UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 
 FORM
10-Q
 
 x
              Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the quarterly period ended June 30, 2008or ̈
              Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      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 the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes
      x
              
              No
       ̈
 
 
 Indicate
by check mark whether the registrant is a larger accelerated filer, an
accelerated filer or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
 
 Large
      accelerated filer [   ]
              
              Accelerated
      filer [ X
      ]Non-accelerated
      filer [   ]
              
              Smaller
      reporting company [   ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes
       ̈
              
              No
      x
 
 As of
August 8, 2008, 18,064,690shares of common stock
were outstanding.
  
  Table
of Contents
 Part
      I. Financial InformationItem
      1. Financial StatementsCondensed Consolidated Statements of Income
      (Unaudited)**************************
              3Condensed Consolidated Balance Sheets
      (Unaudited)********************************
              5Condensed Consolidated Statements of Cash Flows
      (Unaudited)***********************
              6Notes to Condensed Consolidated Financial Statements
      (Unaudited) *******************
              7Item 2.  Management’s Discussion and Analysis
      of Results of Operations and Financial Condition
              22Item 3.  Quantitative and Qualitative Disclosures
      about Market Risk************************
              42Item 4.  Controls and
      Procedures****************************************************
              42Part
      II.  Other InformationItem 1.  Legal
      Proceedings*********************************************************
              43Item 1A.  Risk
      Factors************************************************************
              43Item 2.  Unregistered Sales of
      Equity Securities and Use of
      Proceeds***********************
              43Item 3.  Defaults Upon
      Senior
      Securities**********************************************
              43Item 4.  Submission of Matters
      to a Vote of Security
    Holders*****************************
              43Item 5.  Other Information*******************************************************
              43Item
      6.  Exhibits*****************************************************************
              44
 
 
 
 
 
 
 
 
 
 
 
  2
  Part
1.  Financial Information
 
 Item
1.  Financial Statements
 
 Pinnacle
Airlines Corp.
 Condensed Consolidated Statements of Income
(Unaudited)
 (in
thousands, except per share data)
 
 Three
      Months Ended June 30,2008
              
              2007Operating
      revenuesRegional
      airline services
              
              $
              219,013
              
              $
              198,480Other
              
              
              2,141
              
              
              2,514Total
      operating revenues
              
              
              221,154
              
              
              200,994Operating
      expensesSalaries,
      wages and benefits
              
              
              57,147
              
              
              50,261Aircraft
      fuel
              
              
              14,899
              
              
              9,512Aircraft
      maintenance, materials and repairs
              
              
              23,694
              
              
              23,345Aircraft
      rentals
              
              
              32,507
              
              
              35,306Other
      rentals and landing fees
              
              
              17,372
              
              
              15,061Ground
      handling services
              
              
              23,672
              
              
              23,873Commissions
      and passenger related expense
              
              
              7,427
              
              
              6,741Depreciation
      and amortization
              
              
              6,604
              
              
              2,318Other
              
              
              22,742
              
              
              19,755Impairment
      of goodwill and other charges
              
              
              12,619
              
              
              -Total
      operating expenses
              
              
              218,683
              
              
              186,172Operating
      income
              
              
              2,471
              
              
              14,822Operating
      income as a percentage of operating revenues
              
              
              1.1%
              
              
              7.4%Nonoperating
      (expense) incomeInterest
      income
              
              
              1,724
              
              
              2,882Interest
      expense
              
              
              (8,821)
              
              
              (2,907)Impairment
      of auction rate securities
              
              
              (8,675)
              
              
              -Loss
      on sale of unsecured claim
              
              
              -
              
              
              (4,144)Miscellaneous
      income
              
              
              148
              
              
              318Total
      nonoperating expense
              
              
              (15,624)
              
              
              (3,851)Income
      (loss) before income taxes
              
              
              (13,153)
              
              
              10,971Income
      tax benefit (expense)
              
              
              1,702
              
              
              (3,309)Net
      income (loss)
              
              $
              (11,451)
              
              $
              7,662Basic
      earnings (loss) per share
              
              $
              (0.64)
              
              $
              0.35Diluted
      earnings (loss) per share
              
              $
              (0.64)
              
              $
              0.32Shares
      used in computing basic (loss) earnings per share
              
              
              17,869
              
              
              21,752Shares
      used in computing diluted (loss) earnings per share
              
              
              17,869
              
              
              24,240
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
  Pinnacle
Airlines Corp.
 Condensed
Consolidated Statements of Income (Unaudited)
 (in
thousands, except per share data)
 
 Six
      Months Ended June 30,2008
              
              2007Operating
      revenuesRegional
      airline services
              
              $
              420,172
              
              $
              375,425Other
              
              
              5,323
              
              
              5,119Total
      operating revenues
              
              
              425,495
              
              
              380,544Operating
      expensesSalaries,
      wages and benefits
              
              
              112,473
              
              
              97,562Aircraft
      fuel
              
              
              26,772
              
              
              15,933Aircraft
      maintenance, materials and repairs
              
              
              45,542
              
              
              41,439Aircraft
      rentals
              
              
              66,028
              
              
              69,029Other
      rentals and landing fees
              
              
              32,849
              
              
              28,971Ground
      handling services
              
              
              51,061
              
              
              47,965Commissions
      and passenger related expense
              
              
              14,253
              
              
              11,566Depreciation
      and amortization
              
              
              10,980
              
              
              4,372Other
              
              
              43,667
              
              
              36,060Impairment
      of goodwill and other charges
              
              
              12,619
              
              
              -Total
      operating expenses
              
              
              416,244
              
              
              352,897Operating
      income
              
              
              9,251
              
              
              27,647Operating
      income as a percentage of operating revenues
              
              
              2.2%
              
              
              7.3%Nonoperating
      (expense) incomeInterest
      income
              
              
              4,038
              
              
              5,947Interest
      expense
              
              
              (13,663)
              
              
              (4,981)Impairment
      of auction rate securities
              
              
              (8,675)
              
              
              -Loss
      on sale of unsecured claim
              
              
              -
              
              
              (4,144)Miscellaneous
      (expense) income
              
              
              (26)
              
              
              336Total
      nonoperating expense
              
              
              (18,326)
              
              
              (2,842)Income
      (loss) before income taxes
              
              
              (9,075)
              
              
              24,805Income
      tax benefit (expense)
              
              
              277
              
              
              (7,778)Net
      income (loss)
              
              $
              (8,798)
              
              $
              17,027Basic
      earnings (loss) per share
              
              $
              (0.49)
              
              $
              0.78Diluted
      earnings (loss) per share
              
              $
              (0.49)
              
              $
              0.70Shares
      used in computing basic earnings (loss) per share
              
              
              17,864
              
              
              21,869Shares
      used in computing diluted earnings (loss) per share
              
              
              17,864
              
              
              24,489
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  4
  Pinnacle
Airlines Corp.
 Condensed Consolidated Balance Sheets
 (in
thousands, except share data)
 
 June
      30, 2008
              
              December
      31, 2007Assets
              
              (Unaudited)Current
      assetsCash
      and cash equivalents
              
              $
              65,228
              
              $
              26,785Restricted
      cash
              
              
              4,948
              
              
              5,327Short-term
      investments
              
              
              -
              
              
              186,850Receivables,
      net
              
              
              34,683
              
              
              31,107Spare
      parts and supplies, net
              
              
              20,176
              
              
              16,030Prepaid
      expenses and other assets
              
              
              11,233
              
              
              16,535Deferred
      income taxes, net of allowance
              
              
              13,600
              
              
              12,285Income
      taxes receivable
              
              
              13,758
              
              
              -Total
      current assets
              
              
              163,626
              
              
              294,919Property
      and equipmentFlight
      equipment
              
              
              560,126
              
              
              162,374Aircraft
      pre-delivery payments
              
              
              23,054
              
              
              81,425Other
      property and equipment
              
              
              43,124
              
              
              39,969Less
      accumulated depreciation
              
              
              (39,042)
              
              
              (28,358)Net
      property and equipment
              
              
              587,262
              
              
              255,410Investments
              
              
              127,425
              
              
              -Deferred
      income taxes, net of allowance
              
              
              69,698
              
              
              79,856Other
      assets, primarily aircraft lease deposits
              
              
              33,706
              
              
              28,528Debt
      issuance costs, net
              
              
              6,229
              
              
              4,598Goodwill
              
              
              18,422
              
              
              28,206Intangible
      assets, net
              
              
              15,419
              
              
              17,071Total
      assets
              
              $
              1,021,787
              
              $
              708,588Liabilities
      and stockholders’ equityCurrent
      liabilitiesShort-term
      notes payable and current maturities of long-term debt
              
              $
              39,036
              
              $
              73,513Bank
      lines of credit
              
              
              88,275
              
              
              8,375Accounts
      payable
              
              
              29,447
              
              
              33,062Deferred
      revenue
              
              
              23,839
              
              
              24,099Accrued
      expenses and other current liabilities
              
              
              82,963
              
              
              104,410Total
      current liabilities
              
              
              263,560
              
              
              243,459Senior
      convertible notes
              
              
              121,000
              
              
              121,000Long-term
      debt, less current maturities
              
              
              388,082
              
              
              71,812Deferred
      revenue, net of current portion
              
              
              200,326
              
              
              209,752Other
      liabilities
              
              
              4,207
              
              
              4,743Commitments
      and contingenciesStockholders’
      equitySeries
      A preferred share, stated value $100 per share, one issued share, retired
      on January 4, 2008
              
              
              -
              
              
              -Common
      stock, $0.01 par value; 40,000,000 shares authorized;
                22,514,782
      and 22,402,999 shares issued, respectively
              
              
              225
              
              
              224Treasury
      stock, at cost, 4,450,092 shares
              
              
              (68,152)
              
              
              (68,152)Additional
      paid-in capital
              
              
              92,625
              
              
              91,165Accumulated
      other comprehensive loss
              
              
              (16,073)
              
              
              (10,200)Retained
      earnings
              
              
              35,987
              
              
              44,785Total
      stockholders’ equity
              
              
              44,612
              
              
              57,822Total
      liabilities and stockholders’ equity
              
              $
              1,021,787
              
              $
              708,588
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  5
  
 Pinnacle
Airlines Corp.
 Condensed Consolidated Statements of Cash Flows(Unaudited)
 (in
thousands)
 
 Six
      Months Ended June 30,2008
              
              2007Operating
      activitiesNet
      income (loss)
              
              $
              (8,798)
              
              $
              17,027Adjustments
      to reconcile net income to cash provided by operating
      activities:Impairment
      charges
              
              
              19,232
              
              
              -Depreciation
      and amortization
              
              
              12,050
              
              
              5,632Deferred
      income taxes
              
              
              12,419
              
              
              (98,589)Recognition
      of deferred revenue
              
              
              (12,500)
              
              
              (10,794)Other
              
              
              4,901
              
              
              3,052Changes
      in operating assets and liabilities:Receivables
              
              
              (3,576)
              
              
              53,443Increase
      in deferred revenue
              
              
              2,742
              
              
              269,170Spare
      parts and supplies
              
              
              (4,769)
              
              
              (497)Prepaid
      expenses and other assets
              
              
              (1,074)
              
              
              (3,325)Restricted
      cash
              
              
              379
              
              
              -Accounts
      payable and accrued expenses
              
              
              12,924
              
              
              23,335Hedge
      related payments
              
              
              (20,463)
              
              
              -Insurance
      proceeds
              
              
              1,606
              
              
              -Income
      taxes receivable
              
              
              (16,135)
              
              
              26,559Other
      liabilities
              
              
              -
              
              
              (4,103)Cash
      (used in) provided by operating activities
              
              
              (1,062)
              
              
              280,910Investing
      activitiesPurchases
      of property and equipment
              
              
              (19,402)
              
              
              (8,223)Proceeds
      from the sale of property and equipment
              
              
              142
              
              
              610Aircraft
      pre-delivery payments
              
              
              -
              
              
              (57,628)Purchases
      of short-term investments
              
              
              (82,200)
              
              
              (675,755)Proceeds
      from sale of short-term investments
              
              
              132,950
              
              
              539,680Acquisition
      of Colgan Air, Inc. net of cash acquired
              
              
              -
              
              
              (8,366)Cash
      provided by (used in) investing activities
              
              
              31,490
              
              
              (209,682)Financing
      activitiesProceeds
      from debt
              
              
              91,810
              
              
              -Payments
      on debt
              
              
              (61,462)
              
              
              (12,842)Payments
      on capital leases
              
              
              (596)
              
              
              (440)Purchase
      of Series A Preferred Share
              
              
              (20,000)
              
              
              -Treasury
      shares repurchased
              
              
              -
              
              
              (27,222)Debt
      issuance costs
              
              
              (1,786)
              
              
              -Other
      financing activities
              
              
              49
              
              
              3,028Cash
      provided by (used in) financing activities
              
              
              8,015
              
              
              (37,476)Net
      increase in cash and cash equivalents
              
              
              38,443
              
              
              33,752Cash
      and cash equivalents at beginning of period
              
              
              26,785
              
              
              705Cash
      and cash equivalents at end of period
              
              $
              65,228
              
              $
              34,457Noncash
      investing and financing activitiesProperty
      and equipment acquired through the issuance of debt
              
              $
              331,345
              
              $
              3,180
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  6
 Pinnacle
Airlines Corp.
 Notes to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  1.  Description
of Business and Basis of Presentation
 
 Pinnacle
Airlines Corp. and its wholly owned subsidiaries, Pinnacle Airlines, Inc. and
Colgan Air, Inc., are collectively referred to in this report as the “Company,”
except as otherwise noted.  The Company’s subsidiaries will be
referred to as “Pinnacle” for Pinnacle Airlines, Inc. and “Colgan” for Colgan
Air, Inc.
 
 Pinnacle
operates an all-regional jet fleet providing regional airline capacity to
Northwest Airlines, Inc. (“Northwest”) as a Northwest Airlink carrier at its hub
airports in Detroit, Minneapolis/St. Paul and Memphis and to Delta Air Lines,
Inc. (“Delta”) as a Delta Connection carrier at its hub airport in
Atlanta.  At June 30, 2008, Pinnacle operated 126 Canadair Regional
Jet (“CRJ”)-200 aircraft as a Northwest Airlink carrier with approximately 710
daily departures to 116 cities in 36 states and five Canadian
provinces.  Pinnacle operated a jet fleet of nine CRJ-900 aircraft as
a Delta Connection carrier with approximately 45 daily departures to 22 cities
in 15 states, the Bahamas, Mexico, U.S. Virgin Islands, and Turks and Caicos
Islands.
 
 Colgan
operates an all-turboprop fleet under revenue pro-rate agreements with
Continental Airlines, Inc. (“Continental”), United Air Lines, Inc. (“United”)
and US Airways Group, Inc. (“US Airways”), and also provides regional airline
capacity to Continental under a capacity purchase agreement.  Colgan’s
operations are focused primarily in the southwestern and northeastern United
States and two Canadian provinces.  As of June 30, 2008, Colgan
offered 307 daily departures and operated 12 Saab 340 aircraft as Continental
Connection from Continental’s hub airport in Houston, 12 Saab 340 aircraft as
United Express at Washington/Dulles, and five Beech 1900 aircraft and 16 Saab
340 aircraft a s US Airways Express, with hub locations at New York/LaGuardia
and Boston, under revenue pro-rate agreements.  Colgan operated 13
Q400 aircraft under a capacity purchase agreement with Continental at its global
hub at Newark/Liberty International Airport, providing 81 daily
departures.
 
 These
interim financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States, the
instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X,
and should be read in conjunction with the Company’s Annual Report on Form 10-K
for the year ended December 31, 2007.
 
 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 ended
December 31, 2008.
 
 All
amounts contained in the notes to the condensed consolidated financial
statements are presented in thousands, with the exception of years, number of
employees, per share amounts and number of aircraft.
  7
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  2.  Code-Share
Agreements with Partners
 
 The
Company’s operating contracts fall under two categories: capacity purchase
agreements and revenue pro-rate agreements.  The following is a
summary of the percentage of regional airline services revenue attributable to
each contract type and code-share partner for the three and six months ended
June 30, 2008.
 
 Three
      Months Ended June 30, 2008Percentage
      of Regional Airline Services RevenueSource
      of Revenue
              
              Capacity
      Purchase Agreements
              
              Pro-Rate
      Agreements
              
              TotalNorthwest
              
              66%
              
              -
              
              66%Continental
              
              5%
              
              8%
              
              13%US
      Airways
              
              -
              
              9%
              
              9%United
              
              -
              
              6%
              
              6%Delta
              
              4%
              
              -
              
              4%Essential
      Air Service
              
              -
              
              2%
              
              2%Total
              
              75%
              
              25%
              
              100%
 
 Six
      Months Ended June 30, 2008Percentage
      of Regional Airline Services RevenueSource
      of Revenue
              
              Capacity
      Purchase Agreements
              
              Pro-Rate
      Agreements
              
              TotalNorthwest
              
              70%
              
              -
              
              70%Continental
              
              4%
              
              8%
              
              12%US
      Airways
              
              -
              
              8%
              
              8%United
              
              -
              
              5%
              
              5%Delta
              
              3%
              
              -
              
              3%Essential
      Air Service
              
              -
              
              2%
              
              2%Total
              
              77%
              
              23%
              
              100%
 
 Capacity
Purchase Agreements
 
 The
Company’s preferred contractual relationships with major airlines are structured
as capacity purchase arrangements.  Under capacity purchase
agreements, major airline partners purchase the Company’s flying capacity by
paying pre-determined rates for specified flying, regardless of the number of
passengers on board or the amount of revenue collected from
passengers.  These arrangements typically include incentive payments
that are paid if the Company meets certain operational performance
measures.  Additionally, certain operating costs such as fuel,
aviation insurance premiums, certain ground handling and airport related costs,
and property taxes are reimbursed or paid for directly by the partner, which
eliminates the Company’s risk associated with a change in the price of these
goods or services.
 
 Northwest
Airlines
 
 The
Company, through its Pinnacle subsidiary, provides regional jet service to
Northwest as a Northwest Airlink carrier under an amended and restated airline
services agreement (the “ASA”) that became effective January 1, 2007 and expires
in December 2017.  At the end of its term in 2017, the ASA
automatically extends for an additional five-year periods unless Northwest
provides notice to the Company two years prior to the termination date that it
does not plan to extend the term.
 
