Delta’s Move to Ground Pinnacle Hammers Stock — Memphis-Based Air Carrier Sees No Layoffs, Seeks Injunction

By Jane Roberts

Delta Air Lines’ move to end its contract with Pinnacle Airlines caused the Memphis-based carrier’s stock to fall nearly 26 percent Tuesday and has investors worried about Pinnacle’s future.

Delta said it will terminate its 10-year contract July 31 because Pinnacle has not met on-time performance standards.

The issue is compounded by the fact that Delta is pursuing plans to buy Northwest Airlines, by far Pinnacle’s largest partner.

“We are extremely surprised and disappointed that Delta is attempting to take this drastic and improper action,” said Phil Trenary, president and CEO.

Because the airline expects to receive an injunction, it told pilot leaders it does not foresee immediate layoffs, said union spokesman Scott Erickson.

Pinnacle began flying feeder routes for Delta last December, starting with one plane and agreeing to have 16 76-seat CRJ-900 jets dedicated to the contract by January 2009.

So far, it has invested $200 million in CRJ-900s to cover the contract. The nine aircraft in service now produce about $3.5 million in revenue a month.

“Pinnacle is a high-quality operation,” said George Hamlin, managing director of ACA Associates outside Washington. “The interesting thing is the abruptness. If the allegation is true, it’s very unlike Pinnacle.”

Delta said it has had “ongoing conversations” with Pinnacle regarding performance. “It’s fair to say that operations fell below minimum standards,” said Kent Landers, Delta spokesman.

Landers did not provide figures on Pinnacle’s on-time performance and would not compare Pinnacle’s performance to the seven other carriers that fly similar routes for Delta.

The deal – currently producing about 4 percent of Pinnacle’s revenue – was a symbol that Pinnacle could diversify its platform and become more than one-horse show it had been for years for Northwest Airlines.

In bankruptcy, Northwest cut Pinnacle’s contract nearly in half but gave it the right to fly for other carriers.

To show its newfound muscle, Pinnacle found other partners, announcing within days its purchase of Manassas, Va.-based Colgan Airlines, which had major contracts of its own.

In May 2007, Pinnacle announced the Delta deal and began adding staff. Today, it has 228 pilots and flight attendants assigned to cover 44 daily flights.

In the arrangement – called a capacity-purchase agreement – Delta essentially buys seating from Pinnacle. Pinnacle provides the aircraft, flight crews and administrative costs. What it gets in return is a steady source of income on routes it flies every day, regardless of ticket sales.

Because Delta covers fuel cost, the arrangement has saved Pinnacle exposure to energy costs, sheltering it – in this case – from the pain and cuts hurting mainline carriers.

But the deal has put a strain on the regional contracts. Shortly after Delta announced this spring that it was cutting staff and flights, it alerted Mesa Airlines that its contract with Mesa-owned Freedom Airlines would be terminated, saying Freedom had failed on key indicators. Mesa won a preliminary injunction May 29 in federal court in Atlanta, temporarily stalling Delta.

Analysts say Delta wants to limit outside contracts and pass the flying to its wholly owned regional carrier, Comair.

“Delta is looking for a way to cull its feeders and bring operations in-house,” said David Field, U.S. editor of Airline Business magazine.

– Jane Roberts: 529-2512

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Pinnacle Airlines Corp.

President, CEO: Phil Trenary

Address: 1689 Nonconnah

Memphis employees: About 1,000

Stock : Lost more than two-thirds of its value in the last year, fluctuating between a high of $20.34 and a low of $5.90. On Tuesday, shares closed at $5.98, down $1.54.

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Originally published by Jane Roberts robertsj@commercialappeal.com .

(c) 2008 Commercial Appeal, The. Provided by ProQuest Information and Learning. All rights Reserved.