FORM 10-Q  UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549  [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.  For the quarterly period ended September 30, 2007  [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.  For the transition period from ___________________to____________________  Commission file number 1-13934  MIDWEST AIR GROUP, INC. (Exact name of registrant as specified in its charter)  Wisconsin39-1828757(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)6744 South Howell Avenue
Oak Creek, Wisconsin 53154
(Address of principal executive offices)
(Zip code)414-570-4000
(Registrants telephone number, including area code)  Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YesXNo  Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):  Large accelerated filerAccelerated filerXNon-accelerated filer  Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YesNoX  As of October 15, 2007 there were 25,176,900 shares of common stock outstanding.     MIDWEST AIR GROUP, INC. FORM 10-Q For the period ended September 30, 2007  INDEX  PagePART I  FINANCIAL INFORMATIONItem 1.Financial Statements (Unaudited)Condensed Consolidated Statements of Operations2Condensed Consolidated Balance Sheets3Condensed Consolidated Statements of Cash Flows4Notes to Condensed Consolidated Financial Statements5Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations15Item 3.Quantitative and Qualitative Disclosures About Market Risk32Item 4.Controls and Procedures32PART II  OTHER INFORMATIONItem 1.Legal Proceedings33Item 6.Exhibits34SIGNATURES35  1  MIDWEST AIR GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Three Months EndedNine Months EndedSeptember 30,September 30,2007200620072006Operating revenues:Passenger service$183,317$151,465$501,915$441,209Cargo1,9472,3637,3996,322Other17,37714,73153,62448,648Total operating revenues202,641168,559562,938496,179Operating expenses:Salaries, wages and benefits43,86338,747131,807119,518Aircraft fuel and oil70,05361,468194,944174,891Adjustment to fair value of fixed fuel contracts3,292-(15,092)-Commissions6,0774,62715,93013,459Dining services2,6072,1497,5486,431Station rental, landing and other fees14,06311,96542,92638,523Aircraft maintenance, materials and repairs16,82813,78747,13038,511Depreciation and amortization3,8793,66611,43411,234Aircraft rentals16,18716,57145,86147,773Regional carrier12,325-16,478-Other19,55715,15260,80647,154Total operating expenses208,731168,132559,772497,494Operating income/(loss)(6,090)4273,166(1,315)Other Income/(expense):Interest income2,5192,0767,3545,612Interest expense(285)(819)(1,510)(2,493)Total other income/(expense)2,2341,2575,8443,119Income/(loss) before income tax(3,856)1,6849,0101,804Income tax----Net income/(loss)$(3,856)$1,684$9,010$1,804Income/(loss) per common share  basic:$(0.15)$0.09$0.37$0.10Income/(loss) per common share  diluted:$(0.15)$0.09$0.35$0.09  See notes to unaudited condensed consolidated financial statements  2  MIDWEST AIR GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) September 30,December 31,ASSETS20072006Current assets:Cash and cash equivalents$135,875$118,129Accounts receivable, net7,7204,866Fair value of fixed fuel contracts15,092-Inventories7,9487,944Prepaid expenses15,76612,252Restricted cash35,83039,576Deferred income taxes4,6344,634Total current assets222,865187,401Property and equipment, net151,720154,962Other assets, net21,03014,088Total assets$395,615$356,451LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Accounts payable$9,602$9,984Income taxes payable142297Current maturities of long-term debt7821,932Air traffic liability101,44376,080Unearned revenue16,18329,835Accrued liabilities:Vacation pay6,1025,050Other44,17640,189Total current liabilities178,430163,367Long-term debt19,86042,090Deferred income taxes5,3525,352Accrued pension and other postretirement benefits33,44130,404Deferred frequent flyer partner revenue8,2988,178Deferred revenue, credits and gains63,20065,124Other noncurrent liabilities23,22920,114Total liabilities331,810334,629Shareholders' equity:Preferred stock, without par value; 5,000,000 shares authorized,no shares issued and outstanding--Common stock, $.01 par value; 50,000,000 shares authorized,26,332,924 shares issued in 2007 and 20,490,197 shares issued in 2006263205Additional paid-in capital84,74256,002Treasury stock, at cost; 708,667 shares in 2007 and 2006(15,584)(15,584)Retained earnings (deficit)2,051(7,841)Accumulated other comprehensive loss(7,667)(10,960)Total shareholders' equity63,80521,822Total liabilities and shareholders' equity$395,615$356,451  See notes to unaudited condensed consolidated financial statements  3  MIDWEST AIR GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Nine Months EndedSeptember 30,20072006Operating activities:Net income$9,010$1,804Items not involving the use of cash:Depreciation and amortization11,43411,234Share based compensation945538Fair value of fixed fuel contracts(15,092)-Other, net(2,081)951Changes in operating assets and liabilities:Accounts receivable(2,854)765Inventories(4)766Prepaid expenses1,572(7,252)Other assets(8,418)(2,759)Accounts payable(382)(3,781)Deferred frequent flyer partner revenue7721,561Accrued liabilities3,626(5,721)Unearned revenue(14,304)(17,685)Accrued pension1,2842,029Restricted cash3,746(17,866)Air traffic liability25,36325,883Other non-current liabilities5,871794Net cash provided by (used in) operating activities20,488(8,739)Investing activities:Capital expenditures(8,133)(6,509)Aircraft purchase deposits and pre-delivery progress payments-(100)Return of purchase deposits and pre-delivery progress payments-11,957Proceeds from sale of property and equipment61,210Other, net-1,358Net cash provided by (used in) investing activities(8,127)7,916Financing activities:Proceeds from warrants and options exercise5,544724Payment of debt associated with progress payments-(9,100)Payment on note payable(1,150)(203)Other, net9911,658Net cash provided by (used in) financing activities5,385(6,921)Net increase (decrease) in cash and cash equivalents17,746(7,744)Cash and cash equivalents, beginning of period118,12999,000Cash and cash equivalents, end of period$135,875$91,256Supplemental non-cash activities:Non-cash incentives$-$4,687Conversion of debt to common stock21,6391,424Supplemental cash flow information:Cash paid for:Income taxes$188$-Interest9441,937Supplemental schedule of investing activities:Accrued capital expenditures$3$309  See notes to unaudited condensed consolidated financial statements   4  Midwest Air Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited)  1. Business and Basis of Presentation  The accompanying unaudited condensed consolidated financial statements for the three- and nine-month periods ended September 30, 2007 and 2006 reflect all adjustments (consisting only of normal recurring adjustments, except as noted herein) that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and do not include all of the information and notes required for complete, audited financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto, together with Managements Discussion and Analysis of Financial Condition and Results of Operations, contained in the Annual Report on Form 10-Kfor the year ended December 31, 2006 of Midwest Air Group, Inc. (the Company). The results of operations for the three- and nine-month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for the entire year.  2. Segment Reporting  The Company has two reportable segments that represent strategic units that are managed independently, because they provide different services with different cost structures. Midwest Airlines, Inc. (Midwest Airlines) is the mainline segment and Skyway Airlines, Inc., along with regional jet capacity provided by SkyWest Airlines, Inc., doing business as Midwest Connect (Midwest Connect), constitute the regional segment of the Company. Additional detail on segment reporting is included in the CompanysAnnual Report on Form 10-K for the fiscal year ended December 31, 2006. Financial information for the three- and nine-month periods ended September 30, 2007 and 2006, for the two segments, Midwest Airlines and Midwest Connect, follows (in thousands).  5   Segment InformationThree Months Ended September 30, 2007MidwestMidwestAirlinesConnectEliminationConsolidatedOperating revenues$157,486$49,036($3,880)$202,641Income/(loss) before income tax(988)(2,868)-(3,856)Income tax----Net income/(loss)(988)(2,868)-(3,856)Three Months Ended September 30, 2006MidwestMidwestAirlinesConnectEliminationConsolidatedOperating revenues$144,298$28,289($4,028)$168,559Income before income tax1,66420-1,684Income tax----Net income1,66420-1,684Nine Months Ended September 30, 2007MidwestMidwestAirlinesConnectEliminationConsolidatedOperating revenues$464,702$110,114($11,878)$562,938Income/(loss) before income tax18,578(9,567)-9,010Income tax----Net income/(loss)18,578(9,567)-9,010Nine Months Ended September 30, 2006MidwestMidwestAirlinesConnectEliminationConsolidatedOperating revenues$425,736$82,531($12,088)$496,179Income/(loss) before income tax5,398(3,594)-1,804Income tax----Net income/(loss)5,398(3,594)-1,804 Note:  Numbers and totals in this table may not be recalculated due to rounding.  