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Executives

Brian Hunt – VP and General Counsel

Don Breeding – Interim CEO

Peter Hunt – CFO

Analysts

Duane Pfennigwerth – Evercore Partners

Michael Linenberg – Deutsche Bank Securities

Ray Neidl – Maxim Group

Helane Becker – Dahlman Rose

Bob McAdoo – Avondale Partners

Glenn Engel – Bank of America Merrill Lynch

Pinnacle Airlines Corp. (PNCL) Q1 2011 Earnings Call May 5, 2011 10:00 AM ET

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Pinnacle Airlines Corporation earnings conference call. My name is Brian, and I'll be your operator for today’s call. At this time, all attendee lines are muted and in listen-only mode. We will be facilitating a question-and-answer session after today’s prepared remarks. (Operator instructions)

I would like to turn the call over to Brian Hunt, Vice President and General Counsel. Please proceed, sir.

Brian Hunt

Thank you, Brian. Good morning, everyone, and welcome to the first quarter 2011 earnings conference call of Pinnacle Airlines Corp. On behalf of the more than 7500 employees of Pinnacle, 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 today 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 Don Breeding, our interim Chief Executive Officer.

Don Breeding

Welcome, everyone. Thank you for joining us this morning. I’ll just start off by mentioning that we had a rather tough quarter, the first quarter due to some extremely unusual weather patterns that existed across most of our system. This resulted in a number of cancellation and delays, which impacted us both financially and operationally.

I do want to thank our employees for taking care of our passengers during this very difficult time. They did an outstanding job in doing the best they could to assure that we handle them in a professional way.

The integration process also put an extra strain on our people and they are dealing with that in a very professional way. Mentioning the integration process, I’ll just say that we are on timeline and we’re within our budget at this point in bringing together the corporations of Colgan, Mesaba and Pinnacle. This integration should result in a great benefit to our shareholders, our customers and our employees.

We did six additional Q400 aircraft in the quarter and this strengthens our relationship with United. We now operate 28 of the Q400s for United Express. As you all know, we are searching for a new CEO, who will move in and I can go back home once he is here. This process is going well we have some excellent candidates and we should have our CEO in place in June.

So, I will now turn the call over to our Chief Financial Officer, Peter Hunt, who will lead us through the review of our first quarter financial results. Peter?

Peter Hunt

Thanks, Don and good morning, everyone. Thanks again for joining us today. This morning we did report first quarter diluted EPS excluding special items of a $0.01 and this was down $0.08 year over year. Our results were negatively affected, as Don mentioned, by weather. Not only did we lose revenue in all three airlines related to increased cancelled flight because of weather, but we also had higher operating performance penalties than we did in the first quarter of 2010. Our performance penalties were $2.1 million in the quarter and that’s an increase of over $1 million year over year.

Additionally, we were affected this quarter by the implementation of our new pilot contract with ALPA. It brings our pilot wages up to the industry average, so we have a competitive contract, but it also represents an increase in cost, primarily at Pinnacle but also at Colgan and slightly at Mesaba.

For the quarter, we incurred an additional $2 million or $2.1 million of cost related to this ALPA contract and that’s essentially for about half a quarter, because the terms of the new contract when into effect in the middle of February.

On top of those items that affected our results, we also recorded several special items that reduced our GAAP income and in fact, turned our GAAP income into a loss; total of $5.8 million in special items, $2 million of that total relates to the implementation of our new contract ALPA. We recorded $1.4 million of non-cash accruals to adjust an accrued vacation balances to the new rates that will be paid under the contract. And, in addition, we paid $600,000 to ALPA for their share of costs associated with the implementation plan that we have and the combination of our pilots groups into an integrated seniority list.

Secondly, as part of that $5.8 million, we recorded $800,000 under our integration plan, primarily related to severance and stay bonuses. We’re really at the just the beginning of the implementation program and we do expect additional integration costs as the year progresses and I’ll go over that later.

And then, lastly, to get to the total $5.8 million, we recorded $3 million associated the resignation of our Chief Executive Officer, both related to a consulting agreement that we signed with him, as well as the accelerated vesting of equity related grants that the CEO retained. So, including all of those one-time special charges, we recorded a net loss of $3 million for the first quarter and a net loss per share of $0.16.

Looking at our operations, our Pinnacle Airlines subsidiary flew a 107,634 block hours, just up slightly 3% year over year and Pinnacle had 66,204 departures, just slightly down year over year, about 1%. Pinnacle is still continuing to fly its core fleet of 126 CRJ-200 aircraft and 16 CRJ-900 aircraft.

At Mesaba, we flew 59,756 block hours and had departures of 34,435 and Mesaba’s fleet currently consists of 19 CRJ-200s, 41 CRJ-900s and 27 Saab 340 B+ aircraft. We’re currently flying 20 for Delta and that fleet continues to decline in line with the plans we made with Delta when we acquired Mesaba, and we also have seven aircraft now flying with US Airways, with operations that began in March.

At Colgan, we flew 35,676 block hours, up 19% year over year and we had 26,986 departures, up 12% and the big increases there primarily related to the Q400s that we added in the quarter.

So at the end the quarter now, just to kind of reiterate where we are with fleet, on a consolidated basis, we have our core of 57 CRJ-900 aircraft, 145 CRJ-200 aircraft. We now have 28 Q400 aircraft with two more to deliver this year and a total of 57 Saab aircraft. With the integration of our fleet going forward, we won’t be continuing to disclose operating statistics by subsidiary, but you will be able to obtain statistics on our website every month showing our operating statistics by fleet type.

