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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 September 30, 2004
 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
(State or other jurisdiction
of incorporation or organization)
    
    03-0376558(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) Indicate by check mark whether 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 þ
    
    No o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes þ
    
    No o
 As of October 25, 2004, [21,892,060] shares of common stock were outstanding.




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##### Table of Contents



Table of Contents PART
I. FINANCIAL INFORMATION
    
    1ITEM 1. FINANCIAL STATEMENTS
    
    1Condensed Consolidated Statements of Income (Unaudited) for the
Three Months and Nine Months Ended September 30, 2004 and 2003
    
    1Condensed Consolidated Balance Sheets as of September 30, 2004 (Unaudited)
and December 31, 2003
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 30, 2004 and 2003
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
    
    13ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    24ITEM 4. CONTROLS AND PROCEDURES
    
    24PART II. OTHER INFORMATION
    
    24ITEM 1. LEGAL PROCEEDINGS
    
    24ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
    
    24ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    24ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    24ITEM 5. OTHER INFORMATION
    
    24ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
    
    25EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 1350 CERTIFICATIONS OF THE CEO & CFO




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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 September 30,2004
    
    2003Operating revenues:Passenger
    
    $
    167,063
    
    
    $
    118,487Other
    
    
    1,023
    
    
    
    1,178Total operating revenues
    
    
    168,086
    
    
    
    119,665Operating expenses:Salaries, wages and benefits
    
    
    27,425
    
    
    
    22,265Aircraft fuel
    
    
    22,816
    
    
    
    14,881Aircraft maintenance, materials and repairs
    
    
    5,412
    
    
    
    3,695Aircraft rentals
    
    
    55,290
    
    
    
    35,432Other rentals and landing fees
    
    
    10,047
    
    
    
    7,450Ground handling services
    
    
    17,777
    
    
    
    11,707Depreciation and amortization
    
    
    812
    
    
    
    767Government reimbursements
    
    
    
    
    
    
    (114
    )Other
    
    
    9,982
    
    
    
    7,011Total operating expenses
    
    
    149,561
    
    
    
    103,094Operating income
    
    
    18,525
    
    
    
    16,571Operating income as a percentage of operating revenue
    
    
    11.0
    %
    
    
    13.8
    %Nonoperating (expense) incomeInterest expense, net
    
    
    (1,129
    )
    
    
    (1,883
    )Miscellaneous (expense) income, net
    
    
    (7
    )
    
    
    188Total nonoperating expense
    
    
    (1,136
    )
    
    
    (1,695
    )Income before income taxes
    
    
    17,389
    
    
    
    14,876Income tax expense
    
    
    4,740
    
    
    
    6,138Net income
    
    $
    12,649
    
    
    $
    8,738Basic and
diluted earnings per share
    
    $
    0.58
    
    
    $
    0.40Shares used
in computing basic and diluted earnings per share
    
    
    21,892
    
    
    
    21,892
 The accompanying notes are an integral part of these condensed consolidated financial statements. 1




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Pinnacle Airlines Corp.
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data) Nine Months Ended September 30,2004
    
    2003Operating revenues:Passenger
    
    $
    452,104
    
    
    $
    324,653Other
    
    
    2,034
    
    
    
    5,023Total operating revenues
    
    
    454,138
    
    
    
    329,676Operating expenses:Salaries, wages and benefits
    
    
    75,524
    
    
    
    61,963Aircraft fuel
    
    
    58,883
    
    
    
    38,864Aircraft maintenance, materials and repairs
    
    
    16,927
    
    
    
    9,926Aircraft rentals
    
    
    148,972
    
    
    
    97,987Other rentals and landing fees
    
    
    26,982
    
    
    
    21,419Ground handling services
    
    
    46,130
    
    
    
    31,715Depreciation and amortization
    
    
    2,302
    
    
    
    2,232Government reimbursements
    
    
    
    
    
    
    (1,114
    )Other
    
    
    28,639
    
    
    
    20,077Total operating expenses
    
    
    404,359
    
    
    
    283,069Operating income
    
    
    49,779
    
    
    
    46,607Operating income as a percentage of operating revenue
    
    
    11.0
    %
    
    
    14.1
    %Nonoperating (expense) incomeInterest expense, net
    
    
    (3,558
    )
    
    
    (5,443
    )Miscellaneous income, net
    
    
    309
    
    
    
    213Total nonoperating expense
    
    
    (3,249
    )
    
    
    (5,230
    )Income before income taxes
    
    
    46,530
    
    
    
    41,377Income tax expense
    
    
    16,129
    
    
    
    16,116Net income
    
    $
    30,401
    
    
    $
    25,261Basic earnings per share
    
    $
    1.39
    
    
    $
    1.15Diluted earnings per share
    
    $
    1.39
    
    
    $
    1.15Shares used in computing basic earnings per share
    
    
    21,892
    
    
    
    21,892Shares used in computing diluted earnings per share
    
    
    21,897
    
    
    
    21,892
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands) September 30,
    
    December 31,2004
    
    2003(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    38,094
    
    
    $
    31,523Receivables, principally from Northwest, net
    
    
    21,875
    
    
    
    17,524Spare parts and supplies, net
    
    
    4,401
    
    
    
    3,773Prepaid expenses and other assets
    
    
    6,339
    
    
    
    6,810Deferred income taxes
    
    
    900
    
    
    
    2,549Total current assets
    
    
    71,609
    
    
    
    62,179Property and equipment:Aircraft and rotable spares
    
    
    34,467
    
    
    
    32,779Other property and equipment
    
    
    15,356
    
    
    
    14,081Office furniture and fixtures
    
    
    1,280
    
    
    
    1,25851,103
    
    
    
    48,118Less accumulated depreciation
    
    
    (13,746
    )
    
    
    (13,832
    )Net property and equipment
    
    
    37,357
    
    
    
    34,286Other assets, primarily aircraft deposits with Northwest
    
    
    19,543
    
    
    
    14,019Cost in excess of net assets acquired, net
    
    
    18,422
    
    
    
    18,422Total assets
    
    $
    146,931
    
    
    $
    128,906
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands, except share data) September 30,
    
    December 31,2004
    
    2003(Unaudited)Liabilities and stockholders equity (deficiency)Current liabilities:Accounts payable
    
    $
    14,225
    
    
    $
    9,798Accrued expenses
    
    
    13,227
    
    
    
    11,622Line of credit
    
    
    5,000
    
    
    
    10,000Income taxes payable
    
    
    455
    
    
    
    5,596Current portion of deferred credits
    
    
    494
    
    
    
    434Current portion of note payable to Northwest
    
    
    12,000
    
    
    
    12,000Total current liabilities
    
    
    45,401
    
    
    
    49,450Deferred credits
    
    
    997
    
    
    
    1,438Deferred income taxes
    
    
    7,477
    
    
    
    6,400Note payable to Northwest
    
    
    111,000
    
    
    
    120,000Capital lease obligations
    
    
    37
    
    
    
    Commitments 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, issued and outstanding
    
    
    
    
    
    
    Series common stock, par value $0.01 per share; 5,000,000 shares
authorized; no shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value:Authorized shares  40,000,000Issued and outstanding shares  21,892,060
    
    
    219
    
    
    
    219Additional paid-in capital
    
    
    84,973
    
    
    
    84,973Retained earnings (accumulated deficit)
    
    
    (103,173
    )
    
    
    (133,574
    )Total stockholders equity (deficiency)
    
    
    (17,981
    )
    
    
    (48,382
    )Total liabilities and stockholders equity (deficiency)
    
    $
    146,931
    
    
    $
    128,906
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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Pinnacle Airlines Corp.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands) Nine Months Ended September 30,2004
    
    2003Operating activitiesNet income
    
    $
    30,401
    
    
    $
    25,261Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    2,302
    
    
    
    2,232(Gain) loss on disposal of equipment and rotable spares
    
    
    (132
    )
    
    
    67Deferred income taxes
    
    
    2,726
    
    
    
    769Provision for spare parts and supplies obsolescence
    
    
    123
    
    
    
    81Reduction of deferred credits
    
    
    (381
    )
    
