##### Table of Contents



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 March 31,
2004
 or [  ]
    
    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
    
    03-0376558(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)1689 Nonconnah Blvd, Suite 111Memphis, Tennessee
    
    38132(Address of principal executive offices)
    
    (Zip Code)
 901-348-4100(Registrants telephone number, including area code) Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ]
    
    No [  ]
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [  ]
    
    No [ X ]
 As of April 30, 2004, [21,892,060] shares of common stock were outstanding.




---



##### Table of Contents



Table of Contents  
 PART
I FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2004 and 2003
    
    
    1Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    11Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATION
    
    
    17Item 1. Legal Proceedings
    
    
    17Item 2. Changes in Securities and Use of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits and Reports on Form 8-K.
    
    
    18EX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32  SECTION 906 CERTIFICATION OF THE CEO & CFO




---



##### Table of Contents



Part I Financial Information 
 Item 1. Financial Statements Pinnacle Airlines Corp. 
 Condensed Consolidated
Statements of Income (Unaudited)
 (in thousands, except
per share data)
 Three Months Ended March 31,2004
    
    2003Operating revenues:Passenger
    
    $
    133,387
    
    
    $
    98,605Other
    
    
    492
    
    
    
    1,957Total operating revenues
    
    
    133,879
    
    
    
    100,562Operating expenses:Salaries, wages and benefits
    
    
    23,219
    
    
    
    19,156Aircraft fuel and taxes
    
    
    16,540
    
    
    
    10,881Aircraft maintenance, materials and repairs
    
    
    5,646
    
    
    
    2,966Aircraft rentals
    
    
    43,620
    
    
    
    29,539Other rentals and landing fees
    
    
    8,077
    
    
    
    6,777Ground handling services
    
    
    13,503
    
    
    
    9,324Depreciation and amortization
    
    
    721
    
    
    
    712Other
    
    
    8,209
    
    
    
    6,868Total operating expenses
    
    
    119,535
    
    
    
    86,223Operating income
    
    
    14,344
    
    
    
    14,339Operating
income as a percentage of operating revenue
    
    
    10.7
    %
    
    
    14.3
    %Nonoperating income (expense)Interest expense
    
    
    (1,235
    )
    
    
    (1,571
    )Miscellaneous income, net
    
    
    85
    
    
    
    104Total nonoperating expense
    
    
    (1,150
    )
    
    
    (1,467
    )Income before income taxes
    
    
    13,194
    
    
    
    12,872Income tax expense
    
    
    5,140
    
    
    
    4,848Net income
    
    $
    8,054
    
    
    $
    8,024Basic
earnings per share
    
    $
    0.37
    
    
    $
    0.37Diluted
earnings per share
    
    $
    0.37
    
    
    $
    0.37Shares used
in computing basic earnings per share
    
    
    21,892
    
    
    
    21,892Shares used
in computing diluted earnings per share
    
    
    21,905
    
    
    
    21,892
 The accompanying notes are an integral part of these consolidated financial statements. 1




---



##### Table of Contents



Pinnacle Airlines Corp. 
 Condensed Consolidated
Balance Sheets
 (in thousands, except
share data)
 March 31,
    
    December 31,2004
    
    2003(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    36,600
    
    
    $
    31,523Receivables, principally from Northwest, net
    
    
    18,641
    
    
    
    17,307Spare parts and supplies, net
    
    
    3,986
    
    
    
    3,773Prepaid expenses and other assets
    
    
    7,363
    
    
    
    6,810Deferred income taxes
    
    
    2,505
    
    
    
    2,549Total current assets
    
    
    69,095
    
    
    
    61,962Property and equipment:Aircraft and rotable spares
    
    
    32,275
    
    
    
    32,779Other property and equipment
    
    
    14,102
    
    
    
    14,081Office furniture and fixtures
    
    
    1,258
    
    
    
    1,25847,635
    
    
    
    48,118Less accumulated depreciation
    
    
    (14,105
    )
    
    
    (13,832
    )Net property and equipment
    
    
    33,530
    
    
    
    34,286Deposits with Northwest
    
    
    15,225
    
    
    
    13,300Cost in excess of net assets acquired, net
    
    
    18,422
    
    
    
    18,422Total assets
    
    $
    136,272
    
    
    $
    127,970
 The accompanying notes are an integral part of these consolidated financial statements. 2




---



##### Table of Contents



Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands, except share data) March 31,
    
    December 31,2004
    
    2003(Unaudited)Liabilities and stockholders equity (deficiency)Current liabilities:Accounts payable
    
    $
    14,576
    
    
    $
    9,798Accrued expenses
    
    
    10,763
    
    
    
    11,622Line of credit
    
    
    10,000
    
    
    
    10,000Income taxes payable
    
    
    4,459
    
    
    
    5,596Current portion of deferred credits
    
    
    227
    
    
    
    217Current portion of note payable to Northwest
    
    
    12,000
    
    
    
    12,000Total current liabilities
    
    
    52,025
    
    
    
    49,233Deferred credits
    
    
    658
    
    
    
    719Deferred income taxes
    
    
    6,917
    
    
    
    6,400Note payable to Northwest
    
    
    117,000
    
    
    
    120,000Commitments and contingenciesStockholders equity (deficiency):Preferred stock, par value $0.01 per share; 1,000,000 shares authorized,
no shares issued
    
    
    
    
    
