Mesa Air Group Inc (MESA) 2008 Q4 法說會逐字稿

Welcome, and thank you for standing by.

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

During the question-and-answer session, (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, Mesa Air Chairman and Chief Executive.

Sir, you may begin.

Thank you very much, Operator, and welcome to our call.

I'd like to thank everyone taking time out of your schedule to listen.

We appreciate your interest in our Company.

We'd also like to take a moment just to apologize for the delay in getting these numbers out to you.

This resulted from a tax issue regarding NOLs that took about a month to resolve.

Our numbers were actually done on time and then we had to deal with this tax issue.

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 be -- have been correct.

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

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

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

And again, let's go straight to the numbers.

For the fourth quarter 2008, on a consolidated basis, we posted a net loss of $22.3 million or $0.83 per share from continuing operations on operating revenues of $325.3 million.

On a pro forma basis, however, net profit was $3.1 million or $0.11 per share.

This compares to a net profit of $0.022(sic -- see press release) or $0.08 per share in the fourth quarter of 2007.

Pro forma net income for the quarter includes adjustments for the following items on an after-tax basis -- $10 million of vendor settlements -- this revolved around an engine deal we completed with GE; $4.9 million related to lease return costs; $3.7 million for loss from equity method investments; $2 million expense from Aloha Airline settlement; $1.8 million for the adjustment to income tax valuation allowance; $1.5 million loss on disposal of assets; $900,000 loss associated with our Chinese start-up joint venture; [$400,000 million] of legal expenses for our go!

operations; and a net $200,000 of additional pro forma items.

As of September 30, we had cash, cash equivalents and marketable securities, including restricted cash of $64.9 million compared to $208 million at the end [of] September 30, 2007; also, compared to third quarter 2008 of $60.1 million for an increase of $4.8 million quarter-over-quarter.

In the year ending September 30, 2008, net operating revenue increased $28 million or 2.2% to $1.33 billion from $1.3 billion for the year ending September 30, 2007.

Contract revenue decreased $17.1 million or 1.3%, primarily driven by reduced aircraft in service, including the elimination of our Dash-8 fleet at JFK, operating [itself to] connection, which it contributed $32 million of revenue for the year ending September 30, 2007.

Operating revenues for go!

increased $18.1 million as a result of both fare increases and an increase in number of passengers.

Going forward, at current fuel prices, go!

was currently cash positive and we continued to see opportunities in Hawaii, which we'll go into later in the call.

In the year ended September 30, 2008, we reduced our operating fleet by three aircraft within our continuing operations.

This accounted for a 15.6% reduction in block hours; 17.8% reduction in departures; and available seat miles declined 10.8%.

Our fleet count at the end of the fourth quarter was 159 aircraft, comprised of [143] regional jets; 16 turboprops.

In the regional jet category, we operated 45 CRJ-900's; 44 CRJ-200's; 20 CRJ-700's; 34 Embraer 145's.

In addition to our 143 aircraft regional jet fleet, Mesa operated [16 37C Dash-8] turboprops.

Of those, we operated 55 for US Airways; 56 for United; 37 for Delta; 6 under Mesa Air Group; and 5 CRJ-200's operated as go!.

On November 28, 2008, Mesa announced entering into a settlement with the former controlling shareholder of Aloha Airlines concerning the Aloha Airlines' lawsuit over Mesa's Hawaiian inter-island flight services operated under the go!

brand name.

Under the terms of the settlement and without admitting any wrongdoing, Mesa agreed to make a $2 million cash payment, issue shares of common stock equal to 10% of the outstanding shares, and provide inter-island travel benefits to certain former Aloha Airline employees.

Under the terms of the settlement, if the shareholder is able to purchase the Aloha name in the upcoming Bankruptcy Court auction, it will increase -- it will license the Aloha name to Mesa.

We have recently announced that we are adding an additional aircraft into go!

for the buys spring and summer season.

Advance bookings continue to be very strong.

In March, it's approximately double where we were last year, and we continue to see positive trends in traffic in Hawaii.

On September 26, 2008, the company Bombardier amended the purchase agreement to return $6 million of the $6.5 million previously held on deposit, and in return, we delayed deliveries of certain [10] CRJ-700 aircraft.

