Pinnacle Airlines Management Discusses Q3 2010 Results - Earnings Call Transcript

|
 |  About: Pinnacle Airlines Corp. (PNCLQ)
by: SA Transcripts

Pinnacle Airlines Corporation (PNCL) Q3 2010 Earnings Conference Call November 9, 2010 10:00 AM ET

Executives

Brian Hunt – VP and General Counsel

Peter Hunt – VP and CFO

Analysts

Michael Linenburg – Deutsche Bank

Bob McAdoo – Avondale Partners

Glenn Engle – Bank of America Merrill Lynch

Operator

Good day ladies and gentlemen and welcome to the Third Quarter 2010 Pinnacle Airlines Corp. Earnings Conference Call. My name is Shequana [ph] and I will be your coordinator for today. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s call, Mr. Brian Hunt with Pinnacle Airlines Corp. Please proceed, sir.

Brian Hunt

Good morning, everyone and welcome to the third quarter 2010 earnings conference call with Pinnacle Airlines Corp. On behalf of the more than 7,000 employees, 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. These filings are available to investors at our website or online from the Commission.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove erroneous, actual results may vary materially from results that 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.

And at this time, I will turn the call over to Peter Hunt, Chief Financial Officer.

Peter Hunt

Thanks, Brian. Welcome everyone to our third quarter earnings conference call. Thanks again for joining us this morning. Phil Trenary, our Chief Executive Officer, couldn’t be here with us this morning. So, I will review our third quarter results and then with me to help answer questions after that are Doug Shockey, our Chief Operating Officer, and as you just heard Brian Hunt, our General Counsel is here with me as well.

First, I want to start off by thanking all the women and men at Pinnacle Airlines Corp. We turned in a great financial result for our shareholders this quarter and that really wouldn’t be possible without all the hard work of the people that we have here at all three subsidiaries, Pinnacle, Colgan and Mesaba as well as all of our support functions at Pinnacle Airlines Corp. It’s their dedication that helps us deliver increases in earnings as we did this year.

I specially want to thank our team at Mesaba and welcome to Mesaba to the Pinnacle family. We announced this deal in July and again on our second quarter earnings call, we told you that we thought that the deal we did from Mesaba would be accretive from day one and I’m very pleased to announce that in the third quarter it was accretive. Mesaba generated $3.1 million of operating income and if you take out depreciation and amortization expenses and look at earnings before interest, taxes, depreciation and amortization or EBITDA, Mesaba achieved $4.4 million of EBITDA and that is right in line with our target of $4.5 per quarter or $18 million a year under our contracts with Delta.

So, we’re very pleased with the result there. If you take out the interest that we paid on the note to Delta because Mesaba, the acquisition was fully financed by Delta, Mesaba actually generated $1 million of pre-tax income for us in the third quarter.

Second, I’d also like to congratulate our partners at United Airlines and Continental Airlines for completing their merger on October 1st. With our planned Q400 hundred fleet growth, we will eventually have 29 Q400 aircraft and 20 Saab 340 aircraft operating in the United Express Network. The new United is a very important and a growing partner for us.

We took delivery of 2 Q400s in the late in the third quarter and we’ll add 13 more between now and April. So, it’s a great growing relationship. We’re really fortunate, I think, at Pinnacle that we have strong and growing relationships with the two largest global airlines, with United Airlines and with Delta. Both United and Delta are in good strong financial positions, they have superior networks globally and in the U.S. and we see a lot of opportunity with both of them.

Of course, our relationship with U.S. Airways is also important to us although it is smaller. U.S. Airways is also an important partner and we do see some good opportunities there as well.

With that, I’ll jump right into the actual financial results. We did report this morning, third quarter net income of $9.4 million, which was an increase year-over-year of $2.1 million. If you take out a one-time gain that we had last year on our auction rates securities portfolio, we actually did increase income $2.1 million.

Our fully diluted earnings per share for the third quarter was $0.51 and again excluding that one-time gain, that was an increase of $0.11 over our earnings per share of 40% last year. That’s a 28% increase in EPS.

