MESABA:Avro Article Wall Street Jornal
Feeders Facing Dish of Northwest's Pain
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By Ross Snel
TheStreet.com Staff Reporter
9/21/2005 7:18 AM EDT
Northwest Airlines' stock isn't the only airline equity getting hammered by the carrier's descent into bankruptcy.
Two companies operating regional feeder flights under contracts with Northwest -- Pinnacle Airlines and Mesaba Airlines' parent MAIR Holdings -- have seen their stocks fall about 17% and 25%, respectively, over the past week and a half. Investors are worried about payments Northwest owes the two small airlines, as well as the fate of their partnerships with the nation's No. 4 carrier.
The situations highlight the risks regional carriers face as their legacy partners undergo wrenching restructurings necessitated by record-high fuel costs and competition from nimbler, low-cost discounters.
Last week, Northwest skipped an $18.7 million payment to Mesaba and a $22 million payment to Pinnacle. Northwest's filing last Wednesday for Chapter 11 bankruptcy protection gives it relief from creditors, creating uncertainty about when and if it will make those payments. Both regional carriers also have expressed concern about other big payments due toward the end of the month.
Because Pinnacle's only customer is Northwest, it warned in a regulatory filing Friday that the interruption in its cash flow will be material. Helane Becker, airline analyst at the Benchmark Co., a New York-based brokerage firm, expects Pinnacle shares to remain under pressure because of the company's now-murky outlook. Her firm does no investment banking.
Meanwhile, Northwest is seeking to use the bankruptcy process to reject leases on 35 British Aerospace Avro regional jets it subleases to Mesaba. Although analysts say the move is hardly surprising -- the planes are starting to get long in the tooth and are less efficient than newer models -- it does raise uncertainty for Mesaba, and Becker advises investors to sell the stock.
What's more, analysts expect Northwest to imitate other bankrupt legacy carriers US Airways and United Airlines' parent UAL , which used Chapter 11 to extract contract concessions from regional partners.
Feeders Facing Dish of Northwest's Pain
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That could mean less lucrative payments to the two regional carriers going forward. Northwest reimburses Mesaba based on each hour it flies the Avro planes and each seat it flies one mile in its Saab 340 jet-props. Pinnacle earns an operating margin of between 9% and 11%, but Becker notes Northwest may try to lower that to the midsingle digits.
Northwest might even shop around its regional business to other regional operators such as Mesa Air Group (MESA:Nasdaq - commentary - research - Cramer's Take) and Republic Airways (RJET:Nasdaq - commentary - research - Cramer's Take), giving it bargaining leverage over Mesaba and Pinnacle, says Douglas Abbey, a partner with Velocity Group, a Washington-based consulting and market research firm. Still, Northwest would likely give Mesaba and Pinnacle first dibs on new contract offers, he adds.
In a conference call last week, Northwest's CEO, Doug Steenland, said that while he anticipates having discussions with Mesaba and Pinnacle carriers over issues such as fleet changes, the "nature" of the regional carrier relationships and the services they provide will remain unchanged for the foreseeable future.
Analysts offer different forecasts for what might happen to the 35 Avro jets Mesaba flies. Roger King, airline analyst at CreditSights, an independent New York research firm, says one optimistic possibility is that Northwest renegotiates the lease rates lower and passes the savings onto Mesaba.
Another scenario, according to Becker, is that Northwest cancels its leases on the planes, leaving Mesaba in a position where it must re-lease the planes from their original owners, a prospect that could prove expensive.
A hearing on Northwest's request to reject the leases is set for Oct. 7.
As Northwest seeks to benefit from the flexibility of Chapter 11, it also may try to embrace a broader trend sweeping the airline industry: the conversion of some mainline -- or large-jet -- flying to next-generation regional jets seating between 70 and 110 passengers.
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Feeders Facing Dish of Northwest's Pain
http://www.thestreet.com/tsc/c.gif
By Ross Snel
TheStreet.com Staff Reporter
9/21/2005 7:18 AM EDT
Northwest Airlines' stock isn't the only airline equity getting hammered by the carrier's descent into bankruptcy.
Two companies operating regional feeder flights under contracts with Northwest -- Pinnacle Airlines and Mesaba Airlines' parent MAIR Holdings -- have seen their stocks fall about 17% and 25%, respectively, over the past week and a half. Investors are worried about payments Northwest owes the two small airlines, as well as the fate of their partnerships with the nation's No. 4 carrier.
The situations highlight the risks regional carriers face as their legacy partners undergo wrenching restructurings necessitated by record-high fuel costs and competition from nimbler, low-cost discounters.
Last week, Northwest skipped an $18.7 million payment to Mesaba and a $22 million payment to Pinnacle. Northwest's filing last Wednesday for Chapter 11 bankruptcy protection gives it relief from creditors, creating uncertainty about when and if it will make those payments. Both regional carriers also have expressed concern about other big payments due toward the end of the month.
Because Pinnacle's only customer is Northwest, it warned in a regulatory filing Friday that the interruption in its cash flow will be material. Helane Becker, airline analyst at the Benchmark Co., a New York-based brokerage firm, expects Pinnacle shares to remain under pressure because of the company's now-murky outlook. Her firm does no investment banking.
Meanwhile, Northwest is seeking to use the bankruptcy process to reject leases on 35 British Aerospace Avro regional jets it subleases to Mesaba. Although analysts say the move is hardly surprising -- the planes are starting to get long in the tooth and are less efficient than newer models -- it does raise uncertainty for Mesaba, and Becker advises investors to sell the stock.
What's more, analysts expect Northwest to imitate other bankrupt legacy carriers US Airways and United Airlines' parent UAL , which used Chapter 11 to extract contract concessions from regional partners.
Feeders Facing Dish of Northwest's Pain
Page 2
That could mean less lucrative payments to the two regional carriers going forward. Northwest reimburses Mesaba based on each hour it flies the Avro planes and each seat it flies one mile in its Saab 340 jet-props. Pinnacle earns an operating margin of between 9% and 11%, but Becker notes Northwest may try to lower that to the midsingle digits.
Northwest might even shop around its regional business to other regional operators such as Mesa Air Group (MESA:Nasdaq - commentary - research - Cramer's Take) and Republic Airways (RJET:Nasdaq - commentary - research - Cramer's Take), giving it bargaining leverage over Mesaba and Pinnacle, says Douglas Abbey, a partner with Velocity Group, a Washington-based consulting and market research firm. Still, Northwest would likely give Mesaba and Pinnacle first dibs on new contract offers, he adds.
In a conference call last week, Northwest's CEO, Doug Steenland, said that while he anticipates having discussions with Mesaba and Pinnacle carriers over issues such as fleet changes, the "nature" of the regional carrier relationships and the services they provide will remain unchanged for the foreseeable future.
Analysts offer different forecasts for what might happen to the 35 Avro jets Mesaba flies. Roger King, airline analyst at CreditSights, an independent New York research firm, says one optimistic possibility is that Northwest renegotiates the lease rates lower and passes the savings onto Mesaba.
Another scenario, according to Becker, is that Northwest cancels its leases on the planes, leaving Mesaba in a position where it must re-lease the planes from their original owners, a prospect that could prove expensive.
A hearing on Northwest's request to reject the leases is set for Oct. 7.
As Northwest seeks to benefit from the flexibility of Chapter 11, it also may try to embrace a broader trend sweeping the airline industry: the conversion of some mainline -- or large-jet -- flying to next-generation regional jets seating between 70 and 110 passengers.
Go to NEXT PAGE
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