 Pursuant to the terms of the ASA,
Northwest is currently transitioning 15 of Pinnacle’s CRJ-200 aircraft to one of
its wholly owned subsidiaries. Upon completion of this transition, Pinnacle will
operate a fleet of 124 CRJ-200 aircraft under the ASA (subject to further
adjustment under certain circumstances as provided for in the ASA). As of June
30, 2008, 13 of the 15 CRJ-200 aircraft had been returned, with the remaining
two aircraft expected to be returned in the third quarter 2008.
  8
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  2.  Code-Share
Agreements with Partners – (Continued)
 
 As
provided for in the ASA, on January 4, 2008, the Company purchased its Series A
Preferred Share (the “Preferred Share”) from Northwest. The Preferred Share gave
Northwest the right to appoint two directors to the Company’s Board of
Directors, as well as certain other corporate governance rights.  No
dividends were payable to the stockholder of the Preferred
Share.  After this purchase, Northwest no longer owns any shares of
the Company’s stock and is no longer a related party of the
Company.
 
 Delta
Air Lines
 
 On April
27, 2007, the Company entered into a ten-year capacity purchase agreement with
Delta to operate 16 CRJ-900 aircraft as a Delta Connection Carrier (the “Delta
Connection Agreement”, or “DCA”). Scheduled service began on December 1, 2007
and Pinnacle operated nine CRJ-900 aircraft under the DCA as of June 30,
2008.  Two of the remaining seven aircraft were delivered in July 2008
with the remaining five aircraft to continue being delivered through May
2009.  Delta also has the option to add an additional seven CRJ-900
aircraft under the DCA.
 
 On July
17, 2008, the Company and Delta amended the DCA whereby the parties agreed to
delay the in-service dates for the remaining seven CRJ-900 aircraft to January
through May 2009. The Company and the aircraft manufacturer have also
agreed to defer delivery of the five remaining CRJ-900 aircraft to
Pinnacle.
 
 Continental
Airlines
 
 On
February 5, 2007, the Company entered into a capacity purchase agreement with
Continental under which Colgan operates Q400 regional aircraft predominantly out
of Continental’s hub at Newark/Liberty International Airport.  As of
June 30, 2008, Colgan operated 13 Q400 aircraft and the remaining two aircraft
were delivered in July 2008.
 
 Revenue
Pro-Rate Agreements
 
 When the
Company purchased Colgan in January 2007, its existing agreements with its
partners were structured as revenue pro-rate code-share agreements, which allow
Colgan to market its operations under its partners’ brands.  Under these
agreements, Colgan generally manages its own inventory of unsold capacity and
sets fare levels in the local markets that it serves.  Colgan retains
all of the revenue for passengers flying within its local markets that do not
connect to its partners’ flights.  For connecting passengers, the
passenger fare is pro-rated between Colgan and its major airline partner,
generally based on the distance traveled by the passenger on each segment of the
passenger’s trip.  Under these agreements, Colgan bears the risk associated
with fares, passenger demand, and competition within its
markets.  Colgan incurs all of the costs associated with operating
these flights, including those costs typically reimbursed or paid directly by
the major airline under a capacity purchase agreement. In some instances, Colgan
has the ability to earn incentive-based revenue should it achieve specified
performance metrics.
 
 Colgan’s
financial performance is also subject to seasonal
fluctuations.  Colgan has historically reported lower unit revenue
during the first and fourth quarters each year when demand for air travel
declines, and reported higher unit revenue during the second and third quarters
each year when air travel demand is higher.
 
 US
Airways
 
 As of
June 30, 2008, the Company, through its Colgan subsidiary, operated 16 Saab 340
aircraft and five Beech 1900D aircraft under a code-sharing pro-rate agreement
with US Airways (the “US Airways Agreement”).  In 1999, Colgan entered
into the US Airways Agreement to provide passenger service and cargo service
under the name “US Airways Express.” The current US Airways Agreement became
effective on October 1, 2005 under terms similar to the 1999 agreement and has a
three-year term.  The Company and US Airways are in discussions to
extend the term of this code-share agreement.
  9
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  2.  Code-Share
Agreements with Partners – (Continued)
 
 Continental
Airlines
 
 As of
June 30, 2008, the Company, through its Colgan subsidiary, operated 12 Saab 340
aircraft based in Houston, Texas under a code-share, pro-rate agreement with
Continental (the “Continental Agreement”).  Colgan entered into the
Continental Agreement in January 2005 for a term of five years.  In
addition to receiving pro-rated passenger revenue as described above under
“Revenue Pro-Rate Agreements,” the Company receives an incentive payment for
each passenger connecting onto or from a Continental flight in
Houston.  These incentive payments adjust each six months for changes
in the cost of fuel and changes in certain station-related costs.
 
 United
Air Lines
 
 In
October 2003, Colgan entered into a code-share agreement with United Air Lines
to include the United Air Lines flight designator code on all United flights
operated by Colgan.  In October 2005, Colgan entered into a separate
code-share agreement with United to provide services as a United Express carrier
(the “United Agreement”).  During the first quarter of 2008, Colgan
expanded the number of aircraft and markets operated under this agreement by
transitioning nine markets previously operated from Pittsburgh, Pennsylvania
under Colgan’s US Airways agreement. As of June 30, 2008, the Company operated
12 Saab 340 aircraft under the name “United Express.”  The United
Agreement expires on December 31, 2008.  The Company is currently in
discussions with United to extend the term of this agreement and to make certain
economic and market adjustments to allow the Company to operate profitably in
its United Express markets.
 
 Essential
Air Services
 
 In
addition to the code-share agreements described above, the Company, through its
Colgan subsidiary, operates under nine separate contracts within its pro-rate
network with the Department of Transportation (“DOT”) to provide subsidized air
service to 15 communities as part of the Essential Air Services (“EAS”)
program.  During 2008, Colgan filed notice with the DOT to vacate
service in 13 of these communities, and subsequently re-filed to serve these
communities at an increased level of subsidy.  The DOT has re-awarded
service to seven of these markets to Colgan at an increased subsidy, in some
instances, a reduced level of weekly round trips.  The new terms of
the EAS agreements in these seven markets go into effect in the second and third
quarters of 2008.  The DOT awarded four of the markets to a
competitor, and Colgan will cease service in these four markets during the third
quarter of 2008.  The DOT has not yet awarded two of the markets that
Colgan filed to vacate service, and Colgan continues to operate in these markets
under its existing EAS agreements.
 
 3. Impairment of Goodwill and Other Charges
 
 In
accordance with Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible
Assets (“SFAS 142”), the Company performs an impairment test of goodwill
on an annual basis and, if certain events or circumstances indicate that an
impairment loss may have been incurred, on an interim basis. The analysis of
potential impairment of goodwill requires a two-step process. The first step is
the estimation of fair value. If Step One indicates that impairment potentially
exists, the second step is performed to measure the amount of impairment, if
any. Goodwill impairment exists when the estimated fair value of goodwill is
less than its carrying value.
 
 Because
such indicators existed for Colgan during the three months ended June 30, 2008,
the Company performed impairment testing on Colgan’s goodwill.  Factors
deemed by the Company to be collectively an indicator that a goodwill impairment
test was required for Colgan include record high fuel prices, continued
operating losses, a softening U.S. economy, and the planned removal of ten Saab
aircraft from Colgan’s pro-rate operating fleet in 2008.
  10
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  3.
Impairment of Goodwill and Other Charges – (Continued)
 
 For
purposes of testing Colgan’s goodwill, the Company estimated Colgan’s fair value
using primarily the income approach, a generally accepted fair value measurement
technique.  This approach was built using relevant data available through
and as of June 30, 2008.  Under the income approach, the fair value was
estimated based upon the present value of estimated future cash flows from
Colgan. The income approach is dependent on a number of critical management
assumptions including estimates of future capacity, passenger yield, traffic,
operating costs (including fuel prices), appropriate discount rates and other
relevant assumptions. The Company estimated its future fuel-related cash flows
for the income approach based on the five-year forward curve for crude
oil.
 
 Step One
indicated the fair value of Colgan was less than its carrying value. 
Consequently, to confirm the existence of and to measure the amount of any
impairment, the Company was required to perform Step Two of the SFAS 142
goodwill impairment testing methodology.  In Step Two of the impairment
testing, the Company determined the implied fair value of Colgan’s goodwill
estimating the current fair value of all of its assets and liabilities,
including any recognized and unrecognized intangible assets.  As a result
of the Step Two testing, the Company determined that goodwill was fully impaired
and therefore recorded a $9,785 impairment charge during the three months ended
June 30, 2008 to eliminate the carrying value of Colgan’s goodwill. This
impairment charge is classified within "impairment of goodwill and other
charges" in the Company's condensed consolidated statements of income.  An
adjustment to the impairment charge may be required in the third quarter of 2008
when the Company finalizes its evaluation.
 
 Effective
October 2008, Colgan will eliminate 12 unprofitable markets from its US Airways
Express and United Express operations.  This action will result in the
retirement of ten Saab aircraft from service, the majority of which are leased
aircraft, in addition to the previously announced retirement of Colgan’s fleet
of five Beech 1900 aircraft.  The return of leased aircraft requires
certain maintenance costs necessary to restore the aircraft to a condition
suitable for return to the lessor.  During the three months ended June 30,
2008, the Company recorded a $2,062 charge related to these costs, and expects
to record an additional amount of approximately $1,300 prior to the removal of
the aircraft from service in October 2008.  The Company’s accrued lease
return costs as of June 30, 2008 are included in “accrued expenses and other
current liabilities” on the Company’s condensed consolidated balance
sheets.  The Company also fully impaired certain other long-lived assets
valued at $772.
 
 4.
Fair Value Measurements
 
 On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurements.  SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements.  SFAS 157 applies to reported balances that are required
or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.  Although the adoption of SFAS 157
did not materially affect its financial condition, results of operations, or
cash flow, the Company is now required to provide additional disclosures as part
of its financial statements.
 
 SFAS 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement.  Therefore, a fair value measurement should be determined
based on the assumptions that market participants would use in pricing the asset
or liability.  As a basis for considering market participant
assumptions in fair value measurements, SFAS 157 establishes a fair value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).  A
description of the three-tier fair value hierarchy is as
follows:
  11
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  4.
Fair Value Measurements – (Continued)
 
 Level
      1
              Observable
      inputs such as quoted prices (unadjusted) in active markets for identical
      assets or liabilities that the Company has the ability to
      access.Level
      2
              Inputs,
      other than the quoted prices in active markets, that are observable for
      the asset or liability either directly or indirectly, and may include
      quoted prices for similar assets and liabilities in active markets,
      as well as inputs that are observable for the asset or liability (other
      than quoted prices), such as interest rates, foreign exchange rates, and
      yield curves that are observable at commonly quoted
intervals.Level
      3
              Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own
assumptions.
 
 In
instances where the determination of the fair value measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.
 
 As of
June 30, 2008, the Company held certain assets and liabilities that are required
to be measured at fair value on a recurring basis, none of which were classified
as Level 1. The table below presents the Company’s assets and liabilities
measured at fair value as of June 30, 2008, aggregated by the level in the
fair value hierarchy within which those measurements fall.
  Level
      1
              
              Level 2
              
              Level 3
              
              Balance
      at June 30, 2008AssetsAuction
      Rate Securities (“ARS”)
              
              $
              -
              
              $
              -
              
              $
              127,425
              
              $
              127,425LiabilitiesDerivative
      financial instruments
              
              $
              -
              
              $
              (1,409)
              
              $
              -
              
              $
              (1,409)
 
  The
following table presents the Company’s assets and liabilities at fair value on a
recurring basis using significant unobservable inputs (Level 3):
  AssetAuction
      Rate SecuritiesBalance
      at January 1, 2008
              
              $
              -Transfers
      to Level 3
              
              
              136,100Total
      unrealized gains/(losses)Included
      in nonoperating expense
              
              
              (8,675)Included
      in other comprehensive income (“OCI”)
              
              
              -Balance
      at June 30, 2008
              
              $
              127,425
 
 Auction
Rate Securities
 
 Investments in auction rate securities
are classified as available-for-sale and presented at their estimated fair
values.  However, due to recent events in credit markets, the auction
events for the ARS held by the Company have failed since the first quarter of
2008 (see Note 11 for further discussion).  Therefore, the fair values
of these ARS are estimated utilizing a discounted cash flow analysis model as of
June 30, 2008.  This analysis considers, among other items, the
collateralization underlying the investments, the creditworthiness of the
counterparty, the timing of expected future cash flows, and an estimate of when
the security is expected to have a successful auction or be
called by the issuer.  These securities were also compared, when
possible, to other observable market data with similar characteristics to the
securities held by the Company.
  12
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  4.
Fair Value Measurements – (Continued)
  Based on
market conditions beginning in the first quarter 2008, the Company changed its
valuation methodology for ARS to a discounted cash flow
analysis.  Accordingly, these securities changed from Level 1 to Level
3 within SFAS 157’s hierarchy since the Company’s initial adoption of SFAS 157
at January 1, 2008.
 
 Derivative
Financial Instruments
 
 At times, the Company utilizes a cash
flow hedging program to manage its interest rate risk related to the purchase of
aircraft from the time of entering into an aircraft related purchase commitment
until the delivery of the aircraft, at which time the Company borrows permanent,
fixed-rate financing for each aircraft (see Note 6 for further discussion).As of June 30, 2008, the
Company had two remaining outstanding hedge positions, one of which was settled
in July 2008.  The fair values of interest rate swaps are determined
using the market standard methodology of netting the discounted future fixed
cash receipts (or payments) and the discounted expected variable cash payments
(or receipts).  The variable cash payments (or receipts) are based on
an expectation of future interest rates (forward curves) derived from observable
market interest rate curves.
 
 To comply
with the provisions of SFAS 157, the Company incorporates credit valuation
adjustments to appropriately reflect both its own nonperformance risk and the
respective counterparty’s nonperformance risk in the fair value
measurements.  In adjusting the fair value of its derivative contracts
for the effect of nonperformance risk, the Company has considered the impact of
netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees.
 
 The
Company has determined that all significant inputs used to value its derivatives
fall within Level 2 of the fair value hierarchy, although the credit valuation
adjustments associated with its derivatives utilize Level 3 inputs, such as
estimates of current credit spreads to evaluate the likelihood of default by
itself and its counterparties.  As a result, the Company has
determined that its derivative valuations in their entirety are classified in
Level 2 of the fair value hierarchy.
 
 5.  Borrowings
 
 The
following table summarizes the Company’s lines of credit, short-term notes
payable, and long-term debt:
 As
      of June 30, 2008
              
              As
      of December 31, 2007Lines
      of credit
              
              $
              88,275
              
              $
              8,375Pre-delivery
      payment facility
              
              
              16,191
              
              
              63,603Other
              
              
              -
              
              
              2Total
      short-term notes payable
              
              $
              16,191
              
              $
              66,103Senior
      convertible notes
              
              $
              121,000
              
              $
              121,000Long-term
      notes payable
              
              
              410,927
              
              
              79,222Total
      long-term debt
              
              
              531,927
              
              
              200,222Less
      current maturities
              
              
              (22,845)
              
              
              (7,410)Long-term
      debt, net of current maturities
              
              $
              509,082
              
              $
              192,812
 
  13
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  5.  Borrowings
– (Continued)
 
 The
aggregate amounts of principal maturities of long-term debt as of June 30, 2008
were as follows:
 Remainder
      of 2008
              
              $
              11,2662009
              
              
              24,5762010
              
              
              143,9082011
              
              
              22,7942012
              
              
              23,220Thereafter
              
              
              306,163Total
              
              $
              531,927
 
 Lines
of Credit
 
 On March
11, 2008, the Company entered into a revolving term loan with Citigroup Global
Markets, Inc (the “Credit Facility”).  The Credit Facility provided
for advances up to $60,000 and is collateralized by the Company’s $136,100 par
value of ARS. On June 18, 2008, the Company amended the Credit Facility with the
primary purpose of increasing the eligible amount for borrowing from $60,000 to
$80,000. During the second quarter, the Company drew an additional $20,000
increasing total borrowings under the Credit Facility to $80,000.  The
proceeds are being used to support the Company’s aircraft purchases and for
general working capital purposes.  The Credit Facility is pre-payable
at any time prior to maturity on February 28, 2009.  The Credit
Facility interest rate is indexed to LIBOR and was 4.5% as of June 30,
2008.  The Credit Facility includes both covenant and margin
requirements with which the Company is compliant. As of June 30, 2008, the
balance outstanding was $80,000.
 
 The
Company maintains an additional revolving line of credit with an institutional
lender for a principal amount not to exceed $8,500 or 75% of the net unpaid
balance of eligible accounts receivable.  This instrument has an
interest rate of Prime plus 0.25%, which was 5.25% as of June 30,
2008.  Amounts outstanding under the line of credit were $8,275 at
June 30, 2008 and $8,375 at December 31, 2007. On April 15, 2008, the Company
extended the termination date of this facility to April 15, 2009.
 
 Pre-delivery
Payment Financing Facilities
 
 In 2007,
the Company executed pre-delivery payment financing facilities with Export
Development Canada (“EDC”) for up to $80,000 in short-term borrowings.  The
outstanding balance was $16,191 at June 30, 2008 and $64,419 at December 31,
2007.  Borrowings under the pre-delivery payment facilities bear interest
at the 3-month LIBOR rate plus 1.65%, which was 4.43% as of June 30, 2008, and
are collateralized by the pre-delivery payments to Bombardier.  The Company
repays the borrowings as each aircraft is delivered.
 
 Senior
Convertible Notes
 
 In
February 2005, the Company completed the private placement of $121,000 principal
amount of 3.25% senior convertible notes due February 15, 2025 (the
"Notes").  If certain conditions are met, the Notes are convertible
into a combination of cash and common stock equivalent to the value of 75.6475
shares of the Company’s common stock per $1 par amount of Notes, or a conversion
price of $13.22.  The Notes were not convertible in the second quarter
of 2008.
 
