**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended September 30, 2005**

 

**OR**

 

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

 

**For thetransition period from           to          **

 

**CommissionFile No:  0-17895**

 

**MAIR HOLDINGS, INC.**

Incorporated under the laws ofMinnesota

 

**41-1616499**

(I.R.S. Employer ID No.)

 

**FifthStreet Towers, Suite 1360**

**150 SouthFifth Street**

**Minneapolis,MN  55402**

**(612) 333-0021**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes ý    Noo

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

Yes ý    Noo

 

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

 

Yes o    Noý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                              | ** ** | **Outstanding as of October 31,  2005** |
|----------------------------------------|------------|----------------------------------------------|
| Common Stock, par value $.01 per share |       | 20,591,840                                   |

 

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements in this Quarterly Report on Form 10-Q of MAIR Holdings, Inc.(“Holdings” or the “Company”) under the caption “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and elsewhere inthis report are forward-looking and are based upon information currentlyavailable to the Company.  The Company,through its officers, directors or employees, may also from time to time makeoral forward-looking statements.  Inconnection with the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, the Company notes that a variety of materialrisks and uncertainties could cause actual results to differ materially fromthose contained in any forward-looking statement made by or on behalf of theCompany.  Many important factors that couldcause such a difference are described under the caption “Certain Risk FactorsRelating to the Company and the Airline Industry” in Item 2 of this QuarterlyReport on Form 10-Q.

 

Undue reliance should not be placed on the Company’s forward-lookingstatements because the matters they describe are subject to known and unknownrisks, uncertainties and other unpredictable factors, many of which are beyondthe Company’s control.  The Company’sforward-looking statements speak only as of the date on which they are made.  Over time, actual results, performance orachievements will likely differ from the anticipated results, performance orachievements that are expressed or implied by the Company’s forward-lookingstatements, and such differences might be significant and materially adverse tothe Company’s shareholders.

 

All 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 Companyassumes no obligation, and disclaims any obligation, to update informationcontained in this Quarterly Report on Form 10-Q, including forward-lookingstatements, as a result of facts, events or circumstances after the date ofthis report, except as required by law in the normal course of its publicdisclosure practices.

 

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**Part I.  FINANCIAL INFORMATION**

 

**ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**MAIRHOLDINGS, INC.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS**

**(inthousands, except share information)**

**(Unaudited)**

 
| ** **                                                | ** ** | **September 30** | ** ** | **March 31** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                | ** ** | **2005**              | ** ** | **2005**          | ** ** |
| ASSETS                                                    |       |                  |       |              |       |
|                                                      |       |                  |       |              |       |
| CURRENT ASSETS:                                           |       |                  |       |              |       |
| Cash and  cash equivalents                                |       | $                     | 61,482     |              | $          | 57,968 |   |
| Short-term  investments                                   |       | 59,343                |       | 69,669            |       |
| Restricted  cash and cash equivalents                     |       | 7,100                 |       | —            |       |
| Accounts  receivable, net of reserves of $32,619 and $601 |       | 31,136                |       | 31,176            |       |
| Inventories,  net                                         |       | 12,209                |       | 11,034            |       |
| Prepaid  expenses and deposits                            |       | 5,707                 |       | 5,808             |       |
| Deferred  income taxes and other                          |       | 22,940                |       | 11,892            |       |
| Total current  assets                                     |       | 199,917               |       | 187,547           |       |
|                                                      |       |                  |       |              |       |
| PROPERTY AND EQUIPMENT:                                   |       |                  |       |              |       |
| Flight  equipment                                         |       | 96,643                |       | 93,645            |       |
| Other  property and equipment                             |       | 42,467                |       | 40,248            |       |
| Less:  Accumulated depreciation and amortization          |       | (101,371              | )          | (95,472           | )          |
| Net property  and equipment                               |       | 37,739                |       | 38,421            |       |
|                                                      |       |                  |       |              |       |
| NONCURRENT ASSETS:                                        |       |                  |       |              |       |
| Long-term  investments                                    |       | 22,619                |       | 43,240            |       |
| Goodwill                                                  |       | —                |       | 2,503             |       |
| Other  intangible assets, net                             |       | 2,615                 |       | 2,819             |       |
| Other  assets, net                                        |       | 2,517                 |       | 6,424             |       |
|                                                      |       | $                     | 265,407    |              | $          | 280,954 |   |

 

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

 

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| ** **                                                                                                            | ** ** | **September 30** | ** ** | **March 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                            | ** ** | **2005**              | ** ** | **2005**          | ** ** |
|                                                                                                                  |       |                  |       |              |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                            |       |                  |       |              |       |
|                                                                                                                  |       |                  |       |              |       |
| CURRENT LIABILITIES:                                                                                                  |       |                  |       |              |       |
| Accounts  payable                                                                                                     |       | $                     | 32,765     |              | $          | 19,151 |   |
| Accrued  liabilities:                                                                                                 |       |                  |       |              |       |
| Payroll                                                                                                               |       | 17,070                |       | 19,563            |       |
| Maintenance                                                                                                           |       | 20,353                |       | 20,281            |       |
| Deferred  income                                                                                                      |       | 3,656                 |       | 3,085             |       |
| Other  current liabilities                                                                                            |       | 19,508                |       | 20,126            |       |
| Total  current liabilities                                                                                            |       | 93,352                |       | 82,206            |       |
|                                                                                                                  |       |                  |       |              |       |
| OTHER NONCURRENT LIABILITIES                                                                                          |       | 4,880                 |       | 6,069             |       |
|                                                                                                                  |       |                  |       |              |       |
| COMMITMENTS AND CONTINGENCIES (Note 13)                                                                               |       |                  |       |              |       |
|                                                                                                                  |       |                  |       |              |       |
| 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 and  20,574,340 shares issued and outstanding |       | 206                   |       | 206               |       |
| Paid-in  capital                                                                                                      |       | 69,538                |       | 70,856            |       |
| Accumulated  other comprehensive loss                                                                                 |       | (138                  | )          | (254              | )          |
| Retained  earnings                                                                                                    |       | 97,569                |       | 121,871           |       |
| Total  shareholders’ equity                                                                                      |       | 167,175               |       | 192,679           |       |
|                                                                                                                  |       | $                     | 265,407    |              | $          | 280,954 |   |

 

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

 

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**MAIRHOLDINGS, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(inthousands, except per share information)**