6  3. Derivative Instruments and Hedging Activities  The Company utilizes two types of derivative and hedging instruments to reduce the risk of exposure to jet fuel price increases: collar options and fixed fuel contracts. The Company accounts for certain of its fuel derivative instruments as cash flow hedges, as defined in Statement of Financial Accounting Standards (FAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The Company accounts for the remainder of the fuel derivative instruments as free-standing derivatives. The Company does not purchase or hold any derivative financial instruments for trading or speculative purposes.  The fuel collar options are accounted for as cash flow hedges, as defined by FAS No. 133. Therefore, all changes in the fair value of the derivative instruments that are considered effective are recorded in other comprehensive income until the underlying hedged fuel is consumed, when the fair value of such derivative instruments is reclassified to the statement of operations as an adjustment to fuel expense. As of September 30, 2007, the Company recorded $1.1 million in accounts receivable for unrealized gains related to collar options, with an offset to accumulated other comprehensive loss. This amount will be reclassified to the income statement over the life of the collars.  Starting in 2007, the Company added to its hedge position by entering into fixed fuel contracts. While the Company considers these good economic hedges, these contracts meet the definition of a derivative and are accounted for as free-standing derivatives. As a result, the fixed fuel contracts are adjusted to fair value, through earnings in adjustment to fair value of fixed fuel contracts, each balance sheet date. In addition, any cash settlements for unused fuel commitments are also adjusted to fair value through earnings. This may result, and has resulted, in increased volatility in the Companys results. The Company recorded $15.1 million of fair value gain in the statement of operations for the nine months ended September 30, 2007 for the fixed fuel contracts, comprised of a $19.9 million gain for the three-month period ended March 31, 2007, a $1.5 million loss for the three-month period ended June 30, 2007 and a $3.3 million loss for the three-month period ended September 30, 2007. Approximately 90% of the jet fuel expected to be used by the Company in 2007 has been hedged. Currently, the Company has also hedged approximately 26% of the jet fuel expected to be used in the first half of 2008.  4. Net Income (Loss) Per Share  The following table is a reconciliation of the weighted average shares outstanding and net income (loss) per share for the three- and nine-month periods ended September 30, 2007 and 2006 (in thousands, except per share data):  7   Three Months Ended
September 30,Nine Months Ended
September 30,2007200620072006Net Income (Loss) Per Share  Basic:Net income (loss) (numerator)$(3,856)$1,684$9,010$1,804Weighted average shares outstanding(denominator)25,00618,03024,29717,858Net Income (Loss) per share  basic$(0.15)$0.09$0.37$0.10Net Income (Loss) Per Share  Diluted:Net income (loss) (numerator)$(3,856)$1,684$9,010$1,804Plus income effect of interest onconvertible debt (1)$-$391$102$-Net Income (loss)  assuming   conversion$(3,856)$2,075$9,112$1,804Weighted average shares outstanding25,00618,03024,29717,858Effect of dilutive securities:Stock options (2)-1,0691,169972Warrants (3)-371293246Convertible debt (1)-4,599313-Shares issuable under the stock plansfor outside directors (4)-748574Weighted average shares outstandingassuming dilution (denominator)25,00624,14326,15719,150Net Income (Loss) per share  diluted$(0.15)$0.09$0.35$0.09  (1) Convertible senior secured notes issued by the Company were excluded from the calculation for the nine-month period ended September 30, 2006 as their effect was anti-dilutive. These represented 4,599 shares of the Companys Common Stock at September 30, 2006 at a conversion price of $5.00. Interest on convertible debt totaled $102 and $1,185 for the nine-month periods ended September 30, 2007 and 2006, respectively. In January and February 2007, all of the Companys remaining convertible senior secured notes were converted to Common Stock. (2) The dilutive effect of the potential exercise of outstanding options to purchase the Companys Common Stock is calculated using the treasury stock method. Anti-dilutive securities are excluded from the computation of diluted earnings per share. These include options to purchase 950 and 1,216 shares of the Companys Common Stock for the three-month periods ended September 30, 2007 and 2006, respectively, which were excluded from the computation of diluted earnings per share. Options to purchase 958 and 1,224 shares of the Companys Common Stock for the nine-month periods ended September 30, 2007 and 2006, respectively, were excluded as the effect on earnings per share was anti-dilutive. (3) Warrants issued by the Company were excluded from the calculation for the three-month period ended September 30, 2007 as their effect was anti-dilutive. These represented 110 shares of the Companys Common Stock at an exercise price of $4.72. (4) Shares issuable under the 1995 Stock Plan for Outside Directors and 2005 Non-Employee Director Stock Plan of 87 were excluded from the calculation for the three-month period ended September 30, 2007 as their effect was anti-dilutive.   8   5. Share-Based Compensation  Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards SFAS 123(R), Share-Based Payment(SFAS 123(R)). FAS 123(R) requires measurement of compensation cost for all stock-based awards at fair value on the grant date and recognition of compensation expense over the requisite service period for awards expected to vest. The fair value of stock option grants is determined using the Black-Scholes model.  Expected volatilities are based on historical volatility of the Companys Common Stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The expected term of the option is derived from historical exercise experience and represents the period of time the Company expects options granted to be outstanding. The risk-free rates for the periods within the expected life of the option are based on the U.S. Treasury yield curve in effect at the time of the grant. Option valuation models require the input of subjective assumptions including the expected volatility and lives. Actual values of grants could vary significantly from the results of the calculations. The weighted average fair value of options granted was $7.91 and $3.51 for the nine months ended September 30, 2007 and 2006, respectively. The following assumptions were used to value stock option grants during the following periods:  Three Months Ended
September 30,Nine Months Ended
September 30,2007200620072006Dividend yield0.0%0.0%0.0%0.0%Expected volatility51.5%62.7%65.1%62.2%Risk-free interest rate4.6%4.8%4.7%4.8%Forfeiture rate2.5%1.4%2.3%1.3%Expected life (in years)4.17.24.67.3  Compensation cost for options granted was recognized over the vesting period of the options. The following amounts were recognized for stock-based compensation (in thousands):  Three Months Ended
September 30,Nine Months Ended
September 30,2007200620072006Salaries, wages and benefits:Stock option expense$  288$  198$   891$  538Restricted stock expense24651609172Total$  534$  249$1,500$  710 As of September 30, 2007, there was $2.0 million of total unrecognized compensation cost related to stock options. This cost is expected to be recognized over a weighted average period of 1.5 years.  9   Under the Companys 1995 Stock Option Plan, the Compensation Committee of the Board of Directors granted options, at its discretion, to certain employees to purchase shares of Common Stock. An aggregate of 2,548,900 shares of Common Stock is reserved for issuance under the Plan, of which no shares were available for future grants due to the expiration of the Plan. Under the Plan, options granted have an exercise price equal to 100% of the fair market value of the underlying stock at the date of grant. Granted options become exercisable at the rate of 30% after the first year, 30% after the second year and the remaining 40% after the third year, unless otherwise determined, and have a maximum term of 10 years.  Under the Companys 2003 All-Employee Stock Option Plan, the Compensation Committee of the Board of Directors may grant options, at its discretion, to certain non-represented employees and each union may grant options, at its discretion, to certain represented employees to purchase shares of Common Stock. An aggregate of 1,551,741 shares of Common Stock is reserved for issuance under the Plan, of which no shares were available for future grants as of September 30, 2007. Granted options for non-represented employees become exercisable at the rate of 331⁄3% immediately upon the date of grant, 331⁄3% after the first year and the remaining 331⁄3% after the second year. Options for represented employees become exercisable in varying increments as determined by each union, such that no more than 331⁄3% of the options allocated to a represented group become exercisable immediately upon the date of grant. On each anniversary of the Plan’s effective date, any options that are forfeited by a represented employee without being exercised will be re-granted at the original grant price to other represented employees. All options granted under this Plan will expire no later than August 21, 2015.  Under the Companys 2005 Equity Incentive Plan, the Compensation Committee of the Board of Directors may grant options, at its discretion, to certain employees to purchase shares of Common Stock. In addition, the Committee may award restricted stock to certain employees. An aggregate of 1,000,000 shares of Common Stock is reserved for issuance under the Plan, of which 30,691 shares are available for future grants at September 30, 2007. Under the Plan, options granted have an exercise price equal to 100% of the fair market value of the underlying stock at the date of grant. Granted options become exercisable at the rate of 331⁄3% upon the first anniversary of the date of grant, an additional 331⁄3% upon the second anniversary of the date of grant and the remaining 331⁄3% upon the third anniversary of the date of grant, unless otherwise determined, and have a maximum term of 10 years.  The total intrinsic value of options exercised was $7.2 million and $0.7 million in the nine-month period ended September 30, 2007 and 2006, respectively. Cash received from option exercises was $2.3 million and $0.7 million during the nine-month period ended September 30, 2007 and 2006, respectively.   10   The following table summarizes information concerning outstanding options:  OptionsSharesWeighted 
