Edited Transcript of MESA.OQ earnings conference call or presentation 9-Dec-21 9:30pm GMT

Q4 2021 Mesa Air Group Inc Earnings Call Phoenix Dec 10, 2021 (Thomson StreetEvents) — Edited Transcript of Mesa Air Group Inc earnings conference call or presentation Thursday, December 9, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bradford Roger Rich Mesa Air Group, Inc. […]

Q4 2021 Mesa Air Group Inc Earnings Call Phoenix Dec 10, 2021 (Thomson StreetEvents) — Edited Transcript of Mesa Air Group Inc earnings conference call or presentation Thursday, December 9, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bradford Roger Rich Mesa Air Group, Inc. – Executive VP & COO * Jonathan G. Ornstein Mesa Air Group, Inc. – Chairman & CEO * Michael J. Lotz Mesa Air Group, Inc. – President * Susan Donofrio * Torque Zubeck Mesa Air Group, Inc. – CFO ================================================================================ Conference Call Participants ================================================================================ * Helane Renee Becker-Roukas Cowen and Company, LLC, Research Division – MD & Senior Research Analyst * Michael John Linenberg Deutsche Bank AG, Research Division – MD and Senior Company Research Analyst * Savanthi Nipunika Prelis-Syth Raymond James & Associates, Inc., Research Division – Airlines Analyst ================================================================================ Presentation ——————————————————————————– Operator [1] ——————————————————————————– Welcome to the Mesa Airlines Q4 Investor Conference Call. (Operator Instructions) This call is being recorded. (Operator Instructions) I would now like to turn the call over to Susan Donofrio, Head of Investor Relations. Ms. Donofrio, you may begin. ——————————————————————————– Susan Donofrio, [2] ——————————————————————————– Thank you, operator, and welcome, everyone, to Mesa’s earnings call for its fourth fiscal quarter ended September 30. This call is being recorded and simultaneously webcast. A replay of this call can be found on our website. On the call with me today are Jonathan Ornstein, Mesa’s Chairman and CEO; Brad Rich, EVP and COO; Michael Lotz, President; and Torque Zubeck, CFO as well as other members of the management team. Following our prepared remarks, there will be a question-and-answer session for the sell-side analysts. Also I wanted 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 fourth fiscal quarter earnings release. It is available on our website with the reconciliation of our non-GAAP measures. With that, I will turn it over to Jonathan for his opening remarks. ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [3] ——————————————————————————– Thank you, Susan. Obviously, this was a difficult quarter for Mesa. Who would have anticipated that coming out of COVID will be more difficult than going into it? As Brad and Torque will cover in more detail, our significantly higher seat cost and span times were the primary driver. Larry Risley, Founder of Mesa and my mentor once told me in the airline business something happens every year that happens every 10 years. And beginning in 2020, something happened that happens once a century. The aviation operating environment has been dominated by the pandemic, resulting in massive fluctuations in demand, higher attrition, inflationary pressures and supply chain disruption. This has presented a set of circumstances unlike what we have seen before that will remain — require innovation and cooperation to address successfully. While we believe industry fundamentals remain intact for the long term, our expectation is that 2022 is likely to be a pandemic transition year. I would like to thank all of our employees for their dedication throughout the pandemic as we work through this tough environment and the federal government for the PSP program that allowed us to keep all of our people fully employed. Since it is the end of the fiscal year, I would like to go over some of this year’s highlights. First, we added 20 Embraer 175 aircraft to our United Express operation. We put in place a new contract for American to operate 40 of our CRJ-900s for the next 5 years. We leased 20 CRJ-700s to GoJet, another United Express operator for a 9-year term. We successfully launched our 737 cargo operation with DHL. And in partnership with United, we entered into agreements with electric aircraft manufacturers, Archer Aviation and Heart Aerospace. We believe this will lead to significant long-term growth opportunities that make us the industry leaders in green aviation technology. Archer’s electric vertical takeoff aircraft is designed for convenient, economical and low-carbon transportation from United hubs of airports in congested urban environments like New York, Los Angeles and Chicago. As part of the transaction, Mesa made equity investment in the company and received warrants. As of the close on Tuesday, the value of our investment is approximately $15 million on a cost basis of $5 million. We also entered into a purchase agreement for another 40 and 20 options with deliveries expecting to begin in 2025. Another significant benefit we see is that these small aircraft provide a pathway for our new pilots entering the industry to fly our larger regional jets. In another green initiative, we made an investment in Heart Aerospace alongside United Airlines and breakthrough energy