PNCL - Pinnacle Airlines

[schin]

I've been following this stock since Mohnish Pabrai bought it several years back.

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=awQvTi0N743M

 

Since then, I believe the Delta/Northwest partnership has been cleared up and their relationships seems to be good. The pilot association union negotiation cleared up too.

 

All told, I think the original thesis still holds true and actually go a lot better as they have upgraded their fleet and added partnership with United.

 

Currently, their Q1 was under-pressure from the investments in the fleet and retraining for their staff for the new CRJ-900, but they will be compensated later this year and definitely next year by Delta for this training/resource investment.

 

Their market cap is currently 98M at the current price of $5.22. With earnings of 1.14 FY2011. That's P/E of 4.57.

 

The most interesting part is on their conference calls their CFO says annual earnings should be in the 18M region. 98M/18M = a 5.4 P/E.

 

Also, next year, they expect a Delta rate increase and the training reimbruisement in the order of 20M.

 

So, FY2012 could be amazing with 18M + 20M = 38M for a 98M market cap company.  This is looking like a ATSG or SSW situation. The CFO has mentioned that once the earning are normalized they will look into increasing dividends. FY2013 looks good too - per their latest conference call.

 

Thoughts? That's my table pounder of the year/decade.

[Myth465]

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/18188

 

Nice idea. Just read the latest VIC writeup on this as well as the comments. The only problem I see is Management doesnt care, with ATSG and SSW you could see that Management was focused on the issues the market had with the company which eventually led to a revaluation. Here I dont see that. Value is its own catalyst, but 1. this is an airline, 2. This is a regional airline.

 

I would hate to sit around for a few years waiting for a revaluation only to be hit with cancellation of some of the legacy business, plane crashes, or an airline slowdown / crisis. What do you think of Management and why wont they stop ordering planes, and pay a dividend or buyback stock?

 

Other then that this is dirt cheap at 2x cash flow.

 

This fits my risk reward requirements, but I dont think people will flock to an airline. Management will have to sell it or make it compelling by either paying a high dividend, buying back shares, or designing a robust business model. If I had to guess, Management is focused on saving their jobs / the company, but not the share price. They almost have to invest in new planes, because the legacy contracts will go ASAP due to industry consolidation. The contracts provide safe cash flow, but if they dont buy new planes they are liquidating.

 

Thats my 2 cents, and its with very little research so take it with a grain of salt. I looked into PNCL about a year ago and same story different year.

[schin]

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/18188

 

Nice idea. Just read the latest VIC writeup on this as well as the comments. The only problem I see is Management doesnt care, with ATSG and SSW you could see that Management was focused on the issues the market had with the company which eventually led to a revaluation. Here I dont see that. Value is its own catalyst, but 1. this is an airline, 2. This is a regional airline.

 

I would hate to sit around for a few years waiting for a revaluation only to be hit with cancellation of some of the legacy business, plane crashes, or an airline slowdown / crisis. What do you think of Management and why wont they stop ordering planes, and pay a dividend or buyback stock?

 

Other then that this is dirt cheap at 2x cash flow.

 

This fits my risk reward requirements, but I dont think people will flock to an airline. Management will have to sell it or make it compelling by either paying a high dividend, buying back shares, or designing a robust business model. If I had to guess, Management is focused on saving their jobs / the company, but not the share price. They almost have to invest in new planes, because the legacy contracts will go ASAP due to industry consolidation. The contracts provide safe cash flow, but if they dont buy new planes they are liquidating.

 

Thats my 2 cents, and its with very little research so take it with a grain of salt. I looked into PNCL about a year ago and same story different year.

 

Myth -

RE: Management - I was not too impressed with the prior CEO - Trenary. He left about a month ago and was hired on as a consultant (golden parachute). I don't think he was bad, but he wasn't a tranformational leader. The CFO, Peter Hunt, seems very candid and capable. He has been giving the Wall Street presentations and also, quarterly conference calls.  From the presentations, he's very knowledgable about the industry and the company's finances. 