Turning to our income statement, we recorded almost $300 million of revenue. Revenue was up about $90 million year over year. The biggest piece of that change is associated with Mesaba, which generated an additional $68 million in the first quarter. We also generated another $11.5 million under our Q400 contract with United and the remainder of the increase simply represents changes in revenue in our underlying business.

We reported operating income of $6.3 million that’s inclusive of the special charges. Excluding those special charges, our operating income was $12.1 million, down just slightly year over year from the first quarter of 2010.

Looking at each subsidiary, Pinnacle reported operating income of $9 million that was down $4.8 million year over year. And Pinnacle was heavily affected by the weather. Pinnacle recorded $1 million in incremental performance penalties under its contracts with Delta, in addition to the fact that Pinnacle lost incremental revenues associated with the cancellations that we had from higher level of cancellations from the weather. Pinnacle also had the bulk of the increase in pilot wages from our ALPA contract, had an effect and also Pinnacle is continuing to experience slightly higher maintenance costs year over year on the core fleet.

Mesaba’s operating income was $1.1 million for the first quarter and that is down about $2 million from our expectations under the contracts that we entered into with Delta. Mesaba was also heavily impacted by the weather and Mesaba’s share of Delta related performance penalties was about $300,000 in addition to the lost revenue Mesaba had from canceled flights.

Mesaba is also being affected by the reductions in Saab flying with Delta. As the aircraft come out, crews and mechanics become less productive and we actually have a mechanism in our contract to deal with that with Delta. We’re negotiating a rate adjustment that should be finalized in the second quarter here, it will apply retroactively to January 1 and when that rate adjustment is finalized, we will record the retroactive component of that increase. We currently expect that increase to be about $500,000 related to the first quarter, probably an additional $500,000 in the second quarter as well, and that should be finalized soon in the next month or two.

In addition, Mesaba was affected in the quarter by the preparation for launch of operations at LaGuardia with US Airways. That launch occurred in March. So, the revenue is just starting to ramp up, but we did incur costs associated with crews, moving crews there and starting up in the first quarter and that did affect operating income.

Looking at Colgan, it was actually a significant improvement in operating income year over year. Operating income was 2 million and that was up over $3 million on a year-over-year basis. We had increased profitability related to the Q400s coming in, as the ramp up of operations with the Q continues.

Also in the pro-rate side of our business, we had $1.9 million of additional revenue on 6% less capacity. So, our RASM in our pro-rate operations actually increased 13%. Now offsetting that RASM increase, we did have a pretty big hike on fuel costs. Fuel costs increased 1.3 million year over year and the average price we paid per gallon was $3.16 in the quarter, which was up 32% from the first quarter of 2010.

So, the increases we had related to the Q and the increased revenue in our flying were offset by the winter weather. Colgan was also affected by poor operating performance and had a significantly higher cancellation rate than we had a year ago.

And also one thing I want to mention, we transferred our ground handling operations from our Pinnacle subsidiary to our Colgan subsidiary, primarily because our ground operations handle more Colgan cities than they handle Pinnacle cities. And while we’ve made per segment comparisons in our press release, we’ve made the appropriate re-clauses last year, so we have a good apples-to-apples comparison when we look at the increases in income. But a piece of the increase is attributable to ground handling, which was up about $800,000 or $900,000 year over year.

Our net non-operating expense was 11.9 million for the quarter and that was up $2 million from the first quarter of 2010, that’s primarily driven by the interest associated with the note we issued to Delta when we acquired Mesaba, as well as additional interest on the Q400s that are coming both last – late last year and the first quarter and that are being placed into service with United.

So, on – when you put it all together, we get to net income of excluding the 5.8 million of integration, severance and contract implementation expenses, we had net income of $100,000 and net income per share of $0.01.

Looking at the balance sheet and cash flow, we ended the quarter with just under $80 million of cash, pretty much in line with our expectations. Cash provided by operating activities in the quarter was $13 million, also in line with our expectations. And we used $4.7 million in investing activities. We paid off $3 million in predelivery payments primarily related to the last Q400 to be delivered in August of this year. We also had about $2.7 million of sort of normalized capital expenditures in the quarter and then those uses of cash were partially offset by a million of cash proceeds associated with the proceeds we received from options we continue to hold on auction rate securities. We used $28.7 million in financing activities and the bulk of this is related to the Q400 deliveries.

As each aircraft delivers, we paid down predelivery payment financing facilities that we have in place. We paid $60 million of those PDP financing facilities in the first quarter and then we also had a little over a $11 million of just normal recurring principal payments on our own fleet of aircraft.

So, looking forward at the rest of 2011, the pilot signing bonus that we accrued at the end of 2010 was actually paid to our pilots in April. So, we do expect that when you look at the second quarter that our cash balance will decline from the beginning of the first – or the end of the first quarter because of this large bonus that we paid out. However, the investment in our new Q400s is largely behind us. We just have one aircraft left to deliver in April and one in August and as I mentioned earlier, the PDPs associated with the August delivery have now been paid.

We’ll continue to incur integration costs in 2011 in addition to the $800,000 that we recorded in the first quarter. We still expect roughly 12 million or so to affect us the remainder of the year and potentially a little bit in early next year

And we expect to have capital expenditures for the remainder of the year in the neighborhood of $8 to $10 million. So, we do expect to be profitable for the rest of the year even including the special integration cost that we will continue to occur – incur and the higher wages from our pilot contract, but we do expect cash to decline in the second quarter with the payment of the pilot signing bonus and the CapEx that we’ll have with the rest of the year, but cash flow begin to build again in the second half of the year in 2011.

