Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Philip H. Trenary – President, Chief Executive Officer & Director

Peter D. Hunt – Chief Financial Officer & Vice President

Analysts

Bob Mcadoo – Avondale Partners, LLC

Lily Ng – Merrill Lynch

Analyst for Jamie Baker – J.P. Morgan

Analyst for Dewayne Pfennigwerth – Raymond James

[Arthur Calabartino] – John Hancock Advisory

Rowen Rongarage - Syrus Advisors

Pinnacle Airlines Corp. (PNCL) F3Q08 Earnings Call November 6, 2008 5:00 PM ET

Operator

Welcome to the third quarter 2008 Pinnacle Airline Corp earnings conference call. My name is Stacey and I will be your conference moderator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today’s call Mr. Phil Trenary, President and Chief Executive Officer for Pinnacle Airlines Corp.

Philip H. Trenary

Welcome to the third quarter 2008 earnings conference call with Pinnacle Airlines Corp. On behalf of the more than 5,000 employees of Pinnacle, I would like to thank you for your interest in our company. This call is being presented live over the Internet via the webcast from our website www.PNCL.com. It will also be available on our site for 30 days after this call.

This presentation contains various forward-looking statements that are based on management’s beliefs as well as assumptions made by and information currently available to management. Although the company believes that the expectations reflected in such forward-looking statements are reasonable it can give no assurance that such expectations will prove to have been correct.

Such statements are subject to certain risks, uncertainties and assumptions including those set forth in our filings with the Securities & Exchange Commission which are available to investors at our website or online from the commission. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove erroneous, actual results may vary materially from results that are anticipated or projected.

The company does not intend to update these forward-looking statements before its next require filing with the Securities & Exchange Commission. Again, good afternoon, I’d like to cover a few highlights of the last quarter before I turn it over to Peter for the financial discussion. On our last call we talked about the Colgan operation and what we need to do to turn around that around especially with the impact of fuel in some of the markets we were in.

We’re really starting to see the benefits of that Colgan turnaround. Our people there have done an outstanding job. The fleet rationalization is well underway, the [ES] markets we discussed have been rebid and we’ve either won those markets or we’re exiting those markets. The Q400s are now fully deployed with Continental Airlines out of Newark. We have seen a yield improvement and the pull back in fuel didn’t hurt too much either.

In the very near future we expect to have an agreement with United Airlines for the Dulles operation which will allow us to stay there long term on a profitable basis. The US Airways markets, the markets we’re staying in are the ones we expect to be in long term and we are exiting the unprofitable markets. We also talked about the beached 1900s. There are only two of those aircraft left and both of those will be out in early January.

In addition to the improved financial performance, the folks there have done a great job operating the SAAB. The operating performance for our customers are the best that its been since Colgan began flying the [SAABs]. As expected the Q400s are performing very well and actually doing a little bit better on fuel than we had anticipated and the customer acceptance has been very strong which we did anticipate.

All-in-all Colgan’s done a great job of turning Colgan around and having the company well positioned for a profitable 2009. On the Pinnacle side, Pinnacle has returned to its industry leading performance. In fact, starting in May we’ve had a string of not just regional but industry leading months including one month that we led everyone including Hawaiian. That’s the one that has been usually at the top that we’ve lead all mainline carriers three of the four months and everyone in the fourth month.

In addition, if you look back the last 32 months, we’ve led all regionals in 22 of the last 32 months. So, the operational performance is very, very strong. We have had some negative financial impacts in the quarter and Peter will get in to the details on this but as far as the causes it can be summed up in a few very specific areas one is the preparation for winter operations. I’m sure you remember the fleet wide problem that the CRJ200s has with the flap actuators.

There is an actuator that is more confidence than in anything I’ve seen since we started operating the aircraft. It will actually have a positive impact on the performance. Our folks in maintenance have done a good job on that and we expect to have approximately half the fleet converted by January 1st and when you have half the fleet that gives us some options as far as trying to keep the aircraft out of the colder weather.

