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Executives

Philip H. Trenary - President and Chief Executive Officer

Peter D. Hunt - Vice President and Chief Financial Officer

Analysts

Duane Pfennigwerth - Raymond James

Bob Mcadoo - Avondale Partners LLC

Basili Alukos - Morningstar

Pinnacle Airlines Corp. (PNCL) Q4 2008 Earnings Call March 5, 2009 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the Pinnacle Airlines Corp. Fourth Quarter Earnings Conference Call. My name is Mary and I will be your coordinator 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 CEO of Pinnacle Airlines Corp. Please proceed.

Philip H. Trenary

Thank you, Mary. We typically start these with the forward-looking stuff, I have to read, the law is I just read, but likely it'll change today and I think it's important we acknowledge the tragedy of Flight 3407 on February 12. Several of the owners (ph) called, actually sent letters or called, I want to let you know how much we appreciate it and know that our hearts and our prayers continue be at the families and crew members as well those affected on the ground.

We'd also like to publicly thank all those who helped us out especially Continental Airlines, they had nothing to state but a strong support through this difficult time. So we really appreciate this. Also as far as the accident I can tell you at this time, we do not have any definite cause of the accident. The only thing we know, is we don't know what caused it and we continue to cooperate as a party to the investigation with the NTSP.

Now we'll kick it off. Welcome to the fourth quarter 2008 earnings conference call of Pinnacle Airlines Corp. On the 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 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 being correct.

Such statements are subject to certain risk, 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 vary materially from results that were anticipated or projected.

The company does not intend to update its forward-looking statements before its next proprietary filing with the Securities and Exchange Commission. We have lot of important accomplishments in the fourth quarter to discuss, and I'll turn it over to Peter here in just a moment and he'll brief you on negotiations with the IRS. Also something that's a priority and a focus for us now is the status of our convertible notes due 2010, what we've done to repurchase some of those notes and what we are trying do or what we are doing in the city to try to get them to do the right thing relative to our auction rate securities.

And in the fourth quarter Pinnacle took delivery of three more permanent CRJ 900s for Delta, the one aircraft that we own. In the fourth quarter and also continuing in to the first quarter, we have maintained very strong winter weather performance. And you may remember we had some measures with flights last winter, the flight upgrade program, and it was been very expensive. It has made a difference as far as the improved reliability on the fleet in winter whether operations.

One of the questions that we've had several times over the past few months especially in the fourth quarter is, the impact of the eroding economy on our utilization. The 50 seat jet aircraft we have not seen any erosion on our utilization of the 200s. It's flat to perhaps slightly up a little bit, continue to have very high levels of utilization on the CRJ 900 fleet.

At Colgan back at the end of 2007, we laid a plan out to turnaround the Colgan pro-rate business that is largely improved. Peter will discuss the improvement in Horizon (ph). We did vacate the markets that didn't work at all for us. We did successfully restructured the United business and have a profitable contract with them. The essential air service markets where we had to re-bid and are actually at least breaking even if not profitable in those markets and exited the unprofitable markets.

We continue to pull down the Beech 1900 fleet and the last of those aircraft are now being pulled out of the fleet. The reliability at Colgan continues to improve and it'd take delivery of all 15 of the Q400 aircraft for Continental.

Peter will speak more to the financial challenges of the fourth quarter and what we are looking at going into 2009. One of the things we talked about in the last call that continues to be an issue, is the excess pilots that we have. As you know, we ramped up last year and between the change in our Delta deliveries and attrition coming down, we have had a burden of carrying the extra pilots.

We do have, you are always going to have maintenance costs come up in any fleet but the maintenance cost we're incurring for the flap upgrades, modifying our aircraft with upgrade flap actuators and the engine plant, the GE engine fan blades are unusual and will continue to factor this in the fourth quarter and will continue to impact us in 2009.

The offset to that is, we do expect improved reliability and lower cost for 2010 and beyond.

We did have the ownership of some of the CRJ-900 aircraft not in service and one of the things again that Peter will talk about more in a moment is impact first going to have relative to our not receiving an increase in PPI for 2009 going forward.

We've had some questions on the Q400. I can tell you that, we are very confident in the airplane. It's not only how a capable aircraft, it's a very exciting aircraft. As you look at the future, it's a kind of airplane I'd say looks a lot more like the future than the past as far as the low carbon footprint, performance and efficiency that is just unavailable in a traditional jet aircraft. It's a very capable aircraft in all weather conditions including ice and we do expect to replace the aircraft that was lost in Buffalo. And we are talking to Continental about that and the timing really depends on what we can work out with Bombardier for the next generation interior.

