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Edited Transcript of MESA.OQ earnings conference call or presentation 10-Aug-20 8:30pm GMT

Q3 2020 Mesa Air Group Inc Earnings Call

Phoenix Sep 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Mesa Air Group Inc earnings conference call or presentation Monday, August 10, 2020 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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 & CFO

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Conference Call Participants

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* Bert William Subin

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* 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 Syth

Raymond James & Associates, Inc., Research Division - Airlines Analyst

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Presentation

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Operator [1]

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Welcome, and thank you for standing by. I would like to inform all participants that today's conference is being recorded. If you have any objections, you may disconnect at this time. (Operator Instructions)

I would now like to turn the conference over to your host, Jonathan Ornstein.

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [2]

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Thank you very much, operator, and thank you, everyone, for taking a moment out of your day to listen to our quarterly results. As the operator indicated, this is Jonathan Ornstein. I'm the Chairman and Chief Executive Officer. On the call with me today are Mike Lotz, our President and Chief Financial Officer; Brad Rich, our Chief Operating Officer; and Darren Zapfe, our Vice President of Finance. Unfortunately, Brian Gillman, our General Counsel, got caught on a delayed flight. I'm only thankful it is not one of ours. I'd like everyone to be aware, we are doing this remotely. So it has some challenges, but I think we'll be okay.

I'd like to start off by reading the safe harbor statement. Before the presentation and comments begin, Mesa would like to remind you that some of the statements in response to your questions in this conference call may include forward-looking statements under federal securities laws. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts and assumptions and are subject to future events, risks and uncertainties that could cause actual results and outcomes to differ materially from those expressed in the forward-looking statements. Also, please note that the company undertakes no obligation to update or revise these forward-looking statements, and any forward-looking statements could be considered in conjunction with the cautionary statements in our press release and the risk factors included in our filings with the SEC, including our reports on Form 10-K and 10-Q, which Mesa encourages you to read. These risks and uncertainties include those associated with the COVID-19 virus and its related impact on our business.

In addition, please refer to the press release in the Investors section of our website to find additional disclosures and reconciliations of non-GAAP financial measures that will be used on today's call.

Okay. So let's get to our release. We had a pretty good quarter. We do, however, continue to see significant COVID-19 impact on utilization. Block hours are down 70% this quarter versus the same quarter last year. On a positive note, based on July actuals and our partners' current schedules for August and September, we expect the current quarter, which clearly are subject to change, but we expect the current quarter to be an 87% increase from this last quarter, which should put us at about 54% of pre-COVID-19 levels. If utilization remains in place by continuing working with our employee groups, we believe it is possible for us to avoid an employee furlough. Some of those initiatives include reduced work week, reduction in crew minimums and continued use of voluntary leaves of absence. Of course, if the Payroll Support Program under the CARES Act is extended, these initiatives would be unnecessary.

We believe that Mesa's cost structure and the lower trip costs for small regional aircraft is advantageous in the current environment. Furthermore, we believe as a low-cost provider of regional jet service, Mesa is exceptionally well positioned as costs have become a far more critical element in our partners' analysis. I think it's important and worth emphasizing that Mesa's low costs are not by accident. We do believe Mesa has the lowest overhead for aircraft in the industry, and our corporate culture has always been built around productivity, efficiency and lean organizational structure ever since it was founded by Larry Risley. Additionally, if we are successful in accessing a reasonable portion of our $277 million allocation under the CARES Act loan program, given the increased liquidity as a result of the loan, combined with our current cash flow estimates, we believe Mesa's financial profile will be significantly improved.

It is important to note that we operate 100% of our business under CPAs. These CPAs provide for a significant amount of our costs to be covered with fixed monthly amounts. Although we billed our partners and received payments for those fixed costs, under GAAP, we were required to defer $16 million of fixed revenue in the quarter for future periods.

I'd like to take a moment and welcome David Butler, who is returning to head up our HR department. I would also like to send my heartfelt, best wishes for a speedy recovery to Captain Andy Hughes, our ALPA MEC Chairman, who has been with Mesa for 37 years and has become a very close friend and a great addition to our company.

