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Executives

Brian Hunt – VP, Chief Compliance Officer, General Counsel, Assistant Secretary

Phil Trenary – President and CEO

Peter Hunt – CFO and VP

Analysts

Steven Li – Raymond James

Helane Becker – Dahlman Rose

Bob McAdoo – Avondale Partners

Pinnacle Airlines Corp. (PNCL) Q4 2010 Earnings Conference Call February 17, 2011 3:00 PM ET

Operator

Good day, ladies and Gentlemen. And welcome to the Fourth Quarter 2010 Pinnacle Airlines Corp. Earnings Conference Call. My name is Alicia, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded for replay purpose. Today’s host will be Phil Trenary, President and Chief Executive Officer of Pinnacle Airlines Corp.

Before we begin, I would like to turn the call over to Brian Hunt, Vice President, General Counsel. Please proceed.

Brian Hunt

Thank you, Alicia. Good afternoon, everyone. And welcome to the fourth quarter 2010 earnings conference call of Pinnacle Airlines Corp. On behalf of the more than 7500 Pinnacle 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.

Our presentation will contain various forward-looking statements that are based on management’s beliefs as well as assumptions made by and information currently available to management. Although, we believe that the expectations reflected in such statements are reasonable, we 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 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.

I will now turn the call over to Phil Trenary, our President and Chief Executive Officer.

Phil Trenary

Thanks, Brian and good afternoon, everyone. And welcome to the fourth quarter call of Pinnacle. I will start out with some very good news and everyone on the call will be the first ones to actually hear it.

We'll have our release going out a bit later this afternoon but our pilots at all three carriers, Pinnacle, Mesaba and Colgan have ratified the tentative agreement that we agreed on. So we expect to sign that agreement later today and as indeed very good news. It lets us have a five-year industry standard contract; it's a very competitive contract and will help out tremendously as we focus on integration plan going into 2011.

In the fourth quarter we did have some early deliveries on the Q400, Peter is going to discuss the negative impact that had here in just a minute. We now have 22 aircraft on a certificate with the remaining eight firm that remain to be delivered and it's important to remember that this is a very strong part of our strategy going forward. We believe this aircraft is going to remain in high demand and will be a big part of Mesaba going forward.

We did have some difficult winter weather and continued to have in the first quarter. I've been doing this 27 years and this is by far the most difficult three-month stretch we've had. The weather is actually giving us a little break now but the last part of December, January and into the early part of February did provide some challenges for us.

It's important to remember that Pinnacle has a very complex network, by far the most complex of all of the Delta Connection carriers and we have a lot of concentration in the Northeast, the Detroit hub tying up to LaGuardia, Kennedy, to a less degree Indianapolis, all this ties together. So we have a network that can be severely impacted when you have unusual weather pattern like we've had.

Mesaba continued to perform very well and continues to be accretive for shareholders. It's doing as well as we thought it would do and perhaps a little bit better. One of the things that was completed in the fourth quarter was a work of our takeoff teams and if you remember the takeoff teams are the groups we put together to actually develop the foundation for the integration plan to bring the three carriers into two, where we’ll wind up with all of the jet aircraft at Pinnacle Airlines and all of the turboprop aircraft at Mesaba Airlines.

We had nearly 600 employees participate in this, any time you have an integration, in this case we have a transfer of assets at one carrier, a merger of two other carriers, it's very important to get it right, both from an operations standpoint and from a cultural standpoint. We actually took their work and turned that into the integration plan. That integration has been submitted to the FAA.

By doing that you'll start to see some synergies in 2011 and we don't expect to see the carriers fully integrated until early to mid 2012. I think the best way to look at it with the – bringing the three carriers together, once the integration plan is complete, the two remaining carriers will be more profitable than the three independent carriers today and that's if we did nothing at all.

More important, by having the two carriers integrated, more profitable, that's a very strong foundation to build the future and bring on flying that meets our criteria for return on investment for shareholders.

Now, I'll turn the call over to our Chief Financial Officer, Peter Hunt, who will lead us in a review for our second quarter results.

