Q4 2019 Earnings Call
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Thank you operator.
Thank you everybody for joining us on the call today after hours we greatly appreciate your interest as the operator indicated this is John annoyed, saying I'm, the chairman and Chief Executive Officer Mace Airlines on the call with me today will be Mike lots, our president and Chief Financial Officer, Brian Gilman, Our executive VP and General Counsel Darrin.
Happy our Vice President Finance, Unfortunately, Brad Rich, our Chief operating officer is unable to join us.
As he had to be on a flight to attend is daughters College graduation.
Okay with that I'd like to ask Brian too wide open up was our forward looking statement. Thanks, Jonathan before the presentation any comments began making we'd like to remind you that some of the statements in response to your questions. At this conference call May include forward looking statement.
They are subject to future events and uncertainties that could also affect our 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 risk factors included in our filings with the FTC, which makes it encourages you to read.
Please refer to our press release in Investor section Maces website to find additional disclosure and reconciliations of non-GAAP financial measures that will be used.
Okay. Thank you Brian .
Well.
I think it's important that we start and giving you United update.
We certainly are pleased to have our new capacity for excuse me and put into place.
We know it took a lot longer than any of us anticipate.
We would like to thing United.
It was a complicated transaction, but we believe it was well worth the wait.
I am delighted not to have to tell you, it's going to be into more weeks.
We have 20, new Embraer 175 aircraft for a 12 year term. These aircraft will be owned by Mesa.
In addition, we extended the term of 42, United owned 170 fives.
We believe the contract will give us improve profitability and reliability on the new Embraer 170 fives.
In addition, we agreed to lease our Crj seven hundreds for a period of seven years to another operator.
We believe this is significantly lower risk and equal or potentially higher margins on leases versus actually operating the crj seven hundreds in the Crj 550 configuration.
Mesa will be the largest operator, MBR, what 75 for United at 80 aircraft.
We greatly appreciate their confidence in us.
We will be a single fleet type Friday night operations, making us a more attractive growth vehicle.
We believe the new contract is a strong vote of confidence from United.
[noise] on American.
As you know there have been a lot of moving pieces on the American fleet spares damage aircraft for moved aircraft et cetera. So first I'd like to recap exactly where we are on the American fleet.
We began was 64 aircraft in our C. P eight.
On April one 2019, we voluntarily agreed to remove two aircraft splitting the cost with American.
On November 2nd 2019, two additional aircraft were removed under the terms of our amended SCPA.
On January 2021, additional aircraft will be removed under the terms of the amended C. P. Eight.
So in January 2020, we will at 59 aircraft under our C.P.J.
Of which three or operational spares, and we love five unassigned aircraft.
What important item to note.
Even after these fleet changes our block hour estimates for 2020 or in line with 2019.
Lightly lowered American and slate, we hire at United.
Additionally, American has the right to move up to a maximum of three more aircraft based on operational performance.
I'm going to go further into operational performance in a minute, but we have.
Seen significant operational improvements since November 2nd.
Coinciding with the access to additional aircraft.
I'd like to take a moment not to update you on our efforts.
In cargo.
We continue to remain optimistic on entering into the cargo business in 2020.
We believe cargo represents a significant long term growth opportunity.
Given the nature of our current business.
And our cost structure makes is particularly well suited to enter the H.C.M.I. or CMO like cargo business.
We believe one of the benefits is that it's no conflict with our existing business. In fact, we believe the opportunity to fly larger gauge aircraft will improve our ability to both recruit and retain pilots, which is of critical importance to our major airline partners.
Other industry opportunities as we look into 2020 include the following.
Scope relief that United well. This has been long discussed we believe that United is probably best position to achieve scope really.
We also are looking at a potential opportunity to down gauges American crj nine hundreds to 65 seats and to potentially provide some of the backfill with larger regional Jets. We believe the Crj nine hundreds operated by Mesa are probably the best option for 65 seat aircraft.
We have a very enthusiastic energized and highly efficient workforce ready to take on additional opportunities.
Unfortunately, Brad is not here. He is he wants me to said in his apologies obviously has an important personal issue matter a with a daughter, which is a very good thing so I'm going to touch on some of the operational issues as well.
Most importantly, we can start with American update.
While we have recently experienced significant improvement as I mentioned.
We mentioned in the press release, our fourth quarter American performance still did not meet our expectations.
