##### 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, 2006
 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
    
    03-0376558(I.R.S. Employerof incorporation or organization)
    
    Identification No.)1689 Nonconnah Blvd, Suite 111Memphis, Tennessee(Address of principal executive offices)
    
    38132(Zip Code)
 901-348-4100  (Registrants telephone number, including area code)
  x o
  o x o
  o x




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##### Table of Contents



Table of Contents
 PART I. Financial Information
    
    
    1Item 1.Financial Statements
    
    
    1Condensed Consolidated Statements of Operations (Unaudited)
    
    
    1Condensed Consolidated Balance Sheets (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    19Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31PART II. Other Information
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Changes in Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    33EX-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 Operations (Unaudited)
 (in thousands, except per share data)
 Three Months Ended June 30,2006
    
    
    2005Operating revenuesRegional airline services
    
    $
    202,811
    
    
    $
    210,958Other
    
    
    1,703
    
    
    
    1,941Total operating revenues
    
    
    204,514
    
    
    
    212,899Operating expensesSalaries, wages and benefits
    
    
    35,593
    
    
    
    33,027Aircraft fuel
    
    
    27,211
    
    
    
    28,643Aircraft maintenance, materials and repairs
    
    
    7,996
    
    
    
    8,835Aircraft rentals
    
    
    66,031
    
    
    
    69,589Other rentals and landing fees
    
    
    11,223
    
    
    
    11,062Ground handling services
    
    
    21,765
    
    
    
    23,125Depreciation
    
    
    967
    
    
    
    1,016Other
    
    
    12,885
    
    
    
    14,821Provision for losses associated with bankruptcy filings of
Northwest and Mesaba
    
    
    1,348
    
    
    
    Total operating expenses
    
    
    185,019
    
    
    
    190,118Operating income
    
    
    19,495
    
    
    
    22,781Operating income as a percentage of operating revenues
    
    
    9.5
    %
    
    
    10.7
    %Nonoperating income (expense)Interest expense
    
    
    (1,452
    )
    
    
    (1,069
    )Interest income
    
    
    645
    
    
    
    261Miscellaneous income, net
    
    
    23
    
    
    
    Total nonoperating expense
    
    
    (784
    )
    
    
    (808
    )Income before income taxes
    
    
    18,711
    
    
    
    21,973Income tax expense
    
    
    6,820
    
    
    
    8,177Net income
    
    $
    11,891
    
    
    $
    13,796Basic and diluted earnings per share
    
    $
    0.54
    
    
    $
    0.63Shares used in computing basic earnings per share
    
    
    21,945
    
    
    
    21,908Shares used in computing diluted earnings per share
    
    
    21,984
    
    
    
    21,932
  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 30,2006
    
    
    2005Operating revenuesRegional airline services
    
    $
    407,816
    
    
    $
    403,709Other
    
    
    3,787
    
    
    
    3,922Total operating revenues
    
    
    411,603
    
    
    
    407,631Operating expensesSalaries, wages and benefits
    
    
    70,020
    
    
    
    64,509Aircraft fuel
    
    
    53,912
    
    
    
    54,105Aircraft maintenance, materials and repairs
    
    
    18,258
    
    
    
    16,073Aircraft rentals
    
    
    132,062
    
    
    
    132,895Other rentals and landing fees
    
    
    22,474
    
    
    
    21,204Ground handling services
    
    
    44,124
    
    
    
    45,789Depreciation
    
    
    1,929
    
    
    
    1,978Other
    
    
    26,435
    
    
    
    28,226Provision for losses associated with bankruptcy filings of
Northwest and Mesaba
    
    
    1,365
    
    
    
    Total operating expenses
    
    
    370,579
    
    
    
    364,779Operating income
    
    
    41,024
    
    
    
    42,852Operating income as a percentage of operating revenues
    
    
    10.0
    %
    
    
    10.5
    %Nonoperating income (expense)Interest expense
    
    
    (2,952
    )
    
    
    (2,157
    )Interest income
    
    
    1,149
    
    
    
    417Miscellaneous income, net
    
    
    51
    
    
    
    Gain on extinguishment of debt
    
    
    
    
    
    
    18,000Total nonoperating (expense) income
    
    
    (1,752
    )
    
    
    16,260Income before income taxes
    
    
    39,272
    
    
    
    59,112Income tax expense
    
    
    14,085
    
    
    
    21,984Net income
    
    $
    25,187
    
    
    $
    37,128Basic and diluted earnings per share
    
    $
    1.15
    
    
    $
    1.69Shares used in computing basic earnings per share
    
    
    21,945
    
    
    
    21,908Shares used in computing diluted earnings per share
    
    
    21,979
    
    
    
