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Monday, August 18, 2008
PNCL Reports Loss, Outlines Colgan Turn-Around Plan
Pinnacle Airlines Corp. reported a second quarter net loss of $11.5 million, a significant swing from the $10.3 million profit earned in the year-ago quarter. Excluding special charges on auction rate securities and Colgan, Pinnacle Airlines Corp would have reported a net income of $5.4 million. Related Story
Pinnacle developed a five-point turn-around plan for its troubled Colgan subsidiary which operates under pro-rate contracts. The plan is designed to sustain a profitable operation even at $140+ per barrel. However, it does not expect Colgan to achieve profitability until next spring.
The company is looking for markets that not only cover Colgan’s direct costs but cost of aircraft ownership and contribute to overhead. Colgan’s recovery plan includes route elimination, rebidding EAS contracts and reduced maintenance expenses as well as the possibility of reducing United Express distribution and other costs.
As part of its recovery strategy it is dropping 10 aircraft from the Colgan’s pro-rate operations including eight Saabs, the leases for which will expire in Q109. PNCL hopes to sell two and, if it finds a robust market may sell more. The company incurred lease return costs of $2 million in the second quarter. It will also have $2 million in unreimbursed aircraft ownership expenses in the third and fourth quarters but hopes to mitigate that by pursuing revenue opportunities for the aircraft either through corporate shuttles or opportunities with Delta.
However, its Saab operation for Continental at Houston remains unaffected by the fleet changes. CFO Peter Hunt reported that the Houston operation has a connect incentive component indexed to fuel prices and, thus, expects that operation to be profitable.
Pinnacle’s second quarter performance improved significantly, contributing to incentive payments in both its Delta Connection and Northwest Airlink programs. Finally, deliveries of both Q400 and CRJ 900 aircraft have been deferred in order to get the Next-Gen cabin for the Q400s and to push back costs until the CRJ 900s can be added to the Delta Connection system next spring.
The company ended the quarter with unrestricted cash and cash equivalents totaling $65.2 million. It generated $16.2 million from operating activities during the second quarter. This included $3.4 million of net collateral deposits related to its interest rate hedging program that were returned to the company during the quarter and $12.8 million of cash flow from airline operations. Cash used for investing activities of $11.2 million primarily related to capital expenditures at the company’s operating subsidiaries. Cash used in financing activities was $16.7 million, which included $36.7 million in debt repayments associated with the company’s aircraft pre-delivery payment financing facilities and other related financing payments, offset by $20.0 million in proceeds from draws under the company’s bank credit facilities.
Performance
Operating performance with respect to its Northwest Airlink operations improved dramatically during the second quarter after experiencing severe weather during the first quarter, causing it to record performance penalties during the first quarter to be paid for the six months ended June 30. Pinnacle’s performance in the second quarter reduced the overall performance penalty owed to Northwest for the six-month period by approximately $0.8 million to $1.7 million.
Pinnacle earned approximately $0.3 million in operating performance incentives under its Delta contract during the second quarter. Pinnacle’s Delta Connection performance improved from the first quarter, partially as a result of the schedule changes that Pinnacle and Delta cooperatively implemented in May and June.
“Pinnacle’s operations rebounded in the second quarter to the industry leading performance that we are known for,” said Phil Trenary, president and chief executive officer. “In addition, Colgan reported almost break-even operating results on the strength of its new Q400 operations in spite of a nearly 69 percent increase in fuel costs related to its pro-rate operations. I am proud of the dedication our People at both Pinnacle and Colgan demonstrated despite a difficult industry environment.”
Aircraft Deliveries
Colgan deferred the delivery of the 30 firm orders it has for Q400s until mid-2010 in order to have the enhanced Next-Gen cabin configuration. It took seven Q400s during the second quarter, increasing the total in operation under its capacity purchase agreement with Continental Airlines to 13 as of June 30, with another two delivered in July.
During July, Pinnacle and Delta Air Lines agreed to defer the in-service dates of the remaining seven Bombardier CRJ-900 next generation regional jet aircraft to be operated under the Delta Connection Agreement (the “DCA”). During the second quarter, Pinnacle took delivery of three CRJ-900s, increasing its operating fleet to nine aircraft as of June 30. Pinnacle took delivery of two CRJ-900s during July and has deferred delivery of the remaining five aircraft until their respective in-service dates in 2009 under the DCA.