The primary reason can be attributed to the continued lack of available spares through the quarter due to extended heavy checks and multiple aircraft ground damage of is.
On a positive note however, since gaining access to additional aircraft, although not our full complement.
In November controllable completion factor was 99.7%.
And for the first 10 days of December we have not had a single controllable cancel.
Since joining Mesa, Brad rich and our new senior VP of operations, Brad Holt has worked closely with American and they've Institute a number of initiatives that we believe will allow us to continue to see these improved results.
[noise] United update.
Since October one our United Express Operation has produced an outstanding 99.99% controllable completion factor and in the month of the member makes a led all you know I express operators in on time performance again I'd like to thank all of our people for doing a truly remarkable job a bolt.
Trucking and United side of our business.
Other operational items of importance. We are pleased to report an increase of 119 life pilots year over year, we remain confident in our ability to both higher retain require pilots in order to produce the utilization and reliability expected by our partners.
We have significantly improved our pilot training footprint and substantially reduced our training backlog over the last 90 days.
We've also had success hiring additional mechanics to support the operation, which has become more challenging art mechanic headcount has increased by 66, almost 23% year over year.
However, it's important to note that industry conditions make mechanic high retention more challenging at an area of continued focus.
In the area maintenance.
We had issues with a heavy maintenance vendor, which we discussed on last quarter call and we had some six subsequently replaced the vendor with alternative providers.
I'd like to now turn it over to Mike lots to walk through our financial performance.
Thanks, Jonathan for the fourth quarter reported pretax income of 17.1 million. This compares to pre tax income of 26.6 for the same quarter last year.
Quarter over quarter variances due primarily to the timing of scheduled heavy maintenance and airframe maintenance of approximately $9 million.
Additionally for the quarter, we reported 4.8 million of income tax expense for net income of 12.2 million 35 cents per share.
Excluding special items, our adjusted net income was 12.7 million 36 cents per share I'd also like went out does Jonathan touched on cargo during the quarter. We did we get invest and expense about a million dollars in the cargo operation. Excluding this cargo expense we would have been.
At around 38 cents per share.
Just a quick note also on our income tax expense, although we do reflect income tax expense of 4.8 million for accounting purposes, we will not pay any cash taxes, as we still have a significant $475 million and or anywhere else.
Oh for 2019 overall, we showed significant improvement over 2018 year over year, we saw improvements in virtually every area. Adjusted pretax income was up 78% from 43 to 76 million adjusted EBITDA was up 27% adjusted EBITDAR was up 12%.
Block hours were up 12% on essentially the same fleet by increasing the utilization of the aircraft contract revenue was up 7% 43.5 million up from 639 million last year pre tax margins increased five points from 6% to 11%.
Rent was reduced by $16 million, which was offset by depreciation of approximately $13 million as a result of mine 10 aircraft, which we had previously leased.
Interest was down $4 million as we refinanced high cost debt and read repaid our secured credit credit facility.
Pilot expenses were down per block hour, a little over 9% from $509 a block hour down to 462 and as a percentage of contract revenue from 33% to 31%. We expect we expect we are expecting the block hour rate to stay at this level until Q4 2020 getting down to around.
$440 range or another five present and that will be primarily driven by pilot training efficiencies.
And so as I previously pointed out we invested approximately $1 billion in potential copper operations, which was expense in Q4, and we will continue to see I in 2020. So all in all given some of the operational challenges that were clearly outside of our control. We believe we work through these issues reasonably well.
Oh and minimize the impact on profitability.
As we this as we disclosed in our press release earlier today, we have provided some engine. Some additional forward looking guidance earnings per share for 2020.
Looking at a range of one dollar and 50 to $1.80 or <unk> per share and a 2021 from 190 to $2.30.
For block hours were expecting 2020 block hours should be about the same as 2019 and again, that's with a less aircraft than we had a in in 2019.
Scheduled heavy engine and airframe maintenance 2020 guidance that we provided will be $8 million to $10 million higher than 2019, and we've also provided this information on a quarter by quarter basis.
So overall at a high level for 2020, it's going to be slightly better than 2019.
In our 2020 estimates leaves included roughly $3 million of additional expenses related to the cargo operation and almost $5 million, which will be associated with transitioning pilots from the crj seven hundreds city you 175 that number obviously will be dependent upon how many pilots transfer.
Between the fleets combined these investments.
Represent almost 17 cents per share or for 2020.
