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

[indiscernible] long in the afternoon sessions. Our next airline up is Mesa Air Group. Mesa is a small regional carrier here within the U.S., now transitioning all of their flying into the United network. With us today from Mesa is Torque Zubeck, their Chief Financial Officer. Maybe I'll turn it over to Torque for maybe some introductory remarks because I know there's been a lot of moving parts at Mesa over the past 6 to 12 months.

Yes. No, that's -- there has been a lot of moving parts, no pun intended. You know one of the big things, the big headline for us is the fact that we went from operating 80 E-175s for United and 40 CRJ-900s for American. And we've -- since we went through a restructure and we now have all of our large regional jets are being operated for United now. So we negotiated a wind down with American. And we've moved all of the CRJ-900s over to the United contract. But with United, their requirements are -- they can fly a maximum of 80 large regional jets. So we're sort of balancing out our capacity with them, flying the E-Jets as well as the CRJs so they get a full schedule from us.

Got it. But I guess the -- one of the big conversations at the conference today so far has just been from a pilot perspective, right, whether it's pilot hiring, pilot training, all out of open pilot contracts out there that are being negotiated. You guys have seen the step-up in your pilot wage rates, right?

Right.

You move those? What was that maybe 6 months ago?

Yes, September.

Yes, in line with some of the other regional carriers. Can you maybe talk to -- since you've gotten your new deal across how has attrition trended? Do you still have problems kind of hiring and keeping that net pilot base where you [indiscernible]

Yes. No, so the good news is with the increase in pilot pay as well as now that we're all United all of our pilots are flowing through the United Aviate program. which is something that we're the only large regional jet operator that offers that. It really gives us a recruiting advantage because it's really 1 of the fastest ways if you want to get to a mainline carrier. If you come to Mesa, you're here with us for 4 years, 2 years as a captain and then you're on to United. So that's something that's very attractive for new pilots that are coming into the industry and 1 of the fastest ways to get to a major carrier.

Right. Can you maybe quantify a little bit some of that just in terms of -- is pilot attrition down from its peak? How many -- are you -- do you continue to lose pilots today?

Yes. We still have some attrition, but it's really kind of normalized. Yes, normalized, definitely normalized. We're in the teens right now, which is great on a monthly basis. And it goes up and down a little bit, but that's been relatively stable over the last few months. and has come down dramatically from what we saw before the pay raise and the all moving to United. So we think it's definitely, at least at this point, it's...

And how many are you -- what -- what's your kind of monthly hire rate?

Oh, gosh. Well, right now, we're not hiring. Well, we are still hiring, but really, our pipeline for pilots is full. We've got a lineup of people that are signed up and ready to go, not only to Mesa mainline, but also we have our Mesa Pilot Development Program, which allows pilots to come in and fly a highly efficient aircraft and build time so they can get up to their 1,500 hours that are required. So we have like 1,700 people lined up for that program as well.

Okay. And how long does it take? [indiscernible] those signees to kind of work their way and actually begin flying with Mesa?

Yes. So our first class was -- that we had was back in -- gosh, October is when we our initial class in there. And we already have 15 pilots that have come -- gone to Mesa mainline. And we have more in the training. And we're actually adding another facility. We're planning to open up another training center in Arizona because there's so much demand out there, and we're taking more aircraft, the Pipistrel aircraft for it.

Okay. How many pilots do you have in the company now?

Oh, gosh. I don't have the exact number [ at the top of our ] head, but 600, 700, roughly...

I'm just trying to do the math, if you have, call it, 600, 700 pilots at a kind of teens type of attrition rate. On a net basis, are you down pilots each month? Or are you increasing your pilot count?

No, our pilot production is well above. We're in the 50 range every month.

So you're bringing in a net 50 pilots a month or...

No, no. So we're -- pilots coming out of training, it's roughly about 50 a month, and we have attrition of roughly in the and the [ teens ]. So the net number is what we're...

Net number is -- Got it. Okay. Okay. That's helpful. That's what I was getting at. So you're bringing on a net pilots each month. How is the training process changed over the past year? Have you been able to shrink that training time?

Yes. Yes. So no, we haven't been able to shrink the training time. One of the challenges we had early on was that with the massive amount of attrition that was happening when the mainline carriers rapidly hiring pilots. We had a lot of our instructor pilots that got hired and moved on. And so that's one of the things we've restocked and have gotten the instructor pilots, the trainers involved in there. We've added additional training capacity, some capacity. So our production has improved dramatically from where it was 6 months ago.