Peter Hunt

Thanks, Phil. And thanks everyone for joining us on the call this morning or this afternoon. This morning, we reported fourth quarter 2010 diluted earnings per share of $0.14 and that is excluding a special pilot signing bonus associated with our new collective bonding agreement with ALPA that was ratified today. We did have a pilot signing bonus of $10.9 million inclusive of related payroll taxes that will be paid to pilots of Pinnacle Airlines and excluding those results we reported the EPS of $0.14.

Before I jump into the operating statistics that I normally lead off with, I did want to talk a bit about our operating income and the big reasons why we were down significantly year-over-year.

Our operating income on a consolidated basis was excluding the pilot signing bonus was down $3.6 million from the fourth quarter of 2009 and if you look at it by subsidiary, Pinnacle Airlines was down $1.2 million year-over-year, Colgan Air was down $6.2 million year-over-year and Mesaba, the acquisition of Mesaba offset those declines by adding $3.8 million to our operating income. So the total net effect was a $3.6 million drop in operating income.

We did have some challenges in particular at our Colgan subsidiary this quarter. One major item affecting us as Phil mentioned was the introduction of additional Q400 aircraft into the fleet under our United contract.

Two major drivers related to the Q400, one is that we began taking aircraft earlier than when they would be placed under the contract with United. We wanted adequate time to make certain we could meet United expectations on entry into service and so we incurred a little over $1 million of cost associated with depreciation and interest on aircraft before we actually started earning revenue under the contract with United.

Additionally, we absorbed about $1.4 million of costs related to our crews. This is training costs and productivity costs. This was a lot more than we expected and the big driver there was rapidly changing plans with United about where these aircraft would fly and that caused changes in how we scheduled the crews and where we scheduled the crews that drove some declines in productivity as we start up here with the aircraft. We do think that when we get to the second quarter of 2011 that we will see a dramatic improvement related to the Q400 growth at our Colgan Air subsidiary.

Another item affecting Colgan was maintenance on our Saab aircraft. We incurred about $2.6 in the fourth quarter for Saab related maintenance costs that were somewhat unusual. We had a number of fairly expensive aircraft damage on the ground in October throughout our system.

We also had additional heavy check work on Saab’s. We are in sort of a timing situation where the number of Saab going through our heavy check schedules has increased year-over-year and that's going to continue for a couple more quarters where we'll have a little bit more higher costs related to heavy checks.

Also in that $2.6 million is costs related to returning two Saab aircraft as we reduced the size of our network with the exit of service at LaGuardia in the fourth quarter, we are returning some Saab’s to aircraft lessors and so we've got one-time costs associated with returning those aircraft that we incurred during the quarter.

We do think in 2011 that there will be some positive things affecting our Saab maintenance costs and I'll talk about those towards the end of the call.

Finally, one other item that affected us in the quarter as Phil mentioned was the weather. Across our three subsidiaries we estimated that the effect of cancelled flights and delayed flights added up to almost $1 million affecting us here in the fourth quarter. I think when you look at January and February while the results aren't in yet, I would fully expect to see a similar impact as we look at weather here in the first quarter of 2011.

One good news, well, good piece of news about our operating income was Mesaba. Mesaba continues to perform very well for us both operationally and financially. Mesaba had operating income of $3.8 million in the quarter, which was actually an improvement over our operating income results in the third quarter of 2010.

And when you take into account the interest on the note we issued at Delta to acquire Mesaba, Mesaba actually added $1.9 million to our pre-tax income for the quarter. So performing very well there and very much in line with the expectations we had when we acquired the company.

As we look at our operating statistics for the quarter, Pinnacle Airlines flew 102,766 block hours in the fourth quarter, which was down just about 1% year-over-year. Pinnacle's departures were 65,974 also down about 1%, the declines there mostly driven by the weather.

Mesaba flew 62,831 block hours and had 37,482 departures and Colgan Air flew 33,996 block hours which was up slightly year-over-year about 1% and Colgan had departures of 27,700 also up 1% year-over-year.

