Mesa Air Group, Inc. (MESA) Q2 2020 Earnings Call Transcript

Mesa Air Group, Inc. (MESA 5.75%)
Q2 2020 Earnings Call
May 11, 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] I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Jonathan Ornstein, chairman and chief executive officer.

Thank you. You may begin.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Thank you, operator, and thank you, 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'd like everyone to be aware, we are doing this remotely.

So it has its challenges, but I think we'll be OK. I'd like to ask Brian to read the safe harbor statement. Thank you.

Brian Gillman -- Executive Vice President and General Counsel

Thanks, Jonathan. Before the presentation and 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 results to differ materially from those statements. Also, please note that the company undertakes no obligation to update or revise these forward-looking statements.

And any forward-looking statements should be considered in conjunction with the cautionary statements in our press release and the risk factors included in our filings with the SEC, which Mesa encourages you to read. These risks and uncertainties include those associated with the COVID-19 virus and its impact on our business. 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. The founder of our company, Larry Risley, who's also my mentor, had an expression to describe the uncertainty in the airline industry. Larry used to say something happens every year that happens every 10 years.

Well, I think even Larry would be surprised by the depth of the impact of the coronavirus and what it's had on our employees, our company, our industry, our country and even the world. We'd like to start by thanking all of our people who are out on the front line facing this challenge every day when they come to work. Along with our partners, American and United, we are working diligently to provide the highest level of safety for our passengers and our employees. I'd like to give you a brief update on the level of operations.

We know that things can change rapidly in this environment. Pre-COVID-19, we operated approximately 650 flights per day. In April, we saw that number drop to 194 flights per day or about 30% of pre-COVID-19 levels. For May, we are currently operating at approximately 240 flights per day.

We have been able to respond very quickly and effectively to this new level of operations. I'd also like to give an update on the CARES Act. As previously disclosed, Mesa expects to receive a total of $92.5 million in connection with the payroll support program under the CARES Act covering the period April through September 2020. In April, Mesa received $30.8 million under the program and expects to receive $15.4 million each month, June through September.

Since we were under the $100 million threshold, none of the $92 million is a loan, and we're not required to issue any warrants. The proceeds under the grant can only be used to pay for employee wages and related costs. We have also applied for a loan under the CARES Act. We are working with the treasury department and their advisors and have a call scheduled this week to discuss our loan application.

We believe Mesa is well-positioned given the equity we believe we have in our assets, primarily aircraft and engines. That being said, we have very little insight into loan amounts and approval criteria, and we'll know more later this week. Let's turn now to our partner update. For United, there has been a delay of the 20 new Embraer 175.

These aircraft were originally scheduled for May through December of this year and have been delayed to late 2020 and '21. We plan to finance the aircraft under the same type of structure we had with the previous 18 Embraer 175 that we own today. With the support from both Embraer and United, we continue to pursue various financing options. In conjunction with the delay, we will continue to operate our CRJ-700 fleet of 20 aircraft until the new 175s are delivered, at which point they are scheduled to be leased to another United Express operator configured with 50 seats of the new CRJ-550.

We are working very collaboratively with United and have agreed to waive minimums and have given temporary reduced rates through the end of September and other cash flow benefits around the timing of weekly payments. Of course, we will only do what we are comfortable with in this high-risk environment, but we'd like to do everything we can to assist our partners in seeing through this difficult time. A quick look at the United fleet. We have 60 Embraer 175.

42 are owned by United and leases them to us in 18 are owned by Mesa and head of United participation. We also have 20 CRJ-700, 18 are owned by Mesa and two are leased. So for United, we have very -- we have relatively little exposure or tail risk. As you know, Brad Rich has been focused on American.

So I would like to ask him to give you an update on American.

Brad Rich -- Chief Operating Officer

Thank you, Jonathan. In an effort to reduce system capacity, American elected to remove three aircraft from the CPA, which had previously been deferred. Two of those aircraft come out in May and one in June. We are also working collaboratively with American and have proposed a temporary reduction in rates through the end of September and similar to United, other cash flow benefit around the timing of weekly payments.

