On April 1, 2012, Pinnacle Airlines Corp. (“Pinnacle”) and four of its subsidiaries, filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the Southern District of New York. Based in Memphis, Tennessee, Pinnacle is a regional airline carrier that provides air service to legacy carries such as Delta, United and US Airways. According to the Declaration of Pinnacle’s Chief Operating Officer (the “Declaration”), Pinnacle provides over 1,300 daily flights from cities in the United States, Canada and Mexico. Decl. at *6.
Pinnacle’s Business Model
Pinnacle provides regional air services using a fleet of jet and turboprop aircraft. The company uses two primary types of agreements with its larger airline customers – a capacity purchase agreement or a revenue pro-rate agreement. With a capacity purchase agreement, Pinnacle charges the larger carriers a fixed fee for flights regardless of the number of passengers who are booked on the flight. Under this type of agreement, the larger, “mainline” carrier pays Pinnacle’s fuel, maintenance and ground costs. Historically, the capacity purchase agreements have been profitable for Pinnacle. Decl. at *3
Under a revenue pro-rate agreement, Pinnacle’s compensation from the mainland carriers varies based on ticket sales. Equally important, under these agreements Pinnacle is required to pay fuel and other costs. Unlike the capacity purchase agreements, the pro-rate agreements create greater volatility in Pinnacle’s costs and revenue streams. Decl. at *3.
Pinnacle employs over 7,500 people on either a full or part-time basis. Approximately 70% of the company’s employees are represented by unions. Pinnacle’s union employees generally fall in to one of four categories – pilots, flight attendants, ground operations and dispatchers. Decl. at *4.
Events Leading to Bankruptcy
Pinnacle attributes its bankruptcy filing to factors in the airline industry in general, as well as developments in its business in particular. Over the last ten years, the airline industry has been subject to increased security and fuel costs, while at the same time suffering from a decrease in demand for air travel due to the recession. According to Pinnacle, all “legacy” airline carriers have filed for chapter 11 bankruptcy protection. Decl. at *5.
Pinnacle experienced significant losses in 2008 followed by improved performance in 2009. In 2010, the company acquired Mesaba Aviation, Inc.. Pinnacle’s consolidation of Mesaba in to its operations proved to take longer, and cost more, than originally expected. Going in to bankruptcy, Mesaba is still not fully integrated with Pinnacle and is not expected to be fully integrated until 2013. Decl. at *8.
Objectives in Bankruptcy
In its Declaration, Pinnacle lays out four parts of a business plan that the company hopes will allow it to emerge from bankruptcy. First, the company has reached an agreement with United whereby Pinnacle will wind down its regional air services for this carrier. Similarly, Pinnacle is a party to various “essential air service agreements” with the U.S. Department of Transportation. According to Pinnacle, the company intends to terminate these contracts this year. Decl. at *16. Delta Airlines has agreed to provide Pinnacle with over $74 million in debtor in possession financing. As part of this agreement, Pinnacle is required to produce an “acceptable long-term business plan” and achieve certain cost savings. Id. Finally, Pinnacle intends to seek wage reductions from its labor unions. Decl. at *17.
Pinnacle is represented in this bankruptcy proceeding by the law firm Davis Polk & Wardwell LLP.