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|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | 
|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 March 31, 2006

[ ]
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)
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | Wisconsin                                                                                               |  | 39-1828757                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | (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.



|    |   |  |    | 
|--- | - |  | -- | 
|Yes | X |  | No | 



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 filer |  |  | Accelerated filer |  |  | Non-accelerated filer | X | 



Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



|    |  |  |    |  
|--- |  |  | -- | -
|Yes |  |  | No | X



As of April 30, 2006 there were 17,934,021 shares of common stock outstanding.



---



MIDWEST AIR GROUP, INC.

FORM 10-Q

For the period ended March 31, 2006



INDEX



|           |                                                                                       |     
|---------- | ------------------------------------------------------------------------------------- | ----
|           |                                                                                       | Page
|           | PART I  FINANCIAL INFORMATION                                                        |     
|Item 1.    | Financial Statements (Unaudited)                                                      |     
|           | Condensed Consolidated Statements of Operations                                       | 2   
|           | Condensed Consolidated Balance Sheets                                                 | 3   
|           | Condensed Consolidated Statements of Cash Flows                                       | 4   
|           | Notes to Condensed Consolidated Financial Statements                                  | 5   
|Item 2.    | Managements Discussion and Analysis of Financial Condition and Results of Operations | 15  
|Item 3.    | Quantitative and Qualitative Disclosures about Market Risk                            | 27  
|Item 4.    | Controls and Procedures                                                               | 27  
|           |                                                                                       |     
|           | PART II  OTHER INFORMATION                                                           |     
|Item 6.    | Exhibits                                                                              | 28  
|SIGNATURES | 29                                                                                   





1



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|                                                                    |  |  |   |                    |  |   |         
|------------------------------------------------------------------- |  |  | - | ------------------ |  | - | --------
|MIDWEST AIR GROUP, INC.                                            
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                    
|(Dollars in thousands, except per share amounts)                   
|(Unaudited)                                                        
|                                                                    |  |  |   |                    |  |   |         
|                                                                    |  |  |   |                    |  |   |         
|                                                                    |  |  |   | Three Months Ended
|                                                                    |  |  |   | March 31,         
|                                                                    |  |  |   | 2006               |  |   | 2005    
|                                                                    |  |  |   |                    |  |   |         
|Operating revenues:                                                 |  |  |   |                    |  |   |         
|Passenger service                                                   |  |  | $ | 131,286            |  | $ | 96,550  
|Cargo                                                               |  |  |   | 1,934              |  |   | 1,647   
|Other                                                               |  |  |   | 17,529             |  |   | 13,828  
|Total operating revenues                                            |  |  |   | 150,749            |  |   | 112,025 
|                                                                    |  |  |   |                    |  |   |         
|Operating expenses:                                                 |  |  |   |                    |  |   |         
|Salaries, wages and benefits                                        |  |  |   | 38,990             |  |   | 36,547  
|Aircraft fuel and oil                                               |  |  |   | 52,824             |  |   | 35,205  
|Commissions                                                         |  |  |   | 3,996              |  |   | 2,924   
|Dining services                                                     |  |  |   | 2,047              |  |   | 1,896   
|Station rental, landing and other fees                              |  |  |   | 13,943             |  |   | 11,376  
|Aircraft maintenance, materials and repairs                         |  |  |   | 12,709             |  |   | 11,286  
|Depreciation and amortization                                       |  |  |   | 3,836              |  |   | 4,155   
|Aircraft rentals                                                    |  |  |   | 15,369             |  |   | 11,572  
|Other                                                               |  |  |   | 16,315             |  |   | 12,974  
|Total operating expenses                                            |  |  |   | 160,029            |  |   | 127,935 
|Operating loss                                                      |  |  |   | (9,280)            |  |   | (15,910)
|                                                                    |  |  |   |                    |  |   |         
|Other (expense) income:                                             |  |  |   |                    |  |   |         
|Interest income                                                     |  |  |   | 1,448              |  |   | 732     
|Interest expense                                                    |  |  |   | (851)              |  |   | (899)   
|Total other (expense) income                                        |  |  |   | 597                |  |   | (167)   
|                                                                    |  |  |   |                    |  |   |         
|Loss before income tax credit                                       |  |  |   | (8,683)            |  |   | (16,077)
|Income tax credit                                                   |  |  |   | -                  |  |   | 140     
|                                                                    |  |  |   |                    |  |   |         
|Net loss                                                            |  |  | $ | (8,683)            |  | $ | (15,937)
|                                                                    |  |  |   |                    |  |   |         
|                                                                    |  |  |   |                    |  |   |         
|Loss per common share  basic:                                      |  |  | $ | (0.49)             |  | $ | (0.91)  
|Loss per common share  diluted:                                    |  |  | $ | (0.49)             |  | $ | (0.91)  
|                                                                    |  |  |   |                    |  |   |         
|See notes to unaudited condensed consolidated financial statements.







2



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|                                                                           |           |          |        |              |         
|-------------------------------------------------------------------------- | --------- | -------- | ------ | ------------ | --------
|MIDWEST AIR GROUP, INC.                                                   
|CONDENSED CONSOLDIDATED BALANCE SHEETS                                    
|(Dollars in thousands, except per share amounts)                          
|(Unaudited)                                                               
|                                                                          
|                                                                          
|                                                                           | March 31, |          |        | December 31,
|ASSETS                                                                     | 2006      |          |        | 2005        
|                                                                           |           |          |        |             
|Current assets:                                                            |           |          |        |              |         
|Cash and cash equivalents                                                  | $         | 90,736   |        | $            | 99,000  
|Accounts receivable, net                                                   |           | 6,016    |        |              | 5,276   
|Inventories                                                                |           | 8,707    |        |              | 8,772   
|Prepaid expenses                                                           |           | 16,780   |        |              | 11,485  
|Restricted cash                                                            |           | 59,624   |        |              | 38,780  
|Deferred income taxes                                                      |           | 4,012    |        |              | 5,072   
|Total current assets                                                       |           | 185,875  |        |              | 168,385 
|Property and equipment, net                                                |           | 156,799  |        |              | 158,822 
|Aircraft purchase deposits and pre-delivery progress payments              |           | 3,900    |        |              | 12,540  
|Other assets, net                                                          | 10,765    |          | 11,597
|Total assets                                                               | $         | 357,339  |        | $            | 351,344 
|                                                                           |           |          |        |              |         
|                                                                           |           |          |        |              |         
|LIABILITIES AND SHAREHOLDERS' EQUITY                                       |           |          |        |              |         
|                                                                           |           |          |        |              |         
|Current liabilities:                                                       |           |          |        |              |         
|Accounts payable                                                           | $         | 12,418   |        | $            | 12,730  
|Current maturities of long-term debt                                       |           | 3,261    |        |              | 3,469   
|Air traffic liability                                                      |           | 87,698   |        |              | 63,862  
|Unearned revenue                                                           |           | 27,834   |        |              | 33,115  
|Accrued liabilities:                                                       |           |          |        |              |         
|Vacation pay                                                               |           | 4,175    |        |              | 4,783   
|Accrued fuel purchases                                                     |           | 6,566    |        |              | 8,211   
|Other                                                                      |           | 37,886   |        |              | 37,443  
|Total current liabilities                                                  |           | 179,838  |        |              | 163,613 
|                                                                           |           |          |        |              |         
|Long-term debt                                                             |           | 46,068   |        |              | 46,880  
|Long-term debt on pre-delivery progress payments                           |           | 3,191    |        |              | 9,455   
|Deferred income taxes                                                      |           | 4,302    |        |              | 5,352   
|Accrued pension and other postretirement benefits                          |           | 23,132   |        |              | 22,041  
|Deferred frequent flyer partner revenue                                    |           | 7,328    |        |              | 7,103   
|Deferred revenue, credits & gains                                          |           | 63,316   |        |              | 60,277  
|Other noncurrent liabilities                                               |           | 20,150   |        |              | 19,367  
|Total liabilities                                                          |           | 347,325  |        |              | 334,088 
|                                                                           |           |          |        |              |         
|                                                                           |           |          |        |              |         
|Shareholders' 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,                |           |          |        |              |         
|18,646,317 shares issued in 2006 and 18,473,847 shares issued in 2005      | 186       |          |        | 185         
|Additional paid-in capital                                                 |           | 47,182   |        |              | 47,000  
|Treasury stock, at cost; 708,635 shares in 2006 and 708,480 shares in 2005 | (15,584)  |          |        | (15,584)    
|Retained earnings                                                          |           | (21,936) |        |              | (13,253)
|Cumulative other comprehensive income (loss)                               |           | 166      |        |              | (838)   
|Unearned compensation restricted stock                                     |           | -        |        |              | (254)   
|Total shareholders' equity                                                 | 10,014    |          | 17,256
|Total liabilities and shareholders' equity                                 | $         | 357,339  |        | $            | 351,344 
|                                                                           |           |          |        |              |         
|                                                                           |           |          |        |              |         
|See notes to unaudited condensed consolidated financial statements.       