AverageExercisePriceWeighted AverageRemaining 
Contractual Term (years)Aggregate 
Intrinsic Value (000s)Outstanding at December 31, 20062,940,767$ 11.945.7$ 14,155Granted267,09813.84Exercised(679,845)3.39Forfeited or expired(201,693)16.38Outstanding at September 30, 20072,326,327$ 13.095.4$ 14,679  The following table summarizes information concerning exercisable options:  OptionsSharesWeighted 
AverageExercisePriceWeighted AverageRemaining 
Contractual Term (years)Aggregate 
Intrinsic Value (000s)Exercisable at December 31, 20062,428,759$ 11.875.6$ 10,559Vested253,07616.68Exercised(679,845)3.40Forfeited or expired(200,769)16.38Exercisable at September 30, 20071,801,221$ 14.214.5$ 10,900  The following table summarizes information concerning restricted stock: Restricted StockSharesWeighted 
Average
 Grant-DateFair ValueOutstanding at December 31, 2006264,268$  3.11Granted152,88514.00Restricted at September 30, 2007417,153$  7.11  6. Income Tax  Effective January 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes: An interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty of income taxes recognized in an entitys financial statements in accordance with FAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  11  FIN No. 48 allows transition accounting for the cumulative effect of adopting the provision as an adjustment to beginning retained earnings. The Company recorded a $0.9 million decrease to reserves for uncertain tax positions and a corresponding increase to retained earnings as of January 1, 2007. This adjustment reflects the net difference between related balance sheet accounts before applying FIN No. 48 and as measured pursuant to FIN No. 48s provisions. As of the date of the Companys adoption of FIN No. 48 and at September 30, 2007, the Companys unrecognized tax benefits were $0.2 million. Tax years subsequent to 2002 remain open to examination by the major tax jurisdictions to which the Company is subject.  The Company records interest and penalties related to income taxes as income tax expense. Any future interest and penalties will continue to be reported as income tax expense. The total interest and penalties accrued in the condensed consolidated balance sheets is $0.2 million, none of which was recorded in the condensed consolidated statements of operations for 2006 or 2007.  The Companys effective tax rate would be reduced if the unrecognized tax benefits were recognized. It is unlikely that the unrecognized tax benefits will significantly change in the next 12 months.  There was no provision for income taxes for the three- or nine-month periods ended September 30, 2007 due to accumulated tax losses. The adjustment to fair value of fixed fuel contracts is treated as a tax hedge and does not affect taxable income. As of September 30, 2007, the Company recorded tax-effected federal net operating losses of approximately $27.0 million, which will begin to expire in 2023 and approximately $10.6 million of tax-effected state net operating losses, which began to expire in 2005. As of September 30, 2007, the Company has recorded a valuation allowance on these federal and state net operating losses of $27.0 million and $10.6 million, respectively. Due to accumulated losses and the inability to offset net operating losses against deferred tax liabilities, the Company ceased recording federal income tax benefit on losses effective as of the second quarter 2004 and state income tax benefit as of the second quarter of 2005.  7. Comprehensive Income/(Loss)  As of September 30, 2007, the total balance of accumulated other comprehensive loss includes $0.6 million for unrealized gains on fuel collars and an $8.3 million loss for pension and other postretirement benefit plan liabilities. Total comprehensive income was $12.3 million and a loss of $1.9 million for the nine-month periods ended September 30, 2007 and 2006, respectively.  8. Financing Agreements  The Company has agreements with organizations that process credit card transactions arising from purchases of air travel tickets by customers of the Company. The Company has one such agreement with an organization that processes MasterCard/Visa transactions. The agreement was amended in January 2002 to allow the credit card processor to create and maintain a reserve account that is funded by retaining cash that it otherwise would deliver to the Company (i.e., restricted cash). Effective May 15, 2007, the Company and the processor entered into an  12  amended agreement. This agreement includes provisions that allow the processor to change the holdback percentage based on the Companys performance against certain financial criteria. As of September 30, 2007, the restricted cash amount represented 50% of the processors risk, or approximately $35.8 million. This holdback percentage was reduced in the second quarter of this year from 85% in the first quarter.  The Company also has agreements with American Express, Diners Club and Discover. As of September 30, 2007, those credit card processors had no holdback under these agreements; however they may require holdbacks in the future. The amount of additional holdback if all processors required 100% as of September 30, 2007 was approximately $55.9 million.  9. Retirement and Benefit Plans  The Company adopted FAS No. 158 (FAS No. 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R), as of December 31, 2006. Under FAS No. 158, the funded status of each pension and other postretirement benefit plan is required to be reported as an asset (for over- funded plans) or a liability (for under-funded plans) at December 31, 2006.  The pension and postretirement medical costs for the three- and nine-month periods ended September 30, 2007 and 2006, respectively, include the following (in thousands):  Pension BenefitsOther BenefitsThree Months EndedSeptember 30,Nine Months EndedSeptember 30,Three Months EndedSeptember 30,Nine Months EndedSeptember 30,20072006200720062007200620072006Components of Net Periodic Benefit CostService cost$407$342$1,221$1,154$218$197$  636$591Interest cost4143261,2421,062215167617501Expected return on assets(163)(135)(489)(380)----Amortization of:Prior service cost8036240240(90)(124)(305)(372)Actuarial loss9792291308223670108Total net periodic benefit 
cost$835$661$2,505$2,384$365$276$1,018$828 Note: 2006 presentation modified to conform to 2007 presentation.  The Company continues to sponsor group health care coverage for its retirees; however the Company reduced the amount it subsidizes effective March 31, 2005, resulting in a corresponding reduction in its ongoing annual expense of $1.1 million. On April 2, 2007, a neutral arbitrator ruled that this reduction constituted a violation of the collective bargaining agreement with the pilots union and ordered the Company to reinstate the retiree medical plans from prior to April 1, 2005, resulting in an additional liability of $2.2 million recorded in the first quarter of 2007 for employees covered by collective bargaining agreements with Midwest Airlines. This adjustment was charged to Accumulated Other Comprehensive Loss for the three-month period ended March 31, 2007. This reinstatement will result in an additional $0.4 million expense in 2007.  13   The Company contributed $2.0 million to its qualified pension plan in September 2007.  10. New Accounting Pronouncements  In June 2006, the FASB issued Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes: An interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty of income taxes recognized in an entitys financial statements in accordance with FAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes recognition threshold and measurement principles for financial statement disclosure of tax positions taken or expected to be taken on a tax return. FIN No. 48 also provides guidance on derecognition classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006; the Company adopted FIN No. 48 as of the beginning of the 2007 fiscal year. The effect on the Companys financial results as of the date of adoption was an increase in retained earnings and a reduction in reserves for uncertain tax positions of $0.9 million, as of January 1, 2007.  In September 2006, the FASB issued FAS No. 157, Fair Value Measurements, to define fair value, establish a framework for measuring fair value in accordance with generally accepted accounting principles, and expand disclosures about fair value measurements. For the Company, FAS No. 157 will be effective beginning with the 2008 fiscal year. The Company is currently assessing the impact the adoption of FAS No. 157 will have on the Companys consolidated financial position and results of operations.  