Pinnacle will likely seek an injunction against the July 31 termination of its 10-year Delta Connection contract. Meanwhile, the Memphis Commercial Appeal said Rep. Steve Cohen, D-Tenn., suggested "re-regulation of the airlines" in response to what he termed "distressing news" about Delta’s contract cancellation.
"The courthouse is not the way you enhance long-term relationships," Pinnacle CEO Phil Trenary told the newspaper. "The first thing you have to do is try to find a solution and talk it out. It would be a very, very unfortunate last resort if we had to seek legal remedies."
The cancellation is thought to be the opening blow to Memphis which may lose hub status with the Delta/Northwest merger which could also mean the loss of Pinnacle’s Northwest contract. Analysts suggest the contract cancellation certainly signals how Delta feels about Memphis and expects Pinnacle to be hurt in the merger as initially predicted. However, Delta CEO Richard Anderson told the Commercial Appeal editorial board that actions in advance of the actual merger have no bearing on future decisions. Anderson added that such assumptions could hurt prospects for the merger.
Boyd Group Analyst Michael Boyd called Pinnacle’s fleet a “cost disaster" with current fuel prices. "Delta is way over-invested in regional jets," Boyd told the newspaper, adding after the merger the need to get rid of regional jet capacity will be even more acute. "They need to probably dump another 80 or 90 of those airplanes if they stay alone." Boyd predicts that the combined carrier will dump even more regional jets in favor of lift from Northwest’s wholly-owned subsidiary Compass Airlines.
Pinnacle is only six months into its 10-year contract. The airline called the Delta action a wrongful termination. "We believe that the attempt by Delta to terminate this contract is wrongful, and we intend to pursue appropriate remedies," Pinnacle Airlines Inc CEO Phil Trenary said.
Delta cited the same reason – operational performance – it cited when it notified Mesa that it was cancelling Freedom’s 50-seat flying recently and charged Pinnacle did not meet minimum arrival-time performance requirements for a period since flights began late last year. Mesa won a temporary injunction against the termination in an Atlanta court and said if the injunction had not been granted it would have filed for Chapter 11 bankruptcy protection about July 20.
Pinnacle CEO Phil Trenary noted that many factors affecting on-time performance are beyond Pinnacle's control, chief among which is the fact the operational schedule is created by Delta. Regionals have been complaining that the schedules sent down by Delta are often unrealistic but a recent article on Atlantic Southeast indicated that, at ASA at least, the situation has changed. Related Story
"We are extremely surprised and disappointed that Delta is attempting to take this drastic and improper action," said Trenary. "From the very beginning of our Delta Connection operations, we expressed our concern that the flight schedules Delta created were unrealistic. Our position was affirmed when recent schedule changes by Delta allowed immediate improvement in our on-time performance, well above the agreed minimum standard and above most other Delta Connection carriers."
Under the capacity purchase agreement, Delta is required to collaborate with Pinnacle to create a mutually acceptable operating schedule. Delta has created Pinnacle's operational schedule since the beginning of operations in December 2007. Pinnacle entered into a new capacity purchase agreement with Delta in April 2007 to operate 16 CRJ-900 aircraft as a Delta Connection carrier and began operations under the agreement in December. Pinnacle has currently taken delivery of nine of the 16 CRJ-900 aircraft on order.