3



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|                                                                    |                    |         |         |         |          | 
|------------------------------------------------------------------- | ------------------ | ------- | ------- | ------- | -------- | 
|MIDWEST AIR GROUP, INC.                                            
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                    
|(Dollars in thousands)                                             
|(Unaudited)                                                        
|                                                                   
|                                                                    | Three Months Ended
|                                                                    | March 31,         
|                                                                    | 2006               |         |         | 2005    |         
|Operating activities:                                               |                    |         |         |         |         
|Net loss                                                            | $                  | (8,683) |         | $       | (15,937) | 
|Items not involving the use of cash:                                |                    |         |         |         |         
|Depreciation and amortization                                       | 3,836              |         |         | 4,155   |         
|Deferred income taxes                                               | -                  |         |         | (140)   |         
|Other, net                                                          | (199)              |         |         | 181     |         
|                                                                    |                    |         |         |         |         
|Changes in operating assets and liabilities:                        |                    |         |         |         |         
|Accounts receivable                                                 | (740)              |         |         | (880)   |         
|Inventories                                                         | 178                |         |         | (4)     |         
|Prepaid expenses                                                    | (4,291)            |         |         | (1,698) |         
|Other assets                                                        | 697                |         |         | 85      |         
|Accounts payable                                                    | (312)              |         |         | 4,613   |         
|Deferred frequent flyer partner revenue                             | 404                |         |         | (287)   |         
|Accrued liabilities                                                 | (1,614)            |         |         | 10,276  |         
|Unearned revenue                                                    | (5,460)            |         |         | 537     |         
|Accrued pension                                                     | 1,091              |         |         | 880     |         
|Air traffic liability                                               | 23,836             |         |         | 8,893   |         
|Other non-current liabilities                                       | 1,025              |         | 1,049   |        
|Net cash provided by operating activities                           | 9,768              |         | 11,723  |        
|                                                                    |                    |         |         |         |         
|Investing activities:                                               |                    |         |         |         |         
|Capital expenditures                                                | (957)              |         |         | (2,036) |         
|Return of purchase deposits and pre-delivery progress payments      | 8,272              |         |         | (3,264) |         
|Proceeds from sale of property and equipment                        | -                  |         |         | 3,474   |         
|Restricted cash                                                     | (20,844)           |         |         | (7,618) |         
|Other, net                                                          | 1,362              |         | 13      |        
|Net cash used in investing activities                               | (12,167)           |         | (9,431) |        
|                                                                    |                    |         |         |         |         
|Financing activities:                                               |                    |         |         |         |         
|Proceeds from pre-delivery progress borrowings                      | -                  |         |         | 3,003   |         
|Payment of debt associated with progress payments                   | (6,041)            |         |         | (2,886) |         
|Other, net                                                          | 176                |         | 807     |        
|Net cash (used in) provided by financing activities                 | (5,865)            |         | 924     |        
|                                                                    |                    |         |         |         |          | 
|Net (decrease) increase in cash and cash equivalents                |                    | (8,264) |         |         | 3,216    | 
|Cash and cash equivalents, beginning of period                      | 99,000             |         | 81,492  |        
|Cash and cash equivalents, end of period                            | $                  | 90,736  |         | $       | 84,708   | 
|                                                                    |                    |         |         |         |          | 
|Supplemental non-cash activities:                                   |                    |         |         |         |          | 
|Non-cash incentives                                                 | $                  | 3,117   |         | $       | 1,518    | 
|                                                                    |                    |         |         |         |          | 
|Supplemental cash flow information:                                 |                    |         |         |         |          | 
|Cash paid for:                                                      |                    |         |         |         |          | 
|Income taxes                                                        | $                  | -       |         | $       | 134      | 
|Interest                                                            |                    | 390     |         |         | 571      | 
|                                                                    |                    |         |         |         |          | 
|See notes to unaudited condensed consolidated financial statements.









4



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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-month periods ended March 31, 2006 and 2005 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 Midwest Air Group, Inc.s (the Company) Annual Report on Form 10-Kfor the year ended December 31, 2005. The results of operations for the three-month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2006.



2.

Segment Reporting



Midwest Airlines, Inc. (Midwest Airlines) and Skyway Airlines, Inc. (Skyway), doing business as Midwest Connect, constitute the operating segments of the Company. The Companys reportable segments are strategic units that are managed independently because they provide different services with different cost structures. Additional detail on segment reporting is included in the CompanysAnnual Report on Form 10-K for the fiscal year ended December 31, 2005. Financial information for the three-month periods ended March 31, 2006 and 2005, for the two segments, Midwest Airlines and Skyway Airlines, follows (in thousands).







5



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|                                                                                 |           |         |             |             
|-------------------------------------------------------------------------------- | --------- | ------- | ----------- | ------------
|Segment Information                                                              |           |         |             |             
|                                                                                 |           |         |             |             
|Three Months Ended March 31, 2006                                               
|                                                                                 |           |         |             |             
|                                                                                 | Midwest   | Skyway  | Elimination | Consolidated
|Operating revenues                                                               | $129,447  | $25,209 | ($3,907)    | $150,749    
|Loss before income tax provision                                                 | (5,264)   | (3,419) | -           | (8,683)     
|Income tax provision                                                             | -         | -       | -           | -           
|Net loss                                                                         | (5,264)   | (3,419) | -           | (8,683)     
|                                                                                 |           |         |             |             
|                                                                                 |           |         |             |             
|Three Months Ended March 31, 2005                                               
|                                                                                 |           |         |             |             
|                                                                                 | Midwest   | Skyway  | Elimination | Consolidated
|Operating revenues                                                               | $  93,904 | $19,328 | ($1,207)    | $112,025    
|Loss before income tax provision                                                 | (11,426)  | (4,651) | -           | (16,077)    
|Income tax provision                                                             | -         | (140)   | -           | (140)       
|Net loss                                                                         | (11,426)  | (4,511) | -           | (15,937)    
|                                                                                 |           |         |             |             
|                                                                                 |           |         |             |             
|                                                                                 |           |         |             |             
|                                                                                 |           |         |             |             
|Note:  Numbers and totals in this table may not be recalculated due to rounding.









6



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3.

Derivative Instruments and Hedging Activities



The Company accounts for its fuel hedge derivative instruments as cash flow hedges, as defined in Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities and the corresponding amendments under SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. 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 they are reclassified to the income statement as an offset to fuel expense. The Company does not purchase or hold any derivative financial instruments for trading purposes.



During the fourth quarter of 2004, the Company began hedging a portion of the price risk related to anticipated future jet fuel requirements, primarily through a collar option strategy. As of March 31, 2006, the Company had fuel hedge collars in place covering a percentage of the total fuel consumption for 2006. The collars for second quarter 2006 cover approximately 26.1% of the total estimated fuel consumption with an average ceiling price of $2.01 per gallon and an average floor price of $1.85 per gallon, based on Gulf Coast Mean pricing, and do not include into-plane costs, which have historically been approximately $0.20 per gallon. As of March 31, 2006, there are collars in place that cover 26.7%, 19.8% and 4.9% of the total estimated fuel consumption for the third and fourth quarters of 2006 and the first quarter of 2007, respectively. Ceiling prices are on average $2.05, $2.06 and $2.15 per gallon, and floor prices are on average $1.90, $1.91 and $1.99 per gallon for the third and fourth quarters of 2006 and the first quarter of 2007, respectively, as of March 31, 2006. In the first quarter of 2006, the Company recorded $0.1 million as an offset to fuel expense due to the price of jet fuel purchased being above the fuel hedge collars. As of March 31, 2006, the Company recorded $0.8 million in prepaid expenses and other assets for unrealized gains related to collar options, with an offset to other comprehensive income/(loss). This amount will be reclassified to the income statement over the life of the collars.



