Mesa Air Group Inc. Q2 2023 Earnings Call

May 9, 2023

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Thank you for standing by and welcome to the Mesa Airlines second quarter fiscal year 2023 conference call.

All participants are in a listen only mode until the question and answer session of today's call.

At that time to ask a question. Please press star one on your Touchtone phone.

This call is being recorded if you have any objections. Please disconnect at this time.

I would now like to turn the call over to Doug Cooper head of Investor Relations Mister Cooper you may now begin.

Thank you, Brad Hey, welcome everyone to basis earnings conference call for its fiscal second quarter of 2023 ended March 31 on the call with me today or Jonathan Nordstream may.

<unk>, Chairman and Chief Executive Officer, Michael lots President.

Towards <unk>, Chief Financial Officer, and other members of the management team followed our prepared remarks there'll be a question and answer session for the sell side analysts.

Also want to remind everyone on the call today's discussion today is forward looking statements.

Based on the company's current expectations and are not a guarantee of future performance there could be significant risks and uncertainties that cause actual results to differ materially from those reflected by the forward looking statements, including the risk factors discussed in our report on file with the SEC, we undertake no duty.

To update any forward looking statements.

And comparing results today, we will be adjusted all periods to exclude special items. Please refer to our fiscal second quarter earnings release. This is available on our web site for the reconciliation of our non-GAAP measures with that.

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

Thank you, Doug and thanks, everyone for joining us today as we mentioned before fiscal year 2023 is a transition year in our numbers reflect that.

With that said Ah results were largely in line with our internal expectations as we execute the transition of our C. R. J 900 flying to United Airlines.

In addition to the transition we're still continuing to ramp up are more profitable Egypt flight, while we are experiencing significant improvement a pilot retention and output this quarter or eject utilization was still under six hours.

Turning to the transition. We currently have 24 of the 28 plan C. R. J 900 and service I'll be at at lower block hours, then initially anticipated due to a more conservative approach taken by United.

I'd like to thank all of the hardworking people that makes up who have helped make this transition happen and United for their support.

While we continue to see strong demand for regional flying in our pilot pipeline has recovered significantly our focus over the past several months, it's been on and.

Sharing the United transition and the numerous actions we have taken to strengthen our balance sheet are executed successfully.

I wanted to take a moment to highlight the cornerstones of our plan moving forward.

First and foremost we have a strong relationship with United Airlines.

Which as we work through the transition has been supported both operationally and financially.

We are now flying 20 of the C. R J 900 with United.

As we return to normalize operations and flying higher black hours, there may be an opportunity to restore some regional jet servicing neglected smaller in rural markets nationwide.

Three quarters of these markets.

Service reductions in recent years with the average reduction eliminating 30% of flights in a given market.

This deficit is magnified by the fact that regional flight service accounts for 50% or more of the total air service in 29 U S States and accounts for over 75% of service and 11th.

That's per the regional Airlines Association.

Our new CPA with United Contemplates edition of over 100 daily regional jet flights across the country, representing a solid step for the regional airline industry.

Fortunately without legislative action to Canada, the significant evidence negative impact of the 1500 hour rule. We are still concerned about the long term future of regional aviation service to Rural America.

Further to our mission to improve mobility reduce congestion and Decarbonized travel we remain excited about the potential I previously announced co investments with United on New technology, and electric aircraft, including Archer and heart Aerospace.

We believe Evie tall, and short distance electric aviation will be integral to addressing transit needs and smaller and congested communities moving forward.

While the current pilot charged continues.

Needs to be addressed industrywide through legislative action.

The current industry bottleneck is now ensuring adequate.

Adequate number of qualified first officers to upgrade to captain.

As a result of United's new Aviate program, requiring that candidates have flown his captain's for two years as well as our pilot labor agreements. We believe we have a sufficient number of first softness to fill our capital requirements going forward.

Without captain upgrades, most airlines find themselves with an imbalance of first officer and captains and as a result have paused hiring first officers.

This is just another downside created by the 1500 hour rule.

