Republic Airways Holdings Inc. (RJET) Q3 2019 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. At this time, all participants are on a listen-only mode until the question-and-answer session of today’s conference. [Operator instructions] This call is being recorded. If you have any objections, you may disconnect at this point. May I introduce your speaker for today, Jonathan Ornstein. Please go ahead.

Thank you, operator. Thanks, everyone, for joining us on the call today. As the operator indicated, this is Jonathan Ornstein, Chairman and Chief Executive Officer. On the call with me today will be Mike Lotz, our President and Chief Financial Officer; Brian Gillman, Executive VP and General Counsel; Brad Rich, our Chief Operating Officer; and Darren Zapfe, our Vice President of Finance. First, before we get started, I'd like to ask Darren to just please read the safe harbor statement.

Thanks, Jonathan. Before the presentation and comments begin, Mesa would like to remind you that some of the statements and responses to your questions in the conference call may include forward-looking statements. As such, they are subject to future events and uncertainties that could also affect our actual results to differ materially from those statements. Also, please note the Company undertakes no obligation to update or revise these forward-looking statements. Any forward-looking statements should be considered in conjunction with the cautionary statements in our press release and the risk factors included in our filings with the SEC, which Mesa encourages you to read. In addition, please refer to our press release in the Investor section of Mesa's website to find additional disclosures and reconciliations of non-GAAP financial measures that will be used on today's call.

Okay. Thank you, Darren. Okay, let’s get start. We obviously have a lot to cover. We had a very challenging quarter, operationally and financially is pretty evident. There are three main areas we'd like to cover; status of the United contract, operational performance and financial performance compared to prior quarters. First, let's talk about the status of the United contract. We continue to have productive discussions with the United, related to the 20 CRJ-700, which begin to expire on August 31 through December 31. I know this has been an ongoing topic for far longer than any of us anticipated, but we still remain confident on a CPA extension on the 20 CRJ-700s and the Embraer 175s. There have been a lot of numbers – a number of issues that have led to this delay, not the least of which has been the change in management in United Express program, United's interest in converting the CRJ-700 to CRJ-550, the 50-seat variant and the potential backfill of a 70-seat aircraft, which is also complicated with what was going on at Bombardier at the time. As many of you know, they have recently announced exiting the regional aircraft business. While nothing is done until it is done in this industry and obviously things can change rapidly. We remain confident that the good faith negotiations with the United will lead to a new contract. It's important to note that all of our aircraft are currently scheduled in all future United schedules. Again, we hope to have something announced in the next few weeks and I can assure you that it's been one of our highest priorities. On operational performance. We had a number of challenges in operational performance in the third quarter, which are driven by very specific identifiable issues that I'm going to ask Brad Rich to now walk you through. Brad?

