Pinnacle Airlines Corporation Q1 2008 Earnings Call Transcript

May. 8.08 | About: Pinnacle Airlines (PNCLQ)

Pinnacle Airlines Corporation (PNCL)

Q1 2008 Earnings Call Transcript

May 8, 2008 3:00 pm ET

Executives

Philip Trenary – President and CEO

Peter Hunt – CFO and VP

Analysts

Lily Ng – Merrill Lynch

Jamie Baker – JPMorgan

Bob McAdoo – Avondale Partners

Keith Wiseman – Calyon Securities

Helen Becker – Citigroup

Vasily Volkov [ph] – Morningstar

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2008 Pinnacle Airlines Corporation earnings conference call. My name is Amity 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) I would now like to turn the presentation over to your host for today's call, Mr. Philip Trenary, President and CEO of Pinnacle Corp. Please proceed, sir.

Philip Trenary

Thank you, Amity, and good afternoon everyone. Welcome to the first quarter 2008 earnings conference call of Pinnacle Airlines Corp. On behalf of the more than 5,000 employees at 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.

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 to assurance that such expectations will prove to be correct. Such statements are subject to certain risk, uncertainties and assumptions, including those set forth in your filings with the Securities and Exchange Commission which are available to investors at our web site 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 results that are anticipated or projected. The company does not intend to update these forward-looking statements before its next required filing with the Securities and Exchange Commission.

Again, good afternoon, and we'll jump right in to it, before I turn this over to Peter to talk about the financial results. Obviously, we are very disappointed with our first quarter results. We had a couple of things that we're dealing within the first quarter. The first thing was the weather pattern. It wasn't just in Northeast. In the almost 30 years I have been doing this, it was the worst winter weather pattern we've experienced and not only did we deal with the winter weather issues, it did exacerbate the cold weather maintenance issues that we have the CRJ.

A little bit of light at the end of the tunnel, on that, we are working with the manufacturer for the flap system upgrades and while we don't expect it would be a total fix, we should have a much better operation by next winter related to the maintenance. The other thing that was a big hit was our Colgan operations, more specifically the at-risk pro rata operations. As I think everyone on the call knows, our fuel is up 54% over last year and we do have the program underway to improve coal Colgan. We have talked about some of this in this past, but to give you an update on where we are on those, we're expecting our maintenance move to Dallas to be operational by the 20th of this month. That will generate significant savings and save a lot of the ferry flying we're doing today. The move that we're taking to Dallas and transitioning from the U.S. Air Operations to United at Dallas are largely complete, and those markets are trying to build nicely from a traffic standpoint.

Another difference this year, you may remember that one of the negative impacts we had last summer was we had to share the LaGuardia, Cape market into Nantucket, Martha's Vineyard with U.S. Airways. This year we will not be doing that. We'll have the entire market to ourselves. We should have significantly better results for the Cape than we had year. Again, everything I say about improvements will be tampered with whatever increases we have on fuel from this point forward.

In addition to the initiatives that we're taking to improve Colgan, we are talk to all of our partners and one of the questions we have had is whether or not we are looking for capacity purchase agreements on these. We don't think that is very likely on the Saab flying. However, there's a lot of things that the partners can do to help us out, and there is a fees – some of our arrangements we have, what is called, the connect incentive, which is kind of like a non-standard pro rate, fuel modifications, there's a lot of things we can do to keep many of the markets viable.

The other thing we're doing is rebidding all of the essential air service markets. On several of those markets, we were the only bidder, so we feel very good about having those renewed. We won't have the final determination on some of those for sometime. You would expect to see the new rates going into effect on these markets as we rebid sometime around September, so going in to the fourth quarter when we see the full effect of this.