On the cash and liquidity side, we ended the quarter with 68.8 million in cash total debt on the balance sheet at year end was 843 million, that's primarily aircraft and engine dead about 750, an aircraft and around 90 million an engine that's down 72 million for the 915 million as of Sept.
Number 2018.
During the year, we paid $156 million in principle payments, which was off offset by $70 million in debt that we added with the aircraft lease buyout and $11 million a spare engine financings.
For 2020, we have scheduled principal payments of $175 million.
Capex for 2020 and 2022, we'll obviously include the 20, new Eone hundred 70, fives for United that will be approximately $420 million to $470 million that will be split probably 50 50 between 2020 and 2021 and we were planning to finance most if not all of the purchase price.
Additionally for 2020 and 2021, we plan to purchase 20 to 25 engines to support the lease Crj seven hundreds into Crj 900 fleet at American this would be approximately $100 million split roughly 50 50 per year between 2020 and 2021 on the engines, we are planning to finance, 100% as the purchase.
With we have done in the past.
On the financing refinancing side as a result of our new United SCPA, We released 20 Crj seven hundreds to another operator for seven years. This will allow us the potential to finance five unencumbered crj aircraft and refinance the other 13 crj seven height ramp over an extended period of time at lower rates.
Yes.
Lastly on cash we still have our and our secured credit facility at $35 million, which was extended through 2022 and is currently untapped I'd like to turn that now back over to Jonathan.
Okay, Mike. Thank you for the financial round up and at this point operator, we'd be happy to field any questions that come from any listeners.
Thank you.
We'll now begin.
Yes.
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First question.
<unk>.
Yeah.
Excuse me our first question gains from the line.
Michael.
Michael Your line is now open you may begin.
Hi, This is Keith.
I was just wondering if you could maybe go into little bit more detail. Please about like some of that drivers underlying or 2021 side you know block hour grows the new cargo business any of that thank you.
Well.
Let's start with cargo.
To clarify.
Mike talked a little bit about the fact that we'd have additional investment in the cargo business. These are pre operating startup expenses and then some training expense as we begin to train more pilots to take on all of the aircraft.
We expect that to be approximately $3 million for the year, but that's one potential driver.
On the block hours.
Basically we have an estimate based on past and you know we've spoken with our partners about what our capabilities are what their expectations are and I think the block hour number I think at this point, we're getting pretty good at being able to a project going forward.
In terms of some of the other numbers again, the big variable always is maintenance for us.
That's something again, we have decent visibility, there's often some issues regarding timing, but we think.
You know this is this is one area, where I because as I said has the biggest impact on our quarterly earnings did you want to add anything like no. So and also for 2021, you know where we are expecting that our Ah Ah transition will finish up in the early.
First quarter of 2021, most of that will be behind us. So I think you'll see a pretty big benefit from our flight operations expenses, we I'm kind of normalize for not having any growth that's given given the assumption. We don't have any additional growth. We now in 2021, yeah. There's there's a.
Fair amount of certainty that the newer aircraft will provide us with higher levels of profitability, you know coming out of older aircraft and into new aircraft, which will be covered under warranty for at least the first four year period. So that is you know some of the reasons why we feel confident.
And in terms, how things continue to improve and into 2020 and 2021.
Alright, Thank you very much.
Thank you.
[noise] are.
Our next speaker is came from the line of Bobby.
Well I'll be your line.
Yeah.
Maybe that was for solving real they're going around those Matt for Savi.
Yeah, Hey, Hey, Matt Sharpe, Hey, there yoga and factoring in.
First congrats on the United deal that was great to see.
I is moving along now from that could you talk little bit about any of the maintenance your expectations moving into a 2021 I know you guys went up by quarter for 2020 with maybe some of the puts and takes beyond that.
Yeah, I mean, we right now we don't have that much visibility into the 2021 timings. That's why we havent any provided any quarterly guidance, but we expect 2021 to be pretty consistent quarter over quarter.
Uh huh.
In regards to the I'm missing transitioning to Crj seven hundreds you when 70 fives you all have maintained your your pilot hiring and training and pretty high levels for longer than previously anticipated based on prior calls I'm. So how does that really helps with the transition of the crj seven hundreds to that you.
On 75.
Okay. So I think you know what are the things.
That we have found to be very important it I'll go back in history, a little bit well, we began the Embraer 175 program. We knew how important this was United and you know we over hired pretty significantly obviously times have changed a little bit so it's become more difficult but.