As you remember, we had staffed up for more Delta flying than we actually had to do which had a negative financial impact but actually wound up with a positive effect in that when Delta asked us if we could take on the Freedom aircraft on a temporary basis we were able to do so. So, in addition to the 900s that we have and the ones we planned on, we now have three of the Freedom aircraft online. We expect to have three additional aircraft online by the end of November with the last Freedom aircraft being the additional spare.

There’s been a lot of discussion about the 50 seat jets industry wide and I think it’s important for our investors to understand why we are bullish in our 50 seat fleet. It is the newest fleet in the industry which has a corresponding lower maintenance cost. The lease cost on the aircraft is also very competitive. The Northwest bankruptcy had the effect on our lease rate causing lower lease rate so we have a newer fleet at less than new fleet lease rates I think is the best way to look at that.

That combined with the reliability and low cost we have, should position us very well to operate the aircraft through 2017. The one thing that we should also keep in mind is that the ASA language allows for a one for one swap of larger aircraft for the 50 seaters. So, if Delta decides they’d want to put additional 900s in to Pinnacle and pull 50 seaters out they could do that but that’s the only condition where 50 seaters could come out.

We do continue to meet with Alpha. We’re actually meeting without the mediator right now which is at the mediators suggestion. We continue to be positive about that. As last time, I don’t plan on making any predictions about when we’ll finish up but there are very few issues left and it will have a cost impact to us but we do not anticipate that our rates will be higher than the industry average.

Just with all our other groups whether it be union or non-union we expect the ultimate deal to be rates right around the industry average and we do expect to be able to return to the high level productivity once all our crews are fully deployed with the 900s next year. In summary, before I turn it over to Peter, we are optimistic about the future for I think, four very solid reasons. We have the right aircraft to grow.

The CRJ900 is the most efficient of the regional aircraft. We believe that once the industry sorts itself out that there will be orders for the 900s. The Q400 has proven to be a great airplane. We also believe that we’ll be able to exercise the options that we have on those aircraft. Colgan has done a great job of turning it around and we expect that to be complete by the end of the year and have a profitable 2009.

We do have a strong balance sheet that allows us to meet all financial obligations and again, peter will get in to that more in a minute. And, Pinnacle is performing very well and taking the steps necessary to improve profitability in 2009. With that, I’ll turn it over to Peter Hunt, our Chief Financial Officer who will review our financial results.

Peter D. Hunt

Pinnacle Airlines Corp did report third quarter fully diluted earnings per share of $0.43 which was $0.05 below the third quarter of 2007 but was $0.05 above the first call consensus estimate of $0.38 for the quarter. Starting with the capacity that we generated in the quarter, our Pinnacle subsidiary flew 107,632 block hours. That was a decrease of 4% over the block hours in 2007 and Pinnacle completed 66,779 departures which was a decline of 2% year-over-year.

The decrease in capacity is driven primarily by fleet changes. We did return 15 aircraft throughout late 2007 and 2008 to Northwest. We’re down to our core 124 fleet of CRJ200s and then offsetting the decrease in the 200s is the 11 CRJ900s that we brought in to our fleet, nine of which operated under our Delta connection agreement during the third quarter. We ended the quarter with 135 aircraft and our average utilization at Pinnacle was 8.75 hours during the quarter.

On the Colgan side of our business, Colgan generated 43,004 block hours which is an increase of 22% year-over-year and Colgan generated 34,320 departures which is an increase of 14% year-over-year. The increase in capacity at Colgan is driven by our new Q400 fleet offset by a 16% decline in the block hours and our prorate flying which is part of our prorate turnaround plan that Phil mentioned earlier.

We ended the quarter with 56 total aircraft at Colgan, that includes 15 Q400s, 37 SAAB 340 aircraft and four beached 1900s, two of which are in service now. Our stage length at Colgan was 221 miles, an increase of 19% primarily driven by the addition of the Q400 with the larger stage length.

Looking at our income statement we reported consolidated total operating revenue of $222 million which was up 8% year-over-year and our consolidated operating income was $20 million which was an increase of $5 million or 33% over our operating income in the third quarter 2007. Our operating margin during the quarter was 9%. Looking at each of our two subsidiaries which you will be able to see their independent results in our 10Q filing today, at Colgan we had an $8 million operating income and a 10.9% operating margin.