As you know, Brad Rich is focused on our American contract and operations. So I'd like to turn it over to him now to talk to you about American.

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Bradford Roger Rich, Mesa Air Group, Inc. - Executive VP & COO [3]

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Good afternoon, everyone, and thank you, Jonathan.

We've been working collaboratively with American and have agreed to a temporary reduction in rates and other cash flow benefits around the timing of weekly payments through the end of September, corresponding with the end of the Payroll Support Program under the CARES Act. In addition, we agreed to remove 2 aircraft in June that were scheduled to be removed in January of 2021 given that the aircraft aren't required for operation in this reduced utilization time period and the fact that American has agreed to pay for all of the costs associated with the 2 aircraft. More importantly, we continue to have productive discussions with American with respect to an extension of our existing CPA. Once the CPA terms have been agreed to, we've been told American will determine what the fleet size and term will be. Obviously, in the current environment and extension, we recognize, is more difficult. But as I said on our last call, while we don't know the size, scope or duration of the extension, we do remain convinced that American believes we are a valued part of the portfolio.

In the event we don't get an extension at all, our exposure is fairly limited on the CRJ-900 fleet. Without an extension, 49 aircraft will be expiring over a 23-month period starting in February of 2021. Of the 49 aircraft, 33 will have no debt at the end of the 23-month period, 1 lease expires and 15 leases will have monthly payments of $69,000 per aircraft per month. And keep in mind, that's relative to a current fleet average of $180,000, and that will go through March of 2024, which, those rates, we believe, are competitive as subleases or in better-than-post-COVID-19 market lease rates. The 33 owned aircraft, which will have no debt, have recently been valued at approximately $212 million in post-COVID-19 appraisals. The remaining 7 aircraft do not expire until 2025. While a return-to-normal demand levels would offer the highest likelihood of a contract extension of American, we believe that if there is a silver lining, it is the renewed focus on costs, which has always been one of Mesa's strengths. We believe that our CRJ-900s offer the lowest available seat mile costs in the regional industry.

And I would also just echo what Jonathan already stated that the Mesa corporate culture has always been built around discipline and productivity and efficiency. Given our growth over the last several years and our productive workforce, we believe our low-cost structure is sustainable for the future. And I would maybe just add some emphasis here. I've been doing this a long time. Both in all the years that I was a competitor to Mesa and in my years at United Airlines, I would often hear people that were skeptical about Mesa's ability to maintain and sustain this low-cost structure. Now that I'm here and I've seen it and experienced it, I would just say I do believe that it is sustainable.

Continuing on the cost side for a minute. We've implemented a number of initiatives to take advantage of the reduced utilization. We've also had several significant -- or had significant positive responses to voluntary leaves of absences from our employees. For July, we had almost 500 requests for voluntary leaves that were granted. We obviously have in place a hiring freeze. On the pilot training front, we reduced our simulator and other crew training costs by approximately $4 million in the quarter. On another positive note, while we are not currently dealing with a pilot shortage, we do have approximately 425 pilot applications on file, which is the most that I've ever seen at one time since I've been at Mesa.

Focusing now on operations for a minute. We did not have any controllable canceled flights at either American or United for the entire quarter. We also achieved all of our on-time performance targets for both American and United for each month of the quarter. Lastly, I would just say that we are working very specifically with our major partners and following the guidance of the CDC to create a safe environment for our customers as well as for our employees.

Now I'll turn it back over to Jonathan for an update on United and on our cargo business.

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [4]

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Thank you, Brad.

At United, we have 20 new Embraer 175s scheduled for delivery from September 2020 through June of 2021. We're currently working on the financing for the first 10 aircraft. Obviously, given the current market conditions, this is no small task and we are looking at a multiple creative options. Unfortunately, more conventional standard bank lending would be significantly more expensive than we've previously obtained. Thankfully, the 175 is viewed by the market as strong collateral, and we hope to have something finalized soon.

