MESA - NASDAQ

Welcome and thank you for standing by. [Operator instructions] Today’s call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to turn today’s meeting over to your host, Jonathan Ornstein, Chairman and Chief Executive Officer. Sir, you may begin.

Thank you, sir. First, thanks everyone for joining us on our call today. As the operator indicated, this is Jonathan Ornstein, Chairman and Chief Executive Officer. On the call with me today are Mike Lotz, our President and Chief Financial Officer; Brian Gillman, Executive VP and General Counsel; Brad Rich, our Chief Operating Officer; and Darren

Thanks, Jonathan. Before the presentation and the comments begin, Mesa would like to remind you that some of the statements in response to your questions in this conference call may include forward-looking statements. As such, they are subject to future events and uncertainties that could also affect our actual results to differ materially from those statements. Also please note the company undertakes no obligation to update or revise these forward-looking statements. Any forward-looking statements should be considered in conjunction with the cautionary statements in our press release, the risk factors included in our filings with the SEC, which Mesa encourages you to read. In addition, please refer to the press release in the Investors section of our website to find additional disclosures and reconciliations of non-GAAP financial measures that will be used on today’s call.

Okay. Thank you very much, Brian. Well, I am incredibly pleased to be able to begin our discussion regarding United with a discussion about the deal that in fact is done and we are moving forward. As you know, we are preparing for the delivery of the 20 Embraer 175s, the long-awaited 20 175, which will bring us to a total of 80 Embraer 175s. I believe that will make us the largest operators of that type for United Airlines. We have added 60 of the 175s over the past few years and we believe we are very well positioned and prepared to take on these 20 additional aircraft beginning in May. One thing to note, these aircraft are not incremental. Their introduction will coincide with the removal and the leasing of our CRJ-700 aircraft to another operator. With these 20 aircraft, as I mentioned before, we will be the largest operator of Embraer 175 which we believe is the aircraft of choice within United. We believe Mesa is exceptionally well-positioned given our industry leading cost structure, our outstanding operational performance to take advantage of the future opportunities with the United as they present themselves. We would like to thank the United management for their confidence and trust that has led to their continuing support of Mesa. It truly is greatly appreciated. On the American side, as we have noted in our press release, we have seen significant improvement in our American Eagle operations. We continue to have discussions regarding the extension of our capacity purchase agreement. Given our industry leading cost structure and our current operating performance, we believe our CRJ-900s are very attractive operationally and offer tremendous value in today’s regional airline marketplace. We continue to build significant equity in the CRJ-900 fleet as the debt matures over the next couple of years and do the same in our owned engine that go on these aircraft. On the cargo side, we have talked about the fact that we are looking forward to entering the cargo business. We continue to develop our plan to enter these operations in 2020. We believe cargo represents an important long-term opportunity for the company and significant advancement opportunities for our pilots in particular. We continue to move forward with FAA certification and spent $600,000 this quarter. I would now like to turn the call over to Brad for a more in-depth operational review, which I think you will agree it’s really quite outstanding. I want to appreciate the good work that he has done, along with his team in operations.

Thank you, Jonathan. As far as an update on American is concerned as we’ve previously discussed, our operations were challenged over the summer primarily due to several aircraft unavailable as a result of multiple aircraft damage incidents as some extended heavy maintenance. Since regaining access to the additional aircraft, the controllable completion factor has significantly improved with November and December at 99.7%, January at 99.9%, and February month to-date is at 100%. I would also note that in January, we believe we achieved all of the performance criteria in the American operations. In addition to the available aircraft we have identified, we have identified and are implementing several operational improvement initiatives at American and we are confident that these initiatives will result in continued improved performance. On the United operation, as we pointed out in our press release, we operated at a 99.98% controllable completion factor in the quarter, taking only 6 cancellations out of approximately 34,000 scheduled flights. In the month of November, Mesa led the United Express portfolio in on-time performance both in arrival zero and departure zero, a bit of an update on our pilot situation. We are pleased to report an increase of 84 pilots net of attrition over the past 6 months. We remain confident in our ability to hire, retain and transition the required pilots in order to staff the 20 new E175s, which deliveries begin in May. We also have some good news relative to attrition, which remains lower than we projected for the last several months. We continue to reduce the training footprint and optimized training program by streamlining training processes and procedures as well as implementing additional automation. It’s also worth noting I think that we do have access to the required simulator time to meet our forecasted training events both for new hires, upgrades, recurrent training, and as I mentioned, the transition to the new E175s that are on their way. We have also had success at hiring additional mechanics. However, industry conditions make mechanic hiring and retention more challenging and that is an area of our continued focus. Before I turn the time to Mike, I would like to just express appreciation to all of our employees, our pilots, our flight attendants, our mechanics as well as our headquarter staff and our leadership team. As we mentioned earlier, we have Brad Holt, who I worked with for, oh, gosh, a couple of decades at least has joined the team and we are happy to have him with us and he has been making a positive difference since he arrived. We are also grateful for all of the efforts for the commitment and engagement, dedication of our leadership team and I specifically want to call them out to thank them for their efforts: Cody Thomas, Doug Shockey, Amber Wansten, Kenley Brown, Kevin Wilson, Tyler Campbell, Mike Ferverda, Bob Hornberg and Darren

