Mesa Air Group, Inc. (M2A0.F) Earnings Call Transcript & Summary

The lunch crowd is slow to come back in. But kicking off the afternoon session, we have Mesa Air Group and their CFO, Torque Zubeck. So Torque, thank you for being with us today.

Glad to be here.

So for those of you here in the room and on the lines, Mesa's a little bit different than the other airlines that we've had up here today. So maybe, Torque, tell those listening, how Mesa is different than much of the other -- rest of the airline industry that everyone is so familiar with?

Sure. Yes. Well, so Mesa is the third largest regional carrier. And we operate 80 E-175s on behalf of United, and we have 40 CRJ-900s that we operate on behalf of American Airlines. And then we also are the only regional carrier that has a 737 freighter operation that we do for DHL. So we're building that up. We just finished our first year of operations with DHL with 2 aircraft, and we just added a third one. So it's a little bit different model than some of the other carriers have.

Just about the -- maybe give a little bit of background on the business model just in terms of the risk that you take from a ticket and fuel perspective, the way the -- yes, the way your flights are marketed and operating.

Yes, absolutely. So Mesa is 100% CPA or capacity purchase agreement carrier. And what that means is we are paid to fly the aircraft. And -- but we don't sell any tickets that's -- people think [ the diesel ] take us. No, we don't take any revenue risk on that side of thing. We also -- the fuel is all pass-through. So increasing fuel prices is a pass-through on to the carrier that we fly for. So we don't take the fuel risk in there. We're focused on pilot supply, flight attendants and mechanics. Those are our primary people that we work on. And we also manage -- we have our own systems operations control group that manages our operation. But we don't have the fuel risk where we -- and we don't have the revenue risk on -- for marketing tickets.

Great. So you mentioned pilots, right? I guess, the big topic of the -- question out there in the market is kind of pilot supply, pilot training. It's hurting the entire regional industry. I think your block hours are maybe 80% of the level they were at this time last year. Can you -- I think it would be really helpful to folks if you can maybe kind of quantify and help frame kind of the pilot situation at Mesa to speak a little bit about attrition, and how you're dealing with that?

Yes, absolutely. Yes. So coming out of the pandemic, kind of go back about a year ago, we realized, hey we were going to build up. We expected traffic to come back. So we started hiring pilots early on and tried to kind of get ahead of that because we knew that when the majors were going to be getting back to fuller schedules, they are going to be pilots. So we got out and we started recruiting and started getting our training people set up. And we were actually almost to our pre-pandemic levels in August and November of this year from a flying perspective. What hit us at that time though, is that's when we had the big spike in attrition with all the pilot hiring with all the majors really started coming in full force. And so we went from seeing maybe 5 to 10 pilots a month to 2 or 3x that level kind of overnight. And so that was something that we thought we were prepared for, but the level and how fast it increased, it definitely impacted our capacity. And on top of that, we had the Omicron surge that happened at the same time. And so we were having like 25% call-out rate because of sick leave call-ins between -- in late November, December and January. So that impacted our capacity for sure. And then as we got through the Omicron surge, we eventually got to a point with our partners where we are more stable from a capacity perspective. And we ended up flying about 100% completion factor in March, but our block hours got pulled down quite a bit because of the attrition, but also the concern that until we could prove that we weren't going to be impacted by the COVID variances, they wanted to protect the customers. So we flew less block hours to ensure the higher completion rate during that time.

So what are the kind of the attrition rates right now? Where -- how do they compare to historical levels? And are you seeing it more with first officers, more with captains?

Yes, that's a great question. We're seeing actually on a percentage basis, more first officers billing than captains. I also know that carriers have had kind of the opposite where they've had more captains than first officers. And yes, the why behind that, it's hard to say. But they are predominantly going to the major carriers. That's where we have a flow-through program with United, which is great. Our pilots, we're one of the few carriers that has that flow-through program. But United needs pilots, they hire the pilots, which is great for them. We're glad to do that. But the volume that we're seeing, not just to United, but to American and other mainline carriers, is up dramatically. I guess 2 or 3x the normal volume movements today.