Our focus going forward is to ensure that both of the airlines are operating in a safest manner possible. We are confident that we continue to provide services to our customers at very competitive cost. We are also very focused on ensuring that we meet our 2010 bond obligations.

It's very important that we recover shareholder value that has been eroded in recent months. We're confident we'll resume growth and improve profitability in 2010. And it's very important that we're in a position to take advantage of the bidding for fleet replacements and growth for the fleets it will come. The actual negotiations we expect will take place in 2010 for fleet replacements in 2011 through 2013.

So, at this time I'll turn this over to our Chief Financial Officer, Peter Hunt who'll review our financial results.

Peter D. Hunt

Thanks Phil. Before I jump into the fourth quarter results, I just wanted to reiterate Phil's comments and also express by sympathies that all those affected by Flight 3407, for the accident's had a very predominant impact on all of us here at Pinnacle Airlines Corp. and at Colgan Air.

Now looking at the fourth quarter 2008, we did report this morning net income of $4 million and earnings per share excluding special charges at $0.22. We did have a charge in the fourth quarter related our auction rate securities portfolio, it's a charge of $8.1 million pretax. We value our auction rate securities using models because the market is still very much frozen for these securities and those models are based on underlying interest rates and assumptions about the maturity of the receivable, collateral, backing the securities and the credits spreads of the maturities. And those rates have been very volatile over the last few months. And so that has caused us to revalue these securities.

We now carry our portfolio at the estimated fair value of $117 million which is a discount at par of approximately 12.5%. And including this charge, we reported a loss per share this morning of $0.21.

Our full year 2008 net-net income was 19.9 million excluding special charges. And in addition to charges associated with our auction rate securities impairment, we did record back in the second quarter, some charges related to Colgan. We wrote off the goodwill at Colgan and as well we recorded $3.5 million for the aircraft lease maintenance return costs where the southern Beech aircraft that we exited in the fall, as part of our pro-rate restructuring plan at Colgan.

For the operating statistics for the fourth quarter; Pinnacle Airlines had 111,000 block hours. Block hours were up 1% year-over-year. And Pinnacle had departures of 67,325 which was an increase of 2% year-over-year. We ended the quarter with our core fleet of 124 CRJ-200 aircraft. And we had 18 CRJ-900 aircraft in service at the end of the quarter. This is made up of 11 of our permanent operating aircraft and seven temporary aircraft that we were operating for Delta during the third and fourth quarters.

And just prior to year end, we did take delivery of three additional CRG-900's that were not in service at year end, but they will go into service or they did go into service earlier in 2009 this year.

Looking at capacity at Colgan Air; Colgan flew 36,262 block hours in the fourth quarter which was an increase of 12% year-over-year. And Colgan achieved 28,561 departures, which was an increase of 5% year-over-year. Colgan ended the year with fifteen Q400 aircraft, 34 Saab 340s and two Beech 1900 aircrafts and those two Beeches did come out of service out of our operating fleet in early 2009. And so we're down to our core fleet of Q400s and Saab 340s now at Colgan.

Turning to our fourth quarter financial results; we reported consolidated revenue of $217.5 million in the fourth quarter, which was an increase of 8% from the fourth quarter of 2007. And our consolidated operating income was $16.3 million, which was up 70% from the $9.5 million that we achieved in the fourth quarter of 2007. The real turnaround on operating income was that Colgan Air as Phil mentioned. Colgan reported operating income of $2.5 million and a margin of 4% which is still little lower than where we target.

But it was a significant improvement over the $4.8 million loss, operating loss that Colgan reported last year.

And some of the big contributors there Phil mentioned, the changes to our pro-rate business, our RASM was up 22% year-over-year in the pro-rate business. And the big components to that, is underlying fares were up as they have been through '08. But then in addition to that, the restructurings that we did with our essential air service contracts increased the revenue on our EAS markets. And we did restructure our pro-rate agreement with United Airlines that provided for a higher connect incentive to make some of the markets that we're flying for United out of Dallas continued to work for us. And those contributed to that strength in pro-rate business.

