Mesa Air Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Dec 2020

[Operator:]

Good afternoon, and thank you for standing by. And welcome to the Fourth Quarter Fiscal Year 2020 Earnings Call. Today’s conference is being recorded. If you have any objections you please disconnect at this time. Your lines are in a listen-only mode until the question-and-answer session of today’s conference. It is now my pleasure to turn the conference over to Jonathan Ornstein, Chairman and Chief Executive Officer. Sir, you may begin.

[Jonathan Ornstein:]

Thank you very much, Operator. Sorry for the delay guys. We are all working remotely as you can imagine, so technically, trying to get everyone on the same page. But we appreciate your patience.

[Brad Rich:]

Okay. Thank you, Jonathan. I will begin with an update of our block hour production. For the September quarter, we generated 57,622 block hours, which is about 50% of the pre-COVID level. Based on current guidance with our partners, we expect the December quarter to be at about 60% of pre-COVID levels and roughly 70% for the March quarter. Based on high level projections from one of our partners, we believe block hour utilization will continue to increase and reach pre-COVID levels by the end of the calendar year. I might not like to provide an update on our American operation relationship. We recently amended our CPA to operate 40 of our CRJ-900 aircraft for a term of five years. Our current fleet, as many of you know, is 64 CRJ-900 and that will reduce to 63 in June of 2021. Of these 63 aircraft, we own 48 and 41 of those are financed under our recently announced U.S. Treasury loan. We also have 15 aircraft leased through 2024. We will be using the majority of these aircraft to support the American operation. However, we are reviewing several new opportunities that would productively utilize some of these aircraft.

[Mike Lotz:]

Great. Thanks, Brad. Let me give a quick recap on the earnings for the fourth quarter. Fiscal 2020, we recorded net income of $11.4 million or $0.32 per share. This compares a net income of $12.2 million for the same quarter last year or $0.35 per diluted share.

[Jonathan Ornstein:]

Thank you, Mike, and we appreciate the financial recap. At this point, Operator, I’d be happy to field any questions that come from any of the listeners.

[Operator:]

Thank you, sir. Savi Syth from Raymond James. You may go ahead.

[Savi Syth:]

Hey. Good afternoon, everyone. If I could help us with some of those deferred costs showing up and some of the deferred revenue happening, could you give us an idea of, maybe the progression I know -- the timing of everything is not exact, but any color on the progression of kind of the revenue build and the cost build in fiscal year ‘21?

[Jonathan Ornstein:]

Mike, do you want to do that? Hello.

[Mike Lotz:]

Yes. I got it. Thank you.

[Jonathan Ornstein:]

Yeah.

[Mike Lotz:]

Hey, Savi. This is Mike. So most of our revenue growth is going to be based on our block hour production. We did give guidance for the first two quarters. Third quarter and fourth quarter is a little hard for us to predict. We have gotten some indication from our partners that it’s going to be increased. But we are just not in a position right now to give those from block hour projections for Q3 and Q4. But from a revenue build, that will primarily just be driven by our block hours. And on the cost side, our costs are going to be fairly consistent and we did have this deferral of some of our heavy maintenance on the airplanes that we are deferring from 2020 and we are seeing a lot of that in 2021.

[Savi Syth:]

Okay. Did those deferrals show up in the off -- should we assume kind of off-peak quarters, Mike, and so they are kind of heavy on those time periods or -- and then also do you have an update on any kind of those pass-through costs or are they part of going to be some of the other agreements?

[Mike Lotz:]

No. Some of them are pass-through, but most of them are for the Mesa responsibility. And as far as timing, I think, it would be more likely in the front half of the year than the tail half.

[Savi Syth:]

Makes sense. And then just one last clarification, the request from American that you are still working on for additional block hours line, that -- is that in the guidance or that would be above and beyond what’s in the guidance?

[Mike Lotz:]

I believe that’s in the guidance.

[Savi Syth:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Bert Subin with Stifel. You may go ahead, sir.