 

I don't think the managent were empire builders by any stretch.  Both Trenary and Hunt are major shareholders, so I don't think they were bilking the company and not caring. Why do you say that? Is it referenced in the valueinvestorsclub.com site?

 

Potential catayst - They will finalize on a new CEO -- I think Mr. Hunt is an internal candidate - I wouldn't be unhappy with that choice.

 

RE: Risks - legacy business -- they reloaded their Delta operating agreement till 2017. Please take a look at their Dec. presentation on their website. So, FCF should be easy to model. Unlike Republic Air (RJET) or SkyWest (SKYW), Pinnacle is not created their own branded service, which has inherit risk. I see them using the same model as SSW, but for planes for (United, Delta, Contenential). They didn't upgrade their fleet for the sake of upgrading their fleet. They purchased them to put them into service for their partners. While they were doing purchase them, they bought the more fuel efficient models to buffer against fuel prices plus they get economies of scale by unifying their models (via repair/maintence crew costs)

 

Plane crash, airline slowdown - Plane crash is possible. That's an inherent risk for the industry. It did happen to them before and they survived it. Airline slowdown -- again, true. The risk goes up with bin Laden and any possible retrubution. But, if Warren Buffett is right and all indictators are looking good for the economy, airlines will rally too. I feel the UALs, DAL, and "survivors" have learned a lesson or two and are not doing anything stupid... yet... much like banking, I don't think the climate of scruntiny allows for overly optimiztic projections.

 

RE: Usage of cash - Q42010 and Q12011 was used to update their fleet on the operating agreement. But, they do not see any major plane purchases in the future. The CFO says that with the rate increases and all the purchasing finished -- Cash will increase and a possible dividend increase is possible in FY2012 and FY2013.  They did decrease dividends during the great recession and I think they would like to re-establish it coming out. Buying back stock. I would like that too. Have not heard a reference to it though. But, at these prices, it would be a good management decision once the FCF comes back later this year.

[Myth465]

My comments come from thoughts on the industry, VIC comments, and just my overall thoughts on the market.

 

Regarding a crash, I dont think the problems have been fixed with the regionals. If they havent there will likely be another crash, which will fundamentally change the regional setup inmo. I see it as a ticking time bomb. I would own a regional, but due to this, oil prices, and industry consolidation - I would only want to own one where Management was focused on getting the share price to IV - I recommend watching this documentary if you havent - http://www.pbs.org/wgbh/pages/frontline/flying-cheaper/

 

I went through the presentation and it looks good. Seems like they are handling the blocking and tackling. My thoughts center around airline consolidation and elimination of routes. This will squeeze the demand for regionals. Higher fuel prices inmo will squeeze the demand for the 50 seaters. I think Management ordered planes because they needed to to stay viable. I havent reviewed the calls in over a year, but that was where the industry was headed when I last looked into it. The planes have added quite a bit of debt which will keep groups of investors at bay.

 

Its tough, with that said I own ATSG and SSW. So.....

 

 

[schin]

Outright fraud and shortcuts noted in the Frontline video is scary. Sadly, capitalism and the incentive system fosters preventable disasters.  Every industry has these isses -- banks (Countrywide, the rating agency of CDOs, CMBS, GS approach to their clients); oil (BP and the Deepwater disater - Transocean's involvement); medical (medicare fraud). 

 

It happens everywhere and the shortcut involved in airplane maintenance doesn't shock me... more frustrating than anything. 

 

RE: Pinnancle -- they have performance and safety milestons in their operating agreements with United/Delta to emphasis good service since they are representing their parent.  I believe Pinnalce services their own planes -- thus, they can control costs and quality. Moreover, they unified their fleet to CRJs and Saabs to minimize parts storage and costs. Also, technical experience to service these planes.  The latest jets are 76 seats that are more comfortable and more fuel efficient than the 50-seats. As such, they hope when the regional consolidations do come or contracts are renegotiated, their 76 for the price of 50 works well with major airlines.  I think it's a valid value proposition for the price of gas and reduced routes.