    21,930
  2




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share data)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    32,790
    
    
    $
    31,567Short-term investments
    
    
    45,450
    
    
    
    44,160Receivables, net of allowance
    
    
    29,968
    
    
    
    30,190Spare parts and supplies, net
    
    
    6,847
    
    
    
    6,368Prepaid expenses and other assets
    
    
    11,349
    
    
    
    5,623Deferred income taxes, net of allowance
    
    
    9,781
    
    
    
    9,146Total current assets
    
    
    136,185
    
    
    
    127,054Property and equipmentAircraft and rotable spares
    
    
    39,050
    
    
    
    39,362Other property and equipment
    
    
    20,586
    
    
    
    19,209Office furniture and fixtures
    
    
    2,018
    
    
    
    2,00261,654
    
    
    
    60,573Less accumulated depreciation
    
    
    (19,922
    )
    
    
    (18,038
    )Net property and equipment
    
    
    41,732
    
    
    
    42,535Other assets, primarily aircraft deposits
    
    
    22,010
    
    
    
    22,155Debt issuance costs, net
    
    
    4,088
    
    
    
    4,198Contractual rights under airline services agreement, net
    
    
    13,834
    
    
    
    14,435Goodwill, net
    
    
    18,422
    
    
    
    18,422Total assets
    
    $
    236,271
    
    
    $
    228,799
  3




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##### Table of Contents



Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)Liabilities and stockholders equityCurrent liabilitiesAccounts payable
    
    $
    14,662
    
    
    $
    12,945Accrued expenses
    
    
    25,066
    
    
    
    25,158Line of credit with First Tennessee
    
    
    
    
    
    
    17,000Income taxes payable
    
    
    14,231
    
    
    
    17,756Other current liabilities
    
    
    6,818
    
    
    
    7,161Total current liabilities
    
    
    60,777
    
    
    
    80,020Deferred income taxes
    
    
    7,736
    
    
    
    7,426Other liabilities
    
    
    2,677
    
    
    
    1,735Senior convertible notes
    
    
    121,000
    
    
    
    121,000Commitments and contingenciesStockholders equityPreferred 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,
22,080,585 and 21,945,260 shares issued, respectively
    
    
    221
    
    
    
    219Additional paid-in capital
    
    
    85,824
    
    
    
    85,550Accumulated deficit
    
    
    (41,964
    )
    
    
    (67,151
    )Total stockholders equity
    
    
    44,081
    
    
    
    18,618Total liabilities and stockholders equity
    
    $
    236,271
    
    
    $
    228,799
  4




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (in thousands)
 Six Months Ended June 30,2006
    
    
    2005Operating activitiesNet income
    
    $
    25,187
    
    
    $
    37,128Adjustments to reconcile net income to cash provided by operating
activities:Provision for losses associated with bankruptcy filings of Northwest
And Mesaba
    
    
    1,365
    
    
    
    Pilot-post retirement liability
    
    
    1,556
    
    
    
    Depreciation
    
    
    1,929
    
    
    
    1,978Deferred income tax (benefit) expense
    
    
    (325
    )
    
    
    997Other
    
    
    653
    
    
    
    389Gain on extinguishment of debt
    
    
    
    
    
    
    (18,000
    )Stock-based compensation expense
    
    
    276
    
    
    
    339Amortization of debt issuance costs
    
    
    110
    
    
    
    91Amortization of contractual rights
    
    
    601
    
    
    
    88Changes in operating assets and liabilities:Receivables
    
    
    479
    
    
    
    (3,256
    )Spare parts and supplies
    
    
    (675
    )
    
    
    (821
    )Prepaid expenses and other assets
    
    
    (5,726
    )
    
    
    (1,685
    )Aircraft and engine deposits
    
    
    
    
    
    
    (3,635
    )Accounts payable and accrued expenses
    
    
    1,625
    
    
    
    6,597Other liabilities
    
    
    (2,429
    )
    
    
    4Income taxes payable
    
    
    (3,525
    )
    
    
    11,475Cash provided by operating activities
    
    
    21,101
    
    
    
    31,689Investing activitiesPurchases of property and equipment
    
    
    (1,588
    )
    
    
    (4,489
    )Purchase of contractual rights
    
    
    
    
    
    
    (5,115
    )Purchase of short-term investments
    
    
    (394,200
    )
    
    
    Proceeds from sale of short-term investments
    
    
    392,910
    
    
    
    Cash used in investing activities
    
    
    (2,878
    )
    
    
    (9,604
    )Financing activitiesPayment to extinguish note payable
    
    
    
    
    
    
    (101,600
    )Repayment under line of credit
    
    
    (17,000
    )
    
