The simultaneous Chapter 11 filings on Sept. 14 by Delta Air Lines [DALQ] and Northwest Airlines [NWACQ] reveals a different mindset as to how each network carrier is dealing with the regional airlines that serve as their code-share partners.

Northwest has withheld payments and is treating its Northwest AirLink partners - MAIR Holdings [MAIR] and Pinnacle Airlines [PNCL] - as unsecured creditors. Both regional carriers may get paid the millions owed to them only if Northwest accepts their current operating agreements or they negotiate new contracts.

On the other hand, Delta appears to be treating SkyWest [SKYW] and Republic Airways [RJET] as partners. Neither regional carrier is listed among Delta's creditors.

At Delta's request, a bankruptcy court hearing on Oct. 6 will consider Delta's request to assume the existing contract with SkyWest and its new subsidiary, Atlantic Southeast Airlines (ASA).

Delta has a $125 million incentive to accept the contract that was signed on Sept. 8. The final payment to Delta by SkyWest for ASA has been held in escrow contingent upon Delta accepting the new contract.

Delta is also likely to reaffirm the January 2005 contract with Republic, said Daniel Sklar, a Nixon Peabody bankruptcy attorney specializing in the airline industry. On Oct. 15, Republic's Shuttle America will begin flying Embraer [ERJ] 170s for Delta Connection. In the January contract, Republic agreed to fly 15 of the 70-seat RJs for Delta. If Delta were to treat Republic as an unsecured creditor and withhold payments, Sklar said that could jeopardize the start of the Embraer 170 service.

According to filings that both Pinnacle and MAIR have made with the U.S. Securities and Exchange Commission (SEC), Northwest has failed to make payments to the two carriers.

In MAIR's case, Northwest failed to pay $18.6 million on Sept. 12 - two days before the filing - to Mesaba Airlines. Another payment is due Sept. 26.

At Pinnacle, Northwest failed to pay $22 million on Sept. 15 - the day after the filing. Another payment of $35 million is due on Sept. 30.

Both of these pending payments includes monies owed before and after the Sept. 14 filing.

As of Sept. 22, Northwest had made no effort to pay the regionals or begin talks to reach new contracts, according to representatives of both regionals. Both regional carriers continue to fly their AirLink assignments.

Mesaba signed a new code-share pact with Northwest on Sept. 1 that covers the current Saab 340 and Avro RJ85 fleets as well as the new Bombardier [BBD] CRJ 200s that Mesaba will begin flying in October. A separate bankruptcy hearing will be held at Northwest's request on Oct. 6 to return the 35 Avros to their leaseholders.

Of the affected regional carriers in both bankruptcies, Pinnacle has the oldest operating agreement, which dates to 2003 when Northwest spun off the regional as an independent carrier.

"If they don't need the contract, they could simply reject the contract. They may do this sooner rather than later," said Ronald Barliant, a Chicago bankruptcy attorney with Goldberg Kohn. "At that point, the other party becomes a creditor and is treated like any other creditor. Relegated to the ranks of the unsecured creditors, they wait for whatever distribution there is at the end of the case. In many cases, it is pennies on the dollar."

In United Airlines' [UALAQ] ongoing bankruptcy, United did not reject the Air Wisconsin operating agreement until earlier this year. An interim agreement created an escrow account that covered all payments owed to Air Wisconsin. At the same time, FlyI [FLYI] continues to battle United in court for more than $1 million still owed to it from the time United filed Chapter 11 in December 2002. Operating at the time as Atlantic Coast Airlines, United rejected the pre-bankruptcy pact in 2003 after FlyI refused to negotiate a new agreement with lower compensation rates. The dispute set the stage for FlyI to launch Independence Air in June 2004.

In Mesaba's case, Sklar says, "I can't imagine that given its brand-new agreement that Mesaba wants out. [Northwest] had to know they were on the verge of bankruptcy and looking to drive the best possible deal. The whole thing is strange as to why [Northwest] are doing what they are doing. The only rational explanation is that they did not have enough cash to take care of everything on the first day," Sklar says.

As Delta prepared to file its bankruptcy petition, it lined up nearly $2 billion in new loans - in bankruptcy jargon, a debtor in possession facility. Northwest did not take a similar course. It has said that its $1.5 billion in cash on hand should get it through the proceedings.

"Only 15 percent of the companies that go into Chapter 11 make it out," Sklar says. "If you are trying to do it in cash, you face even tougher odds."

At the same time, Sklar acknowledges that $1.5 billion may be sufficient. "There are not many companies that go into Chapter 11 with that much cash."

As part of the bankruptcy proceedings, Delta and Northwest may be compelled to sell their stock holdings in their code-share partners. The impact may be greater at Northwest than at Delta.

Delta holds about 9 percent of Republic's stock, but it exercises little control.

However, Northwest holds two seats on both Pinnacle's and MAIR's boards. Northwest holds 11.4 percent of Pinnacle's stock and 39.6 percent of MAIR's stock. Northwest's two representatives on the Pinnacle board resigned on Sept. 12.

If Northwest decides to continue its contracts, the creditors may scrutinize the deals more closely due to the ownership issue, Sklar says.

Both Northwest's and Delta's ownership of these regionals is considered an asset of their respective bankruptcy estates. As either company prepares to exit bankruptcy, they may need to sell off these shares or buy the shares from the creditors, Sklar says. If the bankrupt carrier wants to hold onto the stock, they will need to pay their creditors the market value of the regionals' stock, he adds.

MAIR and Pinnacle could best prepare for that eventual ownership change by seeking additional code-share contracts, Sklar says. Northwest's current operating agreements preclude Mesaba and Pinnacle Airlines from flying for any other airline. However, the holding companies for each carrier can form or buy other carriers to enter into non-Northwest code-share agreements.

>>Contact: Daniel Sklar, Nixon Peabody, (603) 628-4000; Ronald Barliant, Goldberg Kohn, (312) 201-4000.<<