ventures led by Bill Gates. In addition to our investment, we received warrants and entered into a purchase agreement for 100 and 50 on option with deliveries scheduled to begin in 2026. Heart Aerospace is located in Gothenburg, Sweden, plans to be the first provider of all-electric 19-seat commercial regional aircraft. Mesa had previously been the largest operator of 19-seat aircraft. And it is our hope that these highly efficient, environmentally friendly aircraft will allow us to reintroduce service to dozens of cities that lost commercial service over the last 20 years. For example, Farmington, New Mexico, our former headquarters at one time at over 40 flights a day to 5 destinations and currently has no commercial air service. As a result, the 45,000 people of Farmington have been effectively cut off from the national air transportation system. Heart’s ES-19 aircraft will reintroduce rural aviation to cities like this with clean, efficient, safe and reliable transportation. Our investment in these 2 companies are designed to position Mesa to be the first regional airline to fly electric aircraft and be in the forefront of decarbonizing air travel and reducing our reliance on fossil fuels. This will allow Mesa to have significant growth opportunities and continue to be a leader in introducing new technology to regional aviation. To put this in perspective, Morgan Stanley has estimated that the EV total market could grow to $9 trillion when it is fully developed, and we intend on being at the forefront of this development. We have also entered into an agreement with SkyDrop, formerly known as Flirtey, to operate 4 drones with an option to acquire up to 500 in total. We believe SkyDrop is one of the most technically advanced precision drone delivery systems in the world with its initial focus on food delivery. We are excited about introducing drone delivery and think about — think there is a huge potential market. While [carefully] limiting our risk, we believe we are pioneering an exciting and potentially high-growth industry of the future. Subsequent to year-end, we finalized our agreement with Gramercy Associates Limited based in London to develop a European-based joint venture regional airline. Mesa owns 49{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} of the new venture. The joint venture will be based in Malta, and the certification is expected to be completed in the first half of 2022. We are excited at the potential to bring our regional business model overseas. I’d like to touch on the overall labor situation and the impact of potential shortages going forward. Brad and Torque will be explaining in more detail, while we are navigating through an uncertain demand environment caused by COVID in 2020, ’21, the shortages of pilots driven by the federally mandated 1,500 hour rule and now exacerbated by early retirements of the major carriers will require our largest focus over the near term. This is an industry-wide problem that needs to be addressed cooperatively with our partners, the FAA and the Federal Government as well as our employees. In response, we increased our recruiting and training efforts back in April and are looking at other strategic initiatives to respond to this potential pilot labor shortage. We believe we are laying the foundation for a strong future by strengthening our airline partnerships and position ourselves at the forefront of environmentally friendly electric aviation. Throughout our history, we have always worked together to come up with creative solutions when we are faced with near-term hurdles and believe this time will be no exception. With that, I’d like to turn the call over to Brad to provide an update on our operational performance this quarter. ——————————————————————————– Bradford Roger Rich, Mesa Air Group, Inc. – Executive VP & COO [4] ——————————————————————————– Thank you, Jonathan, and good afternoon to everyone. Thank you for joining us today. We remain focused on the health and safety of our people and our customers. And as you would expect, we continue to follow the CDC’s latest guidance and are working cooperatively with our major partners to ensure consistency across our network. Our partnerships with United and American remain the cornerstone of our business, and we are committed to not only meeting their performance and capacity objectives but remain flexible and responsive to often rapidly changing industry conditions. We are pleased to see demand for air travel recovery. In the September quarter, we flew 94,868 block hours, which is a 64.6{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} increase from last year and an 11.4{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} above last quarter. Our combined controllable completion factor was 99.7{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} compared to 100{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} a year ago. Our current production is below our 2019 levels, primarily driven by a reduction in flying for American as a result of our smaller fleet under contract. Looking ahead to 2022, while demand has been recovering, there continues to be uncertainty as new variants of COVID-19 arise. Our ability to meet our airline partners’ demand will likely be dependent upon the severity of the pandemic. Additionally, our industry continues to face significant obstacles, often