    
    (5,000
    )Gross proceeds from issuance of senior convertible notes
    
    
    
    
    
    
    121,000Debt issuance costs
    
    
    
    
    
    
    (4,510
    )Other costs to retire note payable
    
    
    
    
    
    
    (400
    )Cash (used in) provided by financing activities
    
    
    (17,000
    )
    
    
    9,490Net increase in cash and cash equivalents
    
    
    1,223
    
    
    
    31,575Cash and cash equivalents at beginning of period
    
    
    31,567
    
    
    
    34,912Cash and cash equivalents at end of period
    
    $
    32,790
    
    
    $
    66,487Supplemental disclosure of cash flow informationInterest paid
    
    $
    2,607
    
    
    $
    518Income tax payments
    
    $
    17,930
    
    
    $
    9,512
  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. Northwest Bankruptcy Filing
     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. Northwest Bankruptcy Filing (continued)
       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)
 2. Northwest Bankruptcy Filing (continued)
  3. Mesaba Bankruptcy Filing
    4. Airline Services Agreement
   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. Airline Services Agreement (continued)
  5. Related Party Transactions
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Regional airline services revenue
    
    $
    202,811
    
    
    $
    210,958
    
    
    $
    407,816
    
    
    $
    403,709Other revenue
    
    
    1,150
    
    
    
    1,430
    
    
    
    2,490
    
    
    
    2,792Expenses:Aircraft fuel
    
    
    27,111
    
    
    
    28,643
    
    
    
    53,650
    
    
    
    54,105Aircraft rentals
    
    
    66,031
    
    
    
    69,589
    
    
    
    132,062
    
    
    
    132,895Other rentals and landing fees
    
    
    4,883
    
    
    
    2,813
    
    
    
    9,807
    
    
    
    5,625Ground handling services
    
    
    16,155
    
    
    
    16,637
    
    
    
    33,201
    
    
    
    32,042Other
    
    
    1,690
    
    
    
    328
    
    
    
    2,253
    
    
    
    513Provision for losses associated with
bankruptcy filings of
Northwest and Mesaba
    
    
    14
    
    
    
    
    
    
    
    (1,552
    )
    
    
    Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    463
  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)
 5. Related Party Transactions (continued)
     6. Employee Benefit Plans
  7. Senior Convertible Notes
   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)
 8. Line of Credit
   9. Leases
    Operating LeasesAircraft
    
    
    Non-aircraftRemainder of 2006
    
    $
    133,854
    
    
    $
    8,6222007
    
    
    262,785
    
    
    
    16,8072008
    
    
    261,792
    
    
    
    16,0322009
    
    
    260,458
    
    
    
    15,7872010
    
    
    260,400
    
    
    
    15,835Thereafter
    
    
    1,822,800
    
    
    
    50,395Total minimum operating lease payments
    
    $
    3,002,089
    
    
    $
    123,478
  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. Earnings Per Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    11,891
    
    
    $
    13,796
    
    
    $
    25,187
    
    
    $
    37,128Basic and diluted earnings per share
    
    $
    0.54
    
    
    $
    0.63
    
    
    $
    1.15
    
    
    $
    1.69Share computation:Weighted average number of shares
outstanding for basic earnings per share
    
    
    21,945
    
    
    
    21,908
    
    
    
    21,945
    
    
    
    21,908Assumed exercise of stock options
    
    
    39
    
    
    
    24
    
    
    
    34
    
    
    
    22Weighted average number of shares
outstanding for diluted earnings per share
    
    
    21,984
    
    
    
    21,932
    
    
    
    21,979
    
    
    
    21,930
  11. Stock-Based Compensation
    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)
 11. Stock-Based Compensation (continued)
   Stock Options
    Weighted AverageStock Options
    
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    652
    
    
    $
    13.88Granted
    
    
    292
    
    
    $
    6.47Exercised
    
    
    
    
    
    
    Forfeited
    
    
    9
    
    
    $
    14.00Outstanding at June 30, 2006
    
    
    935
    
    
    $
    11.56Options exercisable at June 30, 2006
    
    
    643
    
    
    $
    13.87
   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)
 11. Stock-Based Compensation (continued)
   Expected Price Volatility 
 Risk-Free Interest Rate 
 Expected Lives 
 Forfeiture Rate 
 Dividend Yield 
  Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Net income, as reported
    
    $
    13,796
    
    
    $
    37,128Add: Stock-based compensation expense
included in reported net income,
net of tax
    
    
    61
    
    
    
    214Deduct: Total pro forma stock-based
compensation expense, net of tax
    
    
    (309
    )
    
