##### 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 June 30, 2004or[  ]
    
    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 July 23, 2004, [21,892,060] shares of common stock were outstanding.




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Table of Contents PART I FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Statements of Income (Unaudited) for the Three Months and Six Months Ended June 30, 2004 and 2003
    
    
    1Condensed Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    8Item 2. Managements Discussion and Analysis of Results of operations and Financial Condition
    
    
    13Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    24PART II. OTHER INFORMATION
    
    
    24Item 1. Legal Proceedings
    
    
    25Item 2. Changes in Securities and Use of Proceeds
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits and Reports on Form 8-K
    
    
    26EX-10.22.2 AIRLINE SERVICES AGREEMENT AMENDMENT NO. 2EX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32  SECTION 1350 CERTIFICATIONS OF THE CEO & CFO




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Part I Financial Information 
 Item 1. Financial Statements Pinnacle Airlines Corp. 
 Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)
 Three Months Ended June 30,2004
    
    2003Operating revenues:Passenger
    
    $
    151,654
    
    
    $
    107,561Other
    
    
    519
    
    
    
    1,888Total operating revenues
    
    
    152,173
    
    
    
    109,449Operating expenses:Salaries, wages and benefits
    
    
    24,880
    
    
    
    20,542Aircraft fuel and taxes
    
    
    19,527
    
    
    
    13,102Aircraft maintenance, materials and repairs
    
    
    5,869
    
    
    
    3,265Aircraft rentals
    
    
    50,062
    
    
    
    33,016Other rentals and landing fees
    
    
    8,858
    
    
    
    7,192Ground handling services
    
    
    14,850
    
    
    
    10,684Depreciation and amortization
    
    
    769
    
    
    
    753Government reimbursements
    
    
    
    
    
    
    (1,000
    )Other
    
    
    10,448
    
    
    
    6,198Total operating expenses
    
    
    135,263
    
    
    
    93,752Operating income
    
    
    16,910
    
    
    
    15,697Operating income as a percentage of operating revenue
    
    
    11.1
    %
    
    
    14.3
    %Nonoperating income (expense)Interest expense
    
    
    (1,193
    )
    
    
    (1,989
    )Miscellaneous
income (expense), net
    
    
    230
    
    
    
    (79
    )Total nonoperating expense
    
    
    (963
    )
    
    
    (2,068
    )Income before income taxes
    
    
    15,947
    
    
    
    13,629Income tax expense
    
    
    6,249
    
    
    
    5,130Net income
    
    $
    9,698
    
    
    $
    8,499Basic and diluted earnings per share
    
    $
    0.44
    
    
    $
    0.39Shares used in computing basic and diluted earnings per share
    
    
    21,892
    
    
    
    21,892
 The accompanying notes are an integral part of these condensed consolidated financial statements. 1




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Pinnacle Airlines Corp.
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data) Six Months Ended June 30,2004
    
    2003Operating revenues:Passenger
    
    $
    285,041
    
    
    $
    206,166Other
    
    
    1,011
    
    
    
    3,845Total operating revenues
    
    
    286,052
    
    
    
    210,011Operating expenses:Salaries, wages and benefits
    
    
    48,099
    
    
    
    39,698Aircraft fuel and taxes
    
    
    36,067
    
    
    
    23,983Aircraft maintenance, materials and repairs
    
    
    11,515
    
    
    
    6,231Aircraft rentals
    
    
    93,682
    
    
    
    62,555Other rentals and landing fees
    
    
    16,935
    
    
    
    13,969Ground handling services
    
    
    28,353
    
    
    
    20,008Depreciation and amortization
    
    
    1,490
    
    
    
    1,465Government reimbursements
    
    
    
    
    
    
    (1,000
    )Other
    
    
    18,657
    
    
    
    13,066Total operating expenses
    
    
    254,798
    
    
    
    179,975Operating income
    
    
    31,254
    
    
    
    30,036Operating income as a percentage of operating revenue
    
    
    10.9
    %
    
    
    14.3
    %Nonoperating income (expense)Interest expense
    
    
    (2,428
    )
    
    
    (3,560
    )Miscellaneous income, net
    
    
    315
    
    
    
    25Total nonoperating expense
    
    
    (2,113
    )
    
    
    (3,535
    )Income before income taxes
    
    
    29,141
    
    
    
    26,501Income tax expense
    
    
    11,389
    
    
    
    9,978Net income
    
    $
    17,752
    
    
    $
    16,523Basic and diluted earnings per share
    
    $
    0.81
    
    
    $
    0.75Shares used in computing basic and diluted earnings per share
    
    
    21,892
    
    
    
    21,892
 The accompanying notes are an integral part of these condensed consolidated financial statements. 2




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Pinnacle Airlines Corp. 
 Condensed Consolidated Balance Sheets
(in thousands)
 June 30,
    
    December 31,2004
    
    2003(Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    40,553
    
    
    $
    31,523Receivables, principally from Northwest, net
    
    
    20,969
    
    
    
    17,307Spare parts and supplies, net
    
    
    4,000
    
    
    
    3,773Prepaid expenses and other assets
    
    
    5,436
    
    
    
    6,810Deferred income taxes
    
    
    1,739
    
    
    
    2,549Total current assets
    
    
    72,697
    
    
    
    61,962Property and equipment:Aircraft and rotable spares
    
    
    31,755
    
    
    
    32,779Other property and equipment
    
    
    14,900
    
    
    
    14,081Office furniture and fixtures
    
    
    1,266
    
    
    
    1,25847,921
    
    
    
    48,118Less accumulated depreciation
    
    
    (13,014
    )
    
    
    (13,832
    )Net property and equipment
    
    
    34,907
    
    
    
    34,286Deposits with Northwest
    
    
    17,675
    
    
    
    13,300Cost in excess of net assets acquired, net
    
    
    18,422
    
    
    
