##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2005
 or
 o
    
    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 001-31898
 PINNACLE AIRLINES CORP.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    03-0376558(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)1689 Nonconnah Blvd, Suite 111
Memphis, Tennessee(Address of principal executive offices)
    
    38132(Zip Code)
 901-348-4100  (Registrants telephone number, including area code)
  Yes þ
    
    No o
  Yes þ
    
    No o




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Table of Contents
 PART I. FINANCIAL INFORMATION
    
    
    1Item 1.Financial Statements
    
    
    1Condensed Consolidated Statements of Income (Unaudited)
    
    
    1Condensed Consolidated Balance Sheets (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    17Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 2. Changes in Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    30Ex-31.1  Section 302 Certification of the CEOEx-31.2  Section 302 Certification of the CFOEx-32  Section 906 Certification of the CEO & CFO




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 Pinnacle Airlines Corp.
 
 Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
 Three Months Ended June 30,2005
    
    2004Operating revenuesRegional airline services
    
    $
    210,958
    
    
    $
    151,654Other
    
    
    1,941
    
    
    
    519Total operating revenues
    
    
    212,899
    
    
    
    152,173Operating expensesSalaries, wages and benefits
    
    
    33,027
    
    
    
    24,880Aircraft fuel
    
    
    28,643
    
    
    
    19,527Aircraft maintenance, materials and repairs
    
    
    8,835
    
    
    
    5,869Aircraft rentals
    
    
    69,589
    
    
    
    50,062Other rentals and landing fees
    
    
    11,062
    
    
    
    8,858Ground handling services
    
    
    23,125
    
    
    
    14,850Depreciation
    
    
    1,016
    
    
    
    769Other
    
    
    14,821
    
    
    
    10,448Total operating expenses
    
    
    190,118
    
    
    
    135,263Operating income
    
    
    22,781
    
    
    
    16,910Operating income as a percentage of operating revenues
    
    
    10.7
    %
    
    
    11.1
    %Nonoperating income (expense)Interest expense
    
    
    (1,069
    )
    
    
    (1,252
    )Interest income
    
    
    261
    
    
    
    59Miscellaneous income, net
    
    
    
    
    
    
    230Total nonoperating expense
    
    
    (808
    )
    
    
    (963
    )Income before income taxes
    
    
    21,973
    
    
    
    15,947Income tax expense
    
    
    8,177
    
    
    
    6,249Net income
    
    $
    13,796
    
    
    $
    9,698Basic and diluted earnings per share
    
    $
    0.63
    
    
    $
    0.44Shares used in computing basic earnings per share
    
    
    21,908
    
    
    
    21,892Shares used in computing diluted earnings per share
    
    
    21,932
    
    
    
    21,892
  1




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##### Table of Contents



Pinnacle Airlines Corp.
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
 Six Months Ended June 30,2005
    
    2004Operating revenuesRegional airline services
    
    $
    403,709
    
    
    $
    285,041Other
    
    
    3,922
    
    
    
    1,011Total operating revenues
    
    
    407,631
    
    
    
    286,052Operating expensesSalaries, wages and benefits
    
    
    64,509
    
    
    
    48,099Aircraft fuel
    
    
    54,105
    
    
    
    36,067Aircraft maintenance, materials and repairs
    
    
    16,073
    
    
    
    11,515Aircraft rentals
    
    
    132,895
    
    
    
    93,682Other rentals and landing fees
    
    
    21,204
    
    
    
    16,935Ground handling services
    
    
    45,789
    
    
    
    28,353Depreciation
    
    
    1,978
    
    
    
    1,490Other
    
    
    28,226
    
    
    
    18,657Total operating expenses
    
    
    364,779
    
    
    
    254,798Operating income
    
    
    42,852
    
    
    
    31,254Operating income as a percentage of operating revenues
    
    
    10.5
    %
    
    
    10.9
    %Nonoperating income (expense)Interest expense
    
    
    (2,157
    )
    
    
    (2,540
    )Interest income
    
    
    417
    
    
    
    112Miscellaneous income, net
    
    
    
    
    
    
    315Gain on extinguishment of debt
    
    
    18,000
    
    
    
    Total nonoperating income (expense)
    
    
    16,260
    
    
    
    (2,113
    )Income before income taxes
    
    
    59,112
    
    
    
    29,141Income tax expense
    
    
    21,984
    
    
    
