreements.

The aircraft are in fact sublet from Delta for $1.00 per month.

Delta -- this 900 agreement contributed 4% and 2.6% of the Company's revenues for the three months and nine months ending June 30th, 2008, respectively.

go!

we will go a little more into this further on.

go!

increased capacity in Hawaii in its operations to meet the market's decrease in supply.

Available Seat Miles increased 61% from the prior quarter to an average of 11.3 million from an average of 18.1 -- to an average of 18.1 million.

Operating revenue increased $9.4 million for the same period of the prior year.

Mesa operated seven CRJ-200s in the Hawaiian Islands under the go!

brand name during the quarter.

The settlement was also reached with Hawaiian Airlines concerning the lawsuit over Mesa's inter-island flight services operated under the go!

brand name.

In the second quarter Mesa received $37.5 million previously posted under a bond.

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

Air Midwest consists of Beech 1900D turboprop operations which includes Mesa Independent Operations', Midwest Airlines' and US Airways' co-chair operations.

In connection with this decision, the Company began soliciting bids for the sale of 20 1900-D aircraft and began to take the necessary steps to exit the [EAS] markets it served.

We exited all markets on or before June 30th, 2008.

All assets and liabilities, results of the operation, other financial and operational (inaudible) associated with these assets as we presented a discontinued operation separate from continuing operations.

Air Midwest seized operations on June 30th, 2008, in all markets.

On May 16th, the Company sold 14 of its 34 Beechcraft 1900 aircraft to Raytheon Aircraft Company and Raytheon Aircraft credit pursuant to an agreement reached between the parties regarding such aircraft.

The Company sold the aircraft as is, made a payment of $500,000 and in return Raytheon eliminated approximately $28 million in long-term debt due to Raytheon associated with the aircraft.

This transaction resulted in a net gain of $5.8 million which was recorded in gain on extinguishment of debt in the condensed consolidated statement of operations.

On May 12th, the Company reached an agreement with MAIR Holdings, the parent company of Big Sky, in relation to the early return of 10 Beechcraft 1900D leased to Big Sky following Big Sky's announcement that it was ceasing operation and liquidating its assets.

The net gain on the settlement was approximately $2.1 million as recorded in other income in the condensed, consolidated statement of the operations.

In China, the Company entered into a letter of intent with Shenzhen Airlines.

The agreement details the Company's intent to sell its interest in Kunpeng, the Chinese joint venture to Shenzhen Airlines, the majority owner.

As a result of the letter, the Company wrote down its investment in Kunpeng by approximately $1.3 million to reflect the terms of the letter of intent.

Kunpeng will continue to lease the five regional jets currently flying in China from Mesa Airlines.

As discussed previously, operating income fell $16.8 million from an income of $13.6 million in Q3 2007 to a loss of $3.2 million in Q3 2008.

On the revenue side, in the quarter ending June 30, 2008, net operating revenue increased $13.5 million or 4% to $353.9 million from $340.4 million in the previous year.

Primarily due to contract revenue increase of $3.6 million, this is due to fuel pass-throughs and the go!

increase in revenue of $9.2 million.

Fuel expense increased by $32.6 million or 28% to $149.2 million from $116 million in the quarter ending June 30.

Approximately 94.5% of our fuel is reversed by our co-chair partners.

On go!, the go!

segment reported a pretax loss of $7.4 million for the third quarter.

Of that, we are going to go through some numbers here there.

go!

expenses included $0.5 million in leas return costs; $1.3 million in legal expenses; $900,000 for an unscheduled engine overhaul; $700,000 of costs to swap out the aircraft which were all being returned off of short-term lease.

Looking ahead on go!, I would just like to run a few more numbers through.

We carry as we report publicly approximately 80,000 to 85,000 passengers a month.

I can tell you that our average fare is up approximately $9.00 over the previous quarter and our fuel prices are down approximately $0.60 at this point over last quarter's average fuel.

And we burned approximately 600,000 gallons per month.

Okay, in addition, we have approximately $400,000 allocation per month ago to go!

That includes about $200,000 of non-cash depreciation and $200,000 of corporate overhead.

I think if you add those numbers up, you can draw some conclusions as to why we continue to move forward and are committed to the go!

operation.

