Mesa Air Group, Inc.
Q4 2007 Earnings Call Transcript

Published: 15 Jan 2008

[Operator:]

Welcome and thank everyone for standing by. At this time I’d like to inform all participants that the lines will be on listen only mode for today’s conference call until we’re ready to take questions. Also at this time I’d like to inform all participants that today’s call is being recorded. If you have any objections you may disconnect at this time. Now I’d like to turn the call over to Mr. Jonathan Ornstein. Sir, you may begin.

[Jonathan G. Ornstein:]

Thank you very much and thank you everybody for taking the time out from your day to meet with us. We have to go to our forward-looking statement. 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. While the company believes that the expectations reflected in such forward-looking statements are reasonable, they 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 correct, 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 the next filing with the SEC. Again I’d like to welcome everybody on the call and appreciate your interest in our company. Just to give you a high level earnings overview, on a pro forma basis, net income was $2.2 million or $0.08 per share. This compares to $7 million or $0.17 per share in the fourth quarter of 2006. Pro forma adjustments after tax include the award against Mesa in the Hawaiian lawsuit and associated legal costs of $59 million, $3 million in China startup costs, and $1.7 million of remaining Dash-8 shutdown expenses. In addition to pro forma earnings, exclude $6 million in lawsuits at Air Midwest since they will now report to this division separately as discontinued operations. We are exiting routes with Air Midwest and actively marketing the Beech 1900 aircraft. The judgment against Mesa in the Hawaiian lawsuit certainly represents the largest financial impact on the company. We continue to believe that the judgment was wrong. We filed an appeal and that’s primarily based on information gained late in the process that was not allowed into the trial. According to every precedent we could find, both the ruling and the amount of the judgment were extraordinary and in fact unprecedented. Nevertheless, the court system is such that we were required to post a $90 million bond subsequent to fiscal year end. This is to cover $80 million in judgment plus legal fees and interest, thus we are taking a $86.9 million pretax charge in the quarter. Certainly that is the bulk of the bad news for the quarter. We do have some good news in the quarter. Our China joint venture Kunpeng Airlines began service. This was only a short nine months after we signed our original agreement. During the quarter we delivered two aircraft to Kunpeng and continue to work on another two for delivery in the first quarter of ’08. One of those has been delivered and one is in fact on its way, in I believe the Soviet Union or Russia. The cost of taking aircraft out of service and performing major maintenance checks along with legal costs and other China related conformity items was $4.5 million pre tax net maintenance and rent paid to us by Kunpeng. Although the aircraft are operated for just a few days in the quarter, I feel comfortable reporting that they are operating reliably and have experienced increasing load factors on a month to month basis coming out of the Shenzhen hub. As we have said before, we plan to continue to grow the fleet in anticipation of 2008 Olympic games and growth in the Asian market. Kunpeng recently announced major fleet orders of up to 100 ERJ-190s and 100 ARJ 121-700s. The ARJ 121 is a new 90 seat aircraft manufactured by a Chinese aircraft manufacturer. We believe these orders reflect the strong demand for regional jets in China and the confidence of our partner Shenzhen Airlines. Also in the quarter we took delivery of our first CRJ-900 aircraft for Delta airlines. We now have two CRJ-900s in service for Delta with a total of 14 to be put in service over the next year. In addition, after celebrating the one year anniversary of our inter-isle Hawaiian operation in Go! in June, Go! posted a load factor in July of 82.7%. That’s up almost 6 points from the load factor in the fourth quarter the prior year. In addition to that, after almost doubling the third quarter, Go!’s frequent flyer membership increased another 20% in the fourth quarter. On the operating results side, adjusting for the pro forma items, our earnings per share was down $0.09 from $0.17 in the fourth quarter of 2006 to $0.08 in the fourth quarter of ’07. Pro forma net income fell $4.8 million from $7 million to $2.2 million. The primary items of significance affecting our fourth quarter results versus a year prior were a year-over-year variance of $5.3 million in bad debt. This variance reflects a credit in the fourth quarter of 6 due to receipt of US Airways receivables previously characterized as bad debt and an increase in the bad debt allowance in the fourth quarter of ’07. We also had year-over-year adjustments and workers compensation of $1.9 million and sales tax of $1.4 million. These items total $8.6 million. Other information

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Jim Parker. Go ahead.

[Jim Parker:]

Jonathan, Good morning. How much cash do you need to run the business?

