RAA 2007 special section: Pinnacle eyes summit of regional biz

 - April 30, 2007, 10:18 AM

This year’s RAA Convention couldn’t have come at a more appropriate time and place for Memphis, Tenn.’s hometown airline. The proud new owner of a second operating subsidiary and revamped service contract with Northwest Airlines, Pinnacle Airlines has officially shed the manacles of a highly restrictive code-share deal and joined the open market for regional services. Now comes the time to prove it can match or better the costs of some of the industry’s leanest and cheapest suppliers of regional feed–and do it while upholding the reputation for reliability it earned while almost single-handedly building Northwest Airlines’ regional jet presence during the first half of the decade.

Today, with Northwest’s buyout of Minneapolis-based Mesaba Aviation and the launch of fellow wholly owned subsidiary Compass Airlines, Pinnacle faces a challenge unlike any since CEO Phil Trenary arrived in Memphis 10 years ago to lead Northwest’s newly purchased Jetstream 31 operation, then known as Express Airlines I. Of course, times have changed since Trenary and company transformed the company from the Airlink family’s “black sheep” to Northwest’s favorite son, renamed itself Pinnacle Airlines and built a 124-strong fleet of 44- and 50-seat Bombardier CRJs.

Although then-independently owned Mesaba finally did win a contract to fly 15 CRJs as an Airlink partner, it had taken only two since Northwest filed for bankruptcy in October 2005, ceased deliveries of the remaining jets it had ordered and stripped
it of half its fleet capacity. Pinnacle, meanwhile, waited for the proverbial other shoe to drop after Northwest grounded 15 of its CRJs and distributed a series of RFPs to competing airlines to fly the rest. During last year’s convention in Dallas, Trenary said he fully expected, in his words, to “take a beating” from Northwest. Happily for him, the subsequent shakeout left Pinnacle virtually intact and, in some ways, in a stronger position than before.

Pinnacle now carries one of the strongest balance sheets in the industry, thanks in no small part to a $377.5 million bankruptcy claim it negotiated as part of the new deal with Northwest. It subsequently sold the claim to a variety of third parties for $283 million, giving it a cash and short-term investment position at the end of the fourth quarter worth $374.8 million. Trenary plans to put that money to good use by the end of the year, when he expects to see larger regional jets on the Pinnacle certificate. But while the old Airlink agreement barred Pinnacle from flying RJs for other major airlines, the new deal allows the Memphis-based regional to fly jets in any competitors’ colors, as long as it stays away from Northwest’s hubs in Memphis, Minneapolis or Detroit.

Colgan Connection

Less than a month after signing its new contract with Northwest, Pinnacle instantly aligned itself with United, Continental and US Airways by committing $20 million to buy all the assets of Manassas, Va.-based operator Colgan Air, operator of 40 Saab 340s and 11 Beech 1900s. Within a matter of days Pinnacle agreed to place 15 Bombardier Q400s on the Colgan certificate to fly as a Continental Connection carrier from Newark, N.J., starting in January.

Trenary explained that originally the interest in Colgan surfaced out of a desire to find a home for eight Saab 340s that Northwest no longer wanted. “We had known the Colgans for a very long time; this is a relationship that goes back over 20 years,” said Trenary. “They have values that align well with ours. So it was a nice cultural fit, number one.”

Then along came the chance to fly Q400s, making the Colgan connection all the more logical, particularly given Pinnacle’s plan to simultaneously introduce a new regional jet type. Although Colgan will become only the second U.S. airline to fly the Q400 after Seattle-based Horizon Air, Trenary sees the big turboprops proliferating in North America in the near future. “I think the Q400 is going to prove to be a real hit with the industry,” he predicted. “We didn’t do this just to fly 15 airplanes around.”  

Continental hasn’t talked about what cities it wants to serve with the airplanes, but Trenary said the fleet’s service area will likely cover a radius of no more than 300 miles. With a comfortable range of 600 nm and a top speed of 460 knots, the Q400s will make far better use of Newark’s obstacle-limited, 6,800-foot cross runway than does Continental Express partner ExpressJet with its Embraer ERJ 145s.

“Basically we create airspace because we don’t have to go up and get into the arrival flow at the higher altitudes,” said Trenary. “So while everyone else is restricted to say, 200, 220 knots up there, we can come underneath at much faster speeds and cut the corners, and basically have a dedicated runway.”

By now deeply involved in the ATOS (air transport oversight system) process, a team dedicated to adopting the Q400 onto the Colgan certificate will serve as a template for applying the audit regime to the rest of the operation. Meanwhile, pilot recruiters at Pinnacle continue to face a daunting test of their own as they try to fill captain spots left vacant by a recent hiring binge by major airlines.

Regional airlines have seen accelerating turnover rates due largely to the majors’ inability in many cases to convince enough of their furloughed pilots to return to work, said Trenary. Pinnacle felt the effect as hard as anyone, losing many of its most experienced captains to the likes of FedEx, JetBlue and Southwest Airlines.

As a result, Pinnacle had to cut service to destinations such as Lincoln, Neb., Waterloo, Iowa and Hancock, Mich. Hiring 30 pilots a week by the time of AIN’s interview with Trenary in early April, Pinnacle expected to have enough people to fly its full complement of block hours by “early in the second half” of the year.

Of course, no regional airline can present its strongest case for new code-share deals while it struggles to fill left seats. If Trenary expects to land a new contract by the end of the year, the airline might in fact have to intensify its recruiting efforts. So far, according to Trenary, Pinnacle hasn’t relaxed its hiring requirements, although it has begun paying for lodging and $200 a week to trainees for miscellaneous expenses.

Notwithstanding his pilot recruiting “challenges,” Trenary betrayed no ambiguity about Pinnacle’s desire to expand quickly into larger jet types outside the Northwest Airlink network. In a sense, the tables have turned for Pinnacle, particularly since Northwest set into motion its plans to acquire the suddenly low-cost Mesaba, whose employees recently accepted deep pay cuts to keep the airline afloat. Northwest has since assigned Mesaba its planned 36-strong complement of 76-seat CRJ705s, while plans call for its new Compass Airlines subsidiary to fly the same number of Embraer E175s.

Although Pinnacle hasn’t given up on flying larger RJs for Northwest, opportunities now appear limited. In fact, when Pinnacle failed to reach new contract terms with its pilot group by March 31, a clause in its new Airlink agreement activated that allows Northwest to remove as many as 17 CRJs it subleases to the Memphis regional at a rate of three per month, ostensibly in favor of Mesaba. Pinnacle would get another bankruptcy claim worth $42.5 million in return, however, potentially improving its cash position even further for an eventual big RJ acquisition for another major.

With its purchase of Colgan, Pinnacle has already answered the critics’ call for more partners. Now, flush with cash and endowed with a newfound diversity of customers and equipment, it can finally pursue the aspirations suppressed by pilot scope clauses and its Northwest contract for too many years.