I do want to make an important point as I have been tasked with negotiating an extension with American. Although we have not accomplished that yet, in large part due to the current environment, we have been told that we'll continue to be part of the American portfolio of carriers going forward. While we don't know the size, scope or duration of an extension, we remain convinced that American believes we are a valued part of the portfolio. As I just mentioned, I have had ongoing discussions regarding contract extensions, but given the current environment, I think it would be worthwhile to provide some details on the impact of a worst-case, no-extension scenario.

Assuming no extension, 49 of the 56 aircraft expire over 23 months beginning in January of 2021. The remaining seven aircraft do not expire until 2025. The debt on those expiring aircraft that are being removed is very low at under $1.5 million per aircraft. 33 of the aircraft have no debt at the end of the 23 months.

At the time of expiry, our 15 leased aircraft will be rough -- the aircraft expense will be at roughly $69,000 per month per aircraft, certainly at or below post COVID-19 market rates. While a return to normal demand levels would offer the highest likelihood of a contract extension at American, we believe that if there is a silver lining, it is a renewed focus on cost, which has always been one of Mesa's strengths. Another strength of Mesa is proposing creative solutions that create value for Mesa and our partners. For example, Mesa's 76 CRJ-900 aircraft could be converted to 65 seats and operate at what we believe would be rate competitive to 50-seat aircraft while offering both more seats and dual-class service.

As you know, American can operate 65-seat aircraft within their small regional depth and scope limitations, as compared to 50 seats for both United and Delta. I think it is also important and worth emphasizing that Mesa's low costs are not by accident. We believe Mesa has the lowest overhead for aircraft in the industry, and our corporate culture has always been built around productivity, efficiency and a lean organizational structure. We don't have an infrastructure for prorate or at-risk line.

We build our entire business around supporting our partner capacity purchase agreement. In other words, we don't have the traditional overhead that goes with that for at-risk line, such as ticketing, scheduling, filings, credit card processing and other such overhead costs. We have eliminated all those costs and operate 100% CPA. As another clear example, Mesa structured its last pilot agreement and did not, and we have not, incorporated the sign-on or retention bonuses into the pay scale as most other carriers did.

We believe this will give us a significant cost advantage in this environment going forward. As a result of our focus on low operating costs, we believe we offer the lowest rates in the industry creating significant savings to our partners each year. Coupled with our ability to offer modest short-term cash flow relief, we believe we are the most attractive long-term alternative in the industry. Now let me touch on what we are doing operationally to preserve cash.

Deferring heavy maintenance, of course, as we utilize a much smaller portion of our fleet. We've also had significant positive response to voluntary leaves of absences from our employees. And in fact, in May, we have had over 600 requests for voluntary leaves. We obviously have in place a hiring freeze.

We're also reducing pilot training costs as those costs have been reduced to costs associated with required recurrent training, no new hire training. As you know from previous calls, the new hire pilot training expenses were extraordinarily high due to the pilot shortage. That was a priority previously, and it still is. Now if it becomes necessary to downsize in October, given the loss of payroll protection programs and the continuation of a downturn in traffic, although very difficult and as a last resort, the direct labor reductions for pilot, flight attendants, mechanics and dispatch is straightforward and directly related to the level of operations.

Given our current low overhead, the administrative staff reduction, we believe, would likely be less than 100 people. Lastly, we still plan to enter the cargo business prior to calendar year-end. You may have seen that we recently added Dan McHugh to our board of directors. Dan has an extensive cargo background serving as CEO of Southern Air Cargo prior to its acquisition by Atlas.

And now I will turn the time over to Mike, where he'll provide some financial details of where this all puts us.

