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| PNCL > SEC Filings for PNCL > Form 10-Q on 7-Aug-2007 | All Recent SEC Filings |
7-Aug-2007
Quarterly Report
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
February 2009. We believe that the investments we are making at Pinnacle and at
Colgan will result in long-term, profitable growth for our stakeholders.
However, such investments will require significant resources throughout 2007 and
2008, and will likely negatively impact our 2007 financial results.
We expect to incur costs of approximately $8 million during the second half
of 2007 and early 2008 in preparation for the startup of the CRJ-900 and Q400
operations at Pinnacle and Colgan. In addition, we will make investments in
inventory to support our new aircraft of approximately $15 million.
As part of our purchase of Q400 aircraft from Bombardier, Inc., we negotiated
options and cancelable orders to acquire up to 30 additional Q400 aircraft. Our
CPA with Continental can be expanded at Continental's option with the operation
of up to 15 additional Q400 aircraft. In addition, our contract with Delta
contains a provision that could increase our CRJ-900 operations as a Delta
Connection carrier by an additional seven aircraft at Delta's option. We plan to
pursue these potential opportunities with Continental and Delta, as well as
other Q400 and regional jet opportunities with other major airlines.
Colgan's unit revenue has declined year over year by 3%, primarily due to new
competition in certain of Colgan's markets, and due to a decrease in the average
prorated fare it receives from US Airways for a connecting passenger. As a
result of this trend, we expect Colgan to incur a small loss for the year. We
are planning certain initiatives to reduce Colgan's operating costs and
streamline its operations. Once implemented, we expect these enhancements will
improve the profitability of Colgan's existing operations in 2008 and beyond.
Colgan's existing operations are also subject to seasonal fluctuations.
Colgan has historically incurred losses during the first and fourth quarter each
year, when demand for air travel declines, and incurred income or smaller losses
during the second and third quarter each year, when air travel demand is higher.
We expect this seasonality to continue to impact Colgan's financial results in
future periods.
Our Pinnacle subsidiary has been in negotiations with the Air Line Pilots
Association ("ALPA") since April 2005. While both parties have negotiated in
earnest, we have been unable to reach agreement. In August 2006, we filed for
mediation with the National Mediation Board. Negotiations resumed on July 24,
2007 under the supervision of the National Mediation Board. It is of utmost
importance to us to reach an agreement with ALPA that is consistent with our
company-wide philosophy of industry-average pay and benefits with enhanced
employee productivity. Pinnacle's pilot group is currently paid below industry
average, and we expect a new collective bargaining agreement to contain an
increase in pay for Pinnacle's pilots.
ALPA is currently conducting a campaign at Colgan to represent Colgan's
pilots. If ALPA is successful, we would enter into negotiations with ALPA for a
collective bargaining agreement. We do not expect this outcome to have a
material impact on our future results, as Colgan's pilot group is already paid
at pay rates approximating industry average.
As more fully described in Note 3 to our condensed consolidated financial
statements, we are planning for the return of 15 of Pinnacle's CRJ-200 aircraft
to Northwest. These aircraft will be returned at the rate of two per month
beginning in October 2007. Upon completion of this transition, Pinnacle will
operate a fleet of 124 CRJ-200 aircraft under the ASA (subject to further
adjustment under certain circumstances as provided for in the ASA).
The airline industry in general is experiencing a shortage of qualified
pilots to absorb the recent growth in industry capacity. This shortage has
particularly affected regional airlines such as Pinnacle, as major airlines
typically recruit new pilots from within the ranks of regional airlines. During
the first quarter, Pinnacle began experiencing higher than normal attrition,
primarily due to pilots leaving for positions at major carriers. Pinnacle
experienced improvement in its attrition rate in June and July, although
attrition is still above long-term historical levels. As a result of the higher
than expected attrition, Pinnacle reduced its scheduled flying below its
commitments to Northwest during the spring. Pinnacle enacted several programs to
increase pilot recruiting and training efforts. Pinnacle's pilot staffing has
returned to adequate levels to support its level of operations in the third
quarter. As a result, Pinnacle's
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
training costs increased by approximately $0.5 million and $1.8 million,
respectively, during the three and six months ended June 30, 2007, as compared
to the same periods in the prior year.
As a result of reducing capacity below planned levels, Pinnacle did not meet
the required completion factor goal for the six months ended June 30, 2007 under
Pinnacle's ASA with Northwest. Pursuant to the terms of Pinnacle's ASA, we owe
Northwest a performance penalty of approximately $2.4 million for the six months
ended June 30, 2007. We recorded a provision of $1.3 million during the second
quarter associated with this penalty, having previously recorded $1.1 million of
the penalty during the quarter ended March 31, 2007. Pinnacle's operating
performance has exceeded ASA requirements since adjusting its schedule in the
spring. Assuming our recruiting and training plans remain on track, we do not
expect pilot attrition to impact our operational performance during the second
half of 2007. While we expect staffing levels at our subsidiaries to be adequate
going forward, we also expect higher than normal training costs in the third and
fourth quarters as we recruit pilots, flight attendants and mechanics for our
new Q400 and CRJ-900 operations.
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