Q3 2020 Mesa Air Group Inc Earnings Call
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Welcome and thank you for standing by I would like to inform all participants that today's conference is being recorded if you have any objections you may disconnect at this time.
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During the question Port question and answer portion of today's conference asked a question. Please press star one.
I would now like to turn the conference over to your host Jonathan Ornstein.
Thank you very much trouble.
Thank you very much operator, and thank you everyone for taking the moment out of your data to our.
Quarterly result.
As operator indicated this is John at the North Sea, not an chairman and Chief Executive Officer.
On the call with me today.
Hey, Mike lots, our president and Chief Financial Officer, Brad Rich, our Chief operating Officer, Darrin Dappy, our vice President upset.
Unfortunately, Brian good when our general counsel got caught on the delayed flight I'm only thankful that is not one of ours.
I'd like there wouldn't be aware, we are doing this remotely. So it has some challenges, but I think will be okay, I'd like to start off by reading the safe Harbor statement.
Before the presentation in comments begin makes would like to remind you that some of the segments in response to your questions. On this conference call May include forward looking statements under federal Securities laws forward looking statements by their nature.
<unk> estimates projections goals forecasts and assumptions and are subject to future events risks and uncertainties that could cause actual results and outcomes to differ materially from those expressed in the forward looking statements.
Also please note that the company undertakes no obligation to update or revise these forward looking statements.
Any forward looking statements couldn't be considered in conjunction with a cautionary statements in our press release and the risk factors included in <unk> filings with the FCC, including our reports on form 10-K, and 10-Q, which makes it encourages you to read these risks and uncertainties include those associated with the coven 19 virus and it's really impact our business. In addition.
Please refer to the press release in the Investor section of our website find additional disclosures and reconciliations of non-GAAP financial measures that will be used on todays call.
Okay, So let's get to a our release had a pretty good quarter.
We do however continue to see significant covert 19 impact on utilization.
Block hours are down 70% this quarter versus the same quarter last year on a <unk>.
Positive note based on July actuals, and our partners current scheduled for August and September we expect the current quarter, which clearly are subject to change we expect the current quarter to be an 87% increase from this last quarter, which should put us at about 54% of pre called the 19 levels. If you will.
They should remain in place by continuing working with our employee groups. We believe it is possible for us to avoid an employee for a lot.
Some of those initiatives include reduce work week reduction in crew minimums and continued use of voluntary leaves his absence of course, if the payroll support program under the carriers actors extended these initiatives would be on that sorry.
We believe that makes its cost structure and the lower trip cost for small regional aircraft is advantageous in the current environment.
Furthermore, we believe as the low cost provider regional Jets service maxes exceptionally well position.
As costs and become a far more critical element in our partners analysis.
The thing is important in worth emphasizing that makes is low costs are not by accident.
We do believe base has the lowest overhead for aircraft in the industry and our corporate culture has always been built around productivity efficiency and lean organizational structure ever since it was founded by lie originally <unk>.
Additionally, if we're successful in accessing a reasonable portion of our $277 million allocation under the cares at loan program.
The increase liquidity as a result of the loan combined with our current cash flow estimates, we believe maces financial profile will be significantly improved.
It is important to note that we operate 100% of our business under TPH.
BCP A's provides for a significant amount of our cost to be covered with SMIC fixed monthly a mouse.
Although we build our partners and receive payments for those fixed costs under GAAP, we were required to defer 16 million a fixed revenue in the quarter for future periods.
I'd like to take a moment and welcome David Butler, who is returning to head up our HR Department I would also like this and my heartfelt best wishes for a speedy recovery.
Got that Andy Hughes, our Alpha and you see chairman who is that when they sell for 37 years and has become a very close friend and a great addition to our company.
As you know Brad riches focused on our American contract and operation So I'd like to turn it over to him now to talk to you about American.
Good afternoon, everyone and thank you Jonathan.
