Pinnacle Airlines (PNCL) and Mesaba (MAIR) were busy at the close of 2006 having signed a new regional feeder deal with Northwest (NWARQ) and negotiated for the major airline to acquire Mesaba. While no deal has been announced by either Mesaba or Northwest, Northwest said it wanted to acquire Mesaba, in a deal that would make Northwest its owner in a principally noncash transaction.

"Northwest ownership would secure our core business and, in the long run, position us for growth," Mesaba President John Spanjers told the Minneapolis Star Tribune. However, the discussions were at such a preliminary stage as to warrant comment from MAIR Holdings, Mesaba's parent company.

The move could also resolve the highly charged relationship between Mesaba employees and its parent company. Mesaba followed Northwest into bankruptcy and lost half its fleet in the process. Northwest also missed several large payments to its partner. Northwest has already talked with Mesaba leaders about becoming a co-sponsor of Mesaba's reorganization plan, according to Spokesperson Bill Mellon, who added the plan must be approved by the regional's bankrtupcy court. He also said the proposal has been reviewed by Northwest's Creditors Committee.

Mesaba's Creditors Committee is currently after MAIR for financial claims against the parent company. In addition, MAIR sued Mesaba and its creditors in October to block them from gaining access to the parent company's cash which included $111 million in cash paid by Mesaba in dividends between 2002 and 2004 in addition to $11 million in management fees paid between 2003 and 2005. This set off Mesaba employees, especially since the airline spent most of the year trying to gain substantial give backs from its unions. They wanted the restructuring to be shared by all parties, including MAIR.

At least on major investor in MAIR Holdings, however, is concerned the airline will not get "fair value" if acquired by Northwest. Riley Investment Partners told the Pioneer Press it wants independent shareholders interests represented in the negotiations and is calling for a majority shareholder approval of any deal. For its part, MAIR said it "will evaluate any development with an eye to its impact on all shareholders, our subsidiaries, their employees and the communities they serve"

Riley, which owns 5.3 percent of MAIR, said other shareholders, including Lloyd Miller and Palmyra Capital Advisors, which own 6.4 percent combined, share its concerns. It also said Northwest, with a 28 percent holding in MAIR, has a conflict of interest, adding that Mesaba's $145 million unsecured bankruptcy claim "proposed by Northwest is grossly inadequate."

Finally, Riley indicated that if its concerns were not addressed it could intervene in the bankruptcy cases for both Northwest and Mesaba.

It is unclear what this would do to the outstanding request for proposal Northwest has for a regional operator to provide service with 50- to 70-seat regional jets. Mesaba is one of several carriers that have provided bids.

Pinnacle's Deal

In the last days of 2006, Pinnacle closed a new 10-year deal to provide regional feed to Northwest, resolving several outstanding issues between the airline and its major partner. For Pinnacle, the best thing that came out of its new deal was the elimination of the restriction against it creating regional feeder services for other airlines and the settlement of its bankruptcy charge against its major partner to the tune of $337.5 million. The Memphis Commercial Appeal indicated the new deal calls for Pinnacle to receive half the pay of its previous contract but keeps the 124 50-seat regional jets it now flies on loan from its major partner. However, during 2007, Pinnacle also receives 17 76-seat Bombardier (BBD) CRJs this year. Northwest will commit to either a three- or 10-year term for these aircraft with Pinnacle prior to March 31, 2007. It must resolve its labor problems with pilots and reach a deal by March 31. Failing that, Northwest may remove the larger equipment at a rate of three per month. However, pilots indicated the new deal laid the groundwork for the two parties to come together and finally reach a labor agreement.

Assuming it can reach an agreement, Pinnacle expects the deal will provide $50 million in operating income in the first year, excluding earnings from other carriers or earnings it might receive from the sale of its unsecured claim against Northwest.

The release from restrictions against operating for other carriers means Pinnacle will not have to file for a new certificate unless it acquires 90-seat equipment. The only exception to the release from its restrictions is exclusivity for Northwest at its Minneapolis, Memphis and Detroit hubs. In addition Northwest will provide jet fuel at no charge and reduce aircraft sublease expenses, although its margin rate will drop to eight percent, the industry average.

"This ensures the 1,000 Pinnacle employees in Memphis have secure jobs," President and CE0 Phil Trenary told the Memphis Commercial Appeal. "And it allows us to stay in Memphis, our home and the place we love."

Should Pinnacle work for other majors, Northwest will have limited rights to remove some aircraft from Pinnacle's fleet -- one for every two aircraft that Pinnacle operates for another partner above an initial base of 20 regional jets. Northwest may remove no more than 20 aircraft subject to this option and no more than five aircraft in any 12-month period. Notably, Northwest may only exercise this option if the removed aircraft are not operated by or on behalf of Northwest after their removal.

Northwest could also upguage the CRJ-200 aircraft in Pinnacle's fleet for aircraft configured with 70 or more seats on a one-for-one basis and on similar economic terms and conditions.

Should Northwest merge with, acquire or be acquired by another major carrier prior to exiting bankruptcy, it may remove the 17 aircraft to be added during 2007 plus an additional 24 aircraft. The option expires once it exits bankruptcy.

Under the amended ASA, upon a change of control occurring after January 1, 2008, Northwest will no longer have the option to terminate the agreement, but instead will have the option to remove up to 62 aircraft from Pinnacle over a three-year period, and the option to extend the ASA for another five years without resetting rates. In addition, certain operating performance measurement formulas would be revised in Northwest's favor.