Pinnacle Airlines Growing Beyond its Northwest Roots

Memphis-based Pinnacle Airlines Corp. is buying a fleet of 15 planes in another move to ensure its future even as its longtime partner, Northwest Airlines, continues to struggle for its survival.

A month after it bought Virginia-based Colgan Air Inc., Pinnacle has ordered 15 new regional aircraft to serve expanded Continental Airlines' routes out of Newark, N.J.

Subject to financing, Pinnacle expects to begin receiving Bombardier Q400s in December. The plane is a quiet, elongated turboprop that seats 74 passengers. Its efficiency on short routes makes it particularly suited to serving commuter routes in the densely populated Northeast.

"Now when I visit execs from other airlines, I will be able to offer them anything from 36-seat turboprops to 74-seat regional jets," said Phil Trenary, president and CEO of Pinnacle, the publicly traded parent of Pinnacle Airlines Inc. and Colgan Air. "The No. 1 request from the investment community has been that we diversify. Now, we have."

Trenary would not comment on the price, but the plane lists for about $25 million (although companies almost always get deals for multiple orders).

The acquisition of planes is the latest move Pinnacle has made since late December when it ended an exclusive relationship with Northwest that it had since 1985.

As a regional carrier for Northwest, Pinnacle was prohibited from flying for other airlines. The new Northwest contract, though half the value of the old one, gave Pinnacle permission to seek other business.

And it did so immediately when Trenary entered into a deal with old friend Virginia Sen. Charles Colgan, buying the family-owned airline for $20 million. The Colgan deal included 50 planes, most of them turboprops to serve commuter routes in the crowded Northeast corridor.

Analysts applauded the deal because it allowed Pinnacle to grow on its own merits. And Trenary said it ensures "1,000 Pinnacle employees in Memphis have secure jobs. And it allows us to stay in Memphis, our home and the place we love."

The Colgan deal is also proving valuable because it has contracts and longstanding relationships with United Airlines, Continental and US Airways.

"We have Colgan opening doors for us with established carriers," Trenary said. "We're talking about expanding the relationships to regional jets, growing not only the number of aircraft but the size."

Colgan operates 354 daily flights in 13 states, flying as Continental Connection, United Express and US Airways Express.

It won the Continental contract in a competitive bid, "validating the strategy of the Colgan acquisition," Trenary said.

Continental will purchase the seating capacity from Colgan in an agreement that will run 10 years from the date the last plane is received.

Pinnacle in January received $280 million in cash from the sale of its claim against Northwest in bankruptcy, giving it liquidity to take on new challenges.

"That money has allowed them to do things quickly and in a large way," said Doug Abbey at Velocity Group in Washington.

The new planes Pinnacle is buying were introduced by Bombardier in 2000, the manufacturer's answer to demands from regional carriers for larger planes suited to high-density, short-haul routes.

The plane exceeds 400 mph and can fly at 15,000 feet, putting it below airspace increasingly crowded with jets.

Since its introduction, airlines - mostly European carriers - have ordered 185 Q400s; 125 have been delivered.

"What people don't understand is that a big airplane doesn't mean more benefits because in many cases to fill a big plane, the carriers have to charge lower and lower fares," said George Hamlin, independent aviation consultant in Virginia.

But with the proliferation of 50-seat regional jets, airports like La Guardia International Airport in New York "have turned into a mess" with congestion, he said.

The Q400 seems to answer the question by allowing more passengers per takeoff but not forcing airlines to bet economics on filling jets three or four times a day.

Until now, the only U.S. customer for the Q400 has been Horizon Airlines, the regional carrier for Alaskan Airlines. It has 21 Q400s in its fleet with 12 more on order.

Last fall, Frontier Airlines ordered 10 for delivery starting this year and continuing into 2008.

"The Q400 has proven to be an effective tool that has enabled Horizon Air to restore profitability, even in the low-fare arena," Horizon president and chief executive Jeff Pinneo says on Bombardier's Web site.

Horizon this year was named Regional Airline of the Year by Air Transport World, partly for introducing the Q400 to the U.S. market.

What it's also done, Hamlin said, is prove that U.S. customers don't go out of their way to avoid prop planes.

"The old adage is that people don't like seeing the propulsion; they want it hidden in the engine."

While Horizon has made the plane profitable, he cautions that turbos are still typically flown on noncompetitive routes.



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