Total available seat miles for the third quarter of fiscal 2008 decreased 10.9% from the third quarter of 2007, primarily due to a decrease in the number of aircraft flown from 199 to 161 as of June 30th, 2008.

As of -- at June 30th, Mesa's 2008 operating fleet comprised of 80 50 seat regional jets, 38 86 seat regional jets; 7 76 seat regional jets -- those are the aforementioned Delta jets; 20 66 seat regional jets and 16 37 seat turboprops.

Under the US Airways contract, the Company operates 51 regional jets and six turboprops; at United, 46 regional jets and 10 turboprops; and 41 regional jets at Delta.

We also were flying seven regional jets in Hawaii.

We are currently at six regional jets in Hawaii.

For the quarter ending June 30th, the Company's controllable completion factor was 98.5%.

And I would like to talk a little bit about some of the challenges we face going forward and then open up for questions.

Clearly Mesa is not without its issues.

We probably face issues that we have never faced before.

Certainly the high fuel prices while most of our fuel is passed through affected us pretty significantly in go!

Last year, for example our average fuel price was $2.30 a gallon.

This year it was approximately $4.12 a gallon.

You can imagine that that is a pretty big hit to the operation.

We have seen some movement downwards as the rest of the industry, as I said, we are now around the $3.55 range.

We have seen some improvement and, hopefully, continue to see that.

Clearly another big issue we face has been the whole situation with Delta.

We are very fortunate to have won the injunction.

We do have to go to court on that and we remain confident, not only in our position but in the strength of the injunction that our position will be upheld.

We also are contesting the cancellation of the CRJ 900 contract.

Again we feel that the interpretation that Delta has used is inaccurate and incorrect; and we believe that, ultimately, we will prevail on this situation as well.

Of course, as we are with all of our partners, we would prefer to work these things out amicably, remain open to do that, but we also feel that we have to defend our right and will do so to the extent necessary.

I think the other significant challenge that we face, I think most of you know particularly in the financial community is we have a large amount of debt coming due in the early part of next year, and we continue to look at ways to solve that rather complex issue.

There are a number of things that we've done.

The last time we had some of the bonds come due, we were able to roll them for a short period of time.

Clearly the Company does not have the money to pay those bonds.

So we will have to be creative, but again, we think that it is in everyone's interest to come to a reasonable solution so the Company can continue to move forward and return to sustained profitability.

I would like to thank all of our employees who continue to do an excellent job in the field in spite of what is a very difficult operating environment.

I'd like to thank our partners for their continued support.

USAir and United in particular have been just terrific, have been very helpful in working to these issues with us.

I'd like to thank all of the folks there.

And certainly I would like to also send out our appreciation to our many vendors and suppliers, the aircraft manufacturers who have also been helpful.

Mesa has got a long history.

This is our 26th year of operation.

We have faced challenges before and we have come through and I remain confident that we will be able to do the same here as we move forward.

With that I would like to open up the call to any questions and I will do the best -- I have a few other people in the room.

We can all help to answer them as best possible.

(Operator Instructions.) Michael Linenberg.

Merrill Lynch.

Good morning.

Couple of questions here.

When you talked about the agreement that you reached with Delta on compensation for the 145, when we think about that and how we model that, does that assume -- some because you aren't running the operation and there's obviously cost associated with it, but a lot of variables cost is out -- can you, based on the rate that they are paying you, does that result in a breakeven number for the Company?

Is it a loss?

How should we think about that?

On that I think you can look at that as no worse than a breakeven.

Okay, good, and then as a second follow-up to that, with those planes, maybe they are grounded, maybe not, maybe you are able to use them in charter or backfill for Delta, you know because they are out of the schedule until October.

Do you run into any issues with pilot time and making sure that the pilots who are on those planes remain current?

We have been doing some ad hoc work for Delta and so no.

We don't.

We don't see it as an issue and there's 12 aircraft going back into service in September.

Okay, good.

I'm not sure, I may have misspoke, but they all go back in October, but we start in September.

So there's no time out.

There's no issues, we will be fine.

Perfect.

Thanks.

Appreciate it.

Bob McAdoo.

Avondale Partners.

A couple of quick things.

With the line that says loss from discontinued operations, the $5.5 million loss for Air Midwest, fuel costs are involved.

I mean, any fuel costs increases or any fuel that relates to Air Midwest is in that because that is the net of (technical difficulties) expense there?

