##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2005
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from___to___
 Commission File Number 001-31898
 PINNACLE AIRLINES CORP.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    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)
  Yes þ
    
    
    
    No o
  Yes þ
    
    
    
    No o
  Yes o
    
    
    
    No þ




---



Table of Contents
 PART I.FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Statements of Operations(Unaudited)
    
    
    1Condensed Consolidated Balance Sheets (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
    
    
    20Item 3. Quantitative and Qualitative Disclosure about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATION
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 2. Changes in Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    36EX-31.1  CERTIFICATION OF CEOEX-31.2  CERTIFICATION OF CFOEX-32  CERTIFICATION OF THE CEO & CFO




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 Pinnacle Airlines Corp.
 
 Condensed Consolidated Statements of Operations (Unaudited)
 (in thousands, except per share data)
 Three Months Ended September 30,2005
    
    
    2004Operating revenuesRegional airline services
    
    $
    218,832
    
    
    $
    167,063Other
    
    
    2,111
    
    
    
    1,023Total operating revenues
    
    
    220,943
    
    
    
    168,086Operating expensesSalaries, wages and benefits
    
    
    35,155
    
    
    
    27,425Aircraft fuel
    
    
    30,555
    
    
    
    22,816Aircraft maintenance, materials and repairs
    
    
    7,473
    
    
    
    5,412Aircraft rentals
    
    
    73,737
    
    
    
    55,290Other rentals and landing fees
    
    
    11,464
    
    
    
    10,047Ground handling services
    
    
    23,616
    
    
    
    17,777Depreciation
    
    
    1,041
    
    
    
    812Other
    
    
    16,344
    
    
    
    9,982Provision for losses associated with
bankruptcy filings of
Northwest and Mesaba (Note 2)
    
    
    53,914
    
    
    
    Total operating expenses
    
    
    253,299
    
    
    
    149,561Operating income (loss)
    
    
    (32,356
    )
    
    
    18,525Operating income (loss) as a percentage of
operating revenues
    
    
    (14.6
    %)
    
    
    11.0
    %Nonoperating income (expense)
Interest expense
    
    
    (1,109
    )
    
    
    (1,212
    )Interest income
    
    
    402
    
    
    
    83Miscellaneous (expense) income, net
    
    
    (2
    )
    
    
    (7
    )Total nonoperating expense
    
    
    (709
    )
    
    
    (1,136
    )Income (loss) before income taxes
    
    
    (33,065
    )
    
    
    17,389Income tax (benefit) expense
    
    
    (11,673
    )
    
    
    4,740Net income (loss)
    
    $
    (21,392
    )
    
    $
    12,649Basic and diluted earnings (loss) per share
    
    $
    (0.98
    )
    
    $
    0.58Shares used in computing basic and diluted
earnings (loss) per share
    
    
    21,908
    
    
    
    21,892
  1




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##### Table of Contents



Pinnacle Airlines Corp.
 Condensed Consolidated Statements of Operations (Unaudited)
 (in thousands, except per share data)
 Nine Months Ended September 30,2005
    
    
    2004Operating revenuesRegional airline services
    
    $
    622,541
    
    
    $
    452,104Other
    
    
    6,033
    
    
    
    2,034Total operating revenues
    
    
    628,574
    
    
    
    454,138Operating expensesSalaries, wages and benefits
    
    
    99,664
    
    
    
    75,524Aircraft fuel
    
    
    84,660
    
    
    
    58,883Aircraft maintenance, materials and repairs
    
    
    23,546
    
    
    
    16,927Aircraft rentals
    
    
    206,632
    
    
    
    148,972Other rentals and landing fees
    
    
    32,668
    
    
    
    26,982Ground handling services
    
    
    69,405
    
    
    
    46,130Depreciation
    
    
    3,019
    
    
    
    2,302Other
    
    
    44,570
    
    
    
    28,639Provision for losses associated with bankruptcy filings of
Northwest and Mesaba (Note 2)
    
    
    53,914
    
    
    
    Total operating expenses
    
    
    618,078
    
    
    
    404,359Operating income
    
    
    10,496
    
    
    
    49,779Operating income as a percentage of operating revenues
    
    
    1.7
    %
    
    
    11.0
    %Nonoperating income (expense)Interest expense
    
    
    (3,266
    )
    
    
    (3,752
    )Interest income
    
    
    819
    
    
    
    194Miscellaneous (expense) income, net
    
    
    (2
    )
    
    
    309Gain on extinguishment of debt
    
    
    18,000
    
    
    
    Total nonoperating income (expense)
    
    
    15,551
    
    
    
    (3,249
    )Income before income taxes
    
    
    26,047
    
    
    
    46,530Income tax expense
    
    
    10,311
    
    
    
    16,129Net income
    
    $
    15,736
    
    
    $
    30,401Basic and diluted earnings per share
    
    $
    0.72
    
    
    $
    1.39Shares used in computing basic earnings per share
    
    
    21,908
    
    
    
    21,892Shares used in computing diluted earnings per share
    
    
    21,923
    
    
    