So the bottom line is – all the initiatives we're talking about should be in place prior to fourth quarter, when we'll see the revenues drop again. On the Pinnacle side, one of the most frequently asked questions has to do with the contract with our pilots union. Those negotiations are still with the mediator and I don't think there's any secret that we have offered an industry-standard deal. We have addressed not just the compensation, but also the work rules. And it is interesting, in talking with our pilots they are saying the contract, they characterize it as very good. I think one of the key considerations we have to recognize is here is we are dealing with a third negotiating committee and especially we have to recognize that our pilots are doing a great job out there, and they have been very, very patient. They deserve a new contract and we hope that the mediator will be able to bring this together and give our guys the raises they deserve, because they have been doing a great job. However, it is important also to recognize that we cannot agree to terms that would keep us from emerging from the current environment as a long-time provider of regional airline services. So, we want this to wrap up as quickly as we can, but it makes no sense for us to expedite a contract to pursue a situation where we can't be competitive long term.

On a much broader note, as I said earlier, all of our people here at Colgan and Pinnacle are very focused on running a great airline. Both operations are performing well now and in fact, we fully expect to regain our status as the most reliable operator of the CRJ 200 and hopefully the 900 this quarter. At Delta, we have – I have Dr. Shaw [ph] who is sitting with me – seven of the 900s on now, seven of the 16 online. And the CRJ-900 next gen is turning out to be a great aircraft. It's the – I think I said in the last call, CRJ done right, and the combination of the lower capital cost, it's a more fuel efficient aircraft, and with the enhancements made to the next gen, it's really taken away any reason for the customer to book away from CRJ-900 from any other aircraft, so we think in this environment where cost and fuel are so important, it is the right jet aircraft to grow with.

We also have the Q400 at Colgan. We have our 11th aircraft operating there. And we were sold on this airplane when fuel was running at the $50 range. To say it looked good then is an understatement, to say it looks great at $120 a barrel is absolutely true. New York has proven to be the perfect proving ground for it. We continue to work with Air Traffic Control there. We won't see the full benefit of this airplane until we are able to fully utilize the customer approach procedures and the short runway there. But, every week, we are able to utilize these more and more, which makes the aircraft look better and better. One of the questions that has also come up in the environment of potential consolidation, how we feel about our contracts and how they look relative to the industry. It's important to note that the contracts that Pinnacle has are probably – and I'm looking – Peter used to say this – the youngest the industry. We have very recently negotiated these contracts. The Northwest contract came as a result of the Northwest Airlines bankruptcy, so it is very competitive.

The environment we were in and negotiating the contract with Delta was highly competitive. So as you look at the world going forward and what contracts should look like, we believe that our capacity purchase agreements with Continental, Delta and Northwest are very competitive and they represent what the market is going to look like going forward. So we are very confident as far as our purchase capacity agreements.

Just one word on consolidation. We view consolidation as a good thing, a necessary thing. It's something that needs to happen if our industry is going to be viable. It goes back to discussions we have had in the past when we've had to talk to you about very challenging situations with Northwest Airlines going into bankruptcy, that we believe as long as we maintain a very high standard for performance and very competitive cost, long term, we'll be the winner – one of the winners. And we're doing that and feel that we are very well positioned to do well. We do continue to evaluate the environment that we find ourselves in today and look at the market, we look at our options and see what we can do to be the most assistance to our partner carriers.

So with that, I'll turn it over to our Chief Financial Officer, Peter Hunt, who will review our financial results.

Peter Hunt

Thanks, Phil, good afternoon everyone. Thanks for joining us today. This morning, Pinnacle Airlines Corp. reported consolidated fully diluted earnings per share of $0.15, as compared to $0.38 in the first quarter of 2007. And as Phil has already mentioned, there were two primary reasons for the year-over-year decline in earnings, the first has to do with performance at our Colgan subsidiary and the loss that Colgan reported of approximately $5 million for the quarter, almost entirely is attributable to the change in fuel price. Fuel costs year-over-year, the average price per gallon that Colgan paid increased by 54% and that add $4.2 million in additional fuel costs for the quarter for Colgan. Colgan paid $3.27 per gallon for fuel during the first quarter of 2008.