In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The statement offers an irrevocable option to carry financial assets and liabilities at fair value, with changes in fair value recorded in earnings. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities. Not all items are eligible for this treatment. FAS No. 159 will be effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing the impact the adoption of FAS No. 159 will have on the Companys consolidated financial position and results of operations.   14  Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview  (Dollars in millions)Three Months EndedNine Months EndedSeptember 30,September 30,20072006Net Change20072006Net ChangeTotal Operating Revenue$ 202.6$ 168.6$ 34.0$ 562.9$ 496.2$ 66.7Total Operating Expenses$ 208.7$ 168.1$ 40.6$ 559.8$ 497.5$ 62.3Operating Income/(Loss)$  (6.1)$ 0.4$ (6.5)$ 3.2$  (1.3)$   4.5Net Income/(Loss)$  (3.9)$ 1.7$ (5.6)$ 9.0$ 1.8$   7.2  On August 16, 2007, the Company entered into a merger agreement providing for the acquisition of Midwest Air Group by Midwest Air Partners, LLC, a limited liability company formed by an affiliate of TPG Capital, L.P. and Northwest Airlines, Inc. On September 26, 2007, the Company issued a proxy statement relating to a special meeting of its shareholders to be held on October 30, 2007 to consider approval of the merger agreement. The Companys Board of Directors recommended that shareholders vote for the approval of the merger agreement. The proposed merger is subject to a request for additional information by the Department of Justice (DOJ) under the Hart-Scott-Rodino Antitrust Improvements Act (the HSR Act), as well as pending approval by the Department of Transportation. Further details regarding the transactions contemplated by the merger agreement are included in the Recent or Pending Developments section, which follows.  In the third quarter of 2007, Midwest Air Group continued to pursue its goals of increasing revenue, reducing overall and unit costs, and increasing capacity. As a result of these efforts, the Company posted record revenue passenger miles (RPMs). Yield (passenger revenue per RPM) declined as a result of increased passenger trip length and pricing weakness, principally reflecting the ramp-up of new or expanded markets.  During third quarter 2007, total Company revenue increased $34.0 million, or 20.2%, with a 25.1% increase in passenger traffic (measured in RPMs) on 23.6% more available seat miles (ASMs). RPM growth exceeded the growth of ASMs, resulting in a load factor increase of 0.9 percentage points to 79.0% in 2007 from 78.1% in 2006. Market conditions negatively impacted revenue per available seat mile (RASM), which decreased 2.7% in the third quarter of 2007 to 12.18¢ from 12.52¢ in the third quarter of 2006.  Yield decreased 3.2% during the quarter to 14.01¢ from 14.47¢ in the third quarter of 2006 as a result of price weakness and a 2.1% increase in passenger trip length. The Company continues to focus on revenue management actions to improve yield through better price management.  Total operating expenses increased $40.6 million, or 24.1%, in third quarter 2007 compared with third quarter 2006. Regional carrier expenses relating to the Companys new 50-seat regional jet program, which began in April 2007, were $12.3 million. Fuel expense increased $8.6 million, or 14.0%, due to increased fuel consumption from 26.8 million gallons in third quarter 2006 to 33.2 million gallons in third quarter 2007. Fuel consumption increased primarily as a result of a 21.9%  15  increase in block hours. Salaries, wages and benefits increased $5.1 million, as a result of additional flight crew and inflight pay associated with the increase in block hours. Other expenses increased $4.4 million, primarily due to defense costs related to the unsolicited exchange offer by AirTran Holdings, Inc. (AirTran) and costs associated with the merger agreement with Midwest Air Partners, LLC, which are described further in the Recent or Pending Developments section which follows. Aircraft maintenance, materials and repairs increased $3.0 million resulting from increases in purchased engine maintenance. Station rental, landing and other fees increased $2.1 million due to an increase in the number of flights and higher utilization of the fleet during the period. The Company also recorded a $3.3 million loss for the fair value of fixed fuel contracts, as described in Note 3 to the unaudited condensed consolidated financial statements.  16  Operating Statistics  The following table provides selected operating statistics for Midwest Airlines and Midwest Connect.  Three Months EndedNine Months EndedSeptember 30,September 30,2007200620072006Midwest Air GroupScheduled Service Revenue Passenger Miles (000s)1,308,6391,046,4463,606,4173,081,873Scheduled Service Available Seat Miles (000s)1,657,3361,340,2534,578,3184,002,063Total Available Seat Miles (000s)1,663,5681,346,3214,607,9584,049,812Load Factor (%)79.0%78.1%78.8%77.0%Revenue Yield$0.1401$0.1447$0.1392$0.1432Passenger Revenue per Schd. Svc. ASM$0.1106$0.1130$0.1096$0.1102Total Revenue per Total ASM$0.1218$0.1252$0.1222$0.1225Total Cost per Total ASM$0.1255$0.1249$0.1215$0.1228Total Cost per Total ASM (ex-fuel cost) (1)$0.0834$0.0792$0.0792$0.0797Total Cost per Total ASM (ex-fuel cost, ex-FMV) (1)$0.0814$0.0792$0.0824$0.0797Number of Flights32,22927,82088,50282,994Into-plane Fuel Cost per Gallon$2.11$2.30$2.12$2.19Full-time Equivalent Employees at End of Period3,1112,9743,1112,974Aircraft in Service at End of Period70557055Midwest Airlines OperationsOrigin & Destination Passengers998,177930,7132,938,8942,727,783Scheduled Service Revenue Passenger Miles (000s)1,135,432976,6083,265,2472,884,271Scheduled Service Available Seat Miles (000s)1,410,1791,243,2104,091,7973,713,988Total Available Seat Miles (000s)1,416,4101,249,2774,121,4373,761,370Load Factor (%)80.5%78.6%79.8%77.7%Revenue Yield$0.1212$0.1292$0.1230$0.1275Passenger Revenue per Schd. Svc. ASM$0.0976$0.1015$0.0981$0.0990Total Revenue per Total ASM$0.1112$0.1155$0.1128$0.1132Total Cost per Total ASM$0.1139$0.1156$0.1101$0.1130Total Cost per Total ASM (ex-fuel cost) (1)$0.0743$0.0724$0.0701$0.0721Total Cost per Total ASM (ex-fuel cost, ex-FMV) (1)$0.0720$0.0724$0.0737$0.0721Average Passenger Trip Length (miles)1,1381,0491,1111,057Number of Flights13,83013,71041,95140,336Into-plane Fuel Cost per Gallon$2.11$2.29$2.11$2.18Full-time Equivalent Employees at End of Period2,1232,0452,1232,045Aircraft in Service at End of Period38363836Midwest Connect OperationsOrigin & Destination Passengers408,885218,476899,640625,333Scheduled Service Revenue Passenger Miles (000s)173,20769,838341,170197,602Scheduled Service Available Seat Miles (000s)247,15897,044486,521288,075Total Available Seat Miles (000s)247,15897,044486,521288,442Load Factor (%)70.1%72.0%70.1%68.6%Revenue Yield$0.2638$0.3624$0.2942$0.3719Passenger Revenue per Schd. Svc. ASM$0.1848$0.2608$0.2063$0.2551Total Revenue per Total ASM$0.1984$0.2915$0.2263$0.2861Total Cost per Total ASM$0.2074$0.2862$0.2423$0.2937Total Cost per Total ASM (ex-fuel cost) (1)$0.1510$0.2088$0.1808$0.2205Average Passenger Trip Length (miles)424320379316Number of Flights18,39914,11046,55142,658Into-plane Fuel Cost per Gallon$2.12$2.34$2.14$2.23Full-time Equivalent Employees at End of Period988929988929Aircraft in Service at End of Period32193219  (1) Non-GAAP measurement. See non-GAAP disclosures on page 19.  Note: All statistics exclude charter operations except the following: Total Available Seat Miles ("ASMs"), Total Cost per Total ASM, Total Cost per ASM (ex-fuel cost), Total Cost per ASM (ex fuel cost, ex-FMV), Into-plane Fuel Cost, Number of Employees and Aircraft in Service. Aircraft acquired but not yet placed into service are excluded from the aircraft in service statistics.  Numbers in this table may not be recalculated due to rounding  17  The following table provides operating revenues and expenses for the Company expressed as cents per total ASM, including charter operations, and as a percentage of total operating revenues:  Three Months Ended 
September 30,Nine Months Ended 
September 30,2007200620072006Per Total% ofPer Total% ofPer Total% ofPer Total% ofASMRevenueASMRevenueASMRevenueASMRevenueOperating Revenues:Passenger service11.02¢90.5%11.25¢89.9%10.89¢89.2%10.89¢88.9%Cargo0.121.0%0.181.4%0.161.3%0.161.3%Other1.048.6%1.098.7%1.169.5%1.209.8%Total Operating Revenues12.18100.0%12.52100.0%12.22100.0%12.25100.0%Operating Expenses:Salaries, wages and benefits2.6421.6%2.8823.0%2.8623.4%2.9524.1%Aircraft fuel and oil4.2134.6%4.5736.5%4.2334.6%4.3235.2%Adjustment to fair value of fixed 
  fuel contracts0.201.6%0.000.0%-0.33-2.7%0.000.0%Commissions0.373.0%0.342.7%0.352.8%0.332.7%Dining services0.161.3%0.161.3%0.161.3%0.161.3%Station rental, landing,
  other fees0.856.9%0.897.1%0.937.6%0.957.8%Aircraft maintenance, materials 
