Mesa Air Group Inc (MESA) 2009 Q2 法說會逐字稿

Thank you for standing by.

All participants are in a listen-only mode.

(Operator Instructions) Today's conference is being recorded.

I will now turn the meeting over to Jonathan Ornstein.

Thank you, sir.

You may begin.

Thank you very much, operator.

And thank you everybody for joining us on Monday morning.

This conference call will contain various forward-looking statements that are based on management's believes, 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 and uncertainties and assumptions.

Should one or more of the risks and uncertainties materialize or underlying assumptions prove incorrect, actual results may very 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 filing with the Securities and Exchange Commission.

Again, I would like to thank everyone for joining us an your continuing interest in our Company.

First, just to go over high-level earnings overview for the second quarter of 2009, our consolidated basis.

We posted a pre-tax operating profit of $27.2 million, from continuing operations and a net loss of after tax of $37.3 million, and the significant after-tax net loss is a result of recording a $64.5 million income tax expense primarily driven by an IRC Section 382 tax provision affecting net operating losses, carry-forwards.

This came about as a result of the issuance of the new shares in order to retire or restructure the bond that we did recently.

On a pro forma basis, the net loss was $100,000, or break even on a per diluted share basis.

This compares to a $4.1 million loss or $0.15 per share diluted share in the second quarter of 2008.

Pro forma net loss for the quarter includes adjustments for the following items on an after-tax basis.

$54 million adjustment to income tax expense, a $1.7 million loss from equity method investments, $1.6 million costs associated with the Chinese joint venture, $1.1 million in lease return costs and $1.1 million inventory write down, $300,000 go!

legal expense, and a $200,000 impairment charge, and a $100,000 loss on disposal.

These losses were partially offset by a $22.9 million gain on extinguishment of debt.

On the cash front, which obviously is very critical these days, we had cash, cash equivalents, and marketable securities, including current and noncurrent restricted cash of $57.1 million.

That included approximately $14 million of restricted cash, compared to $64.9 million, which included again the $14 million restricted cash as of September 30, 2008.

Our cash and cash equivalents marketable securities was intended to be used for working capital and capital expenditures and the third quarter in fiscal year 2009 and similar prior years, the Company will make aircraft lease payments that impact our cash position.

Events in the first quarter, the Company purchased certain senior convertible notes due January 2023 and February 2024 at a substantial discount and recorded net gain on the extinguishment of debt of approximately $22.9 million.

The Section 382 limitation makes an issue of 117 million shares, in the second quarter, which triggered a 382 limitation in relation to the Company's net operating loss carry forwards.

Section 382 it of the Internal Revenue Code limits the amount of pre-change net operating loss carry-forwards that can be utilized after an ownership change.

Also, during the second quarter, Mesa Air Group divested its indirect interests in Kunpeng Airlines and as a result of the copy recorded net loss on equity method investment of $2.7 million and $1.6 million of other expenses, which included reserve for bad debt in the quarter of 2009.

Obviously, this is disappointing for us.

We had high hopes for Chinese operations -- our Chinese operations, but unfortunately, they had been impacted by pretty much the same things that were impacted here and the operation continued to be unprofitable.

At go!, we continue to expand the Hawaiian inter-island operation.

And available seat miles increased 16% in comparison to the same period the last fiscal year.

Departures increased 13.7 and the passengers carry increased 20.1 over the second quarter of 2008.

go!

celebrated two millionth passenger on March 18, 2009.

Additionally, we terminated our codeshare agreement with Moloka Airlines and commenced a new agreement with Hawaii Island Air, effective March 25, 2009.

go!

began marketing services be flown by Island Air.

We believe the new agreement is a better arrangement for us going forward, as it contains a number of provisions that the old agreement did not.

Total available seat miles for the first quarter of fiscal 2009 decreased 14.2% from the first quarter of 2008.

The decrease is primarily due to reduction of the aircraft loan from 178 to 151.

This 15.2% reduction on the operating fleeted resulted in a 11.3% decline of passengers and 10.7% decrease in departures.

Okay.

We also made a couple of -- I think some good things on the employee side I would like to talk about.

Our operational numbers have continued to improve.

Controllable completion rate, slightly over 99% for the year.

We want to thank all of our employees for their hard work and often times difficult operating environments on the East Coast.

Also, I'm very pleased to announce that we implemented our new pilot agreement.

We've gotten back very good word as it is utilized a number of different scheduling techniques, which we feel is both the benefit of our pilots, as well as the Company.

And it has gone very smoothly in terms of its implementation.

I would like to thank everyone involved in that specifically.

We continue to see a number of challenges.

Certainly, we're well aware of the fact that we've got a pretty tough road ahead of us in a very difficult operating environment.

We're very pleased that our partner situation seems to have, if not improved, certainly stabilized, and we noted that US Air was successfully able to raise over $200 million last week.

We feel confident that as we move forward, we're able to execute both an operating and financial plan that we hope will be successful.

Clearly, again, there are challenges out there that we're going to have to navigate.

We have continued to have discussions with all of our vendors and suppliers and manufacturers and partners on ways that we can move the Company forward in a productive and constructive fashion.

That's pretty much the prepared statements that we have made.

Oh, one other point I think we got a couple of other issues here, I'm sorry.

On the Delta litigation, as you know, we continue to wait for a response back regarding the appeal that Delta made in the cancellation of our contract.

We will apparently hear that news sometime soon.

Although, we don't know what the date will be.

In the meantime, we continue to operate for Delta our ERJ145 fleet.

I will say we are pleased that we have moved primarily out of JFK and into a much easier operating environment in Cincinnati, where our total completion rate is over 99%, and has been since we made that move.

I think in fact, it has been running about 99.5%.

Subsequently, we also filed a lawsuit against Delta regarding the termination of our 900 contract, which we believe much like the AMR145 contract was inappropriate and contrary to the contract and we will see exactly where that leads us.

As always, we would like to resolve these differences in an amicable fashion but if necessary, we will continue to pursue all legal remedies that we have available to us.

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

There is certainly a lot going on and maybe I can help with any specific questions that you might have.

(Operator Instructions).

Looks like the first question is from Bob [Mcadu] at Avondale Partners.

Your line is open.

Thank you.

I got a couple of questions.

In the prepared remarks, you talk about gain on extinguishment of debt at 22.9 million.

And on the statement of operations, that is attached, it shows 37.2 million, gain on extinguishment of debt.

Can you give a clue as to why that would be different?

Yes.

I think the 37.9 million is pre-tax and the 22.9 million is after tax.

Got it.

And can you walk us through generally what the airplanes that disappeared as you went from 178 to 151 or whatever it was.

Hold on a second.

Let me see if I have it in writing, Bob, so I can give I generally what has happened.

We continue to take out -- hold on one sec.

You know, Bob, I don't have it specifically but I think I can give you a pretty good idea.

First and foremost was the 900 that we operated for Delta.

I believe that was 14 aircraft.

And then we took out some additional ERJ's for Delta, which was 12 aircraft that came out of the Delta fleet, and then there have been a couple CRJ200s, which over time have come out of the US air operation.

The 12 ERJ's, are they off of certificate or are they idle now?

They're idle.

Okay.

Is that basically -- I mean we've seen Sky West, it has been under pressure from Delta, where the hours per airplane keeps getting squeezed down, squeezed down and is that what is going on with 12 airplanes and are they doing the same thing with you guys?

They had rights to take some aircraft out and obviously in this environment, I think most care remembers are doing that.

And it is just not that a matter of squeezing down the hours per se, it was something that was written into the contract originally?

Yes, that's correct.

Okay.

And then if I take a look at the year-to-date for this six months, operating profit where you went from a plus 11 million for the full six months, but down negative 2.386 on the operating statement for this quarter, it would imply that last quarter was positive 13 million and this quarter again is a negative 2.3, when you exclude the extinguishment of debt and all of that.

What has really changed in the last quarter?

You listed a few things, these write-offs but is that enough to --

No, there is a couple of different things that have impacted it.

One, there is always the issue of maintenance timing and maintenance events.

Also, the situation in Hawaii has deteriorated, you know, the last quarter, I believe, if I remember correctly, we were profitable at go the quarter before.

This quarter we were not.

As you know, we have additional competition there.

As a result of republic entrant's into the marketplace.

And I think that that would primarily probably be the difference, is generally just maintenance timing event, and there may be some more excess aircraft on the ground right now as well.

Okay.

Which would impact it.

And the go situation having turned.

All right.

And then finally, what have you got for CapEx in this quarter, and what do you have facing you in the coming quarters?

You know, I don't think I could speak to that without the exact numbers.

I know it is very little because obviously we've gone through our budgets and reduced CapEx as much as possible but I would be happy to have Keith call you and just walk through that after the call.

Okay.

I think there was one other thing.

All right.

I will quit.

Okay.

Thanks.

Our next question then comes from Helane Becker, Jessup and Lamont.

Your line is open.

Thanks very much, operator.

Hey, Jonathan.

So, as we think about this going forward, what is the right share count for us to use now?

I should know that and I'm sorry I don't.

I believe it is 147 million.

But I want to just double -- yes, we will confirm it but I believe it is 147 million and some change.

Okay.

And then just in terms of timing, you say Delta, you should have news soon.

Does that mean like this quarter or what is your thinking about soon?

Oh, no, by the way, let me give you -- I have the exact numbers.