As Phil mentioned, this is a dramatic improvement from the results that Colgan had earlier in the year and also an improvement year-over-year at Colgan. The Q400 has a lot to do with this. The increase in our operations there, the investment we’ve made in that fleet is working for us. It’s been a great operating aircraft for us and for continental and we are getting to the point where we’re starting to realize the financial targets that we had for that component of our operations.

In the third quarter it was about 30% of our total block hours at Colgan so it is a bigger part of our operations there. In addition, the pro rate operation side of the business also improved from earlier in the year. Our RASM on our prorate operations, our revenue per available seat mile was up 9% year-over-year. That added about $4 million to net revenue on the prorate side of the business and that increase is due to the improved fair environment, also due to the changes in our essential air service subsidies that we announced as part of our turnaround plan and also changes in connect incentives and tied to fuel prices.

Fuel expense was also up year-over-year about $4 million. Our fuel price for the quarter was $3.79 per gallon. That is up 59% year-over-year. It’s relatively flat compared to the price in the second quarter and that’s because we have a little bit of a lag in the purchase price of our fuel. Through the way that we purchase it through our partners there’s a little bit of lag through the changes in fuel prices so we actually expect additional fuel declines in the fourth quarter, price declines based on what’s happened with underlying spot prices of fuel.

The quarter for Colgan also included an accrual of $1.1 million related to the lease return condition costs on the SAAB aircraft that we are returning and it also included a $1.4 million credit in Colgan’s maintenance costs and this relates to a maintenance accrual that we recorded earlier in the year that we recorded an error and we’ve reversed that out this quarter. So, the net effect of those two one-time items was a net increase of $0.01 on our EPS in the quarter. And, as Phil mentioned, the execution of our prorate turnaround plan is working very well at Colgan.

We do expect to be down to 34 SAAB aircraft for 2009. That is a change in the plan that we announced last quarter where we expected to be at 30 aircraft. The increase of four aircraft has to do with discussions we’re having with United to retain some flying in the United Express operations at Dulles airport. The way that we’re making this work is by modifying our prorate agreement with United to provide for an increase passenger connect incentive to make those additional operations sustainable.

We do expect to complete that modification to the agreement in the fourth quarter so we’ll have that in place. Now, our Pinnacle subsidiary, Pinnacle reported operating income of $12 million in the third quarter of ’08 and an operating margin of 8.1% and this is a decline year-over-year of operating income of about $3 million. There are two kind of key drivers here, really three key drivers related to Pinnacle’s operating income decline. The first has to do with our labor costs, as Phil mentioned we expected to fly more during the third quarter and so we are staffed at a level higher than we would normally be to support the capacity that we generated in the quarter.

In addition, we have the normal wage pressures increasing our wage rates, healthcare costs and salary and merit increases in our labor costs. On the maintenance side, our total maintenance cost at Pinnacle were only up 2% year-over-year. However, there are two offsetting things happening here, the costs that are based through to Northwest were actually slightly down year-over-year and the costs that we’re responsible for within our rate structure were up year-over-year.

A lot of that has to do with preparing for the winter operations and some modifications we’re making to the aircraft to modify some of the parts where we’ve had some reliability problems in the extreme cold temperatures. It’s an investment that we need to make and it will continue in the fourth quarter. We’ll continue to have some of those maintenance costs and we expect it to help us with our reliability over the winter but it is a cost that we incur that is not a pass through under our contract with Delta Northwest.

In addition, we absorbed approximately $750,000 of ownership costs in the third quarter related to our two CRJ900 aircraft that delivered in July but that have not yet gone in to service under our Delta Connection agreement. We are using those aircrafts as spares in our operation and to the extent that we use them in scheduled service in the fourth quarter which we expect to use it occasionally in the fourth quarter, we will receive some reimbursement from Delta on those ownership costs but they won’t go in to full service under the DCA until January of ’09.

