Market Overview

Pinnacle Airlines Dives into Bankruptcy Filing Following Tempestuous Year


Taking flight comes at a high cost to the consumer these days, but as it turns out the airline companies themselves have taken the biggest blow of all. Rather than continue to experience turbulence under wraps, Pinnacle Airlines (NASDAQ: PNCL) has filed for Chapter 11 bankruptcy protection as of this morning.

Just as others before it, (such as American Airlines), Pinnacle found itself desperately needing an operation restructuring, but could not do so outside of the bankruptcy court.

In a research report published today, Dahlman & Rose commented on the unfortunate circumstances that have recently plagued the airline industry.

“Currently two of the largest regional airlines are operating in Chapter 11, and we believe the read-through to the rest of the regionals is somewhat negative, as the major airlines will need to rethink how they structure the Capacity Purchase Agreements. The majors need the feed the regionals provide, but the revenue reimbursement rates are currently below the regional airlines' cost of providing the service. The contracts generally do not provide for revenue increases during the life of the agreement,” Dahlman & Rose commented in the report.

The terms of the filing were mentioned in a report by The Wall Street Journal.

“According to bankruptcy papers, the airline owes $690 million to Export Development Canada, $44 million to Delta and a $34 million loan to CIT Group Inc.'s (CIT) aviation lending division,” The Wall Street Journal reported in an article this morning. “In conjunction with the filing, Pinnacle has received a commitment of $74.3 million of super-priority debtor-in-possession financing from Delta, its biggest customer, to repay borrowings and meet its operational and restructuring needs. That loan, which has an annual interest rate of 12.5%, requires the bankruptcy court's approval.”

The immediate future of Pinnacle will consist of business as usual. However, over the next six months, the unstable company will subsequently end its flying for United Airlines and US Airways (NYSE: LCC).

It would appear that US Airways is trying its very best to not allow the termination of flight to affect its business. It was said on the March 27th conference call that there is no reason for the company to merge as they are still lucrative, despite fuel price concern.

“[We] do not need to merge. US Airways does not need to merge. You will see by our results in 2011 of being profitable for the second year in a row that it is not an imperative for us,” US Airways Group CEO Derek Kerr said. “Our results prove that our stand-alone plan works. We do it a little bit different way than the other major carriers do it. We have lower costs. We have our revenue-generating capabilities, but we keep our costs lower so that we produce margins in that same area as other carriers.”

Monetary stresses are not where the problems end for airlines big and small. JetBlue Airways (NASDAQ: JBLU) may be performing well in the stock market, but a Tuesday afternoon in-flight pilot meltdown could cost the trust of travelers. While bad publicity is something this struggling industry cannot handle at the moment, research firms believe this most recent incident will not impact JetBlue's guidance.

“While guidance season is just getting underway, 1Q operating margins are expected to improve yr/yr at Delta, JetBlue, and potentially US Airways, whereas steep declines are expected at UAL (400~ bps) & LUV (300~ bps),” J.P. Morgan said in the report.

Although soaring through the sky towards business and vacation destinations will likely never be phased out, it is apparent that this alternate form of transportation has become too costly to handle.

Pinnacle is currently trading at $0.60, down -89.91%. US Airways is currently trading at $7.60, down -13.44%. JetBlue is currently trading at $4.89, down -21.88% YoY.

Posted-In: Analyst Color News Topics Travel Legal Econ #s Analyst Ratings General Best of Benzinga


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