Pinnacle Airlines Corporation Q2 2009 Earnings Call Transcript

Aug. 7.09 | About: Pinnacle Airlines (PNCLQ)

Pinnacle Airlines Corporation (PNCL) Q2 2009 Earnings Call August 7, 2009 11:00 AM ET

Executives

Philip Trenary – President, Chief Executive Officer

Peter Hunt – Chief Financial Officer

Analysts

Duane Pfenningwerth – Raymond James

Bob Macadoo – Avondale Partners

Michael Linenberg – BAS-ML

[Elaine Decker – Jessop & Lamont]

[Lorhain Rangera – Cirius Advisors]

[Minoa Meta – Private Investor]

Operator

Welcome to the Q2 2009 Pinnacle Airlines Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Phil Trenary, President and Chief Executive Officer of Pinnacle Airlines Corporation.

Philip Trenary

On behalf of the 5,000 employees, I'd like to thank you for your interest in our company. This call is being presented live over the internet via webcast on 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. All of the company's beliefs and expectations reflecting such forward-looking statements are reasonable, but we can give no assurance 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 and Exchange Commission which are available to investors on our web site 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 were anticipated or projected.

The company does not intend to update these forward-looking statements before its next required filing with the Securities and Exchange Commission.

Again good morning and thank you for joining the second quarter earnings call. Last time we talked, we outlined several challenges we had for 2009 and some of our thoughts about how we're going to address those challenges. Chief among your concerns I believe is our ability to address liquidity to meet our February 2010 bond obligation.

We also want to get a new deal for our pilots, so it's very important to complete negotiations that's been underway for some time. It's also very important from a financial perspective to improve the financial performance of Colgan's pro rate business. On top of all this, as you know we didn’t do to the EPI 2008. We had to deal with flat revenues going into 2009, so we had to find a way to reduce costs to ensure we remain profitable.

We had to do all this and still run a great airline, and I'm very happy to report that thanks to all of our people across the board, we made tremendous progress on all these initiatives. I'd especially like to thank our leadership and finance and operations for the progress they made in a very difficult environment.

At this point, I'd like to turn it over to Peter Hunt, our Chief Financial Officer to share some of this with you.

Peter Hunt

Good morning everyone. Thanks very much for joining us today. This morning we did report consolidated net income of $6 million and fully diluted earnings per share of $0.33. Those results do include a couple of non recurring items that I'll mention in a minute in the quarter, and excluding those items, we had net income of $7.3 million for the quarter and fully diluted earnings per share of $0.41.

Of those two non recurring charges that we had, one related to the retirement of the remainder of our Beach 1900 fleet. We have two aircraft left; one that is leased, one that is owned, and we had some additional costs related to the return of the leased aircraft and related to preparing the owned aircraft for sale.

In addition, we took a look at the balance of our remaining Beach spare parts inventory and market conditions have changed and are different so we have marked those down to what we think is fair value for that pool of assets.

The second charge that we had relates to auction securities portfolio. We take a model based approach to value those securities each quarter and the results of the model based on changes in interest rates indicated that a handful of those securities had declined in value from the March quarter and that resulted in about a $1 million adjustment to those securities that we recorded as a charge in our net operating expenses.

Offsetting that $1 million is an approximately $700,000 gain that we had on some of the auction rate securities that were redeemed during the quarter. There were some partial redemptions at par by some of the issuers that caused us to record a gain.

So the net of that is about a $300,000 charge that's in our net non op, and again, excluding those two items as I mentioned, our total net income was $7.3 million for the quarter.

Looking at our capacity at Pinnacle Airlines, we flew 1.55 billion ASM's during the quarter which is a decrease of 5% over the ASM's in the second quarter of '08. Our block hours were down 5% year over year to 106,475 and our departures were actually up 1% at 68,826 departures.

Our stage length was down as a result of that to about 427 miles, and this is the first quarter where we're really starting to see a year over year decline in utilization. Our utilization was down about 8% at Pinnacle versus the second quarter of '08. Part of that is based on the lower stage length and the multiple departures throughout the day which gives us more down time on the ground.

Part of it is I think, the pressure that all regional's are feeling as the major's are tailoring their schedules to the demand environment that we're in this fall.