Thank you, Jonathan. Jonathan has already mentioned we have experienced several operational challenges in the third quarter. First, I want to express my appreciation to all of the people of Mesa who are working hard every day and committed to producing the reliability and experience that our customers expect and deserve. I've been here at Mesa now just over four months and I think it's worth noting that in my many years of regional airline experience and most recently having mainline experience, I do understand, I think very clearly what our partners expect and require, and I do believe Mesa has the operational capability to meet those expectations. During the third quarter of fiscal 2019, we had a controllable completion factor of 99.4%, which compares to 99.4% for the same period in the prior year. Although the results are the same number, they were actually achieved very differently. The third quarter of fiscal 2019 controllable completion factor was accomplished while increasing our block hours by 10.8% over the same period last year, primarily due to higher utilization on our fleet. At the same time, we experienced several significant challenges during this year's third quarter, including unprecedented weather. Our total completion factor, which includes weather and other uncontrollable cancellations, was 95.9% in the third quarter of 2019 compared to 98.2% for the same period in the prior year. The two point, three point difference is the impact of the weather primarily, which negatively impacts the flow and location of both our aircraft and our crews. And as we previously reported, we removed two CRJ-900 aircraft in the American CPA on April 2 to be used as additional spare aircraft to help support the American operation, which previously had only three operational spares. We also agreed the new performance criteria based on the additional spare aircraft supporting the operation. During the month of April, our first month with the additional spares, we operated at 99.6% controllable completion and we exceeded all of the new performance criteria in the American operation. Unfortunately, during the initial 60-day performance period that began May 1, we had an aircraft unavailable due to ground damage in Dallas by a ground handler and two additional aircraft were unavailable due to extended c-check turn times caused by labor shortages at our heavy maintenance provider Bombardier. As a result, rather than benefiting from the additional two spares, our spare aircraft count was reduced from three to two throughout the majority of the measurement period. When combining the impact of the damaged aircraft, the extended c-checks the unprecedented weather and widely reported GPS outage. We did not meet the performance criteria and American elected to remove two aircraft effective November 2, 2019. Today, we continue to operate with only two of the five dedicated spare aircraft during the second 60-day performance period that began on June 30. Further impacting, negatively impacting the operation, on July 31, we had another aircraft incur significant ground damage in Dallas when it was struck by a fueling truck while parked at the gate. As a result, it's going to be very difficult to meet the performance criteria and that could result in the removal of additional aircraft by the end of the calendar year. Needless to say, we're disappointed to have lost the aircraft after our people have worked very hard to meet the new criteria only to be negatively impacted by events that were largely and primarily out of our control. That being said, we do remain very focused on our identified initiatives to improve our operational performance. And I would say by the end of August, we do believe that all five spare aircraft will be back and operational. On the United side of the operation, our controllable completion factor was also 99.4% for Q3. So I think it's important to note that we had 99.7% controllable completion factor on the E175 fleet, which we do consider to be the premier aircraft in the regional industry and where our potential growth that could come from. It's also worth noting that in July of 2019, Mesa did lead the United Express portfolio in on time performance and overall customer satisfaction, very positive points and I think indicative of improvements. In closing, I would again remind you that we remain very focused on hiring of flight crews and maintenance technicians and we had very positive net increases in both pilots and mechanics over the third quarter of last year. With that, I'll now turn the time over to Mike to walk through the financials?

Thanks Brad. So for the third quarter, we reported pre-tax income of $3.9 million. This compares to a pre-tax loss of $14.6 million for the same quarter last year. Additionally, for the quarter, we reported $900,000 in income tax expense for net income of $3 million or $0.09 per share. Excluding special items, our adjusted net income was $10.4 million or $0.30 per share, and just a quick note on our income tax expense, although we reflect the income tax of $900,000 for accounting purposes. We will not pay any cash taxes as we still have an excess of $400 million in NOLs. For pre-tax income, excluding the lease termination adjustment associated with the GECAS lease buyout, adjusted pre-tax income was $13.4 million for the quarter. This compares to adjusted pre-tax income of $11.6 million for the same quarter last year, about a 15% improvement. If we look at adjusted pre-tax income for the first three quarters of fiscal year, we're at $59.4 million on $535 million of revenue about 11% pre-tax margin. This compares to the first three quarters of last year, we were at $16.4 million on about $504 million of revenue about a 3% margin. So we met significant improvement year-over-year on both revenue as a result of increasing our block hour production on the existing fleet and on our margin as well. Importantly though, when comparing this quarter to our previous quarter, we did have a decrease in adjusted pretax earnings of $7.6 million, down from $21 million in Q2 the $13.4 million in this quarter, to $7.6 million decrease is comprised primarily of the following $3.9 million was due to the timing of ending events which we had anticipated and had provided a guidance for last quarter. Again, Q2 Engine Expense was $5.6 million compared to this quarter of $9.5 million, which was slightly above our guidance. $2.8 million of the increase was due to increased flight operation expense per block hour. Again, as we noted on prior calls, this was primarily due to an increase in pilot wages and pilot training costs as a result of hiring more pilots than needed based on our anticipation that we will add additional block hours or achieve some incremental client going forward. The pilot training footprint also has not been reduced as quickly as anticipated. We had pilot premium pay that was higher. And lastly, as a result of lower total completion factor due to significant weather and ATC which Brad alluded to this quarter versus prior quarters, our crew costs both flight attendants and pilots per block hour cost increase due to having to pay for flights set, pay the crews for flights that we don't operate. And lastly, $1.2 million is due to an increase in line maintenance expense where we use temporary third-party contractors to supplement our in-house maintenance capabilities. On the revenue side, we reported contract or CPA revenue excluding past few items of $170.4 million and increase a 6.5% over the same quarter last year of $159.9 million. Our adjusted EBITDA was $45.9 million and adjusted EBITDAR was $58.8 million. This week compares to the same quarter last year where adjusted EBITDA and adjusted EBITDAR were $41.7 and $59.7 million respectively. Block hours were $114,042 for Q3, as Brad alluded to 10.8% increase from the same quarter last year and slightly below our guidance of 115,203. We're also providing guidance for Q4 to be at 116,600, which is 3.7% increase from the same quarter last year in 2.2% higher than Q3. On the Engine Expense, I'd like to recap where we are. Our Engine Expense was $9.5 million for Q3. We have provided guidance in our earnings release that next quarter we expect Engine Expense to come down about 800,000 to $8.7 million. Although, Engine Expense expected to go down by 800,000 we expect our flight operations expense for black hour and our line maintenance expense per block hour to temporarily ran at these elevated levels through the fourth quarter and into next year. I'd also like to touch on the Aircraft, at American that are coming out as Brad pointed out, we will be reducing two aircraft from our American flying in November. We are currently evaluating alternative uses of the aircraft. Some of those alternatives are to use the aircraft to support the American operation to redeploy the aircraft at other operators to lease the aircraft or to sell the aircraft as we do have significant equity in the two aircraft that we removed. We're still evaluating each of these alternatives as each will have a different short- and long-term financial impact. On June 14, we finalize the purchase and financing of 10 CRJ-700s previously leads from GECAS and operating at United. By purchasing these aircraft previously leased, we have reduced the number of leased aircraft with third parties down into 18 for the entire company. We ended the quarter at $79 9 million in cash, total debt on the balance sheet for Q3 was $881 million down $41 million from the $915 million as of September 30 2018. The change is essentially $109 million of principal payments that were off by $70 million of additional debt for the aircraft that were purchased off lease and $3 million in engine financing. For the fourth quarter and remainder of 2019 other CapEx we expect to be in the $2 million to $5 million range, we don't have any other major transactions planned for the fourth quarter. We also have our revolving credit facility of $35 million, which has been extended through mid-September and we're finalizing long-term extension. I'd like to now turn it back over to Jonathan.