    
    (688
    )Pro forma net income
    
    $
    13,548
    
    
    $
    36,654Earnings per common share:Basic and diluted  as reported
    
    $
    0.63
    
    
    $
    1.69Basic and diluted  pro forma
    
    $
    0.62
    
    
    $
    1.67
 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)
 11. Stock-Based Compensation (continued)
 Restricted Stock
   12. Income Taxes
  Three Months Ended June 30,2006
    
    
    2005$
    
    
    %
    
    
    $
    
    
    %Income tax expense at statutory rate
    
    $
    6,549
    
    
    
    35.0
    %
    
    $
    7,691
    
    
    
    35.0
    %State income taxes, net of federal taxes
    
    
    436
    
    
    
    2.3
    %
    
    
    440
    
    
    
    2.0
    %Valuation reserve
    
    
    (7
    )
    
    
    (0.0
    %)
    
    
    
    
    
    
    Other
    
    
    (158
    )
    
    
    (0.8
    %)
    
    
    46
    
    
    
    0.2
    %Income tax expense
    
    $
    6,820
    
    
    
    36.5
    %
    
    $
    8,177
    
    
    
    37.2
    %
 Six Months Ended June 30,2006
    
    
    2005$
    
    
    %
    
    
    $
    
    
    %Income tax expense at statutory rate
    
    $
    13,745
    
    
    
    35.0
    %
    
    $
    20,689
    
    
    
    35.0
    %State income taxes, net of federal taxes
    
    
    800
    
    
    
    2.0
    %
    
    
    1,227
    
    
    
    2.1
    %Valuation reserve
    
    
    (201
    )
    
    
    (0.5
    %)
    
    
    
    
    
    
    Other
    
    
    (259
    )
    
    
    (0.7
    %)
    
    
    68
    
    
    
    0.1
    %Income tax expense
    
    $
    14,085
    
    
    
    35.8
    %
    
    $
    21,984
    
    
    
    37.2
    %
   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)
 12. Income Taxes (continued)
    13. Contractual Rights under Airline Services Agreement
   14. Short-Term Investments
    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)
 14. Short-Term Investments (continued)
  15. Commitments and Contingencies
 Employees.
 Legal Proceedings.
 Purchase Commitments.
   Self-Insurance.
 Regulatory Matters
 17




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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. Commitments and Contingencies (continued)
  Guarantees and Indemnifications
     18




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 General
   Overview
      Three Months Ended June 30,% Increase2006
    
    
    2005
    
    
    (Decrease)(in thousands, except per share data)Operating Income:Operating income in accordance with GAAP
    
    $
    19,495
    
    
    $
    22,781
    
    
    
    (14
    %)Add: Pilot post-retirement liability
    
    
    1,377
    
    
    
    
    
    
    
    100
    %Add: Provision for losses associated
with Northwest and Mesaba bankruptcy
filings
    
    
    1,348
    
    
    
    
    
    
    
    100
    %Non-GAAP operating income
    
    $
    22,220
    
    
    $
    22,781
    
    
    
    (2
    %)
 19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 Three Months Ended June 30,% Increase2006
    
    
    2005
    
    
    (Decrease)(in thousands, except per share data)Net Income:Net income in accordance with GAAP
    
    $
    11,891
    
    
    $
    13,796
    
    
    
    (14
    %)Add: Pilot post-retirement liability,
net of related tax
    
    
    883
    
    
    
    
    
    
    
    100
    %Add: Provision for losses associated
with Northwest and Mesaba bankruptcy
filings, net of related tax
    
    
    785
    
    
    
    
    
    
    
    100
    %Non-GAAP net income
    
    $
    13,559
    
    
    $
    13,796
    
    
    
    (2
    %)Basic and Diluted EPS:Basic and diluted EPS in accordance with GAAP
    
    $
    0.54
    
    
    $
    0.63
    
    
    
    (14
    %)Add: Pilot post-retirement liability,
net of related tax
    
    
    0.04
    
    
    
    
    
    
    
    100
    %Add: Provision for losses associated
with Northwest and Mesaba bankruptcy
filings, net of related tax
    
    
    0.04
    
    
    
    
    
    
    
    100
    %Non-GAAP basic and diluted EPS
    
    $
    0.62
    
    
    $
    0.63
    
    
    
    (2
    %)
 Six Months Ended June 30,% Increase2006
    
    
    2005
    
    
    (Decrease)(in thousands, except per share data)Operating Income:Operating income in accordance with GAAP
    
    $
    41,024
    
    
    $
    42,852
    
    
    
    (4
    %)Add: Pilot post-retirement liability
    
    
    1,377
    
    
    
    
    
    
    
    100
    %Add: Provision for losses associated with
Northwest and Mesaba bankruptcy filings
    
    
    1,365
    
    
    
    
    
    
    