**(Unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| ** **                                                 | ** ** | ** **             | ** ** | **2004**              | ** ** | ** ** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | ** **             | ** ** | **(As restated-**     | ** ** | ** ** | ** ** | **(As restated-** | ** ** |
| ** **                                                 | ** ** | **2005**               | ** ** | **see Note 14)**      | ** ** | **2005** | ** ** | **see Note 14)** | ** ** |
| OPERATING REVENUES:                                        |       |                   |       |                  |       |   |   |   |   |
| Passenger                                                  |       | $                      | 103,872    |                  | $          | 103,789 |   | $ | 207,655 |   | $ | 201,103 |   |
| Freight and  other                                         |       | 11,034                 |       | 10,377                |       | 21,934 |   | 19,108 |   |
| Total  operating revenues                                  |       | 114,906                |       | 114,166               |       | 229,589 |   | 220,211 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| OPERATING EXPENSES:                                        |       |                   |       |                  |       |   |   |   |   |
| Wages and  benefits                                        |       | 39,070                 |       | 36,537                |       | 78,458 |   | 71,837 |   |
| Aircraft  fuel                                             |       | 1,254                  |       | 640                   |       | 2,212 |   | 1,190 |   |
| Aircraft  maintenance                                      |       | 22,836                 |       | 21,315                |       | 45,607 |   | 41,741 |   |
| Aircraft  rents                                            |       | 25,965                 |       | 25,796                |       | 51,630 |   | 50,902 |   |
| Landing fees                                               |       | 2,584                  |       | 2,643                 |       | 5,204 |   | 5,319 |   |
| Insurance  and taxes                                       |       | 1,921                  |       | 2,331                 |       | 3,814 |   | 4,404 |   |
| Depreciation  and amortization                             |       | 3,507                  |       | 3,355                 |       | 7,309 |   | 7,108 |   |
| Administrative  and other                                  |       | 21,486                 |       | 14,047                |       | 39,990 |   | 27,684 |   |
| Impairment  and other charges (Note 6)                     |       | 36,509                 |       | —                |       | 36,509 |   | — |   |
| Total  operating expenses                                  |       | 155,132                |       | 106,664               |       | 270,733 |   | 210,185 |   |
| Operating  (loss) income                                   |       | (40,226                | )          | 7,502                 |       | (41,144 | ) | 10,026 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| NONOPERATING INCOME (EXPENSE):                             |       |                   |       |                  |       |   |   |   |   |
| Interest  income and other                                 |       | 1,103                  |       | 548                   |       | 2,115 |   | 933 |   |
| Interest  expense                                          |       | (16                    | )          | (16                   | )          | (32 | ) | (34 | ) |
| Arbitration  settlement                                    |       | —                 |       | —                |       | 1,800 |   | — |   |
| Nonoperating  income, net                                  |       | 1,087                  |       | 532                   |       | 3,883 |   | 899 |   |
| Income  (loss) before provision (benefit) for income taxes |       | (39,139                | )          | 8,034                 |       | (37,261 | ) | 10,925 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| (BENEFIT) PROVISION FOR INCOME TAXES                       |       | (13,635                | )          | 3,297                 |       | (12,959 | ) | 3,325 |   |
| NET (LOSS) INCOME                                          |       | $                      | (25,504    | )                     | $          | 4,737 |   | $ | (24,302 | ) | $ | 7,600 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| NET (LOSS) INCOME PER SHARE:                               |       |                   |       |                  |       |   |   |   |   |
| (Loss)  earnings per common share - basic                  |       | $                      | (1.24      | )                     | $          | 0.23 |   | $ | (1.18 | ) | $ | 0.37 |   |
| (Loss)  earnings per common share - diluted                |       | $                      | (1.24      | )                     | $          | 0.23 |   | $ | (1.18 | ) | $ | 0.36 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:                       |       |                   |       |                  |       |   |   |   |   |
| Basic                                                      |       | 20,577                 |       | 20,471                |       | 20,576 |   | 20,462 |   |
| Diluted                                                    |       | 20,577                 |       | 20,947                |       | 20,576 |   | 20,960 |   |

 

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

 

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**MAIRHOLDINGS, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(inthousands)**

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **Six Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **September 30** | ** ** |
| ** **                                                                                           | ** ** | ** **            | ** ** | **2004** | ** ** |
| ** **                                                                                           | ** ** | ** **            | ** ** | **(As restated-** | ** ** |
| ** **                                                                                           | ** ** | **2005**              | ** ** | **see Note 14)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                                |       |                  |       |   |   |
| Net (loss)  income                                                                                   |       | $                     | (24,302    | ) | $ | 7,600 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by (used in) operating  activities: |       |                  |       |   |   |
| Depreciation  and amortization                                                                       |       | 7,309                 |       | 7,108 |   |
| Amortization  of investments                                                                         |       | 855                   |       | 1,030 |   |
| Amortization  of deferred credits                                                                    |       | (710                  | )          | (838 | ) |
| Stock-based  compensation                                                                            |       | (1,444                | )          | (719 | ) |
| Provision  for loss associated with Northwest bankruptcy filing                                      |       | 31,900                |       | — |   |
| Impairment  of goodwill                                                                              |       | 2,503                 |       | — |   |
| Cancellation  of Northwest warrants                                                                  |       | 2,106                 |       | — |   |
| Changes in  current operating items:                                                                 |       |                  |       |   |   |
| Accounts  receivable                                                                                 |       | (31,860               | )          | 2,525 |   |
| Inventories                                                                                          |       | (1,175                | )          | (1,695 | ) |
| Prepaid  expenses and deposits                                                                       |       | 101                   |       | (1,409 | ) |
| Accounts  payable and other                                                                          |       | (13,526               | )          | (1,638 | ) |
| Net cash  (used in) provided by operating activities                                                 |       | (28,243               | )          | 11,964 |   |
|                                                                                                 |       |                  |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                                               |       |                  |       |   |   |
| Purchases of  investments                                                                            |       | (30,603               | )          | (38,049 | ) |
| Sales of  investments                                                                                |       | 60,921                |       | 30,721 |   |
| Increase in  restricted cash and cash equivalents                                                    |       | 7,100                 |       | — |   |
| Purchases of  property and equipment                                                                 |       | (5,708                | )          | (5,111 | ) |
| Net cash  provided by (used in) investing activities                                                 |       | 31,710                |       | (12,439 | ) |
|                                                                                                 |       |                  |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                                                |       |                  |       |   |   |
| Repayment of  other non current liabilities                                                          |       | (67                   | )          | (67 | ) |
| Proceeds  from issuance of common stock                                                              |       | 114                   |       | 647 |   |
| Net cash  provided by financing activities                                                           |       | 47                    |       | 580 |   |
|                                                                                                 |       |                  |       |   |   |
| NET INCREASE  IN CASH AND CASH EQUIVALENTS                                                           |       | 3,514                 |       | 105 |   |
|                                                                                                 |       |                  |       |   |   |
| CASH AND  CASH EQUIVALENTS:                                                                          |       |                  |       |   |   |
| Beginning of  period                                                                                 |       | 57,968                |       | 52,661 |   |
| End of  period                                                                                       |       | $                     | 61,482     |   | $ | 52,766 |   |
|                                                                                                 |       |                  |       |   |   |
| SUPPLEMENTARY  CASH FLOW INFORMATION:                                                                |       |                  |       |   |   |
| Cash paid  (refund received) during period for:                                                      |       |                  |       |   |   |
| Interest                                                                                             |       | $                     | 33         |   | $ | 38 |   |
| Income taxes                                                                                         |       | $                     | (1,203     | ) | $ | 3,488 |   |