Thank you, Mike. Few other items I'd like to just touch on briefly. We talked about on previous calls. On the cargo side, we continue to make good progress in our efforts to diversify into the cargo business. We expect to see this potentially come to fruition in the summer of 2020. One of the main benefits we see from the cargo operation, which is important, we'll be small, but we'll be increased pilot recruiting and reduced attrition, which we believe is still the single biggest challenge in the regional industry. On that point, we continue to hire pilots above our current level of attrition and that's being done purposely to position ourselves for both increased utilization of our existing fleet and the potential opportunity to grow the number of aircraft that we operate in our CPA agreements with either American or United. Obviously, we're pretty disappointed with this quarter. We knew that we would have some challenges, unfortunately, those challenges were really exceptionally exacerbated over this summer. We had hoped and our thoughts had always been that we did not have spares aircraft to adequately operate the elevated levels of utilization. We worked very cooperatively with American to come up with a plan that we thought would be successful. Clearly as we entered April and saw how much the beat was, we did have a lot of confidence that followed through into the first week of May where again, the numbers all were very good. And then once these aircraft started to either get damaged or not come back at a c-check, obviously it had has very severe impact on the operation. We're going to just continue to push hard and do the right thing. Brad has been a huge help to us here and we continue to have a lot of confidence in his ability to help us get the operation to where it needs to be. I'd like to mention that we are very cognizant of the fact that we have an extension to work out with American and that contract does come due within a couple of years. We spent quite a bit of money over the last five or six months. I'm basically an open checkbook to get some of these things fixed and to do it rapidly. And frankly still convinced that we have done that and I think Brad has done a lot to help to make that happen. We have a new VP of maintenance who has done a marvelous job and has received kudos from both of our partners. We don't think that there is a systemic issue nearly as much as we just got caught in what was a confluence of issues that just hit us at precisely the wrong time. We invested a lot of money that is not a small part and why the numbers weren't where they were supposed to be. It would have been a lot easier for us maybe just to pull the plains out and maintain our own contractual requirements, which were far, far less onerous, but we felt in good faith that by going forward with American and showing them that we could do this and agreeing to some of these newer terms, it would put us on much stronger pudding for any discussions that we might have regarding the renewal. I don't think any of us feel differently about that and I think that in spite of the fact that we failed and in spite of the fact that they elected to pull the two aircraft out, I think we still created a lot of good faith by doing what we did. And I think we're going to build on that good faith going forward, particularly as the schedule start to come down. We see a significant drop in block hours coming in September and once these five spare aircraft are back, I don't think we're going to – I think that the proof will be in the putting obviously, but I feel very confident that between all of us here we're going to see these numbers improved very significantly going into the fall. So with that, I met – one other point that I touch on the pilot side. It has always been difficult, but I just want to remind people that unlike just about that I can think of any other regional in the industry, we've expanded very significantly over the last five years. We've been able to keep up that expansion. There are obviously pinch points, most notably in the summer where things are tight. But again, we continue to hire a very significant number of pilots and have exceeded our attrition levels every month, and we have seen a significant decline in attrition, mostly we think in regard to the fact that we have this agreement with the United on the flow through of our pilots, which has helped us considerably. So on the critical areas, we just continued to press forward. We stick to our business. I've always believe that if you do the right things, the right things happen. And while we have had obviously what is not an insignificant setback, we're going to continue to press forward and do whatever it takes to get the ship righted and do that and move forward. So with that, I'm happy to open up to any questions that you might have.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Matt Fallon with Deutsche Bank. Your line is now open.

