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Mesa Air Group, Inc. (NASDAQ:MESA)
Q1 2020 Earnings Call
Feb 10, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Welcome, and thank you for standing by. [Operator instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to turn today's meeting over to your host, Jonathan Ornstein, chairman and chief executive officer.

Sir, you may begin.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Thank you, sir. First, thanks, everyone, for joining us on our call today. As the operator indicated, this is Jonathan Ornstein, chairman and chief executive officer. On the call with me today are Mike Lotz, our president and chief financial officer; Brian Gillman, executive VP and general counsel; Brad Rich, our chief operating officer; and Darren Zapfe, our vice president of finance.

I would like to ask Brian to read the safe harbor statement.

Brian Gillman -- Executive Vice President and General Counsel

Thanks, Jonathan. Before the presentation and the comments begin, Mesa would like to remind you that some of the statements in response to your questions in this conference call may include forward-looking statements. As such, they are subject to future events and uncertainties that could also affect our actual results to differ materially from those statements. Also, please note the company undertakes no obligation to update or revise these forward-looking statements.

Any forward-looking statements should be considered in conjunction with the cautionary statements in our press release, the risk factors included in our filings with the SEC, which Mesa encourages you to read. In addition, please refer to the press release in the Investors section of our website to find additional disclosures and reconciliations of non-GAAP financial measures that will be used on today's call.

Jonathan Ornstein -- Chairman and Chief Executive Officer

OK. Thank you very much, Brian. Well, I'm incredibly pleased to be able to begin our discussion regarding United with a discussion about the deal that, in fact, is done, and we are moving forward. As you know, we are preparing for the delivery of the 20 Embraer 175, the long-awaited 20 175, which will bring us to a total of 80 Embraer 175s.

I believe that will make us the largest operators of that type for United Airlines. We have added 60 175s over the past few years, and we believe we are very well-positioned and prepared to take on these 20 additional aircraft beginning in May. One thing to note, these aircraft are not incremental. Their introduction will coincide with the removal and the leasing of our CRJ-700 aircraft to another operator.

With these 20 aircraft, as I mentioned before, we will be the largest operator of Embraer 175, which we believe is the aircraft of choice within United. We believe Mesa's exceptionally well-positioned given our industry-leading cost structure, our outstanding operational performance to take advantage of the future opportunities with United as they present themselves. We would like to thank United management for their confidence and trust that has led to their continuing support of Mesa. It truly is greatly appreciated.

On the American side, as we've noted in our press release, we've seen significant improvement in our American Eagle operations. We continue to have discussions regarding the extension of our capacity purchase agreement. Given our industry-leading cost structure and our current operating performance, we believe our CRJ-900s are very attractive operationally and offer tremendous value in today's regional airline marketplace. We continue to build significant equity in the CRJ-900 fleet as the debt matures over the next couple of years and do the same in our owned engine that go on these aircraft.

On the cargo side, we have talked about the fact that we are looking forward to entering the cargo business. We continue to develop our plan to enter these operations in 2020. We believe cargo represents an important long-term opportunity for the company and significant advancement opportunities for our pilots, in particular. We continue to move forward with FAA certification and spent $600,000 this quarter.

I would now like to turn the call over to Brad for a more in-depth operational review, which I think you will agree it's really quite outstanding. I want to appreciate the good work that he's done, along with his team in operations.

Brad Rich -- Chief Operating Officer

Thank you, Jonathan. As far as an update on American is concerned, as we previously discussed, our operations were challenged over the summer primarily due to several aircraft unavailable as a result of multiple aircraft damage incidents as some extended heavy maintenance. Since regaining access to the additional aircraft, the controllable completion factor has significantly improved, with November and December at 99.7%, January at 99.9%, and February month to date is at 100%. I'd also note that in January, we believe we achieved all of our performance criteria in the American operations.