Pinnacle ended with 124 CRJ-200 aircraft and with 16 CRJ-900 aircraft. We did take delivery of the last two CRJ-900 aircraft into our fleet in April and so we're now operating the permanent fleet of 16 that we expect to operate long term.

Our Colgan subsidiary flew 272.1 million ASM's which was up just slightly year over year, up 1% and Colgan flew 34,233 block hours which was actually down 15% year over year. Colgan's departures were also down 13% to 27,684 and the declines in the block hours and departures primarily relate to the changes we made to Colgan's pro rate operations last fall where we removed quite a bit of capacity out of that part of our system.

Colgan ended the quarter with 14 Q-400 aircraft and 34 S-340 aircraft. As I mentioned, the Beech aircraft are all now out of service. We just have the last two aircraft remaining on the property one of which has now been returned in July and one of which is owned and will be available for sale.

Turning to our income statement, we reported consolidated total operating revenue of $211.3 million which was down just under $10 million year over year. Pinnacle Airlines revenue was essential flat at $154.5 million. It was down about $1.2 million versus the second quarter of '08. This is a decrease in our CRJ-200 revenue offset by additional CRJ-900 revenue, and that nets down to our $1.2 million change.

Colgan Air's revenue was $56.7 million and that was down $8.7 million or 13% year over year, and again the bulk of Colgan Air's decrease in revenue relates to those reductions in our pro rate operations.

Colgan's [rasim] in the pro rate operations was also down year over year. It was down 3% to $0.337. I think it is a testament to how we set up those pro rate operations, but even though the economy is struggling and most of the airline industry is experiencing double digit declines, because of the way we've structured those pro-rate operations, with the essential air service contracts and with the connect incentives from our partners, the economic impact that we see in our markets is a little bit more muted than it might be across the industry in general.

Our consolidated operating income excluding the non recurring charge I mentioned previously was $23.7 million and our margin was 11.2%. That is an increase of $8.6 million versus our operating income in the second quarter of '08. The biggest change there relates to fuel and the changes we made in the pro rate operations at Colgan.

Our average fuel price paid per gallon during the second quarter was $1.90. That was down $1.89 or basically 50% year over year from the price that we paid in 2008 and the impact of just this price change alone, was a $5.2 million decrease to our fuel costs and therefore increase in our operating income.

Pinnacle's operating income was also positively impacted by $1.3 million reduction in our ground handling and station and airport related costs. It is a one time item that we expect just based on a lot of changes that we've had in our business and our review of the costs that we have there and costs that we had accrued on our balance sheet, we would not expect that same level of lower airport related costs going forward in the future.

Our net interest expense was up $2.6 million from the second quarter of '08 to a total of $12.2 million and the increase there is primarily related to the new aircraft that we have versus the second quarter of last year.

I do want to point out that both the second quarter of '09 and the second quarter of '08 interest expense includes a non cash component of interest of approximately $2.5 million that relates to the new convertible note accounting requirements that we implemented at the beginning of the year, and that did require re-statement of prior periods as well. The net effect of that accounting change is a decrease to earnings per share of $0.09 this year and $0.08 in the second quarter of 2008.

Looking at cash flow, we did end the quarter with just over $94 million of unrestricted cash and cash equivalents. We had a very strong quarter in operating cash flow. We received the $32.8 million tax refund that we've talked about previously on other calls. That was received on April 1, and in addition, we had about $23.5 million of cash flow for core operations.

I do want to point out that our operating cash flow in any given quarter is very dependent on the timing of cash receipts from our partners. We're not like a typical airline that might be selling tickets every day and having revenue and cash come in every day from passenger.

Our cash comes from our partners at pre set intervals and if you go back and look at the first quarter our operating cash flow was just a little over $6 million, and here it is in the second quarter excluding that tax refund, over $23 million. So I do just want to caution that the increase this quarter is somewhat related to the timing of cash flows. It's not necessarily indicative of what we think our normal quarterly operating cash flow would be.

Our cash used in investing activities was $1.3 million in the quarter. We did have an increase on the investing side of $2.9 million for the partial redemption of auction rate securities that I mentioned earlier, and that's offset by about $2.5 million of an investment in the two CRJ-900's that delivered and then $1.7 million for other capital expenditures.

