Following the trend of other regionals reporting the second quarter results, Pinnacle Airlines Corp.’s (PNCL) net income was down, having been reduced by a non-operating loss of $4.1 million from the sale of its Northwest (NWA) claim as well as $0.4 million from the return of six Saab aircraft. It has two more Saabs, acquired in Mesaba’s bankruptcy, which are going to Colgan until the leases expire.
It also incurred a $1.3 million completion factor penalty resulted from Northwest assigning a difficult schedule that Pinnacle could not meet so the regional decided to pull down its schedule in response to a company-wide pilot shortage. Even so, Pinnacle was second only to SkyWest (SKYW) on completion factor in DOT’s second quarter statistics. Airlink contract changes were offset by approximately $5.6 million of amortization of net deferred revenue associated with Pinnacle's ASA. For the year its penalties totaled $2.4 million. It is not anticipating any further penalties this year, said CEO President Phil Trenary, who reported flying has normalized and the airline is delivering what it promised its major partner. Under its new ASA with Northwest, operating revenues declined $82.4 million since fuel is no longer a revenue or expense item and aircraft rents have come down as well. The loss on its Northwest claim resulted from the price softening from 75 cents on the dollar to 65 cents.
Trenary noted Pinnacle is expected to have the highest fleet growth of any regional in 2008. With the addition of 15 Bombardier Q400s at its newly acquired subsidiary, Colgan Air, the smaller carrier is expected to have a 32 percent increase in block hours and a 100 percent increase in ASMs. The Pinnacle subsidiary will be flat on block hours with the addition of the CRJ 900s and the return of 15 CRJ 200s but will have a three to four percent increase in available seat miles. Colgan will take eight Q400s in the first quarter and seven in Q2 of 2008, while Pinnacle will take one CRJ-900 in December, and will accept another four in Q1 2008, four in Q2, two in Q3, three in Q4 and the last two in the first quarter of 2009 when the remaining nine CRJ-200s will be returned to Northwest (NWA).
“With the Q400s, we did not get into this business just to fly 15 aircraft,” he said. “The same goes for the CRJ 900, we didn’t get into the business just to fly 16.”
Colgan contributed $52 million in operating revenue. It has a 2.4 percent operating margin, according to CFO Peter Hunt, compared to Pinnacle’s 9.4 percent without the one-time charge for the Saabs. On a consolidated basis, the company had a 10.2 percent operating margin, lower than it would like because of the Northwest penalty and higher pilot training and crew costs. “We’d like to see four to five percent pre-tax margins at Colgan,” he said. “We see a lot of opportunities to cut costs in that operation simply because, as they grew, they did not change their processes. Reducing costs will make a lot of Colgan markets work better but two or three out of Pittsburgh may need tweaking. It may make sense to serve those markets over another hub” Reducing Colgan’s cost structure is a target for 2008. Pinnacle has already reduced costs by pre-paying $8 million in Colgan debt which was priced at 13.5 percent. Hunt reported the revenue trends for Colgan were strong but it was facing pressure both in its New England beach markets and because US Airways pulled down its Pittsburgh operation. The biggest hit was the start of JetBlue’s (JBLU) Embrear (ERJ) ERJ-170, Kennedy-Nantucket program, once the private preserve of Colgan’s Saab 340 LaGuardia-Nantucket flights. Pressure is also being felt on the pro-rate per passenger for Colgan’s US Airways Express operation.
Hunt said year-over-year comparisons were not possible because the financial reporting as a private company were not as rigorous as for a public company. He did say revenue per available seat mile is down slightly year over year driven by the Nantucket and decline in connect revenues from US Airways (LCC). Colgan pilots are now voting on whether or not to join the Air Line Pilots Association (ALPA).
Pinnacle Corp’s net income was down to $7.7 million from $11.8 million in the year-ago period. The company also incurred $1.3 million in performance penalties for missed completion rates on its Airlink contract as well as an $11 million hit on operating income and an $81.4 million hit on operating revenues for the quarter. For the first half, its penalties have totaled $2.4 million. Trenary reported that while Pinnacle has to pay penalties on missed targets, there are no incentive payments when the company exceeds its targets.
Trenary indicated pilot attrition had returned to forecast levels as pilots migrate to the majors. “We’ve seen an uptick in the pilot qualifications,” he said, adding he remains frustrated over the progress of labor negotiations. “We are turning out better qualified pilots than ever before and our pass rates are up. We are also impressed with the quality of pilots coming through the door. We are forecasting higher attrition levels but they will be lower than we earlier expected.”