As I already mentioned, our operating income and our pre-tax income were positively impacted by Mesaba, both by the EBITDA of $4.4 million and operating income of $3.1 million that Mesaba contributed to us. Mesaba had an even larger impact on our operating cash flow, which I’ll discuss in a minute after I get through with our earnings result.

Looking at our operations at the three subsidiaries, Pinnacle Airlines operated a 108,381 block hours, which was up slightly year-over-year by 3%. Pinnacle’s departures were 71,818, which was an increase of 1% year-over-year and Pinnacle stage length actually increased this year. Our stage length was up to 425 miles, which was up 5%. That’s reversing a trend that we’ve seen back in 2009 and earlier this year, where Delta was moving us into shorter stage length markets. We’re actually increasing the stage length there at Pinnacle. Pinnacle’s fleet during the quarter was static at 126 CRJ-200 aircraft and 16 CRJ-900 aircraft.

Mesaba Airlines flew 68,186 block hours and 42,691 departures, and Mesaba’s average stage length is 525 miles, a little higher than Pinnacle’s primarily because of the waiting of the CRJ-900 in Mesaba’s fleet. The CRJ-900 typically operates on longer haul markets.

Colgan Air flew 35, 384 block hours in the quarter, down just slightly year-over-year. Colgan’s departures were 28,288. Colgan’s average stage length was 238 miles, which was up slightly year-over-year. Colgan entered the quarter with 16 Q400 aircraft, although two of those were added very late in the quarter and really had no material impact on our statistics or operating results and 34 Saab fleet 340 aircraft at the end of September.

Turning to our income statement, our consolidated operating revenue was $302 million, which was up $85 million year-over-year and obviously, the biggest impact on that increase was the acquisition of Mesaba. Mesaba’s revenue during the quarter was $71.5 million.

Pinnacle’s revenue was $166 million in the quarter and that was up 7%. It was up partly because of the increase utilization and the increase in block hours that we had. But also it was up because of a rate increase that went into effect at the beginning of the year that increased the revenue that we earn under our contracts with Delta.

In addition, Pinnacle’s Ground Handling Division had an increase of over $2 million of revenue in the quarter. It’s a very small division for us still, but a very important and growing one. It’s a very profitable business and one that is turning into a nice small line of business for us that we intend to continue to grow.

Colgan’s revenue for the quarter was $64.7 million and that was up $2.7 million year-over-year and the increase primarily was in our pro-rate markets. Revenue on our pro-rate markets was very strong just as it is throughout the industry. Both yield and load factor were up in the markets that we’re in and our Revenue per Available Seat Mile or our RASM was up by 10%, compared to the third quarter 2009.

Looking at operating income, our consolidated operating income was $25.7 million in the third quarter of 2010 and that was up almost $2 million year-over-year. Again, Mesaba contributed $3 million.

Pinnacle’s operating income was $16.5 million in the quarter, which was up almost $1 million year-over-year and again that’s on the strength of the slightly higher block hours, slightly higher utilization and the higher rates in our ASA.

Colgan’s operating income was $6.1 million in the quarter, which was down $2 million year-over-year. Colgan’s income has been down each of the three quarters this year or some similar reasons and some different reasons. In the third quarter, the biggest effect on Colgan is the increase hiring and training that we had related to the startup of our Q400 operations or for the additional Q400 aircraft that are delivering now.

We started hiring and training late in the first quarter, early in the second quarter for that increase in operations. So, now, we are carrying extra pilots and flight attendants and mechanics as we gear up for those operations and of course, we have the training cost of those folks as well in the period.

Colgan’s fuel cost was also up slightly year-over-year about $600,000, but that is on lower fuel volume and our actual fuel price in our pro-rate markets was up 17% to $2.47 per gallon.

Looking at our net non-operating expense. For the quarter, it was $10.3 million. That was up year-over-year. But again last year, we had a one-time $4.2 million gain on the sale of our auction rate securities portfolio and when you exclude that gain our net non-operating expenses were down $1.3 million year-over-year. The primary reason for the decrease there is that we retired our convertible notes that we had outstanding for most of last year and that is net then of the interest that we recorded on the note we issued for Mesaba to Delta.