4. Non-Cash Incentives



Midwest Airlines has received credit memos from certain suppliers associated with the delivery of each Boeing 717 aircraft to be used for the acquisition of aircraft spare parts and maintenance tooling, employee training, flight simulator rental, aircraft and engine lease payments, and engine maintenance agreements. As of March 31, 2006, unused credit memos totaled $2.0 million and are recorded as other assets in the unaudited condensed consolidated balance sheets. Midwest Airlines will receive additional credit memos on the delivery of the final Boeing 717 aircraft and will continue to use the credits as needed to pay for applicable services. The benefit of these credit memos is being recognized on the income statement over the term of the related leases, whereas the related credit memo asset is being depleted as purchases are made.



5. Net Loss Per Share



The following table is a reconciliation of the weighted average shares outstanding for the three-month periods ended March 31, 2006 and 2005 (in thousands, except per share data):





7



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|                                                                     |                              |  |              
|-------------------------------------------------------------------- | ---------------------------- |  | -------------
|                                                                     | Three Months Ended
March 31,
|                                                                    
|                                                                     | 2006                         |  | 2005         
|Net Loss Per Share  Basic:                                          |                              |  |              
|Net loss (numerator)                                                 | $    (8,683)                 |  | $  (15,937)  
|                                                                     |                              |  |              
|Weighted average shares outstanding (denominator)                    | 17,602                       |  | 17,471       
|                                                                     |                              |  |              
|Net loss per share  basic                                           | $      (0.49)                |  | $      (0.91)
|                                                                     |                              |  |              
|Net Loss Per Share  Diluted:                                        |                              |  |              
|Net loss (numerator)                                                 | $    (8,683)                 |  | $  (15,937)  
|                                                                     |                              |  |              
|Weighted average shares outstanding (denominator)                    | 17,602                       |  | 17,471       
|                                                                     |                              |  |              
|Effect of dilutive securities:                                       |                              |  |              
|Stock options (1)                                                    | -                            |  | -            
|Warrants (2)                                                         | -                            |  | -            
|Convertible debt (2)                                                 | -                            |  | -            
|Shares issuable under the Stock Plans for Outside Directors (3)      | -                            |  | -            
|Weighted average shares outstanding assuming 
dilution (denominator) | 17,602                       |  | 17,471       
|Net loss per share  diluted                                         | $      (0.49)                |  | $      (0.91)
|                                                                     |                              |  |              



(1)

The dilutive effect of the potential exercise of outstanding options to purchase common shares is calculated using the treasury stock method. Options to purchase 3,835 and 3,320 shares of the Companys Common Stock for the three-month periods ended March 31, 2006 and March 31, 2005, were excluded from the computation of diluted earnings per share as the effect on earnings per share would be anti-dilutive.

(2)

Warrants and convertible senior secured notes issued by the Company were excluded from the calculation for the three months ended March 31, 2006 and March 31, 2005, as their effect was anti-dilutive. These represent 1,571and 4,884 shares of the Companys Common Stock at exercise prices of $4.72 and $5.00 respectively.

(3)

Shares issuable under the 1995 Stock Plan for Outside Directors and 2005 Non-Employee Director Stock Plan of 84 and 47 were excluded from the calculations for the three months ended March 31, 2006 and 2005, as their effect was anti-dilutive.





6. Share-Based Compensation



Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards SFAS 123(R), Share-Based Payment(SFAS 123(R)), using the modified prospective application transition method: option awards granted, modified or settled after the date of adoption are required to be measured and accounted for in accordance with SFAS 123(R). Unvested equity-classified awards that were granted prior to the effective date will continue to be accounted for in accordance with SFAS 123, and compensation amounts for awards that vest will now be recognized in the income statement as an expense.



SFAS 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 valuation model, which is consistent with valuation techniques previously utilized by the Company for options in pro forma footnote disclosures required under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure.





8



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Expected volatilities are based on historical volatility of the Companys 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 conceptual 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 $3.45 and $2.83 for the quarter ended March 31, 2006 and 2005, respectively. The following assumptions were used to value stock option grants during the following period:



|                         |                                   |                                   | 
|------------------------ | --------------------------------- | --------------------------------- | 
|                         | Three Months Ended
March 31, 2006 | Three Months Ended
March 31, 2005
|                        
|Dividend yield           | 0.0%                              | 0.0%                             
|Expected volatility      | 62.0%                             | 53.3%                            
|Risk-free interest rate  | 4.6%                              | 4.4%                             
|Forfeiture rate          | 1.3%                              | 1.5%                             
|Expected life (in years) | 7.4                               | 7.5                              



Compensation cost for options granted was recognized on an accrual amortization method over the vesting period of the options. The following amounts were recognized for stock-based compensation (in thousands):



|                              |                                                  |           | 
|----------------------------- | ------------------------------------------------ | --------- | 
|                              | Three Months Ended
March 31, 2006
(In thousands)
|Salaries, wages and benefits: |                                                  |           | 
|Stock option expense          |                                                  | $    120  | 
|Restricted stock expense      |                                                  | 58        | 
|Total                         |                                                  | $   178   | 
|Tax Benefit                   |                                                  | $       - | 



As of March 31, 2006 there was $1.9 million of total unrecognized compensation cost related to stock options. This cost is expected to be recognized over a weighted average period of 1.6 years.



Prior to the adoption of SFAS 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows. SFAS 123(R) requires cash flows resulting from excess tax benefits to be classified as financing cash flows. Excess tax benefits result from tax deductions in excess of the compensation cost recognized for those options. The condensed consolidated statement of cash flows for the quarters ended March 31, 2006 and March 31, 2005 did not include any tax benefits.



The fair value of restricted stock awards is determined based on the number of shares granted and the quoted price of the Companys Common Stock (the Common Stock) at the grant date. Such fair values are recognized as compensation expense over the requisite service period, net of estimated forfeitures, using the accrual method of expense recognition under SFAS 123(R). Under the provisions of SFAS 123(R), the contra equity account, representing the unrecognized restricted stock expense, is no longer required. Therefore, as of March 31, 2006, unearned compensation restricted stock totaling $0.3 million was reclassified and reflected as a reduction to the Companys additional paid-in capital in the condensed consolidated balance sheet.





9



---



Under the Companys 1995 Stock Option Plan, the Compensation Committee of the Board of Directors may grant 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 at December 31, 2005 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 March 31, 2006. 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. 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 restricted stock and options, at its discretion, to certain employees to purchase shares of Common Stock. An aggregate of 1,000,000 shares of Common Stock is reserved for issuance under the Plan, of which 381,525 shares are available for future grants at March 31, 2006. 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.



Restricted stock awards vest on the third anniversary of the date of grant. Vesting for all outstanding option grants and restricted stock is based only on continued service as an employee of the Company or upon death or total and permanent disability. The stock options and restricted stock awards provide for accelerated vesting if there is a change in control and generally vest upon retirement. All of the Companys outstanding stock options and restricted stock awards are classified as equity instruments. The Company generally uses either treasury stock or will issue new Common Stock to satisfy stock option exercises.



The total intrinsic value of options exercised in the first quarter of 2006 was $0.1 million and no intrinsic value in the first quarter 2005. Cash received from option exercises during the three months ended March 31, 2006 was $0.1 million. There were no exercises in first quarter 2005.