With that said, we have positioned ourselves to rebuild our pilot pipeline and now at three significant part of initiatives in place.

Again with the support of United Mesa offers an industry, leading pilot pay scale.

This has been a major benefit for retention as fewer pilots are leaving to go to other carriers, most notably nationally low cost carriers, which in the past may have offered higher wages.

Our participation in United HVA program, which is one of the most rapid pass for pilots to join the regional industry in transition to a major airlines is proven successful in attracting and retaining pilots Nathan.

<unk> pilots are afforded an opportunity to transition to United within four years.

Lastly that makes a pilot development program, which was launched in September and in Venice, Florida is one of the fastest most cost creative pass for pilots short of the 1500 hours threshold to accumulate hours.

This program has already graduated a cadre of 11 pilots to Mesa training and has had so many enrollees that we are now preparing to launch a second location in Arizona.

To support this expansion we've taken delivery of four more pipistrelle Alpha trainer two aircrafts with 21 more on the way.

Finally, as you May know, Mike lots, who has previously served as chief High rating officer at Mesa, and Virgin Express is stepping in and taking an expanded responsibilities.

By continues his role as president and will be overseeing all of Mason operating groups. Following his retirement of Brad rich with that I'll turn the call over to him like.

Thank you Jonathan and good afternoon, everyone. Let me start by saying how excited I am with my expanded role overseeing the day to day operations of the company and my 25 years. It as President at Mesa I've also previously served in the <unk> in CFO roles and have been involved in all aspects of our business and particularly our relationship.

Ship with United.

Working through this transition optimizing pilot output <unk>.

Providing exceptional operational performance for United and DHL, all operating at the highest level of safety will be my primary focus.

Transitioning to CRA nine hundreds from Americans United has been a major project for the company.

Although we are keeping both Phoenix and Dallas is crew and maintenance basis, our entire network has been transformed.

Or Houston hub has increased from 55% to 95 flights per day.

As you may or May not know United has never operated the C. R. J 900 in their regional in their regional fleet.

So everything from seat maps to jetway staging ground handling procedures and fuelling are all new to the United Operation.

Given these aircraft, they're flying to 30 cities in the network. This transition entail a lot of preparation and work, we painted 28 aircraft and repositioned or maintenance parts and ground equipment.

This was not just a simple swap of aircraft from one operated to another we appreciate the support we received from United during the transition.

Ultimately the real benefited the transition to that Macy's able to provide United with 100 additional large 76 regional jet flights every day.

Upon our completion of the transition to United are contracted regional fleet will consist of 80 large geese regional jets, comprising a mix of <unk> 175, and Ciara J nine hundreds or.

Our plan is to add back the underutilize the jets as fast as possible. Additionally, we will continue to operate 400 737 108 hundred at DHL.

While our fleet utilization the past few years has been impacted by the industrywide pilot shortage is Jonathan mentioned, we are now seeing nutrition below pre pandemic level and thanks to the number of initiatives we have implemented.

<unk> continues to be a top destination for pilots.

It's especially worth noting that recent pilot turnover is logging result of pilot retirement or transfers to United as part of the aviate programs.

Nonetheless, we are maintaining our focus focus on attraction and retention in our pilot pipeline. We currently have the almost 1600, new hire applicants and combined with the Mesa pilot development program, we have confidence in our ongoing ability to keep our classes filled with a combination of new hires and captain upgrades.

We are continuing to focus on optimizing pilot training throughput and also have access to an additional cents if needed.

With that said in the March quarter, we flew 48186 block hours, a 5% decrease from the December quarter, I would like to point out that are build block hours for the March quarter were actually 51660, we expect our June quarter block hours will be approximately 46000, a fall or <unk>.

Four percentage reduction from the hours in our March quarter. The reductions for both periods are primarily attributable to the C. R. J nine hundreds being transferred transitioned out of America out of American as well as the first officer captain in balance.

Looking forward to the September quarter blackout, we should be closer to 55 and as a result of that transition being completed and the benefits of our captain upgrade actions. We accept we expect subsequent quarters to continue to improve but will not be providing projections for the next fiscal year at this time as.

