Pinnacle Airlines: Risk-Reward Makes It Worth a Look

Who would want to own an airline with slumping business travel, a weakening consumer, and rising unemployment?

Warren Buffett fans know that he specifically singled out the airline industry as destroyer of capital in his last letter to Berkshire investors. There are several decades industry losses and numerous bankruptcies to support his claim. All that being said, recently, I have begun building a position in Pinnacle Airlines (PNCL) which is not a traditional airline and has a compelling valuation. Pinnacle Airlines currently trades at a less than 25% of tangible book value and less than 2X normalized free cash flow. At current prices the shares presents an attractive risk reward proposition for a growing airline that has significantly more stable earnings than a traditional airline.

COMPANY DESCRIPTION

Pinnacle Airlines is a regional jet operator with 135 jets and 56 turboprop aircraft flying over 1,000 flights per day serving 144 cities under the Northwest Link, Delta Express, Continental Express, and US Airways names. Pinnacle was spun out of Northwest Airlines in 2003 where it flew under the name Northwest Link. At the time of the spinoff, Northwest was Pinnacle’s only customer. Today, Northwest is still their largest customer and will account for approximately 62% of 2008 revenue and Delta, who acquired Northwest this year, will account for another 11%. Like other Regional airlines serving the “major” carriers, Pinnacle’s value proposition is its lower cost structure.

LOWER RISK AIRLINE

In 2008, 75% of Pinnacle’s revenue was generated under “Capacity Purchase Agreements”. This is a cost plus model where Pinnacle’s airline customers such as Delta/Northwest assume many of the risks that typically make airline earnings cyclical and volatile. Pinnacle does not assume fuel risk or consumer demand risk and is reimbursed for costs such as insurance and airport landing fees. Pinnacle is paid based on the flight, not the passenger, with fuel provided by their airline partner. For “Capacity Purchase” flights Pinnacle makes virtually the same profit per flight if oil is at $145 a barrel or at $45 barrel. Likewise, they make the same profit if the plane is full or empty. There are some incentives in their contracts for items that are in their sphere of control, such as on-time arrival and customer satisfaction. For 75% of Pinnacle’s business, they have a far more predictable revenue and expense structure than a traditional airline.

In 2007 Pinnacle purchased Colgan, which operates under “Revenue Pro-Rate” agreements with Continental (CAL), United Air Lines (UAUA), and US Airways Group (LCC). Colgan’s operations are focused primarily in the northeastern United States and in Texas. On “Revenue Pro-Rate” flights, Pinnacle assumes fuel risk and has the ability to set ticket prices. The earnings and operations are more like a traditional airline. For nine of the markets served by Colgan, there are guaranteed minimum payments from the Federal Government’s “ESA” program which guarantees Pinnacle minimum revenues to make serving smaller markets economically attractive.

POSITIVE RECENT DEVELOPMENTS

The airline industry has a long tradition of destroying investor capital. It is capital intensive and jet fuel is a large input that is volatile. In the past 6 months, Pinnacle’s stock price has declined 63%, however its operating earnings and earnings prospects have remained strong. Pinnacle is clearly in the penalty box because of its holding of Auction Rate Securities, debt that needs to be refinanced or paid off in 2010 and Delta threatening to cancel part of their contract in July. However, there are also a series of positive developments that do not appear to be priced into the stock.