In addition, our fuel prices were down 11% year-over-year. That's the first quarter and I have been able to say that in '08. So, I am glad to see that and I hope that fuel prices continue to stay manageable and reasonable. And then of course the strength for new Q400 business also contributed positively to Colgan's operating results.

Pinnacle reported operating income of $13.8 million in the fourth quarter and a margin of 9% that was slightly down year-over-year. It was down about $400,000 from operating income in fourth quarter of 2007.

The new CRJ-900 business did contribute positively to our operating income. We did have a slight a negative impact from the carrying cost for two CRJ-900 aircraft that we took the of delivery in July, but that did not enter service under our Delta agreement until January. And so we did absorb some of the ownership costs associated with those aircraft in the third and fourth quarters. But that was offset by additional income from the seven temporary CRJ-900 aircraft that we are operating of behalf of Delta in the fourth quarter.

The big things against pulling down our operating income at Pinnacle as Phil mentioned, we do have extra crews. Our attrition slowed down substantially in 2008 and we do have more crews than we believe we need for the size fleet that we're operating now. We estimate that the drag on labor productivity could be as much as $5 million a year for the crews that we have. And we think as we look at '09, while attrition continues to be very low, attrition will continue to happen. And so throughout 2009, we expect productivity to start to creep back up again and we can get back to a normal level.

The other thing as Phil mentioned, we've had increase in the non-pasture (ph) maintenance costs associated with our CRJ-200 fleet. We have three very specific programs that we're working on, that we had in the third and fourth quarters and that are continuing here into the early part of the 2009. One is a replacement of engine blades that Phil mentioned. The bulk of the cost of replacing those blades has been borne by the manufacturer, but a component of that cost is being borne by Pinnacle.

We are also doing an upgrade program to our flap actuators. We expect this will improve reliability of the aircraft in the winter. You may recall from the previous winters that there have been some failures associated with flap actuators and that does cause an issue with reliability in extreme cold and we hope that this actuator program will reduce our cost in the future in terms of failed actuators and also increase reliability in those cold winter months.

And then our final program is that we are doing inspections earlier on horizontal stabilizer trim actuators, which is a component of the tail of the aircraft. This is a newly mandated decrease in the amount of time between checks and so that is causing some extra cost as well.

And then just in general, our maintenance costs; we've experienced a lot of inflation in the cost of repairing our erodables and in the cost of expendables. And that inflation has exceeded the increases that we receive in our contract with Delta and Northwest.

Our net non-operating expense for the fourth quarter excluding our ARS impairment charge was $9.1 million. That is of course driven by the, the increase there is driven by the interest associated with our new fleet of aircraft. And as I mentioned earlier, our net income for the fourth quarter excluding the charge was $4 million.

Looking at our cash flow; we ended the year with $69.5 million in total cash and cash equivalents. Cash provided by operating activities was $14.9 million. However there was one remaining hedge that we settled in the fourth quarter and again in this period of extreme interest rate volatilities, that last remaining hedge was an expensive settlement for us. Our actual underlying cash flow from regular operations was $18.8 million in the fourth quarter and then we had a $3.8 million cash outflow related to settling that final hedge.

All hedges from our interest rate program have now been settled. We don't have any open hedges associated with our debt financing.

Cash used by investing activities was little over $5 million and that's primarily related to the three CRJ-900 aircraft we took in late December, just prior to the end of the year as well as some CapEx associated with fleet maintenance.

Cash used in financing activities was $4.2 million. The bulk of this relates to repayment of the pre-delivery payment facilities on the three CRJ-900 aircraft, an ongoing regularly scheduled principal payments on our aircraft related debt offset by a draw of $10 million under our credit facility that is tied to our auction rate securities and I'll speak to that a little bit more in a minute.

There have been a few a financial events since year end that I wanted to mention. The first one that's have to do with that credit facility that we have tied to our auction rate securities portfolio. A few days ago we extended the maturity through early 2010, and as I mentioned we did drive down $10 million, an additional $10 million during the fourth quarter against those, against that facility, the purpose of which was to use that money to repurchase some of our convertible notes.

We have been very frustrated by the lack of progress on the part of all the major investment banks. We structured and sold auction rate securities, it's been a year now since that market froze up and there really hasn't been a solution for any of the companies that are in our situation with auction rate securities. And we have a good relationship with the bank who structured and sold the securities to us as evidenced by the credit facility that we have with them.

