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VOL. 127 | NO. 70 | Tuesday, April 10, 2012

Pinnacle's Chapter 11 Filing Could Mean Predictable Turnaround

By Bill Dries

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As Pinnacle Airlines Corp. moves from restructuring to bankruptcy reorganization, an already complex corporate turnaround is about to get much more complex.

(Daily News File Photo: Lance Murphey)

But it will probably also get more predictable.

Chapter 11 bankruptcy reorganization has become a rite of passage for the global air carriers whose contracts with regional carriers like Pinnacle are the lifeblood of the regionals.

What happens next for Pinnacle’s restructuring and reorganization runs past a federal bankruptcy judge in New York, where Pinnacle’s attorneys filed their bankruptcy petition on April 1.

The new plan that has emerged in the bankruptcy court filings is a smaller Pinnacle Corp. with the Colgan Air brand being phased out, leaving Pinnacle Inc. and Mesaba. But Pinnacle Corp. will also be dropping its regional service for United Air Lines Inc. and US Airways Inc.

The remaining partner will be Delta Air Lines Inc. with a new financing arrangement in which Pinnacle will continue to fly 59-seat and 76-seat jets for Delta but with 16 of the 50-seaters being phased out, leaving 41 in the Pinnacle fleet along with 142 of the 50-seaters.

The jets at 74 and 34 seats flown for United Express are to be phased out by Aug. 1 and the same type of jets flown for US Airways will be phased out as soon as federal regulators find new carriers to fly in Essential Air Service flying.

The game plan is an adjustment of Pinnacle’s original plan under former CEO Phil Trenary that began unfolding before the spike in fuel prices that changed the relationship between the global carriers and their regional carriers.

Even without the fuel price spike, there were some enduring difficulties with the change.

Pinnacle’s chief operating officer John Spanjers noted them in his bankruptcy declaration filed last week in New York with the bankruptcy petition.

Trenary’s plan was a reconfiguration of Pinnacle that would remain the same size in terms of fleet and partners but would go from a set of three regional airlines under the Pinnacle umbrella to an umbrella with two divisions beneath it – one for jets and the other for turboprops.

Mesaba’s jets were to be folded into Pinnacle Inc. maintenance and flight operations. But it didn’t go as quickly as Pinnacle Corp. had planned. Federal Aviation Administration approval of the move onto Pinnacle’s certificate happened in January instead of May 2011. With the delay, cost savings were deferred as Pinnacle hired more people to work on the consolidation.

“Additionally, the prior management structure was not conducive to realizing the efficiencies of consolidation,” Spanjers wrote in his declaration.

A month before his resignation, Trenary touted a new contract with the Air Line Pilots Association with 3,000 pilots flying for all three Pinnacle subsidiaries.

The integration of the three pilots groups was not well thought out, according to Spanjers, resulting in “unforeseen and substantial complexities and expense stemming from the creation of an ‘integrated seniority list.’”

“This integration has had severe, disruptive and expensive consequences on the filling of pilot vacancies and associated training costs,” he added. “Pilots must undergo training every time they move to a new aircraft or category, and they are entitled under the collective bargaining agreement to receive their full salary during training, during which time they are not flying.”

With pilots allowed to bid across all three airlines, Spanjers said the result was “an overwhelming number of transfer requests across a substantially more disparate set of routes and fleet types.”

The contract, he concluded, had only “minimal effective safeguards” against the increased training costs and there should have been more “protected” pilot positions.

Pinnacle is seeking but has not reached an agreement with the unions that would change the contract.

Since Sean Menke replaced Trenary as Pinnacle CEO, the company has consolidated what were three management teams at each of its subsidiaries. The company has gone from 29 officers to 18. The team of directors has been reduced by 40 percent with 26 director-level positions eliminated. And merit pay increases and discretionary bonuses set for 2012 have been cancelled producing $3 million in savings.

Meanwhile, Pinnacle’s stock will be delisted from the NASDAQ stock market starting at the opening on business Wednesday, April 11.

And Pinnacle executives will not appeal the NASDAQ delisting, according to a Pinnacle filing Friday with the Securities and Exchange Commission.

“Given these continued listing requirements, the early status of the Chapter 11 cases and the demands the Chapter 11 cases have posed on the company’s resources, the company does not plan to appeal the NASDAQ staff’s determination to delist the company’s common stock,” the Pinnacle statement reads.

With the April 11 suspension, Pinnacle executives have said the company’s stock can be traded only on pink sheets – a pink notice that indicates the company does not trade on NASDAQ.

Pinnacle could apply to trade its stock on the Over the Counter Bulletin Board, (OTCBB) another option for companies delisted. That could happen in May when Pinnacle executives have said they plan to release annual reports and figures that would make the regional air carrier current in its SEC reporting obligations.

Over the counter trading is among individuals connected by computer or telephone without the regulations of a major stock exchange.

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