Turning to our cash flow. We ended the quarter with $126.7 million of unrestricted cash and cash equivalents. It’s up quite a bit from where we were at June 30.

Our operating cash flow was $59.6 million in the quarter, which was a phenomenal result, but very unusually high and not one that I think we will repeat looking at the next couple of quarters.

The third quarter this year, the cash flow benefited. As I mentioned on our last call from a pre-payment of aircraft rent to Delta in July or was in due in July and we paid it June 30th. So, we had sort of a one-time benefit of operating cash flow in the third quarter of $10 million related to that pre-payment that we wouldn’t expect to continue forward.

Mesaba actually contributed $28 million of operating cash flow in the quarter. Some of which is a permanent increase in liquidity for us. Some of which is a timing difference and there’s really kind of three areas that we looked at with Mesaba that contributed to that operating cash flow.

The first is the working capital position that Mesaba was in when we acquired the company. We and Delta targeted a net neutral working capital positions. So, current assets and current liabilities to be equal that was the target that we agreed to as part of the acquisition and the way that we got to equal was that a receivable that Delta owed to Mesaba and that was paid in July was adjusted to an amount that we believe would result in that target zero or neutral working capital.

While Mesaba’s actual working capital was actually $6.3 million as of July 1. So, the actual was much higher and because that receivable was paid by Delta that translated into additional cash flow in the quarter. It’s not cash flow we get to keep because the deal was a neutral working capital position. So, actually in October as we settle up this working capital calculation with Delta, we repaid $5 million of that excess working capital to Delta in cash and we increase the note by $1.3 million. So, the total note now for the acquisition of Mesaba is now $63.3 million.

The second area of Mesaba’s very high operating cash flow, which again is a temporary phenomenon, is about $10 to 12 million of payables, accrued expenses, revenues under EAS contracts that actually belong to Delta but that are paid to Mesaba. Things like that built up in the quarter as we transitioned over from Delta overseeing Mesaba to Pinnacle overseeing Mesaba. Most of that $10 to 12 million again is going to reverse in the fourth quarter of 2010. So, it’s not a permanent increase in liquidity for us.

The third area of Mesaba’s operating cash flow is a permanent increase and that is an additional $10 to 12 million that is a permanent increase in cash. Because of the way that we structured our contracts with Delta, we are paid weekly for the flying operations that we do for Delta under our Mesaba contracts yet the underlying operational expenses as we pay those, those are paid out over 30 or even longer, 30 days beyond when we actually fly depending on the vendor, depending on accrued payroll.

So that results in our – basically under contracts, we can operate in a negative working capital position and it results in a one-time boost to our liquidity and to our cash. We’ve estimated that at about $10 to 12 million that’s part of this operating cash flow that we generated here in the third quarter.

And then finally, our existing operations at Pinnacle and Colgan generated more than a normalized quarter of operating cash flow and this was also a timing phenomenon, just simply related to the timing of payables and accrued expenses and accrued payroll at the end of quarter. We think that will reverse out in the fourth quarter as well.

So, you put all those things together, a great quarter for cash flow in the third quarter. But we do think some of those will reverse in the fourth quarter and we think our operating cash flow in the fourth quarter of 2010 will be much lower. In fact, we think it will be much more in line with what we generated in the second quarter, which was a fairly small number in the fourth quarter.

Looking at our investing flows, we used $4.2 million in the quarter for capital expenditures. Most of this was related to initial provisioning for the Q400 aircraft that are coming, an increase in rotable aircraft parts that we buy and place in the hubs where we operate for the Q400s, for United.

The $4.2 million use for CapEx was offset by two things. One is $2.5 million of cash that was on Mesaba’s balance sheet when we acquired them and the second is $1.5 million of proceeds from redemptions of option rates, securities options that we had during the quarter.

