Pinnacle, Mesaba Closed Out In Expansion

The door is now open for at least one regional jet operator to join the Northwest Airlink family.

In its new concessionary salary agreement with the mainline pilots, Northwest Airlines [NWAC] negotiated the right to fly more 50-seat RJs. The Air Line Pilots Association (ALPA) stipulated that while Northwest could convert up to 60 of the total 44-seat RJs currently flown by Pinnacle Airlines [PNCL] into 50- seaters, Northwest must turn to a new operator if it wants to add 40 additional 50-seat RJs to its fleet.

If Northwest fully exercises its rights under the new accord, by the end of 2005 it could be flying 144 50-seat RJs and 35 others would remain as 44-seaters.

Northwest could boost the seat count on Pinnacle's fleet by 288. It would not be awarding Pinnacle any additional planes beyond the 139 of the Bombardier [BBD] order scheduled to be completed next year.

Pinnacle's fleet consists of a modified CRJ 200 that can easily be configured to carry 50 passengers. The additional six seats could be added overnight once all the paperwork with the Federal Aviation Administration (FAA) has been completed. At this point, Northwest has not asked Pinnacle to add the seats.

Northwest would not talk about its plans for additional RJs. The carrier issued a blanket statement after the mainline pilots agreed to the wage cuts, noting that it "appreciates the financial sacrifices being made by its pilots." Northwest is continuing to negotiate with its other unions to try to exact $950 million in annual wage cuts.

The other Northwest Airlink partner, Mesaba Aviation, flies 36 BAe Avro 85s configured to carry 69 passengers. Mesaba also flies 30 34-passenger Saab 340s.

According to the agreement, the 40 additional 50-seaters must not be owned or leased by Northwest or any Northwest affiliate. Both Pinnacle and Mesaba lease their planes from Northwest.

The union stipulated that a new operator has to enter the mix because it does not want Northwest investing its scarce resources in new planes, said Tony Cristello, an analyst with BB&T. "If they were being asked to make wage concessions, then the union did not want the company spending good money on new planes."

In a summary ALPA prepared for its members, which was obtained by CRAN, the union said that Northwest wanted the provision for additional planes to give the carrier "both offensive and defensive marketing capability. It could help Northwest respond to opportunities in markets where other airlines (such as United [UALAQ] or US Airways [UAIRQ]) are reducing service and would allow Northwest to contract with an existing RJ operator to quickly enter a market without using Northwest revenues to finance additional aircraft."

The freedom to strike a deal with a new regional carrier provides Northwest the flexibility to fly East Coast routes that may be abandoned by the bankrupt US Airways or the struggling Independence Air, Cristello said.

Should either US Airways or United liquidate or dramatically scale back operations, Cristello could see Northwest striking a deal with Mesa Air Group [MESA] or SkyWest [SKYW]. The fleet of 50-seat RJs Mesa flies for US Airways could be quickly tapped by Northwest, Cristello said. In SkyWest's situation, he sees the 50-seat CRJ 200s that are now flying as United Express becoming available even if United survives bankruptcy because the legacy carrier wants more 70-seat RJs. Cristello added that all the regionals would be scrambling to win the Northwest contract.

Airline consultant Robert Mann said that Northwest is looking to diversify its options for "regional lift providers." Chautauqua Airlines uses the model that may be ideal for Northwest since the regional owns all the planes for the four carriers in its code-share partnerships, Mann said.

A new partner may not be limited to servicing Northwest hubs. The pact permits 15 percent of the 50-seat RJs to fly point-to-point routes. Under the previous contract, none of the 44 50-seaters could fly on hub bypass routes while there wasn't any limitation on the routes of the 44-seaters. Mann said the future new partner might be in a better position to fly the point-to-point routes at a lower cost than either Pinnacle or Mesaba.

By adding six seats to the RJs already in service, Mann said the move represents "potential revenue that can be realized at little cost. It this case it would be 288 additional seats that could be made available for sale each day."

In October, Pinnacle's average load factor was 69 percent. However, Mann noted that in many cases the planes are flying full.

Cristello added that Northwest could be increasing the capacity of the RJs by nearly 15 percent with a minimal increase in costs.

As the industry makes a push for 70-seat or even the 90-seat RJs, Cristello noted that Northwest "is relatively light" compared to other carriers in the 50-seat - or the near 50-seat - niche.

By ALPA calculations, Northwest will still have the smallest regional jet fleet of all the network carriers, even if the additional 40 RJs are included in the Airlink fleet. "The negotiating committee does not believe the changes to scope language will have any significant negative impact on Northwest pilot jobs," according to the ALPA summary.

When ALPA and Northwest agreed to new work rules and $265 million in annual wage cuts, the two sides agreed to take up in February 2005 the issue of 70-passenger RJs. The current ALPA contract precludes Northwest from contracting a regional carrier to fly 70-seat RJs. The exception is the Avro 85s flown by Mesaba. The mainline pilots in July offered to establish a new "competitive" wage rate for a 70-seat plane (CRAN, Aug. 9). The two sides agreed to a 90-day negotiating schedule to see if an agreement could be possible.

ALPA wanted to address the 70-seat scope clause in the most recent negotiations, said spokesman Will Holman. However, he said, Northwest did not want to bog down the wage reduction talks with the expansion of the scope clause.

Mann continues to remain doubtful that Northwest will be flying 70-seaters with mainline crews. "The problem has always been if there is a desire to do it cost-neutral with a third party then everyone has to come along. Pilots alone won't solve the problem." In order for Northwest to fly a 70-seat plane with mainline pilots, every other labor group needs to agree to work at a scale competitive with regional carriers. "It is a thorny issue. The problem has not gone away, but the solution remains elusive."

>>Contacts: Tony Cristello, BB&T, (804) 780-3269; Robert Mann, (516) 944-0900; and Will Holman, Northwest ALPA, (952) 853-2311.<<