But we do continue to talk with them very often and very regularly about resolving this situation. Because even though we borrowed $90 million against our securities that still means $44 million of our regional investment is still locked up.

There is some positive news on liquidity as well. We did complete our '08 tax return. We have filed for $31 million tax refund which we expect to get in, probably in early April. And as we look forward in the 2010, we think our tax position will be very similar to 2009. We are expecting an approximately $30 million tax refund in early 2010 as well.

In addition, Phil mentioned our ongoing discussions with the IRS related to our tax audits for the years 2003 through 2005. We've made some significant progress there. I think that we will have an agreement very shortly with the IRS to close out all of those audits. And while we can't talk about the terms of that agreement until it's complete, we do think it'll be a very favorable outcome for us and we do think the outcome will be well within the amounts that we have reserved on our balance sheet.

And as I mentioned, we did draw down $10 million on our credit facility in December and then we used that money to repurchase some of our convertible notes that are outstanding. We repurchased $12 million par amount at a purchase price of approximately $9 million in January. And in addition to that liquidity from our tax refund, we are pursuing a spare parts financing, and as I mentioned we are pursuing resolution to capital that's tied up in our auction rate securities and we intend to use those financings to the extent that we get those completed to purchase additional notes in '09 and make certain that we are prepared from a cash standpoint for the put date on our convertible notes that comes in February 2010.

Also in January, we did sign an expansion of our Q400 relationship with Continental Airlines as Phil mentioned. It is for 15 aircraft they will deliver from August 2010 through April 2011 and the terms for these aircraft under the Continental CPA are very similar to our existing agreement. Each of these aircraft will operate for a term of 10 years from their delivery date. We'll receive the same rates related to our operating costs. The only exception being that the rate that covers the ownership cost of the aircraft will increase commensurately with the purchase price of the aircraft.

We have arranged for financing commitment for all 15 of these aircraft and the terms of that commitment is very similar to the debt financing that we have on our original order of 15 Q400s. And we've also arranged that all pre-delivery payments that we own the manufacturer through April 2010 have been financed. So we won't have any significant cash outflows associated with this aircraft order during 2009.

And then one comment about the accident and the Q400 aircraft that was lost in the accident. We are fully insured for this event. We're participants in a seven airline consortium that includes two major United States airlines, and together we jointly source aircraft tool and aviation liability insurance and every airline in the program is insured to the same level. So, we're fully insured for the cost of the aircraft where we believe we're fully insured for any related aviation liability associated with this accident.

The one thing I do want to mention is that we did have the debt associated with this aircraft hedge. It's one of the hedges that we closed out earlier in 2008. And the cost of that hedge would have amortized into our interest expense over the next 15 years as we paid off that debt. Now that we will pay that debt in early from the insurance proceeds, we will take a charge, a non-cash charge to write off the cost of that interest rate hedge. And that charge is approximately $1.5 million.

As Phil mentioned, we do expect to replace the aircraft so that we'll be back up to our core fleet of 15 Q400s. However, given the availability of Qs, it's probably not going to be replaced until sometime in 2010 and it is important to us in Continental also to make that aircraft the next-gen cabin interior. So that's what we're looking at. And as Phil mentioned, we're talking with Continental and Bombardier about the timing and availability of that replacement aircraft.

Looking forward to 2009; as Phil mentioned, we do have some challenges. We do expect to have some pressure on our operating and pretax margins. Our CRJ-200 ASA is of course the largest component of our business and changes within that contract and changes within the cost of that fleet do have a big impact on the company.

The revenue rates we received under that contract increased every year with the Producer's Price Index. And that increase goes into effect on January 1, of every year. And the increase is calculated by comparing the Producer's Price Index at the end of December with where the Index was at the end of December from the previous year. And if you compare the PPI between December '07 and December '08, it actually went down during that period.

So while we can't have a decrease in our rates, there is a floor of zero, we will not have an increase in our rates under our CRJ-200 contract for 2009. So that will pose a challenge for us because we do have some inflation in our underlying cost structure. And we'll continue to have the specific challenges that I mentioned earlier regarding labor productivity and maintenance costs in 2009. And then of course, once we complete our new pilot contract, we think that will increase our labor cost as well.

On the Colgan side, while the pro-rate business is performing much better than it was early in 2008 with the big decline in fuel and with the changes that we've made in that business. The revenue environment is getting weaker, and we've seen that January and February where our average fares are down in January and February as they are for everyone in the industry. So, there is a little of bit challenge there as well. And we are doing some things to offset those challenges and that pressure that we see on our operating margins.

