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

Thank you for standing by, and welcome to the Mesa Air Market Update Call. [Operator Instructions]. This call is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the call over to [ Sean Lang ], Investor Relations. [ Mr. Lang ], you may now begin.

Thank you, and welcome, everyone, to the Mesa Air market update call. On the call with me today are Jonathan Ornstein, Mesa's Chairman and Chief Executive Officer; and Michael Lotz, Mesa's President. We also want to remind everyone on the call today 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 can 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. With that, I'll turn it over to Jonathan for his opening remarks. Jonathan?

Thank you, [ Sean ], and thank you to everyone for joining us today. We appreciate your patience as our team has worked exhaustively to reach the announcements that we shared today. It has been 1 year since we announced agreements to wind down our operation with American Airlines and transition our CRJ-900 flying to United Airlines. Moving from 2 major commercial partners to 1 was a historic shift for Mesa, and our people put in a tremendous amount of work to make it happen. I want to thank every Mesa pilot, flight attendant, mechanic, dispatcher, members of our financial personnel and operating and support staff that work together to help transition our CRJ-900 flying, while maintaining continuity in our 175 fleet. As you know, the transition was not as seamless as it could have been ideally, I'd like to thank everyone, though for their patience through this often difficult process. While we knew fiscal 2023 would be a restructuring year, adding to this challenge was that our block-hour rates and production were not at levels required to support improved financial results. After extensive negotiations over the past year, we have reached an agreement with United to address part of the equation and elevates Mesa's CPA rates to market levels. This meaningful increase in our block-hour rate is retroactive to this past October and last through December of this year, and we expect it to translate to an additional $63.5 million in revenue approximately for Mesa over the next 12 months. Additionally, United is providing a certain relief to Mesa under our financial agreements to further support our liquidity. United has agreed to reduce the outstanding balance on our revolving credit facility by approximately $2.1 million and leave the full $10.5 million amount of the bridge loan. In exchange United received Mesa's stake in Heart Aerospace, which we originally paid $5 million for in 2021. Following this transaction, Mesa will still retain 222,222 unvested penny warrants in Heart. With the elimination of the bridge loan, we are pleased that our stake in Archer Aviation common stock is no longer restricted as collateral. Mesa currently holds 2.27 million vested shares and 1.1 million unvested penny warrants in Archer. Overall, we believe our new agreements with United combined with our ongoing CRJ-900 related asset sales will enable Mesa to generate substantial incremental contract revenue and improved margins. While the situation remains challenging, this stability is critical as we continue to restore our pilot capabilities, drive increased fleet utilization and step-up block-hour production. Before I turn the call over to Mike to discuss the progress on our asset program, I'd like to mention Mike has resumed his responsibilities as Mesa's Chief Financial Officer from 2018 to '21. On the financial front, we are pleased with the number of agreements we have reached recently to sell down costly excess assets and reduce debt. Our sales and sale agreements executed during the September and December quarters are set to generate a combined $198 million in gross proceeds and reduced $174.3 million of Mesa's debt at close. With that, I'll turn the call over to Mike.

Thank you, Jonathan. Today, I'll be walking through the latest progress on our CRJ-900 asset sale program to reduce debt, debt service payments and other excess costs related to the surplus assets. On last quarter's call, we identified 14 CRJ-900s contracted for sale under 2 separate agreements where we're yet to close. Since our third quarter call, we have closed on all 14 of those aircraft. Under 1 agreement, we closed on 3 CRJ-900 NextGen aircraft during the September quarter and the remaining 4 following quarter end. These 7 aircraft sales generated gross proceeds of approximately $71 million and resulted in the elimination of approximately $62 million of debt, of which approximately $27.3 million was reflected in our debt balance as of September 30. These sales generated approximately $9.4 million in additional liquidity. Additionally, we used the proceeds from the sale of our 7 NextGen CRJ-900 to American to retire approximately $39 million of debt that finance those aircraft. Under the other agreement during the quarter, we closed on 3 of 11 CRJ-900s that we previously agreed to sell to a third party and closed on the final 4 of the aircraft under this agreement subsequent to quarter end. These 7 aircraft sales generated approximately $21 million of gross proceeds, eliminating approximately $10.8 million of debt of which approximately $5.3 million was reflected in our debt on the balance sheet as of September 30. These sales generated approximately $10.2 million in additional liquidity. Additionally, following the fourth quarter, we successfully reached several new agreements to sell 15 CRJ-900 airframes and 65 CF34-8C5 engines for total proceeds of $105.8 million. These transactions are anticipated to eliminate approximately $89.8 million of debt and financial lease buyout obligations, creating approximately $16 million of additional liquidity and meaningfully reducing the company's cash interest expense going forward. We remain engaged in additional efforts to market and sell excess CRJ-900 assets and are satisfied with our success to date. I'd like to highlight that as a result of the CRJ related asset sales and scheduled principal payments, Mesa reduced its total debt from a peak balance of $701.3 million at the end of Q1 2023 to an estimated $539.7 million by the end of fiscal '23, a reduction of approximately $161.2 million. For fiscal 2024, we anticipate that the completion of the additional CRJ related asset sale agreements we just mentioned, along with scheduled principal payments, we will reduce total debt by an additional $225.4 million during the fiscal year. Of the $310.3 million remaining debt, $158.8 million is attributable to E-175 aircraft that are effectively pass-through to United Airlines under our CPA agreement, $110.7 million is U.S. Treasury debt collateralized primarily by 31 CRJ-900s, and $35.6 million in United Airlines debt collateralized with aircraft parts, and $9.2 million related to future lease obligations. In total, we expect that the completion of our agreed-upon asset sales, execution of additional divestitures and asset monetization and other planned savings along with the additional approximately $63.5 million in revenue that we believe our enhanced CPA rates with United will provide will help to support our liquidity needs for fiscal '24. With that, I'd like to now turn it back over to Jonathan for closing comments.