    
    (132
    )Changes in operating assets and liabilities:Receivables
    
    
    (4,351
    )
    
    
    (10,806
    )Spare parts and supplies
    
    
    (927
    )
    
    
    (601
    )Prepaid expenses and other current assets
    
    
    471
    
    
    
    8,137Other assets, primarily aircraft deposits with Northwest
    
    
    (5,524
    )
    
    
    (3,325
    )Accounts payable and accrued expenses
    
    
    5,989
    
    
    
    (1,015
    )Income taxes payable
    
    
    (5,141
    )
    
    
    4,896Cash provided by operating activities
    
    
    25,556
    
    
    
    25,564Investing activitiesPurchases of property and equipment
    
    
    (5,938
    )
    
    
    (9,965
    )Proceeds from the sale of property and equipment
    
    
    960
    
    
    
    Cash used in investing activities
    
    
    (4,978
    )
    
    
    (9,965
    )Financing activitiesPayments on long-term debt
    
    
    (9,000
    )
    
    
    (15,000
    )Repayments on line of credit with bank
    
    
    
    
    
    
    (4,245
    )(Repayments) borrowings under line of credit with Northwest
    
    
    (5,000
    )
    
    
    24,800Payments on capital lease obligation
    
    
    (7
    )
    
    
    Cash (used in) provided by financing activities
    
    
    (14,007
    )
    
    
    5,555Net increase in cash and cash equivalents
    
    
    6,571
    
    
    
    21,154Cash and cash equivalents at beginning of period
    
    
    31,523
    
    
    
    4,580Cash and cash equivalents at end of period
    
    $
    38,094
    
    
    $
    25,734Supplemental disclosure of cash flow informationInterest paid
    
    $
    4,766
    
    
    $
    5,576Income tax payments
    
    $
    19,146
    
    
    $
    10,338Other non-cash transactionsNote payable issued to Northwest as a dividend
    
    $
    
    
    
    $
    200,000Settlement of accounts with Northwest as a dividend
    
    $
    
    
    
    $
    15,500Property acquired through a capital lease obligation
    
    $
    87
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) Pinnacle Airlines Corp. (the Company) operates through its wholly
owned subsidiary, Pinnacle Airlines, Inc., as a regional airline that provides
airline capacity to Northwest Airlines, Inc. (Northwest), a wholly owned
indirect subsidiary of Northwest Airlines Corporation. The Company operates as
a Northwest Airlink carrier at Northwests domestic hub airports in Detroit,
Minneapolis/St. Paul and Memphis. The Company currently operates an
all-regional jet fleet of 109 Canadair Regional Jet (CRJ) aircraft and
offers scheduled passenger service with 636 daily departures to 100 cities in
34 states plus the District of Columbia, and four Canadian provinces. 1. Basis of Presentation These interim financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information, the instructions to Quarterly Report on Form
10-Q and Rule 10-01 of Regulation S-X and should be read in conjunction with
our Annual Report on Form 10-K for the year ended December 31, 2003.
Accordingly, significant accounting policies and other disclosures normally
provided have been omitted since such items are disclosed therein. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (including normal
recurring adjustments) necessary to present fairly the Companys financial
position, the results of its operations and its cash flows for the periods
indicated. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. The term block hours refers to the elapsed time between an aircraft
leaving a gate and arriving at a gate, and the term cycle refers to an
aircrafts departure and corresponding arrival. Available seat miles
represents the number of seats available for passengers, multiplied by the
number of miles those seats are flown. Certain prior year amounts have been reclassified to conform to current
year classifications. 2. Change in Ownership and Public Offering On January 15, 2003, Northwest transferred all of the outstanding common
stock of Pinnacle Airlines, Inc. to Pinnacle Airlines Corp., in exchange for
21,892 shares of the Pinnacle Airlines Corp. common stock, which constitutes
all of its outstanding common stock, and one share of Series A preferred stock.
In January 2003 and September 2003, Northwest contributed 12.9% and 75.7%,
respectively, of the shares of Pinnacle Airlines Corp. common stock to the
Northwest Airlines Pension Plan for Contract Employees, the Northwest Airlines
Pension Plan for Pilot Employees and the Northwest Airlines Pension Plan for
Salaried Employees (collectively, the Northwest Airlines Pension Plan.) The Series A preferred stock has a stated value and liquidation preference
of $100. The Series A preferred stock gives Northwest the right to appoint two
directors to the Companys board of directors. No dividends are payable to the
shareholder of the Series A preferred stock, and it is redeemable by the
Company, at its option, for an amount equal to the liquidation preference, only
upon or following the occurrence of certain events, including the sale or other
disposition of the Series A preferred stock or the termination or expiration of
the airline services agreement between the Company and Northwest. On November 25, 2003, the Company completed an initial public offering
(the Offering) of its common stock, par value $.01 per share. In the
Offering, the Northwest Airlines Pension Plan sold the 19,400 shares that it
received during 2003. The Company did not receive any proceeds from the
Offering. 6




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 3. Airline Services Agreement The Company and Northwest operate under an Airline Services Agreement
(ASA), effective March 1, 2002, pursuant to which the Company provides
regional airline services to Northwest. The terms of the ASA are materially
different from the terms of the historical arrangement between the Company and
Northwest. The initial agreement provided for a term from March 1, 2002,
through February 29, 2012 and would have increased the Companys fleet to 95
regional jets by December 31, 2004. During 2003, the Company and Northwest
entered into certain amendments to the ASA that, among other things, extended
the term of the agreement through December 31, 2017, eliminated incentive
payments based on certain performance criteria, lowered the Companys target
operating margin from 14% to 10% effective December 1, 2003, and provided for
an increase in the size of the Companys fleet to 129 regional jets by December
31, 2005. Under the ASA, the Company receives the following payments from Northwest: Reimbursement payments. The Company receives monthly reimbursements for
all expenses relating to: passenger aircraft fuel; basic aircraft rentals;
aviation liability, war risk and hull insurance; third-party deicing services;
CRJ third-party engine and airframe maintenance; hub and maintenance facility
rentals; passenger security costs; ground handling in cities where Northwest
has ground handling operations; Detroit landing fees; and property taxes. Since
the Company is reimbursed by Northwest for the actual expenses incurred for
these items, the Company has no financial risk associated with these cost
fluctuations. Payments based on pre-set rates. The Company is entitled to receive
semi-monthly payments for each block hour and cycle it operates and a monthly
fixed cost payment based on the size of its fleet. These payments are designed
to cover all of the Companys expenses incurred with respect to the ASA that
are not covered by the reimbursement payments. The substantial majority of these expenses relate to labor costs, line
maintenance and ground handling costs in cities where Northwest does not have
ground handling operations, landing fees in cities other than Detroit, overhead
and depreciation. Margin payments. The Company receives a monthly margin payment based on
the revenues described above calculated to achieve a target operating margin.
The target operating margin for the ten months ended December 31, 2002, and the
eleven months ended November 30, 2003 was 14%. Following the Offering, the
Company and Northwest amended the ASA (as discussed above) to lower the
Companys target operating margin to 10%, effective December 1, 2003. Under
the amended ASA, the Companys target operating margin will be reset to a
market-based percentage in 2008, but the reset target operating margin will be
no lower than 8% and no higher than 12%. The portion of any margin payments attributable to the reimbursement
payments will always be equal to the targeted operating margin for the relevant
period. However, since the payments based on pre-set rates are not based on the
actual expenses incurred, if the Companys expenses are not covered by these
payments, its actual operating margin could differ from its target operating
margin. Through 2007, if the Companys actual costs that are intended to be
covered by the revenues the Company receives based on pre-set rates deviate
from the expected costs used in developing those pre-set rates, and as a result
its annual operating margin is below the 9% floor or above the 11% ceiling for
each year through 2005, or below the 8% floor or above the 12% ceiling for 2006
and 2007, a year-end adjustment in the form of a payment by Northwest or by the
Company will be made to adjust the Companys operating margin to the floor or
ceiling. Specified amounts are excluded when determining whether the Companys
annual operating margin is below the floor or above the ceiling. 7