Over at Delta, on August 1, 2008, Delta notified Mesa of the termination of the CRJ-900 Delta Connection agreement, citing a failure to meet certain contractual benchmarks contained in the CRJ-900 Delta Connection Agreement.

Mesa denies having violated the Delta Connection agreement and intends to challenge Delta's decision.

At year-end, Mesa was operating seven CRJ-900's as Freedom Airlines under the Delta Connection Agreement.

The Company subleased the Delta Connection aircraft from Delta for $1 per month, and these aircraft have been returned to Delta in connection with the termination of no further financial obligation to Mesa.

Mesa disagrees with the validity of the termination and plans to file a lawsuit to enforce its rights.

The Delta litigation regarding the ERJ flying -- this is the 50-passenger regional jet flying -- Delta canceled the agreement on March 28, 2008.

We went to court and won a preliminary injunction on May 29.

The ERJ's are currently flying for Delta.

Delta has appealed the preliminary injunction and the hearing is scheduled for January 30, 2009.

As many of you know, we have some bonds that come due.

We sent out an intent to settle with bondholders with stock at the end of December and the first week of January for both the 2023 and the 2024 debt obligation.

We received shareholder approval to issue up to 900 -- or to authorize up to 900 million shares on January 6, 2009.

We are currently negotiating with the major bondholders.

Our negotiations lead us -- have been productive and we are optimistic they will be concluded in a manner satisfactory to all parties.

In terms of guidance and forecast, I think the best thing we can say is that at this point in time, we believe that the Company will be cash flow positive next year.

And in addition, we believe that we will be profitable as well, with obviously all the considerations that are out there, given the uncertainty that the industry faces; but we believe that at this point in time, our business plan will call for us to be both cash positive and profitable next year.

Clearly, the Company faces a lot of challenges.

Obviously the one most front and center right now is working through the bonds.

Again, as I mentioned, we feel we've made good progress in that regard.

Also, we clearly have continual hurdles with Delta.

We'd like to think that those issues can also be resolved in a productive and more amicable fashion and [we're] working to do that.

We also know that the environment in itself, the overall economic environment, clearly puts a lot of questions in people's minds, but again, with the strong relationships that we've developed with US Air and United, we believe our business model will be successful and will see us through this difficult period.

I'd like to thank all of our employees and employee leadership group; in particular, our pilot and pilot leadership group, which has guided, with our work together, a new contract for Mesa that will take us out a few years and get through what is oftentimes a thorny issue, but for us was, in fact, I think the fastest contract ever negotiated in the history of ALPA and certainly of Mesa.

We'd like to thank all the pilot leadership there and our pilots who voted in support of that agreement.

And we'd like to thank the rest of our operating people and the folks here in the office who have worked under what has been a lot of stress, a lot of difficult situations; but together, we are confident that we can continue to be successful.

Again, I'd like to thank all of you for your continued interest in Mesa in spite of our recent difficulties.

And we certainly look forward with optimism to 2009 and the changes that we hope to implement going forward.

With that, I'd like to answer any questions that you may have and open up to the floor.

(Operator Instructions).

Helane Becker, Jesup & Lamont.

So, I just have a question about the cash position, quite frankly, because it's about 5% of revenue.

And I know that historically you've liked to keep that number higher.

And could you just maybe talk about how you feel about the cash position and what you're thinking about in terms of raising additional money, if that's possible?

I mean, now you're going to have quite a lot of shares outstanding, so I don't know if that's -- obviously selling equity isn't an option, but you have to be a little concerned about the cash.

Well, clearly, in the airline business, definitely it goes without saying that everyone is always concerned about cash.

Mesa, for a long time prior to issuing the bond, ran the Company on very little cash, because we have been cash flow positive for most of our existence; the exception being when we've had to make the big payment to Hawaiian.

And I think that our view is, even with these cash levels -- and they do move up and down, based on our payment schedule on our lessors -- we feel confident that while it will be tight, no doubt, assuming that our partnerships remain intact, which we think they will, I think we feel pretty confident we can work our way through this.

We also have been in discussions with some vendors about providing some cash in case for some reason it becomes necessary.

There are a lot of folks with a vested interest in seeing us continue to operate successfully.

And we feel that if we had to, there could be some non-traditional options to generate additional cash.

As we mentioned last quarter, we ended up with about $5 million of additional cash.

We think that next year we'll be cash flow positive and we could end up with more cash.