The outstanding shares, I was a little high.

It is 146,611, 621.

Okay.

We should hear, when I say soon, we've been told by our lawyers, it literally should be any day.

I see.

Okay.

And this is only on the appeal.

Right.

If they were to lose the appeal, then it would have to get scheduled for trial, which could occur the end of this year, beginning of next year.

But in the meantime, you're flying those planes, and they're paying you on a timely fashion and stuff?

Yes, no, they -- yes, we've had a few issues from time to time but for the most part they've been paying us satisfactory.

And then just on some of your other co-chair agreements are they being flown just as the minimum levels, or can you just say where you are with --

No, I mean, you know, we -- No, I would say, in fact, if anything, we've been pressed to try to put aircraft and improved utilization, not go the other way.

And the CRJ-900 which is the bulk of our fleet for US Air is a very effective aircraft for US Air.

We haven't seen any reduction in utilization there since we've moved part of the fleet over to Charlotte, where some of the utilization came down, but for our purposes, that has not been a driver in terms of profitability for us.

And at United, in fact, about I would say probably the beginning of the year, we actually stepped up utilization, so I can't say that we've seen any kind of reduction in that respect.

We have excess aircraft just because we have had aircraft come off -- that have naturally come off of contracts like we've had at US Air.

We got the aircraft that have come out of China and we have excess aircraft that clearly are a drag right now.

We're working hard to work through those issues.

I can tell you that Mike Lotz, our present Chief Financial Officer and Brian Gillman are down in Brazil today, for example, talking to Embrair, on how we can look at some of these issues and solve them in a constructive and amicable fashion.

So that's clearly, one of our big challenges is going to be to offload some of these aircraft.

It is something that you can see around the industry now has occurred.

Got you.

Okay.

Thank you.

Our next question then comes from Bob Mcadu from Avondale Partners your line is open.

A couple of other things.

With the China, is this the last of the journal entries we're going to see out of China or is there anything that could potentially hit in the future?

Is it completely off the books and no other anything?

Or where are we on that?

There may be some costs involving aircraft return but it will be very minimal.

And then what is the current bonds outstanding after you have gone through all of your process?

What do you have outstanding that is out there and what kind of dates do they have on them?

Hold on one sec.

The date -- well, the bonds were restructured -- some folks kept -- and I don't know the exact breakdown but I can tell you some folks kept their bonds and didn't put them and didn't restructure them and those bonds now have a put date of five years.

The others have a put date now in 2012.

The total amount outstanding, I believe is approximately $22 million, if my memory serves me correctly.

That's combined, everything?

That's combined, everything.

Then the next day is --

Not until 2012.

It is three years out.

Okay.

All right.

Thanks.

(Operator Instructions) I'm not showing any other questions at this time.

Okay.

You know, if I could, operator, and for the folks on the call, just make a couple of closing comments.

First, we understand we have a difficult situation.

We're working hard to get through those issues.

We've got great support from our people who have come together, providing what I think has been the best operation performance we've had in a long time.

Our new Chief Operating Officer, Paul Foley, has done a beautiful job pulling all of the senior management together and focusing them on our operational goals.

Mike has taken over on the financial side and has worked diligently with me to restructure the Company's debt and we're now entering into conversations in regards to eliminating some of the excess aircraft capacity, which we think -- we have some time to do.

So we're pleased that we look forward in our cash projections are on target, and in spite of the drag from these aircraft, we have now passed what we consider sort of our low point in cash in the year, and going forward, we will be building cash for the remainder of the year all the way through until January.

We expect that we will end the year with more cash than he would began the year, which for an airline these days is not the world's worst thing.

We are still very focused on our independent operation in Hawaii.

We continue to run much stronger load factors than our new competition there.

We think that we are the airline of choice among the local population.

We have worked hard to earn that ability to make that statement.

Folks there know that go entered the market, lowered the fares significantly, but fares have stayed low, and we continue to run load factors in the high 60s, which we feel ultimately will be a profitable operation for us, as it was in the prior quarter.

And I think that we are now again focused on what our challenges are, and have begun to look at different ways that we think that we can work through these issues.

We have additional opportunity with United, where we have a contract that allows us to put CRJ-700s into service, that go into service for approximately ten years.

That's a very good contract for us.

Those aircraft are scheduled to enter service through next year.

And we look forward to moving forward with that as well.

So while clearly the Company is not in a position that I would like to see it, and I think everyone here in management knows that we have work to do.

We feel that having navigated the course so far, we feel that we -- as I said, a good understanding of what we need to do going forward.

So with that, I want to thank everyone again for their continued interest.

I would like to thank all of our people.

And if anyone has any question, again, feel free to call us offline.

Thank you very much.

And have a great day.

That does conclude today's conference.