I could just – I want to do that – add to Brad and thank him, because the turnaround that we have seen has really been outstanding. The operational people have done a great job as you know and it’s not been a secret. There have been challenges in the past, particularly with our American operation. We have always felt that we needed some additional spares. Now that we have those spares, you can see the performance has truly skyrocketed up to the top of the heap and we feel very confident that we continue to perform at those levels. You can’t get much better than 100%, but we are going to do everything we can to try, but I want to thank all the operational people for doing a great job. Thank you.

Okay. Thanks, Jon and thanks Brad. It’s Mike. So for the financial update for Q1 2020, we reported pre-tax income of $14.3 million. This compares to pre-tax income of $25 million for the same quarter last year. The quarter-over-quarter negative variance of 10.7% was all due to the timing of scheduled heavy engine and airframe maintenance. Additionally for the quarter, we reported $3.5 million of income tax expense for net income of $10.8 million or $0.31 per share. And as usual, a quick note on the income tax expense, although we reflect $3.5 million for accounting purposes, we will not pay any cash taxes as we still have in excess of $478 million in NOLs. I would like to touch on the scheduled airframe and engine maintenance for Q1 2020. Our heavy scheduled airframe maintenance came in just around $15 million, which although was higher than last year it was lower than we anticipated. Our guidance that we provided last quarter was around $18 million, some if not all of that expense obviously, will push into Q2 as it was all a result of timing. On pilot expenses, our pilot expense for block hour was down year-over-year by over 3% from a little over $463 a block hour to $451 or 31% to 30% of contract revenue. We are expecting the block hour rates to stay at this level. As we begin to transition from the 700 to the 175 by Q4, we hope to reduce by another 3% down to around a $440 per block hour range due to the increased pilot training efficiencies that we are seeing specifically those that have brought over by Brad Holt. Keep in mind, if we reduce this by 3% from $451 to $440 that equates to almost $5 million a year in reduced operating costs. During the quarter, we spent approximately $600,000 on our cargo operation development and are expected to spend another $2 million over the remainder of 2020. As disclosed in our press release earlier today, we have provided some additional forward-looking guidance for block hours. Our Q1 block hours came in right about where we thought at the midpoint of the guidance or the remainder of the year, our projection to remain the same from what we provided last quarter. On scheduled heavy maintenance, heavy engine and airframe maintenance as I mentioned, Q1 came in lower than previous guidance and we expect those expenses to move to Q2. So we have reflected that in our Q2 guidance. Full year engine and airframe is still under review. We have slightly raised the top end of each of the Q3 and Q4 quarters. On cash and liquidity, we ended the quarter at $57.8 million, total debt on the balance sheet, $807 million, down from $843 million as we paid down $36 million in principal payments during the quarter. For 2020, we do have total scheduled principal payments of slightly over $175 million. For CapEx for 2020 and 2021, as we mentioned on our last call, we will need to finance the new E-175, which will be approximately $450 million, split roughly 50-50 between fiscal year ‘20 and ‘21. We are planning to finance most, if not all, the purchase price of the E-175s. Additionally, for 2020 and 2021, we purchased and plan to take delivery of 22 engines to support the leased CRJ-700s and the CRJ-900 fleet at American. We expect to finance approximately $120 million again, split roughly 50-50 per year between fiscal year ‘20 and ‘21 and again, we are expecting to finance most if not all, of the purchase price. On the refinancing side, as a result of our new United CPA, we will lease 20 of our CRJ-700s to another operator for a seven-year term. This will allow us to potentially finance 5 unencumbered CRJ-700 and refinance the other 13 700s over an extended period of time at lower rates and we are still evaluating which alternative would be best for us. I would like to turn now back over to Jonathan.