 Prior to
February 15, 2010, the Company cannot redeem the Notes at its
option.  Beginning on February 15, 2010, the Company may redeem the
Notes for cash, in whole or in part at any time or from time to
time.  The Company will give not less than 30 days’ or more than 60
days’ notice of redemption by mail to holders of the Notes.  If the
Company elects to redeem the Notes, it will pay a redemption price equal to 100%
of the principal amount of the Notes to be redeemed, plus accrued and unpaid
interest to the redemption date. The holders of the Notes may require the
Company to purchase all or a portion of their Notes for cash on February 15,
2010, February 15, 2015 and February 15, 2020 at a purchase price equal to 100%
of their principal amount plus accrued and unpaid interest, if
any.  As a result, the entire principal amount is shown with a
maturity of 2010 in the above table.
  14
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  5.  Borrowings
– (Continued)
 
 New Accounting
Standard.In May 2008, the Financial Accounting Standards
Board (“FASB”) issued a FASB Staff Position (“FSP”) addressing convertible
instruments that may be settled in cash upon conversion (including partial cash
settlement).  This guidance will dramatically affect the accounting
for these instruments.  The FSP will require companies to separately
account for the liability and equity components of the instrument in a manner
that reflects the Company’s economic cost.  The FSP will require
bifurcation of a component of the debt to result in classification of that
component in equity and the “economic interest cost” being reflected in the
statement of income. The Company is evaluating the standard and its potential
impact on the Notes and the Company’s financial statements.  Although
the Company has not fully evaluated the impact of the proposed standard on the
Company’s financial statements, the Company expects that interest expense
recorded on the Company’s income statement will increase substantially, and the
carrying value of the Notes on the Company’s balance sheet will be reduced under
the proposed standard.  This FSP will be effective for the Company’s
2009 fiscal year, and will be applied retrospectively to all periods
presented.
 
 Long
Term Notes Payable
 
 Included
in long-term notes payable are borrowings from EDC for owned aircraft.  As
discussed in Note 6, the Company implemented an interest rate swap hedge program
to reduce its risk from potentially rising interest rates. The Company hedged
its interest rate exposure on the anticipated permanent financing debt for
certain aircraft.  The borrowings are collateralized by the Company’s
fleet of CRJ-900 and Q400 aircraft, which had a balance of approximately
$460,000 at June 30, 2008.  The borrowings bear interest rates,
including the effects of the Company’s hedging activities, ranging between 6.3%
and 7.3% with maturities through the second quarter of 2023 on terms that are
substantially equivalent.  Amounts outstanding were $385,541 and
$60,270 at June 30, 2008 and December 31, 2007, respectively.
 
 Since
June 30, 2008, the Company has entered into four additional debt agreements with
EDC to finance the aircraft delivered thus far in the third quarter of 2008. As
of August 8, 2008, the Company has financed an additional $72,753.
 
 6.  Derivatives
 
 The
Company is exposed to interest rate risk from the time of entering into purchase
commitments until the delivery of CRJ-900 aircraft, at which time the Company
borrows permanent, fixed-rate financing for each aircraft.  To
mitigate the financial risk associated with changes in long-term interest rates,
the Company initiated a cash flow hedging program during July
2007.  The program consists of forward-starting interest rate swaps to
hedge the expected interest payments associated with anticipated future
issuances of long-term debt.
 
 The term
of each cash flow hedge matches the term of the expected financing. As of June
30, 2008, the Company had two remaining outstanding hedge positions, one of
which was settled in July 2008. The remaining outstanding hedge position is
expected to be outstanding for up to four months.  The related
agreements for these outstanding hedge positions require mandatory cash
settlement when the permanent financing is obtained at the time of delivery of
aircraft. Once the permanent financing is secured, the remaining hedge-related
balance included in other comprehensive income will be amortized into interest
expense over the life of the aircraft financing.
 
 In March
2008, the FASB issued SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”).  The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand the use of derivative instruments and their effects on an
entity’s financial condition, performance, and cash flows. It is effective for
financial statements issued after November 15, 2008. SFAS 161 will affect
disclosures only and will not have an impact on the Company’s consolidated
balance sheet, statements of income, or cash flows.
  15
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  6.  Derivatives
– (Continued)
 
 The
following table presents pre-tax gains (losses) on derivative instruments within
the condensed consolidated statements of income:
  Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              2007
              
              2008
              
              2007Ineffectiveness
      from interest rate swaps included ininterest
      expense
              
              $
              (422)
              
              $
              -
              
              $
              (581)
              
              $
              -Interest
      expense recognized in earnings fromother
      comprehensive income
              
              
              (587)
              
              
              -
              
              
              (784)
              
              
              -
 
 The following table presents the fair
values of the Company’s remaining derivative instruments, and the unrealized
gain or loss from settled interest rates swaps, net of tax, within the condensed
consolidated balance sheets.
  As
      of June 30, 2008
              
              As
      of December 31, 2007Fair
      value of active swaps – recorded in accruedexpenses
      as a current liability
              
              $
              (1,409)
              
              $
              (16,777)Net
      unrealized losses from interest rate swaps,recorded
      in other comprehensive
                income, net of tax
              
              
              (16,581)(1)
              
              
              (10,761)
 
 (1)
              Included
      in the net unrealized losses from interest rate swaps are approximately
      $2,708 in net unrealized losses that are expected to be amortized into
      interest expense during the 12 months following June 30,
    2008.
 
 7.  Comprehensive
Income (Loss)
 
 The
following table summarizes the Company’s comprehensive income
(loss):
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              2007
              
              2008
              
              2007Net
      income (loss)
              
              $
              (11,451)
              
              $
              7,662
              
              $
              (8,798)
              
              $
              17,027Adjustments
      (net of tax):Retired
      Pilots’ Insurance Benefit Planamortization
      of unrealized actuarial gain
              
              
              (47)
              
              
              -
              
              
              (53)
              
              
              -Change
      in cash flow hedge unrealized loss
              
              
              4,448
              
              
              -
              
              
              (5,820)
              
              
              -Change
      in unrealized loss on investments
              
              
              6,002
              
              
              -
              
              
              -
              
              
              -Total
      other comprehensive income (loss)
              
              $
              (1,048)
              
              $
              7,662
              
              $
              (14,671)
              
              $
              17,027
 
  16
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
 
 8.  Earnings
(Loss) Per Share
 
 The
following table sets forth the computation of basic and diluted earnings (loss)
per share:
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              2007
              
              2008
              
              2007Net
      income (loss)
              
              $
              (11,451)
              
              $
              7,662
              
              $
              (8,798)
              
              $
              17,027Basic
      earnings (loss) per share
              
              $
              (0.64)
              
              $
              0.35
              
              $
              (0.49)
              
              $
              0.78Diluted
      earnings (loss) per share
              
              $
              (0.64)
              
              $
              0.32
              
              $
              (0.49)
              
              $
              0.70Share
      computation:Weighted
      average number of shares outstanding for basic earnings (loss) per
      share  (1)
              
              
              17,869
              
              
              21,752
              
              
              17,864
              
              
              21,869Senior
      convertible notes (2)
              
              
              -
              
              
              2,334
              
              
              -
              
              
              2,368Share-based
      compensation (3)
              
              
              -
              
              
              154
              
              
              -
              
              
              252Weighted
      average number of shares outstanding for diluted earnings (loss) per
      share
              
              
              17,869
              
              
              24,240
              
              
              17,864
              
              
              24,489
 
 
 (1)During
      2007, the Board of Directors of the Company authorized a share repurchase
      program, whereby the Company repurchased an aggregate of
      4,450
                shares of its
      own common stock, which areexcluded
      from basic earnings (loss) per share.  The Company accounted for
      the repurchase of this treasury
                stock using the cost method.
 
 (2) Dilution is calculated as follows:Three
      MonthsEnded
              
              Six
      Months EndedJune
      30, 2008
              
              June
      30, 2008Increase in fully diluted share count=
              $121,000
                $13.22
      (a)
              -
              $121,000
                $6.85
      (b)
              
              $121,000
                $13.22(a)
              -
              $121,000
                $9.40  (b)(a) = Conversion price of the
    Notes(b) = Average stock price for the
      three and six month period
 
 (3) Options to purchase 972 and 203 shares of common stock were
      excluded from the diluted earnings (loss) per share calculationat
      June 30, 2008  and
                2007,
      respectively, because their effect would be
  anti-dilutive.
 
 9.  Share-Based
Compensation
 
 In
January 2008, the Company granted 284 stock options with an exercise price of
$14.37 per share to members of its Board of Directors, its officers and certain
other employees.  These grants will vest ratably over three
years.  The grant date fair value of these options, estimated using
the Black-Scholes-Merton multiple-option pricing valuation model, was $6.76 per
share.  This fair value was estimated at the date of grant with the
following assumptions for 2008: risk-free interest rate of 3.26%, dividend yield
of 0.0%, expected volatility of the Company’s common stock of 50.0% and expected
life of the options of 5.0 years.  Total expense to be recognized over
the vesting period, net of expected annual forfeitures of 4%, is
$1,847.
 
 In
January 2008, the Company awarded 109 shares of restricted stock to certain
officers and members of the Board of Directors.  Using the
straight-line method, the fair value of $1,566 is being expensed ratably over
the three-year vesting period.  The grant date fair value of these
shares was $14.37 per share, which was the closing stock price on the date of
grant.
 
 During
the three and six months ended June 30, 2008, the Company recognized $616 and
$1,373, respectively, of share-based compensation expense, and $368 and $726 for
the same periods of the prior year.
  17
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  9.  Share-Based
Compensation – (Continued)
 
 The
following table provides certain information with respect to the Company’s stock
options:
 
 Stock
      OptionsShares
              
              Weighted
      Average Exercise
                Price
              
              Fair
                Value
              
              Weighted
      Average
                Remaining
      Life
              
              Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2008
              
              884
              
              $
              12.69
              
              $
              6,470Granted
              
              284
              
              
              14.37
              
              
              1,924Exercised
              
              (8)
              
              
              8.05
              
              
              (38)Forfeited
              
              (35)
              
              
              14.62
              
              
              (285)Outstanding
      at June 30, 2008
              
              1,125
              
              $
              13.09
              
              $
              8,071
              
              7.4
      years
              
              $
              -Options
      exercisable at June 30, 2008
              
              614
              
              $
              12.05
              
              $
              4,685
              
              6.1
      years
              
              $
              -
 
 The
following table provides certain information with respect to the Company’s
restricted stock:
 
 Restricted
      StockShares
              
              Fair ValueUnvested
      at January 1, 2008
              
              
              163
              
              $
              1,827Granted
              
              
              109
              
              
              1,566Vested
              
              
              (74)
              
              
              (753)Forfeited
              
              
              (6)
              
              
              (89)Unvested
      at June 30, 2008
              
              
              192
              
              $
              2,551
 
 10.
Income Taxes
 
 The
Company incurred an income tax benefit for the three and six months ended June
30, 2008 of $1,702 and $277, respectively.  As discussed in Note 11, the
Company recorded an impairment loss of $8,675 on its portfolio of ARS during the
three months ended June 30, 2008.  This impairment charge represents a
capital loss for the Company.  The Company has recorded a full valuation
allowance against the tax benefit associated with this loss, as the Company does
not expect to generate capital gains in the carryforward period against which
the loss could be applied.  The full impact of this non-taxable loss was
recorded during the three months ended June 30, 2008.   As a result,
the Company’s effective tax rate for the three and six months ended June 30,
2008 significantly decreased to 12.9% and 3.1%, respectively.
 
 The
Company is currently under audit by the Internal Revenue Service (“IRS”) for the
tax years 2003 through 2005.  In May 2007, the IRS proposed certain
adjustments to the Company’s positions related to various exam matters. 
The Company submitted a protest to the IRS with respect to the adjustments and
has begun the administrative appeals process.  Should the IRS prevail on
these adjustments, the impact on the Company could be significant.  The
Company believes the potential tax exposure related to the items the IRS has
focused on during its examinations would not exceed $35,000, plus penalties of
$9,747.  The Company has reserved for $16,515 of this exposure.  The
Company believes that it has provided sufficiently for all audit exposures;
however, future earnings, cash flow and liquidity could be materially affected
should it receive adverse rulings on the items under review.  Settlement of
this audit or the expiration of the statute of limitations on the assessment of
income taxes for any tax year may also result in a change in future tax
provisions.
  18
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  11.
Investments
 
 At June
30, 2008, the Company’s investment portfolio included ARS, with fair values of
$127,425, net of recognized losses of $8,675.  As of December 31, 2007, the
Company’s investment portfolio was $186,850.
 
 Because
of the unprecedented events in the ARS market, the Company cannot predict when
liquidity in the ARS market will return.  Although the Company believes its
securities continue to represent good investments due to the credit ratings of
the underlying investments, for a variety of reasons, including record high fuel
prices, uncertainty within the airline industry, and a general softening of the
US economy, the Company may choose to sell some of its ARS portfolio before
liquidity in the ARS market returns.  As a result, the Company has
determined that the decline in value of its ARS portfolio is
other-than-temporary, and may not recover before the investment is sold. 
Therefore, the Company, on a specific identification basis, recorded an
impairment charge of $8,675 during the three and six months ended June 30, 2008
to reflect the decline in value of these securities.  This loss is included
in nonoperating expense in the Company’s condensed consolidated statements of
income.  The Company will continue to evaluate the value of its ARS
portfolio, and may record future additional losses through earnings if the
Company determines that the fair value of its ARS portfolio has declined
further.
 
 12.  Commitments
and Contingencies
 
 Mesaba.As previously
disclosed, the Company was entitled to a claim resulting from Mesaba’s
bankruptcy filing.  In 2006, the Company entered into an assignment of
claim agreement with Goldman Sachs Credit Partners, L.P. (the “Goldman
Agreement”).  At that time, the Company received 80% of the purchase price
based on the claim amount set forth in the Company’s original proof of
claim.  During the three months ended June 30, 2008, the final allowed
amount of the claim was determined and the claim was settled with no material
effect to the Company’s financial statements.
 
 Employees. The Company
operates under several collective bargaining agreements with a portion of its
employees. The collective bargaining agreement between Pinnacle and the Air Line
Pilots Association (“ALPA”) became amendable in April 2005. Pinnacle has been
actively negotiating with ALPA since that time.  In August 2006,
Pinnacle filed for mediation with the National Mediation Board.  Since
then, Pinnacle has met with the mediator assigned to its case and with ALPA, but
Pinnacle has not reached resolution on an amended collective bargaining
agreement.
 
 On
November 5, 2007, ALPA filed suit in the U.S. District Court in Minneapolis,
Minnesota against Pinnacle.  The suit seeks an injunction prohibiting
Pinnacle from paying certain bonuses to its pilots, asserting that such an
action would violate the Railway Labor Act.  Pinnacle believes that
the lawsuit lacks merit, and accordingly, Pinnacle will vigorously defend its
position in this case.  Pinnacle does not believe that it will incur
any material loss with respect to this lawsuit.  On January 8, 2008,
Pinnacle filed suit in the U.S. District Court for the Western District of
Tennessee against ALPA, alleging bad faith bargaining.  The primary
intent of the lawsuit is to encourage ALPA to negotiate in good faith so that an
agreement can be reached for an amended collective bargaining agreement as soon
as possible.  Pinnacle’s pilots are currently paid at rates less than
the industry average for similarly sized aircraft, and an amended agreement is
expected to contain higher rates of pay prospectively for Pinnacle’s
pilots.
 
 Purchase Commitments.The Company has
contractual obligations and commitments primarily related to future purchases of
aircraft, payment on debt and lease obligations.  The Company’s firm
orders and options to purchase aircraft as of June 30, 2008 were as
follows:
  19
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  12.  Commitments
and Contingencies – (Continued)
 
 Firm
              
              Firm
      Cancelable
              
              Options
              
              TotalQ4002008
              
              2
              
              -
              
              -
              
              22009
              
              -
              
              -
              
              -
              
              -2010
              
              -
              
              8
              
              4
              
              122011
              
              -
              
              2
              
              16
              
              18Total
      Q400
              
              2
              
              10
              
              20
              
              32CRJ-9002008
              
              2
              
              -
              
              -
              
              22009
              
              5
              
              -
              
              -
              
              5Total
      CRJ-900
              
              7
              
              -
              
              -
              
              7Total
              
              9
              
              10
              
              20
              
              39
 
 Firm
cancelable aircraft are aircraft that are on firm order, but for which the
Company has the right of cancellation without penalty prior to December
2008.  During July 2008, the Company and Bombardier agreed to defer
the decision date related to exercising the Company’s options for Q400 aircraft
and the date for canceling firm cancelable aircraft orders.  For
further information on CRJ-900 and Q400 aircraft, see Note 2.
 
 The
Company makes pre-delivery payments to the aircraft manufacturer in advance of
the aircraft’s delivery date.  During the three and six months ended
June 30, 2008, the Company paid pre-delivery payments of $3,247 and 4,867,
respectively.  In July 2008, the remaining pre-delivery payments of
$816 were paid.
 
 The
Company’s contractual obligations and commitments, which include future
purchases of aircraft and engines, are approximately $94,000 for the remainder
of 2008 and $123,000 in 2009.
 
 Guarantees and
Indemnifications.  The Company is the guarantor of
approximately $2,140 aggregate principal amount of tax-exempt special facilities
revenue bonds and interest thereon. These bonds were issued by the
Memphis-Shelby County Airport Authority (the “Authority”) and are payable solely
from rentals paid under a long-term lease agreement with the
Authority.  The leasing arrangement is accounted for as an operating
lease in the consolidated financial statements.
 
 In the
Company’s aircraft lease agreements with Northwest, the Company typically
indemnifies the prime lessor, financing parties, trustees acting on their behalf
and other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the aircraft and
for tort liability, whether or not these liabilities arise out of or relate to
the negligence of these indemnified parties, except for their gross negligence
or willful misconduct.
 
 The
Company is party to numerous contracts and real estate leases in which it is
common for it to agree to indemnify third parties for tort liabilities that
arise out of or relate to the subject matter of the contract or occupancy of the
leased premises. In some cases, this indemnity extends to related liabilities
arising from the negligence of the indemnified parties, but usually excludes any
liabilities caused by their gross negligence or willful misconduct.
Additionally, the Company typically indemnifies the lessors and related third
parties for any environmental liability that arises out of or relates to its use
of the leased premises.
 
 The
Company expects that its levels of insurance coverage (subject to deductibles)
would be adequate to cover most tort liabilities and related indemnities
described above with respect to real estate it leases and aircraft it
operates.  The Company does not expect the potential amount of future
payments under the foregoing indemnities and agreements to be material. Colgan
is a defendant in a lawsuit related to the September 11, 2001 terrorist
attacks.  The Company expects that any adverse outcome from this
litigation will be covered by insurance, and therefore, will have no material
adverse effect on the Company’s financial statements as a whole.
 20
 Pinnacle
Airlines Corp.
 Notes
to Condensed Consolidated Financial Statements
 (all
amounts in thousands, except per share data)
  12.  Commitments
and Contingencies – (Continued)
 
 The
Company is currently engaged in discussions with Northwest involving the
interpretation of various components of the ASA.  The Company and
Northwest have agreed to resolve these matters through
arbitration.  The potential outcome of these disputed matters ranges
from an annual increase in the payments received from Northwest of approximately
$2,800 to a decrease in payments received from Northwest of as much as
$4,800.  The Company and Northwest have not begun the arbitration
proceedings, but plan to do so in the near future.  Adverse
determinations in these matters could result in a loss to the Company of up to
$9,500 for disputed amounts accruing through June 30, 2008.
 
