Q2 2022 Mesa Air Group Inc Earnings Call

Please continue to standby today's conference will begin momentarily.

[music].

Yeah.

Yes.

[music].

Hello, and welcome to the Mesa Airlines Q2 fiscal 2022 earnings conference call. My name is Ilan and I will be moderating today's call.

This call is being recorded and a replay will be available on Mesa does share dot com in the Investor Relations section.

After today's prepared remarks, there will be an opportunity to ask questions.

It is now my pleasure to turn the conference over to Susan Donofrio head of Investor Relations. Susan you may begin.

Thank you Elon and welcome everyone to make this earnings call for it second fiscal quarter ended March 31 on the call with me today are Jonathan Ornstein, Macy's, Chairman and CEO , Brad Rich EVP and COO, Michael lot, President and torque Xebec CFO and other members of the management.

Following our prepared remarks, there will be a question and answer session for sell side analysts.

We also wanted to remind everyone on the call that today's discussion contains forward looking statements that are based on the company's current expectations and are not a guarantee of future performance. There can be significant risks and uncertainties that cause actual results could differ materially from those reflected by the forward looking statements, including the risks.

As discussed in our reports on file with the SEC, we undertake no duty to update any forward looking statements in comparing results today, we will be adjusting all periods to exclude special items. Please refer to our second fiscal quarter earnings release, which is available on our website for the reconciliation of our non-GAAP .

Measures with that I will turn it over to Jonathan for his opening remarks Jonathan.

Thank you Susan and thanks, everyone for joining us today.

While not entirely unexpected this quarter, which clearly very disappointing.

<unk> will walk through more of the detail, but the overarching issue is our Kurt.

Level pilot attrition hiring and training brought about by an industry wide pilot shortage that has led to our current inability to generate sufficient block hours to operate profitably under our existing agreements.

We are addressing this through a number of initiatives, including but not limited to increased training capacity pilot retention and cost efficiency.

Beyond providing valuable regional fee for over two decades, Macy's position as an independent regional.

Low cost carrier has provided additional strategic value to both United and American.

We believe our partners recognize the value of our relationship and we will work with us cooperating through this challenging environment.

Some of you may have heard me say this before but the founder of Mesa in my mentor, Larry originally once told me that in this industry something happens every year that happens every 10 years.

The last couple of years. It was COVID-19. This year, it's a pilot George and the associated pilot attrition prevalent throughout the regional industry as pilots are recruited away primarily by major carriers and heavy equipment cargo operators. The sheer magnitude of attrition has created significant backlogs and training further exacerbating an already difficult situation.

While we believe our attrition is in line with the rest of the regional industry. We are taking important steps to further attract and retain qualified pilots.

Appreciate the support of our airline partners and pilot leadership are working with us cooperatively to help us.

As we attempt to successfully navigate through.

This period.

What is most unfortunate is the fact that this shortage is a result of ill-conceived ill advised and politically motivated government regulation.

Most independent accounts.

Absolutely nothing to do with the enhancement of safety.

The problem, which will cost consumers millions of dollars in higher fares.

Cutoff dozens of communities from the National Air Transportation system, and has already reduced service and hundreds more as airlines are unable to fly the aircraft due to lack of files.

All of this can be solved with the stroke of a pen.

It is important to note that no other countries adopted these roles and everyday flights are flown by foreign carriers with pilots in the U S with deemed to be unqualified.

It is a stunning realisation that our government has turbine that foreign pilots are somehow more qualified than our own U S filings with the same amount of experienced and trained in the United States.

So it has now become apparent as an undue burden. This places on minority and other disadvantaged communities, which has been effectively blocks of entering the pilot profession due to the prohibitive costs associated with these regulations.

On a more positive note, while COVID-19 driven absent rates impacted us in January we ended the quarter with absence rates across the board that had returned to pre pandemic levels.

We appreciate the real bravery of our people over the past few years and we're thankful, we all can come to work in a safe and healthier environment.

While both American and United have been supportive we are disappointed in our inability to produce the block hours requested by our partners as demand has increased.

Single issue continues to be this single issue continues to be the primary focus of our management team.

Turning to our DHL cargo operation in the quarter, we continued to perform well with our two dedicated Boeing 737 400 aircraft.

We had a third 737 400 aircraft delivered in March and expected to be entering revenue service for DHL in may.

Larger aircrafts have the added benefit of attracting regional pilots, who have an opportunity to fly larger jet aircrafts at the highest rates in the retail industry.

While the growth of our cargo business has initially been slower than we anticipated going forward. We believe that cargo can be an increasingly important part of our business.

Our partnership with Gramercy Associates Ltd is on track and we expect to have European certification completed in the third quarter of 2022.

We own 49% of the smelter based regional jet operation and we're looking forward to introducing our regional business model.

In Europe .

One of our most exciting initiatives, we have been continuing to pursue selectively is finding new ways to participate invest in partner and newer environmentally friendly technology.

These partnerships are designed to position Mesa as the first regional airline to fly electric aircraft and debate the forefront of Decarbonising air travel and reducing our reliance on fossil fuels.

We also think it will be likely Ian answer to providing flight service to smaller community.

Now facing the loss of flight services pilot challenges that resulted in the mainline carriers, reducing or eliminating flight service.

Another significant benefit is that it could provide mesa was the future pilot pipeline, who can build hours and smaller aircrafts not subject to the 500 hour rule.

Our two electric aviation partnerships with Archer and heart that we entered into the long side, United are reaching production development milestones.

Which is developing an all electric <unk> also continued to make progress towards commercialization.

Going forward our strategy of selectively look at other opportunities in aviation related Green technologies to ensure our leadership role in this area.

With that I will hand, it over to Brad to go over more of the details of an update on our operational performance this quarter.

Thank you Jonathan and good afternoon to everyone.

As Jonathan has mentioned there had been significant challenges due to COVID-19, as well as the transition out of the pandemic, which have been widely discussed and documented.

Of course, we have not been immune from each industry wide issues and we remain committed and focused on both our fundamental operating performance as well as implementing creative initiatives to ensure that we are providing safe high quality and reliable service for our partners and customers.

In the March quarter, we flew 65613 block hours and 11, 3% decrease from the same quarter last year and 23, 7% below the December 2021 quarter.

Our combined controllable completion factor was 96, 7% compared to 99, 9% a year ago.

Both our production and our combined controllable completion factor or below the 2019 levels and have been negatively impacted by the impact of COVID-19 high absence rates and elevated attrition rates as larger carriers are adding capacity and replacing pilots due to attrition and early <unk>.

<unk>.

Also the year over year reduction in block hours is partly due to our smaller fleet under contract with American.

Based on current trends of attrition in training output our block hours are expected to be relatively flat for the next two quarters and due to the volatility of the factors involved we are not able to give further guidance at this time.

Looking ahead to the remainder of fiscal year 2022, we are focused on operating the airline as productively and reliably as possible in the post pandemic environment.

While demand for our flying remains very strong it is an environment that will be constrained by the supply and training requirements of regional airline pilots.

Although our COVID-19 related sick calls have returned to pre pandemic levels are.

Our primary challenge remains elevated attrition and the gap created and replacing the departing pilots with new pilots requiring training.

The average pilot provides us a two week notice prior to departure, while the expected training footprint for a new pilot is approximately 90 days.

We remain focused on our recruiting efforts and we have added another full E jet simulators that came online in February .

We've also secured an additional C. R. J simulator that will become operational in July of this year.

We strategically position the simulators in key locations to decrease our training timelines.

As I previously mentioned our pilot training pipeline is currently not an issue and we have implemented programs to continue to attract new pilots to Mesa and increased our instructor ranks.

Furthermore, we are well positioned to be an attractive option for pilots through opportunities such as.

Flying all large regional jets and narrow bodies 737 aircraft.

The United 88 program, where we're one of few independent regional airlines to be able to offer a direct pathway for our pilots to become a career pilot for United Airlines.

The 737 aircraft, we are the only regional airline offering the opportunity to fly larger aircraft and earn the highest pay in the regional industry.

We have attractive domiciled, which make it easy to commute.

We're currently offering rapid captain upgrade opportunities.

We have an active targeted recruiting efforts, including cadet cadet program and onsite visits at aviation schools across the country.

We have a competitive new higher pay structure and with enhanced bonus opportunities and Additionally, we are pursuing other initiatives to attract and retain new pilot candidates such as discussions with $1 35 operators that can provide an inflow of pilots to Mesa.

We have previously removed all of the <unk> seven hundreds from our operation.

We continue the transition process of leasing these 20 aircraft to go jet Airlines and agreements that end in 2030.