 

 

[schin]

I didn't realized how crappy the prior management was.  Operationally, the company was subpar. Sean Menke looks to be trying to make hard decision to right the company.

 

I continue to find it compelling, with the rate increases coming in 2012 and 2013, plus the one time, 18M-20M payment for training and fixed fees next quarter.

 

I would be interested in anyone else's thoughts?  The company is trading cheaper (~42M) than it's Mesaba acquisition last year (~62M).  So, you're discounting all of its CAPM legacy business.

[enoch01]

Pinnacle trying to force some hands:

 

http://www.prnewswire.com/news-releases/pinnacle-airlines-corp-to-take-steps-to-improve-liquidity-and-profitability-135241693.html

[ValueSlant]

Market taking the announcement as sign of PNCL's imminent disaster. But with these airline stocks it is hard to know how much management is sort of posturing to make things look worse than might be to get labor and vendor concessions. BB of RJET is the master of these games. But the numbers I have run do imply 2012 would be a breakeven year at best even if the rate increases and payments come in from Delta as scheduled. They need to figure out how to make operations more efficient, and probably not prudent for them to just bank everything on the 2013 rate reset from Delta. But in spite of their challenges, it doesn't seem PNCL is at death's door in terms of liquidity or solvency as market seems to be implying. Anybody have any thoughts on what disaster scenarios market is implying?

 

ValueSlant

 

valueslant.com

[Cardboard]

These companies are always one contract away from bankruptcy. The main customer is simply too important, they navigate in debt and the margins are too low. Not sure what could go wrong with PNCL, but these stories always seem to get worse and worse.

 

Peter Lynch in One Up on Wall Street talks about the "middleman" in chapter 9. This is about a company that does 50% or more of its business with one customer and how precarious that situation is. Essentially he says to avoid these companies since the large customer will always try to squeeze bigger concessions.

 

People on this board have had bad experiences with ATSG, PNCL and CLWR. In all cases, one customer represented 50% or more of their business. Of course, ATSG has been a homerun for some who bought at $1 or even less. I ended up doing well, but only because I averaged down with my initial shares in the $3 range AND because with benefited from a miraculous arrangement with DHL. CLWR looks ok now, but there has been a lot of dilution with today's announcement and the future is still unclear. Who has done well so far?

 

So I guess that you need to pay a very, very low prices for these situations and be prepared to sell at low prices since the Street will never give you full valuation knowing that the risk of the big customer hanging you to dry is always there. You also need to assume that bankruptcy and a total loss is never impossible.

 

Cardboard

[Guest Dazel]

 

I shudder to think of investing in an airline....however, I see monish owns 10% of the company and has commented in the past about it.

 

They have $4 in cash...$800m debt....trades for $1.48

 

Anyone have any insight?

 

Dazel

[Guest Dazel]

Sorry did not see the other thread!!!!!

 

[ValueSlant]

These companies are always one contract away from bankruptcy. The main customer is simply too important, they navigate in debt and the margins are too low. Not sure what could go wrong with PNCL, but these stories always seem to get worse and worse.

 

Peter Lynch in One Up on Wall Street talks about the "middleman" in chapter 9. This is about a company that does 50% or more of its business with one customer and how precarious that situation is. Essentially he says to avoid these companies since the large customer will always try to squeeze bigger concessions.

 

People on this board have had bad experiences with ATSG, PNCL and CLWR. In all cases, one customer represented 50% or more of their business. Of course, ATSG has been a homerun for some who bought at $1 or even less. I ended up doing well, but only because I averaged down with my initial shares in the $3 range AND because with benefited from a miraculous arrangement with DHL. CLWR looks ok now, but there has been a lot of dilution with today's announcement and the future is still unclear. Who has done well so far?

 

So I guess that you need to pay a very, very low prices for these situations and be prepared to sell at low prices since the Street will never give you full valuation knowing that the risk of the big customer hanging you to dry is always there. You also need to assume that bankruptcy and a total loss is never impossible.