10



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|                                 |                      |           |          |                                 |      |                                                     |  |                                           | 
|-------------------------------- | -------------------- | --------- | -------- | ------------------------------- | ---- | --------------------------------------------------- |  | ----------------------------------------- | 
|Options                          |                      | Shares    |          | Weighted
Average
Exercise
Price |      | Weighted
Average
Remaining
Contractual
Term (years) |  | Aggregate
Average
Intrinsic
Value
(000s)
|                                 |                      |           |          |                                 |      |                                                     |  |                                          
|Outstanding at December 31, 2005 |                      | 3,292,541 |          | $      10.37                    |      |                                                     |  |                                          
|                                 | Granted              |           | 317,010  |                                 | 5.16 |                                                     |  |                                           | 
|                                 | Exercised            |           | (48,308) |                                 | 3.01 |                                                     |  |                                           | 
|                                 | Forfeited or expired |           | (13,809) |                                 | 3.54 |                                                     |  |                                           | 
|Outstanding at March 31, 2006    |                      | 3,547,434 |          | $      10.01                    |      | 6.3                                                 |  | $      7,298                             
|                                 |                      |           |          |                                 |      |                                                     |  |                                          
|Exercisable at March 31, 2006    |                      | 2,996,566 |          | $      11.04                    |      | 6.2                                                 |  | $      6,095                             
|                                 |                      |           |          |                                 |      |                                                     |  |                                          







|                              |         |         |                                        |      
|----------------------------- | ------- | ------- | -------------------------------------- | -----
|Restricted Stock              |         | Shares  | Weighted Average
Grant-Date Fair Value
|                              |         |         |                                       
|Outstanding December 31, 2005 |         | 179,502 | $1.82                                 
|                              | Granted |         | 107,200                                | $5.16
|                              | Vested  |         | --                                     | --   
|Restricted at March 31, 2006  |         | 286,702 | $3.07                                 

















Prior to the adoption of SFAS 123(R), the Company accounted for share-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.  Accordingly, compensation expense was only recognized for the difference between the fair value and exercise price as of the grant date for options issued under the 2003 All-Employee Stock Option Plan. Had the Company applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation, the Companys net income and earnings per share for the three months ended March 31, 2005 would have been reduced to the following pro forma amounts, in thousands except per share amounts:







11



---





|                                                                         |  |   |         
|------------------------------------------------------------------------ |  | - | --------
|Net loss, as reported                                                    |  | $ | (15,937)
|                                                                         |  |   |         
|Add: Stock-based employee compensation expense recorded for              |  |   |         
|restricted stock awards, net of related tax effects                      |  |   | 36      
|                                                                         |  |   |         
|Deduct: Total stock-based employee compensation expense determined       |  |   |         
|under fair value based method for all awards, net of related tax effects |  |   | (293)   
|                                                                         |  |   |         
|Pro forma net loss                                                       |  | $ | (16,194)
|                                                                         |  |   |         
|Loss per share:                                                          |  |   |         
|Basic - as reported                                                      |  | $ | (0.91)  
|Basic - pro forma                                                        |  | $ | (0.93)  
|                                                                         |  |   |         
|Diluted - as reported                                                    |  | $ | (0.91)  
|Diluted - pro forma                                                      |  | $ | (0.93)  



7. Income Taxes



Due to accumulated losses and the inability to offset net operating losses against deferred tax liabilities, the Company no longer records federal income tax benefit on losses effective as of the second quarter of 2004 and state income tax benefit effective as of second quarter 2005. The effective tax rate is 0% for the three-month period ended March 31, 2006. As of March 31, 2006, the Company has a future federal tax benefit of $30.9 million, which will begin to expire in 2023 and approximately $9.2 million in state tax benefit, which began expiring in 2005. Due to the uncertainty of realizing the benefit of the net operating losses, as of March 31, 2006, the Company has recorded a valuation allowance of $30.9 million on the federal tax benefit and $9.2 million on the state tax benefit.



8.   Comprehensive Loss



As of March 31, 2006, the total balance of accumulated other comprehensive loss includes $0.8 million for unrealized gains on fuel collars and $0.6 million (net of tax) loss for additional minimum pension liability. The comprehensive loss was $7.7 million and $12.3 million for the three months ended March 31, 2006 and 2005, respectively.



9.   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). In the first quarter of 2006, the Company and the credit card processor agreed to an extension of the agreement until March 31, 2007. This extension includes a provision that allows the credit card processor to change the holdback percentage at any time up to 100%. As of March 31, 2006, the restricted cash amount represented 90% of the credit card processors risk, or approximately $54.0 million.





12



---



The Company also has agreements with American Express, Diners Club and Discover. As of March 31, 2006, American Express had retained cash related to credit card processing totaling $1.0 million (resulting in an aggregate of $55.0 million in restricted cash for MasterCard/Visa and American Express). If current industry conditions persist, other credit card processors may require holdbacks as well. The aggregate amount of additional holdback if all processors required 100% as of March 31, 2006 was approximately $18.1 million.



10.   Restricted Cash

Advance ticket sales transactions make up the majority of restricted cash. Airline passengers purchase tickets on flights through a variety of channels, the most popular method of ticket purchase is via credit card. The Companys MasterCard/Visa credit card processor requires amounts representing 90% of the cash received related to flights purchased prior to the scheduled departure date to be maintained in an account at the processors bank (Cash Reserves or Holdback) to cover the potential exposure for the unused tickets. The Company has concluded the Holdback should be characterized as restricted cash as these funds do not meet the definition of cash equivalents as discussed in paragraph 8 of SFAS 95. Although the cash is legally deposited with the bank, the substance of the transaction is to deposit the cash for the benefit of the Company. The Cash Reserves earn interest which is credited to the account of the Company.

Beginning during the second quarter of 2005, the statement of cash flows presents advance ticket sales as an increase in restricted cash in cash used in investing activities and as an increase in air traffic liability in cash provided by operating activities. On the scheduled flight date, the restriction on cash is released, resulting in net cash provided by investing activities and the release of air traffic liability as cash provided by operating activities. The advance ticket sales also result in net income as cash provided by operating activities. The net result of the advance ticket sale and subsequent flight is as net cash provided by operating activities.

The Company has reclassified the cash flows related to its restricted cash from Operating Activities to Investing Activities in the Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005. The net cash provided by operating activities increased $7.6 million to $11.7 million and net cash used by investing activities decreased $7.6 million to ($9.4) million for the three months ended March 31, 2005.

The Company has received a comment from the Securities and Exchange Commission (SEC) questioning this presentation. The Company is currently engaged in discussions with the SEC staff. While the Company believes that its current statement of cash flows presentation is appropriate, the possible resolution of this matter may result in a different presentation of these cash flows in future filings.



11.   Retirement and Benefit Plans



The net periodic benefit cost of benefit pension plans for the three-month periods ending March 31, 2006 and 2005, respectively, includes the following (in thousands):





13



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|                                        |                  |                |       |      
|--------------------------------------- | ---------------- | -------------- | ----- | -----
|                                        | Pension Benefits | Other Benefits
|                                        | 2006             | 2005           | 2006  | 2005 
|Components of Net Periodic Benefit Cost |                  |                |       |      
|Service cost                            | $ 406            | $ 363          | $ 79  | $ 109
|Interest cost                           | 368              | 338            | 69    | 98   
|Expected return on assets               | (123)            | (94)           | -     | -    
|Amortization of:                        |                  |                |       |      
|Prior service cost                      | 80               | 80             | (124) | (98) 
|Actuarial loss                          | 130              | 133            | 33    | 45   
|Plan amendment                          | -                | -              | -     | (83) 
|Total net periodic benefit cost         | $ 861            | $ 820          | $ 57  | $ 71 



In first quarter 2005, the Company amended the Postretirement Welfare Plan (the Plan). The amendment reduced the ongoing annual expense by $1.1 million. The Company will amortize the effect of the plan amendment on the recorded liability over the estimated remaining service period for the affected employees.



The Company previously disclosed in its financial statements for the year ended December 31, 2005, that it expected to contribute approximately $1.6 million to its qualified pension plan in September 2006. As of March 31, 2006, no contributions have been made.