And we only have two remaining aircraft that will be delivered this month.

Our United <unk> Hundred 75 fleet remains at 80 aircraft.

The DHL operation performed very well during the March quarter with our controllable completion factor of 99, 1%.

We took delivery of our third 737 400 cargo aircraft in March and the aircraft has been in operations as a support aircraft. It we'll be doing scheduled operations in may.

We believe our relationship with our partners remains strong as we continue to have productive conversations regarding future capacity and both short and long term strategies.

We remain focused on operator, our core regional business safely and reliably with the health and safety of our people and our customers always the top priority.

With that I will now turn the time over to torque and he will walk through our financial performance.

Great. Thank you Brad.

To review, our financial performance and capital outlook and balance sheet for the second quarter of the fiscal year 2022, we reported a net loss of $42 8 million or $1 19 per diluted share compared to a net income of $5 7 million or <unk> 14 per diluted share for Q2 'twenty one.

On an adjusted basis Mesa reported a pretax loss of $13 1 million for Q2, 'twenty two compared to a pretax income of $12 1 million for Q2 'twenty one.

Important to note that the adjusted pre tax loss for Q2 excludes a $39 5 million noncash impairment charge that is related to the <unk> aircraft, which are classified as held for sale as well as the $2 3 million Mark to market noncash losses on our investments in equity securities and the related impact on our income tax.

Expense a.

The year over year decrease of $25 $2 million was primarily due to lower block hours and the PSP program funding that has now ended.

Revenue in Q2, 'twenty, two with $123 2 million, an increase of $25 6 million up 26, 7% from $97 3 million for Q2 'twenty one.

Our contract revenue increased by $33 million year over year as rates return to normal levels. After a temporary reductions related to the PSP program.

This was partially offset by an 11, 3% reduction of block hours flown versus the same period last year for our major partners across all please.

There was also a decrease in pass through and other revenue of $4 $3 million, primarily due to a decrease in pass through maintenance expenses and as a reminder, the pass through expense has no P&L impact Nathan Q2, 'twenty. Two results include per GAAP, the recognition of $7 million of previously deferred revenue versus the deferral.

A $4 9 million of revenue in Q2 'twenty one.

The remaining deferred revenue balance will be recognized with Pfizer completed over the remaining terms of the contract.

On the expense side, Nathan overall operating expenses for Q2, 'twenty two were $168 million up $87 $5 million versus Q2, 'twenty. One so similar to last quarter, the largest cost variance compared to Q2 'twenty. One is a $56 million in PSP related grant funding that has now ended.

There was also the previously mentioned $39 5 million impairment charge related to our held for sale aircraft. This quarter Nathan flight operations expense was up $5 million versus last year due primarily to higher training expense.

Maintenance expense is now becoming more normalized as we are past the high number of engine overhauls and heavy checks that were deferred at the beginning of Covid.

Maintenance costs of $47 4 million in Q2, 'twenty, two down $4 4 million versus Q2 'twenty one.

<unk> is an expandable and component contract were up $2 8 million versus last year.

Labor costs and other were up $3 5 million versus Q2, 'twenty, one mainly reflecting an increase in outside labor support.

<unk> Q1, 'twenty, two labor costs and other expenses decreased by $2 3 million.

Next let me review, where we are on cash and liquidity.

Cash for the quarter, excluding restricted cash decreased by $26 4 million to $75 9 million, which is in line with where we were forecasting during.

During the quarter, we made scheduled debt payments of $28 6 million and had cash lease payments of $6 $5 million in excess of book.

Going forward, our scheduled aircraft lease payments or $12 million lower than this quarter.

Total debt at the end of the quarter was $652 million, which was down $26 $6 million from the prior quarter.

Now, while we cannot provide specific financial guidance, we will provide some color in a few areas as Brad pointed out we are going to see quite a bit of pressure in block hours through the rest of the fiscal year and we expect them to be roughly flat over the next two quarters.

We look at the summer and fall, we will continue to work closely with our partners to maximize block hours with the goal to at least maintain current production, but also take on more of their pilot training throughput increases in pilot attrition stabilizes.

Pilot training will remain at elevated levels as we continue to hire and train new pilots.

We added some capacity for the <unk> in February as Brad previously mentioned and were looking forward to have any additional CRE, Jason capacity coming on in July .

Our costs are now at more normalized levels, which should continue at similar levels going forward over the next few quarters.

I'd like to now turn it back over to Jonathan.

Thank you tore.

And we appreciate the financial recap in summary, we believe 2022 will be a transition year for Mesa.

But we believe this presents an opportunity for us to make some significant and achievable changes in our business structure and fundamentals that will position us well for the future.

While we faced some significant near term issues.

We believe that by working together with our partners employees vendors and other key stakeholders, we expect to successfully navigate through this period as we've done during other challenging.

Periods in the past.

At this point operator, please open up the call I'd like to thank everyone in advance and we appreciate your questions.

Thank you and at this time, if you would like to ask a question. Please press star one please UN mute your phone and record your name clearly when prompted.

Once again that is star one if you would like to ask a question.

Our first question in the queue today is from Savi <unk> from Raymond James.

Hey, good afternoon, everyone.

I was just curious on the pilot front, if you could just provide a little bit more color on.

Is the current situation.

Worse than you.

Kind of thinking a couple of months ago is the kind of the recovery.

As to kind of when you might be able to bring up block hours taking longer.

In the light of some of the comments that Scott Kirby had on their call about maybe hiring levels in the industry.

Into 2023 at similar levels that Youre seeing this year.

Well, yes, hi, this is Jonathan savvy and thank you.

Few Tricia piece, obviously is the part that we have at least control over that.

That being said.

The majors had in fact.

Given early retirement.

<unk>.

I think the total was about 4000 pilots, which I think clearly has impacted us I think.

Hopefully our view is that we burn through most of that and there are some things out there that can help not the least of which is the.

The extension of <unk>.

<unk> 67.

Theres a lot of talk about pilots being able to be imported.

All five pilots from around the world.

The attrition also has been impacted by some of the growth plans of some of the low cost carriers and whether those will slow down.

So clearly that's the first thing on our attrition has been about where we planned.

It had gone up a little bit it came back down a little bit. This month, we think it'll be down a little bit, but it's still at high levels much higher than we've seen in the past on a on a consistent basis.

Sure.

We just don't have the luxury of planning the way the majors do who can basically we sort of look at how many folks are going to retire and that kind of becomes a number they need to look at.

The part where we can have an impact.

We're working really hard to us in terms of output.

As we mentioned we do have people in training in the pipeline. We've just had to spool up as fast as we can in terms of additional simulators. We were very fortunate that I think from us from that standpoint, we now have doubled our capacity, we're actually more than doubled our capacity.

And also the needed to.

Train and qualify more instructors, which we've done through primarily recruiting internally as well as externally and I think we ultimately will be successful there. So that we can then get.

Training capacity to outstrip the attrition levels.

Clearly with the amount of same time, we have the ability to do that we just need to make sure that.

We execute on that front.

Sure.

Again.

The attrition level is what is in question here.

There are some things that are being talked about in Washington that hopefully will help.

I have probably the strongest feelings in the industry about it.

This is all being generated by a rule that is totally unnecessary.

That's actually creating more velocity I E more turnover, which clearly.

Lack of stability in terms of the workforce.

Has to have much in my opinion.

More serious effects and whether or not a person who spent 500 hours flying circles around the Pacific Ocean and assessed the 172 so.

Hopefully that.

He will act.

When they see the impact which is very apparent and the reduction in capacity across the industry.

And the impact it will have on the smaller communities that already have been hurt by some of these regulatory burden that has made so much flying unprofitable.

There is basically a fairly common feeling in the industry that the 50 seat aircraft.

We will be.

Also goes away of the 19 630 seat aircrafts as it just becomes less and less profitable and harder and harder to find pilots to fly those aircrafts. So it's.

It is clearly difficult.

But again I think we have a decent handle on it and I think it's going to take some time to get through it I think we're trying to be conservative in our estimates going forward, but we're going to continue everything we can to.

Get stable.

Stabilized situations and the other piece that I think is important to note is we've always been a low cost regional airline and we've had a fairly strategic value from that respect. We continue to believe we will remain the low cost carrier. However, I mean, there are some areas for example.

That we think we will solve in relatively short order for example, we had a pilot contract that was.

<unk> negotiation, we feel we're very close to getting that done.

When I say very close I'm talking about.

Weeks not months and I think that will help.

Because our rates clearly have become uncompetitive.

And we've had in spite of that reasonably good support.