As we look at things outside of fuel at Colgan, the RASM on the current operations actually is showing slight improvement year-over-year, about 3% to 4% higher year-over-year in most markets. We did complete the move of our essential air service markets that we were flying into Pittsburgh under the U.S. Airways brand over to the Washington Dallas hub, flying under the United brand during the quarter and we are seeing some improvement there in those markets in terms of increased passengers, increased load factor. But it's off a very small base, so those improvements are still small at that point. And we're working very hard to control non-fuel costs. One big example would be what we're doing on the overhead side, where year-over-year we have dramatically decreased the cost of insurance at our Colgan subsidiary, and we're still in the process of moving our maintenance facilities out of Manassas into Dallas. That will be done during the quarter. That will also improve non-fuel costs. It will eliminate a lot of ferry flights, should make our maintenance operation more productive and run much smoother.

As Phil mentioned, we are working on sources for increased revenue. The changes in non-fuel costs, the changes in the marketplace on revenue that we are able to do will not be enough in and of themselves to offset this very, very dramatic change in fuel price. So, as Phil mentioned, we've rebid the EAS markets that we're in, and it's looking promising in terms of being able to change the amount of grants from the government that we get there to offset the high cost of fuel in those markets.

And in those markets that are not EAS, we are talking with our partners to understand the importance of those markets to our partners and we do think that there will be some receptivity to continue that flying and we'll have to do it in a way where the pro rate changes, or in a way where there is some kind of increase in revenue to offset this high cost of fuel. If we're not able to make those changes, we will make the changes we need to, to reduce the pro rate flying and reduce the exposure that we have to losses in fuel, and that's a decision that we'll be make very shortly as we look as these opportunities.

As we look at the second quarter for Colgan, however, we do expect better RASM performance in the first quarter. Seasonally, the second quarter is much stronger for Colgan than the first quarter would be, but we will have higher fuel costs as well. Fuel prices are already about 15% higher than what we were paying in the first quarter, and when you look at a base of roughly 3.7 million gallons of fuel that we buy a quarter, that kind of change could result in another $1 million of cost on fuel for us. So the second quarter, we do expect another operating loss, although we think it will be smaller than the loss that we have incurred in the first quarter.

Turning to the Pinnacle side, again, that was the other big reason for the change in EPS year-over-year. We did record $2.5 million of penalties under our ASA with Northwest. Those were related to completion factor, on-time performance and mishandled bags. Our contract with Northwest, as many of you know, has standards contained within it. The first level of standards would simply result in this reduction in revenue, and these are measured over 6-month periods. If we hit a second level, the amount of the penalty increases, essentially the amount of penalty doubles. And then there is a third level that is sort of the minimum requirement of performance that's required under the ASA and we are ahead of that third sort of minimum requirement level. I get a lot of questions about that. We're not in any danger we believe for the six-month period of being below the absolute minimums required within our ASA. But, because of the performance and because of the weather and the things that Phil mentioned, we are in the level where we have single penalty and potentially double penalty on some of these member metrics that we look at within the ASA.

So we have recorded $2.5 million for the first quarter and that is one quarter's worth of penalty. And as I said, this is measured over six months. So as we look at the second quarter, we would expect to record an additional amount related to penalty. If our performance improves in the second quarter, however, that could reduce the amount of penalty that we have for the full six-month period, so we'll have a true-up process that we'll have to go through. Typically, we do perform better in the second quarter, the spring months and the early summer months, we tend to have mild weather. They are good seasons. We are seeing that trend in April, the better performance. So at this point, we do expect that the penalty we will end up reporting in the second quarter will be less than the $2.5 million that we recorded in the first quarter.

In addition to that penalty, the first quarter was affected by about $2 million related to lost revenue from the fact that we completed a lot fewer flights than we normally would and also interrupted trip costs that come with that. There are certain amount of costs for passenger re-accommodation that we bear when we run a bad operation. So not only do we end up in a situation where we incur these penalties with Northwest, but it does affect our ongoing revenue and operating cost in the operation. When we don't perform well, it hits us in two different ways.