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 3. Airline Services Agreement (continued) Beginning in 2008, Northwest will not guarantee the Company a minimum
operating margin, although the Company will still be subject to a margin
ceiling above the revised target-operating margin. If the Companys actual
operating margin for any year beginning with 2008 exceeds the revised target
operating margin by up to five percentage points, the Company will make a
year-end adjustment payment to Northwest in an amount equal to half of the
excess. In addition, should the Companys actual operating margin exceed the
targeted operating margin by more than five percentage points, the Company will
pay Northwest all of the excess above five percent. If necessary, the Company
will record an amount each quarter to reflect the Companys right to receive or
the Companys obligation to pay this operating margin adjustment payment, and
any net payment will be made annually. 4. Note Payable and Dividends to Northwest On January 14, 2003, the Company issued a $200,000 note payable to
Northwest as a dividend. The note payable required quarterly principal payments
of $5,000 beginning in March 2003 and continuing through September 2009 with a
final payment of the outstanding principal and interest due in December 2009.
The note payable also required monthly payments to the extent that the
Companys cash equivalents balance exceeds $40,000. This note accrues interest
at the rate of 3.4%, which is payable quarterly. In the event that the Company does not satisfy its obligations under the
note, Northwest has the right to set off any such amounts against its payment
obligations to the Company under the ASA. Should Northwest terminate the ASA
prior to December 2009, all outstanding principal and interest would become
immediately due and payable to Northwest. Immediately following the Offering, Northwest made a capital contribution
to the Company in the amount of $50,000. The contribution of capital was used
by the Company to reduce the outstanding principal balance on the note payable.
The Company and Northwest subsequently amended the note payable to reflect an
outstanding principal balance of $135,000 and quarterly principal payments were
lowered to $3,000. The amended note payable also requires monthly principal
payments to the extent that the Companys cash and cash equivalents balance
exceeds $50,000. No other significant changes were made to the terms of the
note payable. 5. Earnings Per Share The following table sets forth the computation of basic and diluted
earnings per share: Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Basic earnings per share:Net income (in thousands)
    
    $
    12,649
    
    
    $
    8,738
    
    
    $
    30,401
    
    
    $
    25,261Weighted average number of shares
outstanding
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892Basic earnings per share:
    
    $
    0.58
    
    
    $
    0.40
    
    
    $
    1.39
    
    
    $
    1.15Diluted earnings per share:Net income (in thousands)
    
    $
    12,649
    
    
    $
    8,738
    
    
    $
    30,401
    
    
    $
    25,261Share computation:Weighted average number of shares
outstanding
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892Assumed exercises of stock options
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    Weighted average number of shares
outstanding for diluted earnings per
share
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,897
    
    
    
    21,892Diluted earnings per share
    
    $
    0.58
    
    
    $
    0.40
    
    
    $
    1.39
    
    
    $
    1.15
 8




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 5. Earnings Per Share (continued) Options to purchase 759 shares of common stock were excluded from the
diluted EPS calculation for the three and nine months ended September 30, 2004, because
the effect would be anti-dilutive. 6. Stock-Based Compensation The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations (APB
25), and complies with the disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation. Under APB 25, if the exercise price of the
Companys employee stock options equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized. Since
the Companys stock options have all been granted with exercise prices at the
market price of the underlying stock on the date of grant, no compensation
expense has been recognized under APB 25. An initial grant of 858 stock options to purchase the Companys common
stock occurred in November 2003. These options vest over four years in annual
increments of 25% and will expire ten years after the grant date. For the
three months ended September 30, 2004, 131 of previously granted options were
forfeited. In September 2004, an additional 32 stock options to purchase the
Companys common stock were granted to members of the Board of Directors under
the 2003 Stock Incentive Plan at an exercise price of $10.23. These options
vest one year after the grant date and will expire ten years after the grant
date. The following table illustrates the effect on net income and income per
share, assuming the compensation costs for the Companys stock option and
purchase plans had been determined using the fair value method as required
under SFAS No. 123: Three Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2004Net income, as reported
    
    $
    12,649
    
    
    $
    30,401Deduct: Total pro forma stock-based
compensation expense, net of tax
    
    
    (147
    )
    
    
    (732
    )Pro forma net income
    
    $
    12,502
    
    
    $
    29,669Earnings per common share:Basic  as reported
    
    $
    0.58
    
    
    $
    1.39Diluted  as reported
    
    $
    0.58
    
    
    $
    1.39Basic  pro forma
    
    $
    0.57
    
    
    $
    1.36Diluted  pro forma
    
    $
    0.57
    
    
    $
    1.35
 7. Line of Credit with Northwest In January 2003, the Company obtained a Revolving Credit Facility
(Revolver) from Northwest, which allows for borrowings up to $50,000. The term of the Revolver extends through December 31, 2005. The Revolver accrues
interest at the rate of 1% plus a margin that is equal to the higher of the
most recent prime rate offered by JP Morgan Chase Bank, or the most recent
overnight federal funds rate offered to JP Morgan Chase Bank plus .5%. Under
the terms of the Revolver, the Company must continue to operate under the ASA
and is prevented from issuing or declaring dividends or incurring any
additional debt without the approval of Northwest. The interest rate was 5.75%
and 5.0% at September 30, 2004 and 2003, respectively. The Revolver contains
certain affirmative and negative covenants regarding the operation of the
Company. As of September 30, 2004 and December 31, 2003 the Company was in
compliance with all covenants contained in the Revolver. 9




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 8. Related Party Transactions Northwest is a related party of the Company. As previously noted, the
Company generates substantially all of its revenue from its ASA with Northwest
under which the Company uses the NW two-letter designator code in displaying
its schedules on all flights in the automated airline reservation systems used
throughout the industry. Under this agreement, the Company uses the name
Northwest Airlink. Northwest leases the Company all of its regional jets,
provides certain borrowings to the Company and is the owner of 2,492 shares of
the Companys common stock and the Companys Series A preferred stock. Amounts recorded in the Companys condensed consolidated statements of
income for transactions with Northwest are as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue:Passenger revenue
    
    $
    167,063
    
    
    $
    118,487
    
    
    $
    452,104
    
    
    $
    324,653Other revenue
    
    
    699
    
    
    
    283
    
    
    
    882
    
    
    
    1,710Expenses:Aircraft fuel
    
    
    22,698
    
    
    
    14,796
    
    
    
    58,556
    
    
    
    37,892Aircraft rentals
    
    
    55,290
    
    
    
    35,432
    
    
    
    148,972
    
    
    
    97,959Other rentals and landing fees
    
    
    2,813
    
    
    
    2,813
    
    
    
    8,438
    
    
    
    8,438Ground handling services
    
    
    12,657
    
    
    
    8,654
    
    
    
    31,945
    
    
    
    22,831Other
    
    
    210
    
    
    
    112
    
    
    
    345
    
    
    
    262Interest expense
    
    
    1,178
    
    
    
    1,931
    
    
    
    3,646
    
    
    
    5,447
 Nets amounts due from Northwest as of September 30, 2004 and December 31,
2003 were $21,177 and $17,123, respectively. The net amounts at September 30, 2004 and December 31, 2003 include $715 and $936,
respectively, for amounts due to the Company to satisfy its lease
commitments for the Saab aircraft. Of these amounts, $468 and $719,
respectively, were classified as other non-current assets in the
Companys condensed consolidated balance sheets. As
discussed in Note 11, the Company subleases certain Saab aircraft
to Mesaba Airlines (Mesaba), another Northwest regional carrier,
and obtains ground handling services at certain cities where Mesaba
has existing operations. Additionally, as provided in the ASA with
Northwest, the Company provides certain ground handling services at
selected cities to Mesaba. Ground handling services obtained from
Mesaba for the three months ended September 30, 2004 and 2003,
totaled $4,017 and $2,704, respectively. Services obtained for the
nine months ended September 30, 2004 and 2003, were $11,343 and
$8,713, respectively. Ground handling services provided to Mesaba for the three months ended
September 30, 2004 and 2003, totaled $231 and $1,065, respectively. Amounts
provided for the nine months ended September 30, 2004 and 2003, were $1,093 and
$4,072, respectively. These amounts are included in other operating revenue in
the Companys condensed consolidated statements of income. 9. Income Taxes During the three months ended September 30, 2004, the Company lowered its
2004 income tax expense by approximately $1.7 million following reductions in
the Companys previous estimates of its tax obligations for 2003 and 2004. 10