In terms of new hiring we do that with a significant bonus structure and we've had very very good support from our pilot leadership really sees that it's important for us all to work together right now and I have to tell you without that I think this situation will be twice as difficult for us. So that's where we are today hopefully that's a little bit of color.

That was helpful.

Yes.

I appreciate all that.

Hi, Mike.

I ask a quick question on the cargo side I'm curious.

The cargo block hours does this quarter in the past I know with the monthly share that you didn't have that breakout at this time I'm just curious what the cargo block hour was and.

And the trend there I know that's included in the overall color you provided.

This is Mike the cargo block hours are somewhere between 120 to 140 block hours per month per aircraft. So.

We've got our third aircraft now that goes on in May.

So.

That's the rough order of magnitude of their block hour production.

I appreciate it thank you.

Thank you. Our next question is from Michael Lindenberg from Deutsche Bank.

Hi, This is actually Shannon Doherty on for Mike.

On the cargo piece. So are you guys still targeting eight to 10 cargo airplanes over the next few years and can you update us on the current dynamics that youre seeing with demand and the logistics logistics market. Thank you.

Yeah, we think that cargo over the longer haul is going to be more and more important to us.

The cargo operators themselves.

<unk> are generally fairly conservative in their growth plans.

That being said I think it's fair to say that we did anticipate being.

Larger than three aircraft by now and I think our discussions with our partner is that for us to really be a viable entity and I think they agree that over time, we do need to move that number up.

And I think that those are the the level of service that we provided last year.

DHL told us that we.

We were among the best if not their best operator in terms of performance. So.

And on the cost side I think as always.

Mesa has proven that we are attractive from a cost basis.

Extremely valuable to us.

So much that.

It really puts a big.

And the numbers right now, but as it grows it will become more important but it also has a good recruiting tool.

We are in a position where if that a number of aircraft growth.

Not an insignificant number of pilots will have the opportunity to make significantly higher wages that are available any other regional carrier. So.

We would like to continue to grow it.

We think there is opportunity we certainly have not seen any.

Duction in terms of.

Ours is if things have slowed down.

Nothing else.

We think that the capacity requirements are going to continue to increase at this point.

That's really helpful color and then my last question is do you still anticipate to reduce your debt to roughly $490 million by year end 2023.

Can you just really heard anything else sorry.

Sorry about that.

Just on your debt reduction are you guys still anticipating to reduce your total debt level to about $490 million by year end 2023.

Sure.

Yes, we're still on track on that.

Towards the back part.

Great, Thanks, Derrick and James.

That's all.

Thank you and our next question is from Helane Becker from Cowen.

Thanks, very much operator, hi, everybody. Thank you for your time.

Just a couple of questions one on.

Joe I don't know whether issue, Brad or Jonathan you said that.

Okay.

Yes.

Cargo growth was lower than expected.

That because volumes are not growing as fast as you thought or because you don't have the aircraft you thought you would have by now.

Alright.

Hey, sorry, Helane, we're just.

I think the issue is just that.

<unk>.

When United or American orders aircrafts, they order them 10, 20 at a time with a 12 year contract.

Cargo operators are just they do not add aircraft like that day at ones and twos plus.

I think they wanted to make sure that Mesa was a viable and a partner that they can rely on that can provide the level of service and no. Having just finished our first full complete year I think we have shown that and I do feel that we're in a position that if those opportunities come to fly narrow bodies I think we're very well positioned to take advantage of that.

Yes.

Where does that mean, what that means six months from now or a year I don't know, but I feel that at this point given the performance level that we've provided.

Our cost structure I think we are very well positioned to take on additional narrow body flying.

When.

When when DHL.

<unk> is in a position to add we are looking at other options also in the cargo world, but I think having an exclusive arrangement with DHL I think long term could be a very.

Might be the best way for us to go.

We have a very close tie with DHL, we really enjoy working with them. They have been terrific partners and to be Frank putting our energy into building that relationship would be I think a very valuable use of our time.

Okay and then my other questions are related to.

Completion factor and on time performance.

Now in some cases, you have to pay penalties if you don't meet your negotiated agreements.

Are they suspended so they're taking your pilots have you been able to work with them to get them to kind of rethink.

Hello.

<unk>.

How they've I guess signed on.

Penalized.

It's a very good and very relevant question, let me answer it like this and I apologize for.

Having to sort of be somewhat less than a 100% transparent.

We.

Clearly the situation that exists today in the industry is something that is unprecedented.

We are working closely with our partners too.

No.

Have an operation that is the most reliable most on time, but it takes into consideration both what's going on within the industry and the financial impact that it might have on Mesa, which of course, they I believe that our partners with preferred are minimized and maximized.

I think that all of those discussions are ongoing.

Very fortunate that we have good relationships with both of our partners that they view that us as a strategic partner as much as a day to day partner.

But I think.

At this point in time, it's hard to really say, where all that shakes out other than I think in the long term both of our partners would like us to be successful and I think given the scenario.

We're going to have to be very creative here.

In order to ensure that in terms of.

What is the right balance between performance and penalties and revenue and cost and everything else and everything is open for discussion at this point.

Gotcha.

I think just as a follow up to that.

Jonathan There was curious an article on TV I saw recently I'm not sure why.

But yes it was.

You had quoted is talking about the comments you made earlier about the 1500 hour rule.

And one of the.

One of the Cogan.

Survivors.

Somebody.

Pushback on that and talked about the fact that there haven't been any accidents in the U S and felt it was.

If you didn't understand why any aviation professional would would want anything other than 500 hours.

I don't disagree with your comments right I mean, we have pilots to fly into the left with seven or 800 hours and they do it safely.

Do you think that's a realistic goal to get that our routines.

Do you think that government would allow M&A activity in this sector of the industry in order to help solve that issue.

Yes, I mean first let me comment about the <unk> railroad.

Look I think that there are other pathways that people can become proficient pilot highly proficient pilot.

Military pilots, who fly off of aircraft carriers fully armed into combat with less than $200. As an example of what that means.

With all due respect to all the parties. The fact is there is zero evidence zero evidence that total time has any impact on safety whatsoever. There is however, a significant evidence that says that the amount of time and tight does have an impact so by decreasing the amount of time and tight that pilots have.

Because of rapid turnover.

I don't think makes a lot of sense and I think as epithetic all to the interest of safety.

Whether or not the third.

Be M&A.

Any M&A at the regional level.

I don't think it would be subject to any kind of antitrust issues, because we're just too small to count.

And so I don't think that would be a big hurdle.

The bigger hurdle as always our partners have generally have rights.

Under change of control issues, but again I think that given the difficult situation.

I think it would be fair to say that macys is not the only carrier that.

Having difficulties right now in terms of really whats really boil that justice pilot issues.

I don't think that that would be an issue either if there was some creative solutions available.

That being said.

Our biggest issue right now on the pilot side is we can bring people in the door at this point and I mean that is a concern note.

It's just the rapidity of attrition, which has been a result of the pilot.

Pilot shortage that there are fewer.

<unk> options to jetblue or spirit or Atlas. So they immediately have to come to us as a source as opposed to in a more plentiful situations. There are other ways to find pilots so.

I think that debt.

I think that we just need to work together and primarily I think the big players here will be our partners in order to.

Help see us through this.

It has been extremely helpful in terms of allowing makes it to participate in the Eva program. I mean that clearly has helped us in terms of attrition I think that.

Looking at our our our contracts ourselves I think will help us but overall.

We're just going to have to be very creative and it's something that we've done in the past.

And I think something we continue to do because there are solutions.

But I think long term the solution is just going to have.

Refilling the reservoir pilots that has been drained as a result of the.

The impact of the 500 hour rule.

That's really helpful. Jonathan Thank you.

Thank you. Our next question is from Andrew <unk> from Bank of America.

Hey, good afternoon, everyone.

So Jonathan based on kind of what.

What's going on with the operation think about.

March completion factor when you kind of layer in Europe .

<unk>.

The current trading environment.

You've got a recently got in Houston will be getting another new Sim.

I know attrition is the big wildcard, but assuming it stays around where.

It has been recently.

Do you have like a general timeframe of when you think you could be in a position to run at kind of the the.

The optimal utilization or kind of the block hour production that you were doing before these pilot issues popped up.

Hey, Andrew this is Brad.

Look I just want to pay.

A little more attention to the fact that R. R.

Our performance in the quarter was really.

Compromised by the <unk>.

Extended sick calls.

When we were in the <unk>.

One variant outbreak that's really what affected it more than we had high attrition that's been ongoing we've been working with that and planning for it but it was the sick calls really got hurt the performance.

Both myself and Jonathan settlement.

Opening remarks those.

