Potential Return on Investment of Pinnacle Airlines - Report Example

Investment Analysis Analysis of the Potential Return on Investment of Pinnacle Airlines Table of Contents Table of Contents 2 Abstract 4 Glossary of Terms 4 Introduction 5 Project Description 5 Analysis Methodology 5 Analysis 6 History of American Airlines 6 Causes of Bankruptcy 8 Balance Sheets and Predicted Future Performance 10 Building the Core Earnings Capacity of the Firm 12 New Regional Airline Services Contracts 14 Revenue growth 15 Conclusion 16 References 17 Executive Summary This report provides analysis for the potential return of Pinnacles Airlines corp. The analysis will show whether investing Pinnacle Airline would be a sound decision. Special consideration will be given to the history of the Airline with regard to effect it has had in United States, Mexico and Canada market and its potentiality to continued flourishing in the business market. Like other business firms, Pinnacle Airline has experienced low financial period, but managed to come out it successfully. The latest of such a period is in 2011. In 2011, Pinnacles Airlines reported operating revenue of $1.23 billion, which amount to 20.5 % increase compared to $1.02 billion for the previous year; an increase attributed to an increase in the size of Q400 fleet and the rates increase from the operating contracts. Also, the acquisition of Mesaba Aviation in July 2010 increased the revenue by $136 million in 2011 compared to the revenue in 2010. These acquisitions and the challenges of integrating it into its operations inquired heavy cost to the company. The expenses also increased in 2011 that includes $28.5 million for integration, restructuring and impairment charges and the severance expenses of $2.6 million. There was also an additional expense due to increase in the number of crew and increase in fuel prices. Pinnacle also incurred $3 million when Phil Trenary, the CEO left in March 2011. In addition, the company received impairment charges of $14.7 million: the charge is due to the retirement of Saab planes. As a result, Pinnacle encountered a net loss of $1.4 million in 2011 after getting net income of $12.7 million in 2010. At the end of quarter for December 2012, Pinnacle’s net income per diluted common share for common shareholders was $0.34, compared to $0.17 for quarter end of December 2011. Abstract Pinnacles Airlines filed for bankruptcy on may 2012. This report provides an analysis of the performance of the company since it was incorporated in 1985. It previews its historical and financial analysis in the view of attempting to provide a picture of predicting the future of the company after the bankruptcy. There are several factors that will be considered that include: company’s assets, balance sheet, expert’s opinion cause of bankruptcy and the potential to create revenue. This data will used to determine whether or not investing in the company is a sound decision and provide the time needed to implement the decision. Glossary of Terms NASDAQ: PNCL - Pinnacle Airlines Corp. DL – Delta Airlines CRJ - Canadair Regional Jet Introduction Pinnacle Airlines started its operation in 1985 under the name Republic Express and currently operates 190 aircrafts that flies to towns and cities in North America. The company has tremendous passion in airline business and has successfully thrived well in an extremely competitive industry. This success is as a result of its operation in a safe, cost effective and reliable manner. Pinnacles airlines filed for bankruptcy in 1 April 2012 in order to rework its contracts that include investments, labor agreements and structural organization. The is due to increase in the cost of fuel and economic weakness which has increased the operating expenses, business integration delays, liquidity limitations and problems in combining operations (Kyle and Sakthi, 2012). Project Description The aim of this analysis is to investigate the viability and the potentiality of the investment in Pinnacles Airlines. The company was declared bankrupt in 2012 due to its economic weakness that has brought it to very low level. This analyzes therefore attempts to analyze the possibility of the company’s recovery and the potential investment through stock purchase. It will also give the merits and demerits of such investments. Analysis Methodology The report will focus mainly on the Pinnacle Airlines performance data as well as the performance of other airlines which have gone through the same process for correlation purposes. The report seeks to extrapolate historical performance of the company into item used to predict the future operations, with analysis and opinions of the experts. an overview of the history of the airline will be provide, followed by the root causes of bankruptcy, the analysis of its balance sheet, an estimate of the future performance the conclusion