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Triple digit net profit growth for Pinnacle in 4Q2009

Analysis

Blowing all other airlines out of the water, Pinnacle Airlines reporting its 4Q2009 net income - USD5.6 million - was a massive 153% more than its 4Q2008 results. Its earnings per share, at USD0.31, rose 158%. Net income for the year, reached USD41.9 million including special items that increased net by USD18.7 million. Ex items net was USD23.2 million, up 68% over 2008.

The results make for pleasant reading, especially since they give Pinnacle Airlines an operating margin of 8.8% in 4Q2009, while Colgan Air reported a margin of 7.6%.

The results are more impressive for the fact that block hours were down 7% for Pinnacle Airlines to 103,915. Pinnacle experienced an 8% decrease year-on-year in the average utilisation of its fleet, primarily from route network changes resulting in shorter average flights. At the same time, Colgan Air's block hours dropped 7% to 33,766 on the retirement of its seven Saab 340s and Beech 1900s and the elimination of their pro-rate markets. Also contributing to this decrease was a reduction of one Q400 aircraft during 2009.

It was also impacted by the proposed Delta/US Airways slot switch, recently approved by the Department of Transportation. However, the restrictions - giving up numerous slots at both LaGuardia and Washington National - were too onerous for the airlines, making it unlikely the deal with go forward. Pinnacle subsidiary Colgan had taken out four Saabs from LaGuardia in anticipation of the switch but is now negotiating with US Airways to return some of the service operated by the aircraft.

The company said the average stage length was down on the CRJ 200 operations, meaning more departures and more time on the ground and less utilisation. The average stage length was down 7% to 422 miles in the quarter.

"2009 was a significant year for Pinnacle Airlines Corp," said President and CEO Phil Trenary. "We began the year with many challenges, both operationally and financially, but our people delivered solid results…With the full repayment of our 3.25% convertible notes, we are better positioned to take advantage of opportunities in the regional airline industry in 2010 and beyond."

It ended the quarter with USD91 million in cash and cash equivalents and since the repayment earlier this week, it now has over USD60 million. The company generated USD21.7 million in cash and cash equivalents from operating activities during the fourth quarter of 2009. Net cash used in financing activities for the three months ended 31-Dec-2009 totaled USD11.2 million, primarily comprised of USD10.8 scheduled principal payments on long-term debt obligations and USD0.3 million of other financing activities.

The company reported consolidated operating income of USD17.8 million in 4Q2009, an increase of 9% over consolidated operating income of USD16.3 million in the fourth quarter of 2008.

Slower fourth quarter

The company recorded consolidated operating revenue during the fourth quarter of 2009 of USD209.2 million, a decrease of USD8.3 million, or 4%, over the same period in 2008, owing to the elimination of the Colgan markets, as well as the decline in aircraft utilisation at Pinnacle. Consolidated operating income was USD17.8 million for the fourth quarter of 2009. Consolidated operating income for the fourth quarter of 2008 was approximately USD16.3 million.

Pinnacle reported fourth quarter 2009 operating income and an operating margin of USD13.5 million a decrease of USD0.4 million and 0.2 points on its 8.8% operating margin, from the fourth quarter of 2008. It is still in the throes of a contractual dispute with Delta which cost it USD1.7 million relating to Delta's refusal to reimburse the company for aviation hull and liability insurance premiums. It cited GAAP for not recording the unreimbursed insurance amounts as revenue until the parties resolve the issue. However, Trenary said the two airlines are in negotiations concerning the dispute. One of the things to which Delta agreed was paying for painting aircraft with a new livery but other issues remain.

Colgan reported operating income and an operating margin of USD4.3 million and 7.6%, an increase of USD1.8 million and 3.6 points, respectively, from the fourth quarter of 2008. The company cited decreased fuel costs in its pro-rate operations for the income increase. Fuel cost per gallon during the fourth quarter 2009 was USD2.31, down 9%, from USD2.53 per gallon during the same period in 2008. The decline in fuel costs was partially offset by a decrease in Colgan's revenue-per-available-seat-mile within its pro-rate operations of approximately 9%, and increases in Colgan's rising employee health insurance costs and wage and rate adjustments during 2009.

Net non-operating expense was USD10.1 million for the fourth quarter of 2009, as compared to non-operating expense of USD19.8 million for the same period in 2008, which included an USD8.1 million impairment charge related to the company's Auction Rate Securities (ARS) portfolio. Interest income decreased by USD1.5 million, primarily from a decrease in interest rates earned on invested assets, as well as the sale of the Company's ARS portfolio in August 2009. Interest expense for the fourth quarter was $10.2 million, a decrease of $3.2 million from the fourth quarter of 2008, primarily related to a reduction in interest expense on the company's Notes, a large portion of which were repurchased throughout 2009.

Rough first quarter

Slammed by the winter weather which shut down airports or operations at dozens of airports across the east, the company is now sweating whether the impact of cancellations will place it below the contractual benchmarks to avoid having to pay a penalty to its major partners. However, it will not know until the second quarter or beyond since the metrics used cover a six month period.

The company is expected to take delivery of eight Q400s this year, seven of which will go into service between September and December with the eighth following in 2011 when it expects to take another seven in 2011 to finish out its full 15-aircraft order. However, it still holds 15 options.

Capacity for the first and second quarters will be down on a 2% and 6%, respectively owing to a reduction in block hours at Colgan. However, the third quarter will be more consistent with experience in 2009 while it will be up 4-6% in 4Q2010.

Improving offerings to partners - to Mexico and Caribbean

Pointing to the company's route map, CEO Trenary said that Pinnacle now offers increased flexibility to partners because it has adopted the operating specifications for extended over-water operations for its Mexico and Caribbean routes.

"Frankly, it is something they have not thought about before because up until now it was assumed regional aircraft couldn't handle it," he said. "With the contract expirations over the next few years, you will see more demand for 76-seat aircraft and less for 50-seat aircraft. What we can offer is an aircraft that can do over and above the traditional 76-seat aircraft role. We can take them from a short range to a very long range aircraft. A lot of flying is being done by narrow-bodies because they're needed for the range, not because it makes sense for capacity."

Unions, however, already stung by the growing role of regional airlines and its impact on their jobs, are unlikely to give more concessions along these lines, especially when it comes to scope clauses responsible for keeping many 50-seat aircraft in operation.

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