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Monday, January 21, 2008

Mesa in Q4 and Year-End Loss

In a decidedly guarded conversation with investors in which he may have used a lot of words, but, in fact, Mesa  Air Group CEO Jonathan Ornstein, managed to reveal very little about the impact of recent troubles as the airline. Instead he expressed confidence in the company’s ability to turn its 2007 losses around, adding his disappointment in fourth quarter and year-end performance which largely resulted from the $90 million bond the company put up to cover the $80 million judgment against it in the Hawaiian Airlines lawsuit. Related Story Ornstein further said the corresponding suit brought by Aloha, the loss of which could impact FY 2008 results, has been delayed beyond the Spring schedule.
Mesa Air Group, Inc. incurred fourth quarter losses from continuing operations of $62.2 million ($2.16 per diluted share) on gross operating revenues of $327.8 million, a $100 million swing from the $37.1 million profit in the last fiscal year. It also incurred a loss of $81.5 million for its fiscal year ended September 30, compared to a $33.9 million profit in the year-ago period.
Its fourth quarter losses compares to earnings from continuing operations of $5.8 million ($0.14 per diluted share) in the fourth quarter of 2006 on gross operating revenues of $348.8 million. Total operating revenues decreased $21.0 million year-over-year, or 6.0 percent, primarily as a result of a year-over-year decrease in aircraft in service.
“The loss was not anticipated,” Ornstein told investment analysts. “Clearly we are now focused on our operations. We do feel we have made changes in the last quarter and will follow up with additional changes to get us back on track. We continue to be cash-flow positive and we will continue to look at opportunities as they come to us.”
Ornstein reported that Kunpeng, according to Mesa’s partner, Shenzheng Airlines, was expected to be profitable in December. In addition, the fledgling carrier, which launched operations, in September has contracted for 100 Embraer ERJ 190s, set for delivery to begin at the end of this year, and another 100, 90-seat ARJ 121 700s, China’s home-grown regional jet.
The eight CRJ 200s Mesa is taking off its United Express operations are destined for the new airline but it will fall short of the planned 12 aircraft in place by the start of the summer Olympics. Instead, Ornstein said there would be eight or nine aircraft active in the Chinese operation by the opening of the games. The eight aircraft are being replaced with two 66-seat Bombardier CRJ-700 aircraft, set to enter service this year. In addition, Mesa hopes to sign an agreement soon which would spin off another eight CRJ 200s from the United Express network, also replacing them with CRJ 700s. Related Story
He said the CRJ 200s coming off the contract were unprofitable and the CRJ 700s replacing them will be profitable and will be under contract for 10 years, eight beyond the expiration of the CRJ 200 contracts. He also said the transfer of the equipment to China has had unanticipated challenges including the approval of lessors and Chinese aviation authorities. As for the ERJ 190s, he is trying to ensure than any deals “look like what we are accustomed to.”
Mesa is also negotiating with its partners to develop schedules that can handle “irregular operations,” although its controllable completion rate was 98.2 percent, according to Ornstein. Related Story  In addition, the CRJ 900s set to join its Delta Connection program are being leased from Delta for $1 a month.
The company is continuing with plans to eliminate Air Midwest, which Ornstein said was long overdue, and sell off its fleet of Beech 1900s and expects to be out of the Essential Air Service business by the end of this fiscal year in September.
Pilot attrition is slowing with the advent of changes to the Age 60 rule, he said, adding 90 percent of pilots leave to fly larger equipment. “We are a victim of our own success,” he said. “We upgrade so quickly that there are lots of captains who have a lot of flying time and not a lot of seniority, which makes it easier to leave, who are prime targets for the major carriers.”
Ornstein said he did not know the answer to a question regarding the capital needed to run its operations, but added that its cash position was $16 million and it had $100 million in unencumbered spare parts. He indicated he is looking into what opportunities could be had with the spares.
"We are certainly very disappointed with our 2007 earnings results which have been adversely impacted by the judgment rendered in the Hawaiian Airlines litigation,” he said. “We believe the judgment was wrong and an appellate court will ultimately find the sanctions and the judgment should be set aside based on information that was not available until late in the proceedings. Further impacting the year's earnings were the significant losses at our Air Midwest subsidiary which were primarily due to the ongoing effects of Federal regulations governing the operation of 19-seat turboprop aircraft, inadequate funding of the Essential Air Services program, higher maintenance costs and higher fuel prices. With little prospect of future profitability we have reluctantly begun to liquidate those assets and operations."
The GAAP net loss for the quarter was $68.2 million ($2.37 per diluted share) versus $4.8 million net income ($0.12 per diluted share) in the fourth quarter of fiscal 2006. Pro forma net income from continuing operations for the fourth quarter of 2007 was $2.2 million, or $0.08 per diluted share. Pro forma net income includes adjustments for the items on an after tax basis including $57.7 million related to the Hawaiian legal judgment against the company, $1.3 million associated with the company's own legal costs in the litigation, $0.7 million in non-cash losses from equity method investments, $1.7 million in net costs associated with the early return of certain Dash-8 aircraft and $3.0 million in certain start up costs associated with our Chinese joint-venture. This compares to pro forma net income of $7.0 million, or $0.17 per diluted share for the comparable period of fiscal 2006.
As of September 30, 2007, the company's cash, marketable securities and debt investments were approximately $208.6 million, which includes $12.2 million of restricted cash.
During the fourth quarter, Mesa completed its joint plan to eliminate its Delta Connection JFK Dash-8 operations. The nine remaining Dash-8's were removed from line service in the fourth quarter. Subsequent to year end, the company completed the return of five of the aircraft to lessors with the remaining aircraft to be complete by the second quarter of fiscal 2008. It also took delivery of our first CRJ-900 for Delta, two now in service and a total of 14 aircraft to be put in service over the next year.

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