Delta Connections Under Attack
The Pinnacle cancellation is the latest blow in what appears to be a series of attacks on Delta Connections. In January, SkyWest Inc was forced to file suit against Delta in a dispute over a $25 million payment SkyWest and its sister airline, Atlantic Southeast Airlines (ASA), said its major partner owed regarding payments made to passengers owing to irregular operations (IROPs). Delta unilaterally withheld a combined total of approximately $25 million (pretax) from one of the weekly scheduled wire payments to SkyWest Airlines and ASA during December 2007. Delta indicated that it does not believe the majority of IROP expenses SkyWest Airlines and ASA have paid on behalf of customers are reimbursable. Related Story
In April, Delta announced the termination of the capacity purchase agreement with Mesa Air Group’s Freedom Airlines. Mesa contends that the failure to reach Freedom’s completion rate was because of Delta’s own requests to remove the flights. It noted that, in the past, these flights were taken out of Freedom’s performance calculations with Delta not only paying its base margin but its incentive margin after crediting Mesa for the Delta-mandated schedule changes. The Mesa action is the subject of a lawsuit against the major carrier. Related Story
The moves against SkyWest, Pinnacle and Mesa has Wall Street worried, according to Dow Jones, which quoted JP Morgan Analyst Jamie Baker who wrote in a research note last week: “With Delta believing it has found reasonable early-out flexibility at both Mesa and Pinnacle, we wonder if similar efforts aimed at its Republic and SkyWest flying may be forthcoming."
Dow Jones reported that the attack on regional capacity purchase agreements stems from the fact that at current fuel price levels, packed 50 seaters are losing money forcing mainline carriers to question the viability of 50- to 100-seat airliners. It cited Calyon Securities Analyst Ray Neidl as saying the contracts are “almost impossible to break,” which seems to support regional suggestions they are using performance as an excuse to get out of them.
The news service also said Neidl expects more contract fights. "As airlines cut domestic service, it's going to be a mixed bag for regionals," Neidl told Dow Jones, adding that United and Continental see larger – 85-seat – jets as helpful, but Delta doubts the benefit of 70 seaters.

Shape Up or Ship Out
The move seems to put into question recent statements that Delta Connection Senior Vice President Don Bornhorst is bringing Delta Connections closer together. Indeed, it looks as if his mandate is to abrogate contracts.
But Delta insists that is not an attempt to abrogate its contracts, but rather force regional partners to meet contract obligations and fulfill what former CEO Gerald Grinstein said 14 months ago – shape up or ship out. Related Story  A year ago, former Vice President Delta Connections Wayne Aaron signaled the second volley to improve Delta Connection service when he told Regional Aviation News of the division’s top priority. Related Story
Delta Spokesperson Anthony Black confirmed that the actions against regional carriers should not be surprising. He indicated that Anderson had meetings last fall with all the Connection CEOs, telling them what Delta expected and what would happen if they didn’t meet expectations. He also reiterated Grinstein’s warning, adding that what may have been forgiven in the past is no longer tolerated. He also characterized SkyWest’s suit as an accounting, rather than a performance, issue.
“Anderson is an operations nut and expects Delta Connections to be as good, or better, than mainline operations,” he said. “Anderson and Bornhorst both want to run the finest operation in the industry. Don was brought in to implement those changes. Some airlines have improved with ASA a perfect example.” Related Story
As for targeting 50-seaters, Black noted that Pinnacle is flying 76-seat aircraft, characterizing Pinnacle’s and Wall Street’s actions and an over reaction. He noted that Pinnacle’s contract amounts to two percent of its operation and just 23 aircraft. That may be so, but the DL deal was Pinnacle’s first non-Northwest contract.

Renegotiate Contracts?
It may be that mainline carriers are eyeing the fiscal results of their regional partners and wondering why they should be paid so much while the mainline carrier takes a bath. Analysts wonder whether the Delta actions may be an attempt to renegotiate contracts. While some may be profitable, their earnings were down significantly in the first quarter compared to the year-ago period as major carriers began shifting more of the risk to their regional partners. Related Story
Regional affiliates contributed less and cost more, according to first quarter financial reports showing Delta Connection, Northwest Airlink and Continental Express as net contributors to their mainline partners’ bottom lines, while United and US Airways Express programs followed American Eagle in posting losses. Delta Connections contributed $1.039 billion to Delta’s consolidated revenues of $4.7 billion during the first quarter. While regional revenues were up 10 percent and consolidated revenues were up 12 percent, they could not compensate for major carrier’s net loss excluding special items was $274 million compared to a net loss of $6 million in the first quarter of 2007, excluding special and reorganization items. Related Story