and recommendation based on the data obtained. This may not necessarily predict the future performance, but will provide information for options of investment (Wensveen, 2012). Analysis History of American Airlines Pinnacles airlines was founded in 1985 under the name Express Airlines I, Inc. Roman numerical I was included because of the plans by a parent company Phoenix Airlines Services, inc. had to build a family of feeders. The aim was to establish a regional airline which becomes an airlines’ hub. Express Airlines and Republic Airlines made code sharing in May the same year. Republic Express was connecting passengers to the Memphis hub. The dilemma was that the republic’s fleet of Convair CV-580 with fifty seats and DC-9 with ninety seats could not serve the small community economically. The aircraft had too much capacity for Memphis markets that resulted to 1 or 2 services per day. The lack of frequency did little to stimulate traffic when driving was often a more convenient mode of transportation (Kyle and Sakthi, 2012). Express I made a contract to feed traffic to Republic Airlines and at June 1985 they began flying as Republic Express. Originally, the Airlines had 19-seat British aerospace Jetstream 3100s, that operates between Memphis and three destinations that include: Mississippi, Greenville and Columbus, and Monroe. They made a second contract on December 1985 and therefore open operation at Republic Airlines at Minneapolis St. Paul. By the end of its first year of operation, Republican Express had 20 Jetstream 3100s and 7 Saab 340s operating in 32 markets. Airlines’ fleet had increased to 27 planes at June 1986. In October 1986, northwest Airlines acquired Republic Airlines following legal ratification and approval by the respective companies. The airline encountered its first disaster on December 1, 1993, after one turboprop crashed and killed 18 people. Express I was therefore forced to cut its cost extensively in the recession of early 1990s, similar to other Airlines. In 1995, the airlines carried more than 1.5 million passengers and attained revenue of $150 million, emerging as the second top private regional airlines in US (Sandra, 2001). Year Revenue 1995 $150 million 2004 $635.4 million Express II company was created from the operations done in Minneapolis, but was soon combined with Express I. In March 1994, Express I and Northwest Airlines developed more on their relationship. Northwest began connecting flights at Memphis. In October the same year, Express I agreed to sell all its seats to Northwest Airlines for a fixed price, and thereby escaping marketing considerations and fare wars. Northwest company worked on booking and scheduling and Express I leased all its planes from Northwest. Express I was sold to Northwest in April 1997 at a price of $33 million. The operations in Minneapolis-St. Paul were transferred to Mesaba Airlines and the headquarters from Atlanta to Memphis in August 1997. By 1999, Express I had about 1,200 employees and flew more than one million passengers yearly with a network that connects 36 destinations in eleven states (Kyle and Sakthi, 2012). The Express I began flight training center with $23million in Memphis in March 2000. In the following month, the airline bought the first 50-seat Canadair Regional Jet (CRJ). The business grew and the flights for Northwest increased at Memphis by 25%. The expansion program of the facilities also increased. Within a year the employees increased to 1300, and a second hub was opened in Detroit as the feeders were organized basing on the markets. By then, Express I was operating 17 CRJS and 26 Saab 340s in 56 destinations. Following a terrorist attacks on the united states on 2001, 650 employees were laid off. By November 2001 all Saabs were abandoned and only jet aircrafts were operated (Kyle and Sakthi, 2012). In May 2002, Express I was renamed Pinnacles Airlines, Inc. Northwest sold shares on initial public offering (IPO) in 2003, and remained with 11 % and 2 boards seats. In 2004, the revenue increased to $635.4 million with earnings of 16 % amounting to $40.7 million. By the end of the year, the company had employed 1,100 pilots. It was growing fast with 60 regional airlines in US. Twenty years after it was incorporated, in 2005, the company was ranked as the world’s fastest growing airline and 8th regionally by Airline Business News. It had 3,400 personnel and operating 134 jets to 100 destinations (Sandra, 2001). At the end of 2011, the company had 7,797 employees, which includes: 2,831 pilots, 1,777 flight attendants personnel, 1,136 for ground operations. In addition, the company had 491 as support and management personnel and 378 employees as crew resource employees. Pinnacle Airline Corp. own four subsidiaries that include: Pinnacle East Coast Operations Inc., Colgan Air Inc., Mesaba Aviation Inc., and Pinnacles Airlines