Turning to capacity for our two airlines. On the Pinnacle Airlines front, the first quarter ASMs were 1.5 billion, which is about 4% higher year-over-year, almost all of that crease was due to the new CRJ-900 flying with Delta Airlines. Pinnacle flew 112,000 block hours, which was up 5% year-over-year, and actually when we look at the change in block hours, about 3% of that change relates to the CRJ-900 and about 2% relates to our CRJ-200 flying. You may recall that last year at the same time in the first quarter, we were adding back 15 aircraft to our fleet, going from 124 aircraft at the beginning of the quarter to 139. This year, we're taking aircraft out. We ended the period with 132 CRJ-200s. The net effect of all of that was slightly higher block hours in the quarter. We have about the same number of aircraft, we're scheduling them a little bit better this year, flying a little bit harder on the CRJ-200s, and that did result in more block hours year-over-year. We would have had even more block hours if it weren't for the operational issues that we have had.

So as we look forward in the second quarter and the third quarter, we do expect that trend of increased utilization on our 200 fleet to continue. We ended with 138 aircraft in our fleet. That was made up of 132 CRJ-200s and six CRJ-900s. Stats on our Colgan Air subsidiary, we flew 180.6 million ASMs and that's up 53% year-over-year. A big piece of that has to do with the fact that the first quarter of 2007 for Colgan only included the period of time that we owned the company, which was January 18th forward. So there's about a 24% change in our ASMs that relates to simply having a full quarter's worth of flying on the pro rate business. And if you looked at the pro rates, if you actually ironed that out apples-to-apples, you'd find that we really haven't changed capacity much on the pro rate side. It is pretty steady year-over-year.

The other 29% change in our ASMs year-over-year is related to the Q400 flying we had during the quarter. We had about 34 million ASMs related to the Q400 flying. On the block hour side, block hours were up 32% to just over 33,000 block hours in the quarter, and same phenomenon there, 21% of that change relates to the pro rate flying and 11% of it relates to the Q400 flying that we did during the quarter. And we ended the quarter with a total of 51 aircraft at Colgan. That is six Q400 aircraft, 41 Saab 340s and four Beech 1900s.

Consolidated revenue for Pinnacle Airlines Corp. was $201.2 million. That's an increase of 14% over the first quarter 2007 and that change in revenue is almost all primarily attributable to our new contracts and the increases in capacity that we had related to those contracts. Operating income was $6.7 million. That was down from $12.8 million in the first quarter of '07 and our margin on a consolidated basis was 3.3%, also down from 7.1% in the first quarter of '07 and the primary reasons for that change are the two things that we previously discussed. So first quarter '08 consolidated net income was $2.7 million for the quarter.

Looking at the balance sheet and cash flow, we ended the quarter with $76.9 million of cash and cash equivalents. We have reclassified our auction rate securities portfolio to a long-term investment. The par amount of that portfolio is $136 million. In addition to reclassifying it as a long-term investment, we have marked that portfolio to market very consistent with what all other companies and all other airlines that have auction rate securities, we have used the same methodology to do that mark-to-market. So you'll see on our balance sheet, a value of $126 million because we have recorded a $10 million impairment. That impairment doesn't go through the income statement, it goes to other comprehensive income; it goes straight to equity, but we have made that adjustment on our balance sheet.

Looking at cash flow in the quarter, cash used in operating activities was $17.3 million. The primary use of cash on the operating side relates to our hedging program. You may recall that in the second quarter of 2007, we initiated a hedging program to lock in our long-term aircraft financing costs to match the revenue stream that we were getting with our new contracts. We did lock in those costs at 7%. With the changes in interest rates since that time, that has resulted in prepayments essentially related to the change in interest rates versus what we've locked in, and that total was $24 million. Almost all of that now relates to hedges we have either unwound or where we were fully collateralized. So we don't anticipate any other cash flow, or very little cash flows, in the second quarter related to changes in our hedge positions. So if you take that out, we actually had positive operating cash flow of $7 million from underlying operations.

On the investing side, cash provided by investing activities was $43 million. $51 million of that relates to auction rate securities that we actually sold during January and that contributed to the balances that we have on the cash. And that's offset by $8 million of capital expenditures, primarily related to the new fleet.