 13.  Segment
Reporting
 
 SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information, requires disclosures
related to components of a company for which separate financial information is
available to and regularly evaluated by the company’s chief operating decision
maker (“CODM”) when deciding how to allocate resources and in assessing
performance.
 
 Previously,
the Company’s two airline reportable segments included Pinnacle Airlines, Inc.
and Pinnacle Airlines Corp. (the “Pinnacle Segment”) and Colgan Air, Inc. (the
“Colgan Segment”). During the first quarter of 2008, the Company revised its
reportable segments to reflect a change in the information used by the CODM, and
its two operating segments now consist of the Company’s two subsidiaries,
Pinnacle Airlines, Inc. (“Pinnacle”) and Colgan Air, Inc.
(“Colgan”).
 
 The
following represents the Company’s segment data for the periods
indicated:
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              2007
              
              2008
              
              2007Operating
      revenues:Pinnacle
              
              $
              155,731
              
              $
              149,119
              
              $
              310,128
              
              $
              292,773Colgan
              
              
              65,449
              
              
              51,729
              
              
              115,393
              
              
              87,855Eliminations
              
              
              (26)
              
              
              146
              
              
              (26)
              
              
              (84)Consolidated
              
              $
              221,154
              
              $
              200,994
              
              $
              425,495
              
              $
              380,544Operating
      income (loss):Pinnacle
              
              $
              15,405
              
              $
              14,042
              
              $
              27,638
              
              $
              27,203Colgan
              
              
              (12,934)
              
              
              780
              
              
              (18,387)
              
              
              444Eliminations
              
              
              -
              
              
              -
              
              
              -
              
              
              -Consolidated
              
              $
              2,471
              
              $
              14,822
              
              $
              9,251
              
              $
              27,647
 
 The
following represents the Company’s segment assets:
 
 June
      30, 2008
              
              December
      31, 2007Total
      assets:Pinnacle
              
              $
              490,198
              
              $
              544,746Colgan
              
              
              270,841
              
              
              144,183Unallocated
              
              
              260,748
              
              
              19,659Consolidated
              
              $
              1,021,787
              
              $
              708,588
 
  21
 Item 2.  Management’s Discussion and Analysis of
Financial Condition and Results of Operations
  General
 
 The
following management’s discussion and analysis describes the principal factors
affecting the Company’s results of operations, liquidity, capital resources and
contractual cash obligations.  This discussion should be read in
conjunction with the accompanying unaudited condensed consolidated financial
statements and our Annual Report on Form 10-K for the year ended December 31,
2007 (“Annual Report”), which include additional information about our
significant accounting policies, risk factors, practices and the transactions
that underlie our financial results.
 
 Our
website address is www.pncl.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
 
 During the first six months of 2008, we continued to make significant changes to
the operating fleets of our subsidiaries.  Pinnacle placed into
service six CRJ-900 76-seat aircraft as a Delta Connection carrier, and removed
from its Northwest Airlink operations 11 CRJ-200 50-seat aircraft, ending the
quarter with 135 regional jets.  In February, Colgan began flying the
next-generation Q400 turboprop 74-seat aircraft as a Continental Connection
carrier.  As of June 30, 2008, Colgan operated 13 Q400 aircraft under
its Continental capacity purchase agreement.  Colgan placed two
additional Q400 aircraft into service in July.
 
 For the
three months ended June 30, 2008, the Company recorded consolidated operating
revenue of $221.2 million, an increase of $20.2 million, or 10%, over the same
period in 2007. Operating revenues of $425.5 million for the six months ended
June 30, 2008 increased $45.0 million, or 12%, from operating revenues of $380.5
million for the same period in 2007.
 
 Consolidated
operating income and operating margin were $2.5 million and 1.1%, respectively,
for the three months ended June 30, 2008.  Excluding special charges,
consolidated operating income and operating margin  were $15.1 million
and 6.8%, respectively, during the second quarter of
2008.  Consolidated operating income and operating margin were
approximately $14.8 million and 7.4%, respectively, during the same period in
2007.  Consolidated operating income and operating margin were $9.3
million and 2.2%, respectively, for the six months ended June 30,
2008.  Excluding special charges, consolidated operating income and
operating margin were $21.9 million and 5.2%, respectively, for the first six
months of 2008.  Consolidated operating income and operating margin
were approximately $27.6 million and 7.3%, respectively, during the same period
in 2007.
 
 Consolidated
net loss and diluted loss per share for the three months ended June 30, 2008
were $(11.5) million and $(0.64), respectively. Consolidated net loss and loss
per share for the six months ended June 30, 2008 were $(8.8) million and
$(0.49), respectively. Excluding special charges, consolidated net income and
EPS for the three months ended June 30, 2008 were $5.4 million and $0.30,
respectively.  Excluding special charges, consolidated net income and
EPS for the six months ended June 30, 2008 were $8.0 million and $0.45,
respectively.
 
 Outlook
 
 General
 
 We will
continue to execute on our growth plan for the remainder of 2008 and
2009.  Since June 30, 2008, our Colgan subsidiary has taken delivery
of the final two Q400 aircraft to be operated under our capacity purchase
agreement (“CPA”) with Continental and placed them into service.  Our
Pinnacle subsidiary has taken delivery of 11 of the 16 aircraft to be operated
under its Delta Connection Agreement (“DCA”) with Delta, with nine currently
placed in service.  Pinnacle and Delta recently agreed to defer the
remaining in-service dates, with the remaining seven CRJ-900 entering service
under the DCA in the first and second quarters of 2009.
 
 During
April 2008, Delta and Northwest announced intentions to merge, forming what
would be the world’s largest airline.  The carriers have announced
that they expect the merger to receive all necessary regulatory approvals and
will be completed during the fourth quarter of 2008.  We do not
believe that major airline industry consolidation will materially affect our
current or prospective operations, as our capacity purchase agreements are
relatively long-term and do not contain early termination provisions that could
be triggered by consolidation.  In addition, we strive to maintain
strong relationships with all of our partners, and we believe that we will
continue to be an important part of our partners’ networks, with or without
industry consolidation.
 22
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Outlook–
(Continued)
 
 The airline
industry is undergoing a major period of instability as a result of dramatic
increases in the cost of fuel.  As of June 30, 2008, the price of
crude oil had increased approximately 46% since the beginning of the year and
approximately 97% over the past twelve months.  The industry has been
unable to increase passenger revenue enough to offset the substantial increase
in fuel costs.  Most major U.S. airlines have incurred significant
losses during 2008, and several smaller airlines have filed for bankruptcy or
liquidated since the beginning of 2008.  This instability has forced
the entire industry to undergo a major transformation to develop a business
model that can be sustained at high fuel prices.  Most major airlines
have announced significant cuts in capacity to take place beginning in the
second half of 2008.  Many are planning to cut regional airline
capacity as well.  For example, Delta recently announced that it
intended to decrease domestic capacity by 13% during the second half of 2008,
and it is targeting to remove the equivalent of 100 regional aircraft by the end
of 2008.
 
 Regional
jets use more fuel per seat than larger jets, which causes the profitability of
regional jet markets to be more sensitive to changes in fuel
costs.  Many industry experts believe that major airlines within the
United States operate more 50-seat regional jets than can be supported by
current economic conditions.  As our major airline partners
restructure their operations to survive the fuel crisis, we expect them to
review the relationships that they have with regional airlines, and we expect
this to result in changes to these relationships.
 
 In June,
Delta gave notice to Pinnacle that it intended to terminate Pinnacle’s DCA for
16 CRJ-900 aircraft, citing failure to meet on-time performance requirements in
the DCA.  Delta had previously given similar notice to terminate a
capacity purchase agreement for 34 regional jets with another of its partners,
citing failure to meet completion factor requirements.  We disputed
Delta’s right to terminate the DCA, and we subsequently agreed with Delta to
continue operating under the DCA with a deferral of the in-service dates for the
remaining seven CRJ-900 aircraft that are not yet in service.  We
expect all of our partners to increase their scrutiny of the operational and
cost performance of their regional partners in light of ongoing industry
conditions.  Although we were successful in keeping our DCA intact
with Delta, a future attempt by Delta or an attempt by another of our partners
to terminate one of our capacity purchase agreements would, if successful, have
a material negative impact on our financial performance and
liquidity.  We closely monitor the minimum required operational
standards within all of our operating agreements, and, with the exception of the
recently settled dispute with Delta, we believe we are currently in compliance
with all of our major operating agreements.
 
 We
continue to own approximately $136.1 million par amount of auction rate
securities (“ARS”).  Due to recent events in credit markets, these
investments have become illiquid and have suffered a decline in fair
value.  Because we believe this decline in value to be
other-than-temporary, we recorded a loss of $8.7 million in the second quarter,
which represents the difference between the par value and the fair value of our
ARS.  Due to our belief that the market for these student loan
collateralized instruments may take in excess of twelve months to fully recover,
we have classified these investments as noncurrent assets on our condensed
consolidated balance sheet at June 30, 2008 at their fair market value of $127.4
million.  We continue to earn interest on all of our ARS
instruments.  As the market for our ARS portfolio changes, we may
record additional losses to reflect their fair value.
 
 While we
wait for both the ARS market to rationalize and for investor demand to return,
we have arranged for an $80 million margin loan facility (the “Credit Facility”)
to be used to support our aircraft purchases and other working capital
requirements, which we believe will be sufficient to supplement our cash flows
from operations and meet our current liquidity needs.
 
 Outlook
for Pinnacle Airlines, Inc.
 
 With the
addition of the CRJ-900 aircraft, we believe Pinnacle is well positioned for
additional growth opportunities as they materialize within the airline
industry.  The CRJ-900 aircraft is the most cost efficient regional
jet in its class, and the next-generation cabin interior provides a new level of
customer comfort.  Although we expect our major airline customers to
focus more on the current fuel crisis and associated capacity reductions during
2008, we do expect additional opportunities for 70-90 seat aircraft beyond 2008
as major airlines continue to rationalize their domestic networks.
 23
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Outlook–
(Continued)
 
 As part of
the agreement with Delta to withdraw its attempted cancellation of Pinnacle’s
DCA, we agreed to defer the in-service dates under the DCA for the remaining
seven CRJ-900 aircraft to be delivered to Pinnacle.  The aircraft were
previously scheduled to go into service between July 2008 and January
2009.  Under the amended DCA, the aircraft will go into service
between January 2009 and May 2009.  Concurrently, we reached agreement
with the aircraft manufacturer to defer delivery of five of the seven aircraft
into 2009 to match the revised in-service dates under our DCA.  Two of
the seven aircraft were delivered to Pinnacle in July 2008.  We plan
to use these two aircraft to support our operations under the DCA until their
in-service dates in January 2009.  However, we will incur
approximately $2 million of interest, depreciation, insurance, and related costs
until their January 2009 in-service dates that will not be reimbursed by
Delta.
 
 Certain
elements of Pinnacle’s operating performance under its ASA with Northwest are
measured over six month periods beginning each January and
July.  Pinnacle must achieve certain goals for its completion factor,
on-time performance, mishandled baggage ratio, and customer complaints during
each six month period to earn incentive revenue under the ASA.  These
metrics include some items outside of Pinnacle’s control, including
cancellations and delays caused by weather or air traffic
control.  Pinnacle’s performance during the first quarter of 2008 was
below the ASA goals in most categories.  Pinnacle experienced severe
winter weather in all of its hubs, and Pinnacle experienced an increase in
cancellations and delays related to mechanical events during the
period.  We estimated and recorded revenue reductions for lost
incentive payments of approximately $2.5 million for the first quarter of 2008.
Pinnacle’s performance during the second quarter of 2008 improved considerably,
and as a result, we reduced the amount that we expect to pay Northwest related
to performance goals for the six month period to $1.7 million.  This
adjustment improved Pinnacle’s operating income by approximately $0.8 million
during the second quarter.  We continue to place major emphasis on
high operating and reliability standards at our Pinnacle
subsidiary.
 
 The
collective bargaining agreement between Pinnacle and the Air Line Pilots
Association (“ALPA”), the union representing Pinnacle’s pilots, has been
amendable since April 2005.  We have met with ALPA, both with and
without a mediator, many times since April 2005, but we have not reached an
agreement for a new contract.  It is of utmost importance to us to
reach an agreement with ALPA that is consistent with our company-wide philosophy
of industry-average pay and benefits with enhanced employee
productivity.  Wage rates for Pinnacle’s pilot group are currently
approximately four to five percent below industry average, and a new collective
bargaining agreement is expected to contain an increase in pay for Pinnacle’s
pilots.  Such increase could be substantial, and may also include a
substantial one-time signing bonus.  The increase in pay for
Pinnacle’s pilots will likely reduce our profitability in future
periods.  While Pinnacle intends to vigorously pursue obtaining a fair
contract with ALPA, the timing of resolving this matter cannot be
predicted.
 
 We are
currently engaged in discussions with Northwest involving various disputed
payments under Pinnacle’s ASA, including items that relate to the period prior
to commencement of the amended ASA in January 2007 and items that could affect
our operating income in future periods.  The first item relates to a
2006 contractual adjustment to our block hour, departure, and fixed cost
rates.  Our annual operating income could increase or decrease by
approximately $2.8 million per year based upon differing interpretations of the
relevant ASA terms.  The second issue involves the reclassification of
certain airport and ground handling costs and related ASA revenue in a manner
that could reduce the Company’s operating income in future periods by up to
approximately $2.0 million per year.
 
 We have
agreed to arbitrate these issues with Northwest, and we expect the arbitration
process to begin in the near future.  Adverse determinations in these
matters could result in a loss to the Company of up to $9.5 million for disputed
amounts through June 30, 2008.  We believe that we will prevail in
these matters, and therefore, we do not believe a loss is probable at this
time.  However, we may not be successful in resolving these disputes
without reducing our future income, and/or without paying Northwest for some or
all of the amount noted above.  We cannot currently predict the timing
of the resolution of these matters.
  24
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Outlook–
(Continued)
 
 Outlook
for Colgan Air, Inc.
 
 We
recently agreed with Bombardier to convert the options and cancelable orders for
30 additional Q400 aircraft into options and cancelable orders for the
next-generation cabin configuration version of the Q400 aircraft. The next
generation version will contain modifications to enhance passenger comfort,
including a new LED lighting system, new ceiling panels, scalloped side walls,
and larger overhead bins. This next generation cabin configuration will not be
available until 2010, and we have deferred the delivery dates for our 30 options
and cancelable orders to take place between May 2010 and November
2011.  The exercise dates for the options and cancelable orders begin
in December 2008.  We have received very positive feedback on the
operating performance and customer acceptance of the Q400 fleet that we have
added at Colgan, and we continue to discuss the possibility of new capacity
purchase agreements with our major airline partners.  We believe that
in the current high fuel cost environment, the Q400 is a very attractive, cost
efficient alternative to regional jets of similar or smaller
size.  Currently, however, most major airlines are reviewing their
networks and undertaking steps to reduce capacity, including regional aircraft,
to remove marginal flights that are not profitable at current fuel
costs.  We believe there will be long-term demand for our services
with the Q400 aircraft; however, we do not yet know whether we will exercise our
options for delivery of any of the 30 Q400 aircraft.
 
 Colgan
has been operating Q400 aircraft under its CPA with Continental since February
2008.  Although we have not yet achieved the level of ongoing
profitability that we expect under our CPA, our financial performance during
this startup period has generally been in line with our
expectations.  One key factor affecting Colgan’s Q400 financial
performance that was not anticipated were penalties totaling $1.0 million that
we paid to Continental related to delays in aircraft deliveries from the
manufacturer.  Now that all 15 aircraft have been delivered, we expect
Colgan’s financial performance related to the Q400 aircraft to continue to
improve.  It is our intention to grow this component of Colgan’s
business over time.
 
 A large
portion of Colgan’s operations are conducted under revenue pro-rate code-share
agreements.  Under this type of agreement, we select our own routes,
manage our fares and inventory of unsold seats, and incur all of the costs of
operating and marketing our flights.  We market our flights under the
brand of our code-share partners, and we pro-rate the revenue from passengers
who purchase a connecting ticket between flight segments operated by us and our
partners.  Under this type of flying, we bear the risk of changes in
the pricing structure and demand for travel in markets we serve, and we bear the
risk of changes in fuel prices.  The unprecedented increase in fuel
costs over the past 12 months has significantly affected Colgan’s pro-rate
operations.  Colgan experienced an operating loss inclusive of
goodwill impairment and other special charges of $18.4 million during the first
half of 2008.  As a result, we have created a plan to significantly
reduce the scope of Colgan’s pro-rate operations, and to create a sustainable
route structure at current fuel prices for the remaining pro-rate
network.  Some of the key tenets of the turn-around plan
are:
 
 §
              Retirement
      of ten Saab 340 aircraft and the remaining five Beech 1900 aircraft from
      the US Airways and United pro-rate operations.  This fleet
      reduction will also result in the elimination of 12 markets currently
      served.   We expect these Saab aircraft to be removed from
      service during October 2008.  The majority of the ten Saab
      aircraft are leased and will be returned to lessors at the current
      expiration of their leases, through January 2009.  We recorded
      $2.1 million of lease return costs in the second quarter of 2008 and
      expect to record $1.3 million in lease return costs during the third
      quarter of 2008 prior to their removal from service during October
      2008.  We intend to market for sale two owned Saab aircraft as
      part of the retirement program.  After completion of the
      retirement of these ten Saab 340 aircraft, Colgan will operate a fleet of
      30 Saab aircraft in its pro-rate operations, a decrease of 15 aircraft
      from the 40 Saab and five Beech 1900 aircraft currently
      operated.
  §
              Increased
      subsidy under the Federal Essential Air Service (“EAS”)
      program.  We applied for changes in 13 of the 15 markets that we
      serve under the EAS program to offset the increase in fuel
      costs.  We were awarded service in seven of these markets with
      an increased subsidy total of approximately $4 million
      annually.  Colgan will also reduce capacity in four of these
      markets, further reducing Colgan’s operating costs.  The
      Department of Transportation (“DOT”) accepted competing bids in four of
      the remaining six markets, and Colgan will exit these markets in October
      2008 as part of the planned fleet reduction indicated above.  The
      DOT has not acted upon applications in the remaining two
      markets.  Assuming Colgan receives authority to continue
      operations in these two markets, Colgan will operate in 11 EAS markets
      after giving effect to these
changes.
  25
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Outlook–
(Continued)
  §
              The
      transition of nine markets from Pittsburgh under Colgan’s US Airways
      code-share agreement to Washington/Dulles airport under Colgan’s United
      code-share agreement. Washington/Dulles is a larger hub airport than
      Pittsburgh with substantially more connecting opportunities for our
      passengers.  This transition was completed during the first
      quarter of 2008, and Colgan has seen an improvement in the revenue
      performance of these markets.
 