[Bert Subin:]

Hey. This is a Bert Subin with Stifel. Thanks for the time and good afternoon. Over the last couple of quarters, you have highlighted very strong controllable completion factors, almost pretty much as close as you can get to a 100%. What gives you confidence you can run this strong in operation and block hours start to come back and maybe you don’t have the same degree of sparing that you have now?

[Jonathan Ornstein:]

Well, I will take a shot and Brad I am happy to have you add into that. First on the American side, we will have significantly more spares than we have ever had. So I think we would probably be okay there. This is really depends on what ultimately happens with those aircraft. We certainly will make sure that we have the adequate spares to operate at the levels that are above and beyond and I think that having those spare aircraft allows us to do that. On the United side, we have continued to operate. We have always operated for United above any contractual requirements. We have done a really good job. We have a lot of new aircraft there and we have adequate sparing plus. I think a big part of what goes on with United is we have two big maintenance bases that allow us to see a lot of aircraft and we don’t see any real changes there. So I think we feel very confident, particularly with the age of the fleet at United. Brad, do you want to add anything to that?

[Brad Rich:]

I think, no, Jonathan. I think the two main things are, look, we are excited to move to one consistent fleet of Embraer 175s on the United side, which will really enhance operational reliability we believe. And then, as Jonathan already said, on the American side, we will be adequately spared.

[Bert Subin:]

Yeah. No. I appreciate that. I guess, I am just wondering if some of the spares come down, you said there is potentially some productive use for some of those aircraft, if you expect that to have an impact or not really?

[Jonathan Ornstein:]

I don’t think we wouldn’t jeopardize anything at American by pulling more aircraft out than we feel comfortable with. As a result of the financing that made available to us under the Treasury loan. These aircraft become financially much less of a burden and having the additional spare aircraft is something we want to do to continue to build -- even after 30 years, we continue to build the confidence of our partners. So I just don’t think we’d let it get to that point where we felt that we are not adequately spared.

[Bert Subin:]

Okay. Great. Thanks. That’s helpful color. Just one more as a follow-up, Jonathan, last quarter, you said you think there is greater opportunity on the regional side than the cargo side. I assume you still think that’s the case, but just wondering if you had any commentary around that?

[Jonathan Ornstein:]

Well, no, I think, that my view on that is the regional business is clearly our core business and we do think that there continues to be some very good opportunities in the regional side. In terms of the cargo business, I mean, I think, that no one imagined the strength that we have seen in the cargo side and the opportunities that exist. The difference there is our partners at American, United and other mainline carriers, we will do deals 10, 20 aircraft at a time, whereas on the cargo side, they have a tenancy just to be a lot more incremental. And so, I think, for that reason, the cargo business will build, but potentially not at the same rate as we could potentially move the regional business. But that being said, I do think that the cargo business does provide us with some pretty significant opportunity, but it’s just maybe taking a little -- it takes a little bit longer to develop. At United, we went from literally 20 airplanes to 80 airplanes in a matter of a few years, I just think it’s going to, to do that kind of growth in the cargo business will take some time.

[Bert Subin:]

Thanks for the time.

[Operator:]

Thank you. Our next question comes from Mike Linenberg from Deutsche Bank. Sir, you may go ahead.

[Mike Linenberg:]

Oh! Hey. Hey, everyone. Hey, Jonathan. Just two on the cargo piece to kind of follow up on that, like when we think about how big that could be in two or three years? Are we talking what six, eight, 10 airplanes, do you get to a dozen airplanes? Just if you can sort of frame the expectations for us? And then I have a second one.

[Jonathan Ornstein:]

Sure. Well, we think the 737-400 continues to have a long-term attraction to the different cargo operations because of very good niche. We are looking at other aircraft types as well and I think they will probably move to 737-800s at some point. We are also looking at smaller aircraft. There seems to be a great need to get more products out to more places faster with the advent of overnight delivery literally to everywhere in the country, which has been exacerbated by the pandemic and I don’t think it’s going to go away anytime soon. And I think that as a result, we are going to continue to pursue what we think our number of attractive cargo opportunities. How fast they develop and how quick? I think is speculation. But I would be very surprised if we weren’t significantly larger than we are today with only two aircraft and in a year or two. And again, that’s just based on our existing business with -- our business with DHL. So I think that, like I said, the cargo operators take things a little bit more incrementally. But that being said, I think over time, we continue to build that operation nicely over the next couple of years. And I would like to think that we could add -- it would be nice if we could add an airplane every other month there somewhere in that kind of range. I think if we were at 10 and 12 airplanes in two years, I think, we’d be pretty happy.

