Delta wants to jettison Pinnacle's contract

With oil prices soaring, Delta Air Lines intends to terminate its regional flying contract with Pinnacle Airlines, its second attempt to exit long-term contracts with regional carriers in recent weeks.

Delta, which has been using Pinnacle for just seven months, said the Memphis-based carrier had many late flights and had failed to meet minimum performance standards. It wants to sever the relationship at the end of July.

The move is a major setback for Pinnacle, which long has wanted to diversify its flying beyond Northwest Airlines. Pinnacle now flies 129 jets supplied by Northwest, and it operates out of Northwest's three domestic hubs, including the Twin Cities. Last year, Pinnacle arranged its own financing to acquire 16 large regional jets for the contract with Delta.

It's the second time in recent weeks that Atlanta-based Delta, which is in a bid to acquire Northwest by year-end, has attempted to pull out of a regional flying contract.

A court has issued a preliminary injunction that temporarily bars Delta from terminating a flying contract with Freedom Airlines, but Delta spokeswoman Betsy Talton said the carrier plans to appeal the decision.

In March, Delta said that it would reduce its domestic flying by 10 percent later this year.

In late April, Delta said it planned to reduce its mainline fleet by 15 to 20 planes, and cut regional operations by about 70 planes.

It's unclear precisely what flights Delta will remove from its domestic schedule. Another regional carrier is expected to pick up Delta routes now operated by Pinnacle, Talton said.

"Delta is trying to pull out the stops to cut costs," Jim Corridore, an airline equities analyst for Standard & Poor's, said Tuesday. "I think Delta is going over every contract it has with its regional partners."

Eight regional carriers now operate flights for Delta, while Northwest has three regional partners. In addition to Pinnacle, Northwest's regional flying is done by its two subsidiaries, Mesaba and Compass.

In a statement Tuesday, Pinnacle CEO Phil Trenary said the carrier would "pursue appropriate remedies" to try to prevent Delta from ending its relationship with Pinnacle. He added that in the early months Delta's flight schedules for Pinnacle were "unrealistic" and that recent schedule changes by Delta "allowed immediate improvement in our on-time performance."

But it's unclear whether Pinnacle will ultimately seek a judge's help to prevent Delta from divorcing Pinnacle.

"The ideal thing to do would be to talk it out and find a solution," Pinnacle spokesman Joe Williams said in a Tuesday afternoon interview.

Jamie Baker, a J.P. Morgan Chase analyst, assigned a 20 percent probability to a "kiss and make up" scenario between Delta and Pinnacle. "Reconciliation with Delta may be achieved in exchange for favors down the road, particularly after Delta inherits the existing Northwest-Pinnacle relationship," Baker wrote in a Tuesday research report.

Still, Delta's management team had extensive knowledge of Pinnacle's operations when it decided to sever ties. Delta CEO Richard Anderson was Northwest's top executive from 2001 to 2004 when Pinnacle and Mesaba were competing for regional flying at Northwest.

Last November, Anderson hired Steve Gorman, Pinnacle's board chairman for five years and a former Northwest executive, to serve as Delta's executive vice president of operations.

Pinnacle has been flying 50-seat regional jets for Northwest. But, at today's high fuel prices, Corridore and many other industry analysts question whether carriers can make money by operating 50-seaters. Some observers were surprised Tuesday to learn that Delta wanted to back away from its operations with Pinnacle, which has been flying 76-seat aircraft for Delta that are considered more cost-effective.

Scott Erickson, chairman of the Pinnacle pilots union, said that it is "highly unfortunate" that Delta decided to take this "drastic step in realigning their fleet." Delta has moved to end the relationship after only nine of the 16 Bombardier jets have arrived at Pinnacle.

"I don't think we really got a fair chance, a fair shake at proving our worth," Erickson said.

Northwest previously owned Pinnacle, but spun off the carrier in 2003. Pinnacle spent nearly $33 million in late 2007 to buy Northwest's remaining stake of common stock. In January, Pinnacle bought Northwest's preferred share in Pinnacle for $20 million.

Liz Fedor • 612-673-7709

SAFETY HEARING

Pilot fatigue was a factor in a 2007 Pinnacle crash, investigators said. D2