Pinnacle Airlines Corp. Q1 2010 Earnings Call Transcript

May. 4.10 | About: Pinnacle Airlines (PNCLQ)

Pinnacle Airlines Corp. (PNCL) Q1 2010 Earnings Call May 4, 2010 3:00 PM ET

Executives

Philip Trenary - President and CEO

Peter Hunt - VP and CFO

Brian Hunt - VP and General Counsel

Analysts

Duane Pfennigwerth - Raymond James

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2010 Pinnacle Airlines Corporation Earnings Call. My name is Regina and I will be your operator today. (Operator Instructions).

I would now like to turn the conference over to your host for today, Brian Hunt, Vice President and Chief Legal Counsel, of Pinnacle Airlines Corporation. Mr. Hunt, you may proceed.

Brian Hunt

Thank you. Good afternoon everyone and welcome to the first quarter 2010 earnings conference call of Pinnacle Airlines Corp. On behalf of the employees of Pinnacle Airlines 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 statements are reasonable, it can give no assurance that such expectations will prove to have been correct.

Such statements are subject to certain risks, uncertainties and assumptions including those set forth in our filings with the Securities and Exchange Commission, which are available to our investors at our website or online from the Commission.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove erroneous, actual results may vary materially from the results that were anticipated or projected. The company does not intend to update these forward-looking statements before its next required filing with the SEC.

Now I will turn it over to Phil Trenary, President and Chief Executive Officer.

Phil Trenary

Thank you, Brian, and that sounds a whole lot better comment from a professional. Appreciate that, and welcome to our first quarter of 2010 earnings call of Pinnacle Airlines Corp.

We did have a disappointing first quarter in terms of earnings. It turned out as we suggested in our last call, the weather had a dramatic impact on our operations. In 30 years of doing this it was absolutely the worst winter weather pattern ever experienced.

You expect Minneapolis and Detroit and some of the markets in the Northeast to have issues. In fact, we had many full days for operation and New York was completely shutdown. It's highly unusual path Houston and Atlanta shutdown from snow, so it did have dramatic impact on us.

One of the things is real positive coming out of this is recovery of our people. They did an outstanding job of managing through this. As soon as weather permitted, they did get right back into the air.

It did have more of a disproportionate impact on Colgan, a couple of reasons, there was more complete shutdowns in the Northeast relative to the south and also Colgan’s pro-rate operations, when they don’t fly there is no revenue versus all the contracts that do have fixed cost covered under the contract.

The other big news that we just heard this week and I am sure everyone understand and paying attention as the announced merger between Continental and United Airlines and we are very proud to have both this parties as strong partners and from an industry outlook and our perspective on consolidation this is a good thing. We believe that it's in the best long-term interest for our industry. Continental and United will be a great partnership and make a stronger carrier.

If we had to choose between diversity with more airlines and having fewer partners but very strong partners and we’d obviously like to see the fewer very strong partners and we believe this is a step in the right direction not only for Pinnacle but for the industry overall.

Then speaking on strong airlines we continue to talk to Delta and that’s very positive and we continue to have a good relationship with them and we are looking forward to having those resolved at some point in next quarter or too. Delta does continue to take advantage of our capabilities especially with the CRJ-900. We continue to operate our long range overall operations. To my knowledge we are still going to be carrier that can provide those sort of services to Delta or any other carrier.

Colgan will be spending the balance of the second quarter and third quarter in preparing for their growth coming with 15 deliveries of the new Q400 next generation aircraft. Well actually the delivery will be in August but in a service with Continental starting September 2010 with the final aircraft coming in May 2010.

This is something we talked about whether to bring it up, well in the question side is to go ahead and talk about it upfront. We do continue talk with our pilots about getting a new agreement with them, a new tentative agreement. Our people are at the table today. The relationship continues to be positive and we are both committed to try to get this wrapped up as soon as we can.

So in general, it was disappointing quarter financially, but we have to give a lot of credit to our people flying, a great airline recovering nicely and continue to do a good job. I think you will see the results of their efforts in our second quarter results.

At this time, I will turn it over to Peter Hunt, our Chief Financial Officer.

Peter Hunt

Thanks, Phil and thanks to everyone on the call for joining us today. This morning we did report fully diluted earnings per share of $0.09, which was down versus the $0.15, excluding special items that we achieved in the first quarter of 2009 and Phil has already hit the nail on the head on the two big drivers there, weather had a very big impact on both subsidiaries.

We estimate that the weather affect, the lost revenue and increased cost related to cancellation at Colgan was approximately $2 million to $3 million. Pinnacle had probably about $0.5 million of underlying lost revenue net of cost that we don’t incur when we don’t fly, but in addition Pinnacle recorded $1 million reduction of revenue estimate for performance related penalties under our CRJ-200 contract.

