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VOL. 127 | NO. 28 | Friday, February 10, 2012

Pinnacle Making Strides In Comeback Effort

By Bill Dries

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Pinnacle Airlines Corp. reached another important milestone this week in its comeback effort with another interim contract agreement, this time with one of the global air carriers the Memphis-based regional carrier works with.

Like the interim agreement Pinnacle reached in January with Export Development Canada, the United Air Lines Inc. interim agreement runs to April 2.

The two agreements are linked.

EDC lent Pinnacle and its subsidiary Colgan Air Inc. $16.6 million for Q400 aircraft. And EDC agreed last month to defer until April 2 payment of the aggregate amount due in two payments – one Jan. 14 and the other at the end of March.

The interim agreement with United is for United to pay some of Pinnacle/Colgan’s ownership expenses on the Q400s as well as increased rates for flying them and Saab aircraft for United.

“Increased revenue (to Pinnacle) received from United under the capacity purchase agreement is expected to more than offset the lost benefit (Pinnacle) previously negotiated with Export Development Canada for deferral of principal and interest payments for Q400 aircraft,” reads the notice Pinnacle sent Tuesday, Feb. 7, to the Securities and Exchange Commission.

The increased revenue is structured as an interest free loan, according to the notice, which will be automatically forgiven when the term of the agreement runs out. Both sides could agree to extend it past the current April 2 deadline.

“The 50-seat jets are history. It’s got a very, very limited shelf time left before those aircraft are just going to be gone.”

–Robert Herbst
Airline industry consultant, AirlineFinancials.com

Capacity purchase agreements are contracts in which regional carriers operate smaller jets, usually under 70 seats, for global or legacy airlines.

United specifically has a contract with the Colgan Airlines part of Pinnacle Corp. The agreement was made in 2007, the same year that Pinnacle bought Colgan. It was three years before United merged with Continental.

More importantly it was before the recent spike in gas prices that made it too costly for airlines – regional or legacy – to fly smaller aircraft seating 50 or fewer people and make a profit from it.

The move away from those jets is a trend all air carriers are being forced to deal with, said Robert Herbst, an airline industry consultant whose website, AirlineFinancials.com, features financial and performance data of the airlines.

“If they are unable to work out agreements they won’t stay in business,” Herbst said.

“The 50-seat jets are history. It’s got a very, very limited shelf time left before those aircraft are just going to be gone. With the cost of fuel today, they are just noneconomical because of what it costs on a per-seat-mile basis for fuel.”

Reworking the agreements and adapting to 70-seat jets also means renegotiating labor agreements as well.

“It isn’t so much just the regional carriers. The main line carriers are going to be reworking contracts to increase the size of the aircraft up to 70 seaters,” Herbst said. “That’s going to take some concessions and recognition that a lot of the pilot contracts have limitations on anything above 70 seats.”

Pinnacle also announced this week that it won’t release its fourth quarter and year-end 2011 earnings results and financial statements until March because of “the substantial time and resources” focused on the company’s turnaround.

Meanwhile, Georgia’s attorney general made some ripples among those in the southeastern U.S. airport industry this week when he told a Rotary club in Gainesville, Ga., that Tennessee leaders want to see Chattanooga’s airport become “Atlanta’s second airport.”

“And I will tell you, from a metro Atlanta perspective, I don’t believe Cobb, North Fulton, Gwinett (counties) … are viable second airports,” Sam Olens is quoted by The Gainesville Times newspaper as telling the Rotary meeting.

He also tied an agreement on that to an agreement Georgia has been seeking for access to water from the Tennessee River. Olens said he has talked with Tennessee Attorney General Robert Cooper intermittently about what is a long-running legal dispute between the two states over water rights.

The possibility is significant because Delta Air Lines executives have said they view Memphis International Airport’s role as a Delta hub to be a place to send the overflow passenger traffic from Hartsfield Jackson Atlanta International Airport. The Atlanta airport is the flagship hub for Delta, which is based in Atlanta.

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