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Executives

Brian T. Hunt – Vice President, Chief Compliance Officer, General Counsel and Corporate Secretary

Sean E. Menke – President and Chief Executive Officer

Edward M. Christie III – Vice President and Chief Financial Officer

Analysts

Richa Talwar – Deutsche Bank Securities

Glenn Engel – Bank of America/Merrill Lynch

Helane Becker – Dahlman Rose & Co. LLC

Duane Pfennigwerth – Evercore Partners Inc.

Bob Mcadoo – Avondale Partners LLC

Pinnacle Airlines Corp. (PNCL) Q3 2011 Earnings Call November 3, 2011 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Pinnacle Airlines Earnings Conference Call. My name is Tania, and I will be your conference moderator for today. (Operator Instructions) Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the presentation over to your host for today, Mr. Brian Hunt, Vice President and General Counsel. Please proceed.

Brian T. Hunt

Thank you, Tania. Good morning, everyone, and welcome to the Third Quarter 2011 Earnings Conference Call of Pinnacle Airlines Corp. On behalf of the 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 Web site, www.pncl.com. It will also be available on our site for 30 days after this call.

Our presentation today contains various forward-looking statements that are based on assumptions and information currently available to management. Although, we believe 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 also subject to certain risks and uncertainties set forth in our filings with the Securities and Exchange Commission. These filings are available to investors at our Web site or online from the commission. Should any 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 Sean Menke, our President and Chief Executive Officer.

Sean E. Menke

Thanks, Brian. I’d actually like to do introduction of a couple other people in the room, before I get started. I have Ted Christie, the CFO of the organization with me, as well as John Spanjers, our Chief Operating Officer. There are other officers in the room as well, but the four of us will actually be answering questions during the Q&A session.

Before I pass the call over to Ted Christie, our Chief Financial Officer, to discuss the financial details of the quarter, I do want to thank the nearly 8,000 professionals within Pinnacle Airlines Corp.

Following a challenging quarter from an operating perspective, we took steps in the third quarter that translated into significantly improved performance. I am the first to admit that we have more work to do, but I am pleased with the progress and dedication made to fix those things plaguing us.

As for the third quarter financial results, I am disappointed, but understand that much of the disappointment is due in part to the transitional phase we are in with – in respect to the business. After joining the organization in July, it became abundantly clear to me, the work ahead of us. As I stated in the second quarter earnings call, many of the decisions and projects we have embarked upon are stacked upon us now.

These projects, all that important to reaching our future-state objectives, are costly and require a significant amount of oversight to execute properly. Within the quarter, we made significant headway on these notable items. We began implementation of the integrated pilot seniority list. Additionally, we negotiated and agreed to a side letter with the pilots to more efficiently implement the integration. We negotiated and ratified the new five-year contract with the Pinnacle Airlines flight attendants.

We began the move to consolidate all of our corporate functions into our new headquarter facility. The move thus far has included relocation of nearly half of our corporate staff, the Pinnacle Airlines SOC, the Colgan Air SOC and our network data center. None of these are easy, but are critical to our overall business.

We also negotiated a tentative settlement with Delta Airlines on disputes associated with work done during our heavy maintenance visits on the CRJ-200 fleet.

We began pulling down the vast majority of pro-rate flying within the US Air network, with the majority of it to be completed by year-end. Elimination of this service reduces unprofitable pro-rate flying and provides additional pilots to build up staffing levels to implement a pilots integrated seniority list. We also completed a significant amount of work with the oversight of the FAA to move our jet operations onto the Pinnacle Airlines operating certificate. The FAA has approved the essential elements to transfer the Mesaba CRJ-200 and 900 aircraft to Pinnacle Airlines’ certificate. The final step is to complete certain exercises to ensure that oversight of operation is consistent with our FAA-approved operating guidelines.