    21,897
  2




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Condensed Consolidated Balance Sheets
 (in thousands, except share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)AssetsCurrent assetsCash and cash equivalents
    
    $
    58,550
    
    
    $
    34,912Short-term investments
    
    
    4,000
    
    
    
    Receivables, net of allowance of $49,030 and $34, respectively
    
    
    26,969
    
    
    
    25,139Spare parts and supplies, net
    
    
    6,403
    
    
    
    5,341Prepaid expenses and other assets
    
    
    5,452
    
    
    
    5,644Deferred income taxes, net of allowance
    
    
    19,732
    
    
    
    860Total current assets
    
    
    121,106
    
    
    
    71,896Property and equipmentAircraft and rotable spares
    
    
    39,334
    
    
    
    35,837Other property and equipment
    
    
    19,271
    
    
    
    16,161Office furniture and fixtures
    
    
    1,941
    
    
    
    1,86360,546
    
    
    
    53,861Less accumulated depreciation
    
    
    (17,393
    )
    
    
    (14,445
    )Net property and equipment
    
    
    43,153
    
    
    
    39,416Other assets, primarily aircraft deposits
    
    
    24,845
    
    
    
    21,111Debt issuance costs, net
    
    
    4,252
    
    
    
    Contractual rights under airline services agreement, net
    
    
    14,736
    
    
    
    15,115Goodwill, net
    
    
    18,422
    
    
    
    18,422Total assets
    
    $
    226,514
    
    
    $
    165,960
  3




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##### Table of Contents



Pinnacle Airlines Corp.
 Condensed Consolidated Balance Sheets
 (in thousands, except share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)Liabilities and stockholders equity (deficiency)Current liabilitiesAccounts payable
    
    $
    23,847
    
    
    $
    16,983Accrued expenses
    
    
    20,532
    
    
    
    15,083Line of credit with First Tennessee
    
    
    17,000
    
    
    
    Income taxes payable
    
    
    21,430
    
    
    
    1,633Other current liabilities, including $2,793 of accrued sublease losses
(Note 2)
    
    
    4,572
    
    
    
    6,756Total current liabilities
    
    
    87,381
    
    
    
    40,455Deferred income taxes
    
    
    6,968
    
    
    
    7,105Other liabilities, including $2,092 of accrued sublease losses (Note 2)
    
    
    2,542
    
    
    
    948Senior convertible notes
    
    
    121,000
    
    
    
    Note payable and line of credit with Northwest
    
    
    
    
    
    
    125,000Commitments 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 and issued
    
    
    
    
    
    
    Series common stock, par value $0.01 per share; 5,000,000 shares
authorized; no shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value; 40,000,000 shares authorized, 21,945,260
and 21,950,260 shares issued, respectively
    
    
    219
    
    
    
    220Additional paid-in capital
    
    
    85,549
    
    
    
    85,603Accumulated deficit
    
    
    (77,113
    )
    
    
    (92,849
    )Unearned compensation on restricted stock
    
    
    (32
    )
    
    
    (522
    )Total stockholders equity (deficiency)
    
    
    8,623
    
    
    
    (7,548
    )Total liabilities and stockholders equity (deficiency)
    
    $
    226,514
    
    
    $
    165,960
  4




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Condensed Consolidated Statements of Cash Flows (Unaudited)
 (in thousands)
 Nine Months Ended September 30,2005
    
    
    2004Operating activitiesNet income
    
    $
    15,736
    
    
    $
    30,401Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    3,539
    
    
    
    2,302Provision for losses associated with bankruptcy filings of
Northwest and
Mesaba (Note 2)
    
    
    53,914
    
    
    
    Deferred income tax income expense (benefit)
    
    
    (19,008
    )
    
    
    2,726Loss (gain) on disposal of rotable spares
    
    
    311
    
    
    
    (132
    )Provision for spare parts and supplies obsolescence
    
    
    361
    
    
    
    123Gain on extinguishment of debt
    
    
    (18,000
    )
    
    
    Amortization of unearned compensation, net of forfeitures
    
    
    436
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    (50,859
    )
    
    
    (4,352
    )Spare parts and supplies
    
    
    (1,423
    )
    
    
    (927
    )Prepaid expenses and other current assets
    
    
    192
    
    
    
    471Aircraft and engine deposits
    
    
    (3,734
    )
    
    
    (5,523
    )Accounts payable and accrued expenses
    
    
    12,313
    
    
    
    5,964Other liabilities
    
    
    (361
    )
    
    
    85Income taxes payable
    
    
    19,797
    
    
    
    (5,141
    )Cash provided by operating activities
    
    
    13,214
    
    
    
    25,549Investing activitiesPurchases of property and equipment
    
    
    (7,068
    )
    
    
    (5,938
    )Purchase of short-term investments
    
    
    (45,350
    )
    
    
    Proceeds from sale of short-term investments
    
    
    41,350
    
    
    
    Purchase of contractual rights
    
    
    (5,115
    )
    
    
    Proceeds from the sale of property and equipment
    
    
    
    
    