 

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

 

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**MAIR HOLDINGS, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

The condensed consolidated financial statements included herein havebeen prepared by the Company without audit, pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  The information furnished in the condensed consolidatedfinancial statements includes normal recurring adjustments, unless otherwisenoted, and reflects all adjustments that are, in the opinion of management,necessary for the fair presentation of such condensed consolidated financialstatements.  The Company’s business isseasonal and, accordingly, interim results are not indicative of results for afull year.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) have been condensed or omitted pursuant to such rules andregulations, although the Company believes that the disclosures are adequate tomake the information presented not misleading. These condensed consolidated financial statements should be read inconjunction with the consolidated financial statements for the year ended March 31,2005, and the notes thereto, included in the Company’s Annual Report on Form 10-Kfiled with the SEC on June 14, 2005.

 

1.     Basisof Presentation

 

The condensed consolidated financial statements include the accounts ofthe Company and its wholly owned subsidiaries, Mesaba Aviation, Inc. (“Mesaba”)and Big Sky Transportation Co. (“Big Sky”). All significant intercompany transactions and balances have beeneliminated in consolidation.

 

Asdiscussed in Note 3, Mesaba filed a voluntary petition for relief under Chapter11 of the United States Bankruptcy Code (“Bankruptcy Code”) in the UnitedStates Bankruptcy Court for the District of Minnesota (the “Bankruptcy Court”)on October 13, 2005.  Mesaba isoperating its business as a “debtor-in-possession” pursuant to the BankruptcyCode.

 

Theaccompanying condensed consolidated financial statements include those ofHoldings and its subsidiaries, including Mesaba.  Mesaba’s financialstatements have been prepared on a going concern basis, which contemplates continuity of operations,realization of assets and liquidation of post-petition liabilities in theordinary course of business.  Mesaba is early in its Chapter 11 bankruptcycase and is in the process of formulating its reorganization plan; however,various material risks and uncertainties could affect the outlook for Mesaba’soperations.

 

Subsequentto the bankruptcy filing date, the provisions in Statement of Position 90-7, “FinancialReporting by Entities 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 generally accepted accounting principles in thepreparation of financial statements. However, SOP 90-7 does require that thefinancial statements, for periods including and subsequent to the filing of theChapter 11 petition, distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of the business.The accompanying condensed consolidated financial statements do not reflect theChapter 11 filing.

 

*Use of Estimates*

 

The preparation of the condensed consolidated financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities, as well as the reported amounts of revenuesand expenses.  The most significant useof estimates relates to the fiscal 2006 second quarter estimated bad debtreserve due to the September 2005 Northwest bankruptcy filing, accruedmaintenance expenses, aircraft property and equipment lives, inventoryobsolescence reserves, valuation of goodwill and other intangible assets andaccounting for income taxes.  Ultimateresults could differ from those estimates.

 

*Reclassifications*

 

Certain amounts within shareholders’ equity previously reported in theaccompanying condensed consolidated balance sheet as of March 31, 2005have been reclassified to conform to the fiscal 2006 presentation.  The reclassifications had no effect onpreviously reported total shareholders’ equity.

 

2.     Business

 

*Mesaba*

 

Mesaba operates as a regional air carrier providing scheduled passengerservice as “Mesaba Airlines/Northwest Airlink” and “Mesaba Airlines/NorthwestJet Airlink” under a ten-year omnibus airline services agreement (“ASA”) withNorthwest Airlines, Inc. (“Northwest”) dated August 29, 2005.  (See Note 3 regarding Northwest filing forChapter 11 bankruptcy protection on September 14, 2005.)  Prior to the ASA, Mesaba provided regionalairline services to Northwest pursuant to

 

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two separate agreements, an Airline Services Agreement (the “AirlinkAgreement”) that governed Mesaba’s operation of Saab 340 jet-prop aircraft (“Saabs”),and a Regional Jet Services Agreement (the “Jet Agreement”) that governedMesaba’s operation of Avro RJ85 regional jets (“Avros”).  The ASA is an omnibus agreement thatincorporates the existing payment terms for the Saabs and Avros contained inthe Airlink Agreement and the Jet Agreement, and adds new payment terms for theCanadair regional jets (“CRJs”) that Mesaba began operating in October 2005.  As of September 30, 2005, Mesaba served110 cities in the United States and Canada from Northwest’s hub airportslocated in Minneapolis/St. Paul, Detroit and Memphis.

 

Northwest purchases Mesaba’s entire capacity and pays Mesaba in arrearson the 11th and 26th of each month for regional airlineservices that Mesaba provides to Northwest utilizing the Saabs and Avros.  Beginning in October 2005, Northwest isrequired to pay Mesaba, on a regular bi-monthly basis, on the 1stand 16th of each month for regional airline services that Mesabaprovides to Northwest utilizing the CRJs. The CRJ payment to be made on the 1st of each month willrepresent a prepayment based on an estimate of regional airline services to beprovided by Mesaba for the first 15 days of the month.  The CRJ payment made on the 16thof the month consists of a prepayment based on an estimate of regional airlineservices to be provided by Mesaba for the 16th through the end ofthe month, as well as a true-up amount paid for actual services provided byMesaba in the prior month.

 

For flights utilizing the Saabs, Mesaba recognizes revenue for eachcompleted “available seat mile,” or “ASM” (the number of seats in an aircraftmultiplied by the number of miles those seats are flown) and purchases fuel,ground handling and other services from Northwest.  Mesaba paid Northwest $3.6 million and $6.8million for these services for the three months ended September 30, 2005and 2004, respectively.  Mesaba paidNorthwest $6.9 million and $13.0 million for these services for the six monthsended September 30, 2005 and 2004, respectively.

 

For flights utilizing the Avros, Mesaba recognizes revenue for each “blockhour” flown (the elapsed time between aircraft departing and arriving at agate).  Northwest provides fuel andairport and passenger related services at Northwest’s expense for the Avros.

