NTG Clarity Networks Q2 2023 Earnings Call Transcript

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May 9, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Mesa Airlines Second Quarter Fiscal Year 2023 Conference Call. This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Doug Cooper,

Speaker 1

call comes from Mesa's earnings conference call for its fiscal Q2 2023 ended March 31. On the call with me today are Jonathan Ornstein, Mesa's Chairman and Chief Executive Officer Michael Lotz, President and Tore Zubeck, Chief Financial Officer and other members of the management team. Following our prepared remarks, there will be a question and answer session for the Southside analysts. We also want to remind everyone on the call Today's discussion contains forward looking statements that are based on the company's current expectations and are not a guarantee of future performance. Question comes from the line of David.

Speaker 1

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 fiscal 2nd quarter earnings release, This is available on our website for the reconciliation of our non GAAP measures. With that, I will turn it over to Jonathan for his opening remarks.

Speaker 1

Jonathan?

Speaker 2

Thank you, Doug, and thanks everyone for joining us today. As we mentioned before, fiscal year 2023 is a transition year and our numbers reflect that. With that said, our results were largely in line with our internal expectations as we execute the transition question comes from the line of John. While we are experiencing significant improvement of pilot retention and output, This quarter, our eJET utilization was still under 6 hours. Turning to the transition.

Speaker 2

We currently have 24 of the 28 planned question comes from the line of CRJ900s in service, albeit at lower block hours than initially anticipated due to a more conservative approach taken by United. I'd like to thank all of the hard working people at Mesa who have helped make this transition happen and United for their support. While we continue to see strong demand for regional flying and our pilot pipeline has recovered significantly, Our focus over the past several months has been on ensuring the United transition and the numerous actions we have taken to strengthen our balance sheet questions are executed successfully. I want to take a moment to highlight the cornerstones of our plan moving forward. 1st and foremost, we have a strong relationship with United Airlines, which as we work through the transition has been supported both operationally and financially.

Speaker 2

Three quarters of these markets have seen service reductions in recent years with the average reduction eliminating 30% of flights in a given market. This deficit is magnified by the fact that regional flight service accounts for 50% or more of the total air service in 29 U. S. States and accounts for over 75% of service in 11. That's per the Regional Airline Association.

Speaker 2

Our new CPA with United contemplates addition of over 100 daily regional jet flights across the country, representing a solid question comes from the line of the regional airline industry. Unfortunately, without legislative action to counter the significant negative impact of the 1500 hour rule, we are still concerned about the long term future of regional aviation service to rural America. Further to our Mission to improve mobility, reduce congestion and decarbonize travel, we remain excited about the potential of our previously announced Co investments with United on new technology and electric aircraft, including Archer and Hart Aerospace. We believe eVTOL and short distance electric aviation will be integral to addressing transit needs in smaller and congested communities moving forward. While the current pilot shortage continues and needs to be addressed industry wide through legislative action, the current industry bottleneck is now ensuring an adequate number of qualified first officers to upgrade to Captain.

Speaker 2

As a result of United's new AVA program requiring that candidates have flown as captains for 2 years as well as our pilot labor agreement, 1500 hour rule. With that said, we have positioned ourselves to rebuild our pilot pipeline and now have 3 significant pilot initiatives in place. Question is answered. Thank you, sir. Our Our participation in United's AVA program, which is one of the most rapid paths for pilots to join the regional industry and transition to a major airline, Lastly, the Mesa pilot development program, which was launched in September in Inverness, Florida is one of the fastest and most cost creative paths for pilots question is short of the 1500 hour threshold to accumulate hours.

Speaker 2

This program has already graduated a cadre of 11 pilots to Mesa Training and has had so many enrollees that we are now preparing to launch a second location in Arizona. To support this expansion, we have taken delivery of 4 more Pipistrel Alpha Trainer 2 aircraft with 21 more on the way. Finally, as you may know, Mike Lotz, who has previously served as Chief Operating Officer at Mesa and Virgin Express, Following the retirement of Brad Rich. With that, I'll turn the call over to him. Mike?