    18,422Total assets
    
    $
    143,701
    
    
    $
    127,970
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands, except share data) June 30,
    
    December 31,2004
    
    2003(Unaudited)Liabilities and stockholders equity (deficiency)Current liabilities:Accounts payable
    
    $
    16,075
    
    
    $
    9,798Accrued expenses
    
    
    12,886
    
    
    
    11,622Line of credit
    
    
    10,000
    
    
    
    10,000Income taxes payable
    
    
    1,390
    
    
    
    5,596Current portion of deferred credits
    
    
    237
    
    
    
    217Current portion of note payable to Northwest
    
    
    12,000
    
    
    
    12,000Total current liabilities
    
    
    52,588
    
    
    
    49,233Deferred credits
    
    
    595
    
    
    
    719Deferred income taxes
    
    
    7,148
    
    
    
    6,400Note payable to Northwest
    
    
    114,000
    
    
    
    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 (accumulated deficit)
    
    
    (115,822
    )
    
    
    (133,574
    )Total stockholders equity (deficiency)
    
    
    (30,630
    )
    
    
    (48,382
    )Total liabilities and stockholders equity (deficiency)
    
    $
    143,701
    
    
    $
    127,970
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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Pinnacle Airlines Corp. 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 Six Months Ended June 30,2004
    
    2003Operating activitiesNet income
    
    $
    17,752
    
    
    $
    16,523Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    1,490
    
    
    
    1,465(Gain) loss on disposal of equipment and rotable spares
    
    
    (230
    )
    
    
    211Deferred income taxes
    
    
    1,558
    
    
    
    730Provision for spare parts and supplies obsolescence
    
    
    75
    
    
    
    53Reduction of deferred credits
    
    
    (104
    )
    
    
    (86
    )Changes in operating assets and liabilities:Receivables
    
    
    (3,662
    )
    
    
    (6,443
    )Spare parts and supplies
    
    
    (478
    )
    
    
    (817
    )Prepaid expenses and other assets
    
    
    1,374
    
    
    
    8,379Deposits
    
    
    (4,375
    )
    
    
    (2,450
    )Accounts payable and accrued expenses
    
    
    7,541
    
    
    
    (4,773
    )Income taxes payable
    
    
    (4,206
    )
    
    
    8,014Cash provided by operating activities
    
    
    16,735
    
    
    
    20,806Investing activitiesPurchases of property and equipment
    
    
    (2,665
    )
    
    
    (8,108
    )Proceeds from the sale of property and equipment
    
    
    960
    
    
    
    Cash used in investing activities
    
    
    (1,705
    )
    
    
    (8,108
    )Financing activitiesPayments on long-term debt
    
    
    (6,000
    )
    
    
    (10,000
    )Repayments on line of credit with bank
    
    
    
    
    
    
    (4,245
    )Borrowings under line of credit with Northwest
    
    
    
    
    
    
    24,800Cash (used in) provided by financing activities
    
    
    (6,000
    )
    
    
    10,555Net increase in cash and cash equivalents
    
    
    9,030
    
    
    
    23,253Cash and cash equivalents at beginning of period
    
    
    31,523
    
    
    
    4,580Cash and cash equivalents at end of period
    
    $
    40,553
    
    
    $
    27,833Supplemental disclosure of cash flow informationInterest paid
    
    $
    3,553
    
    
    $
    3,605Income tax payments
    
    $
    14,037
    
    
    $
    1,234Other 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 condensed consolidated financial statements. 5




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Pinnacle Airlines Corp. 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)
 Pinnacle Airlines Corp. (the Company) operates through its wholly
owned subsidiary, Pinnacle Airlines, Inc., as a regional airline that provides
airline capacity to Northwest Airlines, Inc. (Northwest), a wholly owned
indirect subsidiary of Northwest Airlines Corporation. The Company operates as
a Northwest Airlink carrier at Northwests domestic hub airports in Detroit,
Minneapolis/St. Paul and Memphis. The Company currently operates an
all-regional jet fleet of 101 Canadair Regional Jet (CRJ) aircraft and
offers scheduled passenger service with 586 daily departures to 94 cities in 32
states and 4 Canadian provinces. 1. Basis of Presentation These interim financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information, the instructions to Quarterly Report on Form
10-Q and Rule 10-01 of Regulation S-X and should be read in conjunction with
our Annual Report on Form 10-K for the year ended December 31, 2003.
Accordingly, significant accounting policies and other disclosures normally
provided have been omitted since such items are disclosed therein. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (including normal
recurring adjustments) necessary to present fairly the Companys financial
position, the results of its operations and its cash flows for the periods
indicated. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. The term block hours refers to the elapsed time between an aircraft
leaving a gate and arriving at a gate, and the term cycle refers to an
aircrafts departure and corresponding arrival. Available seat miles
represents the number of seats available for passengers, multiplied by the
number of miles those seats are flown. 2. Earnings Per Share The following table sets forth the computation of basic and diluted
earnings per share: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Basic earnings per share:Net income
    
    $
    9,698
    
    
    $
    8,499
    
    
    $
    17,752
    
    
    $
    16,523Weighted average number of shares outstanding
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892Basic earnings per share
    
    $
    0.44
    
    
    $
    0.39
    
    
    $
    0.81
    
    
    $
    0.75Diluted earnings per share:Net income (in thousands)
    
    $
    9,698
    
    
    $
    8,499
    
    
    $
    17,752
    
    
    $
    16,523Share computation:Weighted average number of shares outstanding
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892Assumed exercises of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average number of shares outstanding
for diluted earnings per share
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892Diluted earnings per share
    
