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At that time, to ask a question, please press star 1 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. Mr. Cooper, you may now begin.
spk07: Thank you, Brad, and welcome everyone to Mesa's earnings conference call for its fiscal second quarter, 2023, ended March 31st. On the call with me today are Jonathan Ornstein, Mesa's chairman and chief executive officer, Michael Lotz, president, and Tork Zubek, chief financial officer and other members of the management team. Following our prepared remarks, there will be a question and answer session for the Southside analysts. We also want 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 that cause actual results to differ materially from those reflected by the forward-looking statements, including the risk factors 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 fiscal second quarter earnings release. This is available on our website for the reconciliation of our non-GAAP measures. With that, I'll turn it over to Jonathan for his opening remarks. Jonathan?
spk06: Thank you, Doug, and thanks, everyone, for joining us today. As we mentioned before, fiscal year 2023 is a transition year, and our numbers reflect that. With that said, our results were largely in line with our internal expectations as we execute the transition of our CRJ900 flying to United Airlines. In addition to the transition, we're still continuing to ramp up our more profitable EJET flying. While we are experiencing significant improvement of pilot retention and output, this quarter our EJET utilization was still under six hours. Turning to the transition, We currently have 24 of the 28 planned CRJ900s in service, albeit at lower block hours than initially anticipated due to a more conservative approach taken by United. I'd like to thank all of the hardworking people at MESA who have helped make this transition happen and United for their support. While we continue to see strong demand for regional flying and our pilot pipeline has recovered significantly, Our focus over the past several months has been on ensuring the United transition and the numerous actions we have taken to strengthen our balance sheet are executed successfully. I want 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 CRJ900s with United. As we return to normalized operations and flying higher block hours, there may be an opportunity to restore some regional jet service in neglected smaller and rural markets nationwide. Three-quarters of these markets have seen service reductions in recent years, with the average reduction eliminating 30 percent 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 in 11. That's per the Regional Airline Association. Our new CPA with United contemplates the addition of over 100 daily regional jet flights across the country, representing a solid step for the regional airline industry. Unfortunately, without legislative action to counter the significant negative impact of the 1,500-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 decarbonize travel, we remain excited about the potential of our previously announced co-investments with United on new technology and electric aircraft, including Archer and Hart Aerospace. We believe eVTOL and short distance electric aviation will be integral to addressing transit needs in smaller and congested communities moving forward. While the current pilot shortage continues and needs to be addressed industry-wide through legislative action, the current industry bottleneck is now ensuring an adequate number of qualified first officers to upgrade to captain. As a result of United's new AVA program requiring that candidates have flown as captains for two years, as well as our pilot labor agreement, we believe we have a sufficient number of first officers to fill our captain 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 1,500-hour rule. With that said, we have positioned ourselves to rebuild our pilot pipeline and now have three significant pilot 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 national and low-cost carriers, which in the past may have offered higher wages. Our participation in United's AVA program which is one of the most rapid paths for pilots to join the regional industry and transition to a major airline, has proven successful in attracting and retaining pilots. Mesa pilots are afforded an opportunity to transition to United within four years. Lastly, the Mesa pilot development program, which was launched in September in Inverness, Florida, is one of the fastest and most cost-creative paths for pilots short of the 1,500-hour 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 have taken delivery of four more Pipistrelle Alpha Trainer II aircraft, with 21 more on the way. Finally, as you may know, Mike Lotz, who has previously served as chief operating officer at MESA and Virgin Express, is stepping in and taking on expanded responsibilities. Mike continues his role as president and will be overseeing all of Mesa's operating groups following the retirement of Brad Rich. With that, I'll turn the call over to him.