 §
              Discussions
      with United Airlines to jointly reduce certain costs that Colgan incurs at
      Washington/Dulles as a United Express carrier.  Reducing certain
      distribution and ground handling costs or otherwise supplementing Colgan’s
      revenue in its United Express markets is a key component of maintaining
      its operations at Washington/Dulles.  If United and Colgan are
      unable to reduce these costs, Colgan may exit additional markets currently
      operated under the United Express
brand.
 
 §
              The
      addition of Colgan’s new maintenance base at Washington/Dulles, where
      Colgan maintains a significant presence operating as United
      Express.  This location will eliminate ferry flights from
      Colgan’s existing maintenance facilities, reducing operating
      costs.  In addition, to both reduce Colgan’s maintenance costs
      through improved productivity and increase the utilization of its Saab
      fleet, Colgan has undertaken an effort to streamline its maintenance
      operations by reducing the number of stations where it maintains line
      maintenance presence.
 
 These
actions could result in additional significant one-time costs.  Such steps
could involve removing additional leased aircraft from service and returning
them to third party lessors in advance of lease expirations, removing and
remarketing owned Saab aircraft, selling or disposing of Colgan’s inventory of
Saab parts, and potentially furloughing or retraining employees. We
recorded $2.1 million in fleet retirement costs during the second quarter
related to expected maintenance costs on leased aircraft that we will perform
prior to returning the aircraft to the lessors, and we expect to incur an
additional $1.3 million of such costs in the third quarter of 2008. In addition
to the goodwill impairment charge, as discussed in Note 3 in Item 1 of this Form
10-Q, additional reductions in the size and scope of our pro-rate code-share
operations, could result in future write-downs of the carrying value of Colgan’s
pro-rate related tangible and intangible assets.  As of June 30, 2008,
Colgan's intangible assets had a balance of approximately $4
million.
 
 We
believe that the significant measures contained within our turn-around plan will
eliminate or significantly reduce the annual operating losses that Colgan is
experiencing in its pro-rate operations at the current cost of
fuel.  However, the initiatives we implement may not improve Colgan’s
performance enough to restore profitability.  We may not be able to
reduce Colgan’s fixed overhead costs commensurately with the significant
reductions in service that we are planning.  In addition, decreases in
unit revenue or increases in the price of fuel may further deteriorate Colgan’s
financial performance.  We will likely incur a significant loss on
Colgan’s pro-rate operations for the full year of 2008.
 
 Colgan’s
financial performance under its pro-rate agreements is also subject to seasonal
fluctuations.  Colgan has historically reported lower unit revenue
during the first and fourth quarters each year when demand for air travel
declines, and reported higher unit revenue during the second and third quarters
each year when air travel demand is higher.  We expect this
seasonality to continue to affect Colgan’s pro-rate financial results in future
periods.
  26
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Results
of Operations
 
 The following represents our results of
operations, by segment and consolidated, for the three and six months ended June
30, 2008.  A discussion of our results of operations as compared to
the same periods in 2007 follows.
 
 Three
      Months Ended June 30, 2008Pinnacle
              
              
              Colgan
              
              
              Overhead/
      Eliminations
              
              
              Consolidated(in
      thousands)Operating
      revenuesRegional
      airline services
              
              $
              153,619
              
              $
              65,394
              
              $
              -
              
              $
              219,013Other
              
              
              2,112
              
              
              55
              
              
              (26)
              
              
              2,141Total
      operating revenues
              
              
              155,731
              
              
              65,449
              
              
              (26)
              
              
              221,154Operating
      expensesSalaries,
      wages and benefits
              
              
              42,957
              
              
              14,190
              
              
              -
              
              
              57,147Aircraft
      fuel
              
              
              -
              
              
              14,899
              
              
              -
              
              
              14,899Aircraft
      maintenance, materials and repairs
              
              
              11,663
              
              
              12,031
              
              
              -
              
              
              23,694Aircraft
      rentals
              
              
              30,567
              
              
              1,940
              
              
              -
              
              
              32,507Other
      rentals and landing fees
              
              
              13,015
              
              
              4,357
              
              
              -
              
              
              17,372Ground
      handling services
              
              
              20,522
              
              
              3,176
              
              
              (26)
              
              
              23,672Commissions
      and passenger related expense
              
              
              1,643
              
              
              5,784
              
              
              -
              
              
              7,427Depreciation
      and amortization
              
              
              3,364
              
              
              3,240
              
              
              -
              
              
              6,604Other
              
              
              16,595
              
              
              6,147
              
              
              -
              
              
              22,742Impairment
      of goodwill and other charges
              
              
              -
              
              
              12,619
              
              
              -
              
              
              12,619Total
      operating expenses
              
              
              140,326
              
              
              78,383
              
              
              (26)
              
              
              218,683Operating
      income (loss)
              
              
              15,405
              
              
              (12,934)
              
              
              -
              
              
              2,471Operating
      margin
              
              
              9.9%
              
              
              (19.8)%
              
              
              -
              
              
              1.1%Nonoperating
      income (expense)Interest
      income
              
              
              
              
              
              
              
              
              
              
              
              1,724Interest
      expense
              
              
              
              
              
              
              
              
              
              
              
              (8,821)Impairment
      of auction rate securities
              
              
              
              
              
              
              
              
              
              
              
              (8,675)Miscellaneous
      income, net
              
              
              
              
              
              
              
              
              
              
              
              148Total
      nonoperating expense
              
              
              
              
              
              
              
              
              
              
              
              (15,624)Loss
      before income taxes
              
              
              
              
              
              
              
              
              
              
              
              (13,153)Income
      tax benefit
              
              
              
              
              
              
              
              
              
              
              
              1,702Net
      loss
              
              
              
              
              
              
              
              
              
              
              $
              (11,451)
 
  27
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Results
of Operations – (Continued)
 
 Six
      Months Ended June 30, 2008Pinnacle
              
              
              Colgan
              
              
              Overhead/
      Eliminations
              
              
              Consolidated(in
      thousands)Operating
      revenuesRegional
      airline services
              
              $
              304,871
              
              $
              115,301
              
              $
              -
              
              $
              420,172Other
              
              
              5,257
              
              
              92
              
              
              (26)
              
              
              5,323Total
      operating revenues
              
              
              310,128
              
              
              115,393
              
              
              (26)
              
              
              425,495Operating
      expensesSalaries,
      wages and benefits
              
              
              85,382
              
              
              27,091
              
              
              -
              
              
              112,473Aircraft
      fuel
              
              
              -
              
              
              26,772
              
              
              -
              
              
              26,772Aircraft
      maintenance, materials and repairs
              
              
              23,540
              
              
              22,002
              
              
              -
              
              
              45,542Aircraft
      rentals
              
              
              62,157
              
              
              3,871
              
              
              -
              
              
              66,028Other
      rentals and landing fees
              
              
              25,538
              
              
              7,311
              
              
              -
              
              
              32,849Ground
      handling services
              
              
              44,025
              
              
              7,062
              
              
              (26)
              
              
              51,061Commissions
      and passenger related expense
              
              
              3,575
              
              
              10,678
              
              
              -
              
              
              14,253Depreciation
      and amortization
              
              
              5,744
              
              
              5,236
              
              
              -
              
              
              10,980Other
              
              
              32,529
              
              
              11,138
              
              
              -
              
              
              43,667Impairment
      of goodwill and other charges
              
              
              -
              
              
              12,619
              
              
              -
              
              
              12,619Total
      operating expenses
              
              
              282,490
              
              
              133,780
              
              
              (26)
              
              
              416,244Operating
      income (loss)
              
              
              27,638
              
              
              (18,387)
              
              
              -
              
              
              9,251Operating
      margin
              
              
              8.9%
              
              
              (15.9)%
              
              
              -
              
              
              2.2%Nonoperating
      income (expense)Interest
      income
              
              
              
              
              
              
              
              
              
              
              
              4,038Interest
      expense
              
              
              
              
              
              
              
              
              
              
              
              (13,663)Impairment
      on auction rate securities
              
              
              
              
              
              
              
              
              
              
              
              (8,675)Miscellaneous
      expense, net
              
              
              
              
              
              
              
              
              
              
              
              (26)Total
      nonoperating expense
              
              
              
              
              
              
              
              
              
              
              
              (18,326)Loss
      before income taxes
              
              
              
              
              
              
              
              
              
              
              
              (9,075)Income
      tax benefit
              
              
              
              
              
              
              
              
              
              
              
              277Net
      loss
              
              
              
              
              
              
              
              
              
              
              $
              (8,798)
 
 The
following reconciles Colgan’s operating income and operating margin and our
consolidated operating income, operating margin, net income and diluted earnings
(loss) per share (“EPS”) as reported in accordance with generally accepted
accounting principles (“GAAP”) for the three and six months ended June 30, 2008
and 2007 to non-GAAP measures excluding special charges related to the
impairment of Colgan’s goodwill and intangible assets, Colgan’s lease return
costs and the impairment of auction rate securities in 2008, and the loss on the
sale of our unsecured claim in the second quarter of 2007. We believe that this
information is useful as it indicates more clearly our comparative
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.
   28
 Item 2.  Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  Results
of Operations – (Continued)
 
 Three
      Months Ended June 30,2008
              
              2007
              
              %
      Increase (Decrease)(in
      thousands, except per share data)Consolidated
      operating income:Operating
      income in accordance with GAAP
              
              $
              2,471
              
              $
              14,822
              
              (83)%Add:
      Impairment of goodwill and other charges
              
              
              12,619
              
              
              -
              
              100%Non-GAAP
      operating income
              
              $
              15,090
              
              $
              14,822
              
              2%Consolidated
      operating margin:Operating
      margin in accordance with GAAP
              
              
              1.1%
              
              
              7.4%
              
              (6.3)
      pts.Add:
      Impairment of goodwill and other charges
              
              
              5.7%
              
              
              -
              
              5.7
      pts.Non-GAAP
      operating margin
              
              
              6.8%
              
              
              7.4%
              
              (0.6)
      pts.Net
      (loss) income:Net
      (loss) income in accordance with GAAP
              
              $
              (11,451)
              
              $
              7,662
              
              (249)%Add:
      Impairment of goodwill and other charges, net of tax
              
              
              8,139
              
              
              -
              
              100%Add:
      Impairment of auction rate securities
              
              
              8,675
              
              
              -
              
              100%Add:
      Loss on sale of unsecured claim, net of tax
              
              
              -
              
              
              2,644
              
              (100)%Non-GAAP
      net income
              
              $
              5,363
              
              $
              10,306
              
              (48)%Diluted
      earnings (loss) per share:Diluted
      earnings (loss) per share in accordance with GAAP
              
              $
              (0.64)
              
              $
              0.32
              
              (300)%Add:
      Impairment of goodwill and other charges, net of tax
              
              
              0.45
              
              
              -
              
              100%Add:
      Impairment of auction rate securities
              
              
              0.49
              
              
              -
              
              100%Add:
      Loss on sale of unsecured claim, net of tax
              
              
              -
              
              
              0.11
              
              (100)%Non-GAAP
      diluted earnings per share
              
              $
              0.30
              
              $
              0.43
              
              (30)%
  Six
      Months Ended June 30,2008
              
              2007
              
              %
      Increase (Decrease)(in
      thousands, except per share data)Consolidated
      operating income:Operating
      income in accordance with GAAP
              
              $
              9,251
              
              $
              27,647
              
              (67)%Add:
      Impairment of goodwill and other charges
              
              
              12,619
              
              
              -
              
              100%Non-GAAP
      operating income
              
              $
              21,870
              
              $
              27,647
              
              (21)%Consolidated
      operating margin:Operating
      margin in accordance with GAAP
              
              
              2.2%
              
              
              7.3%
              
              (5.1)
      pts.Add:
      Impairment of goodwill and other charges
              
              
              3.0%
              
              
              -
              
              3.0 pts.Non-GAAP
      operating margin
              
              
              5.2%
              
              
              7.3%
              
              (2.1)
      pts.Net
      income:Net
      (loss) income in accordance with GAAP
              
              $
              (8,798)
              
              $
              17,027
              
              (152)%Add:
      Impairment of goodwill and other charges, net of tax
              
              
              8,139
              
              
              -
              
              100%Add:
      Impairment of auction rate securities
              
              
              8,675
              
              
              -
              
              100%Add:
      Loss on sale of unsecured claim, net of tax
              
              
              -
              
              
              2,635
              
              (100)%Non-GAAP
      net income
              
              $
              8,016
              
              $
              19,662
              
              (59)%Diluted
      EPS:Diluted
      earnings (loss) per share in accordance with GAAP
              
              $
              (0.49)
              
              $
              0.70
              
              (170)%Add:
      Impairment of goodwill and other charges, net of tax
              
              
              0.45
              
              
              -
              
              100%Add:
      Impairment of auction rate securities
              
              
              0.49
              
              
              -
              
              100%Add:
      Loss on sale of unsecured claim, net of tax
              
              
              -
              
              
              0.11
              
              (100)%Non-GAAP
      diluted earnings per share
              
              $
              0.45
              
              $
              0.81
              
              (44)%
 
  29
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Results
of Operations – (Continued)
 
 The
following discussion provides an analysis of our results of operations and
reasons for material changes therein for the three and six months ended June 30,
2008 compared to the same periods in 2007.  The acquisition of Colgan
was completed on January 18, 2007.  As such, the data presented for
Colgan includes the period from the acquisition date through June 30, 2007,
which represents approximately 90% of the six months ended June 30,
2007.
 
 Consolidated and Segmented
Results of Operations
 
 Consolidated
 
 Operating
Statistics
 
 Pinnacle
      Airlines Corp. ConsolidatedThree
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              2007
              
              Change
              
              2008
              
              2007
              
              ChangeOther
      Data:Revenue
      passengers (in thousands)
              
              
              3,389
              
              
              3,058
              
              11%
              
              
              6,253
              
              
              5,528
              
              13%Revenue
      passenger miles (in thousands)
              
              
              1,436,388
              
              
              1,310,470
              
              10%
              
              
              2,624,389
              
              
              2,368,071
              
              11%Available
      seat miles (in thousands)
              
              
              1,890,857
              
              
              1,693,208
              
              12%
              
              
              3,565,313
              
              
              3,244,434
              
              10%Passenger
      load factor
              
              
              76.0%
              
              
              77.4%
              
              (1.4)
      pts.
              
              
              73.6%
              
              
              73.0%
              
              0.6
      pts.Block
      hours
              
              
              152,542
              
              
              140,630
              
              8%
              
              
              297,737
              
              
              272,733
              
              9%Departures
              
              
              99,794
              
              
              96,308
              
              4%
              
              
              192,573
              
              
              181,161
              
              6%Number
      of operating aircraft (end of period)
              
              
              193
              
              
              191
              
              1%Employees
              
              
              5,680
              
              
              5,280
              
              8%
 
 Operating
Revenues
  Three
      Months Ended June 30,
                
                Six
      Months Ended June 30,2008
                
                
                2007
                
                
                $
                  Change
                
                %
      Change
                
                2008
                
                2007
                
                $
                  Change
                
                %
      Change(in
      thousands)Operating
      revenuesRegional
      airline services
                $
                219,013
                
                $
                198,480
                
                $
                20,533
                
                10%
                
                $
                420,172
                
                $
                375,425
                
                $
                44,747
                
                12%Other
                
                2,141
                
                
                2,514
                
                
                (373)
                
                (15)%
                
                
                5,323
                
                
                5,119
                
                
                204
                
                4%Total
      operating revenues
                $
                221,154
                
                $
                200,994
                
                $
                20,160
                
                10%
                
                $
                425,495
                
                $
                380,544
                
                $
                44,951
                
                12%
  Operating
revenues of $221.2 million for the three months ended June 30, 2008 increased
$20.2 million, or 10%, from operating revenues of $201.0 million for the same
period in 2007.  Operating revenues of $425.5 million for the six
months ended June 30, 2008 increased $45.0 million, or 12%, from operating
revenues of $380.5 million for the same period in 2007.  This increase
is primarily related to changes in the size and type of aircraft
operated.  At our Pinnacle subsidiary, as of June 30, 2008 we operated
13 fewer CRJ-200s under our capacity purchase agreement with Northwest, but
added to our fleet nine of the larger CRJ-900s under our capacity purchase
agreement with Delta.  At our Colgan subsidiary, we operated two fewer
Saab 340s and five fewer Beech 1900s under pro-rate agreements, while adding 13
Q400 aircraft under the capacity purchase agreement with
Continental.  Primarily as a result of our fleet growth, available
seat miles (“ASMs”) for the three and six months ended June 30, 2008 increased
by approximately 12% and 10%, respectively, and block hours increased by
approximately 8% and 9%, respectively, compared to the same periods in the
previous year.
  30
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  
 Consolidated
and Segmented Results of Operations–
(Continued)
 
 Operating
and Nonoperating Expenses
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              $
      Change
              
              
              %
      Change
              
              
              2008
              
              
              2007
              
              
              $
                Change
              
              
              %
      Change(in
      thousands)Operating
      expensesSalaries,
      wages and benefits
              
              $
              57,147
              
              $
              50,261
              
              $
              6,886
              
              
              14%
              
              $
              112,473
              
              $
              97,562
              
              $
              14,911
              
              
              15%Aircraft
      fuel
              
              
              14,899
              
              
              9,512
              
              
              5,387
              
              
              57%
              
              
              26,772
              
              
              15,933
              
              
              10,839
              
              
              68%Aircraft
      maintenance,materials
      and repairs
              
              
              23,694
              
              
              23,345
              
              
              349
              
              
              1%
              
              
              45,542
              
              
              41,439
              
              
              4,103
              
              
              10%Aircraft
      rentals
              
              
              32,507
              
              
              35,306
              
              
              (2,799)
              
              
              (8)%
              
              
              66,028
              
              
              69,029
              
              
              (3,001)
              
              
              (4)%Other
      rentals and landing fees
              
              
              17,372
              
              
              15,061
              
              
              2,311
              
              
              15%
              
              
              32,849
              
              
              28,971
              
              
              3,878
              
              
              13%Ground
      handling services
              
              
              23,672
              
              
              23,873
              
              
              (201)
              
              
              (1)%
              
              
              51,061
              
              
              47,965
              
              
              3,096
              
              
              6%Commissions
      and passengerrelated
      expense
              
              
              7,427
              
              
              6,741
              
              
              686
              
              
              10%
              
              
              14,253
              
              
              11,566
              
              
              2,687
              
              
              23%Depreciation
      and amortization
              
              
              6,604
              
              
              2,318
              
              
              4,286
              
              
              185%
              
              
              10,980
              
              
              4,372
              
              
              6,608
              
              
              151%Other
              
              
              22,742
              
              
              19,755
              
              
              2,987
              
              
              15%
              
              
              43,667
              
              
              36,060
              
              
              7,607
              
              
              21%Impairment
      of goodwill and other charges
              
              
              12,619
              
              
              -
              
              
              12,619
              
              
              100%
              
              
              12,619
              
              
              -
              
              
              12,619
              
              
              100%Total
      operating expenses
              
              
              218,683
              
              
              186,172
              
              
              32,511
              
              
              17%
              
              
              416,244
              
              
              352,897
              
              
              63,347
              
              
              18%Operating
      income
              
              
              2,471
              
              
              14,822
              
              
              (12,351)
              
              
              (83)%
              
              
              9,251
              
              
              27,647
              
              
              (18,396)
              
              
              (67)%Operating
      margin
              
              
              1.1%
              
              
              7.4%
              
              (6.3)
      pts.
              