Under the term of the existing CPA, as each new Embraer 175 is put into service, an existing CRJ-700 would be removed from our CPA and leased to another United operator for 7 years. The other United Express carrier would be responsible for all obligations under the leases. However, subject to certain limits and requirements, United will be responsible for certain unmet rent obligations under the leases. Given the uncertainties arising from COVID-19, Mesa is prepared to continue to operate the aircraft for United. We have worked collaboratively with United and agreed to waive minimums and given temporary reduced rates and other cash flow benefits around the timing of weekly payments through the end of September 2020, corresponding with the end of the Payroll Support Program under the CARES Act. In spite of a difficult operating environment, we will continue to do everything we can to assist our partners.

On the cargo front, as you know, we announced a 5-year deal to operate Boeing 737-400 freighters for DHL. The aircraft are anticipated to start service in October and November. This is the start of what we hope will be a long-standing successful relationship with DHL. We are still looking -- working through the process of getting the aircraft type on our certificates. The initial cadre of pilots has been trained. The aircraft are going into heavy maintenance, and we are positioning our support staff in Cincinnati. The structure of our contract with DHL is similar to our existing contract business. Mesa will be providing crews and maintenance. DHL will be providing the aircraft and fuel and is responsible for generating cargo revenue. With 2 start-up -- with the start-up of 2 aircraft, we expect it to be slightly better than breakeven and should become profitable over time as we add additional aircraft. The total amount of the start-up cost is approximately $5 million. For this quarter, we spent $600,000 and forecast to spend another $2.1 million in the next quarter as the operations spools up.

I'd like to turn it over to Mike Lotz for a financial overview.

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [5]

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Thanks, Jonathan.

On the liquidity side, for the quarter, we ended at $65 million in cash, which is a $13 million increase over last quarter's $52 million. During the quarter, we had $12 million in capital expenditures related to engines, was also offset by engine deposits that we had. We had $24 million in scheduled principal payments on aircraft and engines. And we had $16 million of principal in lease deferrals that we were able to negotiate.

Looking out to the end of the calendar year, CapEx is expected to be minimal except for the 20 new 175 that is scheduled for delivery and the 20 engines that we currently have order -- on order from GE Aviation. As we pointed out on our last call when we were at $52 million in cash at March 31, we were targeting the breakeven or better cash flow through the end of the calendar year. We believe we are still on target for that and continue -- and should continue to operate at breakeven or better cash flow. This does not take into account any potential proceeds from the U.S. Treasury loan program. Under the U.S. Treasury loan program, we've been allocated $277 million. We are working with the Treasury department and their advisers on terms and final amounts of the loans. Given the equity in our aircraft and other assets, we believe we can access most, if not all, of our allocation. We have been and will continue to work with lessors, our lessors, debt holders and suppliers on deferrals, reduced rates and relaxed payment terms.

Now let me just walk through some of the financial data provided in the press release. We reported adjusted pretax income of $4.9 million. This compares to pretax income of $13.4 million for the same quarter last year. The quarter-over-quarter variance was primarily due to deferred revenue of $16 million. Again, as we outlined in our press release and Jonathan pointed out, this is a GAAP adjustment related to the fixed portion of our CPA revenue and not related to any changes in our CPA. We continue to bill and are getting paid for fixed revenue by our partners as we always have. Additionally, for the quarter, we reported $1.5 million of income tax expense for net income of $3.4 million or $0.10 per share.

Just a quick note on our income taxes. Although we're reflecting tax as an expense, we will not pay cash taxes as we still have roughly $478 million of NOLs. Total debt on the balance sheet at quarter end was $764 million, down $24 million from the prior quarter. We still have our $23 million line of credit drawn.

And just to recap, we were granted the $92.5 million in connection with the Payroll Support Program under the CARES Act, covering the period April through September. Through June, we had received $46.3 million and have subsequently received $15.4 million in July and $15.4 million in August with the remaining $15.4 million due September 1. As discussed in our press release, we're not providing any further guidance at this point.

I'd like to turn it back over to Jonathan now.

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [6]

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Thank you, Mike.

Obviously, this environment has pushed everyone to their limit. I really am thankful that the company has pulled together the way it has. Our whole country has felt the strain of the COVID-19 virus. That being said, we believe we are well positioned with our core company values and assets to take advantage of opportunities that may present themselves. We believe that those opportunities exist and that we will continue to pursue them prudently with the idea to maximize shareholder value.