[Mike Linenberg:]

Okay. Great. And then just a question on, Mike, you gave us a lot of numbers on where you were a year -- fiscal year end from a liquidity perspective and now you have closed the other part of the loan. You talked about maybe paying down the CIT line of credit. How much -- can you just tell us how much capacity you have available on that CIT line and maybe give us a ballpark a calendar year end liquidity level, like, what we should be kind of honing in on? Thanks.

[Mike Lotz:]

Yeah. So the CIT that we have out, I think, it’s roughly $23 million, $24 million. I think that’s about the amount that we have collateral to support under that facility. I think the actual facility may be for $35 million. But it’s based on the collateral, I think, we are probably cap it like $25 million, of which we have the most of it drawn down.

[Mike Linenberg:]

Okay.

[Mike Lotz:]

And based on the Treasury loan and where we see liquidity, we are evaluating just paying that down keeping it in place, of course, just paying it down. And year-end liquidity is a little tricky right now. But we are not sure how much of the United prepayment will be burned off. So I prefer to hold off on kind of predicting cash for the year end right now.

[Mike Linenberg:]

Okay. Very good. Thanks. Thanks, Mike. Thanks, Jonathan.

[Mike Lotz:]

Yeah.

[Jonathan Ornstein:]

Sure. Thanks.

[Operator:]

And our next question comes from Helane Becker with Cowen. You may go ahead.

[Helane Becker:]

Thanks very much, Operator. Hi, everybody, and thank you very much for the time. So one kind of a net question, your liabilities on the current liability line and the non-current liability line don’t add up on the balance sheet you provided today. It’s -- those lines are off by a little bit of money, so you might want to look at that or trying to figure out why they are not adding? And then, my second question is with respect to the operation. The fact that you guys are running a really good on-time performance and a good operation right now, just that -- are you getting more inbounds for people wanting -- from other airlines wanting to sign you up since you have the capacity and you are one of the few airlines that’s profitable?

[Jonathan Ornstein:]

First -- let me address the first question, Helane, since you and I have known each other a long time. It’s not the first time that you have pointed out an error and have been correct. So we would certainly take a good look at that and make sure that we have the numbers right. So, thank you.

[Helane Becker:]

Oh! My god. I am so sorry and I feel really bad.

[Jonathan Ornstein:]

All right. Don’t worry about it. It’s fine. I mean, I was just commenting today that when you run a big operation of any kind occasionally something slips through the cracks. So let us take a look at it and make sure that we have it right. On the second question, yeah, I think that we have really established ourselves as one of the leading regional carriers, and hopefully, one of the leading cargo carriers. There is certainly opportunity within the regional business as other CPAs have aircraft that are expiring. And our cost structure we feel is significantly below our major competitors. We think that in all probability the likelihood to be able to catch our cost structure is very low because so much of our cost structure is based on the fact that I think the last time I looked half of our employees have less than two years’ seniority. So we have a young junior workforce that gives us some benefits there. So, yeah, and I think that both in the regional side and in the cargo side when there are RFPs out there, I think, Mesa will in fact be included going forward. So I do feel that we can win business both on our costs and also on the level of service that we can provide. Believe me, we know that we are being tested right now by DHL and we are doing everything we can to provide the highest quality business because we believe that there could be some growth coming in that regard, but we know that performance is critical. So…

[Helane Becker:]

Okay.

[Jonathan Ornstein:]

… I do think that it’s been helpful to us and obviously, we have to build on this coming out of the pandemic to demonstrate that what we have done here is building the base for us to continue to grow the business.