    11,389Net income
    
    $
    37,128
    
    
    $
    17,752Basic and diluted earnings per share
    
    $
    1.69
    
    
    $
    0.81Shares used in computing basic earnings per share
    
    
    21,908
    
    
    
    21,892Shares used in computing diluted earnings per share
    
    
    21,930
    
    
    
    21,899
  2




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Condensed Consolidated Balance Sheets
(in thousands, except share data)
 June 30,
    
    December 31,2005
    
    2004(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    66,487
    
    
    $
    34,912Receivables, net
    
    
    28,416
    
    
    
    25,139Spare parts and supplies, net
    
    
    6,034
    
    
    
    5,341Prepaid expenses and other assets
    
    
    7,442
    
    
    
    5,644Deferred income taxes
    
    
    967
    
    
    
    860Total current assets
    
    
    109,346
    
    
    
    71,896Property and equipmentAircraft and rotable spares
    
    
    37,758
    
    
    
    35,837Other property and equipment
    
    
    18,363
    
    
    
    16,161Office furniture and fixtures
    
    
    1,934
    
    
    
    1,86358,055
    
    
    
    53,861Less accumulated depreciation
    
    
    (16,389
    )
    
    
    (14,445
    )Net property and equipment
    
    
    41,666
    
    
    
    39,416Other assets, primarily aircraft deposits
    
    
    24,601
    
    
    
    21,111Debt issuance costs, net
    
    
    4,306
    
    
    
    Contractual rights under airline services agreement, net
    
    
    15,027
    
    
    
    15,115Costs in excess of net assets acquired, net
    
    
    18,422
    
    
    
    18,422Total assets
    
    $
    213,368
    
    
    $
    165,960
  3




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##### Table of Contents



Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
 June 30,
    
    December 31,2005
    
    2004(Unaudited)Liabilities and stockholders equity (deficiency)Current liabilitiesAccounts payable
    
    $
    19,214
    
    
    $
    16,983Accrued expenses
    
    
    19,449
    
    
    
    15,083Income taxes payable
    
    
    13,108
    
    
    
    1,633Other current liabilities
    
    
    1,834
    
    
    
    6,756Total current liabilities
    
    
    53,605
    
    
    
    40,455Deferred income taxes
    
    
    8,209
    
    
    
    7,105Other liabilities
    
    
    636
    
    
    
    948Senior convertible notes
    
    
    121,000
    
    
    
    Note payable and line of credit
    
    
    
    
    
    
    125,000Commitments and contingenciesStockholders equity (deficiency)Preferred stock, par value $0.01 per share; 1,000,000 shares authorized,
no shares issued
    
    
    
    
    
    
    Series A preferred stock, stated value $100 per share; one share
authorized and issued
    
    
    
    
    
    
    Series common stock, par value $0.01 per share; 5,000,000 shares
authorized; no shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value; 40,000,000 shares authorized, 21,945,260
and 21,950,260 shares issued, respectively
    
    
    219
    
    
    
    220Additional paid-in capital
    
    
    85,549
    
    
    
    85,603Accumulated deficit
    
    
    (55,721
    )
    
    
    (92,849
    )Unearned compensation on restricted stock
    
    
    (129
    )
    
    
    (522
    )Total stockholders equity (deficiency)
    
    
    29,918
    
    
    
    (7,548
    )Total liabilities and stockholders equity (deficiency)
    
    $
    213,368
    
    
    $
    165,960
  4




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 Six Months Ended June 30,2005
    
    2004Operating activitiesNet income
    
    $
    37,128
    
    
    $
    17,752Adjustments to reconcile net income to cash provided by
operating activities:Depreciation
    
    
    1,978
    
    
    
    1,490Loss (gain) on disposal of rotable spares
    
    
    261
    
    
    
    (230
    )Deferred income taxes
    
    
    997
    
    
    
    1,558Provision for spare parts and supplies obsolescence
    
    
    128
    
    
    
    75Gain on extinguishment of debt
    
    
    (18,000
    )
    
    
    Amortization of contractual rights
    
    
    88Amortization of unearned compensation, net of forfeitures
    
    
    339
    
    
    
    Amortization of debt issuance costs
    
    
    91
    
    
    
    Reduction of deferred credits
    
    
    
    
    
    
    (104
    )Changes in operating assets and liabilities:Receivables
    
    
    (3,256
    )
    
