Pinnacle Income Drops

Pinnacle Airlines Corp reported first quarter 2008 net income and fully diluted earnings per share of $2.7 million, down dramatically from the year-ago period when it posted $9.4 million in first quarter net income. In addition, its earnings per share dropped from 38 cents in the year-ago period to 15 cents at the end of Q1. Consolidated operating income and operating margin were $6.7 million and 3.3 percent, respectively compared to $12.8 million and 7.1 percent, respectively in Q107.
As expected, the company cited the $5 million operating loss at subsidiary Colgan Air, almost completely caused by the fuel increases. Related Story  Its average cost per gallon of fuel increased 54 percent compared to the first quarter of 2007, adding approximately $3.9 million in fuel costs. Colgan's financial performance is also affected by seasonal changes in demand, with unit revenue typically weaker in the first quarter. In addition, the operating performance of Pinnacle Airlines, Inc. was below incentive levels contained in Pinnacle's contract with Northwest. Pinnacle's completion factor, on-time performance, and customer complaints fell below the incentive standards forcing the company to record a $2.5 million performance-related reduction of revenue as an estimate of what it might owe to Northwest related to the first quarter of 2008. The ultimate amount owed to Northwest will not be determined until after June 30.
Pinnacle cited severe winter weather and an increase in the number of operational maintenance events for its performance. The company also estimated that Pinnacle's operating income was reduced by approximately $2 million because of lost revenue associated with cancelled flights and increased interrupted trip and passenger re-accommodation costs related to the higher level of cancelled and delayed flights.
Pinnacle's operating performance is still well above minimum required standards in the ASA and improved significantly during April, said the company. Pinnacle may record a similar or smaller reduction of revenue during the second quarter, depending on Pinnacle's operating performance during the second quarter and the ultimate amount owed to Northwest.
"Although we are disappointed in our first quarter performance, we are proud of the efforts of our people to bring both the CRJ-900 next generation and Q-400 aircraft into service for Delta and Continental respectively," said Philip H. Trenary, president and chief executive officer. "These aircraft represent the best solution for our customers in a very difficult operating environment. Coupled with the actions we are taking to improve Colgan's performance, this provides a positive outlook for the future."

First Quarter Financial and Operating Results
Pinnacle completed 112,061 block hours and 65,979 departures, increases of five percent and three percent, respectively, over the same period in 2007. Pinnacle's capacity increased owing to the addition of its Delta Connection operations with six CRJ-900 aircraft and higher planned utilization of its CRJ-200 fleet in the Northwest system, offset partially by seven fewer CRJ-200 aircraft operating under the Northwest ASA and the operational issues. Colgan completed 33,134 block hours and 26,800 departures during the first quarter, increases of 32 percent and 28 percent, respectively, over the same period in 2007 resulting from the addition of Colgan's Continental Connection operations with the Q400 aircraft during the quarter.
Pinnacle Holdings recorded operating revenue of $204.3 million, an increase of $24.8 million, or 14 percent, over the same period in 2007. This is primarily related to revenue earned under new contracts with Delta and Continental, as well as the inclusion of Colgan's financial results for the entire quarter in 2008.
Pinnacle achieved operating income of $17.7 million and an operating margin of 11.5 percent for the first quarter of 2008. Colgan reported an operating loss of $4.9 million and a negative operating margin of 9.9 percent for the first quarter of 2008. Financial results for both Pinnacle and Colgan exclude certain overhead operating expenses incurred by the company. Unallocated corporate overhead costs totaled $6.1 million for the first quarter of 2008.
The company ended the quarter with cash and cash equivalents totaling $76.9 million. The company's portfolio of auction rate securities ("ARS") has historically been classified as a short-term investment. Because of recent unprecedented events in the capital markets, the vast majority of auction rate securities have become illiquid. Accordingly, the company has reclassified its ARS portfolio as a non-current asset on the company's condensed consolidated balance sheet as of March 31. In addition, the company assessed the current fair value of its ARS portfolio and recorded an unrealized loss of approximately $10 million to reduce the value of the portfolio to $126 million. In addition, Pinnacle secured a $60 million term loan facility collateralized by its ARS portfolio and borrowed the maximum $60 million amount during the quarter.
Pinnacle used $17 million in operating activities during the first quarter. This included $24 million used for cash flows related to the company's interest rate hedging program, offset by $7 million of cash flow from airline operations. Cash provided by investing activities of $43 million primarily related to $51 million in net sales of ARS prior to the market becoming illiquid, offset by investments associated with the new CRJ-900 and Q400 fleets at the company's operating subsidiaries. Cash provided by financing activities was $25 million, which included $72 million in proceeds from borrowings, offset by $26 million in principal payments and $20 million used to acquire the preferred share from Northwest.