Pinnacle Airlines' filing for Chapter 11 bankruptcy protection on 1 April is no April Fool's joke. Despite the unfortunate timing of the announcement, which was released in the last hour before key financing arrangements expired, the Memphis-based carrier asked for bankruptcy court protection and surrendered a four-month old campaign to complete a sweeping internal restructuring.
On the surface, however, Pinnacle does not appear to be a prime candidate for insolvency. Indeed, it was profitable in four of the five years between 2006 and 2010, although earnings were cut to a razor thin 1% margin by the last year. Pinnacle still has not released annual results for 2011, but its third quarter results showed a year-to-date loss of $8.81 million -- certainly no banner year, but also not seemingly a matter of financial crisis.
However, it was burning cash alarmingly quickly. As of 31 September, Pinnacle still had $81.8 million in the bank, or only 67% of its cash reserve from the previous year. The pace of Pinnacle's spending then began to accelerate. Pinnacle now says in court filings the company's cash reserve would have been depleted entirely by mid-April had it not received a $74 million debtor-in-possession loan from Delta Air Lines.
That loan will allow the carrier to continue financing as it attempts to unravel several unprofitable operations under bankruptcy protection and focus on a core business that reliably makes money.
Perhaps counter-intuitively, Pinnacle's strategy is focused on shedding the aircraft normally regarded as its most fuel efficient, such as Bombardier CRJ900s and Q400 turboprops. The carrier instead would rebuild the company around a fleet of 140 50-seat CRJ200s operated for Delta Air Lines.
In the US regional airlines industry, the rising cost of fuel is not the source of its current financial difficulties. In Pinnacle's case, its capacity purchase agreement requires Delta to pay the fuel bill for the CRJ900s, relieving the regional partner of the biggest risk in the airline industry.
Rather, Pinnacle and its competitors in the regional airline industry face a capacity glut. Until fuel prices spiked in 2008, mainline carriers had relied on regional airlines to fuel a race for market share. The trend has now reversed, with legacy carriers maintaining or reducing capacity. The mainline carriers are now pulling back capacity with regional partners or simply reducing the utilisation of the aircraft.
As a result, Mesa Air Group was forced into bankruptcy protection in 2010, while a consolidation frenzy began. Frontier Airlines was acquired by Republic Airways Holdings while Express Jet and Atlantic Southeast Airlines became part of SkyWest. Pinnacle kept pace with the acquisitions of Colgan Air and Mesaba Airlines.
But the consolidation did little to improve the regional airlines' finances. SkyWest posted its first annual loss in 23 years after buying ExpressJet. Republic is now looking to sell off Frontier and Pinnacle has filed for bankruptcy.
Pinnacle is seeking to re-emerge from bankruptcy into a different industry. For most of the last two decades, investors counted on the regional airlines to generate reliable returns, even as their mainline partners experienced swings between meager profits and substantial losses. Now, the regionals are struggling to reduce the size of their operations fast enough to become profitable again.
Under Pinnacle's plan, the carrier would wind down Colgan's turboprop flying for the operations of United-Continental. About 70% of its business is based on 140 CRJ200s flying for Delta Air Lines, and these will be retained because they are profitable.
Pinnacle expects this strategy to provide a "stable relationship with the substantial customer and with a potential path to [the airline's] exit from chapter 11", the court documents state.
Pinnacle already appears to have received approval of the strategy from United and Delta, although some details must still be worked out with Export Development Canada over the return of the Q400s over the next seven months. Labour groups, however, could still try to fight the deal.
"Mismanagement is responsible for poorly running Pinnacle and squandering the millions of dollars in revenue generated by Mesaba prior to the merger," says the Association of Flight Attendants representing former Mesaba employees.