“Obviously we are not happy with the results,” Mesa (MESA) CEO Jonathan Ornstein told analysts last week, citing weather and ATC problems as contributing factors as well as higher maintenance expenses and yield dilution in the Hawaiian market. It is little wonder he focused on pro forma net income results which, while on the plus side, dropped precipitously from $12.9 million in the second quarter 2006 to $4.5 million in the fiscal 2007 second quarter. He also stressed the company was actively working with its partners to minimize the impact of “irregular operations,” meaning United- and Delta-imposed scheduling problems caused it to miss performance marks. Mesa is pursuing a number of different options with respect to its Air Midwest subsidiary in order to reduce its exposure to at-risk flying. Left unsaid but very much in doubt is the fate of Air Midwest which is dubious considering statements by Ornstein that the employees of both its Delta Dash 8 operations now being shed at JFK and Air Midwest could be used to fuel its growth
Despite an increase in its fleet, Mesa Air Group, Inc. announced a second quarter after tax loss of $24 million on gross operating revenues of $336.4 million. Total gross operating revenues for the second quarter of 2007 increased $24.4 million, or 7.8 percent. Net income and earnings per share for the second quarter were a loss of $24 million as compared to net income of $5.3 million for the same period of fiscal 2006.
Owing to certain operational events which occurred in the quarter, Mesa evaluated the recoverability of certain long-lived assets resulting in pretax non-cash impairment charges totaling $37.7 million. The first totaled $31.7 million related to an incentive payment made to United ($25.3 million) and leasehold improvements on certain United aircraft ($6.4 million). The second totaled $6 million and involved leasehold improvements on 12 Dash 8s being removed from service in the JFK Delta code-share. The unanticipated higher expenses in the Dash 8 operation, is forcing the elimination of the type by August 21. Mesa is currently evaluating a number of potential uses for the aircraft, including additional flying, subleasing to other carriers and returning the aircraft to the lessors early.
Its completion factor for United Express was approximately three percent below that of its other operations. This resulted in below-plan and expenses not being fully reimbursed. These problems resulted in a reduction in operating profit of approximately $4.7 million. The company also experienced an 11.6 percent reduction in average fares and higher than anticipated fuel expenses in its Air Midwest operation, which caused operating earnings $1.3 million below plan.
Maintenance costs were cited by Calyon Analyst RayNiedl, who indicated, because of the company’s aging fleet, maintenance costs will exceed previous expectations. Also, fuel costs were up and average fares at Mesa's Air Midwest non-contract subsidiary were down 11.6 percent. “With the stock price at a low point, which we believe is justified based on the company's recent performance and short-term prospects,” he said, “We believe that the company could be a candidate for an leveraged buy out, something Mesa Chair Jonathan Ornstein would only say is one of a number of issues being studied by the company.
A new engine maintenance agreement is expected to save over $100 million during its 12-year term and $10 million for the rest of the fiscal year. It is also negotiating with GE to amend the terms of its current power-by-the-hour engine agreement in order to mitigate the effects of this year's contractual increases. While the outcome of those discussions are currently unknown, this agreement expires in December of 2008, at which point these engines will be covered under the new, lower cost, Delta agreement.
Mesa reached an agreement with Delta for an amendment to and assumption of its existing Delta Connection Agreement, as well as for a new code-share agreement to operate 14 CRJ-900 regional jet aircraft. The compensation structure for the new code share agreement is similar to the structure in the existing agreement, except the CRJ-900 aircraft will be owned by Delta and leased to Mesa for a nominal amount and no mark-up or incentive compensation will be paid on fuel costs above a certain level or on fuel provided by Delta. The amended code share agreement provides for the addition of six additional ERJ-145 aircraft to the scope of existing code-share agreement for up to three years beginning immediately. It also calls for the removal of eight of the original thirty ERJ-145 aircraft at a rate of three aircraft per month beginning in August 2008, and the receipt by Mesa of a general unsecured claim of $35 million as part of Delta's bankruptcy proceedings.
Total Available Seat Miles (ASMs) for the second quarter of 2007 increased four percent from the second quarter of 2006, primarily as a result of an increase in the number of regional jets flown from 144 jets as of March 31, 2006 to 151 as of March 31, 2007. Mesa announced that its board authorized the repurchase up to an additional 10 million shares of its outstanding common stock. The 10 million shares are in addition to the 5.7 million shares remaining under the prior repurchase programs. During the second quarter of 2007, Mesa repurchased approximately 2.7 million shares at an average price of $7.64 for a total cost of $20.6 million.