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 9. Income Taxes (continued) The reduction in the Companys estimates occurred following the
filing of its 2003 state and federal income tax returns and was
primarily due to changes in the expected allocation of taxable income
to those states where the Company has operations. The
change in estimates reduced the Companys income
tax expense by approximately $1.7 million for the three months
ended September 30, 2004. This change in estimates increased the
Companys basic and diluted EPS by approximately $0.08 for the three months ended
September 30, 2004. The
change in estimates reduced the Companys income tax expense for the nine months ended September 30, 2004
by approximately $1.1 million, which is the change in estimate
attributable to the Companys 2003 income tax expense. This
change in estimates increased the Companys basic and diluted EPS
by approximately $0.05 for the nine months ended September 30,
2004. The
following summarizes the significant components of the Companys income tax
expense for the periods indicated: Three Months Ended September 30,2004
    
    2003$
    
    %
    
    $
    
    %Income tax expense at statutory rate
    
    $
    6,086
    
    
    
    35.0
    %
    
    $
    5,207
    
    
    
    35.0
    %State income taxes, net of federal tax benefit
    
    
    313
    
    
    
    1.8
    %
    
    
    580
    
    
    
    3.9
    %(Decrease) increase in estimate of 2003 income taxes
    
    
    (1,063
    )
    
    
    (6.1
    %)
    
    
    347
    
    
    
    2.3
    %Decrease in estimate of 2004 income taxes
    
    
    (611
    )
    
    
    (3.5
    %)
    
    
    
    
    
    
    Other
    
    
    15
    
    
    
    0.2
    %
    
    
    4
    
    
    
    Income tax expense
    
    $
    4,740
    
    
    
    27.3
    %
    
    $
    6,138
    
    
    
    41.3
    %
 Nine Months Ended September 30,2004
    
    2003$
    
    %
    
    $
    
    %Income tax expense at statutory rate
    
    $
    16,285
    
    
    
    35.0
    %
    
    $
    14,482
    
    
    
    35.0
    %State income taxes, net of federal tax benefit
    
    
    837
    
    
    
    1.8
    %
    
    
    1,616
    
    
    
    3.9
    %Decrease in estimate of 2003 income taxes
    
    
    (1,063
    )
    
    
    (2.3
    %)
    
    
    
    
    
    
    Other
    
    
    70
    
    
    
    0.3
    %
    
    
    18
    
    
    
    Income tax expense
    
    $
    16,129
    
    
    
    34.7
    %
    
    $
    16,116
    
    
    
    38.9
    %
 10. Manufacturer Credits The Company purchases from Northwest certain manufacturer credits to
acquire flight equipment, spare parts and supplies and maintenance services.
Under its operating agreement with Northwest, the Company may decline to
purchase credits that it does not plan to utilize within 180 days. The Company
had available manufacturer credits of $3,622 and $3,645 at September 30, 2004
and December 31, 2003, respectively, which are included in prepaid expenses and
other assets. 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) 10. Manufacturer Credits (continued) The Company purchased manufacturer credits from Northwest in the amount of
$3,106 and $0, for the three months ended September 30, 2004 and 2003,
respectively. For the nine months ended September 30, 2004 and 2003, the
Company purchased manufacturer credits of $4,386 and $10,053, respectively. 11. Commitments and Contingencies The Company leases all of its aircraft and certain aircraft equipment,
buildings and office equipment under capital and noncancelable operating leases
that expire in various years through 2017. The Company subleases its CRJ
aircraft from Northwest under operating leases that expire December 31, 2017.
The operating lease agreements contain certain requirements of the Company
regarding the payment of taxes on the aircraft, acceptable use of the aircraft,
the level of insurance to be maintained, the maintenance procedures to be
performed and the condition of the aircraft upon its return to Northwest. The
monthly operating lease rates include certain fleet management costs of
Northwest and are not representative of the rates paid by Northwest to
third-party lessors. Northwest reimburses the Companys aircraft rental
expense in full under the ASA. The
Company transferred 11 Saab turboprops to Mesaba during 2002. The Company entered into
an aircraft sublease agreement with Mesaba with respect to these Saab aircraft
and two engines that it leases from third parties. The term of the sublease
will continue for the remainder of the term of the Companys subleases with the
third-party sublessors, subject to its right to terminate the sublease in the
event of default by Mesaba. Amounts received from Northwest and Mesaba are
consistent with amounts paid by the Company to third party lessors of the Saab
aircraft. The following summarizes approximate minimum future rental payments, by
year and in the aggregate, required under capital leases and noncancelable
operating leases with initial or remaining lease terms in excess of one year as
of September 30, 2004: Capital Leases
    
    Operating LeasesNon-aircraft
    
    Aircraft
    
    Non-aircraftRemainder of 2004
    
    $
    11
    
    
    $
    59,139
    
    
    $
    1,1602005
    
    
    46
    
    
    
    236,556
    
    
    
    4,8822006
    
    
    27
    
    
    
    236,365
    
    
    
    4,9212007
    
    
    
    
    
    
    231,295
    
    
    
    4,6752008
    
    
    
    
    
    
    230,292
    
    
    
    4,494Thereafter
    
    
    
    
    
    
    2,060,158
    
    
    
    32,30984
    
    
    
    3,053,805
    
    
    
    52,441Sublease rental income
    
    
    
    
    
    
    (20,880
    )
    
    
    (361
    )84
    
    
    $
    3,032,925
    
    
    $
    52,080Less amount representing interest
    
    
    4Present value of net minimum
lease payments
    
    $
    80
 12. Subsequent Event On October 14, 2004, a repositioning flight operated by the Company was
involved in an accident near Jefferson City, Missouri. The flight, which was
enroute to Minneapolis, Minnesota, was not carrying any passengers or flight
attendants. The two pilots operating the aircraft did not survive the
accident. The National Transportation Safety Board is currently investigating
the accident and the Company is fully cooperating with the investigation. The
Company is currently assessing the costs that may be associated with the event.
The Company does not expect that these costs will have a material impact on
its operating results, cash flows and financial position. 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition General The following discussion and analysis describes the principal factors
affecting the results of operations, liquidity, capital resources and
contractual cash obligations, as well as the critical accounting policies, of
the Company. This should be read in conjunction with the accompanying unaudited
financial statements and our Annual Report on Form 10-K for the year ended
December 31, 2003 (Annual Report), which include additional information about
our significant accounting policies, practices and the transactions that
underlie our financial results. Our website address is www.nwairlink.com. All of our filings with the SEC
are available free of charge through our website as soon as reasonably
practicable after we file them with, or furnish them to, the SEC. Overview Our available seat miles (ASMs), block hours and cycles increased by
approximately 58%, 56% and 42%, respectively, during the three months ended
September 30, 2004, compared to the same period in 2003. Our ASMs, block hours
and cycles increased by approximately 58%, 53% and 38%, respectively, during
the nine months ended September 30, 2004, compared to the same period in 2003.
The increases were driven primarily by the growth in our fleet of Canadair
Regional Jets (CRJs), 8 and 33 of which were added during the three and
nine months ended September 30, 2004, respectively. By adding 39 aircraft since
September 30, 2003, we have grown our fleet by 56% to include 109 CRJs at
September 30, 2004. Operating revenue increased by $48.4 million, or 40%, and $124.5 million,
or 38%, for the three and nine months ended September 30, 2004, respectively,
over the same period in 2003. Operating income for the three and nine months
ended September 30, 2004 were $18.5 million and $49.8 million, respectively,
which represented increases of $2.0 million and $3.2 million, respectively,
over the same periods in 2003. Net income for the three and nine months ended September 30, 2004 were
$12.6 million and $30.4 million, respectively, which represented increases of
$3.9 million and $5.1 million, respectively, over the same periods in 2003.
Since December 31, 2003, our balance of cash and cash equivalents has increased
by $6.6 million to $38.1 million. Our net income for the three and nine months ended September 30, 2004,
were favorably affected by $1.7 million and $1.1 million, respectively,
associated with reductions in our estimate of 2003 and 2004 tax
obligations. The reduction in estimates occurred following the
filing of our 2003 state and federal income tax returns and were
primarily due to changes in the expected allocation of our taxable
income to states where we operate. Our 2004 passenger revenue and operating income were negatively affected
by the reduction in our target operating margin from 14% to 10%, which occurred
at the time of the Offering. The growth in passenger revenue and operating
income for the three months ended September 30, 2004 would have been
approximately 48% and 64%, respectively, had the target margin been 10% for the
same period in 2003. The growth in passenger revenue and operating income for
the nine months ended September 30, 2004 would have been approximately 46% and
55%, respectively, had the target margin been 10% for the same period in 2003. 13




