Pinnacle Airlines Corp F4Q07 (Quarter End 12/31/2007) Earnings Call Transcript

Apr. 7.08 | About: Pinnacle Airlines (PNCLQ)

Pinnacle Airlines Corp. (PNCL) F4Q07 Earnings Call February 21, 2008 2:00 PM ET

Executives

Philip H. Trenary – President, Chief Executive Officer & Director

Peter D. Hunt – Chief Financial Officer & Vice President

Analysts

Lily Ng – Merrill Lynch

Keith Wiseman – Calyon Securities

Bob Mcadoo – Avondale Partners, LLC

Arthur [Calvertness] – John Hancock

Operator

Good day ladies and gentlemen and welcome to the fourth quarter Pinnacle Airlines Corp earnings conference call. My name is Karen and I will be your coordinator for today. At this time all participants are in listen only mode. We will be facilitating a question and answer session towards the end of this conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call Mr. Philip Trenary, President and Chief Executive Officer of Pinnacle Airlines Corp. Please proceed.

Philip H. Trenary

Good afternoon. Welcome to the fourth quarter 2007 earnings conference call of Pinnacle Airlines Corp. On behalf of the more than 5,000 employees I would like to thank you for the interest in our company. This call is being presented live over the Internet via webcast from our website www.PNCL.com. It will also be available on our site for 30 days after this call. This presentation contains various forward-looking statements that are based on management’s beliefs as well as assumptions made by and information currently available to management. Although the company believes that the expectations reflected in such forward-looking statements are reasonable it can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions including those set forth in our filings with the Securities & Exchange Commission which are available to investors at our website or online from the Commission. Should one or more of these risks and uncertainties materialize or should underlying assumptions prove erroneous actual results may vary materially from results that were anticipated or projected. The company does not intend to update these forward-looking statements before its next required filing with the Securities & Exchange Commission.

Again, good afternoon and thank you for joining us. The fourth quarter was a very busy fourth quarter at Pinnacle. When we think about our priorities for 2007 beyond our number one guiding principle which is operate a safe airline we want to make sure we took care of our existing customers that we’re flying for and bring on the CRJ900 with Delta and the Q400 with Continental on time and our folks were successful in doing both. We’re very excited about both these aircrafts as far as the future goes. We do have a good foundation for our business already in place. The CRJ-900 is the RJ done right. This time there’s just no real incentive or reason for a customer to book away from the 900. The $100 environment for oil plus the lower capital cost aircraft has made it a very attractive aircraft and we’re happy to have it for our growth vehicle in the regional jet.

On the Q400 we had a dedicated team to bring the airplane on under the full [ATAS] certification. The airplane was fully certified in January, actually late January with most of the work being done in 2007. Again, you heard us talk about this airplane before but we do believe it’s going to be a real game changer in the industry. Once ATC gets use to this aircraft, as you know we’re flying most of the operations, not most all of the operations up in the northeast and when we can work with them to take advantage of the speed, altitude capabilities and especially the crosswind runways capability at Newark it’s literally going to be hard to beat. The aircraft has near jet speeds, actually more comfort than an RJ and is also very quite. What the airplane is doing now and what we expect the future holds we anticipate a lot of good things coming out of that as well.

We were disappointed with the financial results and Peter’s going to speak in more detail about that in just a moment. While we knew 2007 would be a year of transition and particularly we knew that fourth quarter would be rough for Colgan we did not anticipate the $100 oil or the Pittsburgh hub becoming not as viable for some of the Colgan markets. And, to be frank, we did slip on some of our cost saving initiatives due to the focus on the on-time launch with the Q400. We’re currently in the process of transitioning nine of the markets. We’re flying out of Pitt, over to Dulles, we believe long term Dulles is going to be a much more viable hub than Pittsburgh. In addition to that, transitioning our maintenance from Manassas to Dulles will eliminate a significant number not only the regularly scheduled ferry flights but the unscheduled ferry flights. We are in the process now of evaluating our prorate markets and that does include the markets that are flown under the Central Air Service subsidies with the United States Government. We will have all of the Beech 1900s gone by the end of the year. And, the markets that will be left we expect will be profitable long term.