    
    Series A preferred stock, stated value $100 per share; one share
authorized, issued and outstanding
    
    
    
    
    
    
    Series common stock, par value $0.01 per share; 5,000,000 shares
authorized; no shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value:Authorized shares40,000,000Issued and outstanding shares21,892,060
    
    
    219
    
    
    
    219Additional paid-in capital
    
    
    84,973
    
    
    
    84,973Retained earnings (deficit)
    
    
    (125,520
    )
    
    
    (133,574
    )Total stockholders equity (deficiency)
    
    
    (40,328
    )
    
    
    (48,382
    )Total liabilities and stockholders equity (deficiency)
    
    $
    136,272
    
    
    $
    127,970
 The accompanying notes are an integral part of these consolidated financial statements. 3




---



##### Table of Contents



Pinnacle Airlines Corp. 
 Condensed Consolidated
Statements of Cash Flows (Unaudited)
 (in
thousands)
 Three Months Ended March 31,2004
    
    2003Operating activitiesNet income
    
    $
    8,054
    
    
    $
    8,024Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    721
    
    
    
    712Loss on disposal of equipment and rotable spares
    
    
    24
    
    
    
    125Deferred income taxes
    
    
    562
    
    
    
    494Provision for spare parts and supplies obsolescence
    
    
    35
    
    
    
    24Reduction of deferred credits
    
    
    (51
    )
    
    
    (42
    )Changes in operating assets and liabilities:Receivables
    
    
    (1,335
    )
    
    
    (5,870
    )Spare parts and supplies
    
    
    117
    
    
    
    (562
    )Prepaid expenses and other assets
    
    
    (2,478
    )
    
    
    8,002Accounts payable and accrued expenses
    
    
    3,919
    
    
    
    (4,825
    )Income taxes payable
    
    
    (1,137
    )
    
    
    3,894Cash provided by operating activities
    
    
    8,431
    
    
    
    9,976Investing activitiesPurchases of property and equipment
    
    
    (709
    )
    
    
    (4,671
    )Proceeds from the sale of property and equipment
    
    
    355
    
    
    
    Cash used in investing activities
    
    
    (354
    )
    
    
    (4,671
    )Financing activitiesPayments on long-term debt
    
    
    (3,000
    )
    
    
    (5,000
    )Repayments on line of credit with bank
    
    
    
    
    
    
    (4,245
    )Net borrowings under line of credit with Northwest
    
    
    
    
    
    
    9,800Cash (used in) provided by financing activities
    
    
    (3,000
    )
    
    
    555Net increase in cash and cash equivalents
    
    
    5,077
    
    
    
    5,860Cash and cash equivalents at beginning of period
    
    
    31,523
    
    
    
    4,580Cash and cash equivalents at end of period
    
    $
    36,600
    
    
    $
    10,440Supplemental disclosure of cash flow informationInterest paid
    
    $
    2,297
    
    
    $
    1,583Income tax payments
    
    $
    5,716
    
    
    $
    460Other non-cash transactionsNote payable issued to Northwest as a dividend
    
    $
    
    
    
    $
    200,000Settlement of accounts with Northwest as a dividend
    
    $
    
    
    
    $
    15,500
 The accompanying notes are an integral part of these consolidated financial statements. 4




---



##### Table of Contents



Pinnacle Airlines Corp. 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 Pinnacle
Airlines Corp. (the Company) operates through its wholly
owned subsidiary, Pinnacle Airlines, Inc., as a regional airline that provides
airline capacity to Northwest Airlines, Inc. (Northwest), a wholly owned
indirect subsidiary of Northwest Airlines Corporation. The Company operates as
a Northwest Airlink carrier at Northwests domestic hub airports in Detroit,
Minneapolis/St. Paul and Memphis. The Company currently operates an
all-regional jet fleet of 87 Canadair Regional Jet (CRJ) aircraft and
offers scheduled passenger service with 508 daily departures to 83 cities in 30
states and one Canadian province. 1. Basis of Presentation These interim financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information, the instructions to Quarterly Report on Form
10-Q and Rule 10-01 of Regulation S-X and should be read in conjunction with
our Annual Report on Form 10-K for the year ended December 31, 2003.
Accordingly, significant accounting policies and other disclosures normally
provided have been omitted since such items are disclosed therein. In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments (including normal recurring
adjustments) necessary to present fairly the Companys financial position as of
March 31, 2004 and the results of its operations and cash flows for the
three-month periods ended March 31, 2004 and 2003. Operating results for the
three-month period ended March 31, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. The
term block hours refers to the elapsed time between an aircraft
leaving a gate and arriving at a gate, and the term cycle refers to an
aircrafts departure and corresponding arrival. Available seat miles
represents the number of seats available for passengers, multiplied by the
number of miles those seats are flown. 2. Earnings Per Share The following table sets forth the computation of basic and diluted
earnings per share for the three months ended March 31, 2004 and 2003: 2004
    
    2003Basic earnings per share:Net income
    
    $
    8,054
    
    
    $
    8,024Weighted average number of shares outstanding
    
    
    21,892
    
    
    
    21,892Basic earnings per share
    
    $
    0.37
    
    
    $
    0.37Diluted earnings per share:Net income
    
    $
    8,054
    
    
    $
    8,024Share computation:Weighted average number of shares outstanding
    
    
    21,892
    
    
    
    21,892Assumed exercises of stock options
    
    
    13
    
    
    