In our financing flows, we used $11.7 million. Most of which was simply related to normal recurring principal payments on aircraft debt.

So, again, looking at the balance sheet, we did take delivery of two aircraft late in the quarter and we’ve taken another $0.03 at the end of the quarter. You may remember on the last call, I was talking about how unbelievably low our rates are simply because interest rates in the economy or so, the underlying rates are very low, and the first aircraft I mentioned on the last call was finished at 5%. Well, rates are even lower now and actually the average rate on this aircraft that we’ve now taken delivery of is less than 4.3% and that’s for 15-year term fixed rate financing.

I never in my 15 years as an airline industry participant never thought that I’d see aircraft financings with rates that low. So, we’re really pleased with how that’s setting us up for profitability in the feature with the Q400 aircraft.

As we look ahead with the deliveries that we have in the fourth quarter and the first four months of next year, we do see about an $18 to 20 million of our cash will be used to invest in those Q400s, it’s the unfinanced portion of the aircraft being delivered in the fourth quarter and then another $20 million used in the first part of next year. Again, for the unfinanced portion of this Q400 aircraft. So, we do think there are – cash will go down because of the lower operating cash flow I mentioned and then of course, these investments we’re making into the Q400s.

Now, investments, I think are – they’re good investments for us. They’re growing our business with United. But I’ll remind everyone, these investment decisions were made several years ago in 2007 as part of our original agreement with Continental. The CPA that we have with Continental does provide for this expansion of these 15 additional aircraft.

A lot of investors ask me about our – how we evaluate investments, how we evaluate our uses of capital especially in light of what some believe and I’m personally one of those that our current market cap, our current equity valuation is very low. I will tell you that we do make these decisions based on looking at the return on capital that we think we’ll get on investments in aircraft or investments in growing the business and the returns that we think that we need are based on what we think our cost of capital is at that time.

Any investment decisions we make in the future will be based on looking at whether or not we’re earning an appropriate return on capital and if we have excess capital, we’ll always look at growing the business versus returning that to shareholders through stock buybacks or dividends or some other form of increasing earnings and increasing returns for our shareholders as such very important to us. We’re not growing the business to simply to grow the business, we’re growing it because we think that we can get returns for our shareholders and we’ll always look at what we think is the best way to get good returns for our shareholders whenever we make these kinds of decisions.

And then one more note about our fourth quarter expectations and then we’ll open the call up for questions. The month of October was a difficult one operationally for us, especially at our Colgan Air subsidiary. We had several Saab aircraft out of service during October, for damage, for maintenance issues that we had and that did result in a higher than normal level of canceled flights in October. We do think that we’re back on track now for the rest of the quarter, but that will have an effect on us here in the fourth quarter.

And then of course, we also still have the labor cost training bubble for the Q400 growth. That’s still affecting us in the fourth quarter as well.

So, just as we’ve seen in the first three quarters of the year, for Colgan, we do think Colgan’s income will be down year-over-year because of those issues.

In addition, Pinnacle began hiring and training late in the third quarter and so Pinnacle’s hiring cost will be higher in the fourth quarter. We had previously experience a period of low attrition over the last year and a half, and we had adequate levels of pilot at Pinnacle. Attrition’s caught back up now and so we’re now back into a mode of hiring for replacement of pilots due to attrition and so that will increase our cost in the fourth quarter as we do some of that hiring and training.

In Mesaba’s income, we think will be slightly down in the fourth quarter as well. Part of our deal with Delta is that the Saab aircraft will decline. They will be returned overtime over the next two years. Six of those aircraft come out in the fourth quarter and so the revenue we earn on our Saabs will come down in the fourth quarter. we will be able to remove cost, the cost don’t come down, commensurate the cost come down sort of as we – in more ratable chunks. So, as we get to a larger decrease of Saab aircraft then more cost will come out in the first quarter. So, we do see a slight decline on income at Mesaba related to the start of the return of the Saab aircraft.

So, all in all, while we think we’ll have a good quarter in the fourth quarter, we do think our net income and our EPS will be down slightly from the income we achieved in the fourth quarter of 2009.