In addition to the available aircraft we have identified, we have identified and are implementing several operational improvement initiatives at American, and we're confident that these initiatives will result in continued improved performance. On the United operation, as we pointed out in our press release, we operated at a 99.98% controllable completion factor in the quarter, taking only six cancellations out of approximately 34,000 scheduled flights. In the month of November, Mesa led the United Express portfolio in on-time performance, both in arrival, zero and departure, zero. A bit of an update on our pilot situation.

We're pleased to report an increase of 84 pilots net of attrition over the past six months. We remain confident in our ability to hire, retain, and transition the required pilots in order to staff the 20 new E175s, which deliveries begin in May. We also have some good news relative to attrition, which remains lower than we projected for the last several months. We continue to reduce the training footprint and optimized training program by streamlining training processes and procedures, as well as implementing additional automation.

It's also worth noting, I think, that we do have access to the required simulator time to meet our forecasted training events, both for new hires, upgrades, recurrent training, and, as I mentioned, the transition to the new E175s that are on their way. We've also had success at hiring additional mechanics. However, industry conditions make mechanic hiring and retention more challenging, and that is an area of our continued focus. Before I turn the time to Mike, I'd like to just express appreciation to all of our employees: our pilots, our flight attendants, our mechanics, as well as our headquarter staff and our leadership team.

As we mentioned earlier, we have Brad Holt, who I worked with for, oh, gosh, a couple of decades, at least, has joined the team, and we're happy to have him with us, and he's been making a positive difference since he arrived. We're also grateful for all the efforts, for the commitment and engagement, dedication of our leadership team, and I specifically want to call them out to thank them for their efforts: Cody Thomas, Doug Shockey, Amber Wansten, Kenley Brown, Kevin Wilson, Tyler Campbell, Mike Ferverda, Bob Hornberg, and Darren Zapfe. We're just very appreciative for all of their efforts. We've had a lot going on in some realigned assignments and some continued leadership changes, and I'm grateful for their engagement.

We're also grateful to have the addition of Todd Wilkinson, who has joined the team full time. Again, Brad Holt and I work with Todd for many decades. He's expertise is in maintenance and sourcing, and we're grateful to have him as a new member of the team. With that, I will permit time to Mike to review our financial performance.

Jonathan Ornstein -- Chairman and Chief Executive Officer

I wanted to add to Brad and thank him because the turnaround that we've seen has really been outstanding. The operational people have done a great job, and it's not been a secret there have been challenges in the past, particularly with our American operation. We've always felt that we needed some additional spares. Now that we have those spares, you can see the performance has truly skyrocketed up to the top of the heap, and we feel very confident that we continue to perform at those levels.

You can't get much better than 100%, but we're going to do everything we can to try. But I want to thank all the operational people for doing a great job. Thank you.

Mike Lotz -- President and Chief Financial Officer

OK. Thanks, Jon, and thanks, Brad. It's Mike. So, for the financial update for Q1 2020, we reported pre-tax income of $14.3 million.

This compares to pre-tax income of $25 million for the same quarter last year. The quarter-over-quarter negative variance of 10.7% was all due to the timing of scheduled heavy engine and airframe maintenance. Additionally, for the quarter, we reported $3.5 million of income tax expense for net income of $10.8 million or $0.31 per share. And as usual, a quick note on the income tax expense, although we reflect $3.5 million for accounting purposes, we will not pay any cash taxes as we still have in excess of $478 million in NOLs.

I'd like to touch on the scheduled airframe and engine maintenance for Q1 2020. Our heavy scheduled airframe maintenance came in just around $15 million, which, although it was higher than last year, it was lower than we anticipated. Our guidance that we provided last quarter was around $18 million. Some, if not all of that expense, obviously, will push into Q2 as it was all a result of timing.

On pilot expenses, our pilot expense for block hour was down year over year by over 3% from a little over $463 a block hour to $451 or 31% to 30% of contract revenue. We are expecting the block hour rates to stay at this level. As we begin to transition from the 700 to the 175 by Q4, we hope to reduce by another 3% down to around the $440 per block hour range due to the increased pilot training efficiencies that we're seeing specifically those that have brought over by Brad Holt. Keep in mind, if we reduce this by 3%, from $451 to $440, that equates to almost $5 million a year in reduced operating costs.