<unk> and call out rates have come down to pre pandemic levels at this point.

Yeah.

And in terms of timing.

I think it's fair to say that.

It's not we cannot snap our fingers and fixed his problem just because of the footprint of training.

We have added more instructors, which has helped so that we can fully utilize the same and.

We've added the additional Sims.

Clearly I think that if.

<unk>.

We can.

Expand the participation the AVN program that we're working on right now.

I think there are some things that we can do internally to slowdown nutrition, but I think the biggest issue is just being able to attract and bring people.

Through the system.

Paying a captain $10, an hour or more and even when we talk to our union leaders about this.

I don't think we have a big disagreement is not what's going to retain someone if they get a job offer from a major that.

Obviously, a much higher projected income stream over the lifetime of pilots career. So I mean, I think that the best thing. We can do is just continue to focus on bringing people in the door and getting them trained as fast as we can which I think is something that we could have done better I mean, right now we probably have.

About 200 people in training too.

200 folks believe me, if we could snap our fingers and those were available tomorrow, we whenever we want to have a shortage online. So that's really our focus right. Now is just continuing to bring people in and then getting them through training as fast as possible and to give a little more color on that.

We have had a little more success on the CRE side in terms of getting people through.

Our footprint is significantly less so hopefully.

We can see some improvement there and that's why we put a lot of your focus now the first focus on getting additional Sim was on the eject.

We have that's been where we've been a little bit weaker on the inkjet, which frankly has also been a churns.

Covid because pre COVID-19.

You always seem to be a little bit better off in the Egypt, but there has been a fair amount of attrition there.

And we now are putting significant amount of focus on the Egypt side.

Understood and bread when you.

Spoke about the block hours being flat.

Next the next two quarters I am assuming thats flat to the March quarter production or is that flat year on year.

Yes.

Flat from last quarter the March quarter's production.

Okay.

Last one for me I guess.

Torque.

The $76 million of cash at the end of the quarter.

Down from $180 million I think was the June cash number.

Kind of when do you expect to see some stabilization on kind of the burn rate here and how.

How should we think about Capex and principal payments over the next 12 to 18 months. Thank you.

Yes, Thanks, Andrew.

When we look at cash I mean, we had some large.

Expenses in the quarter cash expenses in the quarter that we've talked about in the comments that that was the bigger driver of the decline in the quarter that we had.

Right now as we look ahead to that through the next quarter.

We're expecting to be around 65, so the burn isn't going to be nearly as.

That was in the prior quarter and obviously.

As we look at that.

Forecast for block hour production.

The wildcard for us right now and so.

Giving direction.

Further out than that it's pretty difficult at this point because.

It is really dependent on our production and obviously.

We work with our partners.

Happened with that.

That's about what I can provide for you right now I don't know.

Yes, the only thing I can add this is Mike.

Is that this current quarter that we reported we had.

And I think it's in the prepared remarks that we had an extraordinarily high lease payment.

Which is <unk>.

Subsequent in subsequent quarters will be reduced by about 10 or $11 million per quarter going forward. So that that is something that you would need to take into account and then the scheduled principal payments.

They were I think they were $29 million to $30 million this quarter. They go down by another $10 million next quarter too.

<unk>.

Those are the other two factors that might not come out as clearly in the in the 10-Q.

I expect it as far as Capex again.

We have significant is we have five engines, we're taking delivery of those are all we have the financing set up for those already and so.

There'll be a little bit.

Capex on those on just the down payments for those but the majority of that is all going to be financed.

Okay.

It makes sense. Thank you.

Yes.

Okay.

Thank you.

Another question from Savi <unk> from Raymond James.

Hey, Thanks for the follow up just a.

Couple of questions first one just wondering on the moving to CRD and 912 teams.

The held for sale.

Was kind of the driver behind that position and curious.

Interest levels, you're seeing today for that fleet.

Well I mean, the driver was that.

We did not need the aircrafts.

Moving them over we were able to.

Obviously improves our P&L by holding them for sale and we have had multiple parties make offers on the aircraft.

They are getting better with time, I will say that going the wrong direction.

But we want to if we do sell them and I am hopeful that we will.

There'll be sold and we used the proceeds to be used to retire the.

The government debt thats against those aircrafts.

And I think that.

Obviously, you can imagine these are not our high time, I mean, our low time engine aircraft.

These are the aircraft that are.

I think it's fair to say the lease valuable, but we're still very close to being able to do a transaction that will hopefully.

Retire all the government debt associated with those aircraft and just sort of start to chip away on that we do have a couple of other transactions in the works that are would be helpful.

Liquidity side.

And I think that.

We're also looking at other ways that we can save money in the company, we're not just going to sit back and do nothing we obviously are being very proactive in terms of.

Worked on improving liquidity through other means.

Although.

Suffice to say, adding block hours is the fastest and best way for us to do that at this point.

That makes sense. So is it fair to assume that a European JV is still kind of going forward and this doesn't impact that.

No we're going to continue to go forward.

Think that theres good demand over there it would be a wait and see.

There is no pilot shortage in fact.

Believe me if we could.

The government would take action and allow us to.

Give these as like we can in Australia, a large part of this problem would go away, which again is why I say this is politically motivated not safety motivated.

Why shouldn't we bring pilots in.

It's kind of ridiculous when you think about it that.

<unk>.

Our model you can get a visa to come work at the United States, because there is effectively a shortage, where we can't get pilots over where there is a shortage that has literally billions of dollars of impact on the industry and the communities, we serve and the consumer I mean, I think it's pretty clear people have seen prices going up and there is a reason for.

To that.

Demand has increased and supply has decreased.

So I'm hopeful that the government will act quickly because thats one thing that could take a lot of pressure off the system. If they would just let us tap into the.

Pilots around the world, who are all exceptionally well qualified a lot of them fly a more difficult situations in the United States, having been over in Europe , I mean, the flying in Europe is as clearly.

More challenging given the weather and I think that that's one way that we can help solve this problem.

More quickly.

To that end again, we're being proactive I'm actually testifying in it.

Hearing next week.

By Senator cinema regarding the pilot shortage.

I want to make all of these points clear and hope that we can get some of the actions taken.

The other thing too is that in Europe . There is no scope in Europe there.

There are pilots available.

And I think that the American model, a capacity purchase would do very well there.

And we've seen in Europe sort of of balkanization of the regional carriers.

Opposed to a focused effort that we would try to bring to.

To that operation.

I appreciate that good luck next week.

With the.

Can I just quickly clarify it would be add the lease payments that that's just the differential between your cash lease payments in your European OE statements at different rate that this does not have an impact on your P&L is that fair.

Yes, yes, yes, all right okay. Thank you.

And I have another question from Michael Lindenberg from Deutsche Bank.

Hey, it's shannan again, thanks for the follow up.

This involved in conversation with the FAA last week regarding ATC staffing issues.

You were affected in Jackson, and Justin maybe you weren't just curious to hear your thoughts. Thanks.

No we were not involved.

I just didn't impact us so.

We were not involved in that.

Fair enough.

What we were interested in with the FAA and something that we took note of is the fact that one of our fellow carriers at Republic.

<unk> filed for an exemption to the 500 hour rule and we're going to watch that very closely and we will probably follow suit.

And.

Frankly, I applaud the folks at Republic for taking but I think it was to be a very.

Meaningful action and making it clear that this rule is really impacted everyone negatively.

Would be very clear no upside from a safety perspective and potentially significant downside.

And at this time I am showing no further questions.

Okay. Okay.

Okay.

Thank you very much everyone for taking the time to.

Here, our quarterly report.

As I said at the opening obviously this is very disappointing.

We knew where we stood so again, it's not a surprise, but we clearly have a lot of work cut out for us.

In terms of getting the ship back in order.

It's frustrating because there is really nothing else that's impacting us negatively our maintenance operation has been doing well.

Our pilots and flight attendants have been incredibly supportive Walter Covid.

We see people picking up open time and doing all the things that we need in this tough period, our people have been incredibly supportive.

It's just hard to compete when.

There are so many options for a pilot right now to earn significantly higher pay at the major carriers.

Are the air cargo companies or some of the corporate jet opportunities just has become very difficult. We know that while we can't control attrition. We certainly can do a better job in terms of getting our people to training, which is something we are highly focused on doing and I think lastly, and most importantly is.

I think the support that we're getting from our partners has been outstanding and I want to tell you how much I appreciate that because I think in the long run.

Their support will be critical for us to get through this problem successfully so with that we hope will have a better report for you next quarter.

Obviously this has been disappointing.

We're all shareholders.

We know where the stock is and we know what our job is here.