One of the questions that we have been getting fairly often is how are we doing as far as marketing the options on the Q400. We continue to talk to customers on that. There is a lot of interest in the aircraft. I think it’s safe to say that some of the majors have been a bit distracted recently with some of the things going on in the industry. We are still confident we’ll be able to exercise at least some of those options, if not all. There’s also been a lot of discussion about the possibility of consolidation within our industry and particularly the discussion around a potential merger between Delta and Northwest and that’s one of the things that we believe that we are uniquely well positioned in the event that does happen. I believe we are the only carrier that has long term contracts with both Delta and Northwest. I also believe that they’ll be a need for more of the larger regional jet aircraft like the CRJ-900 and potentially the Q400 as well. This goes back to what we’ve used all along as far as our basic operating principal. If we have strong operating performance at competitive costs ultimately things will go well.

I expect later if I don’t say it now we’ll get a question on our pilot negotiations so I’ll go ahead and talk about that. We are still under the guidance of a federal mediator. We were back at the table and it’s been a mixed bag as far as going in, feeling fairly positive on all sides and hitting a few bumps along the road. We are now waiting to hear back from the mediator to see what the next steps are. So, actually not much has changed on that. We do look forward to our people and all of our shareholders benefiting from our growth with the CRJ-900 and Q400s. We’ll be working towards growing both of those fleets and we will be concentrating on doing what it takes to make sure Colgan is consistently profitable.

With that I’ll turn it over to Peter Hunt, our CFO more detailed information on the financial results.

Peter D. Hunt

Thanks everyone for joining us this afternoon. This morning we did report fourth quarter 2007 fully diluted earnings per share of $0.32 and fourth quarter net income of $6.7 million. Our full year net income for 2007 was $36.6 million and I do want to point out, you may have seen in our release that we are evaluating one potential tax adjustment. It’s a non-cash non-recurring item related to a long term intangible asset and the adjustment would affect our deferred tax liability. This is an item that came up just as we were wrapping up audit work with our auditors and we’ve been putting a lot of attention to it over the last 24 hours. At this point we don’t believe that we will record an adjustment but we will finalize that evaluation before we file our 10K. We thought it important to go ahead with our core results because this a non-cash non-recurring item that we’re looking at in any event. But, we will have a final answer before we file our 10K.

Just looking at the operating statistics Pinnacle Airlines flew 109,787 block hours during the quarter. That was an increase of 5% year-over-year and Pinnacle Airlines had 65,820 departures which was an increase of 4% year-over-year. We ended the quarter in the Pinnacle fleet with 138 jets and that was made up of 137 CRJ-200s in service with Northwest Airlink and one CRJ-900 in service as Delta Connection. Colgan Air flew 32,242 block hours in the fourth quarter and 27,189 departures. Colgan ended the quarter with a fleet of 48 aircraft and that consisted of 42 Saab 340s and six Beech 1900s.

Looking at our income statement, our total revenue for the quarter was just over $200 million just slightly down from almost $205 million in the fourth quarter 2006. Our fourth quarter operating income was $9.4 million and our operating margin was 4.7%. And, as Phil already mentioned the primary reason for a much lower than normal operating margin was the fourth quarter performance at our Colgan subsidiary. Colgan reported an operating loss of $4.9 million for the quarter. A big factor in that operating loss was the change in fuel costs. Since we acquired Colgan in January 2007 Colgan’s fuel costs are up almost 30% and the fourth quarter total fuel costs were up $2.6 million as compared to where they would have been with prices at the beginning of the year. In addition to the higher fuel costs Colgan did have costs associated with bringing the Q400 online. Both Colgan and our Pinnacle subsidiary had some costs associated with training crews and mechanics and also with hiring crews in advance of starting service. Colgan probably had slightly more costs simply from the fact that the Q400 is a different fleet type for Colgan and therefore there were training events both as Saab pilots transferred to Q400s and then also as we back filled Saab pilots. Whereas on the Pinnacle side, the CRJ-200 and 900 are common type rated so there was much less of those double training events going on.