What I’m really excited about is 2012 and 2013 because we’re setting ourselves up to really have a strong year in 2012. We’ll be in full swing by the end of the year on our integration and I think that it will be largely completed in the first half of 2012. We’ll also have the first of two major rate adjustments under our contracts with Delta in the first of half of 2012. We’ll get in that period of time both a one-time payment that we’re currently estimating in the neighborhood of $18 to $20 million that’s associated with pilot integration and the changes in pilot cost that we have had over the years here at Pinnacle. And on top of that, we’ll also receive, at the same time, approximately mid-2012. We’ll receive an ongoing prospective rate increase that we’re currently estimating to be as much as $14 million to $17 million annually.

Then when we get to 2013, we’ll have the first normalized rate adjustment under our original ASA with Delta. It will be effective January 1. The adjustment will be based on our operating cost structure at that time and our expectations of cost over the next five years. So, it’s too early to know exactly what that adjustment will be, but we do think it will be of similar magnitude to the prospective rate increase we’re going to receive in 2012.

So, we really think we’re setting ourselves up with integration that we’re going through this year with the changes we’ll have with our contracts with Delta to have a significant increase on profitability in both 2012 and 2013, and we’ll be back to a level of profitability that will exceed the levels of income that we’ve had over the last two or three years.

With that operator, I’d like to turn it back to you to take some questions.

Question-and-Answer Session

Operator

My pleasure, sir. (Operator instructions) And your first question comes from the line of Duane Pfennigwerth with Evercore Partners. Please proceed.

Duane Pfennigwerth – Evercore Partners

Hi, good morning.

Don Breeding

Good morning, Duane.

Duane Pfennigwerth – Evercore Partners

I’m wondering, Peter, if you could maybe give us an update on the CEO search sort of what are the attributes that you guys are looking for and how close are you to naming a permanent CEO?

Don Breeding

I might just deal with that. This is Don Breeding.

Duane Pfennigwerth – Evercore Partners

Hi, Don.

Don Breeding

We’ve been going through a formula search for about two months now using outside search firm. And we started out with a deck of 64 candidates and that was narrowed down to eight two weeks ago. And this coming Monday, we’ll be interviewing the three outside candidates and today, we’re interviewing three internal candidates. So, at the end of next Monday, we should be in a position to extend an offer to one of these six people. And I would anticipate based on that schedule that we should have someone in place here sometime in the month of June.

Duane Pfennigwerth – Evercore Partners

Great. And then what are the key attributes you’re looking for in the next CEO?

Don Breeding

The key attributes are obviously, we’re looking for someone with a strong operating background because that’s a major part of our business providing consistent, strong performance for our customers, so an operating background is a necessity. Someone with a good general understanding of the financials and we also are looking for someone who has a keen sense of the culture that’s been developed here at Pinnacle and someone who can carry that forward and hopefully even enhance it more and that’s important in bringing these entities together as one family. So the cultural piece will also be important to us. And all of those elements have been stressed as we’ve gone through the interviewing process with all of these candidates.

Duane Pfennigwerth – Evercore Partners

Thanks. And then, Peter, just in the near term over the next couple of quarters, what are the sort of three items that should improve profitability? And should we assume that while you’ll be profitable, it will be difficult for you to grow earnings year to year until you get these rate adjustments back?

Peter Hunt

Earnings will not grow this year, Duane, in 2011 and we’ve talked about that at the beginning of the year when we had our first or fourth call. We do expect earnings to be down slightly year over year, primarily as it relates – because of the integration that we’re going through, as well as the pilot costs, the increase in pilot costs.

So – but we do think in 2012, we’ll have a pretty major increase in earnings, really even above where we were last year associated with earnings. As I look at the second and third quarters, seasonally they are always a lot stronger for us, the parade operations, the revenue is strong in the summer, the key part of joining in LaGuardia in March with U S Airways is because LaGuardia performs very well over the summer for us.

So, we do expect to see better performance financially, as well as operationally in the second and third quarters. We’ll caution with the second quarter that a large piece of the penalties that we recorded in the first quarter are measured on a six-month basis. And so, we will look in the aggregate where we are at the end of the six months on those performance penalties and it may very well be the case that we’ll record some additional penalties in the second quarter that will affect us.

Duane Pfennigwerth – Evercore Partners

Thanks Okay. Thank you.

Peter Hunt

Thank you, Duane.

Operator

And your next question comes from the line of Michael Linenberg of Deutsche Bank. Please proceed.

Michael Linenberg – Deutsche Bank Securities

Yes. Good morning. I’m Peter. When you talked about cash being down June quarter versus March quarter, can you get us a sense of the magnitude of that quarter-to-quarter decline?

Peter Hunt

Well, I think the total pilot bonus is $11 million. And when you consider that we are still making investments in the second quarter, the normalized operating cash flow that we have will offset principal payments on debt and some of those investments. So, excluding that pilot bonus, I wouldn’t have expected big increase in cash to begin with. So, I think the magnitude could be as much as the signing bonus itself which is $11 million.

Michael Linenberg – Deutsche Bank Securities

Okay. Okay, that’s helpful. My second question on the pro rate business you gave us the RASM increase, which was a nice year-over-year gain, you tell this what fuel expense was up? What – from maybe an EBIT perspective or pre-tax perspective, how did pro rate look this year versus last year, was it a loss figure or were you able to narrow it?

Peter Hunt

No, – the results on the pro rate business, I would say generally we are slightly better year over year.

Michael Linenberg – Deutsche Bank Securities

Right.

Peter Hunt

– nearly because of the revenue, we still have a lot of extra costs embedded in our Colgan operations associated with the Q400 adds and that extends Saab flying because, Saab pilots move to Qs, and we hire and train Saab pilots. And so, we are still in the first quarter here under what we call pilot double where we have a little bit of hit on productivity and that extends to the Saab supplying the pro-rate business two.