 

For flights utilizing the CRJs, which began revenue service in October 2005,Mesaba recognizes revenue through monthly expense reimbursement paymentsfor actual expenses incurred relating to aircraft rent, maintenance, landingfees and fuel (which is set at a fixed price of $0.70 per gallon for the CRJs);semi-monthly payments for each block hour and cycle operated; a monthly fixedcost payment based on the size of the CRJ fleet (intended to cover Mesaba’scosts that are not reimbursed through the monthly reimbursement payments, whichconsist mainly of labor costs, ground handling costs, landing fees, overheadand depreciation) and margin payments based on the revenues described abovecalculated to achieve a target operating margin.  The target operating margin through April 2007is set at a fixed amount, after which time the target operating margin will bebased on the average operating margin of the publicly traded United Statesdomestic regional airlines operating primarily regional jet aircraft, excludingPinnacle Airlines and any regional carrier under bankruptcy protection, subjectto a margin cap and floor.  The ASAprovides that by December 31, 2005, Mesaba and Northwest are to agree uponrevisions to change the payment methodology for the Saabs and Avros to the samemethodology as set forth above for the CRJs, with the understanding that thechange in payment methodology is not intended to change the financial outcomefor either party with respect to the Saabs and Avros.

 

TheASA contains standard termination provisions that allow both Mesaba andNorthwest to terminate the ASA in the event the other party breaches theagreement, subject to the other party’s right to cure the breach within aprescribed time period.  Additionally,Northwest may terminate the ASA in the event of certain lease and otherperformance defaults; failure by Mesaba to maintain required insurancecoverage; failure by Mesaba to allow inspections pursuant to the ASA; change incontrol events; revocation or failure to obtain Department of Transportation (the“DOT”) certification; if Mesaba or its affiliates operate an aircraft type thatcauses Northwest to be in violation of its collective bargaining agreement withits pilots; failure to elect a chief executive officer/president of Holdings orMesaba reasonably acceptable to Northwest; if a specified percentage of theaircraft subject to the agreement are not operated for a specified period oftime, other than as a result of the Federal Aviation Administration (the “FAA”)grounding all aircraft for all carriers; if there is a strike, cessation orinterruption of work involving Mesaba pilots, flight attendants or mechanicsproviding service; or if Holdings breaches its agreement entered into withNorthwest concurrently with the ASA.

 

Under the ASA, all scheduled flights that Mesaba operates aredesignated as Northwest flights using Northwest’s designator code in allcomputer reservation systems, including the Official Airline Guide, with anasterisk and a footnote indicating that Mesaba is the carrier providing theservice.  In addition, flight schedulesof Mesaba and Northwest are closely coordinated to facilitate interlineconnections, and Mesaba’s passenger gate facilities at the Minneapolis/St. PaulInternational Airport, Detroit Metropolitan Airport and Memphis InternationalAirport are integrated with Northwest’s facilities in the main

 

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terminal buildings.  The Avrosand the CRJs are painted in the colors of Northwest and the Saab aircraft arepainted in a distinctive “Northwest Airlink” configuration, with a Northwestlogo in addition to Mesaba’s name.

 

Mesaba, through the ASA, receives ticketing and certain check-in,baggage, freight and aircraft handling services from Northwest at certainairports.  In addition, Mesaba receivesits computerized reservations services from Northwest.  Northwest also performs all marketing,scheduling, yield management and pricing services for Mesaba’s flights.

 

The ASA provides for incentive payments from Northwest to Mesaba basedon achievement of certain operational or financial goals.  Such incentives totaled $0.8 million and $1.9million for the three months ended September 30, 2005 and 2004,respectively. Incentives totaled $2.2 million and $3.1 million for the sixmonths ended September 30, 2005 and 2004, respectively, and are includedin passenger revenues in the accompanying condensed consolidated statements ofoperations.  Approximately $25.1 million,net of reserve, or 81.0%, and $25.9 million, or 83.0%, of the September 30,2005 and March 31, 2005 accounts receivable balances in the accompanyingcondensed consolidated balance sheets were due from Northwest and were notcollateralized.

 

Upon execution of the ASA and pursuant to a separate agreement betweenHoldings and Northwest, Holdings issued to Northwest an amended and restatedwarrant (the “Warrant”) to replace the warrants held by Northwest to reduce thenumber of shares of Holdings’ common stock issuable upon exercise from4,151,922 shares exercisable at prices ranging from $7.25 to $21.25 per shareto an aggregate of 4,112,500 shares exercisable at a price of $8.74 pershare.  The Warrant expires ten yearsfrom the date of the ASA.  Sixty percentof the shares will become exercisable upon the delivery by Northwest of the 15thCRJ aircraft to Mesaba, and an additional 4% of the shares will becomeexercisable with each subsequent delivery of each of the next ten CRJaircraft.  In the quarter ended September 30,2005, the Company recorded a charge of $2.1 million to write-off theunamortized portion of the old warrants. Holdings also entered into a registration rights agreement to cover the registrationof the shares of stock currently held by Northwest and the shares of stock thatcould be issued to Northwest upon exercise of the Warrant.

 

In connection with the ASA, Mesaba incurred all of the start-up costsnecessary to bring the CRJ fleet into service. For the six months ended September 30, 2005, Mesaba incurredapproximately $7.0 million in start-up costs related to adding the CRJ aircraftinto its fleet, and Holdings incurred approximately $0.3 million in relatedstart-up costs.

 

Finally, in connection with the ASA, and pursuant to its separateagreement with Northwest, Holdings made a capital contribution of approximately$31.7 million to Mesaba.

 

*Big Sky*

 

Big Sky operates as a regional air carrier based in Billings, Montana,primarily providing scheduled passenger, airfreight, express package andcharter services.  As of September 30,2005, Big Sky provided scheduled air service to 20 communities in Montana,Colorado, Idaho, Oregon, Washington and Wyoming.  Big Sky operates daily scheduled flightsproviding interline and online connecting services and local marketservices.  Big Sky also has code-sharingagreements with Alaska Airlines, Horizon Air, America West Airlines andNorthwest, where its services are marketed jointly with those air carriers forconnecting flights.

 

Big Sky participates in the Essential Air Service (“EAS”) program withthe DOT.  The EAS program subsidizes aircarriers to provide air service to designated rural communities throughout thecountry that could not otherwise economically justify that service based on theirpassenger traffic.  The DOT pays EASsubsidies for each departure in a covered market.  For the three months ended September 30,2005 and 2004, Big Sky recognized revenue from EAS subsidies of $2.0 millionand $1.9 million, respectively.  For the sixmonths ended September 30, 2005 and 2004, Big Sky recognized revenue fromEAS subsidies of $4.0 million and $3.6 million, respectively.

 

Big Sky purchased fuel from Northwest for $0.5 million in the threemonth periods ended September 30, 2005 and 2004.  Big Sky purchased fuel from Northwest for $1.3million and $0.9 million for the six months ended September 30, 2005 and2004, respectively.