And you've brought on what is 2 more sims, I forgot the number.

Yes. So we've got -- we have 2 sims, 2 CRJ sims and 2 E-175 sims, and we have more -- we have access to additional sim time if we...

Got it. Okay. So when I think about -- okay, so if you're adding the pilots, training is coming in more normal now. Your block hour production is still down, I forgot the exact number, 20-plus-percent from where it was kind of earlier on in the pandemic. When do you like -- and I know you've just transitioned a lot of your flying to United. They've been maybe a little bit more conservative in the way they're building back their regional network. When do you anticipate your block hour production and your utilization to get -- can it get back to 2019 levels?

Yes. No, definitely, that is the goal to get. That's really where we make money is where when we're flying 10.5 hours a day, that's the spot we want to get back to because that's where we become very profitable in there. But what we said on the call was we had about -- we were anticipating about 46,000 block hours in this next quarter. Looking to get back up to about 55,000 in the following quarter. And then we'll continue to build up from there. I think the goal is to be somewhere around 65,000. So we're on the pathway to do that. And -- but that's not going to happen. It's hard to accelerate that, right? So quarter-wise, we'll be building up and moving forward with United and making sure that we're running a great [ operating ] for them.

What has to happen for you to get to the 65,000 a quarter, right? Is that just proving to United that you can fly what they need? Like what's the bridge from the 46,000 to the 65,000.

Yes. It's just getting the pilots available so we can maximize the per aircraft utilization. So right now, we're roughly around 6 on our E-Jets as an example. -- right -- we want to -- so we have a lot of room to maximize the E-Jet capacity. And that's going to be -- if we do that and get the maximum 80 aircraft with that kind of utilization, we'll be at the target numbers we're looking for.

I guess the question is, in your conversations with United, do they want -- do they want to get to that level of flying?

Yes, they want -- United wants as much capacity as we can provide to them. There's really -- at this point, we've not had any -- they want -- that's one of the reasons why we brought the CRJ-900s over it's because we're able to immediately provide them more capacity in there. It's 100 flights a day that we're providing. So they want more capacity, and we want to give it to them.

Got it. How is your operation evolved over this whole period, right? I know at first, like one of the reasons why you moved to United was, they were -- and not all your or issues. It was certain things with American as well, just in terms of the operation wasn't optimal there. What has changed between then and now and how have you helped mitigate some of that operational risk?

Yes. Well, when you think about where we were, we were operating with 2 different partners in 2 different -- in different hub locations, right now, as we come down, the good news is we're all under 1 contract and 1 program. We only had to deal with 1 partner when we talk about flight frequency and location in there. So that has simplified that because we're not dealing with two separate major partners in kind of what they need. So we can focus on United and really try to provide the best product for them that's out there. But there's still this transition moving -- the 900s they've ever had before in their network. And so this is a new deal for them. There's lots of work that we're still doing. We're not done with the transition. We're still working through that. But we have everybody focused on this with a goal to provide a really great product for them and to operate reliably.

Yes. When you kind of [indiscernible] meet in Phoenix to kind of the rundown on what has transpired over the past year or 2. When you -- when the team thinks back, like what do you think you could have done to help maybe mitigate some of the kind of the issues that you've encountered?

Yes. Well, let's get back to one of the challenges we have, the 1,500-hour rule. We knew there was going to be a pilot shortage coming, right? When the pandemic hit, that just accelerated all the retirements. I think it was basically 5 years of retirements that got compressed into 1.5 years roughly. So that was the context that we are in, right? Now when we think about how we manage through that. I mean we were trying to build through it. I think knowing what you know now, what could we have done differently? It's hard to say exactly. But I think the big thing that we have done is, we've focused on pilot pay. We were able to -- with this transition, we were able to increase our pilot pay to competitive rates, which when we had 2 partners, it was a little bit of an issue because 1 was willing and 1 wasn't. And so that was part of our challenge as we had to work through that, it was really complicated. There was lots of negotiations. And eventually, it led to the fact that United was willing and American wasn't. So I don't know if we would have played that out in any differently. In hindsight, you can say, we should have moved faster, right? But I don't necessarily think that we would have moved any differently if we -- had we known -- there are some things we could have done. I think we could have pushed up going to a higher pilot pay sooner. If we knew now we would have said, no, we got to go -- we got to double and match American's Eagle's new wages, right? We tried other things to say, what could do and try to align partners, and that took time. And -- but yes, there are things we could have done differently. I -- We could have worked harder and tried to prepare for more pilot training capacity, but we were coming out of a pandemic where we were just ramping up capacity. We were at a historic trough. So there's a lot of moving parts to it. But certainly, we could have done some things better.

