UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWASHINGTON,
      D.C. 20549




Form
10-K


[X]
              
              Annual
      report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934For
      the fiscal year ended December 31, 2008or[   ]
              
              Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from__________
  to__________




Commission
File Number 001-31898


PINNACLE
AIRLINES CORP.


(Exact name of registrant
as specified in its charter)









Delaware
                  (State or other
      jurisdiction of incorporation or
      organization)
                03-0376558
                  (I.R.S.
      Employer Identification No.)1689
      Nonconnah Blvd, Suite 111
                  Memphis,
      Tennessee
                  (Address
      of principal executive offices)
                38132
                    (Zip
      Code)


901-348-4100


(Registrant's
telephone number, including area code)


Securities
      registered pursuant to Section 12(b) of the Act:Title of each
      class:
              Name of each exchange on which
      registered:Common
      Stock, $.01 par value
              Nasdaq
      Global Select MarketSecurities
      registered pursuant to section 12 (g) of the Act:
  None




Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.


Yes   [ 
       ]
              No   [ X ]




Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes   [ 
       ]
              No   [ X ]




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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  [ X ]




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer [   ]
                Accelerated
      filer [ X
      ]
                Non-accelerated
      filer [   ]
                Smaller reporting company [   ]




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes   [ 
       ]
              No   [ X ]




The
aggregate market value of the voting and non-voting common equity stock held by
non-affiliates of the registrant was $55 million as of June 30,
2008.




As of
March 2, 2009, 18,342,334 shares of common stock were outstanding.




Documents
Incorporated by Reference


Certain
information called for by Part III of Form 10-K is incorporated by reference to
the Proxy Statement for our 2009 Annual Meeting of Stockholders to be filed with
the Commission within 120 days after December 31, 2008.







Table of Contents





Part
      IForward-Looking
      Statements
                  
                  4Item
      1. Business
                  
                  4Our
      Company
                  
                  4Operating Strategy
                  
                  5Recent
      Developments
                  
                  5Competition
      and Economic Conditions
                  
                  6Industry
      Overview
                  
                  6Our
      Operating Contracts
                  
                  7Pinnacle’s
      Agreements with Major Airlines
                  
                  9Colgan’s
      Agreements with Major Airlines
                  
                  11Employees
                  
                  14Aircraft
      Maintenance
                  
                  15Training
                  
                  15Safety
      and Security
                  
                  16Insurance
                  
                  16Regulations
                  
                  16Seasonality
                  
                  17Website
                  
                  17Item
      1A. Risk Factors
                  
                  18Item
      1B. Unresolved Staff Comments
                  
                  24Item
      2. Properties
                  
                  25Flight
      Equipment
                  
                  25Facilities
                  
                  26Item
      3. Legal Proceedings
                  27Environmental
      Matters
                  
                  27Regulatory
      Matters
                  
                  27Item
      4. Submission of Matters to a Vote of Security
      Holders
                  27Part
      IIItem
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and
      Issuer
                  28Purchases
      of Equity SecuritiesPerformance
      Graph
                  
                  29Item
      6. Selected Financial Data
                  30





2


Table of
Contents


(continued)




Part
      II (continued)Item 7.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations
                      34Overviewand
      Outlook
                      
                      34Consolidated Results of
      Operations
                      
                      37Segmented Results of
      Operations
                      
                      40Liquidity and Capital
      Resources
                      
                      46Significant Accounting Policies
      andCritical
      Estimates
                      51Item 7A.
      Quantitative and Qualitative Disclosures About Market
      Risk
                      56Commodity Price
      Risk
                      
                      56Interest Rate
    Risk
                      
                      56Item 8. Financial Statements and
      Supplementary Data
                      57Item 9. Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                      102Item 9A.
      Controls and Procedures
                      
                      102Item 9B.
      Other Information
                      104Part
      IIIItem 10.
      Directors and Executive Officers of the
    Registrants
                      105Item 11.
      Executive Compensation
                      105Item 12.
      Security Ownership of Certain Beneficial Owners and Management and
      Related
                      105Stockholder MattersItem 13.
      Certain Relationships and Related Transactions
                      105Item 14.
      Principal Accountant Fees and Services
                      105Part
      IVItem 15.
      Exhibits and Financial Statement Schedules
                      106SIGNATURES
                      107





3
 Table of Contents





Forward-Looking Statements





Certain
statements in this Annual Report on Form 10-K (or otherwise made by or on the
behalf of Pinnacle Airlines Corp.) contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”) and
the Private Securities Litigation Reform Act of 1995.  Such statements
represent management's beliefs and assumptions concerning future events. When
used in this document and in documents incorporated by reference,
forward-looking statements include, without limitation, statements regarding
financial forecasts or projections, our expectations, beliefs, intentions or
future strategies that are signified by the words "expects", "anticipates",
"intends", "believes" or similar language. These forward-looking statements are
subject to risks, uncertainties and assumptions that could cause our actual
results and the timing of certain events to differ materially from those
expressed in the forward-looking statements. All forward-looking statements
included in this Report are based on information available to us on the date of
this Report. It is routine for our internal projections and expectations to
change as the year or each quarter in the year progress, and therefore it should
be clearly understood that the internal projections, beliefs and assumptions
upon which we base our expectations may change prior to the end of each quarter
or the year. Although these expectations may change, we may not inform you if
they do. Our policy is generally to provide our expectations only once per
quarter, and not to update that information until the next quarter.





You
should understand that many important factors, in addition to those discussed in
this Report, could cause our results to differ materially from those expressed
in the forward-looking statements. Some of the potential factors that could
affect our results are described in Item 1A Risk Factors and in Item 7
under “Outlook.”  In light of these risks and uncertainties, and
others not described in this Report, the forward-looking events discussed in
this Report might not occur, might occur at a different time, or might cause
effects of a different magnitude or direction than presently
anticipated.





Part
I


Item 1.  Business





Pinnacle
Airlines Corp. and its wholly owned subsidiaries, Pinnacle Airlines, Inc. and
Colgan Air, Inc., are collectively referred to in this report as the “Company,”
“we,” and “us” except as otherwise noted.  Our subsidiaries will be
referred to as “Pinnacle” for Pinnacle Airlines, Inc. and “Colgan” for Colgan
Air, Inc., and collectively as “our subsidiaries.”





In
October 2008, two of our major customers, Northwest Airlines Corporation and
Delta Air Lines, Inc., merged to form the world’s largest passenger
airline.  Delta Air Lines, Inc. (exclusive of its newly merged
operating subsidiary, Northwest Airlines, Inc.) for historical reference
purposes is referred to herein as “Pre-Merger Delta.”  Similarly,
Northwest Airlines Corporation and its subsidiaries as they existed prior to the
merger are referred to herein as “Northwest.”  Pre-Merger Delta and
Northwest combined are collectively referred to herein as “Delta.”





US
Airways Group, Inc. and its subsidiaries are collectively referred to as “US
Airways.”  Continental Airlines, Inc. and its subsidiaries are
collectively referred to as “Continental.”  United Air Lines, Inc. and
its subsidiaries are collectively referred to as “United.”





Our Company





Pinnacle
Airlines Corp. was incorporated in 2003 as a Delaware corporation. As of
December 31, 2008, we had two reportable segments consisting of Pinnacle
Airlines, Inc. and Colgan Air, Inc.





Pinnacle
operates an all-regional jet fleet, and provides regional airline capacity to
Delta at its hub airports in Atlanta, Cincinnati, Detroit, Memphis, and
Minneapolis/St. Paul.  At December 31, 2008, Pinnacle operated 124
Canadair Regional Jet (“CRJ”)-200 aircraft under Delta brands with approximately
665 daily departures to 114 cities in 37 states and three Canadian
provinces.  Pinnacle also operated a fleet of 18 CRJ-900 aircraft
(including seven aircraft Pinnacle is operating on a temporary basis, as
discussed in detail under “Recent Developments”) as a Delta Connection carrier
with approximately 86 daily departures to 34 cities in 16 states, the Bahamas,
Mexico, and U.S. Virgin Islands.




4
 Table of Contents


Item
1.  Business (continued)




are
focused primarily in the northeastern United States and in Texas.  As
of December 31, 2008, Colgan offered within its pro-rate operations 225 daily
departures to 39 cities in 11 states.  Colgan operated 14 Saab 340
aircraft as Continental Connection from Continental’s hub airport in Houston,
ten Saab 340 aircraft as United Express at Washington/Dulles, and two Beech 1900
aircraft and ten Saab 340 aircraft as US Airways Express, with hub locations at
New York/LaGuardia and Boston, under revenue pro-rate
agreements.  Colgan operated 15 Q400 aircraft providing 94 daily
departures to 20 cities in 14 states and two Canadian provinces as Continental
Connection at its global hub at Newark/Liberty International
Airport.





Operating Strategy




Pinnacle serves as our platform for regional jet operations.  Pinnacle
operates regional jets under capacity purchase agreements (“CPA”s) with
Delta.  Our jet fleet consists of 50-seat CRJ-200 aircraft and 76-seat
CRJ-900 aircraft operating in the Delta network. Our business strategy is to
provide our major airline partners with cost-efficient, highly reliable
operations that distinguish us from our competitors. We are focused on providing
excellent customer service and providing a high quality travel
experience.  Pinnacle’s unit cost continues to be one of the most
competitive in the regional airline industry.





Colgan
serves as our platform for turboprop operations.  Colgan operates
under a CPA with Continental.  Under this agreement, Colgan operates
74-seat Q400 turboprop aircraft, which offer superior operating performance at a
lower cost than similarly sized regional jets.  Colgan also operates
under revenue pro-rate agreements with Continental, United, and US Airways,
utilizing the Saab 340 aircraft, a 34-seat turboprop aircraft.





Recent Developments





On
October 1, 2008, Pinnacle entered into an amendment of its Delta Connection
Agreement (“DCA”) with Delta to operate on a short-term basis seven additional
CRJ-900 aircraft that were formerly operated by another Delta Connection
carrier.  Pinnacle will temporarily operate these seven CRJ-900
aircraft through the first half of 2009, and return them to Delta as Pinnacle’s
seven remaining permanent aircraft enter scheduled service under the
DCA.  Pinnacle pays to Delta and is reimbursed a nominal amount of
rent related to these aircraft.  Other than aircraft ownership costs,
Pinnacle receives regular compensation under the DCA related to the operation of
these seven “Temporary Aircraft.”





On October 29, 2008, Pre-Merger Delta
and Northwest completed their previously announced merger, forming the world’s
largest passenger airline.  Pinnacle is the second largest independent
corporate regional partner for Delta.  We do not believe that this
merger will have a material effect on our operations, as our CPAs with
Pre-Merger Delta and with Northwest are relatively long-term and do not contain
early termination provisions that could be triggered by their
consolidation.





On
January 13, 2009, Colgan entered into an amendment to its CPA with Continental,
whereby it will acquire and operate an additional 15 Q400
aircraft.  Colgan is scheduled to take delivery of these aircraft from
August 2010 through April 2011.  Colgan also secured from Bombardier
options to purchase an additional 15 Q400 aircraft for delivery beginning in
March 2013.





As part
of our agreement with Continental, we must purchase and finance the Q400
aircraft to be operated by Colgan.  We have arranged for a commitment
from a lender to finance certain pre-delivery payments that we must make prior
to the delivery of each aircraft, and a commitment to provide permanent
financing for 85% of the net purchase price of each aircraft when it
delivers.  These financing commitments are subject to customary terms
and conditions, including various requirements related to our financial
condition and liquidity at the time of each borrowing request.


5
 Table of Contents


Item
1.  Business (continued)





On
February 12, 2009, Colgan Flight 3407, operated for Continental under the
Company’s Continental CPA, crashed shortly before landing in a neighborhood near
the Buffalo Niagara International Airport in Buffalo, New York. All 49 people
aboard, including 45 passengers and four members of the flight crew, died in the
accident. Additionally, one individual died inside the home destroyed by the
aircraft’s impact, increasing the total fatality count to 50
individuals.  One lawsuit related to this accident has been filed
against the Company, and additional litigation is anticipated.  We
carry aviation risk liability insurance and believe that this insurance is
sufficient to cover any liability arising from this accident.





Competition and Economic Conditions





The
airline industry is highly competitive. Pinnacle and Colgan compete principally
with other code-sharing regional airlines.  In addition, through its
revenue pro-rate agreements, Colgan competes in certain markets with regional
airlines operating without code-share agreements, as well as low-cost carriers
and major airlines.  Our primary competitors among regional airlines
with capacity purchase arrangements include Comair, Inc. ("Comair"); Compass
Airlines, Inc. (“Compass”); and Mesaba Aviation, Inc. (“Mesaba”) (all of which
are wholly owned subsidiaries of Delta); Air Wisconsin Airlines Corporation;
American Eagle Holding Corporation (“AMR Eagle”) (a wholly owned subsidiary of
AMR Corporation); ExpressJet Holdings, Inc. ("ExpressJet"); Horizon Air
Industries, Inc.  (“Horizon”) (a wholly owned subsidiary of Alaska Air
Group Inc.); Mesa Air Group, Inc. ("Mesa"); Republic Airways Holdings Inc.
("Republic"); Skywest, Inc. (“Skywest”); and Trans States Airlines,
Inc.





The
principal competitive factors for regional airlines with capacity purchase
agreements are the overall cost of the agreement, customer service, aircraft
types, and operating performance. Many of the regional airlines competing for
capacity purchase arrangements are larger, and may have greater financial and
other resources than Pinnacle and Colgan. Additionally, regional carriers owned
by major airlines, such as AMR Eagle, Comair, Horizon, and Mesaba, may have
access to greater resources at the parent level than Pinnacle and Colgan, and
may have enhanced competitive advantages because they are subsidiaries of major
airlines.





Our
competition within our pro-rate operations includes other domestic regional
airlines and, to a certain extent, major and low-cost domestic carriers that
maintain operations in the markets that we serve.  The principal
competitive factors we experience with respect to our pro-rate flying include
fare pricing, customer service, routes served, flight schedules, aircraft types
and relationships with major partners. Moreover, federal deregulation of the
industry allows competitors to rapidly enter our pro-rate markets and to quickly
discount and restructure fares. The airline industry is particularly susceptible
to price discounting because airlines incur only nominal costs to provide
service to passengers occupying otherwise unsold seats.





The
airline industry is highly sensitive to general economic conditions, in large
part due to the discretionary nature of a substantial percentage of both
business and leisure travel. Many airlines have historically reported lower
earnings or substantial losses during periods of economic recession, heavy fare
discounting, high fuel costs and other disadvantageous environments. In the
past, economic downturns combined with competitive pressures have contributed to
a number of reorganizations, bankruptcies, liquidations and business
combinations among major and regional carriers. The effect on the Company of
economic downturns is somewhat mitigated by the fact that most of our operations
are conducted under capacity purchase agreements. Nonetheless, to the extent
that our partners experience financial difficulties, they may seek ways to amend
the terms of our capacity purchase agreements in a way that negatively affects
our financial results.  Additionally, Colgan’s pro-rate operations,
which operate similarly to an independent airline, are more directly affected by
changes in the economy.





Industry Overview





The
airline industry in the United States has traditionally been dominated by
several major airlines, including American Airlines, Inc., Continental,
Pre-Merger Delta, Northwest, US Airways and United.  Low cost
carriers, such as Southwest Airlines Co. ("Southwest"), JetBlue Airways
Corporation ("JetBlue"), Frontier Airlines, Inc. ("Frontier") and AirTran
Airways, Inc. ("AirTran"), generally offer fewer conveniences to travelers and
have lower cost structures than major airlines, which permits them to offer
flights to and from many of the same markets as the major airlines, but at lower
prices. Low cost carriers typically fly direct flights with limited service to
smaller cities, concentrating on higher demand routes to and from major
population bases.


6
 Table of Contents


Item
1.  Business (continued)





Regional
airlines, such as ExpressJet, Mesa, Republic and SkyWest, typically operate
smaller aircraft on lower-volume routes than major and low cost carriers.
Several regional airlines, including AMR Eagle, Comair, Compass, Horizon, and
Mesaba, are wholly-owned subsidiaries of major airlines.





In
contrast to low cost carriers, regional airlines generally do not seek to
establish an independent route system to compete with the major airlines.
Rather, regional airlines typically enter into relationships with one or more
major airlines, pursuant to which the regional airline agrees to use its
smaller, lower-cost aircraft to carry passengers ticketed by the major airline
between a hub of the major airline and a smaller outlying city. In exchange for
such services, the major airline pays the regional airline either a fixed flight
fee, termed "capacity purchase" or "fixed-fee" flights, or the regional airline
receives a percentage of applicable ticket revenues, termed "pro-rate" or
"revenue-sharing" flights.





The
growth in the number of passengers using regional airlines and the revenues of
regional airlines during the last decade is attributable primarily to the
introduction and popularity of regional jets.  Major airlines sought
to add regional jets in many markets to replace smaller turboprop aircraft and
slightly larger narrowbody jets.  By adding regional jets, hub and
spoke carriers were able to increase the scope of their network by serving
markets that could not be supported by a narrowbody aircraft, reduce the
operating cost in markets previously supported by narrowbody jets, and increase
the level of passenger service in smaller markets previously serviced with
turboprop aircraft.





Key to this strategy was the ability to
outsource regional jet operations to regional airlines through the use of
capacity purchase arrangements.  Regional airlines tend to have a more
favorable cost structure and leaner corporate structure than many major
airlines.  In addition, the complexities of multiple fleet types at an
airline can increase costs because of the need to maintain multiple aircraft
maintenance functions and multiple flight crew training functions.  By
outsourcing regional jet operations to regional airlines, major airlines can
reduce the number of aircraft types in their operating fleet while still
enjoying the flexibility and revenue production that regional jets provide to
their passenger network.





Regional
airlines generally enter into code-share agreements with major airlines,
pursuant to which the regional airline is authorized to use the major airline's
two-letter flight designator codes to identify the regional airline's flights
and fares in the central reservation systems, to paint its aircraft with the
colors and/or logos of its code-share partner and to market and advertise its
status as a carrier for the code-share partner. For example, Pinnacle flies out
of Detroit, Minneapolis/St. Paul, Memphis, and Atlanta under Delta brands.
Colgan operates as Continental Connection out of Newark and Houston, United
Express out of Washington/Dulles, and US Airways Express with significant
operations at Boston and New York/LaGuardia.  In addition, the major
airline generally provides services such as reservations, ticketing, ground
support and gate access to the regional airline, and both partners often
coordinate marketing, advertising and other promotional efforts. In exchange,
the regional airline provides a designated number of low-capacity (usually
between 30 and 76 seats) flights between larger airports served by the major
airline and surrounding cities, usually in lower-volume markets.





Our Operating Contracts





Our operating contracts fall under two
categories: capacity purchase agreements (“CPA”s) and revenue pro-rate
agreements.  The following table presents for the year ended December
31, 2008 the percentage of our regional airline services revenue derived under
each contract type and by code-share partner:





Percentage
      of Regional Airline Services RevenueCode-Share
      Partner
              
              Capacity
      Purchase Agreements
              
              Pro-Rate
      Agreements
              
              TotalDelta
              
              71%
              
              -
              
              71%Continental
              
              6%
              
              8%
              
              14%US
      Airways
              
              -
              
              8%
              
              8%United
              
              -
              
              5%
              
              5%Essential
      Air Service
              
              -
              
              2%
              
              2%Total
              
              77%
              
              23%
              
              100%





7
 Table of Contents


Item
1.  Business (continued)





Capacity Purchase
Agreements.Our preferred contractual relationships with major
airlines are structured as capacity purchase arrangements.  Under
CPAs, our major airline partners purchase our flying capacity by paying
pre-determined rates for specified flying, regardless of the number of
passengers on board or the amount of revenue collected.  These
arrangements typically include incentive payments that are paid if we meet
certain operational performance measures.  Additionally, certain
operating costs such as fuel, aviation insurance premiums, and ground handling
are reimbursed or provided directly by the partner, which eliminates our risk
associated with a change in the price of these goods or services.  We
believe the capacity purchase model reduces our financial risk and enables us to
focus on operating our business with the highest standards, while maximizing the
efficiencies of the business that we provide to our
partners.  Therefore, we plan to grow the percentage of our revenue
derived from these types of agreements by working to structure new business with
capacity purchase terms.





Pinnacle’s
Amended and Restated Airline Services Agreement (the “CRJ-200 ASA”) pertaining
to its CRJ-200 operations and its DCA pertaining to its CRJ-900 operations are
both structured as CPAs.  In addition, Colgan’s Q400 operations for
Continental are under a CPA (the “Continental CPA”).





Under our
CPAs, most costs we incur are classified as one of the following:





●
            Reimbursed
      – Those costs that are reimbursed to the full extent of the actual cost,
      plus any applicable margin.


●
            Rate-based
      – We receive payments for each block hour and departure we provide and
      based upon the number of aircraft in our fleet.  These payments
      are designed to cover all of our expenses incurred with respect to the CPA
      that are not covered by the reimbursement payments, including overhead
      costs, but we assume the risk that our underlying costs for these
      activities differ from the assumptions used to negotiate the
      rates.


●
            Excluded
      – Services that are provided by or paid for directly by the code-share
      partner.  These costs do not appear on our financial
      statements.





The
following is a summary of the treatment of certain costs under our three
CPAs.





Continental
      CPA
                DCA
                CRJ-200
      ASAAircraft
      ownership
                Rate-Based
                Reimbursed(1)
                ReimbursedAviation
      insurance
                Reimbursed
                Reimbursed
                ReimbursedCommissions
      and passenger distribution costs
                Excluded
                Excluded
                ExcludedFacility
      rentals
                Excluded(2)
                Excluded(2)
                Rate-Based(3)Fuel
                Excluded
                Excluded
                ExcludedGround
      handling
                Excluded(2)
                Excluded(2)
                Rate-Based(3)Heavy
      maintenance
                Rate-Based
                Reimbursed(1)
                ReimbursedLabor
      costs
                Rate-Based
                Rate-Based
                Rate-BasedLanding
      fees / station costs
                Reimbursed
                Reimbursed
                Rate-Based(3)Line
      maintenance
                Rate-Based
                Rate-Based
                Rate-BasedNon-aircraft
      depreciation
                Rate-Based
                Rate-Based
                Rate-BasedOther
      (G&A and training)
                Rate-Based
                Rate-Based
                Rate-BasedProperty
      taxes
                Rate-Based
                Reimbursed
                Reimbursed





(1)
            Reimbursement
      of these costs are both subject to a cap and adjusted downward should
      actual expenses incurred be less than the payments
      received.  Aircraft ownership cost includes principal and
      interest payments on debt associated with each
  aircraft.


(2)
            Ground handling and airport
      facilities are provided free of charge unless our partner asks us to
      perform ground handling in a station.  In these instances, we
      are compensated based upon negotiated ground handling
      rates.


(3)
            Landing fees that we incur in
      Detroit are reimbursed directly.  All other landing fees in our
      CRJ-200 operation are rate- based.  In addition, in certain
      cities under our CRJ-200 ASA, Delta provides or arranges for ground
      handling services on our behalf.  Our costs for these ground
      handling services, which include most other facility costs, are capped
      under the CRJ-200 ASA.




8
 Table of Contents




Item 1.  Business
(continued)





Revenue Pro-rate
Agreements.  In addition to the Continental CPA, Colgan
operates under contracts structured as revenue pro-rate code-share agreements,
which allow for Colgan to market its operations under its partners’
brands.  Under these agreements, Colgan generally manages its own inventory
of unsold capacity and sets fare levels in the local markets that it
services.  Colgan retains all of the revenue for passenger flying
within Colgan’s local markets and not connecting to its partners’
flights.  For connecting passengers, the passenger fare is pro-rated
between Colgan and its major airline partner, generally based on the distance
traveled by the passenger on each segment of the passenger’s trip.  Under
these agreements, Colgan bears the risk associated with fares, passenger demand,
and competition within its markets.  Colgan incurs all of the costs
associated with operating these flights, including those costs typically
reimbursed or paid directly by the major airline under a capacity purchase
agreement. In some instances, Colgan has the ability to earn incentive-based
revenue should it achieve specified performance metrics.





Colgan’s
revenue pro-rate agreement with Continental also contains a connecting passenger
incentive designed to maintain a base level of profitability in the Houston
markets that Colgan serves.  The connect incentive can be a payment
from or a payment to Continental, depending on certain variables such as load
factors, and is designed to create a more stable income level in these markets
than could otherwise be supported under a traditional revenue pro-rate
agreement.  The connect incentives rates are adjusted twice a year for
changes in fuel prices and station/passenger related costs.





Colgan’s
revenue pro-rate agreement with United includes a fixed connecting passenger
incentive payment designed to subsidize some of the markets that Colgan operates
in as United Express.  These markets would not be profitable on a
stand-alone basis without the connecting passenger incentive.  The
incentive amount is fixed for the three-year term of the agreement and may only
be adjusted upon the concurrence of both Colgan and United.  Colgan
does have the ability to exit these markets to the extent that the markets can
no longer be operated profitably with the fixed connecting passenger incentive
payment.





In
addition to operating its flights under revenue pro-rate code-share agreements,
Colgan also operates some flights within its United Express and US Airways
Express networks under Essential Air Service (“EAS”) contracts with the
Department of Transportation (“DOT”).  The EAS program provides a
federal government subsidy within certain small markets that could not otherwise
sustain commercial air service because of limited passenger demand.





Pinnacle’s Agreements with Major
Airlines





CRJ-200
Airline Services Agreement





Pinnacle
provides regional jet service to Delta operating 124 50-seat CRJ-200 aircraft
under the CRJ-200 ASA.  At the end of its term in 2017, the CRJ-200
ASA automatically extends for additional five-year periods unless Delta provides
notice to us two years prior to the termination date that it does not plan to
extend the term.





In
addition to the rate-based and reimbursed payments previously detailed, our
CRJ-200 ASA with Delta provides for margin payments.  The current
rate-based payments will be in effect (subject to indexed annual inflation
adjustments) through 2012, when rates will reset.We receive a monthly
margin payment based on the payments described above calculated to achieve a
target operating margin. The target operating margin is 8% for 2008 and future
years and our margin payments are subject to a ceiling.  As of January
1, 2008, Delta does not guarantee Pinnacle’s minimum operating margin, although
we will still be subject to a margin ceiling above the target operating
margin.  If Pinnacle’s actual operating margin for any year beginning
with 2008 exceeds the 8% target operating margin but is less than 13%, Pinnacle
will make a year-end adjustment payment to Delta in an amount equal to half of
the excess above 8%.  If Pinnacle’s actual operating margin for any
year beginning with 2008 exceeds 13%, Pinnacle will pay Delta all of the excess
above 13%.   Margin calculations under the CRJ-200 ASA exclude
amounts recognized as deferred ASA revenue, which is discussed in detail in Note
3, Code-Share
Agreements, in Item 8 of this Form 10-K.


9
 Table of Contents


Item
1.  Business (continued)




The
CRJ-200 ASA provides that we will be required to negotiate with Delta an
adjustment to our rates to the extent that we establish operations with another
major airline.  Upon reaching a certain level of operations outside of
our CRJ-200 ASA, and to the extent that we have realized operating cost
efficiencies from combining overhead in such outside operations, we will
negotiate a rate reduction to the fixed payment that we receive under our
CRJ-200 ASA related to our overhead.  The method of calculation,
timing and extent of Delta’s rate reduction have not yet been
determined.  To the extent that we cannot agree on the amount of a
rate reduction with Delta, the parties have agreed to pursue binding arbitration
to determine the rate reduction.





To the
extent that Pinnacle operates regional jets on behalf of another major airline,
Delta may remove one aircraft for every two aircraft that Pinnacle operates for
another partner above an initial base of 20 regional jets.  Delta may
remove no more than 20 aircraft subject to this option and no more than five
aircraft in any 12-month period.  Delta may only exercise this option
if the removed aircraft are not operated by or on behalf of Delta after their
removal.





Delta may
terminate the CRJ-200 ASA at any time for cause, which is defined
as:





●
            our
      failure to make any payment under any aircraft lease or sublease with
      Delta;


●
            an
      event of default by us under any aircraft lease or sublease with
      Delta;


●
            an
      event of default under any of our other agreements with
    Delta;


●
            our
      failure to maintain required insurance
  coverages;


●
            our
      failure to comply with Delta’s inspection
  requirements;


●
            suspension
      or revocation of our authority to operate as an airline by the Federal
      Aviation Administration (“FAA”) or the
DOT;


●
            our
      failure to operate more than 50% of our aircraft for more than seven
      consecutive days or our failure to operate more than 25% of our aircraft
      for more than 21 consecutive days, other than as a result
    of:


●
            an
      FAA order grounding all commercial flights or all air carriers or
      grounding a specific aircraft type of all
  carriers,


●
            a
      scheduling action by Delta or


●
            Delta’s
      inability to perform its obligations under the CRJ-200 ASA as a result of
      a strike by Delta employees;


●
            our
      failure to comply with certain other requirements contained in the CRJ-200
      ASA, including operating performance requirements measured over six month
      periods, to the extent such requirements remain uncured after any
      applicable grace period.





Delta
may also terminate the agreement at any time upon our bankruptcy or for any
breach of the agreement by us that continues uncured for more than 30 days after
we receive notice of the breach.  However, in the case of a
non-monetary default, Delta may not terminate the agreement if the default would
take more than 30 days to cure and we are diligently attempting to cure the
default.  In addition, both Delta and we are entitled to seek an
injunction and specific performance for a breach of the agreement.  In
addition, in the case of any other termination of the CRJ-200 ASA, Delta will
have the right to require us:





●
            to
      terminate all leases, subleases and agreements with
  Delta;


●
            to
      assign, or use our best efforts to assign to Delta, subject to some
      exceptions, any leases with third parties for facilities at airports to
      which we primarily fly scheduled flights on behalf of Delta;
      and


●
            to
      sell or assign to Delta facilities and inventory then owned or leased by
      us and used primarily for the services we provide to Delta for an amount
      equal to the lesser of the fair market value or depreciated book value of
      those assets.





In
general, we have agreed to indemnify Delta and Delta has agreed to indemnify us
for any damages caused by any breaches of our respective obligations under the
CRJ-200 ASA or caused by our respective actions or inaction under the CRJ-200
ASA.


10
 Table of Contents


Item
1.  Business (continued)





Delta
Connection Agreement (“DCA”)





Pinnacle
provides regional jet service to Delta operating 76-seat CRJ-900 aircraft under
the DCA.  The DCA provides that Pinnacle operate 16 CRJ-900 aircraft
under a capacity purchase agreement.  As of December 31, 2008,
Pinnacle operated 18 CRJ-900 aircraft (including the seven Temporary Aircraft)
under the DCA.  We placed three additional CRJ-900 aircraft into
service under the DCA during the first quarter of 2009 and expect to place the
final two CRJ-900 aircraft into service during the second quarter of
2009.  The DCA allows Delta the option to add an additional seven
CRJ-900 aircraft to the fleet.





The DCA
provides for Delta to pay pre-set rates based on the capacity we provide to
Delta.  We are responsible for the costs of flight crews, maintenance,
dispatch, aircraft ownership and general and administrative costs.  In
addition, Delta reimburses us for certain pass-through costs, including landing
fees, most station-related costs (to the extent that we incur them) and aircraft
hull and general liability insurance.  In most instances, Delta will
provide fuel and ground handling services free of charge.  We earn
incentive payments (calculated as a percentage of the payments received from
Delta) if we meet certain performance targets.  The DCA also provides
for reimbursements to Delta annually to the extent that our actual pre-tax
margin on our Delta Connection operations exceeds certain
thresholds.





The DCA
terminates for each aircraft upon the tenth anniversary of the in-service date
of such aircraft.  Upon the sixth anniversary of the agreement date,
which is April 27, 2013, either party has the right under the DCA to remove up
to 20% of the CRJ-900 aircraft in service from the terms of the agreement each
year thereafter.





To the
extent that either party materially breaches the DCA and such breach remains
uncured for a period of 30 days, the non-breaching party may terminate the
agreement.  In addition, Delta may temporarily suspend or terminate
the DCA in the event of certain force majeure events that prevent either party
from performing its obligations under the DCA.  Delta may also
terminate the DCA upon certain corporate transactions such as a merger or change
of control involving the Company, our failure to maintain a certain level of
safety, our failure to maintain certain specified operational performance
standards, our failure to maintain various governmental operating regulations,
certifications and authorities, a material breach by us of our purchase
agreement for our CRJ-900 aircraft with the manufacturer, or our failure to
maintain specified levels of insurance.  Delta may also terminate the
DCA if Pinnacle commences operating a fleet type that causes Delta to be in
violation of the collective bargaining agreement with its pilots.





Colgan’s Agreements with Major
Airlines





Continental
Connection Capacity Purchase Agreement (“Continental CPA”)





Colgan
operates 74-seat Q400 turboprop regional aircraft predominantly out of
Continental’s hub at Newark Liberty International Airport.  Colgan
entered into the ten-year Continental CPA on February 5, 2007, which expires on
December 1, 2017.  Operations began on February 4, 2008, and we
currently operate 14 Q400 aircraft under the Continental CPA.  As
previously discussed, on January 13, 2009, we amended the Continental CPA to add
an additional 15 Q400 aircraft.  We will purchase and finance these
aircraft, which are expected to deliver between August 2010 and April
2011.





The
Continental CPA provides that we are compensated at pre-set rates for the
capacity that we provide to Continental.  We are responsible for our
own expenses associated with flight crews, maintenance, dispatch, aircraft
ownership and general and administrative costs.  In addition,
Continental reimburses us without a markup for certain reconciled costs, such as
landing fees, most other station-related costs to the extent that we incur them,
aircraft hull and passenger liability insurance (provided that our insurance
rates do not exceed those typically found at other Continental regional airline
partners) and passenger related costs.  Continental will also provide
fuel and ground handling services at its stations to us at no
charge.  Continental may request that we provide ground handling for
our flights at certain stations, in which case, we will be compensated at a
predetermined rate for these ground handling services.  The
Continental CPA also provides for the ability to earn additional incentive-based
revenue based upon achieving operational and financial performance
targets.


11
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Item
1.  Business (continued)





The
Continental CPA provides for a rate reduction to Continental to the extent that
we begin operating Q400 aircraft for another major airline.  The rate
reduction is designed to share the overhead burden associated with the Q400
aircraft across all of our potential Q400 operations and is only applicable for
the first 15 aircraft that we add with another airline.





Continental
may immediately terminate the Continental CPA following the occurrence of any
event that constitutes cause.  Cause is defined as the
following:





●
            the
      suspension or revocation of our authority to operate as a scheduled
      airline;


●
            the
      cessation of our operations as a scheduled airline, other than as a result
      of a labor strike and other than any temporary cessation not exceeding 14
      days in length;


●
            the
      occurrence of a labor strike that shall have continued for 15 days;
      or


●
            a
      willful or intentional material breach of this agreement by the Company
      that substantially deprives Continental of the benefits of this CPA, which
      continues for 45 days after notice is
given.





To the
extent that either party materially breaches the Continental CPA and such breach
remains uncured for a period of 60 days, the non-breaching party may terminate
the agreement.  Continental may also terminate the CPA upon certain
corporate transactions such as a merger or change of control involving the
Company, our failure to maintain a certain level of safety, our failure to
maintain certain specified operational performance standards, or our failure to
maintain various governmental certifications and to comply with various
governmental operating regulations and authorities.





Continental
Connection Pro-Rate Agreement





We
operate 14 Saab 340 aircraft based in Houston, Texas under a code-share
agreement with Continental (the “Continental Agreement”).  Colgan
entered into the Continental Agreement in January 2005 for a term of five
years.  The Continental Agreement is structured as a pro-rate
agreement for which we receive all of the fares associated with local passengers
and an allocated portion of the connecting passengers’ fares.  We pay
all of the costs of operating the flights, including sales and distribution
costs.  However, we also receive connect incentive payments from
Continental for passengers connecting from Colgan operated flights to any
flights operated by Continental or its other code-share partners at
Houston/George Bush Intercontinental Airport.  The connect incentive
payments are designed to maintain a base level of profitability in the markets
that we fly out of Houston, and can result in a payment to us or from us
depending on our passenger load factor in these markets.  The connect
incentives are modified every six months to adjust for prospective modifications
in fuel prices and certain station expenses.





US
Airways Express Agreement





We
operate ten Saab 340 aircraft under a code-share agreement with US Airways (the
“US Airways Agreement”).  As of December 31, 2008, we also operated
two Beech 1900D aircraft, which have since been removed from
service.  Colgan entered into the US Airways Agreement in 1999 to
provide passenger service and cargo service under the name “US Airways
Express.”  The US Airways Agreement provides us use of the US Airways
flight designator code to identify flights and fares in computer reservations
systems, permits use of logos, service marks, aircraft paint schemes, and
uniforms similar to those used by US Airways and coordinated scheduling and
joint advertising.  The US Airways Agreement is structured as a
revenue pro-rate agreement for which we receive all of the fares associated with
our local passengers and an allocated portion of connecting passengers’
fares.  We pay all of the costs of operating the flights, including
sales and distribution costs.  We control all scheduling, inventory
and pricing for each local market we serve.  The current US Airways
Agreement became effective on October 1, 2005 under terms similar to the 1999
agreement and has a three-year term.  At the end of the three-year
term, the US Airways Agreement automatically extends for multiple six-month
periods until either party provides notice to terminate.


12
 Table of Contents


Item
1.  Business (continued)





United
Express Agreement





In
October 2003, Colgan entered into a code-share agreement with United Air Lines
to include the United Air Lines flight designator code on all United flights
operated by Colgan.  In October 2005, Colgan entered into a separate
code-share agreement with United to provide services as a United Express carrier
(the “United Express Agreement”).  The United Express Agreement was
amended and restated effective November 1, 2008.  Colgan currently
operates ten Saab 340 aircraft under the name “United Express.” The United
Express Agreement expires on November 1, 2011 and is structured as a pro-rate
agreement for which we receive all of the fares associated with local passengers
and an allocated portion of the connecting passengers’ fares.  In
addition, United pays us a set passenger connect incentive fee for certain of
the markets that we operate under the United Express Agreement.  The
passenger connect incentive may only be adjusted during the three-year term by
mutual consent of the parties.  We do have the right, however, to
cease serving certain of these markets to the extent that our operations are not
profitable.  We pay all of the costs of operating the flights,
including sales and distribution costs.  We jointly coordinate with
United all scheduling, inventory and pricing for each local market we
serve.


13
 Table of Contents


Item
1.  Business (continued)





Employees





As of
December 31, 2008, we had 5,644 employees.  Flight attendants and
ground operations agents included 256 and 954 part-time employees, respectively.
The part-time employees work varying amounts of time, but typically work
half-time or less. The follow table details the number of employees by company
and by group:





Employee
      Group
                    
                    Pinnacle
      AirlinesCorp.
                    
                    Pinnacle
      Airlines,Inc.
                    
                    Colgan
      Air,Inc.
                    
                    TotalPilots
                    
                    -
                    
                    1,251
                    
                    451
                    
                    1,702Flight
      attendants
                    
                    -
                    
                    792
                    
                    298
                    
                    1,090Ground
      operations personnel
                    
                    -
                    
                    1,358
                    
                    215
                    
                    1,573Mechanics
      and other maintenance personnel
                    
                    -
                    
                    487
                    
                    218
                    
                    705Dispatchers
      and crew resource personnel
                    
                    -
                    
                    129
                    
                    41
                    
                    170Management
      and support personnel
                    
                    116
                    
                    187
                    
                    101
                    
                    404Total
                    
                    116
                    
                    4,204
                    
                    1,324
                    
                    5,644





Labor
costs are a significant component of airline expenses and can substantially
affect our results. Approximately 78% and 57% of Pinnacle Airlines, Inc. and
Colgan Air, Inc. employees, respectively, are represented by
unions.





The
following table reflects our principal collective bargaining agreements and
their respective amendable dates:





Employee
      Group
                      
                      Employees
      Represented
                      
                      Representing
      Union
                      
                      Contract
      Amendable DatePinnacle’s
      pilots
                      
                      1,251
                      
                      Air
      Line Pilots Association
                      
                      April
      30, 2005Colgan’s
      pilots
                      
                      451
                      
                      Air
      Line Pilots Association
                      
                      Pending(1)Pinnacle’s
      flight attendants
                      
                      792
                      
                      United
      Steel Workers of America
                      
                      February
      1, 2011Colgan’s
      flight attendants
                      
                      298
                      
                      United
      Steel Workers of America
                      
                      April
      30, 2014 (2)Pinnacle’s
      ground operations agents
                      
                      1,180
                      
                      United
      Steel Workers of America
                      
                      March
      19, 2010Pinnacle’s
      flight dispatchers
                      
                      46
                      
                      Transport
      Workers Union of America
                      
                      December
      31,
2013





(1)
      The initial contract negotiations are scheduled to begin during the second
      quarter 2009.
              (2)
      The Colgan flight attendant agreement with the United Steel Workers of
      America is amendable on April 30, 2014 with the exception of a wage only
      review, which could occur in April
2011.





The
Railway Labor Act, which governs labor relations for unions representing airline
employees, contains detailed provisions that must be exhausted before work
stoppage can occur once a collective bargaining agreement becomes
amendable.





The
collective bargaining agreement between Pinnacle and the Air Line Pilots
Association (“ALPA”) became amendable in April 2005.  Pinnacle has
been actively negotiating with ALPA since that time.  In August 2006,
Pinnacle filed for mediation with the National Mediation Board.  Since
then, Pinnacle has met with the  federal mediator assigned to its case
and with ALPA, but has not reached resolution on an amended collective
bargaining agreement.


14
 Table of Contents


Item
1.  Business (continued)





Aircraft Maintenance





Using a
combination of FAA-certified maintenance vendors and our own personnel and
facilities, we maintain our aircraft on a scheduled and as-needed
basis.  We perform preventive maintenance and inspect our engines and
airframes in accordance with our FAA-approved preventive maintenance policies
and procedures.





The
maintenance performed on our aircraft can be divided into three general
categories: line maintenance, heavy maintenance checks, and engine and component
overhaul and repair. Line maintenance consists of routine daily and weekly
scheduled maintenance checks on our aircraft, including pre-flight, daily,
weekly and overnight checks and any diagnostic and routine repairs.





Pinnacle
contracts with an affiliate of the original equipment manufacturer of its
CRJ-200s to perform certain routine heavy maintenance checks on its
aircraft.  Pinnacle also contracts with a third party to perform
engine overhauls on its CRJ-200 fleet.  These maintenance checks are
regularly performed on a schedule approved by the manufacturer and the
FAA.  In general, both the CRJ-200 and CRJ-900 aircraft do not require
their first heavy maintenance checks until they have flown approximately 8,000
hours.  Therefore, we do not expect our CRJ-900 regional aircraft to
require such heavy maintenance checks for several years.  The average
age of the CRJ-200 and CRJ-900 regional jets in our fleet as of December 31,
2008 was approximately 5.7 years and 0.7 years, respectively.