    Weighted average number of shares outstanding
for diluted earnings per share
    
    
    21,905
    
    
    
    21,892Diluted earnings per share
    
    $
    0.37
    
    
    $
    0.37
 5




---



##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 3. Stock Options The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations (APB
25). Under APB 25, if the exercise price of the Companys employee stock
options equals the market price of the underlying stock on the date of the
grant, no compensation expense is recognized. Since the Companys stock
options have all been granted with exercise prices at the market price of the
underlying stock on the date of grant, no compensation expense has been
recognized under APB 25. The initial grant of the employee stock options to purchase the Companys
common stock occurred in November 2003. The following table illustrates the
effect on net income and income per share for the three months ended March 31,
2004 assuming the compensation costs for the Companys stock option and
purchase plans had been determined using the fair value method, prorated over
the vesting periods, at the grant dates as required under SFAS No. 123,
Accounting for Stock-Based Compensation: Three Months EndedMarch 31, 2004Net income, as reported
    
    $
    8,054Deduct: Total pro forma stock-based compensation
expense, net of tax
    
    
    (306
    )Pro forma net income
    
    $
    7,748Earnings per common share:Basic  as reported
    
    $
    0.37Basic  pro forma
    
    $
    0.35Diluted  as reported
    
    $
    0.37Diluted  pro forma
    
    $
    0.35
 4. Change in Ownership and Public Offering On January 15, 2003, Northwest transferred all of the outstanding common
stock of Pinnacle Airlines, Inc. to Pinnacle Airlines Corp., in exchange for
21,892 shares of the Pinnacle Airlines Corp. common stock, which constitutes
all of its outstanding common stock, and one share of Series A preferred stock.
In January 2003 and September 2003, Northwest contributed 12.9% and 75.7%,
respectively, of the shares of Pinnacle Airlines Corp. common stock to the
Northwest Airlines Pension Plan for Contract Employees, the Northwest Airlines
Pension Plan for Pilot Employees and the Northwest Airlines Pension Plan for
Salaried Employees (collectively, the Northwest Airlines Pension Plan.) The Series A preferred stock has a stated value and liquidation preference
of $100. The Series A preferred stock gives Northwest the right to appoint two
directors to the Companys board of directors. No dividends are payable to the
shareholder of the Series A preferred stock, and it is redeemable by the
Company, at its option, for an amount equal to the liquidation preference,
only upon or following the occurrence of certain events, including the sale or
other disposition of the Series A preferred stock or the termination or
expiration of the airline services agreement between the Company and Northwest. 6




---



##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 4. Change in Ownership and Public Offering (continued) On November 25, 2003, the Company completed an initial public offering
(the Offering) of its common stock, par value $.01 per share. In the
Offering, the Northwest Airlines Pension Plan sold the 19,400 shares that it
received during 2003. The Company did not receive any proceeds from the
Offering. 5. Airline Services Agreement The Company and Northwest operate under an Airline Services Agreement
(ASA), effective March 1, 2002, pursuant to which the Company provides
regional airline services to Northwest. The terms of the ASA are materially
different from the terms of the historical arrangement between the Company and
Northwest. The initial agreement provided for a term from March 1, 2002,
through February 29, 2012 and would have increased the Companys fleet to 95
regional jets by December 31, 2004. During 2003, the Company and Northwest
entered into certain amendments to the ASA that, among other things, extended
the term of the agreement through December 31, 2017, eliminated incentive
payments based on certain performance criteria, lowered the Companys target
operating margin from 14% to 10% effective December 1, 2003, and provided for
an increase in the size of the Companys fleet to 129 regional jets by December
31, 2005. Under the ASA, the Company receives the following payments from Northwest: Reimbursement payments. The Company receives monthly reimbursements for
all expenses relating to: passenger aircraft fuel; basic aircraft rentals;
aviation liability, war risk and hull insurance; third-party deicing services;
CRJ third-party engine and airframe maintenance; hub and maintenance facility
rentals; passenger security costs; ground handling in cities where Northwest
has ground handling operations; Detroit landing fees; and property taxes. Since
the Company is reimbursed by Northwest for the actual expenses incurred for
these items, the Company has no financial risk associated with cost
fluctuations. Payments based on pre-set rates. The Company is entitled to receive
semi-monthly payments for each block hour and cycle it operates and a monthly
fixed cost payment based on the size of its fleet. These payments are designed
to cover all of the Companys expenses incurred with respect to the ASA that
are not covered by the reimbursement payments. The substantial majority of
these expenses relate to labor costs, line maintenance and ground handling
costs in cities where Northwest does not have ground handling operations,
landing fees in cities other than Detroit, overhead and depreciation. Margin payments. The Company receives a monthly margin payment based on
the revenues described above calculated to achieve a target operating margin.
The target operating margin for the ten months ended December 31, 2002, and the
eleven months ended November 30, 2003 was 14%. Following the Offering, the
Company and Northwest amended the ASA (as discussed above) to lower the
Companys target operating margin to 10%, effective December 1, 2003. Under
the amended ASA, the Companys target operating margin will be reset to a
market-based percentage in 2008, but the reset target operating margin will be
no lower than 8% and no higher than 12%. The portion of any margin payments attributable to the reimbursement
payments will always be equal to the targeted operating margin for the relevant
period. However, since the payments based on pre-set rates are not based on the
actual expenses incurred, if the Companys expenses are not covered by these
payments, its actual operating margin could differ from its target operating
margin. 7