We knew that what we moved the seven hundreds over some of the pilots will choose to stay which would be helpful are the American side for sure.
That we will have more.
Crj qualified pilots.
And in order to prepare for the backfill we'd be gotten hiring and we do have you know not a huge access but we do have a certain number of surplus inkjet pilots to help when that backfill occurs because all those numbers are those those claims are coming in pretty quickly you know two and three a month.
And so we just need to be prepared the biggest piece of it is we really want to continue to demonstrate to United that we can operate at the levels that they expect because we feel that they are in fact will be future growth.
Whether that's coming from scope relief or contracts that come due you know we think we are extremely well positioned moving forward and you know one of the points I'd like to make and why we're well positioned you'll make says reputation for low costs I think that it's important to.
Note that a big reason why we have low cost is because we have been growing consistently over the last six or seven years and our workforce compared to other regional Airlines is in fact junior.
You know a lot of our employees are one two and three or employees and because you know you're in the industry, where wages are based on seen yardi. Two large degree we have a built in benefit that I think it will be difficult if not impossible for another care to catch us in terms of cost given the level of you know what we called June Yardi.
May so right now.
Okay, certainly appreciate Oh, Oh, the extra detail there and that's a good thing and you can another one and I'm talking about you married on the American side now you certainly made a lot of good leadership hires.
This year. So could you talk about some of the changes you've made specifically the results you've seen from those changes and how you feel about it going forward and then in that regard are there any key measurement dates around that that American deal, where we can you know see if it either the a the curve.
And strategy is succeeding or just kind of when it when the benchmarks are for those parents.
Sure well you know there's been a number of things that we've done not the least of which is then to.
Get our spare count to a level that we think we need given the age of our fleet I mean, our average aircraft in the American.
Fleet is almost 14 years old right now so you know what we signed the original contract. We had three spares you know three spares probably fine one for every 20, but with the police getting older. I think we both American ourselves came to conclude that what's best for us of additional spares, we see the benefit of that and again, we've never had the opportunity there.
Operate with the full complement of spares.
Since some of these aircraft came out.
Because the ground damage in these extended C checks, but we can already see what we think are pretty good results in terms of completion rate.
We're now focusing also on time performance. We should think we'll also be helped significantly the spares commit one of the big areas that we spent a I've done a lot on I've been in maintenance staffing, where we have in fact increase make the staffing as we mentioned in the call almost 23% a large part of that went into the American.
Staffing, we also had the benefit now which is something new.
But having a hangar in Dallas in our hub, which is something we had wanted a you know literally since we started operating there and you know we are very portion we were able to find a facility to do that we think that we'll have a big benefit we've been able to further staff and and build up our other maintenance base in Texas in El Paso.
She has been very successful so all these things I think you're going to in order to our benefit over time.
And the greatest of which being the additional spare aircraft for sure.
The other piece of that as part of our agreement with American they understood our requirements in terms of maintenance touch time, and the number of aircraft that come into maintenance, so that doesn't fluctuate as much as it has in the past all those things. We think are beneficial and you know the very fact, when you're talking about over 300 departures.
Hey that you know and nothing you know sense. This last month I know, it's only 11 day, but we haven't had a cancel and last month again, we ran nine I'd point I think 7% that's the best level in quite some time. So I think we're already beginning to see the benefit of some of those initiatives.
That we worked so hard and been actually been very helpful. As that American has been involved along the way. So I think all those things will start to you'll see this continued level of performance.
I'm so thank you.
Thank you.
I'm sorry.
Sure.
No worries.
[noise] [noise] excuse me.
Please allow me.
The next spring.
Thank you. Our next question came from the line of Cantor Kenner you may begin.
Hi, everybody. This is kind of coming in from Cowen how are you.
Hey, how are you good I'm just I'm on the leased aircraft can just give a little color on economics, I know you talked about them potentially being a little bit better just curious if you give any color. There and also is this like a line item, where you would expect to have further growth.
Over the next couple of years like could we potentially see you guys going out there and being a bigger dry lesser on on.
On the regional side. Thank you.
Okay.
On the seven hundreds which would in fact.
For United's purposes, where they're down gauging those aircraft to 50 seats and being able to put first class. The 20. We have are the only 20 aircraft that would be suitable for that program. The crj nine hundreds. Besides the fact they are in service with American there too heavy to be put into that program.