    
    (3,662
    )Spare parts and supplies
    
    
    (821
    )
    
    
    (478
    )Prepaid expenses and other current assets
    
    
    (1,685
    )
    
    
    1,374Aircraft and engine deposits
    
    
    (3,635
    )
    
    
    (4,375
    )Accounts payable and accrued expenses
    
    
    6,597
    
    
    
    7,522Other current liabilities
    
    
    4
    
    
    
    19Income taxes payable
    
    
    11,475
    
    
    
    (4,206
    )Cash provided by operating activities
    
    
    31,689
    
    
    
    16,735Investing activitiesPurchases of property and equipment
    
    
    (4,489
    )
    
    
    (2,665
    )Purchase of contractual rights
    
    
    (5,115
    )
    
    
    Proceeds from the sale of property and equipment
    
    
    
    
    
    
    960Cash used in investing activities
    
    
    (9,604
    )
    
    
    (1,705
    )Financing activitiesPayment to extinguish note payable
    
    
    (101,600
    )
    
    
    Payments on note payable
    
    
    
    
    
    
    (6,000
    )Repayment under line of credit
    
    
    (5,000
    )
    
    
    Gross proceeds from issuance of senior convertible notes
    
    
    121,000
    
    
    
    Debt issuance costs
    
    
    (4,510
    )
    
    
    Other costs to retire note payable
    
    
    (400
    )
    
    
    Cash provided by (used in) financing activities
    
    
    9,490
    
    
    
    (6,000
    )Net increase in cash and cash equivalents
    
    
    31,575
    
    
    
    9,030Cash and cash equivalents at beginning of period
    
    
    34,912
    
    
    
    31,523Cash and cash equivalents at end of period
    
    $
    66,487
    
    
    $
    40,553Supplemental disclosure of cash flow informationInterest paid
    
    $
    518
    
    
    $
    3,553Income tax payments
    
    $
    9,512
    
    
    $
    14,037
  5




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
  1. Basis of Presentation
     2. Airline Services Agreement
     6




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 2. Airline Services Agreement (continued)
     3. Earnings Per Share
  7




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 3. Earnings Per Share (continued)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    13,796
    
    
    $
    9,698
    
    
    $
    37,128
    
    
    $
    17,752Basic and diluted earnings per share
    
    $
    0.63
    
    
    $
    0.44
    
    
    $
    1.69
    
    
    $
    0.81Share computation:Weighted average number of shares out-
standing for basic earnings per share
    
    
    21,908
    
    
    
    21,892
    
    
    
    21,908
    
    
    
    21,892Assumed exercise of stock options
    
    
    24
    
    
    
    
    
    
    
    22
    
    
    
    7Weighted average number of shares out-
standing for diluted earnings per share
    
    
    21,932
    
    
    
    21,892
    
    
    
    21,930
    
    
    
    21,899
  4. Senior Convertible Notes
    8




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 4. Senior Convertible Notes (continued)
  
    
    During a quarter (and only during such quarter) if the closing price of the
Companys common stock exceeds 120% of the conversion price of the Notes
(initially $15.86 per share) for at least 20 of the last 30 trading days of the
preceding quarter;
    
    During a five day period after the Notes have traded for a five day period at a
price that is less than 98% of the equivalent value that could be realized upon
conversion of the Notes;
    
    If the Company calls the Notes for redemption;
    
    If a change of control or other specified corporate transactions or
distributions to holders of the Companys common stock occurs (and in some
instances, the Company may also owe an additional premium upon a change in
control); and
    
    During the 10 trading days prior to the maturity date of February 15, 2025.
  5. Line of Credit
  6. Borrowings from Northwest
  9




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 6. Borrowings from Northwest (continued)
    7. Stock-Based Compensation
  Stock Options
   10




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 7. Stock-Based Compensation (continued)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income, as reported
    
    $
    13,796
    
    
    $
    9,698
    
    
    $
    37,128
    
    
    $
    17,752Add: Stock-based compensation expense
included in reported net income, net of tax
    
    
    61
    
    
    
    
    
    
    
    214
    
    
    
    Deduct: Total pro forma stock-based
compensation expense, net of tax
    
    
    (309
    )
    
    
    (283
    )
    
    
    (688
    )
    