Well, we've been working collaboratively collaboratively with American have agreed to a temporary reduction in rate.
And other cash flow benefits around the timing of weekly payments through the end of September corresponding with the end of the payroll support program under the care Zack.
In addition, we agreed removed two aircraft in June that were scheduled to be removed in January 2021.
Given that the aircraft aren't required for operation in this reduced utilization time period, and the fact that American has agreed to pay for all the costs associated with two aircraft.
More importantly, we continue to how productive discussions with American with respect to an extension of our existing SCPA.
Once the SCPA terms have been agreed to we've been told American will determine what the fleet side and term will be obviously in the current environment and extension, we recognize it's more difficult, but as I said on our last call. While we don't know the size scope or duration of the extension we do remain convinced.
At American believes we're a valued part of the portfolio.
In the event, we don't get an extension at all our exposure is fairly limited on the Crj 900 sleep.
Without an extension 49 aircraft will be expiring over a 23 month period starting in February 2021.
Oh, the 49 aircraft.
33 will have no debt at the end of the 23 month period.
One lease expires and 15 leases will have monthly payments of 69000 per aircraft per month.
Keep in mind that relative to a current fleet average of 180000 and that will go through March of 2024, which those rates, we believe our competitive as sub leases or and better than post cold with 19 market lease rates.
33 owned aircraft, which will have no debt.
Which will have no debt have recently been valued at approximately $212 million and post cold with 19 appraisals.
The remaining seven aircraft do not expire until 2025.
Waller returned to normal demand levels would offer the highest likelihood of a contract extension at American.
We believe that if there is a silver lining it is a renewed focus on cost which is all always been one of Mesa strengths.
We believe there are crj nine hundreds offers the lowest available seat mile costs and the regional industry and I would also just echo what Jonathan already stated.
Mesa corporate culture, it's always been built around disciplined and productivity and efficiency.
Given our growth over the last several years in our productive workforce, we believe our low cost structure is sustainable for the future.
I would maybe just add some emphasis here I'm I've been doing this a long time both.
All the years that I was a competitor can mesa and in my years at United Airlines.
Yeah, I would often hear people that were skeptical about maces ability to maintain and sustain this low cost structure.
Did I hear and I've seen it an experience that I would just say I do believe that it is sustainable.
Continuing on the cost side for a minute we've implemented a number of initiatives take advantage of the reduced utilization. We've also had several significant other had significant positive responses can voluntary leaves of absent those from our employees.
For July we had almost 500 requests for voluntary leaves that were granted.
We obviously have in place hiring freeze.
I'm on the pilot training front, we reduced our simulator and other creek training costs by approximately $4 million in the quarter.
Another positive note, while we are not currently dealing with a pilot shortage.
We do have approximately 425 pilot applications on file.
Which is the most that I've ever seen that onetime since I've been up Mesa.
Oh, focusing now on operations for a minute would not have any controllable canceled flights out either American or United for the entire corridor.
We also achieved all of our on time performance targets for both American and United for each month of the core.
Lastly, I would just say that we are.
Working very specifically with our major partners and following the guidance of the CDC to create a safe environment.
For our customers as well as for employees.
Now I'll turn it back over Jonathan for an update on United and on our cargo business.
Thank you Brad.
At United We have 20, new Embraer 175 scheduled for delivery from September 2020 through June of 2021.
Oh, we're currently working on the financing for the first 10 aircraft obviously given the current market conditions. This is no small task when we're looking at a multiple of creative options.
Unfortunately, more conventional standard bank lending would be significantly more expensive than we previously obtained.
Actually the 175 was muted by the market is strong collateral and we hope to have something finalized soon.
Under the term of the existing SCPA as each new Embraer 175 is put into service and existing Crj 700 will be removed from our CPGA and lease to another United operated for seven years.
The other United Express care would be responsible for all obligations under the leases.
However, subject to certain limits and requirements United will be responsible for certain unmet rent obligations under the leases.