[Helane Becker:]

Okay. That’s -- Jonathan, that’s really helpful. Thank you so much. Sorry about that my addition there. But the other…

[Jonathan Ornstein:]

Don’t worry about it.

[Helane Becker:]

The other thing I wanted to ask is, one of the things I am starting to see a lot of in the trade press is biometrics and on the use of that at airports and with the airlines and stuff. And I am wondering if either of your two partners have talked to you about making sure all of your gates and your boarding processes that are consistent with theirs as they move to that over the next few years?

[Jonathan Ornstein:]

Well, Brad, do you want to answer that? You were at United. You probably have a better feel for that than I do, any thoughts?

[Brad Rich:]

I apologize, Helane. Can you restate the question? I am sorry.

[Helane Becker:]

Oh! Yeah. No worries. It’s just -- I am seeing a lot of stuff on biometrics and the use of biometrics…

[Brad Rich:]

Yeah.

[Helane Becker:]

… to board people, and I guess, we are going to that because you don’t -- we are going to -- it looks to me like we are going to a touchless environment at airports and so on from a health perspective, even after the pandemic goes away. And I am just kind of wondering if you are partners have approached you about making sure all of your airports are consistent with that?

[Brad Rich:]

So, the part of that obviously that we control is, I mean, we obviously stay in very close contact and follow the guidance of our partners as you well know. And your question is, have they approached us? Not with anything to the level that you have described. Are we making advances and progressions more toward the type of environment you have kind of described? Certainly. But how quickly things continue to develop at least to the extent you have described? I am obviously not very well qualified to address other than we just keep in touch with them closely, follow what the guidance they ask. And then as it relates to our own operation, our own people, of course, we are doing everything I think humanly possible to keep people safe in this environment, but those are my only thoughts, Helane.

[Helane Becker:]

Got you. That’s really helpful. Okay. Thanks, gentlemen. Thanks for the -- thanks for now.

[Operator:]

Thank you. Our next question comes from George Stien with Corre Partners. Sir, you may go ahead.

[George Stien:]

Hey, guys. Thanks for taking my question and congrats on a great quarter. And Mike, this question is on the -- I wanted to restate maybe something that Mike was asking is, maybe if you could just give us a lens into the cash balance as of today are roughly around today where the UAL prepayment stands in gross debt?

[Mike Lotz:]

I mean, yeah, look, we are fairly closer to the end of the calendar year. So we look at year end cash at probably somewhere around $170 million, of which probably at least half, $40 million to $50 million of that is still United prepaid cash that they have to burn off.

[George Stien:]

Got you. Can you remind me of the -- so the CARES Act loan where the LTV stands on that one for the covenant or where you guys…

[Mike Lotz:]

I’d say…

[George Stien:]

… landed on a LTV basis for the collateral?

[Mike Lotz:]

Of the -- yeah. So the loan was based on an LTV, it was different for different types of equipment, but it was 50% on an aircraft with the majority of our loan was based on and the test going forward is 66.2% LTV. So there is some amount of cushion there as we test the collateral, I think, twice a year.

[George Stien:]

But I guess as kind of round numbers today are getting close to year end, somewhere around $130 million to $120 million of cash net of the UAL plus, I guess, conceivably doubly collateralized CARES Act loan of $195 million and I guess, of course, net that against the market cap of $150 million, is that kind of -- those rough numbers add up?

[Mike Lotz:]

Okay. Yeah. That’s correct.

[George Stien:]

Okay. That’s it for me. Thanks.

[Mike Lotz:]

You bet.

[Operator:]

And the next question comes from Savi Syth from Raymond James.

[Savi Syth:]

Hey guys. Thanks for the follow-up. Could you talk a little bit about with the American contract, what’s the threshold that American needs to come down on their mainline fleet for them to be able to take aircraft out in the first half of the year? And also just could you provide an update on the white tail risk, especially if American kind of pulls out aircraft from that contract as they are able to?

[Jonathan Ornstein:]

Brad, do you want to do that?