That contract does measure our operating performance over six month period from January through June and as of March 31, we were below the metrics required to stay above penalty in three out of the four metrics. However, we've had a very good month in April as we would normally. Spring generally brings better weather and so as we look at the second quarter, as long as the weather trends continue the way they are and we operate like we are operating, we actually expect that we better likely won't be incurring a penalty for the six month period, but we did record an estimate in the first quarter, if we end up at June 30th without owning a penalty then we will reverse that $1 million out in the second quarter.

The other item affecting are decline year-over-year on EPS relates to the dispute with Delta, as Phil mentioned, one item in particular has to do with our aviation insurance premiums under our contracts. We believe that Delta is required to fully reimburse 100% our aviation insurance costs and our aviation insurance costs are much higher year-over-year, and since the third quarter we have been talking with Delta, about those increases and Delta has been reimbursing us at a level less than a 100%, and in the first quarter that resulted in about $1.5 million of unreimbursed aviation insurance premiums. We will now record the revenue that we believe Delta owes us, until they pay us under GAAP accounting revenue recognition requirements.

However, we do believe that our position is very strong. We do believe that the contracts do support our position and as Phil mentioned, we continue to discuss this and other matters with Delta and we do believe we can work this out amicably sometime in the near future. We are very committed to getting this one behind us as soon as we can.

Turning to our capacity, at Pinnacle Airlines, we flew just under 105,000 block hours in the first quarter, which was down 4% year over year, and we had 66,575 departures, which was essentially flat year-over-year. Pinnacle stage length was 421 miles, which was down 7% versus the first quarter of '09, and we ended the quarter with the same number of aircraft that we started the quarter with, a 126 CRJ-200s and 16 CRJ-900s, and looking at that change on block hours, there's really kind of two drivers there.

One is the weather, which with that 4% decline, probably about a point of that relates to higher than normal cancellations with respect to the weather. The rest of it relates to the change in our stage length, we're now flying in the combined consolidated Delta network. We're flying shorter flights than we were under Northwest, which means downtime on the ground each and so lowers scheduled utilization on our aircraft. We do think, we're kind of level where we are in the schedule now and would not anticipate utilization going down further, but that is contributing to the change year-over-year on utilization of Pinnacle.

Colgan flew just under 30,000 block hours during the quarter, which was a decrease of 12% year-over-year, and Colgan's departures were 24,088, which was down 11%. Colgan stage length of 222 miles was up slightly, but essentially flat year-over-year and our operating fleet at Colgan, we had no changes during the quarter there as well. 14 Q400 aircrafts operated in the first quarter 2010, and 34 Saab 340s.

However, I will remind everyone, we had four of those 34 temporarily out of service in the first quarter, so when you look at those changes, the big drop in block hours and departures at Colgan, a large piece of that was that we had four Saab aircrafts that we were not flying, primarily related to LaGuardia, these were aircrafts scheduled in LaGuardia, and with the expected transition of slots from US Airways to Delta, we decided to terminate service in those markets and because those markets generally do not perform well in the winter, we decided that it was best to not fly in those markets over the first quarter.

However looking forward, those four aircraft go back into service over the summer, all four will be in service by the end of June, and we anticipate that the new markets we are going to fly and which I’ll talk to you in a minute, will actually contribute quite a bit over the summer.

Turning to our income statement, our consolidated total operating revenue was just over $208 million for the quarter, which was essentially flat year-over-year. Pinnacle’s revenue was $158.6 million which was up 2%. There actually a lot of the ins and outs contributing to that change in 2%, probably the biggest was just simply the CRJ-900 contract. We had two more of our owned aircraft in service this year versus last year we had two aircraft that we were temporarily flying for Delta. So there were no changes in capacity but there were big changes in the revenue associated with the ownership cost on this aircraft.

Colgan’s revenue in the first quarter was $49.5 million, which was down 6% year-over-year, the primary driver there again was the big drop in capacity, which as I mentioned was both from the weather as well as the decrease in the south [core flying] that we had. Both our CPA revenue and our pro-rate were down. The CPA revenue was down because we did fly slightly fewer Q400s this year than we did last year and the pro-rate revenue was as I mentioned a drop on the number of aircraft as well as a lot of the cancels related to weather.

The underlying revenue environment in the pro-rate market actually looked pretty good to us in the first quarter weather notwithstanding. The yield in our pro-rate markets was up 2% year-over-year, a load factor was up three points and our RASM was actually up 11% year-over-year.

So as we look our at the second quarter and beyond we do think that the positive revenue environment that the entire US industry is experiencing now that we will be beneficiaries of that as well. So we do think we’ll see some good trends in our pro-rate flying over the summer especially not having to deal with winter weather.