Given the uncertainties arising from coal with 19 makes his prepared to continue to operate the aircraft for United.
We have worked collaboratively with United them agreed to waive minimums and given temporary reduce rates and other cash flow Bennett's benefits around the timing of we balloon payments to the end of September 2020, corresponding with the end of the payroll support Kroeber I'm under the carriers Act.
In spite of a difficult operating environment, we will continue to everything we can to assist our partners.
On the cargo front as you know, we announced a five year deal to operate Boeing 737, 400 traders for DHL.
The aircraft are anticipated to start service in October and November. This is the start of what we hope will be a longstanding successful relationship with DHL.
We're still looking working through the process of getting the aircraft type on our certificate. The initial condray of pilots has been trained the aircraft are going into heavy maintenance and we are positioning our support staff in Cincinnati.
The structure of our contract with DHL is similar to our existing contract business makes it will be writing crews and maintenance DHL, who Ryan the aircraft and fuel and is responsible for generating cargo revenue.
With two started up let's start up from two aircraft, we expected to be slightly better than breakeven and should become profitable overtime as we add additional aircraft. The total amount of the startup costs as approximately $5 million for this quarter we spent.
600000, and forecast of spend another 2.1 million in the next quarter as the operations pools up.
Like the turn it over to Mike lots for financial overview.
Thanks, Jonathan on liquidity side for the quarter we ended.
65 million in Cat, which is a 13 million dollar.
Increase over last quarter's $52 million during the quarter, we had $12 million and capital expenditures related to engage was also offset by a engine deposits that we had we had 24 million in scheduled principal payments on aircraft engines, and we had 60 million of principal and.
Each deferrals that we were able to negotiate.
Looking out to the ended the calendar year Capex is expected to be minimal except for the 20, New 175 that is good delivery and the 20 engines that we currently have order on order from GE aviation.
As we pointed out on our last call. We were at 52 million in cash at March 31st we were targeting the breakeven or better cash flow through the end of the calendar year.
We believe we are still on target for that and continued and should continue to operate at breakeven it better cash flow.
This does not take into account any potential proceeds from the you the U.S. Treasury loan program.
Under the U.S. Treasury loan program, we've been allocated $277 million, we're working with the Treasury Department in their advisors on terms and final amounts of the loans.
Given the equity in our aircraft and other assets. We believe you can access most if not all of our allocation.
We have been and we'll continue to work with lessors are less or debt holders and suppliers on deferrals reduced rates and relax payment plans.
Now let me just walk through some of the financed by data provided in the press release, we reported adjusted pretax income of 4.9 million. This compares to pretax income of 13.4 million for the same quarter last year.
The quarter over quarter variance was primarily due to deferred revenue of $16 million.
Again, as we outlined in our press release and Jonathan pointed out. This is a GAAP adjustment related to the six portion of our GP a revenue and not really does any changes in our sheet <unk>. We continue to bill on are getting paid the fixed revenue by our partners as we always have.
Additionally for the quarter reported 1.5 million an income tax expense net income of 3.4 million or 10 cents per share.
Just a quick note on our income taxes will that reflecting packages and expense, we will not pay cash taxes as we still have roughly 478 million Anna wells.
Total debt on the balance sheet at quarter end, which segment is 764 million down 24 million from the prior quarter you still have our 23 million dollar a line of credit drawn.
And just to recap we were granted the 92.5 million in connection with the payroll support program into the care that covering the period April through September.
Through June we had received 46.3 million and have subsequently received 50.4 million in July and 15.4 million in August with the remaining 50.1 million due September one.
As discussed in our press release, we're not providing any further guidance at this point.
I'd like to turn it back over to Jonathan now.
Thank you Mike.
Obviously this environment has pushed everyone to their limit.
I really am thankful that the company's pulled together the way it has.
Our whole country has helped the strain of the coated 19 virus that being said, we believe we are well positioned it was our core company values and assets take advantage of opportunities that may present themselves.