Inc. assets and liabilities for pinnacle is above $billion (Kyle and Sakthi, 2012). Causes of Bankruptcy In 2011, Pinnacles Airlines reported operating revenue of $1.23 billion, which amount to 20.5 % increase compared to the previous year’s $1.02 billion. This increase is attributed to an increase in the size of Q400 fleet and the rates increase from the operating contracts. The acquisition of Mesaba Aviation in July 2010 increased the revenue by $136 million in 2011 compared to the revenue in 2010 (Sandra, 2001). This acquisition, together with the challenges of integrating it into its operations inquired heavy cost to the company. The expenses also increased in 2011 that includes $28.5 million for integration, restructuring and impairment charges and the severance expenses of $2.6 million. There was also an additional expense due to increase in the number of crew and increase in fuel prices. Pinnacle also incurred $3 million when Phil Trenary, the CEO left in March 2011. In addition, the company received impairment charges of $14.7 million: the charge is due to the retirement of Saab planes. Pinnacle encountered a net loss of $1.4 million in 2011 after getting net income of $12.7 million in 2010 (Kyle and Sakthi, 2012). At the end of 2011, Delta Airlines Inc. had 74% of Pinnacle’s revenue; United Airlines Inc. had financed 22% while US Airways accounted for 4%. When it was filling for bankruptcy, Pinnacles described the business as a race to the bottom as the bid kept going down. US Airlines contract with Pinnacle was almost ending and pinnacle was seeking for wage reduction and other recession from labor union (Sandra, 2001). Balance Sheets and Predicted Future Performance At the end of quarter for December 2012, Pinnacle’s net income per diluted common share for common shareholders was $0.34, compared to $0.17 for quarter end of December 2011. The fourth quarter of 2012 results include a charge of $2.1 million for Federal Home Loan Bank restructuring offset gains for securities of $2.0 million (Sandra, 2001). The financial results for December 2012 include $1.7 million as an impact of accretion accelerated from the remaining stock discount related to the second quarter redemption of the outstanding shares remaining for TARP stock, and if it is excluded, it would results to a net income per diluted share of $1.15 for 2012. If the income tax of $22.5 million was excluded, as a result of 2011 valuation allowance for differed tax assets, net income for December 2011 would be $0.43 per diluted share. Therefore, if the impact caused by both the tax benefit for valuation allowance release and the accelerated accretion of the preferred stock discount was excluded, the net income per diluted share for the year end 2012 was about 167.4 % compared to the same period duration of 2011 (Kyle and Sakthi, 2012). The graph shows the historical performance of Pinnacle Airlines from 2005 to 2010 compared to other airlines. In the fourth quarter of 2012, Pinnacle identified nonperforming loan of $5.9 million compared to $4.6 million in the 3rd quarter of 2012, including $22.9 million as nonperforming asset resolutions from the third quarter in the same year amounting to $12.5 million. Through bankruptcy settlement, the company recovered a loan of $5.6 million that were charged-off in 2009. Pinnacle also disposed troubled assets that include a massive sale of about $9 million in nonperforming assets (Kyle and Sakthi, 2012). The following table gives a summary of the activity of nonperforming asset as well as troubled debt for the 4th quarter of 2012. Restructured trouble dept Balances at Sept, 30, 2012 - $ Expenses - $ Foreclosure - $ Inflows - $ Balances at Dec, 31, 2012 - $ Mortgage – real estate 16,631 4,103 - 7,736 20,264 Mortgage – consumer real estate 6,031 208 - 488 6,311 Land development 372 302 - - 70 Industrial 935 249 - - 686 Consumer $ other 121 2 - - 119 Totals 24,090 4,864 - 8,224 27,450 Nonperforming loans Mortgage – real estate 14,983 8,447 - 2,754 9,290 Mortgage – consumer real estate 10,548 5,642 333 1,333 5,906 Land development 5,857 1,467 28 147 4,509 Industrial 4,896 3,329 - 1,471 3,038 Consumer $ other 287 168 202 163 80 Totals 36,571 19,053 563 5,868 22,823 Other real estate Residential development and construction 7,680 2,243 28 - 5,465 Commercial development and construction 9,931 615 - - 9,316 Other 4,206 942 535 - 3,799 Totals 21,817 3,800 563 - 18,580 Total (Overall) 82,478 27,717 - 14,092 68,853 The 2012 was dramatic for the improvement of Pinnacle. Nonperforming assets decrease in 2012 compared to 2011, when the charge-off was merely 0.29 %. The company’s organic growth model momentum increased as it experienced a net loan growth of 12.8% by December 2012 and a growth of 38.7 % in non-interest demand deposits. The company also redeemed the rest of the preferred shares given in conjunction with TARP program with no