Mike Lotz -- President and Chief Financial Officer

Thanks, Brad. So in addition to the operational areas to preserve cash, we're working with all of our major vendors on deferrals, reduced rates and relaxed payment terms. We're also working constructively with our aircraft financing parties to achieve potential deferrals or reductions. Given our reasonable expectation regarding deferrals, the significant cost savings we have implemented or plan to implement, as well as a traffic projection with only modest increases toward the end of the year, it is our goal to achieve a breakeven cash flow when we ended March through the end of the calendar year.

While this may appear to be a lofty goal, we believe it is achievable. This goal assumes we not take any loans under the CARE Act and that we were able to successfully finance the E-175 deliveries and new CRJ-700 and 900 engines, which we have on order in the same structure we have in the past. I'd like to just walk through some of the basic Q2 P&L and cash items, most of which are outlined in the earnings release. For the second quarter, we reported pre-tax income of $3.2 million, this compares to pre-tax income of $17 million for the same quarter last year.

The quarter-over-quarter variance was primarily due to the timing of scheduled heavy engine and airframe maintenance of $10.7 million, which was anticipated and outlined in our last quarter guidance. Quarter over quarter, we were also impacted by the severe drop-off in flight activity in March due to the impact of COVID. We estimate the impact of $3 million as we had little to no time to mitigate the impact. Additionally, for the quarter, we reported $1.3 million of income tax expense for net income of $1.9 million or $0.05 per share.

Just a quick note on income taxes, although we reflect income tax as an expense, we will not pay any cash taxes as we still have in excess of $478 million in NOLs. On cash and liquidity, we ended the quarter with $52.4 million in cash. During the quarter, we drew down $23 million on our line of credit. We estimate we still have approximately $5 million under the line.

We also have five unencumbered CRJ-700 aircraft. During the quarter, we paid $11 million in deposits on previously ordered engines. The engine deliveries have been pushed to 2021. Two engines were delivered in April, and we applied our deposits to pay for those engines.

Lastly, on cash during the quarter, we had $6 million in lease expense in excess of book lease expense and $8 million in aircraft property taxes related to prior periods, which are paid by our partners through the CPA and trued up. Total debt on the balance sheet at quarter end was $788 million, down $20 million compared to the loss of last quarter. During the quarter, we paid $43 million in scheduled principal payments and added $23 million from our line. Capex was $3 million for the quarter.

Going forward, capex will be minimal, if any, and dependent on the timing of the E-175 and the engine deliveries. As disclosed in our press release, we're not providing any further guidance at this time. I'd like to turn it back to Jonathan now.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Thank you, Mike. Obviously, this has pushed everyone to our limit. I think the whole country has felt the strain of the COVID-19 virus. That being said, we believe we are well-positioned with our core company values and assets.

As a low cost operator, we believe this environment will ultimately create more opportunities for us. I'd like to thank everyone for taking the time out of their day to join us, and I'd like to open up for questions and answers.

Questions & Answers:

Operator

Thank you. [Operator instructions] Today's first question comes from Savi Syth with Raymond James. Your line is open.

Savi Syth -- Raymond James -- Analyst

Hi. Good afternoon. Thank you. Just a little color on the cash burn.

I was just wondering where the cash kind of burn level is today and what it might take to reach that to level for the nine calendar months that are left here? And also, does that include what you're doing on the cargo side?

Jonathan Ornstein -- Chairman and Chief Executive Officer

I can take a quick shot, and then I'd like Mike to maybe follow up if he has some detail. We have been very diligent at Mesa regarding our cost structure. We continue to work very cooperatively with our labor groups and our partners. As such, at this point, we don't believe that we are suffering from negative cash burn currently.

Mike, if you want to update that and give any more detail, I'm happy to have you do so.

Mike Lotz -- President and Chief Financial Officer

Yeah. No. I mean, we have made some assumptions on traffic. They're coming back.

I mean, between now and August, we don't expect any improvement from September through the end of the year. We expect some small improvement, 3%, 4%, 5% a month. We end the year at only 50% level. So it's not, I don't think, very aggressive assumptions on that side.