    100
    %Non-GAAP operating income
    
    $
    43,766
    
    
    $
    42,852
    
    
    
    2
    %Net Income:Net income in accordance with GAAP
    
    $
    25,187
    
    
    $
    37,128
    
    
    
    (32
    %)Add: Pilot post-retirement liability, net of
related tax
    
    
    883
    
    
    
    
    
    
    
    100
    %Add: Provision for losses associated with
Northwest and Mesaba bankruptcy filings,
net of related tax
    
    
    866
    
    
    
    
    
    
    
    100
    %Deduct: Gain on repurchase of debt, net of
related tax
    
    
    
    
    
    
    (11,302
    )
    
    
    100
    %Non-GAAP net income
    
    $
    26,936
    
    
    $
    25,826
    
    
    
    4
    %Basic and Diluted EPS:Basic and diluted EPS in accordance with GAAP
    
    $
    1.15
    
    
    $
    1.69
    
    
    
    (32
    %)Add: Pilot post-retirement liability, net of
related tax
    
    
    0.04
    
    
    
    
    
    
    
    100
    %Add: Provision for losses associated with
Northwest and Mesaba bankruptcy filings,
net of related tax
    
    
    0.04
    
    
    
    
    
    
    
    100
    %Deduct: Gain on repurchase of debt, net of
related tax
    
    
    
    
    
    
    (0.51
    )
    
    
    100
    %Non-GAAP basic and diluted EPS
    
    $
    1.23
    
    
    $
    1.18
    
    
    
    4
    %
 20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 Outlook
       21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 Results of Operations
  Comparison of Three Months Ended June 30, 2006 to Three Months Ended June 30, 2005
 Revenues
   Three Months Ended June 30,(in thousands)2006
    
    
    2005Reimbursed
    
    
    Unreimbursed
    
    
    Other
    
    
    Total
    
    
    Reimbursed
    
    
    Unreimbursed
    
    
    TotalOperating revenues:Regional airline services
    
    $
    133,759
    
    
    $
    69,052
    
    
    $
    
    
    
    $
    202,811
    
    
    $
    141,141
    
    
    $
    69,817
    
    
    $
    210,958Other revenue
    
    
    
    
    
    
    1,703
    
    
    
    
    
    
    
    1,703
    
    
    
    
    
    
    
    1,941
    
    
    
    1,941Total operating revenues
    
    
    133,759
    
    
    
    70,755
    
    
    
    
    
    
    
    204,514
    
    
    
    141,141
    
    
    
    71,758
    
    
    
    212,899Operating expenses:Salaries, wages and benefits
    
    
    
    
    
    
    35,593
    
    
    
    
    
    
    
    35,593
    
    
    
    
    
    
    
    33,027
    
    
    
    33,027Aircraft fuel
    
    
    27,112
    
    
    
    99
    
    
    
    
    
    
    
    27,211
    
    
    
    28,485
    
    
    
    158
    
    
    
    28,643Aircraft maintenance, materials and repairs
    
    
    3,108
    
    
    
    4,888
    
    
    
    
    
    
    
    7,996
    
    
    
    3,622
    
    
    
    5,213
    
    
    
    8,835Aircraft rentals
    
    
    66,031
    
    
    
    
    
    
    
    
    
    
    
    66,031
    
    
    
    69,589
    
    
    
    
    
    
    
    69,589Other rentals and landing fees
    
    
    4,883
    
    
    
    6,340
    
    
    
    
    
    
    
    11,223
    
    
    
    4,710
    
    
    
    6,352
    
    
    
    11,062Ground handling services
    
    
    16,155
    
    
    
    5,610
    
    
    
    
    
    
    
    21,765
    
    
    
    16,770
    
    
    
    6,355
    
    
    
    23,125Depreciation
    
    
    
    
    
    
    967
    
    
    
    
    
    
    
    967
    
    
    
    
    
    
    
    1,016
    
    
    
    1,016Other
    
    
    3,094
    
    
    
    9,791
    
    
    
    
    
    
    
    12,885
    
    
    
    3,851
    
    
    
    10,970
    
    
    
    14,821Provision for losses associated with bankruptcyfilings of Northwest and Mesaba
    
    
    
    
    
    
    
    
    
    
    1,348
    
    
    
    1,348
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    120,383
    
    
    
    63,288
    
    
    
    1,348
    
    
    
    185,019
    
    
    
    127,027
    
    
    
    63,091
    
    
    
    190,118Operating income:
    
    $
    13,376
    
    
    $
    7,467
    
    
    $
    (1,348
    )
    
    $
    19,495
    
    
    $
    14,114
    
    
    $
    8,667
    
    
    $
    22,781Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    10.6
    %
    
    
    