common share dilution added. It is clear that their rehabilitation of balance sheet has been completed; it is possible that the company will increase its profit prospects for the year 2013 (Sandra, 2001). Building the Core Earnings Capacity of the Firm In the fourth quarter of 2012, the average balances of noninterest deposit increased by 22.4% to $978.4 million from the third quarter and increased by 38.7% from the same quarter the previous year. Loans increase in December 2012 to $3.712 billion compared to $187.0 million less for September and from $420.8 million in December 2011, a growth of 12.8%. Pinnacle has grown in the market after its expansion to Knoxville in mid of 2007. This influence the increase of loan due to Knoxville from $551.1 million in December 2011 to $594.2 million in September 2012 and $641.6 million at the end of the year 2012. Revenues increased at the end of December 2012 to $55.4 million, compared to $49 million fro the same quarter in 2011. If the securities gains were excluded, the revenues for December 2012 were $53.4 million, compared to $51.4 million for September the same year and $48.9 million in the same quarter the previous year (Kyle and Sakthi, 2012) The efficiency ratio of the firm was 58.8% at the fourth quarter of 2012. New Regional Airline Services Contracts CRJ900 –brought into service in 2009, is considered the best in economics of any jet aircraft. It has low cost of operation. It also burns less fuel compared to other jet aircraft, friendly to environment in terms of low external emissions and noise. The new cabin is appealing and offers greater comfort. Continental Airlines - Q400 was brought into service on June 2008. The number was increased to 30. Pinnacle Airlines, Inc. has recorded a strong growth over the years. This is shown in the graph below. Revenue growth In the last quarter of 2012, the company obtained a net interest of $42.2 million, compared to the third quarter of the same year with $40.9 million and $39.3 million for the 4th quarter of 2011. The interest was the highest since the firm was founded. Noninterest income for the 4th quarter of 2012 was $13.1 million, compared to $10.4 for the 3rd quarter and $9.7 million for the last quarter of the previous year. Gains obtained from the sale of mortgage loans were $1.77 million during the 4th quarter of 2012, compared to $1.46 million for the fourth quarter of 2011. $1.98 million was obtained form the 3rd quarter of 2012. Pinnacle Airlines are efficient in their both the operations and regulatory processes. The graph below shows s the trends of safety over the year. Keys areas of success include: Experienced team with good aircraft induction experience Organized and detailed plans developed together with the FAA Coordination of major carriers that include FAA Processes of approval for Q400 and CRJ900s Conclusion When it was filling for bankruptcy, Pinnacles described the business as a race to the bottom as the bid kept going down. Bankruptcy itself is irregular, but the company had no intention of ending the business soon and plans has been underway to come out of bankruptcy. The company has rich history full of ups and down, and therefore the company is armed with experience. The acquisition of new flights for Q400 fleet and Mesaba Aviation has increased its revenue. The challenge was their integration into its operations, which inquired heavy cost to the company. This increase in its capacity has shown that it going to emerge as major aviation industry in North America aviation. Although speculation of the future of the company may not be accurate, it is most likely the company will come out of bankruptcy stronger than before. Therefore, an investment in Pinnacle’s stock has a potential to offer significant earnings. I therefore recommend that a reasonable investment be made in this company and significant returns expected in the next two years. References Kyle P. and Sakthi P., (2012). Pinnacle Airlines files for bankruptcy in U.S. obtained from http://www.reuters.com/article/2012/04/02/us-pinnacleairlines-idUSBRE8310P620120402 United States. National Transportation, (2011). Crash of Pinnacle Airlines Flight 3701, Bombardier Cl-600-2b19, N8396a, Jefferson City, Missouri, October 14 2004, General Books Wensveen J.G., (2012). Air Transportation: A Management Perspective, Ashgate Publishing, Ltd. 1689 Nonconnah Boulevard, Suite 111, Memphis, Tennessee 38132, Pinnacle Airlines Corp. from http://www.enotes.com/pinnacle-airlines-corp-reference/pinnacle-airlines-corp Sandra A., (2001). In Memphis, But Not Blue, Air Transport World, February, pp. 82+. Aircraft accident report United States. National Transportation Safety Board, 2007. Aircraft accident report: crash of Pinnacle Airlines flight 3701, Bombardier CL-600-2B19, N8396A, Jefferson City, Missouri, October 14, 2004, National Transportation Safety Board. Read More