I'd like to thank everyone for taking the time out of their day to join us and open up for any questions that we may be able to help you with.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Savi Syth with Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [2]

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Just on the -- you mentioned the $16 million in lease and principal deferrals. Wondering what -- if you can talk about what you're expecting over the next 18 months. And maybe tied to that, what concessions have you granted your partners and how long those continue for?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [3]

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Mike, do you want to do that?

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [4]

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Sure. So the principal payments going forward, the deferrals that we were able to accomplish so far, we have not projected any further deferrals in any of our projections on cash flow. So they're the existing debt schedules that exist. And as far as with our partners, the agreements we have with both United and American are similar. They're related to credits primarily as a result of us being able to operate at slightly better operating cost as a result of the Payroll Support Program. And additionally, we did some reductions in minimums and adjusted some of the timing of our true-ups. But that's the extent of what we did with the partnership.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [5]

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And is the reduction in the minimums, Mike, does that go through September 30? Or does that go beyond as well?

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [6]

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Just through September 30.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [7]

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Got it. And then just for a second question. Regarding the CRJ-700, the comment about possibly being operated by Mesa I think is new. If kind of GoJet can't take delivery as it seems to be the case based on kind of SkyWest's comments, have you negotiated the economics around operating these 60 seats? Or is there more to go before that can happen?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [8]

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Well, Mike, correct me if I'm wrong; Brad, just jump in. But we have had discussions with United. I don't think we've finalized things. I will mention that we had made a proposal to them a while back. But I don't think that if, in fact, they came to us and asked us to operate the aircraft, I don't think it would be a high hurdle for us to come to an agreement.

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Operator [9]

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And our next question is from Helane Becker with Cowen.

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Helane Renee Becker-Roukas, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [10]

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Are you there?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [11]

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Yes.

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Helane Renee Becker-Roukas, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [12]

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Yes. Good. Thanks. I don't know what's wrong with my phone. So just on the cargo business and the breakeven number, is that after the start-up costs?

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [13]

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No. That's on a run rate basis.

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Helane Renee Becker-Roukas, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [14]

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Okay.

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [15]

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That's on a run rate...

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Helane Renee Becker-Roukas, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [16]

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And then -- okay. That's helpful. And then the other question -- part of the question is, is there potential to grow that business with DHL?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [17]

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Yes. I'll be frank. I don't think we would have taken on the business if we thought that 2 aircraft were going to be the limit. I think that we feel very strongly that if we can operate these aircraft properly, that there is significant growth opportunity. As the package program becomes more important to America and timeliness becomes more important, I think all the cargo operators are looking at how they can most efficiently serve. And one of the ways to do that is by the ability to fly smaller aircraft. They can bring packages closer and later -- leave later in the day with efficient operators like Mesa flying smaller jets like 737s as opposed to the larger gauge aircraft. So we think there's a secular trend towards the smaller aircraft and we would like to be right in the middle of that operating the 737 variant.

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Helane Renee Becker-Roukas, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [18]

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Right. Got you. And they're wanting the 400 versus the 800?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [19]

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I think that I'm not really -- having privy to what DHL is thinking, these are aircraft that had been in their fleet. And so they moved those from another operator to us. But I do think that the long-term plan would be to probably -- just given the fact what the age of the aircraft is, to probably focus on 737-800s going out into the future.

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Operator [20]

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We now have a question from Michael Linenberg with Deutsche Bank.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [21]

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Just a couple here. On the $277 million CARES Act loan, do you have a sense of the potential cost of that, the terms? I know some carriers have indicated the size and they've thrown out numbers anywhere from LIBOR plus 300 to LIBOR plus, I want to say, 400, 450. Are you in that range or anything that you can tell us on the cost of that amount?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [22]

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Mike, do you want to respond?

I mean I don't think we've gotten that far along. We have a rough idea. We think that's probably the range. The range had actually started out a little bit lower. But I think when we've had our discussions, that's been the range.

Mike, do you want to add anything on that?