  and repairs1.018.3%1.028.2%1.028.4%0.957.8%Depreciation and amortization0.231.9%0.272.2%0.252.0%0.282.3%Aircraft rentals0.978.0%1.239.8%1.008.1%1.189.6%Regional carrier0.746.1%0.000.0%0.362.9%0.000.0%Other1.189.7%1.139.0%1.3210.8%1.169.5%Total Operating Expenses12.55¢103.0%12.49¢99.7%12.15¢99.4%12.28¢100.3%Total ASMs (millions)1,663.61,346.34,608.04,049.8 Note:  Numbers, percentages and totals in this table may not be recalculated due to rounding.    18  Non-GAAP Disclosures  Pursuant to Item 10 of Regulation S-K, the Company is providing disclosure of the reconciliation of reported non-GAAP financial measures to the Company's most directly comparable financial measures reported on a GAAP basis. The non-GAAP financial measures provide the Company the ability to measure and monitor its performance both with and without the cost of aircraft fuel or fair market value of fixed fuel contracts ("FMV"). Because the cost and availability of aircraft fuel are subject to many economic and political factors beyond the Company's control, it is the Company's view that the measurement and monitoring of performance without the volatility of fuel is important.  The following table reconciles operating expenses excluding fuel and operating expenses per ASM excluding fuel as well as FMV Three Months EndedNine Months EndedSeptember 30,September 30,20072006%20072006%Midwest Air GroupTotal GAAP operating expenses ($000)$   208,731$   168,13224.1%$   559,772$   497,49412.5%ASMs (000)1,663,5681,346,32123.6%4,607,9584,049,81213.8%CASM$     0.1255$     0.12490.5%$     0.1215$     0.1228(1.1%)Total GAAP operating expenses ($000)$   208,731$   168,13224.1%$   559,772$   497,49412.5%Less: aircraft fuel ($000)(70,053)(61,468)14.0%(194,944)(174,891)11.5%Operating expenses excluding fuel ($000)$   138,678$   106,66430.0%$   364,828$   322,60313.1%Less: FMV ($000)(3,292)-NA15,092-NAOperating expenses excluding fuel and FMV ($000)$   135,386$   106,66426.9%$   379,920$   322,60317.8%ASMs (000)1,663,5681,346,32123.6%4,607,9584,049,81213.8%CASM excluding fuel$     0.0834$     0.07925.2%$     0.0792$     0.0797(0.6%)CASM excluding fuel and FMV$     0.0814$     0.07922.7%$     0.0824$     0.07973.5%Midwest Airlines OperationsTotal GAAP operating expenses ($000)$   161,346$   144,39011.7%$   453,763$   424,8626.8%ASMs (000)1,416,4101,249,27713.4%4,121,4373,761,3709.6%CASM$     0.1139$     0.1156(1.4%)$     0.1101$     0.1130(2.5%)Total GAAP operating expenses ($000)$   161,346$   144,39011.7%$   453,763$   424,8626.8%Less: aircraft fuel ($000)(56,109)(53,963)4.0%(165,034)(153,773)7.3%Operating expenses excluding fuel ($000)$   105,237$     90,42716.4%$   288,729$   271,0896.5%Less: FMV ($000)(3,292)-NA15,092-NAOperating expenses excluding fuel and FMV ($000)$   101,945$     90,42712.7%$   303,821$   271,08912.1%ASMs (000)1,416,4101,249,27713.4%4,121,4373,761,3709.6%CASM excluding fuel$     0.0743$     0.07242.6%$     0.0701$     0.0721(2.8%)CASM excluding fuel and FMV$     0.0720$     0.0724(0.6%)$     0.0737$     0.07212.3%Midwest Connect OperationsTotal GAAP operating expenses ($000)$     51,266$     27,77084.6%$   117,887$     84,72039.2%ASMs (000)247,15897,044154.7%486,521288,44268.7%CASM$     0.2074$     0.2862(27.5%)$     0.2423$     0.2937(17.5%)Total GAAP operating expenses ($000)$     51,266$     27,77084.6%$   117,887$     84,72039.2%Less: aircraft fuel ($000)(13,944)(7,505)85.8%(29,910)(21,117)41.6%Operating expenses excluding fuel ($000)$     37,322$     20,26584.2%$     87,977$     63,60338.3%ASMs (000)247,15897,044154.7%486,521288,44268.7%CASM excluding fuel$     0.1510$     0.2088(27.7%)$     0.1808$     0.2205(18.0%) Note:  Numbers and totals in this table may not be recalculated due to rounding and intercompany eliminations.  19  Three Months Ended September 30, 2007 Compared With Three Months Ended September 30, 2006  Operating Revenues The Companys third quarter 2007 operating revenues of $202.6 million increased $34.0 million, or 20.2%, from third quarter 2006. Passenger revenues accounted for 90.5% of total revenues and increased $31.9 million, or 21.0%, from third quarter 2006 to $183.3 million. The increase is attributable to a 23.7% increase in capacity, as measured by scheduled service ASMs, and a 0.9 percentage point increase in load factor, partially offset by a 3.2% decrease in yield.  The Companys 2007 revenue from cargo and other services of $19.3 million increased $2.2 million, or 13.0%. The increase was primarily due to ticket-related fees ($1.2 million); frequent flyer credit card revenue ($0.5 million); charter revenue ($0.4 million); Essential Air Service (EAS) subsidies ($0.3 million); and buy-onboard meals and entertainment ($0.3 million), partially offset by a decline in mail and freight revenue ($0.4 million).  Midwest Airlines 2007 passenger revenue of $137.6 million increased $11.5 million, or 9.1%. Much of the increase in revenue was volume-related, with scheduled service revenue passenger miles (passenger traffic) increasing 16.3% year over year on a 13.4% increase in scheduled service available seat miles resulting in a 1.9 percentage point increase in load factor from 78.6% to 80.5%. Capacity increased 13.4% due to the addition of two MD-80 series aircraft in June and July 2007, a 0.9% increase in the number of segments (one take-off and landing), and increased utilization of the existing fleet. The revenue growth was due to strong customer demand in response to competitive pricing, as well as schedule and service enhancements that included frequency increases and ongoing aircraft upgrades. Yield decreased 6.2% to 12.12¢ from 12.92¢ in third quarter 2006 due to pricing weakness, as well as an 8.4% increase in length of haul. As a result, passenger revenue per scheduled service available seat mile (PRASM) decreased 3.8% in third quarter 2007 to 9.76¢ from 10.15¢ in third quarter 2006.  Midwest Connects 2007 passenger revenue of $45.7 million increased $20.4 million, or 80.5%. Passenger traffic increased 148.0% in third quarter 2007 compared with the same period in 2006, driven by the new regional jet program that started in April 2007. Yield decreased 27.2% due to a 32.5% increase in average length of haul, driven by the new regional jet program serving longer-range markets, and pricing weakness. Load factor decreased 1.9 percentage points to 70.1% from 72.0% during the period. Midwest Connects total operating revenue increased $20.7 million, or 73.3%, to $49.0 million from third quarter 2006.  Operating Expenses The Companys 2007 operating expenses of $208.7 million increased $40.6 million, or 24.1%. The increase was primarily due to regional carrier expenses ($12.3 million); higher fuel costs ($8.6 million); salaries, wages and benefits ($5.1 million); adjustment to fair value of fixed fuel contracts ($3.3 million); aircraft maintenance, materials and repairs ($3.0 million); station rental, landing and other fees ($2.1 million); and other expenses ($4.4 million), mainly as a result of the AirTran defense costs and costs associated with the merger agreement with Midwest Air  20  Partners, LLC of $2.3 million, and higher booking fees of $1.0 million due to increased passenger volume.  In third quarter 2007, cost per available seat mile (CASM) increased by 0.06¢ to 12.55¢, or 0.5%. A non-GAAP measure that may be useful to some users of the financial statements is CASM excluding fuel, which increased by 0.42¢, to 8.34¢, or 5.2%. CASM excluding fuel and fair value of fixed fuel contracts increased 0.22¢ to 8.14¢ in 2007, or 2.7%. The increase in the Companys CASM reflects the higher growth in the Midwest Connect segment, as a result of the additional regional jet capacity. The Midwest Connect segment operates at a higher CASM than the Midwest Airlines segment.  Salaries, Wages and Benefits Salaries, wages and benefits of $43.9 million in 2007 increased $5.1 million, or 13.2%. This increase was primarily due to $2.2 million in additional flight crew and inflight pay on a 21.9% increase in block hours, and increased station labor costs of $1.4 million on a 21.6% increase in passengers boarded. Other increases in expenses included increases in medical insurance ($0.9 million) and the Companys pension and 401(k) plans ($0.3 million). On a CASM basis, labor costs decreased 0.24¢ to 2.64¢ in 2007, or 8.3%.  Aircraft Fuel and Oil Aircraft fuel, oil and associated taxes of $70.1 million in 2007 increased $8.6 million, or 14.0%. Into-plane fuel prices decreased 8.2% in third quarter 2007, averaging $2.11 per gallon versus $2.30 per gallon in 2006, resulting in a $6.2 million favorable price impact (calculated by applying 2006 prices to actual gallons consumed in 2007 and comparing the result with actual 2007 expense). Fuel consumption increased primarily as a result of a 21.9% increase in the number of total block hours, which resulted in a $14.8 million unfavorable impact in the quarter (calculated by applying 2006 prices to the actual change in gallons consumed in 2007 relative to 2006). On a CASM basis, aircraft fuel and oil decreased 0.36¢ to 4.21¢ in 2007, or 7.9%.  Adjustment to Fair Value of Fixed Fuel Contracts Adjustment to fair value of fixed fuel contracts was a loss of $3.3 million in third quarter 2007. This adjustment reflects the change in the fair value of the fixed fuel contracts during the quarter and cash settlements of any unused fuel commitments. No such adjustment was required in 2006, as the Company entered into these contracts for the first time in 2007.  Commissions Commissions of $6.1 million in 2007, related to travel agent commissions and credit card transactions, increased $1.5 million, or 31.3%. The increase was primarily due to a 21.0% increase in passenger service revenue. On a CASM basis, commissions increased 0.03¢ to 0.37¢ in 2007, or 8.8%.  Dining Services Dining service costs of $2.6 million in 2007 increased $0.5 million, or 21.5%. The increase was a result of a 20.6% increase in buy-onboard meal revenue. On a CASM basis, dining services remained unchanged at 0.16¢ in 2007 and 2006.  