So this year, clearly a transition year as you move everything into United. What does that mean for '24 and beyond?

Yes. Well, really, '23 is the transition year. Where we expect in '24 is to get to what we want to get to that kind of the optimized capacity with them. That's where we want to get it there. And then really it's '25 where we expect to get back to kind of the single-digit profitability that we've historically had. That's kind of where we're thinking...

The 6% to 8% pretax margin.

Yes. Around that. That's sort of what we're thinking at this point. And obviously, there's a lot of things that could change in the part of that. We had heard a number of folks talking about hiring more pilots. So -- that's something we [ recognized ].

[indiscernible]

I don't know. I think with the pilot production with the MDP program that's allowing us to accelerate pilots that don't have 1,500 hours. We've got some insurance around that.

Got it. You have the passenger operation, but you also have what 3 cargo...

4.

4 cargo aircraft running today with DHL. Maybe talk a little bit about how the team decided to branch out into cargo, what you had to do in order to get a cargo operation up and running? And how do you think about the growth of the cargo business, right? Because it wasn't too long ago, you had 2 aircraft with DHL. Now it's 4, like where can it go?

Yes. Well, I think there's been a little bit of a decline in air cargo demand. I think you've seen that across the board there. One of the things that we're really glad about is that DHL gave us the 737, it's actually an 800 as opposed to the other 4 or 400. So this gets us into the NextGen aircraft, which is the preferred cargo aircraft, which we think has a vote of confidence in there. And air cargo will come back. I mean there's a lot of -- as demand continues to build. I'm sure we'll see a resurgence in that. And we want to be positioned to be up to be a great operator for DHL. And it's not grown as fast as maybe we originally anticipated, but we're continuing to get aircraft. And if we do our job and operate it well for them, I think that will be a preferred carrier to get the next aircraft that they want to -- that they have available for us.

Okay. And I know you've also had a little bit of a focus in Europe and building out I haven't heard an update on that in a while. I think probably some of the other issues have been kind of more paramount here. What the -- what's the status in Europe?

Yes. So our -- the air carriers flight, and it's based out of Malta. We are getting ready to get the AOC at this point. The 1 thing that we're looking for is to get the first customer for them to launch with. They had a customer lined up and then that backed off. So that's really kind of where we're at with that. We're ready to go. We've got an aircraft setup. We've got all the documentation ready. It's just getting that first customer and getting that AOC signed and then we'll be off.

First customer, meaning major airline over there?

Yes. No, it's -- what we have to do is, in order to get your certification with the IOSA you operate basically as a charter operator for at least 6 months. And then they can go in and validate your certificate and if you're doing what you're doing and verify that. So it's sort of a minimum of 6 months. So we're looking for a charter customer to begin with. We had one lined up, the market got a little bit, okay, but things in Europe got a little bit soft. And so we're -- but we expect it to go. We've got things lined up and working on it actively. And as soon as we can get something lined up, we'll be ready to hit the button and...

That's helpful. I wasn't aware of that kind of...

There's a lot of dynamics, yes, but it is -- like this is -- we're 49% owner of it, but we're not running daily -- the day operations. We are helping with the technical expertise with it.

Got it. Okay I guess, us outside of a lot of operational issues, I know I think I've got the CFO sitting up here. [indiscernible] had is very complicated. You have a lot of different asset disposal programs going on right now in terms of planes, engines, what have you, can lease wind downs, things like that. Can you kind of give a high-level summary of kind of what's left and the timing of that and then both in terms of what that could mean to cash infusion into the company, but also kind of debt -- to feel like kind of debt pay down or kind of debt wipe out because of the program.

Yes. No, we've been paying down a lot of debt, which is great. As the CFO, it makes me very happy to doing that. We have been doing it, but we have had a lot of assets that are going out there. So the 1 that we did, we sold our 18 CRJ-550s that we were head on lease to GoJet, we sold those aircraft to United. There was a tranche in September and there was a second tranche that we sold in January. Yes so 10 in the first tranche, 8 in the second tranche in there. And then we've also...

And I forget that range -- was -- how much of that...