    
    
    
    9.5
    %
    
    
    10.0
    %
    
    
    12.1
    %
    
    
    10.7
    %
   22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
  Operating Expenses
        Income Tax Expense
   Comparison of Six Months Ended June 30, 2006 to Six Months Ended June 30, 2005
 Revenues
  23




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 Six Months Ended June 30,(in thousands)2006
    
    
    2005Reimbursed
    
    Unreimbursed
    
    Other
    
    Total
    
    Reimbursed
    
    
    Unreimbursed
    
    
    TotalOperating revenues:Regional airline services
    
    $
    270,849
    
    
    $
    136,967
    
    
    $
    
    
    
    $
    407,816
    
    
    $
    272,058
    
    
    $
    131,651
    
    
    $
    403,709Other revenue
    
    
    
    
    
    
    3,787
    
    
    
    
    
    
    
    3,787
    
    
    
    
    
    
    
    3,922
    
    
    
    3,922Total operating revenues
    
    
    270,849
    
    
    
    140,754
    
    
    
    
    
    
    
    411,603
    
    
    
    272,058
    
    
    
    135,573
    
    
    
    407,631Operating expenses:Salaries, wages and benefits
    
    
    
    
    
    
    70,020
    
    
    
    
    
    
    
    70,020
    
    
    
    
    
    
    
    64,509
    
    
    
    64,509Aircraft fuel
    
    
    53,650
    
    
    
    262
    
    
    
    
    
    
    
    53,912
    
    
    
    53,834
    
    
    
    271
    
    
    
    54,105Aircraft maintenance, materials and repairs
    
    
    8,438
    
    
    
    9,820
    
    
    
    
    
    
    
    18,258
    
    
    
    7,493
    
    
    
    8,580
    
    
    
    16,073Aircraft rentals
    
    
    132,062
    
    
    
    
    
    
    
    
    
    
    
    132,062
    
    
    
    132,895
    
    
    
    
    
    
    
    132,895Other rentals and landing fees
    
    
    9,807
    
    
    
    12,667
    
    
    
    
    
    
    
    22,474
    
    
    
    9,342
    
    
    
    11,862
    
    
    
    21,204Ground handling services
    
    
    33,201
    
    
    
    10,923
    
    
    
    
    
    
    
    44,124
    
    
    
    33,891
    
    
    
    11,898
    
    
    
    45,789Depreciation
    
    
    
    
    
    
    1,929
    
    
    
    
    
    
    
    1,929
    
    
    
    
    
    
    
    1,978
    
    
    
    1,978Other
    
    
    6,606
    
    
    
    19,829
    
    
    
    
    
    
    
    26,435
    
    
    
    7,397
    
    
    
    20,829
    
    
    
    28,226Provision for losses associated with bankruptcy
filings of Northwest and Mesaba
    
    
    
    
    
    
    
    
    
    
    1,365
    
    
    
    1,365
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    243,764
    
    
    
    125,450
    
    
    
    1,365
    
    
    
    370,579
    
    
    
    244,852
    
    
    
    119,927
    
    
    
    364,779Operating income:
    
    $
    27,085
    
    
    $
    15,304
    
    
    $
    (1,365
    )
    
    $
    41,024
    
    
    $
    27,206
    
    
    $
    15,646
    
    
    $
    42,852Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    10.9
    %
    
    
    
    
    
    
    10.0
    %
    
    
    10.0
    %
    
    
    11.5
    %
    
    
    10.5
    %
   Operating Expenses
      24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 Nonoperating Income and Expenses
  Income Tax Expense
   Certain Statistical Information
  Three Months Ended June 30,2006
    
    
    2005Cost per
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost perAmount
    
    
    Percent of
    
    
    Cents per
    
    
    Block Hour
    
    
    Amount
    
    
    Percent of
    
    
    Cents per
    
    
    Block Hour(in thousands)
    
    
    Revenue
    
    
    ASM
    
    
    (dollars)
    
    
    (in thousands)
    
    
    Revenue
    
    
    ASM
    
    
    (dollars)Operating expenses:Salaries, wages and benefits
    
    $
    35,593
    
    
    
    17
    %
    
    
    2.60
    
    
    $
    343
    
    
    $
    33,027
    
    
    
    16
    %
    
    
    2.23
    
    
    $
    300Aircraft fuel
    
    
    27,211
    
    
    
    13
    %
    
    
    1.98
    
    
    
    263
    
    
    
    28,643
    
    
    
    13
    %
    
    
    1.93
    
    
    
    260Aircraft maintenance, materials and repairs
    
    
    7,996
    
    
    
    4
    %
    
    
    0.58
    
    
    
    77
    
    
    
    8,835
    
    
    