 

Cardboard

 

I think what maybe makes the PNCL situation more interesting is that

a. Delta ultimately is responsible for the leases on the over 200 CRJ-200 planes that PNCL operates for them.

b. The PNCL regional feed generates a lot of revenue for Delta's mainline operations through passengers connecting at hubs, so Delta needs somebody to run regional routes for them (they can't have their own pilots do it because a. they just don't have enough pilots b. those pilots make way more than PNCL pilots)

 

So I don't think Delta can just walk away from the contract even if they could from a legal perspective (which I think is also not the case). They can still mess over PNCL, but it is hard to see how PNCL does not extract some value out of the contract. PNCL still might run into liquidity issues next year unless Delta helps them out and they get some other concessions from vendors or labor, but I don't think they will need anything major to get by. The situation just doesn't seem as bad as market is implying, but sure hard to get comfortable with a falling knife of this magnitude.

 

ValueSlant

 

valueslant.com

 

 

[twacowfca]

These companies are always one contract away from bankruptcy. The main customer is simply too important, they navigate in debt and the margins are too low. Not sure what could go wrong with PNCL, but these stories always seem to get worse and worse.

 

Peter Lynch in One Up on Wall Street talks about the "middleman" in chapter 9. This is about a company that does 50% or more of its business with one customer and how precarious that situation is. Essentially he says to avoid these companies since the large customer will always try to squeeze bigger concessions.

 

People on this board have had bad experiences with ATSG, PNCL and CLWR. In all cases, one customer represented 50% or more of their business. Of course, ATSG has been a homerun for some who bought at $1 or even less. I ended up doing well, but only because I averaged down with my initial shares in the $3 range AND because with benefited from a miraculous arrangement with DHL. CLWR looks ok now, but there has been a lot of dilution with today's announcement and the future is still unclear. Who has done well so far?

 

So I guess that you need to pay a very, very low prices for these situations and be prepared to sell at low prices since the Street will never give you full valuation knowing that the risk of the big customer hanging you to dry is always there. You also need to assume that bankruptcy and a total loss is never impossible.

 

Cardboard

 

Cardboard, you've nailed it.  The whole industry is a value trap.  The only feasible way to make money is to buy one of these companies dirt cheap and then flip it if it manages to avoid bankruptcy.  Or you might be able to catch an updraft in the downward spiral.  If someone can do that consistently, he's a better man than I.

[PlanMaestro]

Can we play let's kill PNCL?

 

I am having trouble of thinking scenarios where it could be wiped out, except that it is an airline so it will. So at the current price I would be lying if I say I am not tempted. This Seabury thing can be just play normal consulting.

 

What are you guys thinking?

[ValueSlant]

Can we play let's kill PNCL?

 

I am having trouble of thinking scenarios where it could be wiped out, except that it is an airline so it will. So at the current price I would be lying if I say I am not tempted. This Seabury thing can be just play normal consulting.

 

What are you guys thinking?

 

It could be they have decided they need to lower their cost structure in light of the mainline carriers' marginal profitability on a lot of these regional routes. So it could be Menke is just telling the union to give up some concessions or they file BK as the only way to renegotiate the labor deal. But I agree from a liquidity/solvency perspective still seems like they are far from an involuntary BK.

 

ValueSlant

valueslant.com

[PlanMaestro]

But I agree from a liquidity/solvency perspective still seems like they are far from an involuntary BK.

 

For the sake of argument, what about a normal dilutive capital raise? Menke may have the excuse of blaming it all on previous management and the incentive of making his life easier.

[PlanMaestro]

It ain't oil prices either, at least not yet.

 

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.

[PlanMaestro]

and CAPEX for next year is not increasing. So where are the liquidity issues that the market seems to be assuming

 

Duane Pfennigwerth – Evercore Partners Inc.

 

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.