On the cost side, our assumptions are pretty fair. Nothing that's going to be too big of a challenge. As Brad alluded to, the challenge will be in October without the Federal relief going to a major reduction in staff. It will be painful, but we believe very achievable.

On the point of target, we do have included in this forecast, continuing our start-up for the cargo operation.

Savi Syth -- Raymond James -- Analyst

Got it. That's helpful. And just if I might follow-up on the debt side. Is there any -- it's helpful if we can understand the capex.

Are there any kind of debt payments left in the year? Or are you able to kind of defer any debt payment?

Mike Lotz -- President and Chief Financial Officer

We have some very nominal reductions in debt payments, but the rest of the debt payments are as scheduled.

Savi Syth -- Raymond James -- Analyst

All right. Great. And how much is that -- how much is left?

Mike Lotz -- President and Chief Financial Officer

What was that?

Savi Syth -- Raymond James -- Analyst

How much is left for the year?

Mike Lotz -- President and Chief Financial Officer

In debt payments or in debt balance?

Savi Syth -- Raymond James -- Analyst

In debt payments.

Mike Lotz -- President and Chief Financial Officer

The debt payments are roughly $12 million per quarter -- or per month, rather.

Savi Syth -- Raymond James -- Analyst

All right. Perfect. All right. I'll get back in the queue.

Thanks.

Operator

Thank you. The next question comes from Helane Becker with Cowen. Your line is open.

Helane Becker -- Cowen and Company -- Analyst

Thanks very much, operator. Hi, gentlemen. And thank you very much for the time here. On the CARES Act, mainly, the $92.5 million, the first loan or the first amount grant.

Are your partners pushing you to give them some of that money?

Jonathan Ornstein -- Chairman and Chief Executive Officer

OK. All the money that we receive under the CARES Act is required to be paid to our employees. We have, in fact -- or begun -- well, with United, we've completed with American, we're negotiating for some level of credit to their cost based on the fact that they do pay part of our labor costs when they fly the aircraft. That's embedded into the cost of flying the aircraft.

So our view is to the extent that United or American paid our labor costs, they should be entitled to a cost reduction, given the fact that we are receiving those funds from the government under the CARES Act. We feel that, as a good partner, it would be unfair for us to keep that money without giving them some type of cost reduction if they are, in fact, paying for that labor cost when they fly the aircraft. So if they're flying the aircraft 30% of the time, and we're in a situation where we're paying $76 minimums to our pilots and flight attendants, you can see there's a big deficit there. So that's one of the things that we've been discussing, and we feel that they've been very cooperative and constructive and don't feel like it's going to cause any issues between us and it's certainly fair.

Helane Becker -- Cowen and Company -- Analyst

OK. So that's part of the -- what you and Mike and Brad were talking about in terms of the cash flow negotiations and just the negotiations on reductions in rate? Or is that above and beyond? Or is it more --

Jonathan Ornstein -- Chairman and Chief Executive Officer

No, that's primarily what we're talking about. The other issue is just that our partners have asked us for some relief regarding the timing of true up. So that's a weekly item. It's really just a matter of timing as opposed to -- because of the amount that they're flying is reduced so much.

So that just us and it's just a matter of timing and something that also is a reasonable request that we're willing to do.

Helane Becker -- Cowen and Company -- Analyst

OK. And then my other question is on the second loan that you're negotiating for later this week, what would make you say no to that money?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Well, I think that we have to get the terms in regard to what the equity asset is going to be and also what the rate will be. From what we've heard, it appears that the rate is actually fairly attractive. And again, on the finance piece in terms of equity, our equity give up or warrant, we just have to take a close look at that. I think that we feel that there's enough opportunity out there that -- and we have real uses for those funds.