Special Charges
The company recorded a special charge related to the valuation of its auction rate securities (ARS) portfolio during the second quarter, reducing net income for the second quarter by $8.7 million. Its ARS portfolio has a par value of $136.1 million. These securities are secured by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. Auctions for these securities began failing in the first quarter and have continued to fail throughout the second quarter. Additionally, a liquid secondary market for these securities has not developed.
In addition, the company evaluated certain tangible and intangible assets at its Colgan subsidiary in light of the high-fuel-cost environment and operating losses that Colgan has experienced over the last two quarters. As a result, Pinnacle determined that goodwill and certain other assets recorded upon the acquisition of Colgan have been impaired. Coupled with costs associated with returning leased aircraft to lessors under its turn-around plan, the company recorded a special charge of $12.6 million ($8.1 million net of related income taxes) during the second quarter to account for these items. Additionally, the company expects to record an additional $1.3 million in lease return costs during the third quarter of 2008 under its turn-around plan.
Colgan Turn-Around Plan
Its five-point plan has been in the works since Pinnacle’s acquisition of Colgan last year. These significant changes are designed to eliminate unprofitable markets and reduce the losses that Colgan is incurring in its pro-rate operations. The company expects that the turn-around plan will result in an improvement in Colgan’s financial performance, and may eliminate losses in Colgan’s pro-rate operations on a full year basis. However, changes in unit revenue or additional increases in fuel costs will affect Colgan’s financial performance. In addition, Colgan’s profitability in these pro-rate markets will continue to fluctuate seasonally, with Colgan experiencing lower passenger demand and lower unit revenue in the fourth and first quarter of each year than in the second and third quarter of each year.
Key components of the turn-around plan include the following:
Pinnacle developed a five-point turn-around plan for its troubled Colgan subsidiary which operates under pro-rate contracts. The plan is designed to sustain a profitable operation even at $140+ per barrel. However, it does not expect Colgan to achieve profitability until next spring.
The company is looking for markets that not only cover Colgan’s direct costs but cost of aircraft ownership and contribute to overhead. Colgan’s recovery plan includes route elimination, rebidding EAS contracts and reduced maintenance expenses as well as the possibility of reducing United Express distribution and other costs.
As part of its recovery strategy it is dropping 10 aircraft from the Colgan’s pro-rate operations including eight Saabs, the leases for which will expire in Q109. PNCL hopes to sell two and, if it finds a robust market may sell more. The company incurred lease return costs of $2 million in the second quarter. It will also have $2 million in unreimbursed aircraft ownership expenses in the third and fourth quarters but hopes to mitigate that by pursuing revenue opportunities for the aircraft either through corporate shuttles or opportunities with Delta.
However, its Saab operation for Continental at Houston remains unaffected by the fleet changes. CFO Peter Hunt reported that the Houston operation has a connect incentive component indexed to fuel prices and, thus, expects that operation to be profitable.
Pinnacle’s second quarter performance improved significantly, contributing to incentive payments in both its Delta Connection and Northwest Airlink programs. Finally, deliveries of both Q400 and CRJ 900 aircraft have been deferred in order to get the Next-Gen cabin for the Q400s and to push back costs until the CRJ 900s can be added to the Delta Connection system next spring.
The company ended the quarter with unrestricted cash and cash equivalents totaling $65.2 million. It generated $16.2 million from operating activities during the second quarter. This included $3.4 million of net collateral deposits related to its interest rate hedging program that were returned to the company during the quarter and $12.8 million of cash flow from airline operations. Cash used for investing activities of $11.2 million primarily related to capital expenditures at the company’s operating subsidiaries. Cash used in financing activities was $16.7 million, which included $36.7 million in debt repayments associated with the company’s aircraft pre-delivery payment financing facilities and other related financing payments, offset by $20.0 million in proceeds from draws under the company’s bank credit facilities.
Performance
Operating performance with respect to its Northwest Airlink operations improved dramatically during the second quarter after experiencing severe weather during the first quarter, causing it to record performance penalties during the first quarter to be paid for the six months ended June 30. Pinnacle’s performance in the second quarter reduced the overall performance penalty owed to Northwest for the six-month period by approximately $0.8 million to $1.7 million.
Pinnacle earned approximately $0.3 million in operating performance incentives under its Delta contract during the second quarter. Pinnacle’s Delta Connection performance improved from the first quarter, partially as a result of the schedule changes that Pinnacle and Delta cooperatively implemented in May and June.
“Pinnacle’s operations rebounded in the second quarter to the industry leading performance that we are known for,” said Phil Trenary, president and chief executive officer. “In addition, Colgan reported almost break-even operating results on the strength of its new Q400 operations in spite of a nearly 69 percent increase in fuel costs related to its pro-rate operations. I am proud of the dedication our People at both Pinnacle and Colgan demonstrated despite a difficult industry environment.”