• Strong December Numbers – Despite the weakening economy, Pinnacle’s planes are actually carrying more customers y/y. For the Coglan flights where the company is paid by the passenger rather than the flight, their load factors were up 31% in December.
• Better Routes – Pinnacle has renegotiated contracts, stopped flying out of Pittsburgh and has gotten better routes out of Dulles Washington , increasing traffic and reducing maintenance and overhead costs.
• Transition to larger more fuel efficient planes – Over the past year, Pinnacle has begun a transition to larger more fuel efficient planes. In particular, they are retiring their smallest eleven passenger planes from the Colgan acquisition and adding 74 seat Bombadier Q400 planes under the Continental Contract.
• Higher ESA reimbursements – In the fall of 2008 Pinnacle renegotiated higher ESA rates in nine markets from the Federal Government. Pinnacle threatened to pull out of eleven markets and got to rebid them with the Federal Government.
• Lower Fuel Costs/Healthier Partners – Pinnacle was profitable in the 3rd quarter of 2009 with an economy in recession and oil well over $100 per barrel. Of greatest concern was the economic viability of its largest customer, Delta Airlines (DAL).
• Recent Contract Expansions – This month, Continental Airlines agreed to expand their partnership with Pinnacle by adding 15 additional planes starting next year.
• Large Tax Refund – Pinnacle had a large one time gain from the sale of a claim related to Northwestern’s bankruptcy. The net result was a $100M tax bill. Under current tax law, the company is able to “claw back” their payment if they are able to generate a tax loss. Due to the structure of their new contracts and the planes which they are taking on their books, Pinnacle is able to generate $30M in tax refunds that should be received in 2008 and 2009. Almost $4 per share in cash will be returned to the company in the form of a tax refund in the next year and a half.

RISKS

Customer Concentration: The recent combination of Delta and Northwest was a merger of Pinnacle’s two largest customers. For 2009 approximately 73% of Pinnacle’s revenue will come from the combined company. The business is secured by a contract which expires in 2017. However, there are several situations where the contract can be renegotiated. In particular, a Delta bankruptcy, would provide Delta with the opportunity to renegotiate. In addition, this past summer when oil was $145 a barrel and Delta was bleeding cash, they threatened the cancellation of a portion of the contract for performance related issues. As oil prices declined, Delta and Pinnacle resolved the issue and even temporarily increased the number of planes Pinnacle flies for Delta. It is inescapable, that currently, the long term viability of Pinnacle Airlines is tied to the financial health of Delta Airlines. This risk can be largely hedged out through puts, credit default swaps on Delta debt, or shorting of Delta shares. In the short term, there is little correlation between the share prices of the two companies. In the past six months Delta has benefitted from the decline in oil prices and its shares are is up 26% while Pinnacle has declined 63%.

Convertible Notes Feb 2010 – Pinnacle has $121M in convertible notes due in February 2010. The company should have ample liquidity to meet this obligation in 2010. The company exited the last quarter with $68M in cash. In addition, there is $100M in equity in airplanes, a $30M tax refund due in 2009, $50M in spare engines and parts, $45M in unencumbered Auction Rate securities. In addition, they should be cash flow positive in 2009 and be due a similarly large tax refund in the coming year. However, in the current environment where debt coming due is a red flag, Pinnacle appears to be overly penalized for their debt. This seems to be the most intense area of focus for investors.

Pilots Contract – Pinnacle is currently operating without a pilots contract, they are in mediation with their union. The company has stated that their salaries are approximately 5% below the industry average for regional carriers. There is both the possibility of higher wages as well as a retroactive payment to the union. Bringing pilot salaries to their peer average will cost the company between $5M and $10M per year. A retroactive payment covering three years could be higher.

CATALYSTS

Resolution of ARS Holdings – Pinnacle Airlines holds $136M in Auction Rate Securities. These securities were purchased before the market seized up as the company reached for yield. Pinnacle has taken a $9M write down and moved the securities to the long term investments section of the balance sheet. Citigroup was their broker and has provided $80M line of credit against the securities, leaving $45M unencumbered and not written down, which is substantial given the $37M market capitalization of the company.

Stock Buyback - Pinnacle has the flexibility on their balance sheet to repurchase a substantial number of outstanding shares given the company trades at a discount to the cash on hand, and has significant assets in ARS, tax refunds due, spare parts, and equity in their planes.

Repurchase of Convertible Notes – Shares should react positively to any news of Pinnacle buying back their convertible notes in the open market. The notes have been trading at 30% below par. Pinnacle can both retire debt at 70% on the dollar, as well as reduce the size of the debt coming due. There is some precedent for this within the industry, as Jet Blue has recently been a purchaser of their debt.

Continued Earnings Growth, Revenue Growth, and Cash Generation - As Pinnacle continues to earn even in a weakening economy and build their cash reserves , their ability to repay their short term debt should diminish and provide less of an overhang on the stock.