---



##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 5. Airline Services Agreement (continued) Through 2007, if the Companys actual costs that are intended to be
covered by the revenues the Company receives based on pre-set rates deviate
from the expected costs used in developing those pre-set rates, and as a result
its annual operating margin is below the 9% floor or above the 11% ceiling for
each year through 2005, or below the 8% floor or above the 12% ceiling for 2006
and 2007, a year-end adjustment in the form of a payment by Northwest or by the
Company will be made to adjust the Companys operating margin to the floor or
ceiling. Specified amounts are excluded when determining whether the Companys
annual operating margin is below the floor or above the ceiling. Beginning in 2008, Northwest will not guarantee the Company a minimum
operating margin, although the Company will still be subject to a margin
ceiling above the revised target-operating margin. If the Companys actual
operating margin for any year beginning with 2008 exceeds the revised target
operating margin by up to five percentage points, the Company will make a
year-end adjustment payment to Northwest in an amount equal to half of the
excess. In addition, should the Companys actual operating margin exceed the
targeted operating margin by more than five percentage points, the Company will
pay Northwest all of the excess above five percent. If necessary, the Company
will record an amount each quarter to reflect the Companys right to receive or
the Companys obligation to pay this operating margin adjustment payment, and
any net payment will be made annually. 6. Note Payable and Dividends to Northwest On January 14, 2003, the Company issued a $200,000 note payable to
Northwest as a dividend. The note payable required quarterly principal payments
of $5,000 beginning in March 2003 and continuing through December 2009. The
note payable also required monthly payments to the extent that the Companys
cash equivalents balance exceeds $40,000. This note accrues interest at the
rate of 3.4%, which is payable quarterly. In the event that the Company does
not satisfy its obligations under the note, Northwest has the right to set off
any such amounts against its payment obligations to the Company under the ASA.
Should Northwest terminate the ASA prior to December 2009, all outstanding
principal and interest would become immediately due and payable to Northwest. Immediately following the Offering, Northwest made a capital contribution
to the Company in the amount of $50,000. The contribution of capital was used
by the Company to reduce the outstanding principal balance on the note payable.
The Company and Northwest subsequently amended the note payable to reflect an
outstanding principal balance of $135,000 and quarterly principal payments were
lowered to $3,000. The amended note payable also requires monthly principal
payments to the extent that the Companys cash and cash equivalents balance
exceeds $50,000. No other significant changes were made to the terms of the
note payable. 7. Line of Credit with Northwest In January 2003, the Company obtained a Revolving Credit Facility
(Revolver) from Northwest, which allows for borrowings up to $50,000. The
term of the Revolver extends through December 31, 2005. The Revolver accrues
interest at the rate of 1% plus a margin that is equal to the higher of the
most recent prime rate offered by JP Morgan Chase Bank, or the most recent
overnight federal funds rate offered to JP Morgan Chase Bank plus .5%. Under
the terms of the Revolver, the Company must continue to operate under the ASA
and is prevented from issuing or declaring dividends or incurring any
additional debt without the approval of Northwest. The interest rate was 5.0%
and 5.3% at March 31, 2004 and 2003, respectively. The Revolver contains
certain affirmative and negative covenants regarding the operation of the
Company. As of March 31, 2004 and December 31, 2003 the Company was in
compliance with all covenants contained in the Revolver. 8




---



##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 8. Commitments and Contingencies The Company leases all of its aircraft and certain aircraft equipment,
buildings and office equipment under noncancelable operating leases that expire
in various years through 2017. The Company subleases its CRJ aircraft from
Northwest under operating leases that expire December 31, 2017. The lease
agreements contain certain requirements of the Company regarding the payment of
taxes on the aircraft, acceptable use of the aircraft, the level of insurance
to be maintained, the maintenance procedures to be performed and the condition
of the aircraft upon its return to Northwest. The monthly lease rates include
certain fleet management costs of Northwest and are not representative of the
rates paid by Northwest to third-party lessors. Northwest reimburses the
Companys aircraft rental expense in full under the ASA. The following summarizes approximate minimum future rental payments, by
year and in the aggregate, required under noncancelable operating leases with
initial or remaining lease terms in excess of one year as of March 31, 2004: Operating LeasesAircraft
    
    Non-aircraftRemainder of 2004
    
    $
    142,767
    
    
    $
    2,9212005
    
    
    190,356
    
    
    
    3,6562006
    
    
    190,164
    
    
    
    3,5572007
    
    
    185,095
    
    
    
    3,3082008
    
    
    184,092
    
    
    
    3,121Thereafter
    
    
    1,644,358
    
    
    
    23,3862,536,832
    
    
    
    39,949Sublease rental income
    
    
    (24,707
    )
    
    
    (438
    )Total minimum operating lease payments
    
    $
    2,512,125
    
    
    $
    39,511
 9. Related Party Transactions Northwest is a related party of the Company. As previously noted, the
Company generates substantially all of its revenue from its ASA with Northwest
under which the Company uses the NW two-letter designator code in displaying
its schedules on all flights in the automated airline reservation systems used
throughout the industry. Under this agreement, the Company uses the name
Northwest Airlink. Northwest leases the Company all of its regional jets,
provides certain borrowings to the Company and is the owner of 2,492 shares of
the Companys common stock and the Companys Series A preferred stock. 9