Our consolidated net non-operating expense was $8.8 million for the quarter and that’s up about $10 million year-over-year and that is completely driven by the investments we’ve made in our new aircraft, our CRJ900 fleet and our Q400 fleet. And, as I mentioned, our net income for the quarter was $7.7 million as compared to $10.9 million of net income in the third quarter of ’07. Looking at cash flow in the balance sheet we ended the quarter with $64 million of consolidated unrestricted cash and cash equivalents and our cash provided by operating activities during the quarter was $14.7 million.

We used $5.8 million of cash in investing activities and this primarily relates to the net purchase price of our four aircraft that delivered during the quarter and also capital expenditures related to aircraft and technology at the companies. On the financing activity side we used $10.3 million in financing activities, $4.8 million of that was repayments of the pre-delivery payment facilities that we had related to the four aircraft that delivered during the quarter and the $5.5 million of that was regularly scheduled principal payments on our other debt obligations.

We did recently make a modification to our Citigroup credit facility. This was a facility that was put in place when the auction rate security market froze earlier this year and we’ve continued to have a good working relationships with Citigroup throughout this challenging time in the credit markets. The major banks have made some progress in dealing with the issue of the frozen ARS market but most of that progress has been aimed at smaller retail investors and smaller companies.

We do expect that the banks ultimately will reach settlements related to large investors like Pinnacle and that we will be treated similar if the auction rate securities market doesn’t open up. So, we do believe at some point that we will monetize our entire portfolio of auction rate securities. Until that happens, we have this facility with Citigroup and we have modified the facility to extend it out until November 2009 and we’ve also increased the size of the facility by $10 million and that $10 million can be used to repurchase or repay any of our existing indebtedness.

One comment about 2009 cash flow, we do expect strong cash flow driven by the new contracts that we have and the investments in our fleet and we’re currently expecting a tax refund to hit hopefully in the first quarter but perhaps the second quarter of 2009 in the neighborhood of $30 million. This relates to the 2008 tax year where again we have accelerated depreciation benefits and so we will generate a tax loss.

A comment about our convertible notes, Phil mentioned that earlier in the conversation and we do have $121 million par value of 3.25% convertible notes. Those notes have a put option in February 2010 where investors can put those notes back to the company at par and we are very focused on maintaining liquidity to meet this obligation if the capital markets remain close to regional airlines.

We expect a similar tax refund in early 2010 again generated by the accelerated depreciation benefits on our aircraft and we expect strong operating cash flow in our business in 2009. In addition to that, we have a lot of assets on our balance sheet. We have over $50 million par value of unencumbered auction rate securities, we have $50 million of spare engines and aircraft related parts, we have $100 million of equity in our brand new fleet of CRJ900s and Q400s and we have a lot of equity in these assets. We believe that we will be prepared for the repayment of this obligation in early 2010.

I’d like to talk a minute about capacity going forward. When we look at the fourth quarter of ’08 we do expect Pinnacle’s capacity to be relatively flat year-over-year, again driven by the decrease in the size of our 200 fleet but offset by the increase in the CRJ900 fleet inclusive of the Freedom aircraft that we’re now operating. On the Colgan side we expect block hours in the fourth quarter to be up approximately 18% to 20% versus 2007 and that is driven by the increase of the Q400 fleet there offset by the previously announced reductions in our prorate operations.

Looking at 2009 we expect Pinnacles capacity in terms of block hours to be relatively flat and we also expect Colgan’s capacity to be relatively flat in 2009. There’s an increase of Q400 operations of approximately 35% in ’09 but that is also offset by the decline in block hours related to our SAAB prorate flying.

One other item I wanted to mention before we opened it up to questions and that is a new accounting pronouncement that will affect Pinnacle in 2009. It is the FASB Staff Position and it relates to the accounting for convertible notes when the convertible notes can be settled in whole or in part with cash. This new FASB Staff Position requires us to separate the option value equity component of our notes from the debt component and to reflect the implicit unsecured borrowing rate that goes with that debt component in our interest expense.