These exercises will take place over the next couple of weeks. Upon completion of these exercises, we will transfer the Mesaba jet aircraft onto the Pinnacle Airline certificate. We believe these final steps will be completed by year-end and all Mesaba aircraft will be operating under the Pinnacle Airline Certificate in a fenced environment. As I mentioned, the list of projects represents some of the major work completed or underway. But it only represents – it’s only representative of the numerous things ongoing within our organization.

Before I go into any more detail, I would like to pass the call over to Ted to discuss the financial results for the quarter. Following Ted’s commentary, I will add further comments on the work ahead. Ted?

Edward M. Christie III

Thanks, Sean. It has definitely been a quarter filled with financial challenges that have produced disappointing results. Many of the items that we will discuss that are impacting the results in the third quarter, are as a direct result of the integration, labor and maintenance projects that Sean just mentioned.

While we expect to have success in stages on all of these projects throughout next year, their impact on our results will continue in 2012. First looking at our consolidated earnings, excluding special items in the third Q of 2011, diluted loss per share was $0.09, as compared to a diluted earnings per share of $0.51 in the third quarter of 2010. Including special items, we had a 3Q 2011 diluted loss per share of $0.19.

Third quarter 2011 operating income was $6.5 million, as compared to 2010 operating income of $25.7 million, a decrease of $19.2 million or 75% between periods. Operating results were negatively impacted by the following items: first, increases in pilot labor costs under the new collective bargaining agreement with ALPA, decreased operating income by $4.9 million during the quarter, as compared to 2010. As we have previously discussed, we have negotiated a right to reset rates with Delta, as a result of the renegotiated agreement with ALPA, and those new rates will take effect sometime in 2012. We will also expect to receive a lump sum payment for increased expenses incurred during the first year of this new contract. Such expenses include pay, training, per diem and benefits. To date, we have recognized revenue associated with this rate adjustment, as stringent revenue recognition criteria under U.S. GAAP forces conservatively.

Second, increases in crew-related expenses, including premium pay, hiring, training and crew overnight accommodations, due to staffing inefficiencies and staging, impacted flight crews at various destinations, decreased operating income by $5.1 million during the quarter, as compared to 2010. We expect some of these inefficiencies and their related costs to be mitigated over the next three to six months.

We have adjusted near-term block-hour production and have increased pilot staffing levels to address the issue. However, the cost to stage our crews as required by the operation will continue.

Third, per rate operations at Colgan were negatively impacted by an increase in fuel expenses of $1.2 million, due to a 40% increase in the price per gallon of aircraft fuel during the quarter, as compared to 2010. This does not include the additional impact of higher fuel costs on the Saab pro-rate aircraft flying under the Mesaba (audio gap) aircraft were not in the prior year. However, each $1 change in the price per barrel of oil translates to an increase in our pro-rate operational fuel expenses of approximately $300,000 per year, assuming fleet and utilization as of September 30.

Fourth, company incurred special items attributable to integration, severance and contract implementation, which resulted in a decrease of operating income of $2.9 million for the quarter, as compared to 2010. Of that amount, approximately $800,000 pertains to previously disclosed severance expenses not related to our integration plan.

Fifth, as previously discussed on prior quarter 10-Q, we were in a dispute with Delta regarding the reimbursement of certain heavy airframe maintenance costs. This month, we reached a tentative settlement with Delta, which resulted in the company recording a reduction in revenue from reimbursable costs of $3.3 million. As a result of the settlement, we currently estimate a reduction of approximately $6 million in 2012 revenue from reimbursable costs. However, this increase in unreimbursable costs will be a factor when we reset the CRJ-200 ASA base rates during the contractual rate reset, which is scheduled to occur by January 1, 2013.

When we look at consolidated operating revenue, 3Q 2011 revenue was $319.8 million, an increase of $17.4 million, or 6% from revenue of $302.3 million in the same period of 2010. The increase in revenue was mainly attributable to the increase in our Q400 fleet size. As of the end of 3Q 2011, we operated 30 Q400 aircraft, as compared to 16 Q400s in 3Q 2010.

