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Airlines: ‘Capacity is just being driven by pilot supply,’ Mesa Air Group CEO explains

Mesa Air Group Chairman and CEO Jonathan Ornstein joins Yahoo Finance Live to discuss the ongoing pilot shortage, his company no longer partnering with American Airlines, and how his airline can navigate pilot labor supply through its deal with United Airlines.

Video Transcript

[AUDIO LOGO]

SEANA SMITH: Mesa Air Group shares are popping today. The stock moved on news that it is winding down its operations with American Airlines and finalizing a new agreement with United Airlines. Here with more on this is Jonathan Ornstein, Mesa Air Group chairman and CEO. Jonathan, it's great to have you back here on Yahoo Finance.

I know you sent a memo to your employees, saying that you had negotiated a mutual agreement to end your contract with American. I also want to bring up that American has said that it was due to concerns about Mesa's ability to be a reliable partner. This is according to Derek Kerr, the CFO of American Airlines. So just walk us through the decision, what happened, and how you're set up going into 2023.

JONATHAN ORNSTEIN: Yeah. First, let me address that. I mean, it is truly-- it's just-- it's just disingenuous. We actually went to American. And when we first wanted to set up a meeting to talk about a wind down, they said don't even bother coming to Dallas. We don't want to talk about a wind down. In fact, they wanted, not only did they try to incentivize us, they did offered us an extension of the contract. So I mean, I just have a problem with that because, it, you know, really denigrates the hard work of all my people. And the bottom line is we went to them because we were losing so much, like $500 a month. And just said, look, we need to get out so that we can continue to operate the business and provide jobs for 3,500 people.

So I mean, we initiate it. We discussed it. And you know, I think that should be clear. And what really makes it even more irksome is the fact that, you know, for years, Mesa has outperformed American mainline in terms of reliability. Now, recently, with the pilot shortage, obviously, it's been more challenging. But we've been partners with them with American of their predecessors for a long time. And so I just think that it was unfair to say that about my people who I think really do a great job and work really hard and work really hard through the pandemic. I just think it's unfair. And I want to straighten that out because we, in fact, initiated those conversations and really press to be able to wind down the agreement.

DAVE BRIGGS: We appreciate your candor on that, Mr. Ornstein. So what does the value add United versus American?

JONATHAN ORNSTEIN: Well, United has a great long-term future in terms of their growth plan. They just ordered enough aircraft that the aircraft they ordered alone would represent the sixth-largest airline in the world. Scott Kirby, the CEO there, has been a friend of mine since we worked on the American West bankruptcy together in 1992. Andrew Nocella. These are all guys I've worked with at Continental. Their CFO Gerry Laderman. And I know what their vision is for the future, and frankly, they valued our people and our services where when pay rates went up 100%, which in fact was initiated by American Airlines, they came to us and said, look, we want you to be competitive and we're willing to pay that.

American decided that while they were going to pay their own subsidiaries they weren't going to pay Mesa or their other unaffiliated carriers. So I mean, for us, the value add is that we can pay market rates to our people, particularly our pilots where there is a shortage been created due to all the new government regulation. But we now can hire people, we can retain people, and they can move to United Airlines as part of their program at Mesa. And so it's a great opportunity and I think pilots around the country have seen that.

We weren't able to do that before with substandard wages where we just weren't competitive. And if our partners were not willing to pay, I mean, it's not like we can raise fares. I mean we don't control the fares. We can't change our schedule, they control the schedule. So we really were between a rock and a hard spot and just had to make it-- had to make a change and move our operations to a party that valued that and was willing to pay for that. And that's what we did when we moved to United.

- Hey Jonathan, so as we sort of enter in the midst of holiday travel season, are you guys seeing a big pickup in demand? And how do you guys sort of plan for that? Do you buy any planes? How do you expand capacity?

JONATHAN ORNSTEIN: No, I mean, right now capacity is absolutely just being driven by pilot supply. If we had more pilots, we would be flying more. I mean, airfares have gone up a lot over the year. It's not necessarily because of demand. It's just because of supply. I mean, everybody is smaller because of what's going on, on the pilot side. I mean, we would probably be flying 40% more if we had pilots to do that. So when we look at The Holiday season, obviously the problem becomes exacerbated because we can only fly so much.

Again, this is all due to some regulations that made the requirements for pilots much, much harder in terms of the total amount of hours they had and it really just plugged up the supply line. And we're now basically working our way through that. And as I said, with United, they're providing us with the level that we can afford to pay pilots and the rest of our staff, frankly, which we also have shortages, for example, in maintenance, where we can attract and retain the people we need to fly the airplanes as much as we have demand for, which is a lot more than we have right now. That's for sure.

SEANA SMITH: So Jonathan, what does this mean for airfare? Because it's still up in November, up over 30% on a year-over-year basis in terms of any consumers, any fliers seeing any relief? Is that 6 to 12 months, maybe even longer just in terms of the outlook there, given the fact that we do have such a shortage?

JONATHAN ORNSTEIN: I think it's going to take some time. I mean, the problem could obviously be solved by changing some of these regs. But I most people will agree that the likelihood of Washington doing that is pretty remote, so we've all worked as best we can to train people as fast as possible. But remember the training that pilots go through is rigorous, and our failure rate is over 25%, so the fact of the matter is it's just going to take time. And I would suggest that as long as demand holds up, which of course is questionable in this environment, you're going to see continued pressure on pricing. It's, unfortunately, part of the downside of these new regulations.

- Mesa chairman and CEO Jonathan Ornstein, good to see you again, sir. Thank you.