21  Station Rental, Landing and Other Fees Station rentals and landing fees of $14.1 million in 2007 increased $2.1 million, or 17.5%. The increase is primarily due to an increase in ground handling and landing fees ($1.9 million) and baggage expenses ($0.3 million) as a result of a 15.8% increase in flight segments and a 21.6% increase in passengers boarded. On a CASM basis, station rental, landing and other fees decreased 0.04¢ to 0.85¢ in 2007, or 4.5%.  Aircraft Maintenance, Materials and Repairs Aircraft maintenance, materials and repair costs of $16.8 million in 2007 increased $3.0 million, or 22.0%. The increase was primarily the result of increased flight hours and segments resulting in increases in aircraft maintenance and material cost for the MD-80 series aircraft ($1.4 million) and purchased engine repairs for the Companys Fairchild 328JET ($0.9 million) and Boeing 717 aircraft ($0.6 million). On a CASM basis, aircraft maintenance, materials and repairs decreased 0.01¢ to 1.01¢ in 2007, or 1.0%.  Depreciation and Amortization Depreciation and amortization of $3.9 million in 2007 increased $0.2 million, or 5.8%. On a CASM basis, depreciation and amortization decreased 0.04¢ to 0.23¢ in 2007, or 14.8%. Depreciation increased due to the purchase of a Fairchild 328JET in November 2006.  Aircraft Rentals Aircraft rental costs of $16.2 million in 2007 decreased $0.4 million or 2.3%. On a CASM basis, aircraft rentals decreased 0.26¢ to 0.97¢ in 2007, or 21.1%.  Regional Carrier Regional carrier expense was $12.3 million in 2007. This expense relates to the new 50-seat regional jet program, which began in April 2007. On a CASM basis, regional carrier expense was 0.74¢ in 2007.  Other Other operating expenses of $19.6 million in 2007 increased $4.4 million, or 29.1%. The expense increase is primarily attributable to defense costs of $2.3 million related to AirTrans unsolicited exchange offer and costs associated with the merger agreement with Midwest Air Partners, LLC (refer to Recent or Pending Developments below for further details regarding the AirTran unsolicited exchange offer and the merger agreement). Other increases included booking fees ($1.0 million) due to higher passenger volume, flight simulator rental ($0.6 million), frequent flyer award costs ($0.3 million) and property rent ($0.2 million), partially offset by a decrease in advertising and promotions ($0.5 million), and passenger liability insurance ($0.5 million). On a CASM basis, other expenses increased 0.05¢ to 1.18¢ in 2007, or 4.4%.  22   Other Income/(Expense)  Other income of $2.2 million in 2007 increased $1.0 million from third quarter 2006 due to higher interest income ($0.5 million) and lower interest expense ($0.5 million). Interest income reflects interest earned on the Companys cash, cash equivalents and restricted cash. Interest expense consists of interest on the Companys debt related to aircraft and the promissory notes (the Basic Moratorium Notes) issued by the Company to its lessors and lenders as part of the Companys restructuring lease and debt agreements. The Basic Moratorium Notes were paid in full in June 2007. In January and February 2007, all of the Companys remaining convertible senior secured notes were converted to common stock. This conversion reduced long-term debt by $21.6 million.  Income Tax  There was no provision for income taxes for third quarter 2007 and 2006. The Company does not record income tax expense or benefit due to accumulated losses for which valuation allowances have been recorded. The Company will assess the ongoing utilization of accumulated losses and the related valuation allowance each quarter.  Net Income/(Loss)  Net loss for third quarter 2007 was ($3.9) million, a decrease of $5.6 million from third quarter 2006 net income of $1.7 million.  23  Nine Months Ended September 30, 2007 Compared With Nine Months Ended September 30, 2006  Operating Revenues The Companys operating revenues of $562.9 million for the nine months ended September 30, 2007 increased $66.7 million, or 13.5%, from the first nine months of 2006. Passenger revenues accounted for 89.2% of total revenues and increased $60.7 million, or 13.8%, from the same period last year, to $501.9 million. The increase was attributable to a 17.0% increase in passenger traffic, as measured by RPMs, on a 14.4% increase in scheduled service available seat miles, resulting in a 1.8 percentage point increase in load factor from 77.0% in 2006 to 78.8% in 2007. These results were partially offset by a decrease in yield of 2.8% as a result of price weakness and an increase in average passenger trip length.  The Companys 2007 revenue from cargo and other services of $61.0 million increased $6.1 million, or 11.0%. The increase was primarily due to ticket fees ($3.5 million); frequent flyer credit card revenue ($1.2 million); mail and freight revenue ($1.1 million); Essential Air Service (EAS) subsidies ($0.5 million); and buy-onboard meals and entertainment ($0.5 million), partially offset by a decrease in charter revenue of $1.3 million.  Midwest Airlines 2007 passenger revenue of $401.5 million increased $33.8 million, or 9.2%. This increase was primarily the result of a 13.2% increase in passenger traffic, as measured by RPMs, on a 10.2% increase in scheduled service available seat miles, resulting in a 2.1 percentage point increase in load factor from 77.7% in 2006 to 79.8% in 2007. These factors were partially offset by a 3.5% decrease in yield. Total operating revenue of $464.7 million increased $39.0 million, or 9.2%.  Midwest Connects 2007 passenger revenue of $100.4 million increased $26.9 million, or 36.6%. Passenger traffic increased 72.7% compared with the same period in 2006, driven by the new 50-seat regional jet program. Load factor increased 1.5 percentage points to 70.1% from 68.6% in the same period last year. Yield decreased 20.9% as average length of haul increased by 20.0%. Total operating revenue of $110.1 million increased $27.6 million, or 33.4%.  Operating Expenses The Companys 2007 operating expenses of $559.8 million increased $62.3 million, or 12.5%. The increase was due to higher fuel costs ($20.1 million); regional carrier expenses ($16.5 million); salaries, wages and benefits ($12.3 million); aircraft maintenance, materials and repairs ($8.6 million); station rental, landing and other fees ($4.4 million); commissions ($2.5 million); dining services ($1.1 million); and other expenses ($13.7 million), primarily due to AirTran defense costs and costs associated with the merger agreement with Midwest Air Partners, LLC. The increase was partially offset by a favorable adjustment to fair value of fixed fuel contracts ($15.1 million) and a reduction in aircraft rentals ($1.9 million). CASM excluding fuel and fair value of fixed fuel contracts increased 0.27¢ to 8.24¢ in 2007, or 3.5%.   24  Salaries, Wages and Benefits Salaries, wages and benefits of $131.8 million in 2007 increased $12.3 million, or 10.3%. This increase was primarily due to $3.9 million in additional flight crew pay on an 11.8% increase in block hours and increased station labor costs of $3.4 million on a 13.9% increase in passengers boarded. Other increases in expenses included expenses related to the Companys pension and 401(k) plans ($2.0 million), payroll taxes ($0.9 million) and medical insurance ($0.2 million). On a CASM basis, labor costs decreased 0.09¢ to 2.86¢ in 2007, or 3.1%.  Aircraft Fuel and Oil Aircraft fuel and oil and associated taxes of $194.9 million in 2007 increased $20.1 million, or 11.5%. Into-plane fuel prices decreased 3.4% in 2007, averaging $2.12 per gallon in 2007 versus $2.19 per gallon in 2006, resulting in a $6.8 million favorable price impact (calculated by applying 2006 prices to actual gallons consumed in 2007 and comparing the result to actual 2007 expense). Fuel consumption increased primarily as a result of an 11.8% increase in block hours, which resulted in a $26.9 million unfavorable impact (calculated by applying 2006 prices to the actual increase in gallons consumed in 2007 relative to 2006). On a CASM basis, aircraft fuel and oil decreased 0.09¢ to 4.23¢ in 2007, or 2.1%.  Adjustment to Fair Value of Fixed Fuel Contracts Adjustment to fair value of fixed fuel contracts was a gain of $15.1 million in 2007. This adjustment reflects the change in the fair value of the fixed fuel contracts during 2007 and cash settlements of any unused fuel commitments. No such adjustment was required in 2006, as the Company entered into these contracts for the first time in 2007.  Commissions Commissions of $15.9 million in 2007 related to travel agent commissions and credit card transactions increased $2.5 million, or 18.4%. The increase was primarily due to a 13.8% increase in passenger service revenue. On a CASM basis, commissions increased 0.02¢ to 0.35¢ in 2007, or 6.1%.  Dining Services Dining service costs of $7.5 million in 2007 increased $1.1 million, or 17.5%. The increase was a result of a 19.2% increase in buy-onboard meal revenue. On a CASM basis, dining service costs remained unchanged at 0.16¢ in 2007 and 2006.  Station Rental, Landing and Other Fees Station rental, landing and other fees of $42.9 million in 2007 increased $4.4 million, or 11.4%. The increase was primarily due to the increase in flights, resulting in higher costs for ground handling and landing fees of $3.8 million and baggage expenses of $0.8 million. On a CASM basis, station rental, landing and other fees decreased 0.02¢ to 0.93¢ in 2007, or 2.1%.   