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, 2009or[   ]
            
            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.  [ 
 ]





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this
chapter) during the preceding twelve months (or for such shorter period that the
registrant was required to submit and post such files).


Yes   [ 
       ]
            
            No   [   ]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 (check one):




Large
      accelerated filer [   ]
            
            Accelerated
      filer [   ]Non-accelerated
      filer [ X
      ]
            
            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 $48 million as of June 30,
2009.




As of
February 22, 2010, 18,556,328 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 2010 Annual Meeting of Stockholders to be filed with
the Commission within 120 days after December 31, 2009.





TABLE
OF CONTENTS
 
 Part
I
 Forward-Looking
      Statements
              4Item 1.
              Business
              4Our Company
              4Operating Platforms
              5Competition and Economic
      Conditions
              5Industry Overview
              6Our Operating
    Contracts
              7Pinnacle’s Agreements with Major
      Airlines
              9Colgan’s Agreements with Major
      Airlines
              11Employees
              13Aircraft Maintenance
              14Training
              14Safety
              15Insurance
              15Regulations
              15Seasonality
              16Website
              16Item 1A.
              Risk Factors
              17Item 1B.
              Unresolved Staff
      Comments
              21Item 2.
              Properties
              22Flight Equipment
              22Facilities
              22Item 3.
              Legal Proceedings
              23Environmental
Matters
              23Regulatory Matters
              23Item 4.
              Submission of Matters to a Vote of
      Security Holders
              23Part
      IIItem 5.
              Market for Registrant’s Common Equity,
      Related Stockholder Matters and Issuer Purchases of Equity
      Securities
              24Performance Graph
              25Item 6.
              Selected Financial
    Data
              26






2
 
 TABLE OF CONTENTS
 (Continued)
  Part
      II (Continued)Item 7.
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              30Overview and Outlook
              30Results of Operations
              33Consolidated and Segmented Results of
      Operations
              34Liquidity and Capital Resources
              47Significant Accounting Policies and
      Critical Estimates
              51Item 7A.
              Quantitative and Qualitative Disclosures About
      Market Risk
              55Commodity Price Risk
              55Interest Rate Risk
              55Item 8.
              Financial Statements and
      Supplementary Data
              56Item 9.
              Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
              95Item 9A.
              Controls and
      Procedures
              95Item 9B.
              Other Information
              97
  Part
      IIIItem 10.
              Directors and Executive Officers of the
      Registrant
              98Item 11.
              Executive Compensation
              98Item 12.
              Security Ownership of Certain Beneficial
      Owners and Management and Related Stockholder Matters
              98Item 13.
              Certain Relationships and Related
      Transactions
              98Item 14.
              Principal Accountant Fees and
      Services
              98




Part
      IVItem 15.
              Exhibits and Financial Statement
      Schedules
              99SIGNATURES
              100


3
 
 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,
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 solely on information available to us on the
date of this Report.  We assume no obligation to update any
forward-looking statement.





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, Management’s
Discussion and Analysis of Financial Condition and Results of Operations
under “Overview and 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. and its newly merged operating subsidiary, Northwest
Airlines, Inc., are referred to herein as “Delta.”  Northwest Airlines
Corporation and its subsidiaries as they existed prior to the merger are
referred to herein as “Northwest.”





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, 2009, we had two reportable segments consisting of Pinnacle and
Colgan.  Information on our segments’ operating revenues, operating
income, total assets, and other financial measures can be found in Note 4,Segment Reporting, in Item 8
of this Form 10-K.





Pinnacle
operates an all-regional jet fleet, and provides regional airline capacity to
Delta at its hub airports in Atlanta, Detroit, Memphis, and Minneapolis/St.
Paul.  At December 31, 2009, Pinnacle operated 126 Canadair Regional
Jet (“CRJ”)-200 aircraft under Delta brands with approximately 663 daily
departures to 114 cities in 37 states and three Canadian
provinces.  Pinnacle also operated a fleet of 16 CRJ-900 aircraft as a
Delta Connection carrier with approximately 72 daily departures to 27 cities in
14 states, Belize, Mexico, Canada and the U.S. Virgin Islands.


4


Item
1.  Business





Our
Company (Continued)





Colgan
operates an all-turboprop fleet under a regional airline capacity purchase
agreement (“CPA”) with Continental, and under revenue pro-rate agreements with
Continental, United and US Airways.  Colgan’s operations are focused
primarily in the northeastern United States and in Texas.  As of
December 31, 2009, Colgan offered within its pro-rate operations 239 daily
departures to 40 cities in ten states and the District of
Columbia.  Colgan operated 12 Saab 340 aircraft as Continental
Connection from Continental’s hub airport in Houston, 12 Saab 340 aircraft as
United Express at Washington/Dulles, and ten Saab 340 aircraft as US Airways
Express, at New York/LaGuardia and Boston, under revenue pro-rate
agreements.  Colgan operated 14 Bombardier Q400 aircraft providing 90
daily departures to 17 cities in 11 states, the District of Columbia and two
Canadian provinces as Continental Connection at Continental’s global hub at
Newark/Liberty International Airport.





Operating Platforms





Regional Jet Operation





Pinnacle serves as our platform for
regional jet operations.  Pinnacle operates regional jets under two
CPAs  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 safe, highly
reliable and cost-efficient operations that distinguish us from our competitors.
We are focused on providing excellent customer service and providing a safe and
high quality travel experience.  Pinnacle’s unit cost continues to be
competitive in the regional airline industry.





Turboprop Operation





Colgan
serves as our platform for turboprop operations, providing a similar level of
safe, reliable, and cost-efficient operations for our
partners.  Colgan operates the 74-seat Q400 turboprop aircraft under a
CPA with Continental.  The Q400 regional aircraft offers 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.





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 include 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.


5


Item
1.  Business





Competition
and Economic Conditions (Continued)





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, competitors may easily shift
capacity to enter our pro-rate markets and to offer discounted fares. The
airline industry is particularly susceptible to price discounting because
airlines incur only nominal incremental 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. We are somewhat insulated from
the effect of economic downturns 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, Delta,
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
premium services 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.





Regional
airlines, such as ExpressJet, Mesa 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 of regional jets and their popularity with major
airlines.  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.


6


Item
1.  Business





Industry
Overview (Continued)





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.  However, several major airlines have
publicly indicated that their committed supply of regional airline capacity is
larger than they desire given current market conditions.





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 primarily
into two categories: CPAs and revenue pro-rate agreements.  The
following table presents for the year ended December 31, 2009 the percentage of
our regional airline services revenue derived under each contract type and by
code-share partner:





Percentage
      of Regional Airline Service RevenuePro-Rate
      AgreementsSource
      of Revenue
            
            Capacity
      Purchase Agreements
            
            Standard
            
            Modified
            
            TotalDelta
            
            73%
            
            -
            
            -
            
            73%Continental
            
            9%
            
            -
            
            7%
            
            16%United
            
            -
            
            -
            
            5%
            
            5%US
      Airways
            
            -
            
            4%
            
            -
            
            4%Essential
      Air Service
            
            -
            
            -
            
            2%
            
            2%Total
            
            82%
            
            4%
            
            14%
            
            100%





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 from
passengers.  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 are focused
on growing the percentage of our revenue derived from these types of agreements
by working to structure new business with capacity purchase
terms.


7


Item
1.  Business





Our
Operating Contracts (Continued)





Pinnacle’s
Amended and Restated Airline Services Agreement (the “CRJ-200 ASA”) pertaining
to its CRJ-200 operations and its Delta Connection Agreement pertaining to its
CRJ-900 operations (“CRJ-900 DCA”) 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
            CRJ-900
      DCA
            CRJ-200
      ASAAircraft
      ownership
            Rate-Based
            Reimbursed(1)
            ReimbursedAviation
      insurance
            Reimbursed
            Reimbursed
            ReimbursedCommissions
      and passengerdistribution
      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 reimbursements under the CRJ-900
      DCA are based on 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


Item
1.  Business





Our
Operating Contracts (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
serves.  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 or on a
comparison of unrestricted local fares within each segment.  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 is a modified pro-rate agreement in
that it also contains a connecting passenger incentive designed to maintain a
base level of revenue 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 revenue 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 certain
station/passenger related costs.





Colgan’s
revenue pro-rate agreement with United is also a modified pro-rate agreement in
that it 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 has 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 revenue pro-rate 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 126 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 the end of 2012, when a negotiated rate reset will occur,
which is designed to adjust our rate based compensation to cover our actual
costs at that time.We receive a monthly
margin payment based on the payments described above calculated to achieve a
target operating margin of 8%. Delta does not guarantee Pinnacle’s minimum
operating margin, although we are subject to a margin ceiling above the target
operating margin.  If Pinnacle’s actual operating margin related to
its operations under the CRJ-200 ASA for any year 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 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


Item
1.  Business





Pinnacle’s
Agreements with Major Airlines (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.  Under the CRJ-200 ASA, 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.  We have
discussed our current level of operations outside the CRJ-200 ASA with Delta,
and in early 2010, we reached a tentative agreement to provide for a prospective
rate reduction of $2 million in 2010 and $2.5 million in 2011, and $2.5 million
in 2012 under this provision of the CRJ-200 ASA.  We do not expect
this provision to result in further adjustments to our contract billings prior
to our rate reset effective at the end of 2012.





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.  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
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.





We
recently reached a tentative agreement with Delta entered to resolve various
other issues related to the CRJ-200 ASA.  These issues and their
resolution are discussed in greater detail in Note 3, Code-Share Agreements, in
Item 8 of this Form 10-K.





CRJ-900
Delta Connection Agreement (“CRJ-900 DCA”)





Pinnacle
provides regional jet service to Delta operating 76-seat CRJ-900 aircraft under
the CRJ-900 DCA.  The CRJ-900 DCA provides that Pinnacle operate 16
CRJ-900 aircraft under a capacity purchase agreement.  The CRJ-900 DCA
allows Delta the option to add an additional seven CRJ-900 aircraft to the
fleet.





The
CRJ-900 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 CRJ-900 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
CRJ-900 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
CRJ-900 DCA to remove from the terms of the agreement up to 20% of the CRJ-900
aircraft each year thereafter.


10


Item
1.  Business





Pinnacle’s
Agreements with Major Airlines (Continued)





To the
extent that either party materially breaches the CRJ-900 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 CRJ-900 DCA in the event of certain force majeure events that
prevent either party from performing its obligations under the CRJ-900
DCA.  Delta may also terminate the CRJ-900 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 adhere to various
governmental operating regulations, our failure to maintain certain
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
CRJ-900 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 terminates
for each aircraft upon the tenth anniversary of the in-service date of such
aircraft.  Operations began on February 4, 2008, and we currently
operate 14 Q400 aircraft under the Continental CPA.  In early 2009, we
amended the Continental CPA to add an additional 15 Q400 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 station-related costs not otherwise provided by Continental
or its designee; 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 to Colgan at no charge fuel and ground handling services at
its stations.  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.





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.  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.


11


Item
1.  Business





Colgan’s
Agreements with Major Airlines (Continued)





Continental
Connection Pro-Rate Agreement





We
operate 12 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 modified 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.  We are currently in
discussions with Continental about extending and/or modifying this agreement
beyond its initial five year term, which ends in the second quarter of
2010.





US
Airways Express Agreement





We
operate ten Saab 340 aircraft under a code-share agreement with US Airways (the
“US Airways Agreement”).  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
three-year US Airways Agreement became effective on October 1, 2005 under terms
similar to the 1999 agreement.  Since the end of the three-year term
in 2008, the US Airways Agreement continues to automatically extend for multiple
six-month periods until either party provides notice to terminate.





United
Express Agreement





In
October 2005, Colgan entered into a 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 and expires on November 1, 2011.  Colgan
currently operates 12 Saab 340 aircraft under the name “United Express.” The
United Express Agreement is structured as a modified 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 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.


12


Item
1.  Business





Employees





As of
December 31, 2009, we had 5,106 employees.  Flight attendants and
ground operations agents included 239 and 839 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
      Airlines Corp.
            
            Pinnacle
      Airlines, Inc.
            
            Colgan
      Air, Inc.
            
            TotalPilots
            
            -
            
            1,178
            
            403
            
            1,581Flight
      attendants
            
            -
            
            695
            
            282
            
            977Ground
      operations personnel
            
            -
            
            962
            
            192
            
            1,154Mechanics
      and other maintenance personnel
            
            -
            
            504
            
            308
            
            812Dispatchers
      and crew resource personnel
            
            -
            
            285
            
            81
            
            366Management
      and support personnel
            
            124
            
            51
            
            41
            
            216Total
            
            124
            
            3,675
            
            1,307
            
            5,106





Labor
costs are a significant component of airline expenses and can substantially
affect our results. Approximately 78% and 52% 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
            
            1,178
            
            Air
      Line Pilots Association
            
            April
      30, 2005Colgan’s
      pilots
            
            403
            
            Air
      Line Pilots Association
            
            Pending(1)Pinnacle’s
      flight attendants
            
            695
            
            United
      Steel Workers of America
            
            February
      1, 2011Colgan’s
      flight attendants
            
            282
            
            United
      Steel Workers of America
            
            April
      30, 2014 (2)Pinnacle’s
      ground operations agents
            
            929
            
            United
      Steel Workers of America
            
            March
      19, 2010 (3)Pinnacle’s
      flight dispatchers
            
            67
            
            Transport
      Workers Union of America
            
            December
      31, 2013





(1)
      Initial contract negotiations commenced in October 2009 and are
      ongoing.
              (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.
              (3)
      The Company is currently in negotiations with the United Steel Workers of
      America in advance of the amendable
date





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.


13


Item
1.  Business





Employees  (Continued)





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. On August 4, 2009, Pinnacle and ALPA reached a tentative agreement to
amend the collective bargaining agreement.  The tentative agreement
contained substantial wage rate increases and a proposed $10.2 million signing
bonus for Pinnacle’s pilots.  However, on September 24, 2009,
Pinnacle’s pilots voted against ratification of the tentative
agreement.  The National Mediation Board will determine when the
parties will resume negotiations.





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 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 inspections 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.  The average age of the CRJ-200 and CRJ-900 regional jets in
our fleet as of December 31, 2009 was approximately 6.7 years and 1.5 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.  The average age of the Q400 aircraft
in our fleet as of December 31, 2009 was approximately 1.8 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.  Instructors that conduct the training are typically
professional instructors or trained line pilot instructors.  Recurrent
ground training takes place near the Colgan hubs including Newark, New Jersey,
Washington, D.C. and Houston, Texas.  Upgrade training of Colgan
flight personnel is performed at its Corporate Education Center in Memphis,
Tennessee.


14


Item
1.  Business





Training
(Continued)





We
provide both internal and outside training for our maintenance
personnel.  To maximize value for the Company and to ensure our
employees receive the highest quality training available, 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.





Safety





We are
committed to the safety and security of our passengers and
employees.  Our most important Guiding Principle is “Never Compromise
Safety.”  For example, Pinnacle led the way in the regional
airline industry by being one of the first regional airlines to
implement the Flight Operational Quality Assurance (“FOQA”)
program. We are currently in the processing of implementing FOQA at
Colgan.  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.   We also maintain a
Line Observation Safety Audit (“LOSA”) program to obtain a self-evaluation of
safety procedures that are invaluable in assessing opportunities for enhancing
safety in flight operations.





Insurance





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 liability;
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.





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 August 31, 2010.  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 certificate of one of our subsidiaries if the
subsidiary fails 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, transportation of
hazardous materials and other technical matters. The FAA requires each airline
to obtain approval to operate at specific airports using specified
equipment.  Under FAA regulations and with FAA approval, our
subsidiaries have established 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.  As of
December 31, 2009, we had no unresolved significant violations.


15


Item
1.  Business





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.





16


Item 1A. Risk Factors





Risks
Related to our Financial Condition





A. The global
financial crisis could affect our business and financial condition in ways that
we currently cannot predict.





While
over the past several months the financial and credit markets have begun to
stabilize, certain components of the capital markets remain illiquid and the
availability of credit constrained.  Our prospective access to the
capital markets to raise capital may be restricted, which could affect our
ability to meet our obligations, our ability to react to changing economic and
business conditions and our ability to grow our operations either through
expansions of our existing agreements or the addition of new agreements.
Additionally, 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.





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





Our
recent growth strategy has required significant amounts of capital to acquire
CRJ-900 and Q400 regional aircraft.  As a result, we have
significantly increased our total debt obligations and our leverage over the
past three years.  During the year ended December 31, 2009, our
mandatory debt service payments totaled approximately $130 million, and we
expect this amount to increase through April 2011 as we acquire and finance 15
additional Q400 aircraft.  See related risk factor A for additional
information related to credit availability.





There can
be no assurance that our operations will generate sufficient cash flow or
liquidity to enable us to obtain the necessary aircraft acquisition financing
for future growth, or to make required debt service payments related to our
existing obligations.  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.





C.
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, which could lead to poor
operating performance, loss of regional airline services revenue, and financial
penalties under our operating contracts.   In some instances, if
the disruption to our operations was severe, our major airline partners could
have the right to terminate our operating contracts.


17


Item
1A. Risk Factors





Risks
Related to our Code-Share Agreements





D.
There are long-term risks related to supply and demand of regional aircraft
associated with our regional airline services strategy.





Many of
our major airline partners have publicly indicated that their committed supply
of regional airline capacity is larger than they desire given current market
conditions.  Specifically, they cite an oversupply of 50-seat regional
jets under contractual commitments with regional airlines.  Delta in
particular has indicated that it plans to reduce both the number of 50-seat
regional jets within its network and the number of regional airlines with which
it contracts.  There are currently more than 400 50-seat aircraft
within the Delta Connection system, more than any other major carrier
worldwide.  In addition to reducing the number of 50-seat jets under
contract, major airlines have reduced the utilization of regional aircraft,
thereby reducing the revenue paid to regional airlines under capacity purchase
agreements.  The utilization by Delta of our 50-seat CRJ-200 aircraft
decreased by 7% in 2009.  This decrease had a negative impact on our
regional airline services revenue and profitability.





Mesa
Airlines, one of our regional airline competitors, recently filed for Chapter 11
Bankruptcy reorganization.  This was caused in large part by a
significant number of regional aircraft that it owns or leases but that are no
longer committed to fly under an agreement with a major airline
partner.  As major airlines seek to reduce the number of 50-seat
aircraft within their networks, other regional airlines may also be forced to
restructure their operations.  In an environment where the supply of
regional aircraft exceeds the demand from our major airline partners, our
competitors may price their regional airline products below cost or otherwise
compete aggressively to retain business.   In addition, regional
airlines with more financial resources may make loans or pay financial
incentives to retain or increase business with major airlines.  For
example, SkyWest Airlines recently extended loans of up to $129 million to
United in exchange for an extension on the term of some of its regional airline
services agreements with United.  Regional airlines with more
financial resources may also acquire or merge with other regional airlines in an
attempt to mitigate any reductions of regional airline services with their major
airline partners.





We have
fewer financial resources than many of our competitors, and therefore we may be
at a competitive disadvantage as we compete for new business
opportunities.  Additionally, while our CRJ-200 ASA with Delta
contractually extends through December 31, 2017, Delta may still seek to reduce
our level of operations, either through reduced utilization of our fleet or
through attempted reductions in the number of aircraft that we
operate.   Oversupply of regional aircraft may also lead to
reductions of service under our operating agreements with our other
partners.  These reductions in service may lead to reduced
profitability and we may be forced to sell, sublease, or otherwise reduce the
number of aircraft that we own or lease.





E.
We are highly dependent upon our regional airline services agreements with
Delta.





We are
highly dependent on Delta, our largest customer.  Our code-share agreements
with Delta generate approximately 73% of our consolidated regional airline
service revenue, and nearly 75% of our operating fleet is utilized by
Delta.  In addition, our entire fleet of 126 CRJ-200 aircraft is subleased
from Delta under leases that terminate if our airline services agreement with
Delta terminates.  We would be significantly negatively affected should one
of our code-share agreements with Delta be terminated, and we likely would be
unable to find an immediate source of revenue or earnings to offset such a
loss.  We may be unable 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.  Operating as an independent airline is a departure
from our business strategy and would require considerable time and
resources.


18


Item
1A. Risk Factors





Risks
Related to our Code-Share Agreements (Continued)





Our code-share agreements with Delta and our other partners include various
minimum operating performance requirements, which if we fail to meet, provide
the partner with the ability to terminate the agreement with little or no notice
requirement.  Certain conditions that are beyond our control, such as
weather, may negatively affect our performance such that we may fall below the
minimum operating requirements.  For example, in June 2008, Delta gave
notice to Pinnacle that it intended to terminate Pinnacle’s CRJ-900 DCA, citing
failure to meet on-time performance requirements in the CRJ-900 DCA.  We
disputed Delta’s right to terminate the CRJ-900 DCA, and we subsequently agreed
with Delta to continue operating under the CRJ-900 DCA.  Although we were
successful in this instance in keeping our CRJ-900 DCA intact with Delta, a
future attempt by Delta or an attempt by another of our partners to terminate
one of our code-share agreements resulting from our failure to meet our minimum
operating performance requirements would, if successful, have a material
negative impact on our financial performance and liquidity.





We are
also currently in discussion with Delta to resolve certain significant disputed
contractual matters, as discussed in Note 3, Code-Share Agreements with
Partners, in Item 8 of this Form 10-K.  These unresolved disputes,
or future disagreements over interpretation of our code-share agreements, may
result in materially unfavorable adjustments to our revenue and profitability
related to our Delta code-share operations.





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





We are
highly dependent upon Delta and Continental, our capacity purchase agreements
partners, for the services they provide to support our current
operations.  For example, we currently use or rely upon Delta's,
Continental’s and to a lesser degree 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 CRJ-900 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 or otherwise find a suitable use for the
aircraft.





G.
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 the cost of certain reimbursable expenses that
they are contractually required to 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 at predetermined rates based on the level of capacity that
we generate for them.  If our controllable costs exceed our rate-based
revenue, our financial results will be adversely affected.  For
example, certain CRJ-200 maintenance expenses are intended to be covered by our
rate-based revenue.  As our CRJ-200 fleet ages, the maintenance costs
required to support the fleet are increasing, which places additional pressure
on our profitability.  During the year ended December 31, 2009,
approximately 33% of our total costs were pass-through costs and approximately
67% of our costs were controllable costs related to our rate-based
revenue.




H.
Our ability to operate profitably under Colgan’s pro-rate code-share agreements
is heavily dependent on the price of aircraft fuel. Recent volatility in the
price of fuel presents a market uncertainty and 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.  Similarly, we also 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 expose Colgan to
fuel price volatility.  In recent times, fuel prices have been
extremely volatile, increasing by over 100% or decreasing by over 50% over a
period of just a few months.  Our ability to offset increases in the
price of fuel by raising fares or surcharges may be limited, primarily because
of reduced demand for air travel and competitiveness of the airline
industry.  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.


19


Item
1A. Risk Factors





Risks
Related to our Code-Share Agreements (Continued)





I.
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 in which all 49 people aboard and an individual on the
ground died, see Legal
Proceedings in Item 3 of this Form 10-K.





J.  Changes
in government regulations imposing additional requirements and restrictions on
our operations could increase our operating costs and result in service delays
and disruptions.








Airlines
are subject to extensive regulatory and legal requirements that involve
significant compliance costs.  In the last several years, Congress has
passed laws, and the DOT, FAA and the TSA have issued regulations relating to
the operation of airlines that have required significant
expenditures.  We expect to continue to incur expenses in connection
with complying with government regulations.  The FAA is currently
drafting new requirements, and depending on whether the final rules incorporate
significant changes to crew rest requirements, our cost structure could be
adversely affected. We cannot predict the effect that these and other laws or
regulations enacted in the future will have on our business.





Risks
Related to our Labor Costs and Collective Bargaining Agreements





K.
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 28% to 30%, 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.  As of December 31, 2009, 70% of our employees were
unionized.  Additionally, the new terms of a revised collective
bargaining agreement with our pilots at Pinnacle and a new collective bargaining
agreement with our pilots at Colgan will materially increase our salaries, wages
and benefits costs.  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.  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.





L.
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 collective bargaining agreements upon their initial or amendable
dates with any of our unionized work groups in accordance with the Railway Labor
Act, 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 CRJ-900 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.


20


Item
1A. Risk Factors





Risks
Related to our Labor Costs and Collective Bargaining Agreements
(Continued)





Our
collective bargaining agreement with the Air Line Pilots Association, the union
representing Pinnacle’s pilots, became amendable on April 30, 2005. In September
2009, the pilots voted against the ratification of a tentative agreement to
amend the collective bargaining agreement.  While our future
negotiations with ALPA will be conducted under the oversight of the National
Mediation Board, as a result of their vote against the tentative agreement, we
are unable to predict when an agreement could be
reached.  Consequently, we remain at risk of a strike by our pilots
should the National Mediation Board release our pilots from the negotiations and
should we fail to obtain an agreement with ALPA before the parties are legally
entitled to self help under the Railway Labor Act.





M.  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.





Item 1B.  Unresolved Staff
Comments.





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


21


Item 2.  Properties





Flight Equipment





As shown
in the following table, the Company’s aircraft fleet consisted of 142 regional
jet aircraft and 48 turboprop aircraft at December 31, 2009.