              
              
              
              
              2.2%
              
              
              7.3%
              
              (5.1)
      pts.Nonoperating
      (expense) incomeInterest
      income
              
              
              1,724
              
              
              2,882
              
              
              (1,158)
              
              
              (40)%
              
              
              4,038
              
              
              5,947
              
              
              (1,909)
              
              
              (32)%Interest
      expense
              
              
              (8,821)
              
              
              (2,907)
              
              
              (5,914)
              
              
              203%
              
              
              (13,663)
              
              
              (4,981)
              
              
              (8,682)
              
              
              174%Impairment
      of auction rate securities
              
              
              (8,675)
              
              
              -
              
              
              (8,675)
              
              
              100%
              
              
              (8,675)
              
              
              -
              
              
              (8,675)
              
              
              100%Loss
      on sale of unsecured claim
              
              
              -
              
              
              (4,144)
              
              
              4,144
              
              
              (100)%
              
              
              -
              
              
              (4,144)
              
              
              4,144
              
              
              (100)%Miscellaneous
      income (expense), net
              
              
              148
              
              
              318
              
              
              (170)
              
              
              (53)%
              
              
              (26)
              
              
              336
              
              
              (362)
              
              
              (108)%Total
      nonoperating expense
              
              
              (15,624)
              
              
              (3,851)
              
              
              (11,773)
              
              
              306%
              
              
              (18,326)
              
              
              (2,842)
              
              
              (15,484)
              
              
              545%Income
      (loss) before income taxes
              
              
              (13,153)
              
              
              10,971
              
              
              (24,124)
              
              
              (220)%
              
              
              (9,075)
              
              
              24,805
              
              
              (33,880)
              
              
              (137)%Income
      tax benefit (expense)
              
              
              1,702
              
              
              (3,309)
              
              
              5,011
              
              
              (151)%
              
              
              277
              
              
              (7,778)
              
              
              8,055
              
              
              (104)%Net
      (loss) income
              
              $
              (11,451)
              
              $
              7,662
              
              $
              (19,113)
              
              
              (249)%
              
              $
              (8,798)
              
              $
              17,027
              
              $
              (25,825)
              
              
              (152)%
 
 Operating
Expenses
 
 Operating
expenses increased by $32.5 million and 17% during the three months ended June
30, 2008 and by $63.3 million and 18% during the six months ended June 30, 2008,
primarily due to increases in block hours and departures.  In
addition, operating expenses increased as a result of increased fuel prices
related to our pro-rate operations, higher depreciation expense following the
addition of the recently purchased CRJ-900 and Q400
aircraft,  impairment of Colgan’s goodwill and intangibles, Colgan’s
lease return costs, and increased compensation expense resulting from the 8%
increase in headcount related to the growth of our business.
  31
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Consolidated
and Segmented Results of Operations–
(Continued)
 
 Nonoperating
Expense
 
 Net
nonoperating expense of $15.6 million for the three months ended June 30, 2008
increased by approximately $11.8 million over net nonoperating expense of $3.9
million during the same period in 2007.  Net nonoperating expense of
$18.3 million for the six months ended June 30, 2008 increased by $15.5 million
over net nonoperating expense of $2.8 million during the same period in
2007.  This increase is attributable to the $8.7 million impairment
charge on our portfolio of auction rate securities.  In addition,
interest income decreased $1.2 million and $1.9 million, resulting
from a lower average investments balance compared to the same period
of 2007.  Interest expense increased by $5.9 million and $8.7 million,
primarily attributable to the financing of the new CRJ-900 and Q400 aircraft in
our fleet.  The $4.1 million loss on the sale of our unsecured claim
in the Northwest bankruptcy incurred in the second quarter of 2007 offsets these
increases.
 
 Second
quarter 2008 interest expense also includes $0.4 million in current period
interest costs related to the ineffectiveness portion of interest rate hedges
under our interest rate hedging program.  The remaining two unsettled
interest rate hedges are expected to be settled during the third and fourth
quarter of 2008.
 
 Income
Tax Expense
 
 For the
three and six months ended June 30, 2008, our income tax expense decreased by
$5.0 million and $8.1 million, respectively, primarily related to the decrease
in pre-tax income as compared to the same periods in 2007.  Our effective
tax rate for the three and six months ended June 30, 2008 decreased
significantly, primarily related to the previously discussed $8.7 million
impairment loss on our ARS recorded in the second quarter.  Because this
capital loss cannot be used to reduce our ordinary taxable income, and because
we expect no capital gains during the carryforward period against which the loss
could be applied, we expect to receive no tax benefit related to this
charge.  This non-taxable loss was the primarily cause of the decrease
in our effective tax rate to 12.9% for the three months ended June 30,
2008.
 
 Pinnacle
 
 Operating
Statistics
 
 Pinnacle
      Airlines, Inc.Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              2007
              
              Change
              
              2008
              
              2007
              
              ChangeOther
      Data:Revenue
      passengers (in thousands)
              
              2,726
              
              
              2,643
              
              3%
              
              
              5,151
              
              
              4,841
              
              6%Revenue
      passenger miles (in thousands)
              
              1,287,429
              
              
              1,233,335
              
              4%
              
              
              2,386,709
              
              
              2,240,500
              
              7%Available
      seat miles (in thousands)
              
              1,622,264
              
              
              1,532,510
              
              6%
              
              
              3,116,125
              
              
              2,965,558
              
              5%Passenger
      load factor
              
              79.4%
              
              
              80.5%
              
              (1.1)
      pts.
              
              
              76.6%
              
              
              75.6%
              
              1.0
      pts.Operating
      revenue per available seat mile (in cents)
              
              9.60
              
              
              9.73
              
              (1)%
              
              
              9.95
              
              
              9.87
              
              1%Operating
      cost per available seat mile (in cents)
              
              8.65
              
              
              8.81
              
              (2)%
              
              
              9.07
              
              
              8.96
              
              1%Operating
      revenue per block hour
              $
              1,390
              
              $
              1,358
              
              2%
              
              $
              1,384
              
              $
              1,350
              
              3%Operating
      cost per block hour
              $
              1,252
              
              $
              1,230
              
              2%
              
              $
              1,260
              
              $
              1,225
              
              3%Block
      hours
              
              112,051
              
              
              109,810
              
              2%
              
              
              224,112
              
              
              216,823
              
              3%Departures
              
              67,810
              
              
              67,265
              
              1%
              
              
              133,789
              
              
              131,228
              
              2%Average
      daily utilization (block hours)
              
              8.97
              
              
              8.68
              
              3%
              
              
              8.91
              
              
              8.81
              
              1%Average
      stage length (miles)
              
              468
              
              
              461
              
              2%
              
              
              461
              
              
              459
              
              -%Number
      of operating aircraft (end of period)CRJ-200
              
              126
              
              
              139
              
              (9)%CRJ-900
              
              9
              
              
              -
              
              100%Employees
      (end of period)
              
              4,144
              
              
              4,015
              
              3%
  32
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Pinnacle
and Segmented Results of Operations–
(Continued)
 
 Operating
Revenues
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              $
                Change
              
              %
                Change
              
              
              2008
              
              
              2007
              
              $
                Change
              
              %
                Change(in
      thousands)Operating
      revenuesRegional
      airline servicesNorthwest
              $
              145,457
              
              $
              146,662
              
              $
              (1,205)
              
              (1)%
              
              $
              292,898
              
              $
              287,756
              
              $
              5,142
              
              
              2%Delta
              
              8,162
              
              
              -
              
              
              8,162
              
              100%
              
              
              11,973
              
              
              -
              
              
              11,973
              
              
              100%Other
              
              2,112
              
              
              2,457
              
              
              (345)
              
              (14)%
              
              
              5,257
              
              
              5,017
              
              
              240
              
              
              5%Total
      operating revenues
              $
              155,731
              
              $
              149,119
              
              $
              6,612
              
              4%
              
              $
              310,128
              
              $
              292,773
              
              $
              17,355
              
              
              6%
 
 Regional
Airline Services
 
 Regional
airline services revenue increased by 5% and 6%, respectively, during the three
and six months ended June 30, 2008 as compared to the same periods in
2007.  These increases were primarily related to the addition of the
larger 76-seat CRJ-900 aircraft to our fleet, partially offset by the return of
several smaller 50-seat CRJ-200 aircraft to Northwest.  These fleet
changes caused ASMs to increase 6% and 5%, respectively, over the same periods
in 2007.
 
 During
the three and six months ended June 30, 2008, we added three and eight CRJ-900
aircraft, respectively, to our new Delta Connection operations, which began
December 1, 2007.  Revenue earned under the DCA was approximately $8.2
million and $12.0 million for the three and six months ended June 30, 2008,
respectively.
 
 Revenue
earned under our ASA with Northwest was negatively affected by the return of
several CRJ-200 aircraft pursuant to the terms of our ASA with Northwest and
positively affected by an inflation index adjustment in the ASA
rates.  During the three and six months ended June 30, 2008, we
operated 9% fewer CRJ-200 aircraft, respectively, than the same periods in
2007.  Revenue also decreased by $3.3 million and $5.7 million for the
three and six months as compared to the same periods in 2007 as a result of a
change in reimbursable expenses under the ASA.
 
 In
addition, Pinnacle’s operating performance for the first six months of 2008 was
below incentive levels contained in our ASA with
Northwest.  Specifically, to obtain full payment for regional airline
services provided under the ASA, Pinnacle is required to maintain certain levels
of completed flights, on-time performance, mishandled baggage performance, and
customer complaints over six month periods from January 1 to June 30 and July 1
to December 31 of each year.  During the first quarter of 2008,
Pinnacle’s operating performance was affected by severe winter weather and by an
increase in the number of operational maintenance events.  As a
result, we recorded a $2.5 million performance-related reduction of revenue in
the first quarter of 2008 as an estimate of the incentive revenue we believed
would be unearned during the first quarter of 2008.  However,
operating performance greatly improved during the second quarter of 2008 and the
amount of the performance-related reduction of revenue to be for the first six
months of 2008 was actually $1.7 million.  As a result, we increased
regional airline services revenue by $0.8 million in the second quarter of 2008
to adjust the amount owed to Northwest.
 
 Other
Revenue
 
 Other
revenue for the three months ended June 30, 2008 of $2.1 million decreased $0.4
million, or 14%, from other revenue of $2.5 million for the same period in
2007.  This decrease was primarily related to a decline in revenue
earned from providing ground handling services to Northwest at its Memphis
hub.
  33
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Pinnacle
and Segmented Results of Operations–
(Continued)
 
 Operating
Expenses
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              $
                Change
              
              %
                Change
              
              
              2008
              
              
              2007
              
              $
                Change
              
              %
                Change(in
      thousands)Operating
      expensesSalaries,
      wages and benefits
              $
              42,957
              
              $
              38,193
              
              $
              4,764
              
              12%
              
              $
              85,382
              
              $
              76,825
              
              $
              8,557
              
              11%Aircraft
      maintenancematerials
      and repairs
              
              11,663
              
              
              12,907
              
              
              (1,244)
              
              (10)%
              
              
              23,540
              
              
              24,039
              
              
              (499)
              
              (2)%Aircraft
      rentals
              
              30,567
              
              
              32,925
              
              
              (2,358)
              
              (7)%
              
              
              62,157
              
              
              64,777
              
              
              (2,620)
              
              (4)%Other
      rentals and landing fees
              
              13,015
              
              
              12,433
              
              
              582
              
              5%
              
              
              25,538
              
              
              24,403
              
              
              1,135
              
              5%Ground
      handling services
              
              20,522
              
              
              20,766
              
              
              (244)
              
              (1)%
              
              
              44,025
              
              
              42,137
              
              
              1,888
              
              4%Commissions
      and passengerrelated
      expense
              
              1,643
              
              
              1,361
              
              
              282
              
              21%
              
              
              3,575
              
              
              2,592
              
              
              983
              
              38%Depreciation
      and amortization
              
              3,364
              
              
              1,115
              
              
              2,249
              
              202%
              
              
              5,744
              
              
              2,196
              
              
              3,548
              
              162%Other
              
              16,595
              
              
              15,377
              
              
              1,218
              
              8%
              
              
              32,529
              
              
              28,601
              
              
              3,928
              
              14%Total
      operating expenses
              
              140,326
              
              
              135,077
              
              
              5,249
              
              4%
              
              
              282,490
              
              
              265,570
              
              
              16,920
              
              6%Operating
      income
              $
              15,405
              
              $
              14,042
              
              $
              1,363
              
              10%
              
              $
              27,638
              
              $
              27,203
              
              $
              435
              
              2%Operating
      margin
              
              9.9%
              
              
              9.4%
              
              0.5
      pts.
              
              
              
              
              8.9%
              
              
              9.3%
              
              (0.4)
      pts.
 
 Salaries,
wages and benefits increased by $4.8 million and 12% for the three months ended
June 30, 2008 and $8.6 million and 11% for the six months ended June 30, 2008,
as compared to the same periods in 2007.   These increases were
due primarily to the increase in the average number of employees of 3%, coupled
with wage rate and benefit increases for existing employees.
 
 Aircraft
maintenance, materials and repairs expenses decreased by $1.2 million and 10%
and $0.5 million and 2% for the three and six months ended June 30, 2008, as
compared to the same periods in 2007.  This decrease was primarily
related to decreased costs associated with timing differences in the number of
heavy airframe maintenance checks performed on our CRJ-200
aircraft.  The remaining variance is attributable to maintenance costs
reimbursable under the ASA.
 
 Aircraft
rentals expense decreased $2.4 million and $2.6 million during the three and six
months ended June 30, 2008 as compared to the same periods in
2007.  These decreases relate to the 7% and 3% fewer average number of
leased CRJ-200 aircraft, which are leased from Northwest, during 2008 as
compared to 2007.
 
 Depreciation
and amortization expense increased by $2.2 million and $3.5 million,
respectively, for the three and six months ended June 30, 2008.  This
is primarily related to $1.8 million and $2.6 million, respectively, in
depreciation expense incurred related to our new CRJ-900 aircraft added during
2008 to Pinnacle’s operating fleet.
  34
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Colgan
 
 Operating
Statistics
 Colgan
      Air, Inc.Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              2007
              
              Change
              
              2008
              
              2007
              
              ChangeOther
      Data:Revenue
      passengers (in thousands)
              
              663
              
              
              415
              
              60%
              
              
              1,102
              
              
              687
              
              60%Revenue
      passenger miles (in thousands)
              
              148,959
              
              
              77,135
              
              93%
              
              
              237,680
              
              
              127,571
              
              86%Available
      seat miles (in thousands)
              
              268,593
              
              
              160,698
              
              67%
              
              
              449,188
              
              
              278,876
              
              61%Passenger
      load factor
              
              55.5%
              
              
              48.0%
              
              7.5
      pts.
              
              
              52.9%
              
              
              45.7%
              
              7.2
      pts.Operating
      revenue per available seat mile (in cents)
              
              24.37
              
              
              32.19
              
              (24)%
              
              
              25.69
              
              
              31.50
              
              (18)%Operating
      cost per available seat mile (in cents)
              
              29.18
              
              
              31.70
              
              (8)%
              
              
              29.78
              
              
              31.34
              
              (5)%Operating
      cost per available seat mile (in cents)(excluding
      impairment of
                goodwilland
      othercharges)
              
              24.48
              
              
              31.70
              
              (23)%
              
              
              26.97
              
              
              31.34
              
              (14)%Operating
      revenue per block hour
              $
              1,616
              
              $
              1,678
              
              (4)%
              
              $
              1,567
              
              $
              1,571
              
              -%Operating
      cost per block hour
              $
              1,936
              
              $
              1,653
              
              17%
              
              $
              1,817
              
              $
              1,563
              
              16%Operating
      cost per block hour (in cents)(excluding
      impairment of goodwill and
                othercharges)
              $
              1,624
              
              $
              1,653
              
              (2)%
              
              $
              1,646
              
              $
              1,563
              
              5%Block
      hours
              
              40,491
              
              
              30,820
              
              31%
              
              
              73,625
              
              
              55,910
              
              32%Departures
              
              31,984
              
              
              29,043
              
              10%
              
              
              58,784
              
              
              49,933
              
              18%Average
      daily utilization (block hours)
              
              7.76
              
              
              6.50
              
              19%
              
              
              7.56
              
              
              6.65
              
              14%Average
      stage length (miles)
              
              211
              
              
              185
              
              14%
              
              
              203
              
              
              184
              
              10%Fuel
      consumption (in thousands of gallons)
              
              3,931
              
              
              4,299
              
              (9)%
              
              
              7,617
              
              
              8,124
              
              (6)%Average
      price per gallon
              
              3.79
              
              
              2.25
              
              69%
              
              
              3.51
              
              
              2.15
              
              63%Number
      of operating aircraft (end of period)Saab
      340
              
              40
              
              
              42
              
              (5)%Beech
      1900
              
              5
              
              
              10
              
              (50)%Q400
              
              13
              
              
              -
              
              100%Employees
              
              1,427
              
              
              1,183
              
              21%
 
 Operating
Revenue
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              $
                Change
              
              %Change
              
              
              2008
              
              
              2007
              
              $
                Change
              
              %
                Change(in
      thousands)Operating
      revenuesRegional
      airline services:Pro-rate
      and EAS
              $
              53,565
              
              $
              51,818
              
              $
              1,747
              
              3%
              
              $
              100,320
              
              $
              87,669
              
              $          12,651
              
              14%Capacity
      purchase agreement
              
              11,829
              
              
              -
              
              
              11,829
              
              100%
              
              
              14,981
              
              
              -
              
              14,981
              
              100%Other
              
              55
              
              
              (89)
              
              
              144
              
              (162)%
              
              
              92
              
              
              186
              
              (94)
              
              (51)%Total
      operating revenues
              $
              65,449
              
              $
              51,729
              
              $
              13,720
              
              27%
              
              $
              115,393
              
              $
              87,855
              
              $         
      27,538
              
              31%
 
 Regional
Airline Services
 
 Regional
airline services revenue for the three months ended June 30, 2008 of $65.4
million increased $13.6 million, or 26%, from regional airline services revenue
of $51.8 million for the same period in 2007.  Regional airline
services revenue for the six months ended June 30, 2008 of $115.3 million
increased $27.6 million, or 32%, from regional airline services revenue of $87.7
million for the same period in 2007.  The primary reason for this
increase is the addition of the revenue earned under our new CPA with
Continental.  Revenue earned under the CPA was $11.8 million and $15.0
million for the three and six months ended June 30, 2008,
respectively.
  35
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Colgan
and Segmented Results of Operations–
(Continued)
 
 Revenue
earned under our pro-rate and Essential Air Service (“EAS”) agreements increased
by $1.7 million and $12.7 million during the three and six months ended June 30,
2008.  Average fares increased by 14% and 8% during the three and six
months ended June 30, 2008, as compared to the same periods in
2007.  In addition, revenue under our pro-rate agreements during the
six months ended June 30, 2007 excludes revenue prior to our acquisition of
Colgan on January 18, 2007. The increase in revenue earned under our pro-rate
agreements for the six months ended June 30, 2008 primarily related to recording
regional airline service revenue for a full six month period in
2008.
 