Thank you, Mike. At this point, we would be happy to open up to any questions that anyone might have. There is a lot going on, a lot of moving pieces, but we will do the best we can to give you a good answer.

[Operator instructions] My first question comes from Savi Syth. Your line is open.

Hey, good afternoon. Just congrats on moving the American performance in the right direction there. I know it’s still early days, but just wondering, is this the right number of kind of spare whitetail aircraft for that or do you kind of expect to be able to do that with less as you kind of get a handle on that? And somewhat tied to that when do you start the discussions or when do you need to kind of complete the discussions with American on some of the 2020 aircraft that are coming off contract?

Okay. You know, it’s interesting. I will let Brad answer the question regarding the number of spares, because I think for the first time in history, Brad, representing the operational piece and me the financial piece may have a different set of opinion which might surprise you, but Brad, why don’t you start and what’s your view on the spares at this point?

Well, first of all, answer that by saying the majority of the improvement that we have seen actually has occurred even though by I guess by agreement we should have eight spares operating right now. Through all of this improvement period, we have never had that many spare aircraft available. And then most of the time, it’s been with four or maybe five or less of the airplanes. So look, honestly, I don’t think we need a full complement of eight spares to run the operation. And in fact, we have achieved it without that many spares.

Right. And the difference is that I think it’s the first time where the operational person says we don’t need that many spares and myself being on the other side say, now I’ll keep all the spares we need, I don’t care, but just make sure we hit 100% every month. So we will see where we come out, but I actually all kidding aside, agree with Brad that for a long time we had only three spares. And the problem with three spares when you have two hubs and 14-year-old aircraft, three was clearly not the right answer, and that was as you know a point of discussion for literally many years with American. I don’t know if eight is the right number either, but somewhere in the middle, I think we will find a good number. And frankly, if we are going to make a mistake, I will tell you without a doubt, that we will make the mistake by being long, maybe an extra one, but not short one, because we don’t want to be in a position like we were last summer and literally flying with no spares. So, I think that’s the answer on the spares. In terms of the American contract, let me just say we are always in discussion with our partners on potential contract extension. I mean it’s literally non-stop. We believe the aircraft remained very attractive from both an operational as you can tell. We are running north of 99.7% for the last few months, 100% this month. Operationally, the planes are great. And from a cost perspective, I think that we continue to believe that our CRJ-900s are the lowest cost regional jet, large regional jet in service today. However, that being said, as many of you are aware, it’s particularly in light of for example our United conversations that lasted far longer than we anticipated. These discussions are often complicated and protracted. That being said, we think that these are good aircraft and they have a strong position within the regional jet marketplace. In addition as you know, Bombardier has exited the business. So supply right now continues to be tight across all the fronts on these large regional jets. I also would like to add which is something that a lot of folks may not put as much emphasis on, but I can tell you we do on a day-to-day basis we have a very highly motivated group of pilots, maintenance people, flight attendants, dispatchers. And these are people who have all become always – they have always been valuable, but now become even more valuable as supply has tightened across the industry for all of these folks and we are very pleased at Mesa that we are able to attract or retain people. We are delighted that to see our attrition levels decline and we think that in itself presents an incredibly valuable asset to our partners.

I appreciate all that color. Just before I kind of hop on the queue, just a clarification on the guidance. I know the kind of the block hour and maintenance is provided, but EPS was initially provided in this update, I was wondering if you were kind of reiterating what you provided last time or there is a change to that?

We don’t have any changes to that and we are not putting anything out in the press release.

Alright. Sounds good. Thank you.

Thank you. And our next question comes from Helane Becker, Cowen. Your line is open.

Thanks very much, operator. Hi, everybody, and thank you for the time. Just two questions. So, just so I understand this, Mike, on the maintenance costs, that year-over-year increase will be as great going forward. Is that $58 million the new run rate, or does it fall from there?

That’s just for 2020. We have not put anything out for 2021. Again, our initial look at 2021, it looks more like 2019 than 2020. But we haven’t put anything out yet until we kind of decide how much is going to hit this year and how much we could push into next year.