Colgan
performs its own heavy maintenance airframe checks for its Saab fleet at its
maintenance facility in Houston, Texas, and occasionally contracts with
third-party vendors for heavy maintenance airframe checks on an as-needed
basis.  Colgan contracts with third parties to perform engine
overhauls and propeller maintenance on its Saab fleet.  Colgan plans
to use a combination of internal and third-party resources to complete heavy
maintenance requirements on its Q400 fleet.  In general, the Q400
aircraft do not require their first heavy maintenance checks until they have
flown approximately 4,000 hours.  Therefore, we do not expect our Q400
aircraft to require such heavy maintenance checks for several
years.  The average age of the Q400 aircraft in our fleet as of
December 31, 2008 was approximately 0.7 years.





Component
overhaul and repair involves sending parts, such as engines, landing gear and
avionics to a third-party, FAA-approved maintenance facility.  We are
party to maintenance agreements with various vendors covering our aircraft
engines, avionics, auxiliary power units and brakes.





Training





Pinnacle
performs the majority of its flight personnel training in Memphis, Tennessee
both at its Corporate Education Center and the simulator center operated by
FlightSafety International. FlightSafety International, at Pinnacle’s request,
provides some overflow training at various other simulator centers throughout
the U.S. and Canada.  The Memphis simulator center currently includes
three CRJ full-motion simulators. Under Pinnacle’s agreement with FlightSafety
International, Pinnacle has first priority on all of the simulator time
available in the Memphis center.  Instructors used in the Memphis
center are typically Pinnacle employees who are either professional instructors
or trained line pilot instructors.





Colgan’s
flight personnel are trained at various simulator centers throughout the U.S.
and Canada under a contract with FlightSafety
International.  Non-simulator training is conducted near its corporate
headquarters in Manassas, Virginia.





We
provide both in-house and outside training for our maintenance
personnel.  To control costs and to ensure our employees receive the
best training, we take advantage of manufacturers’ training programs offered,
particularly when acquiring new aircraft.  We employ professional
instructors to conduct training of mechanics, flight attendants and ground
operations personnel in Memphis and Manassas.


15
 Table of Contents


Item
1.  Business (continued)





Safety and Security





We are
committed to the safety and security of our passengers and
employees.  One of our most important Guiding Principles is “Never
Compromise Safety.”  For example, we have implemented the Flight
Operational Quality Assurance (“FOQA”) program.  FOQA programs involve
the collection and analysis of data recorded during flight to improve the safety
of flight operations, air traffic control procedures, and airport and aircraft
design and maintenance.  In addition, we have implemented the FAA’s
Aviation Safety Action Program (“ASAP”).  ASAP’s focus is to encourage
voluntary reporting of safety issues and events that come to the attention of
employees of certain certificate holders.





Since the
September 11, 2001 terrorist attacks, Pinnacle and Colgan have taken many
steps to increase the safety and security of their operations. Some of the
security measures we have taken, along with our code-share partners, include:
aircraft security and surveillance, positive bag matching procedures, enhanced
passenger and baggage screening and search procedures, and securing of cockpit
doors.  We will continue to comply with future safety and security
requirements.





Insurance





As
required by our code-share agreements, we currently maintain insurance policies
with necessary coverage levels for: aviation liability, which covers public
liability, passenger liability, hangar keepers’ liability, baggage and cargo
liability and property damage; war risk, which covers losses arising from acts
of war, terrorism or confiscation; hull insurance, which covers loss or damage
to our flight equipment; directors’ and officers’ insurance; property and
casualty insurance for our facilities and ground equipment; and workers’
compensation insurance. Our code-share agreements require that we maintain
specified coverage levels for these types of policies.





Our
aviation liability and hull insurance coverage is obtained through a combined
placement with eight other airlines.  We are reimbursed in full for
aviation insurance under our three capacity purchase agreements.





We were
given the option under the Air Transportation Safety and Stabilization Act,
signed into law on September 22, 2001, to purchase certain third-party war risk
liability insurance from the U.S. government on an interim basis at rates that
are more favorable than those available from the private market. As provided
under this Act, we have purchased from the FAA this war risk liability
insurance, which is currently set to expire on March 31, 2009.  We
expect to renew the policy upon its expiration.





Regulations





Our
subsidiaries operate under air carrier certificates issued by the FAA and
certificates of convenience and necessity issued by the DOT.  The DOT
may alter, amend, modify or suspend these authorizations if the DOT determines
that we are no longer fit to continue operations.  The FAA may suspend
or revoke the air carrier certificates if our subsidiaries fail to comply with
the terms and conditions of the certificates. The DOT has established
regulations affecting the operations and service of the airlines in many areas,
including consumer protection, non-discrimination against disabled passengers,
minimum insurance levels and others. Failure to comply with FAA or DOT
regulations can result in civil penalties, revocation of the right to operate or
criminal sanctions. FAA regulations are primarily in the areas of flight
operations, maintenance, ground facilities, security, transportation of
hazardous materials and other technical matters. The FAA requires each airline
to obtain an operating certificate authorizing the airline to operate at
specific airports using specified equipment.  Under FAA regulations,
our subsidiaries have established, and the FAA has approved, a maintenance
program for each type of aircraft they operate that provides for the ongoing
maintenance of these aircraft, ranging from frequent routine inspections to
major overhauls.


16
 Table of Contents


Item
1.  Business (continued)





Seasonality




As with most airlines, we are subject to seasonality, though seasonality has
historically had a lesser effect on our capacity purchase operations than it has
on our pro-rate operations.  Mainline carriers use capacity purchase
agreements because these arrangements allow them to expand their operations at
lower fixed costs by using a regional’s lower cost structure for operating
aircraft.  Because regional aircraft have lower fixed and variable costs
than larger aircraft, mainline carriers tend to maintain regional aircraft
utilization during seasons of reduced demand. Conversely, our financial results
can be materially affected by the level of passenger demand for our services
operated under pro-rate agreements, under which we more directly bear the risk
of decreased demand for our services.  Our results can materially vary due
to seasonality and cyclicality.  For example, Colgan has historically
reported significant losses or significantly lower income during the first and
fourth quarters of each year when demand for air travel is generally lower, and
higher income during the second and third quarters of each year when demand for
air travel increases.





Website





Our
website address is www.pncl.com.  All
of our filings with the U.S. Securities and Exchange Commission (“SEC”) are
available free of charge through our website on the same day, or as soon as
reasonably practicable after we file them with, or furnish them to, the
SEC.  Printed copies of our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, and Current Reports on Form 8-K may be obtained by
submitting a request at our website.  Our website also contains our
Code of Business Conduct, which contains rules of business conduct and ethics
applicable to all of our directors and employees.  Any amendments to
or waivers from the Code of Business Conduct in the future will be promptly
posted to our website.




17
 Table of Contents


Item 1A. Risk Factors





Risks
Related to our Financial Condition





If
the holders of our 3.25% Senior Convertible Notes Due 2025 (the “Notes”)
exercise their right to require us to redeem their Notes, our liquidity could be
adversely affected or we may issue additional stock, which would dilute existing
shareholders.





Holders
of the Notes may require us to purchase all or a portion of their Notes for cash
on each of February 15, 2010, February 15, 2015 and February 15, 2020 at a
purchase price equal to 100% of the principal amount of the Notes to be
repurchased plus accrued and unpaid interest, if any, to the purchase
date.  While at December 31, 2008 all $121.0 million of the Notes were
outstanding, during January 2009, we repurchased $12.0 million of the Notes for
approximately $8.9 million. As of March 2, 2009, $109.0 million of the Notes
remain outstanding.





Due to
our significant investment in the purchase of our CRJ-900 and Q400 aircraft and
the current illiquid state of our auction rate securities, our financial
leverage has significantly increased and our liquidity has been reduced. Further
limiting our ability to refinance this obligation is the current illiquid nature
of the overall credit markets due to the existing poor condition of the economy
and the financial markets. If the holders of the Notes exercise their right to
require us to repurchase all of their Notes in February 2010, we will be
required to repurchase the remaining Notes for approximately $109.0 million in
cash.  No assurance can be given that we will have sufficient
resources to repay this obligation. One option to obtain additional cash
resources that we might be required to employ would be to issue additional
common stock, either directly to holders of the Notes in satisfaction of our
cash repayment obligation (although holders are not contractually obligated to
accept such shares in lieu of cash) or through a secondary public offering to
raise capital.  Such an issuance would dilute existing
shareholders.





Our
investment portfolio is primarily composed of auction rate securities, or ARS,
which have become illiquid and impaired.  For reasons beyond our
control, we may be unable to comply with our financial covenants contained in
our credit facility associated with our ARS portfolio.  Failure to
comply with our financial covenants could increase the losses that may be
realized on the sale of our ARS.





During
2008, our investments in ARS became illiquid.  In order to improve our
liquidity during the period of time our ARS remain illiquid, we obtained
financing, secured by our ARS holdings, consisting of a fully drawn $90.0
million revolving credit facility, which we refer to as the “Credit Facility,”
with a final maturity in January 2010.   The Credit Facility
contains covenants related to both a loan-to-par value and a loan-to-fair value
ratio.  During 2008, we recorded
$16.8 million in impairment charges related to declines in the fair values of
our ARS, and we may record additional impairment charges in future periods if we
determine that the ARS have further declined in value.While we are able
to control compliance with the loan-to-par value covenant, should the fair value
of our ARS holdings (as established by secondary market trades) continue to
decline, we may fall below the minimum required loan-to-fair value
threshold.  We have no control over the fair values, and the current
market volatility may lead to further declines.  In such instances, we
would have the ability to maintain compliance of the loan-to-fair value ratio by
repaying a portion of the Credit Facility.  The Credit Facility also
includes a net worth test.  While the calculation of this covenant
excludes the effects of our derivative transactions and declines in the fair
value of our ARS, special charges such as goodwill and other intangible asset
impairment charges or poor operating results could cause us to fall below the
minimum net worth value. Failure to comply with these covenants would result in
a default under the Credit Facility.





If we were unable to
obtain a waiver or otherwise mitigate a default of any covenant, the financial
institution could exercise its right to sell all or a portion of our ARS
holdings, which at December 31, 2008 had a par value of $133.7
million.  While we are seeking ways to minimize the actual
losses which would be realized upon the sale of ARS by holding the investments
until their values recover, if we do not comply with debt covenants and the
financial institution then attempts to sell all or a portion of our ARS, the
actual losses realized upon the sale may exceed the $16.8 million impairment
charges already recognized.  Additionally, if the net proceeds from
the sale of our ARS fail to fully satisfy the $90.0 million obligation, we could be required to
repay any shortfall.





For further discussion of
our ARS investments, please refer to Note 9,Investments,in Item 8 of this Form
10-K.   For further discussion of our financial covenants
and the status of our year-end compliance, please refer to Note 10, Borrowings, also found in
Item 8 of this Form 10-K.


18
 Table of Contents


Item
1A. Risk Factors (continued)





The global
financial crisis may have an impact on our business and financial condition in
ways that we currently cannot predict.





Over the
past twelve months, the financial and credit markets have been extremely
volatile, and certain components of the capital markets have become
illiquid.  Many companies with debt obligations or capital needs have
been unable to access components of the capital markets during this
time.  The continued credit crisis and related turmoil in the global
financial system has had, and may continue to have, an impact on our business
and financial condition. For example, our investments in auction rate securities
have become illiquid during this period.  Going forward, our ability
to access the capital markets to either monetize assets or raise capital may be
severely restricted, which could have an impact on our ability to meet our
obligations and react to changing economic and business conditions. See also our
risk factors related to our Notes and investments in ARS for additional
discussion of this risk and its potential effect on our business.  Also,
while we currently have no outstanding hedges, the credit crisis could affect
future hedging contracts if counterparties are forced to file for bankruptcy or
are otherwise unable to perform their obligations.





Our
fleet expansion program will require a significant increase in our leverage and
the related cash outflows.





The
airline business is capital intensive and, as a result, we are highly leveraged,
as are most airlines. During the year ended December 31, 2008, our mandatory
debt service payments totaled $85 million, and our mandatory lease payments
totaled $156 million.  Our current growth strategy involves the
acquisition by purchase or lease of at least 17 more aircraft through April
2011, which includes two CRJ-900 aircraft expected to deliver in the second
quarter of 2009 and our recently announced purchase or lease of an additional 15
Q400 aircraft that we will operate under related capacity purchase code-share
agreements.  We expect to finance a substantial portion of the
purchase price related to these aircraft, which will significantly increase our
future mandatory debt service payments. Additionally, at December 31, 2008, we
have approximately $1 billion of future minimum lease obligations, which run
through 2017 and primarily relate to the lease of our CRJ-200 aircraft from
Delta.  The majority of these lease obligations would terminate if our
CRJ-200 ASA were terminated prior to its 2017 expiration date.





There can
be no assurance that our operations will generate sufficient cash flow, or that
our ARS situation will provide us sufficient additional liquidity to enable us
to obtain the necessary aircraft acquisition financing and to make such
payments.  If we default under our loan, lease or aircraft purchase
agreements, the lender/lessor/manufacturer has available extensive remedies,
including, without limitation, repossession of the respective aircraft and other
assets. Even if we meet all required debt, lease, and purchase obligations, the
size of these long-term obligations could negatively affect our financial
condition, results of operations and the price of our common stock in many ways,
including:





●
            increasing
      the cost, or limiting the availability of, additional financing for
      working capital, acquisitions or other
purposes;


●
            limiting
      the ways in which we can use our cash flow, much of which may have to be
      used to satisfy debt and lease obligations;
and


●
            adversely
      affecting our ability to respond to changing business or economic
      conditions or continue our growth
strategy.





If we
need additional capital and cannot obtain such capital on acceptable terms, or
at all, we may be unable to realize our current plans or take advantage of
unanticipated opportunities and could be required to slow or stop our
growth.





We
are currently under audit by the Internal Revenue Service, and the results of
the audit could materially affect our financial statements and liquid
assets.





The Internal Revenue Service, or “IRS,”
is currently examining our federal income tax returns for years 2003 through
2005.  The IRS has focused on several key transactions that we
undertook during those periods and the IRS has proposed
adjustments.  Should the IRS prevail on any proposed adjustment, the
impact on us could be significant.  While we believe that we have
recorded reserves that are appropriate for each identified issue, our liquid
assets and our net earnings could be significantly reduced if the IRS
examination ultimately overturns our positions.


19
 Table of Contents


Item
1A. Risk Factors (continued)





Our
stock price is volatile.





Since
January 2007, the market price of our common stock has ranged from a low of
$1.69 to a high of $19.88 per share. The market price of our common stock may
continue to fluctuate substantially due to a variety of factors, many of which
are beyond our control, including:








● strategic actions by us, our partners or our
competitors, such as acquisitions or restructurings;


● media reports and publications about the safety
of our aircraft or the aircraft types we operate;


● new regulatory pronouncements and changes in
regulatory guidelines;


● general and industry specific economic
conditions, including the price of oil;


● changes in our leverage and
liquidity;


● changes in financial estimates or
recommendations by securities analysts;


● sales of our common stock or other actions by
investors with significant shareholdings; and


● general market conditions.





The stock
markets in general have experienced substantial volatility that has often been
unrelated to the operating performance of particular companies. These broad
market fluctuations may adversely affect the trading price of our common stock.
In the past, stockholders have sometimes instituted securities class action
litigation against companies following periods of volatility in the market price
of their securities. Any similar litigation against us could result in
substantial costs, divert management's attention and resources and harm our
business.





We
are increasingly dependent on technology in our operations, and if our
technology fails, our business may be adversely affected.





Our
subsidiaries’ systems operations control centers, which oversee daily flight
operations, are dependent on a number of technology systems to operate
effectively.  Large scale interruption in technology infrastructure
that we depend on, such as power, telecommunications or the internet, could
cause a substantial disruption in our operations.





Risks
Related to our Code-Share Agreements





We
are at risk of adverse publicity stemming from any accident involving our
aircraft.




While we
believe the insurance we carry to cover losses arising from an aircraft crash or
other accident is adequate to cover such losses, any accident involving an
aircraft that we operate for one of our code-share partners could create a
public perception that our aircraft or operations are not safe or
reliable.  Such a perception could harm our reputation, result in the
loss of existing business with our code-share partners, result in an inability
to win new business and harm our profitability. For a description of the Colgan
Flight 3407 accident, see Legal Proceedings in Part I,
Item 3 of this Form 10-K.





We
are highly dependent upon our CRJ-200 ASA with Delta due to the concentration of
our total revenue related to this agreement.  During 2008, our CRJ-200
operations with Delta generated approximately 67% of our consolidated regional
airline services revenues.  Termination or modification of our CRJ-200
ASA by Delta would significantly reduce our consolidated revenue, result in a
material decline in our earnings, and affect our ability to continue
operations.





As
discussed in greater detail in Item 1, “Business,” Delta may terminate for cause
the CRJ-200 ASA at any time for any breach of the agreement by us that continues
uncured for more than 30 days after we receive notice of the
breach.  A termination of our CRJ-200 ASA would have a material
adverse effect on our financial condition, operating revenues, and net income
unless we are able to enter into satisfactory substitute arrangements whereby,
because we sublease our CRJ-200 aircraft from Delta, we would acquire aircraft
to operate under a regional airline service agreement with another major
airline.  In addition, we would be required to obtain airport
facilities and gates, and provide the same variety of third-party services
presently provided by Delta, or alternatively, take the necessary steps to
operate as an independent airline.  We may not be able to enter into
substitute code-share arrangements, and any such arrangements we might secure
may not be as favorable to us as our current agreements.


20
 Table of Contents


Item
1A. Risk Factors (continued)





Additionally,
our CRJ-200 ASA is a complex document containing many provisions subject to
interpretation.  Delta has disputed certain provisions of the CRJ-200
ASA in the past in an attempt to reduce the payments it makes to
us.  Two such matters are currently unresolved, as further described
in Note 3 to Item 8 of this Form 10-K.  Typically we would agree to a
dispute resolution process such as arbitration to resolve these types of
disagreements.  The current unresolved matters, or future
disagreements over interpretation of the CRJ-200 ASA, may result in materially
unfavorable adjustments to our revenue and profitability related to our CRJ-200
operations.





Unlike
our CRJ-200 operations under which we sublease our aircraft from Delta, we bear
the aircraft ownership risk associated with our CRJ-900 and Q400
operations.  Termination of either the DCA or the Continental CPA
would materially impede our ability to meet our debt obligations.





As
discussed in greater detail in Item 1, “Business,” Delta and Continental may
terminate for cause the DCA or Continental CPA, respectively, for any breach of
the agreement by us that continues uncured for more than the time allotted in
the agreement.  A termination of either agreement would have a
material adverse effect on our ability to fund our debt obligations, including
our aircraft debt obligations.  Failure to meet these obligations
could lead to the loss of our aircraft and the equity investment we have made in
the purchase of the aircraft.  Additionally, termination of either
agreement would adversely affect our financial condition, operating revenues,
and net income unless we are able to enter into satisfactory substitute
arrangements with another major airline.  In addition, we would be
required to obtain the necessary airport facilities and gates, and provide the
same variety of third-party services presently provided by Delta and
Continental, or alternatively, take the necessary steps to operate as an
independent airline.  We may not be able to enter into substitute
code-share arrangements, and any such arrangements we might secure may not be as
favorable to us as our current agreements.





We
are highly dependent upon the services provided by our major airline
partners.





Related
to our dependence on our capacity purchase agreements is our reliance on our
major airline partners for the services they provide to support our current
operations.  We currently use or rely upon Delta's,
Continental’s and our pro-rate partners’ systems, facilities and services
to support a significant portion of our operations, including airport and
terminal facilities and operations, information technology support,
ticketing and reservations, scheduling, dispatching, fuel purchasing and ground
handling services.  Were we to lose any of our operations with these
partners, particularly related to our DCA and Continental CPA agreements with
Delta and Continental, respectively, for which we bear the ownership risks
associated with the aircraft, we would need to replace all of the services
mentioned above and make the other arrangements necessary to fly as an
independent airline. We may not be able to replace in a timely fashion all of
the services provided by our partners, or enter into substitute code-share
arrangements, and any arrangements we might secure may not be as favorable to us
as our current agreements. Additionally, operating our airline independent from
major partners would be a significant departure from our business plan, and may
require significant time and resources, which may not be available to
us.





There
are risks associated with our regional jet strategy, including potential
oversupply.





Under our
capacity purchase agreements, our major partners bear the risk of increases in
certain operating costs such as fuel expense.  When fuel costs rise,
the “cost per available seat mile” increases more dramatically for 50-seat
regional jets (such as the CRJ-200 aircraft we operate for Delta) versus larger
aircraft.  While the cost of fuel fell in the second half of 2008, we
have no assurance that the cost will remain low.  In fact, if the
overall economy improves, prices could potentially return to record high
levels.   Consequently, these cost pressures reduce the economic
advantage of 50-seat aircraft, prompting major airlines to seek ways to reduce
the number of these aircraft operating within their fleets.





The Delta
system includes more than 400 50-seat aircraft, the most of any major
carrier.  Pinnacle currently operates 124 of these aircraft for
Delta.  As such, the concentration of 50-seat aircraft within
Pinnacle’s operations increases our exposure to the risk that Delta will seek to
reduce the size of its 50-seat fleet, which would have a material adverse result
on our future profitability.


21
 Table of Contents


Item
1A. Risk Factors (continued)





Reduced
utilization levels of our aircraft under our capacity purchase code-share
agreements would reduce our revenues and earnings.




During
2008, approximately 50% of the revenues from our capacity purchase code-share
agreements were derived from block hours, departures and certain reimbursable
expenses that we incur only when we operate the aircraft.  Similar to
the risk of a potential oversupply of 50-seat regional jets, if our code-share
partners seek ways to decrease the size of our fleet or seek to reduce the
utilization of our fleet, our revenues and profitability would
decrease.





Under our
capacity purchase agreements, our code-share partners are solely responsible for
scheduling our flights and could decide to significantly reduce the utilization
levels of our fleet in the future.  During 2007, for example,
construction delays at the Minneapolis/St. Paul airport prompted Northwest to
cancel numerous Pinnacle flights in order to allow its own aircraft to utilize
the available airport and runway capacity during the construction
period.  Similarly, any disruption in the operations of one of our
code-share partners, such as may be caused by strikes by various employee
groups, could adversely affect our fleet utilization, and thus reduce our
revenue and profitability.





Further
increasing the significance of this risk are the recent economic events
prompting major carriers to announce their intention to reduce capacity and/or
utilization.  While the announced capacity reductions have not
included aircraft we operate, we have no assurance that future capacity
reductions will exclude our aircraft.





The
rate-based revenues we receive under our capacity purchase code-share agreements
may be less than the controllable costs we incur.





Under our
capacity purchase code-share agreements with Delta and Continental, the major
airline bears the risk related to reimbursable expenses, which include expenses
for which our code-share partner is obligated repay in full to
us.  With respect to other costs, often called “rate-based,” our
code-share partner is obligated to pay to us amounts based, in part, on
pre-determined rates. If our controllable costs exceed our rate-based revenue,
our financial results will be adversely affected.  During the year
ended December 31, 2008, approximately 26% of our total costs were pass-through
costs and approximately 74% of our costs were controllable costs related to our
rate-based revenue.




Our
ability to operate profitably under Colgan’s pro-rate code-share agreements is
heavily dependent on the price of aircraft fuel. Continued periods of
historically high fuel costs or further increases in fuel costs could have a
significant negative impact on our operating results.




Under our pro-rate
code-share agreements,we bear the risk associated with fares, passenger
demand, and competition within each market.  We incur all of the costs
associated with operating these flights, including those costs typically
reimbursed or paid directly by the major airline under a capacity purchase
agreement. For example, Colgan’s pro-rate agreements provide that Colgan pay for
its own fuel.  Year-over-year, the average cost of jet fuel increased
41%, with the average cost of one gallon of jet fuel increasing from $2.36 in
2007 to $3.33 in 2008.  While fuel prices have recently fallen, we
cannot predict if or when they may rise in the future.  Additionally,
due to the competitive nature of the airline industry, we may not be able to
increase passenger fares to offset the increases in fuel prices. While we do
have the ability to earn incentive-based revenue should we achieve specified
performance metrics, to the extent that we incur expenses that exceed the
revenue we receive from passenger fares and incentive-based revenue, our
financial results will be negatively affected.





Our
efforts to restructure Colgan’s pro-rate operations may fail to eliminate the
net losses incurred.





Colgan
operates under revenue-sharing pro-rate agreements with Continental, United, and
US Airways.  Unlike our capacity purchase operations under which we
are insulated from many of the revenue and cost risks that affect major and
low-cost airlines, under our pro-rate agreements we bear the risks related to
items such as passenger demand, yield, fuel cost, aircraft rent or ownership
costs, ground handling and airport-related charges.




22
 Table of Contents


Item 1A. Risk
Factors





During
2008, we further executed on our publicly announced strategy to improve the
profitability of our pro-rate operations by reducing the scale of these
operations, eliminating unprofitable routes and shifting routes to partners that
maximized passenger connection opportunities.  We also worked with our
code-share partners to increase certain revenues such as the incentive revenue
earned when a Colgan passenger connects to or from a major partner’sconnecting
flight, and we must continue to take steps to generate additional revenues and
to reduce our costs.  While the financial performance of our pro-rate
operations improved during the second half of 2008 subsequent to a further
execution of our turn-around strategy, we have no assurance as to the adequacy
and ultimate success of our initiatives to generate additional revenues and
reduce our costs.  Moreover, whether our initiatives will be adequate
or successful depends in large measure on factors beyond our control, notably
the overall industry environment, including passenger demand, yield, industry
capacity growth and fuel prices.





Risks
Related to our Labor Costs and Collective Bargaining Agreements





Increases
in our labor costs, which constitute a substantial portion of our total
operating costs, may directly affect our earnings.





Labor
costs are not directly reimbursed by any of our code-share
partners.  Rather, compensation for these costs is intended to be
covered by the payments based on pre-set rates for block hours, departures and
fixed costs.  Labor costs constitute a significant portion, ranging
from 26% to 28%, of our total operating costs.  Pressure to increase
these costs beyond standard industry wages, and therefore beyond the limits
intended to be covered by the fixed payments we receive from our code-share
partners, is increased by the high degree of unionization of our workforce (71%
unionized at December 31, 2008) and the ongoing negotiations between Pinnacle
and ALPA for a revised collective bargaining agreement.  Pinnacle’s
pilots are currently paid at rates less than the industry average for similarly
sized aircraft, and an amended collective bargaining agreement with ALPA is
expected to contain higher rates of pay for Pinnacle’s pilots.  We
expect our salaries, wages and benefits costs to materially increase as a result
of an amended collective bargaining agreement with Pinnacle’s
pilots.  In addition, while we have not offered retroactive
compensation to Pinnacle’s pilots during the negotiation process, an amended
collective bargaining agreement may contain a material signing
bonus.  An increase in our labor costs over standard industry wages
could result in a material reduction to our earnings, and could affect our
future prospects for additional business opportunities.





Strikes
or labor disputes with our employees may adversely affect our ability to conduct
our business and could result in the termination, or a significant reduction of
the benefit, of our code-share agreements.





If we are
unable to reach an agreement with any of our unionized work groups on the terms
of their collective bargaining agreements, we may be subject to work
interruptions, work stoppages, or a fleet size reduction.  Work
stoppages may adversely affect our ability to conduct our operations and fulfill
our obligations under our code-share agreements.   Several of our
code-share agreements, including our Continental CPA, our DCA, and our CRJ-200
ASA, contain provisions granting our partners the right to terminate our
agreements in the event of a work stoppage or labor
strike.  Additionally, our CRJ-200 ASA contains a provision allowing
Delta to reduce the size of our CRJ-200 fleet in the event of a work stoppage or
labor strike.





Pinnacle’s
collective bargaining agreement with its pilots became amendable on April 30,
2005, and Pinnacle is currently engaged in discussions with ALPA
representatives.  Both the union and management continue to engage in
labor talks that are governed by the National Mediation Board, and the parties
have not been released from these talks.





If
we are unable to attract and retain key employees, our business could be
harmed.





We
compete against the other major and regional U.S. airlines for pilots, mechanics
and other employee groups essential for providing airlines services. 
Several of the other airlines offer wage and benefit packages that exceed
ours.  We may be required to increase wages and/or benefits in order to
attract and retain qualified employees or risk considerable turnover, which
could negatively affect our ability to provide a quality product to our
customers and therefore negatively affect our relationship with our
customers.  Similarly, as we further expand our Q400 operations for
Continental, our need for qualified pilots, mechanics and other airline-specific
employees increases.  For example, Pinnacle’s ongoing negotiation with ALPA
for an amended collective bargaining agreement may complicate our ability to
both attract and retain pilots, one of our key employee groups.  If we
are unable to hire, train and retain qualified pilots we would be unable to
efficiently run our operations and our competitive ability would be
impaired.  Our business could be harmed and revenue reduced if, due to a
shortage of pilots, we are forced to cancel flights and forego earning
incentive-based revenue under our code-share agreements.  During the first
half of 2007 we failed to earn $2.9 million of incentive-based revenue under our
ASA in part due to an industry wide pilot shortage.


23
 Table of Contents


Item 1B.  Unresolved Staff
Comments.





All staff comments received from the
Securities and Exchange Commission were resolved as of the date of this
filing.


24
 Table of Contents





Item 2.  Properties





Flight Equipment





As shown
in the following table, the Company’s aircraft fleet consisted of 145 Canadair
Regional Jet (“CRJ”) aircraft and 53 turboprop aircraft at December 31,
2008.





Aircraft
      Type
                
                Number
      of Aircraft Leased
                
                Number
      of Aircraft Owned
                
                Total
                  Aircraft
                
                Standard
      Seating Configuration
                
                Average
      Age
                  (in
      years)CRJ-200
                
                124
                
                -
                
                124
                
                50
                
                5.7CRJ-900
                
                7(1)
                
                14(2)
                
                21
                
                76
                
                0.7Total
      regional jets
                
                131
                
                14
                
                145Saab
      340
                
                14(3)
                
                22
                
                36
                
                34
                
                17.2Q400(4)
                
                -
                
                15
                
                15
                
                74
                
                0.7Beech
      1900D(5)
                
                1
                
                1
                
                2
                
                19
                
                14.8Total
      turboprops
                
                15
                
                38
                
                53Total
      aircraft
                
                146
                
                52
                
                198





1.
            On
      October 1, 2008, we entered into an agreement with Delta to operate, on a
      short-term basis, seven additional CRJ-900 aircraft. For further
      discussion, refer to Note 3 in Item 8 of this Form
  10-K.


2.
            Of
      the 14 owned CRJ-900 aircraft, nine were operating in scheduled service as
      of December 31, 2008, two were operating as spare aircraft to support our
      DCA operations, and the remaining three, which were delivered on December
      18, 2008, were being prepared for scheduled operations.  All 14
      aircraft were operating in scheduled service under the DCA by January
      2009.  For further discussion, refer to Note 3, in Item 8 of
      this Form 10-K.


3.
            At
      December 31, 2008, two of the 14 leased Saab 340 turboprop aircraft were
      being prepared to be returned to the lessor, and were not part of the
      operating fleet.  In addition, for purposes of classification,
      three of the 14 leased aircraft were operated under capital leases. For
      further discussion, refer to Note 11, Leases, in Item 8 of
      this Form 10-K.


4.
            On
      February 12, 2009, Colgan Flight 3407, operated for Continental under the
      Company’s Continental CPA, crashed in a neighborhood near the Buffalo
      Niagara International Airport in Buffalo, New
      York.  Consequently, as of this date, 14 Q400 aircraft remain in
      service.


5.
            As
      of February 15, 2009, the Company ceased operations with the two remaining
      Beech 1900D aircraft and removed these aircraft from the operating
      fleet.


25
 Table of Contents


Item
2.  Properties (continued)





Facilities





The
Company had the following significant dedicated facilities as of December 31,
2008:





Location
                      
                      Description
                      
                      Square
                        Footage
                      
                      Lease
      Expiration DateMemphis,
      TN
                      
                      Pinnacle
      Airlines, Inc. Headquartersand
      Corporate Education Center
                      
                      59,100
                      
                      August
      2011Memphis,
      TN
                      
                      Pinnacle
      Airlines Corp. Headquarters
                      
                      12,300
                      
                      July
      2009Memphis,
      TN
                      
                      Hangar
      and Maintenance Facility
                      
                      51,250
                      
                      December
      2016Knoxville,
      TN
                      
                      Hangar
      and Maintenance Facility
                      
                      55,000
                      
                      Termination
      of the CRJ-200 ASAManassas,
      VA
                      
                      Colgan
      Air, Inc. Hangars, MaintenanceFacility
      and Corporate Headquarters
                      
                      63,060
                      
                      December
      2013Dulles,
      VA
                      
                      Hangar
      and Maintenance Facility
                      
                      44,029
                      
                      April
      2011Albany,
      NY
                      
                      Hangar
      and Maintenance Facility
                      
                      24,325
                      
                      December
      2010Houston,
      TX
                      
                      Hangar
      and Maintenance Facility
                      
                      24,325
                      
                      March
      2011





Our
significant maintenance facilities are located in cities that we serve based on
market size, frequency, and location.  These facilities are used for
overnight maintenance; however, Memphis and Dulles are also used during the
day.  We have additional smaller maintenance facilities in Fort Wayne,
Indiana and South Bend, Indiana.  The facilities are highly utilized
with an average turn around time of seven to ten hours.  We believe
that our existing facilities are adequate for the foreseeable needs of our
business.





In
connection with our code-share partners, we maintain contract service agreements
with Delta, Continental, United and US Airways allowing for the use of terminal
gates, parking positions and operations space at Atlanta, Boston Detroit,
Houston, Minneapolis/St. Paul, Newark, New York LaGuardia and Washington Dulles
airports, as well as many of the stations we serve from these hub
airports.  We believe the use of the terminal gates, parking
positions, and operations space obtained from our code-share partners will be
sufficient to meet the operational needs of our business.





Item 3.  Legal Proceedings





Pinnacle
and Colgan are defendants in various ordinary and routine lawsuits incidental to
our business. While the outcome of these lawsuits and proceedings cannot be
predicted with certainty, it is the opinion of our management, based on current
information and legal advice, that the ultimate disposition of these suits will
not have a material adverse effect on our financial statements as a
whole.  For further discussion, see Note 18, Commitments and
Contingencies, in Item 8 of this Form 10-K.





September 11, 2001
Litigation.Colgan is a defendant in litigation resulting from
the September 11, 2001 terrorist attacks.  The Company believes it
will prevail in this litigation; however, any adverse outcome from this
litigation would be covered by insurance and would therefore have no material
adverse effect on the Company’s financial position, results of operations and
cash flows.





ColganFlight 3407.  On
February 12, 2009, Colgan Flight 3407, operated for Continental under the
Company’s Continental CPA, crashed in a neighborhood near the Buffalo Niagara
International Airport in Buffalo, New York. All 49 people aboard, including 45
passengers and four members of the flight crew, died in the accident.
Additionally, one individual died inside the home destroyed by the aircraft’s
impact, increasing the total fatality count to 50 individuals.  One
lawsuit related to this accident has been filed against the Company, and
additional litigation is anticipated.  We carry aviation risk
liability insurance and believe that this insurance is sufficient to cover any
liability arising from this accident.


26
 Table of Contents


Item
3.  Legal Proceedings (continued)





Environmental Matters





We are
subject to regulation under various environmental laws and regulations, which
are administered by numerous state and federal agencies, including the Clean Air
Act, the Clean Water Act and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980. In addition, many state and local
governments have adopted environmental laws and regulations to which our
operations are subject. We are, and may from time to time become, involved in
environmental matters, including the investigation and/or remediation of
environmental conditions at properties used or previously used by us. We are
not, however, currently subject to any environmental cleanup orders imposed by
regulatory authorities, nor do we have any active investigations or remediations
at this time.





Regulatory Matters





We are
subject to regulation under various laws and regulations which are administered
by numerous state and federal agencies, including but not limited to the FAA,
DOT and Transportation Security Administration (“TSA”).  We are
involved in various matters with these agencies during the ordinary course of
our business.  While the outcome of these matters cannot be predicted
with certainty, it is the opinion of our management, based on current
information and past experience, that the ultimate disposition of these matters
will not have a material adverse effect on our financial condition as a
whole.





Item 4.  Submission of Matters to a Vote of Security
Holders





None.


27
 Table of Contents


Part
II




Item 5.  Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities







The
shares of our common stock are quoted and traded on the Nasdaq Global Select
Market under the symbol “PNCL.” Our common stock began trading on November 25,
2003, following our initial public offering. Set forth below, for the applicable
periods indicated, are the high and low closing sale prices per share of our
common stock as reported by the Nasdaq Global Select Market.





2008
                      
                      High
                      
                      
                      LowFirst
      quarter
                      
                      $
                      15.32
                      
                      
                      $
                      8.73Second
      quarter
                      
                      $
                      9.31
                      
                      
                      $
                      3.14Third
      quarter
                      
                      $
                      7.00
                      
                      
                      $
                      3.05Fourth
      quarter
                      
                      $
                      4.13
                      
                      
                      $
                      1.69





2007
                    
                    High
                    
                    
                    LowFirst
      quarter
                    
                    $
                    19.88
                    
                    
                    $
                    16.76Second
      quarter
                    
                    $
                    19.29
                    
                    
                    $
                    16.13Third
      quarter
                    
                    $
                    19.68
                    
                    
                    $
                    15.14Fourth
      quarter
                    
                    $
                    16.75
                    
                    
                    $
                    13.86





As of
March 2, 2009, there were approximately 37 holders of record of our common
stock.  We have paid no cash dividends on our common stock and have no
current intention of doing so in the future.





The
information under the caption “Securities Authorized for Issuance under Equity
Compensation Plans,” appearing in the Proxy Statement for our 2009 Annual
Meeting of Stockholders, anticipated to be filed with the Commission within the
120 days after December 31, 2008, is hereby incorporated by
reference.





Our
Certificate of Incorporation provides that no shares of capital stock may be
voted by or at the direction of persons who are not United States citizens
unless such shares are registered on a separate stock record. Our Bylaws further
provide that no shares will be registered on such separate stock record if the
amount so registered would exceed United States foreign ownership restrictions.
United States law currently limits to 25% the voting power in our company (or
any other U.S. airline) of persons who are not citizens of the United
States.


28
 Table of Contents




Item 5.  Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities (continued)







Performance Graph





The
following graph compares total shareholder return on the Company’s common stock
over the five-year period ending December 31, 2008, with the cumulative total
returns (assuming reinvestment of dividends) on the American Stock Exchange
Airline Industry Index and the NASDAQ Composite Index. The stock performance
graph assumes that the value of the investment in our common stock and each
index (including reinvestment of dividends) was $100 on December 31, 2003. The
graph below represents historical stock performance and it not necessarily
indicative of future stock price performance.










29
 Table of Contents


Item 6.  Selected Financial Data





You
should read this selected consolidated financial data together with the audited
consolidated financial statements and related notes contained in Item 8, Management’s Discussion and Analysis
of Financial Condition and Results of Operation contained in Item 7, and
Risk Factorsin Item 1A
of this Form 10-K.





Years
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006
                        
                        
                        2005
                        
                        
                        2004Statement
      of Operations Data:
                        
                        (in
      thousands, except per share data)Total
      operating revenues(1)(2)
                        
                        $
                        864,785
                        
                        
                        $
                        787,374
                        
                        
                        $
                        824,623
                        
                        
                        $
                        841,605
                        
                        
                        $
                        635,448Total
      operating expenses (3)
                        
                        
                        819,178
                        
                        
                        
                        734,963
                        
                        
                        
                        697,075
                        
                        
                        
                        814,676
                        
                        
                        
                        568,145Operating
      income(1)(2)(3)
                        
                        
                        45,607
                        
                        
                        
                        52,411
                        
                        
                        
                        127,548
                        
                        
                        
                        26,929
                        
                        
                        
                        67,303Operating
      income as a percentage of operating revenues(1)(2)(3)
                        
                        
                        5.3%
                        
                        
                        
                        6.7%
                        
                        
                        
                        15.5%
                        
                        
                        
                        3.2%
                        
                        
                        
                        10.6%Nonoperating
      (expense) income(4)
                        
                        
                        (44,310)
                        
                        
                        
                        (1,374)
                        
                        
                        
                        (2,948)
                        
                        
                        
                        14,482
                        
                        
                        
                        (4,178)Net
      (loss) income
                        
                        
                        (4,907)
                        
                        
                        
                        34,637
                        
                        
                        
                        77,799
                        
                        
                        
                        25,698
                        
                        
                        
                        40,725Basic
      (loss) earnings per share
                        
                        $
                        (0.27)
                        
                        
                        $
                        1.66
                        
                        
                        $
                        3.55
                        
                        
                        $
                        1.17
                        
                        
                        $
                        1.86Diluted
      (loss) earnings per share
                        
                        $
                        (0.27)
                        
                        
                        $
                        1.50
                        
                        
                        $
                        3.54
                        
                        
                        $
                        1.17
                        
                        
                        $
                        1.86Shares
      used in computing basic (loss) earnings per share
                        
                        
                        17,865
                        
                        
                        
                        20,897
                        
                        
                        
                        21,945
                        
                        
                        
                        21,913
                        
                        
                        
                        21,892Shares
      used in computing diluted (loss) earnings per share
                        
                        
                        17,865
                        
                        
                        
                        23,116
                        
                        
                        
                        21,974
                        
                        
                        
                        21,932
                        
                        
                        
                        21,911Our
        target operating margin under the CRJ-200 ASA was 10% from December 1,
        2003 through December 31, 2006. Under the CRJ-200 ASA effective January
        1, 2007, Pinnacle’s CRJ-200 ASA target operating margin was reduced to
        8% and certain significant reimbursed expenses such as fuel and aircraft
        rentals were eliminated or reduced, resulting in lower revenue, expenses
        and income. In addition, operating revenues and operating income for the
        years ended December 31, 2008 and 2007 include $24.0 million and $22.6
        million, respectively, of deferred revenue recognized related to our
        Northwest bankruptcy claim. For further discussion of the target
        operating margin and deferred revenue, refer to Note 3, Code-Share
        Agreements with Partners,in Item 8 of this Form
        10-K.
                            Operating
        revenues and operating income for the year ended December 31, 2007 were
        affected by the acquisition of Colgan. Colgan was acquired on
        January 18, 2007. Operating revenues and operating income for the
        year ended December 31, 2008 were affected by additional revenue earned
        under our DCA and our Continental CPA. We began operating under our
        DCA in December 2007, and we began operating under our Continental CPA
        in February 2008. For more information, refer to Note 3, Code-Share
        Agreements with Partners,in Item 8 of this Form
        10-K.
                            Operating
        expenses for the years ended December 31, 2007, 2006 and 2005 were
        affected by (benefits)/charges of ($1.0 million), ($43.6 million), and
        $59.6 million, respectively, related to the bankruptcies of Northwest
        and Mesaba. For more information, refer to Note 3, Code-Share
        Agreements with Partners,in Item 8 of this Form 10-K. In
        addition, operating expenses for the year ended December 31, 2007 were
        affected by the acquisition of Colgan. As previously mentioned,
        Colgan was acquired on January 18, 2007. Operating expenses for the
        year ended December 31, 2008 were affected by a $13.5 million impairment
        charge on Colgan’s goodwill and aircraft lease return costs. For more
        information, refer to Note 6, Impairment
        of Goodwill and Aircraft Lease Return Costs, in Item 8 of this
        Form 10-K.
                            Nonoperating
        income for the year ended December 31, 2005 includes a gain of $18.0
        million related to the repurchase of our note payable to
        Northwest. Nonoperating income for the year ended December
        31, 2008 includes a $16.8 million impairment charge on our ARS
        investments. For more information on the impairment charge on our
        ARS investments, refer to Note 9, Investments,in Item
        8 of this Form 10-K. In addition, nonoperating expense for the year
        ended December 31, 2008 includes interest expense on the financing for
        the CRJ-900 and Q400 aircraft. For more information related to
        aircraft financing, refer to Note 10, Borrowings,in Item 8
        of this Form
10-K.