 

9

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3.     Northwestand Mesaba Bankruptcy Filings

 

*Northwest Bankruptcy Filing*

 

On September 12, 2005, Northwest failed to make a payment ofapproximately $18.7 million due to Mesaba for services provided by Mesaba toNorthwest from August 15 to August 31, 2005.  Subsequently, on September 14, 2005,Northwest filed in the Southern District of New York for bankruptcy protectionunder Chapter 11 of the Bankruptcy Code. On September 26, 2005, Northwest made a payment of approximately$1.6 million to Mesaba, which payment was for services provided by Mesaba toNorthwest from September 1 to September 15, 2005.  Because Northwest’s bankruptcy petition wasfiled on September 14, Northwest paid only that portion of the paymentattributable to services provided by Mesaba post-petition.  Additionally, on October 11, 2005,Northwest paid Mesaba approximately $15.7 million for services provided byMesaba from September 16 to September 30, 2005.  Northwest deducted approximately $3.3 millionfrom the total amount due for amounts that Northwest asserts representprepetition claims against Mesaba.  On October 26,2005, Northwest paid Mesaba approximately $10.5 million for services providedby Mesaba from October 1 to October 15, 2005.  Northwest deducted approximately $6.1 millionfrom the total amount due, the majority of which related to aircraft paymentsMesaba did not make to Northwest following Mesaba’s own bankruptcy filing on October 13,2005 (see below).

 

At the time of Northwest’s bankruptcy filing on September 14,2005, Northwest owed Mesaba approximately $31.9 million under the ASA andrelated agreements, net of amounts that Mesaba owed to Northwest under theseagreements (principally for aircraft fuel). Generally, all amounts thatNorthwest owed to its creditors at the time of its filing were stayed by thebankruptcy filing. Mesaba’s claims relating to such prepetition amounts areunsecured claims. At any time during Northwest’s bankruptcy proceedings,Northwest has the option to assume or reject the ASA and related agreements,pending approval of the bankruptcy court and a committee representing Northwest’sunsecured creditors. If Northwest assumes the ASA, prepetition amounts owed toMesaba (currently $31.9 million, net of certain offsetting liabilities) wouldbecome an administrative claim and Mesaba could receive payment in full.  If Northwest rejects the ASA and relatedcontracts, then pre-petition amounts owed to Mesaba would remain an unsecuredclaim, and Mesaba would likely receive only a small percentage of the amountsowed to it, and even then would only receive such amounts after the Northwest planof reorganization is approved by the bankruptcy court.  Mesaba believes that, even if Northwestintends to assume the ASA, Northwest will attempt to renegotiate the ASA withMesaba before Northwest will seek to assume the ASA.  This renegotiation could include a negotiationof the amount that Northwest will ultimately pay Mesaba in settlement of thenet pre-petition amounts that Northwest owes to Mesaba.  However, the exact nature of Mesaba’s futurerelationship with Northwest may not be known until such time as Northwestadopts its bankruptcy reorganization plan.

 

After analyzing the collectibility of the prepetition receivables dueto Mesaba from Northwest, the Company concluded that it was necessary toestablish a reserve of $31.9 million for amounts that Mesaba may not ultimatelycollect from Northwest.  To arrive at itsprepetition receivable, amounts owed by Northwest to Mesaba on September 14,2005 were offset by amounts owed by Mesaba to Northwest on that date of $7.0million.  In concluding that thisoffsetting of balances was appropriate, Mesaba followed the guidance providedin Financial Accounting Standards Board (“FASB”) Interpretation No. 39 “Offsettingof Amounts Related to Certain Contracts.”

 

Mesaba’s provision for the loss associated with Northwest’sbankruptcy is included in “Impairment and other charges” in the accompanying condensedconsolidated statements of operations. Although Mesaba recorded the above provision, Mesaba willcontinue to actively seek reimbursement through the bankruptcy process and anyother means, including any future discussions Mesaba may have with Northwestregarding the ASA.

 

Since its bankruptcy filing, Northwest has also proposed and implementedvarious changes to Mesaba’s fleet. Northwest removed nine of the Avros operated by Mesaba from Northwest’s schedule effectiveOctober 31, 2005.  Northwest alsonotified Mesaba that Northwest intends to terminate the Avro leases as of December 20,2005 and that ten of the Saabs operated by Mesaba will be removed fromNorthwest’s schedule as of January 4, 2006.  Finally, Northwest advised Mesaba thatNorthwest may not deliver to Mesaba the remaining 13 CRJs due to Mesabapursuant to the ASA.

 

*Mesaba Bankruptcy Filing*

 

Northwest’s missed payments to Mesaba and Northwest’s actions regardingits fleet and schedule changes 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 itwould receive because of the fleet and schedule changes dictated byNorthwest, Mesaba could not sustain its operations outside of court protectionunder Chapter 11 of the Bankruptcy Code. As a result, on October 13, 2005 (the “Petition Date”), Mesabafiled for bankruptcy protection under Chapter 11 of the Bankruptcy Code.  Mesaba continues to operate its business as “debtor-in-possession”under the jurisdiction of the Bankruptcy Court and in accordance with theapplicable provisions of the Bankruptcy Code, the Federal Rules of BankruptcyProcedure and applicable court orders. In general, as debtor-in-possession,Mesaba is authorized

 

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under Chapter 11 to continue to operate as an ongoing business, but maynot engage in transactions outside the ordinary course of business without theprior approval of the Bankruptcy Court.

 

All of Mesaba’s vendors are being paid for all goods furnished andservices provided after the Petition Date in the ordinary course of business.However, under Section 362 of the Bankruptcy Code, actions to collect mostof Mesaba’s prepetition liabilities are automatically stayed, except forliabilities relating to certain qualifying aircraft, aircraft engines and otheraircraft-related equipment that are leased or subject to a security interest orconditional sale contract. Under Section 1110 of the Bankruptcy Code,actions to collect such aircraft-related prepetition liabilities areautomatically stayed for 60 days after the Petition Date (in Mesaba’s case,until December 12, 2005), except under two conditions: (a) the debtormay extend the 60-day period by agreement with the relevant financier and withcourt approval; or (b) the debtor may agree to perform all of theobligations under the applicable lease or financing and cure any defaults asrequired under the Bankruptcy Code. If neither of these conditions is met, thelessor or financier may demand the return of the aircraft and enforce any ofits contractual rights or remedies to sell, lease or otherwise retain ordispose of such property.

