**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**

**x QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934.**

**Forthe quarterly period ended December 31, 2006**

**OR**

**oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**Forthe transition period from           to           **

**CommissionFile No:  0-17895**

**MAIR HOLDINGS, INC.**

Incorporated under thelaws of Minnesota

| **41-1616499**                       |
|--------------------------------------|
| (I.R.S. Employer  ID No.)            |
|                                 |
| **Fifth  Street Towers, Suite 1360** |
| **150  South Fifth Street**          |
| **Minneapolis,  MN 55402**           |
| **(612)  333-0021**                  |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x     No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filing and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):

| Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
|--------------------------------|--------------------------|------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes oNo x

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.
|                                             | **Class**      | ** ** | ** ** | **Outstanding as of December 31, 2006** | ** ** |
|---------------------------------------------|----------------|------------|------------|-----------------------------------------|------------|
| **Common  Stock, par value $.01 per share** | **20,591,840** |

 

 

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# **CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

Statements in thisQuarterly Report on Form 10-Q of MAIR Holdings, Inc. (“MAIR” or the “Company”)under the caption “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and elsewhere in this report are forward-looking andare based upon information currently available to the Company.  The Company, through its officers, directorsor employees, may also from time to time make oral forward-lookingstatements.  In connection with the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, theCompany notes that a variety of material risks and uncertainties could causeactual results to differ materially from those contained in any forward-lookingstatement made by or on behalf of the Company. Many important factors that could cause such a difference are describedunder the caption “Risk Factors” in Item 1A of Part II of this Quarterly Reporton Form 10-Q.

Unduereliance should not be placed on the Company’s forward-looking statementsbecause the matters they describe are subject to known and unknown risks,uncertainties and other unpredictable factors, many of which are beyond theCompany’s control.  The Company’s forward-looking statements are based onthe information currently available and speak only as of the date on which thisreport was filed with the United States Securities and Exchange Commission (the“SEC”).  Over time, actual results, performance or achievements willlikely differ from the anticipated results, performance or achievements thatare expressed or implied by the Company’s forward-looking statements, and suchdifferences might be significant and materially adverse to the Company’sshareholders.

Allsubsequent written or oral forward-looking statements attributable to theCompany or persons acting on the Company’s behalf are expressly qualified bythe factors described above.  The Company assumes no obligation, anddisclaims any obligation, to update information contained in this QuarterlyReport on Form 10-Q, including forward-looking statements, as a result offacts, events or circumstances after the date of this report, except asrequired by law in the normal course of its public disclosure practices.

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**PARTI.  FINANCIAL INFORMATION**

**ITEM1.  CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**MAIR HOLDINGS, INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except share information)**

**(Unaudited)**

 
| ** **                                                                                                            | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                            | ** ** | **2006**             | ** ** | **2006**          | ** ** |
| **ASSETS**                                                                                                            | ** ** | ** **           | ** ** | ** **        | ** ** |
| **CURRENT ASSETS:**                                                                                                   |       |                 |       |              |       |
| Cash and cash  equivalents                                                                                            |       | $                    | 42,599     |              | $          | 47,135 |   |
| Short-term investments                                                                                                |       | 38,534               |       | 44,117            |       |
| Accounts receivable,  net of reserve of $43 and $33                                                                   |       | 2,708                |       | 3,043             |       |
| Income taxes receivable                                                                                               |       | —               |       | 941               |       |
| Inventories, net                                                                                                      |       | 1,111                |       | 589               |       |
| Prepaid expenses and  deposits                                                                                        |       | 1,928                |       | 2,611             |       |
| Total current assets                                                                                                  |       | 86,880               |       | 98,436            |       |
|                                                                                                                  |       |                 |       |              |       |
| **PROPERTY AND EQUIPMENT:**                                                                                           |       |                 |       |              |       |
| Flight equipment                                                                                                      |       | 768                  |       | 650               |       |
| Other property and  equipment                                                                                         |       | 1,515                |       | 1,401             |       |
| Less: Accumulated  depreciation and amortization                                                                      |       | (832                 | )          | (628              | )          |
| Net property and  equipment                                                                                           |       | 1,451                |       | 1,423             |       |
|                                                                                                                  |       |                 |       |              |       |
| **NONCURRENT ASSETS:**                                                                                                |       |                 |       |              |       |
| Investment in Mesaba  Aviation, Inc.                                                                                  |       | —               |       | —            |       |
| Long-term investments                                                                                                 |       | 16,109               |       | 19,484            |       |
| Other intangible  assets, net                                                                                         |       | 2,108                |       | 2,413             |       |
| Restricted cash                                                                                                       |       | 13,110               |       | —            |       |
| Other assets, net                                                                                                     |       | 197                  |       | 186               |       |
|                                                                                                                  |       | $                    | 119,855    |              | $          | 121,942 |   |
|                                                                                                                  |       |                 |       |              |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                        |       |                 |       |              |       |
| **CURRENT LIABILITIES:**                                                                                              |       |                 |       |              |       |
| Accounts payable                                                                                                      |       | $                    | 2,436      |              | $          | 2,745 |   |
| Intercompany payable to  Mesaba Aviation, Inc. (Note 1)                                                               |       | 3,059                |       | 54                |       |
| Accrued liabilities:                                                                                                  |       |                 |       |              |       |
| Payroll                                                                                                               |       | 1,244                |       | 1,421             |       |
| Deferred income                                                                                                       |       | 691                  |       | 716               |       |
| Other current  liabilities                                                                                            |       | 8,475                |       | 7,635             |       |
| Total current  liabilities                                                                                            |       | 15,905               |       | 12,571            |       |
|                                                                                                                  |       |                 |       |              |       |
| **OTHER NONCURRENT LIABILITIES**                                                                                      |       | 995                  |       | 772               |       |
| Total  liabilities                                                                                                    |       | 16,900               |       | 13,343            |       |
|                                                                                                                  |       |                 |       |              |       |
| **COMMITMENTS AND CONTINGENCIES  (Note 12)**                                                                          |       |                 |       |              |       |
|                                                                                                                  |       |                 |       |              |       |
| **SHAREHOLDERS’ EQUITY:**                                                                                        |       |                 |       |              |       |
| Undesignated preferred  stock, no specified par value; 1,000,000  shares authorized, no shares issued and outstanding |       | —               |       | —            |       |
| Common stock, $.01 par  value; 60,000,000 shares authorized,  20,591,840 shares issued and outstanding                |       | 206                  |       | 206               |       |
| Paid-in capital                                                                                                       |       | 69,844               |       | 69,546            |       |
| Accumulated other  comprehensive income (loss)                                                                        |       | 43                   |       | (176              | )          |
| Retained earnings                                                                                                     |       | 32,862               |       | 39,023            |       |
| Total shareholders’ equity                                                                                       |       | 102,955              |       | 108,599           |       |
|                                                                                                                  |       | $                    | 119,855    |              | $          | 121,942 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

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**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands)**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                               | ** ** | **December 31**             | ** ** | **December 31**            | ** ** |
| ** **                                               | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **OPERATING  REVENUES:**                                 |       |                             |       |                            |       |   |   |   |   |
| Passenger                                                |       | $                                | 3,544      |                            | $          | 17,625 |   | $ | 11,004 |   | $ | 225,280 |   |
| Freight and  other                                       |       | 2,408                            |       | 3,622                           |       | 7,174 |   | 25,556 |   |
| Total operating  revenues                                |       | 5,952                            |       | 21,247                          |       | 18,178 |   | 250,836 |   |
| **OPERATING  EXPENSES:**                                 |       |                             |       |                            |       |   |   |   |   |
| Wages and  benefits                                      |       | 2,842                            |       | 7,647                           |       | 8,148 |   | 86,105 |   |
| Aircraft fuel                                            |       | 1,144                            |       | 1,329                           |       | 4,111 |   | 3,541 |   |
| Aircraft  maintenance                                    |       | 845                              |       | 3,371                           |       | 2,765 |   | 48,978 |   |
| Aircraft rents                                           |       | 453                              |       | 4,195                           |       | 1,359 |   | 55,825 |   |
| Landing fees                                             |       | 75                               |       | 480                             |       | 262 |   | 5,684 |   |
| Insurance and  taxes                                     |       | 319                              |       | 876                             |       | 1,678 |   | 4,690 |   |
| Depreciation and  amortization                           |       | 176                              |       | 611                             |       | 535 |   | 7,920 |   |
| Administrative  and other                                |       | 2,533                            |       | 5,039                           |       | 8,969 |   | 45,029 |   |
| Impairment and  other charges                            |       | —                           |       | 4,759                           |       | — |   | 41,268 |   |
| Total operating  expenses                                |       | 8,387                            |       | 28,307                          |       | 27,827 |   | 299,040 |   |
| Operating loss                                           |       | (2,435                           | )          | (7,060                          | )          | (9,649 | ) | (48,204 | ) |
| **NONOPERATING  INCOME (EXPENSE):**                      |       |                             |       |                            |       |   |   |   |   |
| Interest income  and other                               |       | 1,330                            |       | 685                             |       | 3,889 |   | 2,800 |   |
| Interest expense                                         |       | (16                              | )          | (18                             | )          | (50 | ) | (50 | ) |
| Arbitration  settlement                                  |       | —                           |       | —                          |       | — |   | 1,800 |   |
| Nonoperating  income, net                                |       | 1,314                            |       | 667                             |       | 3,839 |   | 4,550 |   |
| Loss before  (provision) benefit for income taxes        |       | (1,121                           | )          | (6,393                          | )          | (5,810 | ) | (43,654 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| **(PROVISION)  BENEFIT FOR INCOME TAXES**                |       | (10                              | )          | 2,269                           |       | (351 | ) | 15,227 |   |
| Loss before equity in loss  of  Mesaba Aviation, Inc.    |       | (1,131                           | )          | (4,124                          | )          | (6,161 | ) | (28,427 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| **EQUITY  IN LOSS OF MESABA AVIATION, INC., net of tax** |       | —                           |       | (334                            | )          | — |   | (334 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| **NET  LOSS**                                            |       | $                                | (1,131     | )                               | $          | (4,458 | ) | $ | (6,161 | ) | $ | (28,761 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| **NET  LOSS PER SHARE:**                                 |       |                             |       |                            |       |   |   |   |   |
| Loss per common  share - basic                           |       | $                                | (0.05      | )                               | $          | (0.22 | ) | $ | (0.30 | ) | $ | (1.40 | ) |
| Loss per common  share - diluted                         |       | $                                | (0.05      | )                               | $          | (0.22 | ) | $ | (0.30 | ) | $ | (1.40 | ) |
|                                                     |       |                             |       |                            |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING:**                |       |                             |       |                            |       |   |   |   |   |
| Basic                                                    |       | 20,592                           |       | 20,592                          |       | 20,592 |   | 20,581 |   |
| Diluted                                                  |       | 20,592                           |       | 20,592                          |       | 20,592 |   | 20,581 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

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**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **December**                    | ** ** |
| ** **                                                                                   | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                   |       |                            |       |   |   |
| Net loss                                                                                     |       | $                               | (6,161     | ) | $ | (28,761 | ) |
| Adjustments to  reconcile net loss to net cash used in  operating activities:                |       |                            |       |   |   |
| Equity in loss of  Mesaba Aviation, Inc.                                                     |       | —                          |       | 334 |   |
| Depreciation and  amortization                                                               |       | 535                             |       | 7,920 |   |
| Amortization of  deferred credits                                                            |       | (81                             | )          | (789 | ) |
| Stock-based  compensation                                                                    |       | 298                             |       | (1,444 | ) |
| Amortization of  investment (discounts) premiums                                             |       | (983                            | )          | 568 |   |
| Deferred income taxes                                                                        |       | 202                             |       | (12,785 | ) |
| Provision for loss  associated with Northwest bankruptcy filing                              |       | —                          |       | 31,900 |   |
| Impairment and other  charges                                                                |       | —                          |       | 9,368 |   |
| Changes in current  operating items:                                                         |       |                            |       |   |   |
| Accounts receivable                                                                          |       | 335                             |       | (35,150 | ) |
| Income taxes receivable                                                                      |       | 941                             |       | — |   |
| Inventories                                                                                  |       | (522                            | )          | (1,377 | ) |
| Prepaid expenses and  deposits                                                               |       | 683                             |       | (1,996 | ) |
| Accounts payable and  other                                                                  |       | 756                             |       | 13,808 |   |
| Net cash used in  operating activities                                                       |       | (3,997                          | )          | (18,404 | ) |
|                                                                                         |       |                            |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                   |       |                            |       |   |   |
| Purchases of  investments                                                                    |       | (31,138                         | )          | (51,271 | ) |
| Sales of investments                                                                         |       | 40,984                          |       | 112,774 |   |
| Purchases of property  and equipment                                                         |       | (233                            | )          | (6,183 | ) |
| Increase in restricted  cash                                                                 |       | (13,110                         | )          | (6,921 | ) |
| Net cash (used in)  provided by investing activities                                         |       | (3,497                          | )          | 48,399 |   |
|                                                                                         |       |                            |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                                    |       |                            |       |   |   |
| Payment of other  noncurrent liabilities                                                     |       | (47                             | )          | (101 | ) |
| Proceeds from  issuance of common stock                                                      |       | —                          |       | 114 |   |
| Tax refund received  payable to Mesaba Aviation, Inc. (Note 1)                               |       | 3,005                           |       | — |   |
| Net cash provided by  financing activities                                                   |       | 2,958                           |       | 13 |   |
|                                                                                         |       |                            |       |   |   |
| **NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS**                                    |       | (4,536                          | )          | 30,008 |   |
|                                                                                         |       |                            |       |   |   |
| **NET DECREASE IN CASH AND CASH EQUIVALENTS FROM  DECONSOLIDATION OF MESABA AVIATION, INC.** |       | —                          |       | (12,479 | ) |
|                                                                                         |       |                            |       |   |   |
| **CASH  AND CASH EQUIVALENTS:**                                                              |       |                            |       |   |   |
| Beginning of  year                                                                           |       | 47,135                          |       | 57,968 |   |
|                                                                                         |       |                            |       |   |   |
| End of year                                                                                  |       | $                               | 42,599     |   | $ | 75,497 |   |
|                                                                                         |       |                            |       |   |   |
| **SUPPLEMENTARY  CASH FLOW INFORMATION:**                                                    |       |                            |       |   |   |
| Cash paid  (refund received) during period for:                                              |       |                            |       |   |   |
| Interest                                                                                     |       | $                               | 44         |   | $ | 33 |   |
| Income taxes                                                                                 |       | $                               | (6,549     | ) | $ | (1,203 | ) |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

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**MAIRHOLDINGS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

The condensedconsolidated financial statements included herein have been prepared by theCompany without audit, pursuant to the rules and regulations of the SEC.  The information furnished in the condensedconsolidated financial statements includes normal recurring adjustments, unlessotherwise noted, and reflects all adjustments that are, in the opinion ofmanagement, necessary for the fair presentation of such condensed consolidatedfinancial statements.  The Company’sbusiness is seasonal and, accordingly, interim results are not indicative ofresults for a full year.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) have been condensed or omitted pursuant tosuch rules and regulations, although the Company believes that the disclosuresare adequate to make the information presented not misleading.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements for the year ended March 31, 2006, and the notes thereto, includedin the Company’s Annual Report on Form 10-K filed with the SEC on June 27,2006.

**1.****              Basis ofPresentation, Corporate Organization and Business**

*CorporateOrganization*

The condensedconsolidated financial statements include the accounts of MAIR and itswholly-owned subsidiaries, Big Sky Transportation Co. (“Big Sky”) and MesabaAviation, Inc. (“Mesaba”) until Mesaba’s bankruptcy filing on October 13, 2005(the “Petition Date”).  All intercompanytransactions and balances have been eliminated in consolidation.  As discussed below, the accounts of Mesabahave been deconsolidated from the Company’s condensed consolidated financialstatements effective as of the Petition Date.

Since the Petition Date,intercompany balances between MAIR and Mesaba have not been eliminated.  As of December 31, 2006 and March 31, 2006,MAIR had an intercompany payable to Mesaba of $3.1 million and $0.1 million,respectively, and Mesaba had equal intercompany amounts receivable fromMAIR.  During the quarter ended December31, 2006, MAIR received $5.5 million in tax refunds related to net operatingloss carryback claims for fiscal 2006 and 2005, of which $3.1 million ispayable to Mesaba in accordance with the Company’s tax sharing agreement. It isanticipated that this amount will be reconciled (including consideration of theJanuary 2005 tax settlement discussed in Note 3) after Mesaba’s plan ofreorganization is approved by the United States Bankruptcy Court for theDistrict of Minnesota (the “Bankruptcy Court”).

As discussed in Note 2,Mesaba filed a voluntary petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code (“Bankruptcy Code”) in the Bankruptcy Court on thePetition Date. Mesaba is operating its business as a debtor-in-possessionpursuant to the Bankruptcy Code and filed a plan of reorganization on January22, 2007, under which Mesaba will exit bankruptcy as a wholly-owned operatingsubsidiary of Northwest Airlines, Inc. (“Northwest”) (see Note 3).  Mesaba’s financial statements have beenprepared on a going concern basis, which contemplates continuity of operations,realization of assets and liquidation of postpetition liabilities in theordinary course of business.

Due to Mesaba’sbankruptcy and the uncertainties surrounding the nature, timing, and specificsof the bankruptcy proceedings, MAIR deconsolidated Mesaba’s financial resultseffective as of the Petition Date.  As aresult, Mesaba’s assets and liabilities have been removed from the Company’scondensed consolidated balance sheets as of the Petition Date and throughDecember 31, 2006 (see Note 2).  Mesaba’sresults of operations have been removed from the Company’s condensedconsolidated results of operations and cash flows since the Petition Date, butcontinue to be included in such condensed consolidated financial statements forperiods prior to the Petition Date.

MAIR has accounted forMesaba’s financial results under the equity method of accounting since thePetition Date.  In accordance with APBOpinion No. 18, *The Equity Method of Accounting forInvestments in Common Stock*, at March 31, 2006, MAIR evaluatedwhether its investment in Mesaba had experienced an other-than-temporaryimpairment.  MAIR’s evaluation utilized amarket and income approach, including a discounted cash flow analysis.  After analyzing Mesaba’s actual losses infiscal 2006, Mesaba’s projected losses in fiscal 2007 as it transitioned to aSaab-only operation, Mesaba’s five-year Saab business plan and Mesaba’sliabilities subject to compromise as of March 31, 2006, MAIR concluded that itsremaining investment in Mesaba had experienced an other-than-

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temporaryimpairment.  Accordingly, effective March31, 2006, MAIR recorded an $8.9 million impairment charge to write off itsremaining equity investment in Mesaba.

During the ninemonths ended December 31, 2006 Mesaba reported a net loss of $39.8million.  MAIR did not record anyadditional losses in Mesaba that would make MAIR’s equity investment in Mesabanegative due to MAIR not having any further obligations to fund any of Mesaba’sadditional losses.

The provisions ofStatement of Position 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code*, (“SOP 90-7”),apply to Mesaba’s financial statements while Mesaba operates under theprovisions of Chapter 11.  SOP 90-7 doesnot change the application of GAAP in the preparation of financialstatements.  However, SOP 90-7 doesrequire that the financial statements, for periods including and subsequent tothe filing of the Chapter 11 petition, distinguish transactions and events thatare directly associated with the reorganization from the ongoing operations ofthe business.  See Note 13 for thecondensed financial statements of Mesaba presented in accordance with SOP 90-7on a stand-alone basis as of December 31, 2006 and March 31, 2006 and for thethree and nine months ended December 31, 2006 and 2005.

*Business*

Mesaba

Mesaba operates as aregional carrier providing scheduled passenger service as MesabaAirlines/Northwest Airlink and Mesaba Airlines/Northwest Jet Airlink under aten-year omnibus Airline Services Agreement (“ASA”) with Northwest, datedAugust 29, 2005.  On January 22, 2007,MAIR and Mesaba announced that they had reached definitive agreements withNorthwest to allow Mesaba to exit bankruptcy as a wholly-owned operating subsidiaryof Northwest (see Note 3).  In theinterim, the ASA continues to govern Mesaba’s operation of Saab 340 jet-propaircraft (“Saabs”) and Canadair regional jets (“CRJs”).  As of December 31, 2006, Mesaba was operating49 Saabs and one CRJ, all of which are subleased from Northwest.  As of December 31, 2006, Mesaba served 72cities in the United States and Canada from Northwest’s hub airports located inMinneapolis/St. Paul, Detroit and Memphis.

The ASA provides forincentive payments from Northwest to Mesaba based on achievement of certainoperational goals on a semi-annual basis. Such incentives totaled $0.3 million for each the three months endedDecember 31, 2006 and 2005.  Incentivestotaled $1.8 million and $2.5 million for the nine months ended December 31,2006 and 2005, respectively, and are included in passenger revenues in Mesaba’scondensed statements of operations (see Note 13).

Approximately $18.7million, or 86.1%, and $25.7 million, or 88.1%, of the respective December 31,2006 and March 31, 2006 net accounts receivable balances in Mesaba’s condensedbalance sheets were due from Northwest and were not collateralized (see Note13).  Approximately 92.4% and 94.7% ofMesaba’s operating revenue recognized for the three months ended December 31,2006 and 2005, respectively, was from Northwest.  Approximately 93.8% and 95.2% of Mesaba’soperating revenue recognized for the nine months ended December 31, 2006 and2005, respectively, was from Northwest. Accounts payable owed to Northwest by Mesaba, primarily for groundhandling, was $4.0 million as of December 31, 2006 and $4.2 million as of March31, 2006.  Mesaba paid Northwest $4.3million and $4.8 million for ground handling and other services for the three monthsended December 31, 2006 and 2005, respectively. Mesaba paid Northwest $15.5 million and $11.7 million for groundhandling and other services for the nine months ended December 31, 2006 and2005, respectively.

There are othersignificant related party transactions and balances between Northwest andMesaba disclosed throughout the Notes to Condensed Consolidated FinancialStatements.  Northwest’s failure to maketimely payment of amounts owed to Mesaba would have a material adverse effecton Mesaba’s operations, financial position and cash flows.

Big Sky

Big Sky operates as aregional air carrier based in Billings, Montana, providing scheduled passenger,freight, express package and charter services. As of December 31, 2006, Big Sky provided scheduled air service to 20communities in Montana, Colorado, Idaho, Illinois, Oregon, Washington andWyoming.  Big Sky operates dailyscheduled flights providing interline and online connecting services and localmarket services.  Big Sky also hascode-sharing agreements with Alaska Airlines, Horizon Air, US Air andNorthwest, where its services are marketed 

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jointly with those aircarriers for connecting flights.  In thefall of 2006, Big Sky also started a capacity purchase operation in Florida,beginning with one Beechcraft 1900D aircraft. Additionally, in December 2006, Big Sky began service from Springfield,Illinois to Chicago Midway Airport.

Big Sky participates inthe Essential Air Service (“EAS”) program with the Department of Transportation(“DOT”).  The EAS program subsidizes aircarriers to provide air service to designated rural communities throughout theUnited States that could not otherwise economically justify that service basedon their passenger traffic.  The DOT paysEAS subsidies for each departure in a covered market.  During the three months ended December 31,2006 and 2005, Big Sky recognized revenue from EAS subsidies of $1.9 millionand $2.0 million, respectively. During the nine months ended December 31, 2006and 2005, Big Sky recognized revenue from EAS subsidies of $6.2 million and$6.0 million, respectively.

*RecentDevelopments*

In December 2006, DeltaAirlines, Inc. (“Delta”) announced that it had selected Big Sky to operate upto eight Beechcraft 1900D aircraft for Delta between Boston and various citiesin the northeast United States.  Big Skyand Delta are currently negotiating the terms of their agreement, and Big Skyexpects to begin the Delta operations in April 2007.  However, there can be no assurance that BigSky and Delta will be able to reach a satisfactory agreement.

Big Sky has been awarded a two year contract from theDOT to provide EAS service between Massena, Ogdensburg and Watertown, New Yorkto Boston, Massachusetts.  This serviceis scheduled to begin in April 2007, and would be a part of Big Sky’s Deltaoperations.

*Use ofEstimates*

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities, as well as thereported amounts of revenues and expenses. The most significant uses of estimates relate to the allowance fordoubtful accounts, accrued maintenance expenses, aircraft property andequipment lives, inventory obsolescence reserves, valuation of intangibleassets, and accounting for income taxes. Ultimate results could differ from those estimates.

*Reclassification*

Certain amounts withinaccounts receivable previously reported in the accompanying condensedconsolidated balance sheet as of March 31, 2006 have been reclassified toconform to the fiscal 2007 presentation. The reclassification had no effect on previously reported total currentassets.

**2.****              Northwest and MesabaBankruptcy Filings**

*NorthwestBankruptcy Filing*

On September 12, 2005,Northwest failed to make a payment of approximately $18.7 million due to Mesabafor services provided by Mesaba to Northwest from August 15 to August 31,2005.  Subsequently, on September 14,2005, Northwest filed in the Southern District of New York for bankruptcyprotection under Chapter 11 of the Bankruptcy Code.  In the weeks following its bankruptcy filing,Northwest made additional payment adjustments such that Northwest did not payfor services provided by Mesaba to Northwest prior to the date of Northwest’sbankruptcy filing.

At the time of Northwest’sbankruptcy filing on September 14, 2005, Mesaba estimated that Northwest owedMesaba approximately $31.9 million under the ASA and related agreements, net ofamounts that Mesaba owed to Northwest under these agreements.  After analyzing the collectibility of theprepetition receivables due to Mesaba from Northwest, the Company concludedthat it was necessary to establish a reserve of $31.9 million for amounts thatMesaba may not ultimately collect from Northwest.  As of March 31, 2006, Mesaba updated itsreserve balance to $29.1 million, based on revised estimates of $36.4 millionowed by Northwest to Mesaba and $7.3 million owed by Mesaba to Northwest.  Mesaba maintained the above reserve as ofDecember 31, 2006.

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*MAIR’sand Mesaba’s Proofs of Claim Against Northwest*

OnAugust 16, 2006, MAIR and Mesaba each filed their respective proofs of claim inNorthwest’s bankruptcy proceedings.  MAIR filed a proof of claim forapproximately $31.7 million, plus other unliquidated amounts.  The amount of MAIR’s claim reflects thecapital contribution Northwest required MAIR to make to Mesaba prior toNorthwest’s bankruptcy and certain costs MAIR has incurred due to Northwest’smissed payments to Mesaba and Mesaba’s subsequent bankruptcy.  Mesaba filed a proof of claim for $252.8million.  Mesaba’s proof of claim is primarily based on breach of contractwith respect to the ASA.  Neither MAIRnor Mesaba has recorded any amount within its respective financial statementsrelated to the claims due to the significant uncertainty as to what amount, ifany, might ultimately be collected from Northwest.

As partof the agreement to transfer ownership of Mesaba to Northwest upon Mesaba’sexit from bankruptcy (see Note 3), Northwest has agreed to allow a $145 millionclaim by Mesaba in Northwest’s bankruptcy case. If Northwest’s bankruptcy court enters an order allowing the $145million claim, Mesaba will release all other claims against Northwest on thedate that the agreement between Mesaba and Northwest closes, which is expectedto be the date of confirmation of Mesaba’s plan of reorganization.

Inconnection with MAIR’s separate agreement with Northwest (see Note 3), MAIR hasagreed that, on the date of closing of its purchase of Northwest’s stock ofMAIR, MAIR and Northwest will execute a mutual release of claims against eachother, which will include MAIR’s proof of claim filed against Northwest.

*MesabaBankruptcy Filing*

Northwest’s missedpayments to Mesaba and Northwest’s decision to cease CRJ deliveries to Mesaba,to ground the entire fleet of Avro RJ85 regional jets (“Avros”), and to reduceSaab flying by 11 aircraft adversely affected Mesaba.  Specifically, Mesaba determined that due toNorthwest’s failure to make the September 12, 2005 payment, the deductionstaken by Northwest against subsequent payments and the reduced revenues Mesabawould receive because of the fleet and schedule changes dictated by Northwest,Mesaba could not sustain its operations outside of court protection underChapter 11 of the Bankruptcy Code.  As aresult, on the Petition Date, Mesaba filed for bankruptcy protection underChapter 11 of the Bankruptcy Code. Mesaba continues to operate its business as a debtor-in-possession underthe jurisdiction of the Bankruptcy Court and in accordance with the applicableprovisions of the Bankruptcy Code, the Federal Rules of Bankruptcy Procedureand applicable court orders.  In general,as a debtor-in-possession, Mesaba is authorized under Chapter 11 to continue tooperate as an ongoing business, but may not engage in transactions outside theordinary course of business without the prior approval of the Bankruptcy Court.

All of Mesaba’s vendorsare being paid for all goods furnished and services provided to Mesaba afterthe Petition Date in the ordinary course of business.  However, under Section 362 of the BankruptcyCode, actions to collect most of Mesaba’s prepetition liabilities areautomatically stayed, except for liabilities relating to certain qualifyingaircraft, aircraft engines and other aircraft-related equipment that are leasedor subject to a security interest or conditional sale contract.

As Northwest has receivedapproval from its bankruptcy court for rejection of aircraft head leases,Mesaba has made a similar request for approval from its Bankruptcy Court toreject the corresponding subleases. Northwest negotiated agreements with its head lessors to provide for theorderly return to the head lessors of all of Mesaba’s Avro aircraft by December31, 2006.  With the Bankruptcy Court’sapproval, Mesaba executed similar agreements with Northwest to allow for thosesame Avro aircraft to be returned to Northwest. As a result, Mesaba was operating a fleet of 49 Saab aircraft and oneCRJ aircraft as of December 31, 2006, all of which are subleased fromNorthwest.

Under Section 365 of theBankruptcy Code, Mesaba may assume, assume and assign, or reject certainexecutory contracts and unexpired leases, including leases of real property,subject to the approval of the Bankruptcy Court and certain otherconditions.  Mesaba’s original Section365 deadline related to real estate leases was December 12, 2005, which hassince been extended to the earlier of the effective date of Mesaba’s plan ofreorganization or April 13, 2007.  Ingeneral, if Mesaba rejects an executory contract or unexpired lease, it istreated as a prepetition breach of the lease or contract in question and,subject to certain exceptions, relieves Mesaba of performing any futureobligations.  However, such a rejectionentitles the lessor or contract counterparty to a prepetition general unsecuredclaim for damages caused by such deemed breach and, accordingly, thecounterparty may file a claim against 

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Mesaba for suchdamages.  As a result, liabilities subjectto compromise of $81.1 million reported in Mesaba’s condensed balance sheet asof December 31, 2006 (see Note 13) are likely to change in the future as aresult of damage claims created by Mesaba’s rejection of various executorycontracts and unexpired leases. Generally, if Mesaba assumes an executory contract or unexpired lease,Mesaba is required to cure existing defaults under such contract or lease as acondition to such assumption.

The bar date fornon-governmental entities to file proofs of claim against Mesaba was February28, 2006 (the “Bar Date”).  Proofs ofclaim aggregating $237.8 million were filed as of December 31, 2006.  Mesaba’s management and bankruptcy counselhave reviewed and assessed these proofs of claim to eliminate duplicativeclaims and claims without merit, as well as to adjust the amounts of certainproofs of claim based on management’s estimate of the likelihood that the claimwill be allowed by the Bankruptcy Court. During the quarter ended December 31, 2006, Mesaba reached newcollective bargaining agreements with all of its unions.  As part of the agreements, the unions wereallowed claims totaling $22.7 million based on the present value of the wagesand benefits concessions contained within the unions’ agreements.  As of December 31, 2006, Mesaba estimated thevalue of the allowable claims at $81.1 million.  See Note 13 for furtherdiscussion of Mesaba’s liabilities subject to compromise.

Pursuant to Mesaba’srequest for debtor-in-possession financing, Mesaba received a commitment letterfrom Marathon Structured Finance Fund, L.P. (“Marathon”) to providedebtor-in-possession financing.  OnSeptember 20, 2006, the Bankruptcy Court entered an order authorizing thedebtor-in-possession financing with Marathon. Mesaba has not drawn on the debtor-in-possession financing, and Mesabadoes not expect to need such financing prior to its exit from bankruptcy.  However, as disclosed in Mesaba’s plan ofreorganization, Mesaba will be required to pay a termination fee of $0.4 millionto Marathon to terminate the financing agreement.

To successfully emergefrom Chapter 11, the Bankruptcy Court must confirm Mesaba’s plan ofreorganization filed on January 22, 2007. There can be no assurance that the Bankruptcy Court will confirm Mesaba’splan of reorganization or that it will be implemented successfully.

**3.****              Subsequent Events**

*Northwest Agreements*

On January 22, 2007, MAIRannounced that both it and Mesaba had reached definitive agreements withNorthwest.  First, Mesaba executed aStock Purchase and Reorganization Agreement (the “SPRA”) with Northwest, underwhich Mesaba will exit bankruptcy as a wholly-owned operating subsidiary ofNorthwest.  Under the SPRA, Northwestwill allow a claim of $145 million by Mesaba in Northwest’s bankruptcycase.  On January 30, 2007, theBankruptcy Court approved a forward contract between Mesaba and Goldman SachsCredit Partners L.P., (“Goldman”) under which Goldman agreed to payapproximately $125 million for the $145 million claim.  This sale will become final when Northwest’sbankruptcy court enters an order allowing the $145 million claim and Mesaba’sbankruptcy court confirms Mesaba’s plan of reorganization.  Mesaba currently estimates that theimplementation of its plan of reorganization will result in approximately $90to $100 million of allowed claims against its bankruptcy estate.  If Mesaba’s estimate is correct, MAIR expectsthat after all distributions are made in accordance with Mesaba’s plan ofreorganization, it could receive approximately $30 to $50 million, includingits proof of claim and its equity position in Mesaba’s bankruptcy estate. TheSPRA also provides that Mesaba and Northwest will execute a mutual release ofclaims against each other.

Mesaba filed its plan ofreorganization with its bankruptcy court on January 22, 2007 to implement theterms of the SPRA.  Under the plan ofreorganization, Mesaba will release all claims it may have against MAIR,including MAIR’s litigation with Mesaba’s Creditors’ Committee.  Mesaba’s plan of reorganization provides thatMesaba’s current equity will be cancelled, and new equity will be issued toNorthwest.  Mesaba expects that its planof reorganization will be confirmed by the end of May 2007, at which timeNorthwest will own Mesaba.  The confirmationof the plan of reorganization is contingent upon both Northwest’s and Mesaba’sbankruptcy courts approving the SPRA. Each of MAIR, Mesaba and the creditors’ committee supports the SPRA andMesaba’s plan of reorganization. The Company expects that if Northwest’sbankruptcy court approves the SPRA and allows the $145 million claim by Mesaba,Mesaba’s Bankruptcy Court will confirm the plan of reorganization.

Separately, also onJanuary 22, 2007, MAIR and Northwest entered into a Stock Purchase Agreement (the“SPA”) under which MAIR will purchase from Northwest all of the MAIR commonstock that Northwest currently owns, 

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consisting ofapproximately 5.7 million shares, for an aggregate purchase price of $6.25 pershare, or approximately $35 million. MAIR will pay approximately $24 million of the aggregate purchase price,or $4.25 per share, upon the initial closing of the transaction, which isexpected to occur prior to April 15, 2007. MAIR will pay the remaining purchase price, approximately $11 million or$2.00 per share, on the earlier of the date upon which MAIR receives at least$25 million in equity distributions from Mesaba’s bankruptcy estate or ninemonths from the execution of the SPA. Certain defined “acceleration events,” such as a merger or asset saleinvolving MAIR, the liquidation of MAIR or the acquisition by another party of40% or more of MAIR’s stock, would obligate MAIR to pay the remaining purchaseprice earlier.  Northwest’s warrant topurchase 4.1 million shares of MAIR’s stock will also terminate upon closing ofthe SPA.

The SPA also addressedMAIR’s and Northwest’s obligations in connection with Mesaba’s bankruptcy.  First, Northwest agreed to assign to MAIR, atthe closing of the SPRA, Northwest’s $7.3 million claim in Mesaba’s bankruptcy.  The SPRA requires Mesaba to allow the $7.3million claim by Northwest, and Mesaba’s plan of reorganization includes aprovision allowing such claim. Additionally, Northwest will allow Mesaba, upon closing of the SPRA, touse up to $4.5 million to satisfy certain contracts to be assumed by Mesaba inits bankruptcy proceedings, thereby reducing the claim pool in Mesaba’sbankruptcy estate.  Northwest and MAIRwill execute a mutual release of all claims against each other, including MAIR’sbankruptcy claim against NWA.  Finally,MAIR agreed to provide its consent to allow Mesaba to sign the SPRA and to fileits plan of reorganization.  The closingof the SPA is not contingent upon the closing of the SPRA.

Both agreements must beapproved by the bankruptcy courts overseeing, separately, the Northwest andMesaba bankruptcy proceedings.

*Tax Settlement*

On January 24, 2007, MAIRand the Internal Revenue Service (“IRS”) reached a settlement regarding Mesaba’saccounting for per diem allowances during fiscal years 2001 through 2004.  Under the settlement agreement MAIR agreed topay the IRS $1.7 million in taxes and interest for reclassification of per diemamounts.  The settlement resulted in anadditional $0.2 million of tax expense at Mesaba in the third quarter of fiscal2007.  The Company had previouslyrecorded a reserve for the remainder of the $1.7 million.

**4.****              Intangible Assets**

The Company purchased BigSky in December 2002.  The excess of theBig Sky purchase price over the fair market value of the net assets acquiredwas allocated to certain identifiable intangible assets, including Big Sky’spilot labor contract and its air carrier certificate, and to goodwill.  Goodwill and the intangible assets areevaluated for impairment annually, at a minimum, or on an interim basis ifevents or circumstances indicate a possible inability to realize the carryingamounts.  Based on the results of aninterim test performed at September 30, 2005, the Company determined that allof its goodwill was impaired and recorded an impairment charge of $2.5 millionin the second quarter of fiscal 2006.

Intangible assetsand related accumulated amortization were as follows, in thousands:

 
| ** **                           | ** ** | **December 31, 2006** | ** ** | **March 31, 2006** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | ** **                      | ** ** | **Accumulated**              | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Gross**                       | ** ** | **Amortization**             | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived  intangible assets: |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| Air carrier certificate              |       | $                               | 925        |                         |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Amortizable  intangible asset:       |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| Pilot labor contract                 |       | 2,840                           |       | (1,657                       | )          | 1,183 |   | 2,840 |   | (1,352 | ) | 1,488 |   |
|                                 |       | $                               | 3,765      |                         | ($1,657    | ) | $ | 2,108 |   | $ | 3,765 |   | ($1,352 | ) | $ | 2,413 |   |

 

The amortizableintangible asset is being amortized over its estimated period of benefit.  Based on the current amount of intangibleassets subject to amortization, estimated amortization expense for each of thesucceeding four fiscal years will be $0.4 million per year.  During the fourth quarter of fiscal 2006, theCompany completed its annual impairment test of intangible assets anddetermined that no additional impairment charge was necessary.

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**5.****              Investments**

Investments consistprincipally of government, agency, certificates of deposit, corporate andtaxable municipal securities and are classified as available-for-sale.  Fair value of investments is determined basedon quoted market prices.  The Companyclassifies investments with an original maturity of more than 90 days thatmature within one year as short-term and investments with an original maturitygreater than one year as long-term.

As of December 31, 2006and March 31, 2006, cash, cash equivalents, short-term and long-terminvestments totaled $97.2 million (excluding $13.1 million in restricted cashfor the letter of credit supporting MAIR’s guaranty of Mesaba’s obligations forthe hangar at the Cincinnati/Northern Kentucky International Airport) and$110.7 million, respectively.

Amortized cost,gross unrealized gains and losses and fair value of short- and long-terminvestments classified as securities available for sale were as follows, inthousands:

|                          | ** ** | **December 31, 2006** | ** ** | **March 31, 2006** | ** ** |
|--------------------------|------------|---------------------------------|------------|------------------------------|------------|
| Amortized cost           |       | $                               | 54,658     |                         | $          | 63,761 |   |
| Gross unrealized  gains  |       | 34                              |       | 4                            |       |
| Gross unrealized  losses |       | (49                             | )          | (164                         | )          |
| Fair value               |       | $                               | 54,643     |                         | $          | 63,601 |   |

 

For the three and ninemonths ended December 31, 2006 and 2005, the Company’s gross realized gains andlosses were insignificant.

At December 31, 2006 andMarch 31, 2006, Mesaba’s amortized cost and fair value of short- and long-terminvestments classified as securities available for sale was $9.1 million and$10.0 million, respectively, of which $4.8 million and $4.5 million,respectively, was pledged as collateral for letters of credit.  This amount is restricted and has beenclassified within “Long-term investments” in Mesaba’s condensed balancesheets.  For the three and nine months endedDecember 31, 2006 and 2005, Mesaba’s gross unrealized gains and losses wereinsignificant.

**6.****              Nonoperating Income**

In the firstquarter of fiscal 2006, the Company recognized $1.8 million as nonoperatingincome as a result of a favorable arbitration settlement with a formerinvestment advisor.

**7.****              Income Taxes**

*Consolidated*

SFAS No. 109, *Accounting for Income Taxes*, requires the Company toconsider all available evidence, both positive and negative, to determinewhether, based on the weight of that evidence, a valuation allowance for itsdeferred tax assets is needed.  Futurerealization of the deferred tax assets for existing deductible temporarydifference or carryforward ultimately depends on the existence of sufficienttaxable income of the appropriate character within the carryback orcarryforward periods available under the tax law.

The Company has performedsuch an analysis, and a full valuation allowance was provided at the end offiscal 2006.  The Company continues torecord a full valuation allowance against its deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.  Therefore, the Company’s net loss for thethree and nine months ended December 31, 2006 was not reduced by any taxbenefit.  The Company recorded a taxprovision of $0.4 million for the nine months ended December 31, 2006 as aresult of finalizing the Company’s fiscal 2006 tax return.   The Company will continue to evaluate therealizability of the deferred tax assets on a quarterly basis.

*Mesaba*

Mesaba performed ananalysis of the recoverability of its deferred tax assets in accordance withSFAS No. 109, and a full valuation allowance was provided at the end of fiscal2006.  Mesaba continues to record a valuationallowance against its deferred tax assets due to the uncertainty regarding theultimate realization of those assets. Mesaba’s net 

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loss for the three monthsended December 31, 2006 was not reduced by any tax benefit.   During the nine months ended December 31,2006, Mesaba recorded a tax provision of $0.4 million for federal and stateitems.  Mesaba will continue to evaluatethe realizability of the deferred tax assets on a quarterly basis.

In the event thatMesaba experiences a change in ownership, as defined by Internal Revenue CodeSection 382, upon emergence from bankruptcy the annual usage of the remainingtax attributes, primarily net operating losses that were generated prior to thechange in ownership, could be substantially limited. The Company expects thislimitation to apply once Northwest owns Mesaba. The amount of the limitation, if any, will be determined at the time ofMesaba’s emergence from bankruptcy (see Note 3).

**8.****              Stock-BasedCompensation**

Effective April 1, 2006,the Company adopted the fair value recognition provisions of SFAS No. 123R, *Share-Based Payment,*(“SFAS 123R”), using the modifiedprospective transition method. Under that transition method, compensationexpense that the Company recognizes beginning on that date will include expenseassociated with the fair value of all awards granted on and after April 1,2006, and expense for the unvested portion of previously granted awardsoutstanding on April 1, 2006. Results for prior periods have not been restated.

Under SFAS 123R,forfeitures are estimated at the time of valuation and reduce expense ratablyover the vesting period.  This estimateis adjusted periodically based on the extent to which actual forfeituresdiffer, or are expected to differ, from the previous estimate.  Under SFAS 123 and APB 25, the Company electedto account for forfeitures when awards are actually forfeited, at which timeall previous pro forma expense will be reversed to reduce pro forma expense forthat period.

*Stock Option Plans*

The Company has approvedstock option plans for key employees, directors, consultants and advisors tothe Company.  Options have been granted and are presently outstandingunder the Company’s 1994 Stock Option Plan, 1996 Director Stock Option Plan and2000 Stock Incentive Plan.  The 2000 Stock Incentive Plan has a provisionthat automatically increases the authorized shares available for grant onSeptember 1 of each year by the lesser of 300,000 or 1% of the then outstandingcommon shares.  Under the plans, the compensation committee of the boardof directors grants the options and determines the vesting and exercise periodsat the time of the award.  The purchase price of the stock fornon-qualified and incentive stock options is determined at the time of theaward and is equal to the fair market value at the time of the award.

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions: risk-free interest rate, stock price volatility and expected life.  The Company establishes the risk-freeinterest rate using the U.S. Treasury yield curve as of the grant date.  The estimated expected term is consistentwith the simplified method identified in SEC Staff Accounting Bulletin (“SAB”)No. 107*, Share-Based Payment*, for share-basedawards granted during the nine months ended December 31, 2006.  Thesimplified method calculates the expected term as the average of the vestingand contractual terms of the award.  Theexpected volatility assumption is set based primarily on historical volatility.  For options granted, the Company amortizesthe fair value on a straight-line basis over the vesting period of the options.

For the three monthsended December 31, 2006, SFAS 123R’s fair value method has resulted inadditional expense in the amount of $0.1 million related to stock options.  For the nine months ended December 31, 2006,the adoption of SFAS 123R’s fair value method resulted in additional expense inthe amount of $0.3 million related to stock options.  These amounts are included in the “Wages andbenefits” caption in the accompanying condensed consolidated statements ofoperations for the three and nine months ended December 31, 2006.  SFAS 123R also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required prior toSFAS 123R.  As the Company currently hasno excess tax benefits related to SFAS 123R, its adoption has not affected theCompany’s condensed consolidated statement of cash flows. The impact ofadopting SFAS 123R on future results will depend on, among other things, levelsof stock options granted in the future, actual forfeiture rates and the timingof option exercises.

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A summary of stockoption activity since the Company’s most recent fiscal year end is as follows:
| ** **                               | ** ** | **Stock Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                               | ** ** | ** **             | ** ** | ** **                                 | ** ** | ** **                                          | ** ** | **(In thousands)**                  | ** ** |
| Outstanding at March  31, 2006           |       | 1,559,176              |       | $                                          | 6.87       |                                                |       |                                |       |   |
| Granted                                  |       | 45,000                 |       | 5.62                                       |       |                                                |       |                                |       |
| Exercised                                |       | —                 |       | —                                     |       |                                                |       |                                |       |
| Forfeited                                |       | (22,500                | )          | 7.66                                       |       |                                                |       |                                |       |
| Outstanding at December  31, 2006        |       | 1,581,676              |       | 6.82                                       |       | 4.37                                                |       | $                                   | 1,166      |   |
| Options exercisable at December 31, 2006 |       | 1,431,676              |       | 6.75                                       |       | 3.97                                                |       | $                                   | 1,096      |   |
|                                          |            |                        |            |                                            |            |                                                     |            |                                     |            |  |  |

 

Theaggregate intrinsic value of options outstanding at December 31, 2006 iscalculated as the difference between the exercise price of the underlyingoption and the market price of the common stock.

*MesabaSARs*

During fiscal 2004, Mesaba approved a stockappreciation rights (“SAR”) plan for key employees and directors.  The exercise price of each SAR is equal tothe fair market value of the Company’s common stock on the date of the award.Cash is paid based on the difference between the fair market value at the dateof grant and the date the SAR is exercised. The SARs vest over four years and have a ten-year term.

For the three and ninemonths ended December 31, 2006, SFAS 123R’s fair value method has resulted inan expense of $0.4 million related to the SARs. These amounts have been included in the “Wages and benefits” caption inMesaba’s condensed statements of operations for the three and nine months endedDecember 31, 2006.  The impact ofadopting SFAS 123R on future results will depend on, among other things, levelsof SARs granted in the future, actual forfeiture rates and the timing of SARexercises.

Upon adoption on April 1,2006, in accordance with SFAS 123R, Mesaba also recorded $0.5 million for thecumulative effect of a change in accounting principle during the first quarterof fiscal 2007 as a result of valuing SARs under the fair value method.

A summary of Mesaba’s SARactivity since March 31, 2006 is as follows:
| ** **                             | ** ** | **Stock  Appreciation  Rights** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | ** **                      | ** ** | ** **                                 | ** ** | ** **                                          | ** ** | **(In thousands)**                  | ** ** |
| Outstanding at  March 31, 2006         |       | 680,000                         |       | $                                          | 9.23       |                                                |       |                                |       |   |
| Granted                                |       | —                          |       | —                                     |       |                                                |       |                                |       |
| Exercised                              |       | —                          |       | —                                     |       |                                                |       |                                |       |
| Forfeited                              |       | (125,000                        | )          | 9.34                                       |       |                                                |       |                                |       |
| Outstanding at  December 31, 2006      |       | 555,000                         |       | 9.21                                       |       | 7.26                                                |       | $                                   | —     |   |
| SARs exercisable at  December 31, 2006 |       | 380,610                         |       | 9.25                                       |       | 7.25                                                |       | $                                   | —     |   |
|                                        |            |                                 |            |                                            |            |                                                     |            |                                     |            |  |  |

 

Theaggregate intrinsic value of SARs outstanding at December 31, 2006 waszero.  The aggregate intrinsic value iscalculated as the difference between the exercise price of the underlying SARsand the market price of the common stock.

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Mesaba used thefollowing assumptions to estimate the fair value of the SARs:
| ** **               | ** ** | **December 31, 2006** | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|--------------------------|------------|---------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| Risk-free  interest rate |       | 4.7                             | %          | 4.7                              | %          | 5.1                         | %          |
| Expected  volatility     |       | 43.7                            | %          | 36.6                             | %          | 46.4                        | %          |
| Expected term  (years)   |       | 8                               |       | 8                                |       | 8                           |       |
| Expected dividend yield  |       | 0.0                             | %          | 0.0                              | %          | 0.0                         | %          |

 

Mesabaexpects to terminate its SAR plan when it exits from bankruptcy.  MAIR has no obligation to fund payments thatmay be due to SAR holders.

*Unrecognized Compensation*

As ofDecember 31, 2006, the Company had $0.4 million of total unrecognizedcompensation cost related to non-vested stock option compensation arrangementsgranted under all equity compensation plans. Total unrecognized compensation will be adjusted for future changes inestimated forfeitures.  The Companyexpects to recognize the cost over a weighted average period of two years.

As ofDecember 31, 2006, Mesaba had $0.6 million of total unrecognized compensationcost related to non-vested SARs compensation arrangements granted under the SARplans.  Total unrecognized compensationwill be adjusted for future changes in estimated forfeitures.

*Pro Forma Results*

Prior to April 1, 2006, the Company accounted forshare-based payments using the intrinsic value method prescribed by APB 25 andSFAS 123. Under APB 25, if the exercise price of the Company’s employee stockoptions equaled the market price of the underlying stock on the date of thegrant, no compensation expense was recognized. Because the Company’s stockoptions were granted with exercise prices at the market price of the underlyingstock on the date of grant, no compensation expense had been recognized underAPB 25. The following table illustrates the effect on net income and earningsper share assuming the compensation costs for the Company’s stock option planhad been recorded in the three and nine months ended December 31, 2005 based onthe fair value method under SFAS 123R, in thousands:
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                              | ** ** | **December 31, 2005**  | ** ** | **December 31, 2005** | ** ** |
| Net income as  reported                                                                                                                 |       | $                                | (4,458     | )                               | $          | (28,761 | ) |
|                                                                                                                                    |       |                             |       |                            |       |
| Add: Stock-based  employee compensation expense (reduction) included in reported net income,  net of related tax effects                |       | —                           |       | (957                            | )          |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (123                             | )          | (473                            | )          |
|                                                                                                                                    |       | $                                | (4,581     | )                               | $          | (30,191 | ) |
| Loss per share -  basic                                                                                                                 |       |                             |       |                            |       |
| As reported                                                                                                                             |       | $                                | (0.22      | )                               | $          | (1.40 | ) |
| Pro forma                                                                                                                               |       | $                                | (0.22      | )                               | $          | (1.47 | ) |
|                                                                                                                                    |       |                             |       |                            |       |
| Loss per share -  diluted                                                                                                               |       |                             |       |                            |       |
| As reported                                                                                                                             |       | $                                | (0.22      | )                               | $          | (1.40 | ) |
| Pro forma                                                                                                                               |       | $                                | (0.22      | )                               | $          | (1.47 | ) |

 

**9.****              Earnings Per Share**

Basic earnings (loss) percommon share is computed by dividing net income (loss) by the weighted averagenumber of shares of common stock outstanding during the period.  Diluted earnings (loss) per share is computedby dividing net income (loss) by the sum of the weighted average number ofshares of common stock outstanding plus all additional common stock that wouldhave been outstanding if potentially dilutive common shares related to stock 

15

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options and warrants hadbeen issued.  Stock options and warrantswith an exercise price exceeding the fair market value of the Company’s commonstock are considered antidilutive and are excluded from the calculation.  Incremental shares related to dilutivesecurities have an anti-dilutive impact on earnings per share when a net lossis reported and, therefore, are not included in the calculation.

The followingtable reconciles the number of shares utilized in the condensed consolidatedearnings (loss) per share calculations for the periods ended December 31, inthousands:
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **December 31, 2006**  | ** ** | **December 31, 2006** | ** ** |
| ** **                                                                                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                                                                                  |       | $                                | (1,131     | )                               | $          | (4,458 | ) | $ | (6,161 | ) | $ | (28,761 | ) |
| For earnings per  share - basic:                                                          |       |                             |       |                            |       |   |   |   |   |
| Weighted average number of issued shares outstanding                                      |       | 20,592                           |       | 20,592                          |       | 20,592 |   | 20,581 |   |
| Effect of  dilutive securities:                                                           |       |                             |       |                            |       |   |   |   |   |
| Computed shares outstanding under stock option plans  utilizing the treasury stock method |       | —                           |       | —                          |       | — |   | — |   |
| Computed shares outstanding under warrants issued utilizing  the treasury stock method    |       | —                           |       | —                          |       | — |   | — |   |
| For earnings per  share - diluted:                                                        |       |                             |       |                            |       |   |   |   |   |
| Weighted average common and potentially dilutive common  shares outstanding               |       | 20,592                           |       | 20,592                          |       | 20,592 |   | 20,581 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Loss per share -  basic                                                                   |       | $                                | (0.05      | )                               | $          | (0.22 | ) | $ | (0.30 | ) | $ | (1.40 | ) |
| Loss per share -  diluted                                                                 |       | $                                | (0.05      | )                               | $          | (0.22 | ) | $ | (0.30 | ) | $ | (1.40 | ) |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Antidilutive options  and warrants                                                        |       | 1,537                            |       | 5,680                           |       | 1,582 |   | 4,553 |   |

 

**10.****       Consolidated ComprehensiveLoss**

The followingtable presents the calculation of comprehensive loss.  The components of comprehensive loss for theperiods ended December 31 were as follows, in thousands:
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **December 31**             | ** ** | **December 31**            | ** ** |
| ** **                                                                                   | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                                                                                     |       | $                                | (1,131     | )                               | $          | (4,458 | ) | $ | (6,161 | ) | $ | (28,761 | ) |
| Unrealized gains  on investments classified as available for sale, net of tax in fiscal 2005 |       | 11                               |       | 117                             |       | 219 |   | 232 |   |
| Comprehensive loss                                                                           |       | $                                | (1,120     | )                               | $          | (4,341 | ) | $ | (5,942 | ) | $ | (28,529 | ) |

 

**11.****       Segment Information**

The Company follows theprovisions of SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*.  SFAS No. 131 establishes annual and interimreporting standards for an enterprise’s business segments and relateddisclosures about its products, services, geographic areas and majorcustomers.  The method for determiningwhat information to report is based upon the way management organizes the operatingsegments within the Company for making operating decisions and assessingfinancial performance.  Although Mesabahas been deconsolidated from the Company’s condensed consolidated financialstatements as of the Petition Date, the segment information presented belowcontinues to include Mesaba in accordance with SFAS No. 131 and relatedguidance for equity-method investees. Mesaba’s results of operations after the Petition Date are included inthe “Eliminations” column.

16

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Operating segmentinformation for Mesaba, Big Sky and MAIR were as follows, in thousands:
| ** **                                                                                        | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **MAIR** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|----------|------------|------------------|------------|------------------|------------|
| *Three  Months Ended December 31, 2006:*                                                          | * *   | * *   | * *   | * *         | * *   | * * | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                                                                                |       | $          | 60,489     |             | $          | 5,952    |       | $                | 58         |             | $          | (60,547 | ) | $ | 5,952 |   |
| Operating expenses                                                                                |       | 66,033     |       | 6,525            |       | 1,920    |       | (66,091          | )          | 8,387            |       |
| Depreciation and amortization                                                                     |       | 2,158      |       | 170              |       | 6        |       | (2,158           | )          | 176              |       |
| Interest expense                                                                                  |       | 86         |       | 117              |       | —   |       | (187             | )          | 16               |       |
| Reorganization items, net                                                                         |       | 25,491     |       | —           |       | —   |       | (25,491          | )          | —           |       |
| Income (loss) before income taxes and Mesaba  cumulative effect of change in accounting principle |       | (30,753    | )          | (692             | )          | (429     | )          | 30,753           |       | (1,121           | )          |
| Capital expenditures                                                                              |       | 366        |       | 33               |       | 10       |       | (366             | )          | 43               |       |
| At end of period:                                                                                 |       |       |       |             |       |     |       |             |       |             |       |
| Current assets                                                                                    |       | 62,257     |       | 3,987            |       | 87,767   |       | (67,131          | )          | 86,880           |       |
| Total assets                                                                                      |       | 89,028     |       | 7,706            |       | 132,355  |       | (109,234         | )          | 119,855          |       |
| Current liabilities                                                                               |       | 43,110     |       | 8,863            |       | 11,916   |       | (47,984          | )          | 15,905           |       |
| Total shareholders’ equity (deficit)                                                         |       | (36,897    | )          | (2,152           | )          | 120,439  |       | 21,565           |       | 102,955          |       |
| *Three  Months Ended December 31, 2005:*                                                          | * *   | * *   | * *   | * *         | * *   | * * | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                                                                                |       | $          | 102,708    |             | $          | 5,296    |       | $                | 134        |             | $          | (86,891 | ) | $ | 21,247 |   |
| Operating expenses                                                                                |       | 98,207     |       | 6,504            |       | 7,382    |       | (83,786          | )          | 28,307           |       |
| Depreciation and amortization                                                                     |       | 2,718      |       | 230              |       | 4        |       | (2,341           | )          | 611              |       |
| Interest expense                                                                                  |       | —     |       | 112              |       | —   |       | (94              | )          | 18               |       |
| Reorganization items, net                                                                         |       | 3,156      |       | —           |       | —   |       | (3,156           | )          | —           |       |
| Income (loss) before income taxes                                                                 |       | 1,635      |       | (1,320           | )          | (6,500   | )          | (208             | )          | (6,393           | )          |
| Capital expenditures                                                                              |       | 1,823      |       | 156              |       | —   |       | —           |       | 1,979            |       |
| At end of period:                                                                                 |       |       |       |             |       |     |       |             |       |             |       |
| Current assets                                                                                    |       | 104,970    |       | 4,332            |       | 105,229  |       | (102,787         | )          | 111,744          |       |
| Total assets                                                                                      |       | 151,956    |       | 9,833            |       | 181,257  |       | (166,561         | )          | 176,485          |       |
| Current liabilities                                                                               |       | 58,713     |       | 9,761            |       | 8,042    |       | (63,796          | )          | 12,720           |       |
| Total shareholders’ equity (deficit)                                                         |       | 48,531     |       | (811             | )          | 173,215  |       | (58,053          | )          | 162,882          |       |
| *Nine  Months Ended December 31, 2006:*                                                           | * *   | * *   | * *   | * *         | * *   | * * | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                                                                                |       | $          | 215,107    |             | $          | 18,178   |       | $                | 175        |             | $          | (215,282 | ) | $ | 18,178 |   |
| Operating expenses                                                                                |       | 228,317    |       | 20,233           |       | 7,769    |       | (228,492         | )          | 27,827           |       |
| Depreciation and amortization                                                                     |       | 7,141      |       | 519              |       | 16       |       | (7,141           | )          | 535              |       |
| Interest expense                                                                                  |       | 86         |       | 356              |       | —   |       | (392             | )          | 50               |       |
| Reorganization items, net                                                                         |       | 26,816     |       | —           |       | —   |       | (26,816          | )          | —           |       |
| Income (loss) before income taxes and Mesaba  cumulative effect of change in accounting principle |       | (38,970    | )          | (2,405           | )          | (3,405   | )          | 38,970           |       | (5,810           | )          |
| Capital expenditures                                                                              |       | 1,596      |       | 223              |       | 10       |       | (1,596           | )          | 233              |       |
| *Nine  Months Ended December 31, 2005:*                                                           | * *   | * *   | * *   | * *         | * *   | * * | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                                                                                |       | $          | 322,595    |             | $          | 14,998   |       | $                | 3,126      |             | $          | (89,883 | ) | $ | 250,836 |   |
| Operating expenses                                                                                |       | 356,505    |       | 20,619           |       | 8,694    |       | (86,778          | )          | 299,040          |       |
| Depreciation and amortization                                                                     |       | 9,572      |       | 676              |       | 13       |       | (2,341           | )          | 7,920            |       |
| Interest expense                                                                                  |       | —     |       | 265              |       | —   |       | (215             | )          | 50               |       |
| Reorganization items, net                                                                         |       | 3,156      |       | —           |       | —   |       | (3,156           | )          | —           |       |
| Income (loss) before income taxes                                                                 |       | (36,334    | )          | (5,808           | )          | 1,304    |       | (2,816           | )          | (43,654          | )          |
| Capital  expenditures                                                                             |       | 7,123      |       | 544              |       | 20       |       | (1,504           | )          | 6,183            |       |

 

**12.****       Commitments andContingencies**

*SaabLeasing Litigation*

In 2002, FairbrookLeasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“SaabLeasing”) filed a declaratory judgment action against Mesaba relating to 20Saab 340A (“340A”) aircraft leased by Mesaba.  In 2003, the District Courtdeclared that the term sheet relating to the leases for the 340A aircraft was abinding preliminary agreement requiring Mesaba to negotiate in good faithtoward the execution of long-term agreements for each of the 340Aaircraft.  Although Mesaba appealed this ruling, while the appeal waspending, Saab Leasing (relying on the District Court’s declaratory judgmentruling) filed a separate action in the District Court alleging approximately$35 million in damages for past due and future aircraft leaseobligations.  While the damages action was pending, the U.S. Court ofAppeals for the Eighth Circuit affirmed the District Court’s declaratoryjudgment ruling.  On July 6, 2006, theDistrict Court in the damages action granted Mesaba’s motion for partialsummary judgment, ruling that Saab Leasing is not eligible to receive damagesfor the majority of its claims against Mesaba. Because the potential damages for the remaining claim against Mesaba arenot significant, Mesaba has not established any accrual with 

17

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regard to this litigationwithin its condensed financial statements. In the event Saab Leasing appeals the District Court’s decisionfollowing Mesaba’s exit from bankruptcy, Mesaba’s bankruptcy estate will berequired to fund any litigation expenses and any amounts that may be due toSaab Leasing if the District Court’s ruling is reversed.  Any such payments by Mesaba’s bankruptcyestate would ultimately reduce the distribution MAIR is entitled to receivefrom the estate.

*Creditors’Committee Litigation*

Pursuant to theBankruptcy Code, Mesaba’s Creditors’ Committee initiated an investigation oftransactions between MAIR and Mesaba, including the payment of dividends andmanagement services fees from Mesaba to MAIR. In response to this investigation, and to end public speculationregarding the dividends and payments, MAIR filed a complaint with theBankruptcy Court requesting a declaratory judgment that the dividends and feespaid by Mesaba to MAIR were wholly proper and appropriate under law.  In its complaint, MAIR asserted facts todemonstrate that each payment and dividend MAIR received from Mesaba wasappropriate under applicable law, occurred in the ordinary course of Mesaba’sbusiness, that Mesaba was solvent at the time it made each payment anddividend, and that Mesaba remained solvent and able to pay its obligationsafter each payment or dividend to MAIR. On October 11, 2006, Mesaba’s Creditors’ Committee filed an answer andcounterclaim against MAIR, alleging that certain payments from Mesaba to MAIRwere fraudulent under Minnesota law and federal bankruptcy law.  The Creditors’ Committee’s counterclaimasserted approximately $16 million in damages. Additionally, the Creditors’ Committee challenged MAIR’s proof of claimfiled in Mesaba’s bankruptcy proceedings and requested that it be disallowed orsubordinated.  Mesaba’s plan ofreorganization provides that, upon the confirmation of the plan ofreorganization, Mesaba will release all claims it and its bankruptcy estate hasagainst MAIR, including this litigation. MAIR has not established any accrual with regard to this litigationbecause MAIR believes that if such litigation were to proceed, MAIR has validdefenses to the Creditors’ Committee’s claims.

*OtherLitigation Matters*

Mesaba and Big Sky arealso defendants in various lawsuits arising in the ordinary course of business.While the outcome of these lawsuits and proceedings cannot be predicted withcertainty, it is the opinion of Mesaba’s and Big Sky’s management, based oncurrent information and legal advice, that the ultimate disposition of thesesuits will not have a material adverse effect on the separate financialstatements of Mesaba or Big Sky or the consolidated financial statements of theCompany as a whole.  Additionally, anylawsuit filed against Mesaba prior to the Petition Date is subject to theautomatic stay.  If and when these casesproceed, the amount of any damages award to the plaintiffs would be deemedunsecured prepetition claims against Mesaba.

*Guaranty*

Mesaba currently leases ahangar facility at the Cincinnati/Northern Kentucky International Airport.  MAIR has unconditionally guaranteed full andprompt payment of the ground lease and the bonds associated with the initialfinancing of the facility.  In October2005, following its bankruptcy filing, Mesaba vacated the facility.  As of December 31, 2006, Mesaba had notrejected the leases for this facility in its bankruptcy proceedings.  In accordance with its guaranty, MAIR hasbeen making the required ground and facilities lease payments of $0.1 millionper month since November 2005. Additionally, on February 15, 2006, MAIR received notice that UMB Bank,N.A. (“UMB”), the trustee for the bondholders, declared MAIR’s liability forall sums to be immediately due and payable. On April 18, 2006, MAIR entered into an agreement with UMB under whichUMB agreed to forbear acceleration of MAIR’s guaranty obligations in exchangefor MAIR delivering a letter of credit in the amount of $13.1 million to securethe payment of the obligations owed by MAIR to UMB.

The letter of credit wasissued by First Interstate Bank of Billings and is currently fullycollateralized by MAIR’s cash account held at First Interstate Bank.  Under the agreement with UMB, MAIR isobligated to maintain the letter of credit until all obligations under thebonds are satisfied.  MAIR’s annual obligationswith respect to the bonds and the ground lease for the facility totalapproximately $1.2 million, and those obligations will continue through July2029 and will increase at scheduled intervals in accordance with the terms ofthe bond documents.  The UMB agreementand the letter of credit provide that the amount of the letter of credit willautomatically decrease each July in accordance with the redemption schedule forthe bonds.

UMB may draw on theletter of credit upon the occurrence of an event of default under its agreementwith MAIR, including if MAIR fails to make any payment when due to UMB, if MAIRfails to provide evidence that the letter of credit has been renewed annually(or if MAIR fails to renew the letter of credit), if UMB receives notice fromFirst 

18

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Interstate Bank of thebank’s intent not to renew the letter of credit, if the bonds become subject tomandatory redemption, if MAIR fails to comply with the terms of its agreementwith UMB or if MAIR commits any event of default under its guaranty of Mesaba’sbond obligations.  The cash supportingthe letter of credit was classified as “Restricted cash” on the Company’sconsolidated balance sheet at December 31, 2006.

Because Mesaba vacatedthe hangar in October 2005 and MAIR is the guarantor of the facility, MAIR hasbeen seeking other sublessors to lease the facility.  As of March 31, 2006, MAIR had a $4.8 millionaccrual related to this guaranty, which assumed that the facility will remainvacant through March 31, 2008, during which time MAIR would continue to makebond and lease payments, and that thereafter MAIR would be able to sublease thefacility at a 20% discount.  Mesaba’splan of reorganization contemplates Mesaba rejecting the lease associated withthe facility.  MAIR has requested thatthe bondholders and airport authority consent to MAIR entering into anidentical lease, thus allowing MAIR to continue seeking a sublessor.  If the airport authority and bondholders donot consent to a new lease, Mesaba’s rejection may result in a mandatoryredemption event under which the bondholders would likely draw on the letter ofcredit.  In such event, and in connectionwith its guaranty, MAIR may also be required to continue making ground leasepayments to the airport authority.  MAIRwill continue to negotiate with the airport regarding MAIR’s ability tocontinue seeking sublessees for the facility. In the event MAIR loses its rights to the facility, MAIR believes anyfuture payments due to the airport under the guaranty would be reduced by anyrent the airport receives for the facility. As of December 31, 2006, the balance of the accrual recorded by MAIR was$3.7 million.  MAIR continues to reassessthis reserve as material developments occur.

*OtherGuarantees*

Mesaba has letters ofcredit to guarantee certain obligations, principally for workers’ compensationpolicies, airport leases and other obligations, which totaled $4.6 million and$4.1 million as of December 31, 2006 and March 31, 2006, respectively.  There were no amounts drawn on these lettersof credit during fiscal 2007 or 2006.  Ascollateral for these letters of credit, Mesaba had $4.8 million and $4.5million in cash held in an investment account as of December 31, 2006 and March31, 2006, respectively.  This amount isrestricted and has been classified within “Long-term investments” in Mesaba’scondensed balance sheets.

In February 2005,Big Sky obtained a revolving line of credit in the principal amount of $0.3million from First Interstate Bank of Billings. In March 2006, the principal amount available under the line increasedto $0.4 million.  The line of creditrequires a variable interest rate based on the prime rate published in the *Wall Street Journal*. At December 31, 2006, the rate was 8.25%.  The line of credit is collateralized by BigSky’s inventory, accounts receivable and equipment and is scheduled to maturein March 2007.

*MAIRPledge for Big Sky*

In August 2006,MAIR entered into a pledge agreement with U.S. Bank, pursuant to which MAIRpledged $0.8 million in exchange for U.S. Bank reducing the amount of fundsthat it holds back from Big Sky when credit card payments are processed.  U.S. Bank processes payments for Big Skytickets made with various credit cards. In the past, and consistent with industry practice, U.S. Bank held backa specified portion of those credit card payments until the tickets had beenused.  MAIR agreed to pledge its cash inlieu of the required hold back, which subsequently freed up those funds for BigSky’s use.  Under the pledge agreement,MAIR is free to request a release of its collateral at any time.  Following such a request, U.S. Bank wouldagain begin holding back amounts from Big Sky, and MAIR’s collateral would bereturned 90 days after the held back amounts total the requisite level pursuantto U.S. Bank’s credit card processing policies. Because MAIR has the right to request a release of its collateral and toterminate the pledge agreement, the amount of cash pledged is not recorded asrestricted cash.

**13.****       Financial Information ofMesaba**

The followingcondensed financial statements of Mesaba have been prepared in conformity withSOP 90-7, which requires that the liabilities subject to compromise by theBankruptcy Court be segregated from liabilities not subject to compromise and thatall transactions directly associated with the reorganization beidentified.  Liabilities subject tocompromise include prepetition unsecured claims that may be settled at amountsthat differ from those recorded in Mesaba’s condensed financial statements. Thefinancial information is also prepared on a going concern basis, whichcontemplates the realization of assets and the liquidation of liabilities inthe ordinary course of business. However, as a result of the bankruptcy filing, such realization of assetsand liquidation of liabilities is subject to significant uncertainty.

19

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**MESABA AVIATION, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONDENSED BALANCE SHEETS**

**(in thousands)**

**(Unaudited)**
| ** **                                                   | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|--------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | **2006**             | ** ** | **2006**          | ** ** |
| ASSETS                                                       |       |                 |       |              |       |
|                                                         |       |                 |       |              |       |
| CURRENT ASSETS:                                              |       |                 |       |              |       |
| Cash and cash  equivalents                                   |       | $                    | 9,807      |              | $          | 20,718 |   |
| Short-term  investments                                      |       | 4,248                |       | 3,262             |       |
| Restricted cash                                              |       | 7,019                |       | 6,782             |       |
| Accounts  receivable, net of reserves of $29,794 and $29,755 |       | 21,670               |       | 29,181            |       |
| Income taxes  receivable                                     |       | 110                  |       | 3,288             |       |
| Inventories, net                                             |       | 5,490                |       | 9,001             |       |
| Prepaid expenses  and deposits                               |       | 6,385                |       | 5,998             |       |
| Property and  equipment held for sale (A)                    |       | 4,469                |       | —            |       |
| Intercompany  receivable from MAIR Holdings, Inc. (Note 1)   |       | 3,059                |       | 54                |       |
| Total current  assets                                        |       | 62,257               |       | 78,284            |       |
|                                                         |       |                 |       |              |       |
| PROPERTY AND EQUIPMENT:                                      |       |                 |       |              |       |
| Flight equipment                                             |       | 70,189               |       | 95,357            |       |
| Other property  and equipment                                |       | 41,831               |       | 41,373            |       |
| Less:  Accumulated depreciation and amortization             |       | (91,335              | )          | (104,198          | )          |
| Net property and  equipment                                  |       | 20,685               |       | 32,532            |       |
|                                                         |       |                 |       |              |       |
| NONCURRENT ASSETS:                                           |       |                 |       |              |       |
| Long-term  investments                                       |       | 4,836                |       | 6,761             |       |
| Other assets,  net                                           |       | 1,250                |       | 864               |       |
|                                                         |       | $                    | 89,028     |              | $          | 118,441 |   |
|                                                         |       |                 |       |              |       |
| LIABILITIES AND  SHAREHOLDER’S EQUITY (DEFICIT)         |       |                 |       |              |       |
|                                                         |       |                 |       |              |       |
| CURRENT LIABILITIES:                                         |       |                 |       |              |       |
| Accounts payable                                             |       | $                    | 6,788      |              | $          | 8,638 |   |
| Accrued  liabilities:                                        |       |                 |       |              |       |
| Payroll                                                      |       | 13,730               |       | 14,666            |       |
| Maintenance                                                  |       | 10,354               |       | 17,250            |       |
| Deferred income                                              |       | 1,655                |       | 2,962             |       |
| Other current  liabilities                                   |       | 10,583               |       | 9,468             |       |
| Total current  liabilities                                   |       | 43,110               |       | 52,984            |       |
|                                                         |       |                 |       |              |       |
| OTHER NONCURRENT  LIABILITIES                                |       | 1,724                |       | 2,547             |       |
| Total  liabilities not subject to compromise                 |       | 44,834               |       | 55,531            |       |
|                                                         |       |                 |       |              |       |
| LIABILITIES SUBJECT TO  COMPROMISE (B)                       |       | 81,091               |       | 59,973            |       |
| Total liabilities                                            |       | 125,925              |       | 115,504           |       |
|                                                         |       |                 |       |              |       |
| COMMITMENTS AND  CONTINGENCIES (Note 12)                     |       |                 |       |              |       |
|                                                         |       |                 |       |              |       |
| SHAREHOLDER’S EQUITY  (DEFICIT):                        |       |                 |       |              |       |
| Paid-in capital                                              |       | 48,255               |       | 48,255            |       |
| Accumulated  other comprehensive income (loss)               |       | 1                    |       | (13               | )          |
| Accumulated  deficit                                         |       | (85,153              | )          | (45,305           | )          |
| Total  shareholder’s equity (deficit)                   |       | (36,897              | )          | 2,937             |       |
|                                                         |       | $                    | 89,028     |              | $          | 118,441 |   |

 

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**MESABA AVIATION, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONDENSED STATEMENTS OFOPERATIONS**

**(in thousands)**

**(Unaudited)**
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **December 31**             | ** ** | **December 31**            | ** ** |
| ** **                                                                                 | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| OPERATING  REVENUES:                                                                       |       |                             |       |                            |       |   |   |   |   |
| Passenger                                                                                  |       | $                                | 53,376     |                            | $          | 93,612 |   | $ | 193,263 |   | $ | 295,697 |   |
| Freight and other                                                                          |       | 7,113                            |       | 9,096                           |       | 21,844 |   | 26,898 |   |
| Total operating revenues                                                                   |       | 60,489                           |       | 102,708                         |       | 215,107 |   | 322,595 |   |
|                                                                                       |       |                             |       |                            |       |   |   |   |   |
| OPERATING EXPENSES:                                                                        |       |                             |       |                            |       |   |   |   |   |
| Wages and benefits                                                                         |       | 27,900                           |       | 36,190                          |       | 92,377 |   | 111,745 |   |
| Aircraft maintenance                                                                       |       | 10,830                           |       | 19,841                          |       | 40,290 |   | 63,926 |   |
| Aircraft rents                                                                             |       | 10,554                           |       | 22,699                          |       | 41,933 |   | 73,330 |   |
| Landing fees                                                                               |       | 942                              |       | 2,301                           |       | 5,082 |   | 7,343 |   |
| Insurance and taxes                                                                        |       | 1,495                            |       | 1,579                           |       | 4,172 |   | 4,927 |   |
| Depreciation and amortization                                                              |       | 2,158                            |       | 2,718                           |       | 7,141 |   | 9,572 |   |
| Administrative and other                                                                   |       | 12,154                           |       | 14,879                          |       | 37,322 |   | 53,656 |   |
| Impairment and other charges                                                               |       | —                           |       | (2,000                          | )          | — |   | 32,006 |   |
| Total operating expenses                                                                   |       | 66,033                           |       | 98,207                          |       | 228,317 |   | 356,505 |   |
| Operating (loss) income                                                                    |       | (5,544                           | )          | 4,501                           |       | (13,210 | ) | (33,910 | ) |
|                                                                                       |       |                             |       |                            |       |   |   |   |   |
| NONOPERATING  (EXPENSE) INCOME:                                                            |       |                             |       |                            |       |   |   |   |   |
| Interest income and other                                                                  |       | 282                              |       | 290                             |       | 1,056 |   | 732 |   |
| Reorganization items, net (C)                                                              |       | (25,491                          | )          | (3,156                          | )          | (26,816 | ) | (3,156 | ) |
| Nonoperating expense, net                                                                  |       | (25,209                          | )          | (2,866                          | )          | (25,760 | ) | (2,424 | ) |
| (Loss) income before income taxes and cumulative  effect of change in accounting principle |       | (30,753                          | )          | 1,635                           |       | (38,970 | ) | (36,334 | ) |
|                                                                                       |       |                             |       |                            |       |   |   |   |   |
| (PROVISION)  BENEFIT FOR INCOME TAXES                                                      |       | (48                              | )          | (999                            | )          | (371 | ) | 11,190 |   |
| (LOSS) INCOME  BEFORE CUMULATIVE EFFECT OF                                                 |       |                             |       |                            |       |   |   |   |   |
| CHANGE IN ACCOUNTING PRINCIPLE                                                             |       | (30,801                          | )          | 636                             |       | (39,341 | ) | (25,144 | ) |
| CUMULATIVE  EFFECT OF CHANGE IN                                                            |       |                             |       |                            |       |   |   |   |   |
| ACCOUNTING PRINCIPLE (Note 8)                                                              |       | —                           |       | —                          |       | (507 | ) | — |   |
| NET (LOSS) INCOME                                                                          |       | $                                | (30,801    | )                               | $          | 636 |   | $ | (39,848 | ) | $ | (25,144 | ) |

 

21

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**MESABA AVIATION, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONDENSED STATEMENTS OF CASHFLOWS**

**(in thousands)**

**(Unaudited)**
| ** **                                                                                 | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **December 31**            | ** ** |
| ** **                                                                                 | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                     |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (39,848    | ) | $ | (25,144 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                              |       | 7,141                           |       | 9,572 |   |
| Amortization of deferred credits                                                           |       | (823                            | )          | (1,332 | ) |
| Deferred income taxes                                                                      |       | —                          |       | (11,150 | ) |
| Cumulative effect of change in accounting principle                                        |       | 507                             |       | — |   |
| Impairment and other charges                                                               |       | —                          |       | 32,006 |   |
| Changes in current operating items:                                                        |       |                            |       |   |   |
| Accounts receivable                                                                        |       | 7,459                           |       | (33,661 | ) |
| Income taxes and intercompany receivable from MAIR  Holdings, Inc. (Note 1)                |       | 173                             |       | — |   |
| Inventories                                                                                |       | 3,511                           |       | (309 | ) |
| Prepaid expenses and deposits                                                              |       | (387                            | )          | (1,434 | ) |
| Accounts payable and other                                                                 |       | 21,167                          |       | 30,291 |   |
| Net cash used in operating activities before  reorganization items                         |       | (1,100                          | )          | (1,161 | ) |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM  REORGANIZATION ACTIVITIES:                                                |       |                            |       |   |   |
| Reorganization items, net                                                                  |       | (26,816                         | )          | (3,156 | ) |
| Increase in damage claims                                                                  |       | 21,904                          |       | — |   |
| Impairment of property and equipment                                                       |       | 2,088                           |       | — |   |
| Reversal of accrued maintenance                                                            |       | (5,329                          | )          | — |   |
| Net cash used in reorganization activities                                                 |       | (8,153                          | )          | (3,156 | ) |
| Net cash used in operating activities                                                      |       | (9,253                          | )          | (4,317 | ) |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                     |       |                            |       |   |   |
| Purchases of investments                                                                   |       | (4,912                          | )          | (6,648 | ) |
| Sales of investments                                                                       |       | 5,874                           |       | 5,228 |   |
| Increase in restricted cash                                                                |       | (237                            | )          | (6,719 | ) |
| Purchases of property and equipment                                                        |       | (1,596                          | )          | (7,123 | ) |
| Net cash used in investing activities                                                      |       | (871                            | )          | (15,262 | ) |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                      |       |                            |       |   |   |
| Debt issuance costs                                                                        |       | (787                            | )          | — |   |
| Other equity transactions                                                                  |       | —                          |       | 22,193 |   |
| Net cash (used in) provided by financing activities                                        |       | (787                            | )          | 22,193 |   |
|                                                                                       |       |                            |       |   |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                      |       | (10,911                         | )          | 2,614 |   |
|                                                                                       |       |                            |       |   |   |
| CASH AND CASH  EQUIVALENTS:                                                                |       |                            |       |   |   |
| Beginning of period, excluding restricted cash and  cash equivalents                       |       | 20,718                          |       | 20,357 |   |
| End of period, excluding restricted cash and cash  equivalents                             |       | $                               | 9,807      |   | $ | 22,971 |   |
|                                                                                       |       |                            |       |   |   |
| SUPPLEMENTARY  CASH FLOW INFORMATION:                                                      |       |                            |       |   |   |
| Cash paid (refund received) during period for:                                             |       |                            |       |   |   |
| Interest                                                                                   |       | $                               | 8          |   | $ | — |   |
| Income taxes                                                                               |       | $                               | (265       | ) | $ | (339 | ) |

 

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**Mesaba Aviation, Inc.**

**(Debtor-in-Possession)**

**Notes toCondensed Financial Statements**

**(A)****       Property and Equipment Heldfor Sale**

As of December 31, 2006,Mesaba reclassified $4.5 million of surplus Avro rotables and repairables from “Flightequipment” to “Property and equipment held for sale.”  On January 30, 2007, the Bankruptcy Courtauthorized the sale by Mesaba of these Avro parts to City Jet Ltd.

**(B)****       Liabilities Subject toCompromise**

Liabilities subject tocompromise in Mesaba’s condensed balance sheets at December 31, 2006 and March31, 2006 refers to both secured and unsecured obligations that will beaccounted for under a plan of reorganization, including claims incurred priorto the Petition Date.  They represent theestimated amount expected to be allowed on known or potential claims to beresolved through the Chapter 11 bankruptcy process and remain subject to futureadjustments arising from negotiated settlements, actions of the BankruptcyCourt, rejection of executory contracts and unexpired leases, the determinationas to the value of any collateral securing claims, proofs of claim or otherevents.

Mesaba has endeavored tonotify all of its known or potential creditors whose claims are subject toMesaba’s Chapter 11 case.  Subject tocertain exceptions under the Bankruptcy Code, Mesaba’s Chapter 11 filingautomatically stayed the continuation of any judicial or administrativeproceedings or other actions against Mesaba or its property to recover, collector secure a claim arising prior to the Petition Date.  A proof of claim arising from the rejectionof an executory contract or an expired lease must be filed by the later of theBar Date or thirty days from the effective date of any authorized rejection.

Although Mesaba hasestimated the value of the claims that will be allowed by the Bankruptcy Courtat $81.1 million, the Bankruptcy Court will make the final determinationregarding what portion of the $237.8 million in total proofs of claim filedwill be deemed allowable claims.  Thedetermination of how those liabilities will ultimately be treated will not beknown until the Bankruptcy Court confirms Mesaba’s plan of reorganization thatwas filed on January 22, 2007 and the claims resolution process is complete,which may occur well after a confirmation of the plan of reorganization.  Mesaba expects that its plan ofreorganization will be confirmed in the first quarter of fiscal 2008.  In the interim, Mesaba will work with itscreditors’ committee and with MAIR to resolve as many proofs of claim as possibleprior to the confirmation date. Following confirmation of the plan of reorganization, the proceeds fromthe sale of Mesaba’s claim in Northwest’s bankruptcy will be placed in aliquidating trust and held for distribution to Mesaba’s creditors and MAIR.  A liquidating trustee will be appointed towork with the creditors’ committee and with MAIR to continue to resolve anyoutstanding proofs of claim.  Throughoutthe implementation of the plan of reorganization, Mesaba will appropriatelyadjust its liabilities subject to compromise. As a result, the amounts of liabilities subject to compromise are likelyto change.

Liabilitiessubject to compromise at December 31, 2006 and March 31, 2006 were as follows,in thousands:

|                                         | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|-----------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2006**             | ** ** | **2006**          | ** ** |
| Accounts payable  and other liabilities |       | $                    | 33,398     |              | $          | 34,936 |   |
| Damage claims                           |       | 42,940               |       | 20,066            |       |
| Secured claims                          |       | 2,520                |       | 2,520             |       |
| Priority tax  claims                    |       | 2,233                |       | 2,451             |       |
|                                    |       | $                    | 81,091     |              | $          | 59,973 |   |

 

**(C)****       Reorganization Items**

Reorganization itemsrecorded from the Petition Date through December 31, 2006 consisted oftransactions and events that were directly associated with the reorganizationof Mesaba.  The reorganization activityincluded aircraft

23

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impairment and otherrejection charges, legal and professional fees to support the restructuringprocess and the reversal of maintenance accruals.  The charge for damage claims results fromestimated claims as a result of Mesaba’s rejection or renegotiation of certainaircraft and other leases and obligations as part of the bankruptcy process.

Net reorganizationitems for the three and nine months ended December 31, 2006 were as follows, inthousands:
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **December 31, 2006**  | ** ** | **December 31, 2006** | ** ** |
| Additions to damage  claims            |       | $                                | 22,879     |                            | $          | 21,903 |   |
| Legal and  professional fees and other |       | 2,130                            |       | 8,154                           |       |
| Impairment of  property and equipment  |       | 492                              |       | 2,088                           |       |
| Reversal of  accrued maintenance       |       | (10                              | )          | (5,329                          | )          |
|                                   |       | $                                | 25,491     |                            | $          | 26,816 |   |

 

**14.****       New AccountingPronouncements**

In July 2006, the FASBissued FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes,* an interpretation of FASB Statement No. 109 (“FIN 48”),which clarifies the accounting for uncertainty in tax positions. FIN 48requires that the Company recognize in its financial statements, the impact ofa tax position, if that position is more likely than not of being sustained onaudit, based on the technical merits of the position. The accounting provisionsof FIN 48 will be effective for the Company beginning April 1, 2007. TheCompany is in the process of determining what effect, if any, the adoption ofFIN 48 will have on its financial statements.

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*(“SFASNo. 157”), to define fair value, establish a framework for measuring fair valuein accordance with generally accepted accounting principles, and expanddisclosures about fair value measurements. SFAS No. 157 will be effective for the Company beginning April 1, 2008.The Company is assessing the impact the adoption of SFAS No. 157 will have onits financial statements.

In September 2006, theFASB issued FASB Staff Position AUG AIR-1, *Accounting for PlannedMajor Maintenance Activities*(the “FSP”), that reduces the number ofacceptable methods of accounting for planned major maintenance activities.Under the FSP, Mesaba will be required to change its method of accounting forsome planned maintenance activities for certain aircraft types.  The FSP will be effective for the Companybeginning April 1, 2007 and requires retrospective application to all financialstatements presented unless doing so is impractical.  The Company is assessing the impact theadoption of the FSP will have on its financial position and results ofoperations.

In September 2006, theSEC issued SAB No. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*(“SAB No. 108”). SAB No. 108 provides guidanceon how prior year misstatements should be taken into consideration whenquantifying misstatements in current year financial statements for purposes ofdetermining whether the financial statements are materially misstated. SAB 108 is effective for annual financial statements covering the first fiscalyear ending after November 15, 2006, or with respect to the Company’s fiscalyear ending March 31, 2007. The implementation of SAB No. 108 did not have amaterial impact on the Company’s financial statements.

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

*General*

Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the accompanying condensed consolidated financialstatements.  The Company’s operations andfinancial results are subject to various risks and uncertainties associatedwith the airline industry.  See “RiskFactors” in Item 1A of Part II.

*Overview*

Mesaba 

Since Mesaba filed forbankruptcy on the Petition Date, it has been focused on restructuring its laborand non-labor expenses to calibrate its cost structure to a fleet of 49 Saabs,which Northwest has dictated via its own bankruptcy.  In November 2006, Mesaba’s union groupsratified new collective bargaining agreements that provided Mesaba withapproximately 15.8% in annual labor savings. Mesaba’s comprehensive restructuring plan reduces costs by $68 millionper year, secures Mesaba’s core business with Northwest for the 49 Saabaircraft and positions Mesaba for future growth opportunities.  Having completed the majority of its expenserestructuring, Mesaba filed its plan of reorganization on January 22, 2007,under which Mesaba intends to exit bankruptcy as a wholly-owned operatingsubsidiary of Northwest.  Theconfirmation of Mesaba’s plan of reorganization is contingent upon bothNorthwest’s and Mesaba’s bankruptcy courts approving the SPRA.  Each of MAIR, Mesaba and the creditors’committee supports the plan of reorganization. The Company expects that if Northwest’s bankruptcy court approves theSPRA and allows Mesaba’s $145 million claim against Northwest, Mesaba’sbankruptcy court will approve the SPRA and Mesaba’s plan of reorganization.

Big Sky

Big Sky has focused on growing its Beechcraft 1900Doperation by bidding on additional EAS flying and seeking other opportunitiesto expand its fleet.  Specifically, ithas expanded its Boise operation, serving Billings, Bozeman and Missoula,Montana, Pocatello, Idaho, Walla Walla, Washington and Jackson Hole,Wyoming.   In the fall of 2006, Big Skyalso started a capacity purchase operation in Florida, beginning with oneBeechcraft 1900D aircraft.  Additionally,in December 2006, Big Sky began service from Springfield, Illinois to ChicagoMidway Airport.  Finally, in December2006, Delta announced that it had selected Big Sky to operate up to eightBeechcraft 1900D aircraft between Boston and certain northeastern United Statescities.  Big Sky expects to begin itsDelta operations in April 2007.  Big Skyhas been awarded a two year contract from the DOT to provide EAS servicebetween Massena, Ogdensburg and Watertown, New York to Boston,Massachusetts.  This service is scheduledto begin in April 2007, and would be a part of Big Sky’s Delta operations.  Although higher fuel expenses have impactedits profitability, Big Sky will continue throughout the remainder of fiscal2007 to explore ways to expand its operation to become profitable in fiscal2008.

MAIR

For the remainder offiscal 2007 and into fiscal 2008, MAIR will play an active role in Mesaba’splan of reorganization to maximize the potential value to MAIR as Mesaba’sequity holder.  MAIR will also continueto explore additional growth opportunities in Big Sky and will consideracquisitions to diversify both within and outside the airline industry.

**RESULTS OF OPERATIONS**

**ThreeMonths Ended December 31, 2006 and 2005**

The Companyreported a consolidated net loss of $1.1 million, or $0.05 per basic anddiluted share, for the quarter ended December 31, 2006, compared to a net lossof $4.5 million, or $0.22 per basic and diluted share, for the quarter endedDecember 31, 2005.  To allow for a moredirect and meaningful comparison, Mesaba’s results of operations have beenanalyzed for the three months ended December 31, 2006 and 2005 excluding the deconsolidationof Mesaba from the Company’s consolidated financial statements as of thePetition Date.  Mesaba’s condensedfinancial statements on a stand-alone basis are presented in Note 13 of theaccompanying Notes to Condensed Consolidated Financial Statements.

25

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*Mesaba*

Mesaba’soperating statistics for the three months ended December 31 were as follows:
| ** **                      | ** ** | **2006** | ** ** | **2005**  | ** ** | **% Change** | ** ** |
|---------------------------------|------------|----------|------------|-----------|------------|-------------------|------------|
| Passengers                      |       | 663,376  |       | 1,369,532 |       | (51.6             | %)         |
| Available seat  miles (000s)    |       | 257,328  |       | 670,102   |       | (61.6             | %)         |
| Revenue  passenger miles (000s) |       | 161,748  |       | 459,739   |       | (64.8             | %)         |
| Load factor                     |       | 62.9     | %          | 68.6      | %          | (8.3              | %)         |
| Block hours  flown              |       | 42,443   |       | 70,849    |       | (40.1             | %)         |
| Departures                      |       | 31,466   |       | 49,576    |       | (36.5             | %)         |
| Revenue per ASM                 |       | $        | 0.235      |      | $          | 0.153             |       | 53.6 | % |
| Cost per ASM                    |       | $        | 0.257      |      | $          | 0.147             |       | 74.8 | % |
| Aircraft in service (average)   |       | 53       |       | 94        |       | (43.6             | %)         |

 

Mesaba OperatingRevenues

Total operating revenuesdecreased 41.1% in the third quarter of fiscal 2007 to $60.5 million from$102.7 million in the prior year quarter. The decrease was due primarily to the reduction in Saab aircraft, from63 at the end of the third quarter of fiscal 2006 to 49 at the end of the thirdquarter of fiscal 2007, and a 26 aircraft reduction in Avro aircraft, from 26at the end of the third quarter of fiscal 2006 to zero at the end of the thirdquarter of fiscal 2007. As a result of these fleet reductions, Saab ASMs andAvro revenue block hours were significantly lower quarter-over-quarter. Thesedecreases in revenue drivers for the Saab and Avro fleets reduced revenue by$8.8 million and $30.9 million respectively, quarter-over-quarter. Avro groundhandling revenue decreased $1.0 million, deicing decreased $1.7 million and CRJrevenue also decreased by $0.6 million offset by CRJ ground handling of $0.1million.

Mesaba OperatingExpenses

Total operating expenses decreased 32.8% to $66.0million in the third quarter of fiscal 2007 from $98.2 million in the prioryear quarter.  The quarter over quarterdecrease was primarily due to the reduction in wages and benefits, aircraftmaintenance and rents, which were a result of a reduction in fleet size. Thecost per ASM increased 74.8% to 25.7 cents in the third quarter of fiscal 2007from 14.7 cents in the prior year quarter. The following table comparescomponents of operating cost per ASM for the three months ended December 31:
| ** **                     | ** ** | **Operating Expenses**      | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | **Three Months Ended** | ** ** |
| ** **                     | ** ** | **December 31**             | ** ** | ** **                                | ** ** | ** ** | ** ** | **December 31** | ** ** |
| ** **                     | ** ** | **2006**                         | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                                | 27,900     |                                      | $          | 36,190 |   | $ | (8,290 | ) | (22.9 | %) | 10.9 | ¢ | 5.4 | ¢ |
| Aircraft  maintenance          |       | 10,830                           |       | 19,841                                    |       | (9,011 | ) | (45.4 | %) | 4.2 |   | 3.0 |   |
| Aircraft rents                 |       | 10,554                           |       | 22,699                                    |       | (12,145 | ) | (53.5 | %) | 4.1 |   | 3.4 |   |
| Landing fees                   |       | 942                              |       | 2,301                                     |       | (1,359 | ) | (59.1 | %) | 0.4 |   | 0.4 |   |
| Insurance and  taxes           |       | 1,495                            |       | 1,579                                     |       | (84 | ) | (5.3 | %) | 0.6 |   | 0.2 |   |
| Depreciation and  amortization |       | 2,158                            |       | 2,718                                     |       | (560 | ) | (20.6 | %) | 0.8 |   | 0.4 |   |
| Administrative  and other      |       | 12,154                           |       | 14,879                                    |       | (2,725 | ) | (18.3 | %) | 4.7 |   | 2.2 |   |
| Impairment and  other charges  |       | —                           |       | (2,000                                    | )          | 2,000 |   | (100.0 | %) | 0.0 |   | (0.3 | ) |
|                           |       | $                                | 66,033     |                                      | $          | 98,207 |   | $ | (32,174 | ) | (32.8 | %) | 25.7 | ¢ | 14.7 | ¢ |

 

Wages and benefitswere lower primarily due to necessary reductions to personnel levels toaccommodate the reduced fleet levels. More specifically, pilots’ wagesdecreased 30.5%, or $3.7 million; flight attendants’ wages decreased 34.9%, or $1.0million; mechanics’ wages decreased 36.4%, or $1.1 million; and all other wagesdecreased 18.0%, or $2.1 million. Taxes and benefits decreased proportionatelywith wages.

Aircraftmaintenance costs, excluding wages and benefits, decreased 45.4% to $10.8million in the third quarter of fiscal 2007 from $19.8 million in the prioryear quarter.  The reduction inmaintenance expense was primarily driven by an $8.2 million decrease in Avromaintenance due to the reduced fleet.

26

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Aircraft rentsdecreased 53.5% to $10.6 million in the third quarter of fiscal 2007 from $22.7million in the prior year quarter.  Thisdecrease was due to the reduction in Saab, Avro and CRJ aircraftquarter-over-quarter.

Landing feesdecreased 59.1% to $0.9 million in the third quarter of fiscal 2007 from $2.3million in the prior year quarter due to a $0.7 million reduction in Detroitlanding fees and reduced Saab flying, offset by increased rates.

Insurance and taxesdecreased 5.3% to $1.5 million in the third quarter of fiscal 2007 from $1.6million in the prior year quarter. The reduction in insurance and taxes was dueto lower hull insurance on the reduced fleet and a reduced number ofpassengers, offset by directors and officers insurance expense of $0.3 millionthat was paid by MAIR in the prior fiscal 2006.

Depreciation andamortization decreased 20.6% to $2.2 million in the third quarter of fiscal2007 compared to $2.7 million in the prior year quarter.  The reduced depreciation expense was due toreduced capital spending over the last several years and reduced purchases ofrotable and repairable parts due to the reduced fleet size.

Administrative and otherexpenses decreased 18.3% to $12.2 million in the third quarter of fiscal 2007from $14.9 million in the prior year, primarily due to a $1.4 million decreasein glycol and simulator training expenses. The remaining decrease is a result of Mesaba’s effort to reduce fixedcosts.

Reorganization itemstotaled $25.5 million in the third fiscal quarter of 2007, which included $22.9million in additional damage claims primarily due to Mesaba’s new laboragreements, $2.1 million of legal fees and professional fees, outsideconsultant costs and other and $0.5 million of fixed asset write-offs.

Mesaba incurred fuelexpenditures of $3.8 million, or 1.5 cents per ASM, in the third quarter offiscal 2007, compared to $5.1 million, or 0.8 cents per ASM, in the thirdquarter of fiscal 2006.  In accordancewith EITF Issue No. 99-19, *Reporting Revenue Gross asa Principal vs. Net as an Agent*, these costs are classified as areduction from revenue in Mesaba’s condensed statements of operations.  Aircraft fuel decreased due to decreasedflying.   Mesaba’s actual cost of fuelfor the Saab aircraft, including taxes and pumping fees, was 83.5 cents pergallon for both periods.  Mesaba’s actualcost of fuel for the CRJs, including taxes and pumping fees, was 70 cents pergallon for both periods.  These pricesare fixed under the terms of the ASA, thereby insulating Mesaba fromfluctuations in the market price of fuel. Northwest was responsible for all fuel for Mesaba’s Avro operations.

*Big Sky*

Big Sky’soperating statistics for the three months ended December 31 were as follows:
| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                      |       | 26,611   |       | 28,972   |       | (8.1              | %)         |
| Available seat  miles (000s)    |       | 20,149   |       | 19,823   |       | 1.6               | %          |
| Revenue  passenger miles (000s) |       | 7,782    |       | 8,158    |       | (4.6              | %)         |
| Load factor                     |       | 38.6     | %          | 41.2     | %          | (6.3              | %)         |
| Block hours  flown              |       | 5,327    |       | 5,405    |       | (1.4              | %)         |
| Departures                      |       | 5,244    |       | 5,265    |       | (0.4              | %)         |
| Revenue per ASM                 |       | $        | 0.295      |     | $          | 0.267             |       | 10.5 | % |
| Cost per ASM                    |       | $        | 0.324      |     | $          | 0.328             |       | (1.2 | %) |
| Aircraft in service  (average)  |       | 10       |       | 10       |       | 0.0               | %          |

 

Big Sky OperatingRevenues

Total operating revenuesincreased 12.4% to $6.0 million in the third quarter of fiscal 2007 from $5.3million in the prior year quarter as a result of a 26.2% increase in averagefare and an 8.0% increase in other revenue. Other revenue increased as a result of new service betweenChicago-Midway and Springfield, Illinois.

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Big Sky OperatingExpenses

Total operating expensesin the third quarter of fiscal 2007 remained consistent at $6.5 million withthe prior year.  The following tablecompares components of the operating cost per ASM for the three months endedDecember 31:
| ** **                     | ** ** | **Operating Expenses**      | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | **Three Months Ended** | ** ** |
| ** **                     | ** ** | **December 31**             | ** ** | ** **                                | ** ** | ** ** | ** ** | **December 31** | ** ** |
| ** **                     | ** ** | **2006**                         | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                                | 2,304      |                                      | $          | 1,965 |   | $ | 339 |   | 17.3 | % | 11.4 | ¢ | 9.9 | ¢ |
| Aircraft fuel                  |       | 1,144                            |       | 1,329                                     |       | (185 | ) | (13.9 | %) | 5.7 |   | 6.7 |   |
| Aircraft  maintenance          |       | 845                              |       | 818                                       |       | 27 |   | 3.3 | % | 4.2 |   | 4.1 |   |
| Aircraft rents                 |       | 453                              |       | 589                                       |       | (136 | ) | (23.1 | %) | 2.2 |   | 3 |   |
| Landing fees                   |       | 75                               |       | 81                                        |       | (6 | ) | (7.4 | %) | 0.4 |   | 0.4 |   |
| Insurance and  taxes           |       | 108                              |       | 115                                       |       | (7 | ) | (6.1 | %) | 0.6 |   | 0.6 |   |
| Depreciation and  amortization |       | 170                              |       | 230                                       |       | (60 | ) | (26.1 | %) | 0.8 |   | 1.1 |   |
| Administrative  and other      |       | 1,426                            |       | 1,377                                     |       | 49 |   | 3.6 | % | 7.1 |   | 7.0 |   |
|                           |       | $                                | 6,525      |                                      | $          | 6,504 |   | $ | 21 |   | 0.3 | % | 32.4 | ¢ | 32.8 | ¢ |

 

Wages and benefitsincreased $0.3 million, or 17.3%, as a result of increased station andmaintenance staffing and a 30% increase in workers’ compensation and healthcareinsurance.

In the third quarter offiscal 2007, Big Sky experienced a 13.9% decrease in fuel expense as a resultof a lower average price of jet fuel, from $2.05 per gallon in the thirdquarter of fiscal 2006 to $1.87 per gallon in the third quarter of fiscal 2007,as well as a 1.4% reduction of block hours.

Aircraft maintenanceincreased 3.3%, as the result of a wing spar airworthiness directive issued bythe Federal Aviation Administration (“FAA”) in November 2006, which mandatedmore rigorous and detailed inspection of the wing spar portion of theBeechcraft 1900D aircraft, and scheduled heavy checks, off-set  by 1.4% fewer block hours in the 2006quarter.

 The elimination of Metro aircraft in fiscal2005 resulted in a decrease in aircraft rents and depreciation expense duringfiscal 2006.

*MAIR*

MAIR Operating Expenses

Total operating expensesin the third quarter of fiscal 2007 decreased to $1.9 million from $7.4 millionin the prior year period, primarily due to the impairment charge of $4.8million in fiscal 2006.

*Consolidated Operating Loss*

Operating loss forthe third quarter of fiscal 2007 decreased to $2.4 million from $7.1 million inthe prior year quarter.

*Consolidated Nonoperating Income*

Nonoperating income (net)increased to $1.3 million in the third quarter of fiscal 2007 from $0.7 millionin the prior year quarter.

*Consolidated Provision for IncomeTaxes*

The Company’sprovision for income taxes in the third quarter of fiscal 2007 was notsignificant, compared to an income tax benefit of $2.3 million in the prioryear quarter.  The Company continues torecord a full valuation allowance against its deferred tax assets due to theuncertainty regarding the ultimate realization of those assets. Therefore, theCompany’s net loss in the third quarter of fiscal 2007 was not reduced by anytax benefit.

**NineMonths Ended December 31, 2006 and 2005**

The Companyreported a consolidated net loss of $6.2 million or $0.30 per basic and dilutedshare for the nine months ended December 31, 2006, compared to a net loss of$28.8 million or $1.40 per basic and diluted share for the nine months endedDecember 31, 2005.  To allow for a moredirect and meaningful comparison, Mesaba’s

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results ofoperations have been analyzed for the nine months ended December 31, 2006 and2005 excluding the deconsolidation of Mesaba from the Company’s consolidatedfinancial statements on the Petition Date. Mesaba’s condensed financial statements on a stand-alone basis arepresented in Note 13 of the accompanying Notes to Condensed ConsolidatedFinancial Statements.

*Mesaba*

Mesaba’soperating statistics for the nine months ended December 31 were as follows:
| ** **                      | ** ** | **2006**  | ** ** | **2005**  | ** ** | **% Change** | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|
| Passengers                      |       | 2,710,929 |       | 4,370,798 |       | (38.0             | %)         |
| Available seat  miles (000s)    |       | 1,140,253 |       | 2,196,688 |       | (48.1             | %)         |
| Revenue  passenger miles (000s) |       | 778,218   |       | 1,489,980 |       | (47.8             | %)         |
| Load factor                     |       | 68.2      | %          | 67.8      | %          | 0.6               | %          |
| Block hours  flown              |       | 146,098   |       | 216,178   |       | (32.4             | %)         |
| Departures                      |       | 107,883   |       | 155,803   |       | (30.8             | %)         |
| Revenue per ASM                 |       | $         | 0.189      |      | $          | 0.147             |       | 28.6 | % |
| Cost per ASM                    |       | $         | 0.199      |      | $          | 0.162             |       | 22.8 | % |
| Aircraft in service  (average)  |       | 63        |       | 98        |       | (35.7             | %)         |

 

Mesaba OperatingRevenues

Total operating revenuesdecreased 33.1% in fiscal 2007 to $215.1 million from $322.6 million in theprior year.  The decrease was dueprimarily to the reduction in Saab aircraft from 63 aircraft in fiscal 2006 to49 in the current year and a 26 aircraft reduction in Avro aircraft from 26 infiscal 2006 to zero in the current year. As a result of these fleet reductions, Saab ASMs and Avro revenue blockhours were significantly lower year-over-year. These decreases in revenuedrivers for the Saab and Avro fleets reduced revenue by $27.5 million and $79.8million respectively, year-over-year. These reductions were partially offset byan increase of $4.6 million in CRJ revenue.

Mesaba Operating Expenses

Total operating expenses decreased 36.0% to $228.3million in fiscal 2007 from $356.5 million in the prior year period.  The cost per ASM increased 22.8% to 19.9cents in fiscal 2007 from 16.2 cents in the prior year period.  The following table compares components ofoperating cost per ASM for the nine months ended December 31:
| ** **                     | ** ** | **Operating Expenses**     | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Nine Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** |
| ** **                     | ** ** | **December 31**            | ** ** | ** **                                | ** ** | ** ** | ** ** | **December 31** | ** ** |
| ** **                     | ** ** | **2006**                        | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                               | 92,377     |                                      | $          | 111,745 |   | $ | (19,368 | ) | (17.3 | %) | 8.1 | ¢ | 5.1 | ¢ |
| Aircraft  maintenance          |       | 40,290                          |       | 63,926                                    |       | (23,636 | ) | (37.0 | %) | 3.5 |   | 2.9 |   |
| Aircraft rents                 |       | 41,933                          |       | 73,330                                    |       | (31,397 | ) | (42.8 | %) | 3.7 |   | 3.3 |   |
| Landing fees                   |       | 5,082                           |       | 7,343                                     |       | (2,261 | ) | (30.8 | %) | 0.4 |   | 0.3 |   |
| Insurance and  taxes           |       | 4,172                           |       | 4,927                                     |       | (755 | ) | (15.3 | %) | 0.4 |   | 0.2 |   |
| Depreciation and  amortization |       | 7,141                           |       | 9,572                                     |       | (2,431 | ) | (25.4 | %) | 0.6 |   | 0.5 |   |
| Administrative  and other      |       | 37,322                          |       | 53,656                                    |       | (16,334 | ) | (30.4 | %) | 3.2 |   | 2.4 |   |
| Impairment and  other charges  |       | —                          |       | 32,006                                    |       | (32,006 | ) | (100.0 | %) | 0.0 |   | 1.5 |   |
|                           |       | $                               | 228,317    |                                      | $          | 356,505 |   | $ | (128,188 | ) | (36.0 | %) | 19.9 | ¢ | 16.2 | ¢ |

 

Wages and benefitswere lower primarily due to the necessary reductions in personnel levels toaccommodate the reduced fleet levels. More specifically, pilots’ wagesdecreased 23.3%, or $8.1 million; flight attendants’ wages decreased 29.6%, or$2.6 million; mechanics’ wages decreased 24.5%, or $2.1 million; and all otherwages decreased 13.1%, or $4.8 million. Taxes and benefits decreased proportionatelywith wages.

Aircraftmaintenance costs, excluding wages and benefits, decreased 37.0% to $40.3million from $63.9 million in the prior year. The reduction in maintenance expense was primarily driven by a $21.1million decrease in Avro maintenance due to the reduced fleet.

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Aircraft rents decreased42.8% to $41.9 million from $73.3 million in the prior year.  This decrease was due to the reduction inSaab, Avro and CRJ aircraft year-over-year.

Landing feesdecreased 30.8% to $5.1 million from $7.3 million in the prior year due toreduced Saab flying.

Insurance and taxesdecreased 15.3% to $4.2 million from $4.9 million in the prior year. Thereduction in insurance and taxes was due to lower hull insurance on the reducedfleet and a reduced number of passengers, offset by directors and officersinsurance expense of $0.3 million that was paid by MAIR in the prior fiscal2006.

Depreciation andamortization decreased 25.4% to $7.1 million from $9.6 million in the prioryear.  The reduced depreciation expensewas due to reduced capital spending over the last several years and reducedpurchases of rotable and repairable parts due to the reduced fleet size.

Administrative and otherexpenses decreased 30.4% to $37.3 million from $53.7 million in the prior year.

Impairment and othercharges of $32.0 million were recorded in fiscal 2006 as a result of the $31.9million charge to establish a reserve on the unsecured prepetition receivablesdue from Northwest (net of certain offsetting liabilities) and the $2.1 millionwrite-off of the warrants related to the prior airline services agreements.

Reorganization itemstotaled $26.8 million in fiscal 2007, which included $21.9 million ofadditional damage claims, $8.2 million of legal and professional fees, outsideconsultant costs and other, and $2.1 million of fixed asset write-offs. Theseitems were partially offset by reversals of maintenance accruals of $5.3million.

Mesaba incurred fuelexpenditures of $12.0 million, or 1.1 cents per ASM, in fiscal 2007, comparedto $14.6 million or 0.7 cents per ASM, in the prior year period.  In accordance with EITF Issue No. 99-19, *Reporting Revenue Gross as a Principal vs. Net as an Agent*,these costs are classified as a reduction from revenue in Mesaba’s condensedstatements of operations.  Aircraft fueldecreased due to decreased flying.  Mesaba’s actual cost of fuel for the Saab aircraft, including taxes andpumping fees, was 83.5 cents per gallon for both periods.  Mesaba’s actual cost of fuel for the CRJs,including taxes and pumping fees, was 70 cents per gallon for bothperiods.  These prices are fixed underthe terms of the ASA, thereby insulating Mesaba from fluctuations in the marketprice of fuel.  Northwest is responsiblefor all fuel for Mesaba’s Avro operations.

*Big Sky*

Big Sky’soperating statistics for the nine months ended December 31 were as follows:
| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                      |       | 86,879   |       | 85,527   |       | 1.6               | %          |
| Available seat  miles (000s)    |       | 64,490   |       | 57,134   |       | 12.9              | %          |
| Revenue  passenger miles (000s) |       | 25,245   |       | 24,372   |       | 3.6               | %          |
| Load factor                     |       | 39.1     | %          | 42.7     | %          | (8.4              | %)         |
| Block hours  flown              |       | 16,516   |       | 15,337   |       | 7.7               | %          |
| Departures                      |       | 16,926   |       | 15,970   |       | 6.0               | %          |
| Revenue per ASM                 |       | $        | 0.282      |     | $          | 0.263             |       | 7.2 | % |
| Cost per ASM                    |       | $        | 0.314      |     | $          | 0.361             |       | (13.0 | %) |
| Aircraft in service  (average)  |       | 10       |       | 10       |       | 0.0               | %          |

 

Big Sky OperatingRevenues

Total operating revenuesincreased 21.2% to $18.2 million in fiscal 2007 from $15.0 million in the prioryear period.  Passenger revenuesincreased 27.5%, as a result of a 25.6% increase in average fare and a 1.6% increasein passengers transported.  Other revenueincreased 13.1% as a result of the Aircraft Crew Maintenance and Insuranceoperation entered into in July 2006 and the new Chicago-Midway to Springfield,Illinois air service.

Fiscal 2007 included newservice to Bozeman, Montana, Jackson Hole, Wyoming, Pocatello, Idaho and WallaWalla, Washington.  The 2.8% additionalEAS subsidy revenue is the result of a contract renewal for seven locations

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in Montana at higherrates per departure.  The additional EASrevenue was offset by the discontinuation of EAS funded service to Moses Lake,Washington effective September 3, 2006.

Big Sky OperatingExpenses

Total operatingexpenses in fiscal 2007 decreased 1.9% to $20.2 million from $20.6 million inthe prior year period, primarily as a result of the $2.5 million goodwillimpairment charge recorded in fiscal 2006, offset by higher wages and benefits,aircraft fuel and maintenance expenses in fiscal 2007.  Excluding the impairment charge, expenses infiscal 2007 increased over fiscal 2006 by 11.7% as a result of increased flyingperiod-over-period which generated 7.7% more block hours, and the associatedcosts of new service.  The followingtable compares components of operating cost per ASM for the nine months endedDecember 31:
| ** **                     | ** ** | **Operating Expenses**     | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Nine Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** |
| ** **                     | ** ** | **December 31**            | ** ** | ** **                                | ** ** | ** ** | ** ** | **December 31** | ** ** |
| ** **                     | ** ** | **2006**                        | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                               | 6,721      |                                      | $          | 5,312 |   | $ | 1,409 |   | 26.5 | % | 10.4 | ¢ | 9.3 | ¢ |
| Aircraft fuel                  |       | 4,111                           |       | 3,541                                     |       | 570 |   | 16.1 | % | 6.4 |   | 6.2 |   |
| Aircraft  maintenance          |       | 2,765                           |       | 2,340                                     |       | 425 |   | 18.2 | % | 4.3 |   | 4.1 |   |
| Aircraft rents                 |       | 1,359                           |       | 1,588                                     |       | (229 | ) | (14.4 | %) | 2.1 |   | 2.8 |   |
| Landing fees                   |       | 262                             |       | 243                                       |       | 19 |   | 7.8 | % | 0.4 |   | 0.4 |   |
| Insurance and  taxes           |       | 319                             |       | 287                                       |       | 32 |   | 11.1 | % | 0.5 |   | 0.5 |   |
| Depreciation and  amortization |       | 519                             |       | 676                                       |       | (157 | ) | (23.2 | %) | 0.8 |   | 1.2 |   |
| Administrative  and other      |       | 4,177                           |       | 4,129                                     |       | 48 |   | 1.2 | % | 6.5 |   | 7.2 |   |
| Impairment and  other charges  |       | —                          |       | 2,503                                     |       | (2,503 | ) | (100.0 | %) | 0.0 |   | 4.4 |   |
|                           |       | $                               | 20,233     |                                      | $          | 20,619 |   | $ | (386 | ) | (1.9 | %) | 31.4 | ¢ | 36.1 | ¢ |

 

Duringfiscal 2007, wages and benefits increased $1.4 million or 26.5% as aresult of additional staffing requirements in flight, maintenance and stationsalong with a 23.0% increase in workers’ compensation and healthcare insurance.

In fiscal 2007, Big Skyexperienced a 16.1% increase in fuel expense, reflecting a 7.7% increase inblock hours and a 44 cent increase in the average price of jet fuel, from $1.69per gallon in fiscal 2006 to $ 2.13 per gallon in fiscal 2007.

Aircraft maintenanceincreased $0.4 million, or 18.2%, period-over-period primarily due to the wingspar airworthiness directive issued by the FAA in November 2006, which mandatedmore rigorous inspection of the wing spar portion of the Beechcraft 1900Daircraft, along with scheduled heavy checks, and propeller overhaulevents.  Engine power-by-the-hourmaintenance expense increased 7.5% in line with the block hour flying increase

The elimination of Metroaircraft in fiscal 2005 resulted in a decrease in aircraft rents anddepreciation expense during fiscal 2006.

*MAIR*

MAIR Operating Expenses

Total operating expensesin fiscal 2007 decreased to $7.8 million from $8.7 million in fiscal 2006.

*Consolidated Operating Loss*

Operating loss forfiscal 2007 decreased to $9.6 million from $48.2 million in the prior yearperiod due to the $41.3 million in impairment and other charges in fiscal 2006.

*Consolidated Nonoperating Income*

Nonoperating income (net)decreased to $3.8 million in fiscal 2007 from $4.6 million in the prior yearperiod.  The decrease was primarily dueto a $1.8 million arbitration settlement with an investment advisor in theprior year.

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*Consolidated Provision for IncomeTaxes*

TheCompany recorded a provision for income taxes of $0.4 million for the ninemonths ended December 31, 2006 compared to an income tax benefit of $15.2million for the nine months ended December 31, 2005.  The tax provision for the nine months endedDecember 31, 2006 resulted from the Company finalizing its fiscal 2006 taxreturn.  The Company continues to recorda full valuation allowance against its deferred tax assets due to theuncertainty regarding the ultimate realization of those assets. Therefore, theCompany’s net loss in fiscal 2007 was not reduced by any tax benefit.

**Liquidity and Capital Resources**

*Overview*

Consolidated

Unrestricted cash, cashequivalents and investments decreased 12.9% to $97.2 million at December 31,2006 from $110.7 million at March 31, 2006. The Company’s working capital decreased to $71.0 million at December 31,2006 compared to working capital of $85.9 million at March 31, 2006.  These decreases were primarily due torecording restricted cash of $13.1 million for MAIR’s establishment of a letterof credit supporting MAIR’s guaranty of Mesaba’s obligations for the hangar atthe Cincinnati/Northern Kentucky International Airport.

As part of the SPA withNorthwest, MAIR’s liquidity will be affected by the purchase of Northwest’sstock in MAIR.  MAIR will payapproximately $24 million of the aggregate purchase price, or $4.25 per share,upon the initial closing of the transaction, which is expected to occur priorto April 15, 2007.  MAIR will pay theremaining purchase price, approximately $11 million or $2.00 per share, on theearlier of the date upon which MAIR receives at least $25 million in equitydistributions from Mesaba’s bankruptcy estate or nine months from the executionof the SPA.  These cash outflows will likely occur prior to MAIR’s receipt of anypotential distributions from Mesaba’s bankruptcy estate following the closingof the SPRA.  The closing of the SPA is not contingent upon the closing ofthe SPRA.

Mesaba

Approximately $18.7million, or 86.1%, of Mesaba’s net accounts receivable balance as of December31, 2006 was due from Northwest.  The Northwest receivables consisted of$7.3 million in prepetition receivables as a result of offsetting prepetitionliabilities and $11.4 million in post petition amounts due fromNorthwest.  As of January 30, 2007, Mesaba had collected $11.1 million ofthe December 31, 2006 postpetition balance from Northwest.  Although Northwest has been payingpostpetition receivables due to Mesaba in the ordinary course of business sinceNorthwest’s bankruptcy, Mesaba’s business is sensitive to events and risksaffecting Northwest.  See previous bankruptcy discussions in Note 2 andrisks related to Northwest and Northwest’s bankruptcy in Part II, Item 1A “RiskFactors.”  Mesaba’s future liquidity will depend on its operatingperformance until the confirmation of its plan of reorganization, at which timeMesaba expects to become a wholly-owned subsidiary of Northwest.

*Operating Activities*

Consolidated

Net cash used inoperating activities for the nine months ended December 31, 2006 was $4.0million, primarily due to a net loss of $6.2 million and a $0.5 millionincrease in inventories.  These uses ofcash were offset by depreciation and amortization of $0.5 million, an increasein accounts payable and other of $0.8 million, and decreases in income taxesreceivable of $0.9 million, prepaid expenses of $0.7 million and accountsreceivable of $0.3 million.

Mesaba

Net cash used inoperating activities before reorganization activities for the nine months endedDecember 31, 2006 was $1.1 million, primarily due to depreciation andamortization of $7.1 million, an increase in accounts payable and other of$21.2 million, decreases in accounts receivable of $7.5 million, inventories of$3.5 million, intercompany receivable of $3.0 million for Mesaba’s receivablefrom MAIR for tax refunds received at MAIR and income taxes receivable of $0.2million.  The increases in cash wereoffset by a net loss of $39.8 million and decreases in prepaid expenses of $0.4million.

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*Reorganization Activities*

Mesaba

Net cash used inreorganization activities for the nine months ended December 31, 2006 was $8.2million, primarily for legal and professional fees incurred related to Mesaba’sbankruptcy and reorganization.

*Investing Activities*

Consolidated

Net cash used ininvesting activities for the nine months ended December 31, 2006 was $3.5million.  The primary use of cash was forMAIR’s establishment of a $13.1 million letter of credit supporting MAIR’sguaranty of Mesaba’s obligations for the hangar at the Cincinnati/NorthernKentucky International Airport and purchases of property and equipment of $0.2million.  These uses of cash were offsetby net sales of investments of $9.8 million.

Mesaba

Net cash used ininvesting activities for the nine months ended December 31, 2006 was $0.9million.  The primary use of cash was forthe net purchases of property and equipment of $1.6 million and $0.2 millionfor the funding of an irrevocable tax trust. These uses of cash were partially offset by net sales of investments of$0.9 million.

*Financing Activities*

Consolidated

Net cash provided byfinancing activities for the nine months ended December 31, 2006 was $3.0million primarily for MAIR’s intercompany payable to Mesaba for tax refundsreceived at MAIR.

Mesaba

Net cash used byfinancing activities for the nine months ended December 31, 2006 was $0.8million for the costs related to obtaining debtor-in-possession financing.

*Outlook*

Consolidated

The Company hashistorically relied on cash and cash equivalents, investments and internallygenerated funds to support its working capital requirements.  Absent adverse factors outside the control ofthe Company, management believes current liquidity and funds from operationswill provide adequate resources for meeting the Company’s obligations throughthe end of fiscal 2007.

Mesaba

Mesaba’s expects that itwill have sufficient cash to fund its operations through the date of theconfirmation of Mesaba’s plan of reorganization, which is expected to occur byMay 2007.  Additionally, under the termsof the SPRA, Northwest is obligated to provide up to $10 million of additionalcash to satisfy certain administrative expenses.  Therefore, although Mesaba has also reachedan agreement with Marathon to provide debtor-in-possession financing, Mesabadoes not expect to draw on this financing if Mesaba’s plan of reorganization isconfirmed by May 2007.  If the BankruptcyCourt does not confirm Mesaba’s plan of reorganization and Mesaba is unable toexit bankruptcy in May 2007, Mesaba may be forced to draw on itsdebtor-in-possession financing.  If suchfinancing is unavailable to Mesaba, Mesaba could be forced into liquidation.

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

The preparation of theCompany’s consolidated financial statements and Mesaba’s stand-alone condensedfinancial statements in conformity with generally accepted accountingprinciples requires the use of estimates, judgments and assumptions that affectthe reported amounts of assets and liabilities as of the date of the condensedconsolidated financial statements, revenues and expenses during the reportingperiod and related disclosures of contingent assets and liabilities in thecondensed consolidated financial statements and the accompanying notes.  The SEC has defined a company’s most criticalaccounting policies as the ones that are most important to the portrayal of thecompany’s financial condition and results, and which require the company tomake its most difficult and subjective judgments,

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often as a result of theneed to make estimates of matters that are inherently uncertain.  Based on this definition, the Company and itssubsidiaries have identified their critical accounting policies to include thosediscussed in the following paragraphs. The Company and its subsidiaries also have other key accounting policiesthat involve the use of estimates, judgments and assumptions.

Management believes thatits estimates and assumptions are reasonable, based on information presentlyavailable; however, changes in these estimates, judgments and assumptions willoccur as  result of future events, and,accordingly, actual results could differ from amounts estimated.

*ReorganizationRelated Items* —Mesaba’s condensed financial statements havebeen prepared in accordance with SOP 90-7, and on a going concern basis, whichcontemplates continuity of operations, realization of assets and liquidation ofpost-petition liabilities in the ordinary course of business.  In accordancewith SOP 90-7, the financial statements for the periods presented distinguishtransactions and events that are directly associated with the reorganizationfrom the ongoing operations of the Company.  While operating as adebtor-in-possession under the protection of Chapter 11 of the Bankruptcy Code,in some cases, Mesaba may sell or otherwise dispose of assets, or liquidate andsettle liabilities, for amounts other than those reflected in the condensedfinancial statements, subject to the approval of the Bankruptcy Court orotherwise as permitted in the ordinary course of business.  Further, aplan of reorganization could materially change the amounts and classificationsin the historical financial statements.

*Allowance for Doubtful Accounts*—Mesaba and Big Sky grant trade credit to certain approved customers andperform monthly analyses of outstanding trade receivables to assess thelikelihood of collection.  For balanceswhere Mesaba and Big Sky do not expect full payment of amounts owed, an allowanceis recorded to adjust the trade receivable to management’s best estimate of theamount that will ultimately be collected.

*Aircraft Property and Equipment*— Estimated lives are used to record depreciation on aircraft property andequipment.  Aircraft utilization,technology and changes in business strategy may affect the economic lives usedto record depreciation by Mesaba or Big Sky. The foregoing may also affect depreciation rates, impairment or both.  Management of Mesaba and Big Sky regularlyreview the estimated useful lives and salvage values for aircraft property andequipment.

*Excess and Obsolete Inventories*— Estimated recovery percentages are used to record obsolescence reserves forparts inventories.  Aircraft utilization,parts availability and changes in parts cost may affect the valuation of partsinventories and obsolescence reserve levels. Management of Mesaba and Big Sky regularly review recovery percentages,reserve levels and inventory valuations for parts inventories.

As discussed in Note 2,Mesaba’s Saab fleet has been reduced, and its Avro fleet has beeneliminated.  As a result, Mesaba mayrequire additional excess inventory reserves. In future periods, Mesaba will appropriately revise its estimates as itbecomes aware of new information.

*Aircraft Maintenance*— Estimated maintenance costs and anticipated aircraft activity are used todetermine maintenance reserves.  Changesin maintenance contracts, parts and labor costs and aircraft activity mayaffect the maintenance reserves.  Managementof Mesaba and Big Sky regularly review aircraft activity, expected aircraftreturn dates, changes in maintenance contracts and parts and labor costs formaintenance reserves.

*Intangible Assets*— The excess of the Big Sky purchase price over the fair market value of thenet assets acquired was allocated to certain identifiable intangible assets,including Big Sky’s pilot labor contract and air carrier certificate.  The recoverability of intangible assets isevaluated annually, at a minimum, or on an interim basis if events orcircumstances indicate a possible inability to realize the carryingamounts.  The evaluation includes futurecash flow projections, strategic modeling and other management assumptions.

*Income Taxes* —Significant management judgment is required in determining the provisions forincome taxes, deferred tax assets and liabilities and any valuation allowancerecorded against net deferred tax assets. For financial reporting purposes, a valuation allowance is recorded tooffset deferred tax assets that, more likely than not, will not be realizedbased on the Company’s projected future taxable income, the timing of expiringnet operating losses and the Company’s tax planning strategies.  During the fourth quarter of fiscal 2006, theCompany recorded a full valuation allowance against its net deferred taxassets.  In the future, subsequentrevisions to the estimated net

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realizable value of thesedeferred tax assets could cause the Company to reverse its current fullvaluation allowance on all or a portion of the deferred tax assets.  This could cause the provision for incometaxes to vary significantly from period to period, although the Company’s cashpayments would remain unaffected until the benefit of the net operating lossesis completely utilized or expires unused.

*Workers’ Compensation Insurance*— Mesaba and Big Sky estimate the final cost of an on-the-job injury at thetime of the injury to determine their workers’ compensation insurancereserves.  Mesaba and Big Sky use theservices of their respective insurance carriers and outside brokers to assistin determining the reserve levels. Injury severity, cost of care and the insurance contract affect thefinal estimate.  Management of Mesaba andBig Sky regularly review workers’ compensation activity with outsideconsultants for any changes in the workers’ compensation reserve.

*Health and Dental Insurance*— Mesaba estimates the amount of incurred but not reported health and dentalclaims to determine its health and dental insurance reserves.  Mesaba uses the service of its insurancecarriers and outside brokers to assist in determining the reserve levels.  Historical claims, experience claims severityand cost of care affect the ultimate cost and ultimate reserves recorded.  Management of Mesaba regularly reviews healthand dental claims activity with outside consultants for any changes in thehealth and dental insurance reserve. MAIR and Big Sky purchase health and dental insurance and, therefore, donot make estimates for health and dental claims.

*Property Taxes* —Estimated property tax values and assessments are used to record property taxreserves for the various jurisdictions in which Mesaba and Big Skyoperate.  Aircraft and parts values,aircraft flight activity, ground equipment values and the location of personnelmay affect the ultimate property tax obligation.  Management of Mesaba and Big Sky periodicallyreview the above items for any changes in the property tax reserves.

**NEW ACCOUNTING PRONOUNCEMENTS**

In July 2006, the FASB issuedFIN 48, which clarifies the accounting for uncertainty in tax positions.FIN 48 requires that the Company recognize in its financial statements, theimpact of a tax position, if that position is more likely than not of beingsustained on audit, based on the technical merits of the position. Theaccounting provisions of FIN 48 will be effective for the Company beginningApril 1, 2007. The Company is in the process of determining what effect, ifany, the adoption of FIN 48 will have on its financial statements.

In September 2006, theFASB issued SFAS No. 157, to define fair value, establish a framework formeasuring fair value in accordance with generally accepted accountingprinciples and expand disclosures about fair value measurements. SFAS No. 157will be effective for the Company beginning April 1, 2008. The Company isassessing the impact the adoption of SFAS No. 157 will have on its financialstatements.

In September 2006, theFASB issued an FSP that reduces the number of acceptable methods of accountingfor planned major maintenance activities. Under the FSP, Mesaba would berequired to change its method of accounting for some planned maintenanceactivities for certain aircraft types. The FSP will be effective for the Company beginning April 1, 2007 andrequires retrospective application to all financial statements presented unlessdoing so is impractical.  The Company isassessing the impact the adoption of the FSP will have on its financialposition and results of operations.

In September 2006, theSEC issued SAB No. 108. SAB No. 108 provides guidance on how prior yearmisstatements should be taken into consideration when quantifying misstatementsin current year financial statements for purposes of determining whether thefinancial statements are materially misstated.  SAB 108 is effective forannual financial statements covering the first fiscal year ending afterNovember 15, 2006, or with respect to the Company’s fiscal year ending March31, 2007. The implementation of SAB No. 108 did not have a material impact onthe Company’s financial statements.

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## **Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

The Company’s principalmarket risks are the availability and price of jet fuel and changes in interestrates.

*Aircraft Fuel*

The Companybelieves that Mesaba’s arrangements for fuel with Northwest assure an adequatesupply of fuel for current and future operations, provided that Northwest doesnot experience a supply shortage.  As apart of the ASA, Northwest bears the economic risk of fuel price fluctuationsfor Mesaba’s Saab and CRJ fuel requirements, as the fuel price for Mesaba’sSaabs is fixed at 83.5 cents per gallon, and the fuel for Mesaba’s CRJ is fixedat 70 cents per gallon.  Big Sky issubject to fluctuations in fuel prices. A hypothetical 10% increase in the March 31, 2006 cost per gallon offuel, assuming projected fiscal 2007 usage at Big Sky, would result in anincrease to aircraft fuel expense of approximately $0.6 million in fiscal2007.  As of December 31, 2006, Big Sky had no fuel hedges in place forfiscal 2007.

*InterestRates*

TheCompany’s earnings are affected by changes in interest rates due to the impactthose changes have on its interest income from cash equivalents and short- andlong-term investments.  If interest rates were to decrease by 100 basispoints for a full year, based on the Company’s cash equivalents, short-term andlong-term investments balance at December 31, 2006, the Company’s interestincome would decrease by approximately $1.1 million.

The Companydoes not purchase or hold any derivative financial instruments for trading orspeculative purposes.

**ITEM 4.  CONTROLS AND PROCEDURES**

*Evaluationof Disclosure Controls Procedures*

The Company’s managementdoes not expect that its disclosure controls and procedures will prevent allerrors and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been detected. The design of any system of controls also is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions; over time, control may becomeinadequate because of changes in conditions, or the degree of compliance withthe policies or procedures may deteriorate. Because of the inherent limitationsin a cost-effective control system, misstatements due to error or fraud mayoccur and not be detected.

As of December 31, 2006,the Company conducted an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, regarding the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as that term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended).  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective as of thedate of such evaluation.

*Changesin Internal Controls*

During the quarter endedDecember 31, 2006, there were no changes in internal controls over financialreporting that had a material effect on internal control over financialreporting or were reasonably likely to have a material effect on internalcontrol over financial reporting.

# **PART II.OTHER INFORMATION**

## **ITEM 1.  LEGAL PROCEEDINGS**

*Mesaba Bankruptcy*

On the Petition Date,Mesaba filed a voluntary petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code with the United States Bankruptcy Court for the Districtof Minnesota.  The Bankruptcy Court isadministering

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Mesaba’s case under thecaption “In re Mesaba Aviation, Inc., dba Mesaba Airlines, Case No.05/39258(GFK).”  Mesaba continues tooperate its business and manage its property as a debtor-in-possession pursuantto the Bankruptcy Code.  As a result ofthe Chapter 11 filing, attempts to collect, secure or enforce remedies withrespect to prepetition claims against Mesaba are subject to the automatic stayprovisions of Section 362(a) of the Bankruptcy Code, including the Mesabalitigation described below.  On January22, 2007, Mesaba filed its plan of reorganization with the Bankruptcy Court,under which Mesaba plans to exit bankruptcy in the spring of 2007 as awholly-owned operating subsidiary of Northwest.

*Saab Leasing Litigation*

In 2002, Saab Leasingfiled a declaratory judgment action against Mesaba relating to 20 340A aircraftleased by Mesaba.  In 2003, the District Court declared that the termsheet relating to the leases for the 340A aircraft was a binding preliminaryagreement requiring Mesaba to negotiate in good faith toward the execution oflong-term agreements for each of the 340A aircraft.  Although Mesabaappealed this ruling, while the appeal was pending, Saab Leasing (relying onthe District Court’s declaratory judgment ruling) filed a separate action inthe District Court alleging approximately $35 million in damages for past dueand future aircraft lease obligations.  While the damages action waspending, the U.S. Court of Appeals for the Eighth Circuit affirmed the DistrictCourt’s declaratory judgment ruling.  On July 6, 2006, the District Courtin the damages action granted Mesaba’s motion for partial summary judgment,ruling that Saab Leasing is not eligible to receive damages for the majority ofits claims against Mesaba.  Because thepotential damages for the remaining claim against Mesaba are not significant,Mesaba has not established any accrual with regard to this litigation withinits condensed financial statements.  Inthe event Saab Leasing appeals the District Court’s decision following Mesaba’sexit from bankruptcy, Mesaba’s bankruptcy estate will be required to fund anylitigation expenses and any amounts that may be due to Saab Leasing if theDistrict Court’s ruling is reversed.  Anysuch payments by Mesaba’s bankruptcy estate would ultimately reduce anydistribution MAIR may be entitled to receive from the estate.

*Creditors’ Committee Litigation*

Pursuantto the Bankruptcy Code, Mesaba’s Creditors’ Committee initiated aninvestigation of transactions between MAIR and Mesaba, including the payment ofdividends and management services fees from Mesaba to MAIR.  In response to this investigation, and to endpublic speculation regarding the dividends and payments, MAIR filed a complaintwith the Bankruptcy Court requesting a declaratory judgment that the dividendsand fees paid by Mesaba to MAIR were wholly proper and appropriate underlaw.  In its complaint, MAIR assertedfacts to demonstrate that each payment and dividend MAIR received from Mesabawas appropriate under applicable law, occurred in the ordinary course of Mesaba’sbusiness, that Mesaba was solvent at the time it made each payment anddividend, and that Mesaba remained solvent and able to pay its obligationsafter each payment or dividend to MAIR. On October 11, 2006, Mesaba’s Creditors’ Committee filed an answer andcounterclaim against MAIR, alleging that certain payments from Mesaba to MAIRwere fraudulent under Minnesota law and federal bankruptcy law.  The Creditors’ Committee’s counterclaimasserted approximately $16 million in damages. Additionally, the Creditors’ Committee challenged MAIR’s proof of claimfiled in Mesaba’s bankruptcy proceedings and requested that it be disallowed orsubordinated.  Mesaba’s plan ofreorganization provides that, upon confirmation of the plan of reorganization,Mesaba will release all claims it and its bankruptcy estate has against MAIR,including this litigation.

*ALPA Litigation*

OnDecember 28, 2006, MAIR delivered a letter to ALPA’s president terminating aletter agreement, dated January 31, 2004, between the parties.  ALPA has asserted in the past that the letteragreement prevents MAIR from allowing Big Sky to operate any aircraft with morethan 19 seats.  In light of the pendingtransfer of Mesaba to Northwest, MAIR intends to explore expansionopportunities with Big Sky, and these expansion opportunities could benegatively affected if the letter agreement remains in effect.  Therefore, on the same day the terminationletter was sent to ALPA, MAIR filed a declaratory judgment action in the UnitedStates District Court for the Southern District of Texas, Houston Divisionrequesting that the court declare that because the letter agreement has noterm, it is terminable at will. Alternatively, MAIR requested an order that the letter agreementviolates antitrust law.

*Other Litigation Matters*

Mesaba and Big Sky arealso defendants in various lawsuits arising in the ordinary course of business.While the outcome of these lawsuits and proceedings cannot be predicted withcertainty, it is the opinion of Mesaba’s and Big Sky’s management, based oncurrent information and legal advice, that the ultimate disposition of thesesuits will not have a material adverse effect on the separate financialstatements of Mesaba or Big Sky or the consolidated

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financial statements ofthe Company as a whole.  Additionally,any lawsuit filed against Mesaba prior to the Petition Date is subject to theautomatic stay.  If and when these casesproceed, the amount of any damages awarded to the plaintiffs would be deemedunsecured prepetition claims against Mesaba.

## **ITEM 1A.  RISK FACTORS**

The Company’s operationsand financial results are subject to various risks and uncertainties, some ofwhich are described below.  The Companycould also be adversely affected by additional risks and uncertainties notpresently known or believed to be material.

**Risks Related to Mesaba’sBankruptcy**

*Mesaba’s successful operationduring bankruptcy and its successful emergence from bankruptcy will depend onMesaba’s relationship with its Creditors’ Committee.*

The United States Trusteefor the District of Minnesota has appointed a Creditors’ Committee in Mesaba’sbankruptcy case.  The Creditors’Committee and its legal representatives have a right to be heard on all mattersthat come before the Bankruptcy Court concerning Mesaba’s reorganization.  The Creditors’ Committee supported Mesabafiling its plan of reorganization and Mesaba’s intent to become a wholly-ownedoperating subsidiary of Northwest. However, if Mesaba loses the Creditors’ Committee’s support, Mesaba’sability to operate during the Chapter 11 process could be hindered, and Mesaba’semergence from Chapter 11 could be delayed.

*Mesaba’s ability to pay off itscreditors and the related possibility of MAIR receiving a substantialdistribution as Mesaba’s equity holder depend upon Northwest’s bankruptcy courtallowing Mesaba’s $145 million claim.*

In connection with theSPRA, Northwest has agreed to allow a claim by Mesaba of $145 million.  If Northwest’s bankruptcy court does notgrant an order allowing the $145 million claim, Mesaba will be unable tocontinue with its plan of reorganization.

*If Mesaba is unable to adopt asuccessful reorganization plan, it may be unable to emerge from bankruptcy.*

In order for Mesaba toemerge from bankruptcy, the Bankruptcy Court must approve Mesaba’sreorganization plan, which was filed on January 22, 2007.  The reorganization plan will be subject to avote by Mesaba’s secured and unsecured creditors and MAIR.  The Bankruptcy Court will generally notapprove a reorganization plan unless all impaired classes of creditors vote toaccept the plan; however, Mesaba may elect to invoke certain provisions of theBankruptcy Code in order to obtain confirmation of the plan over the voteof  a dissenting class of creditors.  In addition to the voting requirements forconfirmation, Mesaba will have to satisfy other provisions of the BankruptcyCode in order to confirm its reorganization plan, including showing that theplan is feasible.  Finally, it ispossible that a competing plan of reorganization could be filed, in which caseMesaba will need to establish that its own plan is more favorable to creditorsand MAIR.  If Mesaba is unable to meetthese confirmation requirements, it may be unable to emerge from bankruptcy.

*If MAIR is unable to find analternate sublessee for Mesaba’s Cincinnati/Northern Kentucky Airport facility,MAIR may incur additional expense related to the bonds associated with theinitial financing of the facility.*

Mesaba currently leases afacility at the Cincinnati/Northern Kentucky International Airport, but vacatedthe facility and ceased making the required lease payments on it in November2005.  MAIR unconditionally guaranteedfull and prompt payment of the ground lease and the bonds associated with theinitial financing of the facility.  Inaccordance with this guaranty, MAIR has made the required bond and ground leasepayments due since November 2005.  InApril 2006, in exchange for the bondholders forbearing acceleration of thebonds, MAIR delivered a $13.1 million letter of credit to the bondholders toassure payment of the bonds.  As ofDecember 31, 2006, MAIR recorded a $3.7 million liability with respect to thelease and guaranty, which assumed that the facility would remain vacant untilMarch 31, 2008, during which time MAIR would continue to make the bond and leasepayments, and that thereafter MAIR would be able to sublease the facility at a20% discount.  If MAIR is unable to findan alternate sublessee for the facility, MAIR may be required to record anadditional expense.  Additionally, Mesaba’splan of reorganization calls for the rejection of the lease for thefacility.  Unless the bondholders consentto a new lease with MAIR,

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Mesaba’s rejection couldresult in a mandatory redemption event for the bonds, in which case thebondholders may draw on the letter of credit. Additionally, if a rejection occurs, MAIR’s guaranty may also require itto continue making payments on the ground lease.

*Any court-approved reorganizationby Mesaba could result in MAIR losing the value of its equity in Mesaba*.

In general, the absolutepriority rule in the Bankruptcy Code requires that all of the debtor’screditors must be paid in full; otherwise the equity holders in the debtor arenot entitled to retain their equity interests, unless certain exceptions to theabsolute priority rule are met.  Mesaba’splan of reorganization provides that the proceeds of the sale of its $145million claim in Northwest’s bankruptcy will be utilized to pay Mesaba’screditors. Mesaba estimates that creditors claims will total approximately $90to $100 million. If Mesaba’s estimate is correct, MAIR expects that after alldistributions are made in accordance with Mesaba’s plan of reorganization, MAIRcould receive approximately $30 to $50 million, including its proof of claimand its equity position in Mesaba’s bankruptcy estate. However, it is possiblethat Mesaba’s creditors’ claims could be significantly higher than Mesabaestimates, which would reduce the amount of any distribution to MAIR as theequity holder.  It is also possible thatMesaba’s bankruptcy estate could incur substantial expenses in administeringthe liquidating trust, which would also reduce distributions to MAIR.

*MAIR is engaged in litigationwith Mesaba’s Creditors’ Committee and a negative outcome to such litigationcould have a material adverse effect on MAIR.*

Certain provisions of theBankruptcy Code allow a debtor-in-possession to recover transfers of cash orother property that were made prior to the debtor’s bankruptcy filing.  As a result, one of the traditional duties ofan official committee of unsecured creditors appointed in a bankruptcy case isto examine transactions between a debtor-in-possession and its affiliates.  In Mesaba’s bankruptcy case, the Creditors’Committee requested the right to review various documents concerningtransactions between MAIR and Mesaba, including the payment of dividends fromMesaba to MAIR, and to take depositions in order to understand thesetransactions.  In order to address anyquestions about the relationship between MAIR and Mesaba, MAIR entered into anagreed protective order with the Creditors’ Committee to voluntarily providedocuments explaining the relationship between MAIR and Mesaba and to providewitness testimony concerning the documents provided.   MAIR believes all dividends paid by Mesabawere appropriate and in compliance with the requirements of the MinnesotaBusiness Corporation Act.  To that end,MAIR filed a declaratory judgment action requesting an order that the dividendsand other payments from Mesaba to MAIR were legal and appropriate.  In response, the Creditors’ Committee filed acounterclaim alleging that the cash payments were fraudulent under Minnesotalaw and federal bankruptcy law.  Mesaba’splan of reorganization provides that, upon confirmation of the plan of reorganization,Mesaba will release all claims it and its bankruptcy estate has againstMAIR.  However, if such release is notprovided, any negative outcome to this lawsuit could have a material adverseeffect on the financial condition and results of operations of MAIR.

*Mesaba has experienced a high attrition rate in itsaccounting, finance and information technology departments, and if Mesaba isunable to replace individuals in these areas, Mesaba’s internal control overfinancial reporting may be adversely affected.*

Sincethe Petition Date, Mesaba has experienced resignations of key personnel in theaccounting and SEC reporting functions as well as the information technologyarea, which provides technical support to the finance department. Additionally, Mesaba has begun to implement company-wide staff reductions and areorganization of its operations.  Mesaba has added contract workers andconsultants as temporary replacements of the key personnel who have resigned,and Mesaba expects that it will be able to continue to engage consultants andother temporary replacements for these positions in the near future.  However, if Mesaba is not able tosuccessfully attract qualified permanent employees to fill these key positions,Mesaba’s internal control over financial reporting could be adversely affected.

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**RisksRelated to Mesaba’s Relationship with Northwest**

*Mesaba isdependent on its relationship with Northwest as its major customer, and theloss of this relationship would substantially harm the Company’s financialresults.*

During fiscal 2006,Northwest accounted for 94.8% of Mesaba’s operating revenues.  Additionally, Mesaba consistently carries areceivable due from Northwest between $7 million and $10 million that is notcollateralized.  Mesaba’s future successwill depend upon Northwest’s ability to successfully restructure throughbankruptcy.  Mesaba’s plan ofreorganization contemplates that, upon exit from bankruptcy, Mesaba will becomea wholly-owned operating subsidiary of Northwest.  If Mesaba’s plan of reorganization is notapproved by Mesaba’s bankruptcy court, or if Northwest’s bankruptcy court failsto approve Mesaba’s SPRA with Northwest, Mesaba may be unable to exitbankruptcy.  In addition, if Mesaba isunable to retain its relationship with Northwest in any form, Mesaba may beunable to exit bankruptcy.

*Northwesthas not guaranteed that it will grow Mesaba’s regional fleet, and Northwestcould opt to operate new regional aircraft with its own new subsidiary orutilize other regional airlines.*

During negotiations forthe SPRA, Northwest advised Mesaba that Northwest intends to place certainregional jets with Mesaba, after the closing of the SPRA.  However, if Mesaba’s plan of reorganizationis not approved, or if Mesaba meets any obstacles in obtaining court approvalof its plan of reorganization, Northwest may opt to place its jets with anotherregional carrier.

**RisksRelated to the Company’s Business and Operation**

*Mesaba’sand Big Sky’s success is dependent on their ability to obtain all necessaryaircraft, engines, parts and related maintenance and support from variousaircraft manufacturers and vendors.*

Mesaba and Big Sky aredependent on various aircraft manufacturers and other vendors to providesufficient parts and related maintenance and support services on a timelybasis.  Additionally, Mesaba and Big Skyrely on various engine manufacturers for parts, repair and overhaul servicesand other types of support services. Mesaba’s bankruptcy and nonpayment for prepetition goods and serviceshas adversely affected its relationship with certain vendors.  The failure of aircraft or enginemanufacturers and other vendors to provide parts or related services on atimely, cost-effective basis could materially and adversely affect Mesaba’s orBig Sky’s business, financial condition and results of operations.

*BecauseMesaba is unable to pass along increased operating costs, Mesaba’s earningswill be negatively affected as its fleet continues to age.*

As Mesaba’s fleet ofaircraft age, the cost of maintaining the aircraft will likely increase.  Because many aircraft components are requiredto be replaced after a specified time, numbers of flight hours or take-off andlanding cycles, and because new aviation technology may require certain partsto be retrofitted, the cost to maintain aging aircraft will generally exceedthe cost to maintain newer aircraft.  Anymaterial increase in such costs will have a material adverse effect on Mesaba’sbusiness, financial condition and results of operations.

*If Mesabaloses certain of its ground handling business, Mesaba’s results of operationswould be materially affected.*

Mesaba performs variousground handling services for Northwest, Pinnacle Airlines and other airlines atMinneapolis, Detroit and certain other airport locations.  The ground handling business is highlycompetitive, and airlines are constantly reviewing their cost structures tolocate the most cost-effective ground handling providers.  Mesaba does not have long-term agreementswith Northwest or Pinnacle. If Northwest or Pinnacle terminate Mesaba’s groundhandling services, Mesaba’s financial results would be materially affected,both through a loss of revenue and increased transition expenses.

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*Mesabaand Big Sky could incur significant costs if they experience difficultyfinding, training and retaining employees.*

Mesaba’s and Big Sky’sbusinesses are labor-intensive and require large numbers of pilots, flightattendants, maintenance technicians and other personnel.  The airline industry has from time to timeexperienced a shortage of qualified personnel, specifically pilots andmaintenance technicians.  In addition, asis common with most airline competitors, Mesaba and Big Sky have faced turnoverof their employees.  For example, Mesaba’sand Big Sky’s pilots and maintenance technicians, as well as Mesaba’s flightattendants, occasionally leave to work for larger airlines which generallyoffer higher salaries and more extensive benefit programs than regionalairlines are financially able to offer. In the event of a significant increase in the turnover of employees,Mesaba and Big Sky would incur significantly higher training costs than wouldotherwise be necessary.  Mesaba and BigSky cannot provide assurance that they will be able to recruit, train andretain the qualified employees they require to carry out their business plans.

*Mesabaand Big Sky could be adversely affected by the highly competitive nature of theairline industry.*

The airline industry ishighly competitive, and Northwest competes not only with other regionalcarriers, but also with low-cost airlines and major airlines on many of itsroutes, including the routes that Mesaba flies. Some of these competitors are significantly larger and possess greaterresources than Northwest.  Moreover, anynew entry in the markets Mesaba serves could lessen the economic benefitsNorthwest derives from servicing these markets. Finally, Big Sky also competes with low-cost and regional carriers onits routes, and it faces the same competitive challenges described above.

*MAIR’sability to diversify within the airline industry may be limited by the terms ofits side letter agreement with Mesaba’s pilots’ union.*

In January 2004, MAIRentered into a letter agreement with ALPA that may limit the types of aircraftBig Sky may fly and may place additional requirements on MAIR if it forms oracquires any other airline subsidiary.  These possible limitations wereincluded in Mesaba’s negotiations with its pilots in Mesaba’s bankruptcyproceedings, and the Bankruptcy Court ruled that Mesaba cannot reject theletter agreement.  In December 2006, MAIR initiated litigation againstALPA requesting a declaratory judgment that the letter agreement is terminableat will.  Although MAIR believes stronglyin the merit of its case, if the court upholds the letter agreement, MAIR couldbe prevented from expanding Big Sky.

*Mesaba’sand Big Sky’s compliance with various regulations governing the airlineindustry can be costly, and Mesaba and Big Sky could be harmed if they fail tocomply with such regulations.*

Airlines are subject toextensive regulatory and legal requirements that involve significant compliancecosts that can result in increased costs for passengers and the airline.  The Federal Aviation Administration, DOT andTransportation Security Administration periodically propose additional laws,regulations, taxes and airport fees and charges.  Such measures could have the effect ofraising ticket prices, reducing revenue, increasing costs or reducing demandfor air travel.  Mesaba and Big Skyexpect to continue incurring expenses to comply with existing and futureregulations.  Moreover, if either Mesabaor Big Sky fails to comply with applicable regulations, they may be subject tosanctions, including the following:

·                  warning letters;

·                  fines;

·                  injunctions;

·                  orders relating to grounding ofaircraft, inspection of aircraft, installation of new safety-related items andremoval and replacement of certain aircraft parts; or

·                  criminalprosecutions.

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*Futureterrorists attacks, other world events, general economic conditions and otherfactors beyond the Company’s control could substantially harm the Company.*

The terrorist attacks ofSeptember 11, 2001 and the prolonged unrest in the Middle East materiallyaffected and continue to affect the airline industry.  Concerns about further terrorist attacks havehad a negative impact on air travel demand. In addition, security procedures introduced at airports since theattacks have increased the inconvenience of air travel, both in reality and in customerperception, leading to further reduction in demand.  Finally, the continued rise in jet fuelprices has had an adverse economic effect on all airlines, including Northwestand Big Sky.  Additional terrorist attacks,the fear of such attacks, continued conflict in Iraq, Afghanistan or othercountries or continued increases in fuel prices could further affect theairline industry and could cause general instability in financial markets.

Because a substantialportion of air travel, including business travel, is discretionary, theindustry tends to experience adverse financial results during general economicdownturns.  Soft economic conditionscontinue to put pressure on the profitability of the industry.  Any general decline in passenger traffic mayharm the Company’s business.

Mesaba’s and Big Sky’soperations are also subject to delays caused by factors beyond their control,including air traffic congestion at airports, adverse weather conditions andincreased security measures.  Such delaysfrustrate passengers, reduce aircraft utilization and increase costs, all ofwhich may affect profitability and harm the Company’s financial condition andresults of operations.

*Mesabaand Big Sky are increasingly dependent upon technology in their operation andany failure of such technology could adversely affect them.*

Mesaba and Big Sky havemade substantial investments in technology to manage their operations.  In particular, the systems operations controlcenters, which oversee daily flight operations, are dependent on a number oftechnology systems to operate effectively. These technology systems may be vulnerable to various sources ofinterruption due to events beyond Mesaba’s or Big Sky’s control, includingnatural disasters, terrorist attacks, computer viruses and hackers.  In addition, large-scale interruption intechnology on which Mesaba and Big Sky depend, such as power,telecommunications or the Internet, could substantially disrupt theiroperations.

*Anyairline accident in which Mesaba or Big Sky is involved could subject Mesaba orBig Sky to substantial liability and seriously harm the Company’s financialcondition and results of operations.*

An accident involvingMesaba or Big Sky aircraft could result in injuries and loss of life and,therefore, result in significant claims from injured persons and survivingrelatives.  An accident could also resultin substantial property damage, loss of aircraft from service and adversepublicity for the affected airline.  TheDOT requires airlines to carry liability insurance.  Although Mesaba and Big Sky believe theirliability insurance is in amounts and of the type generally consistent withindustry practice, substantial claims resulting from an accident in excess ofinsurance coverage would harm the Company’s business and financialresults.  Any resulting claims would alsobe costly to defend and could harm Mesaba’s or Big Sky’s reputation.  Moreover, any aircraft accident, even iffully insured or not directly involving Mesaba or Big Sky, could cause a publicperception that flying is less safe or reliable than other transportationalternatives, which could harm the Company’s financial condition and results ofoperations.

**RisksRelated to the Company’s Stock**

*Together,certain of the Company’s shareholders own a significant portion of the Company’s stock and could ultimatelycontrol decisions regarding the Company.*

Several of the Company’sshareholders own significant blocks of the Company’s common stock.  Accordingly, they may be able to determine orsignificantly influence the outcome of corporate actions requiring shareholderapproval.  As a result, these parties maybe in a position to control matters affecting the Company, including decisionsas to the Company’s direction and policies; future issuances of securities,incurrence of debt, amendments to the Company’s articles of incorporation andbylaws, payment of dividends on the Company’s common stock; and acquisitions,sales of the Company’s assets, mergers or similar transactions, includingtransactions involving a change of control. As a

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result, some investorsmay be unwilling to purchase the Company’s common stock.  In addition, if the demand for the Company’scommon stock is reduced because of these shareholders’ control of the Company,the price of the Company’s common stock could be materially depressed.  Northwest also owns 27.5% of the Company’sstock and a warrant to purchase an additional 4.1 million shares.  MAIR has entered into an agreement withNorthwest to purchase these shares and cancel the warrant.  If this agreement does not close, Northwestwill continue to have the ability to exert influence as a large shareholder ofthe Company.

*Futuresales of the Company’s common stock by its shareholders could depress the priceof the Company’s stock.*

Sales of a large numberof shares of the Company’s common stock or the availability of a large numberof shares for sale could adversely affect the market price of the Company’scommon stock.  As of December 31, 2006,the Company had 20,591,840 shares of common stock outstanding.  Several of the Company’s shareholders ownsubstantial blocks of the Company’s common stock.  Future sales of large blocks of the Company’scommon stock could substantially depress the Company’s stock price.

*TheCompany’s stock price may continue to be volatile.*

In the past two fiscalyears, the market price of the Company’s common stock has ranged from a low of$4.50 per share to a high of $10.23 per share. Because the Company’s stock is thinly traded, its market price issensitive and may continue to experience substantial fluctuations due to avariety of factors, including the following:

·                  failure of the Company’s operatingresults to meet analysts’ or investors’ expectations in any quarter;

·                  securities analysts’ estimates;

·                  material announcements by theCompany, Northwest or the Company’s, Mesaba’s or Big Sky’s competitors;

·                  public sales of a substantial numberof shares of the Company’s common stock;

·                  increased short sales due to theuncertainty surrounding Mesaba’s bankruptcy, as well as any purchase to covershort positions;

·                  regulatory actions; or

·                  generalmarket conditions.

*Anti-takeoverprovisions of the Company’s articles of incorporation and bylaws and ofMinnesota law could discourage, delay or prevent a change in control.*

The Company’s articles ofincorporation and bylaws, along with Minnesota law, could discourage, delay orprevent persons from acquiring or attempting to acquire the Company.  The Company’s articles of incorporationauthorize the board of directors, without action by the Company’s shareholders,to designate and issue preferred stock in one or more series, with such rights,preferences and privileges as the board of directors shall determine.  The Company’s articles of incorporation andbylaws also mandate a classified board of directors, which makes changingcontrol of the board more difficult.  TheCompany’s bylaws grant the board of directors the authority to adopt, amend orrepeal all or any of such bylaws, subject to the power of the shareholders tochange or repeal such bylaws.  The Company’sbylaws also limit who may call meetings of the Company’s shareholders.

As a public corporation,the Company is prohibited by the Minnesota Business Corporation Act, exceptunder certain specified circumstances, from engaging in any merger, significantsale of stock or assets or business combination with any shareholder or groupof shareholders who own at least 10% of the Company’s common stock.

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**ITEM6.  EXHIBITS**
| Exhibit  Number | ** ** | **Document Description**                                                                                                                               |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1             |       | Mesaba Plan of Reorganization dated January 22,  2007. Filed herewith.                                                                            |
| 10.20           |       | Stock Purchase Agreement, dated January 22,  2007, between Northwest Airlines, Inc. and MAIR Holdings, Inc. Filed herewith.                       |
| 10.21           |       | Stock Purchase and Reorganization Agreement, dated  January 22, 2007, between Northwest Airlines, Inc. and Mesaba Aviation,  Inc. Filed herewith. |
| 31.1            |       | Chief Executive Officer Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.                                 |
| 31.2            |       | Chief Financial Officer Certification Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002. Filed herewith.                                 |
| 32.1            |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. Filed herewith.                                                         |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                          | MAIR Holdings, Inc.                                                                                                              |
|--------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                     |                                                                                                                             |   |
|                     |                                                                                                                             |   |
| Dated: February 8,  2007 | By:                                                                                                                              | /s/ Robert E. Weil |
|                     | Robert E. Weil  Vice President, Chief Financial Officer and Treasurer (principal financial  officer and an authorized signatory) |

 

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