30
 Table of Contents


Item
6.  Selected Financial Data (continued)





As
      of December 31,2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005
                          
                          
                          2004Balance
      Sheet Data:
                          
                          (in
      thousands)Cash
      and cash equivalents (5)
                          
                          $
                          69,469
                          
                          
                          $
                          26,785
                          
                          
                          $
                          705
                          
                          
                          $
                          31,567
                          
                          
                          $
                          34,912Investments
                          
                          
                          116,900
                          
                          
                          
                          186,850
                          
                          
                          
                          72,700
                          
                          
                          
                          44,160
                          
                          
                          
                          -Property
      and equipment, net (6)
                          
                          
                          720,757
                          
                          
                          
                          255,410
                          
                          
                          
                          40,985
                          
                          
                          
                          42,535
                          
                          
                          
                          39,416Total
      assets
                          
                          
                          1,133,122
                          
                          
                          
                          708,588
                          
                          
                          
                          301,273
                          
                          
                          
                          228,802
                          
                          
                          
                          165,960Long-term
      debt obligations, including capital leases (7)
                          
                          
                          614,342
                          
                          
                          
                          196,480
                          
                          
                          
                          121,000
                          
                          
                          
                          121,000
                          
                          
                          
                          120,000Stockholders'
      equity (deficiency)
                          
                          
                          48,593
                          
                          
                          
                          57,822
                          
                          
                          
                          97,021
                          
                          
                          
                          18,618
                          
                          
                          
                          (7,548)









5.
            For the year
      ended December 31, 2006, cash and cash equivalents did not include the
      normal CRJ-200 ASA end-of-month payment of $31.9 million, which was
      received on January
      2, 2007 as December 31, 2006 fell on a non-business
      day.6.
            As of December
      31, 2007, property and equipment included the addition of three CRJ-900
      aircraft. As of December 31, 2008, property and equipment include an
      additional 11 CRJ-900
      aircraft and 15 Q400 aircraft that were received during
      2008.7.
            Long-term debt
      obligations as of December 31, 2007 include financing for three CRJ-900
      aircraft. Long-term debt obligations as of December 31, 2008 include
      financing for 11 additional
      CRJ-900 aircraft and 15 Q400 aircraft that were entered into during
      2008.









31
 Table of Contents


Item
6.  Selected Financial Data (continued)





Years
      Ended December 31,2008(9)
                
                
                2007(8)
                
                
                2006
                
                
                2005
                
                
                2004Other
    Data:Revenue
      passengers (in thousands)
                
                
                12,926
                
                
                
                11,494
                
                
                
                8,988
                
                
                
                8,105
                
                
                
                6,340Revenue
      passenger miles (in thousands) (10)
                
                
                5,420,673
                
                
                
                4,898,188
                
                
                
                4,288,551
                
                
                
                4,129,039
                
                
                
                2,894,776Available
      seat miles (“ASMs”) (in thousands) (11)
                
                
                7,380,490
                
                
                
                6,604,082
                
                
                
                5,640,629
                
                
                
                5,732,773
                
                
                
                4,219,078Passenger
      load factor (12)
                
                
                73.4%
                
                
                
                74.2%
                
                
                
                76.0%
                
                
                
                72.0%
                
                
                
                68.6%Operating
      revenue per ASM (in cents) (2)
                
                
                11.72
                
                
                
                11.92
                
                
                
                14.62
                
                
                
                14.68
                
                
                
                15.06Operating
      revenue per block hour (2)
                
                $
                1,451
                
                
                $
                1,392
                
                
                $
                1,987
                
                
                $
                1,944
                
                
                $
                1,962Operating
      cost per ASM (in cents) (3)
                
                
                11.10
                
                
                
                11.13
                
                
                
                12.36
                
                
                
                14.21
                
                
                
                13.47Operating
      cost per block hour (3)
                
                $
                1,375
                
                
                $
                1,300
                
                
                $
                1,679
                
                
                $
                1,882
                
                
                $
                1,754Block
      hoursRegional
      jets
                
                
                442,911
                
                
                
                438,988
                
                
                
                415,069
                
                
                
                432,900
                
                
                
                323,810Turboprops
                
                
                152,890
                
                
                
                126,675
                
                
                
                -
                
                
                
                -
                
                
                
                -DeparturesRegional
      jets
                
                
                267,893
                
                
                
                265,418
                
                
                
                251,091
                
                
                
                249,262
                
                
                
                201,816Turboprops
                
                
                121,635
                
                
                
                107,171
                
                
                
                -
                
                
                
                -
                
                
                
                -Average
      daily utilization (in block hours)Regional
      jets
                
                
                8.77
                
                
                
                8.73
                
                
                
                9.17
                
                
                
                9.07
                
                
                
                8.98Turboprops
                
                
                7.51
                
                
                
                7.32
                
                
                
                -
                
                
                
                -
                
                
                
                -Average
      stage length (in miles)
                
                
                398
                
                
                
                321
                
                
                
                470
                
                
                
                500
                
                
                
                450Number
      of operating aircraft (end of period)Regional
      jets
                
                
                142
                
                
                
                138
                
                
                
                124
                
                
                
                124
                
                
                
                117Turboprops
                
                
                51
                
                
                
                47
                
                
                
                -
                
                
                
                -
                
                
                
                -Employees
                
                
                5,644
                
                
                
                5,316
                
                
                
                3,860
                
                
                
                3,436
                
                
                
                3,056




8.
            We
      acquired Colgan on January 18, 2007. Data for 2007 includes Colgan data
      and statistics from the date of acquisition through the end of the
      year.9.
            Statistical
      results for the year ended December 31, 2008 were affected by the addition
      throughout the year of regional jets operated under the DCA and turboprops
      operated under the Continental CPA. As of December 31, 2008, Pinnacle
      operated 18 CRJ-900 aircraft under the DCA (seven of which were the
      Temporary Aircraft), and Colgan operated 15 Q400 aircraft under the
      Continental CPA.10.
            Revenue
      passenger miles represent the number of miles flown by revenue
      passengers.11.
            Available seat
      miles represent the number of seats available for passengers multiplied by
      the number of miles the seats are flown.12.
            Passenger load
      factor equals revenue passenger miles divided by available seat
      miles.




32
 Table of Contents


Item
6.  Selected Financial Data (continued)





Certain
Statistical Information:





The
following tables present our operating expenses per block hour and operating
expenses per available seat mile.  While not relevant to our financial
results, this data is used as an analytic in the airline
industry.  Please see Results of Operations in Item
7 of this Form 10-K for more information on our operating expenses.





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004Operating
      expenses per block hour:Salaries,
      wages and benefits
                      
                      $
                      369
                      
                      
                      $
                      346
                      
                      
                      $
                      329
                      
                      
                      $
                      310
                      
                      
                      $
                      325Aircraft
      rentals
                      
                      
                      216
                      
                      
                      
                      245
                      
                      
                      
                      636
                      
                      
                      
                      642
                      
                      
                      
                      645Ground
      handling services
                      
                      
                      162
                      
                      
                      
                      170
                      
                      
                      
                      207
                      
                      
                      
                      214
                      
                      
                      
                      203Aircraft
      maintenance, materials and repairs
                      
                      
                      156
                      
                      
                      
                      159
                      
                      
                      
                      83
                      
                      
                      
                      74
                      
                      
                      
                      73Other
      rentals and landing fees
                      
                      
                      121
                      
                      
                      
                      104
                      
                      
                      
                      104
                      
                      
                      
                      99
                      
                      
                      
                      114Aircraft
      fuel
                      
                      
                      83
                      
                      
                      
                      68
                      
                      
                      
                      263
                      
                      
                      
                      260
                      
                      
                      
                      258Commissions
      and passenger related expenses
                      
                      
                      45
                      
                      
                      
                      46
                      
                      
                      
                      12
                      
                      
                      
                      10
                      
                      
                      
                      11Depreciation
      and amortization
                      
                      
                      44
                      
                      
                      
                      16
                      
                      
                      
                      10
                      
                      
                      
                      9
                      
                      
                      
                      10Other
                      
                      
                      156
                      
                      
                      
                      148
                      
                      
                      
                      140
                      
                      
                      
                      126
                      
                      
                      
                      115Provision
      for (decreases) increases in losses associated with bankruptcy filings of
      Northwest and Mesaba
                      
                      
                      -
                      
                      
                      
                      (2)
                      
                      
                      
                      (105)
                      
                      
                      
                      138
                      
                      
                      
                      -Impairment
      of goodwill and aircraft lease return costs
                      
                      
                      23
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
      operating expenses
                      
                      $
                      1,375
                      
                      
                      $
                      1,300
                      
                      
                      $
                      1,679
                      
                      
                      $
                      1,882
                      
                      
                      $
                      1,754





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Operating
      expenses per available seat mile (in cents):Salaries,
      wages and benefits
                    
                    $
                    2.98
                    
                    
                    $
                    2.97
                    
                    
                    $
                    2.43
                    
                    
                    $
                    2.34
                    
                    
                    $
                    2.49Aircraft
      rentals
                    
                    
                    1.74
                    
                    
                    
                    2.10
                    
                    
                    
                    4.68
                    
                    
                    
                    4.85
                    
                    
                    
                    4.95Ground
      handling services
                    
                    
                    1.31
                    
                    
                    
                    1.46
                    
                    
                    
                    1.53
                    
                    
                    
                    1.62
                    
                    
                    
                    1.56Aircraft
      maintenance, materials and repairs
                    
                    
                    1.26
                    
                    
                    
                    1.36
                    
                    
                    
                    0.61
                    
                    
                    
                    0.56
                    
                    
                    
                    0.56Other
      rentals and landing fees
                    
                    
                    0.97
                    
                    
                    
                    0.89
                    
                    
                    
                    0.76
                    
                    
                    
                    0.75
                    
                    
                    
                    0.88Aircraft
      fuel
                    
                    
                    0.67
                    
                    
                    
                    0.58
                    
                    
                    
                    1.93
                    
                    
                    
                    1.96
                    
                    
                    
                    1.98Commissions
      and passenger related expense
                    
                    
                    0.37
                    
                    
                    
                    0.39
                    
                    
                    
                    0.09
                    
                    
                    
                    0.07
                    
                    
                    
                    0.09Depreciation
      and amortization
                    
                    
                    0.36
                    
                    
                    
                    0.14
                    
                    
                    
                    0.07
                    
                    
                    
                    0.07
                    
                    
                    
                    0.08Other
                    
                    
                    1.26
                    
                    
                    
                    1.26
                    
                    
                    
                    1.03
                    
                    
                    
                    0.95
                    
                    
                    
                    0.88Provision
      for (decreases) increases in losses associated with bankruptcy filings of
      Northwest and Mesaba
                    
                    
                    -
                    
                    
                    
                    (0.02)
                    
                    
                    
                    (0.77)
                    
                    
                    
                    1.04
                    
                    
                    
                    -Impairment
      of goodwill and aircraft lease return costs
                    
                    
                    0.18
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      operating expenses
                    
                    $
                    11.10
                    
                    
                    $
                    11.13
                    
                    
                    $
                    12.36
                    
                    
                    $
                    14.21
                    
                    
                    $
                    13.47




33
 Table of Contents
 
 Item 7.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations




Overview and Outlook





General





During
2008, we further executed on our growth plan by adding 15 Q400 aircraft at our
Colgan subsidiary and 13 CRJ-900 aircraft at our Pinnacle subsidiary, with two
additional CRJ-900 aircraft scheduled to deliver in the second quarter of
2009.  With this phase of our growth plan essentially complete, we
intend to focus on controlling costs, maintaining our strong operational
reliability, and strengthening our balance sheet.  The regional
airline industry is facing a period of slower growth and pressure from major
airline partners to reduce costs and potentially reduce some regional airline
capacity.  While we do not expect significant adjustments in our fleet
size in 2009, we do expect to experience significant cost pressure during this
period of low growth.  Specifically, we anticipate higher costs in
2009 resulting from an expected new collective bargaining agreement with our
pilots at Pinnacle, higher levels of flight crew staffing at Pinnacle, higher
health care costs, increased landing fees and facility rental expense at the
airports that we serve, and general inflationary pressure within the rest of our
cost structure.





In
addition, our pro-rate operations are susceptible to fuel price volatility and
changes in passenger demand.  During the first half of 2008, we
experienced an unprecedented increase in the price of fuel within our pro-rate
operations, and as a result, Colgan incurred an operating loss of $7.9 million
during 2008 (which includes $13.5 million of non-recurring charges related to
goodwill impairment and lease return costs).  In response, we
implemented a turn-around plan during the second half of 2008 to improve the
results of our pro-rate operations.  Key components of the plan
included eliminating our Beech 1900 fleet, reducing our Saab 340 fleet by six
aircraft, eliminating our worst performing markets, rebidding markets that we
serve under the federal government’s Essential Air Service program (“EAS”) to
increase the subsidies we receive, and renegotiating a connect incentive fee
that we receive from United for certain markets that we serve as a United
Express carrier.  While these steps and the recent decline in fuel
prices have reduced the operating losses of our pro-rate operations, our
pro-rate operations are not yet profitable.  Additionally, the airline
industry is beginning to experience the effects of the current recessionary
environment in the United States.  Industry revenue and demand dropped
during the fourth quarter of 2008, and we are beginning to see trends of lower
unit revenue within our pro-rate operations.  We cannot predict how
severely the recessionary environment will affect us in 2009, but we do expect a
significant drop in our unit revenue within our pro-rate
operations.





Further
magnifying the cost pressures previously discussed, we will not receive an
increase in the rates Delta pays us under our CRJ-200 ASA.  The
CRJ-200 ASA contains a provision to adjust rates annually based on the change in
the Producers Price Index (“PPI”), as published by the United States Department
of Labor, Bureau of Labor Statistics.  Our rates could increase by up
to 5% annually, but in no case would they decrease.  The PPI declined
from December 2007 to December 2008, and as a result, our rates will not
increase in 2009.





To offset
some of the increased costs and pro-rate operations risk that we expect to incur
in 2009, we recently announced an internal initiative to create costs savings
and additional revenue opportunities of at least $10.0 million.  We
expect to achieve this through a combination of reducing our operating costs,
adjusting capacity in our pro-rate operations to match the demand environment,
identifying new pro-rate markets with stronger revenue prospects, potentially
reducing the scope of our pro-rate operations by retiring additional Saab
aircraft as necessary, and increasing ancillary third party business such as
ground handling.  We have not yet fully identified these initiatives,
and there can be no assurance that we will attain our target of at least $10.0
million in improvements.  We believe it is critical to reduce our
costs not only to increase our current profitability, but to also remain
competitive long term in the regional airline industry.





The
collective bargaining agreement between Pinnacle and the Air Line Pilots
Association (“ALPA”), the union representing Pinnacle’s pilots, has been
amendable since April 2005.  We have met with ALPA, both with and
without a mediator, many times since April 2005, but we have not reached an
agreement for a new contract.  It is of utmost importance to us to
reach an agreement with ALPA that is consistent with our company-wide philosophy
of industry-average pay and benefits with enhanced employee
productivity.  Wage rates for Pinnacle’s pilot group are currently
below industry average, and a new collective bargaining agreement is expected to
contain an increase in pay for Pinnacle’s pilots.  Such increase could
be substantial, and may also include a considerable one-time signing
bonus.  The increase in pay for Pinnacle’s pilots will likely reduce
our profitability in 2009 and in future periods.  In addition,
Colgan’s pilots recently elected representation by ALPA.  We have not
begun discussions or set a timeline with ALPA to commence negotiations of a
collective bargaining agreement covering Colgan’s pilots. While we intend to
vigorously pursue obtaining a fair contract with ALPA at both of our operating
subsidiaries, the timing of the resolution of these matters cannot be
predicted.


34
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)




While we
expect 2009 to be a challenging year, we are positioning ourselves for success
in 2010 and beyond.  We recently agreed with Continental to expand our
Continental CPA by adding 15 Q400 aircraft from August 2010 through April
2011.  In addition, we acquired an additional 15 Q400 options from the
aircraft manufacturer, thereby increasing the total number of our Q400 options
to 30.  These options, if exercised, provide for the delivery of 15
Q400s in 2011 and the remaining 15 in 2013.  The Q400 aircraft has
become a very competitive product within the regional airline
industry.  The purchase price of the Q400 is significantly less than
that of comparably sized regional jets, and the Q400 uses up to 30% less
fuel.  As a result, we can offer our airline partners a large,
passenger-friendly regional aircraft with a lower operating cost than similar
regional jets.  Several of our partners have indicated interest in the
Q400 aircraft, and we continue to market our option positions to
them.





In
addition to growing Colgan with the Q400 aircraft, we expect to find other
long-term opportunities to increase the number of regional jets that we operate
at Pinnacle.  Capacity purchase agreements for over 400 50-seat
regional jet aircraft at our competitors are set to expire between 2009 and
2015.  While many of these regional jets will likely no longer operate
within the networks of the major U.S. airlines, we believe some of these
contracts will be renewed or offered to other regional airlines and some will be
replaced with larger regional jets.  We intend to actively compete to
obtain profitable regional jet flying during this period of transition within
the industry, and we believe our history of quality performance at a competitive
price well positions us to succeed.  Our capacity purchase contracts
do not begin to expire until December 2017.





Auction
Rate Securities





We
continue to own approximately $133.7 million par amount of auction rate
securities (“ARS”).  Due to unprecedented events in the credit markets
during 2008, these investments became illiquid and have suffered a decline in
fair value.  We reported these investments as noncurrent assets on our
consolidated balance sheet at December 31, 2008 at their estimated fair value of
$116.9 million.  We continue to earn interest on all of our ARS, and
the majority of our ARS are still rated AAA/Aaa by the credit rating
agencies.  Most of the banks that structured and sold ARS to investors
have entered into settlement agreements with various state and federal
regulatory authorities that provide for the repurchase of ARS at par value from
retail investors and small businesses over the next 24 months.  In
addition, some banks have made offers to larger institutional investors to
repurchase ARS at par value in 2009 and 2010 to the extent that institutional
investors have been unable to sell their ARS. We have not yet received such an
offer from the financial institution that structured and sold to us our ARS, and
we have no assurance that we will receive such an offer.  However, we
anticipate that to the extent most major banks make settlement offers to their
institutional clients, we would be made a similar offer for settlement related
to our ARS holdings.





The
collapse of the ARS market has had a significantly negative impact on our
liquidity and the strength of our balance sheet.  To partially offset
this effect, we arranged for a $90.0 million margin loan facility (the “Credit
Facility”) to be used to support our aircraft purchases and other working
capital requirements.  Although the Credit Facility has a maturity
date in January 2010, we anticipate that the Credit Facility will remain
outstanding until we receive an offer to repurchase our ARS or otherwise
monetize our ARS portfolio.  While we have effectively obtained the
use of $90.0 million of our ARS through this Credit Facility, we do not have
access to the remaining $43.7 million par amount of our ARS to support our
liquidity needs.  We do not know when we will be able to monetize our
ARS portfolio, and we may have no choice but to sell our ARS at current
distressed prices or to hold our securities until maturity, which could be 17
years or longer.


35
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


$121
Million Senior Convertible Notes
 
 In
addition to actions noted above to improve our operating income longer term, we
are focused on conserving cash in 2009 in advance of  the first date
that holders of our $121.0 million 3.25% senior convertible notes (the “Notes”)
may contractually require us to repay the Notes.  Although the Notes
have a final maturity date in 2025, holders of the Notes may tender them to us
on February 15, 2010 for a cash payment equal to the par
amount.  While we anticipate positive cash flow from our operations
during 2009, we do not believe that we will have sufficient cash resources to fully
repay this obligation in February 2010 without raising additional
capital.  We are focused on obtaining the resources we need to settle
this obligation without raising capital through a shareholder dilutive action
such as an offering of our common stock.  Some alternatives we are
reviewing include asset financings, such as the financing of our rotable and
expendable spare parts inventory, raising additional capital collateralized by
ARS, or the sale of some or all of our ARS.





We
repurchased $12.0 million par amount of the Notes for approximately $8.9 million
in January 2009.  The Notes are relatively illiquid, but the few
recent trades we have observed have been at prices substantially below
par.  We may purchase additional Notes during 2009 to the extent that
Notes are offered for sale and to the extent that our resources
allow.





Colgan Flight
3407




On
February 12, 2009, Colgan Flight 3407, operated for Continental under the
Company’s Continental CPA, crashed in a neighborhood near the Buffalo Niagara
International Airport in Buffalo, New York. All 49 people aboard, including 45
passengers and four members of the flight crew, died in the accident.
Additionally, one individual died inside the home destroyed by the aircraft’s
impact, increasing the total fatality count to 50 individuals.  One
lawsuit related to this accident has been filed against the Company, and
additional litigation is anticipated.  We carry aviation risk
liability insurance and believe that this insurance is sufficient to cover any
liability arising from this accident.


36
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Results
of Operations




Consolidated Results of
Operations





The following
represents our results of operations, by segment and consolidated, for the year
ended December 31, 2008.




Year
      Ended December 31, 2008Pinnacle
                                        
                                        
                                        Colgan
                                        
                                        
                                        Eliminations
                                        
                                        
                                        Consolidated(in
      thousands)Operating
      revenuesRegional
      airline services
                                        
                                        $
                                        604,166
                                        
                                        $
                                        251,493
                                        
                                        $
                                        -
                                        
                                        $
                                        855,659Other
                                        
                                        
                                        9,031
                                        
                                        
                                        203
                                        
                                        
                                        (108)
                                        
                                        
                                        9,126Total
      operating revenues
                                        
                                        
                                        613,197
                                        
                                        
                                        251,696
                                        
                                        
                                        (108)
                                        
                                        
                                        864,785Operating
      expensesSalaries,
      wages and benefits
                                        
                                        
                                        164,775
                                        
                                        
                                        55,196
                                        
                                        
                                        -
                                        
                                        
                                        219,971Aircraft
      rentals
                                        
                                        
                                        120,932
                                        
                                        
                                        7,627
                                        
                                        
                                        -
                                        
                                        
                                        128,559Ground
      handling services
                                        
                                        
                                        83,444
                                        
                                        
                                        13,023
                                        
                                        
                                        (108)
                                        
                                        
                                        96,359Aircraft
      maintenance, materials and repairs
                                        
                                        
                                        48,786
                                        
                                        
                                        44,123
                                        
                                        
                                        -
                                        
                                        
                                        92,909Other
      rentals and landing fees
                                        
                                        
                                        53,446
                                        
                                        
                                        18,411
                                        
                                        
                                        -
                                        
                                        
                                        71,857Aircraft
      fuel
                                        
                                        
                                        -
                                        
                                        
                                        49,450
                                        
                                        
                                        -
                                        
                                        
                                        49,450Commissions
      and passenger related expense
                                        
                                        
                                        6,160
                                        
                                        
                                        20,865
                                        
                                        
                                        -
                                        
                                        
                                        27,025Depreciation
      and amortization
                                        
                                        
                                        13,346
                                        
                                        
                                        13,172
                                        
                                        
                                        -
                                        
                                        
                                        26,518Other
                                        
                                        
                                        68,788
                                        
                                        
                                        24,194
                                        
                                        
                                        -
                                        
                                        
                                        92,982Impairment
      of goodwill and aircraft leasereturn
      costs
                                        
                                        
                                        -
                                        
                                        
                                        13,548
                                        
                                        
                                        -
                                        
                                        
                                        13,548Total
      operating expenses
                                        
                                        
                                        559,677
                                        
                                        
                                        259,609
                                        
                                        
                                        (108)
                                        
                                        
                                        819,178Operating
      income (loss)
                                        
                                        $
                                        53,520
                                        
                                        $
                                        (7,913)
                                        
                                        
                                        -
                                        
                                        
                                        45,607Operating
      margin
                                        
                                        
                                        8.7%
                                        
                                        
                                        (3.1)%
                                        
                                        
                                        -
                                        
                                        
                                        5.3%Nonoperating
      income (expense)Interest
      expense
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (34,661)Impairment
      of ARS
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (16,800)Interest
      income
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        6,870Miscellaneous
      income, net
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        281Total
      nonoperating expense
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (44,310)Income
      before income taxes
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        1,297Income
      tax expense
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        (6,204)Net
      loss
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        
                                        $
                                        (4,907)







37
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)







2008
                      
                      
                      %
      Change
                        2008
      - 2007
                      
                      
                      2007
                      
                      
                      %
      Change
                        2007
      - 2006
                      
                      
                      2006Total
      operating revenue
                      
                      $
                      864,785
                      
                      
                      
                      10%
                      
                      
                      $
                      787,374
                      
                      
                      
                      (5)%
                      
                      
                      $
                      824,623Total
      operating expenses
                      
                      
                      819,178
                      
                      
                      
                      11%
                      
                      
                      
                      734,963
                      
                      
                      
                      5%
                      
                      
                      
                      697,075Operating
      income
                      
                      
                      45,607
                      
                      
                      
                      (13)%
                      
                      
                      
                      52,411
                      
                      
                      
                      (59)%
                      
                      
                      
                      127,548Operating
      margin
                      
                      
                      5.3%
                      
                      
                      
                      
                      
                      
                      
                      6.7%
                      
                      
                      
                      
                      
                      
                      
                      15.5%Total
      nonoperating expense
                      
                      
                      (44,310)
                      
                      
                      
                      3,125%
                      
                      
                      
                      (1,374)
                      
                      
                      
                      (53)%
                      
                      
                      
                      (2,948)Income
      before income taxes
                      
                      
                      1,297
                      
                      
                      
                      (97)%
                      
                      
                      
                      51,037
                      
                      
                      
                      (59)%
                      
                      
                      
                      124,600Income
      tax expense
                      
                      
                      (6,204)
                      
                      
                      
                      (62)%
                      
                      
                      
                      (16,400)
                      
                      
                      
                      (65)%
                      
                      
                      
                      (46,801)Net
      (loss) income
                      
                      
                      (4,907)
                      
                      
                      
                      (114)%
                      
                      
                      
                      34,637
                      
                      
                      
                      (55)%
                      
                      
                      
                      77,799





2008
Compared to 2007





Operating
Revenue





Operating
revenue of $864.8 million for the year ended December 31, 2008 increased $77.4
million, or 10%, over the year ended December 31, 2007.  This increase
was primarily related to an increase in our capacity purchase
revenue.  During 2008, we added 15 Q400 aircraft and 17 CRJ-900
aircraft, including the seven Temporary Aircraft, to our operating
fleet.   This was partially offset by a 7% decrease in the
average number of CRJ-200 aircraft we operate under our CRJ-200
ASA.  Our pro-rate revenue increased slightly as a result of a 15%
increase in average fare, offset by an 11% decrease in
passengers.  These changes are discussed in greater detail within our
segmented results of operations.





Operating
Expenses





Operating
expenses increased by $84.2 million, or 11%, during the year ended December 31,
2008, primarily due to increases in block hours and departures associated with
the growth in our operating fleet.  In addition, operating expenses
increased as a result of increased fuel prices related to our pro-rate
operations, increased depreciation expense following the addition of our
recently purchased CRJ-900 and Q400 aircraft, increased unreimbursed maintenance
costs incurred on our aging CRJ-200 fleet, impairment charges primarily related
to Colgan’s goodwill, Colgan’s lease return costs, and increased compensation
expense resulting from the addition of employees to support the growth of our
business.  These changes are discussed in greater detail within our
segmented results of operations.





Nonoperating
Expense





Net
nonoperating expense of $44.3 million for the year ended December 31, 2008
increased by approximately $42.9 million over net nonoperating expense of $1.4
million during 2007.  This increase is attributable to the $25.8
million increase in interest expense, primarily related to the financing of the
CRJ-900 and Q400 aircraft, the majority of which were delivered and financed
during 2008.  Interest income decreased by $4.7 million, due to a
lower average invested balance throughout 2008 as compared to
2007.  In addition, we recorded a $16.8 million impairment charge
related to the decline in the fair values of our ARS portfolio.  Net
nonoperating expense for the year ended December 31, 2007 was affected by a $4.1
million loss related to the sale of our remaining Northwest unsecured
claim.


38
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Income
Tax Expense





For the
year ended December 31, 2008, our income tax expense decreased by $10.2 million,
primarily related to the decrease in pre-tax income as compared to
2007.  Partially offsetting the decline of income tax expense is the
valuation allowance we recorded against the tax benefit related to the $16.8
million ARS impairment charge. This valuation allowance was recorded because the
loss cannot offset ordinary income, and we expect no capital gains during the
carryforward period of this loss.





2007
Compared to 2006





Operating
Revenues





Operating
revenue of $787.4 million for the year ended December 31, 2007 decreased $37.2
million, or 5%, over the year ended December 31, 2006.  The decrease
in revenue was primarily due to the decrease in revenue associated with expense
reimbursements from Northwest and a reduction in Pinnacle’s target operating
margin of 10% in 2006 to 8% effective January 1, 2007.  The most
significant decreases in reimbursable expenses were aircraft fuel and aircraft
rent. Under the CRJ-200 ASA, jet fuel is provided to Pinnacle at no cost,
whereas in 2006, jet fuel was a reimbursable expense.  Also under the
CRJ-200 ASA, our aircraft rental expense has been lowered to a rate that
approximated market rates at that time.  These changes to the CRJ-200
ASA caused a decrease of revenue of $323.8 million.  These decreases
are offset by the recognition of deferred CRJ-200 ASA revenue of $22.6
million.  For more information regarding deferred CRJ-200 ASA revenue,
see Note 3 in Item 8 of this Form 10-K.  The remaining 6% increase is
related to the 6% increase in block hours and departures due to an increase in
Pinnacle’s fleet compared to 2006.  In addition, these revenue
decreases are offset by the addition of $192.4 million in revenue related to
Colgan.  These changes are discussed in greater detail within our
segmented results of operations.





Operating
Expenses





Operating
expenses increased by $37.9 million, or 5%, during the year ended December 31,
2007, primarily related to the addition of Colgan’s operating expenses, which
totaled $197.5 million for 2007.  In addition, Pinnacle’s operating
expense increased as a result of the 6% increase in block hours and
departures.  This increase was offset by a decrease of $242.9 million
in fuel and aircraft rent expense, primarily related to the aforementioned
changes to our CRJ-200 ASA.  These changes are discussed in greater
detail within our segmented results of operations.





Nonoperating
Expense





Net
nonoperating expense decreased by $1.6 million, as compared to the same period
in 2006.  The increase was caused by a $3.3 million increase in
interest expense, largely attributable to Colgan’s operations, offset by $2.9
million of capitalized interest, primarily related to the acquisition of our
Q400 and CRJ-900 aircraft.  In addition, miscellaneous expense
increased by $4.1 million related to the $4.1 million loss we recorded on the
sale of our $42.5 million bankruptcy claim against Northwest during the second
quarter of 2007.  Further offsetting the increase in nonoperating
expense is a $9.1 million increase in interest income from our significantly
larger ARS portfolio.  The increase in our portfolio relates to the
investment of proceeds received from the assignment of our Northwest and Mesaba
claims.





Income
Tax Expense





For the
year ended December 31, 2007, our income tax expense decreased $30.4 million,
primarily related to the decrease in pre-tax income as compared to
2006.  In addition, due to the tax free interest income on our ARS
portfolio, the Company’s effective tax rate decreased by 5.5
points.


39
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Segmented Results of Operations




The following represents our
results of operations, by segment, for the years ended December 31, 2008, 2007
and 2006 (in thousands):





Pinnacle Operating
Statistics





2008
                                      
                                      
                                      %
      Change
                                        2008-2007
                                      
                                      
                                      2007
                                      
                                      
                                      %
      Change
                                        2007-2006
                                      
                                      
                                      2006Revenue
      passengers (in thousands)
                                      
                                      
                                      10,393
                                      
                                      
                                      4%
                                      
                                      
                                      
                                      9,996
                                      
                                      
                                      11%
                                      
                                      
                                      
                                      8,988Revenue
      passenger miles (“RPMs”) (in thousands)
                                      
                                      
                                      4,844,526
                                      
                                      
                                      5%
                                      
                                      
                                      
                                      4,620,861
                                      
                                      
                                      8%
                                      
                                      
                                      
                                      4,288,551Available
      seat miles (“ASMs”) (in thousands)
                                      
                                      
                                      6,320,269
                                      
                                      
                                      5%
                                      
                                      
                                      
                                      6,004,680
                                      
                                      
                                      6%
                                      
                                      
                                      
                                      5,640,629Passenger
      load factor
                                      
                                      
                                      76.7%
                                      
                                      
                                      (0.3)
      pts.
                                      
                                      
                                      
                                      77.0%
                                      
                                      
                                      1.0
      pts.
                                      
                                      
                                      
                                      76.0%Operating
      revenue per ASM (in cents)
                                      
                                      
                                      9.70
                                      
                                      
                                      (2)%
                                      
                                      
                                      
                                      9.91
                                      
                                      
                                      (32)%
                                      
                                      
                                      
                                      14.62Operating
      cost per ASM (in cents)
                                      
                                      
                                      8.86
                                      
                                      
                                      (1)%
                                      
                                      
                                      
                                      8.96
                                      
                                      
                                      (28)%
                                      
                                      
                                      
                                      12.36Operating
      revenue per block hour
                                      
                                      $
                                      1,384
                                      
                                      
                                      2%
                                      
                                      
                                      $
                                      1,356
                                      
                                      
                                      (32)%
                                      
                                      
                                      $
                                      1,987Operating
      cost per block hour
                                      
                                      $
                                      1,264
                                      
                                      
                                      3%
                                      
                                      
                                      $
                                      1,225
                                      
                                      
                                      (27)%
                                      
                                      
                                      $
                                      1,679Block
      hours
                                      
                                      
                                      442,911
                                      
                                      
                                      1%
                                      
                                      
                                      
                                      438,988
                                      
                                      
                                      6%
                                      
                                      
                                      
                                      415,069Departures
                                      
                                      
                                      267,893
                                      
                                      
                                      1%
                                      
                                      
                                      
                                      265,418
                                      
                                      
                                      6%
                                      
                                      
                                      
                                      251,091Average
      daily utilization (block hours)
                                      
                                      
                                      8.78
                                      
                                      
                                      1%
                                      
                                      
                                      
                                      8.73
                                      
                                      
                                      (5)%
                                      
                                      
                                      
                                      9.17Average
      stage length (miles)
                                      
                                      
                                      460
                                      
                                      
                                      1%
                                      
                                      
                                      
                                      455
                                      
                                      
                                      (3)%
                                      
                                      
                                      
                                      470Number
      of operating aircraft (end of period)CRJ-200
                                      
                                      
                                      124
                                      
                                      
                                      (9)%
                                      
                                      
                                      
                                      137
                                      
                                      
                                      10%
                                      
                                      
                                      
                                      124CRJ-900
                                      
                                      
                                      18(1)
                                      
                                      
                                      1700%
                                      
                                      
                                      
                                      1
                                      
                                      
                                      100%
                                      
                                      
                                      
                                      -Employees
      (end of period)
                                      
                                      
                                      4,204
                                      
                                      
                                      5%
                                      
                                      
                                      
                                      4,008
                                      
                                      
                                      4%
                                      
                                      
                                      
                                      3,860





(1)  On
October 1, 2008, we entered into an agreement with Delta to operate on a
short-term basis seven additional CRJ-900 aircraft (the “Temporary
Aircraft”).  For further discussion, refer to Note 3, Code-share Agreements with
Partners, in Item 8 of this Form 10-K.





Pinnacle Operating
Revenues





2008
                                    
                                    
                                    %
      Change
                                      2008
      - 2007
                                    
                                    
                                    2007
                                    
                                    
                                    %
      Change
                                      2007
      - 2006
                                    
                                    
                                    2006Operating
      revenues:Regional
      airline servicesCRJ-200
      ASA
                                    
                                    $
                                    569,020
                                    
                                    
                                    (2)%
                                    
                                    
                                    $
                                    583,591
                                    
                                    
                                    (29)%
                                    
                                    
                                    $
                                    816,787DCA
                                    
                                    
                                    35,146
                                    
                                    
                                    2,268%
                                    
                                    
                                    
                                    1,484
                                    
                                    
                                    100%
                                    
                                    
                                    
                                    -Other
                                    
                                    
                                    9,031
                                    
                                    
                                    (9)%
                                    
                                    
                                    
                                    9,978
                                    
                                    
                                    27%
                                    
                                    
                                    
                                    7,836Total
      operating revenues
                                    
                                    $
                                    613,197
                                    
                                    
                                    3.0%
                                    
                                    
                                    $
                                    595,053
                                    
                                    
                                    (28)%
                                    
                                    
                                    $
                                    824,623




40
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)




2008 Compared to
2007




Regional
Airline Services





For the
year ended December 31, 2008, revenue earned under our CRJ-200 ASA of $569.0
million decreased by $14.6 million, or 2%, as compared to
2007.  Revenue earned under our CRJ-200 ASA was negatively affected by
the return of 15 CRJ-200 aircraft pursuant to the terms of our CRJ-200
ASA.  During the year ended December 31, 2008, on average we operated
7% fewer CRJ-200 aircraft as compared to 2007.  In addition, revenue
was negatively affected by a decline in the amount of our reimbursable
costs.  Pursuant to the terms of our CRJ-200 ASA with Delta, we are
reimbursed with margin for certain operational costs.  These costs
include certain maintenance costs, aircraft rentals, passenger liability and
hull insurance, property taxes, fuel, ground handling at CRJ-200 ASA service
cities, and landing fees at Detroit Metropolitan Wayne County Airport
(“DTW”).  To the extent that these reimbursable costs decline, we
experience a corresponding decline in revenue.  Our reimbursable
expenses for the year ended December 31, 2008 decreased by 5%, causing decreases
in revenue of 7%.  Partially offsetting this decrease is a 4% increase
in CRJ-200 ASA revenue for the year ended December 31, 2008 related to the
annual inflation index adjustment in our CRJ-200 block hour and departure ASA
rates.





Revenue
earned under our DCA was approximately $35.1 million for the year ended December
31, 2008.  As of December 31, 2008, we operated 18 CRJ-900 aircraft
under our DCA, seven of which were the Temporary Aircraft.  For
further discussion of the Temporary Aircraft, see Note 3 in Item 8 of this Form
10-K.  We took delivery of three CRJ-900 aircraft in late December
2008 that were placed into service in January 2009.  During the year
ended December 31, 2007, we operated one CRJ-900 for one month under the
DCA.





Other
Revenue





Other
revenue decreased $0.9 million, or 9%, for the year ended December 31, 2008, as
compared to 2007.  This decrease is primarily related to a decrease in
the amount of ground handling we provided to third party vendors, including
Northwest, during 2008.





2007
Compared to 2006





Regional
Airline Services





For the
year ended December 31, 2007, revenue earned under our CRJ-200 ASA of $583.6
million decreased by $233.2 million, or 29%, respectively, compared to
2006.  The decrease in revenue was primarily due to changes in our
CRJ-200 ASA that became effective January 1, 2007.  These changes
included a decrease in revenue associated with expense reimbursements and a
reduction in Pinnacle’s target operating margin from 10% in 2006 to 8% effective
January 1, 2007.  The most significant decreases in reimbursable
expenses were aircraft fuel and aircraft rent. Under the CRJ-200 ASA, jet fuel
is provided to Pinnacle at no cost, whereas in 2006, jet fuel was a reimbursable
expense.  This change resulted in a decrease in revenue of $129.0
million over 2006.  Also under the CRJ-200 ASA, our aircraft rental
expense lowered to a rate that approximated market rates at that
time.  Revenue related to aircraft rent decreased $185.2 million over
2006 as a result of this change.  In addition, these revenue decreases
are offset by the recognition of deferred CRJ-200 ASA revenue of $22.6
million.  The remaining 6% increase is related to a 6% increase in
block hours and departures due to an increase in Pinnacle’s fleet compared to
2006.





Revenue
earned under the DCA was approximately $1.5 million for the year ended December
31, 2007.  We began operations under the DCA December 1, 2007 and we
operated one CRJ-900 aircraft under our DCA as of December 31,
2007.





Other
Revenue





Other
revenue of $10.0 million increased by $2.1 million, or 27%, compared to other
revenue of $7.8 million in 2006.  The increase in revenue is primarily
attributable to a $2.4 million increase related to our agreement to provide
ground handling services to Northwest for its own flights at six additional
cities under a separate agreement and an increase of $0.3 million in revenue for
other services.  These increases are offset by a decrease of $0.6
million of ground handling services to other airlines.