The biggest thing is that we developed an internal $10 million initiative to reduce our cost and increase our operating income in 2009 and beyond. And this is a very lengthy detail list of initiatives that we come up with.

There's some examples; we have ... all of our senior leadership has agreed to forego pay increases in 2009. We've temporarily eliminated our 401K matching program for our non-pilot 401K program. So all non-pilots will not receive their 401K match this year. And we're aggressively bidding for additional ground handling activities in stations where we operate to the extend that we can win those contracts and increase our profit. And we have won some of those.

And our goal is to get that $10 million to offset the pressures that we have and make sure that we're on a good firm financial footing as we get into 2010 and beyond. Because as Phil mentioned, there will be a lot of opportunities in the 2011 through 2013 periods because a lot of 50-seat aircraft will likely come out of the major airlines networks during those periods and we want to be prepared to participate in the growth with 76-seat aircraft flying at that time.

One other note about 2009, I'd mentioned in the past about the new accounting for our convertible notes that is affective for the 2009 year and as a reminder the way that this new accounting works, it requires us to separate the option value of the equity component of our notes from the debt component. And then, on the balance of that debt component, we do have to reflect the implicit unsecured borrowing rate through our interest expense. It is a non-cash cost of but it is an increase to our cost that we'll see in 2009.

The net effect of all this is that we'll show a lower obligation on our balance sheet of going back to 2005, when we issued the convert and we'll accrete up that to that $121 million par amount through that February 2010 put date.

We do have a preliminary calculation of the impact of this on '09, and we think that it will increase interest expense by approximately $10 million in 2009, and again that is all on non-cash. And of course that amount will also be reduced by any of the convertible note repurchases that we may do in 2009, including the repurchase we just did in January. We've not affected that $10 million for that repurchase yet.

As I mentioned, this has absolutely no impact on our cash flow, no impact on our business but you will see that going forward in our 2009 income statement and it is a retrospective pronouncement. So we will restate prior years. So when you look back at our 2008 and '07 results going forward, we will restate those for the effect of this.

And with that operator, I'd like to turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Duane Pfennigwerth from Raymond James.

Duane Pfennigwerth - Raymond James

Hi and good morning. Thanks for taking the question. Peter, can you talk about maybe some more specifics regarding your plan to address the $109 million that remains on the convert during February and specifically the amounts that you think you can raise through spare parts and additional lines against your auction rates?

Peter Hunt

Sure. The specific plans are to make certain that we have enough capital for whatever balance remains in February 2010. We have bought some back. We're now down to $109 million par amount based on the $12 million that we just bought in January to the extent that we can find additional securities in '09 and our resources allow. We'll probably try to buy some more back in 2009. And where we'll obtain those capital is really from three sources.

The first is; the tax situation that we have and the refund that we're getting this year as well as the refund that we expect next year. It probably will be difficult to get next year's refund processed in time to have the actual refund in hand by February 15. But we do think there could be some opportunities for short-term financing to bridge to that tax refund. That is a $30 million refund we think we'll get next year.

Secondly as you mentioned, we are looking at a spare parts financing. We've got a couple of parties that we're talking to that that seemed very interested in that. I don't want to give a specific amount that I think that we'll get from that. But it will be, it will be enough that it will be meaningful in terms of the cash that we need to satisfy this obligation.

And then thirdly on the auction rate securities, we do have a little over $40 million still tied up as it relates to our original investment. I don't think that we'll be able to get all that $40 million back this year, but I think that we will be able to get a portion of that back as we work through auctions with Citibank, with Citigroup.

So when I look at those things together, we do, as we look out at 2010, we do think that those things will be a significant arrow in our quiver as we're dealing with the obligation that we owe in February 2010.

Duane Pfennigwerth - Raymond James

Okay thanks. On the tax settlement that you mentioned, how much have you reserved and I assume there hasn't been any cash payment yet?

Peter Hunt

There has not been any cash payment, won't be until the settlement's completely finalized, which I think could happen in the next 30 to 45 days, pretty helpful. The amount that we have reserved on our books is a little over $16 million today and as I mentioned I think that we will be inside of that number when we settle. We are feeling pretty positive about where these is going.

Duane Pfennigwerth - Raymond James

Okay. And then lastly on the pilot front, do you feel like you have excess pilots at this point and if you do, do you have the ability to furlough?