After net interest and non-operating income of $400,000 we reported consolidated net income of $6.7 million as I said earlier. Looking at cash flow we did end the quarter with cash and short term investments of $213.6 million. During the fourth quarter how you would get to our changes in cash we used $1.5 million of cash in operating activities and that consisted of a little over $27 million of tax payments related to the sale of our claim earlier in the year. We’ve been paying those tax amounts all year long and if you segregate those tax payments out then we actually had just under $26 million of cash from normal ongoing operating activities. We used just under $15 million in cash for investing activities. That was primarily capital expenditures related to new aircraft. And, on the financing activity side we used $15.2 million that is using $33 million to repurchase about 2.5 million shares of our common stock from Northwest which we completed in November and netting against that is $17.6 million of net borrowings primarily under our PDP facilities.

I do want to point out that we took delivery of three aircraft in the quarter and that did result in some non-cash transactions. So, we do have additional long term debt on our balance sheet which you will see when we file our 10K of around $60 million. And, as we’ve talked about before as both our Pinnacle subsidiary and our Colgan subsidiary take deliveries of aircraft throughout 2008 we will see our balances of cash and short term investments declining as we pay for the non-financed portions of those aircrafts. However, we do still expect to generate strong operating cash flow throughout 2008 and again, a primary reason here is because of the tax depreciation benefits promoting these aircraft and the fact that we do not expect to pay taxes in 2008, income taxes in 2008.

I do want to talk for one minute about our short term investments. As many of you may know if you look at our financials we have historically invested our excess cash as short term investments in tax exempt auction rate securities. And, over the past week and a half or so that market has become somewhat [eliquid]. The securities themselves have not had any kind of defaults but because of the credit crunch that’s affected much broader areas of the market that credit crunch is also affecting auction rate securities and that’s resulted in a situation where an owner of these securities would normally be able to sell in an auction and those auctions have not been succeeding which means that we have securities that we’ll be holding for another 35 days at least, until there’s another auction. All of our securities are AAA rated still today, our securities are backed by student loans that are guaranteed under the Federal Family Education Loan Program by the federal government. We think that we have securities that represent very good value and that there’s very good collateral behind. But, we do have a situation where our securities are [eliquid] for the moment. We still feel very confident in our income and cash flow generating power this year. We have liquidity for our operations. We had planned to monetize these investments over the year to support the non-financed portion of our aircraft deliveries and we still think we will do that. In the event that we can’t we do have one commitment for a borrowing facility against these securities for up to $54 million which is as much as we would need to fund all of the non-cash portion of our aircraft delivering this year. And, we’ve talked with several other banks as well about providing facilities. So we’re comfortable with our liquidity while we look at the auction rate security market and we’re monitoring the market closely. We do believe that we’ve got good securities and we’re not interested in selling them in an [eliquid] market where we might have to record a loss.

Just looking forward to the rest of 2008 we did have three CRJ-900s delivered at year end. One of those aircrafts was in service for the month of December. We expect to take delivery of four 900 aircraft in the first quarter and so we will end the first quarter with seven CRJ-900s in the fleet. We started the Q400 service as Phil mentioned, in February with Continental and we do expect to end the quarter with a total of six of the Q400 aircraft in our fleet. If you look forward then at the second quarter we think we’ll deliver nine Q400s and that will bring our total fleet to the 15 that we’ve got commitments for with Continental by the end of the second quarter. And, we expect to deliver three CRJ-900s in for our Delta Connection operations in the second quarter. We’ll take one more 900 in the third quarter, four in the fourth quarter and then the very last one will come in the first quarter of 2009. On the CRJ-200 front with Northwest Airlink, as I mentioned two of those aircraft were returned in the fourth quarter of last year so we ended at 12/31/07 with 137 aircraft in service. We expect that we’ll return five of those aircraft back to Northwest in the first quarter, an additional five in the second quarter and the final three we expect to go back to Northwest in the third quarter of 2008. So, by the end of the third quarter we’ll be done to our core fleet of 124 CRJ-200s with Northwest.