As a final point I would like to reiterate that during the quarter major incorporated a new 737 800 freighter Dewaard DHL operation. This brings our total total cargo fleet to three 737 401 next Gen 737 800.

With that I'd like to now turn the call over to talk to walk through our financial performance.

Thank you Mike now I'll take this opportunity to review, our financial performance and our balance sheet.

For the second quarter of fiscal year, 2023 revenue was $121.8 million, 1.1% lower compared to $123 $2 million in Q2 2022 <unk>.

Contract revenue fell by 8.2 million year over year. These decreases were driven by recognition of deferred revenue and lower block hours, partially offset by higher United block our rates for new pay scales.

The decrease in contract revenue is partially offset by an increase in past the revenue of $6 $8 million driven by pass through maintenance revenue and pass through property taxes based.

<unk> Q2 2023 results.

Include per gap.

The deferral of 5.7 million of revenue versus the recognition that point $8 million previously deferred revenue Q2 2022.

The remaining deferred revenue balance of $24 $5 million will be recognized the flights are completed over the remaining term of the United contract.

On the expense side makes us overall GAAP operating expenses for Q2, 2023 $148.7 million down $19.3 million versus Q2, 2000 2000 to this.

This decrease was primarily due to $22.7 million lower non-cash impairment of assets held for sale versus Q2 2022, Eric.

Aircraft Rat also fell by eight 6 million attributable to the client reclassification from operating lease to finance leaf for certain Ciara, J 900, and depreciation and amortization expense fell by $4.2 million, primarily driven by the lower depreciable base in the <unk> 900 asset impairment charge in Q4 2022.

Maintenance expense fell 1.4 million this quarter versus Q2, 2022, driven by lower expenses foresee checks and parts, partially offset by an increase in pass through maintenance, we expect maintenance expenses to be roughly consistent for the we at this level for the next three to four quarters.

The decrease in GAAP operating expenses was partially offset by higher flight operations expense at $54 $8 million $12 $4 million higher year over year, reflecting higher pilot pay scales that increase training costs as we continue to drive pilot throughput.

General and administrative expenses were also five $7 million higher versus Q2, 2022, driven primarily by higher pass through property tax costs, and we expect G&A will be consistent for this level for the next three to four quarters ahead.

Total adjusted operating expenses, excluding one time items were $132 million, an increase of $2.7 million compared to the prior year.

On the bottom line, we reported a net loss of $35 $1 million or a loss of 88% per diluted share compared to a net loss of $42.8 million or a net loss of $1.19 per diluted share for Q2 2022.

Adjusted basis Mesa reported a loss of $21.3 million or a loss of 53 per share compared to a net loss of $10.3 million or a loss of 29 cents per share a year ago.

Jested loss for Q2, 2023 excludes a $2 $1 million gain our investments and a half a million dollars gain on disposal of fixed assets. It also excludes $16.7 million of asset impairments and another point $7 million from a deferred financing right off of the sale of assets.

That results from Q2, 2022 excluded $39 $8 million, a asset impairment charges and a $2.3 million loss on investments.

Next let me turn to the balance sheet during the quarter, we close on the sale of four of the 11th Ciara Jna hundreds agreed to be sold to a third party Mesa also sold to United The remaining HCR J 500, fifties and 10 at a 30 engines previously agreed upon importantly, these transactions generated $35 million in cash and we paid.

At approximately $52 million in debt during the quarter.

For the June quarter, we expect to close on the seven remaining Ciara K 920 engines agreed to be sold which together will generate approximately $33 million in cash and pay down $42 million in debt.

Going forward, we still have <unk> have excess Dr. J 900, and are working to sell these aircraft recently entered into a letter of intent to sell an additional seven aircraft, which upon completion of the sale will pay off approximately $68 million of debt associated with these aircraft.

Cash for the March quarter, excluding restricted cash decreased by $4 $6 million for the prior quarter and of December 31, 2022% to $51.4 million.

