Mesa Air Group, Inc.
Q2 2009 Earnings Call Transcript

Published: 11 May 2009

[Operator:]

Welcome to the Mesa Air Group’s second quarter earnings conference call. (Operator Instructions) I would now like to turn the meeting over to your host for today’s conference, Jonathan Ornstein, Mesa Air Group Chairman and Chief Executive Officer; sir you may begin.

[Jonathan Ornstein:]

Thank you everybody for joining us. 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 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 and Exchange Commission. Again, I’d like to thank everyone for joining us and your continuing interest in our company. First just to go over high level earnings overview, for the second quarter of 2009 on a consolidated basis, we posted a pretax operating profit of $27.2 million, from continuing operations a net loss of after-tax of $37.3 million, and the significant after-tax net loss is the result of recording a $64.5 million income tax expense primarily driven by an IRC Section 382 tax provision effecting net operating losses carryforwards. This came about as a result of the issuance of the new shares in order to retire or restructure the bonds 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 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 cost associated with the Chinese joint venture, $1.1 million in lease return costs, and $1.1 million inventory write-down, a $300,000 go! legal expenses, 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 an extinguishment of debt. On the cash front which obviously is very critical these days, we had cash and cash equivalents and marketable securities including current and non-current 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 and marketable securities intend to be used for working capital and capital expenditures in the third quarter of fiscal 2009 and similar to 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 in 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, Mesa issued 117 million shares in the second quarter which triggered a 382 limitation in relation to the company’s net operating loss carryforwards. Section 382 of the Internal Revenue Code limits the amount of pre change net operating loss carryforwards that can be utilized after an ownership change. Also during the second quarter Mesa Air Group divested its indirect interest in Kunpeng Airlines. As a result the company recorded a net loss on equity method investment of $2.7 million and a $1.6 million of other expenses which included a reserve for bad debt in the quarter of 2009. Obviously this is disappointing for us. We had had high hopes for our Chinese operation but unfortunately they have been impacted by pretty much the same things that were impacted here and the operation continued to be unprofitable. At go! Mesa continued to expand its Hawaiian inter-island operation, available seat miles increased 16% in comparison to the same period in the prior fiscal year. Departures increased 13.7% and the passengers carried increased 20.1% over the second quarter of 2008. go! also celebrated its two millionth passenger on March 18, 2009. Additionally we terminated our code share agreement with Mokulele Airlines and commenced a new agreement with Hawaii Island Air. Effective March 25, 2009 go! began marketing services to 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 first quarter of 2008. The decrease was primarily due to reduction of our aircraft flown from 178 to 151. This 15.2% reduction in our operating fleet resulted in 11.3% decline in the number of passengers and 10.75 decrease in departures. Okay, we also made a couple of, I think some good things on the employee side I’d 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 in 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 has utilized a number of different scheduling techniques which we feel is both in the benefit of our pilots as well as the company and has gone very smoothly in terms of its implementation. I’d 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 seemed to have if not improved, certainly stabilized. 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 in 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 continue to have discussions with all 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. One other point, I think we have 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 some time soon although we don’t know what the date will be. In the meantime we continue to operate for Delta our ERJ-145 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’ve made that move. I think in fact its 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 145 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’ll continue to pursue all legal remedies that we have available to us. With that, I’d like to open up to any questions anyone may have. There’s certainly a lot going on and maybe I can help with any specific questions that you have.

[Operator:]

(Operator Instructions) Your first question comes from the line of Bob Mcadoo – Avondale Partners

[Bob Mcadoo:]

In the prepared remarks you talk about gain on extinguishment of debt of $22.9 million, but on the statement of operations that’s attached it shows $37.2 million, on gain on extinguishment of debt, can you give us a clue as to why that would be different.

[Jonathan Ornstein:]

Yes, I think that the $37.9 million is pretax and the $22.9 is after-tax.

[Bob Mcadoo:]

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

[Jonathan Ornstein:]

Yes, let me see if I have it in writing or else I can sort of give you generally what’s happened, we have continued to take out, you know, I don’t have it specifically but I think I can give you a pretty good idea. First and foremost was the 900’s 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 of CRJ-200 which over time have come out of the US Air operation.

[Bob Mcadoo:]

The 12 ERJ’s are they off the certificate or are they just idle now.

[Jonathan Ornstein:]

They’re idle.

[Bob Mcadoo:]

Okay, is that basically, I mean we’ve seen Sky West has been under pressure from Delta where the hours per airplane keeps getting squeezed down, squeezed down, is that really what’s going on there with those 12 airplanes, is that the kind of, they’re doing the same thing to you.

[Jonathan Ornstein:]

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

[Bob Mcadoo:]

So its not a matter of just squeezing down the hours per say, it was something that was written into the contract originally.