Yes, that is correct.

Okay.

Could you tell us how much on the go!

side, what your fuel went up, your fuel bill went up on the go!

side year-over-year?

Is there a way to get to that?

(technical difficulties) million dollars.

Excuse me?

$3.8 million.

That's the year-over-year increase in fuel?

That's just on the rate.

That doesn't -- that's not volume, that's just rate.

Okay.

That's a rate variance.

Okay.

And since then -- and [Keith], correct me if I'm wrong, we've seen approximately a $1.2 million decline, based on today's prices versus last quarter, on a quarterly basis.

Again this is a rate variance only.

It doesn't talk about adjusting volumes.

That's correct.

And average fares, and I think that this is reasonably good news for Hawaii, average fares are only up about $9.00.

But we do carry something in the 250,000 range in terms of people per quarter.

Okay, so this is -- when you talk about $9.00 up, is that versus prior year or versus sequential quarter?

Versus this quarter that we are reporting.

But I mean is that the June quarter versus the March quarter or is that the June quarter versus the June quarter a year ago?

No, that's the June quarter versus where we are today.

That's since the June quarter?

Yes.

Being dense here, sorry.

(multiple speakers)

So that is kind of what is currently running at now, the last week or so versus the quarter that you are reporting here?

That's correct.

Well, more than the week.

About the last six weeks.

Last six weeks versus the June quarter.

Yes.

Okay.

And all that list of lease returns and legal and all that is meant to give us a clue as to how to go back and take that $7 million loss that's in the front page of their papers over there and scale it back to get it something as to (multiple speakers) -- ?

Where we think we are.

I mean we had a lot of what we viewed as onetime expenses.

We would like to think that, hopefully, at some point we will not be dealing with as many legal expenses as we have been.

And we do have about $200,000 in non-cash depreciation and about $200,000 of corporate overhead, which we can all look at that number one way or another.

I'm not sure that if that number would necessarily go away if we weren't flying in Hawaii.

So, we are sort of doing that analysis to determine the viability of go!

going forward and at this point we still feel confident that with any help from fuel, primarily, I think we are in reasonably decent shape.

In terms of kind of the ongoing go!

capacity, what's the kind of level that you are at now?

We went from seven aircraft down to six and we do plan a seasonal hold down also to accommodate maintenance in September.

So we will be going down a little bit again in September, not unlike the other carriers in the island after the summer season.

Things do slow down and everyone holds down some capacity just to reflect the demand levels.

And then following that, for next summer or the spring as things start to move back up again and obviously dependent upon general economic conditions and where we are with fuel, we would look to add back that capacity.

Okay.

And on the Chinese venture, there's this letter of intent that's been put together.

That gets you out of everything over there except the fact that they would continue to lease some airplanes on some kind of a reasonable rate basis?

Yes, which it's something that we -- the biggest part of going into that operation was to find homes for aircraft.

Unfortunately our view of this point is again 50 [seaters] are difficult to make work.

They are moving into the larger aircraft which we hopefully will provide them better results.

But the fact of the matter is this will generate a not insignificant amount of cash for us at this point, and I would say that if we are able to successfully complete this transaction which, clearly, has a way to go from an LOI, that that cash would have some value to us right now that otherwise we -- if we were in a different situation maybe we would have a different view.

But I think the fact of the matter is is that we made this investment a couple of years ago to get back the bulk of our cash may make it one of the better airline investments over the last couple of years.

Clearly it is not the big hit that we had hoped for, but unfortunately there's been lots of changes in the industry, lots of changes within China and its stock market and the opportunity to potentially liquefy that investment.

And just -- we felt that if we had the opportunity to generate some cash, that that might make some sense right now.

And these are owned aircraft?

No.

These are aircraft that are sublet.

Okay and is the $1.3 million that you took, is that kind of the end of it or is there some -- if this transaction moves along, there will be another hit somewhere down the road?

I don't believe so.

People here are shaking their heads, so I think (multiple speakers) -- ?

Is that head up-and-down or side to side?

No.

No, we think that that will adequately cover, but again remember it this is only an LOI, and it has been challenging in our operations in China, for sure.

That's all I've got.

Thanks.

(Operator Instructions).

Jim Parker.

Raymond James.