And I can assure you we're all taking that very seriously. So thank you very much and we look forward to talking to you next quarter.

Thank you. This does conclude today's conference you may disconnect at this time.

[music].

[music].

[music].

Hello, and welcome to the Mesa Airlines Q2 fiscal 2022 earnings Conference call. My name is Ilan and I will be moderating today's call. This call is being recorded and a replay will be available on Mesa does share dot com in the Investor Relations section.

After today's prepared remarks, there will be an opportunity to ask questions.

It's now my pleasure to turn the conference over to Susan Donofrio head of Investor Relations. Susan you may begin.

Thank you Elon and welcome everyone to make this earnings call for its second fiscal quarter ended March 31st on the call with me today are Jonathan Ornstein, Chairman and CEO , Brad Rich EVP and C. O O like a lot president and torque xebec CFO and other members of the man.

Legend team following our prepared remarks, there will be a question and answer session for the sell side analysts.

I also wanted to remind everyone on the call that today's discussion contains forward looking statements that are based on the company's current expectations and are not a guarantee of future performance there could be significant risks and uncertainties may cause actual results to differ materially from those reflected by the forward looking statements, including the risk back.

As discussed in our reports on file with the SEC, we undertake no duty to update any forward looking statements in comparing results today, we will be adjusting all periods to exclude special items. Please refer to our second fiscal quarter earnings release, which is available on our website for the reconciliation of our non-GAAP .

With that I will turn it over to Jonathan for his opening remarks Jonathan.

Thank you Susan and thank you everyone for joining us today.

While not entirely unexpected this quarter, which clearly very disappointing.

Brad and <unk> will walk through more detail, but the overarching issue is our current.

Level pilot attrition hiring and training brought about by an industry wide pilot shortage that has led to our current inability to generate sufficient block hours to operate profitably under our existing agreements.

We are addressing this through a number of initiatives, including but not limited to increased training capacity pilot retention and cost efficiency.

Beyond providing valuable regional feed for over two decades, Macy's position as an independent regional.

Low cost carrier has provided additional strategic value to both United and American.

We believe our partners recognize the value of our relationship and we will work with us cooperating through this challenging environment.

Some of you may have heard me say this before but the founder Mesa and my mentor Larry originally once told me that in this industry something happens every year that happens every 10 years.

The last couple of years. It was COVID-19 this year to pilot George and the associated pilot attrition prevalent throughout the retail industry as pilots a recruiter way primarily by major carriers and heavy equipment cargo operators. The sheer magnitude of attrition has created significant backlogs and training further exacerbated an already difficult situation.

While we believe our attrition is in line with the rest of the regional industry. We are taking important steps to further attract and retain qualified pilots.

We appreciate the support of our airline partners and <unk> leadership are working with us cooperatively to help us.

As we attempt to successfully navigate through.

This period.

What is most unfortunate is the fact that this shortage is a result of ill-conceived ill advised and politically motivated government regulation.

Most independent accounts.

Absolutely nothing to do with the enhancement of safety.

The problem, which will cost consumers millions of dollars in higher fares.

Cutoff dozens of communities from the National Air Transportation system, and has already reduced service and hundreds more as airlines are unable to fly their aircraft due to lack of files.

All of this can be solved with the stroke of a pen.

It is important to note that no other countries adopted these roles and everyday flights are flown by foreign carriers with pilots in the U S with deemed the unqualified. It is stunning realisation that our government has determined that foreign pilots are somehow more qualified than our own U S filings with the same amount of experienced and trained in the United States.

But it has now become apparent as the undue burden. This places on minority and other disadvantaged communities, which has been effectively blocked the mentoring the pilot profession due to the prohibitive costs associated with these regulations.

On a more positive note, while COVID-19 driven absent rates impacted us in January we ended the quarter with absence rates across the board that it would return to pre pandemic levels.

Appreciate the real bravery of our people over the past few years and we're thankful, we all can come to work in a safe and healthier environment.

While both American and United have been supportive we are disappointed in our inability to produce the block hours requested by our partners as demand has increased.

Issue continues to be this single issue continues to be the primary focus of our management team.

Turning to our DHL cargo operation in the quarter, we continued to perform well with our two dedicated Boeing 737 400 aircraft.

A third 737 400 aircraft delivered in March and expected to be entering revenue service for DHL in may.

These larger aircrafts have the added benefit of attracting regional pilot.

Had an opportunity to fly larger jet aircrafts at the highest rates in the retail industry.

The growth of our cargo business is initially and slower than we anticipated going forward. We believe that cargo can be an increasingly important part of our business.

Our partnership with Gramercy Associates Ltd is on track and we expect to have European certification completed in the third quarter of 2022, we own 49% of the smelter based regional jet operation.

Looking forward to introducing our regional business model.

Europe .

One of our most exciting initiatives, we have been continuing to pursue selectively is finding new ways to participate invest in partner and newer environmentally friendly technology.

Partnerships are designed to position <unk> as the first regional airline to fly electric aircraft and to be at the forefront of Decarbonising air travel and reducing our reliance on fossil fuels.

So I think it will be likely be an answer to provide in flight service to smaller community and now facing a loss of flight services pilot challenges have resulted in the mainline carriers, reducing or eliminating flight service.

Another significant benefit is that it could provide makes it with the future pilot pipeline, new can build hours and smaller aircrafts not subject to the 500 hour rule.

Our two electric aviation partnerships with Archer and heart and we entered into the long side, United are reaching production development milestones.

Which is developing an all electric seek rider also continues to make progress towards commercialization.

Going forward our strategy of selectively look at other opportunities in aviation related Green technologies to ensure our leadership role in this area.

With that I will hand, it over to Brad to go over more of the details of an update on our operational performance this quarter.

Thank you Jonathan and good afternoon to everyone.

As Jonathan has mentioned there had been significant challenges due to COVID-19, as well as the transition out of the pandemic, which have been widely discussed and documented.

Of course, we have not been immune from each industry wide issues and we remain committed and focused on both our fundamental operating performance as well as implementing creative initiatives to ensure that we are providing safe high quality and reliable service for our partners and customers.

In the March quarter, we flew 65613 block hours and 11, 3% decrease from the same quarter last year and 23, 7% below the December 2021 quarter.

Our combined controllable completion factor was 96, 7% compared to 99, 9% a year ago.

Both our production and our combined controllable completion factor or below the 2019 levels and have been negatively impacted by the impact of COVID-19 high absolute rates and elevated attrition rates as larger carriers are adding capacity and replacing pilots due to attrition and early <unk>.

<unk>.

Also the year over year reduction in block hours is partly due to our smaller fleet under contract with American.

Based on current trends of attrition in training output our block hours are expected to be relatively flat for the next two quarters and due to the volatility of the factors involved we are not able to give further guidance at this time.

Looking ahead to the remainder of fiscal year 2022, we are focused on operating the airline as productively and reliably as possible in the post pandemic environment.

While demand for our flying remains very strong it is an environment that will be constrained by the supply and training requirements of regional airline pilots.

Although our COVID-19 related sick calls have returned to pre pandemic levels are.

Our primary challenge remains elevated attrition and the gap created and replacing the departing pilots with new pilots requiring training.

The average pilot provides us a two week notice prior to departure, while we expect the training footprint for a new pilot is approximately 90 days.

We remain focused on our recruiting efforts and we have added another full E jet simulators that came online in February .

We've also secured an additional <unk> stimulator that will become operational in July of this year.

We strategically position the simulators in key locations to decrease our training timelines.

As I previously mentioned our pilot training pipeline. It's currently not an issue and we have implemented programs to continue to attract new pilots to Mesa and increase our instructor ranks.

Furthermore, we are well positioned to be an attractive option for pilot through opportunities such as.

Flying all large regional jets and narrow bodies 737 aircraft.

The United 88 program, where we're one of few independent regional airlines to be able to offer a direct pathway for our pilots to become a career pilot for United Airlines.

The 737 aircraft, we are the only regional airline offering the opportunity to fly larger aircraft and earn the highest paid in the regional industry.

We have attractive domiciled, which make it easy to commute.

We're currently offering rapid captain upgrade opportunities.

We have an active targeted recruiting efforts, including cadet cadet program and onsite visits at aviation schools across the country.

We have a competitive new higher pay structure and with enhanced bonus opportunities and Additionally, we are pursuing other initiatives to attract and retain new pilot candidates such as discussions with $1 35 operators that can provide an inflow of pilots to Mesa.

We have previously removed all of the <unk> seven hundreds from our operation.

We continue the transition process of leasing these 20 aircraft to go jet Airlines and agreements that end in 2030.

And we only have two remaining aircraft that will be delivered this month.

