Delta ownership of Pinnacle would bring Pinnacle full circle from 2002, when Pinnacle's predecessor, Express Airlines, was spun off by Northwest Airlines and renamed in an initial public offering.
Jan. 04--The future of Pinnacle Airlines Corp.'s Memphis headquarters was further clouded Thursday by news that Pinnacle could exit bankruptcy as a Delta Air Lines subsidiary.
Delta's intended ownership stake in its regional airline partner Pinnacle is one of several provisions set forth in comprehensive agreements that are awaiting U.S. Bankruptcy Court approval.
It wasn't clear what the agreement means for Pinnacle's Downtown Memphis headquarters, where the company moved more than 600 employees in 2011 before financial troubles set in. Pinnacle officials have been considering moving headquarters to Minneapolis in a cost-saving move.
The headquarters choice could be moot depending on how hard Delta pushes to wring out redundant costs of operating Pinnacle as an independent company, airline industry experts said.
"My feeling is if Delta does get beneficial control of the company, they're probably going to do what's right for Delta, and that probably means goodbye Memphis," said Michael Boyd, chairman of aviation consulting firm Boyd Group International.
A Delta stake in Pinnacle isn't likely to be well-received by Delta's critics in Memphis, who have lambasted the Atlanta-based carrier for slashing service at Memphis International Airport since Delta's merger with the former Northwest Airlines in 2008.
Public hostility could make it easier politically for Delta to pull the plug on Pinnacle's Memphis presence. "Right now Memphis is not exactly rolling out the red carpet for Delta," Boyd said.
Airline Weekly managing director Seth Kaplan said acquisition deals always bring potential cost savings. "When companies merge or acquire companies, part of what they're looking for is cost savings from things like reducing redundant management structures, so, very generally, you could imagine them not needing all of what they have there now."
However, Kaplan added, "I doubt they'd totally merge it into Delta, if for no other reason than they'd want to keep it separate enough that they could easily sell it again someday if they want. Because it's a separate carrier, a lot of operational stuff would have to remain separate, because the FAA would see them as two separate airlines even if they might be financially one company. So it's not as if everything Pinnacle would disappear."
Mayor A C Wharton said Memphis officials had been in contact with Delta about maintaining Pinnacle offices in the city. "It does concern us, and we're not sitting idly by. Although it would be owned by Delta, it still would be an operating carrier, and there would still be a need for a headquarters location. It all boils down to which location is best for the shareholders, and we think the Memphis location is extremely competitive compared to the other sites."
Pinnacle filed a statement with the Securities and Exchange Commission Thursday summing up recent developments pointing to its emergence from bankruptcy later this year, pending approval by the court and a favorable vote on wage and benefit concessions by the company's unionized pilots. Pilots are scheduled to vote on contract changes Friday through Jan. 15.
A Pinnacle news release said a reorganization plan would provide for Delta to acquire Pinnacle's equity after bankruptcy.
It makes sense in the context of Pinnacle's dependence on Delta's assistance to dig out of a financial hole that led to the bankruptcy filing last April 1.
Pinnacle at that time announced plans to move forward as a Delta Connection carrier, rather than contracting with multiple airlines that once included United, Continental and US Airways.
Delta also stepped forward as provider of Pinnacle's debtor-in-possession financing, which allowed Pinnacle to stay in business during bankruptcy.
Delta spokeswoman Kristin Baur said, "Converting Delta's financing of Pinnacle to equity makes the most sense for both Pinnacle and Delta given Delta's position as Pinnacle's only customer, and the fact that Delta has provided substantially all of the financing that is enabling Pinnacle to restructure its business."
With Delta's backing, Pinnacle plans to go forward exclusively operating 76-seat, two-class CRJ900 regional jets. It currently has 41 CRJ900s and 140 of the smaller CRJ200s, a 50-seat jet that has fallen out of industry favor because it's inefficient to operate at permanently elevated jet fuel prices.
Thursday's Bankruptcy Court filing included Delta's commitment to add at least 40 CRJ900s to Pinnacle's existing fleet by the end of 2014. Delta has agreed to an additional $52 million in financing for Pinnacle, including $30 million to meet liquidity needs and $22 million for payments to Pinnacle pilots during the fleet's transition to all 76-seaters.
Pinnacle has 2,436 pilots now but would only need about 1,100 to operate 81 CRJ900s. Delta has committed to giving priority to job applications from senior Pinnacle pilots as part of a bridge agreement with Pinnacle and its pilot union, the Air Line Pilots Association.
Delta ownership of Pinnacle would bring Pinnacle full circle from 2002, when Pinnacle's predecessor, Express Airlines, was spun off by Northwest Airlines and renamed in an initial public offering. The acquisition also would appear to be something of a reversal for Delta officials who have pushed to get out of the regional airline business, most recently with the closing of Cincinnati-based Delta subsidiary Comair.
Analyst Helane Becker of Dahlman Rose & Co. said the acquisition would meet two objectives for Delta. "We think they will do what they need to do to protect their investment and ensure they have the larger (regional jets) available to them. We don't think they want to get back into the regional business, but they need to be certain they have the capacity available to them Pinnacle provides at a reasonable cost."
Kaplan said, "Everybody knows by now that the heyday of these regional airlines flying hundreds and hundreds of 50 seaters for the mainline airlines, that's over. On the other hand, there's still a need for larger regional jets. I imagine Delta sees this as an opportunity to invest in something that still has some value at probably very low cost. I think they see it as a low-risk way to get control of an important partner."
Copyright 2013 - The Commercial Appeal, Memphis, Tenn.