 

[PlanMaestro]

http://www.centreforaviation.com/blogs/aviation-blog/with-the-american-regional-aviation-model-broken-consolidation-is-the-answer-62322

[schin]

I was reviewing the 10 year financials for PNCL and trying to figure out the liquidity issues. One, I understand there are:

 

1) Pilot Costs that are being incurred until next year's rate reset. Those will eventually be reimbursable.

2) Their targeted profit is 8% with anything between 8% and 13% split between the parent carriers. So, their business model is to be profitable within the CAP model.

3) Penalties will accrue for performance issues like delayed flights, outages and under prior management they had those operational issues.

 

Does the current operational issues #3 add up to 8% of profits? I guess 8% includes SG&A and overheads, but are the operational issues that were always there under prior management, no recognized before? It was profitable for the last several years and since Sean Menkes came in, the accounting has been super negative.

 

Although, a lot are not fans of aviation, the business model for regional airlines is counter cyclical.

[mloub]

PNCL caught my attention, and I am still digging.

 

The situation is not unlike the old ATSG/ABX situation back in the day for those who followed it. A captive service provider being squeezed by their biggest customer.

 

Sure, PNCL is supposed to receive payments that cover their expenses plus mark-up to give them an 8% operating margin, the problem is they are ultimately at the mercy of Delta, their largest customer, as to when or if those payments ever come.

 

Take this past year for example. Delta reconfigured their network, and PNCL had to incur huge costs moving crews and pilots around to keep up. In theory, at the next rate reset in 2013 these costs will be factored in and reimbursed, but the worry is that Delta will play hard-ball. Ditto for the pilot's salary increase which should be reimbursed in early 2012. What if Delta drags its feet? Can PNCL continue to lose $3-5m a quarter on the higher salaries while maintaining enough liquidity to service and pay down $800 million in debt?

 

As I see it that is why Menke is raising the alarm bells now. It is clear that Delta has told him that they will not reimburse the pilot costs in 2012 unless some major structural changes take place first. Menke's options are limited, which is why has asked all employees for a 5% pay cut. (Needless to say, the pilot's group who just got their pay raise are not thrilled). So Menke tries to meet Delta's cost cuts, and if Delta isn't satisfied, PNCL ends up in bankruptcy. A PNCL bankruptcy would allow Delta to cancel all the PNCL CPA's, potentially eliminate less fuel efficient CRJ 200's and renogotiate rates. It is conceivable that Delta is aiming for this, and will stop at nothing to get out of the contract. A similar situation played out a few years ago between Delta and Mesa, with Mesa ultimately ending up bankrupt.

 

The nut I haven't been able to crack yet is that the CRJ-200's are not PNCL's, they are leased by Delta and subleased by PNCL. So if Delta breaks their contract, they still end up with these CRJ-200's on their hands, and no one but PNCL has the capacity to fly 125 of them. I can't see a situation where Delta just parks these planes, but I have to think about this some more.

 

Not to mention PNCL has one of the lowest unit costs in the business. So maybe the plan is to squeeze PNCL just enough, but not too much. This is what happened with ATSG and DHL, and with Air Canada and Jazz in 2009.

 

If the reimbursement issue is settled, there is huge upside, which is what caught my interest. But with a bankruptcy there is a chance of a zero here as well.

 

The best course of action might be to watch and wait past Jan/Feb 2012. It is quite possible that even after the reimbursement issue is resolved, PNCL could be trading at a meaningful discount. I am not sure how well anyone could handicap those reimbursement negotiations now.

 

M.

 

[Myth465]

ATSG has moved and is moving away from being captive. The regionals will always be captive so ....

[schin]

mloub - could you tell me where Delta was not going to pay the 2012 pilot training cost?

 

Delta sold Mesa to PNCL earlier in 2011 for 62 million? It's outrageous that the whole company (original PNCL, Colgan, and acquired Mesa) is priced at 15 million now. Has all parts degraded that much? I personally don't think so.