Insider Buying – Due to the timing of their quarter ends, conference calls, earnings releases and audits, the window for insiders to purchase stock is currently closed and may not open again until April, however at current prices insider buying would serve as a strong signal to the market regarding the viability of the model.

INEXPENSIVE VALUATION

Pinnacle Airlines is inexpensive by any objective measure. For example, the company currently has a forward PE of 1.21. Pinnacle also trades at a substantial discount to tangible book value when the appropriate adjustments are made to the stated book value. The largest adjustment is the removal of their deferred revenue liability of $216M. This relates to the sale of Northwest Airlines bankruptcy claim that Pinnacle sold two years ago. There is no obligation to deliver any services associated with the deferred revenue. There is however a deferred tax asset associated with the revenue that should be eliminated as well to get a more precise picture of Pinnacle’s current financial health.

At first pass, Pinnacle appears to have weak free cash flow. The traditional calculation of Free Cash Flow that simply subtracts capital expenditures from operating cash flow yields negative $12M free cash flow. However, this calculation understates the free cash flow because it includes two one-time events, $20M in hedging payments related to the financing of aircraft acquired and approximately $15M of the capital expenditures were related to growth. On a normalized basis, the company would have generated over $1.25 per share in cash YTD, or a Free Cash yield in excess of 50%. The one metric Pinnacle trades at a premium to its regional jet peers of Republic and Sky is on an EV/EBITDAR basis where Pinnacle trades at 6.6 vs. 5.9 for Republic and 4.8 for Sky West. However 2/3 of the calculated EV for Pinnacle relates to capitalized leases which Pinnacle has no obligation for if Northwest cancels their contract, making it a difficult comparison with traditional airlines that retain the capital lease obligation.

Pinnacle should earn approximately $1.75 per share next year on approximately $900M in revenue. Since becoming a public company, Pinnacle has traded as high as 12X forward earnings with a historical mean of 5X. In the current environment of multiple compression and a decimated consumer, a lower multiple is appropriate. However, a forward multiple of 1.21 should rise as the financing cloud lifts off of Pinnacle. Applying a modest 3.5X forward multiple yields over a 200% return. Valuing the company based on its tangible book value would yield a return in excess of 300%. Given the stability of the capacity purchase agreement contracts and strong cash flows, at current prices Pinnacle presents an interesting risk reward, particularly for investors that hedge out the Delta risk via puts.

Disclosure: None

Comments

[Marcap:]

In these days of so much uncertainty, I would not touch any airline stock with a 10 foot poll, especially one with such a poor balance sheet, and insider trading sales. But regardless, air travel is down, fuel costs are up, maintenance costs are up, insurance costs are up, and bank financing is virtually non-existent. One bad move, slow period, or unexpected expense and its bankruptcy for sure. Thanks, but no thanks.

Feb 03 09:55 AM

[Rohan:]

Marcap, did you even read past the first paragraph?

Feb 03 02:16 PM

[ramper:]

I cannot believe an article was well researched when the companies are not spelled correctly. Pinnacle & Colgan fly for Northwest Airlink, Delta Connection, Continental Connection and US Airways Express. The author also mentions Northwestern? I am not sure who Northwestern is.

It is also important to mention that Delta/Northwest is in the process of merger integration. Delta has too many CRJ-200's which are Pinnacle's bread and butter. Also, Delta just began to award station handling contracts. Pinnacle is competing with a dozen other companies for these contacts.

Feb 03 03:37 PM

[Rohan:]

ramper - The CRJ 200 issue has been well known since the majors started talking about taking 50-seaters out over half a year ago. You should be asking whether that risk is reflected in the PRICE of the stock. Given the stock is trading at 25% of net tangible book value and (per the author) a 50% normalized FCF yield, what would you argue is reasonable?

Feb 03 04:53 PM

[biomedlives:]

Because Northwest had a history of hardball dealings with its regional operators (MAIR/Mesaba, in particular), it's good that Delta/Northwest does not provide 100% of Pinnacle's business. Nonetheless, I wouldn't be a buyer here.