 

Under Section 365 of the Bankruptcy Code, Mesaba may assume,assume and assign, or reject certain executory contracts and unexpired leases,including leases of real property, subject to the approval of the BankruptcyCourt and certain other conditions.  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 future obligations.However, such a rejection entitles the lessor or contract counterparty to a prepetitiongeneral unsecured claim for damages caused by such deemed breach andaccordingly, the counterparty may file a claim against Mesaba for such damages.As a result, liabilities subject to compromise are likely to change in thefuture as a result of damage claims created by Mesaba’s rejection of variousaircraft leases, executory contracts and unexpired leases. Generally, if Mesabaassumes an aircraft financing agreement, executory contract or unexpired lease,Mesaba is required to cure existing defaults under such contract or lease as acondition to such assumption.

 

Additionally, pursuant to Mesaba’s request for debtor-in possessionfinancing, Holdings has provided a commitment letter and term sheet to Mesabafor such financing.  The total commitmentamount under the commitment letter and term sheet is for $35 million of secureddebtor-in-possession financing, of which $15 million would be available subjectto usual and customary conditions to funding. The incremental $20 million would be available upon the satisfaction ofcertain additional conditions, including Mesaba’s delivery of an acceptablefive-year business plan by January 31, 2006.  The commitment letter, term sheet and thefinancing to be provided thereunder are subject to approval by the BankruptcyCourt.  The hearing to approvefinal debtor-in-possession financing is scheduled to be heard by the BankruptcyCourt on November 29, 2005.  The automatic stay in Mesaba’sbankruptcy case effectively allowed Mesaba to withhold payment on certainprepetition amounts owed by Mesaba to its creditors.  As a result, absentany additional adverse actions by Northwest with respect to its payments toMesaba, Mesaba expects that it will have sufficient cash to fund its operationsthrough the end of the calendar year, after which debtor-in-possessionfinancing should be available either through Holdings or another provider.

 

To successfully emerge from Chapter 11, in addition to obtaining exitfinancing if needed, the Bankruptcy Court must confirm a plan ofreorganization, the filing of which will depend on the timing and outcome ofnumerous ongoing matters in the Chapter 11 process and potentially includingthe outcome of Northwest’s Chapter 11 case. Mesaba intends to file a plan ofreorganization as soon as it is able to do so, but there can be no assurancethat the Bankruptcy Court will confirm a plan of reorganization or that anysuch plan will be implemented successfully. The reorganization plan will determine the rights and claims of variouscreditors and security holders. At this time, it is not possible to predictaccurately the effect of the Chapter 11 reorganization process on Mesaba’sbusiness, nor can Mesaba make any predictions concerning how the variouscreditor claims and interests of security holders will be determined in thebankruptcy proceedings.

 

It is possible that the relationship between Mesaba and Northwest maybe altered during the course of the Northwest and Mesaba bankruptcyproceedings; however, it is too early in that process to predict whether therewill be any alterations, what such alterations might be, or what the impactmight be to Mesaba’s operations.  The Company’s consolidated balance sheetat September 30, 2005 includes various items that could be impacted as aresult of changes to Mesaba’s relationship with Northwest and its fleetcomposition, including inventory, aircraft and ground handling equipment,maintenance and other accruals. As of September 30, 2005 and through thefiling date of this Quarterly Report on Form 10-Q, Mesaba has concludedthat the above items did not require adjustment. However, as Mesaba’s andNorthwest’s bankruptcy processes continue, Mesaba will further evaluate theseand other items for any possible adjustments.

 

4.     Goodwilland Other Intangibles

 

The Company purchased Big Sky in December 2002.  The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certain identifiableintangible assets, including Big Sky’s pilot labor contract and its

 

11

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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.

 

Due to the continued rising costs of fuel andthe resulting operating losses at Big Sky, the Company determined that aninterim impairment test of goodwill and other intangible assets was necessaryat September 30, 2005.  The goodwill impairment test consists of two steps, thefirst of which is to evaluate the recoverability of goodwill forpotential impairment. The fair value of the intangible asset is compared to thebook value reported on the financial statements.  If the fair value is greater than the bookvalue, no adjustment needs to be made to the financial statements.  Fair value is determined using discountedexpected future cash flows.  If the fairvalue is less than the book value, then goodwill is potentially impaired andstep two is performed.  The second stepis used to measure impairment of goodwill. The fair value of goodwill iscalculated by allocating the fair value of a reporting unit to its tangible andintangible assets and liabilities. The excess of goodwill reported on thebalance sheet over the fair value of goodwill is calculated and written off inthe financial statements.

 

Based on the results of the interim testperformed at September 30, 2005, the Company determined that goodwill wasimpaired and recorded an impairment charge of approximately $2.5 million.  The impairment charge was recorded in “Impairmentand other charges” in the accompanying condensed consolidated statements of operationsfor the quarter ended September 30, 2005. Based on its analysis, the Company determined that the air carriercertificate and pilot labor contract were not impaired, but will continue tomonitor the intangible assets at Big Sky for potential impairment in thefuture.

 

Goodwilland other intangible assets and related accumulated amortization were asfollows, in thousands:

 
| ** **                    | ** ** | **September 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | ** **                  | ** ** | **Accumulated**         | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Gross**                   | ** ** | **Amortization**        | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived assets:      |       |                        |       |                    |       |   |   |   |   |   |   |   |   |
| Air carrier  certificate      |       | $                           | 925        |                    |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Goodwill                      |       | —                      |       |                    |       | — |   | 2,503 |   |   |   | 2,503 |   |
| Amortizable intangible asset: |       |                        |       |                    |       |   |   |   |   |   |   |   |   |
| Pilot labor  contract         |       | 2,840                       |       | (1,150                  | )          | 1,690 |   | 2,840 |   | (946 | ) | 1,894 |   |
|                          |       | $                           | 3,765      |                    | $          | (1,150 | ) | $ | 2,615 |   | $ | 6,268 |   | $ | (946 | ) | $ | 5,322 |   |
|                               |            |                             |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizable intangible asset is being amortized over its estimatedperiod of benefit of seven years on a straight-line basis.  Intangible asset amortization expense for thethree and six months ended September 30, 2005 and 2004 was $0.1 millionand $0.2 million, respectively.

 

5.     Investments

 

Investments consist principally of municipal securities and areclassified as available-for-sale.  Fairvalue of investments is determined based on quoted market prices.  The Company classifies investments with anoriginal maturity of more than 90 days that mature within one year asshort-term and greater than one year as long-term.

 

As of September 30, 2005 and March 31, 2005, cash, cashequivalents, short-term and long-term investments totaled $143.4 million and $170.9million, respectively.

 

Amortized cost, gross unrealized gains and losses and fair value of shortand long-term investments classified as debt securities available-for-sale wereas follows, in thousands:

 
| ** **              | ** ** | **September 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Amortized cost          |       | $                           | 82,171     |                    | $          | 113,346 |   |
| Gross unrealized gains  |       | 4                           |       | 3                       |       |
| Gross unrealized losses |       | (213                        | )          | (440                    | )          |
| Fair value              |       | $                           | 81,962     |                    | $          | 112,909 |   |

 

For the three and six months ended September 30, 2005 and 2004,gross realized gains and losses were insignificant as the Company generally holdsthe fully amortized bonds to maturity.

