Regionals feel bankruptcy pain too

 - October 19, 2006, 12:11 PM

The giant sucking sound generated by the bankruptcies of two of the largest airlines in the U.S. echoed last month through the financial community and across the air transport industry, including the regional airline sector. Among Delta’s various partners, wholly owned Comair stands to feel the most profound repercussions because it now too operates under Chapter 11 protection.

Meanwhile, the two main Northwest Airlink partners–Mesaba Aviation and Pinnacle Airlines–as of September 15 held claims against the bankrupt carrier worth $18.7 million and $22 million, respectively, and must now jockey for position among the rest of Northwest’s creditors to get at least part of the debts paid.

Mesaba and Pinnacle both knew that Northwest’s decision to withhold service-contract payments almost certainly meant their mainline partner planned to file for Chapter 11. Comair’s first signal may have come when, only a week before Delta’s filing, the parent company announced it would slash 26 percent of its flying from Cincinnati Northern Kentucky International Airport in December. The only wholly owned Delta regional subsidiary since SkyWest Airlines closed on its $425 million purchase of Atlantic Southeast Airlines last month, Comair will lose nearly a quarter of the 400 flights it now operates from Cincinnati and 350 workers as a result of the cuts.

But even more disconcerting for employees, Comair’s inclusion in the Chapter 11 filing–despite its reported $4.9 million operating profit in the first quarter–opens the possibility that a bankruptcy court could allow the regional airline to void its union contracts, particularly if Delta moves to cancel its fee-per-departure contracts with Comair.

Earlier this year Comair’s three main employee groups agreed to pay freezes in return for job security guarantees and future regional jet growth. Now that it seems certain the airline cannot deliver on its end of the bargain, theoretically the contracts would revert to the old terms. But as Delta calls on Comair to help reduce costs as part of its now forced restructuring, the unions will almost certainly find themselves back at the negotiating table.

In the meantime Comair must satisfy all its creditors, led by Bombardier, before Delta can extract any value from its subsidiary. But in cases such as this, tensions between the creditors of the parent company and its subsidiary often only add to the legal morass.

In the interest of expediency Delta could try to sell the subsidiary, an option many believed it would exercise earlier this year before it announced the sale of Atlantic Southeast to SkyWest. However, now that a bankrupt Delta can expect the ability to renegotiate code-share contracts almost at will (à la United), and assuming the existence of new Delta partner Mesa Air Group renders Comair more expendable, any pool of would-be buyers might have evaporated by now.

Not in any way expendable, but perhaps feeling just as unsettled, Northwest Airlink partners Mesaba Aviation and Pinnacle Airlines also find themselves contemplating the uncertain outcome of their own mainline partner’s bankruptcy. In fact, the first clear indication of Northwest’s imminent insolvency came when it defaulted on an $18.7 million bill it owed Mesaba for two weeks of flying in August. But not until Northwest asked a bankruptcy court for permission to negotiate the leases on as many as 115 airplanes did it become clear how drastic an effect on Mesaba the filing could have.

End of the Line for Avroliners

Under Northwest’s plan, all 35 Avro RJ85s flown by its Minneapolis-based regional partner would return to their lessors. The 69-seat Avros account for close to half of Mesaba’s seating capacity, the rest of which comes from 64 Saab 340 turboprops. Meanwhile, by press time Mesaba had taken two of 15 Bombardier CRJs scheduled for delivery through next March under a new 10-year service agreement, but when AIN contacted Mesaba on September 19, a spokeswoman said the airline still didn’t know whether or not to expect any more.

“We’re moving forward with training and we still expect the first revenue flight to be some time in the first couple of weeks of October, but right now it’s just hard to say definitively, yes, they’re going to keep coming or no, they’re going to put a hold on them, or we’re only going to get ‘x’ number as opposed to 15; we just don’t know right now,” said the spokeswoman. “It wouldn’t be honest to say that it wasn’t [unsettling].”

If Bombardier halts delivery of the CRJs to Mesaba, Pinnacle Airlines would remain Northwest’s only operator of the Canadian regional jets. Although Pinnacle flies all 129 of the CRJs now in the Airlink network and might appear to control a certain amount of leverage, Northwest holds the titles for all the airplanes and could theoretically cancel their leases while under Chapter 11.

In fact, the bankruptcy court could force Pinnacle to honor its service and payment obligations to Northwest if the regional airline tried to withhold any service contract proceeds.

In a recent SEC filing, Pinnacle conceded that the interruption to its cash flow would be “material,” but that “In the longer term, management believes that Pinnacle provides a valuable service to Northwest, and that Pinnacle will be a part of Northwest’s restructured network.

“It is possible that the relative rights and obligations of Pinnacle and Northwest may be altered... however, it is too early in that process to predict whether there will be any alteration, what such alteration might be or what the impact might be on Pinnacle,” the company added.

In other words, stay tuned.