Feb 04 09:45 AM

[I think not:]

biomedlives - if Northwest does indeed use hardball tactics with its regional partners, then I think you would be amazed at the outcome of Northwest's bankruptcy (PNCL's only client at the time) in 2005-07 which resulted in PNCL's continuing profitability, a $300+ million unsecured claim for PNCL, and a new, less restrictive ten year contract. Furthermore, perhaps if you did more research you might find out a few inconvenient facts for Delta/Northwest: 1) there are 9 years left on their CRJ-200 contract with PNCL which GUARANTEES that PNCL will be reimbursed all fixed costs (plus a margin) even if the CRJ-200s are grounded; 2) CRJ-200s can only be removed if they are replaced on a one-for-one basis by larger planes; 3) PNCL's performance is currently vastly exceeding operational minimums under the contract (a breach of these metrics is the ONLY realistic way the CPA could legally be cancelled); and 4) Delta/Northwest are the ones who would be on the HOOK for all the CRJ-200s leases if the CPA were to be cancelled (not PNCL) - judging by Delta's inability to fly 7 CRJ-900's from Freedom on short term notice (oh, they gave those to PNCL), I highly doubt Delta would be MORE profitable with 124 CRJ-200s siting on the tarmac for two+ years. I would agree with the author and Rohan that PNCL's low share price currently reflects irrational pessimism. Clearly it is possible (and likely) that Delta and PNCL agree to a mutually beneficial change in the CPA which removes some CRJ-200s from service over time - in this scenario, PNCL's stock is likely worth more than its net tangible book value of $10.

Feb 04 10:30 AM

[I think not:]

Marcap - I agree that the airline industry is a poor long-term investment. However, PNCL is a contract service provider which serves airlines. Thus, PNCL's clients purchase capacity at predetermined rates from PNCL regardless of the number of passengers on board or the amount of revenue collected from passengers.

Furthermore, PNCL gets reimbursed almost entirely by its clients for all of those increased costs you mentioned (their contracts are essentially cost-plus). Reduced air travel may slightly reduce the number of departures for which PNCL gets paid, but all the company's fixed costs (plus a margin) are reimbursed by its clients regardless of whether their planes fly or not.

Lastly, PNCL got a financing commitment for 85% of a $400+ million aircraft purchase three weeks ago. Apparently credit is still readily available to PNCL.

The real factors affecting the long-term value of PNCL's ongoing businesses include 1) the strength of their capacity purchase contracts in the context of U.S. contract law; 2) the likelihood of a Delta bankruptcy anytime soon; and 3) the costs and logistical hurdles to redeploying a large fleet of regional aircraft in short period of time. If PNCL's performance remains good, it is likely that the contracts are nearly unbreakable outside of bankruptcy. It seems unlikely Delta will be going bankrupt in the next few years given the company's $6 billion in cash, $1 billion receivable from American Express, and predictions for a 6%-8% operating profit margin for 2009. Lastly, the positive outcome for PNCL out of Northwest's 2005-07 bankruptcy validates the large switching costs and costly disruption to mainline connections if a fleet of 124 CRJ-200s were to be yanked quickly from PNCL without negotiation.


On Feb 03 09:55 AM Marcap wrote:

> In these days of so much uncertainty, I would not touch any airline
> stock with a 10 foot poll, especially one with such a poor balance
> sheet, and insider trading sales. But regardless, air travel is down,
> fuel costs are up, maintenance costs are up, insurance costs are
> up, and bank financing is virtually non-existent. One bad move, slow
> period, or unexpected expense and its bankruptcy for sure. Thanks,
> but no thanks.

Feb 04 08:10 PM

[biomedlives:]

Good for Pinnacle, then! I still maintain that it is better for a regional airline to fly routes for multiple large carriers rather than just one.