Revenue was also favorably impacted by the year-over-year increase in the rates earned under our operating contracts, which was partially offset by a reduction in block hours and departures. We do a quick overview on stats. They reflect an increase in revenue passengers, from 5.1 million in 2010, to 5.5 million in 3Q 2011. The change is 7%. ASMs were down 1% to 3.03 billion, while RPMs are up 4% to 2.4 billion, driven by a 3.7 point increase in load factor. On a segmented basis, Pinnacle Airlines, Inc. reported 3Q 2011 operating income and an operating margin of $2.6 million and 1.6%, which is in line with 2Q 2011. Decreases of $12.9 million and eight basis points respectively from 3Q 2010.

Pinnacle’s financial results were negatively impacted by a $2.8 million increase in the pilot wage rates related to the ALPA agreement and a $4.4 million increase in crew-related expenses, resulting from the re-allocation front of flight crews, increases in staging costs and lower pilot utilization.

Mesaba reported breakeven operating income and operating margin for 3Q 2011. Decreases of $3.1 million and 4.3 basis points respectively, from 3Q 2010. Once again, Mesaba’s financial results were adversely affected by the ALPA collective bargaining agreement, which increased regional jet pilot-related expenses by $900,000 for Q3 2011, as compared to 3Q 2010. Also driving down operating income were high fuel costs under our pro-rate turboprop operations with US Airways.

Finally, the accelerated wind down of the Mesaba Saab operations with Delta, negatively impacted Mesaba’s results due to the overhead required to appropriately wind down that operation. The Saab DCA has a retrospective rate adjustment that is intended to compensate us for the overhead required to wind down the Saab operation on Delta’s behalf. We are currently in discussions with Delta on this item.

Colgan reported 3Q 2011 operating income and an operating margin of $6 million and 7.1%, a decrease of $1.1 million and 3 basis points respectively, year-over-year. Colgan experienced a $1.3 million increase in pilot labor costs due to the new ALPA pilot contract, and an increase of $1.2 million in aircraft fuel expense, due to the 40% year-over-year increase in the price per gallon of aircraft fuel.

Looking at cash flow. Our ending cash balance was $81.8 million at September 30, 2011. Net cash provided by operating activities was $11.4 million during the third quarter. Net cash used in investing activities was approximately $4.7 million during the quarter, which is primarily attributable to purchases of property and equipment.

Net cash used in financing activities was approximately $13.7 million during the quarter, primarily related to scheduled principal payments on debt and capital lease obligations. We anticipate cash to decrease by year end, due to the impact of increased pilot and integration expense as discussed here, an impact on our operating revenue and operating cash flow.

With that, I turn the call back to Sean.

Sean E. Menke

Thanks, Ed. Finally, before we take questions, I’m going to take a few minutes and discuss the challenges we face presently and those that lie ahead in fiscal year 2012. As I mentioned earlier, the transfer of the Mesaba jets onto the Pinnacle Airlines’ certificate is a triggering event for the organization. Additionally, we are no longer treating the turboprop operation as a merger between Colgan and Mesaba.

Due to the decision to eliminate the vast majority of flying under the US Airways pro-rate agreement, we have elected to treat this as an asset transfer of the Mesaba Saab aircraft to the Colgan Air certificate. Once this is completed, it is our plan to operate the turboprop operation under a separate certificate and under the Mesaba Airlines brand. This should be completed by the end of the first quarter of 2012.

Since my arrival, we have also done a significant amount of work reviewing our current business units. I want to highlight what we are focusing on and our objectives for 2012. Based on what was planned to be accomplished in 2011 and what was actually completed, we see 2012 as a transition year to extract numerous synergies and efficiencies out of the business. Upon the completion of the jet transfer, our first step is to make the necessary changes to align our workforce and operation around our jet and prop operations.

The first phase is realizing these efficiencies, is focused on management and professional support. Numerous individuals have been involved with many of the projects already discussed. As we draw to a conclusion, we need to make the necessary steps to ensure that our workforce is properly aligned. Following the acquisition of Mesaba, numerous teams were developed to map out what was our future-state management and professional organizations would look like. It is our intent to move these individuals to their future-state positions by the end of the first quarter.

