Mesa Air Group, Inc. (MESA) on Q4 2022 Results - Earnings Call Transcript
Operator: Thank you for standing by, and welcome to Mesa Airlines Q4 and Full Year Fiscal Year 2022 Conference Call. [Operator Instructions] 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.
Doug Cooper: Thank you, Ted, and welcome everyone to Mesa's Earnings Conference Call for its Fiscal Fourth Quarter and Fiscal Year ended September 30, 2022. On the call with me today are Jonathan Ornstein, Mesa's Chairman and Chief Executive Officer; Brad Rich, Executive Vice President and Chief Operating Officer; Michael Lotz, President; and Torque Zubeck, Chief Financial Officer; and other members of the management team. Following our prepared remarks, there will be a question-and-answer session for the sell-side analysts. We also want to remind everyone on the call 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 could 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 fourth quarter earnings release, which is available on our website for the reconciliation of our non-GAAP measures. With that, I will turn it over to Jonathan for his opening remarks. Jonathan?
Jonathan Ornstein : Thank you, Doug, and thank you, everyone, for being with us today. Since we spoke on last quarter's results, several significant transactions have occurred at Mesa. Collectively, these new agreements transitioned our business from American Airlines to United, addressed the industry-wide pilot charge and its financial and operational impacts and created a much stronger liquidity position and balance sheet. Combined, these initiatives have transformed our business. Let's walk through what has been accomplished. As we announced on December 19, as a result of ongoing unprofitable operations due in part to utilization penalties and uncovered increases in our pilot wage structure, we initiated and finalized an agreement to wind down our contract with American Airlines by April 30, 2023. Unfortunately, while American initiated dramatic wage increases at their own subsidiaries, they were unwilling to reimburse Mesa for similar pay increases at our American Eagle operation, leaving us vulnerable to unprecedented pilot attrition. This led to an untenable situation and required us to take action. Fortunately, based on our strong relationship with United Airlines, combined with our consistent operational performance over many years, United took a different view and quickly stepped in to take over the American CRJ-900 flying. Given the industry-wide shortfall in regional jet block hours, United supported higher wages in both our E175 and CRJ-900 operations and intends to increase service to many of the smaller and rural cities that have lost flying due to the pilot shortage. As a result, on December 27, we finalized a new 5-year capacity purchase agreement with United that covers up to 38 of our CRJ-900s depending on the number of E175s we are operating. While there is a very clear business case for United's decision, this view was made possible because of a strong relationship that has developed between United and Mesa over the past 30 years. To ensure a smooth transition, our CRJ-900 crew and maintenance bases in Phoenix, Dallas, El Paso and Louisville will remain in place with an additional CRJ-900 crew base we had in Houston, along with a new pilot base in Denver to expand services to Western states. Other incremental crew bases will be potentially added. Mesa will continue to utilize all of its pilots and crews in the existing locations through the transition and beyond. In addition to these actions, our new pilot pay scale has had an immediate and significant impact on attrition as well as our ability to attract qualified candidates. We currently have approximately 400 pilots in our training pipeline. Concurrently, United is providing financial support to Mesa under two additional agreements that we also finalized on December 27. One to provide Mesa a new $41.2 million liquidity facility, of which $25.5 million will be additional liquidity and another to purchase 30 spare engines from Mesa for $80 million, generating over $50 million of net cash proceeds. As part of the transaction, United will also receive a 10% equity position in Mesa and a seat on the Mesa Board. We thank United for their support, and we look forward to capitalizing on the substantial demand for regional jet flying together. This is an important reversal of momentum for the regional airline industry as [Mesa and I] will work to restore service to neglected smaller and rural markets, 3/4 of which have seen service reductions in the past 3 years by adding over 100 daily regional jet flights to the United network. We look forward to leveraging our previously announced co-investments with United on new technology and electric aircraft to further address the needs in smaller and congested communities. Moreover, after the transition, Mesa will be the only exclusive regional carrier for United operating large regional jets. We believe our strong relationship with United will provide significant opportunities in the future as a preferred carrier. In particular, we believe Mesa's participation in the Aviate program, combined with United's industry-leading growth plan will provide the most reliable, fastest path for aviators to transition to a major commercial care. Once our operations are fully integrated with United, Mesa will be the most attractive career path in regional aviation for pilots as well as all of our other employee groups. In the quarter, we also signed a new 2-year agreement with our flight attendants. I would also like to note that our operation with DHL was unaffected by the American and United agreements, and we continue to maintain a strong relationship with DHL. Additionally, we have completed a number of transactions to strengthen our capital structure. In mid-December, we renegotiated improved terms and conditions with EDC, Export Development Bank Canada on debt associated with 7 next-gen CRJ-900 aircraft, reducing debt service by approximately $14 million from January 2023 to December 2024. The junior noteholder, Mitsubishi, has also agreed to forgive 50% of the outstanding note balance or approximately $4.2 million if the notes are fully repaid prior to December 31, 2023. Additionally, we negotiated an agreement with RASPRO, a Canadian special-purpose finance company on our leases of 15 CRJ-900 aircraft, which reduces the effect of purchase price at or prior to March 2024 lease termination by approximately $25 million. Concurrently, Mesa plans on closing on the sales of the remaining 8 CRJ-550s to United in January 2023; and 11 surplus CRJ-900s to a third party, resulting in net cash proceeds of $16.2 million. These sales are expected to reduce Mesa's U.S. treasury debt by approximately $65 million and reduce annual interest expense by approximately $4.5 million at current rates. With that, I will hand over to Brad Rich to go over more of the details of an update on our operational performance this quarter.