On the financing side, total cash provided by financing activities was around $25 million. We had $72 million of borrowings during the quarter. $60 million of that relates to a margin loan essentially that we have obtained from the bank that sold us the auction rate securities portfolio that we have. That $60 million is collateralized by our portfolio, provided us some liquidity in our portfolio while we are waiting for the ARS market to stabilize. There's $12 million related to other activities, the biggest piece of that relates to some financings that we did related to Colgan Saab aircraft.

We purchased our Series A preferred share for $20 million at the beginning of the quarter. That was in accordance with the terms of amended and restated ASA, with the deal that we struck with Northwest back in late 2006. And then we also had$ 26 million of debt repayments, the primary piece of the debt repayments relates to our PDP financing facilities that were paid off as aircraft delivered during the quarter.

Looking ahead to the rest of the year, we still expect strong operating cash flows, particularly in the second half of the year. We are still in a position where we will make no cash tax payments in 2008. And in fact, at this point, as we look at the benefits of the tax depreciation on our new aircraft fleet, we actually expect that we'll be able to carry back of tax losses for '08 and apply for a refund for NOLs for 2007. So, we are currently anticipating we may receive approximately $25 million tax refund in the first quarter of '09 when we do that carry-back. Cash balances will decline, however, over the next two quarters, as we fund the equity portion of new aircraft as they deliver. And then towards the end of the year, the cash balances with build again.

The deliveries that we expect a delivery of four CRJ-900s in the second quarter, one in the third quarter, and four in the fourth quarter, and then the last of our CRJ-900s should come in the first quarter of 2009. On the Q400 side, we expect seven aircraft to come in the second quarter and there are two aircraft that will come right at the end of the second quarter and the timing is a little uncertain at this point as to whether they will actually be in service by June 30th or they might slip in to early July. But, we do expect all nine aircraft to be in fairly shortly. And then, we do expect the remaining seven CRJ-200s to go back to Mesaba by the end of the third quarter.

With that, I think we'd like to turn the call back over for questions, operator.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Lily Ng with Merrill Lynch. Please proceed.

Lily Ng – Merrill Lynch

Hi, good afternoon Phil and Peter. My first question regards to revolving line of credit that you guys have for the institutional vendors. Can you give me an update on that, because I think as of your K, you said the termination date of that line of credit was extended to April 15. Did you do more extension or considering other forms of financing, so you have some dry powder on the side?

Peter Hunt

Yes, you are referring to an $8.5 million credit facility that Colgan Air had when we acquired the company. It's a facility with a local bank that Colgan has had strong ties with for a long time, and that facility has been extended for another year, so that is still outstanding and will be until spring of 2009.

Lily Ng – Merrill Lynch

Right. And Peter, have you done anything else or looking at just other lines of credit that you might be interested in?

Peter Hunt

We're really not. I mean, I think we're pretty comfortable, Lily, with your liquidity now. Even with the changes in fuel that we see with Colgan and the losses that we did not expect to see as we plan for 2008, we're still fairly comfortable that the cash flow that we have, the liquidity that we obtained related to our ARS portfolio is enough. So we're pretty comfortable with where we are on the liquidity front.

Lily Ng – Merrill Lynch

Great. And then, my second question is a hypothetical one, say you guys decide to just shut down the prorate (inaudible) at Colgan tomorrow, like again hypothetical, do you think you can give me a sense of the magnitude of how your revenue and your cost and your cash flow are going to be affected if you were to do that?

Peter Hunt

Well, first off, let me say that it's not likely we would ever shut the whole thing down, primarily because one component of it – the flying we're doing with Continental already has a mechanism for the prorate formulas to adjust as fuel prices change, so as fuel prices increase, the amount of revenue that we receive under our Continental agreement goes up. So I think that the Continental flying actually probably will continue to work and would be something we would continue to want to do. And that's about a third of the prorate flying. On the other two-thirds, if we were to simply stop it, if we were to shut it down, the total prorate business is about $200 million a year revenue business. And last year, it was about $205 million revenue – $205 million cost. And obviously, with fuel prices, that number is going up and up and up, so that gives you an idea of the size of the business that's there. Hopefully that answers the question for you.