It is important to note that we have had many dedicated employees who have helped us manage through these projects over the past several months, but have elected not to take a position in our future state. I respect their decision and what to thank them for their dedication to the company.

The next phase of savings is focused on ensuring we are seeing productivity improvements within our operations. With Mesaba and Pinnacle Airlines having significant overlap in Detroit, Minneapolis, Memphis and New York’s JFK, we believe there are synergies and productivity enhancements that can be obtained in the first half of 2012.

Finally, the largest productivity savings we’ll obtain are those associated with our pilot group. Due to the implementation of the integrated seniority list and the transfer of aircraft to our two remaining certificates, we have increased our pilots’ ranks to manage the number of training events required. It is our expectation that it will take all of 2012 to manage through these additional training events.

Besides our focus on workforce efficiencies, we have also been evaluating each of our contractual businesses. Due to the additional costs of integration, as well as the increases in labor rates, we have seen an impact from the financial results of each of these business units.

In addition to wage increases, we are also seeing higher than anticipated maintenance expenses on our fleets. More specifically, we are being impacted by maintenance reliability issues with the Saab and Q400 aircraft. The financial results for these business units are being further eroded by operating performance penalties.

Finally, due to the risk profile associated with the Saab pro-rate operations, we continue to be impacted with higher fuel prices on a year-over-year basis. As would be expected, we are evaluating numerous steps to improve reliability of each of these operations, as well as improve their economics. As we move through the development of our business plan and strategies for 2012, we will be making decisions to focus on improving the economics of each of our business units.

At this time, operator, I would like to open up the call to answer any questions that the audience may have.

Question-and-Answer Session

Operator

Sure. (Operator Instructions) Our first question will come from the line of Michael Linenberg with Deutsche Bank. Please proceed.

Richa Talwar – Deutsche Bank Securities, Inc.

Hi, team. This is actually Richa Talwar, filling in for Mike. First, I just have a general modeling question. As you were running through the results, we noticed that there was like a lower tax rate that was applied to the $2.1 million special items than the overall tax rate. And I was wondering if you could comment of what was the cause of that? And if you could share what the appropriate effective tax rate would be going forward to model out? Thank you.

Edward M. Christie III

Sure. This is, Ted. We’re using a current look at our tax rate rather than an estimated tax rate, given the fact how close we are to operating breakeven and the effect that the permanent items have on that. So that’s going to be your difference, is the effect the permanent items would have. If you just calculate the tax rate that we’ve used for the quarter, that’s probably a good estimate for the remainder of the year.

Richa Talwar – Deutsche Bank Securities, Inc.

Okay. Great. Thank you.

Operator

Our next question comes from the line of Glenn Engel with Bank of America. Please proceed.

Glenn Engel – Bank of America/Merrill Lynch

Good morning. There are few questions. One on the rate hikes. When will that rate hike, the $14 million to $17 million, actually start helping the earnings? Is it the first quarter? Or the second quarter? Or third quarter?

Sean E. Menke

Glenn, on the rate hike as it relates – I’m assuming you’re talking about Delta, is what you’re talking about?

Glenn Engel – Bank of America/Merrill Lynch

That’s correct.

Sean E. Menke

If you look at it relative to the contractual arrangement we have with Delta, the focus is that it actually is a year and it goes from February of 2011 when the contract was signed, and that is when we’re targeting essentially that we would begin to see the rate increase take place, as well as the reimbursement. We have already begun discussions with Delta on this. So we are, as you would imagine, preparing all of our information to outline the cost associated with the integration, as well as the cost associated with the increase of the pilot wages.

Glenn Engel – Bank of America/Merrill Lynch

And so the first quarter will only get partial benefit from it presumably, but that rate hike is – in addition, there should be a regular rate hike as well on top of this pilot pay, correct?