---



##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 9. Related Party Transactions (continued) Amounts recorded in the Companys consolidated statements of income for
transactions with Northwest for the three months ended March 31, 2004 and 2003
are as follows: 2004
    
    2003Revenue:Passenger revenue
    
    $
    133,387
    
    
    $
    98,605Other revenue
    
    
    39
    
    
    
    731Expenses:Aircraft fuel and taxes
    
    
    16,411
    
    
    
    10,293Aircraft rentals
    
    
    43,620
    
    
    
    29,511Other rentals and landing fees
    
    
    2,813
    
    
    
    2,813Ground handling services
    
    
    8,915
    
    
    
    6,372Other
    
    
    57
    
    
    
    51Interest expense
    
    
    1,251
    
    
    
    1,535
 Nets amounts due from Northwest as of March 31, 2004 and December 31, 2003
were $18,486 and $16,187, respectively, and are included in accounts receivable
in the Companys consolidated balance sheets. 10




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition General The following managements discussion and analysis describes the principal
factors affecting the results of operations, liquidity, capital resources and
contractual cash obligations, as well as the critical accounting policies, of
the Company. This discussion should be read in conjunction with the
accompanying unaudited financial statements and our Annual Report on Form 10-K
for the year ended December 31, 2003 (Annual Report), which include
additional information about our significant accounting policies, practices and
the transactions that underlie our financial results. Our website address is www.nwairlink.com. All of our filings with the SEC
are available free of charge through our website as soon as reasonably
practicable after we file them with, or furnish them to, the SEC. Overview Our available seat miles (ASMs), block hours and cycles increased by
approximately 60%, 51% and 36%, respectively, during the three months ended
March 31, 2004, compared to the same period in 2003. The increases were driven
primarily by the growth in our fleet of Canadair Regional Jets
(CRJs), 11
of which were added during the three months ended March 31, 2004. By adding 29
aircraft since March 31, 2003, we have grown our fleet by 50% to include 87
CRJs at March 31, 2004. Operating and passenger revenue for the three months ended March 31, 2004
were $133.9 million and $133.4 million, respectively, which represented
increases of 33% and 35%, respectively, over the same period in 2003. Operating
income for the three months ended March 31, 2004 and 2003 was $14.3 million. Net income for the three month periods ending March 31, 2004 and 2003 was
$8.1 million and $8.0 million, respectively. Since December 31, 2003, our
balance of cash and cash equivalents has increased by $5.1 million to $36.7
million. Our 2004 passenger revenue and operating income were negatively affected
by the reduction in our target operating margin from 14% to 10%, which occurred
at the time of the Offering. The growth in passenger revenue and operating
income for the three months ended March 31, 2004 would have been approximately
42% and 44% had the target margin been 10% for the same period in 2003. The following reconciles our passenger revenue and operating income as
reported in accordance with generally accepted accounting principles (GAAP)
for the three months ended March 31, 2003 to passenger revenue and operating
income as if our target operating margin had been 10% for the same period. We
believe that this information is useful as it indicates more clearly our
comparative year-to-year operating results. None of this information
should be considered a substitute for any measures prepared in
accordance with GAAP. We have included this reconciliation of
non-GAAP financial measures to our most comparable GAAP financial
measures included in our consolidated statements of income. Three months ended March 31,2004
    
    2003
    
    % IncreasePassenger RevenuePassenger revenue in accordance with GAAP
    
    $
    133,387
    
    
    $
    98,605
    
    
    
    35
    %Adjustment to reduce target operating margin to 10% from 14%
    
    
    
    
    
    
    (4,382
    )Adjusted passenger revenue with 10% target operating margin
    
    $
    133,387
    
    
    $
    94,223
    
    
    
    42
    %Operating IncomeOperating income in accordance with GAAP
    
    $
    14,344
    
    
    $
    14,339
    
    
    
    0
    %Adjustment to reduce target operating margin to 10% from 14%
    
    
    
    
    
    
    (4,382
    )Adjusted operating income with 10% target operating margin
    
    $
    14,344
    
    
    $
    9,957
    
    
    
    44
    %
 11




---



##### Table of Contents



Outlook The number of aircraft we operate will continue to have the largest effect
on the growth of our passenger revenue, which is derived solely from our
operating agreement with Northwest. Northwest has continued to indicate its
commitment to regional jets as a part of its core strategy. Accordingly, we
have not revised our forecasted growth in fleet size, passenger revenue and
operating income for the remainder of 2004. We are still forecasting that our
fleet will grow to 114 CRJs by the end of 2004 and 129 by the end of 2005. We continue to focus on strong operational performance and cost
efficiencies in order to be well positioned to compete for the remaining 175
CRJs that Northwest has on option. Northwest has made no announcement
regarding the exercise of options or placement of these aircraft with any
regional carrier. We remain the only operator of 44-seat and 50-seat CRJs as a
code-share partner of Northwest. Results of Operations The following discussion provides an analysis of our results of operations
and reasons for material changes therein for the three months ended March 31,
2004 compared to the same period in 2003. All amounts are in thousands except
per share data. Comparison of Three Months Ended March 31, 2004 to Three Months Ended March 31,
2003 Revenue As noted in the discussion of our ASA, we are reimbursed for certain
operating expenses necessary to provide regional airline capacity to Northwest
and receive payments based on pre-set rates for fixed costs, completed block
hours and completed cycles. We also receive margin payments on these items
that are intended to achieve a target operating margin. Our operating results
are not affected by any seasonality trends historically associated with the
airline industry. The following is a summary of our passenger revenue by type, which
includes margin, for the quarters ended March 31, 2004 and 2003 (in thousands): 2004
    
