Northwest Grounds More Regional Jets

Sept. 27, 2005
Northwest grounds 15 of the 139 small jets Pinnacle leases from Northwest out of its Memphis hub.

Northwest Airlines has directed Pinnacle Airlines, its Memphis, Tenn.-based regional carrier, to ground 15 of the 139 small jets it leases from Northwest. They'll be taken out of service on Oct. 31.

It's a move that could foreshadow the shrinkage or elimination of Northwest's Memphis hub and hasten a dogfight among Pinnacle, Mesaba Airlines and other small carriers to provide regional air services to Northwest, analysts say.

In Duluth, Pinnacle jets provide two daily flights to and from Detroit and one to and from Minneapolis. All of those flights are aboard 44-seat Canadair regional jets.

Last week, Northwest told its other regional carrier, Eagan, Minn.-based Mesaba, that it will be taking back 35 of its 69-seat regional jets. Northwest plans to return the planes to leasing companies. About half of the flying Mesaba has done for Northwest has been done with those planes.

Mesaba provides eight daily flights to and from Duluth, although they are aboard its Saab 340 aircraft, which carry 33 passengers.

So far, it's unclear how the lease cancellation will affect scheduled service through Duluth.

Northwest, also based in Eagan, said Monday that it does not "anticipate any material change to its core hub structure" but it will be a smaller airline. It has said it will reduce its flying by 4 percent to 5 percent in coming months. Its schedules, Northwest said, are still under review.

So far, Northwest, which is trying to right itself in a Chapter 11 bankruptcy reorganization, isn't detailing its long-range plans for Mesaba and Pinnacle.

But analysts and union leaders expect Northwest will squeeze the regional carriers for better deals, perhaps using its bankruptcy to undo contracts.

"That's been the pattern with airlines that have gone into bankruptcy," said Wakefield Gordon, head of the pilots' union at Pinnacle. "US Air did it. United did it. They went to their regionals and renegotiated -- or attempted to renegotiate -- their agreements. I certainly believe Northwest will do the same."

Mesaba and Pinnacle rely on Northwest for all or virtually all of their revenue. They have no planes of their own, leasing them from Northwest. For the most part, they ferry passengers between Northwest's hub airports and smaller markets. In 2004, Mesaba carried 5.4 million passengers for Northwest; Pinnacle, 6.3 million.

"There is no explanation of why Northwest wants to reduce the (Pinnacle) flying but we suspect that (Northwest) will severely shrink the marginal Memphis hub," Calyon Securities analyst Ray Neidl wrote in a research note Monday.

Doug Abbey, a principal with the Velocity Group consulting firm, believes Memphis could be dropped as a Northwest hub.

"It's certainly being considered," he said. "It's substantially smaller than Detroit or Minneapolis-St. Paul (Northwest's other hubs). And it's smaller than most other airline hubs. It's always been marginal and it's the most susceptible to cut because it's a relatively poor local market."

To encourage travelers to fly through Memphis, Northwest has had to lower fares there, he said. In 2004, Northwest and its regional carriers flew 7.3 million passengers to or from Memphis. For the Twin Cities, the comparable passenger count was 28.7 million; Detroit, 26.8 million. Those counts include travelers switching planes at the airports, as well as travelers beginning and ending their journeys at the airports.

Pinnacle spokesman Phil Reed said he's seen no sign that Northwest plans to abandon Memphis as a hub. The Memphis airport director couldn't be reached for comment.

Reed estimates the grounding of the 15 regional jets will reduce Pinnacle's fourth quarter revenue by 7 percent and profits by 10 percent to15 percent.

In the end, Neidl expects Pinnacle will do more flying for Northwest. But he said Northwest could really try to shave the operating profit margin it builds into flying contracts with regional carriers, aiming for margins as low as 5 percent.