    
    (566
    )Pro forma net income
    
    $
    13,548
    
    
    $
    9,415
    
    
    $
    36,654
    
    
    $
    17,186Earnings per common share:Basic and
diluted  as reported
    
    $
    0.63
    
    
    $
    0.44
    
    
    $
    1.69
    
    
    $
    0.81Basic and
diluted  pro forma
    
    $
    0.62
    
    
    $
    0.43
    
    
    $
    1.67
    
    
    $
    0.79
  Restricted Stock
   8. Related Party Transactions
  11




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 8. Related Party Transactions (continued)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenue:Regional airline services revenue
    
    $
    210,958
    
    
    $
    151,654
    
    
    $
    403,709
    
    
    $
    285,041Other revenue
    
    
    1,430
    
    
    
    144
    
    
    
    2,792
    
    
    
    183Expenses:Aircraft fuel
    
    
    28,643
    
    
    
    19,447
    
    
    
    54,105
    
    
    
    35,858Aircraft rentals
    
    
    69,589
    
    
    
    50,062
    
    
    
    132,895
    
    
    
    93,682Other rentals and landing fees
    
    
    2,813
    
    
    
    2,813
    
    
    
    5,625
    
    
    
    5,625Ground handling services
    
    
    16,637
    
    
    
    10,373
    
    
    
    32,042
    
    
    
    19,288Other
    
    
    328
    
    
    
    78
    
    
    
    513
    
    
    
    135Interest expense
    
    
    
    
    
    
    1,217
    
    
    
    463
    
    
    
    2,468
      12




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 9. Income Taxes
  Three Months Ended June 30,2005
    
    2004$
    
    %
    
    $
    
    %Income tax expense at statutory rate
    
    $
    7,691
    
    
    
    35.0
    %
    
    $
    5,580
    
    
    
    35.0
    %State income taxes, net of federal taxes
    
    
    440
    
    
    
    2.0
    %
    
    
    621
    
    
    
    3.9
    %Other
    
    
    46
    
    
    
    0.2
    %
    
    
    48
    
    
    
    0.3
    %Income tax expense
    
    $
    8,177
    
    
    
    37.2
    %
    
    $
    6,249
    
    
    
    39.2
    %
 Six Months Ended June 30,2005
    
    2004$
    
    %
    
    $
    
    %Income tax expense at statutory rate
    
    $
    20,689
    
    
    
    35.0
    %
    
    $
    10,199
    
    
    
    35.0
    %State income taxes, net of federal taxes
    
    
    1,227
    
    
    
    2.1
    %
    
    
    1,142
    
    
    
    3.9
    %Other
    
    
    68
    
    
    
    0.1
    %
    
    
    48
    
    
    
    0.2
    %Income tax expense
    
    $
    21,984
    
    
    
    37.2
    %
    
    $
    11,389
    
    
    
    39.1
    %
  10. Warranty
  11. Contractual Rights under Airline Services Agreement
   12. Manufacturer Credits
  13




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 12. Manufacturer Credits (continued)
  13. Leases
    Noncancelable LeasesAircraft
    
    Non-aircraftRemainder of 2005
    
    $
    147,678
    
    
    $
    3,2562006
    
    
    295,165
    
    
    
    6,4862007
    
    
    290,095
    
    
    
    6,2112008
    
    
    289,092
    
    
    
    5,5322009
    
    
    287,758
    
    
    
    5,287Thereafter
    
    
    2,301,600
    
    
    
    34,7303,611,388
    
    
    
    61,502Sublease rental income
    
    
    (15,138
    )
    
    
    (244
    )Total minimum operating lease payments
    
    $
    3,596,250
    
    
    $
    61,258
 14. Commitments and Contingencies
 Employees.
 14




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 14. Commitments and Contingencies (continued)
 Legal Proceedings.
 Purchase Commitments.
  Self-Insurance
 Financings and Guarantees
 Regulatory Matters
 General Guarantees and Indemnifications.
  15




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 14. Commitments and Contingencies (continued)
   Other contingencies
  15. Financial Condition of Major Customer
    16




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 15. Financial Condition of Major Customer (continued)
  
 Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 General
   Overview
    17




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
   Six Months Ended June 30,2005
    
    2004
    
    % Increase(in thousands)Net IncomeNet income in accordance with GAAP
    
    $
    37,128
    
    
    $
    17,752
    
    
    
    109
    %Deduct: Gain on extinguishment of debt, net of
related tax
    
    
    (11,302
    )
    