spk05: Mike? 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. In my 25 years as president at Mesa, I've also previously served in the COO and CFO roles and have been involved in all aspects of our business, and particularly our relationship with United. Working through this transition, optimizing pilot output, providing exceptional operational performance for United and DHL, all while operating at the highest level of safety, will be my primary focus. Transitioning to CRJ900s from American to United has been a major project for the company. Although we are keeping both Phoenix and Dallas' crew and maintenance bases, our entire network has been transformed. Our Houston hub has increased from 55 to 95 flights per day. As you may or may not know, United has never operated the CRJ-900 in their regional fleet. So everything from seat maps to jetway staging, ground handling procedures and fueling are all new to the United operations. Given these aircraft are flying to 30 cities in the network, this transition entailed a lot of preparation and work. We painted 28 aircraft and repositioned our maintenance parts and ground equipment. This was not just a simple swap of aircraft from one operator to another. We appreciate the support we received from United during the transition. Ultimately, the real benefit of the transition is that Mesa is able to provide United with 100 additional large 76 regional jet flights every day. Upon our completion of the transition to United, our contracted regional fleet will consist of 80 large regional jets, comprising a mix of E-175s and CRJ-900s. Our plan is to add back the underutilized E-jets as fast as possible. Additionally, we will continue to operate four 737-400s and 800s at DHL. While our fleet utilization the past few years has been impacted by the industry-wide pilot shortage, as Jonathan mentioned, we are now seeing attrition below pre-pandemic level. And thanks to the number of initiatives we have implemented, MESA continues to be a top destination for pilots. It's especially worth noting that recent pilot turnover is largely a result of pilot retirement or transfers to United as part of the ABA program. Nonetheless, we are maintaining our focus on attraction and retention in our pilot pipeline. We currently have almost 1,600 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 sim if needed. With that said, in the March quarter, we flew 48,186 block hours, a 5% decrease from the December quarter. I would like to point out that our bill block hours for the March quarter were actually 51,660. We expect our June quarter block hours will be approximately 46,000, a 4% reduction from the hours in our March quarter. The reductions for both periods are primarily attributable to the CRJ900s being transferred transition out of America, out of American, as well as the first officer captain in balance. Looking forward to the September quarter, Block Alley should be closer to 55,000 as a result of the transition being completed and the benefits of our captain upgrade actions. We expect subsequent quarters to continue to improve, but will not be providing projections for the next fiscal year at this time. As a final point, I'd like to reiterate that during the quarter, Mesa incorporated a new 737-800 freighter to our DHL operation. This brings our total cargo fleet to three 737-400s and one next-gen 737-800. With that, I'd like to now turn the call over to Tork to walk through our financial performance.
spk03: 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, while 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 hour rates for new pay scales. The decrease in contract revenue is partially offset by an increase in pass-through revenue of $6.8 million driven by pass-through maintenance revenue and pass-through property taxes. Mesa's Q2 2023 results include per gap the deferral of $5.7 million of revenue versus the recognition of $0.8 million of previously deferred revenue of Q2 2022. The remaining deferred revenue balance of $24.5 million will be recognized as flights are completed over the remaining term of the United contract. On the expense side, Mesa's overall gap operating expenses for Q2 2023 were $148.7 million, down $19.3 million versus Q2 2022. This decrease is primarily due to $22.7 million lower non-cash impairment of assets held for sale versus Q2 2022. Aircraft rent also fell by $8.6 million, attributable to the reclassification from operating lease to finance lease for certain CRJ900s, and depreciation and amortization expense fell by $4.2 million, primarily driven by the lower depreciable base in the CRJ900 asset impairment charge in Q4 2022. Maintenance expense fell $1.4 million this quarter versus Q2 2022, driven by lower expenses for C-checks and parts, partially offset by an increase in pass-through maintenance. We expect maintenance expenses to be roughly consistent at this level for the next three to four quarters. The decrease in gap operating expenses was partially offset by higher flight operations expense of $54.8 million, $12.4 million higher year over year, reflecting higher pilot pay scales and increased training costs as we continue to drive pilot throughput. General and administrative expenses were also $5.7 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. On an adjusted basis, MESA reported a loss of $21.3 million or a loss of $0.53 per share compared to a net loss of $10.3 million or a loss of $0.29 per share a year ago. The adjusted loss for Q2 2023 excludes a $2.1 million gain on investments and a half a million dollar gain on a disposal of fixed assets. It also excludes $16.7 million of asset impairments and another $0.7 million from a deferred financing write-off for the sale of assets. Adjusted results from Q2 2022 excluded $39.8 million of asset impairment charges and a $2.3 million loss on investments. Next, let me turn to the balance sheet. During the quarter, We closed on the sale of four of the 11 CRJ900s agreed to be sold to a third party. Mesa also sold to United the remaining eight CRJ550s and 10 out of 30 engines previously agreed upon. Importantly, these transactions generated $35 million in cash and we paid down approximately $52 million in debt during the quarter. For the June quarter, we expect to close on the seven remaining CRJ900s and 20 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 excess CRJ900s and are working to sell these aircraft. We 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 from the prior quarter into 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 payments of $4.6 million. We have $44.7 million of scheduled principal payments remaining in 2023, and after the repayment of debt associated with asset sales, we expect the fiscal 2023 year-end 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 at Mesa, we will not be providing more specific financial guidance at this time. With block hours 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.