    4
    %
    
    
    0.59
    
    
    
    80Aircraft rentals
    
    
    66,031
    
    
    
    32
    %
    
    
    4.81
    
    
    
    638
    
    
    
    69,589
    
    
    
    33
    %
    
    
    4.69
    
    
    
    631Other rentals and landing fees
    
    
    11,223
    
    
    
    5
    %
    
    
    0.82
    
    
    
    108
    
    
    
    11,062
    
    
    
    5
    %
    
    
    0.75
    
    
    
    100Ground handling services
    
    
    21,765
    
    
    
    10
    %
    
    
    1.59
    
    
    
    210
    
    
    
    23,125
    
    
    
    11
    %
    
    
    1.56
    
    
    
    210Depreciation
    
    
    967
    
    
    
    0
    %
    
    
    0.07
    
    
    
    9
    
    
    
    1,016
    
    
    
    0
    %
    
    
    0.07
    
    
    
    9Other
    
    
    12,885
    
    
    
    6
    %
    
    
    0.94
    
    
    
    125
    
    
    
    14,821
    
    
    
    7
    %
    
    
    1.00
    
    
    
    134Provision for losses associated with
the bankruptcy filings of Northwest
and Mesaba
    
    
    1,348
    
    
    
    1
    %
    
    
    0.10
    
    
    
    13
    
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    Total operating expenses
    
    $
    185,019
    
    
    
    89
    %
    
    
    13.49
    
    
    $
    1,786
    
    
    $
    190,118
    
    
    
    89
    %
    
    
    12.82
    
    
    $
    1,724
 Six Months Ended June 30,2006
    
    
    2005Cost per
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cost perAmount
    
    
    Percent of
    
    
    Cents per
    
    
    Block Hour
    
    
    Amount
    
    
    Percent of
    
    
    Cents per
    
    
    Block Hour(in thousands)
    
    
    Revenue
    
    
    ASM
    
    
    (dollars)
    
    
    (in thousands)
    
    
    Revenue
    
    
    ASM
    
    
    (dollars)Operating expenses:Salaries, wages and benefits
    
    $
    70,020
    
    
    
    17
    %
    
    
    2.58
    
    
    $
    340
    
    
    $
    64,509
    
    
    
    16
    %
    
    
    2.33
    
    
    $
    307Aircraft fuel
    
    
    53,912
    
    
    
    13
    %
    
    
    1.99
    
    
    
    262
    
    
    
    54,105
    
    
    
    13
    %
    
    
    1.95
    
    
    
    257Aircraft maintenance, materials and repairs
    
    
    18,258
    
    
    
    4
    %
    
    
    0.67
    
    
    
    89
    
    
    
    16,073
    
    
    
    4
    %
    
    
    0.58
    
    
    
    76Aircraft rentals
    
    
    132,062
    
    
    
    32
    %
    
    
    4.87
    
    
    
    641
    
    
    
    132,895
    
    
    
    33
    %
    
    
    4.80
    
    
    
    631Other rentals and landing fees
    
    
    22,474
    
    
    
    5
    %
    
    
    0.83
    
    
    
    109
    
    
    
    21,204
    
    
    
    5
    %
    
    
    0.76
    
    
    
    101Ground handling services
    
    
    44,124
    
    
    
    11
    %
    
    
    1.63
    
    
    
    214
    
    
    
    45,789
    
    
    
    11
    %
    
    
    1.65
    
    
    
    218Depreciation
    
    
    1,929
    
    
    
    0
    %
    
    
    0.07
    
    
    
    9
    
    
    
    1,978
    
    
    
    0
    %
    
    
    0.07
    
    
    
    9Other
    
    
    26,435
    
    
    
    6
    %
    
    
    0.97
    
    
    
    128
    
    
    
    28,226
    
    
    
    7
    %
    
    
    1.02
    
    
    
    134Provision for losses associated with
the bankruptcy filings of Northwest
and Mesaba
    
    
    1,365
    
    
    
    0
    %
    
    
    0.05
    
    
    
    7
    
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    Total operating expenses
    
    $
    370,579
    
    
    
    88
    %
    
    
    13.66
    
    
    $
    1,799
    
    
    $
    364,779
    
    
    
    89
    %
    
    
    13.16
    
    
    $
    1,733
 25




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
  Three Months Ended June 30,2006
    
    
    2005
    
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    2,340
    
    
    
    2,111
    
    
    
    11
    %Revenue passenger miles (in thousands) (1)
    
    
    1,111,012
    
    
    
    1,086,890
    
    
    
    2
    %Available seat miles (in thousands)
    
    
    1,371,539
    
    
    
    1,482,481
    
    
    
