March 24, 2011. Pinnacle Airlines has become the first regional airline to suffer the effects of the pilot shortage that has been building for the past several months.
On March 23, 2011, Delta Airlines notified Pinnacle that they were cancelling 25% of Pinnacle's daily flights out of the Memphis hub. Pinnacle was expected to fly between 200-220 flights a day for the 2011 summer schedule. Instead Delta has cut Pinnacle's flights down to 150-170 a day in Memphis. The exact schedule has not been set at this time.
Delta Airlines does not own Pinnacle Airlines, but they are Pinnacle's major customer in Memphis. Pinnacle's planes display the "Delta Connection" livery.
A Pinnacle Airlines, CRJ-200 sporting Delta Connection livery.
Delta Airlines handles all reservations for any Pinnacle Airlines flight that displays the Delta Connection logos. Delta also is the only source of revenue, for those flights, for Pinnacle since Delta sets the fares and bundles the tickets for the passengers onto the mainline flights. Delta sells the ticket, collects the money and then pays Pinnacle.
In February, Pinnacle cancelled hundreds of Delta Connection flights, to and from the Memphis hub, due to lack of flight crews. This stranded thousands of Delta passengers and disrupted the Delta system. Delta then sent a letter to the Pinnacle CEO indicating that flights would be cancelled if the problem was not immediately fixed. Within days, the long term Pinnacle CEO, Phillip Trenary would resign.
Pinnacle has been short staffed, on pilots, for the past year. Pilots have been flying 90 flight hours a month on a regular basis. The industry standard is 65-75 flight hours.
In the 3rd and 4th quarter of 2010, many airlines starting hiring again anticipating the work rule changes which take effect on August 1, 2011. This created an exodus of Pinnacle pilots leaving the airline. Because the airline was already short staffed, the minimal hiring that Pinnacle had in place did not cover the number of pilots leaving. In addition, business had been growing without the proper number of pilots being brought onto property.
We had estimated the number of new pilots needed at Pinnacle in 2011 to be 324 before the 25% Memphis hub cuts. So far Pinnacle has brought 134 online. Most of those are Mesaba pilots that had been furloughed.
We estimate the 25% reduction will eliminate the need for about 150 pilots. Since Pinnacle was already short 150 pilots, they should now have enough pilots to fly the schedule through July 31, 2011. We now estimate Pinnacle will need 174 additional pilots to fly the same (reduced) schedule starting August 1, 2011 because of the workrule changes.
The bottom line is that Pinnacle's lack of hiring the proper number of pilots to staff the airline, have caused it to lose 25% of their business in Memphis. Eight of the CRJ-200's can be removed from the fleet.
The regional airlines that have the most pilots will be the airlines that will win the airline business over the next 3 years. There are not enough pilots to go around and those regional airlines that have not hired in 2011 will find themselves suffering the same fate as Pinnacle.
March 15, 2011. Philip Trenary, who built Pinnacle Airlines into a $1 billion company has resigned and will step down as President and CEO next week.
Here is a link to the local news video:
When a long time CEO suddenly resigns from a company on short notice, it sends up signals that something is wrong.
Phil Trenary came to Pinnacle in 1997 and built the airline from 36 turboprops to a fleet of almost 300 jets and turboprops. By any measure this is a record to be proud of.
Considering that Pinnacle Airlines has acheived incredible growth under Phillip Trenary as well as posting impressive financial results for 2009 and 2010 (except for the 4th quarter) one would believe that the problem would not be related to revenue.
The Board of Directors actually make the policy and govern the operation of Pinnacle Airlines. A sudden resignation from the CEO can only be read as a major issue between the board and the CEO.
We know that several regional airiines have not properly planned for the changes taking place in the industry with regards to the new work rules as well as the growth that is taking place. Is Pinnacle one of these airlines?
Pinnacle currently has about 1200 pilots on property. We believe that Pinnacle will need an additional 324 pilots to fly the same planes, with the same number of passengers on the same routes as the new FAA mandated work rules take effect on August 1, 2011.
We do not believe Pinnacle has planned for these additional pilots.
During the Feburary 17, 2011 Q4 Earnings conference call there was no mention of Pinnacle needing additional pilots.