Total debt at the end of the quarter was $608 $7 million down 77 9 million from the prior quarter.

This included scheduled debt payments made during the quarter of $28 million and finance lease payment of $4 $6 million.

We have $44 $7 million a schedule principal payments remaining in 2023 and after the repayment of debt associated with asset sales, we expect the fiscal 2023 year and debt of approximately $470 million, we expect to maintain cash at its current level or better through the end of the fiscal year.

Given the transition that makes that we will not be providing more specific financial guidance at this time with blackout impacted by the transition as Mike indicated we expect earnings for the June quarter to be similar to the March quarter with that I'd like to now turn it back over to Jonathan for closing remarks.

Take your chart.

In summary, we've undertaken an important transition for Mesa.

2023 continues to be your transfer year of transformation in 2024, we will build on the foundation, we are establishing in 2023, focusing on returning to normalize block our utilization we look forward to speaking with you over the coming quarters at this point operator. Please open up the call is I'd be.

Happy to field any questions that the analysts may have thank you very much.

Before taking our first question I would like to turn the call back over to Jonathan for a brief remarks.

Thanks, Brad before we take the first question I just wanted to thank everyone for their patience as we experienced some technical difficulties with the publication of our earnings press release, forcing the delay of the call.

We look forward to taking your questions now thank you.

Thank you Sir.

If you would like to ask a question. Please first on your phone and press Star one please.

Police record your first and last name at the prompt.

Our first question for today will come from savvy site of Raymond James Your line is open.

Good afternoon, everyone.

And I appreciate the collar on that kind of.

Progression here.

There is a lot of those lines on the discharge revenue D can I expected thus modified revenue here in the next couple.

Couple of quarters of the year or or would you be stock is kacey, that's starting to your advice.

<unk>.

The deferred revenues associated with the.

With the recognition of of revenue as we are.

Fly more so we will see a little bit of that but.

I don't have specific guidance for you right now.

But they should shouldn't be deferred revenue it should be.

Recognizing about that.

Right a little bit.

Yes that is the.

Contract move forward.

Okay.

And then just and.

Right on the.

We can address the pilot issue it looks like your block powers are stepping up and I and I can appreciate that wanted to give a lot more color than than the end of this year.

But generally.

What does that sweats quite a look like in terms of utilization I'm just trying to appreciate.

You know how much more of that.

Clark.

No pun intended a diabetic.

Model has an apple.

Let's see it improves.

<unk> kind of pilot cockpit level is it.

Start operating that does sleep better.

Yes, it's Mike so.

Terms of utilization I think we gave guidance for 55000 for.

The September quarter, I mean, with with Ada aircraft 72 lines.

10, and a half hours of utilization, we targeted and get that number up into the 65060 6000 range and that will probably take us a couple of quarters to get there.

Uh-huh.

Alright, I'll get that kind of case.

Once again, if you would like to ask a question. Please press Star then one at this time. Our next question will come from my Cold and and Burke of Deutsche Bank. Your line is open.

Hi, this is actually Shannon.

Thanks for taking my question.

Opening remarks.

She was still under six hours, despite being below pre pandemic levels of attrition can use you know.

Give us some more color on what's happening here.

Keeping the utilization so low.

Sure.

This is Jonathan.

We had the spool up pilot training, which is something that really.

We moved as quickly as possible.

Even just getting people's of trading takes three or four months.

We got a second same we added instructors ground instructors last month to give you an idea.

Our attrition was around 15 pilot is the lowest it's been that frankly set to any of us can remember and we put out of Iowa.

Something over 50.

Those are good numbers I mean, when we go long.

Close to 40 pilots a month that's.

The equivalent of five aircraft now.

Now there is the challenge about first officers.

Most of the other regional is in fact, a lot of the national carriers are having trouble because they just don't have people who have enough time.

And Ah 121 aircraft to upgrade to captain because of the acceleration in nutrition that occurred earlier in the year.

At Mesa, we're fortunate that as a result of Aviate program as well as our labor agreement, which allows us to we're able to move.