Edward M. Christie III

Hey Glenn, it’s Ted. The pilot rate reset was scheduled for February of 2012, so what you’re saying is on a prospective basis the impact would be part of February and March. You do receive a retrospective reimbursement at that time as well, which we – as I mentioned in my comments, we have not been recording. So there would be a one-time pick up that would effectively reimburse us for the prior year.

So that all takes place based on the way the document is drafted in February of next year. Then you may be referencing a secondary rate reset, which we have with Delta, which doesn’t happen until January of 2013.

Glenn Engel – Bank of America/Merrill Lynch

No. I meant that your overall rates get changed each year regardless of this pilot adjustment. So should there be another rate on top of this $17 million?

Edward M. Christie III

Sorry, the only – the rates that get adjusted every year, you get an annual inflation factor applied to your rates. But what will happen in January 2013 is it will actually reset your rates based on your cost structure at that point.

Glenn Engel – Bank of America/Merrill Lynch

And is that reset on January 13 for all the planes? Or just the 126 CRJ-200s?

Edward M. Christie III

It’s for the Delta fleet.

Glenn Engel – Bank of America/Merrill Lynch

So the whole Delta fleet?

Edward M. Christie III

Right.

Glenn Engel – Bank of America/Merrill Lynch

And what will your fleet looks like at the end of 2011 and 2012? What – I guess it’s only the Saabs that are shrinking?

Edward M. Christie III

Yeah. That’s right. The Saabs will be gone – well the Delta Saabs will be gone by the end of the year. And then, we have no changes. We have no orders outstanding or anything happening on the Q400 side of it.

Glenn Engel – Bank of America/Merrill Lynch

And with the pro-rate business dropping with US Airways, does that mean that these – you’ll see a further decline in the pro-rate business? Or the number of Saabs from that as well?

Edward M. Christie III

Yes. So those aircrafts being pulled out of the US Airways side of the business will fund lease returns.

Glenn Engel – Bank of America/Merrill Lynch

So what will the size of Saab fleet be at the end of ‘11 and ‘12?

Edward M. Christie III

Well, we will have seven less, setting aside the Mesaba and Delta Saab; there will be seven less. So it goes from 39 to 32.

Glenn Engel – Bank of America/Merrill Lynch

And do you have what the pro-rate revenue and profits were in the third quarter?

Edward M. Christie III

We don’t disclose that segment profitability, Glenn.

Glenn Engel – Bank of America/Merrill Lynch

Was that profitable for the full year? And does the drop off it – does dropping out of the pro-rate have any financial impacts in 2012 versus 2011?

Sean E. Menke

Well, what we did say, I stated in my comments, Glenn that the US Airways pro-rate was not profitable and that’s the reason we got out of that. As we go forward in the transition and essentially what’s happening is, there’s seven B Plus models that we’re transitioning over to the United network that will help with some of the reliability issues that we have there.

So the focus is to continue to improve the pro-rate flying, but the stuff we made with US Airways did two things essentially, one, it got us out of unprofitable pro-rate flying and then additionally, gave us additional pilots to begin to help with the integrated seniority lists.

Glenn Engel – Bank of America/Merrill Lynch

So there will still be pro-rate flying after this, just not with US Airways?

Sean E. Menke

That’s correct. The Saab flying with United Airlines in Dulles and in Houston is still pro-rate flying.

Glenn Engel – Bank of America/Merrill Lynch

Thank you very much.

Operator

Our next question will come from the line of Helane Becker with Dahlman Rose. Please proceed.

Helane Becker – Dahlman Rose & Co. LLC

Thanks, operator. Hi, gentlemen. Just a couple of things on the – what you said this morning and clarification points on the – US Airways, when they’re leaving LaGuardia, you’re leaving as well? Or are you leaving before they leave?

Sean E. Menke

Our plan is that we will have no more pro-rate flying out of LaGuardia by December 23 of this year. So we’ll actually be pulling out prior to their – prior to this (inaudible) which I think is what you’re referring to.