Speaker 3

Thank you, Jonathan, and good afternoon, everyone. Let me start by As President of Mesa, I've also previously served in the COO and CFO roles and have been involved in all aspects of our business and particularly our relationship with United. Working through this transition, optimizing pilot output, Providing exceptional operational performance for United and DHL, all while operating at the highest level of safety will be my primary focus. Transitioning the CRJ900s from American to United has been a major project for the company. Although we are keeping both Phoenix and Dallas' crew and maintenance bases, our entire network has been transformed.

Speaker 3

Our Houston hub has increased from 55 to 95 flights per day. As you may or may not know, United has never operated the CRJ Q900 in their regional fleet. So everything from seat maps to jetway staging, ground handling procedures and fueling are all new to the United operation. Given these aircraft are flying to 30 cities in the network, this transition entails a lot of preparation and work. We painted 28 aircraft and repositioned our maintenance parts and ground equipment.

Speaker 3

This was not just a simple swap of aircraft from one operator to another. We appreciate the support we received from United during the transition. Ultimately, the real benefit of the transition is that Mesa is able to provide United contracted regional fleet will consist of 80 large regional jets, comprising a mix of E175s and CRJ900s. Our plan is to add back the underutilized ejets as fast as possible. Additionally, we will continue to operate 4737, question comes from the line of the 4 100s and 800s at DHL.

Speaker 3

While our fleet utilization in the past few years has been impacted by the industry wide pilot As Jonathan mentioned, we are now seeing attrition below pre pandemic level. And thanks to the number of initiatives we have implemented, Mesa continues to be a top destination for pilots. It's especially worth noting that recent pilot turnover is largely a result of pilot retirement the transfers to United as part of the AAVA program. Nonetheless, we are maintaining our focus on attraction and retention in our pilot pipeline. We currently have almost 1600 new hire applicants and combined with the Mesa pilot development program, we have confidence in our ongoing ability the keep our classes filled with a combination of new hires and captain upgrades.

Speaker 3

We are continuing to focus on optimizing pilot training throughput question comes from the line of Tim and his team. With that said, in the March quarter, we flew 48,186 block hours, the 5% decrease from the December quarter. I would like to point out that our build block hours for the March quarter were actually 51,660. We expect our June quarter block hours will be approximately 46,000, a 4 percentage reduction from the hours in our March quarter. The reductions for both periods are primarily attributable to the CRJ900s being transitioned Out of American as well as the First Officer Captain in balance.

Speaker 3

Looking forward to the September quarter, block highway should be closer to 55,000 as a result of the transition being completed and the benefits of our Captain upgrade actions. We expect subsequent quarters the quarter, Macer incorporated a new 730seven-eight 100 freighter to our DHL operation. This brings our total cargo fleet to 3737-400s question and one next gen 730seven-eight hundred. With that, I'd like to now turn the call over to Torek to walk through our financial performance.

Speaker 4

Thank you, Mike. Now I'll take this opportunity to review our financial performance and our balance sheet. For the Q2 of fiscal year 2020 Revenue was $121,800,000 1.1 percent lower compared to $123,200,000 in Q2 2022, While contract revenue fell by $8,200,000 year over year, these decreases were driven by recognition of deferred revenue and lower block hours, partially offset by higher United block hour rates for new pay scales. The decrease in contract revenue was partially offset Mesa's Q2 2023 results include per GAAP the deferral of $5,700,000 of revenue versus the recognition of $800,000 of previously deferred revenue of Q2 2022. The remaining deferred revenue balance of $24,500,000 will be recognized as flights are completed over the remaining term of the United contract.

Speaker 4

On the expense side, Mesa's overall GAAP operating expenses for Q2 2023 were $148,700,000 down $19,300,000 versus Q2 2022. This decrease is primarily due to $22,700,000 lower non cash impairment of assets held for sale versus Q2 2022. Aircraft rent also fell by $8,600,000 attributable to the the question comes from the line of the presentation from operating lease to finance lease for certain CRJ900s and depreciation and amortization expense fell by $4,200,000 We expect maintenance expenses to be roughly consistent for this at this level for the next 3 to 4 quarters. The decrease in GAAP operating expenses was question comes from the line of David. Partially offset by higher flight operations expense of $54,800,000 $12,400,000 higher year over year, is coming from the line of Q2 2022, driven primarily by higher pass through property tax costs.

