Monday, April 02, 2012

Pinnacle Airlines Files for Chapter 11 Protection

The Wall Street Journal

Regional airline Pinnacle Airlines Corp. NCL -51.85% sought bankruptcy-court protection in another sign that commuter carriers are struggling with pressure from their big-airline partners.

Pinnacle, which operates more than 1,300 daily flights to smaller cities for larger network carriers, said it plans to cut ties this year with United Continental Holdings Inc. UAL -0.09% and US Airways Group Inc. LCC -1.84%

Pinnacle will undergo "a holistic restructuring of [its] entire relationship with" Delta Air Lines Inc., DAL +1.06% which committed $74.3 million of debtor-in-possession financing to help Pinnacle repay borrowings and meet ongoing needs, Pinnacle's outside attorney, Marshall Huebner, said Monday in U.S. Bankruptcy Court in Manhattan.

The Memphis, Tenn.-based regional carrier said that by the end of this year it will close subsidiary Colgan Air Inc., which mainly operates flights for United. A Colgan plane crashed in February 2009 in Buffalo, N.Y., killing 50 people in the most recent commercial plane crash in the U.S.

Regional airlines carry one in four flyers in the U.S., according to the Regional Airline Association. Like its peers, Pinnacle says that its large airline customers have been passing on increasing amounts of financial hardship. Pinnacle and its competitors have had "to bid ever-lower rates and accept increasingly unfavorable contract terms to win the business of major carriers," Pinnacle Chief Operating Officer John Spanjers said in court documents filed on Sunday.

With cost cutting and capacity reductions in recent years, network carriers "have transformed the market for regional air service, consuming and paying less and demanding more from their regional partners," Mr. Spanjers said. "The result has been a race to the bottom."

American Airlines parent AMR Corp. AAMRQ -2.24% tried shedding its regional unit, American Eagle, before filing for bankruptcy-court protection in November. Mesa Air Group Inc. emerged from bankruptcy last year as a much smaller airline. And the biggest regional carrier, SkyWest Inc., SKYW -0.45% lost $27.3 million last year as it struggled to integrate ExpressJet Holdings Inc., another regional unit it purchased in 2010.

Though most of the regional carriers' contracts pay them fixed fees for flights, largely protecting from the cost of fuel, soaring fuel prices are hurting them in other ways. Larger airlines are avoiding some short-haul flying because regional carriers' smaller planes tend to be less fuel efficient. Network carriers also have pushed for more "pro-rate agreements," where regional carriers pay for fuel and are compensated based on ticket sales, exposing them to volatility.

"For many years, regional airlines enjoyed profit margins under contracts that offered protection against rising fuel costs and other market risks," Mr. Spanjers said in court papers. "This is no longer the case."

Pinnacle said it will reduce its flying for United and US Airways through 2012, allowing the airlines to enter into new contracts with other regional carriers. United said in a statement that it's working with Pinnacle to transition its flying to other carriers "and will contact any customer whose reservation may change as a result."

Shares plunged 52% to 64 cents in afternoon trading. The stock is down 90% over the past year.

For months, Pinnacle had hinted at the possibility of a bankruptcy filing. In December, Chief Executive Sean Menke warned that the airline had to address its financial struggles or 2012 would be an "extremely challenging year."

Pinnacle currently has $1.4 billion worth of debt and $1.5 billion worth of assets, according to court documents. It held just $65.1 million in cash and cash equivalents on Nov. 30.

Mr. Spanjers also said that Pinnacle has struggled to combine its operations with Mesaba Airlines, which it purchased in 2010. And a new union agreement with the Air Line Pilots Association had unforeseen complexities that caused the company to pay for additional training time, he said.

More than 70% of Pinnacle's 7,500-plus workers are represented by a union. Pinnacle "will be seeking wage reductions and other concessions from their labor unions to ensure the viability of the [company's] business," Mr. Spanjers said. Pinnacle's attorney, Mr. Huebner, said the company would engage in "serious talks" with its unions.

The airline owes $690 million to Export Development Canada, $44 million to Delta and a $34 million loan to CIT Group Inc.'s CIT +1.22% aviation lending division, according to bankruptcy papers.

Pinnacle's former chief financial officer, Edward "Ted" Christie, left last month after less than a year in the post to become Spirit Airlines Inc.'s SAVE +2.49% chief financial officer. A shareholder group recently made a bid to reshuffle its board.

According to its bankruptcy petition, shareholders who own more than 5% of Pinnacle's voting power are Fidelity Investments, Apollo Capital Management, hedge fund investor Mohnish Pabrai and an investment fund that includes Meson Capital Partners.

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