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Under the ASA, Northwest bears the economic risk of price fluctuations in
aircraft fuel. We are reimbursed in full by Northwest at the lower of the
actual cost of our passenger fuel (including taxes and fees) or $0.78 per
gallon; any excess over $0.78 is borne by Northwest and does not yield a margin
to us. The following reconciles our passenger revenue and operating income as
reported in accordance with generally accepted accounting principles (GAAP)
for the three and nine months ended September 30, 2003 to passenger revenue and
operating income as if our target operating margin had been 10% for the same
periods. We believe that this information is useful as it indicates more clearly
our comparative year-to-year operating results. None of this information
should be considered a substitute for any measures prepared in accordance with
GAAP. We have included this reconciliation of non-GAAP financial measures to
our most comparable GAAP financial measures included herein. Three Months Ended September 30,2004
    
    2003
    
    % IncreasePassenger RevenuePassenger revenue in accordance with GAAP
    
    $
    167,063
    
    
    $
    118,487
    
    
    
    41
    %Adjustment to reduce target operating
margin to 10% from 14%
    
    
    
    
    
    
    (5,287
    )Adjusted passenger revenue with 10%
target operating margin
    
    $
    167,063
    
    
    $
    113,200
    
    
    
    48
    %Operating IncomeOperating income in accordance with GAAP
    
    $
    18,525
    
    
    $
    16,571
    
    
    
    12
    %Adjustment to reduce target operating
margin to 10% from 14%
    
    
    
    
    
    
    (5,287
    )Adjusted operating income with 10%
target operating margin
    
    $
    18,525
    
    
    $
    11,284
    
    
    
    64
    %
 Nine Months Ended September 30,2004
    
    2003
    
    % IncreasePassenger RevenuePassenger revenue in accordance with GAAP
    
    $
    452,104
    
    
    $
    324,653
    
    
    
    39
    %Adjustment to reduce target operating
margin to 10% from 14%
    
    
    
    
    
    
    (14,450
    )Adjusted passenger revenue with 10%
target operating margin
    
    $
    452,104
    
    
    $
    310,203
    
    
    
    46
    %Operating IncomeOperating income in accordance with GAAP
    
    $
    49,779
    
    
    $
    46,607
    
    
    
    7
    %Adjustment to reduce target operating
margin to 10% from 14%
    
    
    
    
    
    
    (14,450
    )Adjusted operating income with 10%
target operating margin
    
    $
    49,779
    
    
    $
    32,157
    
    
    
    55
    %
 14




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Outlook The number of aircraft we operate will continue to have the largest effect
on the growth of our passenger revenue, which is derived solely from our
operating agreement with Northwest. Northwest has continued to indicate its
commitment to regional jets as a part of its core strategy. Accordingly, we
have not revised our forecasted growth in fleet size, passenger revenue and
operating income for the remainder of 2004. We continue to forecast that our
fleet will grow to 114 CRJs by the end of 2004 and 129 by the end of 2005. We continue to focus on strong operational performance and cost
efficiencies in order to be well positioned to compete for the remaining 175
CRJs that Northwest has on option. Northwest has made no announcement
regarding the exercise of options or placement of these aircraft with any
regional carrier. We remain the only Northwest Airlink operator of 44-seat and
50-seat CRJs. Results of Operations The following discussion provides an analysis of our results of operations
and reasons for material changes therein for the three and nine months ended
September 30, 2004 compared to the same periods ended September 30, 2003. All
amounts are in thousands except per share data. Revenue As noted in the discussion of our ASA, we are reimbursed for certain
operating expenses necessary to provide regional airline capacity to Northwest
and receive payments based on pre-set rates for fixed costs, completed block
hours and completed cycles. We also receive margin payments on those items
that are intended to achieve a target operating margin. Our operating results
are not affected by any seasonality trends historically associated with the
airline industry. Comparison of Three Months Ended September 30, 2004 to Three Months Ended
September 30, 2003 The following is a summary of our passenger revenue by type, which
includes margin, (in thousands): Three Months Ended September 30,2004
    
    2003
    
    ChangePassenger revenue from expense reimbursement
    
    $
    111,270
    
    
    $
    78,431
    
    
    
    42
    %Passenger revenue based on pre-set rates
    
    
    55,793
    
    
    
    40,056
    
    
    
    39
    %Total passenger revenue
    
    $
    167,063
    
    
    $
    118,487
    
    
    
    41
    %
 The increase in passenger revenue of $48.6 million was caused primarily by
the addition of 39 aircraft to our fleet of CRJs. The increase in revenue
associated with expense reimbursements of $32.8 million was largely due to
increases in aircraft rentals, aircraft fuel and ground handling, which
increased with our level of operations. This increase in our fleet and the
corresponding increase in CRJ block hours and cycles of 56% and 42%,
respectively, accounted for an increase of $15.7 million in passenger revenue
based on pre-set rates. 15




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Operating Expenses The following summarizes our operating expenses, reimbursed and
unreimbursed, as provided under the terms of our ASA (in thousands): Three Months Ended September 30,2004
    
    2003Reimbursed
    
    Unreimbursed
    
    Total
    
    Reimbursed
    
    Unreimbursed
    
    TotalOperating expenses:Salaries, wages and benefits
    
    $
    
    
    
    $
    27,425
    
    
    $
    27,425
    
    
    $
    
    
    
    $
    22,265
    
    
    $
    22,265Aircraft fuel
    
    
    22,698
    
    
    
    118
    
    
    
    22,816
    
    
    
    14,796
    
    
    
    85
    
    
    
    14,881Aircraft maintenance, materials and
repairs
    
    
    2,634
    
    
    
    2,778
    
    
    
    5,412
    
    
    
    1,894
    
    
    
    1,801
    
    
    
    3,695Aircraft rentals
    
    
    55,290
    
    
    
    
    
    
    
    55,290
    
    
    
    35,432
    
    
    
    
    
    
    
    35,432Other rentals and landing fees
    
    
    4,768
    
    
    
    5,279
    
    
    
    10,047
    
    
    
    4,102
    
    
    
    3,348
    
    
    
    7,450Ground handling services
    
    
    12,684
    
    
    
    5,093
    
    
    
    17,777
    
    
    
    8,681
    
    
    
    3,026
    
    
    
    11,707Depreciation and amortization
    
    
    
    
    
    
    812
    
    
    
    812
    
    
    
    
    
    
    
    767
    
    
    
    767Government reimbursements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )
    
    
    (114
    )Other
    
    
    2,069
    
    
    
    7,913
    
    
    
    9,982
    
    
    
    2,546
    
    
    
    4,465
    
    
    
    7,011$
    100,143
    
    
    $
    49,418
    
    
    $
    149,561
    
    
    $
    67,451
    
    
    $
    35,643
    
    
    $
    103,094Margin on expense reimbursements
    
    
    11,127
    
    
    
    
    
    
    
    
    
    
    
    10,980Passenger revenue from expense
reimbursements
    
    $
    111,270
    
    
    
    
    
    
    
    
    