magnified by the impact of COVID. This includes the rapid changes in demand, employee retention and hiring, increases in the cost of heavy maintenance, often due to supply chain issues and increasing labor costs and a more expensive overall operating environment due to inflationary pressures. That being said, while we remain focused on solving these difficulties, we are not immune to these industry-wide issues. Let me discuss a few of the issues. In spite of issues obtaining parts and materials, the primary factor driving increased scheduled heavy maintenance expenses is the volume of scheduled C-Checks, which are at historical highs and aircraft interior refurbishment upgrades. This also lengthened the time span of our heavy checks, thus, impeding our ability to return our aircraft into service and to add additional aircraft into heavy maintenance. The result has been a reduction in the number of spare aircraft to support daily operations. We anticipate elevated costs and C-Check times will remain in place into the next fiscal year as the supply chain recovers. It’s important to note that these issues are primarily impacting our CRJ-900 fleet. Regarding our United operations, our E175 fleet remains at 80 aircraft. Our controllable completion factor remained strong throughout the quarter at 99.8{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed}. Our United performance has consistently placed us in the top-tier ranking versus our peers, and this quarter was no exception. We have removed all of the CRJ-700s from our operations, and we continue the transition process of leasing these 20 CRJ-700 aircraft to GoJet airlines as part of the previously announced agreement ending in 2030. 14 of the aircraft have been delivered as of September 30, ’21 with 4 additional aircraft transitioning in the December quarter and the 2 remaining aircraft will be delivered by the end of March of 2022. I’d like to provide a quick update on our American operation, which consists entirely of CRJ-900s. Last quarter, we mentioned the issues we faced with our CRJ-900 fleet. These aircraft were particularly impacted by part shortages and the timing of heavy maintenance events. Additionally, at the request of American, we added an additional 5 lines of flying through the summer schedule. This increased capacity extended through mid-August and combined with the additional C-Checks reduced the number of spare aircraft available to the company. As previously mentioned, our C-Check volume is at a historical high and more than double the company’s normalized scheduled C-Checks rates. Our DHL operation continues to perform very well operationally. We’ve completed our first full year of operations. For DHL, our controllable completion factor was 99.26{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} for the year, and our on-time performance rate was 97.65{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed}. Both have exceeded DHL’s performance goals and our performance. The third 737 aircraft delivery has been postponed by the lessor due to deliveries in conversion, maintenance and certification. I’d now like to make some additional comments about our outlook on labor. We remain focused on hiring and training to meet increasing staffing requirements in all of our operational divisions. For pilots, this was exacerbated by an increase in early retirements with the majors that has resulted in higher attrition. While we put our training back into full capacity in May, we have seen further elevated attrition levels over the past 60 days. While we have been able to successfully recruit a sufficient number of new hire pilots and currently have over 200 pilots in training, there is a gap between the resignations and when the new hire training is completed. In addition, we removed 5 aircraft that have been added for the summer peak from our American operations. And as a result, for the December quarter, we are currently anticipating a block hour reduction in flying of 8{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} from the September 2021 quarter. Furthermore, we feel like we are very well-positioned to be an attractive option for regional pilots through opportunities such as our fleet consists entirely of 76 passenger or narrow-body 737 aircraft and does not have turboprop or 50 passenger aircraft. We offer the United Aviate Program and we’re one of few regional airlines able to offer a direct pathway for our pilots to become a career pilot for United Airlines. Our 737 aircraft, we are the only regional airline offering the opportunity to fly larger aircraft and earn the highest pay in the regional industry. We are well-positioned — we have well-positioned crew domiciles across the country that allow our pilots the opportunity to live where they desire and commute easily to work. We’re currently offering captain upgrade opportunities. We are actively recruiting from hundreds of aviation schools across the country. We have competitive new hire pay with enhanced bonus opportunities, and we are pursuing other creative initiatives to attract and retain new pilot candidates. With respect to mechanics, while we are continuing to deal with attrition, we have been able to hire a sufficient number to keep pace with attrition thus far. That being said, we continue to remain highly focused in this critical area. As an example, we implemented a