PNCL - Pinnacle Airlines

[PlanMaestro]

Very good fact based discussion at Yahoo, it sometimes happens. Two important things

 

1. EDC loan seems to be recourse

2. Cost increases are mismatched with the rate adjustments, so they might well have problems if Delta wants to be a pain ... and they have always been

 

http://messages.finance.yahoo.com/Stocks_%28A_to_Z%29/Stocks_P/threadview?m=tm&bn=22930&tid=4938&mid=5073&tof=-1&rt=1&frt=2&off=1&p=OOkF3uHAWsTbgmbxti7sccLnIcShE0CE6v9z69DVuyk208oT55BjB1o-

[ValueSlant]

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.

 

That is a great summary mloub and I agree with your analysis of Delta's motivations. I have also been trying to figure out what Delta is up to since in the end they are on the hook for the CRJ200 leases. My guess is the following- Delta is primarily motivated by not wanting to pay the 8% operating profit reset on the CRJ200 contract at the end of next year. Many of those routes are probably not profitable for Delta at current rates, much less with a large rate increase. So Delta has to get Pinnacle to not only not raise rates, but actually reduce them. Perhaps the only way for PNCL to be able to do that is in bankruptcy where they can renegotiate pilot rates and the pilot list integration (which would reduce the current high training costs). So Menke is trying to get labor concessions and if he can't Delta will make it clear they will play hardball on the rate increases, at which point Menke will take them into BK.

 

ValueSlant

valueslant.com

[mloub]

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.

 

Schin, Delta obviously hasn't expressed their intention not to pay the increased pilot salary reimbursement. It was just my guess that they were dragging their feet on this payment - and likely other rate adjustments - and that was what put a fire under PNCL management's butts to try and cut costs.

 

As for Mesa and Mesaba, they both entered bankruptcy. Mesa, which was a non-affiliated, regional carrier for Delta, went bankrupt in 2010 after Delta reneged on their CPA and tried to cancel it in 2008. (The Mesa Q's and K's leading up to the bankruptcy make for some pretty grim reading). Mesa management fought for their payments in court, but Delta dragged out the process until Mesa went bankrupt while fighting for their money. I use it here as a warning for the sensitive position the regionals are in. You may have a solid case, as Mesa did, but if Delta turns off the tap for 6 months, you may not be able to stay solvent long enough to win in court.

 

M.

[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.

 

Schin, Delta obviously hasn't expressed their intention not to pay the increased pilot salary reimbursement. It was just my guess that they were dragging their feet on this payment - and likely other rate adjustments - and that was what put a fire under PNCL management's butts to try and cut costs.

 

As for Mesa and Mesaba, they both entered bankruptcy. Mesa, which was a non-affiliated, regional carrier for Delta, went bankrupt in 2010 after Delta reneged on their CPA and tried to cancel it in 2008. (The Mesa Q's and K's leading up to the bankruptcy make for some pretty grim reading). Mesa management fought for their payments in court, but Delta dragged out the process until Mesa went bankrupt while fighting for their money. I use it here as a warning for the sensitive position the regionals are in. You may have a solid case, as Mesa did, but if Delta turns off the tap for 6 months, you may not be able to stay solvent long enough to win in court.

 

M.

 

The big difference with Mesa was that they leased a large fleet of 50 seaters that was on the ground so they were in a large financial hole. Not the same with Pinnacle, that have them under contract and are not even their own.

 

But still, Delta might have seen a window of opportunity, before the resets, to align the cost structure. Delta cut their leases to Mesa for not achieving punctuality metrics, and won the trial ... despite Delta doing everything possible to make it impossible for Mesa to achieve those metrics (ie: changing routes). During that period Delta also payed hardball with Pinnacle (early 2008) when it was under liquidity problems (freezed auction rate securities).

 

Not an easy industry.

[schin]

The whole regional model is like parasite/bacteria and host model.  It could be a probiotic (beneficial) or a tape worm(caustic). It's like Walmart, that wants the products but doesn't want the markup.  Walmart wants you to have enough to buy a Honda Accord, not a Acura MDX. In this case, Delta thinks PNCL is driving a Lexus, when it's actually a Toyota Camry on a 5 year lease with 12% APR.

 

PNCL's best card would be to be the lowest cost provider. Based on presentations on their websites, I thought they were. I am not sure with their latest pilot agreements it shot them up. The unforced errors in delayed flights definitely don't help the financial situation.

 

Did anyone follow Sean Menkes when ran Frontier Airline? That might be a good blue print for this situation. Please note PNCL management never mentioned bankruptcy. All the analysts did.

[PlanMaestro]

Did anyone follow Sean Menkes when ran Frontier Airline? That might be a good blue print for this situation. Please note PNCL management never mentioned bankruptcy. All the analysts did.

 

Just a little (a friend bought shares in BK before they were delisted counting on them being bought). The reason for the filling was the credit card company pulling the rug. It was branded so the situation was a little different.

[PlanMaestro]

A certain Wayne King, a private investor New Jersey, is becoming activist.

 

http://www.marketwatch.com/story/pinnacle-shareholder-seeks-board-agreement-to-allow-two-new-shareholder-appointed-directors-2011-12-23

 

Now more than ever, shareholders need to be confident that their interests are being represented, and by taking this unique and positive step, the Board would demonstrate its respect for shareholder concerns.

 

[PlanMaestro]

Another operational issue: http://uspolitics.einnews.com/247pr/253950

 

 

Airline Faces More Than $1 Million in Penalties After FAA Investigation

 

(...) The FAA alleges that two commercial jets operated by Pinnacle were not in compliance with aviation regulations on a total of 63 flights in 2009 and 2010. The first jet was flown 23 times with flight crew members performing maintenance tasks on an inoperative passenger door wheel assembly. FAA inspectors had previously denied the airline's request to avoid using trained maintenance workers to perform the task.

 

The other violation of compliance with federal air safety regulations involved Pinnacle's failure to make timely inspections of a previously detected and growing crack in a turbine case over a 640-hour operating period. The proposed penalty is based on the commuter airline's use of the jet for over 40 passenger flights while it was out of compliance.

[PlanMaestro]

Speculation on the downtown Memphis lease if they file:

 

http://www.bizjournals.com/memphis/blog/2011/12/pinnacle-airlines-downtown-memphis.html

[schin]

A certain Wayne King, a private investor New Jersey, is becoming activist.

 

http://www.marketwatch.com/story/pinnacle-shareholder-seeks-board-agreement-to-allow-two-new-shareholder-appointed-directors-2011-12-23

 

Now more than ever, shareholders need to be confident that their interests are being represented, and by taking this unique and positive step, the Board would demonstrate its respect for shareholder concerns.

 

PlanMaestro - I never heard of Wayne King. Have you? Is he a value investor activist?  I was hoping Apollo, FMR or Mohnish would get more involved with this since they have a larger percentage of shares. Do you know how much Mr. King has accumulated and any past track record?

[schin]

Another operational issue: http://uspolitics.einnews.com/247pr/253950

 

 

Airline Faces More Than $1 Million in Penalties After FAA Investigation

 

(...) The FAA alleges that two commercial jets operated by Pinnacle were not in compliance with aviation regulations on a total of 63 flights in 2009 and 2010. The first jet was flown 23 times with flight crew members performing maintenance tasks on an inoperative passenger door wheel assembly. FAA inspectors had previously denied the airline's request to avoid using trained maintenance workers to perform the task.

 

The other violation of compliance with federal air safety regulations involved Pinnacle's failure to make timely inspections of a previously detected and growing crack in a turbine case over a 640-hour operating period. The proposed penalty is based on the commuter airline's use of the jet for over 40 passenger flights while it was out of compliance.

 

These are the "unforced errors" that are self-imposed. The fine is just proposed, so there will be an appeal, but this comes along with the training penalty that was levied several months ago.

 

It's sad because this would be money flushed down the toilet. 

[schin]

Did anyone follow Sean Menkes when ran Frontier Airline? That might be a good blue print for this situation. Please note PNCL management never mentioned bankruptcy. All the analysts did.

 

Just a little (a friend bought shares in BK before they were delisted counting on them being bought). The reason for the filling was the credit card company pulling the rug. It was branded so the situation was a little different.

 

I have not finished my research on Frontier's bankruptcy. But, I heard Sean Menkes navigated it out of bankruptcy well with the original shareholders not getting wiped out and the union/employee morale coming out positive. I would be interested how he did that.

 

Interestingly, RJET won the bidding of Frontier over Southwest when it came out of bankruptcy. Sadly, the branded service didn't work that well with RJET and I believe they are spinning it off again.  Originally, when I heard about Sean Menkes taking over PNCL -- I was worried he'll use the excess cash flow to purchase his baby back.

[schin]

 

The big difference with Mesa was that they leased a large fleet of 50 seaters that was on the ground so they were in a large financial hole. Not the same with Pinnacle, that have them under contract and are not even their own.

 

But still, Delta might have seen a window of opportunity, before the resets, to align the cost structure. Delta cut their leases to Mesa for not achieving punctuality metrics, and won the trial ... despite Delta doing everything possible to make it impossible for Mesa to achieve those metrics (ie: changing routes). During that period Delta also payed hardball with Pinnacle (early 2008) when it was under liquidity problems (freezed auction rate securities).

 

Not an easy industry.

 

Changing the routes to cause operational penalties is a bit cold-blooded, but that's business -- I guess. I see they had that 25% reduction in service earlier this year and changes to routes accordingly.  In-line changes are always painful in any business.

 

I was looking at performance statistics for airlines and I could only find dated ones. But, those for Pinnacle were very respectful. I have not been able to find on-time arrivals and departure data recently to really gauge their operational efficiency. If anyone finds a good data, I would be interested in how they really benchmark.

[schin]

Flight Stats

 

I found the following site with flight stats. All told, Pinnacle seems fairly respectable in terms of on-time arrivals.

 

http://www.flightstats.com/go/Airline/airlineScorecard.do?airlineCode=9E

 

If you juxtapose them to Delta's stats, Pinnacle posts better numbers than them and at least, raises the Delta team average.

 

http://www.flightstats.com/go/Airline/airlineScorecard.do?airlineCode=DL

 

 

 

 

[PlanMaestro]

Write-up in SumZero and VIC by Ryan Morris along what we have discussed. The comment sections might get interesting

[PlanMaestro]

The recent CEO letter is very good to understand the situation. It may be a bargaining chip, but he hints on filing Ch11 or possible dilution:

 

 

http://www.sec.gov/Archives/edgar/data/1166291/000116629112000003/exhibit99-1.htm

[PlanMaestro]

Wayne and Ryan fighting the good fight.

 

http://money.cnn.com/news/newsfeeds/articles/globenewswire/248404.htm

[Guru]

I agree. I sent them both a note applauding their effort and also sent a note to PNCL investor relations urging them to have more shareholder representation at the BOD. Would request fellow shareholders from this board to do so also.

[Parsad]

Filed for protection.  Cheers!

 

http://finance.yahoo.com/news/pinnacle-airlines-files-bankruptcy-035519030.html;_ylt=Anu1MYSsyw28XBoWvPznspmiuYdG;_ylu=X3oDMTQ0cTVxNHEyBG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yeSBSaWdodARwa2cDMjEyMzk2Y2ItOTM4YS0zNzk3LTllYTktYWU0Y2UxNjg0YjA5BHBvcwMxBHNlYwN0b3Bfc3RvcnkEdmVyA2Y0ZDZkYzIwLTdjODItMTFlMS04ZmY3LTcxZGU5YmM5NDFiNw--;_ylg=X3oDMTFvdnRqYzJoBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25zBHRlc3QD;_ylv=3

[PlanMaestro]

 

http://www.reuters.com/article/2012/04/02/us-pinnacleairlines-idUSBRE8310P620120402

 

"Quite simply, our current business model is not sustainable, as increasing operating expenses, liquidity constraints, business integration delays and difficulties associated with combining our operations have hindered our ability to maximize our growth potential," said Sean Menke, Pinnacle's president and chief executive, in a statement.

 

Pinnacle, which has 8,000 employees, flies as Delta Connection, United Express and US Airways Express. It operates more than 1,540 daily flights to 188 cities and towns in the United States, Canada, Mexico and Belize.

 

The company said it had received a commitment for $74.3 million of debtor-in-possession (DIP) financing from Delta that would help it to carry out normal operations.

 

"The only reason for their existence going forward appears to be their deal with Delta," said Ray Neidl, an airline analyst at Maxim Group.

 

[schin]

In its Chapter 11 filing on Sunday in United States Bankruptcy Court in Manhattan, Pinnacle listed $1.42 billion in debt and $1.54 billion in assets. It ended the third quarter, the most recent quarter for which financial results are available, with $81.8 million in cash and cash equivalents.

 

So, it has roughly 120 million in net assets minus 44 million in goodwill and intangible assets. You still have  76 million in assets left with decent values still in the fleet of Q400 and CRJ-900s.

 

Based on his letter to employees, they needed the union to concede to 5% pay cuts permanently. All other concerns outlined in his letter seemed to be addressed.

 

76 million in net asset with a current market cap of 13M-26M depending on the day. There should be some value for the existing shareholders, right?

 

Does anyone have any example of a Chapter 11 bankruptcy where the equity owners don't get wiped out? I remember Buffett noted USG as an example. But, that might be the outlier not the norm.

 

Thoughts?

 

[savant]

 

Does anyone have any example of a Chapter 11 bankruptcy where the equity owners don't get wiped out? I remember Buffett noted USG as an example. But, that might be the outlier not the norm.

 

Thoughts?

 

GGP, Amerco, Footsttar(?), Alex & Baldwin(?)

[PlanMaestro]

Does anyone have any example of a Chapter 11 bankruptcy where the equity owners don't get wiped out? I remember Buffett noted USG as an example. But, that might be the outlier not the norm.

 

The most famous is Texaco and most recently GGP. As a percentage, most Ch11 are wipeouts but there are so many Ch11.

 

Icahn on Texaco:

http://articles.chicagotribune.com/1988-03-23/business/8803030028_1_texas-jury-awarded-pennzoil-texaco-stock-getty-oil

[heth247]

Ryan Morris calculated the tangible book value to be $240MM in his VIC write up, mainly because "The deferred revenue liability of roughly $150M is actually NOT real". is that still valid?

 

On the other hand, the reset of rates and margin in 2013 is pretty much gone. Delta is the major creditor and PNCL is completely at the mercy of Delta.  But with an activate share holder like Ryan Morris and Wyane, and the formation of a equity committee, and a substantial tangible book value, I think common won't be wipped out completely. The question is how much further downside risk is here and how much upside is left to justify the risk of entering here.

[MYDemaray]

I spent some time on this yesterday guys, and what I can figure is the following:

 

1.) PNCL was essentially "pushed" into BK b/c of a very stupid job negotiating the Mesaba acquisition.  At the heart of the issue is the "set-off" rights that Delta had in their flying agreement -- which allowed Delta to net-off ANY AMOUNT owed to them from any payment due to PNCL.  The purchase of Mesaba should have included language to exclude the purchase price from this netting arrangement -- and likewise should have guaranteed that PNCL would have received the $18M or whatever in question from DAL in cost adjustments.

 

At least this is the premise being used in Sean Menke's declaration to the bankrupcty court. Whether DAL would have pushed or not, or whether this is simply a convenient excuse to get rid of unprofitable flying is up for grabs, in my mind.  Sean Menke's declaration in the docket provides great color around this if you haven't read it already.

 

2.) Sounds like all turbo-props are gone.  PNCL estimates they lost $11M last year flying for CAL and US Air. 

 

3.) Still looking into whether the EDC loan is going to be completely absolved by the handing over the of planes.  We know the debt is recourse, but I think I saw somewhere in the docs that EDC isn't going back after PNCL and is accepting the planes to wipe out the debt.

 

4.) This thing looks like a pre-pack.  Most of the agreements are already lined up with key players (DAL, EDC, CAL

 

I am currently concerned about the cash burn. Menke projects cash at $40M at end of June....this is after receiving the net $30 from the DIP facility.  The bankruptcy process itself is costing $2.65M a month in lawyer/advisory fees.

 

Lastly, does any one know what the "Printed Checks" line item is on the Weekly Consolidated Cash Forecast as filed with the bankruptcy court?  This line item may hold the key to whether there is any value left in the estate. In June it's estimated to consume $4M of cash a week.