The net effect of this new pronouncement will be that we would have shown a lower obligation on our balance sheet at the time of issuance of our convertible notes and then we would have accreted interest up to the par value of $121 million through the put date of 2010. While we’re still evaluating the assumptions that go in to this calculation, we think the impact of this could mean a significant increase in our interest expense next year by as much as $14 million.

Now, I want to reiterate this has absolutely no impact on our cash flow in 2009. This is simply a balance sheet adjustment related to this convertible accounting. Also, this pronouncement is retrospective so when we adopt this in 2009 we will restate prior years including 2008 to reflect this additional interest expense as well.

With that I’d like to turn the call back over for question and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bob Mcadoo – Avondale Partners, LLC.

Bob Mcadoo – Avondale Partners, LLC

You have a think called income tax receivable for $26,979,000 on your balance sheet, is that the refund that you’re talking about that you think you’ll get in early ’09?

Peter D. Hunt

That is, that’s a portion of it. We will record the remaining portion in the fourth quarter through our tax accrual in the fourth quarter but that’s exactly what that is Bob.

Bob Mcadoo – Avondale Partners, LLC

Could you walk us through what you’ve got in the way of capital expenditures on airplanes? Where are you relative to finishing up all your big aircraft program in terms of cash that’s required over the next period?

Peter D. Hunt

Well, there are five aircraft remaining to be delivered, CRJ900s and they will deliver in the first half of 2009. The net cash outflow associated with those aircrafts is approximately $19 million and that’s a combination of repayment of pre-delivery payment facilities and then the additional net unfinanced amount associated with those aircraft.

Bob Mcadoo – Avondale Partners, LLC

Skywest keeps ringing around and talking about how Delta is pushing on them to reduce the flying, reduce the number of hours they fly and they’re down to their minimums and then they talk about if they go below their minimums for two months then they get renegotiated. Where are you on any of that? Are you at your minimums, near the minimums? Do they have the ability to push you down below the minimums temporarily? How are your contracts with Delta structured versus what Skywest describes?

Peter D. Hunt

Well both of the contracts actually are structured in a way where our fixed costs are paid no matter what happens. Because of that there’s really an economic incentive for Delta to want to fly the aircraft. The marginal costs, the variable costs that they play to fly is not high. In my experience we’ve never had a period where either Delta or Northwest has asked us to lower the utilization significantly.

Even through the bankruptcy, that didn’t really happen. Having said all that, you also have to recognize with our CRJ200s we’ve never had the utilization levels that some of our competitors have had in the first place simply because of the way our network has worked with Northwest. But, when we look at what Northwest is asking us to do and we’re figuring our ’09 plan right now with Northwest Delta, or I guess just really Delta right now, we don’t expect any big changes to aircraft utilization and Delta’s not requested us to change our aircraft utilization.

Bob Mcadoo – Avondale Partners, LLC

Have you started dealing with the Delta planning people as opposed to the Northwest planning people? Or, were you dealing with Delta planning people for the last few months relative to the Northwest fleet?

Peter D. Hunt

Well, we’ve been dealing with both on both sides and we are talking with Delta Connection people with respect to our 200 operations as well as the 900 operations.

Bob Mcadoo – Avondale Partners, LLC

Then finally, the things you’re talking about with United in terms of the roots that you’ll potentially retain, are you cutting out any of the Dulles operation or what is it that you’re likely to end up with relative to what you have been flying in the last several months?

Peter D. Hunt

The Dulles operation has two types of flying. There are a number of small essential air service markets that we added when we moved them over from Pittsburg and all of those markets are markets we intended to continue to fly because we got the rebidding on the EAS. In addition, there are six commercial markets that are markets we’ve been flying for United since 2005 and those were really the ones where the economics of the markets have not really been working for us especially with the fuel price spikes.

Those are the markets that we’re looking at retaining and we had planned for four of those six to be eliminated but their markets that are important to United and to the extent that we can work out economics that work for us and United, we’ll keep flying them.

Bob Mcadoo – Avondale Partners, LLC

But those are discussions that are ongoing at this point, you haven’t really necessarily nailed it down?

Peter D. Hunt

We’ve got basic business terms where we’re working on the document and hope to have it completed and in place for the end of the year.

Operator

Our next question comes from Lily Ng – Merrill Lynch.

Lily Ng – Merrill Lynch

My first relates to reconciling something you [inaudible] versus sort of comments that you had on the call. You said on the Pinnacle side you had planned on operating at a higher level capacity for both Delta and Northwest during the third quarter and obviously you didn’t end up doing that. I was wondering are your partners just rejigging the schedule around very frequently or giving you very little lead time to figure out what you’re going to fly which obviously has an impact on you guys managing the costs.

If you could give some color no how that’s working out? And also, in relation to the block hour forecast that you’ve given for 2009, are those very much influx as well? Or, do you feel fairly comfortable that you’ll probably be able to achieve those block hours?

Peter D. Hunt

Well, with respect to current operations the only component where they’re subject to a lot of change has to do with these Freedom aircraft on because that was a last minute change so that is driving changes in destinations and changes in how we’re operating the CRJ900 aircraft for the next couple of months. The CRJ200 flying has been relatively stable but what we’ve actually experienced is that with I think reduced capacity nationwide, with good weather this summer, our flying has been so strong and our on-time performance has been so strong sometimes we actually get in a little early.

Our revenue is based on our actual block time not our scheduled block time so it’s kind of interesting, it’s a good bad guy in the sense that we’re running a great operation for Northwest and Delta but it does affect the level of revenue that we expected versus the level of costs that we planned for. Looking at ’09, the second part of your questions, it’s based on a plan and it’s a plan that we’ve developed with Delta and with Northwest planning people but obviously Delta will probably have a lot of changes throughout the year.

Now, while we may fly different places we would not expect our utilization to change significantly throughout the year. We do feel somewhat comfortable with our expectations on capacity in ’09.

Lily Ng – Merrill Lynch

My second question relates to all the changes at Colgan especially on the prorate side, after all the markets that you decide to get out and assuming you reached an agreement with United, Peter could you give us a sense on how the seasonality is going to change for just the prorate side of the Colgan business? Are you still going to see sort of operating losses in the first and fourth quarter and then much stronger in the second and third? Is that being smoothed out a little bit? Any color on that will be great?

Peter D. Hunt

Well, it will still be seasonal but I think that Colgan’s results will be less seasonal primarily because such a bigger component of it is driven by the Q400 which is not very seasonal. It’s a fairly stable component of our income stream. With respect to the rest of it, I think on the full year basis we don’t expect to see any losses. I can’t guarantee that the prorate operation will be profitable every quarter because the fourth quarter and first quarters will still see downturns in RASM and the second and third quarters will be our strong quarters on RASM.

But, we think that with the changes to our revenue stream, with the elimination of some bad performing routes and also with one nice surprise we hadn’t expected, moderation in fuel price we do think that barring huge swings in fuel next year, that 2009 should be a good year on the prorate side as well as the Q400 side.

Operator

Our next question comes from Analyst for Jamie Baker – J.P. Morgan.

Analyst for Jamie Baker – J.P. Morgan

I’d like to get your thoughts on the convertible notes that will be putable to you in early 2010. If credit remains tight and your cash is tight up in auction rate securities you mentioned the possibility of getting some cash from your spare parts business and selling of aircraft to cover the notes. With respect to aircraft which planes would you be selling if you have too?

Peter D. Hunt

Well, I would say of the aircraft that we own there’s a lot more interest in the Q400 than on [inaudible] than there is the CRJ900 and I think that’s primarily driven with the fact that within the US the Q400 is still a new product. It’s also from a cost perspective incredibly competitive compared to large regional jets. So, there is interest in those aircrafts.

Having said that, right now is not the time to go raise capital and that doesn’t mean in the next 15 months there won’t be windows, I would expect that there would be windows. The other thing that I would just reiterate is that we’re working very closely with Citigroup and they have been a good partner and they have been standing up with respect to this auction rate security situation and we do expect there to be some resolution at some point and hopefully well before we get to February 2010.

Operator

Our next question comes from Bob Mcadoo – Avondale Partners, LLC.