During the quarter, we spent approximately $600,000 on our cargo operation development and are expected to spend another $2 million over the remainder of 2020. As disclosed in our press release earlier today, we have provided some additional forward-looking guidance for block hours, our Q1 block hours came in right about where we thought at the midpoint of the guidance for the remainder of the year, our projection to remain the same from what we provided last quarter. On scheduled heavy maintenance, heavy engine and airframe maintenance, as I mentioned, Q1 came in lower than previous guidance, and we expect those expenses to move to Q2, so we have reflected that in our Q2 guidance. Full-year engine and airframe is under review.

We slightly raised at the top end of each of the Q3 and Q4 quarters. On cash and liquidity, we ended the quarter at $57.8 million. Total debt on the balance sheet, $807 million, down from $843 million as we paid down $36 million in principal payments during the quarter. For 2020, we do have total scheduled principal payments of slightly over $175 million.

For capex for 2020 and 2021, as we mentioned on our last call, we'll need to finance the new E-175, which will be approximately $450 million, split roughly 50-50 between fiscal year '20 and '21. We're planning to finance most, if not all, the purchase price of the E-175s. Additionally, for 2020 and 2021, we purchased and plan to take delivery of 22 engines to support the leased CRJ-700s and the CRJ-900 fleet at American. We expect to finance approximately $120 million, again, split roughly 50-50 per year between fiscal year '20 and '21, and again, we're expecting to finance most, if not all, of the purchase price.

On the refinancing side, as a result of our new United CPA, we will lease 20 of our CRJ-700s to another operator for a seven-year term. This will allow us to potentially finance five unencumbered CRJ-700 and refinance the other 13 700s over an extended period of time at lower rates, and we're still evaluating which alternative would be best for us. I'd like to turn it now back over to Jonathan.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Thank you, Mike. At this point, we'd be happy to open up to any questions that anyone might have. There's a lot going on, a lot of moving pieces, but we'll do the best we can to give you a good answer.

Questions & Answers:


Operator

[Operator instructions] My first question comes from Savi Syth. Your line is open.

Savi Syth -- Analyst

Hey. Good afternoon. Just congrats on moving the American performance in the right direction there. I know it's still early days, but just wondering, is this the right number of kind of spare whitetail aircraft for that, or do you kind of expect to be able to do that with less as you kind of get a handle on that? And somewhat tied to that, when do you start the discussions or when do you need to kind of complete the discussions with American on some of the 2020 aircraft that are coming off contract?

Jonathan Ornstein -- Chairman and Chief Executive Officer

OK. You know, it's interesting. I'll let Brad answer the question regarding the number of spares because I think, for the first time in history, Brad, representing the operational piece, and me, the financial piece, we may have a difference in opinion which might surprise you. But Brad, why don't you start, and what's your view on the spares at this point?

Brad Rich -- Chief Operating Officer

Well, first of all, answer that by saying the majority of the improvement that we've seen actually has occurred even though by, I guess, by agreement, we should have eight spares operating right now. Through all of this improvement period, we have never had that many spare aircraft available. And then most of the time, it's been with four, maybe five or less of the airplanes. So, look, honestly, I don't think we need a full complement of eight spares to run the operation.

And in fact, we've achieved it without that many spares.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Right. And the difference is that I think it's the first time where the operational person says, we don't need that many spares. And myself, being on the other side, say, now I'll keep all the spares we need. I don't care.

Let's just make sure we hit 100% every month, so we'll see where we come out. But I actually, all kidding aside, agree with Brad that for a long time, we had only three spares. And the problem with three spares when you have two hubs and 14-year-old aircraft, three was clearly not the right answer, and that was, as you know, a point of discussion for literally many years with American. I don't know if eight is the right number either.