Two to 3x?

Yes.

Okay. Yes. So you're losing these pilots to the majors. How are you sourcing new ones?

Yes. Well, so the good thing is we have 200 pilots in our pipeline right now, okay? Because we did go out and start hiring with them. What we're really focused on now is on our throughput is to get them through the training as fast as possible. And we added a new E-Jet sim in February. We're sourcing more instructors to really improve our throughput on that piece. That's kind of the piece that we had issues with because the pilots have got higher number than were instructors, flight line instructors. And so the guys that were teaching pilots, we had to replace the instructors in order to do that. So we got a little bit behind the curve on that. But we're kind of -- we've not fully optimized yet, but we're getting there.

Okay. And on the training requirements, right, so I think you guys spoke about this on your call, right? Like a pilot gives you 2 weeks' notice, but it takes 90 days to train a new one, right? And I know there have been some obstacles in the training process. How is -- are you still at that -- is 90 days still a good time frame? Is that getting elongated? How is that trending?

Yes. That's still pretty accurate. On average, it's about 90 days. On the E-Jet, we're a little bit longer on there because we have -- we actually have a bigger backup of pilots for the jets that want to fly that aircraft and we have more E-Jet aircraft, right? But we're just -- that's the group that we're trying to get through as fast as we can in there. And that's why we added the new sim in February.

So how many pilots would you need to hire get through training, if you were to fly basically all the block hours that your partners want you to?

Yes. Well, I think right now, we have 200 people in the pipeline right now. If I could wave my magic wand and say, have all of them on the line, we'd be in good shape, right? But the problem is the attrition is the variable that we don't control. And so we can project that we know what our throughput is going to be from a pilot perspective, but the attrition component is the wildcard for us. So if that spikes up more than we get behind the power curve.

Okay. So that would be at more normal levels of attrition in because...

Yes.

So those 200 pilots in the backlog right now, how long will it take the last of those 200 pilots to get onto the line flying?

Yes. I don't have that answer off the top of my head, but they're all -- it's a 90-day footprint for the training process. So when they come in, they are -- all 200 are in different stages right now of when they didn't -- so people that just got hired in there, their training footprint is going to be -- we have a little bit of backlog in E-Jet so it might be instead of 90 days, it might be 120 days for the people that just came in, right?

Right? So it takes time for them to -- for you to have availability within the training class, let them in and...

Right. Exactly, and get them through the process. But as we've increased our training capacity, that throughput is improving faster.

Okay. As you look out into I guess next calendar year, what do you see as your, again, assuming normal attrition because I know that, [ that is the plan ], how many pilots do you need to hire?

Yes. Well, probably 200. I think that's -- if you look at -- we're still going to have attrition going on, right? I think that's going to be an ongoing issue. I think if you look at kind of where we were staffing was we were had a little over 1,000 pilots, we're down about 200. So if we get back to that number, we would be pretty good.

Got it. Okay. Yes. Okay. Look, Jonathan -- CEO of Mesa, Jonathan Ornstein, has been very vocal with regards to basically needing to free up this but just attract people, and attract pilots into the industry. He has been vocal about the 1,500-hour rule, which requires pilots to have 1,500 hours of flying before receiving a commercial license. It was early last week, I saw one of your peers, Republic, asked the FAA for basically an exemption to catch 1,500-hour rule. Is there a precedent for that? Is that something you would consider kind of -- I've never like in my years following this industry, I've never seen something like that. Just is there a precedent for them lifting that? I can't imagine...

Yes. Well, I've never -- they haven't allowed it for like an independent carrier to do that before, right? So what they do have -- the way the regulations are is if you go to a 4-year university get an aviation degree there and do your flight training as part of that, then there's actually a lower bar for you to -- so if you've gone through that training program, I think it's like about 1,000 hours. If you go to a certain accredited university, you can fly commercial in 1,000 hours. And if you go to maybe a school that offers an AA degree, there's a different level of hours available in there. But it's never been done for an airline before, for their [ airline ]. So that would be really unique in that area.

Okay. What are some of the things Mesa's kind of thinking about just in terms of pilot recruitment?

