Pinnacle Net Halved in 2007

Regardless of a NW/DL merger, Pinnacle retains its long-term contracts, which continues Northwest flying through 2017. In addition, the airline is optimistic about the Memphis hub. “The reason we think Memphis will be secure is most of the focus has assumed it is the same hub it was before the regional...

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Regardless of a NW/DL merger, Pinnacle retains its long-term contracts, which continues Northwest flying through 2017. In addition, the airline is optimistic about the Memphis hub. “The reason we think Memphis will be secure is most of the focus has assumed it is the same hub it was before the regional jets,” CEO Phil Trenary told investors during last week’s conference call. “It is a completely different hub today. Over half the departures are RJs and even with a combination it provides value and is not only safe but is likely to expand somewhat.” Trenary echoed other regional executives that see more opportunity than problems arising from network carrier consolidation. Related Story
“One of the things we believe is we are uniquely well positioned if consolidation does happen,” he continued. “We have long-term contracts and the networks will need more of the larger RJs as well as the Q400s. We also know that when you have a strong operating performance and competitive costs, things will go well.”
He predicted the additions of more CRJ 900s and the Q400s will continue to make the first half of 2008 challenging, noting the training costs for Q400s will be larger than that for the CRJs. “The 900 is the CRJ done right,” said Trenary. “There is now no real incentive or reason for customers to look away from the CRJ 900, and, in a $100 per barrel oil environment and with low capital costs, it is a very attractive aircraft. We are happy to have it as our growth platform.”
Trenary reported that while he knew the Q400 would be successful for Continental operations at Newark, they were focused on the passenger reaction which has been positive because passengers are more used to the smaller RJ and this is a larger aircraft. From an operational point of view, the increasing fuel prices make the economic argument better and better, especially since it has lower costs over all than the RJs with more seats.
He also reported that while FAA management were convinced of the potential capacity enhancements of the Q400s, there has been an uphill education job for individual controllers who assume it is more like a Dash 8. The trick, said Trenary, is to convince them of its more jet-like operational profile. He called the Q400 a game changer. “Once ATC gets used to the aircraft, which are all flying in the northeast, we will work with them to take advantage of the speed and altitude and especially cross-wind runways operations at Newark. We expect a lot of good things to come out of that.”
Pinnacle noted that it traded cost-cutting measures at Colgan for an on-time introduction of the Q400. However, it was now turning its focus back to costs and expects the second and third quarters to do much better in the seasonally effected airline. It will be looking at all routes to ensure they all make money in a high-fuel environment. If Colgan’s financial performance does not turn around, major adjustments will be made before the next winter season. It also said it is looking at the EAS markets as part of these cost-cutting measures as well as the rest of the pro-rate routes flown by Colgan. The airline’s Beech 1900s will also be gone by year’s end.
CFO Peter Hunt pointed out the impact of Pinnacle’s buying power has yielded over a million dollars in insurance savings for Colgan. In addition, the company expected to gain a couple of million in cost savings from moving nine flights currently served over Pittsburgh to Dulles as well as moving maintenance operations to Dulles which would eliminate the necessity for ferry flights. He noted that Colgan fuel costs were up with a $4.9 million change in fuel costs since Pinnacle acquired Colgan in January 2007. Fourth quarter fuel costs at the carrier rose almost 30 percent and were $2.6 million more than they would have been had fuel prices stayed where they were at the beginning of last year. “We are targeting a pre-tax margin for Colgan of between three and five percent,” he said..
He indicated that the extraordinary costs during 2007 for Colgan, including $2 million related to the Q400 and $1 million in additional certification costs to make manuals ATS compliant, resulted in an on-time certification, compared to other carriers that did not make manuals ATOS compliant. “If you look at the opportunities for 2008 with eliminating ferry operations and changing markets, we may not be able to recover the $4.5 in full-year operating losses but we will definitely get seven figures in improved value to the company,” said Hunt. “We are making sure all the markets can support high levels of fuel costs and if they can’t we will definitely make changes. You have to understand that we have more and more of our operations under CPAs which are not affected by fuel.”
Pinnacle Airlines Corp. reported net income for 2007 of $34.6 million down from $77.7 million in 2006. Pinnacle achieved a full year operating margin of 9.5 percent. The company also reported fourth quarter 2007 net income and fully diluted earnings per share of $6.7 million and $0.32, respectively, excluding a potential one-time, non-cash charge that the company is analyzing. The company's net income and EPS were $12.3 million and $0.56, respectively, for the fourth quarter of 2006, excluding nonrecurring items. The 2007 financial results reflect the contractual changes in its Pinnacle/Northwest contract that became effective January 1, 2007. The company is analyzing a potential one-time, non-cash charge related to its deferred tax liability. The potential adjustment could reduce 2007 net income by approximately $7.4 million. With the additional of so many aircraft it is no expecting to pay income tax over the next few years.