Bob Mcadoo – Avondale Partners, LLC

Just one more quickie, what are you paying for fuel these days?

Peter D. Hunt

I haven’t seen the final for October yet but it’s down significantly from the price that we had in the third quarter.

Bob Mcadoo – Avondale Partners, LLC

I’m trying to get a sense of if we go to spot do we add $0.15 or $0.20 to it or what kind of number? Didn’t you say that you end up buying it through your partners and there’s a delay or whatever?

Peter D. Hunt

Right. There’s about a one month lag in the change in prices. October prices reflect where prices were in September basically.

Bob Mcadoo – Avondale Partners, LLC

Then should we assume that $0.10 or $0.15 of add on to spot to get freight in to plane and all that kind of stuff done? Does that make sense to you? I mean, some guys have, because they go to particularly small cities they have some extraordinary kinds of in to plane charges and whatever. I don’t know where you’re buying fuel from a prorate point of view. Are you buying it all from Dulles or are you buying it out in little towns and getting stuck? I’m just curious as to how that might be?

Peter D. Hunt

Well, we buy it in both places but we try to buy as much as we can in the hubs. In Dulles and Houston, LaGuardia and Boston because to your point that’s a much better pricing is in those high volume airports. When you get to the smaller airports it tends to be one fuel provider and a monopoly price.

Bob Mcadoo – Avondale Partners, LLC

But there’s a one month lag?

Peter D. Hunt

About a one month lag and not in every component of it but in a good bit of what we’re buying the pricing changes kind of monthly.

Operator

Our next question comes from the line of Analyst for Dewayne Pfennigwerth – Raymond James

Analyst for Dewayne Pfennigwerth – Raymond James

Can you talk about the margin profile on your current Delta business and how that compares to the 7% to 9% pre-tax margin you’re expecting initially?

Peter D. Hunt

Well, the 7% to 9% pre-tax margin was our expectation over the life of the 10 year contract with the full complement of 16 aircraft operating. I’ll be quite candid, we’re not anywhere close to that number right now and a lot of that has to do with having two aircraft not in service in the third quarter but it also has to do with as we mentioned, being a little bit higher staffed in the third quarter expecting more operations than we actually had.

We do still believe when we get the full aircraft, the full compliment up and running that we should see margins like that over the life of the contract. They’re going to change from year-to-year depending on our maintenance costs. The ownership costs will go down over time as we pay off the debt associated with it but we do believe over the life that’s the range that we’ll be in.

Analyst for Dewayne Pfennigwerth – Raymond James

Then just as a follow, can you characterize what the pre-tax margin on the Colgan side was including the ownership costs on the Q400s?

Peter D. Hunt

Well, that’s actually not a number that we had broken out. We go down to the operating income line within our segment results in our 10Q and you will have all that information a little later today when we file our 10Q.

Operator

Our next question comes from [Arthur Calabartino] – John Hancock Advisory.

[Arthur Calabartino] – John Hancock Advisory

Just a few questions here, I got on the call a touch later here. In here you had a note – I mean, we know with Northwest and Delta there was no clause that got triggered, a material change where the contracts were invalidated. I’m just wondering do you have similar language with Continental if they do anything with anyone?

Peter D. Hunt

All of the contracts are very similar in that there are ramifications for Pinnacle merging with somebody else but there are not changes to the contract for any of the major carriers merging with someone else or being acquired. So our contract with Continental is we believe a long-term 10-year contract. Like all of our contracts it does have performance metrics in it but our performance has been great especially in the last quarter and there’s really nothing that we believe would be affected if Continental chose to merge with somebody.

[Arthur Calabartino] – John Hancock Advisory

On the auction rate preferred, as I’m looking at the balance sheet I’m looking under investments at $126 million that you’ve got in the long-term asset part of it. Is that all auction rate preferred or is part of that? I thought you used a $50 million PAR level type of number in the discussion you had.

Peter D. Hunt

It’s all auction rate securities. The PAR value’s $136 million but you may remember last quarter we took a charge to write those down to the $127 million number that you see today, and we borrowed $80 million against those securities with Citigroup. So that’s how I get to the $56 million.