 

Although, the CR-200 are a liability, they are recourse to Delta - so, I consider it a non-issue since Delta knows they are contractually obligated to take them on.  The 50-seat dinosaurs were known and acknowledge by the industry. Of all regionals, I think PNCL actually was a the forefront of adding Q400 (76 seaters) and thus, lowering their cost per mile.  I do not think there is an economic incentive for Delta to get these dinosaurs "putted" to their balance sheet. Not now, when the economy is about recovered and it's slowly making a decent profit. I said, decent, not earth shattering.

 

The Q400 are a better plane and I'm sad to hear they have some maintenance/operational issues. But, the cost per mile is definitely an advantage for any airline to have them.  PNCL loaded up on them. If PNCL goes under, I do not know any regional, who has the FAA flight licenses, human capacity (pilots, attendants) and hardware (planes) to take over the hole it would put into Delta's end-to-end service. The transition would not be easy. Although, Delta is streamlining its least cost-effective, regional routes -- it does hit Pinnacle. Yet, I do not think there is a new world with no regionals.  Regionals (and their smaller airport access) are still needed. It's the last mile.  I think PNCL, SKYW, and RJET will take prominent roles.  If PNCL does under, I do not think SKYW or RJET can ramp up quick and I do not think they can offer service cheaper to Delta in the short run. Actually, with their larger coverage for Delta, SKYW and RJET might bargain higher rates from Delta.

[schin]

Since ATSG and PNCL has one major customer, I see many people make a logical leap that they are in the same boat. I see a significant difference in their situations.

 

Yes, ATSG's largest customer was DHL and PNCL's largest customer is Delta. But, let's put it into context. DHL was trying to exit the US delivery business. DHL wanted to refocus its core in Asia and Europe. DHL had higher market shares there and better profitability. It wanted to outsource their US delivery business to UPS. The issue was ATSG wouldn't have enough time to refocus its planes to service it's higher margin, branded business.

 

Delta is not trying to exit the US airline business or regional service on a large scale. Delta is looking at certain regional destinations and reducing not eliminating it. It does have a ripple affect to PNCL as it has to reallocate or eliminate its resources. Those cost must be incurred by Delta, who started the chain reaction.

 

PNCL is not focused on branded businesses like SKYW or RJET.  They have a small turbo prop plane business, but I believe they are trying to exit out of it as that business incurs fuel and customer utilization risk. 90% of PNCL's business is focused on CAP business, which has a fixed 8% profit margin and shared 50%/50% profit between 8%-13%. PNCL is in no way trying to encroach Delta's business. It wants a low return, high probability business model. The issue seems to be the SGA (overhead) and performance penalty issues.

 

I think the Trenary, golden parachute, is a joke.  But, as I see it, fundamentally, it appears to be a operational issue. The cost structure is higher than it needs to be to preserve as much of the 8% it gets.

 

1) Late, delayed flights - The Q400 appears to have some maintenance issues. As such, downtime and utilization is an issue, which generates payment penalties by Delta.

2) Corporate overhead - there appears to be a lot dead weigh in Memphis, TN.

 

If you look at the 10 year financials, I can't fathom how it goes from positive to a negative EPS once Sean Menkes gets there.  The main difference this year is the pilot costs, but that $20M should be address in early 2012.

 

http://www.gurufocus.com/financials.php?symbol=PNCL

 

Thoughts?

[PlanMaestro]

mloub - could you tell me where Delta was not going to pay the 2012 pilot training cost?

 

Delta sold Mesa to PNCL earlier in 2011 for 62 million? It's outrageous that the whole company (original PNCL, Colgan, and acquired Mesa) is priced at 15 million now. Has all parts degraded that much? I personally don't think so.

 

Just to avoid confusions, it is Mesaba not Mesa (that went to Ch11).

 

At the moment I am reading a pilot's message board and they seem as confused as everyone else on the reasons for the hardball (They are being asked a 5% cut). It seems as a mix of paying the parachutes of the VPs, the pilot relocation costs, and Delta using the reinmbursements as an opportunity to ask for an improved cost structure. But also if Delta pushes them into Ch11 the 50-seaters are theirs so why push hard?

 

High stakes game.