41
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Pinnacle Operating
Expenses





Operating
      expenses
                                                    2008
                                                    
                                                    
                                                    %
      Change
                                                      2008
      - 2007
                                                    
                                                    
                                                    2007
                                                    
                                                    
                                                    %
      Change
                                                      2007
      - 2006
                                                    
                                                    
                                                    2006Salaries,
      wages and benefits
                                                    $
                                                    164,775
                                                    
                                                    
                                                    10%
                                                    
                                                    
                                                    $
                                                    150,205
                                                    
                                                    
                                                    10%
                                                    
                                                    
                                                    $
                                                    136,812Aircraft
      rentals
                                                    
                                                    120,932
                                                    
                                                    
                                                    (7)%
                                                    
                                                    
                                                    
                                                    130,181
                                                    
                                                    
                                                    (51)%
                                                    
                                                    
                                                    
                                                    264,124Ground
      handling services
                                                    
                                                    83,444
                                                    
                                                    
                                                    (1)%
                                                    
                                                    
                                                    
                                                    84,215
                                                    
                                                    
                                                    (2)%
                                                    
                                                    
                                                    
                                                    86,117Aircraft
      maintenance,materials
      and repairs
                                                    
                                                    48,786
                                                    
                                                    
                                                    (1)%
                                                    
                                                    
                                                    
                                                    49,277
                                                    
                                                    
                                                    44%
                                                    
                                                    
                                                    
                                                    34,264Other
      rentals and landing fees
                                                    
                                                    53,446
                                                    
                                                    
                                                    9%
                                                    
                                                    
                                                    
                                                    49,005
                                                    
                                                    
                                                    14%
                                                    
                                                    
                                                    
                                                    43,135Aircraft
      fuel
                                                    
                                                    -
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    (100)%
                                                    
                                                    
                                                    
                                                    109,000Commissions
      and passengerrelated
      expense
                                                    
                                                    6,160
                                                    
                                                    
                                                    11%
                                                    
                                                    
                                                    
                                                    5,545
                                                    
                                                    
                                                    11%
                                                    
                                                    
                                                    
                                                    4,992Depreciation
      and amortization
                                                    
                                                    13,346
                                                    
                                                    
                                                    190%
                                                    
                                                    
                                                    
                                                    4,609
                                                    
                                                    
                                                    16%
                                                    
                                                    
                                                    
                                                    3,985Other
                                                    
                                                    68,788
                                                    
                                                    
                                                    5%
                                                    
                                                    
                                                    
                                                    65,746
                                                    
                                                    
                                                    13%
                                                    
                                                    
                                                    
                                                    58,217Provision
      for decreases in lossesassociated
                                                      with
      bankruptcyfilings
      of Northwest andMesaba
                                                    
                                                    -
                                                    
                                                    
                                                    (100)%
                                                    
                                                    
                                                    
                                                    (1,194)
                                                    
                                                    
                                                    (97)%
                                                    
                                                    
                                                    
                                                    (43,571)Total
      operating expense
                                                    
                                                    559,677
                                                    
                                                    
                                                    4%
                                                    
                                                    
                                                    
                                                    537,589
                                                    
                                                    
                                                    (23)%
                                                    
                                                    
                                                    
                                                    697,075Operating
      income
                                                    $
                                                    53,520
                                                    
                                                    
                                                    (7)%
                                                    
                                                    
                                                    $
                                                    57,464
                                                    
                                                    
                                                    (55)%
                                                    
                                                    
                                                    $
                                                    127,548Operating
      margin
                                                    
                                                    8.7%
                                                    
                                                    
                                                    (1.0)
      pts.
                                                    
                                                    
                                                    
                                                    9.7%
                                                    
                                                    
                                                    (5.8)
      pts.
                                                    
                                                    
                                                    
                                                    15.5%





2008
Compared to 2007





Salaries,
wages and benefits increased by $14.6 million and 10% for the year ended
December 31, 2008, as compared to 2007.  These increases were due
primarily to the 5% increase in the average number of employees, coupled with
wage rate and benefit increases for existing employees.  The increase
in the number of employees is related to our planned increases to support our
new DCA operations.  Additionally, due to a significant decline in
pilot attrition in 2008, we experienced an accumulation of additional flight
crews above the target level necessary for our operations.  Because
our agreements with flight crew employees include a guaranteed minimum number of
paid hours, we have experienced a decline in pilot and flight attendant
productivity as we pay salaries and wages in excess of the actual hours worked
such that those employees are paid the guaranteed minimum. To address the
accumulation of excess flight crews, we have suspended our recruiting efforts
until attrition allows our staff levels to return to target
levels.  Also contributing to an increase in salaries, wages and
benefits is a $1.7 million, or 15%, increase in our health insurance costs as a
result of an increase in average employee claims.





Aircraft
rentals expense decreased $9.2 million, or 7%, during the year ended December
31, 2008 as compared to 2007.  This decrease from 2008 to 2007 relates
primarily to the 7% fewer average number of CRJ-200 aircraft, which are leased
from Delta.  As previously discussed, aircraft rentals are
reimbursable expenses under our CRJ-200 ASA, and as a result of the fewer
average number of CRJ-200 aircraft in our fleet, revenue under our CRJ-200 ASA
decreased by $9.8 million for the year ended December 31, 2008.





Ground
handling services decreased $0.8 million, or 1%, during the year ended December
31, 2008 as compared to 2007.  Ground handling expenses decreased by
$4.0 million, or 5%, due to the 5% decrease in CRJ-200
departures.  Offsetting this decrease is a $3.2 million increase in
deicing expense primarily related to severe weather during
2008.  Under our CRJ-200 ASA, deicing expenses are reimbursable costs,
and as such, increased our CRJ-200 ASA revenue by $3.5 million for the year
ended December 31, 2008.  42
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Aircraft
maintenance, materials and repairs expenses decreased by $0.5 million and 1% for
the year ended December 31, 2008 as compared to 2007.  Underlying this
small change are more significant changes in the mix of reimbursed and
unreimbursed maintenance costs on the CRJ-200 aircraft.  To the extent
that we experience an increase in unreimbursed maintenance costs, we receive no
additional revenue to offset the increases.  For the year ended
December 31, 2008, reimbursable maintenance expenses decreased by $9.5 million,
whereas non-reimbursable maintenance expenses increased by $9.0
million.  The $9.5 million reduction in reimbursed expenses results in
a corresponding $10.3 million decline in our CRJ-200 ASA revenue as we also earn
margin on the expenses.  These non-reimbursable increases are
attributable to additional maintenance related to the aging of our CRJ-200
fleet.





Other
rentals and landing fees increased $4.4 million, or 9%, during the year ended
December 31, 2008 as compared to 2007.  These increases primarily
relate to rate increases for landing fees in certain markets, the most
significant increase being at DTW, which increased $2.5
million.  Pursuant to the terms of our CRJ-200 ASA with Delta, DTW
landings fees are reimbursable under our CRJ-200 ASA, and thus caused increases
of $2.8 million in revenue under our CRJ-200 ASA for the year ended December 31,
2008.  The additional increase is related to landing fees associated
with our DCA operations.





Depreciation
and amortization expense increased by $8.7 million for the year ended December
31, 2008.  This is primarily related to $7.3 million of depreciation
on CRJ-900 aircraft added during 2008.





Other
expense increased by $3.0 million, or 5%, for the year ended December 31,
2008.  This increase primarily relates to increased pilot training and
crew travel expenses related to our new operations with Delta.





Provision
for decreases in losses associated with bankruptcy filings of Northwest and
Mesaba, which was an offset to operating expenses in 2007, decreased by $1.2
million.  In 2005, Mesaba filed for bankruptcy and subsequently
rejected lease agreements for 11 Saab turboprop aircraft that were previously
subleased from Pinnacle.  As a result, we recorded sublease losses
during 2006 and 2005 related to these aircraft.  During 2007, we
placed two of these 11 Saab aircraft into service with Colgan and recorded a
recovery of $1.2 million as we operated the aircraft.





2007
Compared to 2006





Salaries,
wages and benefits increased by $13.4 million, or 10%, primarily due to the 4%
increase in the average number of employees, coupled with wage and benefit
increases.





Aircraft
rental expense decreased $133.9 million, or 51%, primarily due to the terms of
the CRJ-200 ASA with Delta.  Effective January 1, 2007, our monthly
lease rates were reduced to rates that approximated market conditions at that
time.  As previously noted, we sublease our CRJ-200 aircraft from
Delta under operating leases that expire December 31, 2017.  Delta
reimburses in full all rental expense for the CRJ-200 aircraft operated under
the CRJ-200 ASA.





Ground
handling services decreased by $1.9 million, or 2.0%, due to the increase in the
number of cities in which ground handling functions are performed by Pinnacle’s
employees rather than being outsourced.





Aircraft
maintenance, materials and repairs expenses increased by approximately $15.0
million and 44%.  Pinnacle incurred an additional $5.9 million of
heavy check expense during 2007, which is related to the aging of its
fleet.  The additional maintenance expense was also attributed to the
11% increase in Pinnacle’s operating fleet.





Aircraft
fuel expense decreased by $109.0 million primarily due to the contractual change
in the CRJ-200 ASA whereby fuel is now provided at no cost.





Commissions
and passenger related expense increased $0.6 million and 11% primarily related
to the 6% increase in block hours and departures.





The $7.5
million, or 13%, increase in other expenses is primarily attributable to the 11%
increase in Pinnacle’s operating fleet.


43
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Provision
for decreases in losses associated with bankruptcy filings of Northwest and
Mesaba increased by $42.4 million.  In 2006, we recorded a $43.6
million benefit related to the assignment of our claim against Northwest, which
decreased operating expenses.  For more information, refer to Note 3,
Code-share Agreements with
Partners,in Item 8 of this Form 10-K.





Colgan Operating
Statistics





2008
                              
                              
                              %
      Change
                                2008-2007
                              
                              
                              2007Pro-Rate
      Agreements:Revenue
      passengers (in thousands)
                              
                              
                              1,380
                              
                              
                              (8)%
                              
                              
                              
                              1,498RPMs
      (in thousands)
                              
                              
                              249,520
                              
                              
                              (10)%
                              
                              
                              
                              277,326ASMs
      (in thousands)
                              
                              
                              558,389
                              
                              
                              (7)%
                              
                              
                              
                              599,402Passenger
      load factor
                              
                              
                              44.7%
                              
                              
                              (1.6)
      pts.
                              
                              
                              
                              46.3%Passenger
      yield (in cents)
                              
                              
                              78.94
                              
                              
                              14%
                              
                              
                              
                              69.27Operating
      revenue per ASM (in cents)
                              
                              
                              35.28
                              
                              
                              10%
                              
                              
                              
                              32.05Operating
      revenue per block hour
                              
                              $
                              1,716
                              
                              
                              13%
                              
                              
                              $
                              1,517Block
      hours
                              
                              
                              114,816
                              
                              
                              (9)%
                              
                              
                              
                              126,675Departures
                              
                              
                              97,174
                              
                              
                              (9)%
                              
                              
                              
                              107,171Fuel
      consumption (in thousands of gallons)
                              
                              
                              14,761
                              
                              
                              (12)%
                              
                              
                              
                              16,797Average
      price per gallon
                              
                              $
                              3.33
                              
                              
                              41%
                              
                              
                              $
                              2.36Average
      fare
                              
                              $
                              143
                              
                              
                              12%
                              
                              
                              $
                              128Capacity
      Purchase Agreement:Revenue
      passengers (in thousands)
                              
                              
                              1,153
                              
                              
                              N/A
                              
                              
                              
                              -RPMs
      (in thousands)
                              
                              
                              326,627
                              
                              
                              N/A
                              
                              
                              
                              -ASMs
      (in thousands)
                              
                              
                              501,832
                              
                              
                              N/A
                              
                              
                              
                              -Passenger
      load factor
                              
                              
                              65.1%
                              
                              
                              N/A
                              
                              
                              
                              -Operating
      revenue per ASM (in cents)
                              
                              
                              10.86
                              
                              
                              N/A
                              
                              
                              
                              -Operating
      revenue per block hour
                              
                              $
                              1,432
                              
                              
                              N/A
                              
                              
                              
                              -Block
      hours
                              
                              
                              38,074
                              
                              
                              N/A
                              
                              
                              
                              -Departures
                              
                              
                              24,461
                              
                              
                              N/A
                              
                              
                              
                              -Total
      Colgan:Block
      hours
                              
                              
                              152,890
                              
                              
                              21%
                              
                              
                              
                              126,675Departures
                              
                              
                              121,635
                              
                              
                              13%
                              
                              
                              
                              107,171ASMs
      (in thousands)
                              
                              
                              1,060,221
                              
                              
                              77%
                              
                              
                              
                              599,402Total
      operating cost per ASM (in cents)
                              
                              
                              24.49
                              
                              
                              (26)%
                              
                              
                              
                              32.94Total
      operating cost per block hour
                              
                              $
                              1,698
                              
                              
                              9%
                              
                              
                              $
                              1,559Average
      daily utilization (block hours)
                              
                              
                              7.51
                              
                              
                              3%
                              
                              
                              
                              7.32Average
      stage length (miles)
                              
                              
                              228
                              
                              
                              34%
                              
                              
                              
                              170Number
      of operating aircraft (end of period)Saab
      340
                              
                              
                              34
                              
                              
                              (15)%
                              
                              
                              
                              40Beech
      1900
                              
                              
                              2
                              
                              
                              (71)%
                              
                              
                              
                              7Q400
                              
                              
                              15
                              
                              
                              N/A
                              
                              
                              
                              -Employees
                              
                              
                              1,324
                              
                              
                              10%
                              
                              
                              
                              1,202





As
previously discussed, the acquisition of Colgan was completed on January 18,
2007.  As such, Colgan’s 2006 data is not presented and Colgan’s 2007
data includes the period from the acquisition date through December 31, 2007,
which represents approximately 94% of that year.


44
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Colgan Operating Revenues





2008
                      
                      
                      %
      Change
                        2008-2007
                      
                      
                      2007Operating
      revenues:Regional
      airline servicesPro-rate
      and EAS
                      
                      $
                      196,982
                      
                      
                      3%
                      
                      
                      $
                      192,104Capacity
      purchase
                      
                      
                      54,511
                      
                      
                      N/A
                      
                      
                      
                      -Other
                      
                      
                      203
                      
                      
                      (33)%
                      
                      
                      
                      301Total
      operating revenues
                      
                      $
                      251,696
                      
                      
                      31%
                      
                      
                      $
                      192,405





2008
Compared to 2007





Total
operating revenue for the year ended December 31, 2008 of $251.7 million
increased by $59.3 million, or 31%, from 2007.  The primary reason for
this increase is the addition of revenue earned under our CPA with
Continental.  During the year ended December 31, 2008, we added 15
Q400 aircraft to our new Continental Connection operations, which began in
February 2008.  Revenue earned under our CPA with Continental was
$54.5 million for the year ended December 31, 2008.  Revenue earned
under our pro-rate and EAS agreements increased $4.9 million and 3% during
2008.  This is primarily related to an increase in EAS revenue, as
well as an increase in passenger unit revenue.  During 2008, Colgan
filed notice with the DOT to vacate service in most of the EAS communities, and
subsequently re-filed to serve these communities for higher subsidies to offset
rising fuel and other operating costs. The DOT subsequently re-awarded service
in 11 of these markets at a higher subsidy and, in some instances, a reduced
level of weekly round trips.  As a result, EAS revenue increased $3.8
million in 2008 as compared to 2007.  The remaining increase in
pro-rate revenue is attributable to a 12% increase in average fare, offset by an
8% decrease in passengers.





Colgan Operating Expenses





2008
                                    
                                    
                                    %
      Change
                                      2008-2007
                                    
                                    
                                    2007Operating
      expensesSalaries,
      wages and benefits
                                    
                                    $
                                    55,196
                                    
                                    
                                    21%
                                    
                                    
                                    $
                                    45,562Aircraft
      rentals
                                    
                                    
                                    7,627
                                    
                                    
                                    (10)%
                                    
                                    
                                    
                                    8,480Ground
      handling services
                                    
                                    
                                    13,023
                                    
                                    
                                    8%
                                    
                                    
                                    
                                    12,091Aircraft
      maintenance, materials and repairs
                                    
                                    
                                    44,123
                                    
                                    
                                    9%
                                    
                                    
                                    
                                    40,614Other
      rentals and landing fees
                                    
                                    
                                    18,411
                                    
                                    
                                    85%
                                    
                                    
                                    
                                    9,951Aircraft
      fuel
                                    
                                    
                                    49,450
                                    
                                    
                                    30%
                                    
                                    
                                    
                                    38,122Commissions
      and passenger related expense
                                    
                                    
                                    20,865
                                    
                                    
                                    3%
                                    
                                    
                                    
                                    20,195Depreciation
      and amortization
                                    
                                    
                                    13,172
                                    
                                    
                                    183%
                                    
                                    
                                    
                                    4,656Other
                                    
                                    
                                    24,194
                                    
                                    
                                    36%
                                    
                                    
                                    
                                    17,787Impairment
      of goodwill and aircraft lease return costs
                                    
                                    
                                    13,548
                                    
                                    
                                    100%
                                    
                                    
                                    
                                    -Total
      operating expenses
                                    
                                    
                                    259,609
                                    
                                    
                                    31%
                                    
                                    
                                    
                                    197,458Operating
      loss
                                    
                                    $
                                    (7,913)
                                    
                                    
                                    57%
                                    
                                    
                                    $
                                    (5,053)Operating
      margin
                                    
                                    
                                    (3.1)%
                                    
                                    
                                    (0.5)
      pts.
                                    
                                    
                                    
                                    (2.6)%





45
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


2008
Compared to 2007





Salaries,
wages and benefits increased by $9.6 million, or 21%, during the year ended
December 31, 2008.  Excluding the effect of the previously discussed
difference in time periods presented, this expense increased primarily due to
the increase in the average number of employees of 10%, largely attributed to
the growth of Colgan’s operating fleet related to its new Q400 operation, as
well as wage rate and benefit increases for existing employees.





Aircraft
rentals decreased by $0.9 million, or 10%, for the year ended December 31,
2008.  This decrease is attributable to the return of 11 of our Saab
and Beech aircraft during 2008.





Ground
handling services increased $0.9 million, or 8%, during the year ended December
31, 2008 as compared to 2007.  This was primarily attributable to the
shift of several markets from our US Airways operations to our United
operations.  Ground handling rates for United are significantly higher
than those previously charged by US Airways.





Aircraft
maintenance, materials and repairs expense increased by $3.5 million, or 9%, for
the year ended December 31, 2008.  Colgan incurred an additional $2.0
million in heavy airframe maintenance during 2008.  Due to internal
resource constraints, Colgan utilized third-party vendors for heavy airframe
maintenance during 2008.  During 2007, most aircraft heavy maintenance
checks were performed by Colgan in-house.  The remaining $1.5 million
additional increase is attributable to the aging of our Saab fleet and addition
of our Q400 operations.





Other
rentals and landing fees increased $8.5 million, or 85%, for the year ended
December 31, 2008.  Landing fees increased as a result of increased
departures and operating the larger Q400 aircraft, which fly into markets with
significantly higher landing fee rates, such as Newark/Liberty International
Airport.  Landing fees associated with our Q400 operations are
reimbursed directly by Continental; therefore, an offsetting amount is included
in revenue.





Aircraft
fuel expense increased $11.3 million, or 30%, for the year ended December 31,
2008.  This increase is primarily related to the 41% year-over-year
increase in the average price per gallon of fuel.  Offsetting this
increase in fuel price was a 12% decrease in gallons consumed for the year ended
December 31, 2008 as a result of a 9% decrease in our pro-rate block hours due
to the retirement of 11 of our Saab and Beech aircraft.





Depreciation
and amortization expense increased by $8.5 million for the year ended December
31, 2008.  This is primarily related to $7.2 million of depreciation
expense related to the new Q400 aircraft.





Other
expenses increased by $6.4 million, or 36%, during the year ended December 31,
2008, as compared to 2007.  This increase primarily relates to increased
crew travel expense primarily due to our new Continental Q400
operations.





Impairment
of goodwill and aircraft return costs increased by $13.5
million.  During 2008, we recorded a $10.5 million impairment charge
related to Colgan’s goodwill and certain intangible assets.  In
addition, we recorded $3.0 million for aircraft lease return costs related to
several of our Saab and Beech aircraft.  For more information, refer
to Note 6, Impairment of
Goodwill and Aircraft Return Costs,in Item 8 of this Form
10-K.





Liquidity and Capital
Resources





We
generate cash by providing regional airline and related services to our
code-share partners and from pro-rated passenger fares received under our
pro-rate agreements.  Our primary source of liquidity is our existing
cash and cash equivalents and cash flows from operations.  Also, we
have approximately $90 million in unencumbered assets, primarily consisting of
spare parts and supplies, aircraft rotable parts, and certain receivables, which
could be used as collateral for additional financing.  As of December
31, 2008, we had cash and cash equivalents of $69.5 million.  Cash
flows from operations were $28.6 million, $275.5million, and $21.1million for the years
ended December 31, 2008, 2007, 2006.  We do not expect to make income
tax payments during 2009-2010 due to the accelerated depreciation recognized for
tax purposes on the newly acquired CRJ-900 and Q400
aircraft.  Additionally, we expect to receive an income tax refund of
approximately $31 million in 2009 primarily related to this accelerated
depreciation.


46
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Contractual obligations. The
following chart details our debt and lease obligations at December 31, 2008 (in
thousands):




Payments
      Due by Period2009
                                                              
                                                              2010
                                                              
                                                              2011
                                                              
                                                              2012
                                                              
                                                              2013
                                                              
                                                              Thereafter
                                                              
                                                              TotalSenior
      convertible notes(1)
                                                              
                                                              $
                                                              -
                                                              
                                                              $
                                                              121,000
                                                              
                                                              $
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              $
                                                              -
                                                              
                                                              $
                                                              121,000Debt
                                                              
                                                              
                                                              36,191
                                                              
                                                              
                                                              30,773
                                                              
                                                              
                                                              31,077
                                                              
                                                              
                                                              31,916
                                                              
                                                              
                                                              32,049
                                                              
                                                              
                                                              376,926
                                                              
                                                              
                                                              538,932Interest
      payments on debt
                                                              
                                                              
                                                              37,432
                                                              
                                                              
                                                              31,325
                                                              
                                                              
                                                              27,370
                                                              
                                                              
                                                              25,556
                                                              
                                                              
                                                              23,706
                                                              
                                                              
                                                              119,114
                                                              
                                                              
                                                              264,503Bank
      line of credit
                                                              
                                                              
                                                              8,275
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              8,275Credit
      facility
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              90,000
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              90,000Capital
      leases
                                                              
                                                              
                                                              1,307
                                                              
                                                              
                                                              1,310
                                                              
                                                              
                                                              777
                                                              
                                                              
                                                              703
                                                              
                                                              
                                                              116
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              4,213Operating
      leases(2)
                                                              
                                                              
                                                              133,716
                                                              
                                                              
                                                              130,771
                                                              
                                                              
                                                              129,888
                                                              
                                                              
                                                              128,368
                                                              
                                                              
                                                              117,576
                                                              
                                                              
                                                              467,516
                                                              
                                                              
                                                              1,107,835Purchase
      obligations(3)
                                                              
                                                              
                                                              45,688
                                                              
                                                              
                                                              461
                                                              
                                                              
                                                              337
                                                              
                                                              
                                                              4,776
                                                              
                                                              
                                                              643
                                                              
                                                              
                                                              2,517
                                                              
                                                              
                                                              54,422Total
      contractual cashobligations
                                                              
                                                              $
                                                              262,609
                                                              
                                                              $
                                                              405,640
                                                              
                                                              $
                                                              189,449
                                                              
                                                              $
                                                              191,319
                                                              
                                                              $
                                                              174,090
                                                              
                                                              $
                                                              966,073
                                                              
                                                              $
                                                              2,189,180





1.
            In
      January 2009, we repurchased $12,000 of our $121,000 3.25% senior
      convertible notes due 2025 for $8,900.  Noteholders have the
      right on February 15, 2010 to require us to repurchase the remaining
      $109,000 of senior convertible notes at the par value, plus any accrued
      and unpaid interest.


2.
            The
      amounts noted above for operating leases include $1,000,000 of obligations
      for CRJ-200 aircraft leased from Delta.  We are reimbursed by
      Delta in full for CRJ-200 aircraft rental expense under the CRJ-200
      ASA.  For a more detailed discussion of operating leases, refer
      to Note 11 in Item 8 of this Form
10-K.


3.
            The
      amounts noted above for purchase obligations include the purchase of two
      CRJ-900 aircraft.  As discussed below, in January 2009, we
      entered into a purchase commitment for 15 Q400 aircraft expected to be
      delivered between August 2010 and April 2011. These amounts are excluded
      from the table above.  As of March 1, 2009, our purchase
      obligations were as follows:  $52,625 for 2009, $173,097 for
      2010, $122,968 for 2011, $4,776 for 2012, $643 for 2013, and $2,517
      thereafter.





The
table above excludes $16.5 million related to the reserves for uncertain tax
positions as we are unable to make reasonably reliable estimates of the amount
and timing of any potential settlement or resolution with the respective taxing
authorities.





As of
December 31, 2008, we had $133.7 million par amount of auction rate securities
instruments (“ARS”), which as discussed further in Note 9 of Item 8 of this Form
10-K, are currently illiquid.  We had planned to monetize ARS
throughout 2008 as necessary to fund the unfinanced portion of our aircraft
deliveries.  While we wait for the ARS market to rationalize and
investor demand to return, we arranged for an $80.0 million margin loan facility
(the “Credit Facility”) to be used to support our aircraft
purchases.  The Credit Facility is pre-payable at any time prior to
maturity.  The Credit Facility interest rate is indexed to LIBOR and
was 2.4% at December 31, 2008.  In November 2008 we amended the Credit
Facility with the lender to extend the maturity date to November 2009 and to
provide for additional borrowings of up to $10.0 million, for a total amount
available under the Credit Facility of $90.0 million.  The additional
$10.0 million may only be used to fund purchases or redemptions of our other
indebtedness.  In December, we drew the additional $10.0 million under
the Credit Facility, $8.9 million of which we then used to fund the repurchase
of $12.0 million par of our Senior Convertible Notes, as discussed
below.  The remaining $1.1 million was used to retire other aircraft
related debt.  The additional $10.0 million borrowing carries an
interest rate that is indexed to the Federal Funds Rate and was 2.7% at December
31, 2008.  In February 2009, we amended the Credit Facility to, among
other items, extend the maturity date to January 31, 2010.  The Credit
Facility includes both covenant and margin requirements, as discussed in Note
10, Borrowings, in Item
8 of this Form 10-K.  Amounts outstanding under the Credit Facility as
of December 31, 2008 were $90.0 million.





In
February 2005, we issued $121.0 million principal amount of our 3.25% senior
convertible notes due 2025 (the “Notes”).  The Notes bear interest at
the rate of 3.25% per year, payable in cash semiannually in arrears on February
15 and August 15 of each year.  Although the Notes have been
convertible in the past and will possibly be convertible during future periods,
due to our current stock price being significantly below the conversion price,
we do not expect a significant number of holders to tender the Notes for
conversion prior to the first contractual initial put/call date of the Notes
unless we exercise our right to call the Notes after February
2010.  Nonetheless, in any period during which the holders have the
right to exercise the conversion option, the Notes’ par value will be classified
as a current liability on our balance sheet.


47
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)




In
January 2009, we repurchased $12.0 million par amount of the Notes for
approximately $8.9 million plus accrued interest.  On February 15,
2010, the holders of the Notes will have the right to require us to repurchase
the Notes at the remaining par value of $109.0 million plus any accrued and
unpaid interest.  We are currently exploring various options to ensure
that we have adequate capital should we be required to repurchase the Notes at
that time.  The Notes are currently trading at a fair value less than
their par value.  We may seek to repurchase additional Notes at a
discount throughout 2009.  For more information on the Notes, refer to
Risk Factors in Item 1A
and Note 10 of Item 8 of this Form 10-K.





On
February 17, 2007, we entered into a purchase agreement for up to 25 firm and 20
option Q400 aircraft with Bombardier, Inc.  Under the agreement, we
are obligated to purchase a minimum of 15 Q400 regional aircraft, which we
satisfied during 2008.  In January 2009, we modified the purchase
agreement to exercise our right to purchase the remaining ten firm Q400 aircraft
and five option Q400 aircraft, which will be delivered between August 2010 and
April 2011.  We also secured additional options to acquire 15 Q400
option aircraft that would be delivered in 2013.  Upon completion of
this amendment, we now have optional rights to acquire a total of 30 Q400
aircraft, 15 of which would deliver in 2011 and 15 of which would deliver in
2013.





We are
required to make pre-delivery payments to Bombardier for the firm Q400 aircraft
that we have on order, which will be made from January 2009 to October
2010.  Of the remaining pre-delivery payments to be made in 2009 and
2010, approximately 85% will be financed with Export Development Canada (“EDC”)
and the remaining will be funded by our internal capital
resources.  The unfinanced portion of our pre-delivery payment
requirements, which is approximately $5 million, is not scheduled to be paid
until the second quarter of 2010.   For more information, refer
to Risk Factors in Item
1A and Note 10 of Item 8 of this Form 10-K.





On April
27, 2007, Delta assigned to us its rights to purchase 16 CRJ-900 aircraft from
Bombardier, Inc.  As of December 31, 2008 we had accepted delivery of
14 of these aircraft.  We will take delivery of the remaining two
aircraft in the second quarter of 2009.  Under the DCA, Delta may also
require us to purchase and operate an additional seven CRJ-900
aircraft.





During
2007, we executed pre-delivery payment financing facilities with EDC to provide
borrowings to fund our pre-delivery payment commitments to Bombardier related to
our purchase of CRJ-900 aircraft and our first 15 Q400
aircraft.  Borrowings under the pre-delivery payment facilities bear
interest at the 3-month LIBOR rate plus 1.65%, which was 3.1% as of December 31,
2008.  The outstanding balance of these borrowings as of December 31,
2008 was $4.1 million.  As each aircraft is delivered to us, we repay
the associated borrowings.





Upon
delivery of our CRJ-900 and Q400 aircraft, we obtained long-term financing for
85% of the aircraft purchase price, the balance of which was $512.6 million at
December 31, 2008.  We expect to finance the purchase of the remaining
two CRJ-900 aircraft and the 15 additional Q400 aircraft using a combination of
internal capital resources and debt financing, or through operating leases to
the extent operating leases are available to us at competitive
rates.  We have obtained commitments from EDC to finance 85% of the
purchase price of the remaining aircraft on order for a term of 15 years from
the delivery date of each aircraft.  In addition to utilizing EDC’s
offer for debt financing, we expect to seek operating lease financing for some
of our remaining Q400 deliveries to reduce the amount of initial capital
required to obtain the aircraft and because we do not need all of the
accelerated tax depreciation benefits associated with owning these
aircraft.





We
maintain a revolving line of credit with an institutional lender for a principal
amount not to exceed $8.5 million or 75% of the net unpaid balance of our Colgan
subsidiary’s eligible accounts receivable.  This instrument has an
interest rate of Prime plus 0.25%, which was 3.50% as of December 31,
2008.  In April 2008, we extended the termination date of the loan to
April 15, 2009.  Amounts outstanding under the line of credit were
$8.3 million at December 31, 2008.  During the first quarter of 2009,
the Company repaid approximately $3.9 million which reduced the remaining
outstanding credit facility to approximately $4.4 million.


48
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


The IRS
is currently examining our tax records for years 2003 through
2005.  The IRS has proposed adjustments related to certain key
transactions that we undertook during those periods.  The adjustments
would increase our tax liability for these periods by approximately $35.0
million (net of offsetting timing differences within these periods) plus
penalties.  We are negotiating and discussing the proposed adjustments
with an appeals team from the IRS, and we expect to resolve these matters during
the first half of 2009.  We continue to believe that the tax positions
we have taken are appropriate and in compliance with tax law and
regulations.  Although we believe our tax positions are appropriate,
we have recorded reserves totaling $16.5 million.  The Company is
still in resolution negotiations with the IRS and cannot predict the ultimate
outcome; however, management believes that any settlement reached will not
exceed our reserves.





Operating activities. Net
cash provided by operating activities was $28.6 million during the year ended
December 31, 2008.  This was due primarily to cash generated from
regional airline service operations of $57.9 million, offset by $29.3 million in
hedge related payments.





Net cash provided by
operating activities was $275.5 million during the year ended December 31,
2007.  This was due primarily to the $271.7 million increase in
deferred revenue, which was primarily comprised of the approximately $311
million of proceeds received from the assignment of our Northwest claims, offset
by the elimination of our pre-petition receivables balance of approximately $42
million.On January 3, 2007, we assigned an aggregate of approximately
$335 million of our $377.5 million stipulated unsecured claim against Northwest
to several third parties for aggregate proceeds of approximately $283 million,
net of expenses.  We received the proceeds from this sale on January
23, 2007.  On June 29, 2007 we assigned the remaining $42.5 million of
our claim for proceeds of $27.7 million.  The sale of our claim is
subject to federal and state income taxation, and through December 31, 2007, we
made estimated tax payments of approximately $110 million related to the claim
sale.





Net cash
provided by operating activities was $21.1 million during the year ended
December 31, 2006, due primarily to cash generated from net income of $77.8
million, which included $43.6 million as a noncash provision for decreases in
losses associated with the bankruptcy filings of Northwest and Mesaba, and $15.6
million in deferred income tax expense, offset by a $30.9 million decrease in
receivables related to the timing of the previously mentioned payment from
Northwest and other miscellaneous charges.





Investing activities. 
Net cash provided by investing activities for the year ended December 31, 2008
was $20.6 million.  This was primarily attributable to net proceeds from
the sale of investments in ARS of $53.1 million, offset by $32.5 million in net
cash purchases of property and equipment, primarily consisting of our equity
investment in aircraft and related flight equipment.





Cash used
in investing activities for the year ended December 31, 2007 was $220.1
million.  This was primarily attributable to net purchases of short-term
investments in marketable debt securities of $114.2 million, $74.1 million in
pre-delivery payments for the Q400 and CRJ-900 aircraft and purchases of
property and equipment of $24.2 million, primarily consisting of aircraft
purchases.  In addition, the acquisition of Colgan decreased cash by $8.3
million, net of cash acquired.





Cash used
in investing activities for the year ended December 31, 2006 was $35.0
million.  This was attributable to the purchase of property and
equipment of $4.4 million and the net purchase of short-term investments in
marketable equity and debt securities of $28.5 million.





We expect
non-aircraft cash capital expenditures for 2009 to be approximately $8.5
million. We expect to fund the non-aircraft capital expenditures with existing
cash resources and cash flows generated from our operations.





Financing activities. Net
cash used in financing activities for the year ended December 31, 2008 totaled
$6.5 million.  During the year ended December 31, 2008, we received $101.8
million in debt proceeds, primarily related to the $90.0 million Credit
Facility.  This was offset by $86.0 million of principal payments on
debt and capital lease obligations, primarily related to our aircraft financing,
$20.0 million purchase of our Series A Preferred Share from Northwest on January
4, 2008, and $2.4 million for debt issuance costs related to our new
borrowings.


49
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Cash used
in financing activities for the year ended December 31, 2007 totaled $29.3
million.  During 2007, we received $68.0 million in debt proceeds,
primarily related to the pre-delivery payment financing facilities for our Q400
and CRJ-900 aircraft.  This was offset by $30.9 million of principal
payments on debt obligations and $1.0 million of payments made on capital
leases.  In addition, we purchased $68.2 million of treasury shares as part
of our share repurchase program.





Cash used
in financing activities for the year ended December 31, 2006 totaled $17.0
million, which related to the repayment of a line of credit with a bank. 
That line of credit expired in June 2006.





Deferred tax
asset.  We have recorded a net deferred tax asset of $59.3
millionrelated to
future tax benefits.  This primarily relates to the timing difference
of tax payments associated with our deferred CRJ-200 ASA revenue, offset by
book-tax timing differences related to aircraft depreciation.  As
discussed in Note 3 in Item 8 of this Form 10-K, we are recognizing the deferred
CRJ-200 ASA revenue over the 11-year term of the CRJ-200 ASA, while we
recognized this as taxable income and paid the associated tax during
2007.





Guarantees and
indemnifications.  We had $4.5 million and $5.3 million
invested in certificates of deposit and in other similar instruments at December
31, 2008 and 2007, respectively.  These certificates of deposit have
various maturities, all less than one year and are used as collateral for
standby letter of credit facilities that we maintain for various
vendors.  As of December 31, 2008 and 2007, we had $3.0 million and
$2.7 million of standby letters of credit outstanding,
respectively.





We are
party to numerous contracts and real estate leases in which it is common for us
to agree to indemnify third parties for tort liabilities that arise out of or
relate to the subject matter of the contract or occupancy of the leased
premises. In some cases, this indemnity extends to related liabilities arising
from the negligence of the indemnified parties, but usually excludes any
liabilities caused by their gross negligence or willful misconduct.
Additionally, we typically indemnify the lessors and related third parties for
any environmental liability that arises out of or relates to our leased
premises.





In our
aircraft lease agreements, we typically indemnify the prime lessor, financing
parties, trustees acting on their behalf and other related parties against
liabilities that arise from the manufacture, design, ownership, financing, use,
operation and maintenance of the aircraft and for tort liability, whether or not
these liabilities arise out of or relate to the negligence of these indemnified
parties, except for their gross negligence or willful misconduct.





We expect
that we would be covered by insurance (subject to deductibles) for most tort
liabilities and related indemnities described above with respect to real estate
we lease and aircraft we operate.





We do not
expect the potential amount of future payments under the foregoing indemnities
and agreements to be material.





Off-Balance Sheet
Arrangements.  None of our operating lease obligations are
reflected on our consolidated balance sheets. We are responsible for all
maintenance, insurance and other costs associated with these leased assets;
however, the lease agreements do not include a residual value guarantee, fixed
price purchase option or other similar guarantees.  We have no other
material off-balance sheet arrangements.


50
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Significant Accounting Policies and Critical
Estimates





Our
discussion and analysis of our results of operations and liquidity and capital
resources is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses.  The SEC has defined critical accounting policies as those
policies that are most important to the preparation of financial statements and
require management’s subjective and complex judgments due to the need to make
estimates about the effect of matters that are inherently
uncertain.  See also Note 10 in Item 8 of this Form 10-K for a
discussion of new and proposed accounting standards.





Revenue
Recognition





Nature of Estimates Required:
We recognize revenue as services are provided based on the rates and provisions
of the underlying code-share agreements with our partners.  Our
operating agreements include the ability to earn incentive
revenue.  The calculation of these revenues involves the use of
estimates that can be subject to differing analysis of the relating operating
metrics or interpretation of the related contractual provisions.  In
some instances, uncertainty exists as to the party responsible for causing a
negative effect on the relevant operating metric.  Our code-share partners
may dispute the amount billed and pay less than the amount invoiced if its
interpretation of the agreement is different from ours.





Assumptions and Approach
Used: Our operating revenues are calculated based on our interpretation
of the underlying code-share agreements and our analysis of the related
operating metrics.





Effect if Different Assumptions
Used:While in practice these kinds of discrepancies are quickly resolved
with our partners (typically within the following month), should our
interpretation of the agreement or analysis of the relevant operating metrics
differ materially from those of our code-share partners and our interpretations
fail to prevail, our revenue could be materially understated or
overstated.  For example, during the second quarter of 2007 we estimated
our operating performance under the CRJ-200 ASA to have resulted in lost
incentive revenue of approximately $2.4 million for the first six months of 2007
compared to Northwest’s assertion that the forgone incentive revenue was $4.8
million.  Subsequent to a detailed analysis of the facts underlying the
cause of the operating performance, we ultimately settled the issue within two
months for approximately $2.9 million.





Income Tax
Reserves





Nature of Estimates Required:
On January 1, 2007, we adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). This interpretation establishes new standards for the
financial statement recognition, measurement and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns.  Under
FIN 48, we recognize tax benefits only for income tax positions that are more
likely than not to be sustained upon examination by tax
authorities.  The amount recognized is measured as the largest amount
of benefit that is greater than fifty percent likely to be realized upon
settlement with the tax authority.  The cumulative effect of adopting FIN
48 was immaterial to our financial statements.  We classify interest
related to income tax liabilities as interest expense, and if applicable,
penalties are recognized as a component of income tax expense.  These
income tax liabilities and accrued interest and penalties are presented as
current liabilities in our consolidated balance sheets.





In
addition to our federal tax return, we file numerous state income tax
returns.  We are no longer subject to U.S. federal income tax examination
for years through 2003 except for specific U.S. federal income tax positions
that are in various stages of appeal, as discussed below.





Assumptions and Approach
Used: Our income tax reserves are based on management’s assessment
of an issue’s expected resolution, based on several factors, including tax
audits, appeals, litigation, changes in tax laws and other rules and the history
of how the issue has been treated by other airlines.


51
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Effect if Different Assumptions
Used:   It is difficult to predict the ultimate outcome or the
timing of resolution for tax positions under FIN 48. Changes may result from the
conclusion of ongoing audits or appeals in state, local, and federal tax
jurisdictions. Our liability for tax positions under FIN 48 includes one matter
that is individually material. Specifically, we are currently under audit by the
Internal Revenue Service (“IRS”) for the tax years 2003 through 2005.  In
May 2007, the IRS proposed certain adjustments to our positions related to
various exam matters.  Should the IRS prevail on these adjustments, the
impact could be significant.  We are currently reviewing these matters
with an administrative appeals team from the IRS, and expect to reach resolution
on the disputed tax exam items during the first half of 2009.   We
believe the potential tax exposure related to the items the IRS has focused on
during its examinations would not exceed $35.0 million, of which we have
reserved $16.5 million.  Should the IRS prevail in obtaining the additional
amount, future earnings could be reduced by up to approximately $18.5
million.  Although we believe our tax positions are appropriate, the
Company is still in resolution negotiations with the IRS and cannot predict the
ultimate outcome; however, management believes that any settlement reached will
not exceed our reserves.





Fair Value of Auction Rate
Securities





Nature of Estimates Required:We have $133.7 million par value of investments related to auction rate
securities, all of which are classified as noncurrent assets at December 31,
2008. As described in Note 9 of Item 8 of this Form 10-K, we have categorized
the fair value for these assets as Level 3 under Statement of Financial
Accounting Standard (“SFAS”) No. 157, Fair Value Measurements
(“SFAS 157”).  Level 3 financial instruments are those with little to no
observable inputs about which there is little or no market data, which require
the reporting entity to develop its own assumptions to use in the determination
of fair value.





Assumptions and Approach Used:For each of our ARS, we prepared a discounted cash flow (“DCF”) analysis
to determine the estimated fair value as of December 31, 2008. The
assumptions used in preparing the DCF model include estimates for the
amount and timing of future interest and principal payments
and the rate of return required by investors to own these securities
in the current environment.  In making these assumptions, we
considered relevant factors including:





§
            the
      likely timing of principal
repayments;


§
            the
      probability of full repayment considering the guarantees by the U.S.
      Department of Education of the underlying student loans
      and guarantees by other third parties;


§
            the formula
      specific to each security which defines the applicable earnings rate paid
      in the event of a failed auction (the “Max
  Rate”);


§
            forward
      projections of the future Max Rates for each security;
  and


§
            our
      estimate of the rate of return required by investors to own these
      securities.





Based on
the results of this assessment and to the extent that we believe any estimated
decline in the fair value is temporary in nature coupled with our ability and
intent to hold the investment until its value recovers, we record a temporary
impairment charge in accumulated other comprehensive income.  Conversely,
to the extent that we believe the charge to be either permanent in nature or to
persist for as long as we may hold the investment, we must record  the
other-than-temporary impairment charge in nonoperating expense in our
consolidated statements of operations. Accordingly, during 2008 we recorded an
impairment charge in nonoperating expenseof $16.8 million to
reduce the carrying value of our ARS to their estimated fair
values.





Effect if Different Assumptions
Used:  While we believe the decline in the fair values of our ARS to
be entirely related to their present illiquidity, we included in earnings the $16.8
million impairment charge because we may not hold the securities until
their values recover for reasons previously explained within our discussion of
liquidity and capital resources.  Had we determined that we had both the
ability and intent to hold the securities until their values recovered, all or a
majority of the impairment would have been recorded in accumulated other
comprehensive income as a component of equity.  Additionally, had any of
our DCF assumptions differed, particularly with respect to the expected duration
of the investments and the discount rate used to value the securities, the
recorded impairment could have materially increased or decreased.  For
example, while our DCF assumes an average holding period of approximately nine
years, had we used an average holding period of eight years, the estimated
impairment would have decreased by approximately $2.0 million.  Conversely,
had we used an average duration of ten years, the estimated impairment would
have increased by approximately $2.6 million.  Similarly, if we were to
decrease or increase by 1% the discount rate used to value the investments, the
estimated impairment would have decreased by $7.8 million or increased by $7.2
million, respectively.  Further, were the credit rating of either the
security issuer or the third-party insurer underlying the investments to further
deteriorate, we may be required to record additional impairment charges, either
through earnings or equity, to adjust the carrying value of our
ARS.