Aircraft
      Type
            
            Number
      of Aircraft
              Leased
            
            Number
      of Aircraft
              Owned
            
            Total
              Aircraft
            
            Standard
      Seating Configuration
            
            Average
      Age
              (in
      years)CRJ-200
            
            126
            
            -
            
            126
            
            50
            
            6.7CRJ-900
            
            -
            
            16
            
            16
            
            76
            
            1.5Total
      regional jets
            
            126
            
            16
            
            142Saab
      340
            
            11(1)
            
            23
            
            34
            
            34
            
            18.4Q400
            
            -
            
            14
            
            14
            
            74
            
            1.8Total
      turboprops
            
            11
            
            37
            
            48Total
      aircraft
            
            137
            
            53
            
            190





(1)
            In
      addition, for purposes of classification, two of the 11 leased aircraft
      were operated under capital leases. For further discussion, refer to Note
      9, Leases,
      in Item 8 of this Form 10-K.





Facilities





The
Company had the following significant dedicated facilities as of December 31,
2009:


Location
            
            Description
            
            Square
      Footage
            
            Lease
      Expiration DateMemphis,
      TN
            
            Pinnacle
      Airlines, Inc. Headquartersand
      Corporate Education Center
            
            59,100
            
            August
      2011Memphis,
      TN
            
            Pinnacle
      Airlines Corp. andColgan
      Air, Inc. Headquarters
            
            27,756
            
            December
      2010Memphis,
      TN
            
            Hangar
      and Maintenance Facility
            
            51,250
            
            December
      2016Knoxville,
      TN
            
            Hangar
      and Maintenance Facility
            
            55,000
            
            Termination
      of the CRJ-200 ASADulles,
      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 Atlanta,
Georgia, Fort Wayne, Indiana and South Bend, Indiana.  While 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 current and growing business.  As our fleet grows, we may
seek additional maintenance space in the future.





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, Memphis, Minneapolis/St. Paul, Newark, New York LaGuardia and
Washington Dulles airports, as well as most 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.


22


Item 3.  Legal Proceedings





Pinnacle
and Colgan are subject to certain legal actions that occur in the ordinary
course of our business. While the outcome of these actions 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 actions
will not have a material adverse effect on our financial statements as a
whole.  For further discussion, see Note 16, 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, the Company believes that 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.





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.  Several lawsuits related to this accident have been
filed against the Company, and additional litigation is
anticipated.  We carry aviation liability insurance and believe that
this insurance is sufficient to cover any liability arising from this
accident.





Environmental Matters





We are
subject to regulation under various environmental laws and regulations, which
are administered by numerous state and federal agencies. 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.


23




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.





2009
            
            High
            
            
            LowFirst
      quarter
            
            $
            2.67
            
            
            $
            1.00Second
      quarter
            
            $
            3.19
            
            
            $
            1.39Third
      quarter
            
            $
            7.66
            
            
            $
            2.55Fourth
      quarter
            
            $
            7.53
            
            
            $
            5.75





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





As of
February 22, 2010, there were approximately 35 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 2010 Annual
Meeting of Stockholders, to be filed with the Commission within the 120 days
after December 31, 2009, 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.


24




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





Performance Graph





The
following graph compares total shareholder return on the Company’s common stock
over the five-year period ending December 31, 2009, 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, 2004. The
graph below represents historical stock performance and it not necessarily
indicative of future stock price performance.











25
 Item 6.  Selected Financial
Data


This
selected consolidated financial data should be read 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 31,2009
            
            
            2008
              (Restated)
            
            
            2007
              (Restated)
            
            
            2006
              (Restated)
            
            
            2005
              (Restated)(in
      thousands, except per share data)Statement
      of Operations Data:Total
      operating revenues(1)(2)
            $
            845,508
            
            
            $
            864,785
            
            
            $
            787,374
            
            
            $
            824,623
            
            
            $
            841,605Total
      operating expenses (3)
            
            764,799
            
            
            
            819,178
            
            
            
            734,963
            
            
            
            697,075
            
            
            
            814,676Operating
      income(1)(2)(3)
            
            80,709
            
            
            
            45,607
            
            
            
            52,411
            
            
            
            127,548
            
            
            
            26,929Operating
      income as a percentage of operating revenues(1)(2)(3)
            
            9.5
            %
            
            
            5.3
            %
            
            
            6.7
            %
            
            
            15.5
            %
            
            
            3.2
            %Nonoperating
      (expense) income(4)(5)
            
            (38,471
            )
            
            
            (54,196
            )
            
            
            (8,462
            )
            
            
            (10,706
            )
            
            
            8,498Income
      tax expense(4)(6)
            
            (382
            )
            
            
            (2,408
            )
            
            
            (13,526
            )
            
            
            (43,758
            )
            
            
            (13,364
            )Net
      income (loss) (4)
            
            41,856
            
            
            
            (10,997
            )
            
            
            30,423
            
            
            
            73,084
            
            
            
            22,063Basic
      earnings (loss) per share (4)
            $
            2.33
            
            
            $
            (0.62
            )
            
            $
            1.46
            
            
            $
            3.33
            
            
            $
            1.01Diluted
      earnings (loss) per share (4)
            $
            2.31
            
            
            $
            (0.62
            )
            
            $
            1.32
            
            
            $
            3.33
            
            
            $
            1.01Shares
      used in computing basic earnings (loss) per share
            
            17,969
            
            
            
            17,865
            
            
            
            20,897
            
            
            
            21,945
            
            
            
            21,913Shares
      used in computing diluted earnings (loss) per share
            
            18,133
            
            
            
            17,865
            
            
            
            23,116
            
            
            
            21,974
            
            
            
            21,932




1.
              Our
      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, 2009, 2008 and 2007 include $23.1 million, $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.2.
              Operating
      revenues and operating income for the year ended December 31, 2007 were
      affected by the January 18, 2007 acquisition of Colgan, offset by changes
      in CRJ-200 ASA with Delta.  Operating revenues and operating
      income for the years ended December 31, 2009 and 2008 were affected by
      additional revenue earned under our CRJ-900 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.3.
              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 retirement costs. For more information, refer to
      Note 14, Impairment
      and Aircraft Retirement Costs, in Item 8 of this Form
      10-K.4.
              A
      new accounting standard related to convertible debt became effective for
      and was adopted by the Company beginning January 1, 2009.  This
      standard required retrospective application to the terms of instruments as
      they existed for all periods presented. As such, results for the years
      ended December 31, 2008 through 2005 have been restated to reflect the
      revised accounting requirement.  For more information, see Note
      7, Borrowings,
      in Item 8 of this Form 10-K.5.
              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 6, Investments
      and Fair Value Measurements,in Item 8 of this Form
      10-K.  In addition, nonoperating expense for the years ended
      December 31, 2008 and 2009 includes interest expense on the financing for
      the CRJ-900 and Q400 aircraft.  For more information related to
      aircraft financing, refer to Note 7, Borrowings,in Item 8 of this Form 10-K.  Nonoperating expense for
      the year ended December 31, 2009 includes a net gain of $3.9 million,
      primarily related to the sale of our Auction Rate Securities (“ARS”)
      portfolio, and a reduction to interest expense of $2.9 million related to
      the reversal of accrued interest on tax reserves.  For more
      information, see Note 6, Investments
      and Fair Value Measurements, and Note 13, Income
      Taxes, in Item 8 of this Form 10-K.6.
              Income
      tax expense for the year ended December 31, 2009 includes a benefit of
      $13.6 million related to the settlement of the Internal Revenue Service’s
      examination of the Company’s federal income tax returns for calendar years
      2003, 2004, and 2005.  For more information, refer to Note 13,
      Income
      Taxes, in item 8 of this Form
10-K.


26


Item
6.  Selected Financial Data





As
      of December 31,2009
            
            
            2008
              (Restated)
            
            
            2007
              (Restated)
            
            
            2006
              (Restated)
            
            
            2005
              (Restated)(in
      thousands)Balance
      Sheet Data:Cash
      and cash equivalents (7)
            
            $
            91,574
            
            
            $
            69,469
            
            
            $
            26,785
            
            
            $
            705
            
            
            $
            31,567Investments
            
            
            2,723
            
            
            
            116,900
            
            
            
            186,850
            
            
            
            72,700
            
            
            
            44,160Property
      and equipment, net (8)(4)
            
            
            731,073
            
            
            
            719,931
            
            
            
            257,168
            
            
            
            40,985
            
            
            
            42,535Total
      assets (10)(4)
            
            
            1,289,420
            
            
            
            1,127,702
            
            
            
            699,548
            
            
            
            299,185
            
            
            
            226,994Long-term
      debt obligations, including capital leases (9)(4)
            
            
            521,961
            
            
            
            603,026
            
            
            
            174,208
            
            
            
            90,208
            
            
            
            82,730Stockholders'
      equity (deficiency) (4)
            
            
            102,237
            
            
            
            55,734
            
            
            
            71,054
            
            
            
            114,468
            
            
            
            40,779




7.
              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.8.
              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 2008.9.
              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 2008.10.
              For
      the year ended December 31, 2009, total assets include approximately $300
      million on long-term receivables related to potential claims related to
      Colgan Flight 3407. This amount is offset in its entirety by a
      corresponding liability.  For more information, see Note 16,
      Commitments
      and Contingencies, in Item 8 of this Form
  10-K.




27


Item
6.  Selected Financial Data





Years
      Ended December 31,2009(12)
            
            
            
            2008(12)
            
            
            
            2007(11)
            
            
            
            2006
            
            
            
            2005Other
    Data:Revenue
      passengers (in thousands)
            
            
            13,473
            
            
            
            12,926
            
            
            
            11,494
            
            
            
            8,988
            
            
            
            8,105Revenue
      passenger miles (in thousands) (13)
            
            
            5,281,461
            
            
            
            5,420,673
            
            
            
            4,898,188
            
            
            
            4,288,551
            
            
            
            4,129,039Available
      seat miles (“ASMs”) (in thousands) (14)
            
            
            7,204,094
            
            
            
            7,380,490
            
            
            
            6,604,082
            
            
            
            5,640,629
            
            
            
            5,732,773Passenger
      load factor (15)
            
            
            73.3
            %
            
            
            73.4
            %
            
            
            74.2
            %
            
            
            76.0
            %
            
            
            72.0
            %Operating
      revenue per ASM (in cents) (2)
            
            
            11.74
            
            
            
            11.72
            
            
            
            11.92
            
            
            
            14.62
            
            
            
            14.68Operating
      revenue per block hour (2)
            
            $
            1,498
            
            
            $
            1,451
            
            
            $
            1,392
            
            
            $
            1,987
            
            
            $
            1,944Operating
      cost per ASM (in cents) (3)
            
            
            10.62
            
            
            
            11.10
            
            
            
            11.13
            
            
            
            12.36
            
            
            
            14.21Operating
      cost per block hour (3)
            
            $
            1,355
            
            
            $
            1,375
            
            
            $
            1,300
            
            
            $
            1,679
            
            
            $
            1,882Block
      hoursRegional
      jets
            
            
            426,432
            
            
            
            442,911
            
            
            
            438,988
            
            
            
            415,069
            
            
            
            432,900Turboprops
            
            
            138,166
            
            
            
            152,890
            
            
            
            126,675
            
            
            
            -
            
            
            
            -DeparturesRegional
      jets
            
            
            273,077
            
            
            
            267,893
            
            
            
            265,418
            
            
            
            251,091
            
            
            
            249,262Turboprops
            
            
            110,568
            
            
            
            121,635
            
            
            
            107,171
            
            
            
            -
            
            
            
            -Average
      daily utilization (in block hours)Regional
      jets
            
            
            8.58
            
            
            
            8.75
            
            
            
            8.73
            
            
            
            9.17
            
            
            
            9.07Turboprops
            
            
            7.84
            
            
            
            7.86
            
            
            
            7.32
            
            
            
            -
            
            
            
            -Average
      stage length (in miles)
            
            
            374
            
            
            
            396
            
            
            
            321
            
            
            
            470
            
            
            
            500Number
      of operating aircraft (end of period)Regional
      jets
            
            
            142
            
            
            
            142
            
            
            
            138
            
            
            
            124
            
            
            
            124Turboprops
            
            
            48
            
            
            
            51
            
            
            
            47
            
            
            
            -
            
            
            
            -Employees
            
            
            5,106
            
            
            
            5,644
            
            
            
            5,316
            
            
            
            3,860
            
            
            
            3,436




11.
              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.12.
              Statistical
      results for the year ended December 31, 2008 were affected by the addition
      throughout the year of regional jets operated under the CRJ-900 DCA and
      turboprops operated under the Continental CPA.  As of December
      31, 2008, Pinnacle operated 18 CRJ-900 aircraft under the CRJ-900 DCA
      (seven of which were the Temporary Aircraft), and Colgan operated 15 Q400
      aircraft under the Continental CPA.13.
              Revenue
      passenger miles represent the number of miles flown by revenue
      passengers.14.
              Available
      seat miles represent the number of seats available for passengers
      multiplied by the number of miles the seats are flown.15.
              Passenger
      load factor equals revenue passenger miles divided by available seat
      miles.


28


Item
6.  Selected Financial Data





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 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Operating
      expenses per block hour:Salaries,
      wages and benefits
            
            $
            399
            
            
            $
            369
            
            
            $
            346
            
            
            $
            329
            
            
            $
            310Aircraft
      rentals
            
            
            214
            
            
            
            216
            
            
            
            245
            
            
            
            636
            
            
            
            642Ground
      handling services
            
            
            165
            
            
            
            162
            
            
            
            170
            
            
            
            207
            
            
            
            214Aircraft
      maintenance, materials and repairs
            
            
            174
            
            
            
            157
            
            
            
            159
            
            
            
            83
            
            
            
            74Other
      rentals and landing fees
            
            
            125
            
            
            
            120
            
            
            
            104
            
            
            
            104
            
            
            
            99Aircraft
      fuel
            
            
            39
            
            
            
            83
            
            
            
            68
            
            
            
            263
            
            
            
            260Commissions
      and passenger related expenses
            
            
            37
            
            
            
            45
            
            
            
            46
            
            
            
            12
            
            
            
            10Depreciation
      and amortization
            
            
            63
            
            
            
            44
            
            
            
            16
            
            
            
            10
            
            
            
            9Other
            
            
            135
            
            
            
            156
            
            
            
            146
            
            
            
            140
            
            
            
            126Provision
      for (decreases) increases in losses associated with bankruptcy filings of
      Northwest and Mesaba
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (105
            )
            
            
            138Impairment
      and aircraft retirement costs
            
            
            4
            
            
            
            23
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      operating expenses
            
            $
            1,355
            
            
            $
            1,375
            
            
            $
            1,300
            
            
            $
            1,679
            
            
            $
            1,882





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005Operating
      expenses per available seat mile (in cents):Salaries,
      wages and benefits
            
            
            3.12
            
            
            
            2.98
            
            
            
            2.97
            
            
            
            2.43
            
            
            
            2.34Aircraft
      rentals
            
            
            1.68
            
            
            
            1.74
            
            
            
            2.10
            
            
            
            4.68
            
            
            
            4.85Ground
      handling services
            
            
            1.29
            
            
            
            1.31
            
            
            
            1.46
            
            
            
            1.53
            
            
            
            1.62Aircraft
      maintenance, materials and repairs
            
            
            1.36
            
            
            
            1.26
            
            
            
            1.36
            
            
            
            0.61
            
            
            
            0.56Other
      rentals and landing fees
            
            
            0.98
            
            
            
            0.97
            
            
            
            0.89
            
            
            
            0.76
            
            
            
            0.75Aircraft
      fuel
            
            
            0.31
            
            
            
            0.67
            
            
            
            0.58
            
            
            
            1.93
            
            
            
            1.96Commissions
      and passenger related expense
            
            
            0.29
            
            
            
            0.37
            
            
            
            0.39
            
            
            
            0.09
            
            
            
            0.07Depreciation
      and amortization
            
            
            0.49
            
            
            
            0.36
            
            
            
            0.14
            
            
            
            0.07
            
            
            
            0.07Other
            
            
            1.07
            
            
            
            1.26
            
            
            
            1.24
            
            
            
            1.03
            
            
            
            0.95Provision
      for (decreases) increases in losses associated with bankruptcy filings of
      Northwest and Mesaba
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (0.77
            )
            
            
            1.04Impairment
      and aircraft retirement costs
            
            
            0.03
            
            
            
            0.18
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      operating expenses
            
            
            10.62
            
            
            
            11.10
            
            
            
            11.13
            
            
            
            12.36
            
            
            
            14.21





29
 Item 7.  Management’s Discussion and Analysis of
Financial Condition and Results of
Operations


Overview and Outlook





Our
results of operations improved substantially in 2009 as compared to
2008.  Our consolidated operating income improved by $35.1 million in
2009 as compared to 2008.  As more fully discussed below under
“Results of Operations,” these improvements came about through, among other
things, the full implementation of our new capacity purchase agreements with
Delta and Continental, a significant decrease in the cost of fuel incurred by
Colgan’s pro-rate operations, and the restructuring of Colgan’s pro-rate
operations.  Partially offsetting these improvements was a decline in
unit revenue in Colgan’s pro-rate operations, and increased labor and
maintenance costs throughout our operations.  Our net income in 2009
is also substantially increased as a result of our settlement with the Internal
Revenue Service related to their review of our tax filings for 2003, 2004, and
2005.  We recorded a nonrecurring increase in net income of $15.4
million from this settlement.





In
addition to improvements in our operating and net income, we completed a number
of transactions during 2009 to increase our liquidity in advance of the date
that holders of our remaining outstanding 3.25% senior convertible notes (the
“Notes”) could require us to repurchase them.  Holders of the Notes
had an option on February 15, 2010 (the “Put Date”) to require us to repurchase
the then outstanding Notes for the par amount plus accrued
interest.  Because of this impending obligation in February 2010,
during 2009 we focused on increasing our liquidity and reducing the amount of
the Notes outstanding through secondary market repurchases.  During
the third quarter of 2009, we completed a $25 million term loan collateralized
by our spare rotable and expendable aircraft parts inventory and certain spare
engines (the “Spare Parts Loan”).  In addition, we entered into a
settlement agreement (the “ARS Settlement”) with the financial institution that
sold us our portfolio of auction rate securities (“ARS”).  The ARS
Settlement increased our cash balance by approximately $27 million. As a result
of these transactions and positive operating cash flow of $105.6 million during
2009, we substantially increased our liquidity position.  We used this
increase in liquidity to repurchase $12 million par amount of the Notes in the
first quarter of 2009 and approximately $78 million par amount of the Notes
during the third quarter of 2009.  Approximately $31 million par
amount of the Notes remained outstanding as of December 31, 2009.





In
addition, we received a federal income tax refund in late February 2010 totaling
approximately $38 million related to our 2009 federal income tax
return.  Receipt of this refund further enhanced our liquidity
position.  In January 2010, we completed a $10 million short-term
credit facility collateralized by our federal income tax
receivable.  This facility was designed to increase our working
capital until we received our 2009 tax refund.  We repaid the facility
in late February upon receipt of our tax refund.





Finally,
in January 2010, we modified a financial covenant to maintain a certain level of
unrestricted cash and cash equivalents contained in our Spare Parts Loan to
lower the minimum requirement to $22.5 million for the first quarter of 2010
(for additional information regarding this minimum cash requirement test, please
refer to Note 7 of our consolidated financial statements, which are contained in
Item 8 of this Form 10-K).  As a result of these accomplishments, we
had sufficient resources to repay the remaining outstanding $31.0 million par
amount of Notes on the Put Date and meet our minimum cash requirement
test.  As of February 16, 2010, and after repurchase of the Notes, we
had consolidated unrestricted cash and cash equivalents of approximately $60
million, and we believe our liquidity will be adequate to fund our operations
and meet our financial covenants for the foreseeable future.





There are
several open disputed contractual issues, primarily related to our CRJ-200 ASA,
between Delta and us.  Some of these issues date back to 2007, and we
have been in discussions with Delta since that time in an attempt to reach
resolution.  The current status of each issue is discussed in greater
detail below.





First,
Delta has challenged a one-time adjustment to our block hour, cycle and fixed
payment rates under our CRJ-200 ASA that was to become effective January 1,
2006.  Niether party has ever applied a rate increase or
rate decrease related to this provision under the CRJ-200 ASA, and we have
received payments from Delta since 2006 as if there were no adjustment under
this provision of the CRJ-200 ASA.  Based on the objection notice we
received from Delta in 2007, the impact of Delta’s assertion could be a
cumulative adjustment of as much as $11.0 million for 2006 through 2009, and a
rate decrease of approximately $3.0 million annually until the next
contractually scheduled rate adjustment on January 1, 2013.  We
believe the rate adjustment, were it applicable, would result in an increase in
our rates.  The parties have agreed to arbitrate this dispute if we
are unable to successfully resolve this matter through further
negotiation.


30
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Overview
and Outlook (Continued)





Second,
during 2009, Delta also disputed its obligation to fully reimburse us for
aviation insurance premiums related to our Delta Connection operations. 
During the second quarter of 2009, Delta requested that we exit the Delta
aviation insurance program and independently source our own aviation
insurance.  Effective July 1, 2009, we obtained our own independent
insurance program at a cost significantly higher than what we were allocated by
Delta under the Delta insurance program.  Delta has asserted that it is not
obligated to reimburse the full costs of aviation insurance obtained under our
independent insurance program related to our Delta Connection
operations.  Since July, Delta has failed to reimburse us for $3.4
million of aviation insurance premiums related to our Delta Connection
operations.  During the fourth quarter of 2009, we concluded that we
did not meet the accounting standards to recognize future unreimbursed insurance
premiums as revenue until we reach conclusion of this matter with Delta, and we
did not recognize $1.7 million of unreimbursed insurance costs.  We
firmly believe that our operating agreements with Delta require full
reimbursement of our actual aviation insurance premiums related to Delta
Connection operations, and we are evaluating our potential remedies related to
this dispute.  We continue to discuss this matter with Delta, and we
believe that the parties will resolve this issue in the near
future.  To the extent that we are unable to successfully resolve this
matter through discussion, we may be forced to take legal action to protect our
contractual rights under our agreements with Delta.





Additionally,
during 2009 Delta asserted that it may materially alter the payments related to
the ground handling of our flights in the majority of the airports where we
operate under our CRJ-200 ASA, resulting in a decrease in our annual operating
income of approximately $1.1 million (subject to fluctuation based on changes in
the level of our operations and the cities where we fly under the CRJ-200
ASA).  In August 2009, Delta began to apply its interpretation of
ground handling to the monthly payments that Pinnacle received, resulting in a
net reduction of payments to Pinnacle of approximately $0.4 million for August
through December 2009.  In addition, Delta asserted that Pinnacle owed
Delta a retroactive payment related to this ground handling issue of
approximately $4 million.  In early 2010, in connection with the tentative
settlement of several items, we tentatively agreed to accept Delta’s treatment
of ground handling costs without any retroactive application prior to August 1,
2009.  We expect this change to reduce our operating income by
approximately $1.1 million in 2010.





In
connection with the resolution of our ground handling dispute, we also
tentatively agreed to stipulate the amount owed to Delta under a provision of
the CRJ-200 ASA associated with the sharing of Pinnacle’s overhead upon the
establishment of a certain level of operations outside of the CRJ-200
ASA.  Under our tentative agreement, Delta will receive a rate
reduction of $2.0 million for 2010 and $2.5 million for 2011, and $2.5 million
for 2012 to satisfy this provision.  The parties also tentatively
settled an outstanding dispute related to the change in aircraft livery of
Pinnacle’s CRJ-200 fleet by Delta agreeing to reimburse us for these
costs.  Finally, as part of the tentative agreement, Delta agreed to
modify the payment terms of some of our airport related costs under certain
circumstances, which will provide us some limited protection in the event that
Delta asks us to operate in different markets in the future.  These
matters, as well as resolution of our ground handling issue noted above, are
subject to the execution of a binding written agreement, which the parties are
in the process of preparing; however, no assurances can be given that additional
modification to these and other arrangements will not occur in order to settle
these matters with Delta.





Our
pro-rate operations, which account for approximately 18% of our consolidated
revenue, are susceptible to changes in passenger demand and fuel price
volatility.  We took a number of steps during late 2008 and early 2009
to eliminate unprofitable markets, reduce costs, and increase revenue in our
remaining pro-rate markets.  These steps and lower fuel prices have
returned our pro-rate operations to profitability during
2009.  However, the airline industry is experiencing the effects of
the current recessionary environment in the United States.  Industry
passenger revenue declined dramatically during 2009, and our pro-rate operations
were negatively affected by this drop.  While industry analysts
forecast a recovery in passenger demand during 2010, we cannot predict whether
there will be an increase in fares associated with our pro-rate operations in
2010.   In addition, in connection with the US Airways
announcement of proposed reductions in service at LaGuardia, we discontinued our
pro-rate operations at LaGuardia in early January 2010, reducing our operations
under our US Airways agreement by four aircraft.  We are currently
evaluating other markets and may enter new markets later in 2010.  If
we do not identify profitable replacement markets for these aircraft, then our
pro-rate revenue and profitability in 2010 will be materially affected by this
reduction. Further, our pro-rate operations are still susceptible to seasonal
demand fluctuations, with passenger demand materially weaker during the fourth
and first quarter of each year as compared to the seasonally high demand we
typically experience in the second and third quarters of each
year.  Similar to prior years, we do not expect to earn a significant
amount of operating income from our pro-rate operations during the first quarter
of 2010.