14



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Overview



|                         |                    |          |            | 
|------------------------ | ------------------ | -------- | ---------- | 
|(Dollars in millions)    | Three Months Ended |          |           
|                         | March 31,          |          |           
|                         | 2006               | 2005     | Net Change | 
|Total Operating Revenue  | $ 150.7            | $ 112.0  | $ 38.7     | 
|Total Operating Expenses | $ 160.0            | $ 127.9  | $ 32.1     | 
|Operating Loss           | $    (9.3)         | $ (15.9) | $   6.6    | 
|Net Loss                 | $    (8.7)         | $ (15.9) | $   7.2    | 



In the first quarter of 2006, Midwest Air Group continued its strategies of growing revenue, aggressively reducing costs and increasing capacity. Revenue passenger miles were at a record level, as increased capacity, competitive pricing and increased connectivity resulted in a significant increase in passenger travel. Also contributing to growing revenue has been steadily increasing industrywide fare increases. Costs have been reduced through outsourcing, insourcing, productivity improvements and other cost reductions.



During first quarter 2006, total Company revenue increased $38.7 million or 34.6%, with a 25.0% increase in passenger traffic (measured in revenue passenger miles, or RPMs) on 21.2% more available seat miles (ASMs). This resulted in a 2.2 percentage point increase in load factor compared with first quarter 2005. The revenue growth and load factor performance are due to strong customer demand in response to competitive pricing, as well as schedule and service enhancements  including frequency increases and aircraft upgrades that started in second quarter 2005. The increase in load factor was coupled with an 8.8% increase in revenue yield, to 13.90¢ from 12.78¢ in the first quarter of 2005. This yield increase was a result of an industrywide capacity reduction coupled with multiple fare increases in the past year. These market conditions and the Companys revenue strategies positively impacted revenue per available seat mile (RASM), which increased by 10.9% in the first quarter of 2006 to 11.18¢ compared with 10.08¢ in the first quarter of 2005



Total operating expenses increased $32.1 million, or 25.1%. Fuel expense increased $17.6 million, representing 54.9% of the total increase, due to a fuel price increase of 26.3% in first quarter 2006 compared with first quarter 2005. In addition, fuel consumption increased 18.9% from 22.0 million gallons to 26.2 million gallons compared with the same prior year period, due to the net addition of three aircraft and increased utilization of the existing fleet. The growth of the Boeing 717 fleet resulted in a $3.8 million increase of aircraft rental expense, which represents 11.8% of the $32.1 million increase. Station rental, landing and other fees increased $2.6 million  compared with 2005 due to an increase in the number of flights and passengers who traveled during the period. Aircraft maintenance materials and repairs increased $1.4 million, primarily related to a 15.2% increase in block hours (the time between aircraft gate departure and aircraft gate arrival).



Unit costs (cost per available seat mile or CASM) increased 3.1% from 11.51¢ in the first quarter of 2005 to 11.87¢ in the first quarter of 2006. A Non-GAAP measurement that may be useful to some users of the financial statements is CASM excluding fuel, which decreased by 0.39¢ to 7.95¢, or 4.7%. See Operating Statistics, below.





15



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During first quarter 2006, the Company placed into service two Boeing 717 aircraft. The Company plans to place its 25th and final Boeing 717 aircraft into service during second quarter 2006.



During first quarter 2006, the Companys unrestricted cash decreased $8.3 million to $90.7 million, primarily due to seasonal fluctuations in the business and the continued increase in the cost of fuel. The Companys strategy of increasing revenue through competitive pricing and yield management will be a continued focus for the remainder of 2006.



Subsequent sections contain a more detailed discussion of revenue and cost comparisons for the first quarter.





16



---



|                                                                                                                                                                                                                                                                                                                 |         |                    |         |          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | ------------------ | ------- | ---------
|Operating Statistics                                                                                                                                                                                                                                                                                             |         |                    |         |          
|The following table provides selected operating statistics for Midwest Airlines and Midwest Connect.                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                 |         |                    |         |          
|                                                                                                                                                                                                                                                                                                                 |         | Three Months Ended
|                                                                                                                                                                                                                                                                                                                 |         | March 31,         
|                                                                                                                                                                                                                                                                                                                 |         | 2006               |         | 2005     
|Midwest Airlines Operations                                                                                                                                                                                                                                                                                      |         |                    |         |          
|Origin & Destination Passengers                                                                                                                                                                                                                                                                                  |         | 827,674            |         | 661,750  
|Scheduled Service Revenue Passenger Miles (000s)                                                                                                                                                                                                                                                                 | 886,035 |                    | 701,295
|Scheduled Service Available Seat Miles (000s)                                                                                                                                                                                                                                                                    |         | 1,225,977          |         | 995,302  
|Total Available Seat Miles (000s)                                                                                                                                                                                                                                                                                |         | 1,254,077          |         | 1,016,954
|Load Factor (%)                                                                                                                                                                                                                                                                                                  |         | 72.3%              |         | 70.5%    
|Revenue Yield                                                                                                                                                                                                                                                                                                    |         | $0.1231            |         | $0.1111  
|Total Revenue per Total ASM                                                                                                                                                                                                                                                                                      |         | $0.1032            |         | $0.0923  
|Revenue per Scheduled Service ASM (1)                                                                                                                                                                                                                                                                            |         | $0.0946            |         | $0.0827  
|Total Cost per Total ASM                                                                                                                                                                                                                                                                                         |         | $0.1082            |         | $0.1038  
|Total Cost per Total ASM (ex-fuel cost) (2)                                                                                                                                                                                                                                                                      |         | $0.0712            |         | $0.0743  
|Average Passenger Trip Length (miles)                                                                                                                                                                                                                                                                            |         | 1,071              |         | 1,060    
|Number of Flights                                                                                                                                                                                                                                                                                                |         | 12,964             |         | 10,107   
|Into-plane Fuel Cost per Gallon                                                                                                                                                                                                                                                                                  |         | $2.01              |         | $1.59    
|Full-time Equivalent Employees at End of Period                                                                                                                                                                                                                                                                  |         | 1,954              |         | 1,897    
|Aircraft in Service at End of Period                                                                                                                                                                                                                                                                             |         | 36                 |         | 31       
|                                                                                                                                                                                                                                                                                                                 |         |                    |         |          
|Midwest Connect Operations                                                                                                                                                                                                                                                                                       |         |                    |         |          
|Origin & Destination Passengers                                                                                                                                                                                                                                                                                  |         | 192,502            |         | 186,734  
|Scheduled Service Revenue Passenger Miles (000s)                                                                                                                                                                                                                                                                 | 58,256  |                    | 54,408 
|Scheduled Service Available Seat Miles (000s)                                                                                                                                                                                                                                                                    |         | 93,890             |         | 94,097   
|Total Available Seat Miles (000s)                                                                                                                                                                                                                                                                                |         | 94,257             |         | 94,343   
|Load Factor (%)                                                                                                                                                                                                                                                                                                  |         | 62.0%              |         | 57.8%    
|Revenue Yield                                                                                                                                                                                                                                                                                                    |         | $0.3809            |         | $0.3423  
|Total Revenue per Total ASM                                                                                                                                                                                                                                                                                      |         | $0.2674            |         | $0.2049  
|Revenue per Scheduled Service ASM (1)                                                                                                                                                                                                                                                                            |         | $0.2423            |         | $0.2036  
|Total Cost per Total ASM                                                                                                                                                                                                                                                                                         |         | $0.2992            |         | $0.2503  
|Total Cost per Total ASM (ex-fuel cost) (2)                                                                                                                                                                                                                                                                      |         | $0.2318            |         | $0.1952  
|Average Passenger Trip Length (miles)                                                                                                                                                                                                                                                                            |         | 303                |         | 291      
|Number of Flights                                                                                                                                                                                                                                                                                                |         | 14,119             |         | 14,662   
|Into-plane Fuel Cost per Gallon                                                                                                                                                                                                                                                                                  |         | $2.05              |         | $1.63    
|Full-time Equivalent Employees at End of Period                                                                                                                                                                                                                                                                  |         | 1,005              |         | 774      
|Aircraft in Service at End of Period                                                                                                                                                                                                                                                                             |         | 20                 |         | 22       
|                                                                                                                                                                                                                                                                                                                 |         |                    |         |          
|Midwest Air Group                                                                                                                                                                                                                                                                                                |         |                    |         |          
|Scheduled Service Revenue Passenger Miles (000s)                                                                                                                                                                                                                                                                 | 944,291 |                    | 755,704
|Scheduled Service Available Seat Miles (000s)                                                                                                                                                                                                                                                                    |         | 1,319,867          |         | 1,089,398
|Total Available Seat Miles (000s)                                                                                                                                                                                                                                                                                |         | 1,348,334          |         | 1,111,297
|Load Factor (%)                                                                                                                                                                                                                                                                                                  |         | 71.5%              |         | 69.4%    
|Revenue Yield                                                                                                                                                                                                                                                                                                    |         | $0.1390            |         | $0.1278  
|Total Revenue per Total ASM                                                                                                                                                                                                                                                                                      |         | $0.1118            |         | $0.1008  
|Revenue per Scheduled Service ASM (1)                                                                                                                                                                                                                                                                            |         | $0.1051            |         | $0.0931  
|Total Cost per Total ASM                                                                                                                                                                                                                                                                                         |         | $0.1187            |         | $0.1151  
|Total Cost per Total ASM (ex-fuel cost) (2)                                                                                                                                                                                                                                                                      |         | $0.0795            |         | $0.0834  
|Number of Flights                                                                                                                                                                                                                                                                                                |         | 27,083             |         | 24,769   
|Into-plane Fuel Cost per Gallon                                                                                                                                                                                                                                                                                  |         | $2.01              |         | $1.60    
|Full-time Equivalent Employees at End of Period                                                                                                                                                                                                                                                                  |         | 2,959              |         | 2,671    
|Aircraft in Service at End of Period                                                                                                                                                                                                                                                                             |         | 56                 |         | 53       
|                                                                                                                                                                                                                                                                                                                 |         |                    |         |          
|(1) Passenger, cargo and other transport-related revenue divided by scheduled service ASMs.                                                                                                                                                                                                                     
|(2) Non-GAAP measurement.  See non-GAAP disclosures on page 17.                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                 |         |                    |         |          
|Note:  All statistics exclude charter operations except the following: Total Available Seat Miles ("ASMs"), Total Cost per Total ASM, 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