The company has introduced new enhanced ground training devices that give pilots a head start on the simulation by as much as five sessions. While that does not shave simulator time, it makes it much more productive. “That’s why we are getting better quality pilots graduating.”
On the heels of its second quarter earnings statement, Pinnacle launched a second share repurchase program in as many months to acquire up to an additional $30 million of the company's outstanding common stock, $20 million of which is contingent on financing. Based on Wednesday’s market closing price of $15.14, the program covers approximately 2.0 million shares of common stock. In July, the company completed a $30 million share repurchase program, acquiring over 1.6 million shares of its outstanding stock.
The company recorded operating revenue of $201.0 million during the second quarter, down two percent over the year-ago period, but revenues from regional airline services dropped four percent to $194.8 million. Meanwhile, expenses increased one percent to $186.2 million. Operating income and operating margin for the second quarter of 2007 were $14.8 million and 7.4 percent, respectively. For the quarter, its Pinnacle subsidiary achieved an operating margin of 9.1 percent, while Colgan recorded an operating margin of 2.4 percent. Consolidated operating income and operating margin for the second quarter of 2006 were approximately $19.5 million and 9.5 percent, respectively.
The increase in its level of operations accounted for an increase in revenue of approximately $21.7 million. The amortization of net deferred revenue associated with Pinnacle's ASA also increased revenue by approximately $5.6 million. Finally, the acquisition of Colgan increased the company's consolidated revenue by approximately $51.9 million.
The company also cited the addition of 15 CRJ-200s to its Pinnacle Airlines subsidiary during the first quarter for increases in block hours and cycles. During the second quarter, the company's Pinnacle subsidiary completed 109,810 block hours and 67,265 cycles, increases of six percent and seven percent, respectively, over the same period in 2006. Its Colgan Air, Inc. subsidiary completed 30,820 block hours and 29,043 cycles during the second quarter. Next year it will field a fleet of 15 Bombardier (BBD) Q400s for Colgan and 13 CRJ 900s, what Calyon Securities Analyst Ray Niedl called “the most aggressive fleet plan among domestic regional carriers.”
Its CRJ-900s will be coming on line next year and it is currently working on financing to cover pre-delivery payments. Once that is complete, it will get $32 million back as reimbursement from payments already made.
Year-to-date, the company reported net income and EPS for the six months ended June 30, were $17.0 million and $0.70, respectively. For the first half of 2007, the company recorded operating revenue of $380.5 million, a decrease of $31.1 million, or eight percent, over the same period in 2006. Operating revenue was reduced by approximately $159.7 million for contractual changes in the ASA. The increase in Pinnacle's level of operations accounted for an increase in revenue of approximately $32.4 million. The amortization of net deferred revenue associated with Pinnacle's ASA also increased revenue by approximately $10.8 million. The acquisition of Colgan increased the company's consolidated revenue by approximately $87.8 million. As discussed above, the company recorded a year-to-date ASA performance penalty of $2.4 million ($1.5 million net of tax).
Operating income and operating margin were $27.6 million and 7.3 percent, respectively, year-to-date. The contractual changes in the ASA reduced operating income by approximately $21.6 million for the six months ended June 30, 2007. The reduction in operating income from contractual ASA changes was offset by approximately $10.8 million of amortization of net deferred revenue associated with Pinnacle's ASA. Year-to-date, Pinnacle achieved an operating margin of 9.0 percent, while Colgan recorded an operating margin of 1.3 percent. Consolidated operating income and operating margin were approximately $41.0 million and 10.0 percent, respectively, for the six months ended June 30, 2006.
Pinnacle completed 216,823 block hours and 131,228 cycles, increases of five percent and six percent, respectively, over the same period in 2006. The company's Colgan subsidiary completed 55,910 block hours and 49,933 cycles from the acquisition date through the end of the second quarter.
Revenue passenger miles reached 1.23 billion, up 11 percent while available seat miles rose 12 percent to 1.53 billion. Load factor dropped slightly to 80.2 percent. Operating revenues per ASM was down 35 percent to 8.73 cents. CASM dropped 34 percent to 8.84 cents. Operating revenue per block hour was down 31 percent to $1,258 while operating costs per block hour declined 31 percent to $1,234.