When you look at our fleet at the end of the quarter we were flying 57 CRJ-900 aircraft at both Pinnacle and Mesaba. We were flying 145 CRJ-200 aircraft at Pinnacle and Mesaba. We had 22 Q400 aircraft in service at Colgan Air and we had a total of 59 Saab aircraft being flown by Pinnacle – by Mesaba and Colgan. The changes to our fleet during the quarter, Mesaba retired six of their Saab’s and Colgan retired one Saab and one more we’ll retire here in the first quarter. And we added eight Q400 aircraft by 12/31.

Looking at our consolidated operating revenue, our total revenue was up – was $291.6 million and it was up over $82 million year-over-year, roughly $70 of the $82 million is related to Mesaba.

Pinnacle's revenue was up $10 million year-over-year and that's due both to increases in pass-through costs, which increased both revenue and expenses. And also due to rate increases under our contracts with Delta.

Colgan's revenue was up $2.8 million versus fourth quarter of 09. Colgan had $4 million of additional CPA revenue for the Q400 growth offset by the decline in pro-rate revenue from the reduction of service at LaGuardia in the quarter.

Our consolidated operating income excluding the pilot signing bonus for the quarter was $14.2 million and as I already mentioned, that was down $3.6 million for the reasons I indicated earlier. Looking at each subsidiary, Pinnacles operating income was $12.4 million for the quarter, Colgan had an operating loss of $1.9 million for the quarter and Mesaba had operating income of $3.8 million.

And our net consolidated non-operating expense was $10.4 million in the fourth quarter of 2010, which was just up – just slightly year-over-year. We had higher net interest expense in the quarter from our Delta note and from the new Q400's offset by the retirement of our convertible notes that were paid off early in 2010, and that net increase in interest was offset by some investment gains related to our auction rate security options portfolio. So putting it all together, our net income for the quarter excluding the pilot signing bonus was $2.6 million.

We ended the year with just over $100 million of cash and our operating cash flow in the fourth quarter was approximately $5 million. As we discussed on our third quarter conference call, we were expecting lower operating cash flow here in the fourth quarter for timing differences that we had related to various payments. So operating cash flow was very much in line with what we were expecting when we last talked with you.

And one thing that I want to note, in addition to just simply the income that Mesaba generated, Mesaba had a very significant effect on our consolidated operating cash flow for 2010. Mesaba we've estimated added $23 million to our operating cash flow for the year and when you take into account an additional $5 million payment we made to Delta in October because that cash flow that working capital was so strong, it was sort of a net $18 million increase to our year end cash balance related to Mesaba.

About $10 million of that operating cash flow was one-time in nature, just one-time positive effect of the acquisition that I discussed on our call last time. So just a really nice benefit to the acquisition that is really improved our results here in 2010.

We look at our cash used in investing activities; we used $6.6 million in the quarter. $5 of that $6.6 million was an additional payment to Delta related again to the acquisition of Mesaba. As you may recall, when I discussed last quarter, because we had such strong operating cash flow, we had an agreement with Delta that if working capital of Mesaba actually exceeded certain targets that we would pay an increase in the purchase price and so $5 million of that excess working capital was paid back to Delta in October.

We used approximately $25 million in financing activities in the quarter, approximately $4 million of that was normal debt amortization on our existing aircraft related financings and a little under $12 million of that was related to payments of short-term financing facilities as we took delivery of our Q400 aircraft during the quarter.

Before we enter the question-and-answer session, I do want to talk a little bit about our expectations here in 2011. First off, we do think that when we get to the second quarter, the Q400's will start to significantly improve Colgan's results year-over-year.

We're off to a bumpy start with the Q. We're a bit disappointed in the financial piece of that but we're encouraged by the fact that we're meeting United’s expectations and as we look here in the first quarter we can already see positive results with the addition of the Q's that we added in the fourth quarter.

Second thing that will positively impact us in 2011 is we do think we'll have a significant reduction of costs on our – maintenance on our Saab aircraft at Colgan. We had a maintenance program at Colgan Air that was in place when we acquired the company and the program, it was a contract with an outside vendor that expired at the end of the year and by eliminating that contract and bringing the repair work associated with that contract in-house, we expect to save $3 to $4 million over the course of a year. So we do think there's some big positives that will help improve the pressures that we felt in 2010 with our Saab program at Colgan.

