April 3, 2012 Pinnacle Airlines Files for CH 11 protection
Pinnacle Airlines today filled for bankruptcy protection and reorganization under Ch. 11. See their press release here.
This bankruptcy is different from most other airline bankruptcies because of the way Pinnacle operates. Pinnacle is a regional operator, in short they operate regional service for other carriers. Pinnacle operates flights for US, DL, and UA.
These flights operate under a “capacity purchase” agreement. Delta pays Pinnacle X number of dollars to fly route aaa-bbb on XYZ plane type, once a day. This is good for Delta as they know how much the flight is going to cost them months in advance. It’s good for Pinnacle, because they know how much revenue is generated so they build a cost structure to meet it. In the event Delta doesn’t sell any tickets Pinnacle still gets paid. In the event of a huge fuel spike, Delta’s costs are the same.
Pinnacle has stated they intend to repudiate some of these capacity purchase agreements. This is interesting. First, I am not a bankruptcy nor contracts expert. Second, I do not have access to said capacity purchase agreements. In fact Pinnacle has petitioned the court to file those agreements under seal, so we the public can not view them. But to get back to the original point. Most Airline bankruptcy’s involve labor agreements and aircraft leases. A capacity purchase agreement is neither, it is a straight up sales contract. Court’s don’t like companies breaching those contracts. I am not sure how the court here will handle them.
Let’s say the contracts are invalidated.Delta would have two options find a new supplier, operate service themselves, or broker a new deal. I am going to go with option c here, broker a new deal. Delta (or UA or US) doesn’t want to operate the service themselves and it is doubtful that there are other carriers out there with excess capacity to move into the market. UA is getting express jet to pull ERJ-135s out of the desert as a stop gap measure, but there are only so many spare planes around.
Some have postulated that another carrier could take over capacity and the route. My question is why? Delta would still have to broker a new deal with the carrier. The new carrier would need more pilots and possibly a new set of regs, simulators, and other materials if it is new type for the carrier. It would be more expensive I think to do that then issue a new contract with Pinnacle. However, this has its own problems.
When did the US bankruptcy system become a way to change basic contracts. At what does the law say no, one can not use bankruptcy to avoid contractual obligations. I think the debtor should be required to make some showing that they are not abusing the system.