Okay, got it. Thank you. And then my other question is with respect to the attrition. I think that’s great that people are coming and that you are retaining pilots. But how much do you think is that because the major airlines slowed some of their hiring because of the MAX being on the ground, and how much is just your ability to attract and retain?

So, Helane, look, I think you are spot on that a lot of this probably is to do with what is going on with the MAX. How long that continues, I mean I know we could have a good debate about that, but it looks like it will go on for at least some time here into the future. And as long as it does, we think it will probably lend itself to these similar type attrition rates. And if it does, we feel really good about our position.

Right. Got it, okay.

This is Mike. Also, if I could add, if and when it does come back, it looks like it is going to be a slow process to come back. It’ll be something that will happen in three months.

Right. No, I don’t necessarily disagree. I just want to make sure that your ability to retain pilots, I guess, continues even after the MAX comes back.

Yes, I think I would agree. We have to keep an eye on what goes on when the MAX comes back, but we really saw the drop in attrition when we instituted the flow-through agreement with United. That really had a big impact, and it really pulled attrition there.

Okay, alright. Well, thank you, guys. I appreciate the color.

Thank you. Our next question comes from Michael Linenberg. Your line is open.

Hey, guys. This is Koosh Patel on for Mike. Just one here, we saw the order for the SpaceJet last year, can you just walk us through the thinking and rationale behind that transaction?

Sure. I mean, on that order, I mean, basically, that was done just to give us a position in the book. We do think at some point in time, while we love the CRJs and we’re the launch customer for the CRJ, they are 14 years old. And assuming this jet is available five, six, seven years out I think we felt it was a good hedge in terms of providing us with an opportunity to re-fleet. There is only one aircraft in the marketplace right now, which is the Embraer 175. And I think just on that basis, I think having one other supplier in the marketplace is probably not a bad thing.

Okay, great. Thank you.

Thank you. Our next question comes from Joseph DeNardi of Stifel. Your line is open.

Yes, thanks. Good evening. Mike, just on the fleet count guidance, is that just assuming kind of into next year, like assuming the status quo, or do you actually have those aircraft under contract? Just trying to reconcile, I think one of your competitors announced some additional aircraft with American. I want to make sure that those aren’t coming from you when you would have maybe better visibility on what the fleet actually will be? Thanks.

Well, I mean, look, the fleet plan that we put out in the press release, I believe, just goes through Q4, and those aircraft are all under CPA. And as Jonathan mentioned, we are in discussions with American about potential extension.

Okay. Yes, I was just referring to the – you have a fleet forecast out through September of 2021. Does that just assume the status quo or some of those other aircraft actually under contract?

It is extended in the status quo.

We do have a follow-up question from Savi Syth. Your line is open.

Hey, thanks. Just on the cargo side, I know you said you are kind of moving forward with that, but just curious if you have kind of an update on – if you still plan on starting early of the next fiscal year. And also, I saw that Sun Country did an agreement with Amazon is kind of seeing that – if that kind of changes your kind of view on the opportunity at all or you kind of view on your positioning?

No. I mean, I think that our plan would be to implement this prior to the end of the fiscal year. The Sun Country announcement actually encourages us because we see and now feel even more confident that there is room for new entrants, and we believe that while we have tremendous respect for Sun Country, our good friend, Mr. Siegel is Chairman over there, we think that Mesa has a superior cost structure and as a result, we can offer those same services at a discount to other operators.

And is the aircraft something that you secure or the cargo operator or the cargo partner secures or just kind of curious with the MAX is a sufficient aircraft out there.

The type of transaction that we are looking at is one where we would operate aircraft on behalf of cargo operation, and the aircraft would be provided to us.

Alright, appreciate the color. Thanks.

Sure.

And I am showing no further questions in queue at this time.

Alright. Well, again, everyone, thank you very much for taking the time. We continue to plug away here. It is something we get up every day and constantly work on. Our operational people have done a terrific job. I know that Mike and Brian and Brad and I continue to look at other opportunities and, right now, focusing both on United and American, where we think there is a tremendous opportunity at both carriers. And again, we would like to leverage our cost structure and the type of aircraft we operate to continue to grow our business profitably. So, thank you very much for your interest and we look forward to talking to you on our next quarterly call. Bye-bye.