[Jonathan G. Ornstein:]

You know that’s a good question in that as you probably recall before we had done the $200 million in converts we used to run it on a pretty tight budget. The company was in fact significantly cash flow positive this last quarter, I believe about $16 million. The aircraft that are being delivered to us from Delta require their delivering the aircraft to us. I’d have to go back and look at what our cash flow requirements would be in terms of how the deposits we do expect to take on additional CRJ-700s but in the past we’ve been pretty nimble. I don’t see that as a big issue. Also I’d point out that last we checked I believe he had about $100 million of unencumbered spare parts. We’ve started to look at some potential opportunities with that but in terms of your question the company being cash flow positive, I don’t think that is a very big number. We actually up until the time prior to the Hawaiian payment had never... This is just from memory, if it serves me correct, I don’t believe we ever dipped below the $200 million mark in the past and actually needed the $200 million we raised with the convertible issue which I think represented about 14 million shares that were diluted.

[Jim Parker:]

And the filing of your 10-K, when do you think that’s going to take place?

[Jonathan G. Ornstein:]

In terms of delay, I think it would be fair to say that our finance department with Peter’s departure has been working very hard to pull things together and clearly that was something of a setback for the department. We are working to try to make these filings more timely in the future and that we feel that we also had to go back and one of the reasons for the delay for this quarter was that discontinued operations took quite a bit of work and again we’re going to work hard to try to improve upon the timeliness our reporting.

[Jim Parker:]

In that context, if you don’t file your within a certain period of time, is there a threat of delisting?

[Jonathan G. Ornstein:]

I know that there is some timetable. We don’t believe that that is going to be an issue for us given that we’re going to file tomorrow.

[Jim Parker:]

Okay, thanks.

[Operator:]

Thank you. Our next question comes from Michael Linenberg. Go ahead.

[Analyst on behalf of Michael Linenberg:]

Good afternoon. This is actually Lily on behalf of Mike. Can I ask you about how we should think about the China JV impact on the P&Ls going forward? Seeing such a run rate costs and maybe a little bit more color on the revenue side, whatever you can help out on that front would be great.

[Jonathan G. Ornstein:]

We will be consolidated in an equity method. I think probably the best way to answer that question would be to talk to Bill Hoke because it is somewhat more technical and I guess something above my pay grade. So maybe after the call if you want to call and discuss it with him offline that would probably be the best way to do it. The Chinese partners seem to be fairly enthusiastic. In the last board meeting they felt that the company would be profitable in December. I have not seen the numbers yet but I can only tell you that Shenzhen runs a pretty good operation and has been profitable and I know that they are working very hard to ensure that Kunpeng will be profitable as well.

[Jonathan G. Ornstein:]

The attrition jumped up probably back in November of last year and it has clearly been higher than we anticipated. We get frankly the pilots tell us there’s going to be a shortage every year. This year in fact has been true. About 90% of our pilots that leave are leaving to go to another airline to fly larger equipment. We don’t think there’s a lot we can do to stop them. If a pilot gets an offer from United or US Air or Delta or Southwest or Continental, Air Tran or even Jet Blue, they’re going to for the most part, that’s a move that they view as upward advancement so as those guys stop hiring you see that attrition drop significantly. We have begun to see some signs of that this month. Also with the impact of the age 65 rule we think things have slowed down a little bit but again Mesa in some respects, and this is something that someone at the union actually mentioned to me, is a victim of our own success in that we upgrade people so quickly at Mesa because of the growth of the past that we have lots of captains who are prime targets for the major airlines who are young with lots and lots of time as a piloting command and not that much overall seniority, so it’s easy for them to leave. This is unlike maybe some of the other regionals where to become a captain can take you over 10 years. At Mesa it takes three so by the time you’re in your 8th year you’ve been a captain for five years and we become a very big target because I think our people are both high quality, high time, and have gone through for the most part excellent training, with most of our pilots coming through our own in-house Mesa pilot development at Arizona State or in Farmington, New Mexico at the program that began almost 15 years ago. So we have seen some things slow down a little bit. We think that as the hiring slows down that will improve further.

[Analyst on behalf of Michael Linenberg:]

Great. Thanks so much.

[Operator:]

Thank you. Our next question comes from Bob Mcadoo. Go ahead.

[Bob Mcadoo:]

Hi. A couple things. You talk about the 50 seniors coming out of United. I’m not real clear as to where we are on that process. Is there 8 that have come out already and you’ve agreed to do 8 more? Is that what you’re saying?

[Jonathan G. Ornstein:]

Yes and no. We have agreed to do 8. Only I believe 1 has come out so far.

[Bob Mcadoo:]

This is the first batch of 8.