[Brad Rich:]

Well, sure. Look, we -- I want to be a little careful here becoming a spokesman for American. And all of the discussions we have had and Savi, I think, your question is, is in the -- it’s related to the first half of 2021, is that correct?

[Savi Syth:]

Okay. That’s correct.

[Brad Rich:]

Okay. Yeah. So, look, we -- in all the discussions we have had with American, the -- we think there is a threshold here of about another 40 aircraft of reduction that would then trigger some type of an issue with their scope. But look I want to be careful of that because it’s Americans to describe, not us, but that’s what we believe. And so -- and if you think of 40 additional narrow-body reductions in excess of the current reduction, that’s quite a few airplanes, which we think would be pretty minimal risk for us, especially in environment where, as we mentioned, we are having more discussion about potentially additional flying above and beyond the 40 aircraft. So we -- having said all of that, we really -- we don’t know exactly what’s going to happen, of course, but we think there is relative -- relatively small risk in those first six months.

[Savi Syth:]

Makes sense. And just kind of curious…

[Brad Rich:]

Okay.

[Savi Syth:]

… what the white -- updated white tail risk and maybe more so because it’s not the CRJ-900s I think have been pledged as well, just kind of curious what the kind of updated white tail risk is?

[Brad Rich:]

Mike, I am happy to make some comments, but do you want to take the tail risk part?

[Mike Lotz:]

Yeah. So what -- you talked about lease exposure?

[Savi Syth:]

Exactly. Lease and debt payments that might go beyond.

[Mike Lotz:]

Yeah. Yeah, I mean our tail risk has always -- it’s really related to the lease aircraft and there is 15 of them. And I think we have always said it’s somewhere around $25 million to $30 million and it’s a tail that occurs not until I think that the first or second calendar quarter of 2024. So that number really hasn’t changed, and of course, the aircraft are fungible, but those 15 aircraft are in the fleet.

[Savi Syth:]

Makes sense. All right. Thank you.

[Operator:]

And at this time, I am showing no further questions. Sir, I will turn the call back over to you for any closing comments.

[Jonathan Ornstein:]

Sure. Thank you very much. Thank you everyone for your support in Mesa over the years and certainly through the pandemic. It’s been obviously challenging. But on the same -- at the same time, we have worked very hard, keep all of our people moving in the same direction. They have been incredibly supportive. I have to tell you, I am every day amazed that the work effort that people are putting in, whether it’s out online in the maintenance hangers and dispatch or the people who are working from home diligently to keep the company moving forward. We think that the accomplishments this quarter certainly will bode well for the future. I think when we look at our two main partnerships with United and their support, your willingness to loan -- to prepay us $80-plus million to help us financially strengthen our balance sheet. I think is something and particularly given the environment remarkable in itself. And we are really pleased with American and their support, and the work that Brad did putting that deal together that allowed us to continue to operate those 40 aircraft within the American system. Those two things, I think, will hopefully be indicative of what we are capable of doing going forward with those partners. Additionally, the U.S. Treasury Department loan has been giving us incredible flexibility with the aircraft. Our cash cost on the aircraft that were financed by the Treasury loan is about $11,000 a month and I think that it’s important that. While we have depreciation expense and obviously, engine expense, that flexibility is what allowed us to put the American deal together. I am hopeful on the cargo side that we can continue to see opportunities there. I can tell you that we have had numerous inbound calls regarding our cargo capability over the last few months. We -- and we are looking forward to acting on those calls also going forward. All in all, we feel much better with what’s happening now on the world scene at the beginning of the distribution of the vaccine, which in itself may be a business opportunity for us and I think that our partners are continuing to show their confidence. In fact, one of our partners has indicated to us at the high level that they expect us to be running at almost 100% utilization by the end of the calendar year. So hopefully, as they say in every -- all the indications are in the green and we are continuing to make progress going forward. So thank you again. Always feel free to give us a call if you have any additional questions. Thank you, everybody.

[Operator:]

And thank you. This concludes today’s conference call. You may go ahead and disconnect at this time.