Memphis-based Pinnacle Airlines Corp. will end its Colgan Air subsidiary and stop flying regional flights for US Airways Inc. and United Air Lines Inc. by the end of the year.
The company announced the changes late Sunday, April 1, as it filed for Chapter 11 federal bankruptcy protection in the southern district of New York.
The changes, along with a new financing agreement with Delta Air Lines Inc., must be approved by the court.
The bankruptcy filing allows the regional air carrier to continue operating as it continues a corporate restructuring that began late last year.
Pinnacle President and CEO Sean Menke has said since then that bankruptcy reorganization has been an option as the company sought to change its business model.
The change is a move away from smaller jets, which had become more expensive to operate with the rapid rise in fuel prices.
When Menke hired a consulting firm and a law firm to begin the restructuring, Pinnacle stock prices plunged below a dollar a share but have since recovered.
Menke described the court filing as “the only feasible course of action to implement our turnaround plan.”
“Quite simply, our current business model is not sustainable, as increasing operating expenses, liquidity constraints, business integration delays and difficulties associated with combining our operations have hindered our ability to maximize our growth potential,” he said in a written statement.
In announcing its move to bankruptcy, Menke said Pinnacle has a commitment from Delta to put up $74.3 million. With court approval, $44.3 million of that would be used by Pinnacle to repay a promissory note that Delta holds. The rest would be added to whatever Pinnacle generates from its operations to keep the carrier flying and continue the restructuring.
The next steps in the plan include winding down operations of its Colgan Air subsidiary’s Saab 340 fleet by a target date of Aug. 1. Colgan’s Q400 aircraft would be phased out by Nov. 30.
John Spanjers, executive vice president and chief operating officer, said in the bankruptcy declaration that the filing was caused by an airline industry “undergoing convulsive changes and contractions in recent years.”
He also said rising fuel prices has caused global carriers to cut costs and capacity that have eliminated protection the regional air carriers enjoyed against fuel costs and other risks.
“The result has been a race to the bottom, as the debtors and other regional airlines have been forced to bid ever lower rates and accept increasingly unfavorable contract terms to win the business of major carriers,” Spanjers said. “These sacrifices have drained regional carriers and continue to do so, with frequently unsustainable consequences.”
Spanjers wrote in his filing that Pinnacle’s plan under former CEO Phil Trenary to go from three subsidiaries to two divisions – one for turbo props and another for jets – “proved substantially more difficult and time consuming than anticipated.”
He also cited the February 2011 contract agreement with the Air Line Pilots Association for nearly 3,000 pilots across the three subsidiaries that boosted their pay above the market average without resolving a difficult consolidation of the pilot groups and the different rules each worked under.
Menke said earlier that the company was seeking permanent pay cuts from ALPA and other labor unions. Reports of the cuts being proposed ranged from 5 percent to 7 percent. No agreement had been reached as of Sunday’s bankruptcy filing.
Three labor unions including ALPA represent approximately 5,000 employees or 70 percent of Pinnacle’s workforce.
Pinnacle is also asking federal regulators to accelerate finding new carriers for markets Colgan Air intends to leave – the markets where Colgan flies the Q400 for US Airways.
Pinnacle had already filed withdrawal notices with the U.S. Department of Transportation in the Essential Air Service markets involved. Those are smaller markets the federal regulators have determined must have some kind of air service. A carrier that intends to leave an EAS market must delay leaving until a replacement carrier can be found.
In a letter to employees, Menke said the company expects to continue paying them and provide benefits without interruption.
“But that does not mean it will be business as usual at Pinnacle,” he wrote. “In fact, our organization must make major changes to remain viable.”
Pinnacle lists more than $1.5 billion in estimated assets and more than $1.4 billion in estimated liabilities.
The list of creditors with the 50 largest unsecured claims is led by United Airlines, in the form of its contract with Pinnacle. The largest non-contract creditor is Standard Aero of Winnipeg, Canada, for aircraft maintenance parts and services totaling $3.7 million. That is followed closely by Accommodations Plus International of Lindenhurst, N.Y., for $3.6 million in crew hotel charges.
Trenary is also listed among the top 50 creditors for an unspecified and unliquidated amount between the $940,250 Pinnacle owes Rockwell International for maintenance, parts and services and the $825,286 Pinnacle owes the Shelby County Trustee in county property taxes.
Other amounts owed include $240,953 in city property taxes and an undisclosed amount to former chief operating officer Doug Shockey.
Pinnacle filed for bankruptcy just hours before an interim financing agreement with United Air Lines Inc. and Export Development Canada it unveiled in February was to run out.
EDC loaned Pinnacle and the Colgan Air subsidiary $16.6 million for the Q400 and agreed in January to defer two payments until April 2. United then agreed to pay some of the ownership expenses as well as the increased rates Pinnacle was paying to fly them and the Saabs for United through increased revenue.
The United revenue was structured as an interest-free loan automatically forgiven when the term of the agreement ran out.