Lily Ng – Merrill Lynch

Yes, if you could – do you have a cash flow, like the contribution to cash flow from your prorate business? I guess if it's not bringing in …

Peter Hunt

I mean, it's – last year, it was about zero on the cash flow side. Because even though it had operating cash flow, the Saab aircraft, about half of them are owned and half are leased. And on the owned side, they are financed. So the operating cash flow that we would have on the Colgan business is offset by the principal interest payments that we make on those aircraft. So, last year basically zero cash flow. This year, at this point, it's a negative because of what is going on with fuel.

Lily Ng – Merrill Lynch

Got it. Thanks very much.

Peter Hunt

Thank you.

Philip Trenary

Thanks Lily.

Operator

Your next question comes from the line of Jamie Baker with JPMorgan. Please proceed.

Jamie Baker – JPMorgan

Good afternoon, gentlemen. A couple of questions. I know the option date for Continental to have you purchase another slug of Q400s has passed. Do we know if Continental decided against doing more of that flying, or have they simply not made up their minds yet?

Philip Trenary

No, we are still talking with them and we have worked with the manufacturer (inaudible), so all of our Q400 options are still very much alive.

Jamie Baker – JPMorgan

Okay. And as a follow-up to that, have you taken a look at any of the Q400 assets or delivery positions that may be available pursuant to the situation at Frontier?

Philip Trenary

We are staying abreast all Q400 availability regardless of where they are.

Jamie Baker – JPMorgan

All right. And lastly, question on that operational threshold in the Northwest contract, to your point, still well above the very minimum level under which you technical breached the contract? But I'm curious what could ultimately put you there? Is that an outcome hypothetically that Northwest could actual force, for example?

Philip Trenary

We don't believe so.

Peter Hunt

Yes, anything that is a Northwest requested action or that is caused by a vendor put in place by Northwest, for instance, Mesaba. Mesaba has a lot of ground handling force. Those types of cancellations and delays are all completely excluded from these calculations.

Jamie Baker – JPMorgan

So, if it comes down from Northwest SOC that they want you to stand down, that's not computed as part of the total.

Peter Hunt

That's right.

Philip Trenary

Yes, this (inaudible) has a separate code and that has never been disputed.

Jamie Baker – JPMorgan

Okay. All right, good. Thanks a lot gentlemen.

Philip Trenary

Thank you.

Operator

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

Bob McAdoo – Avondale Partners

Hi guys, in terms of trying to figure out and trying to understand Colgan and whatever, are we going to get financial statements for Colgan separate from Pinnacle jet operation, or what additional information might be available in the 10-Q or whatever?

Peter Hunt

The 10-Q will have some segmented information, so you'll be able to see revenues between the two operations, you'll be able to see income between the two operations. And as we discuss those segment results, there'll be some sort of qualitative (inaudible) discussion of sort of what is causing those results. So you will see – you won't see every single line of our income statement broken down between the two, but you definitely will see sort of the bottom line, revenue …

Bob McAdoo – Avondale Partners

Will we be able to see like ASMs by type of equipment within Colgan, so we know what is Q400 versus the small airplanes or anything like that?

Peter Hunt

We don't have that broken out in the Q right now, Bob, which is why I tried to address it some on the call here. That's something that we're looking at and I think that probably does make sense to give some of that capacity information broken out. So, that is probably something we'll start doing in the future.

Bob McAdoo – Avondale Partners

Okay. And then finally, you made a comment of 3.7 million gallons of fuel at Colgan. Is that the prorate fuel or is that total fuel, and is that quarterly?

Peter Hunt

Prorated fuel quarterly.

Bob McAdoo – Avondale Partners

Okay.

Peter Hunt

That's what we used in the first quarter.

Bob McAdoo – Avondale Partners

All right.

Peter Hunt

And that actually – you'll see that in the Q. We have that information there.

Bob McAdoo – Avondale Partners

All right. That's all I got. Thanks a lot.

Peter Hunt

Thank you, Bob.

Philip Trenary

Thank you.

Operator

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

Keith Wiseman – Calyon Securities

Couple of questions. One, your share count seemed to drop by about 3 million. Can you explain what caused that?