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [23]

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Yes. That's the range we're expecting, but we haven't had any discussion or negotiating points with the Treasury on the rate of the loan at this point.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [24]

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Okay. Okay. That's helpful. And then the -- let's say that you do operate the CRJ-700s in tandem with the 175s. Are -- you're going to fly them as 50 seaters, right, as CRJ-550s? Or are you actually going to operate them as larger regional jets? I wasn't -- it wasn't clear, obviously.

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [25]

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Yes. No. If -- assuming that we take delivery of the 175s, which we fully intend on doing at this point, to operate those aircraft, they would have to be operated as 50-seat aircraft under United's current scope agreement with their pilots.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [26]

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Okay. Okay. That's great. And then just lastly, when we think about how you're going to account for the DHL business, I think, Jonathan, did you say you cover crews? And did you say maintenance, did I hear that right? Maintenance on 737s, and then DHL picks up the aircraft fuel and the cargo revenues?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [27]

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That's correct. It's just a crew and maintenance, CMI, crew maintenance and insurance, contract.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [28]

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I see. So then does that -- like how do you -- okay. So you'll have some sort of revenue that offsets that. And I don't know if it's going to be -- I don't know, maybe you're going to call it CPA revenue but it will be tied to DHL. Maybe it's all in a single line item.

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [29]

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Yes. I mean just to give you an idea, order of magnitude, we're estimating the revenue on 2 aircraft. It's very small. I mean we're talking about $8 million to $10 million. Obviously, we have to grow the business pretty significantly, but the longest journey begins with the first step. And we just believe that given the environment, which did not exist at the time we went into it, but we clearly now feel that being in the cargo business is probably, we think, a pretty good bet long term.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [30]

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Yes. No. I agree. And then just like on that maintenance, though, with the 737, do you -- I mean are you going to have to have your mechanics proficient on 737 maintenance? Do you have to get spare parts and the like? Like how should we think about that?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [31]

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Mike, Brad, do you want to take a shot at that in terms of how we're going to do the maintenance?

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [32]

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I mean, Brad, go ahead.

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Bradford Roger Rich, Mesa Air Group, Inc. - Executive VP & COO [33]

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Well, yes, Mike, we're setting up parts payments, maintenance agreements, very similar to how we do on the existing passenger flying. So it's not going to be much different.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [34]

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Okay. All right. Very good.

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [35]

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Mike, I can add to that, Mike. We're not going to be responsible for the heavy maintenance, the engines on the 737 and the C-checks. Like our contract with American where they own the aircraft, those become pass-through. So there's little -- a lot less exposure on that. And part of our $5 million start-up is some inventory and start-up costs. We're trying to do a lot of power by the hour to minimize our investments. But yes, our mechanics will be doing the work in setting up in Cincinnati.

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Michael John Linenberg, Deutsche Bank AG, Research Division - MD and Senior Company Research Analyst [36]

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Okay. Okay. No. It sounds like basic line maintenance. That makes sense. Okay. No, that's very helpful.

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [37]

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Yes.

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Operator [38]

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Our final question comes from Bert Subin with Stifel.

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Bert William Subin, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [39]

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Jonathan, just following up on Helane's question, do you view the opportunity on the cargo side or on the air travel side as greater for Mesa longer term, at least in terms of your growth?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [40]

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That's a good question. I think the cargo business will take some time to develop. DHL is a conservative company. We have to develop a reputation with them. Could we be at 10 aircraft in 18 months? Yes. When I look at big opportunities, I still strongly believe that our biggest opportunities are within the regional business as there continues to be consolidation. Clearly, the COVID-19 impact has been negative on some carriers and Mesa's positioned, particularly in light of liquidity that could be granted to us through the Treasury loan, and our cost structure could make some of those opportunities become very real. And I think some of them are, in fact, not insignificant.

So I think our focus has been on the regional jet side. We love the cargo business. As you know, we recently added Dan McHugh, the former CEO of Southern, to our Board. We have some very good people working on the cargo side. But in terms of size, the opportunity on the regional jet side is still a very big opportunity given the dislocation that's occurred due to the pandemic.

Mike, Brian, do you guys -- I mean, Brad, do you want to add anything to that?

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Bradford Roger Rich, Mesa Air Group, Inc. - Executive VP & COO [41]

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Not to me...