Peter Hunt

Well, we have looked at this and we do have excess pilots. In terms of furloughing, the things that we have to take into account are, if you furlough now, there will still be attrition and then at some point later in the year, we would have to go back rehire and we'd have training cost. So the savings that we get from furloughing now would be offset by accelerating training cost back into 2009. So there's a bit of a trade-off there.

And at this point we think the right answer is, not to furlough. One thing we have done with our pilots is what we call a displacement, where we've downgraded some of the pilots from Captain to First Officer, and that does help to some degree on the cost that we have from having this highlight bubble that we've got right now.

Duane Pfennigwerth - Raymond James

Thanks Peter.

Operator

Your next question comes from the line of Bob Mcadoo from Avondale Partners.

Bob Mcadoo - Avondale Partners LLC

Hi guys. What is Colgan's fuel now versus what you paid in the fourth quarter? How much, has it come down and can you tell us how we should be thinking about it as we look at like New York spot fuel or whatever as compared to what you guys in the paying there for the pro-rate?

Peter Hunt

Though, we end up with a little bit of lag because we buy the fuel through our partners and the process that we have in place with them, we don't get immediate stock prices. It's delayed usually by a few weeks. I don't have an exact number for where fuel price is right now Bob but I can tell you that it is lower than the fourth quarter. When we looked at our January results and as I mentioned, the revenue side was not as good as we had hoped. The fuel side was much better than we had hoped.

So, it's definitely an improvement and it's definitely helping our results as we get into the early part of '09 here.

Bob Mcadoo - Avondale Partners LLC

I mean you show a two handle on the front of the fuel price if I remember for registering, right? I mean when you look at what spot prices are now, it's like low $1 to $1.20, $1.30 for spot and then obviously you have got taxes and transportation and whatever, is it a big number difference?

Peter Hunt

Well that's right, we... it was 2.41 in the fourth quarter of '08. It is, again...

Bob Mcadoo - Avondale Partners LLC

If you go out and buy it, the spot price is like $1.20. And I'm trying to figure out how much ... I mean and I understand buying it in small quantities and in miscellaneous places, sometimes you don't get some of those kinds of prices obviously...

Peter Hunt

You don't get those prices...

Bob Mcadoo - Avondale Partners LLC

But I am just trying to figure out how much difference...

Peter Hunt

Right, you don't get those prices and you have inter plane fees that also factor into our fuel costs. But the cost of, basically the distribution the cost of fuel are coming at the fuel in the aircraft.

Bob Mcadoo - Avondale Partners LLC

Right.

Peter Hunt

So there is absolute ... there's a premium above stock prices Bob, but it is where our costs are now, I'll just again because I don't have the specific number in front of me, I'll just tell you that they are meaningfully lower than where they were in the fourth quarter, but they are not spot prices.

Bob Mcadoo - Avondale Partners LLC

No, I understand they are not spot. I mean can we take something to take a look at what the average spot was in the fourth quarter and compare that to your 2.40 and look at that kind of a spread and make that kind of assumption going forward? Is that a reasonable way to think about it?

Peter Hunt

Yeah I think it's fairly consistent.

Bob Mcadoo - Avondale Partners LLC

Okay. On maintenance versus September you had like, you looked like $20 million consolidated up to $26 million. Is that the kind of the...that $6 million bump, is that the kind of bump we should be expecting and is that something last another quarter, another two or three quarters? I think you say it's going to go up always. What should we be thinking about as you put a model together?

Peter Hunt

I think that the specific programs that we have which is probably half of that increase, will last for a couple more quarters.

Bob Mcadoo - Avondale Partners LLC

Okay.

Peter Hunt

The rest of it, I guess just as you've got, there are several offsetting things here on the Pinnacle side. You've got just the underlying cost pressure on the non-reimbursable costs. And I do expect that to continue. On the Colgan side, we had high maintenance cost on the Saabs throughout 2008. We had three heavy check lines going into 2008. We did a lot of heavy maintenance and we do expect that to comedown in 2009 offsetting that will be the maintenance on the Q400 will start to grow in 2009.

We are looking at doing a maintenance cost per hour contract for the engines. We haven't signed that yet. But when we do, it could very well be that some of those costs start to show up in 2009 as well. So on the Colgan side, I guess I see some relief on the Saabs but some potential to offset that with additional Q cost.