Brad Rich : Thank you, Jonathan, and good afternoon to everyone. I'd like to start by reviewing our quarterly operating results. In the September quarter, we flew 56,533 block hours, 11% below the June 2022 quarter in line with our forecast on last quarter's call. Our December quarter block hours are projected to be 52,000, roughly 9% below the September quarter. For the March quarter, we are currently forecasting 53,000 block hours, a slight increase over the December quarter. Consistent with the challenges throughout the regional industry, our block hour production has been limited due to the pilot shortage. As mentioned previously, attrition has come down materially, and we are filling our classes into the future. Our pilot training production is a major focus, and we continue to expand our capabilities with an additional E-Jet simulator coming in the spring of 2023 and additional instructors in both the E-Jet and CRJ fleet. In addition to our own hiring, we have contracted with CAE to provide additional support for our training efforts. We are focusing on our transition out of American and working cooperatively with United in making preparations for facilities, crews and maintenance. We expect to operate our current American schedule through February 28 for approximately 24 lines of flying. From March 1 through April 3, we will reduce the schedule by 50%, and our operations with American will cease on April 3. Beginning March 1, we will begin operating 9 lines for United and expect to have 24 lines operating by May of 2023. As part of the transition agreement with United -- as part of the transition agreement, United will pay the expenses to reconfigure and rebrand the CRJ-900 aircraft. As we transition our CRJ-900 flying to United, we look forward to maintaining the same level of schedule integrity associated with our ERJ fleet. With that, I'd now like to turn the call over to Torque to walk through our financial performance.
Torque Zubeck : Great. Thank you, Brad, and thank you to everyone on the call today for your patience as we work to release our quarterly and fiscal year results. As you can see, the delay was due to a number of transactions that were being finalized that meaningfully restructure our flying agreements as well as our debt and lease obligations. As Jonathan has already covered most of the transactions, I'd like to just touch on a few items and summarize our expectations. First, our performance in the fourth quarter. Revenue in the fourth quarter of fiscal year 2022 was $125.6 million, a decrease of $5.1 million or a negative 3.9% from $130.8 million for Q4 2021. Our contract revenue fell by $5.3 million year-over-year. Pass-through and other revenue remained relatively flat to last year, rising 1% primarily due to pass-through maintenance expense. And as a reminder, the pass-through maintenance expense has no P&L impact. Mesa's Q4 '22 results include per GAAP, the deferral of $1.3 million versus the recognition of $1.3 million of previously deferred revenue in Q4 2021. The remaining deferred revenue balance of $24.1 million will be recognized as flights are completed over the remaining terms of the contract. On the expense side, means overall operating expenses for Q4 2022 were $266.8 million, up $141.1 million versus Q4 2021. This increase was driven by $132.3 million expense for impaired assets related to the American Asset Group, the relatively short duration of the remaining contract with American Airlines and the relative uncertainty around longer-term utilization of CRJ-900 fleet and supporting assets. General and administrative expenses of $12.4 million, primarily driven by a onetime tax adjustment of $7.1 million. Maintenance expenses continued at below normal levels as we passed the high number of engine overhauls and heavy C-checks that were deferred at the beginning of COVID. Maintenance costs was $45.9 million in Q4 2022, down $15.1 million or $24.8 million versus Q4 2021. On an adjusted basis, Mesa reported a pretax loss of $16.4 million for Q4 '22 compared to a pretax loss of $3.1 million for Q4 '21. The year-over-year decrease of $13.3 million was primarily due to lower block hour production and the net impact of the PSP program. It's important to note that the adjusted pretax loss for Q4 excludes $132.3 million impairment loss primarily related to the group of assets that are supporting the American CPA. Excluding this item, adjusted net loss is $13.5 million or $0.37 per share compared to a net loss of $2.1 million or $0.06 per share a year ago. And for the fourth quarter of fiscal year 2022, we reported a net loss of $115.6 million or $3.18 per diluted share compared to a net loss of $7.5 million or $0.21 per diluted share for Q4 2021. So let me turn to cash and liquidity. Cash for the quarter, excluding restricted cash, increased by $3.3 million from the prior quarter, June 30, 2022, to $57.7 million. Based on United funding the $25.5 million loan this week, our projected December 31 cash balance is $55 million. This includes any other proceeds from the sales that are not expected to close until the new calendar year. Total debt at the end of the quarter was $599.7 million, down $36.3 million from the prior quarter. During the quarter, we made scheduled debt payments of $42.9 million. Most importantly, combined, our sales transactions will reduce debt by $84 million by as early as March 2023. We also have $80 million of scheduled principal payments in 2023 resulting in projected end of fiscal year '23 debt of approximately $435 million. So looking to full year 2023, given the major developments at Mesa that we discussed today, we will not be providing specific financial guidance at this time other than the block hours that Brad discussed earlier. With that, I'd like to now turn it back over to Jonathan for closing remarks.
Jonathan Ornstein : Thank you, Torque. In summary, 2022 was a challenging year for the regional industry and for Mesa in particular. But we made many important strides in the past few months towards turning our business around. To recap, we reached major operational and financial agreements with United, we shed our loss-making business with American, we implemented a new pay scale for our employees and seized opportunity to shore up our balance sheet through significant reduction in debt and increases in cash. To end this call, I'd like to again thank United for its continued support over the past 3 decades as well as our other shareholders -- stakeholders, such as the U.S. Treasury Department, Export Development Canada, RASPRO and Mitsubishi as well as the assistance of Sidley Austin representing United and FTI representing Mesa. We are especially thankful for the efforts of all our employees towards helping us rebuild and optimize our operations, setting Mesa up for future success. At this point, operator, please open up the call as I'd like to field any questions that analysts may have.
Operator: [Operator Instructions] The first question we have in the queue is from Michael Linenberg with Deutsche Bank.
Operator: Our next question in the queue is from Savi Syth with Raymond James.
Operator: The next question in the queue is from Helane Becker with Cowen.
Operator: The next question in the queue is from Savi Syth with Raymond James.
Operator: And I'm showing no further questions at this time.
Jonathan Ornstein : Okay. Well, thanks, Albert. Let me just close in this, and I think it's really important that people appreciate. Look, we are now having the opportunity to really focus on these operations and focus on our partnership with United. United is committed to growing their company. It will help us grow our company. They're committed to regional aviation. They too have witnessed just dramatic cutbacks throughout regional aviation in terms of rural cities. And I know that the leadership at United really would like to see that improved and see things turn around. Mesa has always been a rural aviation carrier. We'd love to be a part of that. United's also committed to green technology and doing the right thing for the planet, and we've co-invested with them now on a number of deals. And I think that we would like to think that we could be at the forefront along with United in terms of the implementation of that technology. So we have a long road to hold for sure. But I can't tell you how strongly all of this feel that this is just a great step for Mesa. Hopefully, a great step for United as well and that we feel that our people will clearly be the beneficiaries of this with enhanced security, job security, enhanced opportunity. The Aviate program, I mean I don't think there's going to be a better place to go than Mesa Airlines for folks looking to get into the aviation industry. So overall, we're very enthusiastic about it. We are very thankful for all the parties that help make this happen, and we look forward to seeing some of that value reflected back to our shareholders as well. So thank you very much, and have a great Happy New Year.
Operator: This concludes today's call. Thank you for your participation. You may disconnect at this time.