31
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Overview
and Outlook (Continued)





During
the fourth quarter of 2009, we relocated Colgan’s headquarters from Manassas,
Virginia to Memphis, Tennessee.  We believe that relocating Colgan’s
leadership team and system operations control center to our corporate
headquarters will enhance the financial and operational performance of Colgan
long-term due to a lower cost of living and the sharing of operational and
safety “best practices” between Pinnacle and Colgan.  In addition, we
are negotiating with state and local authorities to obtain certain long-term
incentives that will help offset the cost of relocating Colgan’s
headquarters.  We incurred approximately $1.1 million of costs
associated with this move during 2009, and expect to incur additional costs of
approximately $0.1 million during the first quarter of 2010.





Pinnacle
has been involved in negotiations with the Air Line Pilots Association (“ALPA”)
since April 2005, when the collective bargaining agreement between the two
parties became amendable.  On August 4, 2009, Pinnacle and ALPA
reached a tentative agreement to amend the collective bargaining
agreement.  However, Pinnacle’s pilots did not ratify the tentative
agreement.  The National Mediation Board now controls the timing of
further negotiations with ALPA, and we do not yet have information as to when
further negotiations will take place.  The failed tentative agreement
provided for an increase in compensation for Pinnacle’s pilots to the industry
average, which is consistent with our company-wide philosophy of
industry-average pay and benefits.  In addition, the failed tentative
agreement called for a one-time signing bonus of approximately $10.2
million.  While we cannot predict what the terms of a new tentative
agreement will contain, we do expect any new tentative agreement to
substantially increase Pinnacle’s salaries, wages and benefits
costs.





Colgan’s
pilots also elected representation by ALPA in late 2008, and we recently began
negotiations with ALPA.  It is too early in the negotiation process
for us to predict the timing or impact of a new collective bargaining agreement
with ALPA covering Colgan’s pilots.





Throughout
2009 we have been positioning ourselves for additional profitable growth
opportunities in 2010 and beyond.  In early 2009 we agreed with
Continental to expand our Continental CPA by acquiring 15 Q400 aircraft from
August 2010 through April 2011.  We also acquired an additional 15
Q400 options from the aircraft manufacturer, thereby increasing the total
remaining 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 that of similarly sized regional jets.





In
addition to growing Colgan with the Q400 aircraft, we are positioning ourselves
to capitalize on 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
now 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 strong operating performance with a
competitive cost structure will position us to succeed.  Our capacity
purchase contracts do not begin to expire until December 2017.


32
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Results of Operations





The following represents our results of
operations, by segment and consolidated, for the year ended December 31,
2009.  A discussion of our results of operations as compared to the
same periods in 2008 and 2007 follows.





Year
      Ended December 31, 2009Pinnacle
            
            
            Colgan
            
            
            Consolidated(in
      thousands)Operating
      revenuesRegional
      airline services
            
            $
            609,098
            
            
            $
            227,151
            
            
            $
            836,249Other
            
            
            8,839
            
            
            
            420
            
            
            
            9,259Total
      operating revenues
            
            
            617,937
            
            
            
            227,571
            
            
            
            845,508Operating
      expensesSalaries,
      wages and benefits
            
            
            168,049
            
            
            
            56,965
            
            
            
            225,014Aircraft
      rentals
            
            
            116,768
            
            
            
            3,980
            
            
            
            120,748Ground
      handling services
            
            
            81,161
            
            
            
            12,021
            
            
            
            93,182Aircraft
      maintenance, materials and repairs
            
            
            59,630
            
            
            
            38,445
            
            
            
            98,075Other
      rentals and landing fees
            
            
            50,293
            
            
            
            20,484
            
            
            
            70,777Aircraft
      fuel
            
            
            -
            
            
            
            22,110
            
            
            
            22,110Commissions
      and passenger related expense
            
            
            3,818
            
            
            
            17,101
            
            
            
            20,919Depreciation
      and amortization
            
            
            20,247
            
            
            
            15,152
            
            
            
            35,399Other
            
            
            57,878
            
            
            
            18,717
            
            
            
            76,595Impairment
      and aircraft retirement charges
            
            
            -
            
            
            
            1,980
            
            
            
            1,980Total
      operating expenses
            
            
            557,844
            
            
            
            206,955
            
            
            
            764,799Operating
      income
            
            
            60,093
            
            
            
            20,616
            
            
            
            80,709Operating
      margin
            
            
            9.7
            %
            
            
            9.1
            %
            
            
            9.5
            %Nonoperating
      income (expense)Interest
      income
            
            
            
            
            
            
            
            
            
            
            1,947Interest
      expense
            
            
            
            
            
            
            
            
            
            
            (44,862
            )Investment
      gain
            
            
            
            
            
            
            
            
            
            
            3,877Miscellaneous
      income, net
            
            
            
            
            
            
            
            
            
            
            567Total
      nonoperating expense
            
            
            
            
            
            
            
            
            
            
            (38,471
            )Income
      before income taxes
            
            
            
            
            
            
            
            
            
            
            42,238Income
      tax expense
            
            
            
            
            
            
            
            
            
            
            (382
            )Net
      income
            
            
            
            
            
            
            
            
            
            $
            41,856





The
following discussion provides an analysis of our results of operations and
reasons for material changes therein for the year ended December 31, 2009
compared to the same periods in 2008 and 2007.  The acquisition of
Colgan was completed on January 18, 2007 and Colgan’s 2007 data includes the
period from the acquisition date through December 31, 2007, which represents
approximately 94% of that year.


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


Consolidated and Segmented Results of
Operations





Consolidated





Years
      Ended December 31,2009
            
            
            %
      Change
              2009
      -2008
            
            
            2008
              (Restated)
            
            
            %
      Change
              2008
      - 2007
            
            
            2007
              (Restated)Total
      operating revenue
            
            $
            845,508
            
            
            
            (2
            )%
            
            $
            864,785
            
            
            
            10
            %
            
            $
            787,374Total
      operating expenses
            
            
            764,799
            
            
            
            (7
            )%
            
            
            819,178
            
            
            
            11
            %
            
            
            734,963Operating
      income
            
            
            80,709
            
            
            
            77
            %
            
            
            45,607
            
            
            
            (13
            )
      %
            
            
            52,411Operating
      margin
            
            
            9.5
            %
            
            
            
            
            
            
            5.3
            %
            
            
            
            
            
            
            6.7
            %Total
      nonoperating expense
            
            
            (38,471
            )
            
            
            (29
            )%
            
            
            (54,196
            )
            
            
            540
            %
            
            
            (8,462
            )Income
      (loss) before income taxes
            
            
            42,238
            
            
            
            (592
            )%
            
            
            (8,589
            )
            
            
            (120
            )
      %
            
            
            43,949Income
      tax expense
            
            
            (382
            )
            
            
            (84
            )%
            
            
            (2,408
            )
            
            
            (82
            )
      %
            
            
            (13,526
            )Net
      income (loss)
            
            $
            41,856
            
            
            
            (481
            )%
            
            $
            (10,997
            )
            
            
            (136
            )
      %
            
            $
            30,423





2009
Compared to 2008





The
following summarizes the nonrecurring items affecting our results for the years
ended December 31, 2009 and 2008 (in thousands):





Years
      Ended December 31,2009
            
            
            2008Pre-tax
            
            
            After
      Tax
            
            
            Pre-tax
            
            
            After
      TaxImpairment
      and aircraft retirement charges
            
            $
            1,980
            
            
            $
            1,219
            
            
            $
            13,548
            
            
            $
            8,688Excess
      of property insurance proceeds overcost
      basis of aircraft
            
            
            (835
            )
            
            
            (514
            )
            
            
            -
            
            
            
            -Net
      investment (gain) loss
            
            
            (3,877
            )
            
            
            (3,713
            )
            
            
            16,800
            
            
            
            16,091Ineffective
      portion of hedge
            
            
            1,424
            
            
            
            877
            
            
            
            -
            
            
            
            -Reversal
      of interest on tax reserves
            
            
            (2,926
            )
            
            
            (1,843
            )
            
            
            -
            
            
            
            -Gain
      on debt extinguishment
            
            
            (1,856
            )
            
            
            (1,118
            )
            
            
            -
            
            
            
            -IRS
      settlement
            
            
            -
            
            
            
            (13,551
            )
            
            
            -
            
            
            
            -Total
      nonrecurring (gains) charges
            
            $
            (6,090
            )
            
            $
            (18,643
            )
            
            $
            30,348
            
            
            $
            24,779





Several
nonrecurring items affected both operating and nonoperating expense in
2009.  During 2009, we recorded a net increase to operating expense
related to $2.0 million ($1.2 million net of tax) of return costs associated
with the retirement of our Beech 1900 aircraft fleet, partially offset by the
$0.8 million ($0.5 million net of tax) excess of insurance proceeds received
over the cost basis of an aircraft that was destroyed.  These items
cumulatively reduced operating income by $1.2 million for the year ended
December 31, 2009.





During
2009, we recorded a net nonoperating gain of $3.9 million ($3.7 million net of
tax) primarily related to the sale of our auction rate securities (“ARS”)
portfolio.  Our net income for 2009 also includes net nonoperating
gains of $0.2 million associated with the repurchase of certain indebtedness in
the first quarter of 2009 and hedge losses associated with one Q400 aircraft
that was destroyed.  Our net income for the year ended December 31,
2009 was also increased by $15.4 million related to our settlement with the
Internal Revenue Service on its examination of our federal tax returns for the
tax years 2003 through 2005.


34
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





During
2008, we recorded charges of $13.5 million ($8.7 million net of tax) related to
the impairment of Colgan’s goodwill and certain charges necessary to retire
several of Colgan’s aircraft associated with its pro-rate
operations.  In addition, during 2008, we recorded an impairment
charge of $16.8 million ($16.4 million net of tax) to write down the value of
our portfolio of auction rate securities to fair value.





Operating
Revenues





Operating
revenue of $845.5 million for the year ended December 31, 2009 decreased $19.3
million, or 2%, compared to 2008.  Changes in our capacity purchase
related operating revenue are primarily caused by changes in our operating fleet
size and aircraft utilization.  Changes in our pro-rate related
operating revenue are primarily caused by a reduction in the scope of our
pro-rate operations that we undertook in the fall of 2008, and by changes in the
average load factor, average passenger fare, and average incentive payments we
receive from our partners and under our Essential Air Service
agreements.  These changes are discussed in greater detail within our
segmented results of operations.





Operating
Expenses





Operating
expenses decreased by $54.4 million, or 7%, as compared to 2008, primarily due
to the decrease in fuel expense and gallons consumed at our Colgan subsidiary,
along with the impairment of Colgan’s goodwill and other intangible assets
during 2008.  This change and others are discussed in greater detail
within our segmented results of operations.





Nonoperating
Expense





Net
nonoperating expense of $38.5 million for the year ended December 31, 2009
decreased by approximately $15.7 million as compared to 2008.  The
decrease is primarily related to the previously discussed $3.9 million net
investment gain, as compared to the $16.8 million ARS impairment charge recorded
during 2008.  Interest expense increased slightly, primarily related
to the addition of CRJ-900 and Q400 aircraft to our fleet throughout 2008,
offset by the reversal of interest on tax reserves, as previously discussed, and
by a reduction in interest expense on our senior convertible notes as a result
of the repurchase and retirement of the majority of those obligations during
2009.  The overall decrease was offset by a decrease in interest
income of $4.9 million due to the decrease in interest rates on our ARS
portfolio, as well as the sale of our ARS portfolio in August 2009.





Income
Tax Expense




For the
year ended December 31, 2009, we recorded income tax expense of $0.4
million.  As previously discussed, we recently reached settlement with
the IRS regarding our examination for tax years 2003 through 2005. The IRS had
proposed a number of adjustments to our returns totaling approximately $35.0
million of additional tax, plus accrued interest and penalties on these proposed
adjustments.  We agreed to pay approximately $3 million of additional
income tax and accrued interest in settlement of all open tax matters for the
years examined.  As a result, we recorded a reduction to income tax
expense of $13.6 million to reduce our accrued income tax reserves pursuant to
the settlement.




35
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





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 seven CRJ-900 aircraft owned by Delta and operated by us on
a temporary basis, 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 12% increase in average fare, offset by an 8% 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 $54.2 million for the year ended December 31, 2008
increased by approximately $45.7 million over net nonoperating expense of $8.5
million during 2007.  This increase is attributable to the $28.6
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.





Income
Tax Expense





For the
year ended December 31, 2008, our income tax expense decreased by $11.1 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.


36
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





Pinnacle
Operating Statistics





Years
      Ended December 31,2009
            
            
            %
      Change
              2009
      - 2008
            
            
            2008
            
            
            %
      Change
              2008
      - 2007
            
            
            2007Revenue
      passengers (in thousands)
            
            10,771
            
            
            
            4
            %
            
            
            10,393
            
            
            
            4
            %
            
            
            9,996Revenue
      passenger miles (“RPMs”) (inthousands)
            
            4,640,392
            
            
            
            (4
            )%
            
            
            4,844,526
            
            
            
            5
            %
            
            
            4,620,861Available
      seat miles (“ASMs”) (inthousands)
            
            6,108,609
            
            
            
            (3
            )%
            
            
            6,320,269
            
            
            
            5
            %
            
            
            6,004,680Passenger
      load factor
            
            76.0
            %
            
            (0.7)
      pts.
            
            
            
            76.7
            %
            
            (0.3)
      pts.
            
            
            
            77.0
            %Operating
      revenue per ASM (in cents)
            
            10.12
            
            
            
            4
            %
            
            
            9.70
            
            
            
            (2
            )%
            
            
            9.91Operating
      cost per ASM (in cents)
            
            9.13
            
            
            
            3
            %
            
            
            8.85
            
            
            
            (1
            )%
            
            
            8.95Operating
      revenue per block hour
            $
            1,449
            
            
            
            5
            %
            
            $
            1,384
            
            
            
            2
            %
            
            $
            1,355Operating
      cost per block hour
            $
            1,308
            
            
            
            4
            %
            
            $
            1,263
            
            
            
            3
            %
            
            $
            1,224Block
      hours
            
            426,432
            
            
            
            (4
            )%
            
            
            442,911
            
            
            
            1
            %
            
            
            438,988Departures
            
            273,077
            
            
            
            2
            %
            
            
            267,893
            
            
            
            1
            %
            
            
            265,418Average
      daily utilization (block hours)
            
            8.58
            
            
            
            (2
            )%
            
            
            8.75
            
            
            
            1
            %
            
            
            8.73Average
      stage length (miles)
            
            426
            
            
            
            (7
            )%
            
            
            460
            
            
            
            1
            %
            
            
            455Number
      of operating aircraft (end of period)CRJ-200
            
            126
            
            
            
            2
            %
            
            
            124
            
            
            
            (9
            )
      %
            
            
            137CRJ-900
            
            16
            
            
            
            (11
            )%
            
            
            18
            (1)
            
            
            1,700
            %
            
            
            1Employees
      (end of period)
            
            3,675
            
            
            
            (13
            )%
            
            
            4,204
            
            
            
            5
            %
            
            
            4,008


(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”).  The Temporary Aircraft were returned in early
      2009.





Pinnacle
Operating Revenues





Years
      Ended December 31,2009
            
            
            %
      Change
              2009
      - 2008
            
            
            2008
            
            
            %
      Change
              2008
      - 2007
            
            
            2007Operating
      RevenuesRegional
      airline servicesCRJ-200
            
            $
            540,939
            
            
            
            (5
            )%
            
            $
            569,020
            
            
            
            (2
            )%
            
            $
            583,591CRJ-900
            
            
            68,159
            
            
            
            94
            %
            
            
            35,146
            
            
            
            2,268
            %
            
            
            1,484Other
            
            
            8,839
            
            
            
            (1
            )%
            
            
            8,923
            
            
            
            (10
            )%
            
            
            9,894Total
      operating revenues
            
            $
            617,937
            
            
            
            1
            %
            
            $
            613,089
            
            
            
            3
            %
            
            $
            594,969





2009
Compared to 2008





Regional
Airline Services





For the
year ended December 31, 2009, revenue earned under our CRJ-200 ASA of $540.9
million decreased by $28.1 million, or 5%, compared to 2008. Revenue earned
under our CRJ-200 ASA was reduced by the return of 13 CRJ-200 aircraft
throughout 2008 pursuant to the terms of our CRJ-200 ASA.  During the year
ended December 31, 2009, we operated 3% fewer average CRJ-200 aircraft than
2008.  Compounding the reduction in our operating fleet size, we
experienced declines in aircraft utilization.  As a result of both the
reduction in our CRJ-200 fleet size and the decline in aircraft utilization,
volume based revenue decreased by $22.3 million, or 6%, during 2009, as compared
to 2008.


37
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





We
recorded $8.9 million less in departure based revenue during 2009, as compared
to 2008, as a result of  a dispute with Delta over the amount that we
earn for each departure under the CRJ-200 ASA.  Delta asserted that it
has the right under the CRJ-200 ASA to reduce both the revenue we receive and
the cost we pay for ground handling services in certain cities where Delta or
its designee provides ground handling services to us.  During 2009,
Delta began to compensate us according to its interpretation of the CRJ-200
ASA.  As a result, the revenue we received for the year ended December
31, 2009, related to certain ground handling services was reduced by
approximately $8.9 million, and our related ground handling costs were reduced
by $8.1 million, with the resulting net effect of a reduction of operating
income of approximately $0.8 million.





Lastly, a
change in other reimbursable expenses caused revenue to increase by $1.2
million, for the year ended December 31, 2009, as compared to
2008.  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 increase or
decline, we experience a corresponding increase or decline in
revenue.  Revenue from reimbursable expenses increased by $5.8 million
related to heavy maintenance checks, $1.6 million related to increased deicing
expense, $3.8 million related to increased insurance expenses, and $0.6 million
related to other maintenance expense.  These increases were offset by
a decrease of $4.1 million related to reduced property taxes, $2.6 million
related to reduced engine maintenance expense, and $3.9 million related to
reduced aircraft rental expense.





Revenue
earned under the CRJ-900 DCA was $68.2 million for the year ended December 31,
2009, an increase of $33.0 million, or 94%, as compared to
2008.  During the year ended December 31, 2009, on average we operated
86% more CRJ-900 aircraft than in 2008.





Other
Revenue





Other
revenue decreased $0.8 million, or 1%, for the year ended December 31, 2009, as
compared to 2008.  This decrease was primarily related to a decline in
revenue earned from providing baggage handling services to Delta at its Memphis
hub, offset by an increase in third party ground handling revenue related to new
third party ground handling contracts that we entered into during
2009.





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.    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 CRJ-900 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 CRJ-900 DCA, seven of which were operated on a short-term
basis until the Company’s seven remaining permanent aircraft entered
service.  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 CRJ-900
DCA.


38
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





Other
Revenue





Other
revenue decreased $1.0 million, or 10%, 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.





Pinnacle
Operating Expenses





Years
      Ended December 31,2009
            
            
            %
      Change
              2009
      - 2008
            
            
            2008
            
            
            %
      Change
              2008
      - 2007
            
            
            2007Operating
      expensesSalaries,
      wages and benefits
            
            $
            168,049
            
            
            
            2
            %
            
            $
            164,775
            
            
            
            10
            %
            
            $
            150,205Aircraft
      rentals
            
            
            116,768
            
            
            
            (3
            )%
            
            
            120,932
            
            
            
            (7
            )%
            
            
            130,181Ground
      handling services
            
            
            81,161
            
            
            
            (3
            )%
            
            
            83,336
            
            
            
            (1
            )%
            
            
            84,215Aircraft
      maintenance, materials and repairs
            
            
            59,630
            
            
            
            21
            %
            
            
            49,238
            
            
            
            0
            %
            
            
            49,047Other
      rentals and landing fees
            
            
            50,293
            
            
            
            (5
            )%
            
            
            52,994
            
            
            
            8
            %
            
            
            49,005Commissions
      and passenger related expense
            
            
            3,818
            
            
            
            (38
            )%
            
            
            6,160
            
            
            
            11
            %
            
            
            5,545Depreciation
      and amortization
            
            
            20,247
            
            
            
            52
            %
            
            
            13,346
            
            
            
            190
            %
            
            
            4,609Other
            
            
            57,878
            
            
            
            (16
            )%
            
            
            68,691
            
            
            
            6
            %
            
            
            64,698Total
      operating expenses
            
            
            557,844
            
            
            
            (0
            )%
            
            
            559,472
            
            
            
            4
            %
            
            
            537,505Operating
      income
            
            $
            60,093
            
            
            
            12
            %
            
            $
            53,617
            
            
            
            (7
            )%
            
            $
            57,464Operating
      margin
            
            
            9.7
            %
            
            1.0
      pts.
            
            
            
            8.7
            %
            
            (1.0)
      pts.
            
            
            
            9.7
            %





2009
Compared to 2008





Salaries,
wages and benefits increased by $3.3 million, or 2%, for the year ended December
31, 2009 as compared to 2008.  This increase is largely attributable
to rising health care and insurance costs, which increased approximately $3.8
million in 2009, as compared to 2008.  Wages increased slightly, as
wage rates increased for existing employees, while headcount decreased,
primarily related to reductions in ground handling personnel in stations where
we performed our own ground handling functions under the CRJ-200
ASA.  The reduction in ground handling personnel occurred as a result
of Delta reassigning ground handling functions to itself or its
designees.  Wage rate increases were also offset by a $1.4 million
reduction in the matching contribution of Pinnacle’s non-pilot 401(k)
plan.  During 2009, the matching contribution was temporarily
suspended.





Aircraft
rental expense decreased $4.2 million, or 3%, for the year ended December 31,
2009 as compared to 2008.  This decrease relates to a decrease of 3%
in the average number of CRJ-200 aircraft, which are leased from Delta, operated
during 2009 as compared to 2008.  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 $3.9 million for the year ended December 31, 2009.





Ground
handling services decreased by $2.2 million, or 3%, during the year ended
December 31, 2009, as compared to 2008.  Although this change is
nominal, there were large changes in the mix of reimbursed and unreimbursed
ground handling expense.  These changes caused significant decreases
in regional airlines services revenue.


39
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





Aircraft
maintenance, materials and repairs expenses increased $10.4 million, or 21%, for
the year ended December 31, 2009 as compared to 2008.  This increase
is attributable to additional maintenance related to the aging of our CRJ-200
fleet as the majority of our CRJ-200 aircraft are no longer covered under
warranty.  We are also incurring additional maintenance expense on our
CRJ-200 fleet for specific maintenance programs and upgrades recommended by the
manufacturer associated with engine fan blade replacement and adjustments to the
motor controlling deployment of the wing flaps.





Commissions
and passenger related expense decreased by $2.3 million, or 38%, for the year
ended December 31, 2009 as compared to 2008.  This is primarily
related to the decrease in the number of airport locations we staff under our
CRJ-200 ASA.  As a result, we do not incur the same level of passenger
related expenses, as these costs are included in the ground handing rates that
we pay Delta or its designated ground handler.





Depreciation
and amortization expense increased by $6.9 million for the year ended December
31, 2009 as compared to the same period in 2008.  This is primarily
related to depreciation on our fleet of CRJ-900 aircraft, the majority of which
were added to our fleet throughout 2008.





Other
expense decreased by $10.8 million, or 16%, for the year ended December 31, 2009
as compared to 2008.  Effective July 1, 2009, we are no longer
participating in Delta’s insurance program.  The rates for our new
coverage are significantly higher than those of our previous coverage, which
caused an increase in insurance expense of $6.2 million.  These
insurance costs are reimbursed with margin by Delta.  Offsetting this
increase is a decrease in other expenses primarily related to decreases in costs
related to crew training and other crew related expenses.  As
previously discussed, we are experiencing low levels of attrition within our
flight crews and are not currently hiring or training new crew members and as a
result, flight crew related costs and training decreased by $9.8 million for the
year ended December 31, 2009.  In addition, property tax expense
decreased by $2.7 million due to a reduced assessment in the state of
Tennessee.  Property tax is also reimbursed with margin by
Delta.  The remainder of the
decrease is attributable to the fleet expansion expenses we incurred in 2008 as
we were bringing the CRJ-900 operations online, a decrease in professional
services costs related to our new systems implementation project in 2008, and a
decrease in station related costs as several stations formerly operated by
Pinnacle are now operated by Delta or its designees.





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 CRJ-900 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.


40
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





Ground
handling services decreased $0.9 million, or 1%, during the year ended December
31, 2008 as compared to 2007.  Ground handling expenses decreased by
$4.1 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.





Aircraft
maintenance, materials and repairs expenses increased by $0.2 million and 0% 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 $4.0 million, or 8%, 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 CRJ-900 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 $4.0 million, or 6%, 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.


41
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





Colgan
Operating Statistics




Years
      Ended December 31,2009
              
              
              %
      Change
                2009
      - 2008
              
              
              2008
              
              
              %
      Change
                2008
      – 2007
              
              
              2007Pro-rate
      Agreements:Revenue
      passengers (in thousands)
              
              
              1,169
              
              
              
              (15
              )%
              
              
              1,380
              
              
              
              (8
              )%
              
              
              1,498RPMs
      (in thousands)
              
              
              203,848
              
              
              
              (18
              )%
              
              
              249,520
              
              
              
              (10
              )%
              
              
              277,326ASMs
      (in thousands)
              
              
              456,664
              
              
              
              (18
              )%
              
              
              558,389
              
              
              
              (7
              )%
              
              
              599,402Passenger
      load factor
              
              
              44.6
              %
              
              (0.1)pts.
              
              
              
              44.7
              %
              
              (1.6)pts.
              