    $
    0.44
    
    
    $
    0.39
    
    
    $
    0.81
    
    
    $
    0.75
 6




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 2. Earnings Per Share (continued) Options to purchase 858,200 shares of common stock were excluded from the
diluted EPS calculation because the effect would be anti-dilutive. 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, assuming the compensation costs for the Companys stock option and
purchase plans had been determined using the fair value method as required
under SFAS No. 123, Accounting for Stock-Based Compensation: Three Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2004Net income, as reported
    
    $
    9,698
    
    
    $
    17,752Deduct:
Total pro forma stock-based compensation expense, net of tax
    
    
    (283
    )
    
    
    (566
    )Pro forma net income
    
    $
    9,415
    
    
    $
    17,186Earnings per common share:Basic and
diluted - as reported
    
    $
    0.44
    
    
    $
    0.81Basic and
diluted - pro forma
    
    $
    0.43
    
    
    $
    0.79
 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 7




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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) occurrence of certain events, including the sale or other disposition of the
Series A preferred stock or the termination or expiration of the airline
services agreement between the Company and Northwest. On November 25, 2003, the Company completed an initial public offering
(the Offering) of its common stock, par value $.01 per share. In the
Offering, the Northwest Airlines Pension Plan sold the 19,400 shares that it
received during 2003. The Company did not receive any proceeds from the
Offering. 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 these cost
fluctuations. Payments based on pre-set rates. The Company is entitled to receive
semi-monthly payments for each block hour and cycle it operates and a monthly
fixed cost payment based on the size of its fleet. These payments are designed
to cover all of the Companys expenses incurred with respect to the ASA that
are not covered by the reimbursement payments. The substantial majority of
these expenses relate to labor costs, line maintenance and ground handling
costs in cities where Northwest does not have ground handling operations,
landing fees in cities other than Detroit, overhead and depreciation. Margin payments. The Company receives a monthly margin payment based on
the revenues described above calculated to achieve a target operating margin.
The target operating margin for the ten months ended December 31, 2002, and the
eleven months ended November 30, 2003 was 14%. Following the Offering, the
Company and Northwest amended the ASA (as discussed above) to lower the
Companys target operating margin to 10%, effective December 1, 2003. Under
the amended ASA, the Companys target operating margin will be reset to a
market-based percentage in 2008, but the reset target operating margin will be
no lower than 8% and no higher than 12%. The portion of any margin payments attributable to the reimbursement
payments will always be equal to the targeted operating margin for the relevant
period. However, since the payments based on pre-set rates are not based on the
actual expenses incurred, if the Companys expenses are not covered by these
payments, its actual operating margin could differ from its target operating
margin. 8




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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 September 2009 with a
final payment of the outstanding principal and interest due in December 2009.
The note payable also required monthly payments to the extent that the
Companys cash equivalents balance exceeds $40,000. This note accrues interest
at the rate of 3.4%, which is payable quarterly. In the event that the Company
does not satisfy its obligations under the note, Northwest has the right to set
off any such amounts against its payment obligations to the Company under the
ASA. Should Northwest terminate the ASA prior to December 2009, all
outstanding principal and interest would become immediately due and payable to
Northwest. Immediately following the Offering, Northwest made a capital contribution
to the Company in the amount of $50,000. The contribution of capital was used
by the Company to reduce the outstanding principal balance on the note payable.
The Company and Northwest subsequently amended the note payable to reflect an
outstanding principal balance of $135,000 and quarterly principal payments were
lowered to $3,000. The amended note payable also requires monthly principal
payments to the extent that the Companys cash and cash equivalents balance
exceeds $50,000. No other significant changes were made to the terms of the
note payable. 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 5.25%
and 5.0% at June 30, 2004 and 2003, respectively. The Revolver contains
certain affirmative and negative covenants regarding the operation of the
Company. As of June 30, 2004 and December 31, 2003 the Company was in
compliance with all covenants contained in the Revolver. 9




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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 8. 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 June 30, 2004: Operating LeasesAircraft
    
    Non-aircraftRemainder of 2004
    
    $
    109,878
    
    
    $
    2,5332005
    
    
    219,756
    
    
    
    4,9042006
    
    
    219,565
    
    
    
    4,8002007
    
    
    214,495
    
    
    
    4,5652008
    
    
    213,492
    
    
    
    4,380Thereafter
    
    
    1,908,958
    
    
    
    32,3262,886,144
    
    
    
    53,508Sublease rental income
    
    
    (22,794
    )
    
    
    (400
    )Total minimum operating lease payments
    
    $
    2,863,350
    
    
    $
    53,108
 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. Amounts recorded in the Companys condensed consolidated statements of
income for transactions with Northwest are as follows: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Revenue:Passenger revenue
    
    $
    151,654
    
    
    $
    107,561
    
    
    $
    285,041
    
    
    $
    206,166Other revenue
    
    
    144
    
    
    
    697
    
    
    
    183
    
    
    
    1,427Expenses:Aircraft fuel and taxes
    
    
    19,447
    
    
    
    12,803
    
    
    
    35,858
    
    
    
    23,096Aircraft rentals
    
    
    50,062
    
    
    
    33,016
    
    
    
    93,682
    
    
    
    62,527Other rentals and landing fees
    
    
    2,813
    
    
    
    2,813
    
    
    
    5,625
    
    
    
    5,625Ground handling services
    
    
    10,373
    
    
    
    7,805
    
    
    
    19,288
    
    
    
    14,177Other
    
    
    78
    
    
    
    99
    
    
    
    135
    
    
    
    150Interest expense
    
    
    1,217
    
    
    
    1,981
    
    
    
    2,468
    
    
    