[Arthur Calabartino] – John Hancock Advisory

It’s not something you could sell, right? I know there are guys that buy these things at a price.

Peter D. Hunt

Actually during the quarter we had some offers. They were not offers at levels that we thought were appropriate and we also want to see where things shake out in terms of settlements between the major banks and regulators. We want to make sure that we maximize what we can out of these auction rate securities, and if we end up in a position where we can sell them back at PAR to Citigroup, we want to make sure that we can take advantage of that.

[Arthur Calabartino] – John Hancock Advisory

This is like a AA, a real AA, AAA 30-year piece of paper that was constantly rolled?

Peter D. Hunt

That’s right. All of the ARS are still AAA except for a handful that had bond insurance, had wrappers, and those are all AA now.

[Arthur Calabartino] – John Hancock Advisory

And the interest expense. It was interesting in that ruling that with the component on the convert that you’re going to do. Is that debt interest expense number, because it’s going to be a bigger number, is that a tax deductible item we can use in this company and get a benefit from that?

Peter D. Hunt

That’s actually something that we’re looking at because we have up until now our accounting per tax on our convertible notes has followed our financial reporting accounting, and we are going to look at that to see if that is a tax deduction that we can carry back and potentially increase the refund. But I don’t know the answer to that yet.

Operator

Our next question comes from [Rowen Rongarage - Syrus Advisors].

[Rowen Rongarage - Syrus Advisors]

I just wanted to ask you to clarify a situation if you could with respect to CRJ200 leases. In the 10K under the Risk Factors it says that “if Northwest terminates the ASA for cause, it will have the right to terminate our regional jet aircraft leases covered in agreement.” Then later on footnote 9 on Leases it says, “Should the ASA with Northwest be terminated, those aircraft would be returned to Northwest.” Is there any conceivable scenario in which Delta cancels that contract and leaves you liable for those leases?

Philip H. Trenary

No. The leases are co-terminates with the ASA. So if the ASA is terminated, the leases terminate and I think that was proven out by the Northwest bankruptcy where 15 aircraft went away, basically were pulled out of our ASA with Northwest and we had no ongoing obligation with respect to those 15 aircraft when that happened.

[Rowen Rongarage - Syrus Advisors]

Would you agree then that capitalizing those leases as if they represented true liability for Pinnacle would be inappropriate?

Philip H. Trenary

Well, I do look at it differently than I do the aircraft that we purchased because we don’t have the long-term risk on those aircraft and on the residual value of those aircraft. I would agree with that.

[Rowen Rongarage - Syrus Advisors]

Separately, with respect to the [inaudible] liabilities, I’ve had some discussions over the book value of Pinnacle with some various investors and with respect to the deferred revenue and corresponding deferred tax assets that arose out of the Northwest bankruptcy claim, would you agree that it’s appropriate to back those out to calculate a real adjusted sort of book value of Pinnacle’s true liabilities?

Peter D. Hunt

Irrespective of whatever happens with our contract, that deferred revenue eventually will amortize into income. So it is not deferred revenue in the sense that we haven’t earned it yet; it is deferred revenue simply in that we are spreading it over the term of our contract. I guess I would agree with you to look at it differently from other liabilities on our books because it’s not a true liability.

[Rowen Rongarage - Syrus Advisors]

I don’t even know if you can give this guidance, but at the current price of oil all else being equal would you be able to project what sort of cash you think you could generate next year?

Peter D. Hunt

Not with a number that we would be comfortable presenting. We typically try to be very careful about making a lot of future projections. We think that’s what the analysts are for and we’ve got good analysts that cover us.

Operator

With no further questions in the queue, I’d like to turn the call back over to management for closing remarks.

Philip H. Trenary

Thanks a lot. We’ll close with that and we appreciate the efforts of the folks at Colgan and Pinnacle for really a strong operating performance, improved financial performance and we think fourth quarter is going to be a strong quarter for us and looking forward to a great 2009. Thank you very much for joining the call.

Operator

Thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pinnacle Airlines Corp. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts