##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 Form 10-K
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2006
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from to
 Commission File Number 001-31898
 PINNACLE AIRLINES CORP.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    03-0376558(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)1689 Nonconnah Blvd, Suite 111Memphis, Tennessee
    
    38132(Address of principal executive offices)
    
    (Zip Code)
 901-348-4100  (Registrants telephone number, including area code)
 Title of each class:
    
    Name of each exchange on which registered:Common Stock, $.01 par value
    
    Nasdaq National Market
   Yes o
    
    No þ
  Yes o
    
    No þ
  Yes þ
    
    No o
 þ
  o þ o
  Yes o
    
    No þ
   Documents Incorporated by Reference




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Table of Contents
 PART IItem 1. Business
    
    
    4Our Company
    
    
    4Northwest Bankruptcy
    
    
    4Mesaba Bankruptcy
    
    
    5Our Airline Services Agreement with Northwest
    
    
    5Our Employees
    
    
    11Maintenance of Aircraft
    
    
    12Training
    
    
    12Safety and Security
    
    
    12Insurance
    
    
    13Regulations
    
    
    13Markets and Routes
    
    
    13Competitive Environment
    
    
    14Subsequent Events
    
    
    14Website
    
    
    15ITEM 1A. RISK FACTORS
    
    
    16ITEM 1B. UNRESOLVED STAFF COMMENTS
    
    
    20Item 2. Properties
    
    
    21Flight Equipment
    
    
    21Facilities
    
    
    21Item 3. Legal Proceedings
    
    
    22Environmental Matters
    
    
    22Regulatory Matters
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and issuer purchases of equity securities
    
    
    23Performance Graph
    
    
    23Item 6.Selected Financial Data
    
    
      25Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Outlook for 2007
    
    
     27Certain Statistical Information
    
    
     28Critical Accounting Policies
    
    
    29Basis of Presentation
    
    
    31Results of Operations
    
    
    33Liquidity and Capital Resources
    
    
    37Forward Looking Statements
    
    
    39
 2




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Table of Contents (continued)
 Item 7A.Quantitative and Qualitative Disclosure About Market Risk
    
    
    40Item 8. Financial Statements and Supplementary Data
    
    
    41Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    75Item 9A. Controls and Procedures
    
    
    76PART IIIItem 10. Directors and Executive Officers of the Registrant
    
    
    79Item 11. Executive Compensation
    
    
    79Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    79Item 13. Certain Relationships and Related Transactions
    
    
    79Item 14. Principal Accountant Fees and Services
    
    
    79PART IVItem 15. Exhibits AND Financial Statement Schedules
    
    
    80SIGNATURES
    
    
    81Ex-10.32 Assignment of Claim AgreementEx-10.41 Amended Services AgreementEx-23.1 Ernst & Young ConsentEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32   Section 906 Certification
  3




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Part I
 
 Item 1. Business
  
 Our Company
    
 Northwest Bankruptcy
    4




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Item 1. Business
    
 Mesaba Bankruptcy
     
 Our Airline Services Agreements with Northwest
   5




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Item 1. Business
   Reimbursement payments
 Payments based on pre-set rates
 Margin payments
    6




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Item 1. Business
  Other
Agreements with Northwest,
 Scope of Agreement
 Employees
    Code-Sharing and Marketing
  7




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Item 1. Business
 Aircraft Financing
  Airport Facilities and Ground Handling
     Establishing New Operations
   Labor Disruption
  
    
    terminate the Amended ASA, which would immediately terminate the leases and
subleases for all of our CRJs; and
 8




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Item 1. Business
 
    
    prior to electing to terminate the Amended ASA, immediately terminate the
subleases for 89 of our CRJs, and if the strike continues for more than 45 days,
terminate the subleases for all but 50 of our CRJs.
 Northwests Rights upon a Pinnacle Change of Control
   Term and Termination of Agreement; Remedies for Breach
   
    
    our failure to make any payment under any aircraft lease or sublease with Northwest;
    
    an event of default by us under any aircraft lease or sublease with Northwest;
    
    an event of default under any of our other agreements with Northwest;
    
    our failure to maintain required insurance coverages;
    
    our failure to comply with Northwests inspection requirements;
    
    our failure to operate more than 50% of our aircraft for more than seven
consecutive days or our failure to operate more than 25% of our aircraft for more than
21 consecutive days, other than as a result of:
 1)
    
    an FAA order grounding all commercial flights or all air carriers or
grounding a specific aircraft type of all carriers,2)
    
    a scheduling action by Northwest or3)
    
    Northwests inability to perform its obligations under the Amended ASA
as a result of a strike by Northwest employees;
 
    
    suspension or revocation of our authority to operate as an airline by the
FAA or the Department of Transportation (DOT);
  Treatment of Assets upon Termination
   9




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Item 1. Business
  Indemnification
  10




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Item 1. Business
 
 Employees
    ContractEmployee Group
    
    Number of Employees
    

    Representing Union
    
    Amendable DatePilots
    
    
    1,120
    
    
    Airline Pilots Association
    
    April 30, 2005Flight Attendants
    
    
    604
    
    
    United Steel Workers of America
    
    February 1, 2011Customer Service
    
    
    1,325
    
    
    United Steel Workers of America
    
    March 19, 2010Flight Dispatchers
    
    
    33
    
    
    Transport Workers Union of
America
    
    Initial contract
currently being
negotiated
     11




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Item 1. Business
 
 Maintenance of Aircraft
      
 Training
    
 Safety and Security
   
    
    implementation of a system-wide positive bag match program;
    
    reinforcement of all cockpit doors; and
    
    implementation of strict in-flight cockpit access procedures, including the
removal of all cockpit access keys from within the main cabin.
  12




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Item 1. Business
 
 Insurance
    
 Regulations
   
 Markets and Routes
  13




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Item 1. Business
 
 Competitive Environment
  
 Subsequent Events
 Acquisition of Colgan Air, Inc.
        14




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Item 1. Business
 
 Website
  15




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Item 1 A. Risk Factors
 Risks Relating to our Amended Airline Services Agreement with Northwest
 Northwests bankruptcy proceedings will continue to impact us.
  Termination by Northwest of our Amended ASA would result in material declines in our revenues
and earnings, the size of our regional jet fleet and access to our airport facilities.
  We are heavily dependent on the services that Northwest, or its designated party, provides to
us. Loss of these services would materially impact our revenues and earnings.
   Reduced utilization levels of our aircraft under the Amended ASA would reduce our revenues and
earnings.
   16




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Item 1 A. Risk Factors
 Our Amended ASA with Northwest includes terms that expose us to risk of reduced operating
margin, losses, insufficient cash flow from operations, and limit our ability to benefit from
favorable changes in market conditions.
    Increases in our labor costs, which constitute a substantial portion of our total operating
costs, may directly impact our earnings.
  Risks Related to Our Business and Operations
 We are increasingly dependent on technology in our operations, and if our technology fails,
our business may be adversely affected.
   17




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Item 1 A. Risk Factors
  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 benefits, of the
Amended ASA.
  If we are unable to attract and retain pilots, our business could be harmed.
  We may be unable to obtain all of the aircraft, engines, parts or related maintenance and
support services we require from Bombardier, Inc. or General Electric, which could have a material
adverse impact on our business.
  Under certain circumstances, we may be required to pay cash or a combination of cash and our
common stock to holders of our 3.25% senior convertible notes due 2025 at their option prior to the
maturity date.
 Senior Convertible Notes,
 18




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Item 1 A. Risk Factors
 We are currently under audit by the Internal Revenue Service, and the results of the audit
could materially impact our financial statements and liquid assets.
  Risks Related to Our Acquisition of Colgan Air, Inc.
 We may be adversely affected by increases in fuel prices, and we would be adversely affected
by disruptions in the supply of fuel.
   Our results could be affected by Colgans revenue-sharing agreements.
  We may not achieve the potential benefits of the Colgan acquisition.
  19




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Item 1B. Unresolved Staff Comments.
  20




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Item 2. Properties
 
 Flight Equipment
  Number of
    
    Standard Seating
    
    Average AgeAircraft Type
    
    Aircraft
    
    Configuration
    
    (in years)CRJ 200
    
    
    124
    
    
    
    50
    
    
    
    3.7
  
 Facilities
  Square
    
    Lease ExpirationLocation
    
    Description
    
    Footage
    
    DateMemphis, TN
    
    Corporate Headquarters and
Corporate Education Center
    
    
    47,000
    
    
    August 2011Memphis, TN
    
    Hangar and Maintenance
Facility
    
    
    51,250
    
    
    December 2016Knoxville, TN
    
    Hangar and Maintenance
Facility
    
    
    55,000
    
    
    Termination of the
Amended ASASouth Bend, IN
    
    Hangar and Maintenance
Facility
    
    
    30,000
    
    
    Termination of the
Amended ASAFt. Wayne, IN
    
    Hangar and Maintenance
Facility
    
    
    18,000
    
    
    December 2008
   21




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Item 3. Legal Proceedings
 Commitments and
Contingencies Subsequent Events
 Business
 
 Environmental Matters
  
 Regulatory Matters
  
 Item 4. Submission of Matters to a Vote of Security Holders
  22




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Part II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
  High
    
    Low2005First Quarter
    
    $
    13.90
    
    
    $
    10.17Second Quarter
    
    $
    10.93
    
    
    $
    8.59Third Quarter
    
    $
    10.40
    
    
    $
    6.36Fourth Quarter
    
    $
    7.04
    
    
    $
    4.632006First Quarter
    
    $
    8.14
    
    
    $
    6.07Second Quarter
    
    $
    7.59
    
    
    $
    6.40Third Quarter
    
    $
    7.59
    
    
    $
    5.74Fourth Quarter
    
    $
    17.05
    
    
    $
    7.44
      
 Performance Graph
  23




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Performance Graph
 
 11/25/2003



12/31/2003



12/31/2004



12/31/2005



12/29/2006Pinnacle
Airlines Corp.


$
100.00



$
99.21



$
99.57



$
47.64



$
120.36American
Stock Exchange Airline Industry Index


$
100.00



$
95.06



$
93.06



$
84.31



$
90.29NASDAQ
Composite Index


$
100.00



$
103.10



$
111.96



$
113.50



$
124.30
 24




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Item 6. Selected Financial Data
 Managements
Discussion and Analysis of Financial Condition and Results of Operation Risk Factors
   Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands, except per share data)Statement of Operations Data:Total operating revenues
    
    $
    824,623
    
    
    $
    841,605
    
    
    $
    635,448
    
    
    $
    456,770
    
    
    $
    331,568Total operating expenses (1)
    
    
    697,075
    
    
    
    814,676
    
    
    
    568,145
    
    
    
    392,601
    
    
    
    283,912Operating income (1)
    
    
    127,548
    
    
    
    26,929
    
    
    
    67,303
    
    
    
    64,169
    
    
    
    47,656Operating income as a
percentage of operating
revenues (1) (2)
    
    
    15.5
    %
    
    
    3.2
    %
    
    
    10.6
    %
    
    
    14.0
    %
    
    
    14.4
    %Nonoperating (expense) income
(3)
    
    
    (2,948
    )
    
    
    14,482
    
    
    
    (4,178
    )
    
    
    (6,770
    )
    
    
    2,672Net income (1)
    
    
    77,799
    
    
    
    25,698
    
    
    
    40,725
    
    
    
    35,067
    
    
    
    30,785Basic earnings per share (1)
    
    $
    3.55
    
    
    $
    1.17
    
    
    $
    1.86
    
    
    $
    1.60
    
    
    $
    1.41Diluted earnings per share (1)
    
    $
    3.54
    
    
    $
    1.17
    
    
    $
    1.86
    
    
    $
    1.60
    
    
    $
    1.41Shares used in computing
basic earnings per share
    
    
    21,945
    
    
    
    21,913
    
    
    
    21,892
    
    
    
    21,892
    
    
    
    21,892Shares used in computing
diluted earnings per share
    
    
    21,974
    
    
    
    21,932
    
    
    
    21,911
    
    
    
    21,892
    
    
    
    21,892
 As of December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands)Balance Sheet Data:Cash and cash equivalents (4)
    
    $
    705
    
    
    $
    31,567
    
    
    $
    34,912
    
    
    $
    31,523
    
    
    $
    4,580Short-term investments
    
    
    72,700
    
    
    
    44,160
    
    
    
    
    
    
    
    
    
    
    
    Property and equipment, net
    
    
    40,985
    
    
    
    42,535
    
    
    
    39,416
    
    
    
    34,286
    
    
    
    26,631Total assets
    
    
    301,273
    
    
    
    228,802
    
    
    
    165,960
    
    
    
    128,906
    
    
    
    143,284Lines of credit
    
    
    
    
    
    
    17,000
    
    
    
    
    
    
    
    
    
    
    
    4,245Senior convertible notes
    
    
    121,000
    
    
    
    121,000
    
    
    
    
    
    
    
    
    
    
    
    Borrowings from Northwest
    
    
    
    
    
    
    
    
    
    
    125,000
    
    
    
    142,000
    
    
    
    Stockholders equity (deficiency)
    
    
    97,021
    
    
    
    18,618
    
    
    
    (7,548
    )
    
    
    (42,382
    )
    
    
    82,051
 25




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Item 6. Selected Financial Data
 Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Other Data:Revenue passengers (in thousands)
    
    
    8,988
    
    
    
    8,105
    
    
    
    6,340
    
    
    
    4,540
    
    
    
    2,938Revenue passenger miles (in
thousands) (5)
    
    
    4,288,551
    
    
    
    4,129,039
    
    
    
    2,894,776
    
    
    
    1,797,631
    
    
    
    1,091,181Available seat miles (ASMs) (in
thousands) (6)
    
    
    5,640,629
    
    
    
    5,732,773
    
    
    
    4,219,078
    
    
    
    2,678,000
    
    
    
    1,714,151Passenger load factor (7)
    
    
    76.0
    %
    
    
    72.0
    %
    
    
    68.6
    %
    
    
    67.1
    %
    
    
    63.7
    %Operating revenue per ASM (in
cents) (2)
    
    
    14.62
    
    
    
    14.68
    
    
    
    15.06
    
    
    
    17.06
    
    
    
    19.34Operating revenue per block hour
(2)
    
    $
    1,987
    
    
    $
    1,944
    
    
    $
    1,962
    
    
    $
    2,168
    
    
    $
    2,190Operating costs per ASM (in
cents) (1)
    
    
    12.36
    
    
    
    14.21
    
    
    
    13.47
    
    
    
    14.66
    
    
    
    16.56Operating costs per block hour (1)
    
    $
    1,679
    
    
    $
    1,882
    
    
    $
    1,754
    
    
    $
    1,864
    
    
    $
    1,875Block hours (8)
    
    
    415,069
    
    
    
    432,900
    
    
    
    323,810
    
    
    
    210,646
    
    
    
    124,889Cycles (8)
    
    
    251,091
    
    
    
    249,262
    
    
    
    201,816
    
    
    
    146,898
    
    
    
    85,478Average daily utilization (in
block hours)
    
    
    9.17
    
    
    
    9.07
    
    
    
    8.98
    
    
    
    8.83
    
    
    
    8.47Average stage length (in miles)
    
    
    470
    
    
    
    500
    
    
    
    450
    
    
    
    384
    
    
    
    353Number of operating aircraft (end
of period) (8)
    
    
    124
    
    
    
    124
    
    
    
    117
    
    
    
    76
    
    
    
    51Employees
    
    
    3,860
    
    
    
    3,436
    
    
    
    3,056
    
    
    
    2,253
    
    
    
    2,403
 
 (1)
    
    Results for the years ended December 31, 2006 and 2005 are impacted by the Northwest and Mesaba bankruptcies.(2)
    
    As discussed in Our Airline Services Agreement with Northwest in Item 1. Business, our target operating margin under the ASA was 14% from March 1,
2002 to November 30, 2003. From December 1, 2003 through December 31, 2006, the target operating margin was 10%. Prior to March 1, 2002, there was no
target operating margin as we did not operate under an airline services agreement. For further discussion of the target operating margin, refer to Note
5 Our Airline Services Agreement with Northwestin Item 8 of this Form 10-K.(3)
    
    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.(4)
    
    Cash balance as of December 31, 2006 does not include the normal Northwest 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.(5)
    
    Revenue passenger miles represents the number of miles flown by revenue passengers.(6)
    
    Available seat miles represents the number of seats available for passengers multiplied by the number of miles the seats are flown.(7)
    
    Passenger load factor equals revenue passenger miles divided by available seat miles.(8)
    
    During 2002, we completed an additional 26,509 block hours and 20,262 cycles with our fleet of Saab turboprop aircraft. All Saabs were removed from
our fleet by the end of 2002. 26




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 
 Outlook
 Risk Factors
       27




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
 Certain Statistical Information:
  Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Operating expenses per block hour:Salaries, wages and benefits
    
    $
    342
    
    
    $
    310
    
    
    $
    325
    
    
    $
    395
    
    
    $
    456Aircraft fuel
    
    
    263
    
    
    
    260
    
    
    
    258
    
    
    
    261
    
    
    
    224Aircraft maintenance,
materials and
repairs
    
    
    85
    
    
    
    74
    
    
    
    73
    
    
    
    67
    
    
    
    88Aircraft rentals
    
    
    636
    
    
    
    642
    
    
    
    645
    
    
    
    647
    
    
    
    575Other rentals and landing fees
    
    
    104
    
    
    
    99
    
    
    
    114
    
    
    
    139
    
    
    
    151Ground handling services
    
    
    210
    
    
    
    214
    
    
    
    203
    
    
    
    212
    
    
    
    155Depreciation
    
    
    10
    
    
    
    9
    
    
    
    10
    
    
    
    14
    
    
    
    40Government reimbursements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    Other
    
    
    134
    
    
    
    136
    
    
    
    126
    
    
    
    134
    
    
    
    186Provision for (decreases)
increases in losses associated
with bankruptcy filings of
Northwest and Mesaba
    
    
    (105
    )
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    $
    1,679
    
    
    $
    1,882
    
    
    $
    1,754
    
    
    $
    1,864
    
    
    $
    1,875
 28




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Operating expenses per available
seat mile (in cents):Salaries, wages and benefits
    
    
    2.51
    
    
    
    2.34
    
    
    
    2.49
    
    
    
    3.11
    
    
    
    4.03Aircraft fuel
    
    
    1.94
    
    
    
    1.96
    
    
    
    1.98
    
    
    
    2.05
    
    
    
    1.98Aircraft maintenance, materials
and repairs
    
    
    0.62
    
    
    
    0.56
    
    
    
    0.56
    
    
    
    0.53
    
    
    
    0.77Aircraft rentals
    
    
    4.68
    
    
    
    4.85
    
    
    
    4.95
    
    
    
    5.09
    
    
    
    5.08Other rentals and landing fees
    
    
    0.77
    
    
    
    0.75
    
    
    
    0.88
    
    
    
    1.09
    
    
    
    1.33Ground handling services
    
    
    1.55
    
    
    
    1.62
    
    
    
    1.56
    
    
    
    1.67
    
    
    
    1.37Depreciation
    
    
    0.07
    
    
    
    0.07
    
    
    
    0.08
    
    
    
    0.11
    
    
    
    0.36Government reimbursements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.04
    )
    
    
    Other
    
    
    0.99
    
    
    
    1.02
    
    
    
    0.97
    
    
    
    1.05
    
    
    
    1.64Provision for (decreases)
increases in losses associated
with bankruptcy filings of
Northwest and Mesaba
    
    
    (0.77
    )
    
    
    1.04
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    12.36
    
    
    
    14.21
    
    
    
    13.47
    
    
    
    14.66
    
    
    
    16.56
 
 Critical Accounting Policies
  Revenue Recognition Business 
  Income Tax Reserves
 Goodwill and Contractual Rights
   29




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Spare parts
 Estimated losses on subleased aircraft.
 Significant
Accounting Policies
 30




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 
 Basis of Presentation
  Increase/
    
    
    
    
    
    
    Increase/(Decrease)
    
    
    
    
    
    
    (Decrease)2006
    
    
    2006-2005
    
    
    2005
    
    
    2005-2004
    
    
    2004Operating revenues:Regional airline services
    
    $
    816,787
    
    
    
    (2
    )%
    
    $
    833,125
    
    
    
    32
    %
    
    $
    631,504Other
    
    
    7,836
    
    
    
    (8
    )%
    
    
    8,480
    
    
    
    115
    %
    
    
    3,944Total operating revenues
    
    
    824,623
    
    
    
    (2
    )%
    
    
    841,605
    
    
    
    32
    %
    
    
    635,448Operating expenses:Salaries, wages and benefits
    
    
    141,835
    
    
    
    6
    %
    
    
    134,277
    
    
    
    28
    %
    
    
    105,143Aircraft fuel
    
    
    109,224
    
    
    
    (3
    )%
    
    
    112,666
    
    
    
    35
    %
    
    
    83,572Aircraft maintenance,
materials and repairs
    
    
    35,110
    
    
    
    10
    %
    
    
    31,865
    
    
    
    35
    %
    
    
    23,545Aircraft rentals
    
    
    264,124
    
    
    
    (5
    )%
    
    
    277,914
    
    
    
    33
    %
    
    
    209,047Other rentals and landing fees
    
    
    43,135
    
    
    
    0
    %
    
    
    42,972
    
    
    
    16
    %
    
    
    37,101Ground handling services
    
    
    87,390
    
    
    
    (6
    )%
    
    
    92,689
    
    
    
    41
    %
    
    
    65,877Depreciation
    
    
    3,985
    
    
    
    (1
    )%
    
    
    4,017
    
    
    
    27
    %
    
    
    3,153Other
    
    
    55,843
    
    
    
    (5
    )%
    
    
    58,677
    
    
    
    44
    %
    
    
    40,707Provision for (decreases)
increases in losses
associated with bankruptcy
filings of Northwest and
Mesaba
    
    
    (43,571
    )
    
    
    173
    %
    
    
    59,599
    
    
    
    100
    %
    
    
    Total operating expenses
    
    
    697,075
    
    
    
    (14
    )%
    
    
    814,676
    
    
    
    43
    %
    
    
    568,145Operating income
    
    
    127,548
    
    
    
    374
    %
    
    
    26,929
    
    
    
    (60
    )%
    
    
    67,303Nonoperating (expense) income
    
    
    (2,948
    )
    
    
    (120
    )%
    
    
    14,482
    
    
    
    (447
    )%
    
    
    (4,178
    )Income before income taxes
    
    
    124,600
    
    
    
    201
    %
    
    
    41,411
    
    
    
    (34
    )%
    
    
    63,125Income tax expense
    
    
    46,801
    
    
    
    198
    %
    
    
    15,713
    
    
    
    (30
    )%
    
    
    22,400Net income
    
    $
    77,799
    
    
    
    203
    %
    
    $
    25,698
    
    
    
    (37
    )%
    
    $
    40,725
    31




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
   Year Ended December 31,% Increase2006
    
    
    2005
    
    
    (Decrease)(in thousands, except per share data)Operating Income:Operating income in accordance with GAAP
    
    $
    127,548
    
    
    $
    26,929
    
    
    
    374
    %Add: Provision for (decreases) increases in losses
associated with bankruptcy filings of Northwest and
Mesaba
    
    
    (43,571
    )
    
    
    59,599
    
    
    
    173
    %Add: Pilot post-retirement liability
    
    
    1,300
    
    
    
    
    
    
    
    100
    %Non-GAAP operating income
    
    $
    85,277
    
    
    $
    86,528
    
    
    
    (1
    )%Net Income:Net income in accordance with GAAP
    
    $
    77,799
    
    
    $
    25,698
    
    
    
    203
    %Add: Provision for (decreases) increases in losses
associated with bankruptcy filings of Northwest and
Mesaba, net of related tax
    
    
    (27,417
    )
    
    
    37,763
    
    
    
    (173
    )%Add: Provision for uncertain tax positions identified in
connection with IRS review
    
    
    1,542
    
    
    
    
    
    
    
    100
    %Add: Pilot post-retirement liability, net of related tax
    
    
    812
    
    
    
    
    
    
    
    100
    %Deduct: Gain on repurchase of debt, net of related
tax
    
    
    
    
    
    
    (11,302
    )
    
    
    (100
    )%Non-GAAP net income
    
    $
    52,736
    
    
    $
    52,159
    
    
    
    1
    %Diluted EPS:Diluted EPS in accordance with GAAP
    
    $
    3.54
    
    
    $
    1.17
    
    
    
    203
    %Add: Provision for (decreases) increases in losses
associated with bankruptcy filings of Northwest and
Mesaba, net of related tax
    
    
    (1.25
    )
    
    
    1.73
    
    
    
    (172
    )%Add: Provision for uncertain tax positions identified in
connection with IRS review
    
    
    0.07
    
    
    
    
    
    
    
    100
    %Add: Pilot post-retirement liability, net of related tax
    
    
    0.04
    
    
    
    
    
    
    
    100
    %Deduct: Gain on repurchase of debt, net of related
tax
    
    
    
    
    
    
    (0.52
    )
    
    
    (100
    )%Non-GAAP diluted EPS
    
    $
    2.40
    
    
    $
    2.38
    
    
    
    1
    %
 32




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 
 Results of Operations
 2006 Compared to 2005
  Years Ended December 31,2006
    
    
    
    
    
    
    
    
 
    

    
 
 
    
    2005Reimbursed
    
    
    Unreimbursed
    
    
    Other
    
    
    Total
    
    
    Reimbursed
    
    
    Unreimbursed
    
    
    Other
    
    
    Total(in thousands)Operating revenues:Regional airline services
    
    $
    539,646
    
    
    $
    277,141
    
    
    $
    
    
    
    $
    816,787
    
    
    $
    564,030
    
    
    $
    269,095
    
    
    $
    
    
    
    $
    833,125Other revenue
    
    
    
    
    
    
    7,836
    
    
    
    
    
    
    
    7,836
    
    
    
    
    
    
    
    8,480
    
    
    
    
    
    
    
    8,480Total operating revenues
    
    
    539,646
    
    
    
    284,977
    
    
    
    
    
    
    
    824,623
    
    
    
    564,030
    
    
    
    277,575
    
    
    
    
    
    
    
    841,605Operating expenses:Salaries, wages and benefits
    
    
    
    
    
    
    141,835
    
    
    
    
    
    
    
    141,835
    
    
    
    
    
    
    
    134,277
    
    
    
    
    
    
    
    134,277Aircraft fuel
    
    
    109,230
    
    
    
    (6
    )
    
    
    
    
    
    
    109,224
    
    
    
    111,993
    
    
    
    673
    
    
    
    
    
    
    
    112,666Aircraft maintenance, materials and repairs
    
    
    15,653
    
    
    
    19,457
    
    
    
    
    
    
    
    35,110
    
    
    
    14,582
    
    
    
    17,283
    
    
    
    
    
    
    
    31,865Aircraft rentals
    
    
    264,124
    
    
    
    
    
    
    
    
    
    
    
    264,124
    
    
    
    277,914
    
    
    
    
    
    
    
    
    
    
    
    277,914Other rentals and landing fees
    
    
    16,858
    
    
    
    26,277
    
    
    
    
    
    
    
    43,135
    
    
    
    17,914
    
    
    
    25,058
    
    
    
    
    
    
    
    42,972Ground handling services
    
    
    65,077
    
    
    
    22,313
    
    
    
    
    
    
    
    87,390
    
    
    
    69,580
    
    
    
    23,109
    
    
    
    
    
    
    
    92,689Depreciation
    
    
    
    
    
    
    3,985
    
    
    
    
    
    
    
    3,985
    
    
    
    
    
    
    
    4,017
    
    
    
    
    
    
    
    4,017Other
    
    
    14,739
    
    
    
    41,104
    
    
    
    
    
    
    
    55,843
    
    
    
    15,644
    
    
    
    43,033
    
    
    
    
    
    
    
    58,677Provision for (decreases) increases in losses
associated with the bankruptcy filings
of Northwest and Mesaba
    
    
    
    
    
    
    
    
    
    
    (43,571
    )
    
    
    (43,571
    )
    
    
    
    
    
    
    
    
    
    
    59,599
    
    
    
    59,599Total operating expenses
    
    
    485,681
    
    
    
    254,965
    
    
    
    (43,571
    )
    
    
    697,075
    
    
    
    507,627
    
    
    
    247,450
    
    
    
    59,599
    
    
    
    814,676Operating income
    
    $
    53,965
    
    
    $
    30,012
    
    
    $
    43,571
    
    
    $
    127,548
    
    
    $
    56,403
    
    
    $
    30,125
    
    
    $
    (59,599
    )
    
    $
    26,929Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    10.5
    %
    
    
    
    
    
    
    15.5
    %
    
    
    10.0
    %
    
    
    10.9
    %
    
    
    
    
    
    
    3.2
    %
   Operating Expenses.
 33




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




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 2005 Compared to 2004
  Years Ended December 31,2005
    
    
    
    
    
    
    
    
 
    

    
 
 
    
    2004Reimbursed
    
    
    Unreimbursed
    
    
    Other
    
    
    Total
    
    
    Reimbursed
    
    
    Unreimbursed
    
    
    Total(in thousands)Operating revenues:Regional airline services
    
    $
    564,030
    
    
    $
    269,095
    
    
    $
    
    
    
    $
    833,125
    
    
    $
    423,911
    
    
    $
    207,593
    
    
    $
    631,504Other revenue
    
    
    
    
    
    
    8,480
    
    
    
    
    
    
    
    8,480
    
    
    
    
    
    
    
    3,944
    
    
    
    3,944Total operating revenues
    
    
    564,030
    
    
    
    277,575
    
    
    
    
    
    
    
    841,605
    
    
    
    423,911
    
    
    
    211,537
    
    
    
    635,448Operating expenses:Salaries, wages and benefits
    
    
    
    
    
    
    134,277
    
    
    
    
    
    
    
    134,277
    
    
    
    
    
    
    
    105,143
    
    
    
    105,143Aircraft fuel
    
    
    111,993
    
    
    
    673
    
    
    
    
    
    
    
    112,666
    
    
    
    83,061
    
    
    
    511
    
    
    
    83,572Aircraft maintenance, materials and repairs
    
    
    14,582
    
    
    
    17,283
    
    
    
    
    
    
    
    31,865
    
    
    
    11,842
    
    
    
    11,703
    
    
    
    23,545Aircraft rentals
    
    
    277,914
    
    
    
    
    
    
    
    
    
    
    
    277,914
    
    
    
    209,047
    
    
    
    
    
    
    
    209,047Other rentals and landing fees
    
    
    17,914
    
    
    
    25,058
    
    
    
    
    
    
    
    42,972
    
    
    
    18,651
    
    
    
    18,450
    
    
    
    37,101Ground handling services
    
    
    69,580
    
    
    
    23,109
    
    
    
    
    
    
    
    92,689
    
    
    
    47,533
    
    
    
    18,344
    
    
    
    65,877Depreciation
    
    
    
    
    
    
    4,017
    
    
    
    
    
    
    
    4,017
    
    
    
    
    
    
    
    3,153
    
    
    
    3,153Other
    
    
    15,644
    
    
    
    43,033
    
    
    
    
    
    
    
    58,677
    
    
    
    11,386
    
    
    
    29,321
    
    
    
    40,707Provision for (decreases) increases in losses
associated with the bankruptcy filings
of Northwest and Mesaba
    
    
    
    
    
    
    
    
    
    
    59,599
    
    
    
    59,599
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    507,627
    
    
    
    247,450
    
    
    
    59,599
    
    
    
    814,676
    
    
    
    381,520
    
    
    
    186,625
    
    
    
    568,145Operating income
    
    $
    56,403
    
    
    $
    30,125
    
    
    $
    (59,599
    )
    
    $
    26,929
    
    
    $
    42,391
    
    
    $
    24,912
    
    
    $
    67,303Operating income as a percent of operating revenues
    
    
    10.0
    %
    
    
    10.9
    %
    
    
    
    
    
    
    3.2
    %
    
    
    10.0
    %
    
    
    11.8
    %
    
    
    10.6
    %
   Operating Expenses.
 35




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##### Table of Contents



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




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##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 
 Liquidity and Capital Resources
 th th
    Contractual obligations
 Payments Due by Period(in thousands)Total
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    ThereafterContractual obligations:Senior convertible
notes
    
    $
    121,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    121,000Interest payments
on long-term debt
    
    
    72,751
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    3,933
    
    
    
    53,086Operating leases (1)
    
    
    1,531,506
    
    
    
    145,355
    
    
    
    146,261
    
    
    
    144,618
    
    
    
    144,607
    
    
    
    144,364
    
    
    
    806,301Purchase
obligations (2)
    
    
    5,249
    
    
    
    1,660
    
    
    
    1,369
    
    
    
    1,105
    
    
    
    564
    
    
    
    430
    
    
    
    121Total contractual
cash obligations
    
    $
    1,730,506
    
    
    $
    150,948
    
    
    $
    151,563
    
    
    $
    149,656
    
    
    $
    149,104
    
    
    $
    148,727
    
    
    $
    980,508
 
 (1)
    
    Amounts represent the aircraft rental rates as prescribed in the Amended ASA, which became
effective on January 1, 2007. These rates were lowered to a market-based rate in the Amended
ASA.(2)
    
    Amounts represent non-cancelable commitments to purchase goods and services, including
certain aircraft parts and information technology. See Note 17, Commitment and Contingencies,
in Item 8 of this Form 10-K. Leases
  37




---



##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Senior Convertible Notes
  Operating activities.
 Investing activities Significant Accounting Policies,
  Financing activities Line of Credit
 Deferred tax liability.
 Guarantees and indemnifications
  38




---



##### Table of Contents



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    Off-Balance Sheet Arrangements
 
 Forward-Looking Statements
  Risk Factors
 39




---



##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk
  Aircraft fuel.
 Interest rates.
 Senior Convertible Notes.
 40




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Report of Independent Registered Public Accounting Firm
    
    
    42Consolidated Statements of Income
    
    
    43for the Years Ended December 31, 2006, 2005 and 2004Consolidated Balance Sheetsas of December 31, 2006 and 2005
    
    
    44Consolidated Statements of Stockholders Equity (Deficiency)
    
    
    46for the Years Ended December 31, 2006, 2005 and 2004Consolidated Statements of Cash Flows
    
    
    47for the Years Ended December 31, 2006, 2005 and 2004Notes to Consolidated Financial Statements
    
    
    48Report of Independent Registered Public Accounting Firm on Managements
Assessment and the Effectiveness of Internal Control Over
Financial Reporting
    
    
    77
 41




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
     
  42




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Consolidated Statements of Income
(in thousands, except per share data)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Operating revenues:Regional airline services
    
    $
    816,787
    
    
    $
    833,125
    
    
    $
    631,504Other
    
    
    7,836
    
    
    
    8,480
    
    
    
    3,944Total operating revenues
    
    
    824,623
    
    
    
    841,605
    
    
    
    635,448Operating expenses:Salaries, wages and benefits
    
    
    141,835
    
    
    
    134,277
    
    
    
    105,143Aircraft fuel
    
    
    109,224
    
    
    
    112,666
    
    
    
    83,572Aircraft maintenance, materials and repairs
    
    
    35,110
    
    
    
    31,865
    
    
    
    23,545Aircraft rentals
    
    
    264,124
    
    
    
    277,914
    
    
    
    209,047Other rentals and landing fees
    
    
    43,135
    
    
    
    42,972
    
    
    
    37,101Ground handling services
    
    
    87,390
    
    
    
    92,689
    
    
    
    65,877Depreciation
    
    
    3,985
    
    
    
    4,017
    
    
    
    3,153Other
    
    
    55,843
    
    
    
    58,677
    
    
    
    40,707Provision for (decreases) increases in losses
associated with
bankruptcy filings of Northwest and Mesaba
    
    
    (43,571
    )
    
    
    59,599
    
    
    
    Total operating expenses
    
    
    697,075
    
    
    
    814,676
    
    
    
    568,145Operating income
    
    
    127,548
    
    
    
    26,929
    
    
    
    67,303Operating income as a percentage of operating revenues
    
    
    15.5
    %
    
    
    3.2
    %
    
    
    10.6
    %Nonoperating (expense) income:Interest income
    
    
    2,548
    
    
    
    1,239
    
    
    
    301Interest expense
    
    
    (5,578
    )
    
    
    (4,772
    )
    
    
    (4,907
    )Miscellaneous income, net
    
    
    82
    
    
    
    15
    
    
    
    428Gain on repurchase of debt
    
    
    
    
    
    
    18,000
    
    
    
    Total nonoperating (expense) income
    
    
    (2,948
    )
    
    
    14,482
    
    
    
    (4,178
    )Income before income taxes
    
    
    124,600
    
    
    
    41,411
    
    
    
    63,125Income tax expense
    
    
    46,801
    
    
    
    15,713
    
    
    
    22,400Net income
    
    $
    77,799
    
    
    $
    25,698
    
    
    $
    40,725Basic earnings per share
    
    $
    3.55
    
    
    $
    1.17
    
    
    $
    1.86Diluted earnings per share
    
    $
    3.54
    
    
    $
    1.17
    
    
    $
    1.86Shares used in computing basic earnings per share
    
    
    21,945
    
    
    
    21,913
    
    
    
    21,892Shares used in computing diluted earnings per share
    
    
    21,974
    
    
    
    21,932
    
    
    
    21,911
  43




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Consolidated Balance Sheets
(in thousands, except share data)
 December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    705
    
    
    $
    31,567Short-term investments
    
    
    72,700
    
    
    
    44,160Receivables, principally from Northwest, net of allowances of $7,860
in 2006
and $51,523 in 2005
    
    
    100,925
    
    
    
    29,569Spare parts and supplies, net of allowances of $1,517 in 2006 and
$1,084 in 2005
    
    
    8,061
    
    
    
    6,368Prepaid expenses and other assets
    
    
    15,003
    
    
    
    5,637Deferred income taxes, net of allowance
    
    
    
    
    
    
    9,146Total current assets
    
    
    197,394
    
    
    
    126,447Property and equipment:Aircraft rotable spares
    
    
    38,436
    
    
    
    39,362Other property and equipment
    
    
    22,322
    
    
    
    19,209Office furniture and fixtures
    
    
    2,148
    
    
    
    2,00262,906
    
    
    
    60,573Less accumulated depreciation
    
    
    (21,921
    )
    
    
    (18,038
    )Net property and equipment
    
    
    40,985
    
    
    
    42,535Other assets, primarily aircraft deposits with Northwest
    
    
    27,262
    
    
    
    22,765Debt issuance costs, net of amortization of $414 in 2006 and $194 in 2005
    
    
    3,978
    
    
    
    4,198Goodwill, net of amortization of $4,027
    
    
    18,422
    
    
    
    18,422Contractual rights acquired from Northwest, net of amortization of
$1,883 in 2006
and $680 in 2005
    
    
    13,232
    
    
    
    14,435Total assets
    
    $
    301,273
    
    
    $
    228,802
  44




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##### Table of Contents



Pinnacle Airlines Corp.
Consolidated Balance Sheets
(in thousands, except share data)
 December 31,2006
    
    
    2005Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    18,201
    
    
    $
    12,945Accrued expenses
    
    
    26,190
    
    
    
    25,160Bank line of credit
    
    
    
    
    
    
    17,000Income taxes payable
    
    
    16,658
    
    
    
    17,756Deferred income taxes
    
    
    6,815
    
    
    
    Other current liabilities
    
    
    5,980
    
    
    
    7,161Total current liabilities
    
    
    73,844
    
    
    
    80,022Deferred income taxes
    
    
    7,112
    
    
    
    7,426Senior convertible notes
    
    
    121,000
    
    
    
    121,000Other liabilities
    
    
    2,296
    
    
    
    1,736Commitments and contingenciesStockholders equity:Preferred stock, par value $0.01 per share; 1,000,000 shares authorized,
no shares issued
    
    
    
    
    
    
    Series A preferred stock, stated value $100 per share; one share
authorized and issued
    
    
    
    
    
    
    Series common stock, par value $0.01 per share; 5,000,000 shares
authorized, no shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value; 40,000,000 shares authorized, 22,080,585
and 21,945,260 shares issued in 2006 and 2005, respectively
    
    
    221
    
    
    
    219Additional paid-in capital
    
    
    86,152
    
    
    
    85,550Accumulated earnings (deficiency)
    
    
    10,648
    
    
    
    (67,151
    )Total stockholders equity
    
    
    97,021
    
    
    
    18,618Total liabilities and stockholders equity
    
    $
    301,273
    
    
    $
    228,802
  45




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Consolidated Statements of Stockholders Equity (Deficiency)
(in thousands, except share data)
 UnearnedAdditional
    
    
    Accumulated
    
    
    Compensation
    
    
    AccumulatedCommon
    
    
    Paid-In
    
    
    Earnings
    
    
    on Restricted
    
    
    Other Compre-Stock
    
    
    Capital
    
    
    (Deficiency)
    
    
    Stock
    
    
    hensive Gain
    
    
    TotalBalance, December 31,
2003
    
    $
    219
    
    
    $
    84,973
    
    
    $
    (133,574
    )
    
    $
    
    
    
    $
    
    
    
    $
    (48,382
    )Net income and
comprehensive income
    
    
    
    
    
    
    
    
    
    
    40,725
    
    
    
    
    
    
    
    
    
    
    
    40,725Restricted stock
issuance  58,200
shares
    
    
    1
    
    
    
    630
    
    
    
    
    
    
    
    (631
    )
    
    
    
    
    
    
    Amortization of
unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    109Balance, December 31,
2004
    
    
    220
    
    
    
    85,603
    
    
    
    (92,849
    )
    
    
    (522
    )
    
    
    
    
    
    
    (7,548
    )Net income and
comprehensive income
    
    
    
    
    
    
    
    
    
    
    25,698
    
    
    
    
    
    
    
    
    
    
    
    25,698Forfeiture of
restricted stock 
5,000 shares
    
    
    (1
    )
    
    
    (53
    )
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    Amortization of
unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    468
    
    
    
    
    
    
    
    468Balance, December 31,
2005
    
    
    219
    
    
    
    85,550
    
    
    
    (67,151
    )
    
    
    
    
    
    
    
    
    
    
    18,618Net income
and comprehensive income
    
    
    
    
    
    
    
    
    
    
    77,799
    
    
    
    
    
    
    
    
    
    
    
    77,799Impact of adoption of
SFAS 158, net of
tax of $24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    40Restricted stock
issuance  135,325
shares
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based
compensation
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    564Balance, December 31,
2006
    
    $
    221
    
    
    $
    86,112
    
    
    $
    10,648
    
    
    $
    
    
    
    $
    40
    
    
    $
    97,021
  46




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##### Table of Contents



Pinnacle Airlines Corp.
 
 Consolidated Statements of Cash Flows
(in thousands)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Operating activitiesNet income
    
    $
    77,799
    
    
    $
    25,698
    
    
    $
    40,725Adjustments to reconcile net income to cash provided by
operating activities:Provision for (decreases) increases in losses associated
with
bankruptcy filings of Northwest and Mesaba
    
    
    (43,571
    )
    
    
    59,254
    
    
    
    Pilot post-retirement liability
    
    
    1,522
    
    
    
    
    
    
    
    Depreciation
    
    
    3,985
    
    
    
    4,017
    
    
    
    3,153Deferred income tax expense (benefit)
    
    
    15,647
    
    
    
    (7,965
    )
    
    
    2,394Other
    
    
    3,495
    
    
    
    777
    
    
    
    (485
    )Gain on repurchase of debt
    
    
    
    
    
    
    (18,000
    )
    
    
    Share-based compensation expense
    
    
    564
    
    
    
    468
    
    
    
    109Amortization of debt issuance costs
    
    
    220
    
    
    
    194
    
    
    
    Amortization of contractual rights
    
    
    1,203
    
    
    
    680
    
    
    
    Changes in operating assets and liabilities:Receivables, principally from Northwest
    
    
    (30,929
    )
    
    
    (56,574
    )
    
    
    (7,575
    )Spare parts and supplies
    
    
    (2,126
    )
    
    
    (1,617
    )
    
    
    (1,905
    )Prepaid expenses and other assets
    
    
    (11,834
    )
    
    
    (1,023
    )
    
    
    (6,184
    )Accounts payable and accrued expenses
    
    
    6,286
    
    
    
    6,037
    
    
    
    10,975Other current liabilities
    
    
    (62
    )
    
    
    (785
    )
    
    
    753Income taxes payable
    
    
    (1,098
    )
    
    
    16,123
    
    
    
    (3,963
    )Cash provided by operating activities
    
    
    21,101
    
    
    
    27,284
    
    
    
    37,997Investing activitiesPurchases of property and equipment
    
    
    (4,394
    )
    
    
    (7,962
    )
    
    
    (8,647
    )Proceeds from the sale of property and equipment
    
    
    
    
    
    
    
    
    
    
    1,057Purchases of short-term investments
    
    
    (721,365
    )
    
    
    (114,900
    )
    
    
    Proceeds from sale of short-term investments
    
    
    692,825
    
    
    
    70,740
    
    
    
    Transaction costs related to acquisition of Colgan Air,
Inc., including escrowed funds
    
    
    (2,029
    )
    
    
    
    
    
    
    Purchase of contractual rights from Northwest
    
    
    
    
    
    
    (5,115
    )
    
    
    (10,000
    )Cash used in investing activities
    
    
    (34,963
    )
    
    
    (57,237
    )
    
    
    (17,590
    )Financing activitiesPayments on long-term debt with Northwest
    
    
    
    
    
    
    (101,600
    )
    
    
    (12,000
    )Proceeds from line of credit with a bank
    
    
    
    
    
    
    17,000
    
    
    
    Repayments on line of credit with a bank
    
    
    (17,000
    )
    
    
    
    
    
    
    Repayments on line of credit with Northwest
    
    
    
    
    
    
    (5,000
    )
    
    
    (5,000
    )Gross proceeds from issuance of senior convertible notes
    
    
    
    
    
    
    121,000
    
    
    
    Debt issuance costs
    
    
    
    
    
    
    (4,392
    )
    
    
    Other financing activities
    
    
    
    
    
    
    (400
    )
    
    
    (18
    )Cash (used in) provided by financing activities
    
    
    (17,000
    )
    
    
    26,608
    
    
    
    (17,018
    )Net (decrease) increase in cash and cash equivalents
    
    
    (30,862
    )
    
    
    (3,345
    )
    
    
    3,389Cash and cash equivalents at beginning of period
    
    
    31,567
    
    
    
    34,912
    
    
    
    31,523Cash and cash equivalents at end of period
    
    $
    705
    
    
    $
    31,567
    
    
    $
    34,912Supplemental disclosure of cash flow informationInterest paid
    
    $
    4,594
    
    
    $
    7,562
    
    
    $
    5,920Income tax payments
    
    $
    32,299
    
    
    $
    2,837
    
    
    $
    23,970
  47




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 1. Description of Business
   2. Significant Accounting Policies
 Principles of Consolidation
  Concentration of Credit Risk
  Significant Concentration
  Use of Estimates
  Segment Reporting
  48




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 2. Significant Accounting Policies (continued)
 Revenue Recognition
     Aircraft Maintenance and Repair Costs
  Manufacturer Credits
  Impairment of Long-Lived Assets
  49




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 2. Significant Accounting Policies (continued)
 Share-Based Compensation
 Share-Based Payment Accounting
for Stock Issued to Employees and related interpretations
  Share-Based Compensation
 Cash and Cash Equivalents
  Allowance for Doubtful Accounts
  Property and Equipment
  50




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 2. Significant Accounting Policies (continued)
 Spare Parts and Supplies
  Goodwill
   Contractual Rights Acquired from Northwest
   Estimated Losses on Subleased Aircraft
  51




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 2. Significant Accounting Policies (continued)
 Financial Instruments
   Senior Convertible Notes
  Short-Term Investments
 Accounting for Certain Investments in Debt and Equity Securities
 Reclassification
  52




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 2. Significant Accounting Policies (continued)
 New Accounting Pronouncements
 Accounting for
Uncertainty in Income Taxes
 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans Employee Benefit Plans,,
 3. Northwest Bankruptcy Filing
  Airline Services Agreement
  53




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 3. Northwest Bankruptcy Filing (continued)
    4. Mesaba Bankruptcy Filing
     54




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 4. Mesaba Bankruptcy Filing (continued)
    5. Airline Services Agreement
   Commitments and Contingencies
 Northwest Bankru
 55




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 5. Airline Services Agreement (continued)
    Reimbursement payments
 Payments based on pre-set rates
 Margin payments
   56




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 5. Airline Services Agreement (continued)
     Other Agreements with
Northwest,
 6. Other Agreements with Northwest
  Aircraft and Spare Engine Lease Agreements
  57




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 6. Other Agreements with Northwest (continued)
  Manufacturer Benefits Agreement
 Sublease and Facilities Use Agreements
 Information Technology Support Agreement
 Family Assistance Services Agreement
 Ground Handling Agreement
 Preferential Pilot Hiring Agreement
 58




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 7. Earnings Per Share Calculation
 Earnings per
Share
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Net income
    
    $
    77,799
    
    
    $
    25,698
    
    
    $
    40,725Basic earnings per share
    
    $
    3.55
    
    
    $
    1.17
    
    
    $
    1.86Diluted earnings per share
    
    $
    3.54
    
    
    $
    1.17
    
    
    $
    1.86Share computation:Weighted average number of shares out-standing for basic EPS
    
    
    21,945
    
    
    
    21,913
    
    
    
    21,892Unvested restricted stock
    
    
    29
    
    
    
    19
    
    
    
    19Weighted average number of shares out-standing for diluted EPS
    
    
    21,974
    
    
    
    21,932
    
    
    
    21,911
  The Effect of Contingently Convertible Debt on Diluted Earnings per Share
  Average Stock Price
    
    SharesDuring Reporting Period
    
    (in thousands)$14.00
    
    
    510$15.00
    
    
    1,087$16.00
    
    
    1,591$17.00
    
    
    2,036$18.00
    
    
    2,431$19.00
    
    
    2,785$20.00
    
    
    3,103
  59




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 8. Senior Convertible Notes
      
    
    During a quarter (and only during such quarter) if the closing price of the
Companys common stock exceeds 120% of the conversion price of the Notes ($15.86
per share or the trigger price) for at least 20 of the last 30 trading days of
the preceding quarter;
    
    During a five day period after the Notes have traded for a five day period at a
price that is less than 98% of the equivalent value that could be realized upon
conversion of the Notes;
    
    If the Company calls the Notes for redemption;
    
    If a change of control or other specified corporate transactions or
distributions to holders of the Companys common stock occurs (and in some
instances, the Company may also owe an additional premium upon a change in
control); and
    
    During the ten trading days prior to the maturity date of February 15, 2025.
  60




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 9. Line of Credit
   10. Related Party Transactions
  Years Ended December 31,2006
    
    2005
    
    2004Revenue:Regional airline services revenue
    
    $
    816,787
    
    
    $
    833,125
    
    
    $
    631,504Other revenue
    
    
    5,254
    
    
    
    5,873
    
    
    
    2,380Expenses:Aircraft fuel
    
    
    109,230
    
    
    
    111,993
    
    
    
    83,061Aircraft rentals
    
    
    264,124
    
    
    
    277,914
    
    
    
    209,047Other rentals
    
    
    10,500
    
    
    
    11,250
    
    
    
    11,250Ground handling services
    
    
    65,345
    
    
    
    66,671
    
    
    
    46,112Other
    
    
    4,954
    
    
    
    2,623
    
    
    
    394Provision for (decreases)
increases in losses associated
with the Northwest bankruptcy
filing
    
    
    (44,336
    )
    
    
    51,523
    
    
    
    Interest expense
    
    
    
    
    
    
    463
    
    
    
    4,765
    61




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 11. Leases
    Fleet Size as of December 31,Aircraft
    
    Standard Seating Configuration
    
    2006
    
    2005
    
    2004CRJ 200
    
    
    50
    
    
    
    124
    
    
    
    53
    
    
    
    42CRJ 440
    
    
    44
    
    
    
    
    
    
    
    71
    
    
    
    75124
    
    
    
    124
    
    
    
    117
  Operating LeasesAircraft
    
    
    Non-aircraft
    
    
    Total2007
    
    $
    128,317
    
    
    $
    17,038
    
    
    $
    145,3552008
    
    
    129,984
    
    
    
    16,277
    
    
    
    146,2612009
    
    
    128,650
    
    
    
    15,968
    
    
    
    144,6182010
    
    
    128,592
    
    
    
    16,015
    
    
    
    144,6072011
    
    
    128,592
    
    
    
    15,772
    
    
    
    144,364Thereafter
    
    
    771,552
    
    
    
    34,749
    
    
    
    806,301Total future rental payments
    
    $
    1,415,687
    
    
    $
    115,819
    
    
    $
    1,531,506
  2006
    
    
    2005
    
    
    2004Gross rental expense
    
    $
    283,448
    
    
    $
    303,560
    
    
    $
    233,947Sublease rental payments
    
    
    
    
    
    
    (7,082
    )
    
    
    (7,811
    )Net rental expense
    
    $
    283,448
    
    
    $
    296,478
    
    
    $
    226,136
  62




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 12. Accrued Expenses
  2006
    
    
    2005Taxes other than income
    
    $
    8,441
    
    
    $
    8,342Compensation
    
    
    8,250
    
    
    
    6,842Ground handling and landing fees
    
    
    5,325
    
    
    
    5,489Insurance costs
    
    
    2,031
    
    
    
    1,882Interest
    
    
    1,475
    
    
    
    1,574Other
    
    
    668
    
    
    
    1,031Total Accrued Expenses
    
    $
    26,190
    
    
    $
    25,160
 13. Other Expenses
  2006
    
    
    2005
    
    
    2004Passenger liability insurance
    
    $
    3,284
    
    
    $
    3,427
    
    
    $
    2,682Hull and other insurance
    
    
    2,626
    
    
    
    3,047
    
    
    
    2,785Property and other taxes
    
    
    9,923
    
    
    
    9,701
    
    
    
    6,884Crew training expense
    
    
    5,433
    
    
    
    5,165
    
    
    
    5,124Crew overnight accommodations
    
    
    9,729
    
    
    
    10,252
    
    
    
    6,250Catering expense
    
    
    1,295
    
    
    
    1,644
    
    
    
    1,208Professional services fees
    
    
    2,279
    
    
    
    4,994
    
    
    
    2,048Canadian air traffic control
    
    
    2,267
    
    
    
    2,076
    
    
    
    1,388Other
    
    
    19,007
    
    
    
    18,371
    
    
    
    12,338Total Other Expenses
    
    $
    55,843
    
    
    $
    58,677
    
    
    $
    40,707
 63




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 14. Income Taxes
  December 31,2006
    
    
    2005Deferred tax assets:Asset valuation reserves
    
    $
    592
    
    
    $
    412Vacation pay
    
    
    1,332
    
    
    
    1,213Bad debt reserves
    
    
    2,140
    
    
    
    8,992Other accruals
    
    
    1,083
    
    
    
    48Pilot post-retirement reserve
    
    
    563
    
    
    
    Valuation allowance
    
    
    
    
    
    
    (288
    )Total deferred tax assets
    
    
    5,710
    
    
    
    10,377Deferred tax liabilities:Prepaid insurance
    
    
    (822
    )
    
    
    (376
    )Tax over book depreciation
    
    
    (9,058
    )
    
    
    (7,967
    )Northwest receivable
    
    
    (9,717
    )
    
    
    Other
    
    
    (40
    )
    
    
    (314
    )Net deferred tax liabilities
    
    
    (19,637
    )
    
    
    (8,657
    )Net deferred tax (liability) asset
    
    $
    (13,927
    )
    
    $
    1,720
  2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    27,808
    
    
    $
    21,726
    
    
    $
    19,179State
    
    
    3,346
    
    
    
    1,952
    
    
    
    82731,154
    
    
    
    23,678
    
    
    
    20,006Deferred:Federal
    
    
    14,664
    
    
    
    (7,732
    )
    
    
    2,511State
    
    
    983
    
    
    
    (233
    )
    
    
    (117
    )15,647
    
    
    
    (7,965
    )
    
    
    2,394$
    46,801
    
    
    $
    15,713
    
    
    $
    22,400
 64




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 14. Income Taxes (continued)
  2006
    
    
    2005
    
    
    2004$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Income tax expense at
statutory
rate
    
    $
    43,610
    
    
    
    35.0
    %
    
    $
    14,494
    
    
    
    35.0
    %
    
    $
    22,094
    
    
    
    35.0
    %State income taxes, net of
federal taxes
    
    
    2,722
    
    
    
    2.2
    %
    
    
    832
    
    
    
    2.0
    %
    
    
    1,279
    
    
    
    2.0
    %Valuation reserve
    
    
    (288
    )
    
    
    (0.2
    )%
    
    
    288
    
    
    
    0.7
    %
    
    
    
    
    
    
    Additional provisions
    
    
    1,388
    
    
    
    1.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax-exempt interest income
    
    
    (777
    )
    
    
    (0.6
    )%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    146
    
    
    
    0.1
    %
    
    
    99
    
    
    
    0.2
    %
    
    
    (973
    )
    
    
    (1.5
    )%Income tax expense
    
    $
    46,801
    
    
    
    37.6
    %
    
    $
    15,713
    
    
    
    37.9
    %
    
    $
    22,400
    
    
    
    35.5
    %
  15. Share-Based Compensation
    65




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 15. Share-Based Compensation (continued)
 Years Ended December 31,2005
    
    
    2004(restated)Net income, as reported
    
    $
    25,698
    
    
    $
    40,725Add: Restricted stock share-based compensation expense
included in reported net income, net of tax
    
    
    291
    
    
    
    68Deduct: Restricted stock and stock option share-based
compensation expense determined under the fair value
method, net of tax
    
    
    (2,679
    )
    
    
    (991
    )Net income, including the effects of share-based
compensation expense under SFAS 123
    
    $
    23,310
    
    
    $
    39,802Net income per common share  basic and diluted, as reported
    
    $
    1.17
    
    
    $
    1.86Pro forma net income per common share  basic and diluted
    
    $
    1.06
    
    
    $
    1.82
   Stock Options
     66




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 15. Share-Based Compensation (continued)
    Stock OptionsWeighted
    
    
    
    
    
    WeightedAverage
    
    Fair
    
    Average
    
    AggregateShares
    
    Exercise Price
    
    Value
    
    Remaining Life
    
    Intrinsic ValueOutstanding at beginning of year
    
    
    652
    
    
    $
    13.88
    
    
    $
    5,581Granted
    
    
    292
    
    
    $
    6.47
    
    
    $
    1,031Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    10
    
    
    $
    13.26
    
    
    $
    82Outstanding at end of year
    
    
    934
    
    
    $
    11.57
    
    
    $
    6,530
    
    
    7.6 years
    
    $
    4,936Options exercisable at end of year
    
    
    643
    
    
    $
    13.87
    
    
    $
    5,502
    
    
    6.9 years
    
    $
    1,915
    Expected Price Volatility 
 67




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Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 15. Share-Based Compensation (continued)
 Risk-Free Interest Rate 
 Expected Lives 
 Dividend Yield 
 Restricted Stock
     Restricted StockFairShares
    
    ValueOutstanding at beginning of year
    
    
    
    
    
    
    Granted
    
    
    135
    
    
    $
    875Vested
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at end of year
    
    
    135
    
    
    $
    875
 2007 Grants
  68




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 16. Employee Benefit Plans
 401(K) Plan
    Years of Service
    
    Company Match6 months - 5 years
    
    25% of first 5%6 - 9 years
    
    40% of first 6%10 - 12 years
    
    60% of first 7%13 or more years
    
    70% of first 7%
  Employee Contribution
    
    Company MatchFirst 3%
    
    Dollar for dollar, or 100%Next 3%
    
    Matched at 67%
  Retired Pilots Insurance Benefit Plan
   69




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Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 16. Employee Benefit Plans (continued)
      Components of Net Periodic Benefit CostService Cost
    
    $
    211Interest Cost
    
    
    75Correction
of prior year error
    
    
    1,300Net Periodic Benefit Cost
    
    $
    1,586
  Change in Benefit ObligationBenefit Obligation at Beginning of Year
    
    $
    Correction of prior year error
    
    
    1,300Service Cost
    
    
    211Interest Cost
    
    
    75Participant Contributions
    
    
    9Actuarial (Gain)/Loss
    
    
    (57
    )Benefits Paid
    
    
    (16
    )Benefit Obligation at End of Year
    
    $
    1,522
 70




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 16. Employee Benefit Plans (continued)
 Change in Plan AssetsFair Value of Plan Assets at Beginning of Year
    
    $
    Employer Contributions Current Period
    
    
    7Participant Contribution
    
    
    9Benefits Paid
    
    
    (16
    )Fair Value of Plan Assets at End of Year
    
    $
    Estimated Future Net Company Benefit PaymentsAfter Fiscal Year EndFirst Year
    
    $
    19Second Year
    
    
    26Third Year
    
    
    43Fourth Year
    
    
    58Fifth Year
    
    
    90Next Five Years
    
    
    650AssumptionsDiscount Rate
    
    
    6
    %First Year Health Care Cost Trend
    
    
    10
    %Ultimate Health Care Cost Trend
    
    
    5
    %Year Ultimate Health Care Cost Trend Reached
    
    
    2013
 17. Commitments and Contingencies
 Employees.
 Legal Proceedings
 Purchase Commitments .
 71




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Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 17. Commitments and Contingencies (continued)
   Self-Insurance .
 Regulatory Matters.
 Guarantees and Indemnifications.
     72




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 18. Quarterly Financial Data (Unaudited)
  Three Months Ended2006
    
    March 31
    
    June 30
    
    September 30
    
    December 31Operating revenue
    
    $
    207,089
    
    
    $
    204,514
    
    
    $
    208,500
    
    
    $
    204,520Operating income
    
    
    21,529
    
    
    
    19,495
    
    
    
    25,559
    
    
    
    60,965Net income
    
    
    13,296
    
    
    
    11,891
    
    
    
    15,837
    
    
    
    36,775Basic earnings per share
    
    $
    0.61
    
    
    $
    0.54
    
    
    $
    0.72
    
    
    $
    1.68Diluted earnings per share
    
    $
    0.61
    
    
    $
    0.54
    
    
    $
    0.72
    
    
    $
    1.67Operating income as a
percentage of operating
revenues
    
    
    10.4
    %
    
    
    9.5
    %
    
    
    12.3
    %
    
    
    29.8
    %
 Three Months Ended2005
    
    March 31
    
    June 30
    
    September 30
    
    December 31Operating revenue
    
    $
    194,732
    
    
    $
    212,899
    
    
    $
    220,943
    
    
    $
    213,031Operating income (loss)
    
    
    20,071
    
    
    
    22,781
    
    
    
    (32,356
    )
    
    
    16,433Net income (loss)
    
    
    23,332
    
    
    
    13,796
    
    
    
    (21,392
    )
    
    
    9,962Basic and diluted income
(loss)
per share
    
    $
    1.06
    
    
    $
    0.63
    
    
    $
    (0.98
    )
    
    $
    0.45Operating income (loss) as a
percentage of operating
revenues
    
    
    10.3
    %
    
    
    10.7
    %
    
    
    (14.6
    %)
    
    
    7.7
    %
   19. Subsequent Events
  73




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Item 8. Financial Statements and Supplementary Data
 Notes to Consolidated Financial Statements
(all amounts in thousands, except per share data)
 19. Subsequent Events (continued)
      74




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  75




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##### Table of Contents



Item 9A. Controls and Procedures
 Disclosure Controls and Procedures.
 Managements Report on Internal Control over Financial Reporting Internal Control  Integrated Framework
   Changes in Internal Control over Financial Reporting.
 76




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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
     .
  /s/ ERNST & YOUNG LLPMemphis, TennesseeMarch 8, 2007
 77




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##### Table of Contents



Item 9B. Other Information
  78




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##### Table of Contents



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
  79




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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 Income for the Years Ended December 31, 2006, 2005
and 2004ii)
    
    Consolidated Balance Sheets as of December 31, 2006 and 2005iii)
    
    Consolidated Statements of Stockholders Equity (Deficiency) for the Years
Ended December 31, 2006, 2005 and 2004iv)
    
    Consolidated Statements of Cash Flows for the Years Ended December 31, 2006,
2005 and 2004v)
    
    Notes to Consolidated Financial Statementsvi)
    
    Report of Independent Registered Public Accounting Firm on Managements
Assessment and the Effectiveness of Internal Control Over Financial Reporting
 2.
    
    Financial Statement Schedule:
 Report of Independent Registered Public Accounting
Firm on Financial Statement Schedule
    
    
    S-1Schedule IIValuation and Qualifying Accounts
    
    
    S-2
 All 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.
 80




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##### Table of Contents



SIGNATURES
  Pinnacle Airlines Corp.(Registrant)By:
    
    /s/ Philip H. TrenaryName:
    
    Philip H. TrenaryMarch 8, 2007
    
    Title:
    
    President, Chief Executive Officer
  Signature
    
    Title/s/ Philip H. Trenary

Philip H. Trenary
    
    President, Chief Executive Officer and Director (Principal
Executive Officer)/s/ Peter D. Hunt

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

Stephen E. Gorman
    
    Chairman, Director/s/ Donald J. Breeding

Donald J. Breeding
    
    Director/s/ Ian Massey

Ian Massey
    
    Director/s/ James E. McGehee, Jr.

James E. McGehee, Jr.
    
    Director/s/ Thomas S. Schreier, Jr.

Thomas S. Schreier, Jr.
    
    Director/s/ R. Philip Shannon

R. Philip Shannon
    
    Director/s/ Nicholas R. Tomassetti

Nicholas R. Tomassetti
    
    Director
 81




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##### Table of Contents



Index of Exhibits
  ExhibitNumber
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the registrant (Incorporated by
reference to the Companys Registration Statement Form S-1 (Registration No. 333-83359), as
amended (the S-1) initially filed on February 25, 2002)3.1.1
    
    Second Amended and Restated Certificate of Incorporation of the registrant (Incorporated by
reference to the S-1)3.2
    
    Certificate of Designations for Series A preferred stock of the registrant (Incorporated by
reference to the S-1)3.3
    
    Bylaws of the registrant (Incorporated by reference to the S-1)3.3.1
    
    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 Pinnacle Airlines Corp. and Deutsche Bank Trust Company (Incorporated by reference to
Exhibits 99.2 and 99.3 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 Pinnacle Airlines Corp., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Raymond James & Associates, Inc. (Incorporated by
reference to Exhibits 99.2 and 99.3 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. 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
    
    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
    
    First Amendment to Engine Lease Agreement between Pinnacle Airlines, Inc. and Northwest
Airlines, Inc. (Incorporated by reference to the S-1)10.3#
    
    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)10.4#
    
    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)10.5#
    
    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)
 82




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##### Table of Contents



ExhibitNumber
    
    Description10.6#
    
    Negative Pledge Agreement dated as of June 16, 2005 between Pinnacle Airlines Corp. 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
    
    Non-Qualified 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)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
    
    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
    
    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
    
    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 omitted10.17
    
    Intentionally omitted10.18
    
    Lease Guaranty issued by the registrant to Northwest Airlines, Inc. (Incorporated by
reference to the S-1)10.19
    
    Sublease Guaranty issued by the registrant to Northwest Airlines, Inc. (Incorporated by
reference to the S-1)10.20
    
    Airline Services Agreement dated as of March 1, 2002 among the registrant, Pinnacle
Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)10.21
    
    Airline Services Agreement dated as of January 14, 2003 among the registrant, Pinnacle
Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)10.21.1
    
    Amendment No. 1 dated as of September 11, 2003 to the Airline Services Agreement dated as
of January 14, 2003 among the registrant, Pinnacle Airlines, Inc. and Northwest Airlines,
Inc. (Incorporated by reference to the S-1)10.21.2
    
    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
    
    Amended and Restated Ground Handling Agreement between Pinnacle Airlines, Inc. and
Northwest Airlines, Inc. (Incorporated by reference to the S-1)10.23
    
    Amended and Restated Information Technology Services Agreement between Pinnacle Airlines,
Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)10.24
    
    Amended and Restated Family Assistance Services Agreement between Pinnacle Airlines, Inc.
and Northwest Airlines, Inc. (Incorporated by reference to the S-1)10.25
    
    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, Pinnacle Airlines Corp., 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
    
    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 August 12, 2005)
 83




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##### Table of Contents



ExhibitNumber
    
    Description10.29
    
    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 August 12, 2005)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 August 12, 2005)10.31
    
    Form of Indemnity Agreement between Pinnacle Airlines Corp. and its directors and officers
(Incorporated by reference to the Registrants Current Report on Form 8-K filed on January
26, 2006)10.32*
    
    Assignment of Claim Agreement between Pinnacle Airlines, Inc. and Goldman Sachs Credit
Partners, L.P., dated as of October 5, 2006.10.40
    
    Assumption and Claim Resolution Agreement between Pinnacle Airlines Corp. 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.,
Pinnacle Airlines Corp. and Northwest Airlines, Inc., dated December 15, 2006, effective as
of January 1, 200710.50
    
    Stock Purchase Agreement, dated as of January 18, 2007, by and among Colgan Air, Inc. and
Pinnacle Airlines Corp. (Incorporated by reference to the Registrants Current Report on
Form 8-K filed on January 24, 2007)10.99.1#
    
    Promissory Note issued by Pinnacle Airlines, Inc. to Northwest Airlines, Inc.
(Incorporated by reference to the S-1)10.99.2#
    
    Guarantee 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 February 8, 2005)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 Firm31.1*
    
    Certification of Chief Executive Officer31.2*
    
    Certification of Chief Financial Officer32*
    
    Certifications of CEO and CFO
 
 *
    
    Filed herewith
    
    Management contract or compensatory plan or arrangement#
    
    Cancelled agreement referenced in this Form 10-K 84




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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
    
 85




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##### Table of Contents



(d) 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, 2006Allowance deducted from asset accounts:Allowance for doubtful accounts
    
    $
    51,523
    
    
    $
    (43,663
    )(1)
    
    
    
    
    
    
    
    
    
    $
    7,860Allowance for obsolete inventory parts
    
    
    1,084
    
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    1,517Year Ended December 31, 2005Allowance deducted from asset accounts:Allowance for doubtful accounts
    
    
    34
    
    
    
    51,523
    
    
    
    (31
    )
    
    
    (3
    )(2)
    
    
    51,523Allowance for obsolete inventory parts
    
    
    494
    
    
    
    590
    
    
    
    
    
    
    
    
    
    
    
    1,084Year Ended December 31, 2004Allowance deducted from asset accounts:Allowance for doubtful accounts
    
    
    146
    
    
    
    422
    
    
    
    
    
    
    
    (534
    )
    
    
    34Allowance for obsolete inventory parts
    
    
    2,606
    
    
    
    177
    
    
    
    142
    
    
    
    (2,431
    )(2)
    
    
    494
 
 (1)
    
    On January 3, 2007, the Company agreed to assign an aggregate of $335,000 of its $377,500 stipulated unsecured claim
against Northwest that was agreed to in the Assumption Agreement to several third parties for aggregate proceeds of
approximately $283,000, net of expenses. As a result, the Company lowered its reserve against its pre-petition
receivables from 95% to 15.5%.(2)
    
    Dispositions and write-offs 86




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##### Table of Contents



Pinnacle Airlines Corp.
Ratio of Earnings to Fixed Charges  Unaudited
(in thousands, except ratios)
 Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Earnings:Income from operations before taxes (1)
    
    $
    124,600
    
    
    $
    41,411
    
    
    $
    63,125
    
    
    $
    57,399
    
    
    $
    50,328Add back:Interest expense
    
    
    5,578
    
    
    
    4,772
    
    
    
    4,907
    
    
    
    7,387
    
    
    
    409Portion of rent expense representative
of interest factor
    
    
    127,046
    
    
    
    134,442
    
    
    
    107,118
    
    
    
    71,072
    
    
    
    51,378Earnings as adjusted
    
    $
    257,224
    
    
    $
    180,625
    
    
    $
    175,150
    
    
    $
    135,858
    
    
    $
    102,115Fixed charges:Interest expense
    
    $
    5,578
    
    
    $
    4,772
    
    
    $
    4,907
    
    
    $
    7,387
    
    
    $
    409Portion of rent expense representative
of interest factor
    
    
    127,046
    
    
    
    134,442
    
    
    
    107,118
    
    
    
    71,072
    
    
    
    51,378$
    132,624
    
    
    $
    139,214
    
    
    $
    112,025
    
    
    $
    78,459
    
    
    $
    51,787Ratio of earnings to fixed charges
    
    
    1.94
    
    
    
    1.30
    
    
    
    1.56
    
    
    
    1.73
    
    
    
    1.97
 
 (1)
    
    Income from operations before taxes for the year ended December 31,
2006 includes a $43,571 benefit for the changes in estimates and sale of the
bankruptcy claims related to the bankruptcy filings of Northwest and Mesaba and the
year ended December 31, 2005 includes a gain of $18,000 related to the repurchase
of the Northwest note payable in February 2005 and a $59,599 charge for provisions
related to the bankruptcy filings of Northwest and Mesaba. 87