Maintenance costs also continue to be higher on the Bs we have at Colgan and one of the things that we are looking very carefully at is whether or not we could transition some of those to B+ aircraft which is the model that Mesaba flies today that would be newer aircraft. And so, the operating costs should be lower, but it also represents a change in capital costs when you transition to a new fleet.

So, we are looking at those things to get the core cost to improve, but I am very encouraged by the revenue. The revenue has been strong over the last couple of quarters and the markets that we are in, it continues to be strong. So, I think when we get past some of these cost bubbles we have with pilots, perhaps look at doing some changes with the operating fleet, the pro rate business should still continue to do for us just as it did in 2009.

Michael Linenberg – Deutsche Bank Securities

Okay, good. And just one third question, we know that there is going to be a sizeable cutback in Memphis and obviously, as Delta goes through their fleet plan. Now, I believe from your perspective – your contracts here – you are pretty well protected, so if there is CRJs that come out, it seems like that it won’t be airplanes, you do have some Saabs coming out for the Delta agreement. So, I can see some coming up, can you talk about that and what sort of impact the current Memphis will have on you at? Number one. Number two, as Memphis downsizes, are you going to be moving aircraft and crews and other assets to some of the other Delta hubs which could result in some cost pressures. It could be changes in stage length, it could be moving people around, I mean, we’ve been seeing that with all the regionals right now, given the sizeable downsizing in capacity over the past couple of years. Sometimes you’ve run into these cost hits that you just – you aren’t anticipating, because at any point in time, it’s sometimes hard to get a sense of where you are going to be scheduled and where the aircraft are moving. So, really a long question with a lot of different parts, but I just love to hear how you guys are looking at it.

Peter Hunt

Sure. Well, and that’s a good question, because – you are correct, you’re accurate. What we’ve been experiencing thus for over a year with Delta, changes to the network. We’ve been shifting or flying around between hubs. We’ve grown extensively in the New York area with the CRJ flying which we never had that presence before or at least certainly in our – kind of a hub type of basis. And what the information we are getting from Delta about this latest announcement is additional shifting of capacity in other places. And that does cost pressure, you are absolutely right. And that’s something that’s been affecting us really over the last twelve months. Our pilot productivity has come down over that period. Our total pilot cost at Pinnacle were actually up over $3 million, only about two-thirds of that number is associated with the new contract. The other piece of it is associated with pilot productivity as we get most spread out around Delta network and less focused on Memphis, Minneapolis and Detroit.

So we absolutely see that, it also affects us on the maintenance side, because as the aircraft are spread to different hubs and more hubs. We have to have additional line maintenance in those hubs, we have to have additional overnight facilities to be able to service the aircraft, more spread out, the less concentrated we are, the higher the costs are to operate.

I think the good news with all that is that as we continue to make those adjustments this year, this is all happening right before. We have a major rate adjustment with Delta January 01, 2013. So, the changes that we are going through now on the growing pinch we’re experiencing that Delta will all be captured when we have that rate adjustment and ultimately, we should return to normalized margins under our agreements.

Michael Linenberg – Deutsche Bank Securities

Okay. That’s helpful. Thank you.

Peter Hunt

Sure. Thank you.

Operator

And your next question comes from the line of Ray Neidl of Maxim Group. Please proceed.

Ray Neidl – Maxim Group

Good morning.

Peter Hunt

Hi, Ray.

Ray Neidl – Maxim Group

Can you comment a little bit further on the management search, can you tell us who the insiders might be, is Peter on the list?

Don Breeding

I can’t get into any specific names, I will tell you, however, that all of the people that we have talked to up to this point have a strong aviation background, strong background with airlines and all have the traits that I mentioned earlier, a keen sense of the operations, a good understanding of the financials and good eye towards building a stronger culture here at Pinnacle. But, I wouldn’t want to get into any specific names, but I can tell you they all have strong aviation and airline backgrounds.

Ray Neidl – Maxim Group

Okay. And what is the reason with that Phil turn the – left to pursue other goals, can you go into that?

Peter Hunt

Nice question. The reasons behind why Phil decided to resign.

Don Breeding

That’s a decision that Phil made and you read the same press release that I read and the same statements that Phil made to me personally. I think he felt that he had accomplished a lot here at Pinnacle over the years and headed in a good position to move forward and his desire was to go do some different things. So, spend a little time with his family, do some travelling and take a little different direction and he is terrific.

Ray Neidl – Maxim Group

Okay, great. And this is directed to Peter, we are in very uncertain times. You don’t know what’s going to happen with the economy in the second half of the year, fuel prices are going to the roof, there is lot of uncertainty, now, you got a good business plan here, but your cash levels are low and I know you are going to go – you are saying you’re going to go to positive cash flow later on in the year, but if things don’t work out that way, if the unforeseeable happens and you get hit with some unforeseen things, what ways you have to weight additional cash to maybe get you through those times and to your business, Pinnacle can take full effect in 2012 or 2013.

Peter Hunt

Sure. Well, I think one feel that we are looking at, one thing we are looking at is, we have, I think, a really strong spare parts financing facility in place, something we put in place with CIT couple of years ago and currently the parts that we have in Mesaba are not part of that financing. And we’re talking with CIT about potentially adding that collateral and increasing the size of that facility which would be some additional liquidity that we would have. We always continue to look at sale/leaseback options with the owned aircraft that we have, particularly with the Q400; because of the debt financing that we received from ADC up until now, doing operating leases with those Qs hasn’t made sense.

But, we’ve done a couple of potential opportunities there that lease rates that we’re looking at start to look a little better to us, start to potentially make sense. So, those are the couple of options, some opportunities we’re looking at that we’ll continue to look at in the second and third quarters and maybe do something on those two things. Just a comment about risk to our cash flows, the revenue side of our business, I think, is somewhat predictable. It’s not completely predictable because of changes that we make with Delta on our network as I talked about, but more predictable I think than the major airlines and less sensitive to the economy in the short run than it is with major airlines.

So, I do feel pretty good about near-term visibility on revenue. To the extent that we see some impact on cash, we have some control over the timing of our integration and the cost that we’ll incur there and so we would also look at the potentially slowing that down to also make certain that we maintain more than adequate levels of liquidity.

And then the last thing I would comment is the pro-rate business is the piece that’s the most susceptible to the economy and the fuel is the biggest piece of that. We went into that problem in 2008 and we took a lot of steps pretty quickly in 2008 to make adjustments there. We got auto markets, we went back to the government and EAS markets and changed the subsidies that we received to fly there.

And we talked to our partners and changed connect incentives that we have with our partners. We’re going to keep looking at the pro-rate flying that we do very closely. I feel pretty good about it over the summer, but the fall is a, call it a, inflection point for that business because the fall and the winter is always tougher anyways and the fuel prices are still high. We’ll continue to look at some of the flying that we do there and see if we need to change it, quantify it with our partners or potentially the exit markets. That will be a think that we’ll look at as well.

Ray Neidl – Maxim Group Okay. And Peter, what’s a rough estimate of the cash you could raise, $40 million, $50 million?

Peter Hunt

No, I don’t think it would be that much. With the spare parts deal today, we have about $25 million in the deal. If we add the Mesaba parts to it, that might add somewhere in the neighborhood of other $10 million to 15 million and related to the Q400 aircraft in sale/leasebacks, it’s based on the number of leasebacks that we would do, operating leases we would do. Each aircraft we generate – basically we would be repaid the roughly $3 million equity investment we made in each aircraft. So, I doubt we could do in the magnitude of 10 to 15 of those. But, we might be able to do a handful of those if the economics work for us and make sense and if we wanted do that. I think we could do a handful.

Ray Neidl – Maxim Group

Okay, great. And the last thing is, maybe it’s more of a broader term question. Maybe it’s more in line with your next CEO to give his viewpoints. But the thing is, in a high-field quest environment, the legacy carriers as you’re well aware continue squeezing their regional partners on the contracts and the deals. And, the trend has began already, but it looks like the legacy carriers more and more going to be pulling out of the smaller markets, just abandoning them and leaving them to whoever wants to fly there independently.

And, to me it looks like, as far as the regionals goes, and one of your competitors is moving in this direction is towards the larger R Jets , aircraft that are 70 seat and more, just we’re getting about the small markets. If you want to comment on that that, fine. How – if you agree with that or disagree with that and if you agree with that, how that might affect Pinnacle in the long-term?

Peter Hunt

Well, sure. I can comment on that. We’ve been pretty steadfast in our belief that the CRJ-900 and the Q400 is essentially the wave of the future for us and that’s a big part South acquisition was important to us because it strengthened us with the CRJ-900 76 seat jets. In the case of the CRJ-900, if you compare Embraer 175 which is probably the most comparable in-class aircraft, it costs less to fly. It burns a little bit less fuel, and with the changes made to the next-gen cabin, it’s very comfortable.

When you compare the economics of that aircraft to a 50-seat jet, I think it compares very favorably and I agree with you. I think that over the next four or five years, you see a lot of CRJ-200s or 50-seat jets in general within the major airlines’ networks that probably are going to come out and some of those will be replaced by aircraft like the 900. We think the 900 is the cost effective one which is why that’s where we placed our bet. We think that there will be some growth opportunities over the coming years with that.

Q400 is, I think, maybe even a better story in a high fuel environment than the 900, because the Q400 carries the same number of passengers, in the mid 70s, and it costs about 20% less to buy a Q400 than it costs to buy a CRJ-900 and it burns up to 30% less fuel than the Embraer 175 and the CRJ-900. So, it’s just a incredibly efficient aircraft when you look at a high fuel environment and I think it’s working very well for United which is why we’ve been able to grow with United with that aircraft.

I think more and more majors will take the good hard look at that aircraft because it’s very comfortable for passengers and United hasn’t seen any issues to my knowledge of any kind of passenger aversion that they are being a turboprop. In fact, what they find is because the cabin is slightly larger, and it’s got the anti-noise, anti-vibration technology, makes it a little lighter than a traditional turboprop. Passengers actually prefer it; certainly to the 50-seat jet, they prefer it. So, we see a lot of opportunities with both of those in the future and because we now have the fleet in the operation, we think that we’ll be able add that kind of capacity in the future profitably.

Ray Neidl – Maxim Group

Great, spoken like a true CEO. Thanks, Peter.

Peter Hunt

Thanks, Ray [ph]

Operator

And, your next question comes from the line of Helane Becker of Dahlman Rose. Please proceed.

Helane Becker - Dahlman Rose

Thanks very much operator. Hi, and thank you for taking my question. So, my first question is with respect to the US Airways flying. Is there an opportunity there to increase that flying, a? And, b, has their slot swap at LaGuardia a successful? Is there a provision in your contract with them to modify that flying?

Peter Hunt

We spent a lot of time talking with the US Airways about the slot-swap because they do have a commitment Delta to move forward on that if they can obtain the DOT that they need to do that. I think that – my understanding would be that the implementation of any kind of slot-swap with the next year at the earliest and US Airways has given us a lot of latitude and flexibility for us to pick the time whether we’re early in the process of transitioning the Delta or late in the process of transitioning. We can make that call at the US Airways. But, beyond that, we’ll have seven aircrafts. They are now the big body 340 B+s. They are much more cost effective to operate. We can either simply move them to Boston or refine for US Airways. And, sell some of the Bs that we have in Boston or we can fly them somewhere else with the US Airways.