    
    Net income excluding gain on extinguishment of debt
    
    $
    25,826
    
    
    $
    17,752
    
    
    
    45
    %Basic and Diluted EPSBasic and diluted EPS in accordance with GAAP
    
    $
    1.69
    
    
    $
    0.81
    
    
    
    109
    %Deduct: Gain on extinguishment of debt, net of
related tax
    
    
    (0.51
    )
    
    
    Basic and diluted EPS excluding gain on extinguishment
of debt
    
    $
    1.18
    
    
    $
    0.81
    
    
    
    46
    %
 Outlook
    18




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
      19




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
 Results of Operations
  Comparison of Three Months Ended June 30, 2005 to Three Months Ended June 30, 2004
 Revenues
   Three Months Ended June 30,(in thousands)2005
    
    2004Reimbursed
    
    Pre-set Rates
    
    Total
    
    Reimbursed
    
    Pre-set Rates
    
    TotalOperating revenues:Regional airline services
    
    $
    141,141
    
    
    $
    69,817
    
    
    $
    210,958
    
    
    $
    100,662
    
    
    $
    50,992
    
    
    $
    151,654Other
    
    
    
    
    
    
    1,941
    
    
    
    1,941
    
    
    
    
    
    
    
    519
    
    
    
    519Total operating revenues
    
    
    141,141
    
    
    
    71,758
    
    
    
    212,899
    
    
    
    100,662
    
    
    
    51,511
    
    
    
    152,173Operating expenses:Salaries, wages and benefits
    
    
    
    
    
    
    33,027
    
    
    
    33,027
    
    
    
    
    
    
    
    24,880
    
    
    
    24,880Aircraft fuel
    
    
    28,485
    
    
    
    158
    
    
    
    28,643
    
    
    
    19,447
    
    
    
    80
    
    
    
    19,527Aircraft maintenance, materials and repairs
    
    
    3,622
    
    
    
    5,213
    
    
    
    8,835
    
    
    
    2,842
    
    
    
    3,027
    
    
    
    5,869Aircraft rentals
    
    
    69,589
    
    
    
    
    
    
    
    69,589
    
    
    
    50,062
    
    
    
    
    
    
    
    50,062Other rentals and landing fees
    
    
    4,710
    
    
    
    6,352
    
    
    
    11,062
    
    
    
    4,656
    
    
    
    4,202
    
    
    
    8,858Ground handling services
    
    
    16,770
    
    
    
    6,355
    
    
    
    23,125
    
    
    
    10,541
    
    
    
    4,309
    
    
    
    14,850Depreciation
    
    
    
    
    
    
    1,016
    
    
    
    1,016
    
    
    
    
    
    
    
    769
    
    
    
    769Other
    
    
    3,851
    
    
    
    10,970
    
    
    
    14,821
    
    
    
    3,048
    
    
    
    7,400
    
    
    
    10,448Total operating expenses
    
    
    127,027
    
    
    
    63,091
    
    
    
    190,118
    
    
    
    90,596
    
    
    
    44,667
    
    
    
    135,263Operating income:
    
    $
    14,114
    
    
    $
    8,667
    
    
    $
    22,781
    
    
    $
    10,066
    
    
    $
    6,844
    
    
    $
    16,910Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    12.1
    %
    
    
    10.7
    %
    
    
    10.0
    %
    
    
    13.3
    %
    
    
    11.1
    %
   20




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
 Operating Expenses
         Nonoperating Income and Expenses
   Income Tax Expense
  21




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
 Comparison of Six Months Ended June 30, 2005 to Six Months Ended June 30, 2004
 Revenues
  Six Months Ended June 30,(in thousands)2005
    
    2004Reimbursed
    
    Pre-set Rates
    
    Total
    
    Reimbursed
    
    Pre-set Rates
    
    TotalOperating revenues:Regional airline services
    
    $
    272,058
    
    
    $
    131,651
    
    
    $
    403,709
    
    
    $
    189,974
    
    
    $
    95,067
    
    
    $
    285,041Other
    
    
    
    
    
    
    3,922
    
    
    
    3,922
    
    
    
    
    
    
    
    1,011
    
    
    
    1,011Total operating revenues
    
    
    272,058
    
    
    
    135,573
    
    
    
    407,631
    
    
    
    189,974
    
    
    
    96,078
    
    
    