    3,516
 10




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##### Table of Contents



Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data) 9. Related Party Transactions (continued) Nets amounts due from Northwest as of June 30, 2004 and December 31, 2003 were
$20,233 and $16,187, respectively, and are included in accounts receivable in
the Companys condensed consolidated balance sheets. 
 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 56%, 52% and 37%, respectively, during the three months ended
June 30, 2004, compared to the same period in 2003. Our ASMs, block hours and
cycles increased by approximately 57%, 51% and 36%, respectively, during the
six months ended June 30, 2004, compared to the same period in 2003. The
increases were driven primarily by the growth in our fleet of Canadair Regional
Jets (CRJs), 14 and 25 of which were added during the three and six months
ended June 30, 2004, respectively. By adding 36 aircraft since June 30, 2003,
we have grown our fleet by 55% to include 101 CRJs at June 30, 2004. Operating revenue increased by $42.7 million, or 39%, and $76.0 million,
or 36%, for the three and six months ended June 30, 2004, respectively, over
the same period in 2003. Operating income for the three and six months ended
June 30, 2004 were $16.9 million and $31.3 million, respectively, which
represented increases of $1.2 million over the same periods in 2003. Net income for the three and six months ended June 30, 2004 were $9.7
million and $17.8 million, respectively, which represented increases of $1.2
million over the same periods in 2003. Since December 31, 2003, our balance of
cash and cash equivalents has increased by $9.0 million to $40.6 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 June 30, 2004 would have been approximately
48% and 55%, respectively, had the target margin been 10% for the same period
in 2003. The growth in passenger revenue and operating income for the six
months ended June 30, 2004 would have been approximately 45% and 50%,
respectively, had the target margin been 10% for the same period in 2003. 11




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) The following reconciles our passenger revenue and operating income as
reported in accordance with generally accepted accounting principles (GAAP)
for the three and six months ended June 30, 2003 to passenger revenue and
operating income as if our target operating margin had been 10% for the same
periods. We believe that this information is useful as it indicates more clearly
our comparative year-to-year operating results. None of this information
should be considered a substitute for any measures prepared in accordance with
GAAP. We have included this reconciliation of non-GAAP financial measures to
our most comparable GAAP financial measures included herein. Three months ended June 30,2004
    
    2003
    
    % IncreasePassenger RevenuePassenger revenue in accordance with GAAP
    
    $
    151,654
    
    
    $
    107,561
    
    
    
    41
    %Adjustment to reduce target operating margin to 10% from 14%
    
    
    
    
    
    
    (4,781
    )Adjusted passenger revenue with 10% target operating margin
    
    $
    151,654
    
    
    $
    102,780
    
    
    
    48
    %Operating IncomeOperating income in accordance with GAAP
    
    $
    16,910
    
    
    $
    15,697
    
    
    
    8
    %Adjustment to reduce target operating margin to 10% from 14%
    
    
    
    
    
    
    (4,781
    )Adjusted operating income with 10% target operating margin
    
    $
    16,910
    
    
    $
    10,916
    
    
    
    55
    %
 Six months ended June 30,2004
    
    2003
    
    % IncreasePassenger RevenuePassenger revenue in accordance with GAAP
    
    $
    285,041
    
    
    $
    206,166
    
    
    
    38
    %Adjustment to reduce target operating margin to 10% from 14%
    
    
    
    
    
    
    (9,163
    )Adjusted passenger revenue with 10% target operating margin
    
    $
    285,041
    
    
    $
    197,003
    
    
    
    45
    %Operating IncomeOperating income in accordance with GAAP
    
    $
    31,254
    
    
    $
    30,036
    
    
    
    4
    %Adjustment to reduce target operating margin to 10% from 14%
    
    
    
    
    
    
    (9,163
    )Adjusted operating income with 10% target operating margin
    
    $
    31,254
    
    
    $
    20,873
    
    
    
    50
    %
 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. 12




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) We continue to focus on strong operational performance and cost
efficiencies in order to be well positioned to compete for the remaining 175
CRJs that Northwest has on option. Northwest has made no announcement
regarding the exercise of options or placement of these aircraft with any
regional carrier. We remain the only Northwest Airlink operator of 44-seat and
50-seat CRJs. Results of Operations The following discussion provides an analysis of our results of operations
and reasons for material changes therein for the three and six months ended
June 30, 2004 compared to the same periods ended June 30, 2003. All amounts
are in thousands except per share data. Revenue As noted in the discussion of our ASA, we are reimbursed for certain
operating expenses necessary to provide regional airline capacity to Northwest
and receive payments based on pre-set rates for fixed costs, completed block
hours and completed cycles. We also receive margin payments on those items
that are intended to achieve a target operating margin. Our operating results
are not affected by any seasonality trends historically associated with the
airline industry. Comparison of Three Months Ended June 30, 2004 to Three Months Ended June 30,
2003 The following is a summary of our passenger revenue by type, which
includes margin, (in thousands): Three Months Ended June 30,2004
    
    2003
    
    ChangePassenger revenue from expense reimbursement
    
    $
    100,662
    
    
    $
    69,752
    
    
    
    44
    %Passenger revenue based on pre-set rates
    
    
    50,992
    
    
    
    37,809
    
    
    
    35
    %Total passenger revenue
    
    $
    151,654
    
    
    $
    107,561
    
    
    
    41
    %
 13




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) The increase in passenger revenue of $44.1 million was caused primarily by
the addition of 36 aircraft to our fleet of CRJs. The increase in revenue
associated with expense reimbursements of $30.9 million was largely due to
increases in aircraft rentals, aircraft fuel and ground handling, which
increased with our level of operations. This increase in our fleet and the
corresponding increase in CRJ block hours and cycles of 52% and 37%,
respectively, accounted for increased passenger revenue based on pre-set rates
of $13.2 million. Operating Expenses The following summarizes our operating expenses, reimbursed and
unreimbursed, as provided under the terms of our ASA (in thousands): Three Months Ended June 30,2004
    
    2003Reimbursed
    
    Unreimbursed
    
    Total
    
    Reimbursed
    
    Unreimbursed
    
    TotalOperating expenses:Salaries, wages and benefits
    
    $
    
    
    