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [42]

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No. I mean it was -- this is Mike. It was -- we started this as a way to diversify our business and not just be regional jets. So part of it's diversification of our business. And also, part of it was as part of the pilot situation, being able to offer our existing pilots upgrades into a narrow body who pays more is something that we think will attract and retain people going forward at some point. There will be the pilot -- return to a pilot situation that we've seen in the past, and we'll have to deal with that at that point.

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Bert William Subin, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [43]

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Okay. That's helpful. Just one follow-up. I guess probably for Mike. How variable is Mesa's cost structure, at least in percentage terms? And do you think there's any structural benefit that you'll carry through the pandemic, at least on the other side that you could expect potentially your cost structure to get a little better?

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [44]

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Yes. I mean part of our -- one of our challenges in our cost structure was the cost to train pilots.

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [45]

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And to attract pilots and the bonus impact to those pilots.

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [46]

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And that's going to certainly change going forward for some period of time. We were paying significant bonuses to attract pilots. We had higher-than-normal attrition. So just those factors alone I think will have a favorable impact on our cost structure going forward.

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Bert William Subin, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [47]

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And then on the variable fixed split?

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [48]

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What was that?

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Bert William Subin, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [49]

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I'm just wondering, on the variable fixed, the split for Mesa, I know it's a little different in your business, but I'm just wondering what percentage of your cost structure is variable.

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [50]

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Yes. It's always been roughly 50-50, and we don't see that dynamic changing significantly.

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Operator [51]

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(Operator Instructions) We now have Savi Syth with Raymond James.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [52]

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Just on the cargo side, kind of curious how large that business has to be to kind of get to profitability levels. I'm guessing, as you grow that, the overhead is kind of over more operations. And is that what it takes to get it to be profitable?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [53]

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Mike, do you want to answer that? Mike, do you want to respond to that?

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Michael J. Lotz, Mesa Air Group, Inc. - President & CFO [54]

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Sure. I mean we're -- at 2 aircraft, we're slightly better than breakeven. And I mean we're spreading all of the costs over just 2 aircraft. But I think to the point where we get to 8 or 10 aircraft, it would be profitable like most of our other CPA business -- comparable to our other CPA business, that will probably take to get to 6, 8, 10 aircraft.

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Savanthi Nipunika Syth, Raymond James & Associates, Inc., Research Division - Airlines Analyst [55]

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Makes sense. And if I might ask just a quick question on the United. It sounded like over the weekend, United might have to downgrade some of their 76-seat aircraft to 70 seats if they have to furlough pilots. Does that have any impact on your agreements with United if some of those have to be Mesa aircraft?

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [56]

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I think that there's -- yes, it doesn't have any impact. We would just have to reseat the aircraft and push some of the Embraer 175s from 76 seats down to 70 seats.

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Operator [57]

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We have no more questions in queue.

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Jonathan G. Ornstein, Mesa Air Group, Inc. - Chairman & CEO [58]

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Okay. Well, everybody, again, thank you very much. The company has -- as I mentioned, our employees have just done a fabulous job, very brave in the field. We've done some really good work corporately in terms of maintaining our low-cost structure. We feel that the opportunities in front of us are significant. We feel that given the cost structure, given our liquidity and what very well be significantly enhanced liquidity generated by the Treasury loan, it really puts us in a position where we can take -- I hate to use the word advantage, but we can see some opportunities that may develop as this rather significant dislocation in the industry continues to unwind. We feel strongly that this plan will -- these things can all happen in the near term. And again, we are doing everything we can to position the company to be best -- the choice of our partners when they decide how to do this that we're the company that they choose to do it with.

So again, thank you very much. We have a way to go, no doubt about it. You can imagine, we have a lot of work on our price of our equity, which has been impacted like everyone else in the industry. But hopefully, as we can continue to put more quarters like this together, people will see Mesa for what I think its true value is and realize that we have good income potential as well as good assets behind the value of our stock.

So thank you all very much. We're always free to speak to people, if you'd like to call in afterwards. And again, we appreciate your time today. Thank you.

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Operator [59]

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And this concludes today's conference. You may disconnect at this time. Thank you for your participation.