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VOL. 126 | NO. 245 | Friday, December 16, 2011

Pinnacle Facing Strong Headwinds

By Bill Dries

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It’s been a rough week for Memphis-based Pinnacle Airlines Corp. The regional air carrier – in an age of capacity cuts by major airlines targeting regional carriers – saw its common shares drop to $1.02 per common share Tuesday at the end of the trading day. The stock closed Wednesday at $1.18, but was back down to $1.05 at close Thursday.

The price drop was fallout from the Dec. 8 announcement by Pinnacle CEO Sean Menke that the company has hired a law firm and consultants to “commence a comprehensive program to reduce short- and long-term costs and enhance liquidity.”

“These efforts are necessary to ensure we can operate as a profitable business for our shareholders, mainline flying partners, employees and other stakeholders,” read the written statement from Menke.

That day Pinnacle closed at $1.48 a share; a day later, it closed 11 cents lower.

This week began with analysts at Dahlman Rose & Co. LLC downgrading Pinnacle from hold to a sell rating. The Dahlman Rose note to investors predicted continued losses through the first half of 2012.

“The company has had operational issues this year,” the note read. “We believe it will have to restructure its operations and balance sheet and it is possible the only way may be through the courts.”

Pinnacle stock dropped another 27 cents Monday at the end of trading.

The company announced Tuesday, Dec. 13, that Robert K. Muhs, the senior vice president of operations for Pinnacle Airlines Inc., one of the three subsidiary carriers to Pinnacle Corp., was leaving effective Jan. 13.

2011 has been a series of entrances and exits and changes at a company trying to integrate three established regional carriers assembled in the space of just a few years into a single corporate entity and culture. The integration is taking place against the backdrop of changes for aviation in general.

The major airlines and the regional carriers are connected by contracts in which the major airlines control what jets the regional carriers fly, when they fly them and what they can charge passengers.

Pinnacle Corp. moved into One Commerce Square this year as the new anchor tenant of the building that is part of the Downtown Memphis skyline. That was about the time that CEO Phil Trenary announced his resignation 10 days before its effective date.

The terms of his departure included a $1.7 million consulting fee for two years, just about half of the $3 million severance package Trenary got, including accelerated vesting of equity related grants he kept.

It didn’t help that the one-time cost showed up in first quarter earnings statements as the largest part of $5.8 million in losses. The package was larger than the $2.1 million in performance penalties Pinnacle paid that quarter to the major airlines it has contracts with and more than the $2.1 million in costs that quarter on its labor contract with the Air Line Pilots Association.

Between Trenary’s departure in March and the arrival of Menke in July, analysts began asking if Trenary had been asked to step down in the midst of a complex reorganization of the group of three carriers – Pinnacle, Mesaba and Colgan.

Pinnacle also rolled out PinnPro Profession Ground Services, a business unit Pinnacle was already operating without a brand to handle charter booking, skycap and ramp services as well as customer check-in and aircraft cleaning for other carriers.

Also just before Menke arrived, Pinnacle’s chief financial officer Peter Hunt announced he was leaving to become CFO of Virgin America.

Within days of his arrival, Menke appointed Ted Christie, a former senior vice president at Frontier Airlines with Menke, as Pinnacle’s new CFO.

In October, John Spanjers, a Mesaba senior vice president of operations, was picked by Menke to replace Doug Shockey as chief operating officer of Pinnacle Corp.

And Pinnacle announced that same month it would close the Eagan, Minn., headquarters of Mesaba, moving it to Memphis.

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