              
              
              46.3
              %Passenger
      yield (in cents)
              
              
              75.56
              
              
              
              (4
              )%
              
              
              78.94
              
              
              
              14
              %
              
              
              69.27Operating
      revenue per ASM (in cents)
              
              
              33.73
              
              
              
              (4
              )%
              
              
              35.28
              
              
              
              10
              %
              
              
              32.05Operating
      revenue per block hour
              
              $
              1,692
              
              
              
              (1
              )%
              
              $
              1,716
              
              
              
              13
              %
              
              $
              1,517Block
      hours
              
              
              91,023
              
              
              
              (21
              )%
              
              
              114,816
              
              
              
              (9
              )%
              
              
              126,675Departures
              
              
              79,866
              
              
              
              (18
              )%
              
              
              97,174
              
              
              
              (9
              )%
              
              
              107,171Fuel
      consumption (in thousands of gallons)
              
              
              10,994
              
              
              
              (26
              )%
              
              
              14,761
              
              
              
              (12
              )%
              
              
              16,797Average
      price per gallon
              
              $
              2.01
              
              
              
              (40
              )%
              
              $
              3.35
              
              
              
              48
              %
              
              $
              2.27Average
      fare
              
              $
              132
              
              
              
              (8
              )%
              
              $
              143
              
              
              
              12
              %
              
              $
              128
  Capacity
      Purchase Agreement:Revenue
      passengers (in thousands)
              
              
              1,533
              
              
              
              33
              %
              
              
              1,153
              
              
              
              N/A
              
              
              
              -RPMs
      (in thousands)
              
              
              437,221
              
              
              
              34
              %
              
              
              326,627
              
              
              
              N/A
              
              
              
              -ASMs
      (in thousands)
              
              
              638,821
              
              
              
              27
              %
              
              
              501,832
              
              
              
              N/A
              
              
              
              -Passenger
      load factor
              
              
              68.4
              %
              
              3.3
      pts.
              
              
              
              65.1
              %
              
              
              N/A
              
              
              
              -Operating
      revenue per ASM (in cents)
              
              
              11.45
              
              
              
              5
              %
              
              
              10.86
              
              
              
              N/A
              
              
              
              -Operating
      revenue per block hour
              
              $
              1,551
              
              
              
              8
              %
              
              $
              1,432
              
              
              
              N/A
              
              
              
              -Block
      hours
              
              
              47,143
              
              
              
              24
              %
              
              
              38,074
              
              
              
              N/A
              
              
              
              -Departures
              
              
              30,702
              
              
              
              26
              %
              
              
              24,461
              
              
              
              N/A
              
              
              
              -




Total
      Colgan:Block
      hours
              
              
              138,166
              
              
              
              (10
              )%
              
              
              152,890
              
              
              
              21
              %
              
              
              126,675Departures
              
              
              110,568
              
              
              
              (9
              )%
              
              
              121,635
              
              
              
              13
              %
              
              
              107,171ASMs
      (in thousands)
              
              
              1,095,485
              
              
              
              3
              %
              
              
              1,060,221
              
              
              
              77
              %
              
              
              599,402Total
      operating cost per ASM (in cents)
              
              
              18.89
              
              
              
              (23
              )%
              
              
              24.50
              
              
              
              (26
              )%
              
              
              32.94Total
      operating cost per ASM (in cents)
                (excluding
      impairment and aircraft retirement costs)
              
              
              18.71
              
              
              
              (19
              )%
              
              
              23.22
              
              
              
              (30
              )%
              
              
              32.94Total
      operating cost per block hour
              
              $
              1,498
              
              
              
              (12
              )%
              
              $
              1,699
              
              
              
              9
              %
              
              $
              1,559Total
      operating cost per block hour
                (excluding
      impairment and aircraft retirement costs)
              
              $
              1,484
              
              
              
              (8
              )%
              
              $
              1,610
              
              
              
              3
              %
              
              $
              1,559Average
      daily utilization (block hours)
              
              
              7.84
              
              
              
              (0
              )
      %
              
              
              7.86
              
              
              
              7
              %
              
              
              7.32Average
      stage length (miles)
              
              
              223
              
              
              
              (2
              )%
              
              
              228
              
              
              
              34
              %
              
              
              170Number
      of operating aircraft (end of period)Saab
      340
              
              
              34
              
              
              
              0
              %
              
              
              34
              
              
              
              (15
              )%
              
              
              40Beech
      1900
              
              
              -
              
              
              
              (100
              )%
              
              
              2
              
              
              
              (71
              )%
              
              
              7Q400
              
              
              14
              
              
              
              (7
              )%
              
              
              15
              
              
              
              N/A
              
              
              
              -Employees
              
              
              1,307
              
              
              
              (1
              )%
              
              
              1,324
              
              
              
              10
              %
              
              
              1,202


42
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





Colgan
Operating Revenue





Years
      Ended December 31,2009
            
            
            %
      Change
              2009
      - 2008
            
            
            2008
            
            
            %
      Change
              2008
      - 2007
            
            
            2007Operating
      RevenuesRegional
      airline servicesPro-rate
      and EAS
            
            $
            154,026
            
            
            
            (22
            )%
            
            $
            196,982
            
            
            
            (3
            )%
            
            $
            192,104Capacity
      purchase agreement
            
            
            73,125
            
            
            
            34
            %
            
            
            54,511
            
            
            
            N/A
            
            
            
            -Other
            
            
            420
            
            
            
            107
            %
            
            
            203
            
            
            
            (33
            )%
            
            
            301Total
      operating revenues
            
            $
            227,571
            
            
            
            (10
            )%
            
            $
            251,696
            
            
            
            31
            %
            
            $
            192,405





2009
Compared to 2008





Total
operating revenue for the year ended December 31, 2009 of $227.6 million
decreased by $24.1 million, or 10%, from 2008.  The primary reason for
this decrease is the decrease in our pro-rate operations, which is partially
offset by an increase in revenue earned under our Continental CPA.





Revenue
earned under our pro-rate and Essential Air Service (“EAS”) agreements decreased
by $43.0 million, or 22%, for the year ended December 31, 2009.  This
decrease is attributable to a decrease in pro-rate ASMs of 18% as compared to
2008, which resulted from the retirement of seven of our Saab and Beech aircraft
in conjunction with eliminating certain markets within our pro-rate
agreements.  In addition, we experienced a decrease of 4% in revenue
per available seat mile in our remaining markets during 2009, which was
primarily attributable to decreases in average fares.





Revenue
under our Continental CPA for the year ended December 31, 2009 increased by
$18.6 million, or 34%, due to changes in our Q400 aircraft fleet.  The
average number of Q400 aircraft in our fleet during the year ended December 31,
2009 increased by 35% as compared to 2008.  The Q400 aircraft were
added to our fleet primarily in the first half of 2008.  In addition,
CPA revenue during the year ended December 31, 2008 was negatively affected by
performance penalties incurred as we were introducing the new
fleet.





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.


43
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





Colgan
Operating Expenses





Years
      Ended December 31,2009
            
            
            %
      Change
              2009
      - 2008
            
            
            2008
            
            
            %
      Change
              2008-
      2007
            
            
            2007Operating
      expensesSalaries,
      wages and benefits
            
            $
            56,965
            
            
            
            3
            %
            
            $
            55,196
            
            
            
            21
            %
            
            $
            45,562Aircraft
      rentals
            
            
            3,980
            
            
            
            (48
            )%
            
            
            7,627
            
            
            
            (10
            )%
            
            
            8,480Ground
      handling services
            
            
            12,021
            
            
            
            (8
            )%
            
            
            13,023
            
            
            
            8
            %
            
            
            12,091Aircraft
      maintenance, materials and repairs
            
            
            38,445
            
            
            
            (13
            )
      %
            
            
            44,123
            
            
            
            9
            %
            
            
            40,614Other
      rentals and landing fees
            
            
            20,484
            
            
            
            11
            %
            
            
            18,411
            
            
            
            85
            %
            
            
            9,951Aircraft
      fuel
            
            
            22,110
            
            
            
            (55
            )%
            
            
            49,450
            
            
            
            30
            %
            
            
            38,122Commissions
      and passenger related expense
            
            
            17,101
            
            
            
            (18
            )%
            
            
            20,865
            
            
            
            3
            %
            
            
            20,195Depreciation
      and amortization
            
            
            15,152
            
            
            
            15
            %
            
            
            13,172
            
            
            
            183
            %
            
            
            4,656Other
            
            
            18,717
            
            
            
            (23
            )%
            
            
            24,291
            
            
            
            37
            %
            
            
            17,787Impairment
      and aircraft retirement costs
            
            
            1,980
            
            
            
            (85
            )
      %
            
            
            13,548
            
            
            
            100
            %
            
            
            -Total
      operating expenses
            
            
            206,955
            
            
            
            (20
            )
      %
            
            
            259,706
            
            
            
            32
            %
            
            
            197,458Operating
      income (loss)
            
            $
            20,616
            
            
            
            (357
            )%
            
            $
            (8,010
            )
            
            
            59
            %
            
            $
            (5,053
            )Operating
      margin
            
            
            9.1
            %
            
            12.3
      pts.
            
            
            
            (3.2
            )%
            
            (0.6)
      pts.
            
            
            
            (2.6
            )%





Salaries,
wages and benefits increased by $1.8 million, or 3%, for the year ended December
31, 2009 as compared to 2008.  This increase is largely attributable
to increased health care and insurance costs, which increased by approximately
$0.5 million in 2009, as compared to 2008.  Additionally, a number of
relocated Colgan employees received additional compensation as part of the
Colgan headquarters relocation from Manassas, Virginia to
Memphis.  The remaining increase relates to an increase in wage rates
for existing employees.





Aircraft
rentals decreased by $3.6 million, or 48%, for the year ended December 31,
2009.  This decrease is attributable to the return of eight leased
Saab and Beech aircraft.





Ground
handling services decreased by $1.0 million, or 8%, for the year ended December
31, 2009, as compared to 2008.  This was primarily attributable to the
decrease in departures in our pro-rate operations.  The increase in
our Q400 operations had no effect on ground handling services expense, as ground
handling services associated with our Q400 operations are provided by
Continental at no cost under the Continental CPA.





Aircraft
maintenance, materials and repairs expenses decreased by $5.7 million, or 13%,
for the year ended December 31, 2009 as compared to 2008.  This
decrease is related to the removal of seven Saab and Beech aircraft from our
pro-rate fleet.  These aircraft were out of warranty and required more
maintenance expense than our new fleet of Q400 aircraft, which are currently
covered under warranty.





Other
rentals and landing fees increased by $2.1 million, or 11%, as compared to the
same period in 2008.  Landing fees associated with our pro-rate
operations decreased by $5.2 million related to the overall decrease in our
pro-rate operations.  Landing fees associated with the Continental CPA
increased by $7.1 million as a result of changes in Q400 fleet size, along with
the fact that we are now serving markets with significantly higher landing fee
rates, such as Newark/Liberty International Airport.  Landing fees
associated with our Continental CPA are fully reimbursed by
Continental.  Most airports in our network have also increased their
rates as a result of an overall reduction in industry-wide
capacity.


44
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





Aircraft
fuel expense decreased by $27.3 million, or 55%, for the year ended December 31,
2009 as compared to 2008.  This decline is primarily related to the
decrease in the average price of fuel.  Colgan’s average price paid
per gallon decreased 40% during the year ended December 31, 2009, as compared to
2008.  In addition, gallons consumed decreased by 26% for the year
ended December 31, 2009, due to the retirement of several of our Saab and Beech
aircraft in conjunction with the elimination of certain markets operated under
pro-rate agreements.  Aircraft fuel associated with our Q400
operations is provided at no cost under the Continental CPA.





Commissions
and passenger related expenses decreased by $3.8 million, or 18%, for the year
ended December 31, 2009 as compared to 2008.  This is primarily
attributable to the 15% decrease in passengers carried by our pro-rate
operations.





Depreciation
and amortization expense increased by $2.0 million, or 15%, for the year ended
December 31, 2009, as compared to the same period in 2008.  This is
primarily related to changes in the Q400 aircraft fleet size.  The
Q400 aircraft were added to our fleet throughout 2008.  However,
during the year ended December 31, 2009, we operated one fewer aircraft than the
same period in the previous year.





Other
expenses decreased by $5.6 million, or 23%, for the year ended December 31,
2009, as compared to the same period in 2008.  This decrease is primarily
related to decreases in costs related to crew training and other crew related
expenses.  This was related to low levels of flight crew attrition,
which reduced levels of training as experienced flight crews are
retained.  In contrast, we incurred significant training costs during
the first half of 2008 as we were introducing the Q400 fleet.  As a
result, flight crew related costs decreased by $5.0 million for the year ended
December 31, 2009.  The remaining decrease is attributable to the
fleet expansion expenses we incurred in 2008 as we were bringing the Q400
operations online.  Offsetting these decreases is an increase in
insurance expense of $1.1 million.  As previously discussed, effective
July 1, 2009, we obtained new insurance coverage with significantly higher
rates.





Impairment
and aircraft retirement charges of $2.0 million for the year ended December 31,
2009 related to certain maintenance costs necessary to restore certain Saab and
Beech aircraft to a condition suitable for return to the lessor or for
sale.  In the year ended December 31, 2008, impairment and aircraft
retirement charges of $13.6 million primarily related to the impairment of
Colgan’s goodwill.





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.


45
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Consolidated and Segmented
Results of Operations (Continued)





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 48% 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 $6.5 million, or 37%, 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 retirement 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 retirement costs related to
several of our Saab and Beech aircraft.  For more information, refer
to Note 14, Impairment of
Goodwill and Aircraft Retirement Costs,in Item 8 of this Form
10-K.


46
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





Liquidity and Capital Resources





We
generate cash primarily by providing regional airline and related services to
our code-share partners and passengers.  As of December 31, 2009, we
had cash and cash equivalents of $91.6 million.  Net cash provided by
operations was $105.6 million for the year ended December 31,
2009.  This included a 2008 federal income tax refund of approximately
$33 million that we received on April 1, 2009. We do not anticipate making
federal income tax payments in 2010 due to the accelerated depreciation
recognized for tax purposes related to our newly acquired CRJ-900 and Q400
aircraft, and we received a federal tax refund of approximately $38 million in
late February 2010 related to the 2009 tax year.





Contractual obligations. The
following chart details our debt and lease obligations at December 31, 2009 (in
thousands):




Payments
      Due by Period2010
            
            2011
            
            2012
            
            2013
            
            2014
            
            Thereafter
            
            TotalSenior
      convertible notes(1)
            $
            30,979
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            30,979Debt
            
            38,112
            
            
            42,027
            
            
            54,308
            
            
            35,491
            
            
            36,556
            
            
            355,762
            
            
            562,256Interest
      payments on debt
            
            32,783
            
            
            30,055
            
            
            27,339
            
            
            24,207
            
            
            22,234
            
            
            96,910
            
            
            233,528Capital
      leases
            
            1,869
            
            
            1,336
            
            
            986
            
            
            116
            
            
            -
            
            
            -
            
            
            4,307Operating
      leases(2)
            
            133,406
            
            
            130,412
            
            
            128,897
            
            
            118,110
            
            
            117,339
            
            
            351,984
            
            
            980,148Purchase
      obligations
            
            173,663
            
            
            123,310
            
            
            4,861
            
            
            649
            
            
            643
            
            
            1,875
            
            
            305,001Total
      contractual cashobligations(3)
            $
            410,812
            
            $
            327,140
            
            $
            216,391
            
            $
            178,573
            
            $
            176,772
            
            $
            806,531
            
            $
            2,116,219





(1)
            During
      2009, we repurchased $90,021 par amount of our $121,000 3.25% senior
      convertible notes due 2025.  The remaining Notes were
      repurchased in February 2010.  As of February 16, 2010, no par amount
      of Notes remain outstanding.(2)
            The
      amounts noted above for operating leases include $904,704 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 9 in Item 8 of this Form 10-K.(3)
            The
      table above excludes an approximate $300 million accident liability
      related to Flight 3407, recorded in other liabilities, as discussed
      in  Note 16, Commitments
      and Contingencies, in Item 8 of this Form 10-K.  This
      liability is offset in its entirety by a receivable, recorded in other
      assets, which the Company expects to receive from insurance carriers as
      claims are resolved.





On
January 13, 2010, we entered into a short-term loan agreement with a bank for
$10.0 million (the “Bridge Loan”).  The Bridge Loan was secured by our
2009 federal income tax refund and had an effective interest rate of 4.5%, and
matures on April 1, 2010.  The Bridge Loan was designed to temporarily
provide us with additional working capital until we received our 2009 federal
income tax refund.  We repaid the Bridge Loan in full upon receipt of
our 2009 federal income tax refund in late February 2010.




In August
2009, we entered into a Purchase and Release Agreement (the “ARS Settlement
Agreement”) with the financial institution that originally sold us the ARS
portfolio.  Pursuant to the terms of the ARS Settlement Agreement, the
institution purchased our ARS portfolio at a discount to par plus accrued
interest.  In addition, the institution granted us three-year options
to repurchase all or a portion of the ARS from the institution at the same
discount to par that the institution paid to us under the ARS Settlement
Agreement (the “ARS Call Options”).  We used the majority of the
proceeds to repay a margin loan facility that the institution had previously
provided to us in response to the failure of the ARS market (the “Credit
Facility”).  After repayment of the Credit Facility, we received
approximately $27 million from the ARS Settlement.  Our ARS Call
Options were valued at $2.7 million at December 31, 2009.


47
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Liquidity
and Capital Resources (Continued)





In July 2009, we completed a three-year
term loan financing for $25 million (the “Spare Parts Loan”).  The
Spare Parts Loan is secured by our pool of spare repairable, rotable and
expendable parts and certain aircraft engines.  The interest rate for
the Spare Parts Loan is a variable rate, which is indexed to LIBOR (subject to a
floor) and was 8.5% as of December 31, 2009. The Spare Parts Loan requires that
we maintain a minimum liquidity level at the end of every month and at specified
times preceding the maturity date or call date of certain other indebtedness.
The Spare Parts Loan also has standard provisions relating to our obligation to
timely repay the indebtedness and maintenance of the collateral base relative to
the outstanding principal amount of the borrowing.  On January 13,
2010, we amended the Spare Parts Loan to reduce the required minimum liquidity
level on four specific dates during the first quarter of
2010.  Amounts outstanding under the Spare Parts Loan were $24.2
million as of December 31, 2009.





In
February 2005, we issued $121.0 million principal amount of our 3.25% senior
convertible notes due 2025.  The Notes bear interest at the rate of 3.25%
per year, payable in cash semiannually in arrears on February 15 and August 15
of each year.  The Notes are convertible into a combination of cash and
common stock at a conversion price of approximately $13.22.  The Notes are
convertible in any quarter subsequent to a quarter in which the closing price of
our common stock exceeds $15.86 for 20 of the last 30 trading days.  This
condition was not met during the year ended December 31, 2009, and consequently
the Notes were not convertible by the holders during 2009 or the first quarter
of 2010 while they were still outstanding.  On February 15, 2010, the
holders of the Notes exercised their option to require us to purchase all of the
remaining outstanding Notes for cash at a purchase price equal to 100% of their
principal amount plus accrued interest.  As a result, the entire remaining
carrying amount of the Notes is classified as a current liability on our
consolidated balance sheet as of December 31, 2009.  On February 16, 2010,
we repurchased the remaining outstanding Notes.





In
February 2007, we entered into a purchase agreement for up to 25 firm and 20
option Q400 aircraft with Bombardier, Inc.  Under the agreement, we
were obligated to purchase a minimum of 15 Q400 regional aircraft, 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 of the option Q400 aircraft, which will be delivered between August
2010 and April 2011.  We also secured additional options to acquire 15
Q400 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.





In April
2007, Delta assigned to us its rights to purchase 16 CRJ-900 aircraft from
Bombardier, Inc.  As of December 31, 2009, we had accepted delivery of
all 16 of these aircraft.  Under the CRJ-900 DCA, Delta has the right
to require us to purchase and operate an additional seven CRJ-900
aircraft.





We are
required to make pre-delivery payments to Bombardier for the 15 firm Q400
aircraft that we have on order.  These payments began in January 2009
and will continue through October 2010.  Approximately 85% of the
remaining pre-delivery payments to be made in 2010 will be financed under a
pre-delivery payment financing facility provided by Export Development Canada
(“EDC”).  The remaining 15% or approximately $5 million will be funded
through our internal capital resources.  This unfinanced portion of
our pre-delivery payment requirements is scheduled to be paid in the second
quarter of 2010.  The interest rate associated with this pre-delivery
payment facility is indexed to LIBOR, and was 3.43% as of December 31,
2009.  The outstanding balance of these borrowings as of December 31,
2009 was $6.9 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,
ranging from 10 to 15 years, for 85% of the aircraft purchase price, the balance
of which was $513.5 million at December 31, 2009.  We have also
obtained a commitment from EDC to finance 85% of the purchase price of the 15
Q400 aircraft on order upon the delivery of each aircraft.


48
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Liquidity
and Capital Resources (Continued)





Additionally,
during 2009, we reached a settlement agreement with the Internal Revenue Service
(the “Service”) concerning their examination of our federal income tax returns
for 2003, 2004, and 2005.  The Service had initially proposed a number
of adjustments to the Company’s returns totaling approximately $35 million of
additional tax, plus accrued interest and penalties on these proposed
adjustments.  We agreed to pay approximately $3 million of additional
income tax and accrued interest in settlement of all open tax matters for these
years.  We paid this settlement amount during the second quarter of
2009.  With this agreement, the Service completed its examination of
our federal tax filings for 2003, 2004 and 2005.





Operating activities. Net
cash provided by operating activities was $105.6 million during the year ended
December 31, 2009.  This is primarily attributable to the
approximately $33 million tax refund we received in April 2009, and due to
approximately $73 million in cash generated from our operations.  Net
cash provided by operating activities was $28.8 million during the year ended
December 31, 2008.  This was due primarily to the $29.3 million in
hedge related payments made during 2008, offset by cash primarily generated from
regional airline service operations of $58.1 million.





Net cash provided by
operating activities was $277.2 million during the year ended December 31,
2007.  This was due primarily to the approximately $311 million of
proceeds received from the assignment of our Northwest claims.In January
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.  In June 2007, we assigned the remaining $42.5 million of
our claim for proceeds of $27.7 million.  The majority of these claim
proceeds were recorded as deferred revenue on our balance sheet.  Our
claim assignment proceeds were offset by income tax payments associated with the
claim assignments of $110 million.  In addition, our recurring
airlines operations provided operating cash flow of approximately $76.2
million.





Investing activities. 
Net cash provided by investing activities for the year ended December 31, 2009
was $24.2 million.  This was primarily attributable to proceeds received
from certain ARS redemptions at par by the issuers, proceeds from the ARS
Settlement, and net proceeds from exercises of a portion of the ARS Call Options
totaling $29.1 million.  In addition, we received net insurance
proceeds of $3.6 million.  These amounts were offset by $8.4 million
in cash purchases of property and equipment.





We expect
non-aircraft cash capital expenditures for 2010 to be approximately $8 to $10
million. We expect to fund the non-aircraft capital expenditures with existing
cash resources and cash flows generated from our operations.





Net cash
provided by investing activities for the year ended December 31, 2008 was $20.4
million.  This was primarily attributable to net proceeds from the
sale of ARS of $53.2 million, offset by $31.9 million in net cash purchases of
property and equipment, primarily consisting of flight equipment.





Cash used
in investing activities for the year ended December 31, 2007 was $221.9
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 net purchases of
property and equipment of $25.3 million, primarily consisting of the unfinanced
portion of aircraft purchases.  In addition, the acquisition of Colgan
decreased cash by $8.3 million, net of cash acquired.





Financing activities. Net
cash used in financing activities for the year ended December 31, 2009 totaled
$107.8 million.  This was primarily related to $83.9 million used to
repurchase a portion of the Company’s Notes, $12.9 million repaid on credit
facilities and $34.2 million of principal payments on other debt
obligations.  These debt payments were offset by the $24.8 million
proceeds received related to the Spare Parts Loan.





Net cash
used in financing activities for the year ended December 31, 2008 totaled $6.5
million.  During 2008, we received $101.8 million in debt proceeds,
primarily related to the $90.0 million Credit Facility.  This was
offset by $84.8 million of principal payments on debt obligations, $20.0 million
used to repurchase our Series A Preferred Shares from Northwest, and $3.5
million used in other financing activities.


49
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Liquidity
and Capital Resources (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.  In
addition, we purchased $68.2 million of treasury shares as part of our share
repurchase program.





Guarantees and
indemnifications.  We had $3.1 million and $5.4 million
invested in demand deposit accounts and in other similar instruments at December
31, 2009 and 2008, respectively.  These deposit accounts are used as
collateral for standby letter of credit facilities that we maintain for various
vendors.  As of December 31, 2009 and 2008, we had $2.9 million and
$3.0 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
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


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.





Revenue
Recognition





Nature of Estimates Required:
 Passenger and ground handling revenues are recognized when service is
provided. Under our contract and pro-rate flying agreements with our code-share
partners, revenue is considered earned when the flight is completed. 
Additionally, 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 related 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 revenues could be affected by several
factors, including changes to the code-share agreements, contract modifications
resulting from contract renegotiations and our ability to earn incentive
payments contemplated under applicable agreements.  Also, in the event we
have a reimbursement dispute with a major partner at a quarterly or annual
financial statement date due to matters such as differing interpretations of the
underlying operating agreement, we evaluate the dispute under our established
revenue recognition criteria and, provided the revenue recognition criteria have
been met, we recognize revenue for that period based on our estimate of the
resolution of the dispute.  Accordingly, we are required to exercise
judgment and use assumptions in the application of our revenue recognition
policy.