And then looking at financing activities, we used $18.5 million primarily for the repayment of debt. That included $4.9 million that we paid down on a bank line of credit that we had at Colgan Air that expired during the quarter, $4.2 million that repaid on the credit facility that's tied to our auction rate securities. That was a required payment when we had the redemption on the ARS to maintain the loan to par value requirements that are in that credit facility.

And then we had $9.4 million of just regular scheduled principal payments during the quarter and other activities.

We did have a couple of special things that I wanted to mention before we turn it over to Q&A. As Phil mentioned, we've completed a spare parts financing last week. It totaled $25 million. It is a three year term loan with variable rate. The initial rate on that loan is 8.5%. There is some required principal amortization required during the three year term, and essentially we will pay down to a bullet of about 70% that will be due at the end of year three.

The other important component of this financing is that it does contain minimum liquidity requirements that we must meet and they're primarily tested at the end of every month.

In addition, we still retain $128 million par amount of auction rate securities. It is valued at about $116 million on our balance sheet at June 30. We're still in discussions with the bank who sold us the ARS in the first place and we think that we can reach a settlement there relatively soon, within the next 30 days or so.

That settlement would involve selling our portfolio back to the bank, and we do think, it would be at a discount however. We would not receive par, but we do think that we would receive some additional capital above the $86 million that we had outstanding on our line of credit with that bank.

We would also retain some rights to-repurchase the securities in the future if the market become liquid, and we do think this is a very important step that we must accomplish to continue to prepare for the convertible note obligation that we have in February 2010.

Also, as Phil mentioned we did reach a tentative agreement with Alta for an amended pilot contact. That agreement does include a signing bonus. It would be a $10 million signing bonus if ratified and half of that would be paid this year before the end of 2009; half would be paid in the second quarter of 2010.

We've not accrued for that signing bonus, so that will be an expense that we will incur when the contract is ratified. The contract does also contain wage increases. We do expect our total cost to go up as a result of this, but we still do believe that we will have a cost structure that's in line with the rest of the industry, even with this new contract.

And with that, I'd like to turn it over to Phil for some closing remarks before Q&A.

Philip Trenary

Thanks Peter and again I'd like to offer thanks to all our people for doing a really nice job in the quarter. I want to make sure everyone knows our folks are completely focused on the basic blocking and tackling of running a safe, viable operation and if you look at Pinnacle and how its positioned for the future, this combination of a good operation, the stability that we have based on our long term contracts and what's going to be a much improved balance sheet, we believe Pinnacle is very well positioned to complete what we expect to see coming out in 2010 for the wave of 2011, 2012, and 2013 deliveries of the 50-C replacements.

So with that, I'll open it to any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Duane Pfenningwerth – Raymond James.

Duane Pfenningwerth – Raymond James

On the Pinnacle side, it looks like excluding the accrual that you reversed, it looks like your op margin was still about 10% and that looks like the highest you've had in awhile which is a little surprising given the decreased utilization that you referenced. Can you give us an idea of what drove profitability outside of the reversal that you called out and how should we think about margins in that business going forward?

Peter Hunt

I really have to give a lot of credit to operations leadership because when we started the year, we knew that margins would be very tight. We didn't receive the rate increase in our CRJ-200 ASA that we normally received. That put a lot of pressure on our income statement and we challenged our operations leadership to find some additional cost savings in places where they could.

The total we targeted for the year was $10 million. We did hit a component of that during the quarter of $2 million. That is offset by other cost pressures though. We continue to have cost pressure on our maintenance business, our maintenance side of the business with the CRJ-200's.

The other thing I guess looking forward is with the new pilot contract there will be an increase in salaries, wages and benefits. But the real strength I think this quarter relates to the fact that our operations group worked really hard to find those cost savings where they could, and we did realize some of that this quarter.

Duane Pfenningwerth – Raymond James

Were there any performance incentive payments in the quarter?

Peter Hunt

Nothing significant. Our CRJ-200 contract which is really the bulk of the business, its structured in a way where we, essentially there's a penalty not an incentive if we're below certain levels. We're not below those levels so there's nothing recorded as a penalty.

The CRJ-900 business does contain some incentives or some margin mark ups and we earn some of those but not necessarily any different than we've had in any other quarter, and they're not significantly large numbers in proportion to the total business.