Speaker 4

Operating expenses, excluding one time items, were $132,000,000 an increase of $2,700,000 compared to the prior year. On the bottom line, we reported a net loss of $35,100,000 or a loss of 88% per diluted share compared to a net loss of $42,800,000 or net comes from the line of John. $0.53 per share compared to a net loss of $10,300,000 or a loss of $0.29 per share a year ago. The adjusted loss for Q2 2023 excludes a $2,100,000 gain on investments and a $500,000 gain on a disposal of fixed assets. It also excludes $16,700,000 of asset impairments and another $700,000 from a deferred financing write off for the sale of assets.

Speaker 4

Adjusted results from Q2 2022 excluded $39,800,000 of asset impairment charges and a $2,300,000 loss on investments. Next, let me turn to the balance sheet. During the quarter, we closed on the sale of 4 of the 11 CRJ900s agreed to be sold to a third party. Mesa also sold to United the remaining 8 CRJ550s and 10 out of 30 engines previously agreed upon. Importantly, these transactions generated $35,000,000 in cash and we paid down approximately $52,000,000 in debt during the quarter.

Speaker 4

For the June quarter, we expect to close on the 7 remaining CRJ900s and 20 engines agreed to be sold, which together will generate approximately 33,000,000 question comes from the line of cash and pay down $42,000,000 in debt. Going forward, we still have excess CRJ900s and are working to sell these aircraft. We recently entered into a letter of intent to sell an additional 7 aircraft, which upon completion of the sale will pay off approximately $68,000,000 of debt associated with these aircraft. Cash for the March quarter, excluding restricted cash, decreased by $4,600,000 from the prior quarter ended December 31, 2022 to $51,400,000 Total debt at the end of the quarter was 608 Kevin Owens, down $77,900,000 from the prior quarter. This included scheduled debt payments made during the quarter of 28,000,000 and finance lease payments of $4,600,000 We have $44,700,000 of scheduled principal payments remaining in 20.20 We expect to maintain cash at its current level or better through the end of the fiscal year.

Speaker 4

Given the transition at Mesa, we will not be providing more quarter. With block hours impacted by the transition, as Mike indicated, we expect earnings for the June quarter to be similar to the March quarter. With that, I'd like to now turn it back over to Jonathan for closing remarks.

Speaker 2

Thank you, Tarek. In summary, We've undertaken an important transition for Mesa. 2023 continues to be your year of transformation. In 2024, we will build on the foundation we are establishing in 2023, focusing on returning to normalized block hour utilization. We look forward to speaking with you over the coming quarters.

Speaker 2

At this point, operator, please open up the call as I'd be happy to field any questions that the analysts may have. Question. Thank you very

Operator

much. Before taking our first question, I would like to turn the call back over to Jonathan for brief remarks.

Speaker 2

Thanks, Brad. Before we take the first question, I just want to thank everyone for their patience as we experienced some technical difficulties with the publication of our earnings press release

Operator

Our first question for today will come from Savi Syth of Raymond James. Your line is open.

Speaker 5

Hey, good afternoon, everyone. I appreciate the color on the kind of the block over progression here. I was curious along those lines on the deferred revenue, do you kind of expect to book more deferred revenue here in the next Kind of couple of quarters of the year or do we start to see that starting to reverse now?

Speaker 4

Savi, this is Torek. The deferred revenues associated the with the recognition of revenue as we are flying more. So we'll see a little bit of that, but I I don't have specific guidance for you right now.

Speaker 5

Okay. But it shouldn't be deferred revenue. It should be, if anything, recognizing a little bit?

Speaker 4

Right, a little bit. Yes, as the contract moves forward.

Speaker 5

Makes sense. And then just the question comes from the line of Chris. A little bit on the as you can address the pilot issue, it looks like your block towers are stepping up and I can appreciate not wanting to give a lot more color than comes from the end of this fiscal year. But generally, what does that 4th quarter look like in terms of utilization? I'm just trying to appreciate question comes from the line of Chris.

Speaker 5

Yes, Savi, it's Mike.

Speaker 3

Yes, Savi, it's Mike. So in terms of utilization, I think we gave guidance for 55,000 hours of utilization we targeted to get that number up into the 65,000, 66,000 range and that will probably take us a couple of quarters to get

Operator

Our next question will come from Michael Linenberg of Deutsche Bank. Your line is open.