First officers up to captain and we don't think that will slow us down and in fact I think.

And this month.

Our captain classes about 30 individuals.

You know, it's just a matter of how fast we can spool up there's really no mystery in terms of what it does to our numbers I mean clearly at at six hours, we're not going to make money, we've got a bunch of aircraft Park.

We are also continuing to hire and train C. R J pilots.

We think we haven't.

Adequate number for the most part with what we have but again, we're just going to continue to hire people and not put as many people on and keep pushing up utilization on the existing Ciara J fleet, but clearly the focus is going to be on the jets and again between all these various programs I do think bar.

Being some big Spike in nutrition, which seems to becoming less likely.

As things have slowed down a little bit.

I think we're moving forward pretty well in terms of adding net pilots to the.

To our roster.

Thanks, Thanks, Jonathan and Ah.

Click follow up on.

So do you think that me once.

Once again, returning to 19 operating margins in years to come or how does the profitability bar.

Lowering given the post COVID-19 issues that are disproportionately impacted.

With you guys and other regional airlines, Yeah, what would it take for you guys to get back to pre pandemic profitability levels after transformation.

Sure.

Partners.

No I have to tell you might get a torque discuss this very subject.

Cause this morning, because I really was I wonder what I would say in regard to that cause something I wanted to address I think our belief is that flying our aircraft existing aircraft without additional aircraft, but flying our aircraft.

We believe that once we're at basically full steam in other words flying the aircraft North of 10, 10, and a half hours a day that we could achieve margins between five and 8% consistently.

But because there's so much leverage in that last hour, it's really pretty astounding, probably something maybe even we didn't understand going into this but.

I think that we feel that it may take us.

Can easily take us another year, but to get to that full run rate, but I think that at that point you know looking at margins 567, 8% is is doable.

And the question becomes.

Can we achieve that any sooner just based on what happens in nutrition and our ability to upgrade.

Folks and bring people on board I will say that you know.

We now have as we mentioned I believe almost 1700 applicants.

We've got almost that equivalent about lined up in the Mesa pilot development program.

The real question is just the upgrade ability of first officers.

United has helped tremendously in the Avs program by requiring captains for the Aviate program to <unk> to graduate into the Aviate program that they had to have served as a captain for two years and as well as our labor agreement and the support of our pilots that allows us to upgrade people. So I think that you know.

We're going to work very hard to get to those numbers.

I think also that there may be some opportunities on the cost side once we get to sort of a steady state I mean to be Frank given everything that's happened.

I think it's fair to say and I think Mike Wood and torque would agree that we have thrown a lotta money out there to sort of make this happen more rapidly and I think once we get back to normal I think we can take a closer look at how we might be able to fine tune the operation as well.

Thank you so much.

And our next question will be from savvy sites of Freeman change your line is open.

Thank you.

Maybe just to quickly follow up on our clients I have the first shot 68, and you were talking about pretax margin right Jonathan.

Yes.

Just on the flipside, you you've done a lot of.

Great. So.

I realized I, it's about 80 aircraft in the United Fleet, and then you have 20, maybe 2020th.

C. J 900 said you know kind of keep open <unk>, you can't really fly, they're but with the sales like how many C. I J 900 C. You have certain.

Whenever you're dedicating to United that you can maybe continue to monetize our place in Eugene me in Europe .

<unk> yeah.

Once that let you has kind of gotten is completely like what's left Delaware.

Well I'll start Daleth, Mike and torque, but I think our view doubt is that we're going to sell as many 900 as we can we.

We have the seven that we think we have a contract for I think we're looking to packaging some of the additional line hundreds with parts, which we have plentiful and engines, which are very valuable there is a certain number that we need to operate the.

The existing agreement until such time as we can operate Egypt and I think we're also obviously going to be looking at other opportunities for the aircraft, but I don't think at this point that.

We would slowdown in terms of selling aircraft and starting to continue to pay down the government debt, which most of the aircraft are offsetting the government debt and then we have <unk> all of which we are looking to wind down as quickly as possible you want to add anything to that like her to work.

