Mesa Airlines, a regional passenger airline, expects its cargo business with DHL Express to quickly grow and become profitable by proving it can meet linehaul delivery requirements for the burgeoning e-commerce sector, Chairman and CEO Jonathan Ornstein said Monday.
Mesa (NASDAQ: MESA), the first regional airline in the U.S. to enter the narrow-body cargo business, could be operating 10 aircraft for the express delivery company within 18 months if it performs as expected, he said.
Phoenix-based Mesa operates aircraft for American Airlines and United Airlines under the American Eagle and United Express brands. Last month it signed a five-year contract with express delivery giant DHL Express to fly two Boeing 737-400 cargo jets out of DHL’s North American hub at Cincinnati/Northern Kentucky International Airport, beginning in October.
“I don’t think we would have taken on the business if we thought that two aircraft were going to be the limit. We feel very strongly that if we can operate these two aircraft properly that there is significant growth opportunity,” Ornstein told analysts during a briefing of the company’s fiscal third-quarter results.
Mesa will provide the crew and maintenance, while DHL will provide the aircraft and fuel. The aircraft are in DHL’s fleet and are being moved to Mesa from another operator.
Executives estimated initial DHL revenue at less than $10 million. “We have to grow the business pretty significantly, but the longest journey begins with the first step. And we believe, given the current environment, being in the cargo business is a pretty good bet long term,” Ornstein said.
Transportation providers are under increased pressure to help online retailers meet customer expectations for faster fulfillment of online orders. Smaller jets like the 737 bring packages closer to the end user and leave later in the day than larger-gauge aircraft.
“We think there’s a secular trend towards smaller aircraft, and we would like to be right in the middle of that,” Ornstein said.
Mesa expects to break even once it ramps up operations for DHL and “should become profitable over time as we add new aircraft,” he added.
CFO Michael Lotz said the operation would become profitable at between six and 10 aircraft because all the fixed costs are currently spread over two initial aircraft.
Mesa is investing about $5 million in startup costs, including $2.1 million this quarter as the operation spools up. Part of the expense is for parts inventory and service-support contracts.
The airline is opening a new crew and maintenance facility in Cincinnati and positioning support staff there. It will only handle basic line maintenance. Heavy maintenance and engine refurbishment will be DHL’s responsibility, similar to the arrangements with American and United.
Ornstein said Mesa, which generated $3.4 million of net income for the quarter compared to $3 million in 2019, is working with the Federal Aviation Administration to get the 737 on its operating certificate and has trained the initial cadre of pilots.
Cincinnati/Northern Kentucky International Airport is also the site of Amazon Air’s new national hub, scheduled to open next year. Mesa’s entrance into the cargo market makes it a potential contract target for Amazon, which recently began using leisure carrier Sun Country to fly 737-800 aircraft on its behalf.
Executives say Mesa got into cargo to diversify its business and operate bigger aircraft that would help attract and retain pilots.
Mesa recently added Dan Mchugh, the former CEO of Southern Air Inc., to its board. Another DHL contractor, Atlas Air Worldwide, owns Southern Air.
“Given the difficult operating environment, we are extremely pleased to be reporting both a profit and positive cash flow. We believe this is the result of our relentless focus on low costs and reliable operations, the construct of our agreements with our major partners, and the dedication and hard work of all our employees,” Ornstein said in the profit and loss statement. “While we believe there are significant opportunities ahead, there remain COVID-19 related challenges; our fleets continue to be utilized below 60%, aircraft financing has become more difficult, and the recovery time projected for demand to return to pre-COVID-19 levels.”
Mesa received $92.5 million from the U.S. government’s emergency coronavirus program for airlines to maintain employment levels through Sept. 30. It has also been allocated $277 million in loans and is negotiating with the Treasury Department to determine the final loan amount.