In a bid to reduce costs and streamline its fleet, Pinnacle (PNCL) CEO Phil Trenary indicated that the company would probably not continue EAS service. However, he called 2007 the most important year in the company’s history since it included the acquisition of Colgan for $20 million, additional Continental (CAL) flying, an order for 15 Q400s, a new agreement to become a Delta Connection with 16 CRJ-900s, and the sale of its Northwest (NWACQ) claim for $283 million which has, thus far, provided an additional $180 million in working capital for the airline. Pinnacle ended the quarter with cash and short-term investments totaling $348.2 million. This year, however, will also see 15 aircraft it lost to Mesaba when it couldn’t reach a new pilot agreement, leave the airline at a rate of two per month beginning in September.
Pinnacle is reconsidering the continued use of Beech 1900s at Colgan, 10 of which are now used for EAS service. Trenary indicated it was a matter of reducing the number of aircraft types in the fleet but also mentioned the pro-rate received from the USAirways Express system, increased pilot training costs and utilization.
"We expect the investments we are making at our two operating subsidiaries to establish profitable growth for Pinnacle Airlines Corp.," said Peter Hunt, the company's Chief Financial Officer. "With the addition of 31 aircraft through early 2009, the combined fleet of our subsidiaries will grow by 18 percent. Further, our track record of effectively competing for new regional airline business has been established, and I am confident that we will be successful in winning future profitable growth opportunities."
Even so, income declines in its Northwest contract, pilot shortages which forced schedule reductions, and increased costs associated with the assumption of ground handling at an addition 13 points for Northwest, forced net income down in the first quarter 2007 29.5 percent from $13.3 million experienced in the first quarter of 2006. It also cited flight attendant signing bonuses of $400,000 and operating losses at Colgan.
The airline has worked through the pilot bubble experienced last year in advance of anticipated new Airlink flying. It has now re-opened recruiting. As with most reporting regionals, its attrition rate had been nine to 10 per month but is now at about 20. Shortages cost the airline $1.5 million in the first quarter with an expected repeat in the second quarter.As with his regional airline counterparts, Trenary cited weather and ATC as damaging its performance, especially with the pre-cancellations imposed in advance of predicted storms.
Trenary indicated that, industry-wide, quality took a back seat to costs for some time, but now counts much more than it used to. He also said that the last generation turboprops were really inferior to the Q400. “I spent some time at Horizon and there was no push back from customers about the move to a turboprop,” he said. “In fact it seemed to be the preferred aircraft because it addresses the complaints they had with the CRJs." He added the Q400 is expected to increase capacity at Newark for the Continental operation since its short-field performance allows the use of the cross-wind runway there.
The transition of Colgan has gone better than expected, he reported, and the only thing Pinnacle added to its already strong team was a group solely devoted to the Q400 operation. However, Colgan took a slight operating loss of $800,000, largely owing to fuel increases to $2.13 per gallon.
For the three months ended March 31, the company recorded operating revenue of $179.6 million, a decrease of $27.5 million, or 13 percent, over the same period in 2006. Operating revenue was down 13 percent to approximately $78.3 million by contractual changes in the Airlink contract and approximately $1.1 million for performance penalties, a sum that will likely be repeated in the second quarter. An increase in Pinnacle's level of operations with the addition of 15 Airlink aircraft added during the quarter, resulted in a $10.7 million increase in revenue.
Calyon Securities Analyst Ray Niedl lowered its rating of Pinnacle, citing its continuing struggles creating additional risk this year. However, he said its transition was necessary for its future. “The company has the goal of steady growth beyond this year,” he said. “However, lower margins and a greater assumption of risk are part of the transformation.”
He noted the company indicated EPS may be 10 to 12 cents below previous expectations per quarter. Pinnacle will incur further transition costs with the loss of the 15 aircraft added in the first quarter in addition to the launch of Continental and Delta operations, which begin in the second half of this year and continue into 2008. Related Story
Niedl cited the company’s new Northwest and Continental contracts, saying they entail additional risk and need for capital expenditure since the Continental agreement, unlike its Northwest agreement, calls for aircraft ownership of the Q400s it has ordered. In addition, he said, the Colgan turboprop flying entails more company-specific risk than in the previous pass-through contracts.
The company's Pinnacle subsidiary, with the addition of 15 CRJs for the Airlink operation, completed 107,013 block hours and 63,963 cycles, increases of four percent over the same periods in 2006. Pinnacle's cycles also increased owing to a three percent decrease in the average length of Pinnacle's flights from 473 to 457 miles. The company's Colgan subsidiary completed 25,090 block hours and 20,890 cycles from the acquisition date through the end of the quarter.
Operating income and operating margin for the first quarter of 2007 were $12.8 million and 7.1 percent, respectively. The Pinnacle subsidiary achieved an operating margin of 9.0 percent, while Colgan recorded a negative operating margin of 0.3 percent. Consolidated operating income and operating margin for the first quarter of 2006 were approximately $21.5 million and 10.4 percent because of contractual changes which reduced operating income by approximately $10.6 million. This was offset by the amortization of net deferred revenue associated with Pinnacle's claim sale of approximately $5.2 million.
Colgan recorded an operating loss of $0.1 million during the first quarter of 2007. The company expects Colgan's financial results to improve during the seasonally stronger second and third quarters of 2007, and does not expect Colgan's full year financial results to materially affect its consolidated net income for the year ended December 31, 2007.