    2003
    
    ChangePassenger revenue from expense reimbursement
    
    
    89,351
    
    
    
    64,487
    
    
    
    39
    %Passenger revenue based on pre-set rates
    
    
    44,036
    
    
    
    34,118
    
    
    
    29
    %Total passenger revenue
    
    $
    133,387
    
    
    $
    98,605
    
    
    
    35
    %
 The increase in passenger revenue of $34.8 million was caused primarily by
the addition of 29 aircraft to our fleet of CRJs. This increase in our fleet
and the corresponding increase in CRJ block hours and cycles of 51% and 36%,
respectively, accounted for increased passenger revenue based on pre-set rates
of $9.9 million. The increase in payments based on pre-set rates was partially
offset by a decrease in our margin payments under our ASA with Northwest, which
as previously noted, was amended at the time of the Offering to reduce our
target operating margin from 14% to 10% effective December 1, 2003. The increase in revenue associated with expense reimbursements of $24.8
million was largely due to increases in aircraft rentals, aircraft fuel and
ground handling, which increased with our level of operations. As noted above,
the decrease in our target operating margin under our ASA caused the decline in
our margin associated with expense reimbursements. 12




---



##### Table of Contents



Comparison of Three Months Ended March 31, 2004 to Three Months Ended March 31,
2003 (continued) Operating Expenses The following summarizes our operating expenses, reimbursed and
unreimbursed, as provided under the terms of our ASA (in thousands): 2004
    
    2003Reimbursed
    
    Unreimbursed
    
    Total
    
    Reimbursed
    
    Unreimbursed
    
    TotalOperating expenses:Salaries, wages and benefits
    
    $
    
    
    
    $
    23,219
    
    
    $
    23,219
    
    
    $
    
    
    
    $
    19,155
    
    
    $
    19,155Aircraft fuel and taxes
    
    
    16,411
    
    
    
    129
    
    
    
    16,540
    
    
    
    10,825
    
    
    
    56
    
    
    
    10,881Aircraft maintenance, materials and repairs
    
    
    3,005
    
    
    
    2,641
    
    
    
    5,646
    
    
    
    1,383
    
    
    
    1,583
    
    
    
    2,966Aircraft rentals
    
    
    43,620
    
    
    
    
    
    
    
    43,620
    
    
    
    29,511
    
    
    
    28
    
    
    
    29,539Other rentals and landing fees
    
    
    4,569
    
    
    
    3,508
    
    
    
    8,077
    
    
    
    4,014
    
    
    
    2,763
    
    
    
    6,777Ground handling services
    
    
    8,915
    
    
    
    4,588
    
    
    
    13,503
    
    
    
    6,372
    
    
    
    2,952
    
    
    
    9,324Depreciation and amortization
    
    
    
    
    
    
    721
    
    
    
    721
    
    
    
    
    
    
    
    712
    
    
    
    712Other
    
    
    3,896
    
    
    
    4,313
    
    
    
    8,209
    
    
    
    3,354
    
    
    
    3,514
    
    
    
    6,868Total operating expenses
    
    $
    80,416
    
    
    $
    39,119
    
    
    $
    119,535
    
    
    $
    55,459
    
    
    $
    30,763
    
    
    $
    86,222Margin on expense reimbursements
    
    
    8,935
    
    
    
    
    
    
    
    
    
    
    
    9,028Passenger revenue from expense reimbursements
    
    $
    89,351
    
    
    
    
    
    
    
    
    
    
    $
    64,487
 The increase in operating expenses during the three months ended March 31,
2004 was predominately due to the growth in our level of operations. Total
operating expenses increased by $33,313, or 39%, which is comprised of
increases in reimbursed and unreimbursed expenses of approximately 45% and 27%,
respectively. Salaries, wages and benefits increased primarily due to the increase in
the number of pilots and flight attendants and wage rate and benefit increases.
The number of pilots and flight attendants increased by 22% and 50%,
respectively, which caused an increase in compensation expense of $2.7 million. Aircraft fuel and taxes increased due to the 51% increase in block hours
and a 20% increase in the average length of our flights. Aircraft maintenance, materials and repairs expenses that are reimbursed
by Northwest increased principally due to required heavy airframe maintenance
checks being performed on our CRJ aircraft. This accounted for approximately
$1.2 million of the increase in reimbursed maintenance expenses. Heavy airframe
maintenance checks were performed on 11 aircraft during the quarter and 22 are
scheduled for the
remainder of the year. The remaining increases in maintenance expense,
both unreimbursed and reimbursed, were due mainly to the increase in our level
of operations and the expiration of warranty on a portion of the fleet. Aircraft rentals increased by $14.1 million, or 48%, due to the addition
of 29 CRJ aircraft to our fleet, an increase of 50%. Ground handling services increased by $4.2 million, or 45%, due to the 36%
increase in the number of departures performed. The increase in ground
handling expense per departure was caused by a change in the mix of cities
where we provide passenger service. Other rentals and landing fees increased due to an increase in landing
fees of approximately $ 1.2 million, or approximately 42%, which is due largely
to our increased level of operations. 13