No I, just think savvy that looked at the.

The capacity, we have with the United is for 80 large regional jets, So too you know.

Right now the mixes maybe 30%, 970% 170 fives and look our goal is to try to get as many of the jets flying as quickly as possible that they are certainly more profitable for us there, obviously newer aircraft compared to our.

Very old 900 feet. So it's just gonna be as that movement comes where the jet start coming in and the 900 come out that's where we will look at you know opportunities to dispose of those assets and monetize any equity we have in them.

And 10 cents.

Trying to gauge rather than you had lost power.

Alright, I guess.

Best way for us to think about it it's kind of work backwards is that right.

Mid to high single digit margin and and that's what she can I get to you, but I'm trying to understand is that you know, there's a fixed and variable component and I'm trying to understand how much of that.

Revenue for Black color is probably over standard because it's.

What kind of lower production.

Yeah, and look it's difficult to.

Forecast that because with the mix of the fleet between you know.

Aircraft that we May we may own an aircraft that United homes or certain cases DHL.

So that's that's a difficult number to know when you have that kind of a mix.

It's not yeah, I think what Mike, saying, just not linear because on some aircraft.

We're making the the either the lease payment or the ownership payment and others are partners are so it's just not linear.

Makes sense and and maybe if I can just ask just one last thing that's taking a step back and.

On this kind of the regional friends just.

Thoughts now that you're seeing about.

Settling on that pilot side and.

You know maybe light at the end of the tunnel through this period.

You know your view on the regional market airline market here in the next three three years or so.

Sure I mean look.

A lot of folks were concerned about the differential that <unk>.

Existed between the majors and the regionals in terms of cost benefit, but we've looked at it even with the new wages that cost benefit there's still a significant.

Delta between the costs.

So I think from a macro perspective of the regional business. It still has good legs and I think still makes sense in there just cities out there that are just going to be too small or are just serve better with multiple departures into hubs that I think will require regional jet service.

And my concern that over time.

With costs levels continue to escalate.

Is there a point where the aircraft doesn't work I'm sure I'm sure that point does exist, but between fair levels, increasing demand being strong and the importance to the network for our presided in particular.

Feed traffic has lots of value. So I don't see a situation where the regional industry just sort of goes away at this point cause I think all three of those things are to our benefit.

You know I think that it's still going to take innovation theirs and there is innovation out there and I think that that will continue.

But I think for the basic fleet of aircraft that we operate they're gonna be in service for quite some time and I think we're pretty safe on that as the cost.

May have gone up but they've also gone up at the at the major level in their cities that are just gonna stay on the map regardless.

Okay. Thank you.

And at this time, we have no further questions gentlemen.

Okay, well, thank you very much everyone I know that.

So this is obviously a tough quarter.

We have a ways to go.

United has been extremely supportive in terms of helping us through this.

You know.

We have begun to a good process to liquidate assets that we have.

Our service.

Purpose surplus to our requirements and we have been getting surprisingly good prices doing that.

And allowing us to pay down a significant number of that again on the pilots side, we've made what I considered to be remarkable progress.

Certainly surprise me that the attrition levels are down to this and this has been sorted the second or third month, where we've seen nutrition levels much much lower at our output on training, while it took us a while to get there there's no doubt longer than we had hoped or anticipated, but we're now at levels, where we're beginning to put out real numbers.

When you combine that with the lower.

The lower.

People, leaving I think we.

We could see some things really starting to turn but I want it I don't want to underestimate that it's gonna take time, but.

Clearly we have model this enough to know that if we can fly the aircraft between that magic 10, and 11 hours.

This operation will be profitable going forward.

I think that United is also very much determined to see that happen they would like us to be healthy they rely on us.

And I think that they put a lot of energy into helping us get to that point so.

Continuing to plug along and hopefully next quarter will talk to you again and we continue appreciate your support thank you.

Thank you all for your participation on today's conference call at this time all parties may disconnect.

[music].

Mesa Air Group Inc. Q2 2023 Earnings Call

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