And why we feel Mesa is so well-positioned is these loans were supposed to be made if you were an asset, you had financing in place prior to COVID and as a result of coverage, you no longer can get that financing. That is precisely what we're looking to do with this money. So again, I think it's just a question of how expensive it is, but this is money that we had intended to raise prior to the COVID crisis.

Helane Becker -- Cowen and Company -- Analyst

Gotcha. OK. Thank you very much. Those are mostly my questions.

Thank you.

Operator

Thank you. And the next question comes from Mike Linenberg with Deutsche Bank. Your line is open.

Mike Linenberg -- Deutsche Bank -- Analyst

Oh, hey. Hey, thanks. Good afternoon, guys. A couple here.

Jonathan or Mike or even Brad, on the potential loan size, I think most carriers have said it's -- basically, it's a function of your ASMs relative to system ASMs, so sort of back of the envelope, what would you guys be looking at? I mean, I know you didn't put anything in the release, but is it $100 million, $150 million? Where would you think that secured loan would size out at? Any rough numbers?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Yeah. I mean, I'll give you some thoughts. And then, again, trying to get information has been difficult in terms of what the thought process is. But when we look at what has been granted so far, the loans have amounted to as little as 80% of the money that was done under the CARES Act 1 under the employee protection as much as 220%.

So we'll just have to sort of see where ours comes out. We had made requests pointing out specific requirement on specific issues, specific aircraft, our engines, things like that. Really just won't be able to have a better feel until we have our call because we just don't really fully understand what the criteria is and what the loan is going to be designed to do. I mean, Mike, Brad, does anybody want to add to that?

Mike Lotz -- President and Chief Financial Officer

No. This is Mike. That pretty much sums it up. We don't know if it's going to be this percent of ASMs.

We've seen that, but there's applications that are inconsistent with that. So rather than speculate, we're going to wait to see what the guidance we get specifically from treasury and their advisors.

Mike Linenberg -- Deutsche Bank -- Analyst

OK. And then, Mike, just you talked about, I think you said cash breakeven by the end of this calendar year, I think, is what you said, nine months from March 31. Where do you think your cash is? Because there's a lot of moving pieces here. You talked about some temporary relief to your partners.

Where do you think your cash position is maybe at the end of September or even at December 31, 2020? Do you have kind of a rough kind of giving us a guide on where you think your cash position will be?

Mike Lotz -- President and Chief Financial Officer

So what I say that we expect by the end of the calendar year to be at about where we were in March, which was around $53 million. And month-over-month between now and December, it deviates not very much higher or lower than that.

Mike Linenberg -- Deutsche Bank -- Analyst

OK. And again, that's not including the secured loans. So that would be over and above?

Mike Lotz -- President and Chief Financial Officer

Yeah, that's assuming no secured loan.

Mike Linenberg -- Deutsche Bank -- Analyst

OK. That's helpful. And then just lastly, I know, Brad, you did say that the cargo operation is still full force. But with everything on your plate right now, I guess it's still going to happen, but it feels like it's probably been pushed back.

It's maybe the real capex spend that is associated with it probably doesn't happen in current calendar year and probably gets pushed into 2021. Is that a fair statement?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Well, if I can answer, this is Jonathan. Most of the money that we had to spend to put the aircraft on certificate was spent pre-COVID, manuals and all that sort of stuff. There is a little bit left, but it's not significant. The operation has been pushed, and we are not expecting to begin until September.

But we are going full speed ahead. And Dan joining the board, we -- is indicative that we do have a commitment to try to grow cargo. Dan had a long career with DHL. He then ran Southern and was very successful there.

As you guys may know, I was on the board and that's how I got to know him. And we think that there is a real upside for Mesa. The other piece of it is we have a lot of people now that are available to do work and want to do work and are anxious to be productive. I mean when you think of all the professionals that we have, for example, in our training department.

These are all people that we feel we can utilize to help us move this cargo program forward. And to be frank, we have the luxury of the federal government paying them right now. And we felt it's something to be productive and continue to move the company forward. I want to also emphasize one thing because there may have been a misunderstanding.

