Q1 2020 Earnings Call
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Let's turn today's meeting over to your hosts Johnson, <unk>, Chairman and Chief Executive Officer, Sir you may begin.
Thank you Sir our first thanks, everybody for joining us on our call today as the operator indicated this is John its North Sea, Chairman and Chief Executive Officer on the call with me today or Mike Watch, our President and Chief Financial Officer, Brian Gilman Executive VP and General Counsel right Rich, our Chief operating Officer, Dan Jaffee, Our Vice President Finance.
I would like to ask Brian to read the Safe Harbor statement. Thanks, Jonathan before the presentation and the comments again I would like to remind you that some of the.
Response to your questions in this conference call.
Forward looking statements.
Yes, they are subject to future events.
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.
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 FCC, which makes encourage you to read. In addition, please refer to on the press release in Investor section of our website to find additional disclosures and reconciliations of non-GAAP financial measure.
Today's call.
Okay. Thank you very much right well I'm incredibly pleased to be able to begin our discussion regarding United with a.
Discussion about the deal that in fact, it's done and we are moving forward.
As you know we are preparing for the delivery of the 20 Embraer 170 fives.
The long awaited 20, 175, which will bring us to a total of 80 number 170 fives.
I believe that will make us the largest operators or that type for United Airlines.
We have added 60, the 170 fives over the past few years, we believe we're 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 November 175, which we believe is the airline crafting choice.
Then United.
We believe bases exceptionally well positioned given our industry leading cost structure.
Our outstanding operational performance to take advantage of the future opportunities with United as they present themselves. We would like to thank you and I imagine for their confidence and trust has led to that continuing supportive Mesa. It truly is greatly appreciate it.
On the American side, we liked and as we've noted in our press release, we've seen significant improvement in our American Eagle operations. We continue discussions regarding the extension of our capacity purchase agreement.
In our industry, leading cost structure and our current operating performance. We believe our crj nine hundreds 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 a debt matures over the next couple of years and do the same in our owned Aero engine.
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 ebay certification and spent $600000 this quarter.
I'd now like to turn the call over to Brad for a more in depth operational overview, which I think you will agree.
It's really quite outstanding I want to appreciate the good work that he's done along with his team in operations.
Thank you Jonathan.
As far as an update on American is concerned as we previously discussed our operations were challenged over the summer primarily due to several aircraft available as a result at multiple aircraft damage incidents and some extended heavy maintenance.
Since re gaining 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'd also note that in January we believe we achieved all the performance criteria in the American operations.
In addition to the available aircraft. We have identified we have identified are implementing several operational improvement initiatives at American and we're 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.
Percent controllable completion factor in the quarter, taking only six cancellations out of approximately 34000 scheduled flight.
In the month November Mesa led the United Express [laughter] and on time performance both in arrivals.
And departure zero.
Uh huh.
Update on our pilot situation that we're pleased to report an increase of 84 pilots net of attrition over the past six months, we remain confident in our ability to hire retain and transition the required pilots in order to staff that 20, New you won seven fives, 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 trading footprint and optimized training program by streamline 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 forecasts and training events, both for new hires upgrade recurrent training and as I mentioned the transition to the new.
He wants to seven fives that are on their way.
We've also had a 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'd like to just express appreciation to all of our employees.
Our pilots are flight attendants our mechanics.
Well as our headquarter staff and our leadership team.
As we mentioned earlier we have.
Brad Holt.
Well I worked with four Oh gosh, a couple of decades at least as join the team and we're happy to have him with us and he's been making a positive difference since he arrived a were also grateful for all the efforts for the commitment and engagement dedication of our leadership team and I specifically Wanda.
Called them out.
Thank them for their efforts Cody Thomas Doug Shockey MBR. Once then can lean brown, Kevin Wilson kind or Campbell might forbid to Bob Hornburg and Darrin Safi.
We're just very appreciative for all of their efforts.
We've had a lot going on in some realigned assignments and some continued leadership changes and I'm grateful for their engagement.
We're also grateful to have the addition of caught Wilkinson.
Who is joining the team full time again, Brad Holt night work taught for many decades his expertise in maintenance and and sourcing and we're grateful to have him.
New member of the team.
With that.
I will turn the time to might to review our financial performance. So I can just I want to do that add to Brad and thank him because the turnaround that we've 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've always felt that we needed some additional spares.
Now that we have those barriers you can see the performance is truly skyrocketed up to the top of the heat and we feel very confident that we continue to perform at those levels you can't get much better than a 100%, but where are you do everything we can do to truck, but I want to thank all the operational people for doing a great job. Thank you.
Okay. Thanks, Jami, Thanks, Brad as Mike So for the financial update for Q1 2020 reported pretax income of 14.3 million. This compares to pretax income of 20 mile 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 air frame it.
Maintenance. Additionally for the quarter reported 3.5 million of income tax expense for net income of 10.8 million or 31 Centsper share.
And as usual our quick note on the income tax expense, although 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.
And our wells.