 

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6.     Impairmentand Other Charges

 

Impairment and other charges for the three and six months ended September 30,2005 were as follows, in thousands:

 
| ** **                                                      | ** ** | ** ** | ** ** | **Refer to  Note** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|--------------------|------------|
| Cancellation of Northwest warrants                              |       | $          | 2,106      |               | 2          |   |
| Provision for loss associated with  Northwest bankruptcy filing |       | 31,900     |       | 3                  |       |
| Impairment of Big Sky goodwill                                  |       | 2,503      |       | 4                  |       |
| Total impairment and other charges                              |       | $          | 36,509     |               |       |   |

 

7.     NonoperatingIncome

 

In the first quarter of fiscal 2006, the Company recognized $1.8million as nonoperating income as a result of a favorable arbitrationsettlement with a former investment advisor.

 

8.     IncomeTaxes

 

During the first quarter of fiscal 2005, the Company receivedverification of a final settlement with the Internal Revenue Service (“IRS”)concerning the IRS’ examination of the Company’s fiscal 1995 and 1996 incometax returns.  As a result of thissettlement, the Company reduced its income tax payable and tax provision by$1.2 million in the first quarter of fiscal 2005.

 

In connection with the $31.9 million provisionfor loss associated with the Northwest bankruptcy filing, the Company recordeda deferred tax benefit of $11.3 million, which represents the future federaland state income tax deductions provided to the Company from this loss. Management is currently evaluating the extent to which this deductioncould impact its fiscal 2006 taxable loss.

 

Asof September 30, 2005, the Company has not recorded a valuation allowanceon this deferred tax benefit or on any of the Company’s other deferred taxassets as the Company believes that it is more likely than not that all of thedeferred tax assets will be realized. The Company made this assessment based on the weight of the availableevidence, which consisted principally of the following three sources of future taxable income: (1) taxableincome in prior carryback years (estimated to aggregate approximately $18million in fiscal 2005 and 2004), (2) tax-planning strategies (includingswitching the Company’s investment portfolio from tax-exempt municipalsecurities to taxable investments), and (3) estimated future taxableincome exclusive of reversing temporary differences and carryforwards.  Ultimate realization of approximately $16.5million of deferred tax assets is based upon tax-planning strategies andestimated future taxable income.  TheCompany will be required to update its estimates of future taxable income basedupon additional information management obtains as Mesaba completes itsbankruptcy reorganization plan.  As aresult, realization of the Company’s deferred tax assets will be dependent uponthe Company’s ability to generate sufficient future taxable income within the20 year carryforward period, and those estimates could change materially infuture periods as all available evidence, both positive and negative, is assessed.

 

9.     StockOptions

 

The Company accounts for its stock-based compensation plans using theintrinsic value method prescribed under Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations.  The Company has issuedstock options to key employees and directors. As such, the Company records compensation expense for stock options andawards only if the exercise price is less than the fair market value of thestock on the measurement date.

 

For purposes of the pro forma disclosures of compensation expense underStatement of Financial Accounting Standards (“SFAS”) No. 123, “Accountingfor Stock-Based Compensation” and SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure,” the Company uses theBlack-Scholes option model to estimate the fair value of options not subject tovariable plan accounting.

 

The following information summarizes the pro forma effects assumingcompensation for such awards had been recorded based upon the estimated fairvalue for the periods ended September 30, in thousands, except pershare information:

 

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| ** **                                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| ** **                                                                                                                                    | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (loss)  income as reported                                                                                                                |       | $                      | (25,504    | )                     | $          | 4,737 |   | $ | (24,302 | ) | $ | 7,600 |   |
| Add:  Stock-based employee compensation expense (reduction) included in reported net  (loss) income, net of related tax effects               |       | (956                   | )          | 12                    |       | (942 | ) | (421 | ) |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |       | (118                   | )          | (290                  | )          | (328 | ) | (678 | ) |
| Pro forma  net (loss) income                                                                                                                  |       | $                      | (26,578    | )                     | $          | 4,459 |   | $ | (25,572 | ) | $ | 6,501 |   |
|                                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| (Loss)  earnings per common share – basic:                                                                                               |       |                   |       |                  |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                      | (1.24      | )                     | $          | 0.23 |   | $ | (1.18 | ) | $ | 0.37 |   |
| Pro forma                                                                                                                                     |       | $                      | (1.29      | )                     | $          | 0.22 |   | $ | (1.24 | ) | $ | 0.32 |   |
| (Loss)  earnings per common share – diluted:                                                                                             |       |                   |       |                  |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                      | (1.24      | )                     | $          | 0.23 |   | $ | (1.18 | ) | $ | 0.36 |   |
| Pro forma                                                                                                                                     |       | $                      | (1.29      | )                     | $          | 0.21 |   | $ | (1.24 | ) | $ | 0.31 |   |

 

InDecember 2002, the Company repriced stock options to purchase 745,000shares of the Company’s common stock with exercise prices ranging from $9.05 to$18.00 to an exercise price of $5.97, which represented the fair market value ofthe Company’s stock on the date of the repricing.  As of September 30, 2005, 514,782repriced options were outstanding.  Inaccordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 44,“Accounting for Certain Transactions Involving Stock Compensation,” the Companyadopted variable plan accounting for these options from the date of therepricing.  For the three months ended September 30,2005 the Company recorded a reduction to compensation expense of $1.4 million.  The Company recorded no compensation expensefor the three months ended September 30, 2004.  For the six months ended September 30,2005 and 2004, the Company recorded a reduction in compensation expense of $1.4million and $0.7 million.

 

InDecember 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” which requires all public companiesaccounting for share-based payment transactions to account for these types oftransactions using a fair-value-based method. SFAS 123(R) eliminates the ability to account for share-basedcompensation transactions using APB Opinion No. 25.  SFAS 123(R) also requires the taxbenefits associated with these share-based payments to be classified asfinancing activities in the statement of cash flows rather than as operatingactivities as is currently permitted. SFAS No. 123(R) becomes effective as of the beginningof the first****fiscal year beginning after June 15,2005.

 

TheCompany expects to adopt SFAS No. 123(R) on April 1, 2006 using themodified-prospective method.  Under thistransition method, the Company will record compensation expense for all awardsit grants on a straight-line basis over the vesting period.  In addition, the Company will recordcompensation expense for the unvested portion of previously granted awards thatremain outstanding at the date of the adoption. The Company has not completed its assessment of the impact of thestandard on its financial condition or results of operations.