spk06: Thank you, Torg. In summary, we've undertaken an important transition for MESA. 2023 continues to be a year of transformation, and 2024, we will build on the foundation we are establishing in 2023, focusing on returning to normalized block-hour utilization. We look forward to speaking with you over the coming quarters. At this point, operator, please open up the call, as I'd be happy to field any questions that the analysts may have. Thank you very much.
spk04: Before taking our first question, I would like to turn the call back over to Jonathan for brief remarks.
spk06: Thanks, Brad. Before we take the first question, I just want 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.
spk04: Thank you, sir. If you would like to ask a question, please first unmute your phone and press star 1. Please record your first and last name at the prompt. Our first question for today will come from Savvy Scythe of Raymond James. Your line is open.
spk01: Hey, good afternoon everyone. I appreciate the call on the block cover progression here. I was curious along those lines on the deferred revenue. Do you kind of expect to book more deferred revenue here in the next kind of couple of quarters of the year, or do we start to see that starting to reverse now?
spk03: Hey, Savi, this is Tork. You know, the deferred revenue is associated with the, you know, with the recognition of revenue as we – are flying more. So we'll see a little bit of that, but I don't have specific guidance for you right now.
spk01: Okay. But it shouldn't be deferred revenue. It should be, if anything, recognizing a little bit.
spk03: Right. A little bit. Yeah. As the contract moves forward.
spk01: Makes sense. And then just a little bit on the as you can address the pilot issue, it looks like your block hours are stepping up, and I can appreciate not wanting to give a lot more color than the end of this fiscal year. But generally, you know, what does that fourth quarter look like in terms of utilization? I'm just trying to appreciate, you know, how much more that, you know, kind of torque the, no pun intended there, but the, you know, model has in terms of being able to
spk05: uh improve kind of pilot captain levels and and really uh start operating the the suite better yes uh it's mike so in terms of utilization i think you know we we gave guidance for 55 000 for uh the september quarter i mean you know with with 80 aircraft you know 72 lines you know at even at you know 10 and a half hours of utilization we you know, targeted to get that number up into the 65,000, 66,000 range. And that will probably take us a couple quarters to get there.
spk01: Okay. That's super helpful. All right. I'll get back on the queue.
spk04: Once again, if you would like to ask a question, please press star then 1 at this time. Our next question will come from Michael Linenberg of Deutsche Bank. Your line is open.
spk02: Hi. This is actually Shannon Daugherty on for Mike. Thanks for taking my question. I think in your opening remarks, you mentioned that the EJET utilization was still under the six hours, despite being below pre-pandemic levels of attrition. Can you just, you know, give us more color on what's happening here on keeping the utilization so low?