We don't expect to achieve cash flow breakeven by the end of the year. We believe we're at cash flow breakeven to date, OK? And it is a goal in terms of continuing that because, obviously, we don't know where traffic is going to go. We don't know if our partners can continue to fly 240, 250 flights a day. We don't know how sticky things will become in September after the CARES loan, the CARES grant runs out.

But as of today, we are cash flow breakeven and feel stronger that we will put programs in place to maintain that throughout the rest of the year. And that is also exclusive of any monies that we receive under the act -- the loan act. So it's not going to be easy, but we think given Mesa's history as a low-cost carrier and what is really embedded in our culture, it is something that we can achieve.

Mike Linenberg -- Deutsche Bank -- Analyst

Jonathan, just to -- back to your point about how you have a lot of people and you want to put them to work and you have the cargo operation on the horizon, so that seems like that's a good platform to put people rather than laying them off. Is there any possibility that the CRJ-700s that could be going to another partner, that you end up keeping them in-house and running a 550 operation, as well as also complementing that with the new Embraer 175s that will be flown for United? Or is that just too much on your plate? Would you not be able to accommodate that and to provide that to United if they ask you to do that?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Sure. I can tell you strategically, and I'll let Brad talk about operationally. But strategically, as I think was mentioned on another call, regional airline call, the current operator of the CRJ-550 has -- it's well known, have been having a difficult time with COVID. We will clearly stand ready to continue to operate those aircraft in any configuration United wants.

And given the fact that we operate a large CRJ fleet, I don't believe it will be challenging. But Brad, if you want to add to that and having been at United, you have a pretty good feel for all this. Would you like to add to that?

Brad Rich -- Chief Operating Officer

Jonathan, I don't have a lot to add other than to say, look, that's certainly a possibility that's been in our mind. It's been at the forefront of planning and that sort of thing, and there's probably no better time operationally to continue just those preparations in the event that becomes an opportunity, we'll be ready.

Mike Lotz -- President and Chief Financial Officer

And Mike, I just want to add one thing. I know Mike dropped off. This is Mike. So just we did -- if you did run the ASM math, we're about 1.1% of the ASMs which, on a $25 billion loan program, would be something around $275 million.

Again, we don't know how much of that would be prorated out like 76% on the grant side. So I just wanted to elaborate on that. Thanks.

Operator

And I do have a question from Savi Syth with Raymond James. Your line is open.

Savi Syth -- Raymond James -- Analyst

Hey. Thanks for the follow-up. Just a few small ones here. Just on the CRJ-900 fleet or actually just in general, what is your unencumbered assets? Do you have kind of asset value there? And then also just on the CRJ-900 fleet, like what do you think -- if you do have aircraft that -- and you do already have some extra aircraft there, what values do you think, in this current market, you could sell those for?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Well, again, I'd encourage Mike and Brad to speak up also. But I would suggest that in today's market, a sale at any price would be difficult. I know that there are very few aircraft available, and the production of regional aircraft is literally ground to a halt. So we're hoping that over time, these aircraft will regain sort of the pre-COVID values.

But I think that if you look at the pre-COVID appraisals, which we don't put a lot of stock in, for sure. But I mean, we felt that we had in excess of $200 million worth of equity in the CRJ fleet. We do have five CRJ-700s that we own outright with no -- that are completely unencumbered. And the rest, as Mike mentioned, have about $1.5 million of equity.

So between those, even if you assume a value on those aircraft, literally almost half of what it was pre-COVID, we still have a pretty significant amount of equity. Mike, Brad, do you guys want to comment on that? Mike, you're probably closer to the numbers, if you want to correct me, go right ahead.

Mike Lotz -- President and Chief Financial Officer

No, that's right. I mean, look, we look at it as far as COVID, and then in this environment and at $1.5 million per aircraft. If we weren't able to successfully do something with American with some portion of the fleet, we just look at $1.5 million as something that we think we could almost scrap the aircraft at. So we look at that from more of an exposure standpoint.