    286,052Operating expenses:Salaries, wages and benefits
    
    

    

    
    
    
    64,509
    
    
    
    64,509
    
    
    
    
    
    
    
    48,099
    
    
    
    48,099Aircraft fuel
    
    
    53,834
    

    
    
    271
    
    
    
    54,105
    
    
    
    35,858
    
    
    
    209
    
    
    
    36,067Aircraft maintenance, materials and repairs
    
    
    7,493
    
    
    
    8,580
    
    
    
    16,073
    
    
    
    5,846
    
    
    
    5,669
    
    
    
    11,515Aircraft rentals
    
    
    132,895
    
    
    
    
    
    
    
    132,895
    
    
    
    93,682
    
    
    
    
    
    
    
    93,682Other rentals and landing fees
    
    
    9,342
    
    
    
    11,862
    
    
    
    21,204
    
    
    
    9,190
    
    
    
    7,745
    
    
    
    16,935Ground handling services
    
    
    33,891
    
    
    
    11,898
    
    
    
    45,789
    
    
    
    20,479
    
    
    
    7,874
    
    
    
    28,353Depreciation
    
    
    
    
    
    
    1,978
    
    
    
    1,978
    
    
    
    
    
    
    
    1,490
    
    
    
    1,490Other
    
    
    7,397
    
    
    
    20,829
    
    
    
    28,226
    
    
    
    5,922
    
    
    
    12,735
    
    
    
    18,657Total operating expenses
    
    
    244,852
    
    
    
    119,927
    
    
    
    364,779
    
    
    
    170,977
    
    
    
    83,821
    
    
    
    254,798Operating income:
    
    $
    27,206
    
    
    $
    15,646
    
    
    $
    42,852
    
    
    $
    18,997
    
    
    $
    12,257
    
    
    $
    31,254Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    11.5
    %
    
    
    10.5
    %
    
    
    10.0
    %
    
    
    12.8
    %
    
    
    10.9
    %
   Operating Expenses
    22




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
      Nonoperating Income and Expenses
   Income Tax Expense
   23




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
 Certain Statistical Information
  Three Months Ended June 30,2005
    
    2004Cost per
    
    Amount
    
    
    
    
    
    
    
    
    
    Cost perAmount (in
    
    Percent of
    
    Cents per
    
    Block Hour
    
    (in
    
    Percent of
    
    Cents per
    
    Block Hourthousands)
    
    Revenue
    
    ASM
    
    (dollars)
    
    thousands)
    
    Revenue
    
    ASM
    
    (dollars)Operating expenses:Salaries, wages and benefits
    
    $
    33,027
    
    
    
    16
    %
    
    
    2.23
    
    
    $
    300
    
    
    $
    24,880
    
    
    
    16
    %
    
    
    2.52
    
    
    $
    329Aircraft fuel
    
    
    28,643
    
    
    
    13
    %
    
    
    1.93
    
    
    
    260
    
    
    
    19,527
    
    
    
    13
    %
    
    
    1.97
    
    
    
    258Aircraft maintenance, materials and repairs
    
    
    8,835
    
    
    
    4
    %
    
    
    0.59
    
    
    
    80
    
    
    
    5,869
    
    
    
    4
    %
    
    
    0.59
    
    
    
    78Aircraft rentals
    
    
    69,589
    
    
    
    33
    %
    
    
    4.69
    
    
    
    631
    
    
    
    50,062
    
    
    
    33
    %
    
    
    5.06
    
    
    
    662Other rentals and landing fees
    
    
    11,062
    
    
    
    5
    %
    
    
    0.75
    
    
    
    100
    
    
    
    8,858
    
    
    
    6
    %
    
    
    0.90
    
    
    
    117Ground handling services
    
    
    23,125
    
    
    
    11
    %
    
    
    1.56
    
    
    
    210
    
    
    
    14,850
    
    
    
    10
    %
    
    
    1.50
    
    
    
    196Depreciation
    
    
    1,016
    
    
    
    0
    %
    
    
    0.07
    
    
    
    9
    
    
    
    769
    
    
    
    1
    %
    
    
    0.08
    
    
    
    10Other
    
    
    14,821
    
    
    
    7
    %
    
    
    1.00
    
    
    
    134
    
    
    
    10,448
    
    
    
    7
    %
    
    
    1.06
    
    
    