25  Aircraft Maintenance, Materials and Repairs Aircraft maintenance, materials and repairs expense of $47.1 million increased $8.6 million, or 22.4%. The increase was primarily the result of increased flight hours and segments, including increases in purchased engine maintenance for the Companys Boeing 717 aircraft ($2.5 million), repair of rotable parts ($2.1 million), MD-80 series engine repair and purchased maintenance ($2.1 million), Fairchild 328JET maintenance and material costs ($1.7 million), and general maintenance costs ($0.9 million). On a CASM basis, aircraft maintenance and repairs increased 0.07¢ to 1.02¢ in 2007, or 7.4%.  Depreciation and Amortization Depreciation and amortization of $11.4 million increased $0.2 million, or 1.8%. On a CASM basis, these costs decreased 0.03¢ to 0.25¢ in 2007, or 10.7%.  Aircraft Rentals Aircraft rental costs of $45.9 million in 2007 decreased $1.9 million, or 4.0%. As of March 31, 2007, the Company satisfied the financial covenants contained in its agreement with Boeing Capital Services Corporation (BCSC), which provides for a prospective reduction of aircraft rental expense of $10,000 per month for 21 of the Boeing 717 aircraft leased from BCSC. In addition, the agreement allowed for a one-year retroactive rental reduction of $120,000 for each of those aircraft.  The Company received a payment of $2.5 million from BCSC in second quarter 2007 and recorded a corresponding reduction in aircraft rental expense.  The Company also added two Boeing 717 aircraft to the Midwest Airlines fleet during first quarter 2006, one Boeing 717 aircraft during second quarter 2006, one MD-80 in June 2007 and one MD-80 in July 2007, resulting in an increase in rental expense. On a CASM basis, aircraft rentals decreased 0.18¢ to 1.00¢ in 2007, or 15.3%.  Regional Carrier Regional carrier expense was $16.5 million in 2007. This expense relates to the new 50-seat regional jet program, which began in April 2007.  Other Other operating expenses of $60.8 million in 2007 increased $13.7 million, or 28.9%. The increase was primarily due to $7.7 million in AirTran defense costs and costs associated with the merger agreement with Midwest Air Partners, LLC. Other increases included booking fees ($1.5 million) due to higher passenger volume, flight simulator rentals ($1.1 million), advertising and promotion ($0.5 million), directors fees ($0.5 million), crew expenses ($0.4 million) due to increased flights, property rent ($0.4 million), purchased maintenance and repair ($0.3 million), and state property taxes ($0.2 million). These increased costs were partially offset by a decrease in passenger liability insurance ($0.9 million). On a CASM basis, other operating expenses increased 0.16¢ to 1.32¢ in 2007, or 13.8%.  26   Other Income/(Expense)  Other income of $5.8 million in 2007 increased $2.7 million from 2006 due to higher interest income ($1.7 million) and lower interest expense ($1.0 million). Interest income reflects interest earned on the Companys cash, cash equivalents and restricted cash. Interest expense consists of interest on the Companys debt related to aircraft, the Basic Moratorium Notes and convertible debt, including the write-off of deferred debt issuance expenses on the convertible debt of $0.5 million in first quarter 2007.  Income Tax  There was no provision for income taxes for the first nine months of 2007 and 2006. The Company does not record income tax expense or benefit due to accumulated losses for which valuation allowances have been recorded. The Company will assess the ongoing utilization of accumulated losses and the related valuation allowance each quarter.  Net Income/(Loss)  Net income for the first nine months of 2007 was $9.0 million, an increase of $7.2 million from 2006 net income of $1.8 million.  27  Liquidity and Capital Resources  The Companys unrestricted cash and cash equivalents totaled $135.9 million at September 30, 2007, compared with $118.1 million at December 31, 2006. At September 30, 2007, the restricted cash balance was $35.8 million, compared with $39.6 million at December 31, 2006. The change in restricted cash is due to a decrease in the cash holdback percentage from 85% to 50% by the Visa/MasterCard credit card processor, partially offset by an increase in advance ticket sales.  As of September 30, 2007, the Company had a working capital surplus of $44.4 million compared with a $24.0 million surplus at December 31, 2006. The increase in working capital as of September 30, 2007 is primarily related to an increase in cash and fair value of fixed fuel contracts, and a decrease in unearned revenue, partially offset by an increase in air traffic liability, which represents the liability for sales of future flights.  Operating Activities Net cash provided by operations for the nine-month period ended September 30, 2007 totaled $20.5 million. Cash provided by operations reflects the $9.0 million net income earned during the nine months ended September 30, 2007, a $25.4 million increase in air traffic liability due to increased sales of future flights, offset by a $15.1 million increase in fair value of fixed fuel contracts, and a $14.3 million realization of unearned revenue primarily from the Companys credit card program. Other assets increased $8.4 million, primarily due to an increase in fuel margin deposits of $6.9 million and regional start-up costs of $1.9 million.  Investing Activities Net cash used in investing activities for the nine-month period ended September 30, 2007 totaled $8.1 million, primarily for capital expenditures.  Financing Activities Net cash provided by financing activities for the nine-month period ended September 30, 2007 was $5.4 million, primarily related to proceeds from warrants and options exercised.  As discussed in Note 4 to the Consolidated Financial Statements contained in the Companys Annual Report on Form 10-Kfor the year ended December 31, 2006, the Company issued the Basic Moratorium Notes to its lessors and lenders as part of the restructuring lease and debt agreements. The Basic Moratorium Notes were paid in full in June 2007.  As of February 2007, all of the Companys remaining convertible senior secured notes were converted to Common Stock. This conversion reduced long-term debt by $21.6 million, increased outstanding shares by 4.3 million and increased shareholders equity by $21.6 million.  2007 and Beyond The competitive revenue environment and volatile nature of fuel prices make it difficult to accurately project cash flow from operations for the remainder of 2007 and beyond. Absent adverse factors outside the control of the Company such as terrorist attacks, heightened fear of  28  terrorist attacks or substantial deterioration in the industry revenue environment, the Company believes current liquidity and cash flow from operations will be sufficient to fund current operations through 2007.  Key cash flow items for 2007 and beyond include: ●Anticipated total capital spending of approximately $14.8 million for 2007 and similar spending annually in 2008, with a 30% reduction in 2009. The anticipated spending includes amounts in 2008 and 2009 that are dependent on fleet replacement decisions currently being contemplated and excludes aircraft acquisitions, which are expected to be leased. The Company expects most of the spending to be for spare parts for the Boeing 717 program, continued maintenance support of the Midwest Airlines MD-80 fleet, and parts provisioning for the contemplated fleet replacement referenced above.●Lease payments of $71.8 million in 2007 for aircraft and other operating lease obligations. These payments reflect reductions of $0.2 million per month in the Boeing lease payments due to the Company’s improved financial position.●Estimated net interest income of $8.0 million in 2007.●Non-cash expenses arising primarily from depreciation, contributing approximately $15.4 million to annual cash flow in 2007.●Defined benefit pension plan contributions of $2.0 million in 2007.●Estimated payments to Goldman Sachs of between $4.4 million and $6.6 million for financial advisory services related to AirTrans unsolicited exchange offer and the merger agreement with Midwest Air Partners, LLC (as described further under Recent or Pending Developments).  Forward-Looking Statements  This Form 10-Q, particularly (but not limited to) the Recent or Pending Developments section below and the Overview and 2007 and Beyond sections above, contains forward-looking statements that may state the Companys or managements intentions, hopes, beliefs, expectations or predictions for the future. In the following discussion and elsewhere in the report, statements containing words such as expect, anticipate, believe, estimate, goal, objective or similar words are intended to identify forward-looking statements. It is important to note that the Companys actual results could differ materially from projected results due to the risk factors described under Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and the following: ●the Company’s inability to generate sufficient cash flows to meet obligations on a timely basis;●uncertainties concerning ongoing financing for operations, including the ability to finance the acquisition of new aircraft;●uncertainties related to acquisition of aircraft;●potential delays related to aircraft being acquired;●adverse scheduling developments;●decline in labor relations or unfavorable arbitration rulings;   29   ●costly government regulations, including increased costs for compliance with new or enhanced government regulations;●increases in insurance costs or shortages of available insurance;●more frequent aircraft maintenance and refurbishment schedules;●interest rate fluctuations;●increased costs for security-related measures;●potential aircraft incidents and other events beyond the Company’s control, including traffic congestion and weather conditions;●potential acquisition of the Company, routes or equipment;●potential delays or adverse developments with the regional jet program; and●potential delays or the inability to complete the merger agreement described in the “Recent or Pending Developments” section below due to an adverse ruling by the Department of Justice or lack of shareholder approval.  Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the Companys Securities and Exchange Commission filings. The Company assumes no obligation, and disclaims any obligation, to update information contained in this Quarterly Report on Form 10-Q, including forward-looking statements, as a result of facts, events or circumstances after the date of the report.  Recent or Pending Developments  On August 12, 2007, AirTran announced the expiration of its unsolicited exchange offer with respect to the Companys Common Stock. As previously disclosed, AirTran commenced the unsolicited exchange on January 11, 2007, and had extended it on February 1, 2007, March 7, 2007, April 2, 2007, May 17, 2007 and June 11, 2007.  On August 16, 2007, following an extensive bidding and negotiation process, the Company entered into a merger agreement to be acquired by Midwest Air Partners, LLC, a limited liability company formed by an affiliate of TPG Capital, L.P. and Northwest Airlines, Inc.  Under the terms of the merger agreement, each outstanding share of Company Common Stock will be converted into the right to receive $17.00 per share in cash.  The transaction is expected to be completed in the fourth quarter of 2007, subject to shareholder approval and other customary conditions, including those described below.  On September 26, 2007, the Company issued a proxy statement relating to the special meeting of its shareholders to be held on October 30, 2007 to consider approval of the merger agreement. The Companys Board of Directors recommended that shareholders vote for the approval of the merger agreement.  Pursuant to the HSR Act, the merger is subject to regulatory review by the DOJ and the Federal Trade Commission (FTC). After the parties filed their notification and Report Forms for Certain Mergers and Acquisitions with the DOJ and the FTC, they each received a request for  30  additional information (Second Request) from the DOJ on October 4, 2007. The Second Request extends the waiting period imposed by the HSR Act by up to 30 days after the parties substantially comply with the Second Request unless the period is extended voluntarily by the parties or terminated sooner by the DOJ. The parties are in the process of preparing a response to the Second Request. The merger is also subject to approval by the Department of Transportation.  In September 2007, the Company completed the reconfiguration of its MD-80 aircraft, providing a dual-seating cabin with both Signature and Saver seats that allows customers seating choice options. The Boeing 717 fleet is expected to be reconfigured by mid-2008, offering customers the choice of Signature and Saver seating on all Midwest Airlines flights. It is expected that this change will both increase revenue and reduce unit costs.  In July 2007, warrants covering 389,567 shares of the Companys Common Stock were converted at an aggregate exercise price of $1,838,754. There remain warrants outstanding covering 104,031 shares of Common Stock.  In May 2007, the Company signed a memorandum of understanding with Northwest Airlines to form a strategic codeshare partnership. This codeshare is an expansion of the reciprocal frequent flyer relationship between the Company and Northwest Airlines that began in May 2006. The codeshare partnership agreement was signed in September 2007.  In connection with an industrywide initiative, the Company has received a request from the General Services Administration for the refund of expired airline tickets purchased for government use. The Company is currently investigating this claim and its financial ramifications. Management has recorded an accrual for the claim, but does not expect the refund to have a material effect.  On August 31, 2005, during taxi operations, a piece of airport-controlled ground equipment came into contact with a Midwest Airlines aircraft at Milwaukees General Mitchell International Airport, resulting in damages in excess of $400,000. A formal notice of claim has been filed by the Company with Milwaukee County pursuant to the requirements of Wisconsin Statutes. Outside legal counsel has been retained to prepare the matter for litigation.   31  Item 3. Quantitative and Qualitative Disclosures About Market Risk  Except as discussed below, there have been no material changes in the Companys market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosure about Market Risk of the Companys Annual Report on Form 10-K for the year ended December 31, 2006.  In 2007, the Company increased its fuel hedge position. Approximately 90% of the jet fuel expected to be used by the Company in 2007 has been hedged. The Company has also hedged approximately 26% of the jet fuel expected to be used in the first half of 2008. The Company took these positions because of favorable pricing opportunities and as a means of reducing risk to the Company. Aircraft fuel is the largest expense category for the Company.  As of September 30, 2007, all the Companys fuel hedging and derivative agreements were with one counterparty. The limited number of counterparties exposes the Company to financial risk in the event of nonperformance by the counterparty. The Company does not expect the counterparty to fail to meet its obligations. To manage this risk, the Company will periodically review and consider other counterparties to potentially limit its exposure to a single counterparty.  As of June 30, 2007, the Basic Moratorium Notes were paid in full.  In January and February 2007, all of the Companys remaining senior secured convertible debt was converted to common stock. This exchange reduced long-term debt by $21.6 million, increased outstanding shares by 4.3 million and increased shareholders equity by $21.6 million.  Item 4. Controls and Procedures  (a) Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Companys management evaluated, with the participation of the Companys principal executive officer and principal financial officer, the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Companys chairman of the board, president and chief executive officer and the Companys senior vice president and chief financial officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.  (b) Changes in internal controls. There was no change in the Companys internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.  32  PART II  OTHER INFORMATION  Item 1.  Legal Proceedings  On April 12, 2007, the Company and members of the Companys Board of Directors were named as defendants in a putative class action filed in the United States District Court for the Eastern District of Wisconsin (Market Street Securities v. Midwest Air Group, Inc., et al., Case No. 07-C-0345). The complaint purports to have been filed by a shareholder of the Company who seeks to maintain the suit as a class action on behalf of all holders of Company Common Stock. The complaint asserts claims arising out of the Companys rejection of AirTrans offer to acquire the Company and alleges that the Board breached its duties of care and good faith owed to the Companys shareholders by rejecting AirTrans initial and revised unsolicited exchange offers. The plaintiff seeks, among other things, preliminary and permanent injunctive relief to prevent the Company from enforcing its shareholder rights plan and damages and other monetary relief. Pending before the Court are the plaintiffs motion for a preliminary injunction, which was filed on May 17, 2007, and the motion of the Company and the directors to dismiss the complaint, which was filed on May 22, 2007. The Company does not believe that the action is meritorious and intends to continue to contest it vigorously.    33  Item 6. Exhibits  (2.1)Agreement and Plan of Merger dated as of August 16, 2007 by and among Midwest Air Partners, LLC, Midwest Acquisition Company, Inc. and Midwest Air Group, Inc. (incorporated by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed August 17, 2007).(10.1)First Amendment to Rights Agreement, dated as of August 16, 2007, between Midwest Air Group, Inc. and American Stock Transfer and Trust Company (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed August 17, 2007).(31.1)Certification of the Chief Executive Officer Pursuant to Section 302.(31.2)Certification of the Chief Financial Officer Pursuant to Section 302.(32.1)Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906.  34  SIGNATURES   Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.   Midwest Air Group, Inc.Date:
October 24, 2007By /s/ Timothy E. HoeksemaTimothy E. HoeksemaChairman of the Board, President andChief Executive OfficerDate:
October 24, 2007By /s/ Curtis E. SawyerCurtis E. SawyerSenior Vice President andChief Financial Officer    35