We believe that those opportunities exist.
And that we will continue to pursue them.
Prudently with the idea to maximize shareholder value.
Like to thank everyone for taking the time out of their day to join US and open up for any questions that we may be able to help you with.
We will now begin or question and answer session. If he would like to ask a question. Please press star one from your phone.
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Our first question comes from Savi sites with Raymond James.
Please go ahead get asked thank you have good afternoon, everyone.
Just on the as you mentioned 60 million in lease and principal deferrals wondering if he can talk about you know what you're expecting over the next 18 months and maybe tied to that you know what concessions have you granted a your partners and how long those teaching inflow.
Mike you want to do that.
Sure so the principal payments going forward.
Did you deferrals that that we were able to accomplish.
So far.
We have not projected any further deferrals in any of our projections on cash flow.
So there there the existing debt schedules that exists and as far as with our partners the.
Agreements, we have with both United and American or similar there related to credits a primary primarily as a result that must be able to operate at or slightly better operating cost as results of the payroll support program.
And Additionally, we did some reductions in minimums and Oh, adjusted some of the timing of our our true ups.
But that's that's the extensive what we did with the partners.
And as a reduction in the minimums as Mike. It does that go through September Thirtyth does that go beyond as well.
Oh just through September Thirtyth.
Got it and then just for a second question regarding the Crj seven hundreds you know the comment about possibly being operated that means I think as new it's kind of cogent can't take delivery as it seems to be the case. They sometimes its savvis comments have you negotiated economics around operating needs I think you see that seats or is there more to go there.
For that can happen.
Well I am I correct me, if I'm wrong, Brad jump in but we've had discussions with United I don't think we finalized things I will mention that we had made a proposal to them a while back.
But I don't think that if in fact, they came to us and asked us to operate the aircraft I don't think it would be a high hurdle for us to come to an agreement.
Okay all right. Thank you.
And our next question is from Helane Becker with Cowen. Please go ahead.
Helane Becker your line is open. Please go ahead.
Are you there.
Yeah.
Yeah, good things I don't know, what's wrong with my phone I'm sure. So just on the cargo business and and the breakeven number is is that after the start up costs.
I know that's on a run rate basis.
Okay, and then kind of.
Okay. That's helpful. And then the other question part of the question is is there potential to grow that business with DHL.
Yeah, I I'll be Frank I don't think we would have taken on the business. If we thought that two aircraft. We're gonna be the limits I think that you know we feel very strongly that if we can operate these aircraft properly that there is significant growth opportunity.
You know as a the package program becomes more important to America and timely this becomes more important.
I think all the cargo operators are looking at how they can most efficiently serve and one of the ways to do that is by the ability to fly smaller aircraft. They can bring packages closer and later I leave later in the day with efficient operators like Mesa flying smaller.
You know jets like 737th as opposed to the larger gauge aircraft. So we think there's a secular trend towards the smaller aircraft and we would like to be right in the middle that operating.
No the 737 variant.
Right Gotcha, and they're wanting a 400 versus the tundra.
I think that you know I'm not really having privy to what DHL is thinking these are aircraft that had been in their fleet and so they moved those from another operator to us.
But I do think that the long term plan would be to probably you know just given the fact that the age of the aircraft.
It could probably focus on 7378, hundreds going out into the future.
Yeah, I would make sense, okay, well. Thank you Jonathan Thanks, I'm sure everybody else for your time.
Thank you.
We now have a question from Michael Linenberg with Deutsche Bank. Your line is open.
Oh, Hey M pay a good afternoon, guys I'm just a couple here on the that 277 million dollar there's NAC loan.
Do you have a sensitive.
And so on cost and that the terms I know some carriers have indicated the size and they thrown out numbers anywhere from LIBOR, plus 300 to LIBOR plus I want to say 400, 450 or you are you in that range or anything you can telephone pop that amount.