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 typically
quickly resolved with our partners (usually 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 and as previously discussed in the Overview
portion of this Item, we are currently in discussions with Delta regarding
certain disputed contractual items in both our ASA and DCA.  One of these
issues, for example, includes Delta’s challenge to our interpretation of a
one-time adjustment to our block hour, cycle and fixed payment rates that was to
become effective January 1, 2006.  Based on the objection notice we
received from Delta in 2007, the impact of Delta’s assertion could be a
cumulative adjustment of as much as $11.0 million from 2006 through 2009, and a
rate decrease of approximately $3.0 million annually until the next
contractually scheduled rate adjustment on January 1, 2013.





Fair Value of
Investments





Nature of Estimates Required:Our investment portfolio previously consisted primarily of ARS.  During 2009,
we reached an agreement to sell our portfolio of ARS to the financial
institution that had originally sold the ARS to us.  The ARS
Settlement provides that for a period of three years from the date of the ARS
Settlement, we shall have the right to repurchase all or a portion of the ARS at
the same discount to par the bank paid to us under the ARS
Settlement.  We determined the fair value of the ARS Call Options to
be $2.7 million at December 31, 2009.  The ARS Call Options are
classified as investments on the Company’s consolidated balance sheet as of
December 31, 2009.





As
described in Note 6 of Item 8 of this Form 10-K, we have categorized the fair
value for these assets as Level 3 financial instruments, which are those with
little to no observable inputs or market data, which require the reporting
entity to develop its own assumptions to use in the determination of fair
value.


51
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Significant
Accounting Policies and Critical Estimates (Continued)





Assumptions and Approach
Used:We determined the fair value of our ARS Call Options utilizing
the assistance of a third-party valuation specialist.  For each of our ARS
Call Options, a discounted cash flow (“DCF”) analysis was prepared to determine
the estimated fair value as of December 31, 2009.  The model
considered potential changes in yields for securities with similar
characteristics to the underlying ARS and evaluated possible future refinancing
opportunities for the issuers of the ARS.  The likelihood of future
refinancing opportunities was determined based upon a comparison of projected
rates to be paid by issuers assuming auctions continue to fail versus projected
rates under various refinancing scenarios, based upon different assumptions
about the path of future interest rates.  The analysis then assessed the
likelihood that the options would be exercisable as a result of the underlying
ARS being redeemed or traded in a secondary market at an amount greater than the
exercise price prior to the end of the option term.


Based on
the results of this assessment, we record any change in the fair values of the
ARS Call Options as a mark to market adjustment in the statement of
operations.





Effect if Different Assumptions
Used:  Had we used different DCF assumptions, particularly with
respect to the projected path of future yields on the underlying ARS portfolio
or similar securities, the value of the ARS Call Options could have been
materially different than the value recorded at year-end.


Goodwill and Other
Long-Lived Assets





Goodwill





Nature of Estimates Required:
We perform an impairment test of our Pinnacle reporting unit 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 include items
affecting the cash flows of the reporting segment; significant changes in the
underlying business strategy or operational environment; material ongoing
industry or economic trends; or other factors.  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
October 1, 2009, we performed the annual required impairment test of our
goodwill.  The test resulted in no impairment charge.





Assumptions and Approach
Used:  Our cash flow estimates are based on 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 our common stock and declines in our current or
projected future net income.





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, 2009, we had approximately $18.4 million in
goodwill.  If the current economic market conditions further decline
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 our goodwill.





52
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Significant
Accounting Policies and Critical Estimates (Continued)





Long-lived
Assets





Nature of Estimates Required:Our long-lived assets consist of property and equipment and intangible
assets.   Approximately 57% 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 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 2009, 2008 or
2007.





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.





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.


53
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations


Significant
Accounting Policies and Critical Estimates (Continued)





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, 2009, our fleet retirement reserve related to
our spare parts and supplies was approximately $4.7 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.








54


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 18% 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 recently 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, our pro-rate
code-share agreements with Continental, US Airways, and United expose us 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 $2.3 million change in annual
fuel costs.





Interest Rate Risk





Aircraft financing. We are
exposed to interest rate risk from the time of entering into purchase
commitments until the delivery of aircraft, at which time we receive permanent,
fixed-rate financing for each aircraft.  In January 2009, we entered
into a purchase agreement for 15 firm Q400 aircraft with Bombardier, which will
be delivered between August 2010 and April 2011.  Should interest
rates change by 100 basis points before we take delivery, and assuming that we
do not hedge the anticipated debt on the remaining Q400 aircraft, aggregate
interest expense in the first year of financing would change by approximately
$2.0 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 consist of taxable money market
securities.  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 taxable money market
securities, a 100 basis point change in interest rates would result in an
increase or decrease in annual investment income of approximately $0.8
million.  See Note 6 in Item 8 of this Form 10-K for additional
information.





55


Item
8.                      Financial
Statements and Supplementary Data




Report
      of Independent Registered Public Accounting
      Firm
                57Consolidated
      Statements of Operations
                58for
      the Years Ended December 31, 2009, 2008 and 2007Consolidated
      Balance Sheets
                59as
      of December 31, 2009 and 2008Consolidated
      Statements of Stockholders’
      Equity
                60for
      the Years Ended December 31, 2009, 2008 and 2007Consolidated
      Statements of Cash Flows
                61for
      the Years Ended December 31, 2009, 2008 and 2007Notes
      to Consolidated Financial Statements
                62
  56


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, 2009 and 2008, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2009.  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, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles.





As
discussed in Note 2 of the consolidated financial statements, the consolidated
financial statements have been adjusted for the retrospective application of ASC
470-20, Debt with Conversion
and Other Options,which became effective January 1, 2009.





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, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 26, 2010
expressed an unqualified opinion thereon.











/s/
ERNST & YOUNG LLP





Memphis,
Tennessee


February
26, 2010








57


Pinnacle
Airlines Corp.


Consolidated
Statements of Operations


(in
thousands, except per share data)





Years
      Ended December 31,2009
            
            
            2008
              (Restated)
            
            
            2007
              (Restated)Operating
      revenues:Regional
      airline services
            
            $
            836,249
            
            
            $
            855,659
            
            
            $
            777,179Other
            
            
            9,259
            
            
            
            9,126
            
            
            
            10,195Total
      operating revenues
            
            
            845,508
            
            
            
            864,785
            
            
            
            787,374Operating
      expenses:Salaries,
      wages and benefits
            
            
            225,014
            
            
            
            219,971
            
            
            
            195,767Aircraft
      rentals
            
            
            120,748
            
            
            
            128,559
            
            
            
            138,661Ground
      handling services
            
            
            93,182
            
            
            
            96,359
            
            
            
            96,306Aircraft
      maintenance, materials and repairs
            
            
            98,075
            
            
            
            93,361
            
            
            
            89,661Other
      rentals and landing fees
            
            
            70,777
            
            
            
            71,405
            
            
            
            58,956Aircraft
      fuel
            
            
            22,110
            
            
            
            49,450
            
            
            
            38,122Commissions
      and passenger related expense
            
            
            20,919
            
            
            
            27,025
            
            
            
            25,740Depreciation
      and amortization
            
            
            35,399
            
            
            
            26,518
            
            
            
            9,265Other
            
            
            76,595
            
            
            
            92,982
            
            
            
            82,485Impairment
      and aircraft retirement costs
            
            
            1,980
            
            
            
            13,548
            
            
            
            -Total
      operating expenses
            
            
            764,799
            
            
            
            819,178
            
            
            
            734,963Operating
      income
            
            
            80,709
            
            
            
            45,607
            
            
            
            52,411Operating
      income as a percentage of operating revenues
            
            
            9.5
            %
            
            
            5.3
            %
            
            
            6.7
            %Nonoperating
      (expense) income:Interest
      income
            
            
            1,947
            
            
            
            6,870
            
            
            
            11,601Interest
      expense
            
            
            (44,862
            )
            
            
            (44,547
            )
            
            
            (15,941
            )Investment
      gain (loss), net
            
            
            3,877
            
            
            
            (16,800
            )
            
            
            -Loss
      on sale of unsecured claim
            
            
            -
            
            
            
            -
            
            
            
            (4,144
            )Miscellaneous
      income, net
            
            
            567
            
            
            
            281
            
            
            
            22Total
      nonoperating expense
            
            
            (38,471
            )
            
            
            (54,196
            )
            
            
            (8,462
            )Income
      (loss) before income taxes
            
            
            42,238
            
            
            
            (8,589
            )
            
            
            43,949Income
      tax expense
            
            
            (382
            )
            
            
            (2,408
            )
            
            
            (13,526
            )Net
      income (loss)
            
            $
            41,856
            
            
            $
            (10,997
            )
            
            $
            30,423Basic
      earnings (loss) per share
            
            $
            2.33
            
            
            $
            (0.62
            )
            
            $
            1.46Diluted
      earnings (loss) per share
            
            $
            2.31
            
            
            $
            (0.62
            )
            
            $
            1.32Shares
      used in computing basic earnings (loss)  per
    share
            
            
            17,969
            
            
            
            17,865
            
            
            
            20,897Shares
      used in computing diluted earnings (loss) per share
            
            
            18,133
            
            
            
            17,865
            
            
            
            23,116





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


58


Pinnacle
Airlines Corp.


Consolidated
Balance Sheets


(in
thousands, except share data)


December
      31, 2009
            
            
            December
      31, 2008Assets
            
            
            
            
            (Restated)Current
      assetsCash
      and cash equivalents
            
            $
            91,574
            
            
            $
            69,469Restricted
      cash
            
            
            3,115
            
            
            
            5,417Receivables,
      net of allowances of $213 in 2009 and $135 in 2008
            
            
            34,518
            
            
            
            31,619Spare
      parts and supplies, net of allowances of $4,749 in 2009 and $4,213 in
      2008
            
            
            19,472
            
            
            
            17,106Prepaid
      expenses and other assets
            
            
            3,508
            
            
            
            8,160Assets
      held for sale
            
            
            -
            
            
            
            2,786Deferred
      income taxes, net of allowance
            
            
            10,406
            
            
            
            13,908Income
      taxes receivable
            
            
            40,803
            
            
            
            31,117Total
      current assets
            
            
            203,396
            
            
            
            179,582Property
      and equipmentFlight
      equipment
            
            
            756,815
            
            
            
            721,499Aircraft
      pre-delivery payments
            
            
            12,049
            
            
            
            5,721Other
      property and equipment
            
            
            48,710
            
            
            
            46,218Less
      accumulated depreciation
            
            
            (86,501
            )
            
            
            (53,507
            )Net
      property and equipment
            
            
            731,073
            
            
            
            719,931Investments
            
            
            2,723
            
            
            
            116,900Deferred
      income taxes, net of allowance
            
            
            -
            
            
            
            40,847Other
      assets, primarily insurance receivables
            
            
            317,659
            
            
            
            33,724Debt
      issuance costs, net of amortization of $5,146 in 2009 and $3,911 in
      2008
            
            
            3,561
            
            
            
            3,711Goodwill
            
            
            18,422
            
            
            
            18,422Intangible
      assets, net of amortization of $7,179 in 2009 and  $5,180 in
      2008
            
            
            12,586
            
            
            
            14,585Total
      assets
            
            $
            1,289,420
            
            
            $
            1,127,702Liabilities
      and stockholders’ equityCurrent
      liabilitiesCurrent
      maturities of long-term debt
            
            $
            36,085
            
            
            $
            32,116Bank
      line of credit
            
            
            -
            
            
            
            8,275Senior
      convertible notes
            
            
            30,596
            
            
            
            10,754Pre-delivery
      payment facility
            
            
            2,027
            
            
            
            4,075Accounts
      payable
            
            
            24,306
            
            
            
            30,431Deferred
      revenue
            
            
            24,363
            
            
            
            23,851Accrued
      expenses and other current liabilities
            
            
            60,610
            
            
            
            74,669Total
      current liabilities
            
            
            177,987
            
            
            
            184,171Senior
      convertible notes
            
            
            -
            
            
            
            97,683Noncurrent
      pre-delivery payment facility
            
            
            4,910
            
            
            
            -Long-term
      debt, less current maturities
            
            
            519,234
            
            
            
            502,741Credit
      facility
            
            
            -
            
            
            
            90,000Deferred
      revenue, net of current portion
            
            
            177,711
            
            
            
            192,191Deferred
      income taxes, net of allowance
            
            
            13,532
            
            
            
            -Other
      liabilities
            
            
            293,809
            
            
            
            5,182Commitments
      and contingenciesStockholders’
      equityCommon
      stock, $0.01 par value; 40,000,000 shares authorized;
              22,786,743
      and 22,514,782 shares issued, respectively
            
            
            228
            
            
            
            225Treasury
      stock, at cost, 4,450,092 shares
            
            
            (68,152
            )
            
            
            (68,152
            )Additional
      paid-in capital
            
            
            121,513
            
            
            
            119,611Accumulated
      other comprehensive loss
            
            
            (14,431
            )
            
            
            (17,173
            )Retained
      earnings
            
            
            63,079
            
            
            
            21,223Total
      stockholders’ equity
            
            
            102,237
            
            
            
            55,734Total
      liabilities and stockholders’ equity
            
            $
            1,289,420
            
            
            $
            1,127,702





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


59


Pinnacle
Airlines Corp.


Consolidated
Statements of Stockholders’ Equity


(in
thousands, except share data)


Common
              Stock
            
            Additional
              Paid-In
              Capital
            
            Retained
              Earnings
            
            Accumulated
              Other
              Comprehensive
      Gain/ (Loss)
            
            Treasury
              Stock
            
            TotalBalance,
      December 31, 2006
            $
            221
            
            $
            86,112
            
            $
            10,648
            
            $
            40
            
            $
            -
            
            $
            97,021Impact
      of new convertible debt accounting standard
            
            -
            
            
            25,796
            
            
            (8,351
            )
            
            -
            
            
            -
            
            
            17,445Comprehensive
      income:Net
      income
            
            -
            
            
            -
            
            
            30,423
            
            
            -
            
            
            -
            
            
            30,423Derivative
      instruments (cash flow hedge),
              net
      of tax of $6,016
            
            -
            
            
            -
            
            
            -
            
            
            (10,761
            )
            
            -
            
            
            (10,761
            )Post-retirement
      actuarial gain, net of tax of $304
            
            -
            
            
            -
            
            
            -
            
            
            521
            
            
            -
            
            
            521Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20,183Impact
      of adoption of FIN 48
            
            -
            
            
            -
            
            
            (500
            )
            
            -
            
            
            -
            
            
            (500
            )Restricted
      stock issuance –  76,311  shares
            
            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 (Restated)
            
            224
            
            
            116,961
            
            
            32,220
            
            
            (10,200
            )
            
            (68,152
            )
            
            71,053Comprehensive
      income:Net
      loss
            
            -
            
            
            -
            
            
            (10,997
            )
            
            -
            
            
            -
            
            
            (10,997
            )Cash
      flow hedges:Derivative
      instruments, net of tax of $5,377
            
            -
            
            
            -
            
            
            -
            
            
            (8,445
            )
            
            -
            
            
            (8,445
            )Reclassification
      into earnings, net of tax of $814
            
            -
            
            
            -
            
            
            -
            
            
            1,454
            
            
            -
            
            
            1,454Investments
      in ARS:Unrealized
      loss on investments, net of tax of $709
            
            -
            
            
            -
            
            
            -
            
            
            (16,091
            )
            
            -
            
            
            (16,091
            )Reclassification
      into earnings, net of tax of $709
            
            -
            
            
            -
            
            
            -
            
            
            16,091
            
            
            -
            
            
            16,091Post-retirement
      actuarial gain, net of tax of $9
            
            -
            
            
            -
            
            
            -
            
            
            18
            
            
            -
            
            
            18Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (17,970
            )Restricted
      stock issuance –  108,962 shares
            
            1
            
            
            (1
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Exercise
      of stock options
            
            -
            
            
            49
            
            
            -
            
            
            -
            
            
            -
            
            
            49Share-based
      compensation
            
            -
            
            
            2,602
            
            
            -
            
            
            -
            
            
            -
            
            
            2,602Balance,
      December 31, 2008 (Restated)
            
            225
            
            
            119,611
            
            
            21,223
            
            
            (17,173
            )
            
            (68,152
            )
            
            55,734Comprehensive
      income:Net
      income
            
            -
            
            
            -
            
            
            41,856
            
            
            -
            
            
            -
            
            
            41,856Cash
      flow hedges:Reclassification
      into earnings, net of tax $1,702
            
            -
            
            
            -
            
            
            -
            
            
            2,894
            
            
            -
            
            
            2,894Post-retirement
      actuarial gain, net of tax of $99
            
            -
            
            
            -
            
            
            -
            
            
            (152
            )
            
            -
            
            
            (152
            )Investments
      in ARS:Unrealized
      gain on investments, net of tax of $195
            
            
            
            
            
            
            
            
            
            
            4,403
            
            
            
            
            
            4,403Reclassification
      into earnings, net of tax of $195
            
            
            
            
            
            
            
            
            
            
            (4,403
            )
            
            
            
            
            (4,403
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            44,598Restricted
      stock issuance –  278,336 shares
            
            3
            
            
            (3
            )
            
            -
            
            
            -
            
            
            -
            
            
            -Share-based
      compensation
            
            -
            
            
            2,427
            
            
            -
            
            
            -
            
            
            -
            
            
            2,427Repurchase
      of a portion of  3.25% convertible notes,
              net
      of tax $337
            
            -
            
            
            (522
            )
            
            -
            
            
            -
            
            
            -
            
            
            (522
            )Balance,
      December 31, 2009
            $
            228
            
            $
            121,513
            
            $
            63,079
            
            $
            (14,431
            )
            $
            (68,152
            )
            $
            102,237





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


60





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


Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Operating
      activities
            
            
            
            
            (Restated)
            
            
            (Restated)Net
      income (loss)
            
            $
            41,856
            
            
            $
            (10,997
            )
            
            $
            30,423Adjustments
      to reconcile net income (loss) to cash provided by operating
      activities:Depreciation
      and amortization
            
            
            41,121
            
            
            
            31,289
            
            
            
            11,162Impairment
      charges
            
            
            -
            
            
            
            10,557
            
            
            
            -Investment
      (gain) loss
            
            
            (3,877
            )
            
            
            16,800
            
            
            
            -Interest
      accretion, net
            
            
            6,447
            
            
            
            9,709
            
            
            
            8,520Deferred
      income taxes
            
            
            56,340
            
            
            
            33,514
            
            
            
            (102,591
            )Recognition
      of deferred revenue
            
            
            (24,422
            )
            
            
            (24,696
            )
            
            
            (23,052
            )Other
            
            
            7,587
            
            
            
            6,177
            
            
            
            6,494Changes
      in operating assets and liabilities:Restricted
      cash
            
            
            2,302
            
            
            
            (90
            )
            
            
            (4,077
            )Receivables
            
            
            (2,899
            )
            
            
            (512
            )
            
            
            79,093Prepaid
      expenses and other assets
            
            
            (667
            )
            
            
            4,461
            
            
            
            (3,679
            )Insurance
      proceeds
            
            
            4,345
            
            
            
            2,414
            
            
            
            3,565Spare
      parts and supplies
            
            
            (3,594
            )
            
            
            (2,835
            )
            
            
            (1,846
            )Income
      taxes receivable/payable
            
            
            (9,687
            )
            
            
            (33,493
            )
            
            
            2,064Accounts
      payable and accrued expenses
            
            
            (328
            )
            
            
            7,813
            
            
            
            5,893Change
      in uncertain income tax positions and related interest
            
            
            (19,337
            )
            
            
            -
            
            
            
            -Increase
      in deferred revenue
            
            
            10,454
            
            
            
            6,816
            
            
            
            271,699Hedge
      related payments
            
            
            -
            
            
            
            (29,288
            )
            
            
            (1,310
            )Other
      liabilities
            
            
            -
            
            
            
            1,167
            
            
            
            (5,119
            )Cash
      provided by operating activities
            
            
            105,641
            
            
            
            28,806
            
            
            
            277,239Investing
      activitiesPurchases
      of property and equipment, net
            
            
            (8,410
            )
            
            
            (31,930
            )
            
            
            (25,337
            )Insurance
      proceeds related to property and equipment
            
            
            3,576
            
            
            
            -
            
            
            
            -Aircraft
      pre-delivery payments
            
            
            -
            
            
            
            (816
            )
            
            
            (74,138
            )Purchases
      of auction rate securities
            
            
            -
            
            
            
            (82,200
            )
            
            
            (1,024,284
            )Proceeds
      from auction rate securities redemptions and sales
            
            
            29,058
            
            
            
            135,350
            
            
            
            910,134Acquisition
      of Colgan Air, Inc. net of cash acquired
            
            
            -
            
            
            
            -
            
            
            
            (8,267
            )Cash
      provided by (used in) investing activities
            
            
            24,224
            
            
            
            20,404
            
            
            
            (221,892
            )Financing
      activitiesProceeds
      from debt
            
            
            24,761
            
            
            
            11,810
            
            
            
            67,963Payments
      on credit facilities
            
            
            (12,875
            )
            
            
            (66,712
            )
            
            
            (9,857
            )Repurchase
      of senior convertible notes
            
            
            (83,870
            )
            
            
            -
            
            
            
            -Payments
      on debt
            
            
            (34,191
            )
            
            
            (18,127
            )
            
            
            (21,005
            )Proceeds
      from line of credit
            
            
            -
            
            
            
            90,000
            
            
            
            -Purchase
      of Series A Preferred Share
            
            
            -
            
            
            
            (20,000
            )
            
            
            -Treasury
      shares repuchased
            
            
            -
            
            
            
            -
            
            
            
            (68,152
            )Other
      financing activites
            
            
            (1,585
            )
            
            
            (3,497
            )
            
            
            1,784Cash
      used in financing activities
            
            
            (107,760
            )
            
            
            (6,526
            )
            
            
            (29,267
            )Net
      increase in cash and cash equivalents
            
            
            22,105
            
            
            
            42,684
            
            
            
            26,080Cash
      and cash equivalents at beginning of period
            
            
            69,469
            
            
            
            26,785
            
            
            
            705Cash
      and cash equivalents at end of period
            
            $
            91,574
            
            
            $
            69,469
            
            
            $
            26,785Supplemental
      disclosure of cash flow informationInterest
      paid
            
            $
            36,873
            
            
            $
            24,736
            
            
            $
            8,717Income
      tax (refunds) payments, net
            
            $
            (30,548
            )
            
            $
            4,375
            
            
            $
            113,871Noncash
      investing and financing activitiesProperty
      and equipment acquired through the issuance of debt
            
            $
            53,105
            
            
            $
            466,535
            
            
            $
            73,166Debt
      retired with insurance proceeds
            
            $
            15,424
            
            
            $
            -
            
            
            $
            -Debt
      retired with auction rate securities proceeds
            
            $
            90,000
            
            
            $
            -
            
            
            $
            -Mark-to-market
      adjustment on derivative instruments
            
            $
            -
            
            
            $
            -
            
            
            $
            16,777





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


61
 Pinnacle
Airlines Corp.
 Notes
to Consolidated Financial Statements
 (All
amounts in thousands, except per share data)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS INDEX





1.    Description of
      Business
            10.  Accrued Expenses and Other
      Current Liabilities2.    Significant
      Accounting Policies
            11.  Share-Based
      Compensation3.Code-share Agreements with Partners
            12.  Other
      Expenses4.    Segment
      Reporting
            13.  Income
      Taxes5.   Earnings (Loss) Per Share
            14.  Impairment and Aircraft
      Retirement Costs6.    Investments and
      Fair Value Measurements
            15.  Colgan
      Acquisition7.   Borrowings
            16.  Commitments and
      Contingencies8.    Hedging
            17.  Quarterly Financial Data
      (Unaudited)9.    Leases





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, 2009, Pinnacle and Colgan offered scheduled passenger service with
approximately 1,100 total daily departures to a combined 198
destinations.





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 are issued from either of
these classes of stock.





In
October 2008, two of the Company’s major customers, Northwest Airlines
Corporation and Delta Air Lines, Inc., merged to form the world’s largest
passenger airline.  The combined companies are referred to herein as
“Delta.” Northwest Airlines Corporation and its subsidiaries as they existed
prior to the merger are referred to herein as “Northwest.”





Pinnacle
operates an all-regional jet fleet, and provides regional airline capacity to
Delta at its hub airports in Atlanta, Detroit, Memphis, and Minneapolis/St.
Paul.  At December 31, 2009, Pinnacle as a Delta Connection carrier
operated 126 Canadair Regional Jet (“CRJ”)-200 aircraft with approximately 663
daily departures to 114 cities in 37 states and three Canadian
provinces.  Pinnacle also operated a fleet of 16 CRJ-900 aircraft as a
Delta Connection carrier with approximately 72 daily departures to 27 cities in
14 states, Belize, Mexico, Canada 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, 2009, Colgan, through its pro-rate operations, offered 239 daily
departures to 40 destinations in ten states and the District of
Columbia.  Colgan operated under revenue pro-rate agreements 12 Saab
340 aircraft as Continental Connection from Continental’s hub airport in
Houston, 12 Saab 340 aircraft as United Express at Washington/Dulles, and ten
Saab 340 aircraft as US Airways Express, with hub locations at New
York/LaGuardia and Boston.  Colgan operated under a capacity purchase
agreement 14 Bombardier Q400 aircraft providing 90 daily departures to 17 cities
in 11 states, the District of Columbia and two Canadian provinces for
Continental at its global hub at Newark/Liberty International
Airport.


