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Friday, August 3, 2007

Mesa Follows RJET in Reduced Earnings

Net income for Mesa Air Group’s (MESA) third quarter, dropped significantly from the year-ago period coming in at $2.6 million on gross operating revenues of $355.9 million compared to net income of $10.9 million in Q3 2006. That quarter, however, included income of $5.9 million from its US Airways (LCC) bankruptcy claim. Operating expenses for the quarter were up from $311 million to $343.3 million.
Calyon Securities Analyst Ray Niedl, who has previously indicated that regional growth will be limited, said Mesa is also limited. “We believe that the Hawaiian operation continues to lose money and the company appears to be counting on its Chinese partnership to propel growth,” he said. “While this sounds promising, there remains uncertainty, in our opinion. However, there is an aggressive stock buy-back program and, though it will not increase earnings, it will raise EPS.”
United (UAUA)
and Mesa restructured its regional jet schedule in July, resulting in much improved operating statistics which, of course, yielded increased incentive payments for the United Express partner. However, passenger costs were impacted negatively, according to CEO Jonathan Ornstein who told investors weather, ATC and United core system prompted disruptions, some of which will be mitigated with its new agreement. Its controllable completion factor and on-time performance went to 99.3 percent and 76.1 percent, respectively, during the month, compared to 97.5 percent and 58.0 percent, respectively, for the July 2006 period.
As previously disclosed, effective January 1, 2007 United Airlines assumed responsibility for a portion of Mesa's United Express fuel purchases and as a result, Mesa's revenues, as well as its fuel expenses, were reduced by approximately 4.6 million gallons of fuel in the third quarter which represented approximately $10.6 million. Owing to the pass-through costs this did not impact Mesa's earnings. Its total completion rate for the quarter was 98.6 percent versus its goal of 98.7 percent.
Mesa forecast 2.2 billion ASMs for the fourth quarter, down from the 2.3 flown in the third quarter owning to the elimination of the Dash 8s in Delta’s (DAL) Kennedy operation and well as the three aircraft headed to China. That will continue to build, according to Ornstein with the addition of CRJ 900s at Delta and as aircraft enter service in China.
It continues to prepare for its new Chinese joint venture KunPeng Airlines with three CJR200 beginning the conformity process for sublease. The airline is on track to have 20 aircraft in place by the 2008 Olympics. Ornstein noted that its partner, Shenzeng Airlines the program could represent a demand for 100 aircraft. “It is interesting to note that in a country of 1.4 billion people, only 70 regional jets are currently in operation, less than that at United’s hub operation in Chicago,” he said, adding it the joint venture is still on track for launch in mid- to late September.
Aircraft will originally be sourced from Mesa, but Ornstein said he is supporting GE in its joint venture in China and will be looking at all aircraft when he needs to up-gauge his equipment there.
Mesa celebrated go!’s first anniversary in June with load factors up to 72 percent from 63 percent in May and June. While load factors may mean nothing, Ornstein reported that the airline earned its highest ever fare for 2007 during in the third quarter and its frequent flier program almost doubled its membership. He also indicated loaf factors for July increased significantly.
Attrition is a problem at Mesa as well illustrated by the signing bonuses posted on its web site. It is offering up to $10,000 for dispatchers, up to $5,000 for pilots and up to $5,000 for mechanics. They apply to employees with UA Express experience. Ornstein indicated Mesa experienced a spike early in the year owing to recruiting by low-cost carriers such as JetBlue (JBLU), AirTran (AAI) and Frontier (FRNT). He said the attrition rate was closer to 2006 levels. “Unlike other carriers we do not have a problem recruiting and have made some changes to make our recruiting efforts more effective.” I said there are 250 pilots in training at this time. Mesa average notice time is 11 days and average training time is 90 days. “That equals a lag,” he said.
It is pursuing a number of options for Air Midwest. It is now down to 20 1900s and want to exit this operation in order to reduce exposure to at risk flying which continue to significantly. losses. It is negotiating with Raytheon to get out of its contracts on the 20 remaining aircraft flying on Air Midwest’s essential air service routes. The airline has already filed with the DOT to exit those markets.
Total operating revenues increased $16.9 million year-over-year, or 5.0 percent, primarily as a result of the year-over- year increases in its regional jet fleet. Pro forma net income for the quarter was $5.1 million, or 15 cents per share. Pro forma net income excluded net non-cash investment gains of $0.7 million, costs associated with the early return of certain Dash- 8 aircraft of $1.4 million, a $1.7 million cost associated with a contract settlement with a vendor and $0.1 million in certain start up costs associated with our Chinese joint venture. This compares to pro forma net income of $11.5 million, or 26 cents per share for the comparable period of fiscal 2006.
The company has made several operational changes in its partnership programs in order to reduce costs and its reliability problems. Mesa and Delta have begun implementing their joint plan to eliminate the JFK Dash 8 operations. Three Dash-8's were removed from line service in the third quarter with the remaining nine aircraft set to be removed from service during August.
It is now realizing benefits of its new power-by-the-hour GE engine agreement with Delta, experiencing lower engine repair costs in the quarter as a result of the agreement. The GE agreement ends in 2008 when lower rates through Delta will kick in which is expected to yield over $100 million in savings over the 12-year term of the contract. It also negotiated a lower rate for maintenance for its Embraer regional jets' auxiliary power units, which is expected to save a quarter of a million dollars. and revised its spare parts maintenance agreement with AAR to settle a prior billing dispute and cap certain previously uncapped costs.
On the cost side, work began on adding the first of 14 76-seat CRJ-900 regional jets the Freedom certificate to be operated as a Delta Connection. The first of the CRJ-900s is expected to be in operation by November.
For the first its fiscal first half, Mesa recorded a net loss of $13.3 million compared to earnings of $29.2 million in the year-ago period. Operating revenues were up from $974.719 million to 1.014 billion while operating expenses followed the same trend from $890.5 million to 1.007 billion.
Mesa flew 4,397,338 passengers in the quarter, up from 3.9 million in the year-ago period. Year-to-date enplanements grew from 10.8 million to 12,325,092. ASMs were up from 2.2 billion to 2.3 billion for the quarter, an increased of 1.7 percent from the year-ago period, given the addition of six RJs during the year. It replaced two 50-seat RJs on United service with two CRJ-700s. It also removed two 50-seaters from its fleet, reducing its exposure to the less profitable jets, according to the airline. It plans on spinning out an additional 10 50 seaters on United routes when it begins taking delivery of the 10 Bombardier (BBD) NextGen CRJ-700 aircraft (with an option for an 11th), for delivery late fiscal 2008 and early fiscal 2009.
During the first half ASMs rose 6.7 billion tot 6.9 billion for the first half. RPMs were generally flat at 1.8 billion and went from 5.0 billion to 5.2 billion for the first half. Mesa reported a flat load factor of 79.3 percent for the quarter at 75.3 percent for the half, up slightly. Yield was up from 18.6 cents to 19.2 cents for the quarter and was flat for the first half at 19.4 cents.
Revenue per ASM rose to 15.3 from 14.8 for the quarter and was also flat at 14.6 for the half. Operating cost per ASM was up a penny to 14.6 cents for the quarter and from 13.1 cents to 14.5 cents for the first half. Operating cost per available seat mile, ex fuel and one-time items, was 9.4 cents, up from 8.3 cents and for the first half it rose from 8.3 cents to 9.5 cents. The average stage length dropped from 403 miles to 359 miles for the quarter and from 404 to 363 for the first half.
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