    
    960Cash used in investing activities
    
    
    (16,183
    )
    
    
    (4,978
    )Financing activitiesPayment to extinguish note payable
    
    
    (101,600
    )
    
    
    Payments on note payable
    
    
    
    
    
    
    (9,000
    )Proceeds from line of credit with First Tennessee
    
    
    17,000
    
    
    
    Repayments of line of credit with Northwest
    
    
    (5,000
    )
    
    
    (5,000
    )Gross proceeds from issuance of senior convertible notes
    
    
    121,000
    
    
    
    Debt issuance costs
    
    
    (4,393
    )
    
    
    Other costs to retire note payable
    
    
    (400
    )
    
    
    Cash provided by (used in) financing activities
    
    
    26,607
    
    
    
    (14,000
    )Net increase in cash and cash equivalents
    
    
    23,638
    
    
    
    6,571Cash and cash equivalents at beginning of period
    
    
    34,912
    
    
    
    31,523Cash and cash equivalents at end of period
    
    $
    58,550
    
    
    $
    38,094Supplemental disclosure of cash flow informationInterest paid
    
    $
    2,584
    
    
    $
    4,766Income tax payments
    
    $
    9,523
    
    
    $
    19,146
  5




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
  1. Basis of Presentation
     2. Northwest and Mesaba Bankruptcy Filings
    6




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 2. Northwest and Mesaba Bankruptcy Filings (continued)
        7




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 2. Northwest and Mesaba Bankruptcy Filings (continued)
   3. Airline Services Agreement
        8




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 3. Airline Services Agreement (continued)
   4. Related Party Transactions
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Regional airline services revenue
    
    $
    218,832
    
    
    $
    167,063
    
    
    $
    622,541
    
    
    $
    452,104Other revenue
    
    
    1,644
    
    
    
    699
    
    
    
    4,436
    
    
    
    882Expenses:Aircraft fuel
    
    
    30,555
    
    
    
    22,698
    
    
    
    84,660
    
    
    
    58,556Aircraft rentals
    
    
    73,737
    
    
    
    55,290
    
    
    
    206,632
    
    
    
    148,972Other rentals and landing fees
    
    
    2,813
    
    
    
    2,813
    
    
    
    8,438
    
    
    
    8,438Ground handling services
    
    
    17,657
    
    
    
    12,657
    
    
    
    49,699
    
    
    
    31,945Other
    
    
    1,186
    
    
    
    210
    
    
    
    1,699
    
    
    
    345Provision for losses associated with the
Northwest bankruptcy filing (Note 2)
    
    
    49,030
    
    
    
    
    
    
    
    49,030
    
    
    
    Interest expense
    
    
    
    
    
    
    1,178
    
    
    
    463
    
    
    
    3,646
    9




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 4. Related Party Transactions (continued)
     5. Senior Convertible Notes
    10




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 5. Senior Convertible Notes (continued)
   
    
    During a quarter (and only during such quarter) if the closing price of the
Companys common stock exceeds 120% of the conversion price of the Notes
(initially $15.86 per share) for at least 20 of the last 30 trading days of the
preceding quarter;
    
    During a five day period after the Notes have traded for a five day period at a
price that is less than 98% of the equivalent value that could be realized upon
conversion of the Notes;
    
    If the Company calls the Notes for redemption;
    
    If a change of control or other specified corporate transactions or
distributions to holders of the Companys common stock occurs (and in some
instances, the Company may also owe an additional premium upon a change in
control); and
    
    During the 10 trading days prior to the maturity date of February 15, 2025.
  6. Line of Credit
    11




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 7. Borrowings from Northwest
      8. Leases
     12




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 8. Leases (continued)
    Noncancelable LeasesAircraft
    
    
    Non-aircraftRemainder of 2005
    
    $
    74,889
    
    
    $
    1,7042006
    
    
    299,440
    
    
    
    6,7042007
    
    
    294,452
    
    
    
    6,3072008
    
    
    293,292
    
    
    
    5,5322009
    
    
    292,018
    
    
    
    5,287Thereafter
    
    
    2,335,200
    
    
    
    34,7303,589,291
    
    
    
    60,264Sublease rental payments, net of reserve
    
    
    (8,382
    )
    
    
    (163
    )Total minimum operating lease payments
    
    $
    3,580,909
    
    
    $
    60,101
 9. Earnings (Loss) Per Share
  13




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 9. Earnings (Loss) Per Share (continued)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    (21,392
    )
    
    $
    12,649
    
    
    $
    15,736
    
    
    $
    30,401Basic and diluted earnings (loss) per share
    
    $
    (0.98
    )
    
    $
    0.58
    
    
    $
    0.72
    
    
    $
    1.39Share computation:Weighted average number of shares outstanding for basic earnings (loss) per
share
    
    
    21,908
    
    
    
    21,892
    
    
    
    21,908
    
    
    
    21,892Assumed exercise of stock options
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    5Weighted average number of shares outstanding for diluted earnings (loss)
per
share
    
    
    21,908
    
    
    
    21,892
    
    
    
    21,923
    
    
    