Duane Pfenningwerth – Raymond James

The pilot deal and the impact to the margin profile of the Pinnacle business, I think you've mentioned in the past that your contracts don't necessarily have rate adjustments for higher wages and that you basically have to find incremental cost savings if you give your pilots a raise. So what sort of rate increase is embedded in that and what do you think the impact on Pinnacle's margin profile is?

Peter Hunt

With respect to the contract, the Alfa leadership is now working with our pilots to explain the contracts, and we really think that process needs to continue before we talk about a lot of specifics on the contract. We're looking at it on our side as well. We've mentioned in the past that our average rates are as much as 6% below industry average. We think that this takes us to in line with industry average, and so I'd really like to leave it at that on the contract.

I will say though that you're right. We will need to find some cost savings to help pay for some of this. In addition, when we look at 2010, it's our hope that instead of getting zero inflation increase on our contract like we got this year, that our rates actually will increase, that there will be some inflationary increase when we look at December versus December last year. So that will also offset some of the increase we'll absorb on the new pilot contract.

Duane Pfenningwerth – Raymond James

So you think 10% is the right way to think about that business in terms of margin profile.

Peter Hunt

It's actually below our target, but it is what we have achieved this quarter. As I mentioned, I think there will be an adjustment to that based on the new contract and we'll do our best to find ways to offset that either through the inflation increase in our revenue or through other changes we can make in our cost profile.

Operator

Your next question comes from Bob Macadoo – Avondale Partners.

Bob Macadoo – Avondale Partners

As we think about Colgan with the $6 million operating income, obviously you've made a bunch of changes in where it was predominantly pro rata a year or so ago, now it's predominantly contract. As we think about that $6.7 million operating income number, how much variability is there for seasonality?

I assume that the contract stuff isn't that seasonal because you're kind of flying what you fly, but the rest of it, have we gotten rid of some of the seasonality? How should we be thinking about that? What kind of help can you give us in terms of thinking about how bad Colgan can be in the dead of winter versus how much of the $6.7 million is good side of the pro rate business?

Peter Hunt

It's still very seasonal and I think if you look at the first quarter versus the second quarter you can see that because the year over year [rasim] changes are similar in the first quarter as they were in the second quarter. Fuel price was low in the first quarter just as it was in the second quarter, yet the second quarter was much stronger and most of that again, is because of the seasonality in the business.

We shift some flying to go to New England leisure markets in the summer, and that flying is traditionally very strong for us over the summer period. So I still think we'll see strong margins in the second and third quarter in Colgan, very similar to what we've recorded here in the second quarter of '09 and then pretty weak margins in the fourth quarter and the first quarter.

Bob Macadoo – Avondale Partners

With the new pro rate arrangements that you done and the shrinking of the business, are we to the point where the valley on the pro rate side is a black number or do we still think about going into the red every winter on that side of the Colgan business?

Peter Hunt

Let's just say on a full year basis, the pro rate operations we think are sustainable and positive to our bottom line, on a full year basis.

Bob Macadoo – Avondale Partners

You talked about the timing of the payments from Delta/Northwest and how that impacts your cash flow and you said this time you said was $23.5 million and last time was $6 million, so obviously the impression ought to be on an ongoing basis, it's somewhere between there. Was it that you got paid twice as much in the $23.5 million as you had? We should look at something half way in between, is it kind of an ongoing normalized if you weren't worrying about the end of the month was versus day of the week. Is that really what the issue is?

Peter Hunt

It definitely has to do with when payment dates fall. That's a big part of it. I think if you look at the six months and the total of that being roughly $30 million, it's kind of $15 million a quarter that is indicative of what we achieved in '08 most quarters. I think that is a little bit more indicative of a normalized quarter for us.

I would certainly hope that we'll continue to improve that number, but I do think if you look at the two quarters together, that's a little more indicative.

Bob Macadoo – Avondale Partners

Is it possible to get any kind of a sense of what your debt repayment schedule looks like for the next four, five, six quarters? Is that something we can got offline later?

Peter Hunt

We can. I think there will be some information in the Q which will be filed after this call, and to the extent that you want to ask me any questions, just let me know.

Operator

Your next question comes from Michael Linenberg – BAS-ML.

Michael Linenberg – BAS-ML

A couple of questions on the fleet, when we look at what you're going to take delivery of over the next couple of years, is it third quarter of '10 that you take one Q-400 and then you take another five in 4Q 2010? Is that it with respect to the delivery schedule or are there other airplanes coming in?