    (8
    )%Passenger load factor (2)
    
    
    81.0
    %
    
    
    73.3
    %
    
    7.7pts.Operating revenue per available seat mile (in cents)
    
    
    14.91
    
    
    
    14.36
    
    
    
    4
    %Operating costs per available seat mile (in cents)
    
    
    13.49
    
    
    
    12.82
    
    
    
    5
    %Operating revenue per block hour
    
    $
    1,977
    
    
    $
    1,930
    
    
    
    2
    %Operating costs per block hour
    
    $
    1,788
    
    
    $
    1,724
    
    
    
    4
    %Block hours
    
    
    103,471
    
    
    
    110,301
    
    
    
    (6
    )%Cycles
    
    
    63,053
    
    
    
    63,998
    
    
    
    (2
    )%Average daily utilization (block hours)
    
    
    9.17
    
    
    
    9.26
    
    
    
    (1
    )%Average stage length (miles)
    
    
    467
    
    
    
    504
    
    
    
    (7
    )%Number of operating aircraft (end of period)
    
    
    124
    
    
    
    137
    
    
    
    (10
    )%Employees (end of period)
    
    
    3,567
    
    
    
    3,564
    
    
    
    0
    %
 
 Six Months Ended June 30,2006
    
    
    2005
    
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    4,355
    
    
    
    3,780
    
    
    
    15
    %Revenue passenger miles (in thousands) (1)
    
    
    2,082,817
    
    
    
    1,904,552
    
    
    
    9
    %Available seat miles (in thousands)
    
    
    2,713,207
    
    
    
    2,770,981
    
    
    
    (2
    )%Passenger load factor (2)
    
    
    76.8
    %
    
    
    68.7
    %
    
    8.1pts.Operating revenue per available seat mile (in cents)
    
    
    15.17
    
    
    
    14.71
    
    
    
    3
    %Operating costs per available seat mile (in cents)
    
    
    13.66
    
    
    
    13.16
    
    
    
    4
    %Operating revenue per block hour
    
    $
    1,997
    
    
    $
    1,937
    
    
    
    3
    %Operating costs per block hour
    
    $
    1,798
    
    
    $
    1,733
    
    
    
    4
    %Block hours
    
    
    206,068
    
    
    
    210,444
    
    
    
    (2
    )%Cycles
    
    
    124,318
    
    
    
    121,094
    
    
    
    3
    %Average daily utilization (block hours)
    
    
    9.18
    
    
    
    9.29
    
    
    
    (1
    )%Average stage length (miles)
    
    
    470
    
    
    
    498
    
    
    
    (6
    )%Number of operating aircraft (end of period)
    
    
    124
    
    
    
    137
    
    
    
    (10
    )%Employees (end of period)
    
    
    3,567
    
    
    
    3,564
    
    
    
    0
    %
 
   Liquidity and Capital Resources
    26




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
  Contractual obligations
 Payments Due by PeriodTotal
    
    
    2006 (1)
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterContractual obligations:Sr. convertible notes
    
    $
    121,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    121,000Interest payments on
long-term debt
    
    
    74,718
    
    
    
    1,967
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    57,019Operating leases
    
    
    3,125,567
    
    
    
    142,476
    
    
    
    279,592
    
    
    
    277,824
    
    
    
    276,245
    
    
    
    276,235
    
    
    
    1,873,195Additional aircraft deposits (2)
    
    
    21,700
    
    
    
    
    
    
    
    21,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations (3)
    
    
    6,304
    
    
    
    956
    
    
    
    1,778
    
    
    
    1,355
    
    
    
    1,219
    
    
    
    564
    
    
    
    432Total contractual cash
obligations
    
    $
    3,349,289
    
    
    $
    145,399
    
    
    $
    307,003
    
    
    $
    283,112
    
    
    $
    281,397
    
    
    $
    280,732
    
    
    $
    2,051,646
       27




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
   Operating activities.
 Investing activities.
  Financing activities
 Deferred tax asset.
 28




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
  Critical Accounting Policies and Estimates
  Provisions for losses on subleases.
   Allowance for doubtful accounts.
    Recent Accounting Pronouncement
 29




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
  Forward Looking Statements
  30




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosure about Market Risk
  Aircraft fuel.
 Interest rates.
 Senior Convertible Notes.
 
 Item 4. Controls and Procedures
   31




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors.
  
 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
  32




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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.
 33




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##### Table of Contents



SIGNATURES
  By:

/s/ Philip H. TrenaryPhilip H. TrenaryDate: August 1, 2006
    
    President and Chief Executive Officer By:

/s/ Peter D. HuntPeter D. HuntDate: August 1, 2006
    
    Vice President and Chief Financial Officer 34