Yes. Well, I mean, the number one thing where we're almost ready to get a new deal announced with our pilots. So we think increasing pay will help dramatically. Right now, we offer bonuses, but our base pay isn't quite as high. And we think once we're able to get out and announce the newer -- the higher pay raise, we think that's going to be -- put us on competitive parity with the other folks that are recruiting I think to the regional business. And that will be a big help for us as well. Plus the Aviate program is really powerful. People want to fly for United. I think Andrew mentioned this morning, how attractive it is to have building a career at United. We're one of the few carriers that can offer that program and flow-through through United. So that's also -- even without the pay raise, it's one of the reasons why we attract pilots, is because they want to fly for United.

Got it. Do you think the FAA would ever consider changing that 1,500-hour rule? Because I mean every airline I speak to says, it -- like pilots don't need that much training, right? And Jonathan makes the point it's the type of training that goes into it, right? So what do you think needs to happen?

Yes. Well, I'm not speaking for Jonathan here just so we're clear.

Yes. This is Torque's opinion.

But I do think -- only the United States has the 1,500-hour rule. Every other country out there doesn't. Nobody thinks twice about getting on Singapore Air or on BA or on Lufthansa. None of those folks have that requirement. So the hard part is people waive the safety flag. We can't do that. And that's where I think that if we're going to do something, we have to have alignment on it. It can't just be the industry, but it also needs to be like the pilot's unions have to be onboard as well. So I think we've got to approach it holistically that way. And I also think that we have to think about the political will to do it, right? And when you see communities that are losing service like when SkyWest, they had to announce they wanted to withdraw from 29 EAS routes, I got a call from one of those communities, saying, "Can you please provide service to us? We have a great airport. We need this connection." And I said, look, I can't -- I don't have the capacity to do it. And I don't -- I'm not set up [ from a position ] to do that. But those communities are going to be the big losers on this, right? And the businesses that are there that are trying to work in those communities, it's hard for them to travel. They're more likely to move out of those communities. So I think that's -- there's some real impact to those communities that I think politicians should pay attention to because there's airports all over the country that are underutilized because of the 1,500 rule. So I think there's some opportunity there. I do think that you can't -- you have to take the concerns around safety serious, but I think the facts of the matter, if you bring those up and you talk about what the piece is, I think there's an opportunity to move forward. Now will it be a wave the magic wand to imitate the rule? Probably not. But there's other ways potentially we can skin the cat and do that.

Got it. And in the end, what does the industry have to do to get like basically solve this issue, right? Because it's affecting those types of markets. It's affecting operational reliability, right? Like in the end, what needs to happen?

Yes. I'd have a different job if I knew the answer to that for sure. But I do think -- I think we've all got to be aligned. I think the mainline carriers A4A, the [ RAL ], we all have to be on the same page, and we have to recognize this has got to be done. And we have to do it cooperatively with the pilots. The pilots unions have to be on board with us. And it's really good in the industry because the impact to people, right, and having them -- I have a friend of mine who lives South Dakota. And he's like, you can't fly from Pierre, South Dakota to [ Sioux, Saint Falls ], you have to fly to Denver in order to go there. So their people are on the road all the time in the winter time. And there's life lost, right, because there's no air travel. So anyway, I think there's no easy answer, but I think there's a way forward if there's a political will to do that.

Right. I guess moving on to more Mesa-specific topics. You mentioned earlier a new pilot contract is certainly kind of top of mind for you guys. It's been something I've been thinking about for Mesa since I saw what the [ commuter ] struck a deal several months ago. And I think your pay rates are around 25-ish percent below them. I know the story at Mesa is a good basis and quality of life. But how do you kind of like how do you compete at that level of pay? And is it just a function of this what the next contract is going to be back in line with your peers?

Yes. Well, I do think -- I mean, we have been successful in recruiting. I think we do offer attractive bases. We do have -- we offer bonuses that offset the low base paid that's the way we've kind of managed that as we offset it with that in there. But the new pay scale that we're working on with our pilots and we're doing an accelerated negotiation with them right now. That will certainly help. It won't be leading the industry, but it will take us -- it will be something that will be close to industry average, which then given all the other things that Mesa has and the benefit, I think, is going to be a really strong case for people to want to join Mesa.