Peter Hunt

Well, there's a couple of things that are causing it, the biggest one would be the fact that in the fourth quarter, we repurchased 2.4 million shares from Northwest in a negotiated transaction and the full effect of that isn't felt until the first quarter, because you do sort of a weighted shares outstanding. Now, the other thing that's causing the big drop is that the convertible notes that we have only have dilutive effect on our share count when they are above the conversion price, when the stock is trading above $13.22. So where the stock is trading today, there's no dilutive effects from the convertible notes that we have on our EPS.

Keith Wiseman – Calyon Securities

Okay. In terms of the penalty you had from Northwest for underperformance, where does that show up? Does it offset the revenue?

Peter Hunt

Yes, that's right. It offsets the revenue, reduction of revenue.

Keith Wiseman – Calyon Securities

Okay. That was all. Thanks.

Peter Hunt

Thank you.

Philip Trenary

Thank you.

Operator

(Operator instructions) And your next question comes from the line of Helen Becker with Citigroup. Please proceed.

Helen Becker – Citigroup

Thank you very much, operator. Hi, gentlemen.

Peter Hunt

Hi, Helen.

Helen Becker – Citigroup

Just two questions on the balance sheet, the goodwill that's on the balance sheet, when you are looking at – I assume most of that is related to Colgan, is there a point at which you would have to write that down?

Peter Hunt

There's some goodwill related to Pinnacle. Probably, the bulk of the goodwill is related to Colgan, our acquisition there. And to the extent that we dramatically change the operation – if we significantly pull down the prorate flying, if we did decide to eliminate it in its entirety for instance, we would very well record a write-down or a charge related to those intangible assets. Another big piece of our intangibles aside from goodwill is that we have allocated value to the contracts, the relationships that Colgan brought to us. And so, to the extent that for instance if the U.S. Air business, if we and U.S. Air decided that was no longer working and ended that contract in that relationship, we would probably take a charge related to the intangible value that we have associated with that contract.

Helen Becker – Citigroup

Okay. And then my other question is on the current liability side, where you have the short-term notes that are payable of the 121 million, what is the timing of that and how will that be repaid?

Peter Hunt

Well, those – the 121 million, that is our convertible notes.

Helen Becker – Citigroup

Okay.

Peter Hunt

They show up, they are short-term in periods where they are convertible. And in periods where they are not convertible, they move to long term. And this quarter we're in a period where they are not convertible because of where the stock price is. So, you'll now see it as long term when you see our 10-Q balance sheet. The way those notes are structured, obviously a holder can convert at any time that the price is above the conversion price, but beyond that, investors have the right to put the notes back to us at par in February 2010, and Pinnacle has the right to call those notes at par beginning in February 2010. So when we look at that obligation, we view that as a February 2010 likely obligation.

Helen Becker – Citigroup

Okay. Because, for the March 2008 balance sheet that you put in the press release today, it is showing up in short-term. But you are saying that when you file the Q tonight, it will move to long term?

Peter Hunt

Yes, it should be in long term, I believe.

Helen Becker – Citigroup

Okay. Well, you should take a look at the press release, because it has it in the short-term.

Peter Hunt

Okay. I'm sorry, I'm looking at what you are looking at now. There's $121 million total of short-term notes payable and current maturities of long-term debt, and that's made up of a whole bunch of things. There is the $60 million margin loan that we have just taken out with Citibank and that loan has a maturity date of February '09, and the rest of that relates primarily to the predelivery payment facilities that we have and those payoffs is the aircraft delivered.

Helen Becker – Citigroup

Got you.

Peter Hunt

I'm sorry, they both happen to be $121 million.

Helen Becker – Citigroup

Exactly. I see the other $121 million. Okay, no problem. Thank you for your help then.

Peter Hunt

Sure. Thank you.

Philip Trenary

Thank you.

Operator

Your have a follow-up question from the line of Keith Wiseman with Calyon Securities. Please proceed.