52
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Goodwill and Other
Long-Lived Assets





Goodwill





Nature of Estimates Required:
Our long-lived assets consist of goodwill and intangible assets, as well as
property and equipment.  Under SFAS No. 142, Goodwill and Other Intangible Assets(“SFAS 142”), intangible assets can have either finite or indefinite
useful lives.  Under SFAS 142, we perform an impairment evaluation for each
reporting unit, which are composed of our Pinnacle and Colgan
segments.  We perform an impairment test to the net book value of
goodwill on an annual basis and, if certain events or circumstances indicate
that it is more likely than not that an impairment loss may have been incurred,
on an interim basis. The scheduled annual impairment test date for our goodwill
is October 1.





Factors
considered important when determining the impairment of goodwill under SFAS 142
include items affecting the cash flows of the reporting segments; significant
changes in the underlying business strategy or operational environment; material
ongoing industry or economic trends; or other factors specific to the asset or
reporting segments being evaluated.  Any changes in the key assumptions
about the business and its prospects, or changes in market conditions or other
externalities could result in an impairment charge.





At June
30, 2008, because of impairment indicators existing during the second quarter,
we performed an interim goodwill impairment test of goodwill at our Colgan
reporting unit. Factors we deemed to be collectively an indicator that a
goodwill impairment test was required for Colgan included record high fuel
prices, continued operating losses, a softening U.S. economy, and the planned
removal of ten Saab aircraft from Colgan’s pro-rate operating fleet during
2008.Based
on the results of our evaluation, we determined that Colgan’s goodwill was fully
impaired and recorded a $9.8 million impairment charge at June 30,
2008.  For a discussion of Colgan’s goodwill impairment, see Note 6 in
Item 8 of this Form 10-K.





At
October 1, 2008, we performed the annual required impairment test of our
Pinnacle reporting unit goodwill, which resulted in no impairment
charge.  Additionally, at December 31, 2008, because the Company’s
book value exceeded its market capitalization, we performed an interim
impairment test of Pinnacle’s goodwill.  The interim impairment
analysis also resulted in no impairment charge.





Assumptions and Approach
Used:  Our cash flow estimates are based on historical results
adjusted to reflect our best estimate of future market and operating conditions.
Our determination of a reporting unit’s fair value is based upon our perspective
of industry trends, market rates and market transactions.  Other
assumptions include the appropriate discount rate, which represents our weighted
average cost of capital.  Factors indicating potential impairment include,
but are not limited to, significant decreases in the market value of the
long-lived assets, a significant change in the condition of the long-lived
assets and operating cash flow losses associated with the use of the long-lived
assets.





During
2008, particularly during the fourth quarter, the airline sector and the broader
securities markets generally were materially and adversely affected by
significant declines in the values of nearly all asset classes and by a serious
lack of liquidity. Our stock price, consistent with stock prices in the broader
airline sector, declined significantly during this period of time. During the
fourth quarter of 2008, our market capitalization fell below recorded book
value. With respect to the testing of our goodwill for impairment, we believe
that it is reasonable to consider market capitalization as an indicator of fair
value over a reasonable period of time. If the current economic market
conditions persist and if there is a prolonged period of weakness in the
business environment and airline sector, our businesses may be adversely
affected, which could result in future impairment of Pinnacle’s
goodwill.





Effect if Different Assumptions
Used:If the results of these evaluations determined that impairment has
occurred, an impairment charge could affect earnings by as much as the carrying
value.  As of December 31, 2008, we had approximately $18.4 million in
goodwill.


53
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)


Long-lived
Assets





Nature of Estimates Required:Approximately 63% of our total assets are invested in property and
equipment, which will continue to increase as we acquire additional aircraft to
support our capacity purchase agreements with Delta and Continental. We capitalize only
those costs that meet the definition of capital assets under accounting
standards. Accordingly, repair and maintenance costs that do not extend the
useful life of an asset or are not part of the cost of acquiring the asset are
expensed as incurred.  The depreciation of our property and equipment
over their estimated useful lives and the determination of any salvage values
requires management to make judgments about future
events.





Assumptions and Approach
Used:  In accounting for long-lived assets including intangible
assets with definite lives, we must make estimates about the expected useful
lives of the assets, the expected residual values of the assets, and the
potential for impairment based on the fair value of the assets and the cash
flows they generate.  Because we utilize most of our property and
equipment over relatively long periods, we periodically evaluate whether
adjustments to our estimated service lives or salvage values are necessary to
ensure these estimates properly match the economic use of the asset. In addition
to considering our planned use of long-lived assets, when necessary, such as
when making estimates related to our new aircraft for which there is little
historical data available, we engage airline industry specialists to assist with
the determination of relevant estimates.





When
appropriate, we evaluate our long-lived assets for
impairment.  Factors that would indicate potential impairment may
include, but are not limited to, significant decreases in the market value of
the long-lived asset(s), a significant change in the long-lived asset’s physical
condition, and cash flows associated with the use of the long-lived
asset.   The accounting test for whether an asset held for use is
impaired involves first comparing the carrying value of the asset with its
estimated future undiscounted cash flows. If the cash flows do not exceed the
carrying value, the asset must be adjusted to its current fair
value.  When considering whether or not impairment of long-lived
assets exists, we group similar assets together at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
assets and liabilities and compare the undiscounted cash flows for the entire
group of assets to the carrying value of the same group of
assets.  Asset groupings are typically done at the fleet or contract
level.  We have not experienced any significant impairment of assets
to be held and used. However, from time to time we make decisions to remove
certain long-lived assets from service based on projections of reduced capacity
needs, and those decisions may result in an impairment charge.  There were
no material asset impairment charges recognized in 2008, 2007 or
2006.





Effect if Different Assumptions
Used:Periodic re-evaluations, which can be significant, could be caused
by changes to our maintenance program, changes in the utilization of the
aircraft, governmental regulations on aging aircraft, and changing market prices
of new and used similar aircraft.  Generally, these adjustments are
accounted for on a prospective basis through depreciation and amortization
expense, as required by accounting standards and, ultimately, the gain or loss
on the disposal of the asset. Any impairment charge could affect earnings by as
much as the carrying values of the assets.


54
 Table of Contents
 
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations (continued)




Spare Parts and
Supplies





Nature of Estimates Required:
Inventories, expendable parts and maintenance supplies relating to flight
equipment are carried at cost and are expensed when the inventory is used. 
A fleet retirement reserve is provided over the remaining estimated useful life
of the related aircraft equipment, for spare parts expected to be on hand at the
date the aircraft are retired from service, plus allowances for spare parts
currently identified as obsolete or excess. We will continue to modify these
estimates as our fleet ages.  The adequacy of our fleet retirement
reserve requires a high degree of judgment.





Assumptions and Approach
Used: Our fleet retirement reserve related to inventory is provided over
the remaining useful life of the related aircraft, plus allowance for spare
parts currently identified as excess.  Part of the calculation for this
reserve is based on historical experience.  In addition, we may reserve for
additional amounts when we deem parts as excess inventory.


Effect if Different Assumptions
Used: As of December 31, 2008, our fleet retirement reserve related to
our spare parts and supplies was approximately $4.3 million.  If we
increase the reserve by 10%, the impact on pre-tax income is
immaterial.





In
addition to the estimates discussed above, we have made certain other estimates
that, while not involving the same degree of judgment, are important to
understanding our financial statements.  We continually evaluate our
accounting policies and the estimates we use to prepare our consolidated
financial statements. Our estimates as of the date of the financial statements
reflect our best judgment after giving consideration to all currently available
facts and circumstances. Therefore, actual results may differ significantly from
these estimates and may require adjustment in the future, as additional facts
become known or as circumstances change.





Management
has discussed the development of these critical accounting estimates with the
Audit Committee of our Board of Directors, and the Audit Committee has reviewed
the disclosures presented above relating to them.For more information,
see Note 2 in Item 8 of this Form 10-K.




55
 Table of Contents


Item 7A.   Quantitative and Qualitative Disclosures
About Market Risk





Because
the majority of our contracts are capacity purchase agreements, our exposure to
market risks such as commodity price risk (e.g., aircraft fuel prices) is
primarily limited to our pro-rate operations, which comprise 23% of our
consolidated revenues.  With our 2007 acquisition of Colgan and our
contracts with Delta and Continental that include the purchase of aircraft, we
are exposed to commodity price and interest rate risks as discussed
below.





Commodity Price Risk





Our
pro-rate operations include exposure to certain market risks primarily related
to aircraft fuel, which has been extremely volatile.  Aviation fuel expense
is a significant expense for any air carrier, and even marginal changes in the
cost of fuel greatly affect a carrier’s profitability.  Standard industry
contracts do not generally provide protection against fuel price increases, nor
do they ensure availability of supply.  While our capacity purchase
agreements require that fuel be provided to us at no cost, thereby reducing our
overall exposure to fuel price fluctuations, the Company’s pro-rate code-share
agreements with Continental, US Airways, and United expose the Company to fuel
price risk.  Slightly offsetting our fuel risk, our agreement with
Continental provides for an adjustment to the pro-rate revenue we receive from
Continental based on projected changes in fuel prices.  For the projected
annualized fuel consumption related to these agreements, each ten percent change
in the price of jet fuel amounts to an approximate $4.9 million change in annual
fuel costs.





Interest Rate Risk





Aircraft financing. The
Company is exposed to interest rate risk from the time of entering into purchase
commitments until the delivery of aircraft, at which time the Company receives
permanent, fixed-rate financing for each aircraft.  As of December 31,
2008, the Company had accepted delivery of 14 of its 16 CRJ-900 aircraft with
the remaining two set to deliver in the second quarter of 2009. In January 2009,
the Company entered in a purchase agreement for 15 firm Q400 aircraft with
Bombardier, which will be delivered between August 2010 and April
2011.





Should
interest rates changes by 100 basis points before we take delivery, and assuming
that we do not hedge the anticipated debt on the remaining CRJ-900 and Q400
aircraft, aggregate interest expense in the first year of financing would change
by approximately $3.5 million.





Investment
income.  Our earnings are affected by fluctuations in interest
rates due to the impact those changes have on the amount of interest income we
earn from our investments, which primarily consists of ARS.  We do not
purchase or hold any derivative financial instruments to protect against the
effects of changes in interest rates on our interest income.  Based on
our current balance of ARS, a 100 basis point change in interest rates would
result in an increase or decrease in annual investment income of approximately
$1.3 million.  See Note 9 in Item 8 of this Form 10-K for additional
information about ARS.





Senior convertible notes.
While we pay interest on the Notes at a fixed rate of 3.25%, the fair value of
the Notes is sensitive to changes in interest rates and to changes in the market
price of our common stock.  Interest rate changes may result in
increases or decreases in the fair value of the Notes due to differences between
market interest rates and rates in effect at the inception of the
obligation.  The fair value of the Notes may also increase or decrease
with differences between the current market price of our common stock and the
market price on the original issuance date of the Notes.  Unless we
elect to repurchase additional Notes in the open market, changes in their fair
value have no impact on our consolidated financial statements as a whole. The
estimated fair value of the Notes on March 6, 2009 was approximately $76.8
million, based on quoted market prices.




56


Item 8. Financial Statements and
Supplementary Data
  Report of
      Independent Registered Public Accounting Firm
              58Consolidated Statements of
      Operations
              59for
      the Years Ended December 31, 2008, 2007, and 2006Consolidated
      Balance Sheets
              60as
      of December 31, 2008 and 2007Consolidated Statements of Stockholders’
      Equity
              61for
      the Years Ended December 31, 2008, 2007, and 2006Consolidated Statements of Cash
      Flows
              62for
      the Years Ended December 31, 2008, 2007, and 2006Notes
      to Consolidated Financial Statements
              63


57


REPORT OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM





The Board
of Directors and Stockholders


Pinnacle
Airlines Corp.








We have
audited the accompanying consolidated balance sheets of Pinnacle Airlines Corp.
as of December 31, 2008 and 2007, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2008.  These financial statements are
the responsibility of the Company's management.  Our responsibility is
to express an opinion on these financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Pinnacle Airlines
Corp. at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2008, in conformity with U.S. generally accepted accounting
principles.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Pinnacle Airlines Corp.'s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 5, 2009
expressed an unqualified opinion thereon.











/s/
ERNST & YOUNG LLP





Memphis,
Tennessee


March 5,
2009








58


Pinnacle
Airlines Corp.


Consolidated Statements of Operations


(in
thousands, except per share data)





Years
      Ended December 31,2008
                                                                      
                                                                      
                                                                      2007
                                                                      
                                                                      
                                                                      2006Operating
      revenues:Regional
      airline services
                                                                      
                                                                      $
                                                                      855,659
                                                                      
                                                                      
                                                                      $
                                                                      777,179
                                                                      
                                                                      
                                                                      $
                                                                      816,787Other
                                                                      
                                                                      
                                                                      9,126
                                                                      
                                                                      
                                                                      
                                                                      10,195
                                                                      
                                                                      
                                                                      
                                                                      7,836Total
      operating revenues
                                                                      
                                                                      
                                                                      864,785
                                                                      
                                                                      
                                                                      
                                                                      787,374
                                                                      
                                                                      
                                                                      
                                                                      824,623Operating
      expenses:Salaries,
      wages and benefits
                                                                      
                                                                      
                                                                      219,971
                                                                      
                                                                      
                                                                      
                                                                      195,767
                                                                      
                                                                      
                                                                      
                                                                      136,812Aircraft
      rentals
                                                                      
                                                                      
                                                                      128,559
                                                                      
                                                                      
                                                                      
                                                                      138,661
                                                                      
                                                                      
                                                                      
                                                                      264,124Ground
      handling services
                                                                      
                                                                      
                                                                      96,359
                                                                      
                                                                      
                                                                      
                                                                      96,306
                                                                      
                                                                      
                                                                      
                                                                      86,117Aircraft
      maintenance, materials and repairs
                                                                      
                                                                      
                                                                      92,909
                                                                      
                                                                      
                                                                      
                                                                      89,661
                                                                      
                                                                      
                                                                      
                                                                      34,264Other
      rentals and landing fees
                                                                      
                                                                      
                                                                      71,857
                                                                      
                                                                      
                                                                      
                                                                      58,956
                                                                      
                                                                      
                                                                      
                                                                      43,135Aircraft
      fuel
                                                                      
                                                                      
                                                                      49,450
                                                                      
                                                                      
                                                                      
                                                                      38,122
                                                                      
                                                                      
                                                                      
                                                                      109,000Commissions
      and passenger related expense
                                                                      
                                                                      
                                                                      27,025
                                                                      
                                                                      
                                                                      
                                                                      25,740
                                                                      
                                                                      
                                                                      
                                                                      4,992Depreciation
      and amortization
                                                                      
                                                                      
                                                                      26,518
                                                                      
                                                                      
                                                                      
                                                                      9,265
                                                                      
                                                                      
                                                                      
                                                                      3,985Other
                                                                      
                                                                      
                                                                      92,982
                                                                      
                                                                      
                                                                      
                                                                      83,533
                                                                      
                                                                      
                                                                      
                                                                      58,217Provision
      for decreases in losses associated withbankruptcyfilings
                                                                        of Northwest and Mesaba
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (1,048)
                                                                      
                                                                      
                                                                      
                                                                      (43,571)Impairment
      of goodwill and aircraft lease return costs
                                                                      
                                                                      
                                                                      13,548
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Total
      operating expenses
                                                                      
                                                                      
                                                                      819,178
                                                                      
                                                                      
                                                                      
                                                                      734,963
                                                                      
                                                                      
                                                                      
                                                                      697,075Operating
      income
                                                                      
                                                                      
                                                                      45,607
                                                                      
                                                                      
                                                                      
                                                                      52,411
                                                                      
                                                                      
                                                                      
                                                                      127,548Operating
      income as a percentage of operating revenues
                                                                      
                                                                      
                                                                      5.3%
                                                                      
                                                                      
                                                                      
                                                                      6.7%
                                                                      
                                                                      
                                                                      
                                                                      15.5%Nonoperating
      (expense) income:Interest
      expense
                                                                      
                                                                      
                                                                      (34,661)
                                                                      
                                                                      
                                                                      
                                                                      (8,853)
                                                                      
                                                                      
                                                                      
                                                                      (5,578)Impairment
      of auction rate securities
                                                                      
                                                                      
                                                                      (16,800)
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Interest
      income
                                                                      
                                                                      
                                                                      6,870
                                                                      
                                                                      
                                                                      
                                                                      11,601
                                                                      
                                                                      
                                                                      
                                                                      2,548Loss
      on sale of unsecured claim
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (4,144)
                                                                      
                                                                      
                                                                      
                                                                      -Miscellaneous
      income, net
                                                                      
                                                                      
                                                                      281
                                                                      
                                                                      
                                                                      
                                                                      22
                                                                      
                                                                      
                                                                      
                                                                      82Total
      nonoperating expense
                                                                      
                                                                      
                                                                      (44,310)
                                                                      
                                                                      
                                                                      
                                                                      (1,374)
                                                                      
                                                                      
                                                                      
                                                                      (2,948)Income
      before income taxes
                                                                      
                                                                      
                                                                      1,297
                                                                      
                                                                      
                                                                      
                                                                      51,037
                                                                      
                                                                      
                                                                      
                                                                      124,600Income
      tax expense
                                                                      
                                                                      
                                                                      (6,204)
                                                                      
                                                                      
                                                                      
                                                                      (16,400)
                                                                      
                                                                      
                                                                      
                                                                      (46,801)Net
      (loss) income
                                                                      
                                                                      $
                                                                      (4,907)
                                                                      
                                                                      
                                                                      $
                                                                      34,637
                                                                      
                                                                      
                                                                      $
                                                                      77,799Basic
      (loss) earnings per share
                                                                      
                                                                      $
                                                                      (0.27)
                                                                      
                                                                      
                                                                      $
                                                                      1.66
                                                                      
                                                                      
                                                                      $
                                                                      3.55Diluted
      (loss) earnings per share
                                                                      
                                                                      $
                                                                      (0.27)
                                                                      
                                                                      
                                                                      $
                                                                      1.50
                                                                      
                                                                      
                                                                      $
                                                                      3.54Shares
      used in computing basic (loss) earnings per share
                                                                      
                                                                      
                                                                      17,865
                                                                      
                                                                      
                                                                      
                                                                      20,897
                                                                      
                                                                      
                                                                      
                                                                      21,945Shares
      used in computing diluted (loss) earnings per share
                                                                      
                                                                      
                                                                      17,865
                                                                      
                                                                      
                                                                      
                                                                      23,116
                                                                      
                                                                      
                                                                      
                                                                      21,974





The
accompanying notes are an integral part of these consolidated financial
statements.


59


Pinnacle
Airlines Corp.


Consolidated Balance Sheets


(in
thousands, except share data)


December
      31, 2008
                                                                            
                                                                            
                                                                            December
      31, 2007AssetsCurrent
      assetsCash
      and cash equivalents
                                                                            
                                                                            $
                                                                            69,469
                                                                            
                                                                            
                                                                            $
                                                                            26,785Restricted
      cash
                                                                            
                                                                            
                                                                            5,417
                                                                            
                                                                            
                                                                            
                                                                            5,327Short-term
      investments
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            186,850Receivables,
      net of allowances of $135 in 2008 and $131 in 2007
                                                                            
                                                                            
                                                                            31,619
                                                                            
                                                                            
                                                                            
                                                                            31,107Spare
      parts and supplies, net of allowances of $4,213 in 2008 and $2,536 in
      2007
                                                                            
                                                                            
                                                                            17,106
                                                                            
                                                                            
                                                                            
                                                                            16,030Prepaid
      expenses and other assets
                                                                            
                                                                            
                                                                            8,160
                                                                            
                                                                            
                                                                            
                                                                            16,535Deferred
      income taxes
                                                                            
                                                                            
                                                                            14,338
                                                                            
                                                                            
                                                                            
                                                                            12,285Income
      taxes receivable
                                                                            
                                                                            
                                                                            31,117
                                                                            
                                                                            
                                                                            
                                                                            -Total
      current assets
                                                                            
                                                                            
                                                                            177,226
                                                                            
                                                                            
                                                                            
                                                                            294,919Property
      and equipmentFlight
      equipment
                                                                            
                                                                            
                                                                            723,529
                                                                            
                                                                            
                                                                            
                                                                            162,374Aircraft
      pre-delivery payments
                                                                            
                                                                            
                                                                            5,721
                                                                            
                                                                            
                                                                            
                                                                            81,425Other
      property and equipment
                                                                            
                                                                            
                                                                            45,769
                                                                            
                                                                            
                                                                            
                                                                            39,969775,019
                                                                            
                                                                            
                                                                            
                                                                            283,768Less
      accumulated depreciation
                                                                            
                                                                            
                                                                            (54,262)
                                                                            
                                                                            
                                                                            
                                                                            (28,358)Net
      property and equipment
                                                                            
                                                                            
                                                                            720,757
                                                                            
                                                                            
                                                                            
                                                                            255,410Investments
      in auction rate securities
                                                                            
                                                                            
                                                                            116,900
                                                                            
                                                                            
                                                                            
                                                                            -Deferred
      income taxes
                                                                            
                                                                            
                                                                            45,004
                                                                            
                                                                            
                                                                            
                                                                            79,856Other
      assets, primarily aircraft lease deposits
                                                                            
                                                                            
                                                                            33,723
                                                                            
                                                                            
                                                                            
                                                                            28,528Debt
      issuance costs, net of amortization of $1,117 in 2008 and $636 in
      2007
                                                                            
                                                                            
                                                                            6,505
                                                                            
                                                                            
                                                                            
                                                                            4,598Goodwill
                                                                            
                                                                            
                                                                            18,422
                                                                            
                                                                            
                                                                            
                                                                            28,206Intangible
      assets, net of amortization of  $5,180 in 2008 and $3,594 in
      2007
                                                                            
                                                                            
                                                                            14,585
                                                                            
                                                                            
                                                                            
                                                                            17,071Total
      assets
                                                                            
                                                                            $
                                                                            1,133,122
                                                                            
                                                                            
                                                                            $
                                                                            708,588Liabilities
      and stockholders’ equityCurrent
      liabilitiesShort-term
      notes payable and current maturities of long-term debt
                                                                            
                                                                            $
                                                                            44,116
                                                                            
                                                                            
                                                                            $
                                                                            9,910Bank
      line of credit
                                                                            
                                                                            
                                                                            8,275
                                                                            
                                                                            
                                                                            
                                                                            8,375Pre-delivery
      payment facilities
                                                                            
                                                                            
                                                                            4,075
                                                                            
                                                                            
                                                                            
                                                                            63,603Accounts
      payable
                                                                            
                                                                            
                                                                            29,962
                                                                            
                                                                            
                                                                            
                                                                            33,062Deferred
      revenue
                                                                            
                                                                            
                                                                            23,851
                                                                            
                                                                            
                                                                            
                                                                            24,099Income
      taxes payable
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            2,356Accrued
      expenses and other current liabilities
                                                                            
                                                                            
                                                                            75,136
                                                                            
                                                                            
                                                                            
                                                                            102,054Total
      current liabilities
                                                                            
                                                                            
                                                                            185,415
                                                                            
                                                                            
                                                                            
                                                                            243,459Senior
      convertible notes, less $12.0 million of current portion
                                                                            
                                                                            
                                                                            109,000
                                                                            
                                                                            
                                                                            
                                                                            121,000Long-term
      debt, less current maturities
                                                                            
                                                                            
                                                                            502,741
                                                                            
                                                                            
                                                                            
                                                                            71,812Credit
      facility
                                                                            
                                                                            
                                                                            90,000
                                                                            
                                                                            
                                                                            
                                                                            -Deferred
      revenue, net of current portion
                                                                            
                                                                            
                                                                            192,191
                                                                            
                                                                            
                                                                            
                                                                            209,752Capital
      leases, net of current portion
                                                                            
                                                                            
                                                                            2,601
                                                                            
                                                                            
                                                                            
                                                                            3,668Other
      liabilities
                                                                            
                                                                            
                                                                            2,581
                                                                            
                                                                            
                                                                            
                                                                            1,075Commitments
      and contingenciesStockholders’
      equitySeries
      A preferred share, stated value $100 per share; one share authorized
      andissued,
                                                                              retired on January 4, 2008
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -Common
      stock, $0.01 par value; 40,000,000 shares authorized;22,514,782
                                                                              and 22,402,999 shares issued, respectively
                                                                            
                                                                            
                                                                            225
                                                                            
                                                                            
                                                                            
                                                                            224Treasury
      stock, at cost, 4,450,092 shares
                                                                            
                                                                            
                                                                            (68,152)
                                                                            
                                                                            
                                                                            
                                                                            (68,152)Additional
      paid-in capital
                                                                            
                                                                            
                                                                            93,815
                                                                            
                                                                            
                                                                            
                                                                            91,165Accumulated
      other comprehensive income
                                                                            
                                                                            
                                                                            (17,173)
                                                                            
                                                                            
                                                                            
                                                                            (10,200)Retained
      earnings
                                                                            
                                                                            
                                                                            39,878
                                                                            
                                                                            
                                                                            
                                                                            44,785Total
      stockholders’ equity
                                                                            
                                                                            
                                                                            48,593
                                                                            
                                                                            
                                                                            
                                                                            57,822Total
      liabilities and stockholders’ equity
                                                                            
                                                                            $
                                                                            1,133,122
                                                                            
                                                                            
                                                                            $
                                                                            708,588




The
accompanying notes are an integral part of these consolidated financial
statements.


60


Pinnacle
Airlines Corp.


Consolidated Statements of Stockholders’
Equity


(in
thousands, except share data)





Common
                                    Stock
                                  
                                  
                                  Additional
                                    Paid-In
      Capital
                                  
                                  
                                  Accumulated
      Earnings (Deficiency)
                                  
                                  
                                  Accumulated
      Other
                                    Comprehensive
      Gain/ (Loss)
                                  
                                  
                                  Treasury
                                    Stock
                                  
                                  
                                  TotalBalance,
      December 31, 2005
                                  $
                                  220
                                  
                                  
                                  $
                                  85,549
                                  
                                  
                                  $
                                  (67,151)
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  18,618Net
      income and comprehensive income
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  77,799
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  77,799Impact
      of adoption of  SFAS 158,netof
      tax
                                    of $24
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  40
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  40Restricted
      stock issuance – 135,325shares
                                  
                                  1
                                  
                                  
                                  
                                  (1)
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Share-based
      compensation
                                  
                                  -
                                  
                                  
                                  
                                  564
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  564Balance,
      December 31, 2006
                                  
                                  221
                                  
                                  
                                  
                                  86,112
                                  
                                  
                                  
                                  10,648
                                  
                                  
                                  
                                  40
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  97,021Comprehensive
      income:Net
      income
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  34,637
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  34,637Derivative
      instruments (cash flowhedge),
                                    net
      oftax of $6,016
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (10,761)
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (10,761)Post-retirement
      actuarial gain,netof
      tax
                                    of $304
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  521
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  521Total
      comprehensive income
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  24,397Impact
      of adoption of FIN 48
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (500)
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (500)Restricted
      stock issuance –  76,311shares
                                  
                                  1
                                  
                                  
                                  
                                  (1)
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Treasury
      stock repurchase –
                                    4,450,092
      shares
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (68,152)
                                  
                                  
                                  
                                  (68,152)Exercise
      of stock options
                                  
                                  2
                                  
                                  
                                  
                                  2,896
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,898Share-based
      compensation
                                  
                                  -
                                  
                                  
                                  
                                  2,158
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  2,158Balance,
      December 31, 2007
                                  
                                  224
                                  
                                  
                                  
                                  91,165
                                  
                                  
                                  
                                  44,785
                                  
                                  
                                  
                                  (10,200)
                                  
                                  
                                  
                                  (68,152)
                                  
                                  
                                  
                                  57,822Comprehensive
      income:Net
      loss
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,907)
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (4,907)Cash
      flow hedges:Derivative instruments, net of tax
                                    of
      $5,377
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (8,445)
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (8,445)Reclassification into earnings, netof
      tax
                                    of
      $814
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,454
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,454(6,991)Investments
      in ARS:Unrealized losses on investments,net
                                    of taxof
      $709
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (16,091)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (16,091)Reclassification
      into earnings, netof
      tax
                                    of $709
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  16,091
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  16,091-Post-retirement
      actuarial gain, netof
                                    tax of $9
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  18
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  18Total
      comprehensive loss
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (11,880)Restricted
      stock issuance –  108,962shares
                                  
                                  1
                                  
                                  
                                  
                                  (1)
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Exercise
      of stock options
                                  
                                  -
                                  
                                  
                                  
                                  49
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  49Share-based
      compensation
                                  
                                  -
                                  
                                  
                                  
                                  2,602
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,602Balance,
      December 31, 2008
                                  $
                                  225
                                  
                                  
                                  $
                                  93,815
                                  
                                  
                                  $
                                  39,878
                                  
                                  
                                  $
                                  (17,173)
                                  
                                  
                                  $
                                  (68,152)
                                  
                                  
                                  $
                                  48,593





The
accompanying notes are an integral part of these consolidated financial
statements.


61
 Pinnacle
Airlines Corp.
 Consolidated Statements of Cash Flows
 (in
thousands, except share data)




Years
      Ended December 31,2008
                                
                                
                                2007
                                
                                
                                2006Operating
      activitiesNet
      (loss) income
                                
                                $
                                (4,907)
                                
                                
                                $
                                34,637
                                
                                
                                $
                                77,799Adjustments
      to reconcile net income to cash provided by operating
      activities:Impairment
      charges
                                
                                
                                27,357
                                
                                
                                
                                -
                                
                                
                                
                                -Provision
      for decreases in losses associated with bankruptcyfilings
      of
                                  Northwest and Mesaba
                                
                                
                                -
                                
                                
                                
                                (1,048)
                                
                                
                                
                                (43,571)Loss
      on sale of unsecured claim
                                
                                
                                -
                                
                                
                                
                                4,144
                                
                                
                                
                                -Depreciation
      and amortization
                                
                                
                                30,911
                                
                                
                                
                                10,835
                                
                                
                                
                                5,408Deferred
      income taxes
                                
                                
                                37,310
                                
                                
                                
                                (99,717)
                                
                                
                                
                                15,647Recognition
      of deferred revenue
                                
                                
                                (24,099)
                                
                                
                                
                                (23,058)
                                
                                
                                
                                -Other
                                
                                
                                6,178
                                
                                
                                
                                3,398
                                
                                
                                
                                5,581Changes
      in operating assets and liabilities:Receivables
                                
                                
                                (512)
                                
                                
                                
                                79,093
                                
                                
                                
                                (30,929)Increase
      in deferred revenue
                                
                                
                                6,218
                                
                                
                                
                                271,705
                                
                                
                                
                                -Spare
      parts and supplies
                                
                                
                                (2,835)
                                
                                
                                
                                (1,846)
                                
                                
                                
                                (2,126)Prepaid
      expenses and other assets
                                
                                
                                4,461
                                
                                
                                
                                (3,679)
                                
                                
                                
                                (11,584)Restricted
      cash
                                
                                
                                (90)
                                
                                
                                
                                (4,077)
                                
                                
                                
                                (250)Accounts
      payable and accrued expenses
                                
                                
                                7,813
                                
                                
                                
                                5,893
                                
                                
                                
                                6,286Hedge
      related payments
                                
                                
                                (29,288)
                                
                                
                                
                                (1,310)
                                
                                
                                
                                -Insurance
      proceeds
                                
                                
                                2,414
                                
                                
                                
                                3,565
                                
                                
                                
                                -Income
      taxes payable
                                
                                
                                (33,493)
                                
                                
                                
                                2,064
                                
                                
                                
                                (1,098)Other
      liabilities
                                
                                
                                1,167
                                
                                
                                
                                (5,119)
                                
                                
                                
                                (62)Cash
      provided by operating activities
                                
                                
                                28,605
                                
                                
                                
                                275,480
                                
                                
                                
                                21,101Investing
      activitiesPurchases
      of property and equipment
                                
                                
                                (31,871)
                                
                                
                                
                                (24,188)
                                
                                
                                
                                (4,394)Proceeds
      from the sale of property and equipment
                                
                                
                                142
                                
                                
                                
                                610
                                
                                
                                
                                -Aircraft
      pre-delivery payments
                                
                                
                                (816)
                                
                                
                                
                                (74,138)
                                
                                
                                
                                -Purchases
      of investments
                                
                                
                                (82,200)
                                
                                
                                
                                (1,024,284)
                                
                                
                                
                                (721,365)Proceeds
      from sale of investments
                                
                                
                                135,350
                                
                                
                                
                                910,134
                                
                                
                                
                                692,825Acquisition
      of Colgan Air, Inc. net of cash acquired
                                
                                
                                -
                                
                                
                                
                                (8,267)
                                
                                
                                
                                (2,029)Cash
      provided by (used in) investing activities
                                
                                
                                20,605
                                
                                
                                
                                (220,133)
                                
                                
                                
                                (34,963)Financing
      activitiesPayments
      on capital leases
                                
                                
                                (1,159)
                                
                                
                                
                                (965)
                                
                                
                                
                                -Proceeds
      from line of credit
                                
                                
                                90,000
                                
                                
                                
                                -
                                
                                
                                
                                -Proceeds
      from debt
                                
                                
                                11,810
                                
                                
                                
                                67,963
                                
                                
                                
                                -Payments
      on debt
                                
                                
                                (84,839)
                                
                                
                                
                                (30,862)
                                
                                
                                
                                (17,000)Debt
      issuance costs
                                
                                
                                (2,387)
                                
                                
                                
                                (842)
                                
                                
                                
                                -Purchase
      of Series A Preferred Share
                                
                                
                                (20,000)
                                
                                
                                
                                -
                                
                                
                                
                                -Treasury
      shares repuchased
                                
                                
                                -
                                
                                
                                
                                (68,152)
                                
                                
                                
                                -Proceeds
      from exercise of stock options and excess tax benefits
                                
                                
                                49
                                
                                
                                
                                3,591
                                
                                
                                
                                -Cash
      used in financing activities
                                
                                
                                (6,526)
                                
                                
                                
                                (29,267)
                                
                                
                                
                                (17,000)Net
      increase (decrease) in cash and cash equivalents
                                
                                
                                42,684
                                
                                
                                
                                26,080
                                
                                
                                
                                (30,862)Cash
      and cash equivalents at beginning of period
                                
                                
                                26,785
                                
                                
                                
                                705
                                
                                
                                
                                31,567Cash
      and cash equivalents at end of period
                                
                                $
                                69,469
                                
                                
                                $
                                26,785
                                
                                
                                $
                                705Supplemental
      disclosure of cash flow informationInterest
      paid
                                
                                $
                                24,736
                                
                                
                                $
                                8,717
                                
                                
                                $
                                4,594Income
      tax payments
                                
                                $
                                4,375
                                
                                
                                $
                                113,871
                                
                                
                                $
                                32,299Noncash
      investing and financing activitiesProperty
      and equipment acquired through the issuance of debt
                                
                                $
                                466,535
                                
                                
                                $
                                73,166
                                
                                
                                $
                                -Mark-to-market
      adjustment on derivative instruments
                                
                                $
                                -
                                
                                
                                $
                                16,777
                                
                                
                                $
                                -Other
      noncash investing and financing activities
                                
                                $
                                152
                                
                                
                                $
                                3,453
                                
                                
                                $
                                -


The
accompanying notes are an integral part of these consolidated financial
statements.


62
 Pinnacle
Airlines Corp.
 Notes to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS INDEX





1.    Description of Business
              11.  Leases2.    Significant Accounting Policies
              12.  Accrued Expenses and Other Current
      Liabilities3.Code-share Agreements with
    Partners
              13.  Colgan Acquisition4.    Segment Reporting
              14.  Share-Based Compensation5.Earnings (Loss) Per Share
              15.  Other Expenses6.    Impairment of Goodwill and Aircraft Lease
      Return Costs
              16.  Income Taxes7.    Fair Value Measurements
              17.  Employee Benefit Plans8.    Derivatives
              18.  Commitments and
  Contingencies9.    Investments
              19.  Quarterly Financial Data
      (Unaudited)10.  Borrowings





1.  Description of Business





Pinnacle
Airlines Corp. (“the Company”), through its wholly-owned subsidiaries, Pinnacle
Airlines, Inc. (“Pinnacle”) and Colgan Air, Inc. (“Colgan”), operates the fourth
largest independent regional airline in the United States. As of December 31,
2008, Pinnacle and Colgan offered scheduled passenger service with approximately
1,100 total daily departures to a combined 207 destinations.





On
October 29, 2008, two of the Company’s largest customers, Delta Air Lines, Inc.
and Northwest Airlines Corporation, completed their previously announced merger,
forming the world’s largest airline.  Delta Air Lines, Inc. (exclusive
of its newly merged operating subsidiary, Northwest Airlines, Inc.) for
historical reference purposes is referred to herein as “Pre-Merger
Delta.”  Similarly, Northwest Airlines Corporation and its
subsidiaries as they existed prior to the merger are referred to herein as
“Northwest.”  Pre-Merger Delta and Northwest combined are collectively
referred to herein as “Delta.”





The
Company does not believe that this merger will have a material effect on its
operations, as its capacity purchase agreements with each carrier are relatively
long-term and do not contain early termination provisions that could be
triggered by consolidation.Under the Company’s
capacity purchase agreements, the Company’s partners determine the operating
schedules and utilization of aircraft, thus affecting the variable components of
payments that the Company receives.  However, the Company’s partners also
pay fixed amounts, including amounts related to the ownership costs of the
Company’s aircraft, irrespective of the level of operations set by its partners.
 The marginal cost to the Company’s partners in relation to adding flights
under the capacity purchase agreements is relatively low compared to the total
fixed costs that each partner pays.  Therefore, the Company believes that
its partners have an economic incentive to maintain reasonable levels of
aircraft utilization with respect to the Company’s operations.





Pinnacle
operates an all-regional jet fleet, and provides regional airline capacity to
Delta at its hub airports in Atlanta, Cincinnati, Detroit, Memphis, and
Minneapolis/St. Paul.  At December 31, 2008, Pinnacle operated 124
Canadair Regional Jet (“CRJ”)-200 aircraft under Delta brands with approximately
665 daily departures to 114 cities in 37 states and three Canadian
provinces.  Pinnacle also operated a fleet of 18 CRJ-900 aircraft as a
Delta Connection carrier with approximately 86 daily departures to 34 cities in
16 states, the Bahamas, Mexico, and U.S. Virgin Islands.





Colgan operates an all-turboprop fleet
under a regional airline capacity purchase agreement with Continental Airlines,
Inc. (“Continental”), and also under revenue pro-rate agreements with
Continental, United Air Lines, Inc. (“United”) and US Airways Group, Inc. (“US
Airways”).  Colgan’s operations are focused primarily in the
northeastern United States and in Texas.  As of December 31, 2008,
Colgan, through its pro-rate operations, offered 225 daily departures to 39
destinations in 11 states.  Colgan operated under revenue pro-rate
agreements 14 Saab 340 aircraft as Continental Connection from Continental’s hub
airport in Houston, ten Saab 340 aircraft as United Express at
Washington/Dulles, and two Beech 1900 aircraft and ten Saab 340 aircraft as US
Airways Express, with hub locations at New York/LaGuardia and
Boston.  Colgan operated under a capacity purchase agreement 15 Q400
aircraft providing 94 daily departures to 20 cities in 14 states and two
Canadian provinces for Continental at its global hub at
Newark/Liberty International
Airport.


63
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


1.  Description
of Business (continued)




As shown
in the following table, the Company’s operating aircraft fleet consisted of 142
CRJs and 51 turboprop aircraft at December 31, 2008.





Aircraft
      Type
                              
                              Number
      of Aircraft
                              
                              Standard
      Seating ConfigurationCRJ-200
                              
                              124
                              
                              50CRJ-900
                              
                              18
                              
                              76Total
      Pinnacle aircraft
                              
                              142Saab
      340
                              
                              34
                              
                              34Q400
                              
                              15
                              
                              74Beech
      1900D
                              
                              2
                              
                              19Total
      Colgan aircraft
                              
                              51Total
      aircraft
                              
                              193





All
amounts contained in the notes to the consolidated financial statements are
presented in thousands, with the exception of years, destinations, departures,
per share amounts and number of aircraft.





In
addition to the classes of stock presented on the face of the consolidated
balance sheets, the Company’s capital structure includes 1,000 shares of
preferred stock, par value $0.01 per share and 5,000 shares of Series common
stock, par value $0.01 per share.  No shares have been issued from
either of these classes of stock.





2.  Significant Accounting Policies





Revenue
Recognition





Passenger
revenues and ground handling revenues are recognized in the period the services
are provided.  Under the Company’s capacity purchase arrangements with
Delta and Continental, the Company receives a fixed-fee, as well as
reimbursement of specified costs on a gross or net basis with the potential of
additional revenue incentives from its partners when the Company’s operational
performance exceeds certain metrics.  The reimbursement of specified costs,
known as “pass-through costs,” may include aircraft ownership costs, passenger
liability and hull insurance, aircraft property taxes, landing fees and
catering.





Under the
Company’s Delta Connection Agreement (“DCA”), the Company defers certain revenue
primarily related to maintenance.  For example, the Company receives
monthly payments based on contractual rates per departure and block hour for
heavy maintenance activities not expected for several years.  To the
extent that the ultimate maintenance costs incurred are less than amounts
collected, the Company will refund to Delta the excess.  Conversely,
the Company bears the risk that the maintenance costs incurred exceed the
payments generated from the contractual rates.  The Company defers the
revenue related to these maintenance deposits, and will recognize the revenue
when it performs the underlying maintenance services.  Deferred
revenue is included in the Company’s consolidated balance sheets, and includes
revenue related to the sale of the Company’s bankruptcy claim against Northwest,
which is described in detail in Note 3.


64
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


2.  Significant
Accounting Policies (continued)





Two
significant changes to the Company’s pass-through costs during 2007 compared to
prior years relate to changes in its CRJ-200 Airline Services Agreement with
Delta (the “CRJ-200 ASA”).  Beginning in 2007, fuel is provided at no cost
by Delta, and aircraft rent was reduced to rates that approximate market
rates.  See Note 3 for additional information.  Additionally, because
many of the Company’s expenses are reimbursable expenses,  Company’s
major airline partners sometimes negotiate contracts on the Company’s behalf to
reduce the reimbursable costs and maximize the economic benefits of an
agreement.  For example, during 2008, Delta negotiated an engine
maintenance agreement which included maintenance on CRJ-200 aircraft within the
fleets of some of its subsidiaries as well as Pinnacle.  In situations
where the Company’s major partner negotiates an agreement on the Company’s
behalf such that the maintenance vendor is the primary obligor for the
completion of the service, as defined by Emerging Issues Task Force (“EITF”)
Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent,
the Company’s revenue associated with these agreements is presented at the net
amounts billed for reimbursement.  Gross revenue of $10,269 is presented
net of expense of $10,269 in regional airline services revenue in the Company’s
consolidated statement of operations for the year ended December 31,
2008.  The Company earns margin on this revenue, which is presented
gross.  For all other items, and except as described above, all
revenue recognized under the Company’s capacity purchase contracts is presented
at the gross amount billed for reimbursement pursuant to EITF
99-19.