But somewhere in the middle, I think we'll find a good number and frankly, if we're going to make a mistake, I will tell you without a doubt, that we'll make a mistake by being long, maybe an extra one but not short one, because we don't want to be in a position like we were last summer and literally flying with no spares. So, I think that's the answer on the spares. In terms of the American contract, let me just say we're always in discussion with our partners on potential contract extension. I mean it's literally nonstop.

We believe the aircraft remain very attractive from both an operational, as you can tell. We're running north of 99.7% for the last few months, 100% this month. Operationally, the planes are great. And from a cost perspective, I think that we continue to believe that our CRJ-900s are the lowest cost regional jet, large regional jet in service today.

However, that being said, as many of you are aware, it's particularly in light of, for example, our United conversations that lasted far longer than we anticipated. These discussions are often complicated and protracted. That being said, we think that these are good aircraft, and they have a strong position within the regional jet marketplace. In addition, as you know, Bombardier has exited the business, so supply right now continues to be tight across all the fronts on these large regional jets.

I'd also like to add, which is something that a lot of folks may not put as much emphasis on, but I can tell you we do on a day-to-day basis. We have a very highly motivated group of pilots, maintenance people, flight attendants, dispatchers. And these are people who have all become always -- they've always been valuable but now become even more valuable as supply is tight across the industry for all of these folks. And we are very pleased that Mesa were able to attract and retain people.

We are delighted that to see our attrition levels decline. And we think that, in itself, presents an incredibly valuable asset to our partners.

Savi Syth -- Analyst

I appreciate all that color. Just before I kind of hop on the queue, just a clarification on the guidance. I know the kind of the cover in maintenance is provided, but EPS was initially provided in this update. I was wondering if you were kind of reiterating what you provided last time or if there's a change to that.

Mike Lotz -- President and Chief Financial Officer

We don't have any changes to that, and we're not putting anything out in the press release.

Savi Syth -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Helane Becker, Cowen. Your line is open.

Helane Becker -- Cowen and Company -- Analyst

Thanks very much, operator. Hi, everybody, and thank you for the time. Just two questions. So, just so I understand this, Mike, on the maintenance costs, that year-over-year increase will be as great going forward.

Is that $58 million the new run rate, or does it fall from there?

Mike Lotz -- President and Chief Financial Officer

That's just for 2020. We haven't put anything out for 2021. Again, our initial look at 2021, it looks more like 2019 than 2020. But we haven't put anything out yet until we kind of decide how much is going to hit this year and how much we could push into next year.

Helane Becker -- Cowen and Company -- Analyst

OK. Got you. And then my other question is with respect to the attrition. I think that's great that people are coming and that you're retaining pilots.

But how much do you think is that because the major airlines slowed some of their hiring because of the Max being on the ground, and how much is just your ability to attract and retain?

Brad Rich -- Chief Operating Officer

So, Helane, look, I think you're spot on that a lot of this probably is to do with what's going on with the Max. How long that continues, I mean I know we could have a good debate about that, but it looks like it will go on for at least some time here into the future. And as long as it does, we think it will probably lend itself to these similar type attrition rates. And if it does, we feel really good about our position.

Mike Lotz -- President and Chief Financial Officer

This is Mike. Also, if I could add, if and when it does come back, it looks like it's going to be a slow process to come back. It'll be something that will happen in three months.

Helane Becker -- Cowen and Company -- Analyst

Right. No. I don't necessarily disagree. I just want to make sure that your ability to retain pilots, I guess, continues even after the Max comes back.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Yes, I think I would agree. We have to keep an eye on what goes on when the Max comes back, but we really saw the drop in attrition when we instituted the flow-through agreement with United. That really had a big impact, and it really pulled attrition there.

Helane Becker -- Cowen and Company -- Analyst

OK. All right. Well, thank you, guys. I appreciate the color.

Operator

Thank you. Our next question comes from Michael Linenberg. Your line is open.

