Pinnacle, Northwest extend partnership through 2017; Pinnacle gets $377.5 claim against Northwest

By Caroline Salls

Pittsburgh, Dec. 22 - Pinnacle Airlines Corp. has reached an amended and restated airline services agreement with Northwest Airlines, Inc. under which Pinnacle will remain a long-term partner of Northwest through at least 2017, according to a Pinnacle news release.

In addition, the parties agreed on some corporate governance issues under which Pinnacle will receive a $377.5 million unsecured claim against Northwest in settlement of all claims that Pinnacle may have against Northwest.

The agreements are expected to take effect on Jan. 1.

The amended airline services agreement removes all restrictions preventing Pinnacle from using its wholly owned subsidiary, Pinnacle Airlines, Inc., to provide regional airline services to other major airlines, with the exception of operating flights into or out of Northwest's hub cities of Minneapolis/St. Paul, Detroit and Memphis.

Pinnacle may also operate aircraft with seating capacities of 76 seats or other sizes that do not cause Northwest to violate its collective bargaining agreement with its pilots union.

Further, the existing provision that requires Pinnacle to allocate its overhead between multiple operations, thus reducing the amount Northwest pays to Pinnacle for overhead, will not be applicable until Pinnacle has added at least 24 aircraft with another partner.

The agreement also allows Pinnacle to keep its existing fleet of 124 CRJ-200 aircraft.

Pinnacle fleet changes

Pinnacle's fleet size will further be adjusted under the following conditions:

• 17 CRJ-200/440 aircraft will be delivered to Pinnacle during 2007. Northwest will commit to either a three- or 10-year term for these aircraft with Pinnacle before March 31;

• To the extent that Pinnacle operates regional jets on behalf of another major airline, Northwest will have limited rights to remove some aircraft from Pinnacle's fleet. Northwest may remove one aircraft for every two aircraft that Pinnacle operates for another partner above an initial base of 20 regional jets. Northwest may remove no more than 20 aircraft subject to this option and no more than five aircraft in any 12-month period;

• Northwest may exchange CRJ-200 aircraft in Pinnacle's fleet for aircraft configured with 70 or more seats on a one-for-one basis and on similar economic terms and conditions; and

• If Northwest enters into any merger or acquisition agreement with another major air carrier before completing its bankruptcy, then Northwest can remove the 17 aircraft to be added during 2007 plus an additional 24 aircraft from Pinnacle's fleet.

Northwest will have the option to renew the agreement beyond 2017 for successive five-year terms.

Pinnacle and Northwest will enter into a share purchase agreement requiring Pinnacle to redeem its class A preferred share held by Northwest for a price of $20 million on Jan. 2, 2008.

If Northwest enters into any merger or acquisition agreement with another major air carrier as part of its reorganization proceedings and elects to remove any aircraft from Pinnacle, then the redemption price of the class A preferred share will be reduced to a nominal amount.

The class A preferred share entitles Northwest to appoint two members of Pinnacle's board of directors and also gives Northwest consent rights for changes to its articles of incorporation and bylaws.

In addition, the class A preferred share provides consent rights to merger or acquisition transactions involving another airline with annual revenues greater than $500 million.

Corporate governance agreement

In connection with the corporate governance issue agreement, the allowed unsecured claim will be reduced by $13.6 million if Northwest commits the 17 aircraft added to Pinnacle for a period of three years, and by $42.5 million if the 17 aircraft are committed for a period of 10 years.

Pinnacle will retain the right to assert an additional claim if Northwest enters into a merger or acquisition agreement with another major airline as part of its plan of reorganization and elects to remove up to 24 aircraft above the 17 aircraft delivered in 2007; however, that claim would be reduced by the $20 million decrease in Pinnacle's purchase price paid to Northwest for the series A preferred shares.

The amended airline services agreement and related aircraft subleases provide that Northwest will retain the $24.6 million it is holding as a security deposit for the existing fleet of 124 aircraft and the 17 aircraft to be added during 2007.

Pinnacle will pay a security deposit equal to one month's rent for any aircraft that is subleased from Northwest and operated under the amended agreement above this base of 141 aircraft.

Pinnacle's current obligation to pay a second month's deposit on its existing fleet under certain circumstances will be removed from the aircraft subleases.

Economic impact

In addition, Northwest will provide jet fuel to Pinnacle at no charge to Pinnacle, and fuel will be removed as a revenue and expense item from Pinnacle's statement of operations.

As fuel will no longer be an expense item, Pinnacle will no longer receive its target margin on fuel expense.

The amount that Pinnacle pays to sublease aircraft from Northwest will be reduced under the amended agreement and related aircraft subleases, and Pinnacle will continue to receive its target margin on the reduced aircraft rent.

Pinnacle's target margin rate will also be reduced to 8% from 10%.

The reset of the target margin to industry average in 2008 has also been eliminated. These new rates will remain in effect until 2013, when the rates will be reset.

Pinnacle Airlines is a Memphis-based regional feeder to Northwest Airlines Corp. that operates under the name Northwest Airlink.

Northwest, an Eagan, Minn.-based airline, filed for bankruptcy on Sept. 14, 2005 in the U.S. Bankruptcy Court for the Southern District of New York. Its Chapter 11 case number is 05-17930.

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