    21,897
   10. Stock-Based Compensation
  Stock Options
  14




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 10. Stock-Based Compensation (continued)
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    (21,392
    )
    
    $
    12,649
    
    
    $
    15,736
    
    
    $
    30,401Add: Stock-based compensation expense
included in reported net income, net of tax
    
    
    61
    
    
    
    
    
    
    
    275
    
    
    
    Deduct: Total pro forma stock-based
compensation expense, net of tax
    
    
    (259
    )
    
    
    (147
    )
    
    
    (946
    )
    
    
    (732
    )Pro forma net income (loss)
    
    $
    (21,590
    )
    
    $
    12,502
    
    
    $
    15,065
    
    
    $
    29,669Earnings (loss) per common share:Basic and diluted  as reported
    
    $
    (0.98
    )
    
    $
    0.58
    
    
    $
    0.72
    
    
    $
    1.39Basic  pro forma
    
    $
    (0.99
    )
    
    $
    0.57
    
    
    $
    0.69
    
    
    $
    1.36Diluted  pro forma
    
    $
    (0.99
    )
    
    $
    0.57
    
    
    $
    0.69
    
    
    $
    1.35
  Restricted Stock
   15




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##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 11. Income Taxes
  Three Months Ended September 30,2005
    
    
    2004$
    
    
    %
    
    
    $
    
    
    %Income tax expense (benefit) at
statutory
Rate
    
    $
    (11,573
    )
    
    
    35.0
    %
    
    $
    6,086
    
    
    
    35.0
    %State income taxes, net of federal taxes
    
    
    (93
    )
    
    
    0.3
    %
    
    
    313
    
    
    
    1.8
    %Decrease in estimate of 2003 income
taxes
    
    
    
    
    
    
    
    
    
    
    (1,063
    )
    
    
    (6.1
    %)Decrease in estimate of 2004 income
Taxes
    
    
    
    
    
    
    
    
    
    
    (611
    )
    
    
    (3.5
    %)Other
    
    
    (7
    )
    
    
    0.0
    %
    
    
    15
    
    
    
    0.2
    %Income tax expense (benefit)
    
    $
    (11,673
    )
    
    
    35.3
    %
    
    $
    4,740
    
    
    
    27.3
    %
 Nine Months Ended September 30,2005
    
    
    2004$
    
    
    %
    
    
    $
    
    
    %Income tax expense at statutory rate
    
    $
    9,116
    
    
    
    35.0
    %
    
    $
    16,285
    
    
    
    35.0
    %State income taxes, net of federal taxes
    
    
    1,134
    
    
    
    4.4
    %
    
    
    837
    
    
    
    1.8
    %Decrease in estimate of 2003 income
taxes
    
    
    
    
    
    
    
    
    
    
    (1,063
    )
    
    
    (2.3
    %)Other
    
    
    61
    
    
    
    0.2
    %
    
    
    70
    
    
    
    0.3
    %Income tax expense
    
    $
    10,311
    
    
    
    39.6
    %
    
    $
    16,129
    
    
    
    34.7
    %
    12. Warranty
  16




---



##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 13. Contractual Rights under Airline Services Agreement
     14. Manufacturer Credits
   15. Short-Term Investments
   17




---



##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 15. Short-Term Investments (continued)
  16. Commitments and Contingencies
 Employees.
 Legal Proceedings.
 Purchase Commitments.
  Self-Insurance
 Financings and Guarantees
 18




---



##### Table of Contents



Pinnacle Airlines Corp.
 Notes to Condensed Consolidated Financial Statements (Unaudited)
 (all amounts in thousands, except per share data)
 16. Commitments and Contingencies (continued)
 Regulatory Matters
 General Guarantees and Indemnifications.
    Other contingencies
  19




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condition
 General
   Overview
     20




---



##### Table of Contents



Three Months Ended September 30,% Increase2005
    
    
    2004
    
    
    (decrease)(in thousands)Operating and Net Income (Loss):Operating income (loss) in accordance with GAAP
    
    $
    (32,356
    )
    
    $
    18,525
    
    
    
    (275
    )%Add: Provision for losses associated with Northwest
and Mesaba bankruptcy filings
    
    
    53,914
    
    
    
    
    
    
    
    100
    %Operating income
    
    $
    21,558
    
    
    $
    18,525
    
    
    
    16
    %Net income (loss) in accordance with GAAP
    
    $
    (21,392
    )
    
    $
    12,649
    
    
    
    (269
    )%Add: Provision for losses associated with Northwest
and Mesaba bankruptcy filings, net of tax
    
    
    34,519
    
    
    
    
    
    
    
    100
    %Net income
    
    $
    13,127
    
    
    $
    12,649
    
    
    
    4
    %Basic and Diluted EPS:Basic and diluted EPS (LPS) in accordance with GAAP
    
    $
    (0.98
    )
    
    $
    0.58
    
    
    
    (269
    )%Add: Provision for losses associated with Northwest
and Mesaba bankruptcy filings, net of tax
    
    
    1.58
    
    
    
    
    
    
    