With that operator I think I’d like to turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Lily Ng with Merrill Lynch. Please proceed.

Lily Ng – Merrill Lynch

My first question is regarding whether you could give me an update on some of the issues you raised last quarter with the Northwest ASA. I know they were not big items but given the fact that they’re probably a bit busy this last quarter I was wondering if you have any just updates on those three things that they had issue with you about?

Peter D. Hunt

Sure Lily I’m happy to update you. One thing that I should have pointed out, when you look at our operating results we did have a dispute on how much of a performance based payment we would owe to Northwest for the first half of 07 and we settled that out in the fourth quarter for an additional $500,000. So that was a reduction of revenue item that we had in the fourth quarter here. So, all those performance penalty issues are over and behind us. Both we and Northwest agreed that that was a very fair settlement. With respect to the two ongoing items that would affect the rates that we would receive under the airline services agreement nothing has really happened. We think Northwest has been a little distracted with some other things that they might be looking at in the meantime they are continuing to pay us as we have always been paid under the ASA and at some point we would guess that they will turn their attention back to this and we’ve agreed that at that point we will arbitrate the issues. But, at this point nothing has really changed.

Lily Ng – Merrill Lynch

Great. My second question is regarding to Colgan, I know that you guys are putting in tall this initiatives to try and improve the operation. At this juncture do you have an estimate of the timeline that you think things are going to turn around? Or, perhaps you have a target operating margin in mind for Colgan recognizing that it’s highly seasonal but maybe something for 2008? Do you want to get back to 5% operating margin for instance? Just your thoughts on that would be great.

Peter D. Hunt

Well, we’ve always said that we’ve targeted a pre-tax margin of 3 to 5% and we look at pre-tax because there is a portion of Colgan’s fleet that are owned and have debt associated with them and we need to cover all costs of ownership including the interest costs so that’s what we target. I think that the first quarter will still be a challenge for Colgan quite frankly. Seasonally, it’s still a tough quarter although not as tough as the fourth quarter and it’s during the first quarter that we’re taking on the initiative to transition our maintenance operations to Dulles and we’re also moving those nine markets from Pittsburgh to Dulles. The movement of those markets is occurring as we speak and all nine will be moved by sometime in March. So I think the first quarter will still be a challenge, the second and third quarters tend to be strong for Colgan anyways and we are optimistic that some of these initiatives will be working at that point. I will tell you that before we go into another winter if we haven’t gotten a plan where we’ve increased Colgan’s revenue or reduced their costs enough to offset fuel or if fuel itself hasn’t come back down to a more rational level we will make adjustments. We do not want to in the long term fly prorate operations that don’t work at $100 fuel.

Lily Ng – Merrill Lynch

Got it. That’s great. If I could just the last one, Peter maybe you said that already, the amount of the short term investments that’s under the auction rate securities?

Peter D. Hunt

We have $136 million in our portfolio.

Operator

Your next question comes from the line of Keith Wiseman with Calyon Securities. Please proceed.

Keith Wiseman – Calyon Securities

My first question is you had mentioned in the fourth quarter there was an increase in costs due to training. I was wondering if that was going to continue into 08 as you phase in the rest of the CRJ-900 and the Q400 fleet?

Peter D. Hunt

It will to some degree although I think quite a bit of it was upfront especially with the Q400 they’re coming so rapidly that we had to have a buildup of pilots just to be able to meet the delivery schedule that we’ve got since they’re coming just in a quick really five month timeframe. On the 900s they’re spaced out a bit more so that training can be a little bit more spaced so we won’t have to have that sort of extra buildup of pilots with Pinnacle.

Philip H. Trenary

And not as much training is required on the CRJ-900s on a per unit basis either.

Keith Wiseman – Calyon Securities

So you say generally it’s going to return to more normal levels?

Peter D. Hunt

I think it should. As I said with Colgan in the first quarter they’ll still be doing a lot of training because there are a lot of aircraft going into service between now and June.