And with that, operator, I’d like to open the call up for any questions that we may have.

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) And you first question comes from the line of Michael Linenburg representing Deutsche Bank. Please proceed.

Michael Linenburg – Deutsche Bank

Hey, Peter, good morning. A couple of questions here. I want to go back to what you said about your cash from operations and maybe I misheard you. In the press release, I thought it maybe was written that the fourth quarter operating cash flow would be lower than what it was in the fourth quarter, the $59.6 million. I think it was written as kind of less than the average of what it was over the nine months.

Bu then you indicated that it would, I think you said it would not be that far away from the June quarter cash from operations, which I believe was actually just under $4 million. So, what’s – sort of when I think about an average and the three and maybe less than, I sort of thing around $30 million. But then in the June quarter, it was a much lower number. Can you just give us some additional clarity on that?

Peter Hunt

Sure. Well, if you go back to the beginning of the year, I kind of think of the first quarter, while our reported operating cash flow was much higher, I split that up into two categories. One is a tax refund that we receive related to our 2009 income and then there’s sort of normalized recurring routine cash flow.

Michael Linenburg – Deutsche Bank

Okay.

Peter Hunt

And if you look at the first and second quarters, both of those were lower than what I would consider a normal quarter. Both of those were under $10 million of normalized routine operating cash flow and I think we’ll be in that same level here in the fourth quarter. What we should be doing and what I think is a more normalized level, something like $15 to 20 million per quarter of operating cash flow. It’s just because of the timing of payments and the way things work out this year that most of that came in the third quarter this year.

If we managed payables, if payables kind of stay at a more normal level throughout the year, I would expect a more normalized level to be that $15 to 20 million of operating cash flow each quarter.

Michael Linenburg – Deutsche Bank

Okay, okay, that’s helpful. Then secondly, I guess the true up or not the true up, but the reconciliation on the $6.3 million. I guess you guys paid back Delta $5 million. But then $1.3 million you added to that debt, why did you do that? Why not just pay down that $1.3 million isn’t that accruing interest at 12%? I mean I know it’s a net, but I’m just curious why that is – what was behind that decision.

Peter Hunt

Sure. Well, we put together the deal, while we both expected this adjustment to be really small, both we and Delta because the deal happened fairly quickly – even Delta, even though they own Mesaba didn’t have a lot experience with exactly what Mesaba’s working capital, how it would change from …

Michael Linenburg – Deutsche Bank

Okay.

Peter Hunt

Where they were in April, May to where they might be at June 30th. So, while we all believe that this was going to be a small adjustment, both sides were concerned that something might happen or be forgotten that would make it a large adjustment. So, we agreed that $5 million of the adjustment will be paid in cash and anything above that or below that which is simply be an adjustment to the note balance. So, the deal was sort of pre-wired for that note balance to be adjusted above $5 million.

Now, we have the ability to pre-pay that note.

Michael Linenburg – Deutsche Bank

Yes.

Peter Hunt

And so we can now – this gives us option by adding that $1.3 million to the note instead of paying it in cash. We have some options of what do we want to do with capital that we have and it comes back to what I was just talking about that if we have, if we think we have excess capital, excess liquidity, we will look at all alternatives to do what we think is the best thing for returns for our shareholders. That could be paying this note down …

Michael Linenburg – Deutsche Bank

Yes.

Peter Hunt

It could be buying back stock. It could be growing the business. It just sort of depends on the opportunities we see at the time that we think we have excess cash.

Michael Linenburg – Deutsche Bank

Okay, great. And then if I could just ask one quick last one, when you talk about Mesaba being down in the fourth quarter, was that a sequential comparison with the third quarter or was that year-over-year. And if that’s year-over-year, what was – what did Mesaba do in 2009.