Our new pilot contract today, which I want to congratulate everyone at ALPA and throughout our pilots here at Pinnacle, Colgan and Mesaba, it's great that we have a new contract, but it will represent a cost increase for us in 2011. It brings us to an industry standard contract but it does mean a cost increase primarily related to Pinnacle and Colgan. And we've estimated the total cost increase in 2011 to be approximately $18 million year-over-year associated with that new pilot contract.

Another item to mention, Phil talked a lot about the integration investment that we're going to make here in 2011 and we fully believe that the investments we make to integrate our fleet is going to result in a significantly stronger company in 2012 and beyond. And we'll be more than offset by the benefits, the financial benefits we'll gain from combining our operations.

But we do estimate that we'll incur one-time integration costs in 2011 of approximately $12 to $14 million. These are costs associated with training our crews and our mechanics, moving crews between fleet types and between bases, its IT costs and it's also severance costs related to overhead functions as we combine functions together in Memphis.

Now offsetting these cost pressures we will have an approximately 4% increase under our contracts with Delta that is just the normal inflation indexed rate increase that we get every year. But when you put those things together, we do think the net effect will be that our income in 2011 will be down from 2010 based on the changes that we see coming at us in 2011.

However, we're expecting a significant improvement in our income in 2012 and in 2013. As we sat down with Delta to acquire Mesaba, both we and Delta recognize the fact that combining the operations long-term would result in a better product for Delta and a better cost structure for both of us and could lead to improved earnings for us, for Pinnacle.

And one of the things that we negotiated with Delta when we acquired the company was to have an early rate increase based on the integration of our pilot workforce. So we will have a rate increase approximately 12 months from now, now that we have a single collective bargaining agreement that will be based on the changes and costs associated with the pilots that fly in the Delta Connection network.

The rate increase will include a one-time payment that will get approximately 12 months from now that will be designed to capture the increase in costs that we're going to incur over the next 12 months both from the new contract itself and costs associated with pilot training and pilot re-location as we combine the pilots over the next 12 months.

The rate we set also includes a forward-looking change in the rates that will start to apply 12 months from now that will be based on what our new pilot costs will be under our Delta contracts starting in Spring of 2012 going forward. So we estimate that the one-time payment that we may get 12 months from now could be as much as $18 million to $20 million based on the cost that we will have with our new contract as well as the integration costs associated with training and movement of crews.

And we estimate that the ongoing increase beyond that just simply associated with what we think our steady state pilot costs will be starting in Spring of 2012 could be as much as 14 million annually. So unfortunately, because of the way that the accounting rules work, we will not be able to recognize that revenue until 2012, until we actually determine what those increases will be and receive them from Delta. So 2011 will be a down year because we won't have the benefit of those negotiated rate increases but there will be a vastly dramatic improvement in income in 2012 because of these rate increases that we will have.

Now, one thing I do want to caution you is these are our estimates of what we think these increases will be. The principles behind these increases are very clear in our agreements with Delta and I think very well understood by both Pinnacle and Delta. But neither party knew exactly what these costs would be as we combined our crews between Pinnacle and Mesaba and Colgan and therefore the actual rate increases will be based on financial models that we will build over the next 12 months.

And those models will include allocations of costs between our Delta operations and the operations with our other partners. So it will be subject to our negotiation with Delta as to ultimately where these rate increases will end up. But right now, that's our current best estimate as we look at the costs that we're expecting here over the next 12 months of what those rate increases should be that we will receive from Delta next year.

One other item, I want to mention, in addition to the rate increases for combining crews in 2012, when we get to January 1, 2013 we will finally receive the very first rate reset that we've ever had under our CRJ-200 ASA, ever since that contract was put in place with Northwest in 2003. The original principles of that contract was that every five years there would be an adjustment to our rates based on our actual costs.