new pay scale effective in October of 2021 and implemented other incentive and retention programs. With that, I’d now like to turn the time over to Torque to walk through our financial performance. ——————————————————————————– Torque Zubeck, Mesa Air Group, Inc. – CFO [5] ——————————————————————————– Great. Thank you, Brad. Let me do a review of our financial performance and then provide some more detail on our business outlook. After that, I’ll discuss our capital outlook and balance sheet. For the fourth quarter of fiscal year 2021, we reported a net loss of $7.5 million or $0.21 per diluted share and an adjusted net loss of $2.1 million or $0.06 per diluted share, excluding the $6.8 million mark-to-market non-cash losses on our investments in equity securities and related impact on our income tax expense. For the full year 2021, we reported net income of $16.6 million or $0.43 per diluted share and an adjusted net income of $24.6 million or $0.64 per diluted share. These adjustments include the aforementioned mark-to-market non-cash losses on investments in equity securities as well as a loss on a lease termination and a gain on extinguishment of debt. As Brad mentioned, we’ve been investing in our fleet, getting them through heavy maintenance that has been deferred during COVID-19. Overall, maintenance expense was up $14 million versus prior year. C-Check volumes were double the normal run rate in the quarter. The associated cost was roughly $9 million higher than Q4 2020. Similarly, our rotable and expendable expenses were elevated due to a catch-up on parts removed in fiscal year 2020 that were not needed at lower flying levels but are now being repaired and put back into service to support the higher flying activity. This had another $3 million of expense net of one-time true-ups with one of our maintenance vendors. Let me review where we are on cash and liquidity. Cash for the quarter, excluding restricted cash, decreased by $59.9 to $120.5 million. This amount is slightly above where we forecasted to be last quarter. The reduction from Q3 to Q4 was primarily due to planned scheduled debt payments of $45 million, which included a onetime deferred debt payment of $19 million, partner true-ups of roughly $23 million, a $5 million investment in Archer Aviation, a $5 million investment in Heart Aerospace during the quarter and the purchase of a new spare engine. Total debt at the end of the quarter was $670.3 million, which is down $43.4 million from the prior quarter. Assuming no additional debt, the balance will be reduced by roughly $100 million on average in each of fiscal year 2022 and 2023. This brings the total debt balance down to roughly $470 million at fiscal year-end 2023. There was $9 million of CapEx in the quarter, which primarily consisted of the purchase of a new spare engine in rotable spare parts. For fiscal year 2022, we still have 4 additional new spare engine deliveries and no other major planned capital expenditures. Effective October ’21, all temporary partner rate reductions related to PSP are no longer in effect of the PSP program ended at the end of September. Let me now touch on guidance. Although the environment is still recovering, we did want to provide guidance in a few areas. As Brad outlined, our Q1 2022 block hours are anticipated to be 8{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} lower than the previous quarter. We also anticipate increased pilot training costs as we have our training center at full capacity for new hire training and captain upgrades. And like most regionals, we have enhanced new hire pilot compensation to attract a sufficient number of qualified trainees. Our heavy maintenance expense levels will continue to be elevated for the first 2 quarters of fiscal year 2022. This includes both an interior refresh program at American as well as our regularly scheduled heavy maintenance visits. For our pass-through maintenance expense, as you know, this is — has zero P&L impact and is not related to our level of operations. This is more related to the timing of events, so we provided our best estimates in our press release. We see 2022 as a transitional year, primarily in the first 2 quarters. We are coming to the end of the elevated C-Check activity we’ve seen in the past year. We see travel demand increasing given that pilot hiring at major carriers is expected to be at elevated levels, we are focused on making sure we keep our pilot hiring and recruiting activity at full throttle. Our success in this area will have a direct impact upon our financial performance. Now I’d like to turn it back over to Jonathan. ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [6] ——————————————————————————– Thank you very much, Torque. We appreciate the financial recap. To sum up, we strengthened our partnership with United through the addition of 20 aircraft and our partnership in electric aviation. We were also able to successfully enter into a new contract with American in the midst of the pandemic. We believe we have a plan to attract and retain qualified employees. We also feel our DHL cargo flying and our European growth plans are just a start as we continue to look for and pursue new growth opportunity. Finally, we remain the low-cost regional airline and intend on being the regional airline leader in decarbonization and electric aircraft. While we certainly faced some significant near-term issues, we believe that the fundamentals of our industry remain unchanged over the long term. At this point, operator, please open up the call, as I’d be happy to answer any questions that the analysts may have. ================================================================================ Questions and Answers ——————————————————————————– Operator [1] ——————————————————————————– (Operator Instructions) And our first question comes from Savi Syth. ——————————————————————————– Savanthi Nipunika Prelis-Syth, Raymond James & Associates, Inc., Research Division – Airlines Analyst [2] ——————————————————————————– I’m just a bit confused. If I look at your results relative to your guidance, your — you know, for this quarter, your block hour production came in higher, your kind of, recognition of deferred revenue was higher and some of the non-pass through engine and C-check maintenance cost estimates were actually lower. What seems to be different maybe is the 5 American aircraft leaving a little sooner and maybe slower aircraft with GoJet. So, I’m just kind of curious, were you expecting a loss — a non-GAAP loss in the September quarter previously? Or if something else happened during the quarter that drove that? And also, along those lines, if you expect some of these costs to continue for another couple of quarters, do you — should we be expecting non-GAAP losses for a couple more quarters as well? ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [3] ——————————————————————————– Savi, this is Jonathan. I’m going to just give you a high-level view from my perspective in terms of what drove this quarter, and I’ll let Torque and Mike maybe chime in. But clearly, what drove things here was just the elevated level of heavy maintenance primarily in C-check, the cost, the duration, the number. I think it’s important to point out that we have 64 aircraft on property. We were only flying 42. We had 5 additional aircraft. But in the meantime, we were actually maintaining all of them. And I don’t imagine that just — that will not continue. We had a lot of aircraft that were in also as part of our new agreement with American, we put them through various types of mods, whether it be electric seat mods, interior mods, paint mods. So, we were funding an additional, I believe, it was 5 lines of aircraft that otherwise would either have been available for spares or have been parked and the expense of maintaining those aircrafts would not be there. So, a lot of this is related to that transition into the new American contract. And again, in the higher costs associated with primarily heavy check that came through. And again, on those C-checks, they were more, they took longer due to supply chain issues and they were more expensive as a result. ——————————————————————————– Michael J. Lotz, Mesa Air Group, Inc. – President [4] ——————————————————————————– Yes. And Jonathan, maybe I could just add, is not only the C-checks, but there was an increase in the quarter related to parts support, which is — some of it’s tied to the C-check. When the C-checks are in for that expanded period of time, there are significant parts expenses that we had related to the C-checks and the parts related to the interiors. Like Jonathan alluded to, we’re flying more aircraft than in the CPA, some of them to support for spares, some of them to support for programs that we’re doing with the American fleet. So, those — but those are the 2 major items, the heavy maintenance and the parts support related to them. ——————————————————————————– Savanthi Nipunika Prelis-Syth, Raymond James & Associates, Inc., Research Division – Airlines Analyst [5] ——————————————————————————– That makes sense. And maybe just on the non-GAAP, should we be expecting losses for another couple of quarters here? Or is there something that changes here in the next couple of quarters? ——————————————————————————– Michael J. Lotz, Mesa Air Group, Inc. – President [6] ——————————————————————————– Well, we’re not giving any guidance on earnings, but we — as Torque alluded to, and I think Jonathan did, is the heavy maintenance, a lot of it was for work that took longer than expected and that is going to be tailing off in — it will go through Q1, part of Q2, but then certainly by Q3 and Q4, we’ll be through that whole cycle. And we’ll probably be under run rate at that point, right? We’ll kind of, flip to a lower point. ——————————————————————————– Savanthi Nipunika Prelis-Syth, Raymond James & Associates, Inc., Research Division – Airlines Analyst [7] ——————————————————————————– Got it. And if I might just ask, on the pilot front, could you talk about like any color on levels? And if this is what you’re seeing a little bit of a transitionary issue, as you mentioned, where it takes time for the pilots that are in training to catch up? Or do you see this kind of a treadmill that you’re on lasting quite a bit longer? ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [8] ——————————————————————————– I’m going to — I’ll make my comment again, I want Brad to give you more color. During COVID, there was — the attrition literally went to 0. I mean, when I’m talking 0, you know, 6, 8, 10, 12 pilots a month, which for us, obviously is — and given the fact that we were flying so much reduced. The fact is we also felt that this was not a long-term — this was not going to be long term. There was — when it turned, it would turn. And as we mentioned in the call, we really began back in April, while we still had pilots on voluntary leaves, we fired up the training center and started to move forward. The attrition levels increased and then increased again. And I guess at this point, we’re not counting on them coming down. I do think that they could moderate somewhat but to moderate to what would still be considered elevated levels. We’re also talking to our partners about it and how we might work together. As I mentioned, too, that we have to work this problem together and just coming up with a solution on how to best handle this due to the fact that we — there is, in fact, that lag that Brad talked about. And we need to be able to operate within this new paradigm where the demand for pilots is — it appears to be just very powerful. And again, it was absolutely exacerbated by the early retirements that were offered during the pandemic, which effectively accelerated the impact of the pilot shortage, which I think we all know has been artificially created by government regulation regarding the 1,500-hour rule. But Brad, do you want to add something on that? ——————————————————————————– Bradford Roger Rich, Mesa Air Group, Inc. – Executive VP & COO [9] ——————————————————————————– Jonathan, I think you covered it. I mean I don’t have really anything meaningful to add. That’s the issue. ——————————————————————————– Operator [10] ——————————————————————————– And our next question comes from Helane Becker. ——————————————————————————– Helane Renee Becker-Roukas, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [11] ——————————————————————————– Just cost a couple of questions here, on the — to clarify, on the 5 aircraft that were spares that aren’t being flown out, did that free up pilots? Or did they immediately go into — or did they immediately leave and go to other airlines? ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [12] ——————————————————————————– No, no. We — the 5 aircraft were just transitioned out of service. We have had attrition levels that from best we can tell, and again, this is anecdotal at best. But talking to our partners and talking to other people around the industry, this is not something unique to Mesa by any stretch. At American, for example, our utilization levels because we did fully aircraft out, were higher than other carriers. But again, it’s a question of how fast can we train versus how many people we lose. It took us a little bit of time to spool up training because it’s at least a roughly 90-day footprint at best. And so it just takes time to catch up with that lag. But as Brad mentioned, we have over 200 pilots in training and we think that we’re going to be able to continue to fulfill our pilot requirements going forward as best we could tell. I mean, the environment is very volatile, and that’s for sure. ——————————————————————————– Helane Renee Becker-Roukas, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [13] ——————————————————————————– And then are there issues with people other than pilots that exists? I know you outsource most of your maintenance, and you already talked about that, but are there other issues? ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [14] ——————————————————————————– I’m going to let Brad talk about maintenance. But let me just give you an example where when we say that there’s just labor shortage coming out of — we just are — it’s amazing. I mean, we have generally fairly high level of attrition within flight attendants. But to give you an example, I mean, it is not — not even remotely close to the kind of numbers that we’ve seen a trip out in flight attendants, which, thankfully, we can train quickly and we have thousands of applicants. But just to give you an example, one of our partners hired 22 of our flight attendants in 8 days. I mean, so their demand levels have exploded. So, it’s just like I said, it’s a new regime, and we just have to come to grips with it. And we are, in fact, acting as fast as we can, but you would never think for a second that you’d be dealing with flight attendant attrition the way it is and effectively a shortage in flight attendants. So yes, it affects everybody. And I’ll let Brad talk about the next — obviously, critical is highly trained mechanics. I mean if you want to make a comment? ——————————————————————————– Bradford Roger Rich, Mesa Air Group, Inc. – Executive VP & COO [15] ——————————————————————————– Yes. I mean, look, Helane, I don’t think it’s any surprise. There is pressure on all labor groups. The thing that’s — and mechanics are no exception. The — the actual numbers, though, we’ve been able to hire a sufficient number of mechanics to keep pace with attrition. And with mechanics, although you’re getting an inexperienced mechanic, the training footprint is just not nearly as long as it is with a pilot. So, although with this pressure, we’ve been keeping up on hiring with the other groups, the pilots obviously get more focused and attention because of the demand issues or the supply issues and the length of the training footprint. ——————————————————————————– Helane Renee Becker-Roukas, Cowen and Company, LLC, Research Division – MD & Senior Research Analyst [16] ——————————————————————————– And just if I can follow-up. Does the management change — American change anything for you with the American contract? ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [17] ——————————————————————————– No, nothing — certainly nothing contractually, but I mean, look, Doug and I have been friends since the America West bankruptcy. And certainly, we’re sorry to see him go, to retire because he’s always been — we viewed him as a friend and an ally. But we’ve also known Robert Isom for a long time. Brad has worked very closely with their operational people, [Devon May]. So, for the folks that we deal with, I don’t see any significant change. We like Doug a lot, both professionally and personally and wish him the best. I mean — but I don’t think we’ll be hurt by it, but I think that the impact would be — it will be the same. And contractually, there’s no change. ——————————————————————————– Operator [18] ——————————————————————————– (Operator Instructions) Our next question comes from Mike Linenberg. ——————————————————————————– Michael John Linenberg, Deutsche Bank AG, Research Division – MD and Senior Company Research Analyst [19] ——————————————————————————– Jonathan, the European operation, the 49{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed}, so I guess, you’re going to account for that under the equity method. And when does that — when does that start showing up in the P&L? Like what’s the ramp-up there? I guess there’s start-up costs maybe? And I don’t know if there’s some initial Capex. Can you just — can you talk about that because that felt like that, that was going to be a fiscal year 2022 development? ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [20] ——————————————————————————– Well, I’m going to ask Mike to answer that because he’s been responsible in taking the lead on the European operations. So, I’m going to ask Mike to answer those questions. ——————————————————————————– Michael J. Lotz, Mesa Air Group, Inc. – President [21] ——————————————————————————– Hi, Mike. So, — yes, this is Mike Lotz. We’re expected. We’re working with the Maltese regulatory authorities where we’re going to have the certificate and be incorporated. We’re going through the process of getting a certificate. We expect to get that certificate certainly in Q2 in the first half of calendar ’22. The start-up costs will be minimum. We’re talking not millions of dollars, probably more like hundreds of thousands of dollars to start-up. And we’ll be looking for customers in the coming months and go from there. ——————————————————————————– Michael John Linenberg, Deutsche Bank AG, Research Division – MD and Senior Company Research Analyst [22] ——————————————————————————– Is — are you — like with respect to staffing and bringing in pilots and the like, is it — are you going to run into some of the same — is this operation going to run into some of the same issues that we’re seeing in the US? I know this pilot and mechanic shortage seems to be global. Like anything on that front that you’re seeing or that you can highlight for us? ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [23] ——————————————————————————– Yes. First of all, I want to mention that when Mike said, we’re looking for customers, I think that’s important, because we intend our thought there and our partner’s thought is that we’re going to bring over to Europe, much more of a kind of US model capacity purchase agreement. We’ve already begun conversations with large carriers to provide that level of service. As you know, the regional business has been truly decimated in Europe. In terms of personnel, I mean, so, I know I am probably one of the few people in here to keep harping on the 1,500-hour rule because someone else feels it’s a lost cause, but I just don’t see the same issues internationally that you do in the United States, because no other country in the world has adopted these rules. We’ve looked at some situations in other parts of the world as well. And when we talk about pilot shortage, they look at us and say what shortage. So, I think that we feel comfortable that with the type of aircraft that we operate there and it’ll likely be a regional jet, we don’t think that, that will be a problem. And we feel that we can hire people and retain and attract people without anywhere near the level of difficulty that we have here and it’s kind of crazy to think of Europe as being less regulated in some respects for the United States, but at least when it comes to pilots, that’s the thing. ——————————————————————————– Michael John Linenberg, Deutsche Bank AG, Research Division – MD and Senior Company Research Analyst [24] ——————————————————————————– Okay. And then Jonathan or Mike or Brad, can I just sneak in one last one. You talked about the attrition rate being high, did you throw out a number? What percent what you’re seeing right now, whether it’s pilots or flight attendants? Anything on that front would be great. ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [25] ——————————————————————————– Yes. I mean the pilot numbers are short all over the board, although, I will tell you, they have been increasing since we — I can’t say it would be unfair to say exited COVID, but as COVID had begun to sort of wind down, the numbers went up, and it’s all been driven by hiring at the major levels. And I think that, that’s really what’s driven it. But we have in the past, under high — high levels of attrition, we’ve seen numbers in the 25{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} to 30{92b8314a80b58944ba0df9bff999fd6692ae6ba618bc5950ca8fb5ab90484bed} range and occasionally, it’s topped up a little bit higher than that in terms of total pilots. Again, it’s just a question of where do things level off and what happens. But — and it’s run higher in a couple of months, it’s run lower. But it’s really hard to say right now because it’s going to be dependent upon where things shake out. And the other thing too is, I do believe that our partners realize that this is a problem for all of us. There’s attrition going on throughout the industry. No one is immune. I mean, no one is immune. A lot of regionals, like ourselves, have had to fly lower hours. I actually — I’m not aware of any regionals that’s flying at the levels that we were back in 2019 according to our partners. We maybe the closest at American, but I think the fact of matter — and that’s and to be fair, that’s only because we pulled those aircrafts out. So, I mean we’re not — there’s nothing magical there. I think it’s really a question of how effective we are at not just retaining pilots, but also attracting people. And as one of the drums that we have been beating with our partners is, we really need to focus on ways not just to keep people within the United ecosystem or the American ecosystem, but actually to bring people and sort of refill the reservoir pilot that, in fact, has been drained with expansion of flying as well as the — all the retirements that occurred. ——————————————————————————– Operator [26] ——————————————————————————– And we have another question from Savi Syth. ——————————————————————————– Savanthi Nipunika Prelis-Syth, Raymond James & Associates, Inc., Research Division – Airlines Analyst [27] ——————————————————————————– I was just kind of curious on the cargo front. It sounds like you’re executing well there, getting — it looks on the fleet plan, you’re getting that third aircraft as well. Just any update on how you can expand that or what we can expect in the next year or 2? ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [28] ——————————————————————————– Sure. Clearly, we did not enter the cargo business for 3 aircrafts. I mean, it’s just not an efficient operation. It’s — there’s lots of reasons why it needs to be bigger. In fact, one of the reasons why we got the third aircraft, which is because we were nervous about only having 2 aircrafts and not having a spare. Operationally, we found that — we did operate with only 2 airplanes and we exceeded — I can tell you, without a doubt, that we exceeded DHL’s expectations over the year. So, I think that we are very well positioned for growth. The DHLs of the world, Amazons, they don’t add growth willy-nilly, they’re very thoughtful. But I think in our conversations with DHL, they are well aware that and are supportive of the fact that for us to be successful long term and they have clearly indicated that they want us in the portfolio, and that they’ve made clear without a doubt, that we have to be larger. And can we go to 6 airplanes, 8 airplanes, 10 airplanes? I would say that it’s probably a fair statement that we’re below 8 to 10 airplanes, it’s hard for us to really spread our costs around. And I think that the target for us to be at least at that number over the next few years. It won’t happen fast. We’ve made a big investment so far, which clearly has impacted our numbers as well. But they have made it very clear that they would like to see us remain in the portfolio and they’re going to help us do that. ——————————————————————————– Operator [29] ——————————————————————————– Speakers, I am showing no further questions at this time. ——————————————————————————– Jonathan G. Ornstein, Mesa Air Group, Inc. – Chairman & CEO [30] ——————————————————————————– All right. In conclusion, I just want to say finally, it has been a tough quarter for us. My first statement about who would have thought it would be harder to exit COVID than to enter COVID, the rapidity at which demand levels, at least domestically increased and the fact that majors were anxious to put so much additional capacity. It’s not as if it caught us by surprise. It’s just that even starting training back in April, while we still had pilots on VLOA, it’s just taken time as to get back up to the speed that we want — we would like to be at. The situation has been difficult. We’ve frankly said that attrition levels have still not come down. They are still high and we are going to continue to work as best we can to make sure that we can provide as many block hours as possible. I think that we feel that we’ve got these issues to deal with over the near term. But as I mentioned also, we do feel that not only the fundamentals of the industry are intact long term, but we think we’ve laid a good base here at Mesa and we’ll see that benefit over the long-term as well. So with that, we appreciate your time. We will continue to work hard to do the best we can. And if you have any additional questions, as always, feel free to call any of us after the call or this week, whenever you need to add any additional information. Thank you very much. ——————————————————————————– Operator [31] ——————————————————————————– That will conclude today’s conference, and we thank you for participating. You may disconnect at this time.


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