Hey guys. How it’s going? Two questions from me. Clearly during the June Q, you're sweating the assets, running a tight operation, and then of course you dealt with some operational disruptions at a field, do you think these – absent these operational disruptions, the kind of utilization you’re pushing is still sustainable?

Every month our pilot count has gone up, which is the only issue of significance. Our maintenance numbers have gone up significantly as well in terms of hiring of mechanics to cover this. We are in fact significantly above what our targeted maintenance number is just to be on the safe side. So yes, I think it's absolutely sustainable and in fact, in some of the conversations that we've had particularly on the 175, I think it's important to note that we've never turned back a 175 schedule in terms of hours, and we feel that at this point, we are well prepared to do that. And it just keeps getting better in terms of pilot count their maintenance count, but unfortunately it has been expensive to go above and beyond to make that happen. And hopefully that will get normalized. But going forward – but again, yes, I think that on the hour side it is sustainable and our partners are working closely with us. There's no doubt that they piled on a lot of hours this summer. We have preferred that maybe those numbers have been backed off a little bit, particularly in light of the fact that we did not have adequate spare coverage? Yes. That being said, I mean, we still ran in 99.4% completion rate. I mean, that's still not – it's not like the operations coming apart, it's just wasn't at the level it needed to be.

Got it. Just as a follow-up, I know you sort of talked about ways to monetize those extra airplanes, but just sort of absent that, what is the financial drag on annual basis of carrying these extra airplanes with all the associated costs and crews? How should we think about that?

Well we're still evaluating the alternatives so it could vary significantly. We just don't use the aircraft for anything in support. The American operation that would be a much higher number than if we were to just sell the aircraft and take the cash in. So we're, still evaluating what the potential impact would be based on what we do with the aircraft.

Great. Thanks for taking my questions guys.

The next question is from Helane Becker with Cowen Incorporated. Your line is now open.

Hey guys. It's actually Conor Cunningham on for Helane. I know that your negotiations between American neither [indiscernible]. But I have to ask like have the operational issues that you've seen at American starting to creep into your discussions with United. And also can you just talk about like how the tone of your conversations have changed with United since the new management started?

Well, first of all, I guess for better or worse, I mean Scott Kirby is the President at United, he was the President at American. He is well aware of our operational capabilities of both carriers. So I don't think that that's an issue. And again, I think it's important to note that while we did not make our goals as a result of what Brad had gone through, we still ran in 99.4% completion rate, I mean for the quarter. And so I think that has to be taken into context. And at United, when you're running a 99.7% completion rate and the Embraer 175, which is the aircraft obviously, that they're looking to grow and where the most on time carrier with the highest customer satisfaction, I think that those numbers also speak to Mesa's operational capabilities. So I don't think that what's happening in American has done that and look, everyone in at both America and United are professionals and they've been around the business a long time. And I think it's fair to say that they also do appreciate the fact that a worldwide GPS outage. The issue regarding damaged airplanes, and the c-checks, they realize that. I do think though that American clearly felt that by pulling two airplanes down, it would potentially provide new additional spares into that system. The new management at United are as someone that we just most recently met, we have had very fruitful and positive conversations. I don't think that that is a issue – as an issue whatsoever. And remember Brad worked United and also had previous relationships with all these people as far as running the express program. And Brad, do you want to add anything to that?

