The Colgan turn-around is proceeding well, according to Pinnacle Airlines Corp President and CEO Phil Trenary, who expects the subsidiary to turn to profitability next year. “Changes to revenue stream, combined with the elimination of bad performing routes and moderation in fuel prices will make 2009 a good year on pro rate side of the business,” he said.
In the meantime, Pinnacle has led industry performance in 22 of the last 32 months and in some months besting even Hawaiian, which is usually the industry performance leader owing to its unique operating environment. In fact, performance is so strong in some markets that aircraft arrive early which has a depressing impact of the bottom line since revenues are based on block time.
Just over a week after Delta and Northwest announced their merger, Pinnacle Airlines Corp, the second largest independent regional partner in the combined Delta/Northwest program, reported net income of $7.7 million for the third quarter compared to the $10.9 million earned in the year-ago quarter. The company operates 139 aircraft in the Delta network and said the merger is not expected to have a material adverse effect on its operations. It pointed out that its capacity purchase agreements were long term and do not contain termination provisions triggered by consolidation. It also reported consolidated operating income of $20.0 million during the third quarter of 2008, an increase of 33 percent over the third quarter of 2007.
Trenary pointed to preparation for winter operations as well as fixing the CRJ 200 flap actuator problem as having a negative impact on the third quarter. However, he noted it will lead to better performance next year. Half the fleet will be fixed by January 1 giving the company options to keep those that haven’t run through maintenance out of the colder weather.
Trenary indicated that the capacity cuts had depressed its financials but it also gave the company the flexibility to take on the seven ex Freedom CRJ 900s when Delta cancelled its operating agreement with the Mesa Air Group subsidiary. The company entered into an agreement with Delta to operate on a short-term basis seven additional CRJ-900 aircraft. The Pinnacle Airlines subsidiary will temporarily operate these seven CRJ-900 aircraft until Pinnacle's seven remaining permanent CRJ-900 aircraft begin operations under the Delta Connection Agreement in the first half of 2009. Pinnacle has received and is operating four of the additional seven temporary CRJ-900 aircraft, and expects to receive the remaining three in November 2008. In addition, Pinnacle accepted delivery of two of its permanent CRJ-900 aircraft fleet during the third quarter. These aircraft are being used as spares to support Pinnacle's Delta Connection operations until they are placed into full service under the Delta Connection Agreement in January 2009.
Trenary also addressed the number of 50 seaters in its fleet, saying that unlike other regionals, those aircraft were relatively new with few maintenance costs. They also have lower lease costs cut during the Northwest bankruptcy, meaning their operating costs were lower than average industry rates. They are scheduled to be operated through 2017, although the Delta capacity agreement allows for a one for one swap for larger equipment.
Trenary said the company is still meeting with labor groups and hopes the airline will return to high level of productivity once the crews are fully deployed with its own CRJ 900s next year. Right now, he is not anticipating labor rates higher than the industry average.
He predicted that once the industry completes its capacity restructuring, there will be orders for the CRJ 900s as well as the Bombardier Q400s to the point it will be able to exercise its options on the Q400s.
Capacity for the fourth quarter will be flat with the decline in its CRJ 200 fleet but that will be offset of the CRJ 900 including the Freedom aircraft. Block hours will be up 18-20 percent comparted to Q407 although they will be offset by reductions in its pro rate. In 2009, capacity will be flat. For Colgan Q400 operations will be up 35 percent next year but that will be offset by a decline in block hours in Saab pro-rate flying.
When questioned about where Pinnacle was compared to its contract minimums, Trenary noted that both its Northwest and Delta contracts called for fixed costs to be covered regardless of capacity levels, providing an economic incentive for Delta to fly the aircraft. “We’ve never had a situation in which Northwest, even in bankruptcy, or Delta asked us to lower our utilization significantly,” he told analysts at last week’s call. “However, you have to recognize that our CRJ 200s never had the utilization of some other regionals. We don’t expect any big changes with aircraft utilization. Delta has not requested that of us." The Delta/Northwest merger yielded three owned carriers and six independent regionals representing 36 percent of all U.S. regional jets.
He also discussed its Dulles operation for United Express where many of its EAS flight connect after US Airways pulled out of Pittsburg. He said Colgan was continuing to fly the EAS routes after they were rebid and dropping other routes that were just not profitable. There are, however, six commercial routes that were not working for the carrier but are being retained because they are important to United. The two airlines are working on new rates and if those can be cut, then they will remain on the route map. Trenary said he hoped to complete those negotiations by year’s end.
During the third quarter of 2008, Pinnacle Airlines, Inc., the company's regional jet operating subsidiary, reported operating income and an operating margin of $12.0 million and 8.1 percent, respectively, while Colgan Air, Inc., the company's regional turboprop operating subsidiary, reported operating income and an operating margin of $8.0 million and 10.9 percent, respectively.