---



##### Table of Contents



Comparison of Three Months Ended March 31, 2004 to Three Months Ended March 31,
2003 (continued) Operating Expenses (continued) Other expenses that are reimbursed by Northwest increased primarily due to
an increase in property taxes of $1.1 million, which was partially offset by a
decrease in passenger and hull insurance. The increase in unreimbursed other
expenses was driven by our increased level of operations, most notably an
increase of $0.3 million of expenses associated with overnight travel for our
pilots and flight attendants. Nonoperating Expenses The decrease in interest expense was due to our reduced level of
borrowings from Northwest. Since March 31, 2003, the note payable owed to
Northwest has been reduced by $66.0 million due primarily to the $50.0 million
reduction at the time of the Offering. The 1.3 point increase in our effective tax rate for the three months
ended March 31, 2004 over the same period in 2003 was due primarily to an
increase in our state tax expense, which was caused by the changes in the mix
of cities and states where we provide passenger service. We estimate that our
effective tax rate for the full year of 2004 will be consistent with the rate
for the three months ended March 31, 2004. Certain Statistical Information Information with respect to our operating expense components (amounts in
thousands) as a percentage of revenue and as cents per available seat miles
(ASMs) is as follows: Three Months Ended March 31,2004
    
    2003Percent of
    
    Cents
    
    
    
    
    
    Percent of
    
    CentsAmount
    
    Revenue
    
    per ASM
    
    Amount
    
    Revenue
    
    per ASMOperating expenses:Salaries, wages and benefits
    
    $
    23,219
    
    
    
    17
    %
    
    
    2.84
    
    
    $
    19,155
    
    
    
    19
    %
    
    
    3.74Aircraft fuel and taxes
    
    
    16,540
    
    
    
    12
    %
    
    
    2.02
    
    
    
    10,881
    
    
    
    11
    %
    
    
    2.12Aircraft maintenance,
materials and repairs
    
    
    5,646
    
    
    
    4
    %
    
    
    0.69
    
    
    
    2,966
    
    
    
    3
    %
    
    
    0.58Aircraft rentals
    
    
    43,620
    
    
    
    33
    %
    
    
    5.33
    
    
    
    29,539
    
    
    
    29
    %
    
    
    5.76Other rentals and landing fees
    
    
    8,077
    
    
    
    6
    %
    
    
    0.99
    
    
    
    6,777
    
    
    
    7
    %
    
    
    1.32Ground handling services
    
    
    13,503
    
    
    
    10
    %
    
    
    1.65
    
    
    
    9,324
    
    
    
    9
    %
    
    
    1.82Depreciation and amortization
    
    
    721
    
    
    
    1
    %
    
    
    0.09
    
    
    
    712
    
    
    
    1
    %
    
    
    0.14Other
    
    
    8,209
    
    
    
    6
    %
    
    
    1.00
    
    
    
    6,868
    
    
    
    7
    %
    
    
    1.34Total Operating Expenses
    
    $
    119,535
    
    
    
    89
    %
    
    
    14.60
    
    
    $
    86,222
    
    
    
    86
    %
    
    
    16.82
 14




---



##### Table of Contents



Certain Statistical Information (continued) The following table summarizes certain operational statistics for the
three months ended March 31, 2004 and 2003: 2004
    
    2003
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    1,229
    
    
    
    829
    
    
    
    48
    %Revenue passenger miles (in thousands) (1)
    
    
    513,097
    
    
    
    293,392
    
    
    
    75
    %Available seat miles (in thousands)
    
    
    818,689
    
    
    
    512,553
    
    
    
    60
    %Passenger load factor (2)
    
    
    62.7
    %
    
    
    57.2
    %
    
    5.5 ptsOperating revenue per available seat mile (in cents)
    
    
    16.35
    
    
    
    19.62
    
    
    
    (17
    %)Operating costs per available seat mile (in cents)
    
    
    14.60
    
    
    
    16.82
    
    
    
    (13
    %)Block hours
    
    
    64,769
    
    
    
    42,888
    
    
    
    51
    %Cycles
    
    
    42,185
    
    
    
    30,969
    
    
    
    36
    %Average daily utilization (block hours)
    
    
    8.44
    
    
    
    8.36
    
    
    0.08 hrsAverage length of aircraft flight (miles)
    
    
    416
    
    
    
    346
    
    
    
    20
    %Number of operating aircraft (end of period)
    
    
    87
    
    
    
    58
    
    
    
    50
    %Employees at end of period
    
    
    2,228
    
    
    
    2,329
    
    
    
    (4
    %)
  (1)
    
    Revenue passenger miles represents the number of miles flown by revenue
passengers. (2)
    
    Passenger load factor equals revenue passenger miles divided by available
seat miles.
 Liquidity and Capital Resources As of March 31, 2004, we had $36.6 million in cash and cash equivalents.
Net cash provided by operating activities for the three months ended March 31,
2004 and 2003 was $8.4 million and $10.0 million, respectively. The reduced
cash flow during 2004 is due primarily to settlement of trade balances with
Northwest, which occurred during January 2003. Cash used for investing activities for the three months ended March 31,
2004 and 2003 was $0.4 million and $4.7 million, respectively. The decrease is
due to the timing of purchases of rotable (renewable) parts. We are still
forecasting that capital expenditures for 2004 will be approximately $16.0
million, which will be funded with cash flows from our current operations. Cash used for financing activities for the three months ended March 31,
2004 was $3.6 million more than the same period in 2003, due primarily to the
2003 borrowings under our line of credit with Northwest of $5.6 million. As of March 31, 2004, we had $40.0 million of available borrowings under
our revolving credit facility with Northwest, which had an interest rate of 5%. We have significant lease and sublease obligations for aircraft that are
classified as operating leases on our balance sheet. We are responsible for
all maintenance, insurance and other costs associated with operating these
aircraft; however, we have not made any residual value or other guarantees to
our lessors. We have no other off-balance sheet arrangements. 15