Keith Wiseman – Calyon Securities

Do you expect to continue buying back shares in 08? Do you have any program in place for 08?

Peter D. Hunt

We don’t have a program in place. Our focus right now is the delivery of these aircraft which are expensive investments and over the next six months we’ll have cash outflows associated with that. We’ve got good long term financing but it is for 85% of the purchase price. So, our focus is making sure that we can fund the non-financed portion and as cash continues to build once we have the aircraft here and in service then we’ll start thinking about what’s the optimal use for that cash.

Keith Wiseman – Calyon Securities

Is that the second half event at best?

Peter D. Hunt

Yeah really I would say late in the year.

Keith Wiseman – Calyon Securities

Lastly, just to make sure that I heard correctly you said that you don’t expect to pay taxes next year?

Peter D. Hunt

That’s right. We’ve said this before as well that really for the next three years we do not expect to be a cash tax payer. It has to do with the timing difference of how we depreciate these new aircraft for tax purposes versus how we depreciate them for book purposes. One of the great things in the tax code is that we’re highly incentivized to go buy aircraft in the United States. And, aircraft can be depreciated on an accelerated basis using seven year makers which is essentially over an eight year period. So, we will have very, very large tax deductions for the next several years whereas for book purposes we’ll be depreciating these aircrafts over the next 25 years. So, when we kind of look at the income we think we’ll have and those tax depreciation deductions we think we’ll have we don’t think we’ll be a significant tax payer for income tax purposes for the next two to three years.

Operator

Your next question comes from the line of Bob Mcadoo with Avondale Partners. Please proceed.

Bob Mcadoo – Avondale Partners, LLC

As you look at the three things related to Colgan, the markets plus fuel plus maintenance or whatever, where’s the real leverage in terms of fixing the $4 or $5 million hit? Obviously even if fuel went down back to the old levels you’d still be, if I read my notes right, you’d still be operating loss of $2.3 million. I guess the question is how much do you get by – what’s the improvement that you anticipate that comes out of the Pitt to Dulles move versus the elimination of ferries on the maintenance or whatever? Where’s the leverage, the upside on which of those things?

Peter D. Hunt

Let me first start off by saying if you look at the whole year of 07 Colgan actually had operating income through September 30th. Colgan was for the full year I think they reported a $4.5 million operating loss. We do have periods of time where Colgan performs better and included in those results is what we’ve estimated to be about $2 million or so related to starting up the Q400. There’s at least $1 million that we devoted to kind of go above and beyond on certification by making certain that our Q400 manuals were [ATAS] compliant. [ATAS], we’ve talked about this before with respect to Pinnacle is it’s that program that the FAA has that is a very standardized program and we think by making that investment which somewhere down the road we’d probably have to make Colgan’s manuals [ATAS] compliant anyways, by making that investment now that helped us considerably in the certification process. And, we didn’t have any holdups and we do note that some other airlines that have tried to startup with Q400s have had some holdups. So, we think that was a good investment but it was an expense during the year. So, there’s a little bit of extra expense during 07 because of getting ready for the Q400. Then, I think when you look at those opportunities that we have in 08 we do think that both eliminating the ferry flights and changing the markets, those by themselves aren’t going to recover a $4.5 million full year operating loss that we have but they’re definitely seven figures in terms of their value and their improvement to the company.

We have to do those two things. We also have to look at our central air service markets and see if the revenue subsidies that we have make sense long term. And, we have a whole bunch of other smaller things that we’re going to look at that we think will also help here. But, the bottom line is we need to make sure that we’re flying in markets that the revenue can support high levels of fuel costs and if we can’t then we’ll probably have to make some changes.

Philip H. Trenary

If you look at the two ends of the spectrum at one end you have the markets that aren’t working well, we won’t be flying those. Then, on the other end you have so much more of the system being operated on capacity that will not be affected by fuel costs to revenue.