On Feb 04 10:30 AM I think not wrote:

> biomedlives - if Northwest does indeed use hardball tactics with
> its regional partners, then I think you would be amazed at the outcome
> of Northwest's bankruptcy (PNCL's only client at the time) in 2005-07
> which resulted in PNCL's continuing profitability, a $300+ million
> unsecured claim for PNCL, and a new, less restrictive ten year contract.
> Furthermore, perhaps if you did more research you might find out
> a few inconvenient facts for Delta/Northwest: 1) there are 9 years
> left on their CRJ-200 contract with PNCL which GUARANTEES that PNCL
> will be reimbursed all fixed costs (plus a margin) even if the CRJ-200s
> are grounded; 2) CRJ-200s can only be removed if they are replaced
> on a one-for-one basis by larger planes; 3) PNCL's performance is
> currently vastly exceeding operational minimums under the contract
> (a breach of these metrics is the ONLY realistic way the CPA could
> legally be cancelled); and 4) Delta/Northwest are the ones who would
> be on the HOOK for all the CRJ-200s leases if the CPA were to be
> cancelled (not PNCL) - judging by Delta's inability to fly 7 CRJ-900's
> from Freedom on short term notice (oh, they gave those to PNCL),
> I highly doubt Delta would be MORE profitable with 124 CRJ-200s siting
> on the tarmac for two+ years. I would agree with the author and Rohan
> that PNCL's low share price currently reflects irrational pessimism.
> Clearly it is possible (and likely) that Delta and PNCL agree to
> a mutually beneficial change in the CPA which removes some CRJ-200s
> from service over time - in this scenario, PNCL's stock is likely
> worth more than its net tangible book value of $10.

Feb 06 09:44 AM

[Michael Dem...:]

Great article and great comments. Thanks.

Feb 06 10:45 AM

[I think not:]

I agree with you, biomedlives: more customers are preferable to fewer. The flip side is that PNCL is Delta's number 2 regional service provider including internal subsidiaries (and its top 1-2 performing one). Thus, there would be tremendous disruption to Delta's mainline connections (and profitability) if there were a non-negotiated abrupt cancellation of the CRJ-200 CPA. If Delta was desperate to cut more 50-seat planes, it would be wiser to negotiate a phased transition with PNCL (like the one Delta just negotiated with SKYW). Similarly, why wouldn't Delta continue to retire more aircraft from its internally owned regionals rather than risk a $500+ million breach of contract lawsuit and still need to retire the 124 CRJ-200s PNCL flies? Delta clearly has no "bad blood" with PNCL (yet) because they recently awarded 7 CRJ-900s to PNCL for temporary flying.

PNCL's management team has worked to diversify but Delta set that back a few years by buying Northwest. It is still likely that Delta will represent less than 65% of revenues by 2011 and only a small number of planes (15 CRJ-900s at last count) which PNCL would have to deal with should all the Delta CPAs be cancelled successfully. Thus, PNCL would probably remain profitable even if Delta was no longer a client.

However, PNCL's stock price is trading in territory that is populated mostly by companies that are within months or quarters of bankruptcy. Although bankruptcy is always a potential outcome here, it seems highly unlikely that enough things could go wrong with PNCL's business over the next year for bankruptcy to be a reality. Cash flow would have to decline dramatically (i.e. Delta successfully canceling the CRJ-200 CPA), PNCL would need to be unable to tap its significant unencumbered assets (e.g. plane equity, spare parts, ARS, 2008/09 tax refunds) for liquidity, and PNCL would need to be unable to refinance or get a waiver for a portion of its convertible note coming due in 2010.

I think Marcap's observation of a lack of insider buying (or actual selling) is a very fair criticism for PNCL's management given the stock price's indication of a massive crisis in confidence. However, PNCL's management has handled every operational issue surprisingly well over the past few years - their only major mistake seems to have been investing excess cash in ARS rather than money market funds.

Feb 06 03:17 PM

[Finished:]

What is not mentioned here is the recent restructuring on Pinnacle management. The results of that restructure are going to be catastrophic to the performance of the airline. I expect to see all of the performance metrics such as A/0, D/0 and completion factor drop to levels that result in the performance default clauses to be put in to effect for both the NW and DL contracts. This will result in, at best payment penalties/fines allowed by the contracts, and at worst the cancellation of the contracts. Part of this restructure involves the management groups of the pilot and flight attendant groups. Needless to say, these are the two groups that the airline relies most heavily on to operate flights. Both of these groups are going to go through some changes that will put them in positions that will result in decreased performance and this is going to affect Pinnacle's bottom line and as I foresee it, the end of an airline.

Feb 06 09:59 PM

[I think not:]

It is laughable to contend that a 1% reduction in work force, some pilot demotions, and a restructuring will bring about the "end of the airline" (and erode more than $160 million in tangible book value). How about providing some facts or actual logic to back up your ludicrous assertion?

Here's a fact: Pinnacle's management team has been good enough to lead the company's exceptional employees to the best regional airline on time performance in 24 out of the last 35 months (airconsumer.ost.dot.go.../). Here's another fact: Pinnacle posted a 93%+ on time rating yesterday, today, and most of last week (flightstats.com). When is it we should expect the precipitous plunge in performance, again?

Clearly if the pilot's union is suicidal, they can cost themselves all a job to spite management and shareholders.


On Feb 06 09:59 PM User 352604 wrote:

> What is not mentioned here is the recent restructuring on Pinnacle
> management. The results of that restructure are going to be catastrophic
> to the performance of the airline. I expect to see all of the performance
> metrics such as A/0, D/0 and completion factor drop to levels that
> result in the performance default clauses to be put in to effect
> for both the NW and DL contracts. This will result in, at best payment
> penalties/fines allowed by the contracts, and at worst the cancellation
> of the contracts. Part of this restructure involves the management
> groups of the pilot and flight attendant groups. Needless to say,
> these are the two groups that the airline relies most heavily on
> to operate flights. Both of these groups are going to go through
> some changes that will put them in positions that will result in
> decreased performance and this is going to affect Pinnacle's bottom
> line and as I foresee it, the end of an airline.

Feb 07 02:09 PM

[I think not:]

Not that "station handling contracts" are material to PNCL's business, but it appears that PNCL is ADDING new business here:

"Atlantic Southeast Airlines, the dominant carrier at Montgomery Regional Airport, will lose some of its dominance later this year. Pinnacle is taking over ASA's ground duties. After taking bids, Delta Air Lines has awarded Pinnacle, formerly the regional carrier for Northwest Airlines on the Montgomery-to-Memphis route, the ground duties for its Montgomery services."

www.montgomeryadvertis...


On Feb 03 03:37 PM ramper wrote:

> I cannot believe an article was well researched when the companies
> are not spelled correctly. Pinnacle & Colgan fly for Northwest
> Airlink, Delta Connection, Continental Connection and US Airways
> Express. The author also mentions Northwestern? I am not sure who
> Northwestern is.
>
> It is also important to mention that Delta/Northwest is in the process
> of merger integration. Delta has too many CRJ-200's which are Pinnacle's
> bread and butter. Also, Delta just began to award station handling
> contracts. Pinnacle is competing with a dozen other companies for
> these contacts.

Feb 24 10:21 AM

[Marcap:]

When I wrote my comment back on Feb 3, the crux of which was to avoid investment in Pinnacle Airlines due to its very poor financial condition, Pinnacle shares were trading at just over $2.20. Today, just 1 month later, Pinnacle shares are trading at only $1.10 (50% of what they were then), due mostly as a result of the Buffalo crash.

The point is that financially unstable companies (such as Pinnacle) will rarely survive such major incidents. in all likelihood I suspect that Pinnacle may indeed file for bankruptcy after the fallout from that one crash hits home. Even a major airline takes a tremendous financial hit when people are killed and a plane is lost. Small airlines, very rarely if ever, survive such a catastrophe.

On Feb 04 08:10 PM I think not wrote:

> Marcap - I agree that the airline industry is a poor long-term investment.
> However, PNCL is a contract service provider which serves airlines.
> Thus, PNCL's clients purchase capacity at predetermined rates from
> PNCL regardless of the number of passengers on board or the amount
> of revenue collected from passengers.
>
> Furthermore, PNCL gets reimbursed almost entirely by its clients
> for all of those increased costs you mentioned (their contracts are
> essentially cost-plus). Reduced air travel may slightly reduce the
> number of departures for which PNCL gets paid, but all the company's
> fixed costs (plus a margin) are reimbursed by its clients regardless
> of whether their planes fly or not.
>
> Lastly, PNCL got a financing commitment for 85% of a $400+ million
> aircraft purchase three weeks ago. Apparently credit is still readily
> available to PNCL.