We had consolidated operating income in the first quarter of $12.7 million and that was down over $4 million year-over-year and again the big driver here was Colgan primarily and it was primarily related to the weather.

Pinnacle’s operating income was $14.7 million and actually increased year-over-year by $800,000. This despite us recording the $1 million of operating performance penalties, and also having $1.5 million of unreimbursed aviation insurance.

So, if you take those things out of the equation, we were actually very pleased with the performance at Pinnacle. Our cost controls were good and the revenue environment that we have under out contract is still pretty strong.

Colgan did record an operating loss of $2 million in the first quarter, which was a decline of $5 million year-over-year and clearly that had the biggest impact on our consolidated results in the first quarter.

As I mentioned earlier we think the weather impact was as much as $3 million on the first quarter related to Colgan and in addition we had higher fuel costs this year. Our average price per gallon was up 40% to $2.40 and our total fuel bill was up about $1.2 million versus the first quarter of ’09. So, those two things together contributed to the big change in the operating results at Colgan.

Our net non-operating expense on a consolidated basis was $9.8 million. This is all primarily net interest cost and it was down $2 million from the first quarter of 2009. The big driver in the decrease in our interest expense relates to the repayment of our $121 million senior convertible notes all of which have now been repaid and that deleveraging that resulted from that has reduced our interest expense going forward.

So, all this together resulted in net income in the first quarter $1.7 million, which was down $1 million versus the first quarter of 2009 excluding special items. I will remind everyone the first quarter ‘09 had a lot of special items they I referenced in last year’s press release and we also have a non-GAAP to GAAP reconciliation at the back of this year's press release so that you can see those items.

Looking at our liquidity and our cash flow, we did end the first quarter with a very strong liquidity position. Our total cash balance at the end of March was $92 million and looking at our cash flow during the quarter, we generated almost $41 million of operating cash flow by far the biggest piece of this was our 2009 tax refund of $38 million. If you take that out, we had about $3 million of operating cash flow just resulting from our underlying airline operations.

That is historically very low for us. There is couple of reasons for that. Typically we are low in the first quarter anyways because we have a lot of prepaid items that hit us in the beginning of the year that we have been amortized out the rest of the year.

Then secondly, this year we signed a new engine maintenance agreement related to our Q400 fleet and it is a maintenance cost for our agreement, so our cost will be stable and steady going forward, but it did require an upfront buying to reflect the usage on the aircraft from 2008 through the end of 2009. That total buying was about $6 million, $4 million of which we paid in the first quarter. If you adjust for that $4 million, the cash flow from our operations was really about $7 million in the first quarter of 2010 versus the $3 million that it looks like when you take out the tax refund.

Our cash used in investing activities was $1.6 million. This is all primarily sort of ongoing routine for placement capital expenditures, and then within our financing activities, we used almost $39 million to repay debt, $31 million of this was the repayment of the remainder of our convertible notes and then we had approximately $8 million of normal regularly scheduled debt amortization on our aircraft obligations.

We did borrow $10 million in January of 2010. It was a temporary bridge loan with a local bank here in Memphis to help tied us over until we received our tax refund, and when we received that refund, we did repay that $10 million as well.

I'd like to talk about two new risk management programs that we put in place in April because these will affect our results over the next several quarters. First off, we entered into a program to provide some protection on interest rates related to the 15 Q400 aircraft that we have on order that are coming starting this fall.

Those of you have followed Pinnacle over the last several years, you may remember that we did something very similar when we purchased the first set of Q400s and the CRJ-900s, in those instances, we entered into interest rate swaps, and that protected the economics of our aircraft purchases as they relate to the fixed payments we receive from our partners.

The amount that we received from Continental is fixed upfront. We've agreed to it, so we are exposed to changes in interest rates should rates go up. For this year, we instead of doing swaps, we entered into options to be able to swap into fixed term rates when the aircraft come.

The reason that we did this differently is that these options, we pay an upfront premium but then we have the benefit if interest rates actually decline over the period, we're not actually locking in our interest rates, so the only potential downside we have related to these options is the cost of the premium that we buy upfront. We don't have any downside related to interest rates actually declining from where they are today, and the swaps that we bought are out of the money, interest rates would have to go up approximately 1% between now and the time of that each aircraft delivers before these options would have value to us.

Currently, we've hedged or bought options with the 12 aircraft deliveries. We do expect to do the other three as well over the next couple of weeks. The total premium we have paid for these options is approximately $1.4 million and because these are options in stead of a more traditional we know as swap we won’t receive hedge accounting on these purchases.

