Mesa Air Group, Inc.
Q4 2008 Earnings Call Transcript

Published: 13 Jan 2009

[Operator:]

Welcome to the Mesa Air Group’s fourth 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:]

Welcome to our call. I would like to thank everyone for 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 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 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. 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 $2.2 million 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 revolves around an engine deal we completed with GE, $4.9 million related to lease return costs, $3.7 million for loss from equity method and 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; $0.9 million loss associated with our Chinese start-up joint venture; $0.4 million of legal expenses for our go! operations, and a net $0.2 million of additional pro form 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 the third quarter 2008 of $60.1 million for an increase of $4.8 million quarter-over-quarter. [Near] 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 its Delta connection which had 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! is currently cash positive and we continue to see opportunities in Hawaii which we’ll go into later in the call. In year ended September 30, 2008 we reduced our operating fleet by three aircraft within our continuing operations. This accounted for a 15.6% reduction of 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 Embrarer 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, six under Mesa Air Group, and five 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 license the Aloha name to Mesa. We have recently announced that we are adding an additional aircraft into go! for the busy spring and summer season. Advance bookings continue to be very strong. In March its 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 the termination of CRJ-900 Delta Connection agreement citing a failure to meet certain contractual benchmarks contained in the CRJ-900 Delta Connection agreement. Mesa denies the we 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 with no further financial obligation to Mesa. Mesa disagrees with the validity of the termination and plans to file a lawsuit to enforce its rights. Delta’s litigation regarding the ERJ line, this is the 50-passenger regional jet line, Delta cancelled 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 2024 debt obligation. We received shareholder approval to authorize up to a 900 million shares on January 6, 2009. We are currently negotiating with the major bond holders. Our negotiations have been productive and we are optimistic they will be concluded in a matter 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’ve 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 is guided with our work together a new contract for Mesa that will take us out a few years and get through what is often times a thorny issue but for us, was in fact I think the fastest contract ever negotiated in the history of ALPA and certainly at Mesa and 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:]

(Operator Instructions) Your first question comes from the line of Helane Becker – Jesup & Lamont

[Helane Becker:]

I have a question about the cash position quite frankly because its about 5% of revenue and I know that historically you like 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. Now you’re going to have quite a lot of shares outstanding so if that’s, obviously selling equity isn’t an option, but you have to be a little concerned about the cash.

[Jonathan Ornstein:]

Well clearly in the airline business that 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 payments 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 in tact 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 invested 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 will be cash flow positive and we could end up with more cash. The big issue though is that we do have 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 that 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.

[Helane Becker:]

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?

[Jonathan Ornstein:]

I think that first off and I want to mention another too is that we are talking to our bondholders and so while we do get authorization to issue up to 900 million total shares 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 contract 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, [inaudible] standpoint, so most significantly fuel. It was not too long ago that we were paying over $4 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 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 contract and then the drag that we have and 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. I think that while maybe at $4 a gallon, the market for 50-seaters was pretty soft. At $1.60 a gallon we think the market has 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 then zero which is where they’re currently in our budget.

[Operator:]

Your next question comes from the line of Bob Macadoo – Avondale Partners

[Bob Macadoo:]

You just mentioned aircraft coming out of service that you’ve got in the budget, how many of those aircraft are there?

[Jonathan Ornstein:]

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

[Bob Macadoo:]

That’s in the budget on an annual basis?

[Jonathan Ornstein:]

Yes, with no mitigation.

[Bob Macadoo:]

And when do those start to happen.

[Jonathan Ornstein:]

Its basically spread throughout the year. We actually have some now and again, 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 operations which we get paid incentives. 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.

[Bob Macadoo:]

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

[Jonathan Ornstein:]

About $45,000 a month.

[Bob Macadoo:]

And you right quick ran through how many airplanes you had a US Air and Delta, etc. Can you back through those numbers again slowly.

[Jonathan Ornstein:]

Sure, 55 at US Airways, 56 at United, 37 at Delta, and five are in Hawaii right now.

[Bob Macadoo:]

Did you say something else that you listed as Mesa or no?

[Jonathan Ornstein:]

Yes, there are six that are at Mesa, that are unspoken for or are—

[Bob Macadoo:]

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

[Jonathan Ornstein:]

No, the Dash 8’s, 10 at United and six at US Air and this is as of September 30.

[Bob Macadoo:]

So the six surplus were as of September 30 as well.

[Jonathan Ornstein:]

Yes and a number of those are subleased already.

[Bob Macadoo:]

As I recall on 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 our whatever, what’s the status of that and how much of this 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.

[Jonathan Ornstein:]

The settlement agreement is separate from the license agreement. We have settled with the former shareholder. That deal is done. 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. 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 the license agreement done. However if it is not done, if for some reason that largest shareholder is topped by a higher bidder or withdraws his bid or what have you, if it doesn’t get completed then we don’t have a license agreement, we don’t 1% of revenue but we have settled the Aloha litigation in its entirety.

[Bob Macadoo:]

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.

[Jonathan Ornstein:]

That’s part of the licensing agreement. That part of the agreement which never really got a lot of press is not a bad deal. 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 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.

[Bob Macadoo:]

Net net are you really better off having the Aloha name do you think? That’s the marketing decision that says, gee its worth 1% of revenue to get that? Is that the basic thought?

[Jonathan Ornstein:]

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 is 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.

[Bob Macadoo:]

Obviously one of the more recent things, subsequent to the end of this quarter was this surfacing of [Mokalali] 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 are getting on and off the plane as we’ve obviously done all over the country whenever various of us 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?

[Jonathan Ornstein:]

Who’s to say, the operation is effectively being funded by Republic who gave them an $8 million line of credit. We’ve done some math obviously to see where they might be. We have looked at their loads. They’re loads have historically been operating below 20%. I’m not sure to what degree that would be sustainable for [Mokalali]. We do have a partnership with them so we continue 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 our industry. We were once a third carrier there as well. We think that our marketing, our convenience at the commuter terminal, the reputation we’ve developed for reliability, 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 December we reported our load factors actually higher then it was year-over-year. I think that January’s loads continue to look strong. Our advance bookings are much stronger then they were last year. Again there’s always been people that want to get into this business and its something that we accept and we’ll just compete vigorously and hopefully continue to maintain and grow our own passenger base.

[Bob Macadoo:]

The bonds that are putable 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 issues are and when are they putable?

[Jonathan Ornstein:]

We have two bonds, one is putable January 31, one is putable February 10 of this year. Let me give you, 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.

[Bob Macadoo:]

And these are face amounts.

[Jonathan Ornstein:]

That’s the put value of the bonds. Face amount is actually higher because the bonds accrue. The putable 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 are 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 puts one more major issue to bed again in a way that I think is going to be satisfactory to all parties.

[Bob Macadoo:]

As we back and look at 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.

[Jonathan Ornstein:]

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 have 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 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 what people would call a clean number.

[Bob Macadoo:]

In terms of things like stuff still outstanding relative to Aloha, Hawaiian, go!, go! legal, all those kinds of things, are we kind of about through with that now?

[Jonathan Ornstein:]

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.

[Bob Macadoo:]

And there’s nothing left at Air Midwest, no more things to come, surprises there?

[Jonathan Ornstein:]

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

[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:]

Again folks we appreciate your interest. We understand that Mesa is certainly a company that has its challenges going forward. Its been a tough year for everyone here and I know all of you and as well 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. I want to thank everyone 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.