    138Total operating expenses
    
    $
    190,118
    
    
    
    89
    %
    
    
    12.82
    
    
    $
    1,724
    
    
    $
    135,263
    
    
    
    90
    %
    
    
    13.68
    
    
    $
    1,788
 Six Months Ended June 30,2005
    
    2004Cost per
    
    Amount
    
    
    
    
    
    
    
    
    
    Cost perAmount (in
    
    Percent of
    
    Cents per
    
    Block Hour
    
    (in
    
    Percent of
    
    Cents per
    
    Block Hourthousands)
    
    Revenue
    
    ASM
    
    (dollars)
    
    thousands)
    
    Revenue
    
    ASM
    
    (dollars)Operating expenses:Salaries, wages and benefits
    
    $
    64,509
    
    
    
    16
    %
    
    
    2.33
    
    
    $
    307
    
    
    $
    48,099
    
    
    
    17
    %
    
    
    2.66
    
    
    $
    342Aircraft fuel
    
    
    54,105
    
    
    
    13
    %
    
    
    1.95
    
    
    
    257
    
    
    
    36,067
    
    
    
    12
    %
    
    
    2.00
    
    
    
    257Aircraft maintenance, materials and repairs
    
    
    16,073
    
    
    
    4
    %
    
    
    0.58
    
    
    
    76
    
    
    
    11,515
    
    
    
    4
    %
    
    
    0.64
    
    
    
    82Aircraft rentals
    
    
    132,895
    
    
    
    33
    %
    
    
    4.80
    
    
    
    631
    
    
    
    93,682
    
    
    
    33
    %
    
    
    5.18
    
    
    
    667Other rentals and landing fees
    
    
    21,204
    
    
    
    5
    %
    
    
    0.76
    
    
    
    101
    
    
    
    16,935
    
    
    
    6
    %
    
    
    0.94
    
    
    
    120Ground handling services
    
    
    45,789
    
    
    
    11
    %
    
    
    1.65
    
    
    
    218
    
    
    
    28,353
    
    
    
    10
    %
    
    
    1.57
    
    
    
    202Depreciation
    
    
    1,978
    
    
    
    0
    %
    
    
    0.07
    
    
    
    9
    
    
    
    1,490
    
    
    
    1
    %
    
    
    0.08
    
    
    
    11Other
    
    
    28,226
    
    
    
    7
    %
    
    
    1.02
    
    
    
    134
    
    
    
    18,657
    
    
    
    6
    %
    
    
    1.03
    
    
    
    133Total operating expenses
    
    $
    364,779
    
    
    
    89
    %
    
    
    13.16
    
    
    $
    1,733
    
    
    $
    254,798
    
    
    
    89
    %
    
    
    14.10
    
    
    $
    1,814
  Three Months Ended June 30,2005
    
    2004
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    2,111
    
    
    
    1,618
    
    
    
    30
    %Revenue passenger miles (in thousands) (1)
    
    
    1,086,890
    
    
    
    725,980
    
    
    
    50
    %Available seat miles (in thousands)
    
    
    1,482,481
    
    
    
    988,958
    
    
    
    50
    %Passenger load factor (2)
    
    
    73.3
    %
    
    
    73.4
    %
    
    (0.1
    ) ptsOperating revenue per available seat mile (in cents)
    
    
    14.36
    
    
    
    15.39
    
    
    
    (7
    %)Operating costs per available seat mile (in cents)
    
    
    12.82
    
    
    
    13.68
    
    
    
    (6
    %)Operating revenue per block hour
    
    $
    1,930
    
    
    $
    2,011
    
    
    
    (4
    %)Operating costs per block hour
    
    $
    1,724
    
    
    $
    1,788
    
    
    
    (4
    %)Block hours
    
    
    110,301
    
    
    
    75,666
    
    
    
    46
    %Cycles
    
    
    63,998
    
    
    
    48,347
    
    
    
    32
    %Average daily utilization (block hours)
    
    
    9.26
    
    
    
    8.78
    
    
    0.48
    hrsAverage stage length (miles)
    
    
    504
    
    
    
    449
    
    
    
    12
    %Number of operating aircraft (end of period)
    
    
    137
    
    
    
    101
    
    
    
    36
    %Employees (end of period)
    
    
    3,564
    
    
    
    2,477
    
    
    
    44
    %
 24




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
 Six Months Ended June 30,2005
    