Right. I just agree with what you just said. I don't think there's a negative impact or any spillover as you just described.

Just a change. That position unfortunately seen a lot of turnover. Brad knows that and he used to be in that position. But the fact of the matter is, Tracey came in, who's a good friend of ours from back in the continental days. But we're very comfortable with [Sara] that we'll develop a strong relationship as we've always had back since 1990 at United.

Okay. And then just on American specifically, I mean can you just talk to the actual plan of how you think you're going to improve the underlying performance side? Does it really just come down to having more crew and spare aircraft? And then just secondly on top of that, can you actually provide the financial impact from the operational issues in the quarter. It just seems like theoretically that could be one-time in nature if you fix everything. Thanks again for the time.

Well, okay, sure. I'm going to let Brad talk to the spares and aircraft issue because – go ahead Brad.

Yes. Well, certainly from the highest level, yes and that's why we've made a big focus here on the call about our commitment to continually hiring crews and we are. We're focused on it. We're doing everything we can. We've got some interesting creative things that we're going to begin implementing to do that. So that's a big issue. And then fundamentally even as we described what's happened with the damaged aircraft, extended c-checks, that's reduced the spare count. When you look at how the airline actually operates and functions every day. There have been days here where we essentially have had no spares. So yes, that's why I made a point to say by August, by the end of August, we expect the spare count to come up to its expected level. And those two things will continue to make a positive difference. But on top of that, look, there are a lot of things that we're doing, initiatives that we're focusing on everywhere from continued focusing on the pilot, hiring footprint in the training department to the quality of the training, right into the curriculum to technology improvements that we need to make in the system. And we're focused on all of those things.

Yes. And I would also want to point out too that. I think the issues bears as in fact critical. It's been one of my real issues. We looked at another care that's operated very – it had a very good operating track record at one of our partners. And they operate about the same number of embraces that we operate. We've operated with three spares since we operated and they operate with five spares. Maybe they negotiated a better contract, maybe times have changed. Maybe we were more hungry to take those airplanes on. But I'm convinced that I truly am convinced that for example, at American with the five spares, the numbers would have been significantly different. And now if they give us two more and we're at seven and we elect to keep them in, which we may well do in an effort to show good faith and continue to try to show them that as we've said, that money is not the issue right now. We really want to be able to demonstrate that we can do the job they want. If that's what it takes, so that's what we'll do. The fact is I don't see any operational [indiscernible] any other carrier that would not allow us to achieve those results. And I think Brad having come over from United and managing all the carriers would agree with me on that.

Yes, I do.

And you can add – it did add some financial impact on the quarter, but again, we did run a 99.4% controllable completion factor. Overall, we did spend additional money at American on supplementing our maintenance staff. We talked about spending slightly over $1 million for that. But we still run at 99.4%, but the threshold that American was at such a level that we still didn't meet the criteria.

All right. Thank you.

The next question is Joseph DeNardi with Stifel. Your line is now open.

Yes. Good afternoon. Brad, can you just walk us through the process that American looks at in terms of evaluating whether to pull additional aircraft and what the risk is that they continue to do that. I mean, how many more could you potentially lose over the next several months?

Okay. Well, I'll first, just talked about – I'll just give my thoughts about whenever I'm doing this it's hard because I'm not American, right? So we have a contract in place and the contract has, I mean, specific provisions and look they're adhering to their rights within the contract. Now having said that look, there's one angle you could look at on this and say right up until some of these issues start happening with damaged aircraft and extended c-checks and those types of things. And again, every time we say that, it almost appears we're just making excuses. I mean, these are just facts that happened in the operation. I mean largely the issues that negatively impacted us were uncontrollable. And we were certainly hoping that as American looked at that that would come into play. And I think we've been doing a lot of things to demonstrate our willingness to do the things that Jonathan has outlined. And Jonathan has given us the green light to do the types of things and make the investments we need to improve the operations and we have been doing that. And I think American has seen that, but look at the end of the day, what are we hoping for some I'm guessing I'll use the term leniency given that lot of this was uncontrollable. Yes, at the end of the day they made a business decision and look honestly, I think from their perspective they thought doing what did removing the airplanes would give us some would actually be helpful to the operation to have additional spares. So look, it is what it is. I don't know what they're going to do going forward. Our objective is to do everything we can to run the operation in a way that meets their expectations and the expectations of the customers. And we've outlined a lot of things that we're doing and have identified that need to be done to create the reliability that's expected.