    
    $
    78,431
 The increase in operating expenses during the three months ended September
30, 2004 was predominately due to the growth in our level of operations. Total
operating expenses increased by $46.5 million, or 45%, which is comprised of
increases in reimbursed and unreimbursed expenses of approximately 48% and 39%,
respectively. Salaries, wages and benefits increased by $5.2 million primarily due to
the increase in the number of pilots and flight attendants of 37% and 43%,
respectively, as well as wage rate and benefit increases. An increase in other
employee benefits, primarily the cost of employee insurance, accounted for the
remaining increase in salaries, wages and benefits, as overall headcount
increased 16%. Aircraft fuel increased $7.9 million, or 53%, due to the 56% increase in
block hours and a 17% increase in the average length of our flight, which was
partially offset by a slight improvement in our fuel burn efficiency. Aircraft maintenance, materials and repairs expenses that are reimbursed
by Northwest increased principally due to an increase in volume-driven
expenses, which normally represent approximately 50% of our maintenance,
materials, and repair costs. The remaining increases in maintenance expense,
both unreimbursed and reimbursed, were due mainly to the increase in our level
of operations and the expiration of warranty on a portion of the fleet. Aircraft rentals increased by $19.9 million, or 56%, due to the addition
of 39 CRJ aircraft to our fleet. Ground handling services increased by $6.1 million, or 52%, due primarily
to the 42% increase in the number of departures performed. The increase in
ground handling expense per departure was caused by a change in the mix of
cities where we provide passenger service. Other rentals and landing fees increased due to an increase in landing
fees of approximately $2.4 million, which is due largely to our increased level
of operations and a change in the mix of cities where we provide passenger
service. 16




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Government reimbursements related to a refund of previously paid passenger
screening costs received in May 2003. Because we are reimbursed for passenger
screening costs, we distributed 100% of the funds received to Northwest. Other expenses reimbursed by Northwest decreased primarily due to a
decrease in property taxes of $0.8 million. Reductions in amounts previously
estimated for property tax obligations were the cause of the decrease. The
increase in unreimbursed other expenses was driven by our increased level of
operations, most notably an increase of $0.9 million of expenses associated
with overnight travel of our pilots and flight attendants, and $0.8 million of
expenses associated with new pilot training. Additionally, $0.3 million of the
increase is attributable to directors and officers insurance coverage. Nonoperating Expenses The decrease in interest expense was due to our reduced level of
borrowings from Northwest. Since September 30, 2003, the note payable owed to
Northwest has been reduced by $62.0 million due primarily to the $50.0 million
reduction at the time of the Offering. Additionally, borrowings under the line
of credit with Northwest decreased by $19.8 million from September 30, 2003 to
September 30, 2004. Income Taxes During the three months ended September 30, 2004, we lowered our income tax expense by approximately $1.7 million due to reductions in amounts
we previously estimated for our tax obligations for 2004 and 2003. The
reduction in estimates occurred following the filing of our 2003
state and federal income tax returns and was primarily due to
changes in the expected allocation of our taxable income to those states
where we operate. The
change in estimates reduced our 2004 estimated income tax expense by
approximately $1.7 million for the three months ended
September 30, 2004. For the three months ended
September 30, 2004, this change in estimates increased our basic
and diluted EPS by approximately $0.08. A
more detailed discussion of this change in estimate is included in
Note 9 to our condensed consolidated financial statements. 17




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended September 30, 2003 The following is a summary of our passenger revenue by type, which
includes margin, (in thousands): Nine Months Ended September 30,2004
    
    2003
    
    ChangePassenger revenue from expense reimbursement
    
    $
    301,244
    
    
    $
    212,670
    
    
    
    42
    %Passenger revenue based on pre-set rates
    
    
    150,860
    
    
    
    111,983
    
    
    
    35
    %Total passenger revenue
    
    $
    452,104
    
    
    $
    324,653
    
    
    
    39
    %
 The increase in passenger revenue of $127.5 million was caused primarily
by the addition of 39 aircraft to our fleet of CRJs. This increase in our fleet
and the corresponding increase in CRJ block hours and cycles of 53% and 38%,
respectively, accounted for an increase of $38.9 million in increased passenger
revenue based on pre-set rates. The increase in revenue associated with expense reimbursements of $88.6
million was largely due to increases in aircraft rentals, aircraft fuel and
ground handling, which increased with our level of operations. Operating Expenses The following summarizes our operating expenses, reimbursed and
unreimbursed, as provided under the terms of our ASA (in thousands): Nine Months Ended September 30,2004
    
    2003Reimbursed
    
    Unreimbursed
    
    Total
    
    Reimbursed
    
    Unreimbursed
    
    TotalOperating expenses:Salaries, wages and benefits
    
    $
    
    
    
    $
    75,524
    
    
    $
    75,524
    
    
    $
    
    
    
    $
    61,963
    
    
    $
    61,963Aircraft fuel
    
    
    58,556
    
    
    
    327
    
    
    
    58,883
    
    
    
    38,681
    
    
    
    183
    
    
    
    38,864Aircraft maintenance, materials and
repairs
    
    
    8,480
    
    
    
    8,447
    
    
    
    16,927
    
    
    
    4,737
    
    
    
    5,189
    
    
    
    9,926Aircraft rentals
    
    
    148,972
    
    
    
    
    
    
    
    148,972
    
    
    
    97,959
    
    
    
    28
    
    
    
    97,987Other rentals and landing fees
    
    
    13,958
    
    
    
    13,024
    
    
    
    26,982
    
    
    
    12,108
    
    
    
    9,311
    
    
    
    21,419Ground handling services
    
    
    33,163
    
    
    
    12,967
    
    
    
    46,130
    
    
    
    23,563
    
    
    
    8,152
    
    
    
    31,715Depreciation and amortization
    
    
    
    
    
    
    2,302
    
    
    
    2,302
    
    
    
    
    
    
    
    2,232
    
    
    
    2,232Government reimbursements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    (114
    )
    
    
    (1,114
    )Other
    
    
    7,991
    
    
    
    20,648
    
    
    
    28,639
    
    
    
    6,848
    
    
    
    13,229
    
    
    
    20,077$
    271,120
    
    
    $
    133,239
    
    
    $
    404,359
    
    
    $
    182,896
    
    
    $
    100,173
    
    
    $
    283,069Margin on expense reimbursements
    
    
    30,124
    
    
    
    
    
    
    
    
    
    
    
    29,774Passenger revenue from expense
reimbursements
    
    $
    301,244
    
    
    
    
    
    
    
    
    
    
    $
    212,670
 The increase in operating expenses during the nine months ended September
30, 2004 was predominately due to the growth in our level of operations. Total
operating expenses increased by $121.3 million, or 43%, which is comprised of
increases in reimbursed and unreimbursed expenses of approximately 48% and 33%,
respectively. Salaries, wages and benefits increased by $13.6 million primarily due to
the increase in the number of pilots and flight attendants of 37% and 43%,
respectively, as well as wage rate and benefit increases. An increase in other
employee benefits, primarily the cost of employee insurance, accounted for the
remaining increase in salaries, wages and benefits. 18




