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Pinnacle gains on Mesaba acquisition

11-Nov-2010
Pinnacle CEO, Philip Trenary
Pinnacle CEO, Philip Trenary

After Pinnacle Airlines Holdings executives promised its acquisition of Mesaba would be immediately accretive, they were proved right as the new subsidiary generated USD3.1 million in the third quarter and EBITDA of USD4.4 million, consistent with expectations and targets under its purchase agreement with Delta.

Inclusive of interest expense on a USD63.3 million note issued as part of the acquisition, Mesaba contributed USD1.0 million to the company's consolidated pre-tax earnings, according to CFO Peter Hunt, in a briefing to analysts.

Pinnacle Airlines Holdings company reported net income rose 29% to USD 9.4 million ex-special items. Consolidated operating income of USD25.7 million was reported in the third quarter, up USD1.9 million from 3Q2009.

Total operating revenues reached USD303.3 million in the third quarter compared with the USD217.2 million in 3Q2009, an increase of 39%. The company cited Mesaba for the increase as it contributed an additional  USD71.5 million in revenues but Hunt added higher reimbursable costs also contributed to the increase.

Total operating expenses increased from USD193.4 million in the 2009 third quarter to USD276.6 in the 2010 third quarter.

While it took delivery of two more Q400s destined for United, it remains uncertain as to the ultimate destinations for the equipment as the United Continental Holdings works through its integration. The delivery of three Q400s in October and November were the first new aircraft to be delivered since the United/Continental merger. Three more aircraft are expected during the fourth quarter with another seven scheduled for delivery in the first half of 2011.

“This investment in new regional aircraft will increase the company's operations as a United Express carrier and further diversify the company's revenue,” Hunt told investors.

The company ended the quarter with total cash and cash equivalents of USD126.7 million. Operating cash flow during the third quarter was USD59.6 million, unusually high on the Mesaba acquisition and timing of payments related to prepaid expenses, trade payables and accrued expenses. It is expected to be lower in the fourth quarter, similar to its second quarter, as prepaid expenses, trade payables and accrued expenses are expected to return to lower levels. Liquidity will also be lower as new aircraft are delivered.

The company generated USD59.6 million in cash from operating activities during the third quarter of 2010. Hunt noted that Mesaba receives payments weekly under its contracts with Delta, while expenses are not due for up to 30 days. In addition, he said, Mesaba’s actual working capital as of 1-July-2010 was USD6.3 million higher than the targeted working capital under the stock purchase agreement, which ultimately resulted in additional operating cash flow during the third quarter. Those funds were reimbursed to Delta for this excess working capital in October through a USD5 million cash payment and through a USD1.3 million increase in the note issued to Delta as part of the acquisition.

Hunt explained that the purchase agreement with Delta assumed USD5 million in working capital but the two agreed that any surplus would be an adjustment of the note balance. He added that while the company has the ability to per-pay the note, its philosophy is to determine the best use of the money in terms of the best return to shareholders.

Pinnacle Airlines

Pinnacle reported third quarter 2010 operating income and operating margin of USD16.5 million and 9.9%, an increase of USD0.8 million and a decrease of 0.2 points, respectively, from the third quarter of 2009. Operating income increased as a result of higher revenue from an annual increase in rates under Pinnacle's operating agreements, slightly improved aircraft utilisation, and a USD0.5 million reduction in previously recorded estimated performance-based penalties.

Pinnacle Airlines, Inc. completed 110,381 block hours and 71,818 departures, increases of 3% and 1%, respectively, over the same period in 2009. Pinnacle's average daily utilisation of its operating fleet increased by 2% to 8.45 hours on a 5% increase in average stage length to 425.

Revenue passengers dipped 7% to 2.7 million while RPMs were down 1% to 1.1 billion. Available seat miles rose 6% to 1.5 billion for a five-point drop in load factor to 74.9%. Operating revenue per ASM rose 1% to 10.43 cents while operating costs per ASM rose 2% to 9.40 cents.

Hunt noted the increase in average stage length reversed a downward stage-length trend.

Mesaba Aviation

Mesaba reported third quarter 2010 operating income and operating margin of USD3.1 million and 4.3%, respectively. Mesaba is temporarily operating a fleet of Saab 340 B+ aircraft under a capacity purchase agreement with Delta that is structurally designed to produce little or no EBITDA, resulting in a lower aggregate operating margin until this agreement expires in June 2012, according to Hunt.

Mesaba completed 68,186 block hours and 42,691 departures during the third quarter, with an average daily utilisation of 8.1 block hours per day. While it had no comparable numbers for the third quarter 2009, Mesaba flew 1.6 million passengers. Hunt cited the fact that the comparables were irrelevant since the acquisition was 1-July. RPMs were 910,891 while ASMs reached 1.1 billion for a 77% load factor.

Operating revenue per ASM was 6.05 cents while operating costs per ASM was 5.79 cents.

Colgan Air

Colgan reported operating income and operating margin of USD6.1 million and 9.5%, a decline of USD2.0 million and 3.6 points, respectively, from the third quarter of 2009. Fuel costs for its pro-rate operations increased by USD0.6 million year-over-year.

Hunt reported very strong revenues in the pro-rate operation and a 10% increase in RASM over the 2009 quarter.  

Increased costs were also caused by a USD1 million increase in salaries, wages and benefits from lower productivity, higher healthcare and other benefits costs, and a build-up of crews in advance of the delivery of additional Q400 aircraft. Cost increases were partially offset by USD2.7 million of additional revenue, primarily from a 10% increase in revenue per available seat mile in Colgan's pro-rate markets.

Hunt reported that Colgan Air, Inc completed 35,384 consolidated block hours and 28,288 consolidated departures during the third quarter, decreases of 2% and 4%, respectively, from the same period in 2009. Colgan operated one less Saab 340 aircraft within its pro-rate network during the third quarter.

Revenue passengers in its pro-rate operations dropped 1% to 335,000. RPMs grew 1% to 58.9 million while ASMs dropped 5% to 116.9 million. Its pro-rate passenger load factor rose 2.7 points to 50.4%.

Yield rose 4% in the quarter to 76.64 cents while operating revenue per ASM rose 10% to 38.63 cents. Pinnacle did not report the cost per available seat mile for Colgan pro-rate operations.

Its capacity purchase results included a 2% drop in passengers to 408,000 as RPMs rose 8% to 133 million and ASMs increased 6% to 183.3 million. Passenger load factor rose .0.4 points to 72.6% as operating revenue per available seat mile dropped 5% to 10.49 cents. Block hours flown rose 1% to 12,102 and departures dropped 4% to 7773.

Operating cost per ASM rose 6% to 19.50 cents and average daily utilisation dropped 4% to 7.91 hours.


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