[Jonathan Ornstein:]

Yes, that’s correct.

[Bob Mcadoo:]

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 a positive $13 million, this quarter again is a negative $2.3 when you exclude the extinguishment of debt and all that, what’s really changed in the last quarter and you’ve listed a few things, these write-offs, but is that enough to—

[Jonathan Ornstein:]

No, there’s a couple of different things that have impacted it. One there’s always the issue of maintenance timing and maintenance events. Also the situation in Hawaii has deteriorated. 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’s] entrance into the marketplace. And I think that that would primarily probably be the difference is generally just maintenance timing events, and there may be some more excess aircraft on the ground right now as well which would impact it, and the go! situation having turned.

[Bob Mcadoo:]

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

[Jonathan Ornstein:]

I don’t think I could speak to that without the exact numbers. I know its very little because obviously we’ve gone through our budgets and reduced CapEx as much as possible. But I’d be happy to call you and just walk through that after the call.

[Operator:]

Your next question comes from the line of Helane Becker – Jesup & Lamont

[Helane Becker:]

As we think about this going forward, what’s the right share count for us to use now.

[Jonathan Ornstein:]

I believe its 147 million but I want to confirm it, but I believe its 147 million and some change.

[Helane Becker:]

Just in terms of timing you said Delta you should have news soon, does that mean like this quarter or what’s your thinking about soon.

[Jonathan Ornstein:]

No, by the way, the outstanding shares, I was a little high. Its 146,611,621. We should hear, when I say soon I mean we’ve been told by our lawyers it literally should be any day. And this is only on the appeal. If they were to lose the appeal then it would have to get scheduled for trial which could occur the end of this year, the beginning of next year.

[Helane Becker:]

Right but in the meantime you’re flying those planes and they’re paying you on a timely fashion and stuff.

[Jonathan Ornstein:]

Yes, yes, we’ve had a few issues from time to time but for the most part they’ve been paying us satisfactorily.

[Helane Becker:]

Just on some of your other code share agreements, are they being flown just at the minimum levels or can you just say where you are with—

[Jonathan Ornstein:]

No, I would say in fact, if anything we’ve been pressed to try to put aircraft and improve utilization, not go the other way. 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 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’ve had aircraft come off that have naturally come off of contracts like we’ve had at US Air. We’ve got the aircraft that have come out of China, there are excess aircraft which clearly are a drag right now and we’re working hard to work through those issues. I can tell you that Mike Lotz, our President, and Chief Financial Officer, and Brian Gillman, down in Brazil today for example talking to Embraer, on how we can look at some of these issues and solve them in a constructive and amicable fashion. Because that’s clearly one of our big challenges is going to be to offload some of these aircraft. Its something that you can see around the industry now.

[Operator:]

Your next question is a follow-up from the line of Bob Mcadoo – Avondale Partners

[Bob Mcadoo:]

With the China, is this the last of the journal entries that we’re going to see out of China or is there anything else that could potentially hit in the future. Is it completely off the books and no other anything, or where are we on that.

[Jonathan Ornstein:]

There may be some costs involved in aircraft return, but it will be very minimal.

[Bob Mcadoo:]

What’s the current bonds outstanding after you’ve gone through all of your process, what do you have outstanding that’s out there and what kind of dates do they have on them.

[Jonathan Ornstein:]

Well the bonds were restructured, some folks kept and I don’t know if we’ve got a break down but I can just tell you, some folks kept their bonds and just 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.

[Bob Mcadoo:]

That’s combined, everything.

[Jonathan Ornstein:]

That’s combined, everything.

[Bob Mcadoo:]

And the next date is.

[Jonathan Ornstein:]

Not until 2012, its three years out.

[Operator:]

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

[Jonathan Ornstein:]

If I could, I’ll just make a couple of closing comments. First, we understand we have a difficult situation. We’re working hard to get through these issues. We’ve got great support from our people who have come together providing what I think has been the best operational performance we’ve had in a long time. Our new Chief Operating Officer, Paul Foley, has done a beautiful job pulling all 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 and 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. Going forward we will be building cash for the remainder of the year all the way through to January. We expect that we will end the year with more cash then we began the year which for an airline these days is not the world’s worst thing. We are still very focused on our independent operating in Hawaii. We continue to run much stronger load factors then our new competition there. We think that we are the airline of choice among the local population. We worked hard to earn that ability to make that statement. Folks there know that go! entered the market, lowered the fares significantly, the fares have stayed low and we continue to run load factors in the high 60’s 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-700’s into service, that go into service for approximately 10 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 the position that I’d like to see it and I think everyone here at management knows that we have work to do. We feel that having navigated the course so far, we feel that as I said, have 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’d like to thank all of our people and if anyone has any questions again, feel free to call us offline. Thank you very much and have a great day.