Helane Becker – Dahlman Rose & Co. LLC

Right. Exactly. Okay. And then, my other question is, with respect to these contracts with Delta. They’ve been very difficult to negotiate with as you guys are well aware and there were some comments earlier in the week by some of your peers about negotiating with them. And not putting you in a position where you have to negotiate publicly or comment publicly so much, but these agreement and rate resets that you’re talking about, have they been signed off on, so that you have a high degree of confidence that the 2013 – I guess 2012 you said is a transition year, so we can think 2013 is the next year where you’re really getting better year-on-year results? So do you have a high degree of confidence that, that’s signed off on? Or is that still subject to negotiation?

Edward M. Christie III

Hey, Helane. It’s Ted. They are contractual if that’s what you mean by signed off on? So now what we have to do is present the date in line with what the contract states so that we can finalize the numbers.

Helane Becker – Dahlman Rose & Co. LLC

Okay. And then, just on the United agreements with – or Continental agreements, do you have – I guess if your reliability has been an issue, there are no – you haven’t had any bonus payments. But with the steps you’re taking with the pilot adjustments and so on, are you confident that, that gets back into balance?

Sean E. Menke

As it relates – if we look at the performance, we didn’t clarify. I’ll talk about Q400 and Saab separately. They haven’t really – they have not been crew related, they have been just maintenance reliability related. On the Q400, we have been spending a significant amount of time with Bombardier on trying to get fixes in place. We’ve also had a number of conversations with United relative to the network that we’re flying. Essentially, when we started the Q400 business, it was in Newark and then, it began to expand to Dulles and Houston and then, a small operation in Cleveland.

Actually this month, the small Cleveland operation moves to Houston. So we begin to consolidate some of that operation, which we will help from our reliability perspective as well.

On the Saab fleet, we have actually had the opportunity to put an additional spare in both Houston and Dulles to help out the operation. And again, once we wind down the US Airways flying, we are able to put more reliable B Plus aircraft, Saab B Plus aircraft into that network and help out.

So from that perspective, if you break it up, we’re not having issues with pilots relative to reliability, it’s more of a maintenance reliability and we’re taking numerous steps to fix that because it is impacting, like I said, the bottom line relative to performance penalties.

Helane Becker – Dahlman Rose & Co. LLC

Great. Does – on the Q400, does Bombardier give you any relief?

Sean E. Menke

I’m going to have John Spanjers speak, he’s been heavily engaged with Bombardier on a number of different things. And I’ll let him walk you through some of things we’ve been doing with that.

John G. Spanjers

Yeah. I would say that we started to engage Bombardier earlier this year to really focus on improvement in reliability of the Q400. They have been very active partners with us. We have a number of efforts launched looking at where our reliability issues exist and trying to find corrective actions.

So yes, I would say Bombardier has been very active. They’ve been working with our vendors to find reliability improvements for us and we expect that to continue. So we are seeing some good participation by Bombardier in this effort.

Helane Becker – Dahlman Rose & Co. LLC

Okay. But they’re not compensating you?

John G. Spanjers

No.

Helane Becker – Dahlman Rose & Co. LLC

Okay. And then, my last question is with respect to regulatory things on the horizon. Is there anything coming out of Washington that could potentially derail the turnaround and cause it to take longer than you’re thinking?

Brian T. Hunt

Helane, this is Brian. Not that we’re aware of.

Helane Becker – Dahlman Rose & Co. LLC

Okay. Great. Thanks for answering all my questions. I appreciate the time.

Brian T. Hunt

Thanks, Helane.

Operator

Our next question comes from the line of Duane Pfennigwerth with Evercore. Please proceed.

Duane Pfennigwerth – Evercore Partners Inc.

Hey, guys. Good morning.

Sean E. Menke

Hi, Duane.

Duane Pfennigwerth – Evercore Partners Inc.