This is Mike. I can just add to that. The other part of your question is, they did notice this on these two aircraft and the agreement that we have is on were maximum of six aircraft. So the maximum number of aircraft they could take beyond these two with an additional four and that wouldn't happen. And so if it were still get not until the end of 2019 into the first quarter 2020.

Okay. Well, I mean, is it your expectation that's what they're going to do?

We do not – we don't know, honestly.

Okay. And then Mike, it seems like just from on the expense side, the biggest variance, relative to what you guys maybe were expecting 12 months ago was on the flight ops side. And so should we continue to expect kind of through 2020 or through your FY 2020 for that to remain at 30%, 31% of revenue and for that not to come down for the foreseeable future?

Yes, I think at least through the first half of 2020 maybe into the second half. And again, some of that will be dependent on if we get asked with why additional block hours or if we were to increase by any incremental aircraft because once that occurs and obviously you're going to either further build up backlog pilots to prepare for that type of growth and that generally accelerates your increased with your flight ops spent over a normal level and so the block hours come in, so but certainly at least through the first half of the year.

Okay. And then Jonathan, I mean, it sounds like you guys are staffing up to prepare for growth or for higher utilization, but at the same time you're losing aircraft with American and the extension with United is kind of dragging on. So can you talk about when the opportunities to grow the fleet? Where they are? What are some of the key milestones you're looking at are? Thank you.

So first of all, it's important to note, and again, Mike and Brad, we did fly with two fewer aircraft, but we flew more hours.

That's correct.

Right. So even though American pulled the two airplanes out to help us. And by the way, we've been talking about doing that for quite some time prior to that agreement. So it is not like that from our standpoint, we wanted the additional spares. Okay. But they did fly more hours even with the fewer aircraft and that will continue. And I would be surprised if that doesn't continue even now beyond the additional two airplanes coming out. On the United side, we continued to have some level of expectation that a) the block hour numbers will go up. The difference at United is, they had been constrained in terms of increasing block hours on the 175 fleet because we operate all out of one hub. So they've been talking to us about potentially moving aircraft and putting flow through to another hub. And on the 700s, I mean we have a stage length of 380 miles, which is half of the stage length basically that we have on the 175. So it's hard to really press that utilization up a whole lot because the trips are so short. That being said, we still would like to add more CRJ crews in both the American and United just to give ourselves bigger buffers. I think in terms of growth, obviously the discussion has been around the CRJ-700. Those aircraft potentially being downgraded and then back filling those airplanes with 70-seat aircraft. Those discussions have been ongoing for quite some time. As I mentioned, disappointed. I have some very longstanding relationships at United that I still have that level of confidence. But at this point in time, I think it's fair to say the deal is not done until it's done and we're going to just have to wait and let that continue to go through what has been a very long process. But we continue to hire crews. We continue to hire crews in anticipation of flying more block hours one way or the other.

Is it your expectation that in FY2020 that you can grow contract revenue assuming you get an extension with United?

In 2020, particularly, I would think that every projection that we've seen includes more block hours going forward without any incremental aircraft. And I think it's fair to say that with any incremental aircraft, yes, the answer would be we'll be flying more hours for sure.

Thank you.

And the next question is from Savi Syth with Raymond James. Your line is now open.

Thank you. Good afternoon. I just wonder, I guess you can – clearly the E175 operation is doing well and the CRJ operation is not, is it just a matter of aircraft age and stage length or I was hoping you can kind of walk me through what the differences there are and if there are any learnings that you can kind of bring over from the E175 side to the CRJ side?