And it's too hard right now to predict what values will be that could change. In six months, it could be dramatically different.

Savi Syth -- Raymond James -- Analyst

Makes sense. And then just a clarification on the cash burn. I'm guessing, for months April through kind of September, you have the benefit of the grant in that cash spend calculation. And then as you get into kind of the rest of the -- to the fourth -- the calendar fourth quarter, then you'll have to kind of figure out based on whatever the volume of flying to kind of maintain that cash breakeven.

Am I thinking about that correctly?

Jonathan Ornstein -- Chairman and Chief Executive Officer

Mike, go ahead.

Mike Lotz -- President and Chief Financial Officer

Yeah. You're thinking it correctly. And we look at it not only as getting the benefits of getting that money, but also the obligation that we can't furlough our employees. So it's not like a lot of companies that would think we have all this grant money to spend, and we also are obligated to keep all our employees.

So it's -- but yes, that's the correct assumption.

Jonathan Ornstein -- Chairman and Chief Executive Officer

Well, and if I could add something, Savi, on that. Prior to the CARES program, we actually had come to an agreement with our pilots. And this is just to show you the level of cooperation that we have and the forward-thinking that I think our pilot group has always exhibited. Prior to that, we came to an agreement to actually reduce minimum hours in order to avoid a furlough.

And the agreement being that if we were able to do the CARES program and not have to furlough, of course, we weren't going to hold them to those minimum hours. But they did that voluntarily in literally days. And so I'm hopeful that depending on the level of flying that we're doing that rather than just say, we have to do a wholesale furlough across all our workgroups, that people can continue to pull together and come up with strategies so that we could eliminate or potentially -- or certainly minimize the number of our people that would be furloughed because, look, our people work really hard. They do a great job.

They've been out there facing this head on. And the last thing that we want to do is to furlough anybody under these circumstances. So I'm hopeful that we will continue to come up with creative ideas to avoid that outcome.

Savi Syth -- Raymond James -- Analyst

That would be great. And then just one last question on the cargo business. As on the one side, it seems a little riskier because it is something new. It's a new fleet type.

But on the flip side, cargo is doing well. Do you have any kind of thoughts on expanding that from what you are thinking? Are you still thinking maybe kind of two or three aircraft type size business to launch with?

Jonathan Ornstein -- Chairman and Chief Executive Officer

On the launch, we will be at two or three aircraft, for sure, and we will be very careful about how this is structured. I remember, we are not buying the aircraft. We're not leasing the aircraft. Those aircraft are being provided for us -- to us.

Clearly, with only two or three aircraft, we would look to expand. And it's our belief that given our cost structure and our flexibility that we would be an ideal candidate to see that fleet expand, which, again, will just give us another leg on a stool that we could fit more firmly. And the cargo business is, in fact, one of the few bright spots. We would not be doing the cargo business ad hoc.

Any deal that we did in cargo would be done with an internationally recognized cargo operator, where we entered into a contract with them, very similar to what we do with United and American.

Savi Syth -- Raymond James -- Analyst

OK. I appreciate all the responses.

Operator

There are no other questions at this time.

Jonathan Ornstein -- Chairman and Chief Executive Officer

OK. Well, thank you, everyone, for taking time. I know it's really surreal for all of us, and something that we really hope that we can work our way through this successfully, but more importantly, we really pray for the safety of all of you and the rest of our country. I want to thank all of our employees for doing just an outstanding job, and we really appreciate all the work that's been done.

And hopefully, we continue to do for our shareholders. So thank you very much. Have a great day. And we'll talk to you at the next quarterly call.

Operator

[Operator signoff]

Duration: 43 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 -- Raymond James -- Analyst

Helane Becker -- Cowen and Company -- Analyst

Mike Linenberg -- Deutsche Bank -- Analyst

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