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Pinnacle cozies up to Delta

by Lou Whiteman | Published April 3, 2012 at 4:25 PM

The mantra of regional airlines in recent years has been diversification. But Pinnacle Airlines Corp., as part of its restructuring in bankruptcy, is charting a course against the trend by cozying up with Delta Air Lines Inc.

Memphis-based Pinnacle, which provides fee-based small plane flying for larger airline partners, is effectively handing the joystick to Delta, obtaining a $74.3 million debtor-in-possession loan from the Atlanta-based airline and announcing plans to wind down its relationships with United Airlines Inc. and US Airways Group Inc.

Regional airlines have come under pressure in recent years as airline partners, seeking to cut costs and reduce flying, have pitted companies against each other and brought down industry margins. Mesa Air Group Inc. went bankrupt in January 2010, while SkyWest Inc. and Republic Airways Holdings Inc. have sought diversification by acquiring airlines including Atlantic Southeast Airlines Inc. and Frontier Airlines Holdings Inc., respectively.

But Pinnacle, through its bankruptcy filing on April 1, will only grow more dependent on Delta, a reflection of the important role each airline plays for the other. Pinnacle, a one-time subsidiary of Delta merger partner Northwest Airlines Corp., still generates more than 70% of its revenue from its former parent and by breaking ties with US Air and United will be even more reliant on it post-restructuring. Delta, meanwhile, would be left scrambling to fill huge holes in its route network should Pinnacle fail, grounding the 140 50-seat regional jets Pinnacle flies as Delta Connection.

As regionals have discovered, diversification is no panacea. Republic, three years after buying Frontier out of bankruptcy, now has the discounter on the block, while Pinnacle can point to its dabble at M&A in an attempt to branch out for at least some of its troubles.

Pinnacle in 2007 bought Colgan Air for $20 million, largely to add Colgan's contracts to fly for US Airways and the two airlines that would eventually merge to create United Continental Holdings Inc. But Colgan, according to sources, has struggled to break even as a Pinnacle subsidiary, and was dealt a blow in February 2009 when a Colgan Bombardier Q400 operated for Continental crashed into a house in Clarence Center, N.Y., killing all 49 people abroad and one person in the house.

A source close to Pinnacle said that the company's Delta contracts had in the past been subsidizing the Colgan losses, but an increase in labor rates at Pinnacle that the company was unable to counter through higher fees from Delta was causing the company to burn cash. Pinnacle, which was profitable in four of the five years between 2006 and 2010, lost $8.81 million in the first nine months of 2011.

Another deal, a $62 million purchase of Mesaba Airlines Inc. in 2010 from Delta, did not diversify Pinnacle's customer base but did broaden its fleet and give it additional larger, more lucrative aircraft. But the integration of Mesaba bogged down, and the contract to fly those larger jets was unprofitable, contributing to the company's woes.

Pinnacle in bankruptcy will buck another industry trend, shedding those usually more-favored larger jets to concentrate on its fleet of smaller aircraft that it believes it can operate profitably for Delta. Expansion, in theory, is wonderful, but profitable is hard to beat.

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Pinnacle cozies up to Delta

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