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


1.  Description
of Business (Continued)





As shown
in the following table, the Company’s operating aircraft fleet consisted of 142
CRJs and 48 turboprop aircraft at December 31, 2009.





Aircraft
      Type
            
            Number
      of Aircraft Leased
            
            Number
      of Aircraft Owned
            
            Total
              Aircraft
            
            Standard
      Seating Configuration
            
            Average
      Age
              (in
      years)CRJ-200
            
            126
            
            -
            
            126
            
            50
            
            6.7CRJ-900
            
            -
            
            16
            
            16
            
            76
            
            1.5Total
      regional jets
            
            126
            
            16
            
            142Saab
      340
            
            11(1)
            
            23
            
            34
            
            34
            
            18.4Q400
            
            -
            
            14
            
            14
            
            74
            
            1.8Total
      turboprops
            
            11
            
            37
            
            48Total
      aircraft
            
            137
            
            53
            
            190





(1)
            In
      addition, for purposes of classification, two of the 11 leased aircraft
      were operated under capital leases. For further discussion, refer to Note
      9, Leases.





2.  Significant Accounting Policies





(a)
Basis of Presentation, Principles of Consolidation, Reclassification and
Restatement




The
Company’s consolidated financial statements include the accounts of Pinnacle
Airlines Corp. and its wholly-owned subsidiaries, Pinnacle Airlines, Inc. and
Colgan Air, Inc, with all intercompany transactions and balances having been
eliminated.  Certain prior year amounts, all of which were considered
immaterial, unless otherwise disclosed within the notes to the financial
statements, have been reclassified to conform to current year
classifications.  In addition, certain prior period amounts have been
restated to conform to the provisions of a newly adopted accounting standard
that affected the accounting treatment of the Company’s senior convertible
notes.  See Note 7 for further discussion of this standard.  The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of
America.





(b)
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 (“CRJ-900 DCA”), the Company defers certain
revenue, primarily related to maintenance.  For example, the Company
receives monthly payments based on contractual rates per block hour for heavy
maintenance activities not expected to be performed for at least a
year.  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.


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


2.  Significant
Accounting Policies (Continued)





Because
many of the Company’s expenses are reimbursable expenses, the 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, the
Company’s revenue associated with these agreements is presented at the net
amounts billed for reimbursement net of the related expense incurred. 
Gross billings of $8,566 and $11,162 is presented net of expense of $7,881 and
$10,269 in regional airline services revenue in the Company’s consolidated
statement of operations for the years ended December 31, 2009 and 2008,
respectively.  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.





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. The Company has concluded that a component of its revenue under the
CRJ-900 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 2009 and 2008 was $65,125 and $30,961, respectively, and has been
included in regional airline services revenue on the Company’s consolidated
statements of operations.





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.





New Accounting
Standard.  In September 2009, the Financial Accounting
Standards Board Emerging Issues Task Force (“EITF”) reached final consensus on
Issue 08-1, Revenue
Arrangements with Multiple Deliverables, or Issue 08-1, which will update
Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and
changes the accounting for certain revenue arrangements. The new requirements
change the allocation methods used in determining how to account for multiple
payment streams and will result in the ability to separately account for more
deliverables, and potentially less revenue deferrals. Additionally, Issue 08-1
requires enhanced disclosures in financial statements. Issue 08-1 is effective
for revenue arrangements enter into or materially modified in fiscal years
beginning after June 15, 2010 on a prospective basis, with early
application permitted. The Company is currently evaluating the impact this Issue
will have on its financial statements.





(c)
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.





(d)
Capitalized Interest





The
Company capitalizes interest on assets that require a period of time to acquire
the asset and prepare them for their intended use.  The Company is
currently capitalizing interest, as part of the asset’s cost, on its aircraft
pre-delivery payments.  For the years ended December 31, 2009, 2008
and 2007, the Company recorded gross interest expense of $45,399, $46,539, and
$20,629, respectively, of which $537, $1,992, and $4,688 was capitalized,
respectively.


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


2.  Significant
Accounting Policies (Continued)





(e)
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 demand
deposit accounts 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, 2009 and 2008, the Company had restricted cash of $3,115 and
$5,417, respectively.





(f) 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 money market mutual funds collateralized by U.S. treasury
securities. In addition, the Company invests a portion of its excess cash in
overnight repurchase agreements collateralized by U.S. agency securities at the
end of each business day. The agreements represent an unconditional obligation
of banks to repay principal and repurchase securities on the next business day.
The overnight investment balance was $11,559 and $1,695 at December 31, 2009 and
2008, 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 $2,856 and $3,024 at December 31, 2009 and 2008,
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 $30,979 and $121,000 par amount
of Notes still outstanding on December 31, 2009 and 2008, respectively, was
$29,779 and $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, or as of the end
of a period preceding the period in which holders of the Notes have the right to
cause the Company to repurchase the Notes, in which case the entire balance
would be classified as a current liability.  As of December 31, 2009,
the Company had an additional $555,319 of long-term notes payable, which had a
fair value of $482,161.  For further discussion, see Note
7.




(g)
Accounts Receivable and Related Reserve





The Company periodically evaluates and
makes estimates of the collectability of its accounts
receivable.  Generally, the reserve for bad debt is determined using
the specific identification method.  The Company exercises judgment in
assessing the realization of such receivables, and the Company’s policy is to
continuously review the age and quality of its accounts receivable as one
element of determining the approximate amount of revenue.  In
accordance with this policy, the receivable reserve was $213 and $135 as of
December 31, 2009 and 2008, respectively.





(h)
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.


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


2.  Significant
Accounting Policies (Continued)





(i)
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 that
extend the useful life of the asset are capitalized.  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
      Method
            
            Depreciable
      Life
            
            Residual
      ValueOwned
      AircraftRegional
      jets
            
            Straight–line
            
            25
      years
            
            10%Turboprops
            
            Straight–line
            
            15-25
      years
            
            8 -
      10%Aircraft
      rotablesRegional
      jets
            
            Straight–line
            
            25
      years(1)
            
            10
      - 40%Turboprops
            
            Straight–line
            
            15-25
      years
            
            8 -
      10%Ground
      service equipment
            
            Straight–line
            
            10
      years
            
            0%Office
      equipment
            
            Straight–line
            
            10
      years
            
            0%Software
      and computer equipment
            
            Straight–line
            
            3-7
      years
            
            0%Leasehold
      improvements
            
            Straight–line
            
            2-17
      years
            
            0%Vehicles
            
            Straight–line
            
            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.





(j)
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.


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


2.  Significant
Accounting Policies (Continued)





The
Company’s most significant intangible asset is its contractual rights, which
were acquired from Northwest.  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, 2009
            
            
            Carrying
      Value
              as
      of
              December
      31, 2009
            
            Amortization
              Expense
              Recognized
              during
      2009
            
            Estimated
              Annual
      Amortization Expensefor
              2010
      - 2014Contractual
      rights
            $
            15,115
            
            $
            (5,491
            )
            
            $
            9,624
            
            $
            1,203
            
            $
            1,203Code-share
      andEAS
      agreements
            
            3,900
            
            
            (1,138
            )
            
            
            2,762
            
            
            390
            
            
            390Airport
      slots
            
            750
            
            
            (550
            )
            
            
            200
            
            
            406
            
            
            N/A1Total
            $
            19,765
            
            $
            (7,179
            )
            
            $
            12,586
            
            $
            1,999
            
            $
            1,593





(1)  In
      early 2010, the Company sold its remaining airport slots to another
      party.





(k)
Fair Value





On January 1, 2008, the Company adopted authoritative guidance issued by
the Financial Accounting Standards Board (“FASB”) on fair value
measurements.  This guidance defined fair value, established a framework
for measuring fair value, and expanded disclosures about fair value
measurements.  On January 1, 2009, the Company implemented the previously
deferred provisions of this guidance for nonfinancial assets and liabilities
recorded at fair value, as required.  The adoption of this new guidance did
not materially affect the Company’s financial condition, results of operations,
or cash flows.  For further discussion, see Note 6.





Effective
June 30, 2009, the Company adopted new accounting guidance that extends the
disclosure requirements regarding fair value of financial instruments to interim
financial statements.  The adoption of this standard affects
disclosures only and had no effect on the Company’s statement of operations,
balance sheet, or statement of cash flows.  For further discussion,
see Note 6.





(l)
Investments





The
Company invests excess cash balances primarily in short-term money market
instruments and overnight repurchase agreements.  Previously, the
Company held 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 were classified as available-for-sale and presented at
their estimated fair values based on quoted market prices for those
securities.





Fair
Value Measurements




The
Company’s borrowings and investments are required to be measured at fair value
on a recurring basis.  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, accounting guidance 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:


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


2.  Significant
Accounting Policies (Continued)





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




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




At
December 31, 2009, the Company’s investment balance included its ARS Call
Options, as discussed and defined in Note 6.  The ARS Call Options are
reported at fair value, which is determined using a discounted cash flow model
that assesses the likelihood that the underlying ARS may be redeemed at par or
sold through a successful auction or in a secondary market prior to the end of
the option term. At December 31, 2009, the fair value of the ARS Call Options
was $2,723.  For further discussion, see Note 6.





(m)
Goodwill





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 and was expensed 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 as well.  The Company determined that its goodwill was
not impaired as of December 31, 2009.  For additional information, see
Note 14.





(n)
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.


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


2.  Significant
Accounting Policies (Continued)





(o)
Defined Contribution Plans and Other Post-retirement Benefits





401(k)
Plans





The
Company maintains two 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’s 401(k)
plans also contain profit sharing provisions allowing the Company to make
discretionary contributions for the benefit of all plan
participants.  The Company made the following matching
contributions:





Years
      Ending December 31,2009
            
            
            2008
            
            
            2007401(k)
      matching contributions
            
            $
            1,331
            
            
            $
            2,865
            
            
            $
            2,743Discretionary
      contributions
            
            
            -
            
            
            
            -
            
            
            
            -





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 Company is self-insured for these
costs.





The
estimated future net benefit payments will be immaterial to the Company’s
financial results and cash flows.





(p)
Segment Reporting





Generally
accepted accounting principals require 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.  As of December 31,
2009, the Company had two reportable segments consisting of Pinnacle and
Colgan.  For additional information regarding the Company’s reportable
segments, see Note 4.





(q)
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.





(r)
Subsequent Events





Effective
June 15, 2009, the Company adopted a new accounting standard related to
subsequent events.  This standard established standards for accounting
for and disclosing subsequent events (events that occur after the balance sheet
date, but before financial statements are issued or are available to be
issued).  Entities must now disclose the date subsequent events were
evaluated and whether that evaluation took place on the date financial
statements were issued or were available to be issued.  The adoption
of this standard did not have a material impact on the Company’s statement of
operations or balance sheet.  For the year ended December 31, 2009,
the Company has considered subsequent events through February 26,
2010, which is the date its consolidated financial statements were filed with
the Securities and Exchange Commission on Form 10-K.


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





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,
2009.





Percentage
      of Regional Airline Service RevenuePro-Rate
      AgreementsSource
      of Revenue
            
            Capacity
      Purchase Agreements
            
            Standard
            
            Modified
            
            TotalDelta
            
            73%
            
            -
            
            -
            
            73%Continental
            
            9%
            
            -
            
            7%
            
            16%United
            
            -
            
            -
            
            5%
            
            5%US
      Airways
            
            -
            
            4%
            
            -
            
            4%Essential
      Air Service
            
            -
            
            -
            
            2%
            
            2%Total
            
            82%
            
            4%
            
            14%
            
            100%





Capacity
Purchase Agreements





The
Company’s preferred contractual relationships with major airlines are structured
as capacity purchase agreements (“CPAs”).  Under CPAs, 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 or mark-up payments added to the reimbursed cost when the Company
invoices its partner for reimbursement.  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.





The
Company currently operates under the following CPAs:





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.  The Company subleases its 126 CRJ-200 aircraft from Delta,
and Delta reimburses the Company’s CRJ-200 aircraft rental expense in full under
the terms of the CRJ-200 ASA.





CRJ-900 DCA.  On
April 27, 2007, the Company entered into a ten-year CPA with Delta under which
Pinnacle operates 16 CRJ-900 aircraft, each for ten years, as a Delta Connection
Carrier (the “CRJ-900 DCA”).  Delta also has the option to add an
additional seven CRJ-900 aircraft under the CRJ-900 DCA.  As of
December 31, 2009, Pinnacle operated 16 CRJ-900 aircraft under the CRJ-900
DCA.





Continental
CPA.  On February 5, 2007, the Company entered into a CPA (the
“Continental CPA”), with Continental under which Colgan operates Q400 regional
aircraft predominantly out of Continental’s hub at Newark/Liberty International
Airport.  As of December 31, 2009 Colgan operated 14 Q400 aircraft,
most of which were delivered and placed in service in the first half of
2008.  Each aircraft will be operated under the Continental CPA for a
term of ten years from the date it was placed into service.  On
January 13, 2009, the Company amended the Continental CPA to operate an
additional 15 Q400 aircraft. The additional aircraft, which are scheduled to
deliver on various dates between August 2010 and April 2011, will be placed into
service for Continental beginning in September 2010.


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


3.  Code-share
Agreements with Partners (Continued)





Under its
CPAs, the Company receives the following payments from the major
airline:





Reimbursement
payments:  The Company receives monthly reimbursements for
certain expenses associated with CPA operations.  These vary by
contract, but might include: basic aircraft and engine rentals; aviation
liability, war risk and hull insurance; third-party deicing services;
third-party engine and airframe maintenance; hub and maintenance facility
rentals; passenger security costs; certain ground handling expenses; certain
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 the major airline for the actual
expenses incurred.  The CPAs provide that the major airline partner
will supply certain supplies and services such as fuel and aircraft rent and
ownership costs at no charge.  As a result, these items are not
recorded in the Company’s consolidated statements of operations.





Payments based on pre-set
rates:  Under CPAs, the Company is entitled to receive payments
for each completed block hour and departure 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 CPA operations that are
not covered by the reimbursement payments.  The substantial majority
of these expenses relate to labor costs, ground handling costs in cities where
the partner does not have ground handling operations, landing fees that are not
otherwise specifically reimbursed, overhead and depreciation.





Margins, mark-up and incentive
payments:  The Company receives from Delta monthly margin and
mark-up payments related to the CRJ-200 ASA and the CRJ-900 DCA,
respectively.  For example, the monthly margin payment for the
Company’s CRJ-200 ASA is calculated based on a target operating margin of 8% on
qualifying expenses.  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 actual expenses
differ from these payments, the actual operating margin on CRJ-200 operations
could differ from target operating margin.  Under the CRJ-900 DCA,
Pinnacle receives monthly mark-up payments calculated as a percentage of certain
expenses.  Additionally, under the Continental CPA, Colgan is eligible
for certain incentive payments, which are based upon its operating
performance.





Deferred
revenue:  After Northwest’s 2005 bankruptcy, the Company and
Northwest entered into an Assumption and Claims Resolution Agreement (the
“Assumption Agreement”) on December 15, 2006.  Under the Assumption
Agreement, Northwest and the Company agreed that the Company would receive an
allowed unsecured claim against Northwest in its bankruptcy
proceedings.  The Company is recognizing $253,042, the fair value of
its stipulated unsecured claim, over the 11-year term of the CRJ-200
ASA.  The Company expects to recognize non-cash CRJ-200 ASA-related
revenue of $23,199 per year in the years 2010 – 2017.





Under the
Company’s CRJ-900 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 at least a year.  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.


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


3.  Code-share
Agreements with Partners (Continued)





The
following table includes the deferred revenue components of the Company’s
CRJ-200 ASA and CRJ-900 DCA with Delta:





Balance
      at January 1, 2007
            
            Additions
              During
              2007
            
            Amount
      Recognized
              in
      2007
            
            Additions
      During
              2008
            
            Amount
      Recognized
              in
      2008
            
            Additions
      During
              2009
            
            Amount
      Recognized
              in
      2009
            
            Balance
      at December 31,
              2009CRJ-200
      ASA related,primarily
              fromsale
      ofbankruptcy
      claim
            $
            -
            
            $
            255,946
            
            $
            (23,052
            )
            $
            -
            
            $
            (24,099
            )
            $
            -
            
            $
            (23,200
            )
            $
            185,595Contractual
      rights asset
            
            (13,233
            )
            
            -
            
            
            1,203
            
            
            -
            
            
            1,203
            
            
            -
            
            
            1,203
            
            
            (9,624
            )CRJ-900
      DCA related
            
            -
            
            
            1,028
            
            
            -
            
            
            6,816
            
            
            (597
            )
            
            10,454
            
            
            (1,222
            )
            
            16,479Total
            $
            (13,233
            )
            $
            256,974
            
            $
            (21,849
            )
            $
            6,816
            
            $
            (23,493
            )
            $
            10,454
            
            $
            (23,219
            )
            $
            192,450





Disputes with Code-share
Partner.  The Company and Delta are in disagreement over
several contractual items, primarily related to the Company’s CRJ-200
ASA.  The Company is in discussions with Delta over the resolution of
these matters, and the status of each item is discussed in further detail
below.





One
disputed item relates to a one-time adjustment to the Company’s block hour,
cycle and fixed payment rates under the CRJ-200 ASA that was to become effective
January 1, 2006.  Delta has asserted that the adjustment should have
resulted in a significant decrease in the rates under the CRJ-200
ASA.  Based on the objection notice that the Company received from
Delta in 2007, the impact of Delta’s assertion could be a cumulative adjustment
of as much as $11,000 from 2006 through December 31, 2009, and a rate decrease
of approximately $3,000 annually until the next contractually scheduled rate
adjustment on January 1, 2013. The parties have agreed to arbitrate this dispute
if they are unable to successfully resolve this matter.  No
adjustments have occurred to the Company’s monthly collections from Delta as a
result of this matter.  No provision has been recorded in the
consolidated financial statements as the Company does not believe a loss is
probable.





During
the second half of 2009, Delta also began disputing its obligation to fully
reimburse Pinnacle for its aviation insurance premiums.  During the second
quarter of 2009, Delta requested that Pinnacle exit the Delta aviation insurance
program and independently source its own aviation insurance.  Effective
July 1, 2009, Pinnacle obtained its own independent insurance program at a cost
significantly higher than what it was allocated by Delta under the Delta
insurance program.  Delta has asserted that it is not obligated to
reimburse the full costs of Pinnacle’s independent insurance program related to
Pinnacle’s Delta Connection operations and began reducing its monthly payments
to the Company.  The Company firmly believes that its operating
agreements with Delta require full reimbursement of its actual aviation
insurance premiums.  The Company is evaluating its potential remedies,
and continues to discuss the matter with Delta.  In the event the
Company is unable to successfully resolve this matter through discussions, it
may be forced to seek remedy through legal action.  As a result of
this matter, in the fourth quarter of 2009, the Company did not recognized
revenue for approximately $1,700 of unreimbursed insurance
costs.  Additionally, the Company has not collected outstanding
accounts receivable relating to this matter of approximately
$1,700.  No provision has been recorded in the consolidated financial
statements for the possible loss on this receivable from Delta because the
Company believes that it will prevail and consequently no loss is
probable.





Beginning
August 1, 2009, Delta materially altered the payments related to the ground
handling of the Company’s flights in the majority of the airports where Pinnacle
operates under the CRJ-200 ASA, resulting in a decrease in Pinnacle’s operating
income for the year ended December 31, 2009 of approximately $820 and a
potential future decrease in annual operating income of approximately $1,100
(subject to fluctuation based on changes in the level of Pinnacle’s operations
or the cities where Pinnacle flies under the CRJ-200 ASA).  In addition,
Delta asserted that Pinnacle owed Delta a retroactive adjustment related to this
ground handling issue of approximately $4,000.  Pinnacle’s 2009 ground
handling revenues and expenses were recognized at the lower amounts actually
received from or paid to Delta.  No provision has been recorded in the
consolidated financial statements for the previously discussed retroactive
adjustment because the Company does not believe a loss is
probable.


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


3.  Code-share
Agreements with Partners (Continued)





In early
2010, Pinnacle tentatively agreed to accept Delta’s treatment of ground handling
revenues and costs for all periods after August 1, 2009, without any retroactive
application prior to August 1, 2009.  Pinnacle and Delta also
tentatively agreed to stipulate the prospective revenue adjustment under a
provision of the CRJ-200 ASA associated with the allocation of Pinnacle’s
overhead upon the establishment of a certain level of operations outside of the
CRJ-200 ASA.  The parties tentatively agreed to an annual rate
reduction of $2,000 for 2010 and $2,500 for 2011 and 2012 to satisfy this
provision.  The parties also tentatively agreed that Delta will
reimburse Pinnacle for the costs related to the change in aircraft livery of
Pinnacle’s CRJ-200 fleet.  Finally, as part of the tentative
agreement, Delta agreed to modify the payment terms of some of Pinnacle’s
airport related costs under certain circumstances in the event Delta request
Pinnacle to operate in different markets in the future.  These
matters, which would affect the Company’s financial results beginning in 2010,
are subject to the execution of a binding written agreement, which the parties
are in the process of preparing; however, no assurances can be given that
additional modification to these and other arrangements will not occur in order
to settle these matters with Delta.





Concentration of credit risk:As of December 31, 2009, amounts owed from Delta represented 72%, or
approximately $26,000, of the Company’s accounts receivable balance, which is
uncollateralized.





Related party:  In
connection with the assumption of the CRJ-200 ASA, 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. The Preferred Share had 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
during the term of the CRJ-200 ASA.  No dividends were payable to the
shareholder of the Preferred Share.  Prior to this purchase, Northwest
was considered to be a related party of the Company.  During the year
ended December 31, 2007, operating revenues and operating expenses of $590,648
and $199,552, respectively, included transactions with Northwest.





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.





Continental
Airlines





As of
December 31, 2009, the Company, through its Colgan subsidiary, operated 12 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.   The Company and Continental are in
discussions to extend and/or modify the terms of the Continental Agreement
beyond its current term, which ends in the summer of 2010.


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


3.  Code-share
Agreements with Partners (Continued)





US
Airways





As of
December 31, 2009, the Company, through its Colgan subsidiary, operated ten Saab
340 aircraft under a pro-rate agreement with US Airways (the “US Airways
Agreement”).  In 1999, Colgan entered into
the US Airways Agreement to provide passenger service and cargo service under
the name “US Airways Express.” The current US Airways Agreement became effective
on October 1, 2005 under terms similar to the 1999 agreement and has a
three-year term.  The 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.





United
Air Lines





As of
December 31, 2009, the Company, through its Colgan subsidiary, operated 12 Saab
340 aircraft under a code-share agreement with United to provide services as a
United Express carrier (the “United Agreement”), which expires on November 1,
2011.  In addition to receiving pro-rated passenger revenue as described
above under “Revenue Pro-Rate Agreements,” 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.





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.  Colgan operated in 11 markets under
the EAS program at December 31, 2009.





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,
2009, 2008 and 2007.




Year
      Ended December 31, 2009Pinnacle
      Segment
            
            Colgan
      Segment
            
            Unallocated
            
            ConsolidatedOperating
      revenues
            $
            617,937
            
            $
            227,571
            
            
            -
            
            $
            845,508Depreciation
      and amortization
            
            (20,247
            )
            
            (15,152
            )
            
            -
            
            
            (35,399
            )Impairment
      and aircraft retirement costs
            
            -
            
            
            (1,980
            )
            
            -
            
            
            (1,980
            )Operating
      income
            
            60,093
            
            
            20,616
            
            
            -
            
            
            80,709Deferred
      tax asset (liability)
            
            26,977
            
            
            (29,792
            )
            
            (311
            )
            
            (3,126
            )Identifiable
      intangible assets, other than goodwill
            
            9,624
            
            
            2,962
            
            
            -
            
            
            12,586Goodwill
            
            18,422
            
            
            -
            
            
            -
            
            
            18,422Total
      assets
            
            616,340
            
            
            676,377
            
            
            (3,297
            )
            
            1,289,420Capital
      expenditures (including non-cash)
            
            46,392
            
            
            12,950
            
            
            2,573
            
            
            61,915




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


4.  Segment
Reporting (Continued)





Year
      Ended December 31, 2008(Restated)Pinnacle
      Segment
            
            Colgan
      Segment
            
            Unallocated
            
            ConsolidatedOperating
      revenues
            $
            613,089
            
            $
            251,696
            
            
            -
            
            $
            864,785Depreciation
      and amortization
            
            (13,346
            )
            
            (13,172
            )
            
            -
            
            
            (26,518
            )Impairment
      and aircraft retirement costs
            
            -
            
            
            (13,548
            )
            
            -
            
            
            (13,548
            )Operating
      income (loss)
            
            53,617
            
            
            (8,010
            )
            
            -
            
            
            45,607Deferred
      tax asset (liability)
            
            62,905
            
            
            (5,463
            )
            
            (2,687
            )
            
            54,755Identifiable
      intangible assets, other than goodwill
            
            10,827
            
            
            3,758
            
            
            -
            
            
            14,585Goodwill
            
            18,422
            
            
            -
            
            
            -
            
            
            18,422Total
      assets
            
            582,176
            
            
            388,990
            
            
            156,536
            
            
            1,127,702Capital
      expenditures (including non-cash)
            
            250,994
            
            
            245,086
            
            
            3,343
            
            
            499,423





Year
      Ended December 31, 2007(Restated)Pinnacle
      Segment
            
            Colgan
      Segment
            
            Unallocated
            
            ConsolidatedOperating
      revenues
            $
            594,969
            
            $
            192,405
            
            
            -
            
            $
            787,374Depreciation
      and amortization
            
            (4,609
            )
            
            (4,656
            )
            
            -
            
            
            (9,265
            )Operating
      income (loss)
            
            57,464
            
            
            (5,053
            )
            
            -
            
            
            52,411





5.  Earnings (Loss) Per Share





The following table sets forth the
computation of basic and diluted earnings per share (“EPS”):




Years
      Ended December 31,2009
            
            
            2008
              (Restated)
            
            
            2007
              (Restated)Net
      income (loss)
            $
            41,856
            
            
            $
            (10,997
            )
            
            $
            30,423Basic
      earnings (loss) per share
            $
            2.33
            
            
            $
            (0.62
            )
            
            $
            1.46Diluted
      earnings (loss) per share
            $
            2.31
            
            
            $
            (0.62
            )
            
            $
            1.32Share
      computation:Weighted
      average number of shares out-standing
      for basic EPS (1)
            
            17,969
            
            
            
            17,865
            
            
            
            20,897Senior
      convertible notes
            
            -
            
            
            
            -
            
            
            
            2,017Share-based
      compensation (2)
            
            164
            
            
            
            -
            
            
            
            202Weighted
      average number of shares out-standing
      for diluted EPS
            
            18,133
            
            
            
            17,865
            
            
            
            23,116





(1)
            During
      2007, the Board of Directors of the Company authorized a share repurchase
      program, whereby the Company repurchased an aggregate of 4,450 shares of
      its own common stock, of which the weighted average number of shares
      repurchased during the current period are excluded from basic
      EPS.  The Company accounted for the repurchase of this treasury
      stock using the cost method.(2)
            Options
      to purchase 1,095, 917, and 201 shares of common stock were excluded from
      the diluted EPS calculation at December 31, 2009, 2008 and 2007,
      respectively, because their effect would be
  anti-dilutive.