---



##### Table of Contents



Critical Accounting Policies The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to adopt
accounting policies and make significant judgments and estimates to develop
amounts reflected and disclosed in the financial statements. In many cases,
there are alternative policies or estimation techniques that could be used. We
maintain a thorough process to review the application of our accounting
policies and to evaluate the appropriateness of the many estimates that are
required to prepare the financial statements of a corporation. However, even
under optimal circumstances, estimates routinely require adjustment based on
changing circumstances and the receipt of new or better information. Information regarding our Critical Accounting Policies can be found in
our Annual Report on page 27. In addition, Note 2 to the consolidated financial
statements in our Annual Report contains a summary of our significant
accounting policies. Forward Looking Statements Statements in this Form 10-Q report contain various forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Act of 1934,
as amended, or the Exchange Act, which represent our managements beliefs and
assumptions concerning future events. When used in this document and in
documents incorporated by reference, forward-looking statements include,
without limitation, statements regarding financial forecasts or projections,
our expectations, beliefs, intentions or future strategies that are signified
by the words expects, anticipates, intends, believes or similar
language. These forward-looking statements are subject to risks, uncertainties
and assumptions that could cause our actual results and the timing of certain
events to differ materially from those expressed in the forward-looking
statements. All forward-looking statements included in this report are based on
information available to us on the date of this report. It is routine for our
internal projections and expectations to change as the year or each quarter in
the year 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 not more than once per quarter, and not
to update that information until we deem it appropriate. 
 Item 3. Quantitative and Qualitative Disclosure about Market Risk We are not subject to any significant degree to market risks such as
commodity price risk (e.g., aircraft fuel prices) and interest rate risk. We
have not been a party to any derivative financial instruments. Aircraft fuel. Under the ASA, Northwest bears the economic risk of price
fluctuations in aircraft fuel. We are reimbursed in full by Northwest at the
lower of the actual cost of our passenger fuel (including taxes and fees) or
$0.78 per gallon; any excess over $0.78 is borne by Northwest and does not
yield a margin to us. Interest rates. All of our CRJs are operated under long-term operating
leases with Northwest. Our Saab aircraft, which are being subleased to Mesaba
Airlines, are leased from a third party. We also anticipate leasing all of our
future deliveries of aircraft. Under the ASA, the lease payments associated
with aircraft deliveries are fixed. We do not hold long-term interest sensitive
assets and, therefore, we are not exposed to interest rate fluctuations for our
assets. The note payable we issued to Northwest bears interest at a fixed rate,
but loans under our revolving credit facility bear interest at a floating rate.
We do not purchase or hold any derivative financial instruments to protect
against the effects of changes in interest rates. 16




---



##### Table of Contents



Item 4. Controls and Procedures Our principal executive and financial officers have evaluated our
disclosure controls and procedures and, based on such evaluation, have
determined that such disclosure controls and procedures were effective as of
March 31, 2004 (the end of the period covered by this Quarterly Report on Form
10-Q). During our fiscal quarter ended March 31, 2004, no change occurred in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 
 Part II. Other Information 
 Item 1. Legal Proceedings We are a defendant in various lawsuits and other proceedings arising in
the ordinary course of our business. While the outcome of these lawsuits and
proceedings cannot be predicted with certainty, it is the opinion of
management, based on current information and legal advice, that the ultimate
disposition of these actions will not have a material adverse effect on our
financial position, results of operations or cash flows. 
 Item 2. Changes in Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 17




---



##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.32
    
    Section 1350 Certification by
Chief Executive Officer and Chief Financial Officer.
 (b) Reports on Form 8-K: The Company filed the following Current Reports on Form 8-K during the
quarter ended March 31, 2004: Date Filed
    
    Event ReportedJanuary 28, 2004
    
    Items 7 and 12. Earnings release for the fourth quarter
and full fiscal year ended December 31, 2003.March 1, 2004
    
    Items 5 and 7. Issuance of a press release announcing
that the Company had reached a tentative agreement with
the union representing the Companys fleet and passenger
service employees.March 9, 2004
    
    Items 5 and 7. Issuance of a press release by Pinnacle
Airlines, Inc., a wholly-owned subsidiary of the Company,
announcing its passenger traffic and capacity for
February 2004.March 11, 2004
    
    Items 5 and 7. Issuance of a press release announcing
the appointment of James McGehee to the Companys board
of directors.March 16, 2004
    
    Items 5 and 7. Issuance of a press release by Pinnacle
Airlines, Inc. announcing that its fleet and passenger
service employees, represented by the Paper,
Allied-Industrial, Chemical & Energy Workers
International Union, ratified a tentative agreement.
 18




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. By:
    
    /s/ Philip H. TrenaryPhilip H. TrenaryDate: April 29, 2004
    
    
    
    President and Chief Executive OfficerBy:
    
    /s/ Curtis E. SawyerCurtis E. SawyerDate: April 29, 2004
    
    
    
    Vice President andChief Financial Officer
 19