Peter D. Hunt

There’s one other item that I haven’t mentioned that will be a really big winner on our Colgan operations in 08 and that is there have been a couple of instances as we start 08 where we’ve been able to leverage the buying power of Pinnacle Airlines Corp. And a big one of those was aviation insurance where we have both our Pinnacle Airlines subsidiary and our Colgan subsidiary in a joint program that is sponsored by Northwestern Continental and just that alone also is a seven figure improvement to Colgan in terms of the value to the company, over $1 million on an annual basis. So there’s several things like that that we’re going to keep looking at to get Colgan’s prorate operations to a level that makes sense long term to us.

Bob Mcadoo – Avondale Partners, LLC

The other thing, could you talk to us in a little more specifics about what the nature of the uncertainty is relative to this tax adjustments that your auditors so graciously found for you at the last minute? They always seem to do that.

Peter D. Hunt

Well, I honestly think that there is no uncertainty now. It was one of those sort of last minute things over the last two days where we just needed to provide some more facts and as we did everyone gained a better understanding and as of this morning we believe we probably won’t be recording anything. But, essentially it related to a long term intangible asset that we have that we will be amortizing over time for financial reporting purposes and the question was whether the amortization could also be deducted for tax purposes.

Bob Mcadoo – Avondale Partners, LLC

What is that asset?

Peter D. Hunt

Its contractual rights associated with our Northwest ASA.

Bob Mcadoo – Avondale Partners, LLC

Okay. Then just one last thing, when you described early on the discussion of the Q400 moving into Newark it sounded as if the use of the crosswind runway was a down the road item and not a current action, the FAA wasn’t quite ready for it yet. Is that an accurate statement? Or, are they using it once and a while? What’s going on there?

Philip H. Trenary

It’s being used more and more. It really came down to the FAA at the highest levels and the ATO, they were ready for it, the individual controllers were not. So, it’s been a matter of just spending a lot of time in the individual control centers. Not just even the crosswind runways, it’s an education process to help them understand that this airplane is very jet like that when they need to go up it can go up. That from a speed standpoint can run with the jets. So, it’s been an educational process.

Bob Mcadoo – Avondale Partners, LLC

They tend to hold it down like a normal Dash 8 or something? Is that what you’re saying?

Philip H. Trenary

Right, we’ve had that. Once the controllers – you can tell who’s behind the radar screen by how the airplane is handled on a particular date. Some will go up and fly with the jets and come in on the short runway and next they may be held low and not be able to use that. So, it’s just been an education process. And on a, I wouldn’t say day-to-day but certainly week-by-week basis they are using the crosswind runway more and more and taking advantage of the performance capabilities of the aircraft.

Bob Mcadoo – Avondale Partners, LLC

I guess the reason I’m asking is because I’m just kind of curious what do you think the likelihood is that Continental after this short period any how is starting to get comfortable enough with it and the FAA that maybe Continental would expand the use of it at Newark?

Philip H. Trenary

Well, we’d certainly hope so. Look at it another way, let’s say we didn’t have all these advantages from a performance standpoint. It can fly as fast as a jet and more comfort than a regional jet at the costs of 50 seats with 75 seats on board. So, even without the benefits that the uniqueness the aircraft provides it’s still a winner. It’s good now and we only expect it to get better.

Operator

(Operator Instructions) Your next question comes from the line of Arthur [Calvertness] with John Hancock. Please proceed.

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Arthur [Calvertness] – John Hancock

On the ASA agreement with Northwest and I’m not sure what you have with Delta, I remember when you guys were cutting the deals during their bankruptcy, is there any language in there, change of control provisions or anything like that with Northwest that you guys get affected?

Peter D. Hunt

No, not when there is a change of control at Northwest. There is a clause that relates to a change of control with Pinnacle that give Northwest some rights. But, with a respect to a change of control at Northwest absolutely nothing happens except we continue to fly through 2017.

Arthur [Calvertness] – John Hancock

Okay. Then, if you start looking and reading the paper and people are talking about Memphis and if they did do something with the Memphis hub and downsize it, how would that work? How does that work if they cut capacity a lot in Memphis?