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


6. Investments and Fair Value Measurements





The
Company invests excess cash balances primarily in short-term money market
instruments and overnight repurchase agreements.  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.





Prior to
August 2009, Company’s investment portfolio consisted primarily of auction rate
securities (“ARS”).  In August
2009, the Company reached an agreement to sell its portfolio of ARS to the
financial institution that originally sold the ARS portfolio to the Company (the
“ARS Settlement”).  After repayment of a related credit facility, the
Company received approximately $27,000 in net cash proceeds from this
transaction.  In addition, the ARS Settlement provides that for a
period of three years from the date of the ARS Settlement, the Company shall
have the right to repurchase all or a portion of the ARS at the same discount to
par the bank paid to the Company under the ARS Settlement (the “ARS Call
Options”).  In November 2009, the Company exercised a portion of the
ARS Call Options.  The Company received net cash proceeds of $1,288
and recorded a realized gain of $582 as a result of this
transaction.  The Company determined the fair value of the remaining
ARS Call Options to be $2,723 at December 31, 2009.  They are
classified as investments on the Company’s consolidated balance sheet as of
December 31, 2009.





Due to
events in the credit markets that predominantly began during the first quarter
of 2008, there is no longer an active trading market for
ARS.  Therefore, throughout 2008 and 2009, until the ARS Settlement,
the fair values of the Company’s ARS were estimated utilizing a discounted cash
flow model.  This model considered, 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.  As previously discussed, and as a result of the ARS
settlement, the Company’s balance of ARS as of December 31, 2009 was
$0.




The fair
values of the ARS Call Options were also estimated using a discounted cash flow
model.  The model considered potential changes in yields for securities
with similar characteristics to the underlying ARS and evaluated possible future
refinancing opportunities for the issuers of the ARS.  The analysis then
assessed the likelihood that the options would be exercisable as a result of the
underlying ARS being redeemed or traded in a secondary market at an amount
greater than the exercise price prior to the end of the option
term.  Future changes in the fair values of the ARS Call Options will
be marked to market through the statement of operations.




The
tables below present the Company’s assets and liabilities measured at fair value
as of December 31, 2009, aggregated by the level in the fair value hierarchy
within which those measurements fall.




Level
      1
            
            
            Level 2
            
            
            Level 3
            
            
            Balance
      at
              December
      31, 2009AssetsInvestments
      in ARS
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -ARS
      Call Options
            
            $
            -
            
            
            $
            -
            
            
            $
            2,723
            
            
            $
            2,723




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


6.
Investments and Fair Value Measurements (Continued)




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




AssetAuction
      Rate SecuritiesYears
      Ended December 31,2009
            
            
            2008Balance
      at January 1
            
            $
            116,900
            
            
            $
            -Transfers
      to Level 3
            
            
            -
            
            
            
            136,100Total
      unrealized gains (losses)Included
      in nonoperating expense
            
            
            -
            
            
            
            (16,800
            )Included
      in other comprehensive income (“OCI”)
            
            
            -
            
            
            
            -Realized
      gains (losses), included in nonoperating expense(1)
            
            
            (135
            )
            
            
            -Interest
      accretion
            
            
            1,005
            
            
            
            -Redemptions
      (2)
            
            
            (6,450
            )
            
            
            (2,400
            )Sales
      (3)
            
            
            (111,320
            )Balance
      at December 31
            
            $
            -
            
            
            $
            116,900





(1)  The
      Company determines the cost basis for ARS redemptions using the specific
      identification method.(2)  Partial
      redemption of securities at par by the
    issuer.(3)  Proceeds
      received from the sale of the ARS portfolio in connection with the ARS
      Settlement.





AssetARS
      Call OptionsYears
      Ended December 31,2009
            
            
            2008Balance
      at January 1
            
            $
            -
            
            
            $
            -Transfers
      to Level 3
            
            
            4,078
            
            
            
            -Total
      unrealized gains (losses)Included
      in nonoperating expense
            
            
            (649
            )
            
            
            -Realized
      gains on option exercises, included in nonoperating
expense
            
            
            582
            
            
            
            -Net
      proceeds from option exercises
            
            
            (1,288
            )
            
            
            -Balance
      at December 31
            
            $
            2,723
            
            
            $
            -





The carrying amounts and estimated fair
values of the Company’s borrowings, which are discussed in detail in Note 7, as
of December 31, 2009 were as follows:





As
      of December 31, 2009
            
            As
      of December 31, 2008Carrying
      Amount
            
            Estimated
      Fair Value
            
            Carrying
      Amount
            
            Estimated
      Fair ValueSenior
      convertible notes
            $
            30,596
            
            $
            29,779
            
            $
            108,437
            
            $
            80,465Lines
      of credit, including PDP facilities
            
            6,937
            
            
            6,937
            
            
            102,350
            
            
            102,350Long-term
      notes payable, primarily relatedto
      owned aircraft
            
            555,319
            
            
            482,161
            
            
            534,857
            
            
            483,506





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


7.  Borrowings





The
following table summarizes the Company’s borrowings:





As
      of December 31, 2009
            
            
            As
      of December 31, 2008(Restated)Lines
      of credit:Pre-delivery
      payment facilities, current
            
            $
            2,027
            
            
            $
            4,075Pre-delivery
      payment facilities, noncurrent
            
            
            4,910
            
            
            
            -Total
      pre-delivery payment facilities
            
            
            6,937
            
            
            
            4,075Credit
      facility
            
            
            -
            
            
            
            90,000Bank
      line of credit
            
            
            -
            
            
            
            8,275Total
      lines of credit
            
            $
            6,937
            
            
            $
            102,350Senior
      convertible notesCurrent
            
            $
            30,596
            
            
            $
            10,754Noncurrent
            
            
            -
            
            
            
            97,683Total
      senior convertible notes
            
            $
            30,596
            
            
            $
            108,437Secured
      long-term debtCurrent
      maturities
            
            $
            36,085
            
            
            $
            32,116Noncurrent
      maturities
            
            
            519,234
            
            
            
            502,741Total
      long-term debt
            
            $
            555,319
            
            
            $
            534,857Total
      borrowings
            
            $
            592,852
            
            
            $
            745,644





The
aggregate amounts of principal maturities of debt as of December 31, 2009 were
as follows:





Lines
      of
              Credit
            
            
            Senior
              Convertible
              Notes
            
            
            Long-term
              Debt
            
            
            Total2010
            
            $
            2,027
            
            
            $
            30,596
            
            
            $
            36,085
            
            
            $
            68,7082011
            
            
            4,910
            
            
            
            -
            
            
            
            37,117
            
            
            
            42,0272012
            
            
            -
            
            
            
            -
            
            
            
            54,308
            
            
            
            54,3082013
            
            
            -
            
            
            
            -
            
            
            
            35,491
            
            
            
            35,4912014
            
            
            -
            
            
            
            -
            
            
            
            36,556
            
            
            
            36,556Thereafter
            
            
            -
            
            
            
            -
            
            
            
            355,762
            
            
            
            355,762Total
            
            $
            6,937
            
            
            $
            30,596
            
            
            $
            555,319
            
            
            $
            592,852





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"), of
which $30,979 par amount was outstanding as of December 31, 2009.  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.   These conditions were not met as of December 31,
2009.





On
February 15, 2010, the holders of the Notes exercised their option to require
the Company to purchase all of the remaining outstanding Notes for cash at a
purchase price equal to 100% of their principal amount plus accrued
interest.  As a result, the entire remaining obligation is shown as a
current liability in the Company’s consolidated balance sheet as of December 31,
2009.  As of February 16, 2010, $0 par amount of the Notes was
outstanding.


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


7.  Borrowings
(Continued)





New
Accounting Standard





A new
accounting standard related to convertible debt became effective for and was
adopted by the Company beginning January 1, 2009.  This standard
changed the accounting for convertible debt instruments that may be settled in
cash (including partial cash settlement) upon conversion.  Issuers
must 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.  In addition, issuers are required to bifurcate the value
of the convertible instrument upon its issuance into the component that
represented debt and the component that represented the imbedded equity
option.  The value of the imbedded equity option is reclassified to
additional paid-in capital.  The resulting discount on the par amount
of the debt is recognized as interest expense in the Company’s consolidated
statement of operations over the expected term of the debt.





The new
accounting standardrequires
retrospective application to the terms of instruments as they existed for all
periods presented.  The cumulative effect of the changes in accounting
principle on periods prior to those presented is recognized as of the beginning
of the first period presented with an offsetting adjustment made to the opening
balance of retained earnings for that period.  As a result, the
Company recorded a net $8,351 reduction to the January 1, 2007 balance of
retained earnings to apply the provisions of the new standardfrom the
February 15, 2005 issuance date of the Notes.





The
Company estimated the fair value of the Notes as of the date of
issuance.  The difference between the fair value and the principal
amounts of the Notes was $44,046.  This amount was retrospectively
applied to the Company’s financial statements from the issuance date, and was
retrospectively recorded as a debt discount and as an increase to additional
paid-in capital, net of tax.  The discount is being amortized over the
expected five-year life of the Notes resulting in an increase to interest
expense in historical and future periods.The following
reconciles the Company’s consolidated statements of operations for the years
ended December 31, 2008 and 2007 and its consolidated balance sheet as of
December 31, 2008, as originally reported to the restated statements contained
in these financial statements.





Year
      Ended December 31, 2008As
      Reported
            
            
            Adjustments
            
            
            RestatedOperating
      income
            
            $
            45,607
            
            
            $
            -
            
            
            $
            45,607Nonoperating
      (expense) incomeInterest
      income
            
            
            6,870
            
            
            
            -
            
            
            
            6,870Interest
      expense
            
            
            (34,661
            )
            
            
            (9,886
            )
            
            
            (44,547
            )Investment
      loss
            
            
            (16,800
            )
            
            
            -
            
            
            
            (16,800
            )Miscellaneous
      income, net
            
            
            281
            
            
            
            -
            
            
            
            281Total
      nonoperating expense
            
            
            (44,310
            )
            
            
            (9,886
            )
            
            
            (54,196
            )Income
      (loss) before income taxes
            
            
            1,297
            
            
            
            (9,886
            )
            
            
            (8,589
            )Income
      tax expense
            
            
            (6,204
            )
            
            
            3,796
            
            
            
            (2,408
            )Net
      loss
            
            $
            (4,907
            )
            
            $
            (6,090
            )
            
            $
            (10,997
            )Basic
      and diluted loss per share
            
            $
            (0.27
            )
            
            $
            (0.35
            )
            
            $
            (0.62
            )





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


7.  Borrowings
(Continued)





Year
      Ended December 31, 2007As
      Reported
            
            
            Adjustments
            
            
            RestatedOperating
      income
            
            $
            52,411
            
            
            $
            -
            
            
            $
            52,411Nonoperating
      (expense) incomeInterest
      income
            
            
            11,601
            
            
            
            -
            
            
            
            11,601Interest
      expense
            
            
            (8,853
            )
            
            
            (7,088
            )
            
            
            (15,941
            )Loss
      on sale of unsecured claim
            
            
            (4,144
            )
            
            
            -
            
            
            
            (4,144
            )Miscellaneous
      income, net
            
            
            22
            
            
            
            -
            
            
            
            22Total
      nonoperating expense
            
            
            (1,374
            )
            
            
            (7,088
            )
            
            
            (8,462
            )Income
      before income taxes
            
            
            51,037
            
            
            
            (7,088
            )
            
            
            43,949Income
      tax expense
            
            
            (16,400
            )
            
            
            2,874
            
            
            
            (13,526
            )Net
      income
            
            $
            34,637
            
            
            $
            (4,214
            )
            
            $
            30,423Basic
      earnings per share
            
            $
            1.66
            
            
            $
            (0.20
            )
            
            $
            1.46Diluted
      earnings per share
            
            $
            1.50
            
            
            $
            (0.18
            )
            
            $
            1.32





As
      of December 31, 2008As
      Reported
            
            
            Adjustments
            
            
            RestatedCurrent
      deferred tax asset
            
            $
            14,338
            
            
            $
            (430
            )
            
            $
            13,908Total
      current assets
            
            
            180,012
            
            
            
            (430
            )
            
            
            179,582Net
      property and equipment
            
            
            717,970
            
            
            
            1,961
            
            
            
            719,931Noncurrent
      deferred tax asset
            
            
            45,004
            
            
            
            (4,157
            )
            
            
            40,847Debt
      issuance costs, net
            
            
            6,505
            
            
            
            (2,794
            )
            
            
            3,711Total
      assets
            
            
            1,133,122
            
            
            
            (5,420
            )
            
            
            1,127,702Senior
      convertible notes
            
            
            121,000
            
            
            
            (12,563
            )
            
            
            108,437Additional
      paid-in capital
            
            
            93,815
            
            
            
            25,796
            
            
            
            119,611Retained
      earnings
            
            
            39,876
            
            
            
            (18,653
            )
            
            
            21,223Total
      liabilities and stockholders’ equity
            
            $
            1,133,122
            
            
            $
            (5,420
            )
            
            $
            1,127,702





In
January 2009, the Company repurchased $12,000 par value of the Notes for $8,870
plus accrued and unpaid interest.  The book value of that portion of
the Notes at the time of the repurchase was $10,801.  In August 2009,
the Company repurchased $78,021 par value of the Notes for $75,000 plus accrued
and unpaid interest.  The book value of that portion of the Notes at
the time of the repurchase was $74,492.  As a result of the
repurchase, the Company recorded a gain on debt extinguishment of $2,046 and a
reduction to additional paid-in capital of $523, net of tax, during the year
ended December 31, 2009.





As a
result of the adoption of the new accounting standard, interest expense
increased by $7,718 for the year ended December 31, 2009.  Income
before income taxes, net income and EPS decreased by $7,718, $4,666, and $0.25,
respectively, for the year December 31, 2009.





The
unamortized discount of the liability component was $383 and $12,563 at December
31, 2009 and December 31, 2008, respectively.  This discount was
amortized through February 15, 2010.  The fair value of the Notes as
of December 31, 2009 and 2008 was $29,779 and $80,465,
respectively.


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


7.  Borrowings
(Continued)





The
following table provides additional information about the Company’s
Notes:





Years
      Ended December 31,2009
            
            
            2008
            
            
            2007Effective
      interest rate on liability component
            
            13.5
            %
            
            
            13.5
            %
            
            
            13.5
            %Interest
      cost recognized as amortization of thediscount
      of liability component
            $
            7,451
            
            
            $
            9,709
            
            
            $
            8,520Cash
      interest cost recognized (coupon interest)
            
            2,683
            
            
            
            3,933
            
            
            
            3,933





Credit
Facility





In March
2008, the Company entered into a revolving term loan (the “Credit Facility”)
with a financial institution.  The Credit Facility provided for
advances up to $60,000 and was collateralized by the Company’s ARS portfolio.
The Company amended the Credit Facility in June 2008, to increase the eligible
amount for borrowing from $60,000 to $80,000, and again in November 2008 to
increase the eligible amount for borrowing from $80,000 to
$90,000.  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 as aircraft delivered in December 2008.  The
Company repaid in full the Credit Facility as a result of the ARS Settlement in
the third quarter 2009.  See Note 6 for further
discussion.





Line
of Credit





The
Company maintained 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.  Amounts outstanding under this
line of credit were $8,275 at December 31, 2008.  This instrument had
an interest rate of Prime plus 0.25%, which was 3.50% as of December 31,
2008.  The line of credit expired on April 15, 2009, and the
outstanding balance was paid in full.





Long-Term
Notes Payable





As of
December 31, 2009 and 2008, the Company had long-term notes payable of $555,319
and $534,857, respectively.  Included in long-term notes payable are
borrowings from Export Development Canada (“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 $600,000 as of December
31, 2009, and bear interest at rates ranging between 3.8% and 6.7% with
maturities through the fourth quarter of 2023.  Amounts outstanding
under these EDC borrowings were $513,462 and $512,575 at December 31, 2009 and
2008, respectively.





The fair
value of the Company’s long-term notes payable as of December 31, 2009 and 2008
was $482,161 and $483,506, respectively.  These estimates were based
on either market prices or the discounted amount of future cash flows using the
Company’s current incremental rate of borrowing for similar
liabilities.





As
discussed in Note 16, one of the Company’s Q400 aircraft was destroyed in an
accident on February 12, 2009.  The insurance proceeds were used to
retire the related debt of approximately $15,400 during the first quarter of
2009.


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


7.  Borrowings
(Continued)





Long-term
notes payable primarily for owned aircraft consisted of the following at
December 31, 2009:





Principal
            
            Interest
      rates
            
            Maturities
      Through$    
       98,129
            
            3.5%
      - 4.5%
            
            202314,554
            
            4.6%
      - 5.6%
            
            2023172,632
            
            5.7%
      - 6.0%
            
            2023182,567
            
            6.1%
      - 6.4%
            
            202355,197
            
            6.5%
      - 7.0%
            
            20225,813
            
            7.1%
      - 8.0%
            
            201726,427
            
            8.1%
      - 8.6%
            
            2014$   
      555,319





Pre-delivery
Payment Financing Facilities





As
previously discussed, on January 13, 2009, the Company amended its Continental
CPA to operate an additional 15 Q400 aircraft beginning in September
2010.  The aircraft have scheduled delivery dates from August 2010
through April 2011.  In connection with this amendment, the Company
executed a new pre-delivery payment financing facility with EDC for up to
$35,600 on substantially similar terms to its other pre-delivery payment
facilities.  This instrument has an interest rate indexed to LIBOR,
which was 3.43% as of December 31, 2009.  Amounts outstanding under
this facility were $6,937 at December 31, 2009.





Spare
Parts Loan





On July
30, 2009, the Company completed a $25,000, three-year term loan financing with
C.I.T. Leasing and funded by CIT Bank.  The Spare Parts Loan is
secured by the Company’s pool of spare repairable, rotable and expendable parts
and certain aircraft engines.  The interest rate for the Spare Parts
Loan is a variable rate, which for the first interest period is indexed to LIBOR
(subject to a floor) and was 8.5% as of December 31, 2009. The Spare Parts Loan
requires that the Company maintain a minimum liquidity level at the end of every
month and at specified times preceding the maturity date or call date of certain
other indebtedness. The Spare Parts Loan also has standard provisions relating
to the Company’s obligation to timely repay the indebtedness and maintenance of
the collateral base relative to the outstanding principal amount of the
borrowing.  The proceeds of the Spare Parts Loan were used to
repurchase a portion of the Notes during the third quarter of
2009.  Amounts outstanding under the Spare Parts Loan were $24,215 as
of December 31, 2009.





Subsequent
Event





On
January 13, 2010, the Company entered into a short-term loan agreement with a
bank for $10,000 (the “Bridge Loan”).  The Bridge Loan was secured by the
Company’s 2009 federal income tax refund and had an effective interest rate of
4.5%.  The Bridge Loan was designed to temporarily provide the Company with
additional working capital until it received its 2009 federal income tax
refund.  The Company repaid the Bridge Loan in full upon receipt of
the 2009 federal income tax refund of approximately $38 million in late February
2010.





8.  Hedging





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
utilizes 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, 2009 and
2008.


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


8.  Hedging
(Continued)





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.





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





Years
      EndedDecember
      31,
            
            Amount
      of Loss Reclassified
              from
      OCI into Interest Expense
              (Effective Portion)(2)
            
            
            Amount
      of Loss Recognized
              in
      Expense on Derivative
              (Ineffective
      Portion and Amount
              Excluded
      from Effectiveness Testing)2009
            
            $
            (3,137
            )
            
            $
            (1,424
            )(1)2008
            
            $
            (2,268
            )
            
            $
            (504
            )2007
            
            $
            -
            
            
            $
            (51
            )





(1)
            This
      charge is related to the debt that financed the Q400 aircraft that was
      destroyed in an accident during the three months ended March 31,
      2009.  The associated debt was repaid during the first quarter
      of 2009.  This loss is included in miscellaneous nonoperating
      expense in the Company’s  consolidated statement of operations
      for the year ended December 31, 2009.(2)
            Derivatives
      classified as cash flow hedges include interest rate
      swaps.  Amounts reclassified from OCI into income are recorded
      in interest expense within the Company’s consolidated statements of
      operations.





The following table presents 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 31,2009
            
            
            2008Net
      realized and unrealized (losses) gains from interest rate swaps, net oftax
      and amortization,
              recorded in other comprehensive income
            
            $
            (14,858
            )(1)
            
            $
            (17,752
            )





(1)
            Included
      in the above total net realized losses from interest rate swaps as of
      December 31, 2009, are $2,996 in net unrecognized losses that are expected
      to be amortized into earnings during the 12 months following December 31,
      2009.





9.  Leases





Capital
Leases





The
Company leases certain aircraft equipment 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, 2009, the
weighted average interest rate implied in these leases was approximately 9.5%,
and the net book value of the assets associated with the capital leases was
$3,371.


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


9.  Leases
(Continued)





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, 2009:





2010
            
            $
            1,8692011
            
            
            1,3362012
            
            
            9862013
            
            
            1162014
            
            
            -Thereafter
            
            
            -Total
      future rental payments
            
            
            4,307Amount
      representing interest
            
            
            (444
            )Present
      value of future lease payment
            
            
            3,863Less:  current
      maturities
            
            
            (1,137
            )Capital
      leases, net of current maturities
            
            $
            2,726





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.





The
Company also leases nine of its 34 Saab 340 aircraft under operating
leases.  Eight of the lease agreements allow for early termination or
will terminate at various points during 2010 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.





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,
2009:





Aircraft(1)
            
            
            Non-aircraft
            
            
            Total2010
            
            $
            118,633
            
            
            $
            14,773
            
            
            $
            133,4062011
            
            
            116,814
            
            
            
            13,598
            
            
            
            130,4122012
            
            
            116,814
            
            
            
            12,083
            
            
            
            128,8972013
            
            
            116,814
            
            
            
            1,296
            
            
            
            118,1102014
            
            
            116,814
            
            
            
            525
            
            
            
            117,339Thereafter
            
            
            350,442
            
            
            
            1,542
            
            
            
            351,984Total
      future rental payments
            
            $
            936,331
            
            
            $
            43,817
            
            
            $
            980,148


(1)
              The
      amounts noted above for operating leases include $904,704 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, 2009,
2008 and 2007, was $142,835, $156,042 and $161,103,
respectively.


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





10.  Accrued Expenses and Other Current
Liabilities





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





2009
            
            
            2008Ground
      handling and landing fees
            
            $
            15,443
            
            
            $
            8,462Salaries
      and wages
            
            
            14,417
            
            
            
            13,233Taxes
      other than income
            
            
            11,343
            
            
            
            10,229Interest
            
            
            8,573
            
            
            
            13,017Pro-rate
      operations costs
            
            
            4,044
            
            
            
            5,592Insurance
      costs
            
            
            3,039
            
            
            
            2,729Current
      portion of capital leases
            
            
            1,137
            
            
            
            1,025Hangar
      and facilities rent
            
            
            958
            
            
            
            892Income
      tax reserves (1)
            
            
            547
            
            
            
            16,518Other
            
            
            1,109
            
            
            
            2,972Total
            
            $
            60,610
            
            
            $
            74,669





(1)
            This
      decrease is related to the previously discussed settlement reached with
      the IRS regarding the Company’s examination for the tax years 2003 through
      2005.





11. Share-Based Compensation





The
Company grants share-based compensation, including
grants of stock options and restricted stock, under its 2003 Stock Incentive
Plan, for which 4,152 shares were reserved.  The shares may
consist, in whole or in part, of 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,
2009, the Company had1,573shares of common stock reserved for issuance under the
plan.





When
calculating the expense related to share-based payment, the Company estimates
expected forfeitures, option expected life, and other elements that affect the
amount of expense recognized.  The benefits of tax deductions in
excess of recognized compensation cost are reported as a financing cash
flow.





