Pinnacle Airlines Corp., which flew about 4 million passengers in and out of the Twin Cities last year, is flying dangerously close to a landing in bankruptcy court.
If the Chapter 11 filing occurs, it will trigger bad memories and financial insecurity for Minnesota-based Pinnacle employees who were working for Mesaba Airlines in 2005. That’s because it would be their second trip through bankruptcy.
The Eagan-based Mesaba, which operated regional flights for Northwest Airlines, entered U.S. Bankruptcy Court in Minneapolis in October 2005 on the heels of Northwest’s bankruptcy.
Airline employment isn’t well-suited for people who need stability in their lives. MAIR Holdings was Mesaba’s owner when it entered bankruptcy in late 2005, then Northwest brought Mesaba out of bankruptcy in April 2007 when the regional carrier became a wholly-owned Northwest subsidiary. That structure was short-lived because Delta Air Lines acquired Mesaba in October 2008 when the Delta-Northwest merger deal closed. Memphis-based Pinnacle later acquired Mesaba for $62 million in a deal announced in July 2010.
Since early December, Pinnacle has been attempting to slash costs and strengthen its revenue position. It’s been trying to negotiate new labor contracts, modify terms with its lessors and debt holders and reset agreements with its airline partners. Pinnacle pilots fly regional flights for Delta, United, Continental and US Airways.
But Pinnacle CEO Sean Menke painted a dire picture on Friday in a letter to Pinnacle’s 8,000 employees.
Need to act
“On the current path, our financial position will continue to worsen at an alarming rate,” he wrote. “We need to act immediately.”
Menke said management hoped to reach deals with all of the major parties, so it could implement its turnaround plan and ensure the carrier’s viability.
“What happens next is not yet clear,” Menke wrote. “We may ultimately conclude the best way for us to achieve our goal is to use the court-supervised Chapter 11 process.” He said that route could allow Pinnacle to “change or cancel key contracts, obtain financing and take other important actions” while “continuing normal business operations.”
In the past dozen years, bankruptcy has become commonplace in the airline industry.
Using the federal bankruptcy code is expensive. Bankruptcy attorneys and restructuring specialists don’t come cheap. But airlines use bankruptcy to pump up their leverage so they can extract contract concessions to reshape their businesses.
Pinnacle had a simple business model for many years and it was a safe investment because Pinnacle bore little financial risk. Most of Pinnacle’s revenue came from Northwest Airlines, which would provide Pinnacle with airplanes and pay the regional carrier for transporting passengers in and out of Northwest’s hubs that included the Twin Cities.
Right now, Pinnacle is struggling to revamp its business plan that has become vastly more complicated. It purchased Colgan Air, a Virginia-based operator of turboprops, for $20 million in 2007, and it acquired the larger Mesaba in 2010. Between those transactions, Pinnacle executives took part in investigations and policy reviews and addressed training issues that surfaced after a Colgan Air plane crashed in 2009. The accident killed 50 people in New York state.
Menke, who became Pinnacle CEO last summer, alluded to the growing pains in his employee message on Friday that also was filed with the Securities and Exchange Commission.
Delta provides more than 75 percent of Pinnacle’s revenue and Delta pays the fuel bills for those regional Delta Connection flights, so the Atlanta-based carrier takes the risk on volatile oil prices. But Pinnacle has multiple contracts with Delta and has been in talks about alterations to those service agreements to boost Pinnacle’s revenue.
Losses ‘not sustainable’
It also has a different type of contract with United Continental Holdings, in which Pinnacle is responsible for fuel and maintenance expenses. “The losses on this operation are not sustainable,” Menke wrote.
Pinnacle executives reached a deal with the Air Line Pilots Association a year ago in which compensation rates and work rules were spelled out for the combined pilot groups from Pinnacle, Mesaba and Colgan. An arbitrator’s ruling detailed how the pilot seniority lists of the three carriers would be merged. Menke blamed that ruling as driving up costs for Pinnacle because he said it allowed pilots to move quickly to bid on different aircraft to fly. While Menke wanted a gradual phase-in, he indicated that the faster integration of the three pilot groups increased training costs and pilot pay.
Pinnacle Airlines Corp. lost $8.8 million during the first nine months of 2011, and won’t report full 2011 results until February. That loss compares with a $17 million profit for the same three quarters in 2010.
The carrier’s unrestricted cash was $82 million at the end of September. It’s unclear how much money Pinnacle may have burned through since releasing that liquidity figure.
Many consumers are just looking for a safe flight at a reasonable price. To deliver on that promise and survive in a tough industry frequently battered by high oil prices, U.S. airlines have been choosing the paths of bankruptcy and consolidation.
Since 9/11, some of the airlines that have endured the expense, time and agony of bankruptcy are Northwest, Mesaba, Delta, United, US Airways and Sun Country.
Delta kicked off the big mergers in 2008 when it struck a deal to buy Northwest, and Continental and United forged a combination deal two years later.
American Airlines, a recent entry into bankruptcy, is now being eyed as a potential acquisition target for Delta.
But before that could happen, the Pinnacle restructuring will unfold inside or outside bankruptcy court. Many of the key players on opposing sides don’t need introductions.
Delta is Pinnacle’s chief customer and several top Delta executives are familiar with every nuance of Pinnacle’s business. For example, Steve Gorman, a Delta executive vice president, served as Pinnacle’s board chairman for five years.
Pilot Tom Wychor, who lives in the Twin Cities, is chairman of the combined Pinnacle pilots union, and he held that same union post with Mesaba. John Spanjers was Mesaba’s president and now he’s the chief operating officer at Pinnacle. The pair spent months of their lives together across bargaining tables and in Judge Gregory Kishel’s bankruptcy courtroom in Minneapolis.
Pinnacle hired the Seabury Group to mold its turnaround plan, and Seabury worked on Northwest’s financial restructuring. Pinnacle’s legal counsel handled Delta’s bankruptcy case.
In 1978, Congress and President Jimmy Carter deregulated the airline industry, an action that was designed to stimulate competition.
Yet, instead of seeing an increasing number of carriers operating out of U.S. airports, we are watching all kinds of mergers take shape.
United and Continental, big network carriers, are in the process of combining. So are two prominent low-fare airlines, Southwest and AirTran.
Now Minnesotans who’ve been working for Pinnacle or Mesaba will get financially squeezed as Pinnacle becomes a bigger, newly-merged regional airline.
The unknown for Pinnacle employees, including about 1,200 Minnesotans, is precisely what kind of pain is coming their way. But some cutbacks are inevitable.
Pinnacle CEO Menke’s message was abundantly clear on Friday. He wrote: “We cannot continue to operate businesses that are losing money. We do not have the cash to sustain it.”