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Pinnacle Airlines (PNCL)- Headed For A Rough Landing.

|Includes: Pinnacle Airlines Corp. (PNCLQ)

Unlike the recent (Dec 28th) near catastrophe that was averted by regional jet, turbo prop operator Pinnacle Airlines Corp (PNCL) $0.81 share, the company itself is headed off a cliff into the oblivion of defunct companies.

Pinnacle Airlines Corp is a regional carrier that operates smaller turbo prop planes (34-74 seats).  They fly under the flag of its partners, by going into markets that are too small for the majors to service.  Pinnacle has been unable to make money due to the horrific margins associated w/ equipment leasing, monstrous debt servicing, and poorly constructed vendor agreements. 

The company went from a profit of $17M in 2010 to a loss of $8.8M in the just the first three quarters of 2011.  Most of this loss is attributed to the contract it has with its pilots union and fuel costs. Although at quarter end, there was $81M cash on the books that stands at a 36% decrease from the same quarter the year prior with only more severe obstacles that they will need to confront.

Fuel costs for the airline industry are about to soar.  Since the advent of electronic trading, the ability of airlines to hedge their exposure to the ever volatile oil market have gone from challenging, to precarious, to almost impossible. While the company was burning cash the oil market dropped from nearly $115 a barrel to below $80.  And although many in the markets have become numb to the political risk associated with the oil market, we are actually on the precipice of what could potentially be the most challenging climate ever as Iran is threatening to block the supply of Crude leaving the Gulf and if that wasn’t enough- it is currently in a price dispute with its largest customer- China.  This has resulted in China looking elsewhere for their crude.  Suddenly- Crude is back over the $100 mark for the first time in over six months with little standing in its way for a steep incline.

In addition to all this:  there are red flags within its accounting.  For starters, they are losing $3M a quarter, have lost routes and are still victim to my favorite four letter word:  Union contracts.  (ok- so its five letters but it might as well be four).  Not to mention that the equity calculations are based on their PP& E number of $1B, essentially a valuation of turbo prop planes that do not have a long list of suitors if there were a need for an orderly liquidation. How about the $35M in inventory?  What inventory does a small airline have that is not planes? Essentially- if ANY of their numbers are off by as little as 7%, you could value this stock at sub zero.

Having said all this- the company has been smart enough to retain DavisPolk to handle certain negotiations for them.  It doesn’t take a rocket scientist to know that one of DavisPolk’s specialties is “insolvency and restructuring”.  When you consider that they have already renegotiated some of the contracts (such as the one with the flight attendants) the only reason would be that they are hurling toward a bankruptcy filing imminently. 

It is the opinion of this author that this company is headed into bankruptcy, and the stock currently trading $0.80 is headed to zero.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in PNCL over the next 72 hours.