Stock
Options





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 2009, 2008 and 2007, the Company granted 626, 284 and 203 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.  The
Company recorded pre-tax compensation expense in the amount of $1,438, $1,443
and $816, respectively, related to stock options during the years ended December
31, 2009, 2008 and 2007.





Pre-tax
compensation cost yet to be recognized related to non-vested stock options was
$1,194 as of December 31, 2009.  This cost will be recognized over the
next 1.5 years. During the years ended December 31, 2009, 2008, and 2007, the
Company recorded financing cash flows of $0, $20, and $693, respectively,
related to excess tax deductions.


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


11.
Share-Based Compensation (Compensation)





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





Shares
            
            
            Weighted
      Average
              Exercise
      Price
            
            Weighted
      Average
              Remaining
      Life
            
            Aggregate
              IntrinsicValueOutstanding
      at January 1, 2009
            
            
            1,106
            
            
            $
            13.09Granted
            
            
            626
            
            
            
            2.65Exercised
            
            
            -
            
            
            
            -Forfeited
            
            
            (25)
            
            
            
            5.06Expired
            
            
            (12)
            
            
            
            12.05Outstanding
      at December 31, 2009
            
            
            1,695
            
            
            
            9.36
            
            7.0
      years
            
            $
            2,645Options
      exercisable at December 31, 2009
            
            
            855
            
            
            
            12.57
            
            5.3
      years
            
            $
            83





The total
fair value of shares vesting during the years ended December 31, 2009, 2008, and
2007, was $1,436, $900, and $340, respectively.  The total aggregate
intrinsic value of the options exercised for the years ended December 31, 2009,
2008, and 2007, was $0, $26, and $1,645 respectively.





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.  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, 2009, 2008 and 2007.





2009
            
            
            2008
            
            
            2007Expected
      price volatility
            
            
            58.3
            %
            
            
            50.0
            %
            
            
            53.5
            %Risk-free
      interest rate
            
            
            1.4
            %
            
            
            3.3
            %
            
            
            4.6
            %Expected
      lives (years)
            
            
            5.0
            
            
            
            5.0
            
            
            
            5.0Dividend
      yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Expected
      forfeiture rate
            
            
            4
            %
            
            
            4
            %
            
            
            4
            %Exercise
      price of option grants
            
            $
            2.65
            
            
            $
            14.37
            
            
            $
            16.76Fair
      value of option grants
            
            $
            1.33
            
            
            $
            6.76
            
            
            $
            8.57





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.


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


11.
Share-Based Compensation (Compensation)





Restricted
Stock





In
January 2009, 2008 and 2007, the Company awarded 278, 109 and 76 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, 2009,
2008 and 2007, the Company recognized $1,199, $1,159 and $643, 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 $1,036 as of December 31,
2009.  This cost will be recognized over the next 1.5
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
            
            
            Weighted-Average
              Grant-Date
              Fair
      ValueNonvested
      at January 1, 2009
            
            
            197
            
            
            $
            13.20Granted
            
            
            278
            
            
            
            2.65Vested
            
            
            (102
            )
            
            
            11.57Forfeited
            
            
            (6
            )
            
            
            2.65Nonvested
      at December 31, 2009
            
            
            367
            
            
            $
            5.82





12.  Other Expenses





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





2009
            
            
            2008
            
            
            2007Employee
      overnightaccommodations
            
            $
            21,118
            
            
            $
            30,819
            
            
            $
            25,876Insurance
            
            
            13,146
            
            
            
            5,903
            
            
            
            8,786Professional
      services fees
            
            
            7,931
            
            
            
            10,691
            
            
            
            9,343Property
      and other taxes
            
            
            7,139
            
            
            
            10,382
            
            
            
            9,425Communications
      and informationtechnology
      related expenses
            
            
            6,601
            
            
            
            7,417
            
            
            
            4,808Recruiting
      and other personnelexpenses
            
            
            6,433
            
            
            
            7,195
            
            
            
            6,677Office
      equipment and relatedsupplies
      and services
            
            
            4,221
            
            
            
            4,905
            
            
            
            3,843Employee
      training expense
            
            
            2,853
            
            
            
            7,899
            
            
            
            8,289Station-related
      expenses
            
            
            2,396
            
            
            
            3,183
            
            
            
            2,675Other
            
            
            4,757
            
            
            
            4,588
            
            
            
            2,763Total
      other expenses
            
            $
            76,595
            
            
            $
            92,982
            
            
            $
            82,485





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


13. Income Taxes


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


December
      31,2009
            
            
            2008Deferred
      tax assets:Lease
      return costs
            
            $
            1,509
            
            
            $
            1,145Accrued
      interest
            
            
            95
            
            
            
            1,315Stock
      compensation
            
            
            1,946
            
            
            
            1,365Inventory
      reserves
            
            
            1,747
            
            
            
            1,573Vacation
      pay
            
            
            2,439
            
            
            
            2,199State
      net operating losses
            
            
            5,623
            
            
            
            2,713Intangible
      assets
            
            
            3,241
            
            
            
            3,681Capital
      loss carryforward
            
            
            4,656
            
            
            
            6,644Derivatives
            
            
            9,425
            
            
            
            11,058Deferred
      revenue
            
            
            75,792
            
            
            
            83,768Other
            
            
            640
            
            
            
            1,537Total
      deferred tax assets
            
            
            107,113
            
            
            
            116,998Valuation
      allowance
            
            
            (5,641
            )
            
            
            (7,525
            )Net
      deferred tax assets
            
            $
            101,472
            
            
            $
            109,473Deferred
      tax liabilities:Prepaid
      expenses
            
            
            (44
            )
            
            
            (222
            )Tax
      over book depreciation
            
            
            (103,008
            )
            
            
            (49,499
            )Senior
      convertible notes
            
            
            (1,546
            )
            
            
            (4,587
            )Other
            
            
            -
            
            
            
            (410
            )Net
      deferred tax liabilities
            
            
            (104,598
            )
            
            
            (54,718
            )Net
      deferred tax asset (liability)
            
            $
            (3,126
            )
            
            $
            54,755


At
December 31, 2009, the Company had state net operating loss carryforwards of
$108,727 ($5,623 tax effected), the majority of which will expire between 2022
and 2029.  The Company has recorded a valuation allowance on these
state net operating loss carryforwards of $679.
 
 The
provision for income tax expense includes the following components for the years
ended December 31:


2009
            
            
            2008
            
            
            2007Current:Federal
            
            $
            (55,221
            )
            
            $
            (31,192
            )
            
            $
            105,656State
            
            
            135
            
            
            
            541
            
            
            
            10,887Subtotal
            
            
            (55,086
            )
            
            
            (30,651
            )
            
            
            116,543Deferred:Federal
            
            
            54,797
            
            
            
            34,778
            
            
            
            (92,693
            )State
            
            
            671
            
            
            
            (1,719
            )
            
            
            (10,324
            )Subtotal
            
            
            55,468
            
            
            
            33,059
            
            
            
            (103,017
            )Total
      income tax expense
            
            $
            382
            
            
            $
            2,408
            
            
            $
            13,526





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


13.
Income Taxes (Continued)





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:





2009
            
            
            2008
            
            
            2007$
            
            
            %
            
            
            $
            
            
            %
            
            
            $
            
            
            %Income
      tax expense at statutory rate
            $
            14,783
            
            
            35.0
            %
            
            $
            (3,006
            )
            
            35.0
            %
            
            $
            15,382
            
            
            35.0
            %State
      income taxes, net of federal taxes
            
            1,057
            
            
            2.5
            %
            
            
            (766
            )
            
            8.9
            %
            
            
            366
            
            
            0.8
            %Tax-exempt
      interest income
            
            (289
            )
            
            (0.7
            %)
            
            
            (2,141
            )
            
            24.9
            %
            
            
            (3,638
            )
            
            (8.2
            )%Fines
      and penalties
            
            52
            
            
            0.1
            %
            
            
            64
            
            
            (0.7
            )%
            
            
            56
            
            
            0.1
            %Meals
      and entertainment disallowance
            
            595
            
            
            1.4
            %
            
            
            754
            
            
            (8.8
            )%
            
            
            997
            
            
            2.3
            %Accrual
      to return adjustments
            
            (178
            )
            
            (0.5
            )%
            
            
            454
            
            
            (5.3
            )%
            
            
            -
            
            
            -Revaluation
      of state deferred taxes dueto
      apportionment changes
            
            (320
            )
            
            (0.8
            )%
            
            
            640
            
            
            (7.4
            )%
            
            
            -
            
            
            -Settlements
            
            (13,434
            )
            
            (31.7
            )%
            
            
            -
            
            
            -
            
            
            
            -
            
            
            -Valuation
      allowance
            
            (1,884
            )
            
            (4.4
            )%
            
            
            6,409
            
            
            (74.6
            )%
            
            
            363
            
            
            0.8
            %Income
      tax expense
            $
            382
            
            
            0.9
            %
            
            $
            2,408
            
            
            (28.0
            )%
            
            $
            13,526
            
            
            30.8
            %


Income
taxes paid (net of refunds received) during the years ended December 31, 2009,
2008 and 2007 were approximately $(30,548), and $2,808 and $114,013,
respectively.
 
 In 2009,
the Company reversed tax reserves due to the IRS settlement, thereby lowering
the Company’s effective tax rate for the year ended December 31,
2009.  In addition, the release of valuation allowances relating to
state net operating losses, hedging transactions and the Company’s investment in
certain auction rate securities resulted in a decrease to the Company’s
effective tax rate.  The disallowance of 50% of meals and
entertainment expenses, fines and penalties, and state income taxes served to
increase the Company’s effective tax rate.
 
 During
the year ended December 31, 2009, the Company released a valuation allowance of
$1,884 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.
 
 As of
December 31, 2009 and 2008, the Company had $547 and $16,518 of unrecognized tax
benefits, respectively.  The following table reconciles the Company’s
beginning and ending unrecognized tax benefits balances:


2009
            
            
            2008Unrecognized
      tax benefits balance at January 1
            
            $
            16,518
            
            
            $
            16,694Increases/(decreases)
      for prior period positions
            
            
            (1,533
            )
            
            
            -Increases/(decreases)
      for current period positions
            
            
            
            
            
            
            -Settlements
            
            
            (14,438
            )
            
            
            (176
            )Lapses
      of statutes
            
            
            
            
            
            
            -Unrecognized
      tax benefits balance at December 31
            
            $
            547
            
            
            $
            16,518


The
Company provides for interest and penalties accrued related to unrecognized tax
benefits in nonoperating expenses.  The Company recorded interest and
penalties of $28 during the year.   As of December 31, 2009 and
December 31, 2008, the Company had $325 and $3,692 of accrued interest and
penalties, respectively.


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


13.
Income Taxes (Continued)


The
amount of unrecognized tax benefits that would affect the Company’s effective
tax rate if recognized is $547 as of December 31, 2009 and $16,170 as of
December 31, 2008.  The tax years 2006-2008 remain open to examination
by major taxing jurisdictions to which the Company is subject and the tax year
2008 is currently under examination by the Internal Revenue Service (the
“Service”).





During
the three months ended March 31, 2009, the Company reached agreement with the
Service to resolve certain matters related to the Service’s examination of the
Company’s federal income tax returns for calendar years 2003, 2004 and
2005.  Previously, the Service had proposed a number of adjustments to the
Company’s returns totaling approximately $35,000 of additional tax, plus accrued
interest and penalties on these proposed adjustments.





The
Company and the Service agreed for the Company to pay approximately $3,000 of
additional income tax and accrued interest in settlement of all open tax matters
for these years.  With this agreement, the Service completed its
examination of the Company’s federal tax filings for 2003, 2004 and
2005.  The Company paid the settlement amount during the three months
ended June 30, 2009.  As a result of the completion of this
examination, the Company recorded during the three months ended March 31, 2009 a
reduction to income tax expense of $13,551 and a pre-tax reduction to interest
expense of $2,926.





14. Impairment and Aircraft Retirement Costs





Impairment
of Goodwill





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 as well. The
analysis of potential impairment of goodwill requires a two-step process. The
first step is the estimation of fair value. If step one indicates that
impairment potentially exists, the second step is performed to measure the
amount of impairment, if any. Goodwill impairment exists when the estimated fair
value of goodwill is less than its carrying value.





Because
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 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
and aircraft retirement costs” in the Company’s consolidated statement of
operations for the year ended December 31, 2008.


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


14.
Impairment and Aircraft Retirement Costs (Continued)





The
Company completed its analysis of its Pinnacle reporting unit’s goodwill at
October 1, 2009 and concluded that Pinnacle’s goodwill balance of $18,422 was
not impaired during the current reporting period.





Aircraft
Retirement Costs





For the
year ended 2008, Colgan eliminated nine markets from its pro-rate
operations.  This action resulted in the retirement of six 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, 2009 and 2008, the Company recorded charges of $1,980 and $2,991,
respectively, related to these lease returns.  The Company’s accrued lease
return costs as of December 31, 2009 and 2008 are included in “accrued expenses
and other current liabilities” on the Company’s consolidated balance
sheet.





15. 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.  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 one-year $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





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.  As previously discussed in
Note 14, Impairment and Lease
Retirement 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.




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


16.  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
            
            1,178
            
            Air
      Line Pilots Association
            
            April
      30, 2005Colgan’s
      pilots
            
            403
            
            Air
      Line Pilots Association
            
            Pending
      (1)Pinnacle’s
      flight attendants
            
            695
            
            United
      Steel Workers of America
            
            February
      1, 2011Colgan’s
      flight attendants
            
            282
            
            United
      Steel Workers of America
            
            April
      30, 2014 (2)Pinnacle’s
      ground operations agents
            
            929
            
            United
      Steel Workers of America
            
            March
      19, 2010 (3)Pinnacle’s
      flight dispatchers
            
            67
            
            Transport
      Workers Union of America
            
            December
      31, 2013





(1)
      Initial contract negotiations commenced in October 2009 and are
      ongoing.
              (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.
              (3)
      The Company is currently in negotiations with the United Steel Workers of
      America in advance of the amendable
date.





As of
December 31, 2009, approximately 69% of the Company’s workforce were members of
unions, including pilots (31%), flight attendants (19%), ground operations
agents (18%) 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.  On August 4, 2009, Pinnacle and ALPA reached a tentative
agreement to amend the collective bargaining agreement.  The tentative
agreement contained substantial wage rate increases and a proposed $10,200
signing bonus for Pinnacle’s pilots.  However, on September 24, 2009,
Pinnacle’s pilots voted against ratification of the tentative
agreement.  The National Mediation Board will determine when the
parties will resume negotiations.





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 and ALPA are currently negotiating an initial
agreement.





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, 2009 were as follows:




Firm
            
            Options
            
            TotalQ4002010
            
            8
            
            -
            
            82011
            
            7
            
            15
            
            22Total
      Q400
            
            15
            
            15
            
            30





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 the 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 December 31, 2009,
primarily related to future purchases of aircraft and related equipment, are
approximately $173,663 for 2010, $123,310 for 2011, $4,861 for 2012, $649 for
2013, and $643 for 2014.


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


16.  Commitments
and Contingencies





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.





Litigation
Contingencies.Colgan is a defendant in litigation 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.  Several lawsuits related to this accident have 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.





The
Company has recorded a related liability of approximately $300,000 in other
non-current liabilities on its consolidated balance sheet at December 31, 2009
related to potential claims associated with this accident.  This
liability is offset in its entirety by a corresponding long-term receivable,
recorded in other assets on the consolidated balance sheet that the Company
expects to receive from insurance carriers as claims are
resolved.  These estimates may be revised as additional information
becomes available.





Disputes with Code-share
Partner.  The Company is in discussions with Delta regarding
certain disputed contractual items in its CRJ-200 ASA.  For more
information of these disputes, please refer to Note 3, Code-Share
Agreements.


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





17.  Quarterly Financial Data (Unaudited)





Unaudited
summarized financial data by quarter for 2009 and 2008 is as
follows:





Three
      Months Ended During 2009March 31(1)
            
            
            June 30(2)
            
            
            September 30(3)
            
            
            December 31Operating
      revenue
            $
            207,822
            
            
            $
            211,263
            
            
            $
            217,208
            
            
            $
            209,215Operating
      income
            
            16,935
            
            
            
            22,183
            
            
            
            23,796
            
            
            
            17,795Net
      income
            
            18,843
            
            
            
            5,993
            
            
            
            11,377
            
            
            
            5,643Basic
      earnings per share
            $
            1.05
            
            
            $
            0.33
            
            
            $
            0.63
            
            
            $
            0.31Diluted
      earnings per share
            $
            1.05
            
            
            $
            0.33
            
            
            $
            0.62
            
            
            $
            0.31Operating
      income as apercentage
      of  operatingrevenues
            
            8.1
            %
            
            
            10.5
            %
            
            
            11.0
            %
            
            
            8.5
            %





Three
      Months Ended During 2008March 31
            
            
            June 30(4)
            
            
            September 30(5)
            
            
            December 31(6)Operating
      revenue
            $
            204,341
            
            
            $
            221,154
            
            
            $
            221,792
            
            
            $
            217,498Operating
      income
            
            6,785
            
            
            
            2,466
            
            
            
            20,010
            
            
            
            16,346Net
      income (loss)
            
            1,236
            
            
            
            (12,914
            )
            
            
            6,207
            
            
            
            (5,526
            )Basic
      earnings (loss) per share
            $
            0.07
            
            
            $
            (0.72
            )
            
            $
            0.35
            
            
            $
            (0.31
            )Diluted
      earnings (loss) per share
            $
            0.07
            
            
            $
            (0.72
            )
            
            $
            0.35
            
            
            $
            (0.31
            )Operating
      income as apercentage
      of  operatingrevenues
            
            3.3
            %
            
            
            1.1
            %
            
            
            9.0
            %
            
            
            7.5
            %





(1)
            The
      Company’s operating income and net income for the three months ended March
      31, 2009 includes $835 related to excess property insurance proceeds over
      cost basis of aircraft ($514 net of related tax) and net income includes
      $2,926 related to the reversal of interest on income tax reserves ($1,843
      net of related tax), a $1,856 gain on the repurchase of the outstanding
      senior convertible notes ($1,118 net of related tax), a $1,424 charge
      related to the ineffective portion of a certain interest rate hedge ($876
      net of related tax) and $13,551 related to the reversal of income tax
      reserves.


(2)
            The
      Company’s operating income and net income for the three months ended June
      30, 2009 includes a $1,533 charge related to the retirement of the
      Company’s Beech 1900 fleet ($992 net of related tax) and net income
      includes $334 related to an investment loss on the Company’s portfolio of
      ARS securities ($320 net of related
tax).


(3)
            The
      Company’s net income for the three months ended September 30, 2009
      includes $4,233 related to an investment gain on the Company’s portfolio
      of ARS securities ($4,054 net of related
tax).


(4)
            The
      Company’s operating income and net income for the three months ended June
      30, 2008 includes $12,619 related to impairment and aircraft retirement
      costs ($8,139 net of related tax) and net income includes $8,675 related
      to the impairment of the Company’s ARS securities ($8,309 net of related
      tax).


(5)
            The
      Company’s operating income and net income for the three months ended
      September 30, 2008 includes $1,069 related to aircraft retirement costs
      ($674 net of related tax)


(6)
            The
      Company’s net income for the three months ended December 31, 2008 includes
      $8,125 ($7,759 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.


94


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.Under
the supervision and with the participation of our management, including our
Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we
evaluated the effectiveness of our disclosure controls and procedures (as such
term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934) as of December 31, 2009. Based upon that evaluation, our CEO and
CFO concluded that our disclosure controls and procedures are effective as of
December 31, 2009.





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, 2009 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, 2009.





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, 2009, which appears on page
96.  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 57of this Annual
Report on Form 10-K.





Changes in Internal Control over
Financial Reporting.There has been no change in our internal
control over financial reporting during the year ended December 31, 2009, that
has materially affected, or is reasonably likely to materially affect our
internal control over financial reporting.




















95





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, 2009, 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, 2009, 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, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2009 of Pinnacle Airlines Corp. and
our report dated February 26, 2010 expressed an unqualified opinion
thereon.








/s/ ERNST & YOUNG LLP





Memphis,
Tennessee


February
26, 2010


96





Item 9B.  Other
Information





None.





97







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 2010 annual meeting of stockholdersto be filed within 120 days
of December 31, 2009.


98







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, 2009, 2008 and
      2007





ii)
            Consolidated
      Balance Sheets as of December 31, 2009 and
2008





iii)
            Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2009,
      2008 and 2007





iv)
            Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007





v)
            Notes
      to Consolidated Financial
Statements





2.      Financial
Statement Schedule:


Report
      of Independent Registered Public Accounting Firm on Financial Statement
      Schedule
            Page
      105Schedule
      II—Valuation and Qualifying Accounts
            Page
      106All 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.


99




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.







By:
            /s/
      Philip H. TrenaryName:
            Philip
      H. TrenaryFebruary
      26, 2010
            
            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 February 26, 2010





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/
      Susan M. Coughlin
            
            DirectorSusan
      M. Coughlin





/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





100


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. 333-83354), 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. 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)


101


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
            Omnibus
      Agreement dated January 15, 2003 among Northwest Airlines, Inc., Northwest
      Airlines Corporation and Aon Fiduciary Counselors, Inc. (Incorporated by
      reference to the S-1)


10.21
            Airline
      Services Agreement dated as of March 1, 2002 among 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 Omnibus Agreement dated as of
      January 15, 2003 among the Registrant, Northwest Airlines, Inc., Northwest
      Airlines Corporation and Fiduciary Counselors, 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)


102


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 (Incorporated by
      reference to the Registrant’s Form 10-K filed on March 17,
      2008)


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, 2007 (Incorporated by reference to the
      Registrant’s Form 10-K filed on March 12,
2009)


10.74
            Loan
      Agreement, dated as of January 30, 2009, between Colgan Air, Inc., and
      Export Development Canada (Incorporated by reference to the Registrant’s
      Form 10-K filed on March 12, 2009)


10.75
            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, 2007 (Incorporated by reference to the
      Registrant’s Form 10-K filed on March 12,
2009)


10.76
            United
      Express Agreement, dated as of November 1, 2008, between United Air Lines,
      Inc. and Colgan Air, Inc. (Incorporated by reference to the Registrant’s
      Form 10-K filed on March 12, 2009)


10.77
            Credit
      Agreement, dated as of July 30, 2009, by and amount Pinnacle Airlines,
      Inc. and Colgan Air, Inc., C.I.T. Leasing Corporation, and CIT Bank.
      (Incorporated by reference to the Registrant’s Form 10-Q filed on November
      3, 2009)


10.78
            Purchase
      and Release Agreement, dated August 21, 2009 (Incorporated by reference to
      the Registrant’s Form 10-Q filed on November 3,
  2009)


103





Exhibit


Number                 Description


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)


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


104


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, 2009 and 2008, and for each of the three years in the period ended
December 31, 2009, and have issued our report thereon dated February 26, 2010
(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


February
26, 2010











105


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, 2009Allowance
      deducted from asset accounts:Allowance
      for doubtful accounts
            
            $
            135
            
            
            $
            167
            
            
            
            -
            
            
            $
            (89
            )
            
            $
            213Allowance
      for obsolete inventory parts
            
            
            4,213
            
            
            
            1,396
            
            
            
            -
            
            
            
            (860
            )
            
            
            4,749Year
      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
            )(1)
            
            
            131Allowance
      for obsolete inventory parts
            
            
            1,517
            
            
            
            1,019
            
            
            
            -
            
            
            
            -
            
            
            
            2,536(1) Bankruptcy
      related amounts settled as part of the unsecured claim the Company
      received from Northwest.








106


Exhibit
12


Pinnacle
Airlines Corp.


Ratio
of Earnings to Fixed Charges - Unaudited


(in
thousands, except ratios)








Years
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(Restated)
            
            
            (Restated)
            
            
            (Restated)
            
            
            (Restated)Earnings:Income
      from operations before taxes
            
            $
            42,238
            
            
            $
            (8,589
            )
            
            $
            43,949
            
            
            $
            116,842
            
            
            $
            35,427Additions:Interest
      expense, net of capitalized interest
            
            
            44,862
            
            
            
            44,547
            
            
            
            15,941
            
            
            
            13,336
            
            
            
            10,757Portion
      of rent expense representativeof
      interest factor
            
            
            63,921
            
            
            
            79,967
            
            
            
            127,046
            
            
            
            134,442
            
            
            
            107,118Earnings
      as adjusted
            
            $
            151,021
            
            
            $
            115,925
            
            
            $
            186,936
            
            
            $
            264,620
            
            
            $
            153,302Fixed
      charges:Interest
      expense, net of capitalized interest
            
            $
            44,862
            
            
            $
            44,547
            
            
            $
            15,941
            
            
            $
            13,336
            
            
            $
            10,757Capitalized
      interest
            
            
            537
            
            
            
            1,992
            
            
            
            4,688
            
            
            
            -
            
            
            
            -Portion
      of rent expense representativeof
      interest factor
            
            
            63,921
            
            
            
            79,967
            
            
            
            127,046
            
            
            
            134,442
            
            
            
            107,118$
            109,320
            
            
            $
            126,506
            
            
            $
            147,675
            
            
            $
            147,778
            
            
            $
            117,875Ratio
      of earnings to fixed charges
            
            
            1.38
            
            
            
            0.92
            
            
            
            1.27
            
            
            
            1.79
            
            
            
            1.30





107