In terms of or the relative profitability as you can imagine you know in order to fly the five Fiftys is 50 seat United needed to see some fairly significant reduction in the expense associated with those aircraft in terms of their operation. It was our view that the lease terms for the aircrafts.
Would be more attractive to us ultimately and significantly less risk in terms of operation, particularly given the 20 additional aircraft on the E Jets on the pilot side that we just we're better off <unk> leasing. The aircraft you do you know as we mentioned there are five aircraft that we currently have that are unencumbered.
And that number the aircraft will in fact get paid off over time, making that transaction, even more attractive I think that you know in terms of the overall financials, a large part will depend on our ability to reply to do engine overhauls and how that works, but again.
Having been the first in the shoot.
In regards to these big engines on the larger regional jets as the large customer for the Crj 900, I think we have a very good handle what our expenses are going to be and we feel confident that the lease transaction will in fact, the a better transaction that operating the aircraft on our own in the 50 seat configuration.
Okay, but it's not a you don't.
Oh, sorry, God knows I in terms of the other aircraft.
We have withdrawn of a number of aircraft out of the American system.
At this point our plan is to leave as much spares. One other thing that this brings up the point out is we are paying down a significant amount of debt.
We have some of those aircraft by the time on the American transaction is completed as they miss that even assuming extension, but we're going to own outright or nearly outright a big bulk of those aircraft I believe 49, and the last Crj nine hundreds traded in the marketplace for us.
Pretty significant amount of money anywhere from $678 million, some even traded higher than that some of those aircraft were just parted out. So we do think that we are creating a fairly significant amount of value.
In the aircraft overtime as we as we continue to pay down the debt associated with those aircraft.
Okay, and then I think you mentioned just the potential for de seeding the nine hundreds for American just curious on.
And how that conversation started and then.
What a potential timeline might be for a decision to be made there is it just is it.
Central like three year thing or is it more more more near term than that thanks again no.
You know American has had a it has a tremendous advantage in that they have the ability to fly 65 seat aircraft and not count against their larger aircraft count for scope purposes. Its just at this point is a discussion we think that it it's potentially something that may.
Sense for both parties and we'll just see how that goes as we move forward and something certainly that we're cognizant of it I know American is but as of now theres no. It by anyway any stretch any firm decisions one way or the other.
Great. Thank you.
Sure.
Thank you Ken or.
Our next line is gain from the line of savvy savvy you may begin.
Hey, Matt again, a fair figured I'd sneak one more in.
I'm looking out again into 2021.
Do you have any color on how the block excuse me in Black operations are flight operations for block hour a would perform moving into 21. It seems like the fleet count would be kind of steady, but just on how you. How you think about right now.
Yeah. This is Mike so.
You just take a quick look at it.
Yeah, So like I said in the a in my outline it it's going to in 2020 looking at it going down.
You know before.
20 range for so there's going to be for 48 for mid forties in 2020, It will go down another 5% and 2021.
Great. Thanks for clarification.
Sure.
Thank you savvy.
Okay. Thanks, Yes, we don't have any question. Thank you.
Okay.
All right well again folks we certainly appreciate you're interested in Mesa.
We're very pleased about the United deal, which finally has happened.
We continue to be optimistic in terms of our operating performance at American which has been a tremendous tremendous focus at at the company.
We do look forward to launching cargo operations.
The second half of 2020.
And we continue to look at various financial transactions that will help us lower interest expense extend our maturities held cash flow and just overall benefit the company I'd like to take one second is always a thank all of our people. We have a just a great group of employees, who have just done a fabulous job.
It's really I think the only reason why Mesa is where it is today is that we're all you know rowing in the same both in the same direction and I just want to thank not only all our line employees, but as well as our pilot Union leadership, our flight attendant you will leadership they have been just a very good to work with.
And have made all of as possible. So again. Thank you for your support and your interest if you have any additional questions. Please feel free to call. It.
Available anytime thank you.
Oh, Thanks, a lot more participant who chose <unk>. It's Scott it's came from the line of good luck.
Okay.
Oh I'm sorry.
I got disconnected.
Maybe you can <unk> he is.
Okay No problem I. Thank you operator.
You're welcome.
Yeah.
Is there anything else that Q1, thank you.
All right.
That concludes today's conference. Thank you. Thank you all for participating you may now disconnect.