This is not simply an oversight. Pilots were discussed extensively during the call. The new tentative ageeement had just been approved, by the pilots, and there was a discussion of the increased costs of that agreement. There was even a mention of the extra unexpected training expenses, for pliots, on the Q400.
The recruitment, training and employment of 324 pilots will have a major financial impact on Pinnacle Airlines and this major expense was simply left out and not talked about. If this fact were known, it can not be left out and not disclosed to the investment community.
Under this circumstance, the only conclusion one can make is that on February 17, 2011, Pinnacle Airlines was not aware that they need to hire 324 pilots right away.
We have also been hearing that many Pinnacle pilots have been flying 90 hours, per month, since at least last summer. Normal pilot flying hours are around 65-75 hours per month at most airlines. The reason for the extra hours is because Pinnacle is understaffed in Pilots.
This understaffing is getting worse as Pinnacle loses pilots to other carriers and does not replace those pilots.
For the past 9 months, this understaffing has lead to hundreds of cancelled flights each month at Pinnacle. Because Pinnacle is the feeder for Delta Airlines (and carries over 51% of Delta's passengers) these cancellations have caught the attention of Delta management.
Pinnacle is only paid, by Delta, when a passenger is actually transported from point a to point b. If the flight is cancelled, Pinnacle receives no revenue. While we don't know the revenue numbers lost, a 50 seat CRJ with each passenger paying $100 would represent a $5000 loss per flight to Pinnacle. If 900 flights were cancelled in a month, that would represent a $4,500,000 loss in revenue to Pinnacle each month.
On March 17, 2011, just two days after the CEO's resignation, Ed Foley, the Director of flying at Pinnacle airlines sent a memo to all Pinnacle pilots projecting that Pinnacle will hire "over 250 pilots" in 2011. Ed further went on to explain that there will be 2 classes each month of 14 pilots each.
Earlier in the week, 14 students from Western Michigan University were put in the latest pilot class at Pinnacle. Those 14 students each had 250 hours.
Pinnacle is now officially hiring pilots and a new CEO. Applications are being accepted.
November 28, 2009.
As the price of fuel settled down in 2009 compared to the outrageous prices in 2008, Pinnacle and the other regional airlines have fared pretty well.
For the nine months ending September 30, 2009, Pinnacle reported net income of $36.2 million dollars and Earnings Per Share of 2.01. This compares to a $5.4 million dollar loss for the same period in 2008.
For the nine months ending September 30, 2009 Pinnacle has operating income as a percentage of operating revenue in 2009 of 9.9% vs. 4.5% in 2008.
The major difference relates to the cost of fuel which is $15.9 million dollars spent so far in 2009 vs. $41.6 million dollars for the same period in 2008.
Pinnacle also used 2009 to shore up their balance sheet in preparation for the repurchase of the outstanding senior notes scheduled for the 1st quarter of 2010. The company has already repurchased $78 million dollars (at par) of these notes in 2009. There are currently $31 million dollars (at par) still outstanding.
Pinnacle has also increased their cash on hand through earnings as well as net proceeds utilizing a CIT credit facility of $27 million dollars. Pinnacle sold off their ARS portfolio and received options to repurchase that portfolio at anytime over the next three years.
Management has done an outstanding job with the balance sheet and they will have no trouble with the outstanding senior notes.
This company continues to make money and should do so for the next 3 years as long as the price of fuel remains steady and reasonable.
Pinnacle has not yet announced the number of pilots they will hire in 2010. However they have started hiring instructors and we expect up to 120 new pilots will be hired during 2010.
Other regional airlines have indicated they will be hiring soon. Some have already started.
We expect the regional airlines will begin to stockpile low time pilots in 2010 and 2011 in anticipation of the ATP law that could take effect as early as 2013 which will require all pilots flying passengers to have an ATP rating which currently requires 1500 flight hours.
We do not expect Pinnacle or any of the regional airlines to actively recruit and employ higher time pilots going forward if the ATP law goes into effect. The reason for this is because the major airlines will be recruiting just about every qualified ATP rated pilot from the regional airlines in 2012 and 2013 due to the work rule changes as well as the age 65 pilots that will start retiring in 2013.
We feel it is possible there could be a 100% + turnover of pilots at the regional airlines, in 2012 and 2013, if the pilot recruitment is handled improperly in 2010 and 2011.