So over the next several quarter we will have mark-to-markets to the extent of these swaps go up or down, I’m sorry, these auctions go up or down in value. So as I said, we’ll never loose more than $1.4 million that we have paid and the way that we looked at this is, this is essentially insurance to make certain and protect the economics on our Q400 business that we have with Continental.

The second program we began in April is a fuel hedging program and similar to what I just described on interest rates we did not enter in to swaps or forward purchase contract with fuel but instead we have bought options to purchase jet fuel. We have covered just over 50% of our expected fuel purchases from May to December of this year and these are all options that are out of the money. This is essentially an insurance product for us. In case fuel prices spike significantly throughout the remainder of the year ,we have some protection and it will give us some ability to kind of ride out those fuel price spikes to the extent that they incur.

The average cap rate that we have on the options we purchased is just over $2.70 a gallon and that does exclude into-plane fees. So if you tack on the actual into-plane fees that we would have that’s usually another $.015 or so per gallon above that. So that’s the max that we will pay at least on half of our expected fuel purchases looking out over the rest of the year. These auctions only cost us 200,000. So we view this is a good trade-off to have some insurance to protect us against rising fuel prices over the next seven months.

Similar, to the interest rates we won’t receive hedge accounting on these. So the gains and losses associated with these options won’t be in our fuel expense, but rather we will have mark-to-markets on these each quarter over the next couple of quarters and this is sort of first kind of step in to a few hedging program for Pinnacle. We have not done this before. So, we are looking because we are going to see how works out and continue to monitor the fuel markets to determine if we want to continue a program like this on an ongoing basis.

So, just to wrap up before we turn it over for questions. Given the poor weather that we had over the winter I did want to talk a little bit about what we see going forward. We actually do see some positive trends especially with Colgan with the pro-rate business.

As I mentioned we do have plans for all four of our Saab 340 aircraft that went out of service in January to go back. We have a new contract with the Department of Transportation to provide essential air service in Plattsburgh, New York. That starts June 24th. We are very excited about that. We think that will be the good profitable market flying from Boston to Plattsburgh for us.

Then in addition we are going back in to LaGuardia for the summer with the remaining three aircraft, we are going to fly in Manchester, New Hampshire and in Nantucket and Martha's Vineyard. That flying begins June 1st. We think all of that will contribute very positively to operating results looking out in to the summer.

Also Pinnacle was performing very well in our underlying contracts. We have good underlying cost containment and we do have revenue increases that are built in on a rate basis in to our contracts. So, as we look out here in the second quarter when we have the weather effect kind of out of the Pinnacle results and we hope we won't have the performance penalties. We think we will see good trends there as well.

Now with that I would like to turn the call back to the operator to open it for questions.

Question-and-Answer-Session

Operator

(Operators Instructions) Your first question today comes from the line of Duane Pfennigwerth with Raymond James

Duane Pfennigwerth - Raymond James

I was wondering if I could ask a longer term question around scope relief and as you look out with new labor agreements on the horizon, how do you handicap the probability of scope relief amongst the legacies?

Philip Trenary

It depends on how much relief you are looking for. Over the next few years, we know this is going to be 400 to 500 at the 50-seat regional jet contracts expiring and we also know that the majors who want to replace a lot of those, certainly not all but lot of those with larger aircraft, we believe this is reasonable to expect that the majors will have more flexibility on the 76-seat aircraft. I think the real question is, will it be flexible to go larger in 76-seats. Now I think that is a much more difficult question to answer and we don’t have a good answer on that one. You mean relief on near-term 76-seats, yes, we believe that will come as far as large aircrafts, that may be a bit further out.

Duane Pfennigwerth - Raymond James

Maybe a bit more on near-term period, where do you expect to end the year in terms of cash?

Peter Hunt

As I mentioned the first quarter here was not a typical quarter in terms of cash generation. I think when you look at the second and third quarters they will be little bit more closer to operating cash flow that we had last year. That's assuming that underlying income and our contacts kind of remain strong. I would think that we would slightly build cash, but for the Q400 aircraft deliveries that we have and as each of those aircraft delivers, there is 15% of the purchase price that is not financed that we will then pay out. The total of all that for all 15 aircraft is north of $40 million and about half of the aircraft come here in 2010. We will have some reductions in our total cash by the end of the year, primarily related to those investments we are making into the Q400.

Duane Pfennigwerth - Raymond James

Is your $10 million bridge loan still open or when does that mature?

Peter Hunt

It was tied directly to the receipt of the tax refund, and so we repaid it when we received the refund and it's essentially expired now. It was a very short-term bridge loan, just a couple of months.

Operator

There are no further questions in the queue at this time, gentlemen.

Philip Trenary

Thank you very much for your interest in Pinnacle Airlines and look forward to talking to you next quarter.

Operator

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes our presentation and you may now disconnect. Have a wonderful day.

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

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

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