Remember Pinnacle Airlines? Delta Does

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Editor's Note: Delta acquired Comair in the late 1990's, not 1980's. This version has been corrected and Motley Fool apologizes for the error.

After declaring bankruptcy due to a sluggish economy and rising debt levels, Pinnacle Airlines appears to be the next course in Delta Air Lines (NYSE: DAL) acquisition feast. In an industry with a major consolidation trend, Delta has made its mark acquiring Northwest Airlines in 2008 and a 49 percent stake in Virgin Atlantic in 2012. But Pinnacle is different from the major carriers Delta has been involving itself in. Pinnacle is a regional airline and it sets up a new line of business for Delta.

Return of Comair?

Long time followers of Delta may be familiar with the airline's previous efforts in the regional business. In the late 1990's Delta took control of Delta operating airline Comair for approximately $2 billion. The airline was headquartered at Delta's Cincinnati hub and operated a fleet of Bombardier (TSX: BBD.B) CRJs, similar to the makeup of the Pinnacle fleet.

However, by mid 2012 Delta shuttered its regional subsidiary and Comair ceased to exist. Many of Delta's regional flights began to be operated by bankrupt Pinnacle, whom Delta was providing financing for, and by SkyWest (NASDAQ: SKYW), a far healthier regional carrier. But action by Pinnacle forced Delta's hand and would lead to Delta once again operating a regional airline.

No Monopoly for SkyWest

While major airlines have been merging to cut costs and reduce competition, they are still very much in favor of competition among those that they purchase services from. When it comes to regional flights, major airlines often outsource these shorter flights to regional carriers and pay them a fee for service.

While there are numerous smaller regional airlines, SkyWest is taking a position as a major player among regionals. Operating regional flights across the U.S., SkyWest flies not only for Delta, but also for United Continental, US Airways (NYSE: LCC), and more recently for bankrupt American Airlines. With SkyWest edging its way into American's operations and the airline already flying for US Airways, SkyWest looks like it could have a major role to play in a merged US Airways American Airlines combination.

But airlines like competition, just not when it is amongst themselves. To prevent SkyWest from becoming the sole operator on more routes, Delta decided saving Pinnacle from possible liquidation would be a strategically smart move. Now with Delta highly likely to acquire Pinnacle, it remains to be seen exactly what the carrier's plans are for its soon to be regional subsidiary.

Delta Keeps Flying

Unlike previous airline mergers which involved equity purchases or integration with another major airline, Delta's expected acquisition of Pinnacle Airlines involves taking on a regional partner. Delta has had close relations with Pinnacle operating flights with the airline, financing it in bankruptcy, and financing its ill-fated acquisition of Mesba Aviation just a few years ago.

With Pinnacle in its hands, Delta will need to decide what to do with the carrier. It has not yet been decided what to do with Pinnacle's Memphis headquarters. Some suggest they may be moved to Minneapolis but this remains uncertain and would largely center around costs. But if Delta can successfully manage Pinnacle it may become yet another jewel on Delta's growing crown. 


TulipSpeculator1 owns shares of Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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