Our United <unk> Hundred 75 fleet remains at 80 aircraft.

The DHL operation performed very well during the March quarter with our controllable completion factor of 99, 1%.

We took delivery of our third 737 400 cargo aircraft in March and the aircraft has been in operations as a support aircraft. It we'll be doing scheduled operations in may.

We believe our relationship with our partners remains strong as we continue to have productive conversations regarding future capacity and both short and long term strategies.

We remain focused on operator, our core regional business safely and reliably with the health and safety of our people and our customers always the top priority.

With that I'll now turn the time over to torque and he will walk through our financial performance.

Great. Thank you Brad.

To review, our financial performance and capital outlook and balance sheet for the second quarter of the fiscal year 2022, we reported a net loss of $42 8 million or $1 19 per diluted share compared to a net income of $5 7 million or <unk> 14 per diluted share for Q2 'twenty one.

On an adjusted basis Mesa reported a pretax loss of $13 1 million for Q2 dollars 22 compared to a pretax income of $12 1 million for Q2 'twenty one.

Important to note that the adjusted pretax loss for Q2 excludes a $39 5 million noncash impairment charge that is related to the <unk> aircraft, which are classified as held for sale as well as the $2 $3 million Mark to market noncash losses on our investments in equity securities.

The related impact on our income tax expense a.

The year over year decrease of $25 2 million was primarily due to lower block hours and the PSP program funding that has now ended.

Revenue in Q2, 'twenty, two with $123 2 million, an increase of $25 6 million up 26, 7% from $97 3 million for Q2 'twenty one.

Our contract revenue increased by $33 million year over year as rates return to normal levels after temporary reductions related to the PSP program.

This was partially offset by an 11, 3% reduction in block hours flown versus the same period last year for our major partners across off late.

There was also a decrease in pass through and other revenue of $4 3 million, primarily due to a decrease in pass through maintenance expense.

And as a reminder, the pass through expense has no P&L impact Macy's Q2, 'twenty. Two results include per GAAP. The recognition of $7 million of previously deferred revenue versus the deferral of $4 9 million of revenue in Q2 'twenty one.

Remaining deferred revenue balance will be recognized with Pfizer completed over the remaining terms of the contract.

On the expense side, Nathan overall operating expenses for Q2 dollars $20 million to $168 million up $87 $5 million versus Q2 'twenty one.

Similar to last quarter, the largest cost variance compared to Q2 'twenty. One is a $56 million in PSP related grant funding that has now ended.

There was also the previously mentioned $39 5 million impairment charge related to our held for sale aircraft this quarter.

Flight operations expense was up $5 million versus last year, due primarily to higher training expense.

Maintenance expense is now becoming more normalized as we are past the high number of engine overhauls and heavy C check that were deferred at the beginning of Covid mainly.

Maintenance costs of $47 4 million in Q2, 'twenty, two down $4 4 million versus Q2 'twenty one.

Notables and expandable and component contract were up $2 8 million versus last year.

Labor costs and other were up $3 5 million versus Q2, 'twenty, one mainly reflecting an increase in outside labor support compared to Q1, 'twenty two labor costs and other expenses decreased by $2 3 million.

Next let me review, where we are on cash and liquidity.

Cash for the quarter, excluding restricted cash decreased by $26 4 million.

$75 9 million, which is in line with where we were forecasting.

During the quarter, we made scheduled debt payments of $28 6 million and had cash lease payments of $6 $5 million in excess of book.

Moving forward, our scheduled aircraft lease payments or $12 million lower than this quarter.

Total debt at the end of the quarter was $652 million, which was down $26 6 million from the prior quarter.

Now, while we cannot provide specific financial guidance, we will provide some color in a few areas as Brad pointed out we are going to see quite a bit of pressure in block hours through the rest of the fiscal year and we expect them to be roughly flat over the next two quarter.

As we look at the summer and fall, we will continue to work closely with our partners to maximize block hours with the goal to at least maintain current production.

Also take on more of their pilot training throughput increases in pilot attrition stabilizes.

Pilot training will remain at elevated levels as we continue to hire and train new pilot. We added some capacity for the <unk> in February as Brad previously mentioned and we are looking forward to have any additional fee or Jason capacity coming on in July .

Our costs are now at more normalized levels, which should continue at similar levels going forward over the next few quarters.

I'd like to now turn it back over to Jonathan.

Thank you Charles.

And we appreciate the financial recap in summary, we believe 2022 will be a transition year for Mesa.

But we believe this presents an opportunity for us to make some significant and achievable changes in our business structure.

On the metal that will position us well for the future.

While we faced some significant near term issues.

We believe that by working together with our partners employees vendors and other key stakeholders, we expect to successfully navigate through this period as we've done during other challenging.

Periods in the past.

At this point operator, please open up the call I'd like to thank everyone in advance and we appreciate your questions.

Okay.

Thank you and at this time, if you would like to ask a question. Please press star one please UN mute your phone and record your name clearly when prompted.

Once again that is star one if you would like to ask a question.

Our first question in the queue today is from Savi <unk> from Raymond James.

Hey, good afternoon, everyone.

I was just curious on the pilot front, if you could just provide a little bit more color on.

Is the current situation.

Worse than you.

Kind of thinking a couple of months ago is the kind of the recovery.

As to kind of when you might be able to bring up block hours taking longer.

Actually in the light of some of the comments that Scott Kirby had on their call about maybe hiring levels in the industry.

Into 2022 at similar levels that Youre seeing this year.

Well, yes, hi, this is Jonathan savvy and thank you.

The attrition piece, obviously is the part that we have least control over.

That being said.

The majors had in fact.

Given early retirement.

<unk>.

I think the total was about 4000 pilots, which I think clearly has impacted us I think.

Hopefully our view is that we burned through most of that and there are some things out there that could help not the least of which is the <unk>.

Extension of aged 67.

There's a lot of talk about pilots being able to be imported.

Qualified pilots from around the world.

The attrition also has been impacted by some of the growth plans of some of the low cost carriers and whether those will slow down.

So clearly that's the first thing on our attrition has been about where we planned.

It had gone up a little bit it came back down a little bit. This month, we think it'll be down a little bit, but it's still at high levels much higher than we've seen in the past on a on a consistent basis.

Yes.

We just don't have the luxury of planning the way the majors do who can basically we sort of look at how many folks are going to retire and that kind of becomes the number they need to look at.

The part where we can have an impact and we're working really hard to us in terms of output.

As we mentioned we do have people in training in the pipeline. We've just had to spool up as fast as we can in terms of additional simulators. We were very fortunate that I think from us from that standpoint, we now have doubled our capacity or actually more than doubled our capacity.

And also the needed to.

Train and qualify more instructors, which we've done through primarily recruiting internally as well as externally and I think we ultimately will be successful there. So that we can then get the.

Training capacity to outstrip the attrition levels.

Clearly with the amount of same time, we have the ability to do that we just need to make sure that.

We execute on that front.

Sure.

Again the.

The attrition level is what is in question here.

There are some things that are being talked about in Washington that hopefully will help.

I have probably the strongest feelings in the industry about it.

This is all being generated by a rule that is totally unnecessary.

It's actually creating more velocity I E more turnover, which clearly.

<unk> lack of stability in terms of the workforce.

To have much in my opinion.

More serious effects and whether or not a person who spent 500 hours flying circles around the Pacific Ocean and assessed at 172.

So.

Hopefully that.

They will act.

When they see the impact which is very apparent and the reduction in capacity across the industry.

And the impact it will have on the smaller communities that already had been hurt by some of these regulatory burden that has made so much flying unprofitable.

There is a basically a fairly common feeling in the industry that the 50 seat aircraft.

We'll be.

Also go the way of the 19 630 seat aircrafts as it just becomes less and less profitable and harder and harder to find pilots to fly those aircrafts. So it's.

It is clearly difficult.

But again I think we have a decent handle on it and I think it's going to take some time to get through it I think we're trying to be conservative in our estimates going forward, but we're going to continue everything we can to.

Yes.

Stabilized situations. The other piece that I think is important to note.

We've always been a low cost regional airline and we've had a fairly strategic value from that respect. We continue to believe we will remain the low cost carrier. However, I mean, there are some areas for example that.

That we think we will solve in relatively short order for example, we had a pilot contract that was.

Under negotiation, we feel we're very close to getting that done.

When I say very close I'm talking about.

Not months and I think that will help.

Our rates clearly had become uncompetitive.

And we've had in spite of that reasonably good support.

In terms of new hiring we do that with a significant bonus structure and we've had very very good support from our pilot leadership really sees that it's important for us all to work together right now and I have to tell you without that I think this situation will be twice as difficult for us. So that's where we are today hopefully that's a little bit of color.