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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 for first quarter 2006 and 2005:



|                              |                              |               |                              |        |  |               |  |       
|----------------------------- | ---------------------------- | ------------- | ---------------------------- | ------ |  | ------------- |  | ------
|                              | Three Months Ended
March 31, |               | Three Months Ended
March 31,
|                              | 2006                         |               | 2005                        
|                              |                              | Per Total
ASM |                              | %      |  | Per Total
ASM |  | %     
|Operating revenues:           |                              |               |                              |        |  |               |  |       
|Passenger service             |                              | 9.74¢         |                              | 87.1%  |  | 8.69¢         |  | 86.2% 
|Cargo                         |                              | 0.14          |                              | 1.3%   |  | 0.15          |  | 1.5%  
|Other                         |                              | 1.30          |                              | 11.6%  |  | 1.24          |  | 12.3% 
|Total operating revenues      |                              | 11.18         |                              | 100.0% |  | 10.08         |  | 100.0%
|                              |                              |               |                              |        |  |               |  |       
|Operating expenses:           |                              |               |                              |        |  |               |  |       
|Salaries, wages and benefits  |                              | 2.89          |                              | 25.9%  |  | 3.29          |  | 32.6% 
|Aircraft fuel and oil         |                              | 3.92          |                              | 35.0%  |  | 3.17          |  | 31.4% 
|Commissions                   |                              | 0.30          |                              | 2.7%   |  | 0.26          |  | 2.6%  
|Dining services               |                              | 0.15          |                              | 1.4%   |  | 0.17          |  | 1.7%  
|Station rental/landing/other  |                              | 1.03          |                              | 9.2%   |  | 1.02          |  | 10.2% 
|Aircraft maintenance          |                              | 0.94          |                              | 8.4%   |  | 1.02          |  | 10.1% 
|Depreciation and amortization |                              | 0.28          |                              | 2.5%   |  | 0.37          |  | 3.7%  
|Aircraft rentals              |                              | 1.14          |                              | 10.2%  |  | 1.04          |  | 10.3% 
|Other                         |                              | 1.21          |                              | 10.8%  |  | 1.17          |  | 11.6% 
|Total operating expenses      |                              | 11.87¢        |                              | 106.2% |  | 11.51¢        |  | 114.2%
|                              |                              |               |                              |        |  |               |  |       
|Total ASMs (millions)         |                              | 1,348.3       |                              |        |  | 1,111.3       |  |       











18



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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | ------------- |  | -------------- |  | -----
|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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | Three Months Ended |  |               |  |               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | March 31,          |  |               |  |               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  | 2006               |  | 2005          |  | Change         |  | %    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Midwest Airlines Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |                    |  |               |  |                |  |      
|Total GAAP operating expenses  ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | $     135,737      |  | $   105,532   |  | $      30,205  |  | 28.6%
|ASMs (000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 1,254,077          |  | 1,016,954     |  | 237,124        |  | 23.3%
|CASM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | $       0.1082     |  | $     0.1038  |  | $      0.0045  |  | 4.3% 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Total GAAP operating expenses ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | $     135,737      |  | $   105,532   |  | $      30,205  |  | 28.6%
|Less: aircraft fuel ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | $       46,478     |  | $     30,010  |  | $      16,468  |  | 54.9%
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Operating expenses excluding fuel ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $       89,259     |  | $     75,522  |  | $      13,736  |  | 18.2%
|ASMs (000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 1,254,077          |  | 1,016,954     |  | 237,124        |  | 23.3%
|CASM excluding fuel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | $       0.0712     |  | $     0.0743  |  | $    (0.0031)  |  | -4.2%
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Midwest Connect Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                    |  |               |  |                |  |      
|Total GAAP operating expenses  ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | $       28,200     |  | $     23,609  |  | $        4,590 |  | 19.4%
|ASMs (000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 94,257             |  | 94,343        |  | (86)           |  | -0.1%
|CASM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | $       0.2992     |  | $     0.2503  |  | $      0.0489  |  | 19.6%
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Total GAAP operating expenses ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | $       28,200     |  | $     23,609  |  | $        4,590 |  | 19.4%
|Less: aircraft fuel ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | $         6,346    |  | $       5,195 |  | $        1,151 |  | 22.2%
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Operating expenses excluding fuel ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $       21,853     |  | $     18,414  |  | $        3,439 |  | 18.7%
|ASMs (000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 94,257             |  | 94,343        |  | (86)           |  | -0.1%
|CASM excluding fuel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | $       0.2318     |  | $     0.1952  |  | $      0.0367  |  | 18.8%
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Midwest Air Group                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                    |  |               |  |                |  |      
|Total GAAP operating expenses  ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | $     160,029      |  | $   127,935   |  | $      32,094  |  | 25.1%
|ASMs (000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 1,348,334          |  | 1,111,297     |  | 237,038        |  | 21.3%
|CASM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | $       0.1187     |  | $     0.1151  |  | $      0.0036  |  | 3.1% 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Total GAAP operating expenses ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | $     160,029      |  | $   127,935   |  | $      32,094  |  | 25.1%
|Less: aircraft fuel ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | $       52,824     |  | $     35,205  |  | $      17,619  |  | 50.0%
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Operating expenses excluding fuel ($000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | $     107,205      |  | $     92,730  |  | $      14,475  |  | 15.6%
|ASMs (000)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 1,348,334          |  | 1,111,297     |  | 237,038        |  | 21.3%
|CASM excluding fuel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | $       0.0795     |  | $     0.0834  |  | $    (0.0039)  |  | -4.7%
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |               |  |                |  |      
|Note:  Numbers and totals in this table may not be recalculated due to rounding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |  |                    |  |              







19



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Three Months Ended March 31, 2006 Compared With

Three Months Ended March 31, 2005



Operating Revenues

Company operating revenues totaled $150.7 million in first quarter 2006, a $38.7 million, or 34.6%, increase from first quarter 2005. Passenger revenues accounted for 87.1% of total revenues and increased $34.7 million, or 36.0%, from first quarter 2005 to $131.3 million in first quarter 2006.