    $
    24,880
    
    
    $
    24,880
    
    
    $
    
    
    
    $
    20,542
    
    
    $
    20,542Aircraft fuel and taxes
    
    
    19,447
    
    
    
    80
    
    
    
    19,527
    
    
    
    13,062
    
    
    
    40
    
    
    
    13,102Aircraft maintenance, materials and repairs
    
    
    2,842
    
    
    
    3,027
    
    
    
    5,869
    
    
    
    1,458
    
    
    
    1,807
    
    
    
    3,265Aircraft rentals
    
    
    50,062
    
    
    
    
    
    
    
    50,062
    
    
    
    33,016
    
    
    
    
    
    
    
    33,016Other rentals and landing fees
    
    
    4,656
    
    
    
    4,202
    
    
    
    8,858
    
    
    
    3,992
    
    
    
    3,200
    
    
    
    7,192Government reimbursements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    (1,000
    )Ground handling services
    
    
    10,541
    
    
    
    4,309
    
    
    
    14,850
    
    
    
    7,938
    
    
    
    2,746
    
    
    
    10,684Depreciation and amortization
    
    
    
    
    
    
    769
    
    
    
    769
    
    
    
    
    
    
    
    753
    
    
    
    753Other
    
    
    3,048
    
    
    
    7,400
    
    
    
    10,448
    
    
    
    1,521
    
    
    
    4,677
    
    
    
    6,198$
    90,596
    
    
    $
    44,667
    
    
    $
    135,263
    
    
    $
    59,987
    
    
    $
    33,765
    
    
    $
    93,752Margin on expense reimbursements
    
    
    10,066
    
    
    
    
    
    
    
    
    
    
    
    9,765Passenger revenue from expense reimbursements
    
    $
    100,662
    
    
    
    
    
    
    
    
    
    
    $
    69,752
 14




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) The increase in operating expenses during the three months ended June 30,
2004 was predominately due to the growth in our level of operations. Total
operating expenses increased by $41.5 million, or 44%, which is comprised of
increases in reimbursed and unreimbursed expenses of approximately 51% and 32%,
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.
Compensation expense increased by $3.4 million due principally to an increase
of 36% and 38% in the number of pilots and flight attendants, respectively,
which was partially offset by a 22% decrease in the number of ground service
personnel. This decrease occurred in January 2004 following a reduction in
scheduled service at the Memphis hub. An increase in other employee benefits,
primarily the cost of employee insurance, accounted for the remaining increase
in salaries, wages and benefits. Aircraft fuel and taxes increased due to the 52% increase in block hours
and a 19% 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
$0.6 million of the increase in reimbursed maintenance expenses. Heavy airframe
maintenance checks were performed on 9 aircraft during the quarter and 13 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. As of June 30, 2004, we had 19 aircraft out of warranty. During
the three months ended June 30, 2004, we received warranty credits of repair
costs incurred during 2003 that were $0.5 million in excess of amounts
previously estimated. Aircraft
rentals increased by $17.0 million, or 52%, due to the addition
of 36 CRJ aircraft to our fleet. Ground handling services increased by $4.2 million, or 39%, due to the 37%
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 $1.6 million, or approximately 50%, which is due largely
to our increased level of operations. Government reimbursements related to a refund of previously paid passenger
screening costs received in May 2003. Because we are reimbursed for passenger
screening costs, we distributed 100% of the funds received to Northwest. Other expenses that are reimbursed by Northwest increased primarily due to
an increase in property taxes of $1.0 million and in passenger liability
insurance of $0.4 million. The increase in unreimbursed other expenses was
driven by our increased level of operations, most notably an increase of $1.3
million of expenses associated with new pilot training and $0.6 million of
expenses associated with overnight travel of our pilots and flight attendants. Nonoperating Expenses The decrease in interest expense was due to our reduced level of
borrowings from Northwest. Since June 30, 2003, the note payable owed to
Northwest has been reduced by $64.0 million due primarily to the $50.0 million
reduction at the time of the Offering. Additionally, borrowings under the line
of credit with Northwest decreased by $14.8 million from June 30, 2003 to June
30, 2004. 15




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) Miscellaneous income consists of a gain of $0.2 million recorded in
connection with the sale of Saab equipment during the three months ended June
30, 2004. The increase in our effective tax rate for the three months ended June 30,
2004 over the same period in 2003 was due primarily to an increase in our state
tax expense, which was caused by 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
June 30, 2004. Comparison of Six Months Ended June 30, 2004 to Six Months Ended June 30, 2003 The following is a summary of our passenger revenue by type, which
includes margin, (in thousands): Six Months Ended June 30,2004
    
    2003
    
    ChangePassenger revenue from expense reimbursement
    
    $
    189,974
    
    
    $
    134,238
    
    
    
    42
    %Passenger revenue based on pre-set rates
    
    
    95,067
    
    
    
    71,928
    
    
    
    32
    %Total passenger revenue
    
    $
    285,041
    
    
    $
    206,166
    
    
    
    38
    %
 The increase in passenger revenue of $78.9 million was caused primarily by
the addition of 36 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 $23.1 million. The increase in revenue associated with expense reimbursements of $55.7
million was largely due to increases in aircraft rentals, aircraft fuel and
ground handling, which increased with our level of operations. Operating Expenses The following summarizes our operating expenses, reimbursed and
unreimbursed, as provided under the terms of our ASA (in thousands): Six Months Ended June 30,2004
    
    2003Reimbursed
    
    Unreimbursed
    
    Total
    
    Reimbursed
    
    Unreimbursed
    
    TotalOperating expenses:Salaries, wages and benefits
    
    $
    
    
    
    $
    48,099
    
    
    $
    48,099
    
    
    $
    
    
    