I'd like to touch on the schedule airframe and engine maintenance for Q1 2020 are heavy scheduled airframe maintenance came in just around $15 million, which although it was higher than last year was lower than we anticipated our guidance that we provided last quarter was around 18 million. Some if not all that expense obviously, we'll push into Q2 as it was all.
So a result of mining.
On pilot expenses, our pilot expense for block hour was down year over year by over 3% from 400 and little over $463 a block hour for 51 or 31% 30% of contract revenue, we're expecting the block hour rate stay at this level I should begin to transition from the 700 to the ones.
75 by Q4, we hope to reduce by another 3%.
Down to around the $440 per block hour range due to the increase pilot training efficiencies that we're seeing specifically those that are drugs for right over by Brad.
Keep in mind, if we reduced by 3% from 451 to 440 that if waste almost $505 million a year in a reduced operating costs.
During the quarter, we spent approximately 600000 on our cargo operation development are expected to spend another $2 million over the remainder of 2020.
As are disclosed in our press release earlier today, we have provided some additional forward looking guidance for block hours. Our Q1 block hours gave me right about where we thought at the midpoint of the guidance for the remainder of year our projection to remain the same remains the same that we provide and what we provided last quarter on schedule heavy maintenance heavy engineer.
Every maintenance as I mentioned that Q1 came in lower than previous guidance and we expect those expenses and move to Q twos that we have reflected that.
You know to Q2 guidance, who your engine airframe is still in the review you slightly raised the top end of each of the Q3 Q4 quarters.
On cash and liquidity, we ended the quarter. Its 57.8 million total debt on the balance sheet 807 million down from 843 million as we paid down 36 million principal payments during the quarter for 2020, we do have a schedule total scheduled principal payments of slightly over $175 million.
For Capex for 2020, and 2021 as we mentioned on our last call or will lead to finance the new Eone hundred 70, fives, which will be approximately 450 million split roughly 50 50 between fiscal year 20, and 21, we plan to finance most if not all the purchase price of the 170 Fives addition.
Lease for 2020, and 2021, we purchased and plan to take delivery of 22 engines to support the lease Crj seven hundreds and the Crj 900 fleet at American.
We expect to finance approximately 120 million against split roughly 50 50 per year between fiscal year, 20, and 21 and again, we're expecting to fund is most if not all of the purchase price on the renamed refinancing side as a result of our new.
We will lease 20 of our Crj seven hundreds to another operator for a seven year term. This will allow us to potentially finance five unencumbered crj seven hundreds and refinance the other 13 seven hundreds over an extended period of time at lower rates and we're still evaluating we filter.
And it would be best for us.
Turning now back over the Jonathan.
[noise]. Thank you Mike.
At this point, we'd be happy to open up to any questions that anyone who might have you know there's lot going on a lot of moving pieces, but we'll do the best weekend to give you a good answer.
As a quick reminder, if you'd like to ask a question. Please press Star then one remember to on mute your phone and records and include <unk>. If you like to withdraw that course, either press star too.
First question comes from sub Besides your line is open.
Good afternoon.
Hey, congrats on on moving the American.
And then right direction there.
I know, it's still early days, but just wondering if that's the right number.
Kind of spare a white tail aircraft for that or do you connect stack.
To be able to do that with less than you can I get it handle on that.
Somewhat tied to that when you started the discussions or when do you need to kind of complete the discussions as American on some of the 2020 aircrafts that are coming off contract.
Okay.
It's interesting.
I'll, let Brad and as answer the question regarding the numbers spares, because I think for the first time in history.
Brad representing the operational piece of me the financial if he's made a difference of opinion, which might surprise you [laughter], but a red why don't you start and what's your view on the scares at this point well.
First of all answer that by saying the majority of the improvement that we've seen actually as occurred even.
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 a that many spare aircraft available and in 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've achieved it with out that many spares right and the differences I think it's the first time or the operational person says, we don't need that many spares and myself being on the other side say now keep all its whereas we need I don't care, let's just make sure we had 100% every month, so Uh huh.
See where we come out, but I actually all kidding aside I agree with Brad that you know for a long time, we had only three spares and the problem with three spares. When you have to hubs in 14 year old aircraft three was clearly not the right answer and that was as you know appointed discussion for literally many years with American I don't know aid is the right now.
<unk>, either but somewhere in the middle I think we'll find a good a good number and a you know frankly, if we're going to make a mistake I will tell you without a doubt that will make it just the mistake by being long maybe an extra one let's 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 you know we're always in discussion with our partners on potential contract extension I mean, it's literally nonstop.
We believe the aircraft remain very attractive from both an operational as you can tell you know we're running north of 9.7 for the last few months, 100%. This month operationally the planes are great and from a cost perspective.
No I think that we continue to believes that our crj nine hundreds are the lowest cost regional jet large regional jet in service today.
However that being said as many of you aware because you know, particularly in light of for example, our United conversations that last far longer than we anticipated you know these discussions are often complicated and protracted.
That being said a we think that these are good aircraft and they have a strong position within the regional jet marketplace. In addition, as you know BARDA has exited the business. So supply right now continues to be tight across you know all the funds on on on these larger regional jets.
I also 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 basin, we I'd be very highly motivated.