A couple of questions.

One, so I think everyone thought for a while that China would be a great market and now it isn't.

So what has gone wrong there?

I think that from the cost side of the equation, I mean their fuel is more controlled than it is here.

The aircraft have operated as we expected.

I think the biggest issue has been, we had relied on our partners there obviously have a much better understanding of the marketplace than we do and I think that what they have found is that while their yields have been reasonably good, that their load factors have just not been where they need to be.

And it may just mean that there is a longer development cycle.

You know, they don't quite have the same level of sophistication in terms of distribution and might have a sense that unlike the United States where it gets immediately distributed through literally dozens of channels, over there it just takes more time.

Our view is again, that the cash is probably worth more to us and I will also add that I think that is just been difficult managing the operation at such a distance.

And it's just become such that, while we do have a revenue guarantee effectively where we are only responsible for a small portion of the losses, I can tell you that that has worked very much in our favor because it was a conservative approach.

We decided to take a shot at it, but the numbers have just not been where I think we had hoped or the Chinese had anticipated.

And at this point in time, it may just be a little bit more long-term than we have the ability to stomach.

Frankly, the cash right now is valuable to us.

Okay.

Jonathan, more of a big picture question.

You mentioned Mesa has been in business for 26 years.

I think you've been there for about 18 of them.

This may be the most difficult point in that time frame.

What is the future for the regional airline business for investors?

Will regional airlines be worthy of investment in the future?

What is your thinking?

I think that's a good question.

I mean -- and you know it is something that we have all been asking ourselves because the bottom line is with fuel reaching upwards to $4.50 a gallon not too long ago, I don't think anyone could make sense of 50 seat aircraft.

You know, there's been somewhat of a shift I see among our partners and there's a difference of opinion among some of the partners in that if you are going to fly a network, maybe even though the 50 seater is not the most efficient, if you are just sort of hunkering down, maybe you continue to fly the small aircraft until such times turnaround.

United, for example, moved pretty aggressively on the capacity side internally.

And they've also come to us and said What can we do to help them and certainly we want to do everything we can.

The smaller aircraft with fuel (inaudible) where it is makes it difficult.

I think going forward, Mesa still has the option and we continue to pursue the option where we will swap out [700, 500, 200s for 700s].

We are talking to our lessors and manufacturers about potentially giving us more flexibility with the 50 seat fleet and we have to wait for what I think is going to be a general industry recovery before we see any significant growth opportunity.

I mean when you look at the losses being generated in the industries this year, even compared to those at 9/11 this has been far more damaging and it has put everyone in sort of a hold, certainly in terms of any kind of growth opportunities.

And I just think that we have to sort of bear through it as best we can.

We have immediate challenges.

We are fortunate that we have got partners who have been very supportive at USAir and at United.

Because clearly there were times when they knew that the level of difficulty we had, and I think they could have treated us much differently.

They chose not to.

They viewed us as a long-term partner and it was very helpful.

Now we are looking at ways that we can be of assistance to them as well with what is, unfortunately, limited capability, but nonetheless maybe some flexibility in terms of the fleet.

So I think it's a tough situation and, clearly, the most immediate challenge we have to determine whether Mesa is "investment worthy" or, from our perspective, we obviously have the bonds to deal with.

And that is going to take some work, no doubt, and some creativity.

Clearly, we don't have the cash to pay them in cash.

We do have the ability to give them stock, but I think we are looking to be a little more creative so that we can all see some benefits to hopefully in an improving environment certainly led by hopefully fuel prices continuing to lower.

But at this point in time I think that with the industry been where it is and where Mesa is in particular, we still face some pretty serious challenges.

Thank you.

There are no further questions.

Okay.

With that, again, thank you for taking time out of your day.

It has been a very busy time here, as you can imagine.

We've got a lot of good people here working in Phoenix to try to resolve these issues.

We've got thousands of great people out in the field who continue in some very tough environment out there doing what I consider to be an excellent job.

And we are all working very hard to see the Company return to sustained profitability as it had been for pretty much most of its history and certainly over the last 10 years.

So I appreciate everyone's patience.

If you have any additional questions, please feel free to call us and we will do the best we can.

Thank you very much.

Have a great day.

Bye-bye.

Thank you for participating in today's conference.

You may disconnect at this time.