And when Northwest was in bankruptcy, we missed one rate increase. So this will be the first one after 10 years. And when we look at what's actually happened with our costs over the last 10 years versus the inflation based increases we've had in our rates over those 10 years, with the aging of the CRJ-200 fleet, with the complexity and the growth we've had in our company, our costs have far outpaced the inflation increases we've had under that contract. So when we look at 2013, we're expecting an additional fairly sizeable rate increase under our contracts with Delta related to all of our costs outside of our pilot costs which will already reset by then.

So while 2011 is a year of transition for us and will result in a year where we think income will be down year-over-year, we are really seeing some or expecting some fairly sizable improvements to our profitability when we look at 2012 and 2013 and beyond. And I think that's really where the focus needs to be because we are building what we think will be a much stronger company both financially and operationally when we get to 2012.

And with that, Operator, I'd like to turn the call back to you to open the Q&A session.

Question-and-Answer Session

Operator

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

Steven Li – Raymond James

Hi there, this is actually Steven Li, Duane's R.A. Duane unfortunately couldn't be on the phone with us today. Just two quick questions, just wondering what the implications are from the new labor agreements on your 2011 operating margins, any kind of disclosure on what margins look like for the Q1 and for the full year would be great and the second question is could you provide any commentary on what fuel price level we’d have to see for your pro rate business to be operating at breakeven level? Thank you.

Phil Trenary

Well, let me start on your first question. I've already mentioned that we think that the impact on income from the new contract will be approximately 18 million. We typically as a philosophy have not given a lot of forward-looking guidance historically but we felt it was important to talk about the impact of that contract. There's a lot of other things that will affect our actual margins in 2011.

The rate increases we'll get under our contracts, other changes and underlying costs, the Q400 growth that we're going to have. If I put it all together, while we don't have a specific target for what we think our margin will be in 2011, I do think our operating income will be down slightly primarily related to the integration costs and related to the pilot costs, labor costs that we have. Excluding those two items, we expect a big improvement in both operating income and operating margin year-over-year.

Your question on fuel, we don't – I've not really looked at exactly what we would want to see in terms of fuel from a breakeven standpoint. I will tell you that when we look at 2010, the revenue environment for our pro rate business, the increases that we saw in unit revenue far outpace the increases we saw on fuel price. The issues we've had in that side of our business relates to direct costs. Both costs that we had as we move crews around from Saabs to Q400s as well as the maintenance cost that I talked about and so focus in 2011 is going to be to focus on those non-fuel costs to get our Colgan unit back in line with the profitability expectations that we have.

I think if you saw fuel prices going up another 20% or 25% without revenue increases that help offset that, we’d have to start looking at our pro rate operation again and seeing which pieces of it make sense. And also I'll remind everyone, you may remember back in 20008 when we had the huge fuel price increases, we did renegotiate essential air service rates with the Federal Government. I think that we would have the potential to do that again if we saw huge fuel price spikes and we also talked to our partners at that time and changed some of the agreements with our partners to increase some of the incentive payments we get from our partners to fly in these pro rate markets. So those are the tools that we would have to help offset big changes on fuel price.

Steven Li – Raymond James

Great. Thank you.

Phil Trenary

Sure.

Operator

Your next question comes from the line of Helane Becker from Dahlman Rose. Please proceed.

Helane Becker – Dahlman Rose

Thanks very much, Operator. Can you hear me okay?

Phil Trenary

We hear you well, Helane.

Helane Becker – Dahlman Rose

Okay. Thank you. So I’m just sort of looked into what you're saying and it sounds like 2011 is just going to be another difficult year but as you think about Continental and United and what they're doing, have they talked to you about adjustments in flying and are there anything that you're – is there anything that you’re anticipating for Colgan in Newark that we should know about?

Phil Trenary

It's a little premature to speculate on what they are going to do as they look to put their network together and integrate their own system. I'm sure, we will see some changes. The one thing we do know is that they like the Q400 a lot and they would like to see it in a lot of different places. So long term, I think that bodes well for us but it's too early to tell exactly what that means.