Peter Hunt

Yes. I was really talking sequentially. Mesaba’s 2009 result are sort of irrelevant because the contracts that we’re operating under are completely different from what Mesaba had in place with Delta when they were wholly-owned. So, the ‘09 results really don’t – are irrelevant. I was really talking about versus the third quarter and versus our target of $4.5 million of EBITDA in the quarter. I think we’ll be down a little bit and again, that’s just simply because the Saab are starting to return and once we have a larger critical mass of returns then we’ll be able to start pulling some of the cost up that goes with that.

Michael Linenburg – Deutsche Bank

Okay, good. Okay, good quarter. Thank you.

Peter Hunt

Thank you.

Operator

(Operator Instructions) You have a question from the line of Bob McAdoo representing Avondale Partners. Please proceed.

Bob McAdoo – Avondale Partners

Up here. Just a couple of little things here. As I look at the data that you provided with the news release and the revenue per block hour, I try to figure out what’s included in Mesaba and whatever. It seems like the Mesaba’s revenue per block hour is meaningfully below some of the others. Is that because of the mix of Saabs? Is that just because of – what’s included versus not included there.

I would’ve have thought that it was, would kind of look like maybe the Pinnacle stuff, where it’s kind of all in contract and the airplanes are by and large up at Delta. How do I think about that? What else is included in your Mesaba contract going forward? What is the fee?

Peter Hunt

Sure. Thanks, Bob, good question. Because these Mesaba contracts are different from our existing contracts and the biggest reason, the biggest difference is that there is no aircraft rent expense and therefore, there is no revenue to cover that aircraft rent expense.

Under our original CRJ-200 contract that we have with Delta, while we don’t have any ownership risk on those aircraft, we do pay aircraft rent to Delta and therefore, the rates we receive from Delta do include reimbursement of that aircraft rent.

On our CRJ-900s and our Q400s, we own those aircraft. We do have residual value risk on those aircraft and therefore our partners, Delta and United are paying us revenue that is greater than the ownership cost that we have on those aircraft.

With Mesaba, with the aircraft we acquired there, the 900s and the Saabs, we pay no aircraft. We have no ongoing obligation or liability on the aircraft. That’s a significant component of the cost structure of the aircraft and therefore, our costs are much lower on these aircrafts and our revenue is much lower on this aircraft.

Another big difference, probably the second largest big difference is that in our original CRJ-200 ASA, we pay for all ground handling and then again we are reimbursed or receive through our rates with Delta compensation for that ground handling. All of Mesaba’s ground handling is provided by Delta. It’s Delta’s responsibility and there is no payment or no cost for that ground handling. So, these are the two biggest differences that result in that lower revenue you’re looking at and also a much lower cost structure as well.

Bob McAdoo – Avondale Partners

So, as we look forward and as the Saabs come down, is that rate going to still hold up pretty much or is there not much difference between what you pay the pilots on one airplane versus the other on the Mesaba side? What should we be thinking about going forward?

Peter Hunt

It’s going to come down. The revenue will come down as the Saabs come out. I think when we originally talked about the bill, we were talking about revenue in the neighborhood of around $60 million on the core fleet, which are the 900s and 200s versus the $73ish million that we recorded this quarter.

The cost on the Saabs, the seniority level on our Saab pilots is not tremendously different from what it is on the RJs at Mesaba, maybe a little bit lower. It obviously will go down as Saabs start to leave because the lower seniority folks end up flying the Saab aircraft. But I don’t think, if you’re trying to measure cost per block hour per labor something like that, I don’t think there would be material difference between the Saab labor cost that will be remove overtime versus the RJ labor cost that remain. There is a rate difference between the two, but the overall cost on the seniority basis isn’t tremendously different.

Bob McAdoo – Avondale Partners

Okay. And then to just a different topic, you talked about rotables for the Q400 and whatever. It brings to mind a question of as you have continued to bring on the Q400s and look to bring on even more and as you’re dealing with now the combined Continental United, have people been talking to you about putting Q400s anywhere other than Newark or they’re still all going to be Newark? What’s going on there?

Peter Hunt

Well, that’s a great question, one that we keep asking ourselves and asking United and Continental. The network is sort of a blank slate now. It’s sort of a new frontier for the folks at United, who are scheduling. They have a lot of options now that they’re putting Continental United together. And so, we’re kind of influx of where these skews are going to go.