Speaker 6

Hi. This is actually Shannon Doherty on for Mike. Thanks for taking my question. I think in your opening remarks, you mentioned that the E Jet utilization was still under the

Speaker 2

This is Jonathan. We had to spool up pilot training, which is something that really We moved as quickly as possible. Even just getting people through training takes 3 or 4 months. Question comes from the line of Tim. We got a second SIM.

Speaker 2

We added instructors, ground instructors. Last month to give you an idea, our attrition was Around 15 pilots, that's the lowest it's been that frankly since any of us can remember. And we put out of IOE something over 50. Those are good numbers. I mean, when we go long close to 40 pilots a month, that's the The equivalent of 5 aircraft.

Speaker 2

Now there is the challenge about First Officers. Most of the other regionals, in fact, the question comes from the line of the National carriers are having trouble because they just don't have people who have enough time in a 121 aircraft to upgrade the that as a result of the AVA program as well as our labor agreement, which allows us to we're able to move first officers up to captain question and we don't think that will slow us down. And in fact, I think, in this month, our captain class is about 30 individuals. It's just a matter of how fast we can spool up. There's really no mystery in terms of what it does to our numbers.

Speaker 2

I mean, clearly, at quarter. We're not going to make money. We've got a bunch of aircraft parked. We are also continuing to hire and train CRJ We're going to continue to hire people and put as many people on and keep pushing up the utilization on the existing CRJ fleet. But clearly the focus is going to be on the E Jet.

Speaker 2

And again between all these various programs, I do think Barring some big spike in attrition, which seems to be coming less likely, as things have slowed down a little bit, I think we're moving forward pretty well in terms of adding net pilots to the to our roster.

Speaker 6

Thanks, Jonathan. And just a quick follow-up on the profitability rate. So do you think that Mesa can once again question comes from the line of John. Has the profitability bar been permanently lowered given the post COVID issues that have disproportionately impacted both you guys and other regional airlines. What would it take for you guys question

Speaker 4

comes from the line of Chris. To get back

Speaker 6

to prepandemic profitability levels after transformation, do you need to engage with or reengage with your airline partners or?

Speaker 2

No, I have to tell you, Mike and I and Torek discussed this very subject to this morning because I really was I wonder what I would say in regard to that, because it's something I wanted to address. I think our belief is that flying our aircraft, existing aircraft without additional aircraft. But flying our aircraft, we believe that once we're at basically full steam, in other words, flying the aircraft north of 10, 10.5 hours a day that we could achieve margins between 5% 8% consistently. But we because there's so much leverage in that last hour, it's really pretty astounding and probably something maybe even we didn't understand going into this. But, I think that we feel that, it may take us it could easily take us another year, But I think to get to that full run rate, but I think that at that point looking at margins 5%, 6%, 7%, 8% is doable.

Speaker 2

Question becomes, can we achieve that any sooner, just based on what happens in attrition and our ability to upgrade question comes from the line of Alex. I will say that, we now have, as we mentioned, I believe almost 17 100 applicants. We've got almost that equivalent amount lined up in the Mesa pilot development program. The real question is just the up great ability of first officers. United has helped tremendously in the AVA program by requiring captains for the AVA program the to graduate into the AVA program they had to have served as a captain for 2 years and as well as our labor agreement and the support of our pilots question comes from the line of John.

Speaker 2

So I think that we're going to work very hard to get to those numbers. I think also that there may be some opportunities on the cost side once we get to sort of a steady state. I mean to be frank given everything that's happened, I think it's fair to say and I think Mike would and Torek would agree that we have thrown a lot of money out there to sort of make the This happened more rapidly. And I think once we get back to normal, I think we could take a closer look at how we might be able to fine tune the operation as well.

Speaker 6

Thank you so much.

Operator

And our next question will be from Savi Syth of Raymond James.

Speaker 5

Question comes from the line of John. 6% to 8%, you were talking about pretax margin, right, Jonathan?

Speaker 2

Yes.

Speaker 5

Yes, makes sense. And Just on the fleet side, you've done a lot of kind of monetizing the fleet, which is great. And so I realize there's about 80 aircraft on the United fleet and then you have 20, maybe 20, 24 kind of CRJ900s that you'll I keep open to fill in there until you can fully fly there. But with the sales, like how many CRJ900s do you have Then ex whatever you're dedicating to United that you can maybe continue to monetize or place in your JV in Europe. Just what's the Once what you have kind of done is complete, like what's left over?