spk06: Sure. This is Jonathan. You know, we had the spool-up pilot training, which, you know, something that, you know, really we moved as quickly as possible. Um, you know, even just getting people through training takes three or four months. Um, you know, we got a second SIM, we added instructors, um, ground instructors last month to give you an idea. Um, you know, our attrition was around 15 pilots. That's the lowest it's been that, you know, frankly, since any of us can remember and we put out of IOE, you know, something over 50. Um, those are good numbers. I mean, when we go long, you know, close to 40 pilots a month, that's, you know, the equivalent of five aircraft. Now, you know, there is the challenge about first officers. Most of the other regionals, in fact, a lot of the national carriers are having trouble because they just don't have people who have enough time in a 121 aircraft to upgrade to captain because of the acceleration and attrition that occurred earlier in the year. At Mesa, we're fortunate that as a result of the AVA 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 in this month, our captain class is about 30 individuals. So, you know, it's just a matter of how fast we can spool up. There's really no mystery in terms of, you know, what it does to our numbers. I mean, clearly at six hours, we're not going to make money. We've got you know, a bunch of aircraft parked. We are also continuing to hire and train CRJ pilots. We think we have, you know, an adequate number for the most part with what we have. But again, we're just going to continue to hire people and put as many people on and keep pushing up utilization on the existing CRJ fleet. But clearly the focus is going to be on the EJETs. And again, between all these various programs, I do think barring some big spike in attrition, which seems to be coming 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 our roster.
spk02: Thanks, Jonathan. And just a quick follow-up on the profitability rate. So Do you think that Mesa, you know, can once again return to mid-teen operating margins in the year to come? Or has the profitability bar, you know, been permanently lowered given the post-COVID issues that have disproportionately impacted, you know, both you guys and other regional airlines? You know, what would it take for you guys to get back to pre-pandemic profitability levels after a transformation? Do you need to engage with or re-engage with your airline partners or –
spk06: No, I have to tell you, Mike and I and TORC discussed this very subject this morning because I really was wondering what I would say in regard to that because it's something I wanted to address. I think our belief is that flying our aircraft, the 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, 10.5, hours a day that we could achieve margins between 5% and 8% consistently. Because there's so much leverage in that last hour, it's really pretty astounding and probably something maybe even we didn't understand going into this. But I think that we feel that it may take us, you know, it could easily take us another year to get to that full run rate. But I think that at that point, you know, looking at margins, you know, 5, 6, 7, 8% is doable. And the question becomes, you know, can we achieve that any sooner just based on what happens in attrition 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 1,700 applicants. We've got almost that equivalent amount lined up in the MESA pilot development program. Um, the real question is just the upgrade ability of first officers. Uh, United has helped tremendously in the AVA program by requiring captains for the AVA program to grant, you know, to graduate into the AVA 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 and Tork would agree, that we have thrown a lot of money out there to sort of make this happen more rapidly. And I think once we get back to normal, I think we could take a closer look at how we might be able to fine-tune the operation as well.
spk02: Thank you so much.
spk04: And our next question will be from Savvy Scythe of Freeman James. Your line is open.
spk01: Okay, thank you. Maybe just to quickly follow up and clarify on the first one, six to eight, you were talking about pre-tax margin, right, Jonathan?
spk06: Yes.
spk01: Yeah, makes sense. And just on the fleet side, you've done a lot of kind of monetizing the fleet, which is great. And so, you know, I realize there's about 80 aircraft on the United fleet, and then you have 20, maybe 2024 kind of CRJ 900s that you'll kind of keep open to fill in there until you can fully fly there. But with the sales, like how many CRJ 900s do you have then X, whatever you're dedicating to United that you can maybe continue to monetize or place in your JV in Europe? Just what's the once what you have kind of done is complete, like what's left over?
spk06: Well, I'll start, Dalette, Mike, and Tork, but I think our view now is that we're going to sell as many 900s as we can. We have the seven that we think we have a contract for. I think we're looking to packaging some of the additional 900s with parts, which we have plentiful, and engines, which are very valuable. There's a certain number that we need to operate the – you know, the existing United agreement until such time as we can operate EJET. And I think, you know, 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 slow down in terms of selling aircraft and starting to continue to pay down the government debt, which, you know, most of the aircraft are offsetting the government debt. And then we have RASPRO, all of which, you know, we are looking to wind down as quickly as possible. Do you want to add anything to that, Mike, or Tork?