Mar 03 11:57 AM

[I think not:]

Marcap, you couldn't be more wrong. I don't think you have done your research. Would you care to source facts to back up your thesis that a crash leads to bankruptcy?

PNCL management reiterated clearly on the call that their insurance is the same coverage as Delta's ($1.75 billion coverage limit) and will cover all property damage, legal liabilities, defense costs, and administrative costs. They also said that Continental wants to replace the missing Q400 - hardly the intentions of a partner about to breach a contract. Management specifically stated that they see no material costs from the crash hitting their income statement or balance sheet and that 50% of the value of the plane had already been reimbursed by part of the insurance consortium. If you did some research, you would find that most recent crashes have been entirely covered by insurance (e.g. Comair, AA).

PNCL generated $13 million in free cash flow in 4Q08 ($19 million in CFO) - their seasonally weak quarter - up from $8 million in 3Q08 and $5 million in 2Q08. In addition, the Company saved themselves $3 million by buying back some of their convert in the open market. Furthermore, management indicated capital expenditures would likely be only $2-$3 million per quarter ex 2 new plane purchases for 2009 - far below the $5-$6 million in the latest quarter.

Cash inflows between 12/31/08 and 2/1510:

FCF for 4.5 quarters before convert put: $40 - $65 million (conservative)
April 2009 tax refund: $31 million
Borrowing against 2010 tax refund: $25 million
Borrowing against $50 million spare parts: $15 million
Additional Liquidity from ARS portfolio: $0 - $45 million

Total cash inflows: $111 - $181 million
Cash on hand (12/31/08): $70 million

Jan 09 Convert Buyback: $9 million ($12 million face value)
IRS Settlement: $15 million
2 Plane Purchases: $6 million
Debt Repayment: $34 million

Total Cash Outflows: $64 million

Cash on hand 2/15/2010: $117 - $187 million
Convertible Outstanding: $109 outstanding

As you can see, PNCL should easily be able to meet the convertible note and continue to generate nearly $3 per share in FCF.


On Mar 03 11:57 AM Marcap wrote:

> When I wrote my comment back on Feb 3, the crux of which was to avoid
> investment in Pinnacle Airlines due to its very poor financial condition,
> Pinnacle shares were trading at just over $2.20. Today, just 1 month
> later, Pinnacle shares are trading at only $1.10 (50% of what they
> were then), due mostly as a result of the Buffalo crash.
>
> The point is that financially unstable companies (such as Pinnacle)
> will rarely survive such major incidents. in all likelihood I suspect
> that Pinnacle may indeed file for bankruptcy after the fallout from
> that one crash hits home. Even a major airline takes a tremendous
> financial hit when people are killed and a plane is lost. Small airlines,
> very rarely if ever, survive such a catastrophe.
>
> On Feb 04 08:10 PM I think not wrote:

Mar 05 06:52 PM

[I think not:]

When you wrote your comment back on Feb 3rd, you were wrong.

PNCL is financially sound and generating record free cash flow ($20 million in the last quarter alone).

You should stick to commenting AFTER you have done thorough research.

Aug 09 01:12 AM

[I think not:]

PNCL has been the top performing on-time airline in the continental U.S. over the past year (only bested by Hawaiian)... we are still waiting for that "catastrophic" performance hit.

airconsumer.dot.gov/re...


On Feb 06 09:59 PM Finished wrote:

> What is not mentioned here is the recent restructuring on Pinnacle
> management. The results of that restructure are going to be catastrophic
> to the performance of the airline. I expect to see all of the performance
> metrics such as A/0, D/0 and completion factor drop to levels that
> result in the performance default clauses to be put in to effect
> for both the NW and DL contracts. This will result in, at best payment
> penalties/fines allowed by the contracts, and at worst the cancellation
> of the contracts. Part of this restructure involves the management
> groups of the pilot and flight attendant groups. Needless to say,
> these are the two groups that the airline relies most heavily on
> to operate flights. Both of these groups are going to go through
> some changes that will put them in positions that will result in
> decreased performance and this is going to affect Pinnacle's bottom
> line and as I foresee it, the end of an airline.

Aug 09 01:19 AM

[I think not:]

PNCL is clearly worth north of $15 per share.

Aug 30 12:04 AM