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Aircraft fuel increased $20.0 million, or 52%, due to the 53% increase in
block hours and a 19% increase in the average length of our flights, which was
partially offset by a slight improvement in our fuel efficiency. Aircraft maintenance, materials and repairs expenses that are reimbursed
by Northwest increased principally due to required heavy airframe maintenance
checks being performed on our CRJ aircraft. This accounted for approximately
$1.8 million of the increase in reimbursed maintenance expenses. Heavy airframe
maintenance checks were performed on 23 aircraft during the nine months ended
September 30, 2004 and 10 are scheduled for the remainder of the year. The
remaining increases in maintenance expense, both unreimbursed and reimbursed,
were due mainly to the increase in our level of operations and the expiration
of warranty on a portion of the fleet. Aircraft rentals increased by $51.0 million, or 52%, due to the addition
of 39 CRJ aircraft to our fleet. Ground handling services increased by $14.4 million, or 45%, due primarily
to the 38% increase in the number of departures performed. The increase in
ground handling expense per departure was caused by a change in the mix of
cities where we provide passenger service. Other rentals and landing fees increased due to an increase in landing
fees of approximately $5.1 million, or approximately 55%, which is due largely
to our increased level of operations and a change in the mix of cities where we
provide passenger service. Government reimbursements related to a refund of previously paid passenger
screening costs received in May 2003. Because we are reimbursed for passenger
screening costs, we distributed 100% of the funds received to Northwest. Other expenses that are reimbursed by Northwest increased primarily due to
increases in property taxes of $0.6 million and incremental passenger screening
costs of $0.3 million. The increase in unreimbursed other expenses was driven
by our increased level of operations, most notably an increase of $2.4 million
of expenses associated with new pilot training and $1.9 million of expenses
associated with overnight travel for our pilots and flight attendants.
Additionally, $0.8 million of the increase is attributable to directors and
officers insurance coverage. Nonoperating Expenses The decrease in interest expense was due to our reduced level of
borrowings from Northwest. Since September 30, 2003, the note payable owed to
Northwest has been reduced by $62.0 million due primarily to the $50.0 million
reduction at the time of the Offering. Additionally, borrowings under the line
of credit with Northwest decreased by $19.8 million from September 30, 2003 to
September 30, 2004. Miscellaneous income consists of a gain of $0.3 million recorded in
connection with the sale of Saab equipment during the nine months ended
September 30, 2004. Income Taxes During the nine months ended September 30, 2004, we lowered our income tax expense by approximately $1.1 million due to reductions in amounts
we previously estimated for our tax obligations for 2003. The
reduction in our estimates occurred following the filing of our 2003
state and federal income tax returns and was primarily due to changes
in the expected allocation of our taxable income to those states where we operate. The
change in estimates reduced our 2004 income tax expense for the nine
months ended September 30, 2004 by approximately
$1.1 million, which is the change in estimate attributable to
our 2003 income tax expense. This change in estimates increased our
basic and  diluted EPS by approximately $0.05 for the nine months
ended September 30, 2004. 19




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Certain Statistical Information Information with respect to our operating expense components (amounts in
thousands) as a percentage of revenue and as cents per ASM is as follows: Three Months Ended September 30,2004
    
    2003Cents
    
    
    
    
    
    
    
    
    
    CentsPercent of
    
    per
    
    
    
    
    
    Percent of
    
    perAmount
    
    Revenue
    
    ASM
    
    Amount
    
    Revenue
    
    ASMOperating expenses:Salaries, wages and benefits
    
    $
    27,425
    
    
    
    16
    %
    
    
    2.36
    
    
    $
    22,265
    
    
    
    19
    %
    
    
    3.04Aircraft fuel
    
    
    22,816
    
    
    
    14
    %
    
    
    1.97
    
    
    
    14,881
    
    
    
    12
    %
    
    
    2.03Aircraft maintenance,
materials and repairs
    
    
    5,412
    
    
    
    3
    %
    
    
    0.47
    
    
    
    3,695
    
    
    
    3
    %
    
    
    0.51Aircraft rentals
    
    
    55,290
    
    
    
    33
    %
    
    
    4.77
    
    
    
    35,432
    
    
    
    29
    %
    
    
    4.84Other rentals and landing fees
    
    
    10,047
    
    
    
    6
    %
    
    
    0.87
    
    
    
    7,450
    
    
    
    6
    %
    
    
    1.02Ground handling services
    
    
    17,777
    
    
    
    11
    %
    
    
    1.53
    
    
    
    11,707
    
    
    
    10
    %
    
    
    1.60Depreciation and amortization
    
    
    812
    
    
    
    0
    %
    
    
    0.07
    
    
    
    767
    
    
    
    1
    %
    
    
    0.10Government reimbursements
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    (114
    )
    
    
    0
    %
    
    
    (0.02
    )Other
    
    
    9,982
    
    
    
    6
    %
    
    
    0.86
    
    
    
    7,011
    
    
    
    6
    %
    
    
    0.96Total operating expenses
    
    $
    149,561
    
    
    
    89
    %
    
    
    12.90
    
    
    $
    103,094
    
    
    
    86
    %
    
    
    14.08
 Nine Months Ended September 30,2004
    
    2003Cents
    
    
    
    
    
    
    
    
    
    CentsPercent of
    
    per
    
    
    
    
    
    Percent of
    
    perAmount
    
    Revenue
    
    ASM
    
    Amount
    
    Revenue
    
    ASMOperating expenses:Salaries, wages and benefits
    
    $
    75,524
    
    
    
    17
    %
    
    
    2.55
    
    
    $
    61,963
    
    
    
    19
    %
    
    
    3.29Aircraft fuel
    
    
    58,883
    
    
    
    13
    %
    
    
    1.98
    
    
    
    38,864
    
    
    
    12
    %
    
    
    2.07Aircraft maintenance,
materials and repairs
    
    
    16,927
    
    
    
    4
    %
    
    
    0.57
    
    
    
    9,926
    
    
    
    3
    %
    
    
    0.53Aircraft rentals
    
    
    148,972
    
    
    
    33
    %
    
    
    5.02
    
    
    
    97,987
    
    
    
    30
    %
    
    
    5.21Other rentals and landing fees
    
    
    26,982
    
    
    
    6
    %
    
    
    0.91
    
    
    
    21,419
    
    
    
    6
    %
    
    
    1.14Ground handling services
    
    
    46,130
    
    
    
    10
    %
    
    
    1.55
    
    
    
    31,715
    
    
    
    9
    %
    
    
    1.69Depreciation and amortization
    
    
    2.302
    
    
    
    0
    %
    
    
    0.08
    
    
    
    2,232
    
    
    
    1
    %
    
    
    0.12Government reimbursements
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    (1,114
    )
    
    
    0
    %
    
    
    (0.06
    )Other
    
    
    28,639
    
    
    
    6
    %
    
    
    0.97
    
    
    
    20,077
    
    
    
    6
    %
    
    
    1.07Total operating expenses
    
    $
    404,359
    
    
    
    89
    %
    
    
    13.63
    
    
    $
    283,069
    
    
    
    86
    %
    
    
    15.06
 20




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Certain Statistical Information (continued) The following table summarizes certain operational statistics for the
three months and nine months ended September 30, 2004 and 2003: Three Months Ended September 30,2004
    
    2003
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    1,777
    
    
    
    1,256
    
    
    
    41
    %Revenue passenger miles (in thousands) (1)
    
    
    827,798
    
    
    
    516,851
    
    
    
    60
    %Available seat miles (in thousands)
    
    
    1,159,265
    
    
    
    732,112
    
    
    
    58
    %Passenger load factor (2)
    
    
    71.4
    %
    
    
    70.6
    %
    
    0.8 ptsOperating revenue per available seat mile (in cents)
    
    
    14.50
    
    
    
    16.35
    
    
    
    (11
    %)Operating costs per available seat mile (in cents)
    
    
    12.90
    
    
    
    14.08
    
    
    
    (8
    %)Block hours
    
    
    87,540
    
    
    
    56,146
    
    
    
    56
    %Cycles
    
    
    54,946
    
    
    
    38,746
    
    
    
    42
    %Average daily utilization (block hours)
    
    
    9.16
    
    
    
    9.07
    
    
    0.09 hrsAverage length of aircraft flight (miles)
    
    
    466
    
    
    
    397
    
    
    
    17
    %Number of operating aircraft (end of period)
    
    
    109
    
    
    
    70
    
    
    
    56
    %Employees at end of period
    
    
    2,826
    
    
    
    2,438
    
    
    
    16
    %
 Nine Months Ended September 30,2004
    
    2003
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    4,625
    
    
    
    3,217
    
    
    
    44
    %Revenue passenger miles (in thousands) (1)
    
    
    2,066,875
    
    
    
    1,250,019
    
    
    
    65
    %Available seat miles (in thousands)
    
    
    2,966,912
    
    
    
    1,880,168
    
    
    
    58
    %Passenger load factor (2)
    
    
    69.7
    %
    
    
    66.5
    %
    
    3.2 ptsOperating revenue per available seat mile (in cents)
    
    
    15.31
    
    
    
    17.53
    
    
    
    (13
    %)Operating costs per available seat mile (in cents)
    
    
    13.63
    
    
    
    15.06
    
    
    
    (9
    %)Block hours
    
    
    227,976
    
    
    
    148,937
    
    
    
    53
    %Cycles
    
    
    145,478
    
    
    