Koosh Patel -- Analyst

Hey, guys. This is Koosh Patel on for Mike. Just one here. We saw the order for the SpaceJet last year.

Can you just walk us through the thinking and rationale behind that transaction?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Sure. I mean, on that order, I mean, basically, that was done just to give us a position in the book. We do think at some point in time, while we love the CRJs and we're the launch customer for the CRJ, they're 14 years old. And assuming this jet is available five, six, seven years out, I think we felt it was a good hedge in terms of providing us with an opportunity to refleet.

There is only one aircraft in the marketplace right now, which is the Embraer 175. And I think just on that basis, I think having one other supplier in the marketplace is probably not a bad thing.

Koosh Patel -- Analyst

OK, great. Thank you.

Operator

Thank you. Our next question comes from Joseph DeNardi of Stifel. Your line is open.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

Yeah, thanks. Good evening. Mike, just on the fleet count guidance, is that just assuming kind of into next year, like assuming the status quo, or do you actually have those aircraft under contract? Just trying to reconcile. I think one of your competitors announced some additional aircraft with American.

I want to make sure that those aren't coming from you when you would have maybe better visibility on what the fleet actually will be. Thanks.

Mike Lotz -- President and Chief Financial Officer

Well, I mean, look, the fleet plan that we put out in the press release, I believe, just goes through Q4, and those aircraft are all under CPA. And as Jonathan mentioned, we're in discussions with American about potential extension.

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

OK. Yeah, I was just referring to the -- you have a fleet forecast out through September of 2021. Does that just assume the status quo or some of those other aircraft actually under contract?

Mike Lotz -- President and Chief Financial Officer

It is extended in the status quo.

Operator

We do have a follow-up question from Savi Syth. Your line is open.

Savi Syth -- Analyst

Hey, thanks. Just on the cargo side, I know you said you're kind of moving forward with that, but just curious if you have kind of an update on -- if you still plan on starting early of the next fiscal year. And also, I saw that Sun Country did an agreement with Amazon. Is kind of seeing that -- if that kind of changes your kind of view on the opportunity at all or you kind of view on your positioning.

Jonathan Ornstein -- Chairman and Chief Executive Officer

No. I mean, I think that our plan would be to implement this prior to the end of the fiscal year. The Sun Country announcement actually encourages us because we see and now feel even more confident that there's room for new entrants, and we believe that while we have tremendous respect for Sun Country, our good friend, Mr. Siegel is Chairman over there, we think that Mesa has a superior cost structure and as a result, we can offer those same services at a discount to other operators.

Savi Syth -- Analyst

And is the aircraft something that you secure or the cargo operator or the cargo partner secures? Or just kind of curious with the Max is a sufficient aircraft out there.

Jonathan Ornstein -- Chairman and Chief Executive Officer

The type of transaction that we're looking at is one where we would operate aircraft on behalf of cargo operation, and the aircraft would be provided to us.

Savi Syth -- Analyst

Appreciate the color. Thanks.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Sure.

Operator

And I'm showing no further questions in queue at this time.

Jonathan Ornstein -- Chairman and Chief Executive Officer

All right. Well, again, everyone, thank you very much for taking the time. We continue to plug away here. It's something we get up every day and constantly work on.

Our operational people have done a terrific job. I know that Mike and Brian and Brad and I continue to look at other opportunities and, right now, focusing both on United and American, where we think there's a tremendous opportunity at both carriers. And again, we'd like to leverage our cost structure and the type of aircraft we operate to continue to grow our business profitably. So, thank you very much for your interest, and we look forward to talking to you on our next quarterly call.

Bye-bye.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Jonathan Ornstein -- Chairman and Chief Executive Officer

Brian Gillman -- Executive Vice President and General Counsel

Brad Rich -- Chief Operating Officer

Mike Lotz -- President and Chief Financial Officer

Savi Syth -- Analyst

Helane Becker -- Cowen and Company -- Analyst

Koosh Patel -- Analyst

Joseph DeNardi -- Stifel Financial Corp. -- Analyst

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