Speaker 2

Well, I'll start and I'll let Mike can talk. But I think our view now is that we're going to sell as many 900s as we can. We have the 7 that we think we have a contract for. I think we're looking to packaging some of the additional 900s with parts, which we have plentiful existing United agreement until such time as we can operate E Jet. And I think we're also obviously going to be looking at other opportunities for the aircraft, but I don't think at this point Most of the aircraft are offsetting the government debt and then we have Raspro, all of which we are looking to wind down Do you want to add anything to that Mike or Tore?

Speaker 3

No, I just think Savi that look the capacity we have with United is for 80 large regional jets. So right now, the mix is maybe 30%, question comes from the line of John. And look, our goal is to try to get as many E Jets flying

Speaker 1

So it's just going to

Speaker 3

be as that movement comes where the E Jets start coming in and the 900s come out, that's where we'll look opportunities to dispose of those assets and monetize any equity we have in them.

Speaker 5

And just in terms of kind of trying to gauge kind of the revenue per block hour, I guess, kind of the best way for us to think about is kind of work backwards. Is that right? Like a mid to high single digit question and that's what you kind of get to. What I'm trying to understand is that there's a fixed and a variable component and I'm trying to understand how much of that Current revenue for block hour is probably overstated because it's over kind of lower block hour production.

Speaker 3

Yes. And look, it's difficult to forecast that because of the mix of the fleet between aircraft that we may

Speaker 2

It's not yes, I think what Mike is saying, just not linear because on some aircraft, we're making the either the lease payment or the ownership payment and others our partners are. So it's just not linear.

Speaker 5

Makes sense. And maybe if I can just ask just one last kind of taking a step back on this kind of the regional front, just Any kind of thoughts now that you're seeing a little bit of settling on the pilot side and maybe light at the end of the tunnel Just your view on the regional airline market here in the next kind of 3 years or so?

Speaker 2

Sure. I mean, look, a lot of folks were concerned about the differential that existed between the majors question and the regionals in terms of cost benefits. When we've looked at it, even with the new wages, that cost benefit, there's still a significant question comes from a macro perspective, the regional business still has good legs and I think still makes question comes from the line of Jefferies. And there are just cities out there that are just going to be too small or are just served better with multiple departures into hubs that I think will require regional jet service. Am I concerned that over time, question comes from the line of John.

Speaker 2

If cost levels continue to escalate, is there a point where the aircraft doesn't work? I'm sure that point does exist. But Between fare levels increasing, demand being strong and the importance to the network for United in particular, question comes from the line of John. The fee traffic has lots of value. So I don't see a situation where the regional industry just sort of goes away at this point, Because I think all three of those things are to our benefit.

Speaker 2

I think that it's is still going to take innovation. There's going to and there is innovation out there and I think that that will continue. But I think for the basic

Operator

And at this time, we have no further questions. Gentlemen?

Speaker 2

Okay. Well, thank you very much, everyone. I know that this is obviously a tough quarter. We have a ways to go. United has been extremely supportive in terms of helping us through this.

Speaker 2

As you know, we have begun a good process to liquidate assets that we have the surplus to our requirements and we have been getting surprisingly good prices doing that And allowing us to pay down a significant number of debt. Again, on the pilot side, we've made what I consider to be remarkable progress. Certainly surprised me that the attrition levels are down to this and this has been sort of the second or third month where we've seen attrition levels much, much lower. And our on training. While it took us a while to get there, there's no doubt longer than we had hoped or anticipated.

Speaker 2

But we're now at levels where We're beginning to put out real numbers. And when you combine that with the lower question comes from the line of Alex. Please go ahead. Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 2

Thank you. Thank you. Thank you. Thank you. Thank you.

Speaker 3

Thank you. Question comes from the

Speaker 2

line of John. But clearly, we have modeled this enough to know that if we can fly the aircraft between that magic 10 11 hours, This operation will be profitable going forward. I think that United is also very much determined to see that happen. Question comes from the line of John. They would like us to be healthy.

Speaker 2

They rely on us. And I think that they put a lot of energy into helping us get to that point. We'll continue to plug along and hopefully next quarter we'll talk to you again and we continue to appreciate your support.

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