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Pinnacle Airlines (PNCL) |
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WIKI ANALYSIS
Memphis, Tennessee-based Pinnacle Airlines Corp. (PNCL) was incorporated in Delaware on January 10, 2002 to be the holding company of Pinnacle Airlines, Inc., which was incorporated in Georgia in 1985. Northwest Airlines Corporation (Northwest or NWA) acquired Pinnacle Airlines, Inc. in April 1997. Since the acquisition, PNCL has provided regional airline service exclusively to Northwest. During the time that Northwest was PNCL's sole owner, the company was operated as a business unit of Northwest, without regard to its stand-alone profitability. On November 25, 2003, PNCL completed an initial public offering and became a publicly traded company.
PNCL operates under an airline service agreement (ASA) as a Northwest Airlink carrier, providing regional jet capacity to Northwest Airlines at its domestic hubs in Detroit, Minneapolis/St. Paul, and Memphis. With a fleet of 124 Canadair Regional Jets (CRJs) at yearend 2006, PNCL offers scheduled passenger services to 115 cities across 35 states and four Canadian provinces. Apart from reimbursing PNCL for fuel and aircraft expenses, Northwest makes pre-set, bi-monthly payments to the company, based on the size of the fleet PNCL operates. Approximately 99% of the company's 2006 revenue was derived from scheduled passenger services.
On September 14, 2005, Northwest filed for bankruptcy, spurred, in part, by the spike in oil prices following Hurricane Katrina. Regional carrier Mesaba Airlines (Mesaba) followed Northwest Airlines into bankruptcy on October 13, due to cash shortages and significant fleet changes and uncertainties related to its agreement with Northwest Airlines, which is Mesaba's only customer. On October 31, 2005, PNCL removed 15 CRJ aircraft (roughly 10% of its fleet) from service pursuant to a request from Northwest, which notified Pinnacle that effective December 1, 2005, it did not intend to pay Pinnacle any amounts associated with these 15 CRJ aircraft. In addition, Mesaba returned 11 Saab Turboprop aircraft and two related engines that Pinnacle had subleased to Mesaba in January 2006.
In January 2006, Pinnacle submitted its response to the Northwest Airlines request for proposal (RFP), announced on December 9, 2005. In the RFP, Northwest requested Pinnacle and others to submit proposals to operate up to 126 regional jets with capacity levels up to 76 seats. Pinnacle's response to the RFP addressed its current airline services agreement with Northwest to operate CRJ-200 aircraft, as well as Pinnacle's potential operation of new aircraft for Northwest with seating capacities up to 76 seats. In March 2006, Pinnacle disclosed that it had not made $21.7 miillion in additional aircraft sublease security deposits as requested by Northwest Airlines last September. Pinnacle has disputed Northwest's right to seek additional security deposits at this time.
On August 18, 2006, Northwest agreed to negotiations on a new or amended ASA to replace the current ASA, provided that PNCL complete negotiations with the pilots union on a new contract. While the pilots' contract became amenable in April 2005, ensuing discussions proved fruitless. On August 22, 2006, PNCL file for mediation with the National Mediation Board.
On December 21, 2006, PNCL announced an amended agreement with Northwest, effective January 1, 2007, which called for : (1) a reduction in the target margin to 8.0% from 10.0%, with these rates to remain in effect (subject to annual inflation adjustments) until 2013 when the rates can be reset (2) Northwest to provide fuel to PNCL at no charge to PNCL, and fuel to be removed as a revenue and expense item from PNCL's income statement and (3) the amount PNCL pays to NWA for subleasing aircraft will be significantly reduced. These changes are expected to reduce operating income by about $10 million per quarter. In addition, the agreement provides that PNCL will continue to be a long-term partner with Northwest through December 31, 2017, removes all restrictions regarding PNCL's ability to provide airline services to other major airlines, places conditions upon further changes to PNCL's fleet under varying circumstances, and provides a $377.5 million unsecured claim for PNCL against Northwest in Northwest's bankruptcy proceedings. This agreement is subject to approval by the court overseeing Northwest's bankruptcy.
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