spk05: No, I just think, Savvy, that, look, the capacity we have with United is for 80 large regional jets. So, you know, right now the mix is maybe, you know, 30%, 900, 70%, 175s. And, look, our goal is to try to get as many E-jets flying as quickly as possible. They're certainly more profitable for us. They're obviously newer aircraft compared to our, you know, very old 900 fleet. So it's just going to be, you know, as that movement comes where the EJETs start coming in and the 900s come out, that's where we'll look at, you know, opportunities to dispose of those assets and monetize any equity we have in them.
spk01: And just in terms of kind of trying to gauge kind of the revenue per block hour and I guess kind of the best way for us to think about it is kind of work backwards. Is that right? Like a mid to high single-digit margin, and that's what you kind of get to. What I'm trying to understand is that, you know, there's a fixed and a variable component, and I'm trying to understand how much of that current revenue for block hour is probably overstated because it's over kind of lower block hour production.
spk05: Yeah, and look, it's difficult to – forecast that because of the mix of the fleet between, you know, uh, aircraft that we may, we may own and aircraft that United owns or in certain cases, DHL. Um, so that's, that's a difficult number to nail when you have that kind of a mix.
spk06: It's not, yeah, I think what Mike's saying is just not linear because on some aircraft, you know, we're, we're making the, the, the, you know, the, either the lease payment or the ownership payment and others, our partners are, so it's just not linear.
spk01: Makes sense. And maybe if I can just ask just one last kind of taking a step back on this kind of the regional front, just any kind of thoughts now that you're seeing a little bit of settling on the pilot side and, you know, maybe the light at the end of the tunnel through this kind of period, just, you know, your view on the regional airline market here in the next kind of three years or so.
spk06: Sure. I mean, look, you know, lot of folks were concerned about the differential that you know existed between the majors and the regionals in terms of cost benefits when we've looked at it even with the new wages that cost benefit there's still a significant you know Delta between the costs so I think from a macro perspective the regional business it still has good legs and I think still makes sense and there are just cities out there that you know are just going to be too small and or are just served better with multiple departures into hubs that I think will require regional jet service. Am I concerned that over time, if cost levels continue to escalate, is there a point where the aircraft doesn't work? I'm sure that point does exist. But between fare levels increasing, demand being strong, and the importance to the network for United in particular, You know, the feed traffic has lots of value. So I don't see a situation where the regional industry just, you know, sort of goes away at this point because I think all three of those things are to our benefit. You know, I think that it's still going to take innovation. 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, you know, they're going to be in service for quite some time. and I think we're pretty safe on that as you know the cost may have gone up but you know they've also gone up at the at the major level in their cities that are just going to stay on the map regardless thank you and at this time we have no further questions gentlemen okay well thank you very much everyone I know that You know, this is obviously a tough quarter. We have a ways to go. United has been extremely supportive in terms of, you know, helping us through this. As you know, we have begun a good process to liquidate assets that we have, you know, are surplus to our requirements. And we have been getting surprisingly good prices doing that and allowing us to pay down a significant number of debt. Again, on the pilot side, we've made what I consider to be remarkable progress. It certainly surprised me that the attrition levels are down to this, and this has been sort of the second or third month where we've seen attrition levels much, much lower. And 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, you know, put out real numbers. And when you combine that with the lower levels, the lower people leaving, I think, you know, we could see some things really starting to turn. But I don't want to underestimate that it's going to take time, but clearly we have modeled this enough to know that if we can fly the aircraft, you know, 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, you know, we'll continue to plug along, and hopefully next quarter we'll talk to you again, and we continue to appreciate your support. Thank you.
spk04: Thank you all for your participation on today's conference call. At this time, all parties may disconnect.
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