Mike do you want to respond I mean, I don't think we've gotten that far along we have a rough idea, we think thats probably the range.
The range that actually started out a little bit lower but I think I think when we've had our discussions.
That's been the range might do you want to add anything on that yeah. That's that's the range where were expecting but we haven't had any discussion on negotiating points with treasury on the on the rate of the loan at this point.
Okay. Okay. That's helpful. And then the let's say that you'd use operate the crj seven hundreds in tandem with the 170 fives or you're going to fly than its 50, Seaters right and Crj high Fiftys or you actually going up and as you know a larger regional jets I wasn't it wasn't clear Oh, yeah no.
If you know assuming that we take delivery of the 170 fives, which we fully intend on doing at this point.
To operate those aircraft they would have to be operated as 50 seat aircraft under United's current scope agreement with the pilots.
Okay. Okay. That's great and then just lastly, when we think about how you're going to account for the DHL business I think Jonathan did you say wait you cover three years and did you see maintenance did I hear that right maintenance on seven pretty Sevens, and then DHL picks up the aircraft fuel and the cargo revenues that's correct. It's.
Just say crew and maintenance semi crew maintenance and insurance contract.
I see so then there is that like how do you. Okay. So you'll have some certain revenue that offsets and I don't know if it's gonna be kind of the I don't know you're going to talk SCPA revenue that will be tied to DHL, maybe it's all in.
In a single line item.
Yeah, I mean it.
Just to give you an idea order of magnitude you know we're estimating the revenue on two aircraft. It's very small I mean, we're talking about $10 million.
Obviously, we have to grow the business.
You know pretty significantly, but you know the longest journey begins with the first step and now we just believe that given the environment.
Which did not exist at the time, we went into it but we know clearly now feel that are being in the cargo business is probably you know we take a pretty good bet long term.
Yeah, I agree and then just like on that maintenance, though with the seven Threeseventy you. I mean are you gonna have to have your mechanics.
Sufficient and 77 maintenance do you have to get spare parts and the like like how should we think about that.
Mike Brad you want to take a shot at that in terms of how we're going to do the maintenance.
I mean that Brad go ahead.
Well, yeah, Mike worst we're setting up you know partner payments made its agreements very similar to how we do on the you know the existing you know passenger flying.
So, it's it's not going to be much different.
Okay.
All right here I.
You can add to that that might you know, where we were not going to be.
Responsible for the heavy maintenance you know the engines on the seventh resettlement into C checks like our contract with American where they they only aircraft those those become pass through so there's little.
Got less exposure on that and part of our $5 million startup is some inventory and startup costs were trying to a you know do a lot of power by the hour to minimize our investments, but but yeah. We'll all be patents will be doing the work in setting up in Cincinnati.
Okay. Okay now it sounds like Heck basic line maintenance that makes sense, okay. Yeah, that's right health Yep.
Great. Thanks, guys.
Our final question comes from first see then with Stifel. Your line is open.
Yeah. Thanks for the time, Jonathan just following up on Helanes question do you view the opportunity on the cargo side or on the air travel side is greater for from Mesa you no longer term leads in terms of your growth.
That's a good question I think the cargo business. It will take some time to develop DHL is conservative company. It you know we have to develop a reputation with them.
You know could we be a 10 aircraft or an 18 month, yes.
I looked at big opportunities I still strongly believes that our biggest opportunities are within the regional business as there continues to be consolidation.
Clearly the cobot 19 impact has been negative.
On on some carriers and you know maces position, particularly in light of liquidity that could be granted to us through the through the treasury loan and our cost structure could make some of those opportunities become very real and I think some of them are in fact.
No not insignificant. So I think our focus has has been on the on the regional jet side, we loved the cargo business as you know, we recently added Dan MCU, the former CEO of southern to our board you know we have some very good people working on the cargo side, but in terms of size.
The opportunity down the regional jet side is still a very big opportunity given the dislocation that's occurred.