"We are very proud of our people at Colgan and Pinnacle," said Trenary. "Thanks to their focus, hard work, and dedication, Colgan's financial performance dramatically improved and Pinnacle led all regional carriers and most mainline carriers in the United States in on-time performance during the third quarter of 2008."

During the quarter:
Colgan took delivery of two Q400 aircraft to be operated under its capacity purchase agreement with Continental Airlines. With the addition of these two aircraft, Colgan now operates 15 Q400 aircraft as Continental Connection, primarily out of Continental's hub at Newark Liberty International Airport. Operating and financial performance related to the Q400 was strong during the third quarter, contributing significantly to the improved operating income at Colgan. As part of its turn-around plan, six Saab 340 and three Beech 1900 aircraft are scheduled to retire during the fourth quarter.
In November 2008, the company amended its revolving credit facility collateralized by the company's auction rate securities portfolio. This amendment extends the maturity date from February 2009 to November 2009 and provides for additional borrowings of up to $10 million to be used to fund purchases or redemptions of other indebtedness of the company.

Third Quarter 2008 Financial and Operating Results
Pinnacle completed 107,632 block hours and 66,779 departures, decreases of 4 percent and 2 percent, respectively, over the same period in 2007. Pinnacle's capacity decreased owing to the return of 15 CRJ-200 aircraft operating under its Airline Services Agreement with Northwest, partially offset by the addition of 10 CRJ-900 aircraft operating under its Delta Connection Agreement. Colgan completed 43,004 block hours and 34,320 departures during the third quarter, increases of 22 percent and 14 percent, respectively, over the same period in 2007. The addition of Colgan's Q400 aircraft fleet was the primary factor in the growth in its operations.
The company recorded consolidated operating revenue of $221.8 million, an increase of $16.1 million, or 8 percent, over the same period in 2007. This increase is primarily related to revenue earned under the company's new contracts with Delta and Continental, offset by a decrease in revenue in its Northwest Airlink and pro-rate operations. Consolidated operating income and operating margin were $20.0 million and 9.0 percent, respectively, during the third quarter of 2008. Consolidated operating income and operating margin for the third quarter of 2007 were approximately $15.0 million and 7.3 percent, respectively.
Pinnacle reported operating income and operating margin of $12.0 million and 8.1 percent, a decline of $3.9 million from the third quarter of 2007 owing to the previously mentioned reduction in capacity, and ongoing transitional costs associated with the start-up of Pinnacle's CRJ-900 operations for Delta. Pinnacle had planned to operate at a higher level of capacity in both its Delta Connection and Northwest Airlink operations, and hired and retained crews accordingly. These higher levels of staffing led to lower productivity and a higher unit labor cost during the third quarter of 2008 than expected. In addition, Pinnacle incurred approximately $0.75 million of unreimbursed costs associated with two CRJ-900 aircraft that delivered during the third quarter but that will not enter into service under the DCA until January 2009. Pinnacle also began certain upgrades to its CRJ-200 fleet during the third quarter to improve the maintenance reliability of the fleet during the upcoming winter months. These maintenance upgrades, which are not reimbursable maintenance costs under Pinnacle's ASA, also contributed to lower operating income.
Colgan reported operating income and operating margin of $8.0 million and 10.9 percent, an increase of $8.9 million from the third quarter of 2007. The addition of Colgan's Q400 aircraft fleet contributed significantly to the improvement in operating income during the third quarter. In addition, Colgan's revenue per available seat mile within its pro-rate operations increased by 9 percent year over year. This increase in revenue was partially offset by a $4.0 million increase in fuel costs from the third quarter of 2007. Colgan's fuel cost per gallon during the third quarter of 2008 was $3.79. Colgan's third quarter 2008 results included a charge related to the previously announced retirement of a portion of the company's Saab 340 and Beech 1900 fleet totaling $1.1 million ($0.7 million net of related income taxes), and a credit resulting from a correction of an error that reduced maintenance expense by $1.4 million ($0.9 million net of related income taxes). Together these two items increased the company's third quarter 2008 EPS by $0.01.
Net interest expense for the third quarter was approximately $9.0 million, as compared to net interest income of $1.4 million during the third quarter of 2007. The increase in net interest expense is driven by interest costs from the investments the Company has made in its new fleet of Q400 and CRJ-900 aircraft.
The company ended the quarter with unrestricted cash and cash equivalents totaling $63.8 million. In addition, it generated $14.7 million in cash and cash equivalents from operating activities during the third quarter 2008. Cash used for investing activities of $5.8 million primarily related to non-aircraft capital expenditures and the net purchase of aircraft. Cash used in financing activities was $10.3 million, which included $4.8 million in debt repayments associated with the Company's aircraft pre-delivery payment financing facilities and $5.5 million of regularly scheduled principal payments on long-term debt and other items.