Yes. I mean, can you talk a little bit more about that? Like what -- like if I'm a new pilot coming into the industry, what would drive me to a Mesa over a SkyWest or over a Republic?

Yes. Well, it's a great question. I mean we do have a great location. I mean, being based out of Phoenix or Dallas or Houston, all very popular. ID is actually a great place to work out of as well. I think the opportunity to fly the E-Jets and be part of the United program is also fairly powerful, especially for folks that are looking with -- to make -- to go on to United. And we have a close relationship with American as well. And so there's a definitely a preference for folks that want to go to either of those big carriers as an opportunity to do that. So I think that's really, really strong. And we only fly the large retail jets as opposed to the 50 seaters, which aren't necessarily as attractive for folks. And then we also -- we offer the opportunity for 737 flying, which is something no other regional can do. And we expect our DHL business to grow, and that's going to be an even bigger part of our business. So that can be cool if you just you like Mesa and you want to continue to get the highest pay, you can go to the highest pay in the industry pipeline, our 737s.

Right. That's something we haven't touched on, right? You do have a narrow-body option.

Yes. Today. Yes. Today, you can go out and get the highest pay in the regional industry.

Right. What's the process like for Mesa Pilots to move over to cargo?

Well, it's all bid. So if you're in the -- if you want to apply, you can just put your application in and it will go by seniority, right? So if you're the most senior person, you get to choose first whether it's a first officer or a captain.

Yes. And then you'd go through some training from the E-Jet up to the 737.

Yes. It's really -- the training footprint is any different between the E-Jet or the 737. I mean it's different aircraft type of the process and the training circle is the same.

Yes. Got it. So you spoke a little about this earlier in terms of meeting the 200 pilots. But in order to get your block hour production back up, you obviously need the pilots to do that. How do you think about that process and being able to get back up to kind of your optimal utilization levels and be able to do that flying profitably?

Yes, is the question like how long will it take to do that?

Yes, because it seems like it's all pilot training related.

It's primarily pilot, the training throughput in there. And if we had attrition sort of back to more normal levels, we would be kind of back in business in like 6 to 8 months, probably. Like if we went back to normal levels to the extent we stay really high, that's going to put us back...

Doesn't seem like attrition is going to be coming down that quickly.

Yes. I mean we still have some upward improvement on our throughput on our training throughput, which will help a lot. But that 2-week and 9-month thing or 3 months training cycle, just that math, it doesn't work.

Yes, it doesn't work. Yes. Is there anything your partners or American or United are saying to you with regards to -- like is there any way -- I mean, they're taking your pilots, right? Any way like they can kind of help back-solve for this a little bit?

Yes. I would just say that we communicate regularly with both American and United. And we're really open book with them on what our pilot supply is, what our forecasted block hours are going to be. They recognize that the situation we're in isn't of Mesa's creation. It's an industry-wide problem. And so we're working collectively on how do we get through this. Because the reality is there's no place for those planes to go if they're not flying at Mesa. You can't -- nobody has capacity. So I think Andrew mentioned it this morning, but there's high demand for flying and the regional jet flying demand is high. And so as much as they would take as much land as we can offer them today. So we're obviously working with them on how to kind of navigate through this sort of trough, I would say to get through this and then come out on the other side and be a strong airline and continue to serve with them.

Yes. And Andrew, this morning, also spoke a lot about kind of [ United ] and they're looking more to more gauge, so more mainline and less regional. What does that mean for Mesa?

Yes, I actually think it's a good thing for Mesa because we fly all large regional jets. I think if you're a 50-seater operator, that might be more of a concern. Because if you're going to cut capacity back, the easiest thing is to cut the 50 seaters back. So fortunately, we don't operate 50 seaters. So we think we're in a good position to continue to grow when the time is right.

So cargo, right? You have 3 737 freighters operating now. How do you grow that business? It seems like a good right? It seems like a good business. We had some country up here before, they have a bit of cargo business. Is it -- how did you source your freighters? Are they easy to get on the market? How are you thinking about cargo?

Yes. So we're excited to grow the cargo business. Typically, with DHL, what we're seeing is that they like to provide the aircraft for us. Like the first 2 aircraft we took, they provided to us. The third one, we actually sourced ourselves originally as a spare, but DHL is excited to bring that on with full capacity. We anticipate that the next add to the fleet will most likely come through the CMI piece where they have provided the aircraft, we would just provide the crew and the maintenance and the insurance on it. So it's really kind of based upon DHL's need for growth and capacity. And we're -- we've been working with them well. We had a good first year and we're anticipating more growth with that. But they don't -- I think Jonathan may have mentioned this before, they don't come out and give you like 20 or 30 aircraft at a time, like they kind of move in smaller tranches. And so our goal is like we'd love to see this to 5 to 10 aircraft in the next 5 years, would be great. But there's not a guarantee on that just so we're clear. But that's sort of like when we think about how they -- unless there was a huge uptick in demand. We probably would just kind of see adding a couple of planes a year potentially.

And what's the utilization of those cargo aircraft like? Is it similar to passenger...

No, it's different. Because, yes, these aircraft are doing out and back. And this is really tied into their need to kind of connect up with the whole supply chain. So they fly at night off peak time and they're serving sort of like the last line of delivery for DHL essentially. And so typical block hours might be in the 120, 130 a month, kind of range. So relatively low utilization compared to the regional jets, but that's how the model works for them for the country cargoes.

Got it. And is that enough flying for the pilots to be well like...

Yes. Yes. Yes, the pilots get compensated well. They have a minimum for flying. And so if for some reason they don't get as much flying in, they have kind of a base level, and the rates are competitive with other 737 operators. So they're getting paid more than the regionals on that.

Got it. And does your agreement with DHL -- does it allow you to branch out to other cargo operators?

Yes. There's nothing -- actually, I don't want to talk about the details of the DHL comp. I just really can't comment on that. Yes. So -- yes.

Okay. We'll leave it at that. I guess kind of the last thing I wanted to -- last major topic to touch on is eVTOL. We -- the industrial team here at BofA, we hosted the [ Stars Conference ] out in Deer Valley back in March, where basically all of the eVTOL companies were at. When Jonathan saw the agenda, he was like, "I want to go." So he was out there interested in the aircraft. I know you guys have an investment in Archer. Could you maybe talk a little bit about Mesa's vision and how you think about eVTOL?

Yes, absolutely. So I mean, we think it's -- first of all, we think it's a great -- it's part of our ESG strategy. We think investing in green technology makes a ton of sense. The difference, though, is we want to be the operator, not just the owner, you're not investing with us, we would like to be an owner and operator of the aircraft. We think it could be a way for us to kind of bridge some of the hours gap that we have between today between people coming out of their flight training system with, say, 250 hours. And we've still got to build them up to some number, maybe less than 1,500. But we think that could be -- we'd like to be an operator of that. If that works out for how we would do that. So it's an investment, but we're also thinking ahead going this could be another pathway for us to build ours to supply to the larger carrier part of it. And also with our other -- the heart of the aircraft is the vertical takeoff and landing. It's a little bit different model that has to be kind of worked through. I think you probably saw the Wall Street Journal article this week talking about that. But the more traditional aircraft that we've invested in with Heart Aviation out of Sweden, that's a more traditional aircraft design, 19-seater aircraft, 250-mile range. And that actually might be -- if it's done properly, it might be an aircraft we could use to reopen service to some of these communities that have lost service and do it more economically where it can make financial sense to do that. So that's sort of what we have kind of our thinking about it and how we want to invest in it.

Yes. And how are you working with them now? Are you lending your expertise in knowing how the FAA works? Or I know United is involved in this as well they're -- they invested along with you. Just what's that relationship like? And how involved in the kind of not the certification of the aircraft, but just getting eVTOL towards more of a reality?