    100
    %Basic and diluted EPS
    
    $
    0.60
    
    
    $
    0.58
    
    
    
    3
    %
 Nine Months Ended September 30,% Increase2005
    
    
    2004
    
    
    (decrease)(in thousands)Operating and Net Income (Loss):Operating income (loss) in accordance with GAAP
    
    $
    10,496
    
    
    $
    49,779
    
    
    
    (79
    )%Add: Provision for losses associated with Northwest
and Mesaba bankruptcy filings
    
    
    53,914
    
    
    
    
    
    
    
    100
    %Operating income
    
    $
    64,410
    
    
    $
    49,779
    
    
    
    29
    %Net income (loss) in accordance with GAAP
    
    $
    15,736
    
    
    $
    30,401
    
    
    
    48
    %Add: Provision for losses associated with Northwest
and Mesaba bankruptcy filings, net of tax
    
    
    34,519
    
    
    
    
    
    
    
    100
    %Deduct: Gain on extinguishment of debt, net of tax
    
    
    (11,302
    )
    
    
    
    
    
    
    100
    %Net income
    
    $
    38,953
    
    
    $
    30,401
    
    
    
    28
    %Basic and Diluted EPS:Basic and diluted EPS in accordance with GAAP
    
    $
    0.72
    
    
    $
    1.39
    
    
    
    (48
    )%Add: Provision for losses associated with Northwest
and Mesaba bankruptcy filings, net of tax
    
    
    1.58
    
    
    
    
    
    
    
    100
    %Deduct: Gain on extinguishment of debt, net of
related tax
    
    
    (0.52
    )
    
    
    
    
    
    
    (100
    )%Basic and diluted EPS
    
    $
    1.78
    
    
    $
    1.39
    
    
    
    28
    %
 21




---



##### Table of Contents



Outlook
        22




---



##### Table of Contents



Results of Operations
  Comparison of Three Months Ended September 30, 2005 to Three Months Ended September 30,
2004
 Revenues
  23




---



##### Table of Contents



Three Months Ended September 30,(in thousands)2005
    
    
    2004Reimbursed
    
    
    Pre-set Rates
    
    
    Total
    
    
    Reimbursed
    
    
    Pre-set Rates
    
    
    TotalOperating revenues:Regional airline services
    
    $
    148,291
    
    
    $
    70,541
    
    
    $
    218,832
    
    
    $
    111,270
    
    
    $
    55,793
    
    
    $
    167,063Other
    
    
    
    
    
    
    2,111
    
    
    
    2,111
    
    
    
    
    
    
    
    1,023
    
    
    
    1,023Total operating revenues
    
    
    148,291
    
    
    
    72,652
    
    
    
    220,943
    
    
    
    111,270
    
    
    
    56,816
    
    
    
    168,086Operating expenses:Salaries, wages and benefits
    
    
    
    
    
    
    35,155
    
    
    
    35,155
    
    
    
    
    
    
    
    27,425
    
    
    
    27,425Aircraft fuel
    
    
    30,338
    
    
    
    217
    
    
    
    30,555
    
    
    
    22,698
    
    
    
    118
    
    
    
    22,816Aircraft maintenance, materials and repairs
    
    
    2,537
    
    
    
    4,936
    
    
    
    7,473
    
    
    
    2,634
    
    
    
    2,778
    
    
    
    5,412Aircraft rentals
    
    
    73,737
    
    
    
    
    
    
    
    73,737
    
    
    
    55,290
    
    
    
    
    
    
    
    55,290Other rentals and landing fees
    
    
    4,726
    
    
    
    6,738
    
    
    
    11,464
    
    
    
    4,768
    
    
    
    5,279
    
    
    
    10,047Ground handling services
    
    
    17,637
    
    
    
    5,979
    
    
    
    23,616
    
    
    
    12,684
    
    
    
    5,093
    
    
    
    17,777Depreciation
    
    
    
    
    
    
    1,041
    
    
    
    1,041
    
    
    
    
    
    
    
    812
    
    
    
    812Other
    
    
    4,487
    
    
    
    11,857
    
    
    
    16,344
    
    
    
    2,069
    
    
    
    7,913
    
    
    
    9,982Charges associated with bankruptcy filings of
Northwest and Mesaba (Note 2)
    
    
    
    
    
    
    
    
    
    
    53,914
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    133,462
    
    
    
    65,923
    
    
    
    253,299
    
    
    
    100,143
    
    
    
    49,418
    
    
    
    149,561Operating income:
    
    $
    14,829
    
    
    $
    6,729
    
    
    $
    (32,356
    )
    
    $
    11,127
    
    
    $
    7,398
    
    
    $
    18,525Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    (9.3
    )%
    
    
    (14.6
    )%
    
    
    10.0
    %
    
    
    13.0
    %
    
    
    11.0
    %
   Operating Expenses
   24




---



##### Table of Contents



Nonoperating Income and Expenses
   Income Tax Expense
  25




---



##### Table of Contents



Comparison of Nine Months Ended September 30, 2005 to Nine Months Ended September 30, 2004
 Revenues
  Nine Months Ended September 30,(in thousands)2005
    