Midwest Airlines passenger revenue increased $31.2 million, or 40.0%, from first quarter 2005 to $109.1 million in first quarter 2006.  Much of the increase in revenue was volume related, with scheduled service revenue passenger miles (passenger traffic) increasing by 26.3% year-over-year on a 23.2% increase in scheduled service available seat miles, resulting in a 1.8 point increase in load factor from 70.5% to 72.3%. 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 aircraft upgrades that started in second quarter 2005. Pricing changes also positively affected revenue, with revenue yield increasing by 10.8% to 12.31¢ from 11.11¢ in first quarter 2005, the result of industrywide fare increases. As a result, RASM increased 11.8% in first quarter 2006 to 10.32¢ compared with 9.23¢ in first quarter 2005.



Midwest Connect passenger revenue increased $3.6 million, or 19.1%, from first quarter 2005 to $22.2 million in first quarter 2006. Passenger traffic increased 7.1% in first quarter 2006 compared with the same period in 2005 coupled with an 11.3% increase in revenue yield. Load factor increased 4.2 points to 62.0% from 57.8% during the period.



The Companys revenue from cargo and other services increased $4.0 million, or 25.8%, from first quarter 2005 to $19.5 million in first quarter 2006. The increase was due to higher mail and freight revenue ($0.3 million), charter revenue ($1.9 million), ticket services ($1.1 million), buy-onboard meals and entertainment ($1.1 million) and frequent flyer credit card revenue ($0.3 million), which was partially offset by a reduction of $1.0 million for services to other airlines. The increase in charter revenue is primarily due to an increased number of charter flights related to the National Hockey League (NHL) 2005-2006 season. The prior year NHL season was canceled.



Operating Expenses



Company operating expenses increased $32.1 million, or 25.1%, from first quarter 2005 to $160.0 million in first quarter 2006. The increase was primarily due to higher fuel costs ($17.6 million); aircraft rentals ($3.8 million) due to the addition of six Boeing 717 aircraft; other expenses ($3.3 million) primarily due to higher advertising and booking fees; station rental, landing and other fees ($2.6 million); and aircraft maintenance, material and repairs ($1.4 million) resulting from a 9.3% increase in the number of flight segments and a 15.2% increase in block hours. In first quarter 2006, cost per available seat mile (CASM) increased by 0.36¢ to 11.87¢, or 3.1%.







20



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Salaries, Wages and Benefits

Salaries, wages and benefits increased $2.4 million, or 6.7%, from first quarter 2005 to $39.0 million in first quarter 2006. The labor increase was primarily due to $2.1 million in additional flight crew and inflight pay on a 15.2% increase in block hours as well as insourcing the commissary operations for buy-onboard meal service ($0.9 million). Total benefit costs for the quarter decreased $0.6 million.  The decrease was primarily attributable to a reduction in medical insurance costs ($0.4 million) and expenses associated with the Qualified Defined Contribution Plan ($0.8 million), offset by increased workers compensation ($0.3 million) and other benefit costs.  The reduction in expenses associated with the Qualified Defined Contribution Plan was primarily the result of $1.2 million in forfeited benefits. A $0.8 million reduction in maintenance labor costs resulted from outsourcing heavy maintenance for the Companys MD-80 aircraft. On a CASM basis, labor costs decreased from 3.29¢ in first quarter 2005 to 2.89¢ in 2006.



Aircraft Fuel and Oil

Aircraft fuel, oil and associated taxes increased $17.6 million, or 50.0%, from first quarter 2005 to $52.8 million in first quarter 2006. Into-plane fuel prices increased 26.3% in first quarter 2006, averaging $2.01 per gallon versus $1.60 per gallon in 2005, resulting in a $11.0 million (pre-tax) unfavorable price impact (calculated by applying 2005 prices to actual gallons consumed in 2006 and comparing the result with actual 2006 expense). The fuel consumption increase resulted in an $8.3 million (pre-tax) unfavorable impact in the quarter (calculated by applying 2006 prices to the actual change in gallons consumed in 2006 relative to 2005), primarily as a result of an increase in the number of block hours.



Commissions

Travel agent commissions and commissions related to credit card transactions increased $1.1 million, or 36.7%, from first quarter 2005 to $4.0 million in first quarter 2006. The increase was primarily due to a 36.0% increase in passenger service revenue.



Dining Services

Dining service costs increased $0.2 million, or 8.0%, from first quarter 2005 to $2.0 million in first quarter 2006. Increases in meal costs ($1.0 million) and other dining service and onboard expenses ($0.3 million) were offset by $1.3 million reduction in service fees from an outside vendor. The decision to insource the buy-onboard dining service in second quarter 2005 resulted in meal and entertainment revenue of $1.1 million in first quarter 2006. In previous years, an outside vendor realized the revenue and cost of buy-onboard meals.



Station Rental, Landing and Other Fees

Station rentals and landing fees increased $2.6 million, or 22.6%, from first quarter 2005 to $13.9 million in first quarter 2006. The increase is primarily due to an increase in ground handling and landing fees ($1.5 million), station rental fees ($0.6 million) and security fees ($0.3 million).



Aircraft Maintenance Materials and Repairs

Aircraft maintenance material and repair costs increased $1.4 million, or 12.6% from first quarter 2005 to $12.7 million in first quarter 2006. A 15.2% increase in block hours was the primary driver of a $1.4 million increase in purchased engine maintenance programs for the Companys MD-80 and Boeing 717 aircraft.





21



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Depreciation and Amortization

Depreciation and amortization decreased $0.3 million, or 7.7%, from first quarter 2005 to $3.8 million in first quarter 2006. On a cost per ASM basis, these costs decreased 23.9%. Depreciation was lower as an MD-80 aircraft was removed from service in December 2005 and the value of a second MD-80 was impaired in September 2005, in anticipation of sale in second quarter 2006.



Aircraft Rentals

Aircraft rental costs increased $3.8 million, or 32.8%, from first quarter 2005 to $15.4 million in first quarter 2006. These costs increased $3.5 million related to the addition of six leased Boeing 717 aircraft to the Midwest Airlines fleet quarter over quarter. On a cost per ASM basis, these costs increased 9.5%.



Other

Other operating expenses increased $3.3 million, or 25.8%, from first quarter 2005 to $16.3 million in first quarter 2006. The cost increases were primarily due to advertising expenses ($1.1 million), booking fees ($0.8 million), professional fees ($0.3 million) and ground services ($0.3 million). On a cost per ASM basis, other operating expenses increased 3.6%.



Other (Expense) Income



Other income increased $0.8 million from first quarter 2005 due to higher interest income ($0.7 million) and lower interest expense ($0.1 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 long-term debt related to aircraft and convertible debt.



Credit for Income Taxes



Income tax credit for first quarter 2006 was $0.0 million, a decrease of $0.1 million from first quarter 2005. The effective tax rate for first quarter 2006 and 2005 was 0.0% and (0.9)%, respectively. The Company no longer records income tax benefit on losses due to the accumulated losses and the Companys inability to offset net operating losses against deferred tax liabilities.



Net Loss



Net loss for first quarter 2006 was ($8.7) million, an improvement of $7.2 million from the first quarter 2005 net loss of ($15.9) million. The net loss margin improved from (14.2%) in first quarter 2005 to (5.8%) in 2006.





22



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Liquidity and Capital Resources



The Companys unrestricted cash and cash equivalents totaled $90.7 million at March 31, 2006, compared with $99.0 million at December 31, 2005. At March 31, 2006, the restricted cash balance was $59.6 million, compared with $38.8 million on December 31, 2005. The change in restricted cash is primarily attributable to an increase in the cash holdback amount due to an increase in the volume of advance ticket sales related to the credit card processing agreement for MasterCard/Visa transactions. The aggregate amount of the additional holdback if all the processors required 100% as of March 31, 2006 was approximately $18.1 million. In addition to the holdback amount, the restricted cash balance also includes collateral for insurance, letters of credit and the fuel hedging agreement.