Under the
Company’s code-share agreements, the Company is reimbursed an amount per
aircraft designed to compensate the Company for certain aircraft ownership
costs. In accordance with EITF No. 01-08, Determining Whether an Arrangement
Contains a Lease, the Company has concluded that a component of its
revenue under the DCA and Continental CPA is rental income, inasmuch as the
agreements identify the code-share partner’s “right of use” of a specific type
and number of aircraft over a stated period of time. The amount deemed to be
rental income during 2008 was $30,961 and has been included in regional airline
services revenue on the Company’s consolidated statement of operations for the
year ended December 31, 2008.





The
Company also earns revenue from its pro-rate operating agreements with
Continental, United, US Airways, and under Essential Air Service (“EAS”)
contracts with the Department of Transportation (“DOT”).  Regional airline
service revenues are recognized when flights are completed.  Tickets are
sold and processed by the partner airlines and amounts due to the Company for
completed flights and incentive compensation are settled on a monthly basis.
Passenger tickets typically include segments flown by the Company and segments
flown by the partner airlines. Passenger revenues are based on a pro-rated share
of ticket prices earned by the Company for the passengers transported.  The
Company earns additional compensation based on the achievement of certain
performance metrics.  Revenue earned by the Company under its EAS contracts
with the DOT is recognized based on actual flights completed to and from
selected smaller cities and communities and is based on pre-determined
contractual rates.  In addition, the Company’s pro-rate operating agreement
with Continental includes a guarantee fee provision whereby a payment is either
made by or to the Company to the extent that scheduled block hours for any given
month are higher or lower than the guaranteed block hours.  For a
discussion of the Company’s code-share agreements, see Note 3.





Aircraft
Maintenance and Repair Costs





Aircraft maintenance, including planned
major maintenance activities, and repairs are expensed as incurred because
maintenance activities do not represent separately identifiable assets or
property units in and of themselves.  Rather, they serve only to
restore assets to their original operating condition.  Maintenance and
repairs incurred under power-by-the-hour maintenance contracts are accrued and
expensed when the contractual obligation exists.


65
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


2.  Significant
Accounting Policies (continued)





Capitalized
Interest





The Company accounts for capitalized interest in accordance with the provision
of Statement of Financial Accounting Standard (“SFAS”) No. 34, Capitalization of Interest
Cost, which requires the Company to capitalize interest on assets that
require a period of time to prepare them for their intended use.  The
Company is capitalizing interest, as part of the asset’s cost, on its aircraft
pre-delivery payments and on costs associated with its system implementation
project.  For the years ended December 31, 2008 and 2007, the Company
recorded gross interest expense of $36,451 and $11,783, respectively, of which
$1,790 and $2,930 was capitalized, respectively.  The Company did not
capitalize interest in the year ended December 31, 2006.





Cash
and Cash Equivalents and Restricted Cash





Cash equivalents consist of short-term,
highly liquid investments, which are readily convertible into cash and have
initial maturities of three months or less.





Restricted cash consists of
certificates of deposits and other similar instruments with various maturity
dates, all less than one year, and are used as collateral for standby letter of
credit facilities that the Company maintains for various vendors.  As
of December 31, 2008 and 2007, the Company had restricted cash of $5,417 and
$5,327, respectively.





Financial
Instruments





Fair values of receivables and
accounts payable approximate their carrying amounts due to the short period of
time to maturity.




The Company invests excess cash balances into overnight Eurodollar deposits and
collateralized repurchase agreements with banks at the end of each business day.
The deposits and agreements represent an unconditional obligation of the banks
to repay principal and repurchase securities on the next business day. The
overnight investment balance was $1,695 and $21,602 at December 31, 2008 and
2007, respectively, and is included in cash and cash equivalents on the
Company’s consolidated balance sheets.





The Company is required to provide
standby letters of credit to support certain obligations that arise in the
ordinary course of business. Although the letters of credit are off-balance
sheet, the majority of obligations to which they relate are reflected as
liabilities in the consolidated balance sheet. Outstanding letters of credit
totaled $3,024 and $2,742 at December 31, 2008 and 2007,
respectively.





In
February 2005, the Company completed a private placement of $121,000 principal
amount of the Company’s 3.25% senior convertible notes due February 15, 2025
(the “Notes”).  The fair value of the Notes on December 31, 2008 was
$80,465, based on quoted market prices.  The Notes are normally
classified as noncurrent liabilities, except as of the end of a period preceding
the period when the Notes’ conversion option applies, in which case the entire
balance would be classified as a current liability.  As of December
31, 2008, the Company had an additional $534,857 of long-term notes payable,
which had a fair value of $483,506.  For further discussion, see Note
10.





Concentration
of Credit Risk





The
Company’s accounts receivable is uncollateralized.  Because 71% of the
Company's 2008 revenues were derived from Delta, 76%, or approximately $24,000,
of the Company’s accounts receivable balance represents amounts due from Delta
at December 31, 2008.


66
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


2.  Significant
Accounting Policies (continued)





Spare
Parts and Supplies





Spare parts and supplies consist of
expendable parts and maintenance supplies related to flight equipment, which are
carried at cost using the first-in, first-out (FIFO) method. Spare parts and
supplies are recorded as inventory when purchased and charged to expense as
used.  Fleet retirement reserve for spare parts expected to be on hand
at the date the aircraft are retired from service is provided over the remaining
estimated useful life of the related aircraft equipment. In addition, an
allowance for spare parts currently identified as obsolete or excess is
provided.  These allowances are based on management estimates and are
subject to change.





Property
and Equipment





Property
and equipment, consisting primarily of aircraft, aircraft rotable spare parts
and other property, are stated at cost, net of accumulated depreciation.
 Expenditures for major renewals, modifications and improvements are
capitalized to extend the useful life of the asset.  Property and equipment
are depreciated to estimated residual values using the straight-line method over
the estimated useful lives of the assets.  Depreciation of owned aircraft
and aircraft rotable spares is determined by allocating the cost, net of
estimated residual value, over the asset’s estimated useful life. 
Depreciation of leased aircraft is determined by allocating the cost, net of
estimated residual value, over the shorter of the asset’s useful life or the
remaining lease terms of related aircraft.  Modifications that
significantly enhance the operating performance and/or extend the useful lives
of property and equipment are capitalized and amortized over the lesser of the
remaining life of the asset or the lease term, as applicable.







The
depreciation of property and equipment over their estimated useful lives, and
the determination of any salvage values, requires management to make judgments
about future events. Because the Company utilizes many of its assets over
relatively long periods, periodic evaluations are performed to determine whether
adjustments to the estimated service lives or salvage values are necessary to
ensure these estimates properly match the economic use of the asset. This
evaluation may result in changes in the estimated lives and residual values used
to depreciate the aircraft and other equipment. These estimates affect the
amount of depreciation expense recognized in a period and, ultimately, any gain
or loss on the disposal of the asset.





Estimated
useful lives and residual values for the Company’s property and equipment are as
follows:





Depreciable
      Life
                  
                  Residual
      ValueOwned
      AircraftRegional
      jets
                  
                  25
      years
                  
                  10%Turboprops
                  
                  15-25
      years
                  
                  8 -
      10%Aircraft
      rotablesRegional
      jets
                  
                  25
      years
                  (1)
                  10
      - 40%Turboprops
                  
                  15-25
      years
                  
                  8 -
      10%Ground
      and shop equipment
                  
                  10
      years
                  
                  0%Office
      equipment
                  
                  10
      years
                  
                  0%Software
      and computer equipment
                  
                  3-7
      years
                  
                  0%Leasehold
      improvements
                  
                  2-18
      years
                  
                  0%Vehicles
                  
                  5
      years
                  
                  0%


_____________________




(1)
              Depreciation is determined by allocating the cost,
      net of estimated residual value, over the shorter of the asset’s
      useful life or the remaining lease terms of related aircraft, as
      applicable.







67
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


2.  Significant
Accounting Policies (continued)





Long-Lived
and Intangible Assets





The Company evaluates whether there has
been an impairment of its long-lived and intangible assets when indicators of
impairment exist.  Impairment exists when the carrying amount of a
long-lived or intangible asset is not recoverable (undiscounted cash flows are
less than the asset’s carrying value) and exceeds its fair value. If it is
determined that an impairment has occurred, the carrying value of the long-lived
asset is reduced to its fair value.  When considering whether or not
impairment of long-lived assets exists, the Company groups similar assets
together at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities and compares the
undiscounted cash flows for the entire group of assets to the carrying value of
the same group of assets.  Asset groupings are typically done at the
fleet or contract level.  Because impairment indicators existed during
the second quarter of 2008 related to long-lived assets supporting the Company’s
pro-rate operations, the results of the Company’s impairment analysis indicated
no asset impairment.  Additionally, the Company concluded that there
were no indicators of long-lived or intangible asset impairment at December 31,
2008.





The
Company’s most significant intangible asset is its contractual rights, which
were acquired from Northwest.  Among other things, the contractual
rights granted Pinnacle the right to operate an additional ten CRJs during the
remaining term of the CRJ-200 ASA.  In consideration of these
contractual rights, the Company paid $15,115 to Northwest.  The
acquired contractual rights are being amortized as an adjustment to revenue on a
straight-line basis over the remaining term of the CRJ-200 ASA.





The
following is a summary of the Company’s intangible assets:


Gross
                                Carrying
                                Amount
                              
                              
                              Accumulated
      Amortization
                                December
      31, 2008
                              
                              
                              Carrying
                                Valueas
      of
                                December
      31,
                                2008
                              
                              
                              Amortization
                                Expense
                                Recognized
                                during
      2008
                              
                              
                              Estimated
                                Annual
                                Amortization
                                Expense
      for
                                2009
      - 2013Contractual
      rights
                              
                              $
                              15,115
                              
                              
                              $
                              (4,288)
                              
                              
                              $
                              10,827
                              
                              
                              $
                              1,203
                              
                              
                              $
                              1,203Code-share
      andEAS
      agreements
                              
                              
                              3,900
                              
                              
                              
                              (748)
                              
                              
                              
                              3,152
                              
                              
                              
                              390
                              
                              
                              
                              390Airport
      slots
                              
                              
                              750
                              
                              
                              
                              (144)
                              
                              
                              
                              606
                              
                              
                              
                              75
                              
                              
                              
                              75Total
                              
                              $
                              19,765
                              
                              
                              $
                              (5,180)
                              
                              
                              $
                              14,585
                              
                              
                              $
                              1,668
                              
                              
                              $
                              1,668





Investments





The
Company invests excess cash balances primarily in short-term money market
instruments, short-term marketable debt securities and highly liquid equity
securities.  The Company also holds auction rate securities (“ARS”),
which prior to events that developed during the first quarter of 2008 that
impaired the investments’ liquidity, met the Company’s stated investment
policy.  Investments in marketable securities are classified as
available-for-sale and presented at their estimated fair values based on quoted
market prices for those securities, in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities.  In instances when quoted market
prices are unavailable, such as for our ARS at December 31, 2008, the Company
estimates fair values in accordance with SFASNo. 157,Fair Value Measurements(“SFAS 157”), which is discussed
below. For further discussion, see Note 7 and Note 9.


68
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


2.  Significant
Accounting Policies (continued)





Fair
Value




On January 1, 2008, the Company adopted SFAS 157.  SFAS 157 defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.  SFAS 157 applies to
reported balances that are required or permitted to be measured at fair value
under existing accounting pronouncements; accordingly, the standard does not
require any new fair value measurements of reported balances.  There
is a one-year deferral of the adoption of the standard as it relates to
non-financial assets and liabilities. Accordingly, this standard did not apply
to the Company’s goodwill and intangible assets during 2008.  The
Company adopted the remaining provisions of SFAS 157 on January 1,
2009.  Although the adoption of SFAS 157 did not materially affect its
financial condition, results of operations, or cash flows, the Company is now
required to provide additional disclosures as part of its financial statements.
For further discussion, see Note 7.





Goodwill




The
Company’s financial statements include amounts recorded in accordance with SFAS
No. 142, Goodwill and Other
Intangible Assets(“SFAS 142”).  Goodwill represents the excess
of the purchase price over the fair value of acquired net
assets.  Goodwill in the amount of $22,449 was recorded in connection
with Northwest’s acquisition of the Company in 1997.  Similarly,
goodwill in the amount of $9,785 was recorded in connection with the 2007
acquisition of Colgan, all of which became impaired during 2008.




Goodwill is reviewed at least annually for impairment by comparing the fair
value of each of the Company’s reporting units with its carrying
value.  The Company’s reporting units are Pinnacle and
Colgan.  Fair value is determined using a discounted cash flow
methodology and a market approach and includes management’s assumptions on
revenue growth rates, operating margins, discount rates and expected capital
expenditures.  The Company performs its impairment test of each
reporting unit’s goodwill on an annual basis at October 1 and, if certain events
or circumstances indicate that an impairment loss may have been incurred, on an
interim basis.  For additional information, see Note 6.





Employee
Health-Care Related Benefits and Accruals





The
Company is self-insured for the majority of group health insurance costs,
subject to specific retention levels.  Liabilities associated with the
risks that are retained by the Company are not discounted.  The Company
records a liability for health insurance claims based on its estimate of claims
that have been incurred but are not yet reported to the Company by its plan
administrator.  These estimates are largely based on historical claims
experience and severity factors. The estimated accruals for these liabilities
could be significantly affected if future occurrences and claims differ from
these assumptions and historical trends.  Additionally, the Company offers
its pilots limited post-retirement health care benefits, which are accrued over
the service periods in accordance with SFAS No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions.  For further
discussion, see Note 17.





Derivative
Instruments





The
Company accounts for derivative financial instruments in accordance with the
provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), as amended and
interpreted. SFAS 133 requires the Company to measure all derivatives at fair
value and to recognize them in the balance sheet as an asset or liability with
the offset to accumulated other comprehensive income/loss (“OCI”), net of taxes
and hedge ineffectiveness.  These gains or losses are recognized in
the Company’s consolidated statements of operations as interest expense or
income over the life of the underlying permanent aircraft
financing.  To the extent that the Company is overhedged and the
change in the fair value of the hedge does not perfectly offset the change in
cash flows resulting from a change in interest rates, the ineffective portion is
immediately recognized as interest expense or income in the Company’s
consolidated statements of operations.  The ineffective portion of the
hedge is determined by comparing changes in the actual hedge to changes in a
hypothetical perfect hedge.


69
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


2.  Significant
Accounting Policies (continued)





For all
cash flow hedges, the Company expects its hedges will be highly effective during
their terms in offsetting changes in cash flow attributable to the hedged risk.
The Company performs both prospective and retrospective assessment at least
quarterly, including assessing the possibility of counterparty default.  To
assess effectiveness, the Company performs a regression analysis at the
inception of each hedge and performs a similar analysis in each reporting period
during the term of the hedge.   The Company’s assessment considers the
various risks that could cause ineffectiveness and considers scenarios where the
hypothetical derivative does not equal the actual derivative.  If the
Company determines that a derivative is no longer expected to be highly
effective, the Company will discontinue hedge accounting prospectively and
recognize subsequent changes in the fair market value of the hedge in the
consolidated statements of operations as interest expense/income rather than
deferring the amount in OCI.





At
December 31, 2008, the Company had no unsettled cash flow hedges.  For
further discussion of the Company’s derivative instruments, see Note
8.





Principles
of Consolidation





The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
and include the accounts of Pinnacle Airlines Corp. and its wholly owned
subsidiaries, Pinnacle Airlines, Inc. and Colgan Air, Inc.  All
intercompany transactions have been eliminated in consolidation.  The
Company’s acquisition of Colgan occurred on January 18, 2007, and as such,
information presented for 2006 includes only Pinnacle Airlines Corp. and
Pinnacle Airlines, Inc.





Segment
Reporting





SFAS 131,
Disclosures about Segments of
an Enterprise and Related Information, requires disclosures related to
components of a company for which separate financial information is available to
and evaluated regularly by the company’s chief operating decision maker when
deciding how to allocate resources and in assessing
performance.  Prior to January 1, 2007, the Company operated in one
reportable business segment consisting of regional airline services provided to
Northwest.  As of December 31, 2008, the Company had two reportable
segments consisting of Pinnacle and Colgan.  For additional
information regarding the Company’s reportable segments, see Note
4.





Use
of Estimates





The
preparation of the Company’s consolidated financial statements requires the use
of estimates and assumptions that affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses and the disclosure of
contingent liabilities.  Management makes its best estimate of the
ultimate outcome for these items based on historical trends and other
information available when the financial statements are
prepared.  Changes in estimates are recognized in accordance with the
accounting rules for the estimate, which is typically in the period when the new
information becomes available to management.





Significant
Concentration





One
supplier manufactures the Company’s CRJ and Q400 series aircraft, which
comprises the majority of the Company’s operating fleet. One supplier also
manufactures the CRJ engines. These suppliers also provide the Company with
parts, repair and other support services for the CRJ aircraft and
engines.





Reclassification





Certain prior year amounts, all of
which were considered immaterial, have been reclassified to conform to current
year classifications.


70
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


3.  Code-share Agreements with Partners





The
Company’s operating contracts fall under two categories: capacity purchase
agreements and revenue pro-rate agreements.  The following is a
summary of the percentage of regional airline services revenue attributable to
each contract type and code-share partner for the year ended December 31,
2008.








Year
      Ended December 31, 2008Source
      of Revenue
                
                Capacity
                  Purchase
                  Agreements
                
                Pro-Rate
                  Agreements
                
                TotalDelta
                
                71%
                
                -
                
                71%Continental
                
                6%
                
                8%
                
                14%US
      Airways
                
                -
                
                8%
                
                8%United
                
                -
                
                5%
                
                5%Essential
      Air Service
                
                -
                
                2%
                
                2%Total
                
                77%
                
                23%
                
                100%





Capacity
Purchase Agreements





The
Company’s preferred contractual relationships with major airlines are structured
as capacity purchase arrangements.  Under capacity purchase
agreements, major airline partners purchase the Company’s flying capacity by
paying pre-determined rates for specified flying, regardless of the number of
passengers on board or the amount of revenue collected from
passengers.  These arrangements typically include incentive payments
when the Company meets certain operational performance
measures.  Additionally, certain operating costs such as fuel,
aircraft rent or ownership costs, aviation insurance premiums, certain ground
handling and airport related costs, and property taxes are reimbursed or paid
for directly by the partner, which eliminates the Company’s risk associated with
a change in the price of these goods or services.  The Company earns
additional revenue for costs reimbursed by the partner due to the contractual
margin payments added to the reimbursed cost when the Company invoices its
partner.  Conversely, while the Company bears no risk for the change
in the prices of costs paid directly by the partner, the Company also earns no
additional revenue related to the contractual margin added to reimbursed
costs.





CRJ-200
ASA





The
Company, through its Pinnacle subsidiary, provides regional jet service to Delta
under an amended and restated airline services agreement (the “CRJ-200 ASA”)
that became effective as of January 1, 2007 and expires in December
2017.  At the end of its term in 2017, the CRJ-200 ASA automatically
extends for additional five-year periods unless Delta provides notice to the
Company two years prior to the termination date that it does not plan to extend
the term.





On
September 14, 2005, Northwest filed for protection under Chapter 11 of the
United States Bankruptcy Code. Throughout 2006, the Company continued to operate
under its 2002 ASA while Northwest continued with its bankruptcy
proceedings.  On December 15, 2006, the Company and Northwest agreed
to the terms of the current CRJ-200 ASA that became effective as of January 1,
2007, and entered into an Assumption and Claims Resolution Agreement (the
“Assumption Agreement”).  In addition, the Company entered into a
Stock Purchase Agreement pursuant to which it purchased its Series A Preferred
Share (the “Preferred Share”) previously held by Northwest for $20,000 on
January 4, 2008. This amount is included in accrued expenses and other current
liabilities on the Company’s consolidated balance sheet at December 31,
2007.  The Preferred Share has a stated value and liquidation
preference of $100 per share and gave Northwest the right to appoint two
directors to the Company’s Board of Directors, as well as certain other
rights.  No dividends were payable to the shareholder of the Preferred
Share.  After this purchase, Northwest no longer owned any shares of
the Company’s stock and is no longer a related party of the
Company.


71
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


3.  Code-share
Agreements with Partners (continued)





The
CRJ-200 ASA provided for the Company to take delivery of 17 additional CRJ-200
aircraft during 2007.  The Company took delivery of 15 CRJ-200
aircraft during the three months ended March 31, 2007, increasing Pinnacle’s
fleet to 139 aircraft as of March 31, 2007.  Two additional CRJ-200s
were scheduled to be delivered to the Company by the end of 2007.  The
retention of these aircraft as permanent additions to the Company’s fleet was
contingent upon Pinnacle reaching an agreement with the Air Line Pilots
Association (“ALPA”), the union representing Pinnacle’s pilots, for an amended
collective bargaining agreement by March 31, 2007.  Pinnacle did not
reach agreement with ALPA, and, as a result, Northwest gave the Company notice
during April 2007 that it would transition these 15 aircraft to one of its
wholly owned subsidiaries.  Further, the Company did not receive the
two remaining aircraft originally scheduled to be delivered in
2007.





During
the three months ended September 30, 2007, the Company and Northwest agreed to
defer the transition of these 15 aircraft, originally scheduled to begin in
September 2007, to allow Northwest to more efficiently introduce the aircraft
into service at its wholly owned subsidiary.  In exchange, Northwest
agreed to pay the Company $1,500 to compensate it for the costs associated with
the delay.  The Company recorded this payment as deferred revenue,
which was recognized ratably into operating revenue during the transition
period, which lasted through the third quarter of 2008.  This
transition was completed in August 2008, and Pinnacle operated a fleet of 124
CRJ-200 aircraft under the CRJ-200 ASA as of December 31, 2008.





Under the
Assumption Agreement, Northwest and the Company agreed that the Company would
receive an allowed unsecured claim of $377,500 against Northwest in its
bankruptcy proceedings as settlement of all amounts that Northwest may owe to
the Company for pre-petition claims and the economic adjustments provided for in
the CRJ-200 ASA.  The claim would have been reduced by up to $42,500
if the Company had reached an agreement with ALPA allowing the 17 additional
CRJ-200 aircraft in Pinnacle’s fleet to be committed for up to ten
years.  On January 3, 2007, the Company agreed to assign an aggregate
of $335,000 of its $377,500 stipulated unsecured claim to several third parties
for aggregate proceeds of approximately $282,900, net of expenses.  At
March 31, 2007, the Company estimated the fair value of its remaining $42,500
claim to be approximately $31,900, for a total expected value for the entire
stipulated unsecured claim of approximately $314,800.





The
unsecured claim was intended to compensate the Company for pre-petition account
receivables and foregone future earnings under the 2002 ASA, and amounts owed at
the time of Northwest’s bankruptcy.  Therefore, the Company is
recognizing the $271,900, the fair value of its stipulated unsecured claim in
excess of the $42,900 pre-petition receivables, over the 11-year term of the
CRJ-200 ASA.  No gain or loss was recognized relating to the sale and
assignment of $335,000 of the unsecured claim.  Additionally, as the
Preferred Share was only determined to have a nominal fair value, the Company
determined its agreement to pay $20,000 to purchase this share should be treated
as a payment in respect of entering into the CRJ-200
ASA.  Consequently, the Company reduced the deferred CRJ-200 ASA
revenue by $18,858, which represented the present value of this obligation as of
January 1, 2007.





Although
the Company was entitled to the remaining $42,500 of its unsecured claim against
Northwest on March 31, 2007, the Company did not immediately sell
it.  On June 29, 2007, the Company sold the claim to Goldman Sachs
Credit Partners L.P. (“Goldman Sachs”) for a net purchase price of
$27,731.  Under the agreement, Goldman Sachs received 941 shares of
new Northwest common stock that the Company had previously received in respect
of the assigned portion of the stipulated claim, and received subsequent
distributions of Northwest shares made in respect of the assigned portion of the
stipulated claim pursuant to Northwest’s plan of
reorganization.  During the year ended December 31, 2007, the Company
recognized a nonoperating loss on the sale of this claim of $4,144, which
represents the difference between the $31,875 fair value of the claim as of
March 31, 2007 and the sale proceeds of $27,731.


72
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


3.  Code-share
Agreements with Partners (continued)





The
following table summarizes the amounts previously described, which resulted in
the recognition of deferred revenue related to the Company’s CRJ-200 ASA with
Delta:





Proceeds
      received, net of expenses, for $335,000 of total $377,500
      claim
                      
                      $
                      282,900Fair
      value, measured at March 31, 2007, of remaining $42,500 of
      claim
                      
                      
                      31,900Less:  Amounts
      applied to pre-petition receivables
                      
                      
                      (42,900)Fair
      value of unsecured claims in excess of amount applied to pre-petition
      receivables
                      
                      
                      271,900Less:  Present
      value of $20,000 liability for preferred share, measured at January 1,
      2007
                      
                      
                      (18,858)Amount
      recognized as deferred revenue
                      
                      $
                      253,042




The
following table includes the non-cash revenue components of the Company’s
CRJ-200 ASA with Delta:





BeginningBalance
                                        atJanuary
      1, 2007
                                      
                                      Additions
                                        During
                                        2007
                                      
                                      Amount
                                        Recognized
                                        in
      2007
                                      
                                      Amount
                                        Recognized
                                        in
      2008
                                      
                                      EndingBalance
      at
                                        December
      31,2008Deferred
      revenue from saleof
      unsecured claim(1)
                                      
                                      $
                                      -
                                      
                                      $
                                      253,042
                                      
                                      $
                                      (22,330)
                                      
                                      $
                                      (23,071)
                                      
                                      $
                                      207,641Aircraft
      delivery fees
                                      
                                      
                                      -
                                      
                                      
                                      1,404
                                      
                                      
                                      (122)
                                      
                                      
                                      (128)
                                      
                                      
                                      1,154Deferred
      aircraft return fee
                                      
                                      
                                      -
                                      
                                      
                                      1,500
                                      
                                      
                                      (600)
                                      
                                      
                                      (900)
                                      
                                      
                                      -Contractual
      rights asset
                                      
                                      
                                      (13,233)
                                      
                                      
                                      -
                                      
                                      
                                      1,203
                                      
                                      
                                      1,203
                                      
                                      
                                      (10,827)Total
                                      
                                      $
                                      (13,233)
                                      
                                      $
                                      255,946
                                      
                                      $
                                      (21,849)
                                      
                                      $
                                      (22,896)
                                      
                                      $
                                      197,968





(1)
            Amount
      is net of offset for pre-petition receivables of approximately $42,900 and
      amounts payable to Northwest for the Preferred Share of
      $20,000.





The
Company expects to recognize non-cash CRJ-200 ASA-related revenue of $21,996 per
year in the years 2009 – 2017.





Under the
CRJ-200 ASA, the Company receives the following payments from
Delta:





Reimbursement
payments:  The Company receives monthly reimbursements for all
expenses associated with its operations under the CRJ-200 ASA and relating to:
basic aircraft and engine rentals; aviation liability, war risk and hull
insurance; third-party deicing services; CRJ-200 third-party engine and airframe
maintenance; hub and maintenance facility rentals; passenger security costs;
ground handling in cities where Delta has ground handling operations; Detroit
landing fees and property taxes.





The
Company has no direct financial risk associated with cost fluctuations for these
items because the Company is reimbursed by Delta for the actual expenses
incurred.  The CRJ-200 ASA provides that Delta will supply jet fuel to
Pinnacle at no charge beginning January 1, 2007, although Pinnacle is still
required to meet certain fuel usage targets.  As a result, fuel
attributable to CRJ-200 ASA operations is provided directly by Delta and is no
longer recorded in the Company’s consolidated statements of
operations.  Prior to 2007, the Company purchased fuel from Northwest
and fuel expense was reimbursed by Northwest.  The Company subleases
its CRJ-200 aircraft from Delta and Delta reimburses CRJ-200 aircraft rental
expense in full.  Also effective January 1, 2007, Pinnacle’s aircraft
lease rates were reduced to rates that approximated market conditions at that
time.


73
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


3.  Code-share
Agreements with Partners (continued)





Payments based on pre-set
rates:  Under the CRJ-200 ASA, the Company is entitled to
receive semi-monthly payments for each block hour and departure it completes 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 CRJ-200 ASA that are not covered by the reimbursement
payments.  The substantial majority of these expenses relate to labor
costs, ground handling costs in cities where Delta does not have ground handling
operations, landing fees in cities other than Detroit, overhead and
depreciation.  These rates will be in effect (subject to indexed
annual inflation adjustments) until 2013.  Beginning in 2013, the rates
will be reset through good faith negotiations every fifth year.  If the
Company and Delta are unable to reach an agreement on the revised rates, the
rates will be reset through arbitration.





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 year ended December 31,
2006 was 10%.  Under the CRJ-200 ASA, effective January 1, 2007,
Pinnacle’s target operating margin under the CRJ-200 ASA was reduced to
8%.  The portion of any margin payments attributable to reimbursement
payments will always be equal to the targeted operating margin for the relevant
period.  However, since the margin pre-set rate payments are not based
on the actual expenses incurred, if the Company’s actual expenses differ from
these payments, its actual operating margin could differ from its target
operating margin.





Beginning in 2008, Delta no longer
guarantees Pinnacle’s minimum operating margin, although Pinnacle will be
subject to an 8% margin ceiling.  If the actual operating margin
associated with CRJ-200 ASA operations for any year beginning with 2008 exceeds
the 8% target operating margin but is less than 13%, the Company will make a
year-end adjustment payment to Delta in an amount equal to half of the excess
above 8%.  If the actual operating margin associated with CRJ-200 ASA
operations for any year beginning with 2008 exceeds 13%, the Company will pay
Delta all of the excess above 13% and half of the excess between 8% and
13%.  The CRJ-200 ASA contains a provision requiring the Company to
allocate its overhead costs after adding 24 regional aircraft with other
partners, thereby providing for a rate reduction to Delta.





Disputes: The Company is
currently engaged in discussions with Delta involving the interpretation of
various components of the CRJ-200 ASA.  If the parties are unable to
reach a mutually agreeable resolution related to these matters, the parties may
elect to resolve the issues through arbitration.  The potential
outcome of these disputed matters ranges from an annual increase in the payments
received from Delta of approximately $2,800 to a decrease in payments received
from Delta of as much as $4,800.  Adverse determinations in these
matters could result in a loss to the Company of up to $11,900 for disputed
amounts accruing through December 31, 2008.





Related
party:  Prior to the January 4, 2008 repurchase of its Series A
Preferred Share, Northwest was a related party of the Company.  During
the years ended December 31, 2007 and 2006, operating revenues of $590,648 and
$822,041, respectively, included transactions with
Northwest.  Operating expenses of $199,552 and $404,093 for the years
ended December 31, 2007 and 2006, respectively, included transactions with
Northwest.  As of December 31, 2007, net amounts due to and from
Northwest were $1,864 and $20,370, respectively.





Delta
Connection Agreement





On April
27, 2007, the Company entered into a ten-year capacity purchase agreement with
Delta to operate 16 CRJ-900 aircraft, each for ten years, as a Delta Connection
Carrier (the “Delta Connection Agreement”, or “DCA”).  Delta also has
the option to add an additional seven CRJ-900 aircraft under the
DCA.  Scheduled service began on December 1, 2007.  As of
December 31, 2008, Pinnacle had taken delivery of 14 of the 16 CRJ-900 aircraft,
with 11 operating.  Pinnacle operated 14 of the 16 CRJ-900 aircraft
under the DCA as of February 15, 2009.


74
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


3.  Code-share
Agreements with Partners (continued)





On July
17, 2008, the Company and Delta amended the DCA whereby the parties agreed to
delay the in-service dates for CRJ-900 aircraft from January through May
2009. Pinnacle accepted delivery of five of these aircraft during the third
and fourth quarters of 2008, with the remaining two set to deliver in the second
quarter of 2009. As of February 2, 2009, all five of these aircraft were in
service and supporting DCA operations. The Company and the aircraft manufacturer
have agreed to defer delivery of the two remaining CRJ-900 aircraft to Pinnacle
to dates commensurate with the new in-service dates under the
DCA.




On October 1, 2008, the Company entered into an agreement with Delta to operate
on a short-term basis seven additional CRJ-900 aircraft that were formerly
operated by another Delta Connection carrier (the “Temporary Aircraft”). The
Company is temporarily operating these seven CRJ-900 aircraft until the
Company’s seven remaining permanent aircraft enter service under the
DCA.  Pinnacle pays a nominal amount of rent to Delta for these
aircraft and Pinnacle does not receive any reimbursement or margin payments
related to this aircraft rent.  Other than aircraft ownership costs,
Pinnacle receives regular compensation under the DCA related to the operation of
these seven Temporary Aircraft.  As of December 31, 2008, Pinnacle was
operating all seven of these Temporary Aircraft. The Temporary Aircraft will be
returned to Delta during the first and second quarters of 2009 as Pinnacle
places the remaining CRJ-900 aircraft into service.





Continental
Airlines





On
February 5, 2007, the Company entered into a capacity purchase agreement (the
“Continental CPA”), expiring in December 2017, with Continental under which
Colgan operates Q400 regional aircraft predominantly out of Continental’s hub at
Newark/Liberty International Airport.  As of December 31, 2008 Colgan
operated 15 Q400 aircraft, most of which were delivered and placed in service in
the first half of 2008, with the final two aircraft delivering in July of
2008.  The term of the agreement is ten years, ending December
2017.





On
January 13, 2009, the Company amended the Continental CPA to operate an
additional 15 Q400 aircraft. The terms of the Continental CPA were extended
until August 31, 2020. The aircraft will be placed into service for Continental
beginning in September 2010. The aircraft have scheduled delivery dates from
August 2010 through April 2011.





Revenue
Pro-Rate Agreements





The
contractual relationships the Company acquired through its purchase of Colgan in
January 2007 included revenue pro-rate code-share agreements, which allow Colgan
to market its operations under its partners’ brands.  Under these
agreements, Colgan generally manages its own inventory of unsold capacity and
sets fare levels in the local markets that it serves.  Colgan retains
all of the revenue for passengers flying within its local markets that do not
connect to its partners’ flights.  For connecting passengers, the
passenger fare is pro-rated between Colgan and its major airline partner,
generally based on the distance traveled by the passenger on each segment of the
passenger’s trip.  Under these agreements, Colgan bears the risk associated
with fares, passenger demand, and competition within its
markets.  Colgan incurs all of the costs associated with operating
these flights, including those costs typically reimbursed or paid directly by
the major airline under a capacity purchase agreement. In some instances, Colgan
has the ability to earn incentive-based revenue should it achieve specified
performance metrics.





Colgan’s
financial performance is also subject to seasonal
fluctuations.  Colgan has historically reported lower unit revenue (as
measured by revenue per available seat mile) during the first and fourth
quarters each year when demand for air travel declines, and reported higher unit
revenue during the second and third quarters each year when air travel demand is
higher.


75
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


3.  Code-share
Agreements with Partners (continued)





Continental
Airlines





As of
December 31, 2008, the Company, through its Colgan subsidiary, operated 14 Saab
340 aircraft based in Houston, Texas under a pro-rate agreement with Continental
(the “Continental Agreement”).  Colgan entered into the Continental
Agreement in January 2005 for a term of five years.  In addition to
receiving pro-rated passenger revenue as described above under “Revenue Pro-Rate
Agreements,” the Company receives an incentive payment for each passenger
connecting onto or from a Continental flight in Houston.  These
incentive payments adjust every January 1 and July 1 for anticipated changes in
the cost of fuel and changes in certain station-related costs over the
subsequent six-month period.





US
Airways





As of
December 31, 2008, the Company, through its Colgan subsidiary, operated ten Saab
340 aircraft and two Beech 1900D aircraft under a pro-rate agreement with US
Airways (the “US Airways Agreement”).  As of February 15, 2009, the
Company had ceased operations with the two Beech
1900.  In 1999, Colgan
entered into the US Airways Agreement to provide passenger service and cargo
service under the name “US Airways Express.” The current US Airways Agreement
became effective on October 1, 2005 under terms similar to the 1999
agreement and has a three-year term.  The term of the agreement
automatically extends in six-month increments beyond the September 30, 2008
termination date unless terminated by either party upon 120 days
notice.  The Company expects to enter into a revised agreement with US
Airways on substantially similar terms in the near future.





United
Air Lines





In
October 2003, Colgan entered into a code-share agreement with United to include
the United flight designator code on all United flights operated by
Colgan.  In October 2005, Colgan entered into a separate code-share
agreement with United to provide services as a United Express carrier (the
“United Agreement”).  The United Agreement was amended and restated
effective November 1, 2008 by the parties.  Colgan currently operates
ten Saab 340 aircraft under the name “United Express.” The United Agreement
expires on November 1, 2011 and is structured as a pro-rate agreement for which
the Company receives all of the fares associated with local passengers and an
allocated portion of the connecting passengers’ fares.  In addition,
United pays the Company a set passenger connect incentive fee for certain of the
markets that Colgan operates under the United Express Agreement.  The
passenger connect incentive may only be adjusted during the three-year term by
mutual consent of the parties.  The Company does have the right,
however, to cease serving these markets to the extent that its operations are
not profitable.  The Company pays all of the costs of operating the
flights, including sales and distribution costs.  Colgan jointly
coordinates with United all scheduling, inventory and pricing for each local
market it serves.





Essential
Air Service





In
addition to the code-share agreements described above, the Company, through its
Colgan subsidiary’s pro-rate networks, operates under agreements with the DOT to
provide subsidized air service to 11 communities as part of the Essential Air
Service program.  Colgan operates in three of these markets under its
US Airways Agreement, seven markets under its United Agreement, and one market
under its Continental Agreement.  During 2008, Colgan filed notice
with the DOT to vacate service in most of these communities, and subsequently
re-filed to serve these communities for higher subsidies to offset rising fuel
and other operating costs. The DOT subsequently re-awarded service in 11 of
these markets at a higher subsidy and, in some instances, a reduced number of
weekly round trips.  With the completion of these changes in its EAS
operations during the fourth quarter of 2008, Colgan operated in 11 markets
under the EAS program as of December 31, 2008, as compared to 15 markets as of
December 31, 2007.


76
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


4.  Segment Reporting





During
the year ended December 31, 2007, the Company’s two reportable segments included
Pinnacle Airlines, Inc. combined with Pinnacle Airlines Corp. (the “Pinnacle
Segment”) and Colgan Air, Inc. (the “Colgan Segment”). Effective January 1,
2008, the Company revised its reportable segments to reflect a change in the
information used by the chief operating decision maker, and its two operating
segments now consist of the Company’s two subsidiaries, Pinnacle Airlines, Inc.
(“Pinnacle”) and Colgan Air, Inc. (“Colgan”).  Corporate overhead
costs incurred by Pinnacle Airlines Corp. are allocated to the operating costs
of each subsidiary.  Prior year presentation has been conformed to the
current year presentation.





The
following represents the Company’s segment data for the years ended December 31,
2008 and 2007.  Prior to the acquisition of Colgan, the Company
consisted of one reportable segment.  Therefore, segment data for the
year ended December 31, 2006 is not presented.





Year
      Ended December 31, 2008Pinnacle
      Segment
                    
                    
                    ColganSegment
                    
                    
                    Other/Eliminations
                    
                    
                    ConsolidatedOperating
      revenues
                    
                    $
                    613,197
                    
                    
                    $
                    251,696
                    
                    
                    $
                    (108)
                    
                    
                    $
                    864,785Depreciation
      and amortization
                    
                    
                    (13,346)
                    
                    
                    
                    (13,172)
                    
                    
                    
                    -
                    
                    
                    
                    (26,518)Impairment
      of goodwill and aircraftlease
      return costs
                    
                    
                    -
                    
                    
                    
                    (13,548)
                    
                    
                    
                    -
                    
                    
                    
                    (13,548)Operating
      income (loss)
                    
                    
                    53,520
                    
                    
                    
                    (7,913)
                    
                    
                    
                    -
                    
                    
                    
                    45,607Deferred
      tax asset (liability)
                    
                    
                    63,143
                    
                    
                    
                    (5,156)
                    
                    
                    
                    1,355
                    
                    
                    
                    59,342Identifiable
      intangible assets, net ofamortization
                    
                    
                    10,827
                    
                    
                    
                    3,758
                    
                    
                    
                    -
                    
                    
                    
                    14,585Goodwill
                    
                    
                    18,422
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    18,422Total
      assets
                    
                    
                    581,769
                    
                    
                    
                    388,430
                    
                    
                    
                    162,923
                    
                    
                    
                    1,133,122Capital
      expenditures (including non-cash)
                    
                    
                    251,337
                    
                    
                    
                    245,086
                    
                    
                    
                    2,799
                    
                    
                    
                    499,222





Year
      Ended December 31, 2007PinnacleSegment
                    
                    
                    ColganSegment
                    
                    
                    Other/Eliminations
                    
                    
                    ConsolidatedOperating
      revenues
                    
                    $
                    595,053
                    
                    
                    $
                    192,405
                    
                    
                    $
                    (84)
                    
                    
                    $
                    787,374Depreciation
      and amortization
                    
                    
                    (4,609)
                    
                    
                    
                    (4,656)
                    
                    
                    
                    -
                    
                    
                    
                    (9,265)Provision
      for (decreases) increases inlosses
      associated with
                      bankruptcyfilings
      of Northwest and Mesaba
                    
                    
                    1,194
                    
                    
                    
                    -
                    
                    
                    
                    (146)
                    
                    
                    
                    1,048Operating
      income (loss)
                    
                    
                    57,464
                    
                    
                    
                    (5,053)
                    
                    
                    
                    -
                    
                    
                    
                    52,411Deferred
      tax asset (liability)
                    
                    
                    87,672
                    
                    
                    
                    (2,325)
                    
                    
                    
                    6,794
                    
                    
                    
                    92,141Identifiable
      intangible assets, otherthan
      goodwill
                    
                    
                    12,030
                    
                    
                    
                    5,041
                    
                    
                    
                    -
                    
                    
                    
                    17,071Goodwill
                    
                    
                    18,422
                    
                    
                    
                    9,784
                    
                    
                    
                    -
                    
                    
                    
                    28,206Total
      assets
                    
                    
                    544,746
                    
                    
                    
                    144,183
                    
                    
                    
                    19,659
                    
                    
                    
                    708,588Capital
      expenditures (including non-cash)
                    
                    
                    116,792
                    
                    
                    
                    58,153
                    
                    
                    
                    -
                    
                    
                    
                    174,945





77
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


5.  Earnings (Loss) Per Share





The Company accounts for earnings
(loss) per share (“EPS”) in accordance with SFAS 128, Earnings Per
Share.  The following table sets forth the computation of basic
and diluted earnings per share:


Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Net
      (loss) income
                      
                      $
                      (4,907)
                      
                      
                      $
                      34,637
                      
                      
                      $
                      77,799Basic
      (loss) earnings per share
                      
                      $
                      (0.27)
                      
                      
                      $
                      1.66
                      
                      
                      $
                      3.55Diluted
      (loss) earnings per share
                      
                      $
                      (0.27)
                      
                      
                      $
                      1.50
                      
                      
                      $
                      3.54Share
      computation:Weighted
      average number of shares out-standing
      for basic EPS (1)
                      
                      
                      17,865
                      
                      
                      
                      20,897
                      
                      
                      
                      21,945Senior
      convertible notes (2)
                      
                      
                      -
                      
                      
                      
                      2,017
                      
                      
                      
                      -Share-based
      compensation (3)
                      
                      
                      -
                      
                      
                      
                      202
                      
                      
                      
                      29Weighted
      average number of shares out-standing
      for diluted EPS
                      
                      
                      17,865
                      
                      
                      
                      23,116
                      
                      
                      
                      21,974




1.
                                During
      2007, the Board of Directors of the Company authorized a share repurchase
      program, whereby the Company repurchased an aggregate of4,450
      shares of its own common stock, of which the weighted average number of
      shares repurchased during the current period are excluded frombasic
      EPS.  The Company accounted for the repurchase of this treasury
      stock using the cost method.2.
                                Dilution
      is calculated as follows:Increase in fully diluted share count =  $121,000   -     
      $121,000
                                  $13.22(a)      Average stock
                                  price during
                                  the year (b)(b)
                                Conversion
      price of the Notes(c)
                                Average
      stock price for the years ended Decemeber 31, 2008, 2007 and 2006 were
      $6.59, $16.96 and $7.53, respectively3.
                                Options
      to purchase 917, 201, and 935 shares of common stock were excluded from
      the diluted EPS calculation at December 31, 2008, 2007 and 2006,
      respectively, because their effect would be
      anti-dilutive.