 Operating
Expenses
 
 Three
      Months Ended June 30,
              
              Six
      Months Ended June 30,2008
              
              
              2007
              
              
              $
                Change
              
              %
                Change
              
              
              2008
              
              
              2007
              
              
              $
                Change
              
              
              %
      Change(in
      thousands)Operating
      expensesSalaries,
      wages and benefits
              
              $
              14,190
              
              $
              12,068
              
              $
              2,122
              
              18%
              
              $
              27,091
              
              $
              20,737
              
              $
              6,354
              
              
              31%Aircraft
      fuel
              
              
              14,899
              
              
              9,512
              
              
              5,387
              
              57%
              
              
              26,772
              
              
              15,933
              
              
              10,839
              
              
              68%Aircraft
      maintenance,materials
      and repairs
              
              
              12,031
              
              
              10,438
              
              
              1,593
              
              15%
              
              
              22,002
              
              
              17,630
              
              
              4,372
              
              
              25%Aircraft
      rentals
              
              
              1,940
              
              
              2,381
              
              
              (441)
              
              (19)%
              
              
              3,871
              
              
              4,252
              
              
              (381)
              
              
              (9)%Other
      rentals and landing fees
              
              
              4,357
              
              
              2,628
              
              
              1,729
              
              66%
              
              
              7,311
              
              
              4,568
              
              
              2,743
              
              
              60%Ground
      handling services
              
              
              3,176
              
              
              3,107
              
              
              69
              
              2%
              
              
              7,062
              
              
              5,828
              
              
              1,234
              
              
              21%Commissions
      and passengerrelated
      expense
              
              
              5,784
              
              
              5,380
              
              
              404
              
              8%
              
              
              10,678
              
              
              8,974
              
              
              1,704
              
              
              19%Depreciation
      and amortization
              
              
              3,240
              
              
              1,203
              
              
              2,037
              
              169%
              
              
              5,236
              
              
              2,176
              
              
              3,060
              
              
              141%Other
              
              
              6,147
              
              
              4,232
              
              
              1,915
              
              45%
              
              
              11,138
              
              
              7,313
              
              
              3,825
              
              
              52%Impairment
      of goodwill and other charges
              
              
              12,619
              
              
              -
              
              
              12,619
              
              100%
              
              
              12,619
              
              
              -
              
              
              12,619
              
              
              100%Total
      operating expenses
              
              
              78,383
              
              
              50,949
              
              
              27,434
              
              54%
              
              
              133,780
              
              
              87,411
              
              
              46,369
              
              
              53%Operating
      income
              
              $
              (12,934)
              
              $
              780
              
              $
              (13,714)
              
              (1,758)%
              
              $
              (18,387)
              
              $
              444
              
              $
              (18,831)
              
              
              (4,241)%Operating
      margin
              
              
              (19.8)%
              
              
              1.5%
              
              (21.3)
      pts.
              
              
              
              
              (15.9)%
              
              
              0.5%
              
              (16.4)
      pts.
 
 Salaries,
wages and benefits increased by $2.1 million and 18% and $6.4 million and 31%
during the three and six months ended June 30, 2008.  Excluding the
effect of the previously discussed change in time periods presented, this
expense increased primarily due to the increase in the average number of
employees of 21%, largely attributed to the growth of Colgan’s operating fleet,
as well as wage rate and benefit increases for existing employees.
 
 Aircraft
fuel expense increased $5.4 million, or 57%.  This expense increased
primarily due to the increase in fuel costs.  Colgan’s average price
paid per gallon increased 69% and 63%, respectively, during the three and six
months ended June 30, 2008 as compared to the same periods in
2007.  Offsetting this increase was a decrease in the amounts of
gallons consumed from the retirement of seven of our Saab and Beech aircraft
since June 30, 2007.
  36
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Colgan
and Segmented Results of Operations–
(Continued)
 
 Aircraft
maintenance, materials and repairs expense increased by $1.6 million and 15% for
the three months ended June 30, 2008 and $4.4 million and 25% for the six months
ended June 30, 2008.  Excluding the additional days of expense
previously discussed, this expense increased primarily due to increased costs
related to our increase in operations.
 Other rentals and landing fees
increased $1.7 million, or 66% for the three months ended June 30, 2008 and $2.7
million and 60% during the six months ended June 30, 2008.  This was a
result of the increase in departures, as well as a change in the mix of cities
we serve.  We have increased levels of flying into markets with
significantly higher landing fees, such as Newark/Liberty International
Airport.
 
 Ground
handling services increased $1.2 million or 21% during the six months ended June
30, 2008.  This was primarily attributable to increased deicing
expense in Colgan’s pro-rate operations, as the first quarter of 2008
experienced more severe winter weather than the same period in
2007.
 
 Depreciation
and amortization expense increased by $2.0 million and $3.1 million,
respectively, for the three and six months ended June 30, 2008.  This
is primarily related to $1.8 million and $2.3 million, respectively, in
depreciation expense incurred related to our new Q400 aircraft.
 
 Other
expenses increased by $1.9 million and 45% during the three months ended June
30, 2008, as compared to the same period in 2007.  This primarily relates
to increased pilot training expense attributable to the introduction of the Q400
aircraft.  In addition, crew travel expense increased as a result of
increased block hours and departures.  Other expenses increased by $3.8
million and 52% during the six months ended June 30, 2008, as compared to the
same period in 2007.  This increase relates to the changes in time periods
presented, along with increased pilot training expense and crew travel
expense.
 
 Liquidity
and Capital Resources
 
 We
generate cash primarily by providing regional airline and related services to
our code-share partners.  As of June 30, 2008, we had cash and cash
equivalents of $65.2 million.  Net cash used from operations was $1.1
million for the six months ended June 30, 2008 and net cash provided by
operations was $280.9 million for the six months ended June 30,
2007.  We expect our cash flow from operations and our financing
arrangements to be sufficient to meet our ongoing capital requirements and
financial commitments.  Additionally, we do not expect to make income
tax payments during 2008-2010 due to the accelerated depreciation recognized for
tax purposes on the newly acquired CRJ-900 and Q400 aircraft, and we expect to
receive a federal income tax refund ranging between $20 million and $25 million
in early 2009.
 
 As of
June 30, 2008, we had $136 million par amount of Auction Rate Securities
instruments (“ARS”).  As discussed further in Note 11 in Item 1 of
this Form 10-Q, these securities are not currently liquid.  We had
planned to monetize a portion of our ARS portfolio throughout 2008 to fund the
non-financed portion of our aircraft deliveries.  While we wait for
both the ARS market to rationalize and for investor demand to return, we have
arranged for a margin loan facility (the “Credit Facility”) to be used to
support our aircraft purchases.  In June, we drew an additional $20
million increasing total borrowings under the Credit Facility to $80
million.The Credit
Facility is pre-payable at any time prior to maturity on February 28,
2009.  The Credit Facility interest rate is indexed to LIBOR and was
4.5% at June 30, 2008.  We believe that this short-term financing
facility in addition to cash flows from our operations is adequate to meet our
aircraft funding requirements and related debt covenants.
 
 In
February 2005, we issued $121.0 million principal amount of our 3.25% senior
convertible notes due 2025 (the “Notes”).  The Notes bear interest at
the rate of 3.25% per year, payable in cash semiannually in arrears on February
15 and August 15 of each year.  The Notes are convertible into a
combination of cash and common stock at a conversion price of approximately
$13.22.  The Notes are convertible in any quarter subsequent to a
quarter in which the closing price of our common stock exceeds $15.86 for 20 of
the last 30 trading days.  This condition was not met during the
second quarter of 2008, and consequently the Notes are not convertible at this
time.  Due to the option value imbedded within each Note, the Notes
generally trade at values higher than the fair value of the common stock and
cash into which they could be converted.  Although the Notes have been
convertible and will possibly be convertible during future periods, we do not
expect a significant number of holders to tender the Notes
  37
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Liquidity
and Capital Resources – (Continued)
 
 for
conversion.  Nonetheless, in any period during which the holders have
the right to exercise the conversion option, the Notes’ $121.0 million par value
will be classified as a current liability on our balance sheet.
 
 On
February 17, 2007, we entered into a purchase agreement for up to 25 firm and 20
option Q400 aircraft with Bombardier, Inc.  Under the agreement, we
were obligated to purchase a minimum of 15 Q400 regional aircraft.  As
of June 30, 2008, Colgan operated 13 Q400 aircraft and the remaining two
aircraft delivered in July 2008.  We have a right of cancellation for
an additional ten firm aircraft for which notice is required by December
2008.  If we do not exercise these cancellation rights, then we will
take delivery of these ten additional aircraft between April 2010 and February
2011.  In addition to the 25 firm aircraft, we have optional rights to
acquire 20 Q400 aircraft that would be delivered between October 2010 and
November 2011.
 
 On April
27, 2007, Delta Air Lines assigned to us its rights to purchase 16 CRJ-900
aircraft from Bombardier, Inc.  As of June 30, 2008 we had accepted
delivery of nine of these aircraft.  We will take delivery of the
remaining seven aircraft by May 2009.  Under our capacity purchase
agreement with Delta, Delta may also require us to purchase and operate an
additional seven CRJ-900 aircraft.
 
 We are
required to make pre-delivery payments to Bombardier, which are refunded to us
upon the delivery of the aircraft.  During 2007, we executed two
pre-delivery payment financing facilities (the “PDP Facilities”) withExport
Development Canada (“EDC”) for up to $80 million to provide borrowings to fund
our pre-delivery payment commitments to Bombardier.  Borrowings under
the pre-delivery payment facilities bear interest at the 3-month LIBOR rate plus
1.65%, which was 4.43% as of June 30, 2008.  The outstanding balance
for the borrowings as of June 30, 2008 was $16 million.  As each
aircraft is delivered to us, we repay the associated borrowings under the PDP
Facilities.
 
 Upon
delivery of our CRJ-900 and Q400 aircraft, we obtained long-term financing for
the aircraft, the balance of which was $386 million at June 30,
2008.  We expect to finance the purchase of the remaining nine
aircraft using a combination of internal capital resources and debt
financing.  We have obtained commitments from EDC to finance the
aircraft for a term of 15 years from the delivery date of each
aircraft.  As of June 30, 2008 the approximate remaining purchase
price was $209 million. We expect to debt finance $177 million and fund the
balance of $32 million from internal capital resources.
 
 To reduce
the financial risk associated with changes in long-term interest rates while we
take delivery of CRJ-900 aircraft, we initiated a cash flow hedging program
during July 2007.  The program consists of interest rate swaps whereby
we agree to pay a fixed interest rate and receive the six-month LIBOR
rate.  The swaps have been or will be cash settled when the permanent
financing is obtained at the time we take delivery of the
aircraft.  Should interest rates change by 100 basis points before we
take delivery, and assuming that we do not hedge the anticipated debt on the
remaining firm noncancelable aircraft, aggregate interest expense in the first
year of financing would change by approximately $1.0 million.  During
the three and six months ended June 30, 2008, the Company made interest rate
swap settlement payments of $4.4 million and $20.5 million, respectively, in
connection with its cash flow hedging program.  As of June 30, 2008,
the Company expected to make additional interest rate swap settlement payments
of $1.4 million during 2008.
 
 We
maintain a revolving line of credit with an institutional lender for a principal
amount not to exceed $8.5 million or 75% of the net unpaid balance of eligible
accounts receivable.  This instrument has an interest rate of Prime
plus 0.25%, which was 5.25% as of June 30, 2008. In April 2008, we extended the
termination date of the loan to April 15, 2009.  Amounts outstanding
under the line of credit were $8.3 million at June 30, 2008.
 
 As part
of our agreement to purchase Colgan, we agreed to purchase from one of its
selling shareholders two aircraft hangars located in Manassas, Virginia if the
selling shareholder is unable to consummate a sale to a
third-party.  The Company agreed to purchase the two hangars for a
purchase price of $6.4 million, which approximates their fair
value.  We currently expect the current owner of the hangars to sell
the hangars to a third party, and that we will continue to lease them on a
short-term basis. If the current owner is unable to sell these hangars to a
third party, we could still be required to purchase these hangars in the
future.
  38
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Liquidity
and Capital Resources – (Continued)
 
 The IRS
is currently examining our tax records for years 2003 through
2005.  The IRS has proposed adjustments related to certain key
transactions that we undertook during those periods.  The adjustments
would increase our tax liability for these periods by approximately $33 million
(net of offsetting timing differences within these periods) plus
penalties.  We have filed a formal protest with respect to these
proposed adjustments and have started an administrative appeals review within
the IRS.  We do not expect resolution of this matter during
2008.  We continue to believe that the tax positions we have taken are
appropriate and in compliance with tax law and regulations.  Although
we believe our tax positions are appropriate, we have recorded reserves totaling
$16.5 million.  While we believe our reserves are adequate for each
identified issue, our liquid assets would be significantly reduced if we are
ultimately required to make payments to the IRS for taxes and related interest
and penalties associated with these proposed adjustments.
 
 Operating activities. Net
cash used in operating activities was $1.1 million during the six months ended
June 30, 2008.  This was due primarily to the $20.5 million in hedge
related payments made during the first six months.  This decrease in
cash was offset by various changes in our operating assets and
liabilities.
 
 Net cash
provided by operating activities was $280.9 million during the six months ended
June 30, 2007.  This was due primarily to the $269.2 million increase
in deferred revenue, which was comprised of proceeds received from the
assignment of our Northwest claims.
 
 Investing activities. 
Net cash provided by investing activities for the six months ended June 30, 2008
was $31.5 million.  This was primarily attributable to net proceeds of
investments in ARS of $50.8 million, offset by $19.4 million in cash purchases
of property and equipment, primarily consisting of flight
equipment.
 
 Cash used
for investing activities for the six months ended June 30, 2007 was $209.7
million.  This is primarily attributable to net purchases of
short-term investments in marketable debt securities of $136.1 million and $57.6
million in pre-delivery payments for the Q400 and CRJ-900
aircraft.  In addition, the acquisition of Colgan decreased cash by
$8.4 million, net of cash acquired.
 
 We expect
non-aircraft cash capital expenditures for the remainder of 2008 to be
approximately $5 million. We expect to fund the non-aircraft capital
expenditures, with existing cash resources and cash flows generated from our
operations.
 
 Financing activities. Net
cash provided by financing activities for the six months ended June 30, 2008
totaled $8.0 million.  During the six months of 2008, we received $91.8
million in debt proceeds, primarily related to the Credit Facility.  This
was offset by $61.5 million of principal payments on debt obligations, primarily
related to our pre-delivery payment facilities, and the $20.0 million purchase
of our Series A Preferred Share from Northwest on January 4, 2008.
 
 Cash used
in financing activities for the six months ended June 30, 2007 totaled $37.5
million, which related to $12.8 million of debt principal payments made and $0.4
million of payments made on capital leases.  In addition, we purchased
$27.2 million of treasury shares as part of our share repurchase
program.
 
 Deferred tax
asset.  We have recorded a deferred tax asset of $83.3
millionrelated to
future tax benefits.  This primarily relates to future tax benefits we
will receive for our deferred ASA revenue.  As discussed in Note 2 to
our condensed consolidated financial statements, the deferred ASA revenue is
being recognized over the 11-year term of the ASA.
 
 Guarantees and
indemnifications. We are the guarantor of approximately $2.1 million
aggregate principal amount of tax-exempt special facilities revenue bonds and
interest thereon. These bonds were issued by the Memphis-Shelby County Airport
Authority (the “Authority”) and are payable solely from our rentals paid under a
long-term lease agreement with the Authority. The leasing arrangement is
accounted for as an operating lease in the consolidated financial
statements.
 
 We had
$4.9 million and $5.3 million invested in certificates of deposit and in other
similar instruments at June 30, 2008 and December 31, 2007,
respectively.  These certificates of deposit have various maturities,
all less
  39
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Liquidity
and Capital Resources – (Continued)
 
 than one
year and are used as collateral for standby letter of credit facilities that we
maintain for various vendors.  As of June 30, 2008 and December 31,
2007, we had $3.1 million and $2.7 million of standby letters of credit
outstanding, respectively.
 
 We are
party to numerous contracts and real estate leases in which it is common for us
to agree to indemnify third parties for tort liabilities that arise out of or
relate to the subject matter of the contract or occupancy of the leased
premises. In some cases, this indemnity extends to related liabilities arising
from the negligence of the indemnified parties, but usually excludes any
liabilities caused by their gross negligence or willful misconduct.
Additionally, we typically indemnify the lessors and related third parties for
any environmental liability that arises out of or relates to our leased
premises.
 