Originally, before the United Continental deal was announced, the original plan was Houston and we were gearing up for Houston earlier this year that changed to a mix of some flying in Newark, some flying in Cleveland, some flying in Dallas and potentially some flying in Houston. So, we’re working with United and Continental on where this aircraft will go permanently. It looks like where they will start out will be Newark and Dallas-based and with the last aircraft deliveries in the spring, some of those going to Houston. But, ultimately, I think that could change overtime and we’re talking to United about where the permanent location of this aircraft will be.

Bob McAdoo – Avondale Partners

Any sense of their excitement about adding to this fleet beyond what you got?

Peter Hunt

Well, I think they’re excited. Personally, I mean as we talk to them, they really like the performance of the Q. It’s a great aircraft from a corporate [ph] perspective or passengers, more comfortable than a CRJ for certain, than a CRJ-200 and the economics are great. It burns 30% less fuel than the 76-feet jet. The acquisition cost of the aircraft is a lot lower, so the reimbursement they’re paying us on our ownership is lower than what they’d be paying for a CRJ-900 or a [inaudible].

So, I think they like the aircraft, but everything is really influx as they’re looking at their network. So, I don’t know whether they’ll be changes or request for them for additional aircraft anytime soon. It might be a year to two out while they’re playing with their network and figuring out what they want to look like long-term.

Bob McAdoo – Avondale Partners

All right. Thanks a lot.

Peter Hunt

Thank you.

Operator

And your next question comes from the line of Glenn Engle representing Bank of America Merrill Lynch. Please proceed.

Glenn Engle – Bank of America Merrill Lynch

Good morning. Question first on the pilot, can you talk about pilot negotiations both at Pinnacle and Colgan and what’s happening.

Peter Hunt

Sure, Glen. Good morning. We actually – since the acquisition was announced, we sat down with Alpha and we voluntarily agreed that we would meet jointly representatives of Alpha from all three airlines and representatives on the management side from all three airlines and talk for a period of time about moving to a single seniority list, single collective bargaining agreement. We’re doing that now in good faith. We think that’s the right way to go for all of our pilot groups, but it’s got to be a contract that’s both fair to all of our pilots, but also fair to the company and it keeps us competitive.

So that discussion is going right now. We would think that if that is successful, it would happen relatively soon potentially by yearend or early next year. If for whatever reason that process doesn’t work, then we’ll simply go back to negotiating the contract at Pinnacle and negotiating the initial contract at Colgan. Mesaba’s Alpha agreement isn’t up until 2012, so that would then – we would just have three contracts that would be negotiated whenever they become amendable.

But we’re hopeful that this process will work and that we’ll end up with a single agreement, which we think, is advantageous for Alpha and could be advantageous for us, if the agreement is structured properly.

Glenn Engle – Bank of America/Merrill Lynch

You’re rates are set by PPI thought not CP – help [ph] last year. I was curious of the routes ended, stopped today. What would rates look like for 2011?

Peter Hunt

Yes. Well, our business contract is the CRJ-200 ASA and it’s kind of quirky how it sets. Instead of looking at sort of full year changes at PPI, it’s a December versus December comparison. So, the biggest piece, we won’t really know until we get to December. If you look at where PPI is as of now versus last December, it is up a little bit. I think its maybe 1.2 to 1.3% something like that. So, it would be a lower increase than what we got last year, but still it would be an increase on that contract.

Glenn Engle – Bank of America/Merrill Lynch

Thank you very much.

Peter Hunt

Thank you, Glenn.

Operator

At this time, there are no further audio questions. I will now like to turn the call over to Mr. Peter Hunt for closing remarks.

Peter Hunt

Okay. Well, once again, thanks everyone for joining us today. We appreciate your interest in Pinnacle and we’re always available here both at our website and if you call us as well to answer any other questions that you have. I look forward to talk to you next quarter. Thank you again.

Operator

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

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

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

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

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!