The big issue though, is that we do have sort of lumpy payments to our lessors.

And so what we always have to basically size everything to is not the high points, which is where we may be today, but the low points, which occur after some big payments.

But we actually feel reasonably comfortable at these levels that we're going to be fine moving forward and we will start to build some cash.

And if there are some other -- if we had to, we could look at some other types of non-traditional manner that we could raise some cash if it got down to the wire.

Okay.

And then just on an unrelated topic, can you say at all how business is in the March quarter?

Because this is for last summer, so this number shouldn't be such a big surprise to people, right?

But can you just talk about how business might be now?

Yes.

I mean, I think that first off -- and I want to mention another thing too, is that we are talking to our bondholders.

And so while we did get authorization to issue up to 900 million total shares, I mean, obviously we're negotiating with the bondholders to try to come to the deal that works best for all parties.

So there's no assurance that we necessarily will issue 900 million shares.

There are obviously some significant alternatives that all parties might find more attractive.

In terms of this year, 96% of our business is under the contracts and is not seasonal, but a lot depends on how certain maintenance events hit and how things are going.

The one place where we do see some continued improvement has been in Hawaii, both from a revenue standpoint, RASM standpoint, so most significantly fuels.

It was not too long ago that we were paying over $4.00 a gallon in fuel, and today, we're paying something in the neighborhood of $1.75.

Every $0.10 equals close to $45,000 a month to us.

And you can see that moving down $2.00 is a very, very significant number for us in terms of the Hawaii operations.

So I would say that the small piece of business that we have that's subject to the market and fuel is doing better.

The rest of our business is basically going to generate margins, positive margins in our contracts.

And then the drags that we have -- in particular, next year -- for example, the numbers that we have used to bake into our plan include full payment on all aircraft that are scheduled to come out of service with no sublease, no income, no -- at all, mitigation of those aircraft, assuming we just park them.

And I think that while maybe at $4.00 a gallon, the market for 50-seaters was pretty soft; at a $1.60 a gallon, we think the market is, in fact, improved.

And we think that ultimately those aircraft will be sublet.

Will they be sublet at the same rate that we have to pay?

Probably not.

But certainly, we think that they will be sublet at something greater than $0, which is they're currently in our budget.

Okay, great.

Thank you, good luck.

Thank you very much.

We'll probably need that too.

Bob McAdoo, Avondale Partners.

Yes, I've got two or three questions, Jonathan.

You just mentioned aircraft coming out of service that you've got kind of in the budget.

How many of those aircraft are there?

Well, I can't tell you how much and how many, but I can tell you that we have over $8 million in the budget for aircraft that would be otherwise parked.

And so (multiple speakers) --

And that's in the budget on an annual basis?

Yes, with no mitigation.

And when do those start to happen?

They basically spread throughout the year.

We actually have some now.

And again, we have -- we're in negotiations with our lessors; we think we have homes for some aircraft in terms of returns.

And as we mentioned, one of the things we're doing, we are moving another airplane to Hawaii.

And I think that ultimately we can start to -- and we also are using some of the additional aircraft to support the operation, which we get paid incentives.

And like -- one of the things that we realize is some of the other regionals, in fact, support the operation with additional spares because they can make back the cost in their incentives.

And so we've begun to do that in a couple of the operations as well.

Okay.

Let me get you to go back and repeat a couple things more slowly.

What was the -- each $0.10 a gallon was worth how much in Hawaii, did you say?

About $45,000 a month.

$0.10 a gallon equals $45,000 a month.

Okay.

And you right-quick ran through how many airplanes you had at US Air and Delta, et cetera.

Can you go back through those numbers again, slowly?

Sure, sure.

At -- 55 at US Airways; 56 at United; 37 at Delta; and 5 are in Hawaii right now.

Okay.

Was there -- did you say something else that you listed as Mesa, or no?

Yes, there's 6 that are at Mesa.

Those are -- that are --

(inaudible)?

-- unspoken for or [currently] being -- or those include the sublet [air].

And all the Dash-8's are with US Air or half -- are there still some at United?

No, the Dash-8's -- 10 at US Air -- 10 at United, rather; and 6 at US Air, pardon me.

10 at United and 6 at US Air.

Okay.

And this is as of September 30.

And so the 6 surplus were as of September 30, as well?