Helane Becker – Dahlman Rose

Okay. So they really haven't talked to you yet about what their plans are for you guys, right?

Phil Trenary

Not beyond our current fleet plan, the 30 aircraft we have, no.

Helane Becker – Dahlman Rose

Okay. All right. And then my other question is with respect to the Delta $5 million payment, so are there anymore payments if you exceed expectations or do you – where do you guys draw the line for them?

Peter Hunt

That's the final adjustment that we have to the purchase price, Helane. The way that we negotiate the purchase agreement and because this was all coming together on July 1, we wanted to base the value of the company as of June 30th but of course, those numbers weren't known. We didn't know exactly what working capital would be. So we built a mechanism in that said if working capital was either lower or higher than a target that either Delta would pay us money or we would pay Delta some money and working capital far exceeded our expectations than theirs which has resulted in the additional payment of purchase price to Delta.

Helane Becker – Dahlman Rose

Okay. So that's very helpful. Thank you very much, and I think that was all my questions for now. Thank you.

Peter Hunt

Okay. Thanks, Helane.

Phil Trenary

Thanks, Helane.

Operator

(Operator Instructions) Your next question comes from the line of Bob McAdoo from Avondale Partners. Please proceed.

Bob McAdoo – Avondale Partners

Hi, guys. Back to the question about United and the fleet whatever, a couple of things. If I look out into June, you see a bunch of Q400s that would appear down in Houston going back and forth to McAllen and Jackson, Mississippi and Dallas and things like that. Is that – when you get to that point, is that – do you have all of the Q400s in service then or are there more Q400s coming after that? When do you get the last of the Q400s in and is that schedule kind of the farthest out that we can see in terms of really trying to understand what they are going to do with the airplane?

Phil Trenary

Bob, by June, we will have all but one aircraft delivered. The bulk of the aircraft delivered here in the first quarter with one additional aircraft in April and then the last aircraft that is going to come with some additional or differences in cabin configuration basically will deliver in August. So the bulk of the aircraft outcome here at the beginning of the year, so I think as you look out, I mean the schedules with our partners are never set in stone.

We find that they quite often ask us to make changes and that's part of the issues we had in the fourth quarter was changes on where these aircraft were going to fly. We talked to them about Newark, we talked to them about Dulles, about Houston, about Cleveland, so they've kind of spread them around the network a little bit. But I do think that as we look out the next couple quarters, what you're seeing is the visibility that we see which is we think maybe getting to some stability in how the Q400 will be used.

Bob McAdoo – Avondale Partners

So looking at that, it's at least as much as you know and it's out there for sale so I guess they may not be somewhat serious about it. I guess the other thing, just can you tell us what you understand from the back and forth between the two big airline pilot unions and the company as to what can and can't be done with airplanes and what you can do, there was this back and forth about where they could put 70 seat airplanes and where they can't and what limitations, are there limitations that would prohibit you guys from flying with United on the side of the plane as opposed to Continental on the side of the plane or among any of the unions that you know about.

Phil Trenary

So far, what we believe is that the discussions, let's call them discussions do not impact the Q400, that most of the discussions around the jet equipment. So we don't see that as being impact the Qs as delivering all have United on their airplanes already. So at this point, we don't believe those discussions would affect the Q.

Brian Hunt

And just to add to that, Bob, under the original Continental agreement with ALPA, there are zero limitations on adding turbo prop aircraft with a regional airline provider like Pinnacle, Mesaba, Colgan. The United contract there are no limitations on turbo props but there are limitations, I think on the overall number of aircraft that can be flown by regionals. So we think that Q400 is a very labor friendly aircraft and a very competitive one that can be used by United as they try to sort through their regional operations.

Bob McAdoo – Avondale Partners

Okay. All right. I guess that really kind of answers my questions. I guess, the other thing is you've talked to us about the impact of labor rate changes in the pilot group. Are there any other meaningful labor negotiations that you guys are entered into that may get settled here in the next two, four, six, eight quarters that could be an issue and if they are, is it anything like the size – I assume they aren't anything like the size of the payments that you're having to make here in the incremental costs here but what's kind of the status of the rest of your labor agreements?