Yes. I mean, I’ll let Brad also to talk about this, but I will just tell you my feeling. Yes. The planes are older, there's no doubt about it, but there's still frontline good airplanes. They're not unreliable. But when you're trying to run a fleet of 64 airplanes with two spares, and as Brad says on many days, no spares, it's just very difficult. Are the 175 is more reliable? Yes. There's no doubt that the aircraft are more reliable. At 175 fly average stage lengths in excess of 720 miles, which clearly helps us on the utilization side. And on the American side, our average stage length on the 900 is 520 miles. So again, if you would adjust for stage length, I mean we fly a lot. I mean we actually have an average generally one more departure than most other large regional jet operators on our CRJ fleet, one more departure per day than other operators because we have a shorter stage length. So those are all things that come into play. But I don't think there's any fundamental difference on the CRJ other than the fact that it's an older aircraft, it's going to be a bit more maintenance intensive, but they still operate with the same engines. I mean, no, I think that we just have to focus a little bit and already, I mean the idea was that we were going to operate American with five spares as whereas at United, we've achieved excellent results with only three spares. But do we think that those two spares would make the difference? I certainly do. And I let Brad continue that, I mean it's your right.

Yes. I agree completely. I mean the questions are very valid question. But the issues that would – that come into play on a CRJ and older CRJ, we're addressing. We've hired 54 new mechanics since the third quarter of last year and we've added additional spares with the expectation that they would really be spares to deal with some of those issues. Unfortunately, we just haven't had the spares. So once we're properly spared, we've add the mechanics to deal with some of the more intensive maintenance issues and we should be able to operate the fleet very reliably and meet their expectations. And look, the one thing that that we're trying to do to accommodate our partner is on both sides, the aircraft utilization is going up and the schedules are being tweaked and each major, I mean across our system, we've got increased utilization. So all of this is happening at the same time, the schedules have become – I'll just say as they tweaked the schedules. They become more difficult to fly. But we're addressing that by staffing up, on both crews and mechanics and we've added this additional spares.

Yes. And I think it's fair to note that our partners have their own pressures too. And we're cognitive those and sympathetic. You look at American. American has had the Max problem. They want us operate reliably. And so I think that in the Max issue, certainly something out of their control. They were able to take two airplanes out, give us more spares, which we all thought was a good thing. We also included. I think they expected better performance from us as did we, but the spares were not available. But you can see it's not as if they said, hey, let's fly the planes less. They flew the planes more, 10% more with two fewer airplanes. So obviously the planes are being pushed a lot harder than they were even last summer. And we achieve results that were – in our view pretty good, but unfortunately not at the level that we needed to be for that test bird. We had a very good April. We felt very confident in that. Unfortunately, May, June became tougher as the airplanes became unavailable to us.

Okay. And maybe I don't understand this, but if the spares are being funded by the American fleets and American still takes the kind of the baseline utilization and keeps pushing it up. Do you not need to kind of find spares outside of the fleet to try and meet the increase utilization?

Well, no, I mean the fact is that the five – we had three spares historically with American. There was literally years of discussions in regard to what was the adequate spare count versus for example, other operators, okay. I was a very strong advocate that basal was being – what's the right word? Disadvantage, because we did not have adequate spare count. We put the two spares in. We all anticipated that that was going to solve the problem with all the initiatives that Brad as discussed and initiatives that we implemented along with American. The fact that matter is, now if in fact we now are looking at seven spares going into the fall, the idea we had looked at getting additional spares and did not – at this point, I don't think any of us think it's necessary to go beyond the seven spares, operating for literally over a decade with three spares. On the other point too is that, clearly Mesa has been in an expansion mode for a long time. Having gone from 58 aircraft to 143, where some of the other big operators have actually shrunk their fleet and had a pool of pilots to call upon. The environment for pilots has been tough. We had a seven-month period before we got our pilot contract put in place, where we actually were net down almost 150 pilots and we'd been crawling – slowly crawling or either that hole at the same time while we've been expanding the fleet. So we've had some headwinds and clearly this quarter, we've seen sort of a confluence of issues that have really put us in a difficult position. But I don't have any lack of confidence in the model and what we're doing and with the people who we have here, including Brad and our new VP of Maintenance, Doug Shockey. I mean, these are all good quality people who I'm convinced. We're going to get this thing to where it needs to be.

I appreciate that and just a couple of clarification, just first on the American contract. I thought they were only able to pull two aircraft every six months. I'm kind of curious why, if one is coming out in November, why the other one would come out end of year and into 1Q?