    
    2004Reimbursed
    
    
    Pre-set Rates
    
    
    Total
    
    
    Reimbursed
    
    
    Pre-set Rates
    
    
    TotalOperating revenues:Regional airline services
    
    $
    420,349
    
    
    $
    202,192
    
    
    $
    622,541
    
    
    $
    301,244
    
    
    $
    150,860
    
    
    $
    452,104Other
    
    
    
    
    
    
    6,033
    
    
    
    6,033
    
    
    
    
    
    
    
    2,034
    
    
    
    2,034Total operating revenues
    
    
    420,349
    
    
    
    208,225
    
    
    
    628,574
    
    
    
    301,244
    
    
    
    152,894
    
    
    
    454,138Operating expenses:Salaries, wages and benefits
    
    
    
    
    
    
    99,664
    
    
    
    99,664
    
    
    
    
    
    
    
    75,524
    
    
    
    75,524Aircraft fuel
    
    
    84,172
    
    
    
    488
    
    
    
    84,660
    
    
    
    58,556
    
    
    
    327
    
    
    
    58,883Aircraft maintenance, materials and repairs
    
    
    10,030
    
    
    
    13,516
    
    
    
    23,546
    
    
    
    8,480
    
    
    
    8,447
    
    
    
    16,927Aircraft rentals
    
    
    206,632
    
    
    
    
    
    
    
    206,632
    
    
    
    148,972
    
    
    
    
    
    
    
    148,972Other rentals and landing fees
    
    
    14,068
    
    
    
    18,600
    
    
    
    32,668
    
    
    
    13,958
    
    
    
    13,024
    
    
    
    26,982Ground handling services
    
    
    51,528
    
    
    
    17,877
    
    
    
    69,405
    
    
    
    33,163
    
    
    
    12,967
    
    
    
    46,130Depreciation
    
    
    
    
    
    
    3,019
    
    
    
    3,019
    
    
    
    
    
    
    
    2,302
    
    
    
    2,302Other
    
    
    11,884
    
    
    
    32,686
    
    
    
    44,570
    
    
    
    7,991
    
    
    
    20,648
    
    
    
    28,639Charges associated with bankruptcy filings of
Northwest and Mesaba (Note 2)
    
    
    
    
    
    
    
    
    
    
    53,914
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    378,314
    
    
    
    185,850
    
    
    
    618,078
    
    
    
    271,120
    
    
    
    133,239
    
    
    
    404,359Operating income:
    
    $
    42,035
    
    
    $
    22,375
    
    
    $
    10,496
    
    
    $
    30,124
    
    
    $
    19,655
    
    
    $
    49,779Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    (10.7
    )%
    
    
    1.7
    %
    
    
    10.0
    %
    
    
    12.9
    %
    
    
    11.0
    %
   Operating Expenses
   26




---



##### Table of Contents



Nonoperating Income and Expenses
   Income Tax Expense
  27




---



##### Table of Contents



Certain Statistical Information
  Three Months Ended September 30,2005
    
    
    2004Cost per
    
    
    Amount
    
    
    
    
    
    
    
    
    
    
    Cost perAmount (in
    
    
    Percent of
    
    
    Cents per
    
    
    Block Hour
    
    
    (in
    
    
    Percent of
    
    
    Cents per
    
    
    Block Hourthousands)
    
    
    Revenue
    
    
    ASM
    
    
    (dollars)
    
    
    thousands)
    
    
    Revenue
    
    
    ASM
    
    
    (dollars)Operating expenses:Salaries, wages and benefits
    
    $
    35,155
    
    
    
    16
    %
    
    
    2.26
    
    
    $
    305
    
    
    $
    27,426
    
    
    
    16
    %
    
    
    2.36
    
    
    $
    313Aircraft fuel
    
    
    30,555
    
    
    
    14
    %
    
    
    1.96
    
    
    
    265
    
    
    
    22,816
    
    
    
    14
    %
    
    
    1.97
    
    
    
    261Aircraft maintenance, materials and repairs
    
    
    7,473
    
    
    
    4
    %
    
    
    0.48
    
    
    
    65
    
    
    
    5,412
    
    
    
    3
    %
    
    
    0.47
    
    
    
    62Aircraft rentals
    
    
    73,737
    
    
    
    33
    %
    
    
    4.74
    
    
    
    639
    
    
    
    55,289
    
    
    
    33
    %
    
    
    4.77
    
    
    
    632Other rentals and landing fees
    
    
    11,464
    
    
    
    5
    %
    
    
    0.74
    
    
    
    99
    
    
    
    10,047
    
    
    
    6
    %
    
    
    0.87
    
    
    
    115Ground handling services
    
    
    23,616
    
    
    
    11
    %
    
    
    1.52
    
    
    
    205
    
    
    
    17,777
    
    
    
    11
    %
    
    
    1.53
    
    
    
    203Depreciation
    
    
    1,041
    
    
    
    0
    %
    
    
    0.07
    
    
    
    9
    
    
    
    812
    
    
    