One defensive hiring method we believe the regional airlines will widely utilize is the hiring of low time pilots in 2010 and 2011. By the time the ATP law would go into effect, the low time pilots will have their ATP and 1500 hours. However they would not have enough hours to be attractive to the majors at that time.
This defensive hiring method would allow the regional airlines, like Pinnacle, to operate through 2013 and 2014 without a tremendous loss of pilots advancing to the majors. However we expect that 2015 and beyond to be problematic for the regional airlines due the the lack of ATP rated pilots that will be available for employment.
It is yet to be determined how new pilots are going to be able to obtain 1500 flight hours and an ATP rating in sufficient quantities to fill the positions available in 2013 and beyond.
We actually have this information. Keep in mind that about 254 students were enrolled at Jet University since it began in May 2006.
In 2007, no "zero to hero pilots" from Jet University were hired by Pinnacle. Pinnacle did hire Jet University Students that came in to Jet University that already had their multi-commercial ratings and then took the three month CRJ First Officer Course.
In 2007, 53 Jet University students were offered training classes at Pinnacle.
Of those 53, 42 actually accepted the Pinnacle training classes.
Of those 42 that accepted the Pinnacle training classes, 33 passed the Pinnacle training class and were hired at Pinnacle.
Two, "zero to hero pilots" from Jet University were offered a training class at Pinnacle.
Nineteen other Jet University Students (that already had their multi-commercial ratings) were offered a training class at Pinnacle.
That means that 21 Jet University Students were offered a training class at Pinnacle.
Of those 21 Students offered the class, 18 accepted the offer.
Of those 18 that accepted the offer, 14 passed the Pinnacle training class and were hired at Pinnacle.
So based upon this information, it appears that a total of 51 Jet University Students were actually hired by Pinnacle from the beginning of Jet University until now.
No Jet University student has been hired since April, 2008.
As we reported on February 03, 2009, Pinnacle will not hire new pilots in 2009. The letter came this week from Pinnacle confirming this. Here is the letter:
We have some news that you probably will not want to hear. We have reliable information that Pinnacle will not be hiring any new pilots in 2009. There simply are not any pilot or first officer positions at Pinnacle this year. They may have to furlough First Officers and downgrade Captains to First Officers depending upon how the economy works out. It may also be difficult to get hired by Pinnacle, as a first officer, in 2010 and beyond.
We do have three Jet University alumni at Pinnacle working in non pilot jobs.
One is a flight attendant that originally flew with Pinnacle, took a leave of absence, came to Jet University and completed the program, went back to Pinnacle and is still a flight attendant because there simply are not any pilot jobs available.
There are two other Jet University graduates working in Pinnacle crew scheduling that took those positions in order to be closer to being employed as first officers when Pinnacle started hiring pilots again.
There is also a rumor going around that Pinnacle may start their own flight training school, later this year, utilizing the full motion CRJ simulators in Memphis. The cost of the full motion CRJ course is expected to be in the ten thousand dollar ($10,000) range.
We would expect that if Pinnacle does start a flight training school, that the Pinnacle students would have first hiring priority over students from Jet University or other flight schools.
Pinnacle has some heavy debt payments coming up in 2010 and they are preparing their balance sheets for those debt payments.
One of Pinnacles major issues is that they are so heavy with CRJ-200's. At the present time they have 128 of these aircraft. (Down from 155) The problem with these CRJ-200's is that they are not fuel efficient and have the highest fuel burn per passenger seat mile in the industry.
American Eagle and Express Jet (Continental Express) have already parked many of their ERJ's (in Arizona and in Louisiana) because of the fuel burn issue with those aircraft. Here are a couple photos of these planes parked in the Arizona desert. You can see the American and Continental logos on the ERJ's parked in Kingman, Arizona.
The CRJ-700 and CRJ-900 are much more fuel efficient per passenger seat mile.
Pinnacle will need to transition out of their CRJ-200's and into the CRJ-700 and CRJ-900 in order to remain competitive and fuel efficient. The CRJ-200's will most likely sent to overseas operators since no domestic airline will pick them up. As these transitions are made, there is a substantial cost to Pinnacle (or other domestic CRJ-200 operators) for each aircraft, removed from the fleet, that must be written down in value. This will amount to millions of dollars per CRJ-200 aircraft removed from permanent domestic service.