Northwest Costs Pinnacle 15 Cents a Share

Northwest Airlines' bankruptcy cost Pinnacle Airlines $3.2 million in the quarter ending Dec. 31, knocking 15 cents a share off earnings for a company already in a serious holding pattern.

The Memphis-based carrier reported earnings of 45 cents a share Thursday - down 2 cents from the same period of 2004 - and 5 cents less than Wall Street expected.

Operating revenue for the quarter was $213 million, up 17 percent. Without the charge, earnings would have been up 28 percent for a quarter that Pinnacle was also forced to fly with 15 fewer planes.

"Given the challenges we had, our company, and especially our people, did an outstanding job," said president and chief executive officer Phil Trenary.

Excluding the charge, operating margins improved to 10.4 percent from 9.7 percent.

Pinnacle flies as an Airlink partner for Northwest Airlines, covering feeder routes to Northwest hubs. Pinnacle offers 709 daily departures to 110 cities. In 2003, it was the fastest growing regional carrier in the nation, adding two regional jets a month and posting double digit passenger growth as Northwest funneled more and more traffic to Pinnacle as a way to keep its costs down.

While traffic was up 32 percent in January and 27 percent the in December, the road has been rocky since Northwest, Pinnacle's only customer, announced it was seeking bankruptcy protection in mid-September.

Not only does Northwest owe Pinnacle $37.8 million for services it performed before the bankruptcy was announced, in October, Northwest recalled 15 of Pinnacle's planes, reducing its earning potential by 10 percent as of Nov. 1.

Weeks later, Northwest said it would be seeking bids from other airlines for Pinnacle's work.

"We don't know the outcome of the bid," Trenary said. "But we believe we have a very good product to offer Northwest."

Pinnacle did not submit the low bid, Trenary said, saying it didn't have a clear idea of what Northwest wanted.

"They seem to be making good progress (on labor negotiations.) We think we'll start getting more attention as they move forward," he said, adding that he expected the matter would be resolved within months.

Even if Pinnacle did have opportunities to fly for another carrier, it couldn't accept the work under its current deal with Northwest.

"It would require another certificate," Trenary said. "From the time we pull the trigger until the time we'd be ready to go, it would be less than a year" to obtain the second certificate.

Until there is progress on the Northwest contract, Calyon Securities is maintaining its neutral rating on Pinnacle shares, which in 52 weeks hit a high of $11.25 and a low of $4.42.

Thursday, shares closed at $7.87, down 1.5 percent.

"Pinnacle has weathered the storm and has sufficient cash, in our opinion, to wait it out until Northwest acts," said Calyon analyst Ray Neidl. "But there is still downside risk from Northwest."

For the first time in Pinnacle's history, auditors will include a caution in the annual report discussing "going concern" uncertainties.

Trenary said it wasn't reason for alarm, saying "we believe we will be part of Northwest's future plans."

Pinnacle ended the year with cash and short-term investments totaling $76 million, up from the $35 million it had on hand a year ago.

"Building cash reserves is critical, Neidl said. "In our opinion, the trend will be toward regional carriers being required to finance aircraft on their own versus the ownership by their legacy carriers."

-Jane Roberts: 529-2512

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