    0
    %
    
    
    0.07
    
    
    
    8Other
    
    
    16,344
    
    
    
    7
    %
    
    
    1.05
    
    
    
    141
    
    
    
    9,982
    
    
    
    6
    %
    
    
    0.86
    
    
    
    114Provision
for losses associated with bankruptcy filings of Northwest and Mesaba
(Note 2)
    
    
    53,914
    
    
    
    23
    %
    
    
    3.47
    
    
    
    467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    $
    253,299
    
    
    
    113
    %
    
    
    16.29
    
    
    $
    2,195
    
    
    $
    149,561
    
    
    
    89
    %
    
    $
    12.90
    
    
    $
    1,708
 Nine Months Ended September 30,2005
    
    
    2004Cost per
    
    
    Amount
    
    
    
    
    
    
    
    
    
    
    Cost perAmount (in
    
    
    Percent of
    
    
    Cents per
    
    
    Block Hour
    
    
    (in
    
    
    Percent of
    
    
    Cents per
    
    
    Block Hourthousands)
    
    
    Revenue
    
    
    ASM
    
    
    (dollars)
    
    
    thousands)
    
    
    Revenue
    
    
    ASM
    
    
    (dollars)Operating expenses:Salaries, wages and benefits
    
    $
    99,664
    
    
    
    16
    %
    
    
    2.30
    
    
    $
    306
    
    
    $
    75,524
    
    
    
    17
    %
    
    
    2.55
    
    
    $
    331Aircraft fuel
    
    
    84,660
    
    
    
    14
    %
    
    
    1.96
    
    
    
    260
    
    
    
    58,883
    
    
    
    13
    %
    
    
    1.98
    
    
    
    258Aircraft maintenance, materials and repairs
    
    
    23,546
    
    
    
    4
    %
    
    
    0.54
    
    
    
    72
    
    
    
    16,927
    
    
    
    4
    %
    
    
    0.57
    
    
    
    74Aircraft rentals
    
    
    206,632
    
    
    
    33
    %
    
    
    4.78
    
    
    
    634
    
    
    
    148,972
    
    
    
    33
    %
    
    
    5.02
    
    
    
    654Other rentals and landing fees
    
    
    32,668
    
    
    
    5
    %
    
    
    0.76
    
    
    
    100
    
    
    
    26,982
    
    
    
    6
    %
    
    
    0.91
    
    
    
    119Ground handling services
    
    
    69,405
    
    
    
    11
    %
    
    
    1.60
    
    
    
    213
    
    
    
    46,130
    
    
    
    10
    %
    
    
    1.55
    
    
    
    202Depreciation
    
    
    3,019
    
    
    
    0
    %
    
    
    0.07
    
    
    
    10
    
    
    
    2,302
    
    
    
    0
    %
    
    
    0.08
    
    
    
    10Other
    
    
    44,570
    
    
    
    7
    %
    
    
    1.03
    
    
    
    136
    
    
    
    28,639
    
    
    
    6
    %
    
    
    0.97
    
    
    
    126Provision
for losses associated with bankruptcy filings of Northwest and Mesaba
(Note 2)
    
    
    53,914
    
    
    
    8
    %
    
    
    1.18
    
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    $
    618,078
    
    
    
    98
    %
    
    
    14.22
    
    
    $
    1,888
    
    
    $
    404,359
    
    
    
    89
    %
    
    
    13.63
    
    
    $
    1,774
 28




---



##### Table of Contents



Three Months Ended September 30,2005
    
    2004
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    2,192
    
    
    
    1,777
    
    
    
    23
    %Revenue passenger miles (in thousands) (1)
    
    
    1,160,095
    
    
    
    827,798
    
    
    
    40
    %Available seat miles (in thousands)
    
    
    1,555,520
    
    
    
    1,159,265
    
    
    
    34
    %Passenger load factor (2)
    
    
    74.6
    %
    
    
    71.4
    %
    
    3.2 ptsOperating revenue per available seat mile (in cents)
    
    
    14.20
    
    
    
    14.50
    
    
    
    (2
    %)Operating costs per available seat mile (in cents)
    
    
    16.29
    
    
    
    12.90
    
    
    
    26
    %Operating costs per available seat mile without the
losses associated with bankruptcy filings (in cents)
    
    
    12.82
    
    
    
    12.90
    
    
    
    (1
    %)Operating revenue per block hour
    
    $
    1,915
    
    
    $
    1,920
    
    
    
    (0
    %)Operating costs per block hour
    
    $
    2,195
    
    
    $
    1,708
    
    
    
    29
    %Operating costs per block hour without the losses
associated with bankruptcy filings
    
    $
    1,728
    
    
    $
    1,708
    
    
    
    1
    %Block hours
    
    
    115,358
    
    
    
    87,540
    
    
    
    32
    %Cycles
    
    
    66,094
    
    
    
    54,946
    
    
    
    20
    %Average daily utilization (block hours)
    
    
    9.04
    
    
    
    9.16
    
    
    (0.12 hrs)Average stage length (miles)
    
