Pinnacle Signs New Agreement With Northwest

The agreement removes all restrictions preventing Pinnacle from providing regional airline services to other major airlines, with the exception of operating flights into or out of Northwest's hub cities of Minneapolis/St. Paul, Detroit, and Memphis.

-- If Northwest enters into any merger or acquisition agreement with another major air carrier prior to completing its bankruptcy proceedings, then Northwest may remove from Pinnacle's fleet the 17 aircraft to be added during 2007 plus an additional 24 aircraft. Once Northwest has completed its bankruptcy proceedings, it will no longer have this option.

Amended ASA Term

The term of the Amended ASA as it relates to Pinnacle's existing fleet of 124 aircraft will extend through December 31, 2017, subject to renewal at Northwest's option for successive five-year terms. The term for the additional 17 aircraft to be added to Pinnacle's fleet during 2007 will be as described above.

Northwest's Rights Upon a Pinnacle Change of Control

The existing ASA provided that Northwest may terminate that agreement upon a change of control of Pinnacle (as defined in the ASA). Under the Amended ASA, upon a change of control occurring after January 1, 2008, Northwest will no longer have the option to terminate the agreement, but instead will have the option to remove up to 62 aircraft from Pinnacle over a three-year period, and the option to extend the Amended ASA for another five years without the obligation to reset rates. In addition, certain operating performance measurement formulas would be revised in Northwest's favor.

Preferred Share Purchase Agreement

Pinnacle and Northwest will enter into a Share Purchase Agreement requiring Pinnacle to redeem its Class A Preferred Share held by Northwest for a price of $20 million on January 2, 2008, subject to bankruptcy court approval. If Northwest enters into any merger or acquisition agreement with another major air carrier as part of its reorganization proceedings and elects to remove any aircraft from Pinnacle, then the redemption price of the Class A Preferred Share will be reduced to a nominal amount. The Class A preferred share entitles Northwest to appoint two members of Pinnacle's Board of Directors and also gives Northwest consent rights for changes to its articles of incorporation and bylaws. In addition, the Class A Preferred Share provides consent rights to merger or acquisition transactions involving another airline with annual revenues greater than $500 million. Additionally, the existing ASA includes a termination provision if Northwest does not consent to any replacement of Pinnacle's chief executive officer. After the Class A Preferred Share is redeemed on January 2, 2008, Northwest will no longer retain these corporate governance rights.

Claim Resolution Agreement

In a separate agreement, Northwest and Pinnacle have agreed that Pinnacle will receive an allowed unsecured claim of $377.5 million, subject to bankruptcy court approval, against Northwest in its bankruptcy proceedings in settlement of all amounts that Northwest may owe to Pinnacle for pre-petition claims and the economic adjustments provided for in the Amended ASA. The allowed unsecured claim will be reduced by $13.6 million if Northwest commits the 17 aircraft added to Pinnacle for a period of three years, and by $42.5 million if the 17 aircraft are committed for a period of ten years. Pinnacle will retain the right to assert an additional claim should Northwest enter into a merger or acquisition agreement with another major airline as part of its plan of reorganization and elect to remove up to 24 aircraft above the 17 aircraft delivered in 2007, as indicated above; however, such claim would be reduced by the $20 million decrease in Pinnacle's purchase price paid to Northwest for the Series A Preferred share discussed above.

Aircraft Security Deposits

The Amended ASA and related aircraft subleases will provide that Northwest will retain the $24.6 million it is currently holding as a security deposit for the existing fleet of 124 aircraft and the 17 aircraft to be added during 2007. Pinnacle will pay a security deposit equal to one month's rent for any aircraft that is subleased from Northwest and operated under the Amended ASA above this base of 141. Pinnacle's current obligation to pay a second month's deposit on its existing fleet under certain circumstances will be removed from the aircraft subleases.

Restructured Economics

We Recommend