Bob Mcadoo - Avondale Partners LLC

Okay. The other thing is that the ground handling number seems to bounce around between $23 million a quarter, $21 million back to 23. What is ground handling cost and why would it be bumping up and down?

Peter Hunt

The biggest thing there is the icing. So in the winter times, you are always going to see big increases for the icing.

Bob Mcadoo - Avondale Partners LLC

Okay.

Peter Hunt

With respect to our CRJ contract that's passed through. So thus the icing costs are a good thing. On the pro-rate side our business, that's part of why the economics deteriorate in the winter time.

Bob Mcadoo - Avondale Partners LLC

I see, if there is anything else. The restatements that you talk about related to the new accounting for the convert, is that something that will be with when you file the 10-K. When is all this is likely to be available for us?

Peter Hunt

It won't be with the 10-K. We will...that the first quarter Q will show '08 and '09 with the restatement and we would likely in the Q disclose information about prior years as well.

Bob Mcadoo - Avondale Partners LLC

Okay

Peter Hunt

To the extent that we have available before then, I'll see if there is a way that we can make that public. We're still finalizing it. And I do think it will be in that range of $10 million for 2009 that I mentioned.

Bob Mcadoo - Avondale Partners LLC

Okay. So ... and that will be in the March quarter actual results.

Peter Hunt

Yes.

Bob Mcadoo - Avondale Partners LLC

And if it shows up as just interest will you break it out as other interest or separating interest or just it will just be kind of in the fold?

Peter Hunt

well, in the income statement itself that won't be broken out.

Bob Mcadoo - Avondale Partners LLC

Okay.

Peter Hunt

But in the footnotes and in the SG&A we will absolutely break it out.

Bob Mcadoo - Avondale Partners LLC

Okay. And then the final thing is when you have ... you said that for the 2010, 2011 airplanes, you've arranged basically the same kind of financing. Is that mean if you have to come up with the same general amount of cash in terms of your equity contribution towards the ownership of those airplanes?

Peter Hunt

Well, we will and I guess one thing I should have mentioned is that from a tax standpoint the debt financing was significantly better for us with the first aircraft. We've used up a lot of that tax capacity with those first aircraft. So, as we look at the 2010 and 2011 deliveries, the leasing options will look a lot more attractive to us and...

Bob Mcadoo - Avondale Partners LLC

So if you say the financing that you've arranged then becomes a...is there as a back up if you want to use it but you are not obligated to do it that, or you could take another route?

Peter Hunt

That's right, that's right. We are not obligated to do it and we are going to look at leasing alternatives to help to fray that upfront cost that we have to put in.

Bob Mcadoo - Avondale Partners LLC

Got it, all right thanks.

Peter Hunt

Thank you.

Operator

Thank you. (Operator Instructions). Your next question comes from Garrett Wilson, Serus (ph) LLC Advisors

Unidentified Analyst

Hi guys. Thanks for taking my questions. What affect will the tragic Buffalo crash have on your cash flow in terms of the administrative cost and your Colgan contract for next 12 months?

Peter Hunt

I think very little here. There will be some timing difference between when we have cost associated with dealing with the accident and when insurance proceeds would come in. There are obviously, they were cost associated with assisting the families at the time of the accident and with our team that went up there to help with the situation. And, so there is a little bit of a timing difference but all of those costs we think are insured.

So I don't see any material cost that will hit our income statement. And I don't think there will be any material impact to our cash flow either. The aircraft hull, already about 50% of the insurance proceeds are in. The insurance is all through a syndicate and so each piece of the syndicate has to pay their portion. And many of them have already done that and that money is just going to a trust that will then pay off the debt and then also reimburses our equity in the aircraft.

So, I don't think there will be a significant impact to our cash flow. We will only operate 14 aircraft instead of 15 aircraft for the next year until we have a replacement. So there will be a minor change to our profitability associated with that. But the biggest piece of our underlying costs in the contract is that ownership cost. And that will be taken care of by the insurance proceeds from the hull value.

Unidentified Analyst

Okay. And you don't believe that cost price is a material breach under your Continental contract?

Peter Hunt

No, we don't at all.

Philip Trenary

WE don't at all.

Unidentified Analyst

Okay and in terms of your early 2010 maturity of your auction rate security borrowing now, is there any more clarity on what early means? Is it beyond your convert put date?