Yes. there was...

That was mostly kind of a debt [indiscernible] right?

Yes. We've got -- we generated a fair amount of cash on the first transaction at about $30 million roughly. And then we paid down a significant amount of debt. The other 1 was owned by treasury. We paid down a significant debt to the treasury on that. Yes. And then we have another 11 CRJ-900s that we have a third-party that we have a purchase agreement with. We transacted on 4 of those aircraft in -- gosh, it was March time frame. And then we have 7 more that we're going to sell to them, probably 3 more this quarter and then the follow-up for later in the quarter or later in the year. Yes. But in this fiscal year is what we're looking at right now. So that's been a good transaction. Those are aircraft that are under the treasury loan. So those will all pay down treasury loan, and we'll net about $8 million, roughly -- $8 million to $10 million off of that.

Will that take care of the treasury loan?

No. We still have a fair amount of treasury loan that we'll be continuing to pay down. But I don't have the number off the top of my head, but it's continuing to pay down. We did have 30 engines also that we are selling to United, and that's a combination of engines that we have with a third party also engines that were under the treasury loan as well. So we sold 6 to the treasury loan and those -- sold 6 of those that went to treasury, that all went to pay off the debt on those. So that's -- there are 6 more aircraft that we've -- engines that we've sold, and we've reduced our debt. The more recent thing that we've done is that we were forecasting around to be $535 million roughly like that. I think at the end of the prior quarter, this time, we guided to $470 million, that's because we've got a signed LO -- letter of intent with a third party for a 7 additional CRJ-900s and net after that, we'll -- that net proceeds of that will be about $68 million. And so that will pay down from the $535 million. That takes the big chunk and gets us down to about $470 million.

Got it. Yes. So after all this is said and done, what's going to be the number of aircraft in the fleet?

What we'll have left? Yes, we'll have -- we've got -- we'll be operating -- we've got 80 E-175s that were not -- none of that -- those are -- those are not be exposed out there. When we finish with that, I think we'll have about -- I have -- that number was at the top of my head. I think we're going to have a 15 -- we have 15 RASPPRO that we will be left. And gosh, I think we'll be somewhere around 30 aircraft potentially. I need to go back and double check the numbers, but yes.

Yes. Got it. Then in terms of cash needs coming up, it seems like minimal CapEx on that horizon?

Yes. We're not doing a lot of capital just a nominal amount. We're not making any big purchases between -- in the near future. Right now, we are doing -- we are spending some money right now in the transition with United, but United has been funding all the transition costs at this point. There's some stuff that we pick up. But really nothing on the horizon that's a big capital outlay..

Okay. Yes. And then I know you have your investments in Archer and [ art ] right? Any stipulations in those agreements, whereby you might be on the hook for any potential additional funding.

Yes. So with those -- right now, we don't anticipate any kind of additional cash need in there. There may be some opportunities that could come up where we would maybe have an opportunity to purchase the stock. But right -- there's no requirement for us to put any more cash into those right now.

And no -- you didn't commit to future funding periods or anything...

No, nothing like that.

Okay. Got it. Got it. Any questions from the room before I -- I got 1 upfront here. Bring a mic.

I'd say, I had a couple of questions. The first one is, can you walk us through deferred revenue accounting?

I love deferred revenue accounting.

Yes, it's tricky with your business. Second thing is with this United contract, can you discussed what they're paying for what you're paying for, this is like a fixed -- anything that may be cost-plus or is it all fixed price?

Let me take -- maybe take the United question first, and we can talk about the deferred revenue accounting. So on the -- with United, they're paying for the -- during the transition, they were paying for infrastructure direct cost, repainting aircraft, that's sort of what they were paying for. If we had to put aircraft through heavy check or something like that. Those are things that they would pick up as part of the transition if it was involved with that. That's really what they've been doing because we had to rent additional facilities temporarily. Those things like that would get covered under the program Yes. So that's basically it. Yes. Yes. And then on the deferred revenue, so what happens is, the revenue gets deferred and it has to get kind of marked every quarter depending on what the anticipated time line is of when you're going to complete the flying. And so to the extent that your aircraft -- you have forecasted flying changes, that can actually change your deferred revenue, either positive or negative. You could recognize more if, hey, the time lines come in like for American as an example hey, the revenue we deferred for American, that's going to get closed up because we've finalized our deal. So that would drive more recognized revenue to the extent that our revenue for United change, for example, and went out further, then we'd have -- we'd defer more revenue to recognize it over that period. That's basically how it works.