    2004
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    3,780
    
    
    
    2,847
    
    
    
    33
    %Revenue passenger miles (in thousands) (1)
    
    
    1,904,552
    
    
    
    1,239,077
    
    
    
    54
    %Available seat miles (in thousands)
    
    
    2,770,981
    
    
    
    1,807,647
    
    
    
    53
    %Passenger load factor (2)
    
    
    68.7
    %
    
    
    68.5
    %
    
    0.2
    ptsOperating revenue per available seat mile (in cents)
    
    
    14.71
    
    
    
    15.82
    
    
    
    (7
    %)Operating costs per available seat mile (in cents)
    
    
    13.16
    
    
    
    14.10
    
    
    
    (7
    %)Operating revenue per block hour
    
    $
    1,937
    
    
    $
    2,037
    
    
    
    (5
    %)Operating costs per block hour
    
    $
    1,733
    
    
    $
    1,814
    
    
    
    (4
    %)Block hours
    
    
    210,444
    
    
    
    140,435
    
    
    
    50
    %Cycles
    
    
    121,094
    
    
    
    90,532
    
    
    
    34
    %Average daily utilization (block hours)
    
    
    9.29
    
    
    
    8.72
    
    
    0.57
    hrsAverage stage length (miles)
    
    
    498
    
    
    
    435
    
    
    
    14
    %Number of operating aircraft (end of period)
    
    
    137
    
    
    
    101
    
    
    
    36
    %Employees (end of period)
    
    
    3,564
    
    
    
    2,477
    
    
    
    44
    %
 (1)
    
    Revenue passenger miles represents the number of miles flown by revenue passengers.(2)
    
    Passenger load factor equals revenue passenger miles divided by available seat miles. Liquidity and Capital Resources
  Contractual obligations
 Payments Due by Period(in thousands)Total
    
    2005(1)
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterContractual Obligations:Senior convertible notes
    
    $
    121,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    121,000Interest payments on long-term debt
    
    
    78,738
    
    
    
    2,054
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    60,952Capital lease
    
    
    49
    
    
    
    23
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases (2)
    
    
    3,709,855
    
    
    
    148,976
    
    
    
    298,235
    
    
    
    298,095
    
    
    
    297,432
    
    
    
    297,187
    
    
    
    2,369,930Purchase obligations (3)
    
    
    6,794
    
    
    
    1,235
    
    
    
    1,757
    
    
    
    1,094
    
    
    
    949
    
    
    
    916
    
    
    
    843Total contractual cash obligations
    
    $
    3,916,436
    
    
    $
    152,288
    
    
    $
    303,951
    
    
    $
    303,122
    
    
    $
    302,314
    
    
    $
    302,036
    
    
    $
    2,552,725
 
 (1)
    
    Contractual obligations for the remainder of 2005(2)
    
    As of June 30, 2005, our obligations relating to operating
leases, excluding future scheduled deliveries of aircraft under
the ASA, were as follows (in thousands): Total
    
    2005(1)
    
    2006
    
    2007
    
    2008
    
    2009
    
    Thereafter$3,657,508
    
    $
    147,029
    
    
    $
    294,035
    
    
    $
    293,895
    
    
    $
    293,232
    
    
    $
    292,987
    
    
    $
    2,336,330
 (3)
    
    Amounts represent noncancelable commitments to purchase goods and services, including certain
aircraft parts and information technology.  25




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
     Operating activities.
 Investing activities.
  26




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued)
 Financing activities
 Critical Accounting Policies
   Forward Looking Statements
  
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
  Aircraft fuel.
 Interest rates.


27



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##### Table of Contents



Senior Convertible Notes.
 
 Item 4. Controls and Procedures
   28




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Changes in Securities and Use of Proceeds
 
 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   
 Item 5. Other Information
  29




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##### Table of Contents



Item 6. Exhibits
 
 31.1
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.32
    
    Section 1350 Certification by Chief Executive Officer and Chief Financial Officer.
 30




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##### Table of Contents



SIGNATURES
  By:
    
    /s/ PHILIP H. TRENARYPhilip H. TrenaryDate: August 2, 2005
    
    
    
    
    
    President and Chief Executive OfficerBy:
    
    /s/ PETER D. HUNTPeter D. HuntDate: August 2, 2005
    
    
    
    
    
    Vice President and Chief Financial Officer
 31