Peter Hunt

We really would like to see resolution of that in the next few months and the biggest reason being that we want that capital. We want to be able to use that to offset the put obligation that we have in 2010. But a lot of that timing is really based on what we can do with Citigroup and what's going on the larger context of all of the banks who have obligations to their customers who have these auction rate securities.

Unidentified Analyst

Okay. Now you guys have done a fantastic job turning around Colgan and with the operations. But one question I have is, given the distressed stock price which suggests a high probability you're going to make at Colgan foot, why hasn't senior management partner shares throughout the market that will illustrate their confidence in your future?

Peter Hunt

Well in the last...we have trading index at the most companies and our window was closed throughout most of the fourth quarter because we were working on Q400 deal. The window remains closed after the end of the quarter until we release our results, as the results are not public yet. The window does open going forward and I certainly can't speak for all of our executives. So we'll see what people do. I personally believe the stock is undervalued. I think Phil shares that belief as well.

Unidentified Analyst

Okay. Thanks. That's all I got.

Operator

Your next question comes from the line of Basili Alukos of Morningstar.

Basili Alukos - Morningstar

Hi guys. Good morning. Thank you for taking my call. I want to say my thoughts and prayers go out to the families that were affected by the crash. Just kind of going forward, what do you expect capital expenditures to be for 2009? And kind of tied into that, if you could help me kind of understand the accounting in the investing section of cash flows for 2008. It seems to me that there must have been some other activity that's not listed because obviously keeping any increase dramatically you get there is actually cash received and investing activities?

Peter Hunt

Well, our PP&E (ph) did increase dramatically but that is from all of the aircraft that we took in 2008. And all of those ... the only piece that shows up in our cash flow statement is the non-finance portion, which is why you don't see the gross amounts in the cash flow. 85% of the purchase price of all of the aircraft we took in 2008 is financed and that money just goes directly from the lender to the manufacturer, which is why you don't see it there.

You looking at 2009, we think our normal CapEx that we need to maintain the two businesses, Colgan and Pinnacle, is in the neighborhood of $9 million to $10 million a year. I think in '09 we are planning to tighten our belt, because we do have the obligations of our convert in 2010. So, I expect that number to be less than that in '09. The one thing that we will have in addition to that normal maintenance CapEx, is that there are two additional CRJ-900 aircraft to deliver still.

Those will deliver in April. And so we will have some un-financed portion of those aircraft as well that we'll hit in 2009.

Basili Alukos - Morningstar

Okay. And kind of a follow-up on the auction rate securities, I know earlier some of the investment banks said they were willing to make some smaller investors hold on their purchases. Obviously, I would imagine Pinnacle's kind of a larger client. They might not necessarily fall in that bucket. But is there any market, I mean if Pinnacle ever decide today, to sell those auction rate securities, is there a bid out there, someone willing to purchasing? Or is it a question of the company intends to hold it and therefore doesn't want to take the loss?

Peter Hunt

There is not an active secondary market for these securities. There are some bottom feeders out there. There are some folks who want to look to buy these at a very significant discount and those kinds of discounts are not attractive to us at this point. If there were a more active secondary market, we probably would be looking at going ahead and monetizing some of these securities.

But the underlying belief that we have here too is that banks who structured and sold these have some culpability in the sell situation and they are the ones that really need to stand up and help companies like Pinnacle resolve it.

Basili Alukos - Morningstar

I would agree with you on that one but at least politics aside, as far as amount of that spend borrowed against that, if I recall I think, could help me recall the numbers, or how much?

Peter Hunt

Yeah, we'd now because with the $10 million that we drew in December, we now borrowed $90 million against the par amount of $144 million...$134 million, I am sorry. So we have $44 million of our original investment that's still just locked up.

Basili Alukos - Morningstar

Okay, alright. I think that's all. Thanks for the help.

Peter Hunt

Thank you.

Operator

Thank you. There are no other questions at this time. I would like to turn the call over to Phil Trenary for closing remark.

Philip Trenary

Thank you and thanks to all you for joining us today. I'd just like to close by saying that our people at Colgan and Pinnacle are committed to running great airline. Looking forward, we have the right fleets to grow. We have long-term contracts. We have this growth still coming upon on the horizon and our firm is to increase our shareholder value for the long-term.

Thank you very much.

Operator

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.

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Source: Pinnacle Airlines Q4 2008 Earnings Call Transcript
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