    $
    39,698
    
    
    $
    39,698Aircraft fuel and taxes
    
    
    35,858
    
    
    
    209
    
    
    
    36,067
    
    
    
    23,886
    
    
    
    97
    
    
    
    23,983Aircraft maintenance, materials and repairs
    
    
    5,846
    
    
    
    5,669
    
    
    
    11,515
    
    
    
    2,841
    
    
    
    3,390
    
    
    
    6,231Aircraft rentals
    
    
    93,682
    
    
    
    
    
    
    
    93,682
    
    
    
    62,527
    
    
    
    28
    
    
    
    62,555Other rentals and landing fees
    
    
    9,190
    
    
    
    7,745
    
    
    
    16,935
    
    
    
    8,006
    
    
    
    5,963
    
    
    
    13,969Government reimbursements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    (1,000
    )Ground handling services
    
    
    20,479
    
    
    
    7,874
    
    
    
    28,353
    
    
    
    14,882
    
    
    
    5,126
    
    
    
    20,008Depreciation and amortization
    
    
    
    
    
    
    1,490
    
    
    
    1,490
    
    
    
    
    
    
    
    1,465
    
    
    
    1,465Other
    
    
    5,922
    
    
    
    12,735
    
    
    
    18,657
    
    
    
    4,303
    
    
    
    8,763
    
    
    
    13,066$
    170,977
    
    
    $
    83,821
    
    
    $
    254,798
    
    
    $
    115,445
    
    
    $
    64,530
    
    
    $
    179,975Margin on expense reimbursements
    
    
    18,997
    
    
    
    
    
    
    
    
    
    
    
    18,793Passenger revenue from expense reimbursements
    
    $
    189,974
    
    
    
    
    
    
    
    
    
    
    $
    134,238
 16




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) The increase in operating expenses during the six months ended June 30,
2004 was predominately due to the growth in our level of operations. Total
operating expenses increased by $74.8 million, or 42%, which is comprised of
increases in reimbursed and unreimbursed expenses of approximately 48% and 30%,
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.
Compensation expense increased by $5.8 million due principally to an increase
of 36% and 38% in the number of pilots and flight attendants, respectively,
which was partially offset by a 22% decrease in the number of ground service
personnel. The decrease in ground service personnel occurred as a result of the
January 2004 reduction in scheduled service at the Memphis hub, where most of
our ground service personnel are stationed. An increase in other employee
benefits, primarily the cost of employee insurance, accounted for the remaining
increase in salaries, wages and benefits. Aircraft fuel and taxes increased due to the 51% increase in block hours
and a 16% 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
$1.8 million of the increase in reimbursed maintenance expenses. Heavy airframe
maintenance checks were performed on 20 aircraft during the six months ended
June 30, 2004 and 13 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. As of June 30, 2004, we had 19 aircraft
out of warranty. During the three months ended June 30, 2004, we received
warranty credits of repair costs incurred during 2003 that were $0.6 million in
excess of amounts previously estimated. Aircraft rentals increased by $31.1 million, or 50%, due to the addition
of 36 CRJ aircraft to our fleet. Ground handling services increased by $8.3 million, or 42%, 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 $2.7 million, or approximately 46%, which is due largely
to our increased level of operations. Government reimbursements related to a refund of previously paid passenger
screening costs received in May 2003. Because we are reimbursed for passenger
screening costs, we distributed 100% of the funds received to Northwest. Other expenses that are reimbursed by Northwest increased primarily due to
an increase in property taxes of $1.4 million. The increase in unreimbursed
other expenses was driven by our increased level of operations, most notably an
increase of $1.6 million of expenses associated with new pilot training, $0.6
million in directors and officers insurance, and $0.8 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 June 30, 2003, the note payable owed to
Northwest has been reduced by $64.0 million due primarily to the $50.0 million
reduction at the time of the Offering. Additionally, borrowings under the line
of credit with Northwest decreased by $14.8 million from June 30, 2003 to June
30, 2004. 17




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) Miscellaneous income consists of a gain of $0.3 million recorded in
connection with the sale of Saab equipment during the six months ended June 30,
2004. The increase in our effective tax rate for the six months ended June 30,
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 six months
ended June 30, 2004. Certain Statistical Information Information with respect to our operating expense components (amounts in
thousands) as a percentage of revenue and as cents per ASM is as follows: Three Months Ended June 30,2004
    
    2003Percent of
    
    Cents per
    
    
    
    
    
    Percent of
    
    Cents perAmount
    
    Revenue
    
    ASM
    
    Amount
    
    Revenue
    
    ASMOperating expenses:Salaries, wages and benefits
    
    $
    24,880
    
    
    
    16
    %
    
    
    2.52
    
    
    $
    20,542
    
    
    
    19
    %
    
    
    3.23Aircraft fuel and taxes
    
    
    19,527
    
    
    
    13
    %
    
    
    1.97
    
    
    
    13,102
    
    
    
    12
    %
    
    
    2.06Aircraft maintenance, materials and repairs
    
    
    5,869
    
    
    
    4
    %
    
    
    0.59
    
    
    
    3,265
    
    
    
    3
    %
    
    
    0.51Aircraft rentals
    
    
    50,062
    
    
    
    33
    %
    
    
    5.06
    
    
    
    33,016
    
    
    
    30
    %
    
    
    5.20Other rentals and landing fees
    
    
    8,858
    
    
    
    5
    %
    
    
    0.90
    
    
    
    7,192
    
    
    
    6
    %
    
    
    1.13Ground handling services
    
    
    14,850
    
    
    
    10
    %
    
    
    1.50
    
    
    
    10,684
    
    
    
    10
    %
    
    
    1.68Depreciation and amortization
    
    
    769
    
    
    
    1
    %
    
    
    0.08
    
    
    
    753
    
    
    