Thank you, Mike. While the situation overall remains challenging. With the new revenue and liquidity support from United, the sale of the surplus assets, along with our continued actions to improve our operating and financial position, we see fiscal 2024 building on our transition year of fiscal 2023. With continued support from United and diligent work from our team, we look forward to continuing to restore our business and return to profitability.

[Operator Instructions] Our first question comes from Savi Syth with Raymond James.

Congratulations to everyone on getting this done. Can I ask about the -- kind of the rate -- the block-hour rate change that kind of United did, where does that take you in terms of kind of market rates and especially it only runs through the end of, I think, this calendar year. And just curious what happens afterwards?

Savi, thank you. A couple of things. One, on the block-hour rate, United -- we had been talking to United for quite some time. I mean, in probably 18 months, and then after we did the deal, it became clear that the rates just -- in the new environment that exists, Mesa had always been a low-cost carrier. We got a lot of new business as a result of that. But that those rates just would not support operating in this environment as well as the fact that United's requirements changed moving from sort of let's have low cost to levels of service that were significantly higher than your requirements than they have been in the past. So between those two things, we went back and said, look, we just have to have more money in order to move forward and be able to provide a stable operating platform. In terms of market rates, I mean, we do believe that these rates are, in fact, market -- United had an issue with -- some accounting issues themselves internally that would not allow them to pay more than market rate. And so we feel highly confident these rates do not reflect rate any higher than what exists in the marketplace for other 76-seat regional jet flying. As far as the term, to be frank, I think our view was let's get the ship righted, take one step at a time, if nothing else. I think this proves that United does value Mesa's flying. They don't want to see an interruption. And I think they take the steps necessary to ensure that, that lift is preserved. The 900 is moving over, it was effectively a stop gap measure. We had 900 pilots trained. We had the 900 aircraft. We are operating out of cities that were not United cities, but it did provide a significant amount of incremental revenue to United and it also obviously put work on these aircraft. But now we have begun the process of winding that operation down and selling the assets, and as you can see from Mike's comments, we've been selling a lot of airplanes, a lot of engines, and we've been getting prices that have actually not just only paid off the debt, but in many cases, generated additional cash. So again, we felt it was very important just to get the agreement in place that would provide the level of liquidity and the financial support that makes sense in today's operating environment. And we'll just continue to monitor things as we go forward. But I do think that this was a very big step. I mean I know that you had mentioned it's a lifeline. I think it's a little more than the lifeline in the sense that this is a pretty big commitment on their part. And I think it would, in my mind, at least indicate that the flying of the 76-seat E-Jets is valuable to United, and they want to make sure that it has continued.

That's a good point. And maybe for a follow-up, just on that comment. I'm guessing United wouldn't do this unless they were seeing good progress on the -- kind of the pilot front and the utilization front. So I wonder if you can kind of give an update. You've done some creative things on kind of getting qualified pilots. And just curious what trends you're seeing on your pilot levels?

Sure. I mean we have seen improvement in our utilization quarter-over-quarter. Actually not insignificant improvement. So that's been a very positive move in the right direction. I will say that, that has come in large part due to the fact that attrition has fallen off. And as you know, the environment has changed significantly. There was a time when none of us could find first officers. Now I mean, I think we have close to 2,000 applicants for qualified first officers. The problem now that choke is around captains. But that too will start to improve as more and more first officers build the necessary time. They need to get to 1,000 hours in time so that they can be upgraded. We have put in a couple of the direct entry captain positions and that has generated some additional, but for the most part, it's been lower attrition as well as internal upgrades. Mesa also is in the fortune position that we're able to require upgrades. And we have required the upgrades. But again, we're obviously, the training aspect becomes even more important when that happens, and we're very focused on ensuring that our people are qualified to fly the aircraft. But we have seen some positive movement in that direction. We do have a long way to go. And there's no doubt that a large part of the issue has been just utilizing all the aircraft. And as you know, we still have airplanes that are parked. We still have aircraft that are underutilized. I think it's fair to say that, that's not problem that Mesa alone faces right now in the regional space. And I think as more and more first officers build time and are able to upgrade, I think things could come back into balance. But it will take some time for that to happen.

I'm showing no further questions in queue at this time.

Okay. Well, thank you, Savi, and thank you folks. In conclusion, again, I just feel it's necessary to emphasize that we had entered the deal with United. Everyone was very excited about it. Everyone from Scott Kirby on down to United was supportive. And things just went off track because I think that the environment in itself had changed and the impact of the pilots became significant. And I think all these things just sort of happened and it took some time for us to work our way through each problem and working with United. United is a big company. It takes time, but I do feel that the result now is one that will support the operation and give us the financial foothold to continue to rebuild and rebuild our utilization, which is really the key. And look, I think that obviously, the environment can change, and I want to emphasize that we're not out of the woods, but I do think that we've made the right steps. And I think that we're going to continue to look at all the various options that we have to continue to improve both financially and operationally. So with that, thank you very much, and we'll talk to you next quarter.

Thank you. And that concludes today's conference. You may all disconnect at this time. Speakers, you may stand by for post conference.