(multiple speakers) Yes.

A number of those are subleased already.

Okay.

All right.

As I recall on this -- the Aloha settlement, there was something about certain pieces of it that the judge rejected, or he didn't like or he wanted to go have -- the last headlines I saw, he wanted to have some more hearings about or whatever.

What's the status of that?

And how much of this required -- how much of this, you know, the $2 million payment and all that kind of stuff -- how much of that requires Bankruptcy Court approval over there versus it goes on regardless of what the judge does?

Okay.

Good question.

The settlement agreement is separate from the license agreement.

We have settled with the former shareholder.

That deal is done.

The bankruptcy -- (multiple speakers) without bankruptcy, it was a settlement with the former shareholder.

The licensing of the name, the same shareholder, made a bid for the name, was the highest bid by a wide margin, and turned around and then agreed to lease us the name for a number of different things, primarily 1% of revenue going forward for 10 years.

Okay?

The judge said that he had just learned about this and felt that he wanted to offer it to other parties and delayed finalizing that.

Now, I'm not a lawyer, but in the end, I believe that in a Bankruptcy Court, the highest bidder wins and gets the asset.

We think that this bidder who can use a credit bid -- in other words, the amount of money that he has as a claim against the estate, which is over $100 million, I think has certainly the ability to be the highest bidder.

And we think ultimately that we will get licensing agreement done.

However, if it is not done, if, for some reason, that larger shareholder is topped by a higher bidder or withdraws his bid or what-have-you, if it doesn't get completed and we don't have a license agreement, we don't pay 1% of revenue, but we have settled the Aloha litigation in its entirety.

And the issue about hauling former Aloha employees, is that tied to the licensing agreement?

Or that's a separate deal, that's part of the deal with the shareholder?

That's part of the licensing agreement.

And that part of the agreement, which never really got a lot of press, it's not a bad deal.

I mean, we estimated that those benefits at sort of a retail price is worth approximately $2 million a year.

And for folks around the Island, that would be a helpful benefit for the former employees, which was what was asked of us and what we gave as a way to spread some of that benefit to the former employees.

Okay.

Net-net, are you really better off having the Aloha name, do you think?

That's the marketing decision that says, gee, it's worth 1% of revenue to get that?

Is that -- that's the basic thought?

Yes.

I think that this -- the concept of licensing the name basically came to us from our experience at Virgin, where we did basically the same thing.

We owned Euro Belgium airlines and we licensed the Virgin name from Virgin, and paid them approximately the same thing.

And I always felt that it was worthwhile.

I think the Aloha name -- it's a 60-year-old brand name.

I think it would -- the 1% revenue would be offset by at least that amount and potentially more.

I think it would help us in terms of our pursuit for other partnership, co-chair arrangements where we think we are making good progress.

And I think that ultimately, it's a way for ourselves and the former shareholder to potentially work together in the future, which I think is also a positive thing.

Obviously, one of the more recent things, subsequent to the end of the end of this quarter, was this surfacing of Mokulele or however you say it.

My sense is that they're not carrying a lot of customers and I assume that both you and Hawaiian have people out there counting how many people you're getting on and off the plane, as we've obviously done all over the country whenever various others have been involved in the airline business and you've got a new competition.

What's your sense of what's going on with those guys?

And how bad do you think it is with those guys?

How long do you figure they'll last?

Well, who's to say that -- you know, the operation is effectively be funded by Republic, who gave them an $8 million line of credit.

We've done some math, obviously, to sort of see where they might be.

We have looked at their loads.

Their loads have historically been operating below 20%.

I'm not sure to what degree that would be sustainable for Mokulele.

We do have a partnership with them, so we've continued to operate as go!

Express.

Under the partnership, however, we have given them notice to conclude the partnership.

And again, I think it's a question of to what degree people want to stay in the marketplace and hang in there.

We certainly understand that competition is part of the -- our industry.

We were once the third carrier there as well.

We think that our marketing, our convenience at the commuter terminal, the reputation we've developed for reliability -- you know, the operation has been stellar since we began operating there.

We have a lot of frequency, and people like the service that we provide, so we think we can offer a very competitive product.

I will tell you that since their entry, we have really not seen a decrease in load factor.

In fact, last -- in December, we reported our load factor was actually higher than it was year-over-year.

