Pinnacle Air's Partnership With Continental Affords Low-Risk Growth Opportunity

Small-cap Watch List member Pinnacle Airlines (PNCL) issued a news release announcing an arrangement to expand their role as offering regional connection service to Continental Airlines (CAL). According to the release, Pinnacle will operate fifteen 74-seat Bombardier Q400 regional aircraft as a Continental Connection carrier. The aircraft will operate primarily out of the Continental hub at Newark Liberty International Airport. Although a modest 8% expansion to its existing number of aircraft, the structure of the arrangement provides Pinnacle with a low-risk route to that growth.

Key commercial terms of the agreement include the following:

• Continental will purchase all Q400 capacity at predetermined rates and industry standard pass-through costs. Fuel will be purchased directly by Continental and provided to Colgan at no cost.

• The aircraft will be delivered to Colgan from December 2007 through June 2008 and placed into service in early 2008.

• The capacity purchase agreement will be for a term of ten years from the date of the last Q400 delivery, extending to June 2018.

With the capacity pre-purchased, Pinnacle appears to have limited risk in this transaction.

PNCL 1-yr chart: