US regional operator Pinnacle Airlines is holding preliminary talks to obtain a loan secured by its inventory of rotable and expendable spare parts.
During a 7 May earnings call company CFO Peter Hunt explained Pinnacle's entire pool of rotable and expendable spare parts has a net book vale of more than $60 million. Pinnacle flies Bombardier CRJ200s/900s while it Colgan Airways subsidiary operates Saab 340 and Q400 turboprops.
"I think if we are able to execute this transaction it is likely to happen some time in the second quarter," says Hunt.
Pinnacle's potential use of spare parts to shore up its balance sheet is part of a larger trend of carriers examining creative financing options as traditional sources of credit are frozen.
Mesa Air Group in late 2005 sought to restructure its parts inventory, brokering a deal with AAR to sell the inventory to the aftermarket supplier. At that time Mesa CEO Jonathan Ornstein said the deal would generate $30 million in cash and create costs savings by eliminating the need to buy additional spare parts.
Recently AAR CEO David Storch told ATI the company had modified its agreement with Mesa "to accommodate some of their pressing needs. We are an integral part of their operation". Mesa for a large portion of 2008 worked with note holders to restructure agreements to avoid requirements to back a large portion of debt.
Storch says AAR also recently signed a deal the company does not plan to announce to help an undisclosed carrier demonetize its rotable pool and manage the inventory. "We're prepared to engage in some of those deals," says Storch, "and some discussions are happening with other carriers".
The trend of using the value of spare parts inventory to increase cash balances is more accelerated in Europe, says consultancy Oliver Wyman. However with "non-traditional sources of credit beginning to dwindle, North American airlines are beginning to consider their component inventories as an asset that can be monetized".
Oliver Wyman estimates that some of the largest North American airlines carry as much as $700 million in rotable and repair inventory.
"This is a favorable time for airlines to address roadblocks to pooling, and at the same time for asset managers to aggressively pursue large airlines," the consultants suggest in a recently-released report.