Peter Hunt

It's a total of 15 in the second tranche of Q-400's with Continental and they stretch from August of 2010 into April of 2011.

Michael Linenberg – BAS-ML

Are you only going to have 29? I thought you were going to take that additional odd airplane to get you up to 30.

Peter Hunt

I think we probably will, but we have not ordered an additional aircraft yet. We're still talking with Continental about the timing of that aircraft, when it should come and whether or not it makes sense. But I do believe we probably will go back up to 30 in total.

Michael Linenberg – BAS-ML

What does the CapEx look like out over the next, maybe second half of 2009, 2010, what should we anticipate with delivery deposits or whatever?

Peter Hunt

All delivery deposits for the rest of this year are financed so you won't see any showing up in our cash flow statements for the Q's and there's no aircraft to deliver. So our CapEx for the rest of this year will be relatively small, probably $2 million to $3 million in total CapEx.

In 2010, in the spring there is a component of our PDP's that we will pay that is not financed and then of course as the aircraft start to deliver, we'll have some significant payments related to the equity in the aircraft. We're expecting a similar structure where 85% of the purchase price of the aircraft will be financed and then 15% will be equity that we will contribute out of our cash flow. So the serious capital requirements start in the fall of next year.

Michael Linenberg – BAS-ML

When I think about the CIT loan, the $25 million, you basically said that there are some amortizing payments but 70% gets paid off in year three. When do those payments start and how much are they? When do you have to start paying down principal?

Peter Hunt

They're quarterly principal payments, so they'll start next quarter and for the first year of the loan it's a total of I think 7.5% that amortizes down, then years two and years three, I think it's 11.25% in each of those two years. So it's kind of spread out, but there is a quarterly amortization requirement.

Michael Linenberg – BAS-ML

You indicated that there's a minimum cash requirement. Can you tell us what that is? Is that out there?

Peter Hunt

It's not the same number every quarter. It does vary. It actually is a little bit lower in early2010 to give us a little bit of room in dealing with our convertible notes. I think that is a key term that both we and CIT would like to keep confidential though. But we do want to make it known that there is a liquidity requirement.

Michael Linenberg – BAS-ML

I just want to make sure I heard the numbers on the auction rate securities. I think you said it's on the balance sheet for $116 million. Is that right?

Peter Hunt

That's right.

Michael Linenberg – BAS-ML

And then you said par, did you say $128 million?

Peter Hunt

$128 million, yes.

Michael Linenberg – BAS-ML

And then the loan that is off, what you borrowed against, I think you said $86 million?

Peter Hunt

That's right, just under $86 million is still left on the loan.

Michael Linenberg – BAS-ML

So within the next couple of months, that entire batch of securities will be cleared out. Is that the game plan?

Peter Hunt

We hope so. Again, we're still in negotiations with the bank, but we're working towards a settlement and what we're working towards is one where they buy those securities back at some discount, but we're still negotiating the terms so I can't tell you exactly how much we'll net out of it, but we do expect something above the amount that we owe them on the credit facility.

Michael Linenberg – BAS-ML

You did say that to net above something on the credit facility, but I guess my question and the way I look at it is I'm curious are you actually going to receive something that is a discount to par, the $128 million or should we actually look at the $116 million with a view that it could potentially be a discount to that. How should we think about it?

Peter Hunt

The number is still under negotiation so I really can't tell you a lot other than to say that it's going to be a discount, but it is a number that we think is a reasonable approximation of that value and it's a number that we think will help us achieve our objectives with the convert.

The other key thing is that we would have some, we're talking about there being some kind of option to be able to re-purchase the securities if the market gets fixed in the future. So it's not just simply that we're selling it and taking that big loss and accepting it. There would be some ability to re-capture some upside if the government helps with this market or some liquidity is restored in the market somehow.

Operator

Your next question comes from [Elaine Decker – Jessop & Lamont]

[Elaine Decker – Jessop & Lamont]

You may have actually answered this one question before, and I just missed it. On the pilot contract, you mentioned that you haven't accrued any wage increases. Can you tell us the timing of the vote and so on so we know when to kind of build them into our model?