Phil Trenary

Sure. On the flight attendant side, we are negotiating a contract at our Pinnacle subsidiary but there is a difference between where we are there versus where we were with ALPA at Pinnacle. We had an open contract with ALPA for five plus years and so to get to the industry standard that we target and that is very fair for pilots and for the company, represented a big increase from where things were five years ago.

With our flight attendants union, this is negotiation number two since I've been here anyways. And so when we look at where we are versus the industry, the size increases that we would think would target industry standard are much, much smaller than what you see with pilots. So I don't, while we'll probably end up with an agreement with them some time here in 2011, I don't think that those numbers will be anything like what we're talking about with our pilots union.

On the mechanics side, we have a non-unionized workforce at Pinnacle and Colgan and a unionized workforce at Mesaba. With respect to the non-unionized workforce, every one to two years, we again canvas the industry and we make adjustments to pay based on industry standard pay. So we think we're pretty close there with our mechanics group and with the mechanics group at Mesaba, that would not have an amendable contract until 2012. So I guess there still would be questions as we put together fleets and move aircraft around between companies as to what our mechanic groups will want to do, whether they want to remain non-unionized or whether they want to have a union as the Mesaba mechanics do but either way we don't think there would be any big increases in cost.

Bob McAdoo – Avondale Partners

Great. Appreciate it. Thanks.

Phil Trenary

Thanks, Bob.

Operator

Your next question is a follow-up question from the line of Helane Becker from Dahlman Rose. Please proceed.

Helane Becker – Dahlman Rose

Thanks. Sorry. I just forgot, wanted one about the flight cancellations due to weather. When they cancel you guys, are they canceling a disproportion at number? Let me ask it this way. Can you tell whether they're canceling because of one-way, you know, Tarmac rules or are they canceling because you just have more flights and they can kind of consolidate your passengers? Is there a way for you to kind of disaggregate what's being done for weather and what's being done for convenience on their part?

Phil Trenary

Well, I'd say most of the effect of the storms is truly weather related and it's not cancels on aircraft that are sitting on the tarmac and getting close to the new rules about ground delays. When we look at this with our partners I would say we're not disproportionately cancelled versus other regional airlines but I think it's pretty typical when a major airline looks at their network, they want to do the thing that inconveniences the fewest number of passengers. And so that tends to mean that if we need to pull aircraft or flights out of a bank because of a big storm coming through, that tends to mean you cancel the smaller aircraft regional aircraft. So while there may be times where we might cancel a little bit more heavily than our partners, I don't think that we’re – I don’t think that's aimed at us anymore than it is any other regional Operator.

Helane Becker – Dahlman Rose

Okay. I guess that's fair enough. So you can't tell if somebody is coming from a smaller city going into a storm at Chicago and United switches them over to Newark versus doing the other way around and canceling you in favor of a SkyWest plane or something, right? You can't tell that. Is that what you're saying?

Phil Trenary

Well, after the fact, we can see the number of cancels we had versus let's say SkyWest or versus mainline Operator. After the fact, we can see those numbers and when we see those numbers, what I would tell you is that I don't think we're cancelled disproportionately more than other Operators like SkyWest for weather.

Helane Becker – Dahlman Rose

Got it. Okay. Thank you.

Phil Trenary

Thank you.

Peter Hunt

Thank you.

Operator

There are no further questions at this time. This does conclude the question-and-answer portion of the call. I'd like to turn the call back over to Phil Trenary for closing remarks.

Phil Trenary

Thank you, Alicia and in wrapping up, I'd like to focus on what Peter said for a CFO. He gave a pretty strong statement. I have read it through his thought however, talking about the significant improvements in earnings. We’ve talked a lot about having the right aircraft and flying the right way being the operational thing to do and position us well for the future and what this integration does and what we're doing positions Pinnacle very well financially to the long-term benefit of our shareholders.

The steps we're taking go a very long way to insuring our success and profitability which leads to improved earnings for our shareholders as well. So we appreciate your participation in the call and thank you for supporting Pinnacle.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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