That was helpful.

Yes that was very.

I appreciate all that.

I might add.

Ask a quick question on the cargo side I was curious what the cargo block hours does this quarter in the past I know with the monthly you share that you didn't have a breakout at this time I'm just curious what the cargo block hour was and.

And the trend there I know thats included in the overall color you provided.

This is Mike the cargo block hours are somewhere between 120 to 140 block hours per month per aircraft. So.

We've got a third aircraft now that goes on line in May so.

What's the rough order of magnitude of their block hour production.

I appreciate it thank you.

Thank you. Our next question is from Michael Lindenberg from Deutsche Bank.

Hi, This is actually Shannon Doherty on for Mike.

On the cargo piece. So are you guys still targeting eight to 10 cargo airplanes over the next few years.

And can you update us on the current dynamics that youre seeing with demand and the logistics logistics market. Thank you.

Yeah, we think that cargo over the longer haul is going to be come more and more important to us.

The cargo operators themselves are generally fairly conservative in their growth plans.

That being said I think it's fair to say that we did anticipate being.

Larger than three aircraft by now and I think our discussions with our partner is that for us to really be a viable entity and I think they agree that over time, we do need to move that number up.

And I think that those are the the level of service that we provided last year.

DHL told us that.

We were among their best if not their best operator in terms of performance. So.

And on the cost side I think as always.

Mesa has proven that we are attractive from a cost basis.

Dreams valuable to us not so much that.

It really puts a big.

And the numbers right now, but as it grows it will become more important but it also has a good recruiting tool because we are in a position where if that.

The number of aircraft growth, it's not an insignificant number of pilots who will have the opportunity to make significantly higher wages that are available any other regional carrier. So.

We would like to continue to grow it.

There is opportunity, we certainly have not seen any reduction in terms of hours as if things have slowed down.

Nothing else.

We think that the capacity requirements are going to continue to increase at this point.

That's really helpful color and then my last question is do you still anticipate to reduce your debt to roughly $490 million by year end 2023.

Can you could you could you just really heard that and I am sorry.

Oh, sorry about that.

Just on your debt reduction are you guys still anticipating to reduce your total debt level to about $490 million by year end 2023 next year.

Yes, we're still on track on that.

Turning to the back part.

Great, Thanks, Dorothy and Jim.

Tom.

Thank you and our next question is from Helane Becker from Cowen.

Thanks, very much operator, hi, everybody. Thank you for your time.

Just a couple of questions one on.

Joe I don't know whether issue, Brad or Jonathan you said that.

Yes.

That cargo growth was lower than expected.

That because volumes are not growing as fast as you thought or because you don't have the aircraft you thought you would have by now.

Okay.

Hello.

Hey, sorry, Helane, we're just.

I think the issue is just that.

<unk>.

When United or American orders aircrafts, they order them 10, 20 at a time with a 12 year contract.

Cargo operators are just they do not add aircraft like that they add ones and twos plus.

I think they wanted to make sure that Mesa was a viable and a <unk>.

Partner that they can rely on and can provide the level of service and no. Having just finished our first full complete year I think we have shown that and I do feel that we're in a position that if those opportunities come to fly narrow bodies I think we're very well positioned to take advantage of that.

Where does that mean, what that means six months from now or a year.

Note, but I feel that at this point given the performance level that we've provided.

And our cost structure I think we are very well positioned to take on additional narrow body flying.

When.

When when DHL.

Is in a position to add.

Let's get other options also in the cargo world, but I think having an exclusive arrangement with DHL I think long term could be a very.

Might be the best way for us to go.

We have a very close tie with DHL, we really enjoy working with them. They have been terrific partners and to be Frank putting our energy into building that relationship would be I think a very valuable use of our time.

Okay and then my other questions are related to.

Completion factor and on time performance.

I know in some cases, you have to pay penalties. If you don't meet your negotiated agreements.

Are they suspended so they're taking your pilots have you been able to work with them to get them to kind of rethink.

Hello.

I guess I don't know penalized.

It's a very good and very relevant question, let me answer it like this and I apologize for.

Having to sort of be somewhat less than 100% transparent.

We.

Clearly the situation that exists today in the industry is something that is unprecedented.

We are working closely with our partners too.

No.

Have an operation that is the most reliable most on time, but it takes into consideration both what's going on within the industry and the financial impact that it might have on Mesa, which of course, they I believe our partners would prefer to minimize and maximize.

I think that all of those discussions are ongoing.

It's very fortunate that we have good relationships with both of our partners that they view that us as a strategic partner as much as a day to day partner.

But I think.

At this point in time, it's hard to really say, where all that shakes out other than I think in the long term both of our partners would like us to be successful and I think given the scenario.

We're going to have to be very creative here.

In order to ensure that in terms of.

What is the right balance between performance and penalties revenue and costs and everything else and everything is open for discussion at this point.

Gotcha.

I think just as a follow up to that.

Jonathan.

There is an article on TV recently I'm not sure why.

But yes it was.

You had quoted is talking about the comments you made earlier about the 1500 hour rule.

Hi, Ann.

One of the.

One of the Cogan I'm under no survivors.

From somebody.

Really pushback on that and talked about the fact that there haven't been any accidents in the U S and felt it was.

He didn't understand why any aviation professional would would want anything other than 500 hours.

I don't disagree with your comments right I mean, we have pilots to fly into the left with seven or 800 hours and they do it safely.

Do you think that's a realistic goal to get that our routines.

Do you think the government would allow M&A activity in this sector of the industry in order to help solve that issue.

Yes, I mean first let me let me comment about the <unk> Railroad look I think that there are other pathways that people can become proficient pilot highly proficient pilot.

Military pilots, who fly off of aircraft carriers fully armed into combat with less than $200. As an example of what that means.

With all due respect to all the parties. The fact is there is zero evidence zero evidence that total time has any impact on safety whatsoever. There is however, a significant evidence that says that the amount of time and tight does have an impact so by decreasing the amount of time and tight that pilots have.

Because of rapid turnover.

I don't think makes a lot of sense and I think it episodically to the interest of safety.

Whether or not the third.

Be M&A.

Any M&A at the regional level.

I don't think it would be subject to any kind of antitrust issues, because we're just too small to count.

So I don't think that would be a big hurdle the bigger hurdle as always our partners have generally have rights.

Under change of control issues, but again I think that given the difficult situation.

I think it would be fair to say that macys is not the only carrier that.

Having difficulties right now in terms of really whats really boiled that justice pilot issue.

I don't think that that would be an issue either if there was some creative solutions available.

That being said.

Our biggest issue right now on the pilot side is we can bring people in the door at this point and I mean that is a concern note.

It's just the rapidity of attrition, which has been a result of the pilot.

Pilot shortage that there are fewer.

<unk> options to jetblue or spirit or Atlas. So they immediately have to come to us as a source as opposed to more plentiful situation. There are other ways to find pilots so.

I think that debt.

I don't I think that we just need to work together and primarily I think the big players here will be our partners in order to.

Help see us through this.

It has been extremely helpful in terms of allowing makes it to participate in the Aviate program. I mean that clearly has helped us in terms of attrition I think that.

Looking at our our our contracts ourselves I think will help us but.

Raul.

We're just going to have to be very creative and it's something that we've done in the past.

And I think something we continue to do because there are solutions.

I think long term the solution is just going to have.

Refilling the reservoir pilots that has been drained as a result of the.

The impact of the 500 hour rule.

That's really helpful. Jonathan Thank you.

Thank you. Our next question is from Andrew <unk> from Bank of America.

Hey, good afternoon, everyone.

So Jonathan based on kind of what.

What's going on with the operation think about.

March completion factor when you kind of layer in Europe .

<unk>.

The current trading environment.

<unk> recently got a new city, we will be getting another new Sim.

I know attrition is the big wildcard, but assuming it stays around where.

It has been recently.

Do you have like a general timeframe of when you think you could be in a position to run at kind of the the.

The optimal utilization or kind of the block hour production that you were doing before these pilot issues popped up.

Hey, Andrew this is Brad.

Look I just want to pay.

A little more attention to the fact that our.

Our performance in the quarter was really.

Compromised by the <unk>.

Extended sick calls when we were in the.

Omicron outbreak, that's really what affected it more than maybe we had high attrition that's been ongoing we've been working with that and planning for it but it was the sick calls that really got hurt performance.

So myself and Jonathan settlement.

Opening remarks, those calls and call out rates have come down to pre pandemic levels at this point.

And in terms of timing.

I think it's fair to say that.