We have a good relationship. We’ve talked to them about other opportunities in other hubs. I think, when the time comes, there will be some opportunities to fly them somewhere else. But, the royalty for us is that because these are pro-rate arrangements, is we have to make certain – well, I think there’s plenty of places US Airways would like us to fly. (inaudible) certain places that we can fly profitably. And, that’s really going to be key I think is to whether these aircrafts go to a new hub and our new flying versus simply moving and replacing flying to Boston. So, we (inaudible) wait and see whether that happens at the time.

Helane Becker - Dahlman Rose

Okay, alright. Well, what was their response? I just – Mike Linenberg, actually asked a lot of my Delta related questions. I just had a couple of follow-up. Delta is really not a very good partner for any of its regional providers. And, you mentioned on the call that, in your remarks that, you are negotiating a new contract with them and you talked about the revenue benefits that you are hoping to see. And, given that – you’ve given us these numbers.

I’m sure you have a high degree of confidence in that. So, on a scale from one to ten, can you actually handicap where you think that you’ll come out on that negotiation with Delta where one is not very well and ten is really well?

Peter Hunt

Well, you’re right that Delta is aggressive and I knew that both has a positive and a negative. It does make them a little bit more demanding partner to work with, but it also means they’re very action oriented and they respond when they see crisis out there and that’s the kind of partner we want. We want one that, in the long run, is going to well and they are one that is very action oriented to next certain that they do for more profitability and value [ph] in the future.

So I view that not necessarily all negative to the extent that they’re aggressive sometimes with the regionals. With respect to us and with the rate adjustments that we’re going to have coming forward, it will be a negotiation. I think that as we sat down with Delta back last late June and put together the contracts for Mesaba, we did try to make the language as clear as we possibly could, so that it wasn’t open to a lot of kind of interpretation and then it wasn’t too nebulous or vague. So, I think that the road that we have to go down to determine the rate adjustment is a little more clear than it’s been in the past negotiations with Delta, but it still will be a negotiation. Having said, that you’re right, we wouldn’t be putting out some of these numbers if we didn’t have a reasonable degree of confidence that we’re going to be within those ranges.

The cost associated with the new pilot contract and the cost structure that we now have which is industry average and it’s competitive, that kind of is what it is and so I don’t think there’s really a lot of room for debate as to what the rates that we’re paying our pilots are. So, there are pieces like that I think that will be fairly straight forward. There may be some pieces in some of these adjustments that relate to allocating costs between operations where we’ll have some good discussions with Delta, but I do think – I do feel pretty comfortable we’ll end up in ranges that I indicated.

Helane Becker – Dahlman Rose

Okay, alright. And then just two other questions, if I may, on – and you might have said this. I hopped on the call about five minutes late. I think you have $75 million of debt repayment due this year. Is that going to be – what are you doing there? Are you refinancing that debt? How should we think about that?

Peter Hunt

Well, the biggest piece of it was paid this quarter because there was PDP facilities with the Qs. Beyond that, we tend to have roughly $12 million or so a quarter of principal amortization on just the owned aircraft that we now have, the 900s, that Pinnacle 5s and the Q400s, and, that will be – continue to be pretty stable. We’ll also have the payments that we make to Delta each quarter for the Delta note which is another couple of million, $2 million or $3 million a quarter. Generally that kind attracts with operating cash flow and CapEx.

So beyond the payments we make for our pilot signing bonus that comes in the second quarter, I think we’ll be relatively stable on cash flow and liquidity for the rest of the year. We’ll make that big payment. We’ve already made it actually in April for our pilots and then looking at the rest of the year, I think operating cash flow will be enough to pay for the CapEx and the principal amortization that we have remaining.

Helane Becker – Dahlman Rose

Got it. And then, part B of that question is, can you renegotiate actually the purchase price of the Mesaba acquisition or renegotiate the load given kind of the changes that Delta has made since the acquisition, is that possible?

Peter Hunt

Well, what we try to do was put in inflection points where we have these rate adjustments, so that we’re always driving back to the expected profitability that we and Delta agreed to in the contract. The biggest changes are really coming on the Pinnacle side of the business, not from Mesaba side of the business. I realize Mesaba’s operating income was down a little bit this quarter, but we think that will change. When we look at the second quarter, we’ll be back to kind of levels we expect from the contracts that we negotiated with Delta.

The rate adjustments should take care of the cost pressures that we’ve had both this year and in the last several years on the Pinnacle side. It’s just we’ve been waiting to actually get to the point in time where we have those rate adjustments. So, I really think that’s the focus on making sure we get the profitability out of our contracts that we should be getting that there is not a adjustment to the purchase price, we had one adjustment that happened in October and it was simply related to the balance sheet in the amount of working capital associated with Mesaba which was actually higher than expected, but beyond that, the purchase price is done, we’ve paid it and will continue to pay the obligation – the note obligation that we have with Delta.

Helane Becker – Dahlman Rose

Okay. And then on – I think you said that you are going to put the breakdown on a monthly basis, what did you say on the traffic, your fleet or block hours, free type each month, right?

Peter Hunt

Well, we‘re going to do all the statistics, so you had block hours, departures, ASNs, RPM’s load factor. We are going to do that by fleet type going forward which is more reflective of how we’re viewing the business. Now that we are consolidating the fleets so that’s not split up by subsidiary anymore and that will be available. In fact, it already is available for the first quarter on our website pncl.com. The monthly releases we put out for the media, they were getting kind of unwieldy, putting out all these data on these different subsidiaries. So the actual press releases will be very abbreviated, but then you can the detail at the website.