[Jonathan G. Ornstein:]

They’re now telling me 3 have come out, 2 came out this month. We have 5 more to go, and we have a tentative agreement for another 8 that would also come out over this 2008 and all those aircraft are in fact unprofitable and are replaced by 700s that are in fact profitable and have a 10 year term as opposed to a remaining only about 2.5 year life on the other aircraft.

[Bob Mcadoo:]

So that leaves you what 14 of the pigs that are still there?

[Jonathan G. Ornstein:]

We had already taken out 2. It would bring us down to 12.

[Bob Mcadoo:]

When you get these 2 batches of 8, you’ll have 12 left?

[Jonathan G. Ornstein:]

Right and we’re in agreement. We have not yet signed the agreement but it is our belief that that will be signed shortly. We will sign it shortly. United has agreed.

[Bob Mcadoo:]

On the China thing, are you still sending them airplanes that they’re subleasing from you in terms of 50-seaters and how many more of those come before they actually start to get to E-190s?

[Jonathan G. Ornstein:]

Right now there are 3 in service, a 4th one on its way, and a 5th one scheduled to go over within the next 30 days I believe. They have a contract with us to take 20 aircraft and the Embraer 190s would not be available until I believe the end of this year, and that’s only a couple, so we’re going to work with our Chinese partners. We’ll see exactly how many 50-seaters are required. As I mentioned we do have a contract though for 20 of our aircraft to go over to China.

[Bob Mcadoo:]

So can you take the planes that are coming out of United and send them over there? Is that what’s going on?

[Jonathan G. Ornstein:]

That is basically the concept. I will say that it’s been a little more challenging just because of getting approvals from the lessors. The Chinese government has to approve it, but so far we’ve remained reasonably on schedule in terms of getting aircraft over there. We had hoped to have 12 prior to the Olympics. I think the number probably will be 8 or 9.

[Bob Mcadoo:]

When it comes time to do the 190s, what’s your participation in that next 100? I assume you guys still own your x% of the company. Do you have to come up with any capital to help bring those airplanes on board or are those all kind of being financed by the Brazilian export organization or what?

[Jonathan G. Ornstein:]

There will be a lot of different ways. We have a capital commitment that we’ve made to Kunpeng. We also have the ability to negotiate with the Embraer and are getting more actively involved in that in order to ensure that the deals that the Chinese are doing sort of look like the kind of deal that we would be accustomed to doing so the bank has in fact been willing to finance quite a bit of the three deposit down payments et cetera so again we are working with our Chinese partners. This is frankly why they asked us to be their partners was to help them on the regional jet side and we continue, we want to be involved in that process and make sure that we match the fleet requirements up to the demand in the marketplace.

[Bob Mcadoo:]

One last thing. On the CRJ-900 project for Delta, are they financing those planes and you’re just leasing them from them or are you having to put capital in there or what’s going on with that one?

[Jonathan G. Ornstein:]

We do have to put capital one. It’s $1 a month.

[Bob Mcadoo:]

$1 a month?

[Jonathan G. Ornstein:]

Yes. That one I think we can handle.

[Bob Mcadoo:]

You can do that. Okay. All right. I’ll quit for now.

[Operator:]

Thank you. Our next question comes from Jeff Marcus. Go ahead.

[Jeff Marcus:]

Hey guys, how’s it going. I just have two quick questions. First in regards to your marketable securities balance, I was wondering if you could go into a little detail and actually tell us what makes that up.

[Jonathan G. Ornstein:]

Bill Hoke, our CFO, has asked me if he can call you back when he has the detail in front of him and he’d be happy to go through that with you.

[Jeff Marcus:]

Lastly, can you provide any update in terms of the Aloha Airlines case? Has anything happened in the last quarter on that?

[Jonathan G. Ornstein:]

No, the case has been delayed and it’s my understanding that they’ve asked for a further delay so at this point there’s really no update in terms of the Aloha case.

[Jeff Marcus:]

Thank you very much.

[Operator:]

At this time I show no further participants.

[Jonathan G. Ornstein:]

Again everybody I can appreciate your feelings as you can imagine being nearer ours. We are not particularly pleased, in fact significantly disappointed but we do feel that we have made some changes this quarter We’re going to follow them through with additional changes as we move forward that will get the company back on track. We certainly have something of a setback with this Hawaiian judgment both just in the loss and certainly of the size of the loss, something that I think it’s fair to say was not anticipated by anyone and I think that we clearly need to just as we have focus on operations. We continue to be cash flow positive and we are going to continue to look for opportunities as they come to us. I want to thank everyone for their continued interest and as always please feel free to give us a call if you have any additional questions. With that, I conclude the call. Thank you very much.

[Operator:]

This concludes today’s conference call. Thank you for your attendance and participation. You may disconnect at this time.