Just summing all this up. So the rate increase next year, assuming contracts are honored, which sometimes is a big assumption. You’ve got this maintenance, it looks like some incremental maintenance headwind in terms of maybe a new agreement about how that’s going to be viewed, which is a headwind. And then, pilot integration, sounds like it’s taken longer than maybe initially expected, through all of next year. So when you add all that up, are you guys going to make any money next year?

Sean E. Menke

We’re in the middle of the plan for next year and you’ve stated a number of headwinds, but I also believe there’s a lot of synergies that we’re working through and efficiencies within the organization. So as we look at it, and we’re in the midst of this, as you assume right now, relative to 2012, that will be presented to our board, a number of items relative to what we think can take place in the organization.

The way that I look at it, the first half of the year is going to be a big part of the integration phase. On the back half of the year, I think relative to the synergies and efficiencies I see capable of obtaining in the organization should be in place. And then, it’s a matter of just working through the integrated seniority list with the pilots.

So for me, there’s a number of things that this organization needs to do to essentially get after some of the other cost structure. There’s essentially three organizations with new organization right now, with Colgan, Mesaba and Pinnacle and I do believe there are savings there. That was my point relative to get to the future-state organization and what that needs to be.

So part of the analysis that we’ve gone through and continue to go through is, there are items there that I think we have other cost savings that are out there, even though that there’s headwind. So for me to say where we end up at the end of the day, I’m not there yet because of all the work that we’re doing.

Duane Pfennigwerth – Evercore Partners Inc.

Okay. That’s fair. And then, can you give us any early read on CapEx and debt principal repayments next year?

Edward M. Christie III

Hey, Duane. It’s Ted. CapEx will be probably in line or a little less than this year, just because we’re experiencing some CapEx with regard to the move, the headquarter move. So that should mitigate and then, principal repayments are kind of – most of our debt is mortgage style. So you can follow the way it’s moving based on what’s happening this year.

Duane Pfennigwerth – Evercore Partners Inc.

So like – what was it this quarter, like $13 million? Is that a reasonable quarterly run rate?

Edward M. Christie III

Yep. Yep.

Duane Pfennigwerth – Evercore Partners Inc.

Okay. Thank you.

Operator

(Operator Instructions) Our next question will come from the line of Bob McAdoo with Avondale Partners. Please proceed.

Bob McAdoo – Avondale Partners LLC

Yeah. Just a couple of questions. On the Q400 reliability and the issues that you’re dealing with Bombardier, is – are these problems similar? Is Horizon having similar kind of problems with their airplane? Or is there similar problems at Frontier? Do we know anything – are these something special that you’re having? Or is it something that’s just a part of this airplane?

Sean E. Menke

Bob, this is Sean. And I’ll pass it off to John. Just because of the nature of what I saw at Frontier and wanting specifically on the Q400 and what I’m seeing here, as well as know what was – has been plaguing Horizon. Some of these essentially, all operators are dealing with it in some form or fashion. And we as an operator group, continue to have conversations with Bombardier on it. The thing I need to be fair is there’s things that we need to do internally as well, to improve the operating performance, essentially how the network is strung out did have an impact. But there’s some other things that we need to do internally. But there are some, I would say, issues with the aircraft that these operators have been dealing with.

And I’ll pass it off to John, to make some other comments.

John G. Spanjers

Hey, Bob. I would follow-up what Sean said. I would put in three buckets, the challenges that we’re having with the Bombardier fleet. One is structural, and what I mean by that is and as Sean was talking earlier, we got tests brought out and we had a pretty lengthy network. And the more we can consolidate, the more – the better chance of our reliability improving.

Second of all, is our own internal processes. We have to keep looking at ourselves and making sure that we are doing the right things ourselves and being proactive and have the plans in place to be in front of this airplane. And that’s an effort that’s going on right now. And a lot of it is, how much Plus time do we need in airplanes and working with United and things like that.

The third item is the aircraft itself. And as I said earlier, we are working very aggressively with Bombardier in a partnership way. Bombardier is very active and they have people onsite with us, helping to get the aircraft reliability up.