Philip H. Trenary

We don’t expect that to happen but let’s say they did. Let me take it in two pieces. There’s going to be a network regardless what hubs are there, where those hubs are. And, if you look at the contracts we have, the aircraft we have those aircraft will be secure. So let’s say Memphis is not on the radar screen, Pinnacle would still be able to fly all of its aircraft. The reason we think Memphis will be in good shape, a lot of people keep focusing on the old Memphis and the way it looked pre RJ. Now that we have over half the departures on the capacity of half of the departures out of Memphis our regional jets, it’s a completely different hub. And, we believe it’s well positioned in the Northwest network and if you looked at a combined network it would continue to be valuable and would be safe. In fact, we think the hub would actually wind up expanding somewhat in a consolidated environment.

Peter D. Hunt

And I’ll just add to that Arthur, we move our aircraft and change our schedules with Northwest all the time. We use to have a large presence in Milwaukee a few years ago which we no longer have. So, aircraft move back and forth between the hubs and between other cities. But, the amount of flying that we do is the piece we worry about and that has not changed over time.

Arthur [Calvertness] – John Hancock

Okay. I know I should know this but they don’t fly that many big jets out of Memphis, Northwest doesn’t, right?

Philip H. Trenary

Well, if you look at the departures about something slightly less than 50% are narrow body aircraft then you have the one wide body going international.

Arthur [Calvertness] – John Hancock

Right. The Amsterdam flight, right?

Philip H. Trenary

That’s correct.

Arthur [Calvertness] – John Hancock

Okay. Then, on the prorate paragraph here, as the fuel went 29% and you’re referencing the first quarter of 07 and I haven’t focused that much on these prorate deals in Colgan, does that mean down the road – how does that work? Do you have to pass this cost back on to the guy you’re providing service for? Or, do you just eat all that?

Peter D. Hunt

Well, the prorate deals which is Colgan’s historic bread and butter you can think of it really they’re like marketing agreements and Colgan is more like a traditional airline. With Colgan we pick markets that we fly and we have a marketing agreement that we use the Continental Connection brand or the United Express or the US Airways Express brand but we take the risk of revenue on the routes and we bear all the costs of the routes including fuel. So, we do have price risk on fuel and when you look at Colgan in 2007 unit revenue was kind of basically flat year-over-year whereas some of the majors were able to have some of the fair increases throughout the year. There were some issues that we’ve talked about on previous calls related specifically to some of Colgan’s markets that kept revenue flat in and environment where fuel prices actually went up.

Arthur [Calvertness] – John Hancock

Alright. I’ll follow up on that because I have a few more questions. Then, it hasn’t even been two weeks since you guys put in the Q400. I’m just wondering any feedback? Anything you’re hearing from the guys in Houston on how it’s operating in Newark? And also, we’re at a lot higher fuel environment than we were when those airplanes were ordered and I mean, it must just make the gap, the competitive gap much bigger and I was just wondering if you could comment on that? I know you made some comments on that but again, anything you’ve seen in the beginning two weeks here?

Philip H. Trenary

The main thing we were watching, we knew the airplane would look better financial than it did when we very first proposed it and that of course is true. The thing we were most interested in was what the customer perception would be and what we’re seeing is a bit of pushback. We’re actually seeing airplanes sitting out there with props and when they get off the airplane they are very happy with it because they’ve been use to the RJ and it’s actually more comfortable and as quiet so that part is working out very well. That’s the one point we were probably the most interested in getting the feedback on.

Operator

Your next question is a follow up from Lily Ng with Merrill Lynch. Please proceed.

Lily Ng – Merrill Lynch

Peter, I forgot to ask you this, do you mind giving us an update on the ASM and/or block hour break down for the first quarter in 2008?

Peter D. Hunt

Yeah, we haven’t revised our model in a few weeks and some things have shifted around on a weekly basis in terms of deliveries but, I’m happy to do that and I can provide that to you at a later date.

Operator

(Operator Instructions) There are no additional questions at this time. I would now like to turn the call over to your host for today Mr. Philip Trenary for closing remarks.

Philip H. Trenary

Thank you very much folks. We appreciate you joining us and if can answer other questions, please feel free to call. Thanks again.

Operator

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

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