As of March 31, 2006, the Company had a working capital surplus of $6.0 million compared with a $4.8 million surplus on December 31, 2005. The increase in working capital as of March 31, 2006 is primarily related to an increase in restricted cash partially offset by an increase in air traffic liability.



Operating Activities

Net cash provided by operations for the quarter ended March 31, 2006 totaled $9.8 million. Cash provided by operations reflects the $8.7 million net loss incurred during the quarter and a decrease in prepaid expenses and unearned revenue, which was offset by a $23.8 million increase in air traffic liability due to increased sales for future flights and $3.8 million in depreciation.



Investing Activities

Net cash used in investing activities for the three months ended March 31, 2006 totaled $12.2 million. The cash used in first quarter 2006 includes $1.0 million of capital expenditures, primarily related to spare parts and other equipment for the Boeing 717 program. Purchase deposits that had been returned for the two Boeing 717 deliveries in the first quarter provided an $8.3 million increase in cash. An increase in credit card sales for future flights resulted in an increase of $20.8 million in restricted cash.



Financing Activities

Net cash used by financing activities for the three months ended March 31, 2006 was $5.9 million, primarily related to the payoff of debt to Kreditanstalt fur Wiederaufbau Bank (KfW) associated with progress payments for two Boeing 717 aircraft delivered to the Company during first quarter 2006. The progress payments were originally provided to The Boeing Company (Boeing) by KfW on behalf of Rolls-Royce Deutschland Ltd. & Co. KG (Rolls-Royce).



In second quarter 2002, Midwest Airlines entered into a loan agreement to fund pre-delivery progress payments to The Boeing Company for new Boeing 717 aircraft. Midwest Airlines also entered into a loan agreement with Kreditanstalt fur Wiederaufbau Bank (KfW) with the assistance of Rolls-Royce Deutschland Ltd. & Co. KG (Rolls-Royce). Rolls-Royce agreed to guarantee the loan agreement on behalf of Midwest Airlines. This agreement is discussed in more detail in Note 4 of the Notes to Consolidated Financial Statements contained in the Companys Annual Report on Form 10-Kfor the year ended December 31, 2005. As of March 31, 2006, the Company owed $2.5 million under the loan agreement. The Company expects that the debt associated with this financing transaction will be extinguished, as the last of 25 aircraft will be delivered, in the second quarter 2006.





23



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The Company maintains a qualified defined benefit plan, the Pilots Supplemental Pension Plan (the Qualified Plan), which provides supplemental retirement benefits to Midwest Airlines pilots, and an unfunded nonqualified defined benefit plan to provide Midwest Airlines pilots with annuity benefits for salary in excess of amounts permitted to be paid under the provisions of the tax law to participants in the Qualified Plan. The method used to determine the market-related value of plan assets is the prior years market-related value of assets, adjusted by contributions, disbursements, expected return on investments and 20% of investment gains (losses) during the five prior years. As of March 31, 2006, the Qualified Plan assets were invested primarily in equities and fixed income instruments. Additional discussion of Qualified Plan investment strategy is included in Note 10 to the Consolidated Financial Statements contained in the Companys Annual Report on Form 10-Kfor the year ended December 31, 2005.



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, 2005, the Company issued promissory notes (the Basic Moratorium Notes) to its lessors and lenders as part of the restructuring lease and debt agreements. The aggregate principal amount of these notes is $7.5 million. Principal and interest (fixed at 10%) on these Basic Moratorium Notes are payable, in arrears, in 36 monthly installments. As of March 31, 2006, the Company owed $3.1 million under the Basic Moratorium Notes.



As a result of the restructuring of the lease and debt agreements, the Company significantly reduced its obligations compared with the obligations under the previous lease and debt agreements. Included in the restructured agreements are clauses that would make the Companys obligations, under certain default situations, increase to the amounts under the previous agreements. Such defaults include the Company filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The amount of such contingent obligation is approximately $40.0 million as of March 31, 2006. This contingent obligation terminates in July 2006.



2006 and Beyond

The competitive revenue environment and volatile nature of fuel prices make it difficult to accurately project cash flow from operations for 2006 and beyond. Absent factors outside the control of the Company such as terrorist attacks or heightened fear of terrorist attacks, substantial deterioration in the industry revenue environment and significant increases in fuel prices, the Company believes current liquidity and cash flow from operations will be sufficient to fund current operations through 2006.



Key cash flow items for 2006 and beyond include:

·

Anticipated total capital spending of approximately $7 million for 2006 and similar spending annually in 2007 and 2008, excluding 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 and continued maintenance support of the Midwest Airlines MD-80 fleet. Some of the capital spending will be funded using credit memos.

·

Estimated net interest income of $1.5 million in 2006.





24



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·

Non-cash expenses arising primarily from depreciation contributing approximately $15.0 million to annual cash flow in 2006.

·

Estimated defined benefit pension plan contributions of approximately $1.6 million in 2006.

·

Payment of principal on the lender and lessor moratorium note for 2006 totaling approximately $2.7 million, ending with principal payments of $1.2 million in 2007.



Forward-Looking Statements



This Form 10-Q filing, particularly the Pending Developments section below and the Overview and 2006 and Beyond sections above, contain 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, 2005 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;

·

increases in fuel costs or the failure of fuel costs to decline;

·

uncertainties related to jet fuel availability;

·

the Companys inability to benefit from premium pricing;

·

the Companys inability to differentiate its product from competing products;

·

the Companys inability to effectively compete;

·

uncertainties related to competitive actions in the Milwaukee market;

·

uncertainties related to acquisition of aircraft;

·

uncertainties related to general economic factors;

·

uncertainties concerning the Companys ability to attract and retain people in key positions;

·

adverse scheduling developments;

·

adverse industry conditions;

·

decline in labor relations;

·

costly government regulations, including increased costs for compliance with new or enhanced government regulations;

·

increases in insurance costs;

·

more frequent aircraft maintenance and refurbishment schedules;

·

potential delays related to acquired aircraft;

·

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;

·

terrorist attacks or fear of terrorist attacks and other world events, including U.S. military involvement in overseas operations; and





25



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·

an adverse resolution of matters relating to a Wisconsin ad valorem property tax exemption.



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.



Pending Developments



Property Tax Exemption  On November 7, 2003, a Dane County, Wisconsin, circuit court, in an action brought by Northwest Airlines, Inc., against the State of Wisconsin, declared invalid the Wisconsin statute that provides the hub airline exemption from Wisconsin ad valorem property taxes. Savings to the Company from the exemption had been approximately $2.0 million annually. However, the Company estimates savings could be as high as $7.0 million annually by 2010. The State of Wisconsin has appealed the ruling. The Company has intervened in the case and joined in the appeal. The case was argued in the Wisconsin Supreme Court on December 13, 2005 and a decision is expected by the end of the second quarter of 2006. The Company believes the appeal will be successful and has not recorded any reserve with respect to this matter, though there can be no assurance that the appeal will succeed.







26



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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, 2005.



At April 4, 2006, 26.1% of second quarter and 26.7% of third quarter 2006 estimated fuel consumption is hedged at an average ceiling price of $2.01 and $2.05 per gallon and an average floor price of $1.85 and $1.90 per gallon, respectively, which does not include into-plane costs that historically average $0.20 per gallon. The purpose of these hedges is to provide protection from rapidly escalating prices. Additionally, there are hedges in place for fourth quarter 2006 for approximately 22.3% and first quarter 2007 for approximately 7.4% of total expected fuel usage.



As of April 4, 2006, all the Companys fuel collar 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.



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 (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.





27



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PART II  OTHER INFORMATION



Item 6. Exhibits





|       |                                                                                                      
|------ | -----------------------------------------------------------------------------------------------------
|(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.







28



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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:

May 9, 2006

By /s/ Timothy E. Hoeksema

Timothy E. Hoeksema

Chairman of the Board, President and

Chief Executive Officer





Date:

May 9, 2006

By  /s/ Curtis E. Sawyer



Curtis E. Sawyer



Senior Vice President and

Chief Financial Officer







29