    1
    %
    
    
    0.12Government reimbursements
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    (1,000
    )
    
    
    (1
    %)
    
    
    (0.16
    )Other
    
    
    10,448
    
    
    
    7
    %
    
    
    1.06
    
    
    
    6,198
    
    
    
    6
    %
    
    
    0.98Total operating expenses
    
    $
    135,263
    
    
    
    89
    %
    
    
    13.68
    
    
    $
    93,752
    
    
    
    86
    %
    
    
    14.75
 Six Months Ended June 30,2004
    
    2003Percent of
    
    Cents per
    
    
    
    
    
    Percent of
    
    Cents perAmount
    
    Revenue
    
    ASM
    
    Amount
    
    Revenue
    
    ASMOperating expenses:Salaries, wages and benefits
    
    $
    48,099
    
    
    
    17
    %
    
    
    2.66
    
    
    $
    39,698
    
    
    
    19
    %
    
    
    3.46Aircraft fuel and taxes
    
    
    36,067
    
    
    
    12
    %
    
    
    2.00
    
    
    
    23,983
    
    
    
    11
    %
    
    
    2.09Aircraft maintenance, materials and repairs
    
    
    11,515
    
    
    
    4
    %
    
    
    0.64
    
    
    
    6,231
    
    
    
    3
    %
    
    
    0.54Aircraft rentals
    
    
    93,682
    
    
    
    33
    %
    
    
    5.18
    
    
    
    62,555
    
    
    
    30
    %
    
    
    5.45Other rentals and landing fees
    
    
    16,935
    
    
    
    6
    %
    
    
    0.94
    
    
    
    13,969
    
    
    
    7
    %
    
    
    1.22Ground handling services
    
    
    28,353
    
    
    
    10
    %
    
    
    1.57
    
    
    
    20,008
    
    
    
    9
    %
    
    
    1.74Depreciation and amortization
    
    
    1,490
    
    
    
    1
    %
    
    
    0.08
    
    
    
    1,465
    
    
    
    1
    %
    
    
    0.13Government reimbursements
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    (1,000
    )
    
    
    0
    %
    
    
    (0.09
    )Other
    
    
    18,657
    
    
    
    6
    %
    
    
    1.03
    
    
    
    13,066
    
    
    
    6
    %
    
    
    1.14Total operating expenses
    
    $
    254,798
    
    
    
    89
    %
    
    
    14.10
    
    
    $
    179,975
    
    
    
    86
    %
    
    
    15.68
 18




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) The following table summarizes certain operational statistics for the
three months and six months ended June 30, 2004 and 2003: Three Months Ended June 30,2004
    
    2003
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    1,618
    
    
    
    1,132
    
    
    
    43
    %Revenue passenger miles (in thousands) (1)
    
    
    725,980
    
    
    
    439,776
    
    
    
    65
    %Available seat miles (in thousands)
    
    
    988,958
    
    
    
    635,503
    
    
    
    56
    %Passenger load factor (2)
    
    
    73.4
    %
    
    
    69.2
    %
    
    4.2 ptsOperating revenue per available seat mile (in cents)
    
    
    15.39
    
    
    
    17.22
    
    
    
    (11
    %)Operating costs per available seat mile (in cents)
    
    
    13.68
    
    
    
    14.75
    
    
    
    (7
    %)Block hours
    
    
    75,666
    
    
    
    49,903
    
    
    
    52
    %Cycles
    
    
    48,347
    
    
    
    35,400
    
    
    
    37
    %Average daily utilization (block hours)
    
    
    8.78
    
    
    
    8.70
    
    
    0.08 hrsAverage length of aircraft flight (miles)
    
    
    449
    
    
    
    376
    
    
    
    19
    %Number of operating aircraft (end of period)
    
    
    101
    
    
    
    65
    
    
    
    55
    %Employees at end of period
    
    
    2,477
    
    
    
    2,423
    
    
    
    2
    %
 Six Months Ended June 30,2004
    
    2003
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    2,847
    
    
    
    1,961
    
    
    
    45
    %Revenue passenger miles (in thousands) (1)
    
    
    1,239,077
    
    
    
    733,168
    
    
    
    69
    %Available seat miles (in thousands)
    
    
    1,807,647
    
    
    
    1,148,056
    
    
    
    57
    %Passenger load factor (2)
    
    
    68.5
    %
    
    
    63.9
    %
    
    4.6 ptsOperating revenue per available seat mile (in cents)
    
    
    15.82
    
    
    
    18.29
    
    
    
    (14
    %)Operating costs per available seat mile (in cents)
    
    
    14.10
    
    
    
    15.68
    
    
    
    (10
    %)Block hours
    
    
    140,435
    
    
    
    92,791
    
    
    
    51
    %Cycles
    
    
    90,532
    
    
    
    66,369
    
    
    
    36
    %Average daily utilization (block hours)
    
    
    8.72
    
    
    
    8.53
    
    
    0.19 hrsAverage length of aircraft flight (miles)
    
    
    435
    
    
    
    374
    
    
    
    16
    %Number of operating aircraft (end of period)
    
    
    101
    
    
    
    65
    
    
    
    55
    %Employees at end of period
    
    
    2,477
    
    
    
    2,423
    
    
    
    2
    %
  (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. 19




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) Liquidity and Capital Resources As of June 30, 2004, we had $40.6 million in cash and cash equivalents.
Net cash provided by operating activities for the six months ended June 30,
2004 and June 30, 2003 was $16.7 million and $20.8 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 six months ended June 30, 2004
and June 30, 2003 was $1.7 million and $8.1 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 six months ended June 30, 2004 was
$16.6 million more than the same period in 2003, due primarily to the 2003
borrowings under our line of credit with Northwest of $24.8 million. As of June 30, 2004, we had $40.0 million of available borrowings under
our revolving credit facility with Northwest, which had an interest rate of
5.25%. 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. The following chart details our debt and lease obligations on a pro forma
basis at June 30, 2004. Operating lease information includes scheduled
deliveries of the 28 additional aircraft we will receive through December 2005
at the basic aircraft rental rate provided in the ASA. Under our ASA, amounts
relating to operating leases will be directly reimbursed by Northwest. Payments Due by Period(in thousands)Total
    