Year-to-Date 2007 Financial and Operating Results
Pinnacle completed 438,988 block hours and 265,418 departures, increases of six percent and six percent, respectively, over 2006. Colgan completed 126,675 block hours and 107,171 departures from the acquisition date of January 18, 2007 through the end of the year.
For the year ended December 31, the company recorded operating revenue of $787.4 million, a decrease of $37.2 million, or five percent, over 2006. Operating revenue was reduced by approximately $323.8 million for contractual changes in the ASA. The amortization of net deferred revenue associated with Pinnacle's ASA also increased revenue by approximately $22.6 million. The acquisition of Colgan increased the company's consolidated revenue by approximately $192.3 million.
Operating income and operating margin were $52.1 million and 6.6 percent, respectively, year-to-date. Excluding nonrecurring items related to a decrease in Saab return condition accruals of approximately $1.0 million, operating income and operating margin were $51.0 million and 6.5 percent, respectively, for the year ended December 31.
Pinnacle achieved a full-year operating margin of 9.5 percent, while Colgan recorded a negative operating margin of 2.3 percent for 2007. Consolidated operating income and operating margin were approximately $85.3 million and 10.3 percent, respectively, excluding nonrecurring items, for 2006. Contractual changes in Pinnacle's ASA with Northwest, net of the related amortization of deferred revenue, reduced operating income by approximately $21.1 million for 2007. Pinnacle's operating income also declined by $5.8 million, primarily as a result of increased costs associated with training for additional pilots due to the industry-wide increase in pilot attrition in 2007.
Net income and EPS for the year ended December 31 were $34.6 million and $1.50, respectively. Excluding nonrecurring items related to a $4.1 million loss on the company's Northwest claim sale and a decrease in Saab return condition accruals of approximately $1.0 million, net income and EPS were $36.6 million and $1.59, respectively, for the year ended December 31, 2007. Excluding nonrecurring items, net income and EPS for the year ended December 31, 2006 were $52.7 million and $2.40, respectively.
The company ended the year with cash and short-term investments totaling $213.6 million. The company's balance of cash and short-term investments decreased by approximately $31.5 million during the fourth quarter, primarily as a result of the company's $33 million purchase of common shares from Northwest.

Pinnacle completed 109,787 block hours and 65,820 departures in Q4, increases of five percent and four percent, respectively, over the same period in 2006 owing to an 11 percent increase in Pinnacle's operating fleet. Colgan completed 32,242 block hours and 27,189 departures during the fourth quarter.
The company recorded operating revenue of $201.1 million, a decrease of $3.4 million, or two percent, over the same period in 2006. Operating revenue was reduced by approximately $81.2 million for contractual changes in Pinnacle's ASA with Northwest. The amortization of net deferred revenue associated with Pinnacle's ASA also increased revenue by approximately $6.1 million. The acquisition of Colgan increased the company's consolidated revenue by approximately $49.4 million.
Consolidated operating income and operating margin were $9.4 million and 4.7 percent, respectively. Consolidated operating income and operating margin for the fourth quarter of 2006 were approximately $19.6 million and 9.6 percent, respectively, excluding nonrecurring charges. Contractual changes under Pinnacle's ASA with Northwest reduced operating income by $4.9 million, inclusive of the amortization of net deferred revenue associated with the ASA. In addition, Pinnacle recorded an additional $0.5 million in the fourth quarter related to the settlement of performance penalties for the first half of 2007.
Pinnacle expects that Colgan's new Q400 operations under its capacity purchase agreement with Continental will be profitable in 2008.