    105,115
    
    
    
    38
    %Average daily utilization (block hours)
    
    
    8.88
    
    
    
    8.71
    
    
    0.17 hrsAverage length of aircraft flight (miles)
    
    
    447
    
    
    
    377
    
    
    
    19
    %Number of operating aircraft (end of period)
    
    
    109
    
    
    
    70
    
    
    
    56
    %Employees at end of period
    
    
    2,826
    
    
    
    2,438
    
    
    
    16
    %
  (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 As of September 30, 2004, we had $38.1 million in cash and cash
equivalents. Net cash provided by operating activities for the nine months
ended September 30, 2004 and September 30, 2003 was $25.6 million and $25.6
million, respectively. Cash used for investing activities for the nine months ended September 30,
2004 and September 30, 2003 was $5.0 million and $10.0 million, respectively.
The decrease is due to the timing of purchases of rotable (renewable) parts.
During the three months ended September 30, 2004, we lowered our forecasted
capital expenditures for 2004 from approximately $16.0 million to approximately
$9.0 million, which will be funded with cash flows from our current operations. Cash
used for financing activities for the nine months ended September 30,
2004 was $19.6 million more than the same period in 2003, due primarily to the
2003 borrowings under our line of credit with Northwest of $24.8 million. 21




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Liquidity and Capital Resources (continued) As of September 30, 2004, we had $45.0 million of available borrowings
under our revolving credit facility with Northwest, which had an interest rate
of 5.75%. We have significant lease and sublease obligations for aircraft that are
classified as operating leases on our balance sheet. We are responsible for
all maintenance, insurance and other costs associated with operating these
aircraft; however, we have not made any residual value or other guarantees to
our lessors. We have no other significant off-balance sheet arrangements. The following chart details our debt and lease obligations on a pro forma
basis at September 30, 2004. Operating lease information includes scheduled
deliveries of the 20 additional aircraft we will receive through December 2005
at the basic aircraft rental rate provided in the ASA. Under our ASA, amounts
relating to operating leases will be directly reimbursed by Northwest. Payments Due by Period(in thousands)Total
    
    2004 (1)
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterContractual Obligations:Line of credit (2)
    
    $
    5,000
    
    
    $
    
    
    
    $
    5,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long term debt
    
    
    123,000
    
    
    
    3,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    72,000Capital lease
    
    
    84
    
    
    
    11
    
    
    
    46
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    Operating leases (3)
    
    
    3,623,847
    
    
    
    59,787
    
    
    
    267,029
    
    
    
    275,669
    
    
    
    275,559
    
    
    
    275,394
    
    
    
    2,470,409Total contractual cash
obligations
    
    $
    3,751,931
    
    
    $
    62,798
    
    
    $
    284,075
    
    
    $
    287,696
    
    
    $
    287,559
    
    
    $
    287,394
    
    
    
    2,542,409
  (1)
    
    Contractual obligations for the remainder of 2004(2)
    
    Borrowings outstanding as of September 30, 2004, under our revolving credit
facility with Northwest, which expires December 31, 2005.(3)
    
    As of September 30, 2004, our obligations relating to operating leases,
excluding future scheduled deliveries of aircraft under the ASA, were as follows
(in thousands): Total
    
    2004 (1)
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter$
    3,085,004
    
    
    $
    58,346
    
    
    $
    233,627
    
    
    $
    233,669
    
    
    $
    233,559
    
    
    $
    233,394
    
    
    $
    2,092,409
 Critical Accounting Policies The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to adopt
accounting policies and make significant judgments and estimates to develop
amounts reflected and disclosed in the financial statements. In many cases,
there are alternative policies or estimation techniques that could be used. We
maintain a thorough process to review the application of our accounting
policies and to evaluate the appropriateness of the many estimates that are
required to prepare the financial statements of a corporation. However, even
under optimal circumstances, estimates routinely require adjustment based on
changing circumstances and the receipt of new or better information. Information regarding our Critical Accounting Policies can be found in
our Annual Report on page 27. In addition, Note 2 to the consolidated financial
statements in our Annual Report contains a summary of our significant
accounting policies. 22




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial Condition (continued) Forward Looking Statements Statements in this Form 10-Q report contain various forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Act of 1934,
as amended, or the Exchange Act, which represent our managements beliefs and
assumptions concerning future events. When used in this document and in
documents incorporated by reference, forward-looking statements include,
without limitation, statements regarding financial forecasts or projections,
our expectations, beliefs, intentions or future strategies that are signified
by the words expects, anticipates, intends, believes or similar
language. These forward-looking statements are subject to risks, uncertainties
and assumptions that could cause our actual results and the timing of certain
events to differ materially from those expressed in the forward-looking
statements. All forward-looking statements included in this report are based on
information available to us on the date of this report. It is routine for our
internal projections and expectations to change as the year or each quarter in
the year progresses, and therefore it should be clearly understood that the
internal projections, beliefs and assumptions upon which we base our
expectations may change prior to the end of each quarter or the year. Although these expectations may change, we may not inform you if they do.
Our policy is generally to provide our expectations not more than once per
quarter, and not to update that information until we deem it appropriate. 23




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosure about Market Risk We are not subject to any significant degree to market risks such as
commodity price risk (e.g., aircraft fuel prices) and interest rate risk. We
are not a party to any derivative financial instruments. Aircraft fuel. Under the ASA, Northwest bears the economic risk of price
fluctuations in aircraft fuel. We are reimbursed in full by Northwest at the
lower of the actual cost of our passenger fuel (including taxes and fees) or
$0.78 per gallon; any excess over $0.78 is borne by Northwest and does not
yield a margin to us. Interest rates. All of our CRJs are operated under long-term operating
leases with Northwest. Our Saab aircraft, which are being subleased to Mesaba
Airlines, are leased from a third party. We also anticipate leasing all of our
future deliveries of aircraft. Under the ASA, the lease payments associated
with aircraft deliveries are fixed. We do not hold long-term interest sensitive
assets and, therefore, we are not exposed to interest rate fluctuations for our
assets. The note payable we issued to Northwest bears interest at a fixed rate,
but loans under our revolving credit facility bear interest at a floating rate.
We do not purchase or hold any derivative financial instruments to protect
against the effects of changes in interest rates. 
 Item 4. Controls and Procedures Our principal executive and financial officers have evaluated our
disclosure controls and procedures and, based on such evaluation, have
determined that such disclosure controls and procedures were effective as of
September 30, 2004 (the end of the period covered by this Quarterly Report on
Form 10-Q). During our fiscal quarter ended September 30, 2004, no change occurred in
our internal control over financial reporting that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings We are a defendant in various lawsuits and other proceedings arising in
the ordinary course of our business. While the outcome of these lawsuits and
proceedings cannot be predicted with certainty, it is the opinion of
management, based on current information and legal advice, that the ultimate
disposition of these actions will not have a material adverse effect on our
financial position, results of operations or cash flows. 
 Item 2. Changes in Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 24




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K. (a) 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
 (b) Reports on Form 8-K: The Company filed the following Current Reports on Form 8-K during the
quarter ended September 30, 2004: Date Filed
    
    Event ReportedJuly 14, 2004
    
    Items 5 and 7. Issuance of a press release to report
passenger traffic results for June 2004July 29, 2004
    
    Items 7 and 12. Issuance of a press release to
announce, among other things, its quarterly earnings
results for its second quarter 2004.August 12, 2004
    
    Items 5 and 7. Issuance of a press release to report
passenger traffic results for July 2004August 16, 2004
    
    Items 5 and 7. Issuance of a press release to announce
that Chief Financial Officer, Curtis E. Sawyer will be
leaving the airline to accept the position of Chief
Financial Officer for Midwest AirlinesSeptember 9, 2004
    
    Items 5 and 7. Issuance of a press release to report
passenger traffic results for August 2004
 25




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. By:
    /s/ Philip H. TrenaryPhilip H. TrenaryDate: October 28, 2004
    
    President and Chief Executive Officer By:
    /s/ Jesse B. MillerJesse B. MillerDate: October 28, 2004
    
    Chief Financial Officer 26