Group of pilots maintenance people flight attendants dispatchers and these are people who have all become a always they've always been valuable but now become even more valuable as supply is trying to cross the industry for all of these folks and we're very pleased that makes that we're able to attract and retain people. We are delighted that the CR.
Christian levels decline and we think that in itself present incredibly valuable asset.
To our partners.
I appreciate all that call Evan as just before I kind of help on the can you just a clarification on the guidance I know the kind of.
Well cover in many Maintenances provided but EPS live initially provided in this update I was wondering if you are kind of reiterating what you provided last time.
The change that.
Oh, we don't have any changes to that and we're not putting anything on the press release.
Sounds good thank you.
Thank you know next question comes from Heli Picker comment your line is open.
Thanks, very much operator, hi, everybody and thank you for this time.
Yes, HM two questions. So just so I understand this Mike on the maintenance cost.
That euro for your increase will.
Yes, great going forward, it's up 58 million, the new run rate or does it fall from there.
That's just for 2020, we haven't put anything out for 2021, a again our initial looks at 2021, it looks more like 2019 and 2020, but we haven't we haven't seen anything out yet until we kind of decide how much is going to hit this year.
Push into next year.
Okay got you. Thank you and then my other question.
With respect to the attrition I think that's great that people are coming.
That you're retaining pilots, but how much do you think is is that because the major airlines slowed some of their hiring because of the Max being on the ground.
How much is you know just.
Your abilities.
Trust and routine.
Well done so so helane I think look I think you're spot on but a lot of this probably is to do a with what's going on with the Max how long that continues or I mean, I know, we could have a good debate about that but it looks like it.
We'll go on for for at least sometime here into the future.
And as long as it does we think it will.
What we lend itself to the similar type attrition rates and if it does we feel really good about well position.
Right.
Mike also they get Ed.
You said when it does come back it looks like it's going to be a slow process that it'll be something that'll happen in three months.
Right no I don't necessarily disagree I just want to make sure about your ability to retain pilots I guess continues even after the Max comes back.
Yeah, I think there.
I would agree we'd have to conduct keep an eye on what goes on one of the Max comes back, but you know 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.
Okay, all right well. Thanks, you guys I appreciate the color.
Thank you. My next question comes from Michael Linenberg. Your line is open.
Hey, guys. This is a key for tell on for Mike I'm, just one here we sold the order for the space can't last year can you just walk us through the thinking and rationale behind that transaction.
Sure I mean, you know on that order I mean, I'm 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 CR Jayson, where the launch customer for the Crj I'm you know there 14 years old and a you know if assuming this this jet is available 567 years out.
I think we felt it was a good hedge in terms of Ah you know, providing us with an opportunity to re fleet.
There is only one aircraft in the marketplace right now which is the number 175 I think just on that basis you know the.
I think having one other supplier in the marketplace is probably not a bad thing.
Okay, great. Thank you.
Thank you know next question comes from Joseph Denardi Stifel. Your line is open.
Yeah. Thanks, good evening.
Mike just on the the fleet count guidance.
Is that just assuming kind of into into next year like assuming the status quo or do you actually have those aircraft under contract just trying to.
Reconcile thing one of your competitors announce some additional aircraft with American.
But make sure that those aren't coming from you.
When you would have maybe better.
Visibility.
There will be the fleet actually will be thanks.
Well I mean look the the fleet, saying that we put out in the press release I believe just goes through you floor and those those aircraft are all under SCPA as Jonathan [noise].
We're in discussions.
With American about the potential extension.
Yes.
Okay. Yeah, I was just referring to the you have the fleet or cap out through September of 2021.
Does that just assume the status quo or for some of those are those aircraft actually under contract.
Actually I assume status quo.
Oh.
[noise], Okay do have a follow up question from softer your line is open.
Hey, Thanks, just on the cargo aside.
He said you kind of moving forward with with that but just curious as you know what you're really if you have kind of update on he still plan on starting early of the next fiscal year.
And also you know I saw that some country did an agreement with Amazon if it's kind of seeing that it's that kind of changes youre kind of view on the opportunity at all or you can view on your position.
No I mean, I think that you know our our our plan would be due.
To implement this prior to the end of this fiscal year.
That sun country.
Announcement actually encourages us because we see and now feel even more kaufman that there's room for new entrants and a you know we believe that while we have tremendous respect for Sun country are good friend Mr. Seagulls German over there we think that Mesa has a superior cost structure and as a result, we can offer those thing.
Services.
At a discount to other operators.
And is the aircraft.
It's something that you secure the karger operated the cargo partner unsecured there just kind of curious with the Max or you are insufficient aircraft out there like type of transaction that we're looking at is one where we would operate aircraft on behalf of cargo operation and the aircraft would be provided to us.
I appreciate the palace.
[music].
And showing no further questions in queue at this time.
All right.
Well again, everyone. Thank you very much for taking the time.
We continue to plug away here.
Let's say you know something we are going up everyday 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 American where we think there's a tremendous opportunity both carriers and you know.
Again, we'd 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 our next quarterly call Bye Bye.
Thank you next today's conference you May now disconnect at this time.