6.
Impairment of Goodwill and Aircraft Lease Return Costs





Impairment
of Goodwill





In
accordance with SFAS 142, the Company performs an impairment test of goodwill on
an annual basis at October 1 and, if certain events or circumstances indicate
that it is more likely than not that an impairment loss may have been incurred,
on an interim basis. The analysis of potential impairment of goodwill requires a
two-step process. The first step is the estimation of fair value. If step one
indicates that impairment potentially exists, the second step is performed to
measure the amount of impairment, if any. Goodwill impairment exists when the
estimated fair value of goodwill is less than its carrying
value.


78
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of Contents


6.
Impairment of Goodwill and Aircraft Lease Return
Costs (continued)





Because
impairment indicators existed for Colgan during the second quarter of 2008, the
Company performed impairment testing on Colgan’s goodwill at June 30,
2008.  Factors deemed by the Company to be collectively an indicator that a
goodwill impairment test was required for Colgan included record high fuel
prices, continued operating losses, the uncertainty of the U.S. economy, and the
planned removal of several Saab aircraft from Colgan’s pro-rate operating fleet
during the third and fourth quarters of 2008.





For
purposes of testing Colgan’s goodwill, the Company estimated Colgan’s fair value
using primarily the income approach, a generally accepted fair value measurement
technique.  This approach was built using relevant data available through
and as of the second quarter of 2008.  Under the income approach, the fair
value was estimated based upon the present value of estimated future cash flows
from Colgan. The income approach is dependent on a number of critical management
assumptions including estimates of future capacity, passenger yield, traffic,
operating costs (including fuel prices), appropriate discount rates and other
relevant assumptions. The Company estimated its future fuel-related cash flows
for the income approach based on the five-year forward curve for crude
oil.





Cash flow
estimates were based on historical results adjusted to reflect the Company’s
best estimate of future market and operating conditions. The Company’s estimates
of fair value represent its best estimate based on industry trends and reference
to market rates and transactions.  Other assumptions include determining
the appropriate discount rate, which represents the Company’s weighted average
cost of capital.





Step one
of the impairment analysis indicated the fair value of Colgan was less than its
carrying value.  Consequently, to confirm the existence of and to measure
the amount of any impairment, the Company was required to perform step two of
the SFAS 142 goodwill impairment testing methodology.  In step two of
the impairment analysis, the Company determined the implied fair value of
Colgan’s goodwill by estimating the current fair value of all of its assets and
liabilities, including any recognized and unrecognized intangible assets. 
As a result of the step two testing, the Company determined that goodwill was
fully impaired, and therefore recorded a $10,557 impairment charge during the
second quarter of 2008 to eliminate the carrying value of Colgan’s goodwill and
certain other intangible assets. This impairment charge is classified within
“impairment of goodwill and aircraft lease return costs” in the Company’s
consolidated statement of operations for the year ended December 31,
2008.





The
Company completed its analysis of its Pinnacle reporting unit’s goodwill at
October 1, 2008 and concluded that goodwill was not
impaired.  Additionally, at December 31, 2008, because the Company’s
book value exceeded its market capitalization, the Company performed an interim
impairment test of Pinnacle’s goodwill.  The interim impairment
analysis also resulted in no impairment charge.





Aircraft
Lease Return Costs





For the
year ended 2008, Colgan eliminated nine markets from its pro-rate
operations.  This action resulted in the retirement of six additional
Saab 340 aircraft from service in addition to the previously announced
retirement of Colgan’s fleet of five Beech 1900 aircraft.  The return of
leased aircraft requires certain maintenance costs necessary to restore the
aircraft to a condition suitable for return to the lessor.  During the year
ended December 31, 2008, the Company recorded charges of $2,991 related to these
lease returns.  The Company’s accrued lease return costs as of December 31,
2008 are included in “accrued expenses and other current liabilities” on the
Company’s consolidated balance sheet.


79
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of Contents


7.
Fair Value Measurements





As
previously discussed, the Company adopted SFAS 157 on January 1,
2008.  SFAS 157 emphasizes that fair value is a market-based
measurement, not an entity-specific measurement.  Therefore, a fair
value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability.  As a basis
for considering market participant assumptions in fair value measurements, SFAS
157 establishes a fair value hierarchy that distinguishes between market
participant assumptions based on market data obtained from sources independent
of the reporting entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entity’s own assumptions about market
participant assumptions (unobservable inputs classified within Level 3 of the
hierarchy).  A description of the three-tier fair value hierarchy is
as follows:





Level
      1
                                                      Observable
      inputs such as quoted prices (unadjusted) in active markets for identical
      assets or liabilities that the Company has the ability to
      access.Level
      2
                                                      Inputs,
      other than the quoted prices in active markets, that are observable for
      the asset or liability either directly or indirectly, and may include
      quoted prices for similar assets and liabilities in active markets,
      as well as inputs that are observable for the asset or liability (other
      than quoted prices), such as interest rates, foreign exchange rates, and
      yield curves that are observable at commonly quoted
intervals.Level
      3
                                                      Unobservable
      inputs in which there is little or no market data, which require the
      reporting entity to develop its own assumptions.





In
instances where the determination of the fair value measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment and considers
factors specific to the asset or liability.





As of
December 31, 2008, the Company held certain assets and liabilities that are
required to be measured at fair value on a recurring basis, none of which were
classified as Level 1. As previously discussed, there is a one-year deferral of
the adoption of the SFAS 157 as it relates to non-financial assets and
liabilities. Accordingly, this standard did not apply to the Company’s goodwill
and intangible assets during 2008.  The Company adopted the remaining
provisions of SFAS 157 on January 1, 2009.  The table below presents
the Company’s assets and liabilities measured at fair value as of December 31,
2008, aggregated by the level in the fair value hierarchy within which those
measurements fall.




Level
      1
                          
                          
                          Level 2
                          
                          
                          Level 3
                          
                          
                          Balance
      at
                            December
      31, 2008AssetsInvestments
      in ARS
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          116,900
                          
                          
                          $
                          116,900




80
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


7.
Fair Value Measurements (continued)





The
following table presents the Company’s assets and liabilities at fair value on a
recurring basis using significant unobservable inputs (Level 3):




AssetAuction
      Rate SecuritiesBalance
      at January 1, 2008
                        
                        $
                        -Transfers
      to Level 3
                        
                        
                        136,100Total
      unrealized gains/(losses)Included
      in nonoperating expense
                        
                        
                        (16,800)Included
      in other comprehensive income (“OCI”)
                        
                        
                        -Redemptions
      (1)
                        
                        
                        (2,400)Balance
      at December 31, 2008
                        
                        $
                        116,900(1)Partial redemption of securities
      at par by the issuer





Auction
Rate Securities




Investments in auction rate securities are classified as available-for-sale and
presented at their estimated fair values.  However, due to events in
credit markets that predominantly began during the first quarter of 2008, the
auctions related to the Company’s ARS holdings have failed since the first
quarter of 2008 (see Note 9 for further discussion).  Therefore, the
fair values of these ARS are estimated utilizing a discounted cash flow analysis
model.  This analysis considers, among other items, the
collateralization underlying the investments, the creditworthiness of the
counterparty, the timing of expected future cash flows, and an estimate of when
the security is expected to have a successful auction or be called by the
issuer.  These securities were also compared, when possible, to other
observable market data with similar characteristics to the securities held by
the Company. Accordingly, since the Company’s initial adoption of SFAS
157 at January 1, 2008, these securities changed from Level 1 to Level 3 within
SFAS 157’s hierarchy.




8.  Derivatives





The
Company is exposed to interest rate risk from the time of entering into purchase
commitments until the delivery of aircraft, at which time the Company receives
permanent, fixed-rate financing for each aircraft.  To mitigate the
financial risk associated with changes in long-term interest rates, the Company
during July 2007 initiated a cash flow hedging program.  The program
includes forward-starting interest rate swaps intended to hedge the expected
interest payments associated with anticipated future issuances of long-term
debt.  The Company had no unsettled swaps as of December 31,
2008.





The term
of each cash flow hedge matched the term of the expected
financing.  The related agreements for these hedge positions required
mandatory cash settlement at the settlement date, which was intended to coincide
with the delivery of the related aircraft and the receipt of permanent, fixed
rate financing. Once permanent financing was secured, the remaining
hedge-related balance, which is included in other comprehensive income, is being
amortized into interest expense over the life of the aircraft
financing.


81
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


8.  Derivatives
(continued)





The
following table presents pre-tax gains (losses) on derivative instruments within
the consolidated statements of operations:





Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Interest
      rate swaps ineffectiveness included in interestexpense
                      
                      $
                      (504)
                      
                      
                      $
                      (51)
                      
                      
                      $
                      -Interest
      rate swap losses included in interest expense from
                        othercomprehensive
      income
                      
                      
                      (2,268)
                      
                      
                      
                      -
                      
                      
                      
                      -




The following table presents the fair values of the Company’s remaining
derivative instruments, and the amounts from settled interest rates swaps
recorded in other comprehensive income, net of tax and amortization, within the
consolidated balance sheets.





Years
      Ended December 31,2008
                          
                          
                          2007Fair
      value of active swaps – recorded in accrued expenses
                          
                          $
                          -
                          
                          
                          $
                          (16,777)Net
      realized and unrealized (losses) gains from interest rateswaps,
                            net oftax
      and amortization,recorded
      in other comprehensive income
                          
                          $
                          (17,752)
                          (1)
                          
                          $
                          (10,761)





(1)
              Included
      in the above total net realized losses from interest rate swaps as of
      December 31, 2008, are approximately $3,287 in net unrealized losses that
      are expected to be amortized into earnings during
  2009.





9.
Investments





The
Company invests excess cash balances primarily in short-term money market
instruments, short-term marketable debt securities and highly liquid equity
securities.  Investments in marketable securities are classified as
available-for-sale and presented at their estimated fair values based on quoted
market prices for those securities, in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities.





At
December 31, 2008, the Company’s investment portfolio included ARS with fair
values of $116,900, net of recognized losses of $16,800.  As of December
31, 2007, the fair value of the Company’s investment portfolio was $186,850,
which equaled the Company’s historical cost basis.  The majority of
ARS are issued by U.S. states and political subdivisions of the states and
typically have contractual maturities of more then ten years.  Due to
their current illiquid state and management’s intent to hold the investments
until their fair values recover, the Company classified investments in ARS as
noncurrent assets on the Company’s consolidated balance sheet at December 31,
2008.  All income generated from these securities is earned from
interest and dividends.





Prior to
the events described below that dramatically changed the nature of ARS
investments, ARS were notes structured to provide for an interest rate reset
through a “Dutch auction” process in periods spanning from 7 to 35
days.  The underlying bonds have long-term maturities, but because of
the auction process have heretofore been viewed as relatively liquid, short-term
investments.  The auction process resets the interest rate on the
securities to current market rates, and provides a vehicle for investors to buy
or sell the securities in what has historically been a very liquid
market.  Most of the Company’s ARS remain rated AAA/Aaa by Standard
& Poors, Moody’s, or Fitch ratings services, and are collateralized by
student loan receivables that are guaranteed under the government’s Federal
Family Education Loan Program.


82
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


9.
Investments (continued)





Because
of the unprecedented events in the ARS market that primarily emerged during the
first quarter of 2008, coupled with overall current market conditions, the
Company cannot predict when liquidity in the ARS market will return. 
Although the Company believes its securities continue to represent good
investments due to the credit ratings and collateral value of the investments,
for a variety of reasons, including  future payment obligations on the
Company’s debt, fuel price volatility, uncertainty within the airline industry,
liquidity demands related to the Company’s operational and financing commitments
and the state of U.S. economy in general, the Company may choose to sell some of
its ARS portfolio before liquidity in the ARS market returns and before their
values recover.  As a result, the Company has determined that the decline
in value of its ARS portfolio is other-than-temporary, and may not recover
before the investment is sold.  Therefore, the Company, on a specific
identification basis, recorded a total impairment charge of $16,800 during the
year ended December 31, 2008 to reflect the decline in the fair value of these
securities.  This charge is included in nonoperating expense in the
Company’s consolidated statement of operations for the year ended December 31,
2008.





The
Company classifies investments in ARS as noncurrent assets on the Company’s
consolidated balance sheet as of December 31, 2008. These investments were
classified as current assets as of December 31, 2007.  All income
generated from these securities was from earned interest and
dividends.  The Company will continue to evaluate the value of its ARS
portfolio, and may record future additional losses through earnings if the
Company determines that the fair value of its ARS portfolio has declined
further.





Most of
the banks that structured and sold ARS to investors have entered into settlement
agreements with various state and federal regulatory authorities that provide
for the repurchase of ARS at par value from retail investors and small
businesses over the next 24 months.  In addition, some banks have made
offers to larger institutional investors to repurchase ARS at par value in 2009
and 2010 to the extent that institutional investors have been unable to sell
their ARS.  The Company has not yet received such an
offer.





10.  Borrowings





The
following table summarizes the Company’s borrowings:





As
      of December 31, 2008
                          
                          
                          As
      of December 31, 2007Line
      of credit
                          
                          $
                          8,275
                          
                          
                          $
                          8,375Pre-delivery
      payment facilities
                          
                          
                          4,075
                          
                          
                          
                          63,603Other
                          
                          
                          -
                          
                          
                          
                          2,500Total
      short-term notes payable
                          
                          $
                          4,075
                          
                          
                          $
                          66,103Senior
      convertible notes
                          
                          $
                          121,000
                          
                          
                          $
                          121,000Credit
      facility
                          
                          
                          90,000
                          
                          
                          
                          -Long-term
      notes payable
                          
                          
                          534,857
                          
                          
                          
                          79,222Total
      long-term debt
                          
                          
                          745,857
                          
                          
                          
                          200,222Less
      current maturities
                          
                          
                          (44,116)
                          
                          
                          
                          (7,410)Long-term
      debt, net of current maturities
                          
                          $
                          701,741
                          
                          
                          $
                          192,812





83
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


10.  Borrowings
(continued)





The
aggregate amounts of principal maturities of debt as of December 31, 2008 were
as follows:


2009
                    
                    $
                    44,1162010
                    
                    
                    229,7732011
                    
                    
                    31,0772012
                    
                    
                    31,9162013
                    
                    
                    32,049Thereafter
                    
                    
                    376,926Total
                    
                    $
                    745,857





Credit
Facility





In March
2008, the Company entered into a revolving term loan (the “Credit Facility”)
with Citigroup Global Markets, Inc. (“Citigroup”).  The Credit
Facility provided for advances up to $60,000 and is collateralized by the
Company’s $133,700 par value of ARS. The Company amended the Credit Facility in
June 2008, with the primary purpose of increasing the eligible amount for
borrowing from $60,000 to $80,000, and again in November 2008 to provide for
additional borrowings of $10,000.  The agreement allowed up to $80,000
of the proceeds to be used to support the Company’s aircraft purchases and for
general working capital purposes.  The remaining $10,000 was
restricted for use to retire other outstanding debt, which the Company used to
repurchase $12,000 par value of the Notes in January 2009 and to repay a portion
of its pre-delivery deposit financing facility debt as aircraft delivered in
December.  The Credit Facility is pre-payable at any time prior to
maturity in January 2010.  The first $80,000 of the Credit Facility
carries an interest rate indexed to LIBOR, which was 2.4% as of December 31,
2008.  The additional $10,000 carries an interest rate that is indexed
to the Federal Funds Rate and was 2.7% at December 31, 2008.  As of
December 31, 2008, the balance outstanding was $90,000. The Credit Facility
includes both covenant and margin requirements, including a loan-to-par value
ratio, a loan-to-fair value ratio, and a net worth
test.  Additionally, the Credit Facility includes a cross-default
provision related other indebtedness of the Company in excess of
$5,000.  As of December 31, 2008, the Company was in compliance with
these covenants.





Line
of Credit





The
Company maintains a revolving line of credit with an institutional lender for a
principal amount not to exceed $8,500 or 75% of the net unpaid balance of
Colgan’s eligible accounts receivable.  On April 15, 2008, the Company
extended the termination date of this facility to April 15,
2009.  This instrument has an interest rate of Prime plus 0.25%, which
was 3.50% as of December 31, 2008.  Amounts outstanding under the line
of credit were $8,275 and $8,375 at December 31, 2008 and 2007, respectively.
During the first quarter of 2009, the Company repaid $3,861, which reduced the
remaining outstanding line of credit to approximately $4,414.





Pre-delivery
Payment Financing Facilities





In 2007,
the Company executed pre-delivery payment financing facilities with Export
Development Canada (“EDC”) for up to $80,000 in short-term borrowings.  The
outstanding balance was $4,075 and $64,419 at December 31, 2008 and 2007,
respectively.  Borrowings under the pre-delivery payment facilities bear
interest at the 3-month LIBOR rate plus 1.65%, which was 3.1% as of December 31,
2008, and are collateralized by the pre-delivery payments to the aircraft
manufacturer.  On February 27, 2009, the Company repaid the remaining
balance of $4,075 under the pre-delivery payment
facility.


84
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


10.  Borrowings
(continued)





As
previously discussed, on January 13, 2009, the Company amended its Continental
CPA to operate an additional 15 Q400 aircraft.  The aircraft have
scheduled delivery dates from August 2010 through April
2011.  Immediately thereafter, the Company executed a new pre-delivery
payment financing facility with EDC for up to $35,600 on substantially similar
terms to the facilities discussed above.  As of March 1, 2009, amounts
outstanding under this facility were $4,910.





Senior
Convertible Notes





In
February 2005, the Company completed the private placement of $121,000 principal
amount of 3.25% senior convertible notes due February 15, 2025 (the
"Notes").  If certain conditions are met, the Notes are convertible
into a combination of cash and common stock equivalent to the value of 75.6475
shares of the Company’s common stock per $1 par amount of Notes, or a conversion
price of $13.22 per share.   The Notes were not convertible in
2008.  As of December 31, 2008 the fair value of the Company’s senior
convertible notes was $80,465.





The
holders of the Notes may require the Company to purchase all or a portion of
their Notes for cash on February 15, 2010, February 15, 2015 and February 15,
2020 (“Redemption Dates”) at a purchase price equal to 100% of their principal
amount plus accrued and unpaid interest, if any, to the purchase date. The Notes
are structured such that, upon the occurrence of certain events, holders may
convert the Notes into the equivalent value of the Company's common stock at an
initial conversion rate of 75.6475 shares (not in thousands) per $1 principal
amount of Notes, representing an initial conversion price of $13.22 per
share.  Upon conversion, the Company will pay the holder all or a
portion of a conversion value in cash up to the $1 principal
amount.  To the extent that the conversion value exceeds the $1
principal amount, the excess will be settled in cash, common stock or a
combination of both, at the Company's option.





Holders
may convert their Notes only during the following periods:





●
            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
      ($15.86 per share or the “trigger price”) 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 ten trading days prior to the maturity date of February 15,
      2025.





The
conditions described above were met during the first and second quarters of
2007, thereby causing the Notes to become convertible at the option of each Note
holder during the second and third quarters of 2007.  The excess of
the Company's average common stock price for the period over the conversion
price of $13.22 increases the weighted average number of shares outstanding for
diluted earnings per share.  See Note 5 for additional information
regarding the dilutive effect of the Notes’ conversion rights.  No
Notes were tendered for conversion during the periods in which they were
convertible.


85
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


10.  Borrowings
(continued)





Prior to
February 15, 2010, the Company cannot redeem the Notes at its
option.  Beginning on February 15, 2010, the Company may redeem the
Notes for cash, in whole or in part at any time or from time to
time.  The Company will give not less than 30 days’ or more than 60
days’ notice of redemption by mail to holders of the Notes.  If the
Company elects to redeem the Notes, it will pay a redemption price equal to 100%
of the principal amount of the Notes to be redeemed, plus accrued and unpaid
interest to the redemption date.  Holders of the Notes may require the
Company to purchase all or a portion of their Notes for cash on each of February
15, 2010, February 15, 2015 and February 15, 2020 at a purchase price equal to
100% of the principal amount of the Notes to be repurchased plus accrued and
unpaid interest, if any, to the purchase date.





Long-Term
Notes Payable





Long-term
notes payable for owned aircraft consisted of the following at December 31,
2008:





Principal
                  
                  Interest
      rates
                  
                  Maturities
      Through$      63,674
                  
                  3.5%
      - 4.5%
                  
                  202315,268
                  
                  4.6%
      - 5.6%
                  
                  2023195,382
                  
                  5.7%
      - 6.0%
                  
                  2023190,011
                  
                  6.1%
      - 6.4%
                  
                  202357,816
                  
                  6.5%
      - 7.0%
                  
                  20227,259
                  
                  7.1%
      - 8.0%
                  
                  20175,447
                  
                  8.1%
      - 8.6%
                  
                  2014$    534,857





The fair
value of the Company’s long-term notes payable was $483,506 at December 31,
2008, assuming that the debt is financed by the same lenders.





Included
in long-term notes payable are borrowings from EDC for owned aircraft.  The
borrowings are collateralized by the Company’s fleet of CRJ-900 and Q400
aircraft, which had a net book value of approximately $560,000 at December 31,
2008.   Amounts outstanding were $512,575 and $60,270 at December
31, 2008 and 2007, respectively.





The
Company’s borrowing agreements with EDC include cross-default provisions related
to the borrowing for each financed aircraft with the EDC and a cross-default
provision related to other indebtedness of the Company in excess of
$5,000.  As of December 31, 2008, the Company was in compliance with
these covenants.





Subsequent
Event. In
January 2009, the Company repurchased $12,000 of the Notes for $8,870 plus
accrued and unpaid interest. This amount is reflected in the 2009 column in the
above maturities table.


86
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


10.  Borrowings
(continued)





New Accounting
Standard.  On January 1, 2009, the Company adopted Financial
Accounting Standards Board (“FASB”) Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)("FSP APB 14-1"), which dramatically changes the accounting
for convertible debt instruments that may be settled in cash (including partial
cash settlement) upon conversion.  FSP APB 14-1 requires issuers to
account separately for the liability and equity components of certain
convertible debt instruments in a manner that reflects the issuer's
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized.  FSP APB 14-1 requires bifurcation of a component of the
debt, classification of that component in equity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in
our consolidated statement of operations.  FSP APB 14-1 requires
retrospective application to the terms of instruments as they existed for all
periods presented.  The Company adopted FSP APB 14-1 effective January
1, 2009.  The adoption of FSP APB 14-1 will affect the accounting for
the Notes and will result in increased interest expense of approximately $11,000
in 2009 and $700 in 2010, assuming the Notes will be settled in February
2010.  The retrospective application of FSP APB 14-1 to years 2005
through 2008 will result in increased annual interest expense of approximately
$6,000 in 2005, gradually increasing to approximately $10,400 in
2008.





11.  Leases





Capital
Leases





The
Company leases certain aircraft equipment, buildings and office equipment under
noncancelable capital leases that expire on various dates through
2013.  Under these capital leases, an obligation is shown on the
Company’s consolidated balance sheets for the present value of the future
minimum payments.  Amortization of the assets recorded under the
capital leases is included in the consolidated statement of operations as
depreciation and amortization expense.  At December 31, 2008, the
weighted average interest rate implied in these leases was approximately 9.1%,
and the net book value of the assets associated with the capital leases was
$4,064.





The
following table summarizes approximate minimum future rental payments for the
Company, by year and in the aggregate, together with the present value of net
minimum lease payments as of December 31, 2008:





2009
                      
                      $
                      1,3072010
                      
                      
                      1,3102011
                      
                      
                      7772012
                      
                      
                      7032013
                      
                      
                      116Thereafter
                      
                      
                      -Total
      future rental payments
                      
                      
                      4,213Amount
      representing interest
                      
                      
                      (587)Present
      value of future lease payment
                      
                      
                      3,626Less:  current
      maturities
                      
                      
                      (1,025)Capital
      leases, net of current maturities
                      
                      $
                      2,601





Operating
Leases





The
Company subleases its CRJ-200 aircraft and related engines from Delta 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 Delta.  Pursuant to the CRJ-200 ASA, Delta
reimburses Pinnacle’s aircraft rental expense in full.


87
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


11.  Leases
(continued)





The
Company currently leases one Beech 1900 aircraft.  The aircraft is
subject to 60-month lease ending in 2010, but allows the Company the option
without penalty to early terminate this lease.  As of February 15,
2009, the Company had ceased pro-rate operations with the last remaining leased
Beech 1900 aircraft.





The
Company also leases 11 of its 36 Saab 340 aircraft under operating
leases.  Six of the lease agreements allow the Company to terminate
the agreements at various points from 2009 through 2011.  These
aircraft lease agreements generally provide that the Company pay taxes,
maintenance, insurance and other operating expenses applicable to the leased
assets.  The leases require the aircraft to be in a specified
maintenance condition at lease termination or upon return of the
aircraft.





As
discussed in Note 3, the Company entered into an agreement with Delta to operate
on a short-term basis seven additional CRJ-900 aircraft that were formerly
operated by another Delta Connection carrier.  The Company is
temporarily operating these seven CRJ-900 aircraft through the second quarter of
2009.   These leased CRJ-900s will be returned on a one-for-one
basis to Delta as the Company places into service its own purchased CRJ-900
aircraft during the first and second quarters of 2009.  Pinnacle pays
a nominal amount of rent to Delta for these aircraft, which Delta
reimburses.  As of February 15, 2009, the Company had returned five
aircraft to Delta and expects to return the remaining two aircraft in April
2009.





The
Company’s non-aircraft operating leases primarily relate to facilities and
office equipment.





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 December 31,
2008:





Aircraft(1)
                    
                    Non-aircraft
                    
                    Total2009
                    
                    $   
       115,981
                    
                    $ 
      17,735
                    
                    $    133,7162010
                    
                    113,323
                    
                    17,448
                    
                    130,7712011
                    
                    113,088
                    
                    16,800
                    
                    129,8882012
                    
                    113,088
                    
                    15,280
                    
                    128,3682013
                    
                    113,088
                    
                    4,488
                    
                    117,576Thereafter
                    
                    452,352
                    
                    15,164
                    
                    467,516Total
      future rental payments
                    
                    $ 
      1,020,920
                    
                    $ 
      86,915
                    
                    $ 
      1,107,835




(1)
      The amounts noted above for operating leases include $1,017,792 of
      obligations for leased CRJ-200 aircraft from Delta.  The Company
      is
                    reimbursed with margin by Delta in full for CRJ-200 aircraft rental
      expense under the CRJ-200 ASA.  Should the CRJ-200 ASA with
      Delta be
                    terminated, these aircraft would be returned to
    Delta.





The
Company’s total rental expense for operating leases for the years ended December
31, 2008, 2007 and 2006, was $156,042, $161,103 and $283,490,
respectively.


88
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


12.
Accrued Expenses and Other Current
Liabilities





Accrued
expenses and other current liabilities consisted of the following as of December
31:





2008
                            
                            
                            2007Income
      tax reserves
                            
                            $
                            16,518
                            
                            
                            $
                            16,694Interest(1)
                            
                            
                            13,017
                            
                            
                            
                            4,640Salaries
      and wages
                            
                            
                            13,233
                            
                            
                            
                            11,888Taxes
      other than income
                            
                            
                            10,229
                            
                            
                            
                            9,600Ground
      handling and landing fees
                            
                            
                            9,821
                            
                            
                            
                            7,587Insurance
      costs
                            
                            
                            2,729
                            
                            
                            
                            4,130Fuel
                            
                            
                            2,473
                            
                            
                            
                            2,157Ticketing
      costs
                            
                            
                            1,428
                            
                            
                            
                            1,345Current
      portion of capital leases
                            
                            
                            1,025
                            
                            
                            
                            1,118Maintenance
                            
                            
                            616
                            
                            
                            
                            2,731Derivative
      liability(2)
                            
                            
                            -
                            
                            
                            
                            16,777Preferred
      share payable
                            
                            
                            -
                            
                            
                            
                            20,000Other
                            
                            
                            4,047
                            
                            
                            
                            3,387Total
                            
                            $
                            75,136
                            
                            
                            $
                            102,054





(1)
            This
      increase is primarily related to the financing of the CRJ-900 and Q400
      aircraft, the majority of which were delivered in
  2008.


(2)
            As
      of December 31, 2008, the Company had settled all interest rate
      swaps.


89
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of Contents


13.
Colgan Acquisition





On
January 18, 2007, the Company completed the acquisition of all of the issued and
outstanding stock of Colgan.  The consolidated statements of
operations reported herein contain Colgan’s operating results since the date of
purchase.





The
acquisition of Colgan was accounted for using the purchase method of accounting,
as required by SFAS No. 141, Business
Combinations.  Accordingly, the aggregate purchase price was
assigned to the acquired assets and liabilities based on their fair market
values on the purchase date.





Pursuant
to the terms of the stock purchase agreement between the Company and the selling
shareholders of Colgan, the purchase price was $20,000 payable through a $10,000
cash payment and a $10,000 promissory note, bearing interest at 6.0%, secured by
the stock of Colgan.





The
following table reflects the final allocation of the aggregate purchase price of
the acquisition to the assets acquired and liabilities assumed:




Purchase
      Price AllocationCurrent
      assets
                                      
                                      $
                                      18,949Property
      and equipment
                                      
                                      
                                      50,286Other
      assets
                                      
                                      
                                      2,276Intangibles
                                      
                                      
                                      5,550Goodwill
                                      
                                      
                                      9,785Total
      assets acquired
                                      
                                      
                                      86,846Less:
      Accounts payable
                                      
                                      
                                      (13,531)Accrued expenses
                                      
                                      
                                      (12,996)Bank line of credit
                                      
                                      
                                      (8,375)Long-term debt and capital leases
                                      
                                      
                                      (30,460)Purchase
      price, including $1,484 of transaction costs
                                      
                                      
                                      21,484Less:  Note
      payable issued
                                      
                                      
                                      (10,000)Less:  Cash
      acquired
                                      
                                      
                                      (1,187)Cash
      paid for acquisition
                                      
                                      $
                                      10,297





During
2006, the Company paid $1,000 in escrow payments and $1,030 of transaction
costs.  The remaining $8,267 was paid during the three months ended
March 31, 2007.  The difference between the purchase price and the
fair value of Colgan’s assets acquired and liabilities assumed was recorded as
goodwill.  The Company attributed this goodwill to the opportunity to
diversify its operations to include turboprop aircraft and to expand its
relationships with the three major airlines for which Colgan
operates.  For tax purposes, goodwill is deductible over 15
years.





The
primary intangible assets acquired by the Company through its acquisition of
Colgan include $3,900 for code-share and EAS agreements and $1,650 for landing
slots.  These intangible assets were assigned 10-year
lives.





As
previously discussed in Note 6, Impairment of Goodwill and Aircraft
Lease Return Costs, impairment indicators existed for Colgan during the
second quarter of 2008.  Consequently, the Company performed
impairment testing on Colgan’s goodwill at June 30, 2008 and ultimately recorded
a charge during that period to fully impair Colgan’s $9,785 of
goodwill.





Colgan’s
pro-rate operations are subject to seasonal fluctuations.  Colgan has
historically recorded losses during the first and fourth quarters each year,
when demand for air travel declines, and recorded income or smaller losses
during the second and third quarters each year, when air travel demand is
higher.


90
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


13.
Colgan Acquisition (continued)





The
following unauditedpro forma information
presents the results of operations of the Company for the year ended December
31, 2006 as if the acquisition of Colgan had taken place at the beginning of
that period.  Because the acquisition of Colgan occurred early in the
year ended December 31, 2007, pro forma information for that period is not
presented.





Year
      Ended
                        December
      31, 2006
                        (unaudited)Operating
      revenues
                      
                      $
                      1,016,005Operating
      income
                      
                      
                      131,308Net
      income
                      
                      
                      77,904Basic
      earnings per share
                      
                      $
                      3.55Diluted
      earnings per share
                      
                      $
                      3.55





14.
Share-Based Compensation





The
Company accounts for share-based payment compensation under SFAS 123R, Share-Based Payment (“SFAS
123R”), using the modified-prospective transition method.  When
calculating the expense related to share-based payment, SFAS 123R requires the
Company to estimate expected forfeitures, option expected life, and other
elements that affect the amount of expense recognized.  SFAS 123R also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required prior to SFAS 123R.





The
Company grants share-based compensation, including
grants of stock options and restricted stock, under its 2003 Stock Incentive
Plan, for which 3,152 shares were reserved.  The shares may
consist, in whole or in part, on unissued shares or treasury
shares.  Awards which terminate or lapse without the payment of
consideration may be granted again under the plan.  As of December 31,
2008, the Company had1,432shares of common stock reserved for issuance under the
plan.





Stock
Options





Under
SFAS 123R, forfeitures are estimated at the time of valuation and reduce expense
ratably over the vesting period. This estimate is adjusted periodically based on
the extent to which actual forfeitures differ, or are expected to differ, from
the previous estimate.





In
January 2008, 2007 and 2006, the Company granted 284, 203 and 292 stock options,
respectively, to its executive officers, members of its Board of Directors and
certain other employees.  The option grants vest ratably over
three-year periods and expire ten years from the grant date.  Expense
is recognized on a straight-line basis over the vesting period.  Under
the provisions of SFAS 123R, the Company recorded pre-tax compensation expense
in the amount of $1,443, $816 and $305, respectively, related to stock options
during the years ended December 31, 2008, 2007 and 2006.





Pre-tax
compensation cost yet to be recognized related to non-vested stock options was
$1,859 as of December 31, 2008.  This cost will be recognized over the
next 1.7 years. During the years ended December 31, 2008 and 2007, the Company
recorded financing cash flows of $20 and $693, respectively, related to excess
tax deductions.  The Company had no excess tax benefits related to
SFAS 123R during the year ended December 31, 2006. The total intrinsic value of
the options exercised for the years ended December 31, 2008 and 2007 was $26 and
$1,645, respectively. No options were exercised during the year ended December
31, 2006.


91
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of Contents


14.
Share-Based Compensation (continued)





The
following table provides certain information with respect to the Company’s stock
options:





Shares
                                            
                                            
                                            Weighted
      Average
                                              Exercise
      Price
                                            
                                            
                                            Fair Value
                                            
                                            Weighted
      Average
                                              Remaining
      Life
                                            
                                            Aggregate
                                              Intrinsic
      ValueOutstanding
      at January 1, 2008
                                            
                                            
                                            884
                                            
                                            
                                            $
                                            12.69
                                            
                                            
                                            $
                                            6,470Granted
                                            
                                            
                                            284
                                            
                                            
                                            
                                            14.37
                                            
                                            
                                            
                                            1,924Exercised
                                            
                                            
                                            (8)
                                            
                                            
                                            
                                            8.05
                                            
                                            
                                            
                                            (38)Forfeited
                                            
                                            
                                            (54)
                                            
                                            
                                            
                                            14.09
                                            
                                            
                                            
                                            (412)Outstanding
      at December 31, 2008
                                            
                                            
                                            1,106
                                            
                                            
                                            
                                            13.09
                                            
                                            
                                            
                                            7,944
                                            
                                            6.8
      years
                                            
                                            $
                                            -Options
      exercisable at December 31, 2008
                                            
                                            
                                            624
                                            
                                            
                                            
                                            11.99
                                            
                                            
                                            $
                                            4,762
                                            
                                            5.6
      years
                                            
                                            $
                                            -





During
the years ended December 31, 2008 and 2007, 160 and 96 options vested,
respectively.  These options had fair values of $900 and $340,
respectively.  No options vested during the year ended December 31,
2006.





The fair
value of each option grant is estimated using the Black-Scholes-Merton
multiple-option pricing valuation model.  The application of this
valuation model involves assumptions that are judgmental and highly sensitive in
the determination of compensation expense.  The fair value of each
option is amortized into compensation expense on a straight-line basis between
the grant date for the award and each vesting date.  Under SFAS 123R,
the Company does not recognize expense related to forfeited non-vested stock
options.  The Company estimates that 4% of stock options will be
forfeited or cancelled before becoming fully vested, which is based on
historical experience and its expectations of future forfeitures.  An
increase in the forfeiture rate will decrease compensation expense while a
decrease in the forfeiture rate will increase compensation expense.





The
following table presents the assumptions used and fair value of grants in the
years ended December 31, 2008, 2007 and 2006.





2008
                      
                      
                      2007
                      
                      
                      2006Expected
      price volatility
                      
                      
                      50.0%
                      
                      
                      
                      53.5%
                      
                      
                      
                      59.4%Risk-free
      interest rate
                      
                      
                      3.3%
                      
                      
                      
                      4.6%
                      
                      
                      
                      4.3%Expected
      lives (years)
                      
                      
                      5.0
                      
                      
                      
                      5.0
                      
                      
                      
                      5.0Dividend
      yield
                      
                      
                      0%
                      
                      
                      
                      0%
                      
                      
                      
                      0%Expected
      forfeiture rate
                      
                      
                      4%
                      
                      
                      
                      10%
                      
                      
                      
                      10%Exercise
      price of option grants
                      
                      $
                      14.37
                      
                      
                      $
                      16.76
                      
                      
                      $
                      6.47Fair
      value of option grants
                      
                      $
                      6.76
                      
                      
                      $
                      8.57
                      
                      
                      $
                      3.53





The
risk-free interest rate is measured on the U.S. Treasury yield curve in effect
for the expected term of the option at the time of the grant. Historically, the
Company has not paid dividends nor does it plan to pay any dividends in the
foreseeable future. The expected term of options granted have a maximum life of
ten years. The expected life is the period of time the Company expects the
options granted to be outstanding. The market price volatility of options
granted is based on the historical volatility since November 25, 2003, the date
of the Company’s initial public offering. The forfeiture rate is based on
historical information and management’s best estimate of future
forfeitures.


92
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


14.
Share-Based Compensation (continued)





Restricted
Stock





In
January 2008, 2007 and 2006, the Company awarded 109, 76 and 135 shares,
respectively, of restricted stock to certain officers and members of the Board
of Directors under the Company's 2003 Stock Incentive Plan.  Using the
straight-line method, these shares are being expensed ratably over the
three-year vesting period.  During the years ended December 31, 2008,
2007 and 2006, the Company recognized $1,159, $643 and $259, respectively, of
pre-tax compensation expense related to these grants of restricted
stock.  Pre-tax compensation cost yet to be recognized related to
these restricted stock grants was $1,515 as of December 31,
2008.  This cost will be recognized over the next 1.7
years.





During
the vesting periods, grantees have voting rights, but the shares may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
alienated or encumbered.  Additionally, granted but unvested shares
are forfeited upon a grantee’s separation from service.





The
following table provides certain information with respect to the Company’s
restricted stock:





Shares
                    
                    
                    Fair ValueNonvested
      at January 1, 2008
                    
                    
                    163
                    
                    
                    $
                    1,827Granted
                    
                    
                    109
                    
                    
                    
                    1,566Vested
                    
                    
                    (68)
                    
                    
                    
                    (700)Forfeited
                    
                    
                    (7)
                    
                    
                    
                    (94)Nonvested
      at December 31, 2008
                    
                    
                    197
                    
                    
                    $
                    2,599





2009
Grants





In
January 2009, the Company granted 625 stock options and 278 shares of restricted
stock to members of its Board of Directors, its officers and other key
employees.  These grants will vest ratably over three
years.  The Company expects the 2009 expense associated with these
grants to be approximately $525.


93
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


15.  Other Expenses





Other
expenses consisted of the following for the years ended December
31:





2008
                        
                        
                        2007
                        
                        
                        2006Employee
      overnightaccommodations
                        
                        $
                        30,819
                        
                        
                        $
                        25,876
                        
                        
                        $
                        15,414Professional
      services fees
                        
                        
                        10,691
                        
                        
                        
                        9,343
                        
                        
                        
                        7,486Property
      and other taxes
                        
                        
                        10,382
                        
                        
                        
                        9,425
                        
                        
                        
                        9,349Employee
      training expense
                        
                        
                        7,899
                        
                        
                        
                        8,289
                        
                        
                        
                        5,570Communications
      and informationtechnology
      related expenses
                        
                        
                        7,417
                        
                        
                        
                        4,808
                        
                        
                        
                        2,802Recruiting
      and other personnelexpenses
                        
                        
                        7,195
                        
                        
                        
                        6,677
                        
                        
                        
                        4,657Insurance
                        
                        
                        5,903
                        
                        
                        
                        8,786
                        
                        
                        
                        5,910Office
      equipment and related supplies and services
                        
                        
                        4,905
                        
                        
                        
                        3,843
                        
                        
                        
                        2,159Station-related
      expenses
                        
                        
                        3,183
                        
                        
                        
                        2,675
                        
                        
                        
                        1,834Other
                        
                        
                        4,588
                        
                        
                        
                        3,811
                        
                        
                        
                        3,038Total
      other expenses
                        
                        $
                        92,982
                        
                        
                        $
                        83,533
                        
                        
                        $
                        58,219





94
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


16.
Income Taxes





The
significant components of the Company's deferred tax assets and liabilities are
as follows:


December
      31,2008
                
                
                2007Deferred
      tax assets:Lease
      return costs
                
                $
                1,145
                
                
                $
                -Accrued
      interest
                
                
                1,315
                
                
                
                1,321Stock
      compensation
                
                
                1,365
                
                
                
                578Inventory
      reserves
                
                
                1,573
                
                
                
                1,017Vacation
      pay
                
                
                2,199
                
                
                
                1,990State
      net operating losses
                
                
                2,713
                
                
                
                1,121Intangible
      assets
                
                
                3,681
                
                
                
                -ARS
                
                
                6,644
                
                
                
                -Derivatives
                
                
                11,058
                
                
                
                6,465Deferred
      revenue
                
                
                83,768
                
                
                
                93,383Other
                
                
                1,537
                
                
                
                1,838Total
      deferred tax assets
                
                
                116,998
                
                
                
                107,713Valuation
      allowance
                
                
                (7,525)
                
                
                
                (844)Net
      deferred tax assets
                
                $
                109,473
                
                
                $
                106,869Deferred
      tax liabilities:Prepaid
      expenses
                
                
                (222)
                
                
                
                (203)Tax
      over book depreciation
                
                
                (49,499)
                
                
                
                (13,958)Other
                
                
                (410)
                
                
                
                (567)Net
      deferred tax liabilities
                
                
                (50,131)
                
                
                
                (14,728)Net
      deferred tax asset
                
                $
                59,342
                
                
                $
                92,141





At
December 31, 2008, the Company had state net operating loss carryforwards of
$57,197 ($2,713 tax effected), the majority of which will expire between
2022 and 2028.  The Company has recorded a valuation allowance on
these state net operating loss carryforwards of
$839.