Yes, there was not – it was not to every six months, it was six total, two every maximum of two in any given month.

Okay. Got it. And then just on the follow-up on comments – your response to Conor on the financial impact, Mike in the last quarter you guys made close to about $0.46 and in this quarter was $0.30. I'm just kind a curious if the $0.30 versus the $0.46 is a function of these issues and therefore this is kind of a I think that's what Conor was trying to get at and that's what I'm trying to understand is? What would have been kind of the earnings this quarter if you hadn't had some of these kind of expanding as the second chances?

Yes. I mean, like I pointed out that the three biggest drivers for the change in the earnings quarter-over-quarter were almost $4 million more in just heavy maintenance on the engines, which is a timing issues. I was going to hit this quarter, irrespective of what happened in the – with the American fleet. The other piece was $2.5 million to $3 million in additional flight operations costs. And again, that was when we talked about this, better preparing ourselves for potential increased block hours or even better, obviously increased fleet growth. As well as our training footprint is not as efficient as it needs to be and with some overtime that we paid for the quarter. But again, that wasn't necessarily related to the American completion factor issues. And the third one was there was about a $1 million, $1.5 million in additional maintenance expense where we brought in some outside maintenance contractors to ironically improve the fleet, so that we would hit some of these targets. And that expense is not going to be ongoing that was more related to the challenge to try to pre-empt challenges that could have represented this quarter and that will start going down as early as next quarter.

But I will say, Savi – this is Jonathan. I mean, we threw money at this issue. There's no doubt. Like Mike said, the temporary maintenance people. We wanted to ensure that we could fly the block hours in terms of that overtime for the pilots, which was running I think what about $600,000 or $700,000 a month. That's not a small expense. We did that specifically to do that. Our pilots had been super productive. And I will say, I'm very cooperative and helpful in this whole process. And I think that those things may have been different. And I think we'd be having a much different call if we hadn't missed the numbers with all these investments. And in spite of the fact we might have missed our numbers if it hadn't been for the fact that we had some really tough luck in terms of the spare count going from what should have been three to five actually down to one or two and these investments would have looked really smart right now. I mean, obviously I think there are people questioning that. I personally think that in the long-run, we’re still best suited by doing everything we can to demonstrate that we can operate these levels and that the money we spent was the right decision at the time. And continue to be the right decision. And we're going to continue to do it. I mean, people should know that we are doing what we have to, to make sure that our partners are satisfied with our operational results. And I'm hopeful that in spite of the fact that American did pull these two planes down, which I think they felt in the end, it would be helpful to us again that we can look back and say these were the right decisions.

Okay. Thanks, guys.

Speakers, we show no further questions in queue at this time.

Okay. Mike, why don’t you add something.

Yes. I just want to address on the American operation that we do. We do have the three spares and we did get these two additional aircraft, we call them white tails. They are not necessarily spares. Their intent is to use those aircraft when other aircraft already maintenance run available to us. For this time period, we had that need all the time, but just a nuance there I just wanted to clarify.

Okay, so we appreciate everyone's time this morning. To say that we're disappointed would be an understatement. We had very strong hopes that our new agreement with American was going to strengthen our relationship and would allow us to continue to operate all the aircraft. Unfortunately, as we mentioned, due to a lot of different events, at least two aircraft are going to come out. At United, we continue to have confidence that the extension which is only days away and I think it's important to point out that those aircraft are scheduled as far out as United schedules ago. I don't think that there is a risk on the 700s, but I understand that people have grown concern given the fact that it's taken this long. All I can tell you is that we continue to press forward on all these fronts. We're going to do the best job possible. We continue to feel that the model works and we just have to fine tune that model and get us to where we need to be. But with that, I want to thank everyone for taking their time. We're always available if you want to call us afterwards if you have any other additional questions. And I think that one of the things at Mesa we've always tried to do is align the interests of both the shareholders and management. I mean I still continue to be one of the largest individual shareholders and I’m disappointed from that regard as well as I know most of you are. But we've been here for a long time. We intend to do everything we can to get everything fixed and move forward in a positive way. So with that, I want to thank everyone for taking the time today and we look forward to talking to you on our next call. Thank you very much.

And that concludes today's conference. Thank you for your participation. You may now disconnect.