Keith Wiseman – Calyon Securities

Hi. One question here regarding merger activity. Obviously you have had Delta and Northwest and rumors of United with Continental or U.S. Airways, it's actually a two-part question. One, are your contracts with all of those carriers ironclad with respect to mergers, and number two, even if they are iron clad, would you expect these mergers to cause any of the partners to come back and try to renegotiate any of the contracts, being that they will be kind of a more bulked-up player? Can you just comment on that?

Peter Hunt

Well, the contracts we have on the capacity purchase agreements have no change of control language in them. There is change of control on our side, someone tried to buy Pinnacle, you would have to deal with that, but the way it is set up, the change of control on the part of the major partners does not impact our contracts. To the extent that the partners would want to look at our contracts, as long as it is beneficial to both of us, that would be fine. We always expect that in something like this would be things we have to do to make it work for both. So, we don't see anything that would make it in any way – disadvantageous in any way, but there may certainly be an opportunity to talk about certain parts of the contract.

Philip Trenary

And I'll just add to that, Keith, we view that as probably unlikely, primarily because the process we went through with Delta on the CRJ-900s was very competitive, very intense, and we think that in terms of the 76-seat aircraft flying in the Delta work, when they look at what they are paying Pinnacle, that's got to look very attractive to them. I don't think that this would be a contract that would be high on their list. And the same thing on the 200s, Northwest went through an RFP process in their bankruptcy. They obtained quotes from others and they came back to us and said this is sort of the level where you need to be to be very competitive and we got there. So, we think that the flying we're doing both for Northwest and Delta that the cost of that flying to those two parties probably looks very attractive, and I think that that's also sort of proven out by the fact that they are both encouraging us to have as high utilization as we can.

Peter Hunt

To be clear, when I talk about there maybe some need to look at these contracts, I'm not talking about the financial aspects of it. There would be certain operational things like hub restrictions, things like that to look at, but nothing financial.

Keith Wiseman – Calyon Securities

It doesn't concern you they both own, speaking of Northwest and Delta, their own regional carriers (inaudible)?

Philip Trenary

It could effect – if they add airport in the future, it could affect how they decide where they would want to add those aircraft. But, there is really no contractual way to shift aircraft from Pinnacle and we don't see how they would want to do that anyways.

Keith Wiseman – Calyon Securities

Okay. Thanks.

Peter Hunt

And it gets back to what I said earlier, it comes down to – you know the management of both airlines and they are going to favor cost and performance.

Operator

Your next question comes from the line of Vasily Volkov [ph] with Morningstar. Please proceed.

Vasily Volkov – Morningstar

Thank you. Good afternoon guys, I was wondering if you could add a little clarity into capital expenditures for the company for the next two years. I remember reading in the 10-K there are about 28 aircrafts that are going to be put into service over the next two years. I was wondering if you could give a little color as to I guess dollar amounts as far as what to forecast for capital expenditures then as well as trying to figure out exactly what – to what extent the tax depreciation shield will kind of add value to the firm?

Peter Hunt

Well, the total of the new aircraft we're adding is 31. We added three in the fourth quarter of '07 and then we got those 28 that come in '08 and January '09, and the total investment on the fleet is $660 million, of which $100 million is financed by Pinnacle. It's come out of our pocket and then $560 million of the $660 million is financed through Export Development Canada, where we're borrowing the funds from EDC in 15-year mortgage-style loans. So that's the total on kind of the big CapEx side. On top of that, there's about $25 million that we're investing in new inventory and spare engines and things like that to support that fleet, and a good chunk of that has already been invested. So, as we look out for the rest of the year, we'll have the equity components of each aircraft that they deliver. But, by the end of the year, we'll get down to sort of the run rate normalized CapEx to support both airlines and that's probably something like $10 million to $12 million a year over the next several years.

Vasily Volkov – Morningstar

Okay. Yes, I think that's the only question that I have. Thank you.

Peter Hunt

Thank you.

Operator

I'll now turn the call back over to Mr. Philip Trenary for closing remarks.

Philip Trenary

Okay. With that, we really appreciate everyone calling in. If anyone has any further questions after feel free to call Peter or me. Thank you very much.

Operator

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

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