95
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


16.
Income Taxes (continued)





The
provision for income tax expense (benefit) includes the following components for
the years ended December 31:





2008
                
                
                2007
                
                
                2006Current:Federal
                
                $
                (31,192)
                
                
                $
                105,656
                
                
                $
                27,808State
                
                
                541
                
                
                
                10,887
                
                
                
                3,346Subtotal
                
                
                (30,651)
                
                
                
                116,543
                
                
                
                31,154Deferred:Federal
                
                
                36,365
                
                
                
                (90,931)
                
                
                
                14,664State
                
                
                490
                
                
                
                (9,212)
                
                
                
                983Subtotal
                
                
                36,855
                
                
                
                (100,143)
                
                
                
                15,647Total
      income tax expense
                
                $
                6,204
                
                
                $
                16,400
                
                
                $
                46,801





The
following is a reconciliation of the provision for income taxes at the
applicable federal statutory income tax rate to the reported income tax expense
for the years ended December 31:





2008
                  
                  
                  2007
                  
                  2006$
                  
                  
                  %
                  
                  
                  $
                  
                  
                  %
                  
                  $
                  
                  
                  
                  %Income
      tax expense at statutory rate
                  
                  $
                  454
                  
                  
                  35.0%
                  
                  
                  $
                  17,863
                  
                  
                  35.0%
                  
                  $
                  43,610
                  
                  
                  
                  35.0%State
      income taxes, net offederal
      taxes
                  
                  
                  (430)
                  
                  
                  (33.1)%
                  
                  
                  
                  759
                  
                  
                  1.5%
                  
                  
                  2,722
                  
                  
                  
                  2.2%Tax-exempt
      interest income
                  
                  
                  (2,141)
                  
                  
                  (165.1)%
                  
                  
                  
                  (3,638)
                  
                  
                  (7.1)%
                  
                  
                  (777)
                  
                  
                  
                  (0.6)%Fines
      and penalties
                  
                  
                  64
                  
                  
                  4.9%
                  
                  
                  
                  56
                  
                  
                  0.1%
                  
                  
                  (7)
                  
                  
                  
                  0.0%Meals
      and entertainment disallowance
                  
                  
                  754
                  
                  
                  58.1%
                  
                  
                  
                  997
                  
                  
                  1.9%
                  
                  
                  153
                  
                  
                  
                  0.1%Accrual
      to return adjustments
                  
                  
                  454
                  
                  
                  35.0%
                  
                  
                  
                  -
                  
                  
                  -
                  
                  
                  1,388
                  
                  
                  
                  1.1%Revaluation
      of state deferred taxes dueto
      apportionment changes
                  
                  
                  640
                  
                  
                  49.4%
                  
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  -Valuation
      allowance
                  
                  
                  6,409
                  
                  
                  494.1%
                  
                  
                  
                  363
                  
                  
                  0.7%
                  
                  
                  (288)
                  
                  
                  
                  (0.2)%Income
      tax expense
                  
                  $
                  6,204
                  
                  
                  478.3%
                  
                  
                  $
                  16,400
                  
                  
                  32.1%
                  
                  $
                  46,801
                  
                  
                  
                  37.6%





Income
taxes paid (net of refunds received) during the years ended December 31, 2008,
2007 and 2006 were approximately $2,808, and $114,013 and $32,504,
respectively.





As
discussed in Note 3, the Company assigned its Northwest bankruptcy claim during
the first quarter of 2007.  A majority of the proceeds received were
invested in short-term investments earning tax-exempt interest
income.  As a result, the Company’s taxable income excluded these
earnings, thereby lowering the Company’s effective tax rate for the year ended
December 31, 2008.  Valuation allowances relating to state net
operating losses, hedging transactions and the Company’s investment in certain
auction rate securities resulted in an increase to the Company’s effective tax
rate.  The disallowance of 50% of meals and entertainment expenses and
adjustments to the current period tax provision to reflect certain accrual to
return adjustments for prior periods also served to increase the Company’s
effective tax rate.


96
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of Contents


16.
Income Taxes (continued)





During
the year ended December 31, 2008, the Company recorded a valuation allowance of
$6,409 against certain deferred tax assets.  The valuation allowance
relates primarily to state net operating losses generated in the current and
prior year, amounts recorded through other comprehensive income related
primarily to impairment charges related to the Company’s investment in certain
auction-rate securities and hedging transactions.  In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  The ultimate realization of deferred tax assets is
dependent upon the generation and appropriate character of future taxable income
during the periods and in the jurisdictions in which those temporary differences
become deductible.  Based upon the level of historical taxable income
and projections of future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will not realize the benefit of these assets.





In July
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes, which became effective for and was adopted by the Company
beginning January 1, 2007.  As a result of the implementation of FIN
48, the Company recognized a $500 increase in its liability for unrecognized tax
benefits, which was accounted for as a reduction to the January 1, 2007 balance
of retained earnings.  As of December 31, 2008 and 2007, the Company
had $16,518 and $16,694 of unrecognized tax benefits,
respectively.  The following table reconciles the Company’s beginning
and ending unrecognized tax benefits balances:





2008
                
                
                2007Unrecognized
      tax benefits balance at January 1
                
                $
                16,694
                
                
                $
                16,692Increases/(decreases)
      for prior period positions
                
                
                -
                
                
                
                76Increases/(decreases)
      for current period positions
                
                
                -
                
                
                
                -Settlements
                
                
                (176)
                
                
                
                (74)Lapses
      of statutes
                
                
                -
                
                
                
                -Unrecognized
      tax benefits balance at December 31
                
                $
                16,518
                
                
                $
                16,694


The
Company provides for interest and penalties accrued related to unrecognized tax
benefits in nonoperating expenses.   As of December 31, 2008, the
Company filed several local jurisdiction tax returns relating to prior
years.  The previously reserved amount for these prior positions was
$176 and such amount was remitted with the return
filings.  Additionally, the Company recorded interest and penalties of
$1,233 during the year.   As of December 31, 2008 and December
31, 2007, the Company had $3,692 and $2,495 of accrued interest and penalties,
respectively.





The
amount of unrecognized tax benefits that would affect the Company’s effective
tax rate if recognized is $16,170 as of December 31, 2008 and $16,346 as of
December 31, 2007.  The tax years 2005-2007 remain open to examination
by major taxing jurisdictions to which the Company is
subject.





The
Company is currently in appeals with the Internal Revenue Service (“IRS”) for
the tax years 2003 through 2005.  In May 2007, the IRS proposed
certain adjustments to the Company’s positions related to various exam
matters.  Later in 2007, the Company submitted a protest to the IRS
with respect to these adjustments.  In April 2008, an opening appeals
conference was held and resolution negotiations are still ongoing as of December
31, 2008.  Should the IRS prevail on these adjustments, the impact on
the Company could be significant.  The Company believes the potential
tax exposure related to the items the IRS has focused on during its examinations
would not exceed $35,000 plus penalties of $9,747.  The Company has
reserved $16,518 of this exposure plus accrued interest of
$3,623.  The Company believes that it has provided sufficiently for
all audit exposures; however, future earnings, cash flow and liquidity could be
materially affected should these positions not be settled favorably in the
appeals process.  Settlement of this audit or the expiration of this
statute of limitations on the assessment of income taxes for any tax year may
also result in a change in future tax provisions.  As of December 31,
2008, the Company is still in resolution negotiations with the IRS and cannot
predict the ultimate outcome; however, management believes that any settlement
reached will not exceed our reserves.


97
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


17.
Employee Benefit Plans





401(k)
Plans





The
Company maintains two defined contribution 401(k) plans covering substantially
all of its employees.  Each year, participants may contribute a portion of
their pre-tax annual compensation, subject to Internal Revenue Code
limitations.  The Company made matching contributions of approximately
$2,865, $2,743 and $2,474 for the years ended December 31, 2008, 2007 and
2006.  The Company’s 401(k) plans also contain profit sharing provisions
allowing the Company to make discretionary contributions for the benefit of all
plan participants.  For the years ended December 31, 2008, 2007, and
2006, the Company made no discretionary contributions to its 401(k)
plans.





Retired
Pilots’ Insurance Benefit Plan





The
Company’s Pinnacle subsidiary provides its pilots with health and dental
insurance benefits from their retirement age of 60 until they are eligible for
Medicare coverage at age 65.  The plan’s benefit obligation was $1,210
and $1,091 at December 31, 2008 and 2007, respectively, and the plan had no
assets at either date.  The rate used to discount future estimated
liabilities was 6.25% and 6.0% in 2008 and 2007, respectively.  Net
periodic benefit cost was $145, $329 and $1,586 for the years ended December 31,
2008, 2007 and 2006, respectively.  The Company’s estimated future net
benefit payments will be immaterial to the Company’s financial results and cash
flows.





18.  Commitments and Contingencies





Employees.  The
Company operates under several collective bargaining agreements with groups of
its employees.  The following table reflects the Company’s collective
bargaining agreements and their respective amendable dates:




Employee
      Group
                  
                  Employees
      Represented
                  
                  Representing
      Union
                  
                  Contract
      Amendable DatePinnacle’s
      pilots
                  
                  1,251
                  
                  Air
      Line Pilots Association
                  
                  April
      30, 2005Colgan’s
      pilots
                  
                  451
                  
                  Air
      Line Pilots Association
                  
                  Pending(1)Pinnacle’s
      flight attendants
                  
                  792
                  
                  United
      Steel Workers of America
                  
                  February
      1, 2011Colgan’s
      flight attendants
                  
                  298
                  
                  United
      Steel Workers of America
                  
                  April
      30, 2014 (2)Pinnacle’s
      ground operations agents
                  
                  1,180
                  
                  United
      Steel Workers of America
                  
                  March
      19, 2010Pinnacle’s
      flight dispatchers
                  
                  46
                  
                  Transport
      Workers Union of America
                  
                  December
      31, 2013





(1)
      The initial contract negotiations are scheduled to begin during the second
      quarter 2009.
              (2)
      The Colgan flight attendant agreement with the United Steel Workers of
      America is amendable on April 30, 2014 with the exception of awage
      review only which could occur in
              April 2011.





As of
December 31, 2008, approximately 71% of the Company’s workforce were members of
unions, including pilots (30%), flight attendants (19%), ground operations
agents (21%) and dispatchers (1%).





The
collective bargaining agreement between Pinnacle and the Air Line Pilots
Association (“ALPA”) became amendable in April 2005. Pinnacle has been actively
negotiating with ALPA since that time.  In August 2006, Pinnacle filed
for mediation with the National Mediation Board.  Since then, Pinnacle
has met with the federal mediator assigned to its case and with ALPA, but
Pinnacle has not reached resolution on an amended collective bargaining
agreement.


98
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


18.  Commitments
and Contingencies (continued)





In
December 2008, Colgan’s pilots voted to select ALPA to represent them for
purposed of negotiating a collective bargaining agreement with the
Company.  The Company does not expect a collective bargaining
agreement at Colgan to have a material effect on its future financial results,
as Colgan’s pilots are already compensated near industry-standard
pay.





Purchase Commitments.The Company has
contractual obligations and commitments primarily related to future purchases of
aircraft.  The Company’s firm orders and options to purchase aircraft
as of December 31, 2008 were as follows:




Firm
                        
                        Options
                        
                        TotalQ4002010
                        
                        8
                        
                        4
                        
                        122011
                        
                        2
                        
                        16
                        
                        18Total
      Q400
                        
                        10
                        
                        20
                        
                        30CRJ-9002009
                        
                        2
                        
                        -
                        
                        2Total
      CRJ-900
                        
                        2
                        
                        -
                        
                        2Total
                        
                        12
                        
                        20
                        
                        32





As
discussed in Note 3, in January 2009, the Company modified its purchase
agreement with Bombardier to exercise its right to purchase the remaining ten
firm Q400 aircraft and five option Q400 aircraft included in the table above,
which will be delivered between August 2010 and April 2011.  In
addition, Colgan acquired an additional 15 of Q400 options from the aircraft
manufacturer thereby increasing our total Q400 options to 30.  These
options, if exercised, provide for the delivery of 15 Q400s in 2011 and the
remaining 15 in 2013. These commitments are excluded from the table
above.





The
Company’s contractual obligations and commitments at March 1, 2009, primarily
related to future purchases of aircraft and related equipment, are approximately
$52,625 for 2009, $173,097 for 2010, $122,968 for 2011, $4,776 for 2012, and
$643 for 2013.





Guarantees and
Indemnifications.  In the Company’s aircraft lease agreements
with Delta, the Company typically indemnifies the prime lessor, financing
parties, trustees acting on their behalf and other related parties against
liabilities that arise from the manufacture, design, ownership, financing, use,
operation and maintenance of the aircraft and for tort liability, whether or not
these liabilities arise out of or relate to the negligence of these indemnified
parties, except for their gross negligence or willful misconduct.





The
Company is party to numerous contracts and real estate leases in which it is
common for it to agree to indemnify third parties for tort liabilities that
arise out of or relate to the subject matter of the contract or occupancy of the
leased premises. In some cases, this indemnity extends to related liabilities
arising from the negligence of the indemnified parties, but usually excludes any
liabilities caused by their gross negligence or willful misconduct.
Additionally, the Company typically indemnifies the lessors and related third
parties for any environmental liability that arises out of or relates to its use
of the leased premises.





The
Company expects that its levels of insurance coverage (subject to deductibles)
would be adequate to cover most tort liabilities and related indemnities
described above with respect to real estate it leases and aircraft it
operates.  The Company does not expect the potential amount of future
payments under the foregoing indemnities and agreements to be
material.


99
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


18.  Commitments
and Contingencies (continued)





Litigation
Contingencies.Colgan is a defendant in a lawsuit related to
the September 11, 2001 terrorist attacks.  The Company expects that
any adverse outcome from this litigation will be covered by insurance, and
therefore, will have no material adverse effect on the Company’s financial
statements as a whole.





On
February 12, 2009, Colgan Flight 3407, operated for Continental under the
Company’s Continental CPA, crashed in a neighborhood near the Buffalo Niagara
International Airport in Buffalo, New York. All 49 people aboard, including 45
passengers and four members of the flight crew, died in the accident.
Additionally, one individual died inside the home destroyed by the aircraft’s
impact, increasing the total fatality count to 50 individuals.  One
lawsuit related to this accident has been filed against the Company, and
additional litigation is anticipated.  The Company carries aviation
risk liability insurance and believes that this insurance is sufficient to cover
any liability arising from this accident.





Disputes with Codeshare
Partners.  The Company is currently engaged in discussions with
Northwest involving the interpretation of various components of the CRJ-200
ASA.  If the parties are unable to reach a mutually agreeable
resolution related to these matters, the parties may elect to resolve the issues
through arbitration.  The potential outcome of these disputed matters
ranges from an annual increase in the payments received from Northwest of
approximately $2,800 to a decrease in payments received from Northwest of as
much as $4,800.  Adverse determinations in these matters could result
in a loss to the Company of up to $11,900 for disputed amounts accruing through
December 31, 2008.


100
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)
 Table of
Contents


19.  Quarterly Financial Data (Unaudited)





Unaudited
summarized financial data by quarter for 2008 and 2007 is as
follows:





Three
      Months Ended During 2008March 31
                    
                    
                    June 30(1)
                    
                    
                    September 30(2)
                    
                    
                    December 31(3)Operating
      revenue
                    
                    $
                    204,341
                    
                    
                    $
                    221,154
                    
                    
                    $
                    221,792
                    
                    
                    $
                    217,498Operating
      income
                    
                    
                    6,780
                    
                    
                    
                    2,471
                    
                    
                    
                    20,010
                    
                    
                    
                    16,346Net
      income (loss)
                    
                    
                    2,653
                    
                    
                    
                    (11,451)
                    
                    
                    
                    7,717
                    
                    
                    
                    (3,826)Basic
      earnings (loss) per share
                    
                    $
                    0.15
                    
                    
                    $
                    (0.64)
                    
                    
                    $
                    0.43
                    
                    
                    $
                    (0.21)Diluted
      earnings (loss) per share
                    
                    $
                    0.15
                    
                    
                    $
                    (0.64)
                    
                    
                    $
                    0.43
                    
                    
                    $
                    (0.21)Operating
      income as apercentage
      of  operatingrevenues
                    
                    
                    3.3%
                    
                    
                    
                    1.1%
                    
                    
                    
                    9.0%
                    
                    
                    
                    7.5%





Three
      Months Ended During 2007March 31(4)
                    
                    
                    June 30(5)
                    
                    
                    September 30
                    
                    
                    December 31Operating
      revenue
                    
                    $
                    179,550
                    
                    
                    $
                    200,994
                    
                    
                    $
                    205,730
                    
                    
                    $
                    201,100Operating
      income
                    
                    
                    12,825
                    
                    
                    
                    15,127
                    
                    
                    
                    15,007
                    
                    
                    
                    9,452Net
      income
                    
                    
                    9,365
                    
                    
                    
                    7,662
                    
                    
                    
                    10,904
                    
                    
                    
                    6,706Basic
      earnings per share
                    
                    $
                    0.43
                    
                    
                    $
                    0.35
                    
                    
                    $
                    0.53
                    
                    
                    $
                    0.35Diluted
      earnings per share
                    
                    $
                    0.38
                    
                    
                    $
                    0.32
                    
                    
                    $
                    0.48
                    
                    
                    $
                    0.32Operating
      income as a percentage
      of  operatingrevenues
                    
                    
                    7.1%
                    
                    
                    
                    7.5%
                    
                    
                    
                    7.3%
                    
                    
                    
                    4.7%





(1)
            The
      Company’s operating income and net income for the three months ended June
      30, 2008 includes $12,619 related to impairment of goodwill and lease
      return costs ($8,139 net of related tax) and net income includes $8,675
      related to the impairment of the Company’s ARS securities ($8,308 net of
      related tax).


(2)
            The
      Company’s operating income and net income for the three months ended
      September 30, 2008 includes $1,069 related to aircraft lease return costs
      ($674 net of related tax)


(3)
            The
      Company’s net income for the three months ended December 31, 2008 includes
      $8,125 ($7,782 net of related tax) related to impairment of the Company’s
      ARS securities and a charge of approximately $2,869 ($1,786 net of related
      tax) related to the true-up of maintenance expense for the period January
      1 through September 30, 2008.


(4)
            The
      Company’s operating income and net income for the three months ended March
      31, 2007 includes a benefit of $1,048 ($666 net of related tax) related to
      changes in estimates of sublease
losses.


(5)
            The
      Company’s net income for the three months ended June 30, 2007 includes a
      $4,144 loss ($2,631 net of related tax) on the sale of the Company’s
      $42,500 unsecured claim against
Northwest.





101
 Table of Contents


Item 9.  Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure





There
were no changes in or disagreements on any matters of accounting principles or
financial statement disclosure between us and our independent
auditors.





Item
9A.  Controls and Procedures





Disclosure Controls and
Procedures.  An evaluation was performed under the supervision
and with the participation of our management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of our
disclosure controls and procedures as of December 31,
2008.  Disclosure controls and procedures are controls and procedures
that are designed to ensure that information required to be disclosed in our
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and completely and accurately reported within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.  Based on that evaluation, our management, including our CEO
and CFO, concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
as specified in the SEC’s rules and forms.




Management’s Report on
Internal Control over
Financial Reporting.  Management is responsible for
establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f).  Under the supervision and with the participation of our
management, including our CEO and CFO, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December
31, 2007 based on the framework in Internal Control – Integrated
Framework published by the Committee of Sponsoring Organizations (COSO)
of the Treadway Commission.  Based on that evaluation, management
concluded that our internal control over financial reporting was effective as of
December 31, 2008.





Because
of its inherent limitations, internal control over financial reporting can
provide only reasonable assurance that the objectives of the control system are
met and may not prevent or detect misstatements.  In addition, any
evaluation of the effectiveness of internal controls over financial reporting in
future periods is subject to risk that those internal controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





The
Company’s independent registered public accounting firm has issued an
attestation report regarding its assessment of the Company’s internal control
over financial reporting as of December 31, 2008, which appears on page
103.  Additionally, the financial statements for each of the years
covered in this Annual Report on Form 10-K have been audited by an independent
registered public accounting firm, Ernst & Young LLP whose report is
presented page 58 of this Annual Report on Form 10-K.





Changes in Internal Control over
Financial Reporting.Except as discussed below, there has been
no change in our internal control over financial reporting during the year ended
December 31, 2008, that has materially affected, or is reasonably likely to
materially affect our internal control over financial reporting.





During
the first quarter of 2008, the Company implemented a new financial system that
encompasses financial reporting, the general ledger, inventory control, and
other similar and related processes.  The new financial system was
implemented to enhance the Company’s business processes.




102


REPORT
OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM





The Board
of Directors and Stockholders


Pinnacle
Airlines Corp.





We have
audited Pinnacle Airlines Corp.’s internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Pinnacle Airlines Corp.’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





In our
opinion, Pinnacle Airlines Corp. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on the
COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pinnacle
Airlines Corp. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2008 of Pinnacle Airlines Corp. and
our report dated March 5, 2009 expressed an unqualified opinion
thereon.








/s/ ERNST & YOUNG LLP





Memphis,
Tennessee


March 5,
2009


103
 Table
of Contents


Item 9B.  Other Information





None.





104




Part
III







Item 10.  Directors and Executive Officers of the
Registrant





Item 11.  Executive Compensation




Item 12.  Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters





Item 13.  Certain Relationships and Related
Transactions




Item 14. Principal Accountant Fees and Services





The
information required by Items 10 through 14 is incorporated by reference to
the definitive proxy statement for our 2009 annual meeting of stockholdersto be filed within 120 days of December 31,
2008.


105







Part
IV







Item 15.  Exhibits and Financial Statement
Schedules





(a)
            Documents
      Filed as Part of this Report





1.
            The
      following financial statements are included in Part II, Item 8.
      Financial Statements and Supplementary
Data:





Report of
Independent Registered Public Accounting Firm:





i)
            Consolidated
      Statements of Operations for the Years Ended December 31, 2008, 2007 and
      2006





ii)
            Consolidated
      Balance Sheets as of December 31, 2008 and
2007





iii)
            Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2008,
      2007 and 2006





iv)
            Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006





v)
            Notes
      to Consolidated Financial
Statements







2.      Financial Statement Schedule:


Report
      of Independent Registered Public Accounting Firm on Financial Statement
      Schedule
            Page
      112Schedule
      II—Valuation and Qualifying Accounts
            Page
      113All other schedules have been omitted because they are inapplicable, not
      required, or the information is included elsewhere in the consolidated
      financial statements or notes
thereto.





3.
            Exhibits:
      See accompanying Exhibit Index included after the signature page of this
      report for a list of the exhibits filed or furnished with or incorporated
      by reference in this report.


106














SIGNATURES











Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, Pinnacle Airlines Corp. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.





Pinnacle Airlines
Corp.


(Registrant)





By:
            /s/
      Philip H. TrenaryName:
            Philip
      H. TrenaryMarch
      12, 2009
            
            Title:
            President,
      Chief Executive Officer








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 12, 2009








Signature
                
                Title/s/
      Philip H. Trenary
                
                President,
      Chief Executive Officer and DirectorPhilip
      H. Trenary
                
                (Principal
      Executive Officer)





/s/
      Peter D. Hunt
            
            Vice-President,
      Chief Financial OfficerPeter
      D. Hunt
            
            (Principal
      Accounting Officer)





/s/
      Donald J. Breeding
            
            Chairman
      , DirectorDonald
      J. Breeding




/s/
      Ian Massey
            
            DirectorIan
      Massey





/s/
      James E. McGehee, Jr.
            
            DirectorJames
      E. McGehee, Jr.





/s/
      Thomas S. Schreier, Jr.
            
            DirectorThomas
      S. Schreier, Jr.





/s/
      R. Philip Shannon
            
            DirectorR.
      Philip Shannon





/s/
      Alfred T. Spain
            
            DirectorAlfred
      T. Spain





/s/
      Nicholas R. Tomassetti
            
            DirectorNicholas
      R. Tomassetti





107


Index
of Exhibits


Certain
portions of the exhibits described below have been omitted. The Company has
filed and requested confidential treatment for non-public information with the
Securities and Exchange Commission.





The
following exhibits are filed as part of this Form 10-K.





Exhibit


Number                 Description


3.1
            Second
      Amended and Restated Certificate of Incorporation of Pinnacle Airlines
      Corp. (the “Registrant”) (Incorporated by reference to the Registrant’s
      Registration Statement Form S-1 (Registration No. 333-83359), as amended
      (the “S-1”) initially filed on February 25,
  2002)


3.2
            Certificate
      of Correction Filed to Correct a Certain Error in the Second Amended and
      Restated Certificate of Incorporation of the Registrant (Incorporated by
      reference to the S-1)


3.3
            Amended
      and Restated Bylaws, dated January 14, 2003, of the Registrant
      (Incorporated by reference to the
S-1)


4.1
            Specimen
      Stock Certificate (Incorporated by reference to the
  S-1)


4.2
            Rights
      Agreement between the Registrant and EquiServe Trust Company, N.A., as
      Rights Agent (Incorporated by reference to the
  S-1)


4.3
            Indenture,
      3.25% Senior Convertible Notes due 2025, dated as of February 8, 2005, by
      and between the Registrant and Deutsche Bank National Trust Company
      (Incorporated by reference to the Registrant’s Current Report on Form 8-K
      filed on February 8, 2005)


4.4
            Registration
      Rights Agreement made pursuant to the Purchase Agreement dated February 3,
      2005, dated as of February 8, 2005, by and among the Registrant, Merrill
      Lynch, Pierce, Fenner & Smith Incorporated and Raymond James &
      Associates, Inc. (Incorporated by reference to the Registrant’s Current
      Report on Form 8-K filed on February 8,
  2005)


10.1#
            Loan
      Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc, the
      Registrant, and First Tennessee Bank National Association (Incorporated by
      reference to the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.2
            Sublease
      Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)


10.2.1
            Form
      of First Amendment to Sublease Agreement between Pinnacle Airlines, Inc.
      and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.2#
            Guaranty
      Agreement between Pinnacle Airlines, Inc. and First Tennessee Bank
      National Association (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on June 23,
  2005)


10.3
            Engine
      Lease Agreement between Pinnacle Airlines, Inc., the Registrant, and
      Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.3.1
            Form
      of First Amendment to Engine Lease Agreement between Pinnacle Airlines,
      Inc. and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.4#
            Revolving
      Credit Note dated as of June 16, 2005 between Pinnacle Airlines, Inc. and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.5#
            Security
      Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc. and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.6#
            Negative
      Pledge Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc.
      and First Tennessee Bank National Association (Incorporated by reference
      to the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.7#
            Negative
      Pledge Agreement dated as of June 16, 2005 between the Registrant and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.8†
            Pinnacle
      Airlines Corp. 2003 Stock Incentive Plan (Incorporated by reference to the
      S-1)


10.9
            Form
      of Incentive Stock Option Agreement for options granted under the Pinnacle
      Airlines Corp. 2003 Stock Incentive Plan (Incorporated by reference to the
      S-1)


10.10†
            Pinnacle
      Airlines, Inc. Annual Management Bonus Plan (Incorporated by reference to
      the S-1)


10.11
            Amended
      and Restated Sublease Agreement dated as of January 14, 2003 between
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (SBN Facilities)
      (Incorporated by reference to the
S-1)


108


Exhibit


Number                 Description


10.12
            Sublease
      Agreement dated as of August 1, 2002 between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (TYS Facilities) (Incorporated by reference to
      the S-1)


10.13
            Form
      of Amended and Restated Facilities Use Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (DTW Facilities) (Incorporated
      by reference to the S-1)


10.14
            Form
      of Amended and Restated Facilities Use Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (MEM Facilities) (Incorporated
      by reference to the S-1)


10.15
            Form
      of Amended and Restated Facilities Use Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (MSP Facilities) (Incorporated
      by reference to the S-1)


10.16
            Intentionally
      omitted


10.17
            Intentionally
      omitted


10.18
            Lease
      Guaranty issued by the Registrant to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)


10.19
            Sublease
      Guaranty issued by the Registrant to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)


10.20
            Airline
      Services Agreement dated as of March 1, 2002 among the Registrant,
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by
      reference to the S-1)


10.21
            Airline
      Services Agreement dated as of January 14, 2003 among the Registrant,
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by
      reference to the S-1)


10.21.1
            Amendment
      No. 1 dated as of September 11, 2003 to the Airline Services Agreement
      dated as of January 14, 2003 among the Registrant, Pinnacle Airlines, Inc.
      and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.21.2
            Form
      of Amendment No. 2 dated as of November 26, 2003 to the Airline Services
      Agreement dated as of January 14, 2003 among the Registrant, Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)


10.22
            Form
      of Amended and Restated Ground Handling Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)


10.23
            Form
      of Amended and Restated Information Technology Services Agreement between
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by
      reference to the S-1)


10.24
            Form
      of Amended and Restated Family Assistance Services Agreement between
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by
      reference to the S-1)


10.25
            Form
      of Amended and Restated Manufacturer Benefits Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)


10.26
            Form
      of Amended and Restated Preferential Hiring Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)


10.27
            Purchase
      Agreement, Senior Convertible Notes due 2025, dated as of February 3,
      2005, by and among, the Registrant., Merrill Lynch, Pierce, Fenner &
      Smith Incorporated and Raymond James & Associates, Inc. (Incorporated
      by reference to the Registrant’s Current Report on Form 8-K filed on
      February 8, 2005)


10.28†
            Second
      Amended and Restated Management Compensation Agreement between Pinnacle
      Airlines, Inc. and Philip H. Trenary (Incorporated by reference to the
      Registrant’s Current Report on Form 8-K filed on December 16,
      2008)


10.29†
            Amended
      and Restated Management Compensation Agreement between Pinnacle Airlines,
      Inc. and Peter D. Hunt (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on December 16,
  2008)


10.30†
            Amended
      and Restated Management Compensation Agreement between Pinnacle Airlines,
      Inc. and Douglas W. Shockey (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on December 16,
  2008)


10.31†
            Form
      of Indemnity Agreement between the Registrant and its directors and
      officers (Incorporated by reference to the Registrant’s Current Report on
      Form 8-K filed on February 1, 2006)


10.32
            Assignment
      of Claim Agreement between Pinnacle Airlines, Inc. and Goldman Sachs
      Credit Partners, L.P., dated as of October 5, 2006 (Incorporated by
      reference to the Registrant’s Form 10-K filed on March 8,
      2007)


109





Exhibit


Number                 Description


10.40
            Assumption
      and Claim Resolution Agreement between Pinnacle Airlines, Inc., the
      Registrant, and Northwest Airlines, Inc., dated as of December 20,
      2006 (Incorporated by reference to the Registrant’s Current Report on Form
      8-K filed on January 3, 2007)


10.41
            Amended
      and Restated Airline Services Agreement by and among Pinnacle Airlines,
      Inc., the Registrant, and Northwest Airlines, Inc., dated December 15,
      2006, effective as of January 1, 2007 (Incorporated by reference to the
      Registrant’s Form 10-K filed on March 8,
2007)


10.42
            Amendment
      No. 1 dated as of November 21, 2007 to the Amended and Restated Airline
      Services Agreement by and among Pinnacle Airlines, Inc., the Registrant,
      and Northwest Airlines, Inc., dated December 15,
  2006


10.43
            CF34-3B1
      Engine Hourly Rate Program Repair and Services Agreement between Northwest
      Airlines, Inc. and Standard Aero Ltd., dated as of September 1, 2007
      (Incorporated by reference to the Registrant’s Form 10-K filed on March
      17, 2008)


10.50
            Stock
      Purchase Agreement, dated as of January 18, 2007, by and among Colgan Air,
      Inc. and the Registrant (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on January 24,
  2007)


10.60
            Capacity
      Purchase Agreement between Continental Airlines, Inc., the Registrant, and
      Colgan Air, Inc., dated as of February 2, 2007 (Incorporated by reference
      to the Registrant’s Form 10-Q filed on November 2,
  2007)


10.61
            Purchase
      Agreement between Bombardier Inc. and the Registrant, relating to the
      purchase of twenty-five (25) Bombardier Q400 series aircraft, dated as of
      February 17, 2007 (Incorporated by reference to the Registrant’s Form 10-K
      filed on March 17, 2008)


10.62
            Form
      of Loan Agreement, between the Registrant and Export Development Canada,
      for the financing of Q400 and CRJ-900 aircraft (Incorporated by reference
      to the Registrant’s Form 10-K filed on March 17,
  2008)


10.65
            Delta
      Connection Agreement among Delta Air Lines, Inc., the Registrant, and
      Pinnacle Airlines, Inc., dated as of April 27, 2007 (Incorporated by
      reference to the Registrant’s Form 10-Q filed on November 2,
      2007)


10.66
            Purchase
      Agreement between Bombardier Inc. and Pinnacle Airlines, Inc, relating to
      the purchase of sixteen (16) Bombardier CRJ-900 series aircraft, dated as
      of April 26, 2007 (Incorporated by reference to the Registrant’s Form 10-K
      filed on March 17, 2008)


10.70
            Credit
      Facility Agreement between Citigroup Global Markets, Inc. and the
      Registrant, dated as of March 11, 2008 (Incorporated by reference to the
      Registrant’s Form 10-Q filed on May 8,
2008)


10.71
            Amendment
      No. 1, dated as of June 18, 2008, to the Credit Facility Agreement between
      the Registrant, and Citigroup Global Markets, Inc., dated as of March 11,
      2008 (Incorporated by reference to the Registrant’s Current Report on Form
      8-K filed on June 20, 2008)


10.72
            Amendment
      No. 1, dated as of March 2, 2009, to the Amended and Restated Loan
      Agreement between the Registrant and Citigroup Global Markets, Inc., dated
      as of November 5, 2008 (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on March 5,
  2009)


10.73*
              Third
      Amendment, dated as of January 13, 2009, to the Capacity Purchase
      Agreement between Continental Airlines, Inc., the Registrant, and Colgan
      Air, Inc., dated as of February 2, 200710.74*
              Loan
      Agreement, dated as of January 30, 2009, between Colgan Air, Inc. and
      Export Development Canada10.75*
              Change
      Order No. 16, dated as of January 13, 2009, and Change Order No. 18, dated
      as of February 6, 2009, to the Purchase Agreement between Bombardier, Inc.
      and the Registrant, relating to the purchase of Bombardier Q400 series
      aircraft, dated as of February 17, 200710.76*
              United
      Express Agreement, dated as of November 1, 2008, between United Air Lines,
      Inc. and Colgan Air, Inc.10.99.1#
              Form
      of Promissory Note issued by Pinnacle Airlines, Inc. to Northwest
      Airlines, Inc. (Incorporated by reference to the
  S-1)


10.99.2#
            Form
      of Guaranty of Promissory Note issued by Registrant to Northwest Airlines,
      Inc. (Incorporated by reference to the
S-1)


10.99.3#
            Revolving
      Credit Facility dated as of January 14, 2003 between Pinnacle Airlines,
      Inc. and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.99.4#
            First
      Amendment dated as of February 5, 2003 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the
  S-1)


10.99.5#
            Second
      Amendment dated as of November 28, 2003 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the
  S-1)


10.99.6#
            Third
      Amendment dated as of December 13, 2004 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the Registrant’s Current
      Report on Form 8-K filed on December 16,
2004)


110


Exhibit


Number                 Description


10.99.7#
            Fourth
      Amendment dated as of February 8, 2005 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the Registrant’s Current
      Report on Form 8-K filed on February 8,
  2005)


10.99.8#
            Guaranty
      dated as of January 14, 2003 issued by Registrant to Northwest Airlines,
      Inc. (Incorporated by reference to the
S-1)





21.1
            List
      of Subsidiaries (Incorporated by reference to the
  S-1)


23.1*                      Consent
of Independent Registered Public Accounting Firm


31.1*                      Certification
of Chief Executive Officer


31.2*                      Certification
of Chief Financial Officer


32*                        
Certifications of CEO and CFO





*
            Filed
      herewith


†
            Management
      contract or compensatory plan or
arrangement


#                             Cancelled
agreement referenced in this Form 10-K


111


REPORT
OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM








The Board
of Directors and Stockholders


Pinnacle
Airlines Corp.





We have
audited the consolidated financial statements of Pinnacle Airlines Corp. as of
December 31, 2008 and 2007, and for each of the three years in the period ended
December 31, 2008, and have issued our report thereon dated March 5, 2009
(included elsewhere in this Form 10-K). Our audits also included the financial
statement schedule listed in Item 15(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.





In our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.











/s/ ERNST & YOUNG LLP








Memphis,
Tennessee


March 5,
2009











112


Schedule
II


Pinnacle
Airlines Corp.


Valuation
and Qualifying Accounts


(in
thousands)




AdditionsBalance
      at
                                                                    
                                                                    
                                                                    Charged
      to
                                                                    
                                                                    
                                                                    Charged
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    Balance
      atBeginning
                                                                    
                                                                    
                                                                    Costs
      and
                                                                    
                                                                    
                                                                    to
      Other
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    
                                                                    End
      ofDescription
                                                                    
                                                                    of
      Period
                                                                    
                                                                    
                                                                    Expenses
                                                                    
                                                                    
                                                                    Accounts
                                                                    
                                                                    
                                                                    Deductions
                                                                    
                                                                    
                                                                    PeriodYear
      Ended December 31, 2008Allowance
      deducted from asset accounts:Allowance
      for doubtful accounts
                                                                    
                                                                    $
                                                                    131
                                                                    
                                                                    
                                                                    $
                                                                    134
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    (130)
                                                                    
                                                                    
                                                                    $
                                                                    135Allowance
      for obsolete inventory parts
                                                                    
                                                                    
                                                                    2,536
                                                                    
                                                                    
                                                                    
                                                                    1,677
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    4,213Year
      Ended December 31, 2007Allowance
      deducted from asset accounts:Allowance for doubtful accounts
                                                                    
                                                                    
                                                                    7,860
                                                                    
                                                                    
                                                                    
                                                                    131
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    (7,860)
                                                                    (2)
                                                                    
                                                                    
                                                                    131Allowance for obsolete inventory parts
                                                                    
                                                                    
                                                                    1,517
                                                                    
                                                                    
                                                                    
                                                                    1,019
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    2,536Year
      Ended December 31, 2006Allowance
      deducted from asset accounts:Allowance for doubtful accounts
                                                                    
                                                                    
                                                                    51,523
                                                                    
                                                                    
                                                                    
                                                                    (43,663)
                                                                    (1)
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    7,860Allowance for obsolete inventory parts
                                                                    
                                                                    
                                                                    1,084
                                                                    
                                                                    
                                                                    
                                                                    433
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    
                                                                    1,517(1) On January
      3, 2007, the Company agreed to assignan aggregate of $335,000 of
      its $377,500 stipulated unsecured claim against Northwest that was agreed
      to in the Assumption Agreement to several third parties for aggregate
      proceeds of approximately $283,000, net of expenses. As a result, the
      Company lowered its reserve against its pre-petition receivables from 95%
      to 15.5%.(2) Bankruptcy
      related amounts settled as part of the unsecured claim the Company
      received from
Northwest.





113





Pinnacle
Airlines Corp.


Ratio
of Earnings to Fixed Charges - Unaudited


(in
thousands, except ratios)





Years
      Ended December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004Earnings:Income
      from operations before taxes (1)
                                        
                                        $
                                        1,297
                                        
                                        
                                        $
                                        51,037
                                        
                                        
                                        $
                                        124,600
                                        
                                        
                                        $
                                        41,411
                                        
                                        
                                        $
                                        63,125Additions:Interest
      expense, net of capitalized interest
                                        
                                        
                                        34,661
                                        
                                        
                                        
                                        8,853
                                        
                                        
                                        
                                        5,578
                                        
                                        
                                        
                                        4,772
                                        
                                        
                                        
                                        4,907Portion
      of rent expense representativeof
      interest factor(2)
                                        
                                        
                                        69,031
                                        
                                        
                                        
                                        79,968
                                        
                                        
                                        
                                        127,046
                                        
                                        
                                        
                                        134,442
                                        
                                        
                                        
                                        107,118Earnings
      as adjusted
                                        
                                        $
                                        104,989
                                        
                                        
                                        $
                                        139,858
                                        
                                        
                                        $
                                        257,224
                                        
                                        
                                        $
                                        180,625
                                        
                                        
                                        $
                                        175,150Fixed
      charges:Interest
      expense, net of capitalized interest
                                        
                                        $
                                        34,661
                                        
                                        
                                        $
                                        8,853
                                        
                                        
                                        $
                                        5,578
                                        
                                        
                                        $
                                        4,772
                                        
                                        
                                        $
                                        4,907Capitalized
      interest
                                        
                                        
                                        1,790
                                        
                                        
                                        
                                        2,930
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Portion
      of rent expense representativeof
      interest factor(2)
                                        
                                        
                                        69,031
                                        
                                        
                                        
                                        79,968
                                        
                                        
                                        
                                        127,046
                                        
                                        
                                        
                                        134,442
                                        
                                        
                                        
                                        107,118$
                                        105,482
                                        
                                        
                                        $
                                        91,751
                                        
                                        
                                        $
                                        132,624
                                        
                                        
                                        $
                                        139,214
                                        
                                        
                                        $
                                        112,025Ratio
      of earnings to fixed charges
                                        
                                        
                                        1.00
                                        
                                        
                                        
                                        1.52
                                        
                                        
                                        
                                        1.94
                                        
                                        
                                        
                                        1.30
                                        
                                        
                                        
                                        1.56








(1)
            The
      decrease in income from operations before taxes for the year ended
      December 31, 2007 from the year ended December 31, 2006 is primarily
      attributed to the change in the terms of the CRJ-200 ASA with Northwest
      and is also attributed to the addition of Colgan.  Income from
      operations before taxes for the year ended December 31, 2006 includes a
      $43,571 benefit for the changes in estimates and sale of the bankruptcy
      claims related to the bankruptcy filings of Northwest and Mesaba and the
      year ended December 31, 2005 includes a gain of $18,000 related to the
      repurchase of the Northwest note payable in February 2005 and a $59,599
      charge for provisions related to the bankruptcy filings of Northwest and
      Mesaba.


(2)
            Aircraft
      rental expense decreased due to the terms of the CRJ-200 ASA with Delta.
      Effective January 1, 2007, our monthly lease rates were reduced to rates
      that approximated market conditions at that time.  The decrease
      in rent is slightly offset by rent expense attributable to
      Colgan.











114