I guess what I don't get from a deferred revenue perspective because don't they just pay you based on their block hour production.

Yes, this has nothing to do with cash. So we get the cash from United and previously American when we fly, right? And do that but the recognition of that revenue has to -- the accounting requires you to look over the length of the contract to say how much of that -- how much of can you recognize now, how much of that revenue do you need to defer?

I was always under the assumption it was so short-term-oriented that they paid you pretty close to when you flew the block hours. So I don't know why there would be deferral.

Yes, it has -- we get the cash -- this is all about accounting recognition. So that -- so when we fly, we get paid, that's not it. It's just a matter of when do you do this. And it's one of those odd accounting functions, but they're just trying to recognize revenue in the period in which it's earned. And if that -- if part of that revenue is considered to be further out and to be recognized later then you have to make that determination. We do it every quarter. But when big things change, like the American contract ending, then that's a big revenue recognition that we had that we recognized right so.

Right, right. And how much -- how much do you -- how much of deferred revenue is recognized generally each quarter [indiscernible]

You know it's been variable, to be honest, and it can change. So I can't give you an exact number on that, but we can go back and look at all the -- we look at the variation over there, and we can point it out for you.

Got it. It's a great question. Not many people ask that question, but [Audio Gap]

Yes, so it's a question, and again, I didn't come prepared to go through the details on this. But -- yes, it's -- but the reality is when you think about the revenue, there's a current component and then there's kind of what you're recognizing from an activity perspective and then what might be fixed amount. And then what portion -- how do you recognize that fixed amount? Is that fixed over -- do you spread that out of the whole contract that's sort of what they're assessing, right? They say, okay, there's -- I'm flying today, I'm going to recognize x amount of revenue. This revenue, though, that actually ought to be spread over the whole contract. That's the accounting were the we can I can have your controller call you we can bore you to death.

Got it. So going forward, what do you -- like -- what are the biggest risks to the current plan.

It's a great question. So the current plan, I mean, one of the things that even though we have great pilot supply right now, and I think we're in a really good position from pilots being sticky as far as being involved in there. To the extent that we go through another massive wave of hiring by the major carriers, that's a general concern, right? We think we're better off relative because of the flow-through to the United that's very attractive for pilots, and they'd be willing to sit around there. That's probably one of the bigger things. On a shorter-term basis, there's also -- we have a little bit of a pilot imbalance right now where we have -- we need to build more captains there. And so that can -- until you get that resolved. And we've worked with United on this as well, we're -- United is requiring pilots to upgrade and be a captain for 2 years before they moved to United. Previously, they didn't have that requirement. And so now there's an incentive for FOs to upgrade as soon as possible. So they can get that done. Previously, they're like, "Oh, hey, I'm making great money now. My wages have already doubled. Maybe I don't want to upgrade to Captain because I'm going to flow through anyway, and I don't want to take a risk of another training -- of a failure for instance. So yes, so that's part of the dynamic that's in play there. But to the extent that we see another massive hiring from the major carriers, going to impact everybody. I think we're relatively better off because of what we mentioned as far as the United program, our flow-through from -- that makes a pilot development so we can take those pilots that aren't 1,500 hours and accelerate them and have them come to our company. So -- but it's -- it will impact everybody in the regional side. So if they keep -- if they do that.

Yes. And then lastly for me, what worries you about balance sheet?

Yes, not enough cash. No. I mean...

Anything from maturity-wise?

No. I mean we're -- when we think about -- we've restructured our debt as part of some of the -- we went through to our partners. We've made some changes on that. I feel pretty comfortable about where we're at. But for us, cash is king and making sure that we're flying high, getting that done and start generating positive cash flow. That's really what I'm focused on right now.

Yes. Yes. Are there any other assets that you could sell?

Well, yes, there's aircraft. We have 15 aircraft that are on long-term release with RASPRO. We have a buyout provision in there. So those are assets that...

That what was like recently renegotiated, right?

Yes, yes, yes. And so we have -- we'll purchase those, we'll probably sell those. We also have like 20 engines, some of them that are relatively new that we aren't going to need because we'll be -- these are CRJ engines. And since we'll be doing primarily E-Jet flying moving forward, those are assets that we could sell as well.

That's it for me. Any last questions from the audience? I'll leave it there.

Thank you much, Andrew. Appreciate it.

Appreciate it.