    
    510
    
    
    
    466
    
    
    
    9
    %Number of operating aircraft (end of period)
    
    
    139
    
    
    
    109
    
    
    
    28
    %Employees (end of period)
    
    
    3,605
    
    
    
    2,826
    
    
    
    28
    %
 Nine Months Ended September 30,2005
    
    2004
    
    ChangeOther Data:Revenue passengers (in thousands)
    
    
    5,971
    
    
    
    4,625
    
    
    
    29
    %Revenue passenger miles (in thousands) (1)
    
    
    3,064,647
    
    
    
    2,066,875
    
    
    
    48
    %Available seat miles (in thousands)
    
    
    4,326,501
    
    
    
    2,966,912
    
    
    
    46
    %Passenger load factor (2)
    
    
    70.8
    %
    
    
    69.7
    %
    
    1.1 ptsOperating revenue per available seat mile (in cents)
    
    
    14.53
    
    
    
    15.31
    
    
    
    (5
    %)Operating costs per available seat mile (in cents)
    
    
    14.22
    
    
    
    13.63
    
    
    
    4
    %Operating costs per available seat mile without the
losses associated with bankruptcy filings (in cents)
    
    
    13.04
    
    
    
    13.63
    
    
    
    (4
    %)Operating revenue per block hour
    
    $
    1,929
    
    
    $
    1,992
    
    
    
    (3
    %)Operating costs per block hour
    
    $
    1,888
    
    
    $
    1,774
    
    
    
    6
    %Operating costs per block hour without the losses
associated with bankruptcy filings
    
    $
    1,731
    
    
    $
    1,774
    
    
    
    (2
    %)Block hours
    
    
    325,802
    
    
    
    227,976
    
    
    
    43
    %Cycles
    
    
    187,188
    
    
    
    145,478
    
    
    
    29
    %Average daily utilization (block hours)
    
    
    9.20
    
    
    
    8.88
    
    
    0.32 hrsAverage stage length (miles)
    
    
    502
    
    
    
    447
    
    
    
    12
    %Number of operating aircraft (end of period)
    
    
    139
    
    
    
    109
    
    
    
    28
    %Employees (end of period)
    
    
    3,605
    
    
    
    2,826
    
    
    
    28
    %
 
 (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. 29




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##### Table of Contents



Liquidity and Capital Resources
   Contractual obligations
 Payments Due by Period(in thousands)Total
    
    
    2005(1)
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterContractual Obligations:Senior convertible notes
    
    $
    121,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    121,000Line of credit (2)
    
    
    17,000
    
    
    
    
    
    
    
    17,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest payments on long-term debt
    
    
    76,684
    
    
    
    
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    60,952Capital lease
    
    
    38
    
    
    
    12
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    3,640,972
    
    
    
    75,307
    
    
    
    301,277
    
    
    
    299,231
    
    
    
    297,959
    
    
    
    297,268
    
    
    
    2,369,930Additional aircraft deposits (4)
    
    
    24,325
    
    
    
    
    
    
    
    
    
    
    
    24,325
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations (3)
    
    
    6,352
    
    
    
    782
    
    
    
    1,757
    
    
    
    1,094
    
    
    
    960
    
    
    
    916
    
    
    
    843Total contractual cash obligations
    
    $
    3,886,371
    
    
    $
    76,101
    
    
    $
    323,993
    
    
    $
    328,583
    
    
    $
    302,852
    
    
    $
    302,117
    
    
    $
    2,552,725
 
 (1)
    
    Contractual obligations for the remainder of 2005(2)
    
    Borrowings outstanding as of September 30, 2005, under our revolving credit facility with
First Tennessee Bank, which expires June 16, 2006.(3)
    
    Amounts represent noncancelable commitments to purchase goods and services, including
certain aircraft parts and information technology.(4)
    
    Disputed additional aircraft deposits demanded by Northwest before March 1, 2006. The
Company has offered payment prior to November 2007.    30




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##### Table of Contents



Operating activities.
 Investing activities.
 31




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##### Table of Contents



Financing activities
 Deferred tax asset.
 Critical Accounting Policies
  Provisions for losses on subleases.
   32




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##### Table of Contents



Allowance for doubtful accounts.
    Forward Looking Statements
  33




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosure about Market Risk
  Aircraft fuel.
 Interest rates.
 Senior Convertible Notes.
 
 Item 4. Controls and Procedures
   34




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##### Table of Contents



Part II. Other Information
 
 Item 1. Legal Proceedings
  
 Item 2. Changes in Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  35




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##### Table of Contents



Item 6. Exhibits
  31.1
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.31.2
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.32
    
    Section 1350 Certification by Chief Executive Officer and Chief Financial Officer.
 36




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##### Table of Contents



SIGNATURES
  By:
    
    /s/ PHILIP H. TRENARYPhilip H. TrenaryDate: November 2, 2005
    
    
    
    President and Chief Executive OfficerBy:
    
    /s/ PETER D. HUNTPeter D. HuntDate: November 2, 2005
    
    
    
    Vice President and Chief Financial Officer
 37