Peter Hunt

How the process works, the committee will look at this. They will put together their plan to go out and inform all the pilots what's in the contract. So you're probably looking at a range of 30 to 60 days on the entire process start to finish.

[Elaine Decker – Jessop & Lamont]

So that would be this quarter, so we should put some increase for accruing this quarter?

Peter Hunt

The new rates would start when the contract is ratified which could be this quarter, but in addition, we'll have that $10 million signing bonus, that one time cost. That will hit as soon as it's ratified, so if that's this quarter, we will record that as expense this quarter.

[Elaine Decker – Jessop & Lamont]

And that will show up on salaries, raises an benefit line? Is that it?

Peter Hunt

That's correct. And actually to be fair, we'll pay payroll tax on that too, so it will actually be a cost of about $10.8 million in total.

[Elaine Decker – Jessop & Lamont]

On the tax rate, I know last quarter there was a benefit. I'm not exactly sure what that was about, but can you just talk me through what the rate is that I should be accruing for going forward?

Peter Hunt

With where our income is and the amount of permanent differences, the dollar amount, and those permanent differences, really just a couple of things. One relates to per diems we pay to our crews and meals and entertainment that are disallowed under IRS regs, and then the other is related to the income on our auction rate securities.

The ETR does flip around a little bit, but I think if you look at this quarter we're around 36% to 36.5%, that should probably be a normalized ETR going forward. But it is somewhat dependant on levels of income in the quarter as compared to those permanent differences that we have.

[Elaine Decker – Jessop & Lamont]

Will the change over from Northwest to Delta have, has Delta given any indication they're anything other than still happy with your services and so on? Have any of your partners said anything about that?

Peter Hunt

We continue to perform well with them in the confines of the contracts. If you look at our performance, we're not near any penalty thresholds or anything that should be of a concern.

Operator

Your next question comes from [Lorhain Rangera – Cirius Advisors]

[Lorhain Rangera – Cirius Advisors]

Congratulations on a very good quarter. I'd like to give you a tip of the hat on pretty much everything you've talked about the last couple of years from pro rate, finances, to settling with the IRS, adding the Q400 business when really nobody thought you'd be able to do it, working with Alpha and getting these term loans, all that stuff. You guys deserve a lot of credit for that. I'm really impressed. The shareholders are very pleased to see that.

I'd just like to ask, with the term loan being collateralized by your spare parts, your account receivable I gather are untouched by that? Are they still unencumbered if you were to ever need to borrow against that? Would those still be available?

Peter Hunt

Accounts receivable are all still unencumbered. The small credit facility that Colgan had, the accounts receivable were encumbered, but as I mentioned that credit facility matured in the quarter and so it's been paid off. So all of our A/R's are unencumbered.

Also thank you very much for those comments. We appreciate it.

[Lorhain Rangera – Cirius Advisors]

It's kind of turning the table on the worries have been whether you would be able to meet the put obligation next February. Now my attention is turning to, you have the option to call them at par. Would you ever think about doing that? Assuming business goes as you, say you're able to actually get the settlement done with Citigroup, is that something you would consider in February if your finances were as planned between now and then?

Peter Hunt

Obviously it's dependent on where the stock price is in relation to that and where our cash is in relation to the obligation. Despite the fact that we have been very concerned about this obligation this year, over the last 12 months, the actual net cost of that financing over this five year period is going to turn out to be relatively low for us because essentially it has been a debt obligation with a low coupon.

So to the extent that the stock is below the strike price, which I think is $13.22, and we're just paying a 3.25% coupon, that still kind of looks like low cost debt to me. So it's really dependant on how the stock price trades in relation to that debt.

[Lorhain Rangera – Cirius Advisors]

I was just curious in terms of the cash outflow that would be required versus, suppose it's in that range and they end up not being put to use, how you would balance the thought of buying back or calling that and getting the potential dilution off the books versus potentially having a ton of extra cash available for the new debt for the new fleet that's going up for the next few years.

Peter Hunt

When you look at that debt in relation to our market cap, my long term goal would not be to have a convertible note that's that large. But going to zero would be a big change as well. So it's hard to answer the question because it really is very dependant on circumstances at the time. If the debt looks expensive from a dilution standpoint, and we have the capital, then we probably would call it or buy it back.