Aircraft Deliveries
Colgan deferred the delivery of the 30 firm orders it has for Q400s until mid-2010 in order to have the enhanced Next-Gen cabin configuration. It took seven Q400s during the second quarter, increasing the total in operation under its capacity purchase agreement with Continental Airlines to 13 as of June 30, with another two delivered in July.
During July, Pinnacle and Delta Air Lines agreed to defer the in-service dates of the remaining seven Bombardier CRJ-900 next generation regional jet aircraft to be operated under the Delta Connection Agreement (the “DCA”). During the second quarter, Pinnacle took delivery of three CRJ-900s, increasing its operating fleet to nine aircraft as of June 30. Pinnacle took delivery of two CRJ-900s during July and has deferred delivery of the remaining five aircraft until their respective in-service dates in 2009 under the DCA.
Special Charges
The company recorded a special charge related to the valuation of its auction rate securities (ARS) portfolio during the second quarter, reducing net income for the second quarter by $8.7 million. Its ARS portfolio has a par value of $136.1 million. These securities are secured by pools of student loans guaranteed by state-designated guaranty agencies and reinsured by the U.S. government. Auctions for these securities began failing in the first quarter and have continued to fail throughout the second quarter. Additionally, a liquid secondary market for these securities has not developed.
In addition, the company evaluated certain tangible and intangible assets at its Colgan subsidiary in light of the high-fuel-cost environment and operating losses that Colgan has experienced over the last two quarters. As a result, Pinnacle determined that goodwill and certain other assets recorded upon the acquisition of Colgan have been impaired. Coupled with costs associated with returning leased aircraft to lessors under its turn-around plan, the company recorded a special charge of $12.6 million ($8.1 million net of related income taxes) during the second quarter to account for these items. Additionally, the company expects to record an additional $1.3 million in lease return costs during the third quarter of 2008 under its turn-around plan.
Colgan Turn-Around Plan
Its five-point plan has been in the works since Pinnacle’s acquisition of Colgan last year. These significant changes are designed to eliminate unprofitable markets and reduce the losses that Colgan is incurring in its pro-rate operations. The company expects that the turn-around plan will result in an improvement in Colgan’s financial performance, and may eliminate losses in Colgan’s pro-rate operations on a full year basis. However, changes in unit revenue or additional increases in fuel costs will affect Colgan’s financial performance. In addition, Colgan’s profitability in these pro-rate markets will continue to fluctuate seasonally, with Colgan experiencing lower passenger demand and lower unit revenue in the fourth and first quarter of each year than in the second and third quarter of each year.
Key components of the turn-around plan include the following:
• The elimination of 12 markets from Colgan’s US Airways Express and United Express pro-rate operations, effective in October. This will result in the retirement of 10 Saab aircraft from service in addition to the previously announced retirement of Colgan’s fleet of five Beech 1900 aircraft.
• Increased subsidy under Essential Air Service program. To offset the increase in fuel costs, Colgan applied for changes in 13 of the 15 markets that it serves under the EAS program. It was awarded service in seven of these markets with an increased subsidy totaling approximately $4 million annually. Colgan will also reduce capacity in four of these seven markets, further reducing Colgan’s operating costs. The Department of Transportation accepted competing bids in four of the remaining six markets, and Colgan will exit these markets in October as part of the planned fleet reduction. The DOT has not acted upon applications in the remaining two markets. Assuming Colgan receives authority to continue operations in these two markets, Colgan will operate in 11 EAS markets after the changes.
• The addition of Colgan’s new maintenance base at Washington/Dulles International airport, where Colgan maintains a significant presence operating as United Express. This will eliminate ferry flights from Colgan’s existing maintenance facilities, reducing operating costs. In addition, Colgan has undertaken an effort to streamline its maintenance operations by reducing the number of stations where it maintains a line maintenance function and by increasing the productivity of its maintenance operations.
• The transition of nine markets that Colgan operated from Pittsburgh under the US Airways Express brand to Washington/Dulles under the United Express brand. This transition was completed during the first quarter, and Colgan has seen an improvement in the revenue performance of these markets.
• Discussions with United Airlines to jointly reduce certain costs that Colgan incurs at Dulles. Reducing certain distribution and ground handling costs or otherwise supplementing Colgan’s revenue in its United Express markets is a key component of maintaining its operations at the hub. If United and Colgan are unable to reduce these costs, Colgan may exit additional markets currently operated under the United Express brand.
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