It's not we cannot snap our fingers and fix this problem just because of the footprint of training.

We have added more instructors, which has helped so that we can fully utilize the sims and we've added the additional sims.

Clearly I think that if.

We can.

The participation the AVN program that we're working on right now.

I think there are some things that we can do internally to slowdown attrition, but I think the biggest issue is just being able to attract and bring people.

Through the system.

Paying a captain $10, an hour or more and even when we talk to our union leaders about this.

I don't think we have a big disagreement is not what's going to retain someone if they get a job offer from a major that.

Obviously, a much higher projected income stream over the lifetime of pilots career. So I mean, I think that the best thing. We can do is just continue to focus on bringing people in the door and getting them trained as fast as we can which I think is something that we could have done better I mean, right now we probably have.

About 200 people in training too.

200 folks believe me, if we could snap our fingers and those were available tomorrow, we whenever we wouldn't have a shortage online.

That's really our focus right now is just continuing to bring people in and then getting them through training as fast as possible and to give a little more color on that.

We have had a little more success on the <unk> side in terms of getting people through.

Our footprint is.

Significantly less so hopefully we can see some improvement there and that's why we put a lot of focus now the first focus on getting additional symbols on the eject.

Because we have that's been where we've been a little bit weaker on the jet, which frankly has also been a churns.

Covid because.

Pre COVID-19, we always seem to be a little bit better off in the Egypt, but there has been a fair amount of attrition there.

And we now are putting.

Putting significant amount of focus on the Egypt side.

Understood and bread when you.

Spoke about the block hours being flat. The next the next two quarters I am assuming thats flat to the March quarter production or is that flat year on year.

Yes flat from last quarter the March quarter's production.

Okay.

Last one for me I guess.

The $76 million of cash at the end of the quarter.

Down from $180 million I think was the June cash number.

Kind of when do you expect to see some stabilization on kind of the burn rate here and know how.

How should we think about capex and principal payments over the next call. It 12 to 18 months. Thank you.

Yes, Thanks, Andrew.

When we look at cash I mean, we had March.

Expenses in the quarter cash expenses in the quarter that we've talked about in the comments that that was the bigger driver of the decline in the quarter that we had.

Right now as we look ahead to that through the next quarter.

We're expecting to be around 65, so the burn isn't going to be nearly as.

Patent was in the prior quarter and obviously.

As we look at that.

Forecast for block hour production.

The wildcard for us right now and so giving.

Giving giving direction.

Further out than that it's pretty difficult at this point because it is.

Really dependent on our production and obviously.

As we work with our partners.

May happen with that.

And that's sort of that's about what I can provide for you right now I don't know.

Yes, the only thing I can add this is Mike.

Is that the current quarter that we reported we had.

And I think it's in the prepared remarks that we had an extraordinarily high lease payment.

Which is.

Subsequent in subsequent quarters will be reduced by about 10 or $11 million per quarter going forward. So that that is something that you would need to take into account and then the scheduled principal payments.

They were I think they were $29 million to $30 million. This quarter. They go down by another $10 million next quarter too so.

Those are the other two factors that might not come out as clearly in the in the 10-Q.

I expect it as far as Capex again.

We have significant is we have five engines, we're taking delivery of those are all we have the financing set up for those already and so thats.

There'll be a little bit.

Capex on those on just the down payments for those but the majority of that is all going to be financed.

It makes sense. Thank you.

Okay.

Okay.

Thank you.

I have another question from Savi <unk> from Raymond James.

Hey, Thanks for the follow up just.

Couple of questions first one just wondering on the moving to CRD and 912 teams.

The held for sale.

Was kind of the driver behind that decision.

I'm curious.

Interest levels, you're seeing today for that fleet.

Well I mean, the driver was that.

We did not need the aircrafts.

By moving them over we were able to.

And obviously improves our P&L by helping them for sale and we have had multiple parties make offers on the aircraft.

They are getting better with time, I will say that going in the wrong direction.

But we want to if we do sell them and I am hopeful that we will.

There'll be sold and we used the proceeds to be used to retire the.

Government debt against those aircrafts.

And I think that obviously you can imagine these are not our high time.

No time engine aircraft. These are the aircraft that are I.

I think it's fair to say, the least valuable, but we're still very close to being able to do a transaction that will hopefully.

Retire all the government debt associated with those aircraft and just sort of start to chip away on that we do have a couple of other transactions in the works that are would be helpful.

On the liquidity side.

And I think that we are also looking at other ways that we can save money in the company, we're not just going to sit back and.

So nothing we obviously are being very proactive in terms of.

Worked on improving liquidity through other means although.

Suffice to say, adding block hours is the fastest and best way for us to do that at this point.

That makes sense. So is it fair to assume the European JV is still kind of going forward and this doesn't impact that.

No we're going to continue to go forward, we think that there is good demand over there it would be away and.

There is no pilot shortage in fact.

Believe me if we could.

The government would take action and allow us to.

Give these as like we can in Australia, a large part of this problem would go away, which again is why I say this is politically motivated not safety motivated.

Why shouldn't we bring pilots in.

I mean, it's kind of ridiculous when you think about it that if.

You're a.

Our model you can get a visa to come work at the United States, because there is effectively quotes a shortage.

We can't get pilots over where there is a shortage that has literally billions of dollars of impact on the industry. The communities, we serve and the consumer.

It's pretty clear people have seen prices going up and there is a reason for that.

Demand has increased and supply has decreased so I'm hopeful that the government will act quickly because thats one thing that could take a lot of pressure off the system. If they would just let us tap into the.

Pilots around the world, who are all exceptionally well qualified a lot of them flying more difficult situations in the United States, having been over in Europe , I mean, the flying in Europe is as clearly.

More and more challenging given the weather and I think that that's one way that we can help solve this problem more.

More quickly I am too.

And again, we're being proactive I'm actually testifying in it.

Hearing next week.

Led by Senator cinema regarding the pilot shortage.

I want to make all of these points clear and hope that we can get some of these actions taken.

The other thing too is that in Europe . There is no scope in Europe there.

There are pilots available.

And I think that the American model, a capacity purchase would do very well there.

And we've seen in Europe sort of of balkanization of the regional carriers.

Opposed to a focused effort that we would try to bring to.

To that operation.

I appreciate that good luck next week.

With the assets that you're testifying can I just quickly clarify it would be the lease payments that that's just the differential between.

Your cash lease payments in your European OE statements are different right that this does not have an impact on your P&L is that fair.

Yes, that's fair to say, yes, yes, all right. Okay. Thank you.

And I have another question from Michael Lindenberg from Deutsche Bank.

Hey, it's shannan again, thanks for the follow up.

Are you guys involved in conversation with the FAA last week regarding ATC staffing issues.

Maybe reflecting Jackson dome and Duston, maybe you weren't just curious to hear your thoughts. Thanks.

No we were not involved.

Sure.

I just didn't impact us so.

We were not involved in that.

Fair enough.

What we were interested in with the FAA and something that we took note of is the fact that one of our fellow carriers at Republic.

Just filed for an exemption to the 500 hour rule and we're going to watch that very closely and we will probably follow suit and.

Frankly, I applaud the folks at Republic for checking, but I think it was to be a very meaningful action and making it clear that this rule is really impacted everyone negatively.

That would be very clear no upside from a safety perspective and potentially significant downside.

And at this time I am showing no further questions.

Okay.

Okay.

Thank you very much everyone for taking the time to.

Here, our quarterly report.

As I said at the opening obviously this is very disappointing.

We knew where we stood so again, it's not a surprise, but we clearly have a lot of work cut out for us.

In terms of getting the ship back in order.

It's frustrating because there is really nothing else that's impacting us negatively our maintenance operation has been doing well.

Our pilots and flight attendants have been incredibly supportive Walter Covid.

We see people picking up open time and doing all the things that we need in this tough period, our people have been incredibly supportive.

But it's just hard to compete when.

There's so many options for a pilot right now to earn significantly higher pay at the major carriers.

The air cargo companies or some of the corporate jet opportunities just has become very difficult. We know that while we can't control attrition. We certainly can do a better job in terms of getting our people to training, which is something we're highly focused on doing and I think lastly, and most importantly is.

I think the support that we're getting from our partners has been outstanding and I want to tell you how much I appreciate that because I think in the long run.

<unk> support will be critical for us to get through this problem successfully so with that we hope will have a better report for you next quarter.

Obviously this has been disappointing.

We're all shareholders.

We know where the stock is that we know what our job is here.

And I can assure you we're all taking that very seriously. So thank you very much and we look forward to talking to you next quarter.

Thank you. This does conclude today's conference you may disconnect at this time.