Helane Becker – Dahlman Rose

The other part of the question that’s actually are – do you think you are going to tell us how many hours you are going fly by fleet type?

Peter Hunt

We typically haven’t given a lot of projection data partly philosophically and partly because with our partners, sometimes it’s more difficult to predict that beyond the next quarter. Generally, I would say the jet fleet operations year over year can be relatively stable. Aside from the fact that we have Mesaba, this year in the second and we didn’t last year, but the amount of flying that we are doing is relatively stable there. The Saabs will continue to shrink down between now and sometime early next spring, so you see the decline on the Saab side, but beyond that we haven’t any specific projections with the block hours and the level of capacity that we’ll have, but as I said I think it will be relatively stable and should be somewhat easy to predict.

Helane Becker – Dahlman Rose

Thank you, alright. Thank you very much for your help.

Peter Hunt

Okay. Thank you, Helane.

Operator

And your next question comes from the line of Bob McAdoo of Avondale Partners. Please proceed.

Bob McAdoo – Avondale Partners

Hi, guys. Most of my questions have been answered, but I’d like to go back to kind of the plan for the fleet on the Saab, because we’ve heard Delta talking about as they talk about reacting to high fuel prices, they are talking about pulling down their Saab flying, it sounds like faster, you’ve talked at times about potentially using some of the Mesaba Saab’s over the old Colgan fleet you are flying. I think you used to now – you just mentioned here a few minutes ago that the 340 B+s are going to be in LaGuardia, can you tell us what we should be thinking about in terms of what you have now in terms of airplanes and of those, how many are early active of the two different kinds of Saabs? And how soon do you think the Delta wind-down is going to happen of the Saabs. And so we can kind of think about what the fleet plan might plan look like, so you are being obviously subject to change because Delta could decide to do something different, but it’s really confusing because there are so many people talking about different pieces of this?

Peter Hunt

It’s confusing for us too, Bob, unfortunately. But let me try to explain a little bit to you how we view it. When you look at the fleet today, Colgan is operating around 30, Saab 340 Bs. I think there are 30 in operation and perhaps one additional aircraft associated with heavy checks that we are doing right now, so a total of 31 in the fleet, but 30 that would be sort of normalized operations. Barring big changes on fuel, we don’t anticipate having big changes to that network. So the question then becomes, do we replace any of those 30s with 30Bs, with B+s or not? And that’s something we are looking at now.

On the B+ side, Mesaba is flying 27 today, 7 of them are newly acquired that we are flying with US Airways, they will be in our fleet for several years, they are under operating lease. And then we’ve 20 that are still flying for Delta under the Saab Delta connection agreement. The information from Delta changes almost daily as to exactly when those Saabs will retire. If they could be accelerated to where they retire by year-end or they could remain on our – the plan that we had negotiated with Delta back in the summer 2010 where that Saab line down would continue through, roughly May or early June of 2012.

So, it’s about a six month difference, I think, is to whether or not that will be accelerated and we have flexibility with Delta. We are willing to accelerate the retirement if that’s what they want to do. We are willing to continue to fly them through next May or early June if that’s what they want to do. And we’re just every day talking to them about what makes sense for them in their network on that front. So, I don’t really know exactly which way it will go at this point.

Bob McAdoo – Avondale Partners

But in terms of you – as far as you understand what they’ve told you thus far as their plan, the 20 that they are flying – that you are flying for them would be all wound down by wind, is that by end of this year or mid next year, what are you saying is that?

Peter Hunt

Well, the earliest would be the end of this year. The latest would be May or early June next year.

Bob McAdoo – Avondale Partners

And the point is, they haven’t finalized your schedule and the policy, don’t know what’s going to happen there?

Peter Hunt

That’s right. We are still talking to them about exactly where they want to go with this.

Bob McAdoo – Avondale Partners

Okay. And then you said you have seven new ones that came in that you are using with US Air, what was Mesaba flying at the time you bought it, where they flying 27 or the flying 20 or what were they doing there?

Peter Hunt

They were flying with low 30s, around 33 or 34 B+s when we bought them and the Saab have been continuing to decline, which was the plan that those Saabs would continue to wind down through the middle of 2012.

Bob McAdoo – Avondale Partners

Okay. Remind me then when they decide to ground one or ten or whatever they are going to ground and whenever they do it, those planes – and they talk to them to worry about disposing of those planes and the ownership cost of those planes, is that right? And – but if you want – yourself that you end up owing them or whoever the ultimate of that plane is, you would end up having to pick up the ownership cost on those B+ to keep, is that the way it works?

Peter Hunt

That is correct. We don’t have any responsibility on the Delta sops. When Delta takes the amount of service, we just simply hand them back to Delta, they are responsible for return of costs to their lessor. They’re responsible for – to the extent that these are rather early, any rentals or any lease costs that they have through the end of each lease term. So, we don’t really have any ownership responsibilities on the Delta fleet. Now, the seven that we took in the first quarter to fly for US Airways, those actually were aircraft that Delta had already returned back to Saab and we entered into a new operating lease on those seven aircraft. So, now they are our responsibility and those lease terms average a little over three-and-a-half years that we’ve got those under operating lease.

Bob McAdoo – Avondale Partners

So you – and the 30 lines of flight that you have on the Bs, if you decide to get rid of the B, what’s the market value of the Bs, are there – is there a market for used Bs, given that there is B+s floating market?