Yes. I mean we're happy to be there to consult with them. Jonathan has spent a far more time than I have with them as far as going out, visiting them. You're talking about like brainstorming about how things could work. Certainly knowledge about how the FAA operates. And this -- especially that Archer is going to be a different beast and I think that the fact that it's -- my understanding is that they're putting it into a different category of flying, could actually really help us out quite a bit because that could accelerate the approval process in there. So we are happy to consult with them. That's about the level that we're involved with in there. They're -- we're happy to supply any expertise. We actually contemplated that in our agreement and say, "Hey, we're happy to talk to you guys about technical issues, Heart Aircraft, especially how they may get that certified in the U.S. We certainly have resources that could help out with that.

Right. And what was the dollar commitment you would eventually have in terms of the aircraft purchase?

Yes. I don't have that at the top of my head. I apologize for that. I mean I think we have up to 100 -- the rights to purchase up to 100 aircraft, Archer aircraft. And I think similarly on the Heart side as well.

What do you think is the biggest roadblock to that becoming a reality?

Well, I think we have to be ready for the infrastructure for the Heart aircraft -- or not Heart, but for the Archer aircraft. That whole infrastructure has to be thought through on how we would manage that. And I think there could be some issues with, okay, how does this actually deploy, right? We'd love for this to like bring people from all over the Bay Area to San Francisco Airport. Okay, where are we going to park the aircraft, right? Some of those things have to be figured out, how we're going to manage that. The Heart aircraft is a little more simple because it fits much more easily into sort of the more normal process. I think that one would more likely get to market sooner. All of the things being equal because it kind of looks like a duck, flies like a duck kind of thing.

Yes. Yes. you have the interest in eVTOL, but you're also looking to expand regional operations over in Europe. I'm not as familiar with that kind of the way that market is structured. Can you maybe just give us a little bit of an overview on what you -- what Mesa is doing over there?

Yes, absolutely. I mean the European market is pretty fractured. They don't have the American CPA model operating over the not American Airlines, but like the U.S. model over there. And so what we saw the opportunity as we are partnering with Gramercy Partners over there, some people who have a lot of experience starting up airlines. And we just think there's an opportunity in Europe to bring that model over there and do a deal with, hopefully, with one of the larger carriers where we can provide 20 -- fly 20 or 30 aircraft for them eventually. But we're starting small, we're getting it certified. We're on track to have the airline operating certificate by the end of Q3 here.

Yes. I knew it was coming up.

Yes, it's coming up fast. And we have an aircraft sourced in Malta for what we want to use. So that's going to be -- it's written into the regulation. So we're excited about it. We have prospective customers that are -- that have not made firm commitments yet but are very close to. And so we think it will start small, but once we prove ourselves, improve the operation, and we expect to leverage Mesa resources to help them with that, then it will be -- we think it will be a great model for Europe.

It doesn't seem like the certain -- the pilot issues seem to be concentrated here in the U.S., not so much over in Europe. So hopefully that's not a road block for once things get up and get close to up and running.

No, there's no pilot shortage in Europe. It's amazing how different it is over there and the training program. So yes, there's not a problem at all. Flight crews, you have flight attendants, pilots. It's really easy to work over there. It's one of the few areas they're doing it right. And I wish that model could get exported to the U.S.

So we have a couple of minutes left here, but for a relatively small company, you guys have a lot going on, right, between the pilot issue, getting them through training, you have your hand in eVTOL and you're looking at Europe. What are you -- what are the top 2 things the team is really focused on right now?

Yes. Pilots and pilots. Yes. I mean, it really -- I mean, the other ventures are great, but it's not our primary focus.

I forgot the cargo side, too.

Yes. Well, cargo, yes, the nice thing about cargo is we don't have a pilot issue with cargo. We have plenty of pilots for that. But it is all about the throughput for us and getting our pilots trained up and getting that improved there so that we can get our full capacity back. That's the number one thing we focus on every day at the airline. So everything else is details.

Great. That's all I had. Anybody in the audience have any questions? Everyone's quiet. Okay. Great.

Thank you. I appreciate it, Andrew, a pleasure.

Thank you. Yes. Absolutely.