I would echo what Sean said, this is a not a problem that’s unique to Colgan. We talk to our other operators on a regular basis and we understand some of the similar issues that we’re working our way through.

Bob McAdoo – Avondale Partners LLC

Secondly, we’ve talked a lot about pilot retro pay or retroactive amounts that’ll be coming due when you reset rates with Delta and whatever with the new pilot agreement. Is there a similar kind of a reset? Or going forward, are the Q400 rates that you get paid, are they enough to compensate you for the – or do they encompass some kind of adjustment to compensate for the higher pilot rates? Or does the higher pilot agreement just cut into the margins on the Q400 versus what you had in earlier quarters?

Sean E. Menke

Bob, they cut into the margin; there is no reset in the United contract.

Bob McAdoo – Avondale Partners LLC

Is there – how long does that – is that contract a long-term contract? Or does it come up every two or three years, that there’s adjustment for inflation? Or was it something that was just negotiated, a kind of a one time, this is what it is, and you – it’s that until the plane dies?

Edward M. Christie III

Bob, you’re talking – this is Ted. You’re talking about the Q400 agreement with United, right?

Bob McAdoo – Avondale Partners LLC

Right.

Edward M. Christie III

You say that. Yeah. It’s a 10-year deal by tail. There is an annual adjustment for inflation.

Bob McAdoo – Avondale Partners LLC

But this kind of a deal is not really inflation? It’s kind of cost of living or normal broad economic inflation as opposed to...

Edward M. Christie III

Yeah, no. That kind of concept was not addressed.

Bob McAdoo – Avondale Partners LLC

Yeah. Okay. And then finally, if I remember right, it seemed like that the – when things got crazy with fuel in 2008, there – that the kind of agreements that existed on the Saabs relative to Continental at Houston were different than the kinds of arrangements that were negotiated as planes were brought over to Dulles out of Pittsburgh. Are those two agreement – when you talk about what’s going on with that, the “United” now that it’s one company, how does that whole thing work? Are there separate agreements still, one for Houston, one for Dulles? Or are they both as attractive in terms of trying to evaluate the quality of those agreements going forward, as compared to the US Air agreement, which obviously you’ve decided is not a particularly productive kind of a place to be?

Edward M. Christie III

Yeah. No. Understood, Bob. To answer your question, they’re two separate agreements. We refer to them as, one is the Continental agreement, which is the Houston operation. And the other is the United agreement, which is the Dulles operation. And you’re statement relative to adjustments, relative to fuel, in the Continental agreement that is actually in place, but there’s the ability to reset some compensation to essentially Colgan, for adjustments that need to be made relative to economics.

And as they are now, they continue to be separate contractors. There’s not a plan to actually bring it into a single contract.

Bob McAdoo – Avondale Partners LLC

Do you view those contracts as productive in today’s economic environment? Are they okay? Or is it something that still needs to be looked at?

Sean E. Menke

I’m looking at everything, Bob. I’ll be honest with you, on the pro-rate side and it’s the way that I looked at the US Airways piece is – if there’s risk flying out there that I don’t like, we’re going to make the adjustments necessary to try to fix those. These agreements do have essentially a 90 and 120 day termination right. So we continue to look at each of our business units and understand what we can and cannot do.

But again at the end of the day, my focus is to get this company back to sustained profitability. And like I said, we’re looking at each of the business units.

Bob McAdoo – Avondale Partners LLC

Okay. Thanks. That’s good. Good answers. I appreciate it.

Operator

We have no additional questions at this time. I would like to conclude the Q&A session and hand the conference back over to Sean Menke for closing remarks.

Sean E. Menke

Great. Thank you very much and thanks for everybody in listening and participating this morning. As we’ve mentioned, there’s a lot of work to do within the organization. I feel confident in our capability of getting through this. I’m working through the number of hurdles we have, but there’s no doubt that 2012 will be a transition year for this organization, in getting costs out.

Once again, I look forward to working with the team to get these things accomplished. Have a great day.

Operator

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

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