Due to dependent.
Mike Brian do you guys I mean, the Brad you want to add anything to that.
Hi, knocking on doors.
This is Mike. It was there was a you know we started this as a way to diversify our business.
And not not just the regional jets. So part of his diversification of our business and also part of it was you know.
As far as part of the pilot situation, you know being able to offer oh, our existing pilots upgrades into a narrow body, who pays more is something that we think will attract and retain people I'm going forward. It at some point there will be the pilot you know returned to a pilot.
Situation that we've seen in the past and well have to deal with that that point.
Okay. Thanks, that's helpful lot just just one follow up I guess flat from Mike how variable because me so its cost structure at least in percentage terms and you think there's any structural benefit. So you will carry through the pandemic you know at least on the other side you could expect potentially your cost structure to get a little better.
Yeah, I mean part of our one of our challenges in our cost structure was the cost to to train pilots.
And to attract pilots and the bonuses that ran piles and that that's going to certainly change going forward for some period of time, we're playing significant bonuses to attract pilots.
We had higher than normal attrition. So just those factors alone I think we'll we'll have a.
A favorable impact on our cost structure going forward.
And then on the variable fixed split.
What was that.
I just wondering you know on the variable fixed you know the split for Mesa I know you know, it's a little different in your business, but it and just wondering what percentage of your cost structure is variable.
Yeah, it's always been roughly 50 50.
Thanks, I mean, we don't see that dynamic changing significantly.
And as a final reminder, if you haven't last question. Please press star one from your phone, we now have savi size with Raymond James.
Hey, Thanks, just on the and the cargo side kind of curious how large that business has to be taken I get to profitability levels I'm guessing as you grow that the overhead is it's kinda over more operations and is that what takes it gets it to be profitable.
Mike you want to answer that <unk>.
Mike you want to respond to that.
Sure I mean, I'm, you know where at two aircraft where were slightly better than breakeven and linguist rating all of the all of the costs over just two aircraft by doing so the point, where we get said eight or 10 aircraft. It would be you know a profitable like.
Most of our other.
SCPA business you know.
Comparable to other CPG business, there are probably take to get the.
Six 810 aircraft.
Makes sense. Thank you and I think I might ask just a quick question on the United.
Sounded like over the weekend unite it might have to downgrade somebody I 76 seat aircraft or 70 seats. If they have to furlough pilot does that have any impact on on your agreements at United If if some of those tend to be Mesa aircraft.
Uh Huh [laughter] I think but you know there's it doesn't have any impact we would just have to receive the aircraft and and push some of the number 170 576 seats down to 70 seats.
Thank you.
We have no more questions in queue.
Okay well.
Well everybody again, thank you very much.
You know the <unk> the company.
As you know as I mentioned, our employees of just on a fabulous job.
Very brave in the field we've done.
Some really good work corporately in terms of maintaining our low cost structure, we feel that the opportunities in front of us are significant we feel that given the cost structure.
Given our liquidity and what very well be significantly enhanced liquidity generated by the treasury loan.
It really puts us in a position.
Where we can take I hate to use the word advantage, but we can see some opportunities that may develop as this rather you know significant dislocation in new Srini industry continues to unwind.
We feel strongly that this plan will you know these these things can all happen in the near term and again, we are doing everything we tended to position the company to be best.
Choice of our partners or when they when they decide how to do this that where the company that they choose to do it with so again. Thank you very much we'd have a way to go no doubt about it you can imagine we have a lot of work on our price of our equity, which you know has been impacted like everyone else.
In the industry, but hopefully as we can continue to put more quarters like this together people see Mesa for what I think it's true value is and realize but we have good income potential as well as good assets behind or the value of our stock. So thank you all very much a we're always free that speak to people looks like.
The call in afterwards and again, we appreciate your time today. Thank you.
And this concludes today's conference you may disconnect at this time, thank you for your participation.
Speaker standby for post conference.
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