I think that January's loads continue to look strong.

Our advance bookings are much stronger than they were last year.

And again, there's always been people that want to get into this business and it's something that we accept, and we'll just compete vigorously and hopefully, continue to maintain and grow our own passenger base.

Okay.

Just a couple more.

Sure.

This -- the bonds that are puttable to you, can you go back and refresh my memory as to -- or tell us, I guess it would have been as of September 30, is the latest you've disclosed or will be disclosing -- what is the outstanding amounts that these two bonds -- these two issues are?

And when are they puttable?

Yes.

We have two bonds.

One is puttable January 31; one is puttable February 10.

And --

[Most] of this year?

Yes.

Let me just give you sort of -- these are just rough numbers, but very close -- the bond that's due in January is approximately $20 million and the bond that's due in February is approximately $72 million.

And these are face amounts?

That's the put value of the bond.

Not -- the face amount is actually higher because the bonds accrue.

Right.

Okay.

I remember that now.

Yes.

The puttable amount is approximately $92 million.

As I mentioned, we have gotten shareholder approval to issue stock if we have to, which would effectively securitize all that debt.

We also are talking to the bondholders and I can say with some degree of confidence that our discussions have been productive and amicable.

I think most bondholders these days understand the situation that a lot of companies face.

There is really no credit market today as we know it -- or as we knew it -- and I think we have to be creative.

To that extent, again, we've had what I believe to be productive discussions with the bondholders.

We're fortunate that the bonds are not widely held; they're all pretty much institutionally held.

And I think that we can come to a solution that allows the Company to remain viable; allows the Company to move forward and at least put one more major issue to bed, again, in a way that I think is going to be satisfactory to all parties.

And then one last one.

As we go back and look at your -- this -- what, a $25 million laundry list of miscellaneous things between GAAP and pro forma numbers, what are the kinds of things that are still outstanding that we're going to have to -- obviously, there's issues relative to the bonds; what are some of the other kinds of things that, as we look forward for the next quarter or two, what are the kinds of -- not necessarily trying to get amounts, but at least just the topics that we need to be aware of that are still out there?

Well, clearly the bonds will -- however those bonds are resolved will have a big impact on accounting.

We are working to resolve, for example, this NOL issue, which could have a big impact, although we think we've come to some -- our research and due diligence at this point seems to indicate a favorable outcome.

We have certain investments that we may dispose or not, which could have an impact.

The China joint venture is another issue that one way or another will be resolved, we think, in the near future.

We, in fact, had entered into an agreement to sell it, given the economic environment over there.

We don't believe that that deal is going to happen as we had initially structured, so we're continuing to talk to them.

And we'll see how that impacts things.

On the operating side, we've got our partnerships.

The real issue there is just going to be the disposal of the excess aircraft and how that impacts us.

But we are talking to a number of parties in regard to continuing to eliminate 50-seat aircraft from the fleet.

And I think that, from that standpoint, those are probably the major issues that would impact the accounting from having effectively what I think people would call a clean number.

In terms of things like stuff still outstanding relative to Aloha, Hawaiian and go!, go!

legal, all those kind of -- are we kind of about through with that now?

Yes.

Oh, yes.

That we feel is done.

In fact, part of the reason why we had what we view internally has been an improvement in our outlook going forward, has been the elimination of the legal budget, which had been pretty significant in the last couple of years.

Okay.

And there's nothing left at Air Midwest, no more things to surprise us there?

No, the only thing there would be a disposition of the 1900's and that's another project that is ongoing.

Okay.

All right.

I've taken enough time.

Okay, well, thank you, Bob.

Thanks.

At this time there are no other questions.

Okay.

All right, well, again, folks, we appreciate your interest.

We understand that Mesa is certainly a company that has its challenges going forward.

It's been a tough year for everyone here and I know all of you as well as our folks; but we really do believe that working together in the spirit that we have developed at Mesa over the last 25 years, I think certainly is evidenced by the agreement we recently came to with our pilots, and the continuing strong relationship we have with United and US Air.

We feel that, ultimately, we can get this thing turned around and back on track again.

So I want to thank everybody for their time, wish everyone a very happy new year.

I know that most of you are facing the same challenges of some type and wish you all the best in your endeavors as well.

Thank you very much.

Have a good day.

Thank you for your participation.

You may disconnect at this time.