[Lorhain Rangera – Cirius Advisors]

Let's say Alpa is maybe off the table, then in that case, if you do have the cash available, would you consider starting a regular stock buy back?

Peter Hunt

We've done it in the past. We balance the trade offs of needing capital for growth and we want to make sure that that's profitable growth, that it hits our targets versus we don't want to sit on excess capital and so we would want to return that to stakeholders to the extent we have excess.

We don't have excess yet though. I wish that we did, but that would be a nice problem to have, but when we do, we'll look at it the same way we looked at it in 2007 when we did return some of that capital to shareholders.

Operator

Your next question comes from [Minoa Meta – Private Investor]

[Minoa Meta – Private Investor]

Did you buy back anymore converts in the open market?

Peter Hunt

We didn't buy back any more converts. The notes are very concentrated in the hands of just a few investors and there are really few trades that actually occur. So we monitor the market. We looked at it. We considered it.

Another important point is we wanted to make sure that we actually have the capital before we did any aggressive buying on the notes. That is something we'll continue to look at. If we can buy notes at a discount before February, and we still feel comfortable that we can meet the obligations of February, then we would definitely look at that again.

[Minoa Meta – Private Investor]

On the Air facility, you mentioned that you're working on a deal with Citigroup that's going to get you to above how much they've lend against your auction rate portfolio, so just doing the math, if you have $87 million borrowed against $128 million face, that's $0.67. So if you came up with a settlement anywhere close to that, that's a massive discount at face value.

If you came up with a settlement of $0.90 that would provide incremental liquidity of about $25 million. So just want to get a sense of when you mentioned you're in discussions to get some sort of resolution, what are we talking about?

Peter Hunt

As I mentioned, I don't want to go into specifics on the price while we're still negotiating, but I will say it would make zero sense for us to settle at the loan amount. We've already got that. So I don't think we would ever do that. We would never settle at the loan amount. We would want to settle at something that materially helped our cash position as we're preparing for the February 2010 put date.

[Minoa Meta – Private Investor]

So if you settle it close to $0.90 it's going to give you an incremental $25 million of liquidity going into that converts for example. Am I thinking about it properly?

Peter Hunt

That's an example. I don't know what the price will be we'll settle at, but you're correct on the math there.

[Minoa Meta – Private Investor]

Phil mentioned that Pinnacle's position for some RFP's going forward. Shareholders have gotten burned by some, we would have been better off if you had just distributed cash after the Northwest settlement and I understand a lot of things happened which are beyond your control, but how do you think about new business philosophically versus returning capital to shareholders or buying back stock? I just want to get a sense of what's your thought process behind before you put more CapEx into growing the business as opposed to returning cash to shareholders.

Peter Hunt

I will say the business is different than it was two years ago when we completed the two deals that we did with Continental and with Delta. Majors want regional's to take on more risk and so with more risk means we need to have a better return that comes with that. So I'll just say that we'll be very careful when we evaluate any new opportunities, especially in a world where those new opportunities may involve increased risk as well.

I still think the two deals we did are good deals for us, and they'll be something that we'll continue to grow from long term. But we do want to be careful about the risk that we take on with any new business.

[Minoa Meta – Private Investor]

On the liquidity bridge between now and the converts, can you just walk us through how much cash you have and the expected payments on the pilot contract? Just give us a big picture overview how you get from now to the maturity of the converts.

Peter Hunt

You can see what we ended the quarter with and as I mentioned, our quarter balance is always a high balance, especially at June 30 because of the timing of payments we got. So you have to factor in our working capital when you look at this on top of the cash that we have on our balance sheet at June 30.

We did complete this $25 million deal. We're hopeful we'll complete something on the auction rate securities that will add some cash. The pilot signing bonus you mentioned, $5 million of that if it's ratified will be paid out this year and $5 million will be paid out next spring that would affect that.

To get to February 2010 on top of the $109 million par amount you have to keep in mind that we do have working capital needs in the business and we do have liquidity requirements, particularly with this new spare parts deal. So all of those things do have to be factored in. There's more information and detail about those in our 10-Q that we're going to file. I think that might be able to help you.

Operator

There are no further questions. I would now like to turn the call over to Phil Trenary for closing remarks.

Philip Trenary

Thanks everyone for joining us on this call. One more round of thanks to our people for delivering a great quarter. We all really appreciate it. Thank you.

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!