 In our
aircraft lease agreements, we typically indemnify the prime lessor, financing
parties, trustees acting on their behalf and other related parties against
liabilities that arise from the manufacture, design, ownership, financing, use,
operation and maintenance of the aircraft and for tort liability, whether or not
these liabilities arise out of or relate to the negligence of these indemnified
parties, except for their gross negligence or willful misconduct.
 
 We expect
that we would be covered by insurance (subject to deductibles) for most tort
liabilities and related indemnities described above with respect to real estate
we lease and aircraft we operate.
 
 We do not
expect the potential amount of future payments under the foregoing indemnities
and agreements to be material.
 
 Off-Balance Sheet
Arrangements.  None of our operating lease obligations are
reflected on our consolidated balance sheets. We are responsible for all
maintenance, insurance and other costs associated with these leased assets;
however, the lease agreements do not include a residual value guarantee, fixed
price purchase option or other similar guarantees.  We have no other
off-balance sheet arrangements.
 
 Fair
Value Measurements
 
 As
discussed in Note 4 in Item 1 of this Form 10-Q, the Company adopted the
provisions of SFAS 157 effective January 1, 2008.  The Company has
determined that it utilizes unobservable (Level 3) inputs in determining the
fair value of its ARS and observable (Level 2) inputs in determining the fair
value of its cash flow hedges, which totaled $127.4 million and $1.4 million,
respectively, at June 30, 2008.
 
 The
Company’s ARS instruments are classified as available for sale securities and
reflected at fair value.  In prior periods, due to the auction process
which took place every 30-35 days for most securities, quoted market prices were
readily available, which would qualify as Level 1 under SFAS
157.  However, due to events in credit markets during first quarter
2008, the auction events for most of these instruments failed, and, therefore,
the Company has determined the estimated fair values of these securities
utilizing a discounted cash flow analysis.  This analysis considers,
among other items, the collateralization underlying the security investments,
the creditworthiness of the counterparty, the timing of expected future cash
flows, and an estimate of when the security is expected to have a successful
auction or be called by the issuer.  These securities were also
compared, when possible, to other observable market data with similar
characteristics to the securities held by the Company.
 
 Due to
these events, the Company reclassified these instruments as Level 3 during first
quarter 2008 and recorded an impairment charge of $8.7 million during the second
quarter 2008.  The Company currently believes that this decline in
fair value is due entirely to liquidity issues, because the underlying assets
for the majority of securities are almost entirely backed by the U.S.
government.  The Company will continue to re-evaluate each of these factors
as market conditions change in subsequent periods.
 
 The
Company has determined that all significant inputs used to value its derivatives
fall within Level 2 of the fair value hierarchy, although the credit valuation
adjustments associated with its derivatives utilize Level 3 inputs, such as
estimates of current credit spreads to evaluate the likelihood of default by
itself and its
  40
 Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
  Fair
Value Measurements – (Continued)
 
 counterparties.  As
a result, the Company has determined that its derivative valuations in their
entirety are classified in Level 2 of the fair value hierarchy.
 
 As
discussed in Note 4 in Item 1 of this Form 10-Q, any changes in the fair values
of the Company’s derivative financial instruments are subject to the
requirements of SFAS 133.  Any changes in fair value that are
considered to be effective, as defined, are offset within OCI until the period
in which the expected cash flow affects earnings.  Any changes in the
fair value of its derivatives that are ineffective, as defined, or do not
qualify for special hedge accounting, are reflected in earnings within interest
expense, in the period of the change.
 
 Forward-Looking
Statements
 
 Statements
in this Quarterly Report on Form 10-Q (or otherwise made by or on the behalf of
Pinnacle Airlines Corp.) contain various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended (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 progress, 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 only once per
quarter, and not to update that information until the next quarter.
 
 You
should understand that many important factors, in addition to those discussed in
this report, could cause our results to differ materially from those expressed
in the forward-looking statements. Some of the potential factors that could
affect our results are described in Item 1A Risk Factorsof our annual
report and in this item under “Outlook.”  In light of these risks and
uncertainties, and others not described in this report, the forward-looking
events discussed in this report might not occur, might occur at a different
time, or might cause effects of a different magnitude or direction than
presently anticipated.
  41
  Item 3. Quantitative and Qualitative Disclosures About Market
Risk
 
 Because
the majority of our business is under capacity purchase agreements, our exposure
to market risks such as commodity price risk (e.g., aircraft fuel prices) is
primarily limited to our pro-rate operations which comprise approximately 23% of
our consolidated revenues.  With our 2007 acquisition of Colgan and the
subsequent contracts with Delta and Continental regarding the purchase of
aircraft, we are exposed to commodity price and interest rate risks as discussed
in our 2007 Form 10-K. There have been no material changes in market risk from
the information provided in Item 7A “Quantitative and Qualitative
Disclosure About Market Risk” in our 2007 Form 10-K except as
follows:
 
 Commodity
Price Risk
 
 Our
pro-rate operations have exposure to certain market risks associated with
aircraft fuel, which has recently experienced significant price increases. 
Aviation fuel expense is a significant expense for any air carrier and even
marginal changes in the cost of fuel greatly affect a carrier’s
profitability.  Standard industry contracts do not generally provide
protection against fuel price increases, nor do they ensure availability of
supply.  However, our capacity purchase agreements require that fuel be
provided to us at no cost, thereby reducing our overall exposure to fuel price
fluctuations.  However, the Company’s pro-rate code-share agreements with
US Airways, Continental, and United Air Lines expose the Company to fuel price
risk.  Slightly offsetting our fuel risk, our agreement with Continental
provides for an adjustment to the pro-rate revenue we receive from Continental
based on projected changes in fuel prices.  For the projected annualized
fuel consumption related to these agreements, each ten percent change in the
price of jet fuel amounts to an approximate $6.3 million change in annual fuel
costs.
 
 Item 4.  Controls and Procedures
 
 The
Company, under the supervision and participation of its management, including
the Chief Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15 and 15d-15.   Based
upon that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective. 
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and
completely and accurately reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms.  Except as discussed
below, there has been no change in our internal control over financial reporting
during the six months ended June 30, 2008 that has materially affected, or is
reasonably likely to materially affect the our internal control over financial
reporting.
 
 Change
in Internal Controls
 
 During
the first quarter of 2008, the Company implemented a new financial system that
encompasses financial reporting, the general ledger, inventory control, and
other similar and related processes.  The new financial system was
implemented to enhance the Company’s business processes.
 
 The
Company has remediated a deficiency related to its cash flow hedging activies,
as previously discussed in its Form 10-Q/A for the period ended March 31,
2008.
 
  42
  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 1A.
Risk Factors
  There are
no material changes to the risk factors described under the title “Risk Factors”
in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
  
 Item 2.  Unregistered Sales of Equity
Securities and Use of Proceeds
 
 None.
 
 Item 3.  Defaults Upon Senior
Securities
 
 None.
 
 Item 4.  Submission of Matters to a Vote
of Security Holders
 
 The
Company’s Annual Meeting of Stockholders was held on May 15,
2008.  The following Class I directors were elected to our Board of
Directors:
 
 Nominee
              
              Votes
      For
              
              Votes
      WithheldIan
      Massey
              
              12,256,132
              
              158,218James
      E. McGehee Jr.
              
              12,160,150
              
              254,200Philip
      H. Trenary
              
              12,260,612
              
              153,738
 
 A
proposal to ratify the appointment by the Audit Committee of the Board of
Directors of Ernst & Young LLP as the principal independent auditors for
2008 was voted on by stockholders as follows:
 
 Votes
      For
              
              Votes
      Against
              
              Votes
      Abstaining12,377,633
              
              27,109
              
              9,608
 
 A
proposal to amend the 2003 Stock Incentive Plan was voted on by stockholders as
follows:
 
 Votes
      For
              
              Votes
      Against
              
              Votes
      Abstaining7,279,973
              
              2,013,315
              
              3,706
 
 The
following directors’ terms of office as a director continued after the Annual
Meeting: Donald J. Breeding, Ian Massey, James E. McGehee, Jr., Thomas S.
Schreier, Jr., Alfred T. Spain, R. Philip Shannon, Nicholas R. Tomassetti and
Philip H. Trenary.
 
 Item 5.  Other Information
 
 None.
  43
  
 Item
6.  Exhibits
 
 The
following exhibits are filed as part of this Form 10-Q.
 
 Exhibit
 Number                 Description
 3.1
              Amended
      and Restated Certificate of Incorporation of the registrant (Incorporated
      by reference to the Company’s Registration Statement Form S-1
      (Registration No. 333-83359), as amended (the “S-1”) initially filed on
      February 25, 2002)
 3.1.1
              Second
      Amended and Restated Certificate of Incorporation of the registrant
      (Incorporated by reference to the
S-1)
 3.2
              Certificate
      of Designations for Series A preferred stock of the registrant
      (Incorporated by reference to the
S-1)
 3.3
              Bylaws
      of the registrant (Incorporated by reference to the
  S-1)
 3.3.1
              Amended
      and Restated Bylaws, dated January 14, 2003, of the registrant
      (Incorporated by reference to the
S-1)
 4.1
              Specimen
      Stock Certificate (Incorporated by reference to the
  S-1)
 4.2
              Rights
      Agreement between the registrant and EquiServe Trust Company, N.A., as
      Rights Agent (Incorporated by reference to the
  S-1)
 4.3
              Indenture,
      3.25% Senior Convertible Notes due 2025, dated as of February 8, 2005, by
      and between Pinnacle Airlines Corp. and Deutsche Bank Trust Company
      (Incorporated by reference to Exhibits 99.2 and 99.3 to the
      Registrant’s Current Report on Form 8-K filed on February 8,
      2005)
 4.4
              Registration
      Rights Agreement made pursuant to the Purchase Agreement dated February 3,
      2005, dated as of February 8, 2005, by and among Pinnacle Airlines Corp.,
      Merrill Lynch, Pierce, Fenner & Smith Incorporated and Raymond James
      & Associates, Inc. (Incorporated by reference to Exhibits 99.2
      and 99.3 to the Registrant’s Current Report on Form 8-K filed on
      February 8, 2005)
 10.1
              Loan
      Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc. and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)
 10.2
              Sublease
      Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)
 10.2.1
              First
      Amendment to Sublease Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)
 10.2#
              Guaranty
      Agreement between Pinnacle Airlines, Inc. and First Tennessee Bank
      National Association (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on June 23,
  2005)
 10.3
              Engine
      Lease Agreement between Pinnacle Airlines, Inc. and Northwest Airlines,
      Inc. (Incorporated by reference to the
S-1)
 10.3.1
              First
      Amendment to Engine Lease Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)
 10.3#
              Revolving
      Credit Note dated as of June 16, 2005 between Pinnacle Airlines, Inc. and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)
 10.4#
              Security
      Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc. and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)
 10.5#
              Negative
      Pledge Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc.
      and First Tennessee Bank National Association (Incorporated by reference
      to the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)
 10.6#
              Negative
      Pledge Agreement dated as of June 16, 2005 between Pinnacle Airlines Corp.
      and First Tennessee Bank National Association (Incorporated by reference
      to the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)
 10.8†
              Pinnacle
      Airlines Corp. 2003 Stock Incentive Plan (Incorporated by reference to the
      S-1)
 10.9
              Non-Qualified
      Stock Option Agreement for options granted under the Pinnacle Airlines
      Corp. 2003 Stock Incentive Plan (Incorporated by reference to the
      S-1)
  44
  Exhibit
 Number                 Description
 10.10†
              Pinnacle
      Airlines, Inc. Annual Management Bonus Plan (Incorporated by reference to
      the S-1)
 10.11
              Amended
      and Restated Sublease Agreement dated as of January 14, 2003 between
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (SBN Facilities)
      (Incorporated by reference to the
S-1)
 10.12
              Sublease
      Agreement dated as of August 1, 2002 between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (TYS Facilities) (Incorporated by reference to
      the S-1)
 10.13
              Amended
      and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (DTW Facilities) (Incorporated by reference to
      the S-1)
 10.14
              Amended
      and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (MEM Facilities) (Incorporated by reference to
      the S-1)
 10.15
              Amended
      and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (MSP Facilities) (Incorporated by reference to
      the S-1)
 10.16
              Intentionally
      omitted
 10.17
              Intentionally
      omitted
 10.18
              Lease
      Guaranty issued by the registrant to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)
 10.19
              Sublease
      Guaranty issued by the registrant to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)
 10.20
              Airline
      Services Agreement dated as of March 1, 2002 among the registrant,
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by
      reference to the S-1)
 10.21
              Airline
      Services Agreement dated as of January 14, 2003 among the registrant,
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by
      reference to the S-1)
 10.21.1
              Amendment
      No. 1 dated as of September 11, 2003 to the Airline Services Agreement
      dated as of January 14, 2003 among the registrant, Pinnacle Airlines, Inc.
      and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)
 10.21.2
              Amendment
      No. 2 dated as of November 26, 2003 to the Airline Services Agreement
      dated as of January 14, 2003 among the registrant, Pinnacle Airlines, Inc.
      and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)
 10.22
              Amended
      and Restated Ground Handling Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)
 10.23
              Amended
      and Restated Information Technology Services Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)
 10.24
              Amended
      and Restated Family Assistance Services Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)
 10.25
              Amended
      and Restated Manufacturer Benefits Agreement between Pinnacle Airlines,
      Inc. and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)
 10.26
              Form
      of Amended and Restated Preferential Hiring Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)
 10.27
              Purchase
      Agreement, Senior Convertible Notes due 2025, dated as of February 3,
      2005, by and among, Pinnacle Airlines Corp., Merrill Lynch, Pierce, Fenner
      & Smith Incorporated and Raymond James & Associates, Inc.
      (Incorporated by reference to the Registrant’s Current Report on Form 8-K
      filed on February 8, 2005)
 10.28†
              Amended
      and Restated Management Compensation Agreement between Pinnacle Airlines,
      Inc. and Philip H. Trenary (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on August 12,
  2005)
 10.29†
              Amended
      and Restated Management Compensation Agreement between Pinnacle Airlines,
      Inc. and Peter D. Hunt (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on August 12,
  2005)
 10.30†
              Amended
      and Restated Management Compensation Agreement between Pinnacle Airlines,
      Inc. and Douglas W. Shockey (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on August 12,
  2005)
 10.31†
              Form
      of Indemnity Agreement between Pinnacle Airlines Corp. and its directors
      and officers (Incorporated by reference to the Registrant’s Current Report
      on Form 8-K filed on February 1,
2006)
  45
  Exhibit
 Number                 Description
 10.32
              Assignment
      of Claim Agreement between Pinnacle Airlines, Inc. and Goldman Sachs
      Credit Partners, L.P., dated as of October 5,
  2006
 10.40
              Assumption
      and Claim Resolution Agreement between Pinnacle Airlines Corp. and
      Northwest Airlines, Inc., dated as of December 20, 2006 (Incorporated
      by reference to the Registrant’s Current Report on Form 8-K filed on
      January 3, 2007)
 10.41
              Amended
      and Restated Airline Services Agreement by and among Pinnacle Airlines,
      Inc., Pinnacle Airlines Corp. and Northwest Airlines, Inc., dated December
      15, 2006, effective as of January 1,
2007
 10.50
              Stock
      Purchase Agreement, dated as of January 18, 2007, by and among Colgan Air,
      Inc. and Pinnacle Airlines Corp.  (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on January 24,
      2007)
 10.60
              Capacity
      Purchase Agreement between Continental Airlines, Inc., Pinnacle Airlines
      Corp. and Colgan Air, Inc., dated as of February 2,
  2007
 10.61
              Purchase
      Agreement between Bombardier Inc. and Pinnacle Airlines Corp., relating to
      the purchase of twenty-five (25) Bombardier Q400 series aircraft, dated as
      of February 17, 2007
 10.65
              Delta
      Connection Agreement among Delta Air Lines, Inc., Pinnacle Airlines Corp.
      and Pinnacle Airlines, Inc., dated as of April 27,
  2007
 10.66
              Assignment
      and Assumption Agreement by and among Delta Air Lines, Inc., Pinnacle
      Airlines, Inc., Pinnacle Airlines Corp., and Bombardier Inc., dated as of
      April 26, 2007
 10.67
              Purchase
      Agreement between Bombardier Inc. and Pinnacle Airlines, Inc, relating to
      the purchase of sixteen (16) Bombardier CRJ-900 series aircraft, dated as
      of April 26, 2007
 10.70
              Credit
      Facility Agreement between Citigroup Global Markets, Inc. and Pinnacle
      Airlines Corp., dated as of March 11,
2008.
 10.71
              Amendment
      No. 1, dated as of June 18, 2008, to the Credit Facility Agreement between
      Pinnacle Airlines Corp. and Citigroup Global Markets, Inc., dated as of
      March 11, 2008
 10.99.1#
              Promissory
      Note issued by Pinnacle Airlines, Inc. to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)
 10.99.2#
              Guarantee
      of Promissory Note issued by registrant to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)
 10.99.3#
              Revolving
      Credit Facility dated as of January 14, 2003 between Pinnacle Airlines,
      Inc. and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)
 10.99.4#
              First
      Amendment dated as of February 5, 2003 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the
  S-1)
 10.99.5#
              Second
      Amendment dated as of November 28, 2003 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the
  S-1)
 10.99.6#
              Third
      Amendment dated as of December 13, 2004 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the Registrant’s Current
      Report on Form 8-K filed on February 8,
  2005)
 10.99.7#
              Fourth
      Amendment dated as of February 8, 2005 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the Registrant’s Current
      Report on Form 8-K filed on February 8,
  2005)
 10.99.8#
              Guaranty
      dated as of January 14, 2003 issued by registrant to Northwest Airlines,
      Inc. (Incorporated by reference to the
S-1)
 21.1
              List
      of Subsidiaries (Incorporated by reference to the
  S-1)
 23.1
              Consent
      of Independent Registered Public Accounting
Firm
 31.1*                      Certification
of Chief Executive Officer
 31.2*                      Certification
of Chief Financial Officer
 32*                        
Certifications of CEO and CFO
 
 *
              Filed
      herewith
 †
              Management
      contract or compensatory plan or
arrangement
 #                             Cancelled
agreement referenced in this Form 10-Q
  46
  
 
 
 
 
 
 
 
 
 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.
 
 
 
 
 
 
 PINNACLE
      AIRLINES CORP.By:
              /s/
      Philip H. TrenaryPhilip
      H. TrenaryDate:  August
      11, 2008
              President
      and Chief Executive OfficerBy:
              /s/
      Peter D. HuntPeter
      D. HuntDate:  August
      11, 2008
              Vice
      President and Chief Financial Officer