Peter Hunt

Well, there is a market for used Bs, because the capital costs to fly our B is less than the B+ and the market actually outside the US is relatively strong for these aircraft. And we are talking to Saab about that. In terms of value, I don’t want to speculate a lot on the value today, but I will tell you we own 22 of the 31 and we don’t have a lot of debt against those. So if we sell any, we’ll get some incremental capital into the business which I think is a good thing. If it takes a while to sell them, there are ongoing cash ownership costs with those. And whatever plan we put together to replace Bs or the B+s, we’ll take into account the lease expirations on the nine that are leased which all expire over the year-and-a-half, so that we have a nice orderly transition there. That’s part of the issue that we are looking at. We want to make certain that if we have a transition, it doesn’t cost a lot to transition.

Bob McAdoo – Avondale Partners

Okay. That’s very helpful. So, basically you get the interesting lines of flight, plus seven more lines and if you decide to wind some of them down, that’s fine. And if you decide to pick up the B+s, it’s separate deal, totally separate from the Delta transactions. So if I –

Peter Hunt

That’s right. Totally separate.

Bob McAdoo – Avondale Partners

They get out of the way, some of the planes back to Saab and then you go, do your own deal with Saab, you don’t have to mess with Delta in terms of trying to figure out something that way.

Peter Hunt

That’s exactly right. Not only do they go back to Saab, but Saab repaints them, refurbishes, cleans them up and that’s the maintenance work them too. So they come to us in a really great shape.

Bob McAdoo – Avondale Partners

Got it. Okay. And that’s very helpful. Thanks a lot.

Peter Hunt

Okay. Thank you, Bob.

Operator

(Operator instructions) And, your next question comes from the line of Glenn Engel of Bank of America Merrill Lynch. Please proceed.

Glenn Engel – Bank of America Merrill Lynch

Good morning. A couple of questions, one on the pilot increase, the pilot pay, you said that was mid-February, so does that mean that the pilot impact on short-term earnings is going to be bigger in the second quarter than the first?

Peter Hunt

It will be – we are estimating that for the rest for the year that the total increase in pilot cost is roughly $16 million or $17 million for the next nine months. So, $2.1 million for a little less than half the quarter close to $5 million, maybe a little more for a full quarter. But we also have revenue increases that when you just see the effect down the first quarter because of the penalties we reported as well as all the cancellations that we had. So even with that increased cost, we still do expect better earnings performance looking out of the rest of the year than we had here in the first quarter.

Glenn Engel – Bank of America Merrill Lynch

Second, on the labor side, did the flight attendants reject the offer?

Peter Hunt

They did reject the offer and –.

Glenn Engel – Bank of America Merrill Lynch

Why?

Peter Hunt

Well, they – the union – you have to ask the union really. I mean, the union took that out. We think it’s a very fair deal. It brings pay up to industry standards, but the flight attendants did vote to reject it and we are back at the table with the union talking about next steps, talking about what could be changed in the contract. We philosophically will stay the same play with the union as we have with employees who are unionized which is that we pay bare industry standard wages and benefits and to the extent that we can come up with something that works there with our flight attendants, we’ll make changes to that contract. But it’s still kind of early in the process, so I don’t know exactly where that’s going to yet.

Glenn Engel – Bank of America Merrill Lynch

And was the problem pay or benefits?

Peter Hunt

We really

Glenn Engel – Bank of America Merrill Lynch

Or workload?

Peter Hunt

I mean, what we know is that the flight attendants didn’t ratify it. And so, we don’t know yet exactly. The union hasn’t exactly told us yet of what they think are some of the issues associated with why it didn’t ratify it. But we are working on that with them and I think over the next couple of months, we’ll hopefully make some progress.

Glenn Engel – Bank of America Merrill Lynch

Well, I got a feel a lot of the problem was politics within the union. They had some difficulty among themselves in deciding exactly what they wanted and how they wanted the package split. So it’s going to be up to them come together under better passion than they did originally, but we don’t anticipate that we would put any more money on the table, but we are willing to move some things around if it doesn’t impact the operation or if it doesn’t increase our costs. And I think we’re cautiously optimistic that we’ll get it ratified this second time around.

Glenn Engel – Bank of America Merrill Lynch

And finally, is there any change in turnover in either your – in your pilot ranks over the last year or so?

Peter Hunt

There have been over the last year, and I think that’s something the whole industry is experiencing. You had this well with the change in age from 60 to 65. We are almost to that point where that five year lull is ending. Majors, while they’ve scaled back a lot on growth over the last year or two, as we are experiencing and some last year, that’s changing. Some of the majors are hiring again; FedEx is hiring again. As those larger carriers hire, they take pilots from us. That’s why Pinnacle started hiring again last August and we have been doing a lot of hiring and training that we weren’t doing in the first half of last year. Colgan has been hiring like crazy simply because Colgan also had the growth as well. But even in the Saab, we are now expecting to start hiring despite the fact that some of these Saabs are coming out. So we are seeing that and I think it is being driven by changes with the majors.

Glenn Engel – Bank of America Merrill Lynch

Is it – can you quantify, is it pretty modest, is it just still a few percent?

Glenn Engel

I mean, it’s not inconsistent with the types of attrition that we had if you go back five years or so when the majors where also adding pilots again, kind of the post-bankruptcy period there, ‘06, ’07 kind of timeframe. It’s very consistent with what we’ve seen in past periods. It’s not significantly higher than other times when we’ve had to hire pilots, but we are hiring a lot of pilots right now.

Glenn Engel

– Bank of America Merrill Lynch

Thank you very much.

Peter Hunt

Yes

Don Breeding

Yes, thank you, Glenn.

Operator

And gentlemen, there are no more questions in the queue at this time. I would like to turn the call back over to Don Breeding for any closing remarks.

Don Breeding

Well, thank you very much for your questions. They have been very good ones and we appreciate your participation and thank you for your support. Since there are no other questions, we will close the call. Thank you very much.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect your line and have a nice day.

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