    2004 (1)
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterContractual Obligations:Line of credit (2)
    
    $
    10,000
    
    
    $
    
    
    
    $
    10,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long term debt
    
    
    126,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    12,000
    
    
    
    66,000Operating leases (3)
    
    
    3,679,436
    
    
    
    115,010
    
    
    
    267,722
    
    
    
    275,549
    
    
    
    275,449
    
    
    
    275,280
    
    
    
    2,470,426Total contractual cash obligations
    
    $
    3,815,436
    
    
    $
    127,010
    
    
    $
    289,722
    
    
    $
    287,549
    
    
    $
    287,449
    
    
    $
    287,280
    
    
    $
    2,536,426
  (1)
    
    Contractual obligations for the remainder of 2004(2)
    
    Borrowings outstanding as of June 30, 2004, under our revolving credit facility with Northwest, which
expires December 31, 2005.(3)
    
    As of June 30, 2004, our obligations relating to operating leases, excluding future scheduled deliveries of
aircraft under the airline services agreement, were as follows (in thousands): Total
    
    2004 (1)
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter$ 
      2,916,458
    
    $
    108,505
    
    
    $
    216,849
    
    
    $
    216,749
    
    
    $
    216,649
    
    
    $
    216,480
    
    
    $
    1,941,226
 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. 20




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##### Table of Contents



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 progresses, and therefore it should be clearly understood that the
internal projections, beliefs and assumptions upon which we base our
expectations may change prior to the end of each quarter or the year. 21




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##### Table of Contents



Managements Discussion and Analysis of Results of Operations and Financial
Condition (continued) 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
are not a party to any derivative financial instruments. Aircraft fuel. Under the ASA, Northwest bears the economic risk of price
fluctuations in aircraft fuel. We are reimbursed in full by Northwest at the
lower of the actual cost of our passenger fuel (including taxes and fees) or
$0.78 per gallon; any excess over $0.78 is borne by Northwest and does not
yield a margin to us. Interest rates. All of our CRJs are operated under long-term operating
leases with Northwest. Our Saab aircraft, which are being subleased to Mesaba
Airlines, are leased from a third party. We also anticipate leasing all of our
future deliveries of aircraft. Under the ASA, the lease payments associated
with aircraft deliveries are fixed. We do not hold long-term interest sensitive
assets and, therefore, we are not exposed to interest rate fluctuations for our
assets. The note payable we issued to Northwest bears interest at a fixed rate,
but loans under our revolving credit facility bear interest at a floating rate.
We do not purchase or hold any derivative financial instruments to protect
against the effects of changes in interest rates. 
 Item 4. Controls and Procedures Our principal executive and financial officers have evaluated our
disclosure controls and procedures and, based on such evaluation, have
determined that such disclosure controls and procedures were effective as of
June 30, 2004 (the end of the period covered by this Quarterly Report on Form
10-Q). During our fiscal quarter ended June 30, 2004, no change occurred in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. 22




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##### Table of Contents



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 The Companys Annual Meeting of Stockholders was held on May 14, 2004.
Three Class I directors were elected to our Board of Directors: Philip H.
Trenary was elected with 20,662,219 votes for and 220,930 votes withheld, James
E. McGehee, Jr. was elected with 20,183,694 votes for and 699,455 withheld, and
Robert A. Peiser was elected with 20,662,219 votes for and 220,930 votes
withheld. A proposal to amend the 2003 Stock Incentive Plan was approved with
13,830,949 votes for, 4,937,355 votes against, and 23,621 votes abstained. 
 Item 5. Other Information None. 23




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits  10.22.2
    
    Form of Amendment No. 2 to the Airline Services
Agreement by and among Pinnacle Airlines Corp., Pinnacle Airlines,
Inc. and Northwest Airlines, Inc., effective November 26, 2003 (correcting filing of this
instrument as exhibit 10.22.2 to the Companys amended S-1
registration statement #333-83354 filed October 3, 2003)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.32
    
    Section 1350 Certification (b) Reports on Form 8-K: The Company filed the following Current Reports on Form 8-K during the
quarter ended June 30, 2004: Date Filed
    
    Event ReportedMarch 31, 2004
    
    Items 5 and 7. Issuance of a press release to announce
that Philip H. Trenary, President & CEO, has joined the
Companys Board of DirectorsApril 16, 2004
    
    Items 5 and 7. Issuance of a press release to report
passenger traffic results for March 2004April 29, 2004
    
    Items 7 and 12. Issuance of a press release announcing,
among other things, quarterly earnings results for its
first quarter 2004May 11, 2004
    
    Items 5 and 7. Issuance of a press release to report
passenger traffic results for April 2004June 10, 2004
    
    Items 5 and 7. Issuance of a press release to report
passenger traffic results for May 2004June 25, 2004
    
    Items 5 and 7. Issuance of a press release to announce
that in celebration of the delivery of its 100th Canadair
Regional Jet, President & CEO, Philip Trenary will open the
NASDAQ Stock Exchange on June 28, 2004 at NASDAQs Market
Site on Times Square in New York
 24




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. By:
    
    /s/ Philip H. TrenaryPhilip H. TrenaryDate: July 29, 2004
    
    
    
    President and Chief Executive OfficerBy:
    
    /s/ Curtis E. SawyerCurtis E. SawyerDate: July 29, 2004
    
    
    
    Vice President andChief Financial Officer
 25