 

10.   Earnings(Loss) Per Share

 

Basic earnings (loss) per common share is computed by dividing netincome (loss) by the weighted average number of shares of common stockoutstanding during the period.  Dilutedearnings (loss) per share is computed by dividing net income (loss) by the sumof the weighted average number of shares of common stock outstanding plus alladditional common stock that would have been outstanding if potentiallydilutive common shares related to stock options and warrants had beenissued.  Stock options and warrants withan exercise price exceeding the fair market value of the Company’s common stockare 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.

 

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The following table reconciles the number of shares utilized in the condensedconsolidated earnings (loss) per share calculations for the periods endedSeptember 30, in thousands:

 
| ** **                                                                                                   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                   | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| ** **                                                                                                   | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (loss) income                                                                                            |       | $                      | (25,504    | )                     | $          | 4,737 |   | $ | (24,302 | ) | $ | 7,600 |   |
| For earnings (loss) per common share -  basic:                                                               |       |                   |       |                  |       |   |   |   |   |
| Weighted average  number of issued shares outstanding                                                        |       | 20,577                 |       | 20,471                |       | 20,576 |   | 20,462 |   |
| Effect of dilutive securities:                                                                               |       |                   |       |                  |       |   |   |   |   |
| Computed  shares outstanding under the Company’s stock option plan utilizing the  treasury stock method |       | —                 |       | 358                   |       | — |   | 370 |   |
| Computed  shares outstanding under warrants issued utilizing the treasury stock method                       |       | —                 |       | 118                   |       | — |   | 128 |   |
| For earnings (loss) per common share -  diluted:                                                             |       |                   |       |                  |       |   |   |   |   |
| Weighted  average common shares and potentially dilutive common shares                                       |       | 20,577                 |       | 20,947                |       | 20,576 |   | 20,960 |   |
|                                                                                                         |       |                   |       |                  |       |   |   |   |   |
| Antidilutive options and warrants                                                                            |       | 4,333                  |       | 3,505                 |       | 220 |   | 3,505 |   |
|                                                                                                              |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

11.   Consolidated Comprehensive Income

 

The following table presents the calculation of comprehensiveincome.  The components of comprehensiveincome for the periods ended September 30 are as follows, inthousands:

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | **September 30**  | ** ** | **September 30** | ** ** |
| ** **                                                                             | ** ** | **2005**               | ** ** | **2004**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                                                      |       | $                      | (25,504    | )                     | $          | 4,737 |   | $ | (24,302 | ) | $ | 7,600 |   |
| Unrealized  gains (losses) on investments classified as available for sale, net of tax |       | 27                     |       | 58                    |       | 116 |   | (109 | ) |
| Comprehensive income (loss)                                                            |       | $                      | (25,477    | )                     | $          | 4,795 |   | $ | (24,186 | ) | $ | 7,491 |   |

 

12.   SegmentInformation

 

The Company follows the provisions of SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information.”  SFAS No. 131 establishes annual andinterim reporting standards for an enterprise’s business segments and relateddisclosures about its products, services, geographic areas and major customers.  The method for determining what informationto report is based upon the way management organizes the operating segmentswithin the Company for making operating decisions and assessing financialperformance.  Operating segmentinformation for Mesaba, Big Sky and Holdings for the periods endedSeptember 30 were as follows,in thousands:

 

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| ** **                                    | ** ** | ** ** | ** ** | ** **  | ** ** | **Holdings and** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|------------|------------|-------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| *Three Months Ended September 30, 2005:* |       |       |       |        |       |             |       |             |       |
| Operating  revenues                           |       | $          | 109,744    |        | $          | 5,162            |       | $                | —     |   | $ | 114,906 |   |
| Operating  expenses                           |       | 148,025    |       | 8,757       |       | (1,650           | )          | 155,132          |       |
| Depreciation  and amortization                |       | 3,276      |       | 226         |       | 5                |       | 3,507            |       |
| Interest  expense                             |       | —     |       | 88          |       | (72              | )          | 16               |       |
| Income  (loss) before income taxes            |       | (38,043    | )          | (3,608      | )          | 2,512            |       | (39,139          | )          |
| Capital  expenditures                         |       | 2,629      |       | 107         |       | 8                |       | 2,744            |       |
| At end of  period:                            |       |       |       |        |       |             |       |             |       |
| Current  assets                               |       | 90,504     |       | 3,587       |       | 105,826          |       | 199,917          |       |
| Total assets                                  |       | 137,254    |       | 9,165       |       | 118,988          |       | 265,407          |       |
| Current  liabilites                           |       | 85,354     |       | 9,234       |       | (1,236           | )          | 93,352           |       |
| Total  stockholders’ equity              |       | 47,905     |       | (954        | )          | 120,224          |       | 167,175          |       |
| *Three Months Ended September 30, 2004:* |       |       |       |        |       |             |       |             |       |
| Operating  revenues                           |       | 110,214    |       | 3,952       |       | —           |       | 114,166          |       |
| Operating  expenses                           |       | 101,673    |       | 4,701       |       | 290              |       | 106,664          |       |
| Depreciation  and amortization                |       | 3,152      |       | 199         |       | 4                |       | 3,355            |       |
| Interest  expense                             |       | —     |       | 68          |       | (52              | )          | 16               |       |
| Income  (loss) before income taxes            |       | 8,649      |       | (824        | )          | 209              |       | 8,034            |       |
| Capital  expenditures                         |       | 2,105      |       | 31          |       | 4                |       | 2,140            |       |
| At end of  period:                            |       |       |       |        |       |             |       |             |       |
| Current  assets                               |       | 75,123     |       | 2,896       |       | 100,905          |       | 178,924          |       |
| Total assets                                  |       | 122,424    |       | 9,931       |       | 140,270          |       | 272,625          |       |
| Current  liabilites                           |       | 71,049     |       | 5,995       |       | (2,402           | )          | 74,642           |       |
| Total  stockholders’ equity              |       | 45,307     |       | 3,313       |       | 143,935          |       | 192,555          |       |
| *Six Months Ended September 30, 2005:*   |       |       |       |        |       |             |       |             |       |
| Operating  revenues                           |       | 219,887    |       | 9,702       |       | —           |       | 229,589          |       |
| Operating  expenses                           |       | 258,298    |       | 14,115      |       | (1,680           | )          | 270,733          |       |
| Depreciation  and amortization                |       | 6,854      |       | 446         |       | 9                |       | 7,309            |       |
| Interest  expense                             |       | —     |       | 153         |       | (121             | )          | 32               |       |
| Income  (loss) before income taxes            |       | (37,969    | )          | (4,488      | )          | 5,196            |       | (37,261          | )          |
| Capital  expenditures                         |       | 5,300      |       | 388         |       | 20               |       | 5,708            |       |
| *Six Months Ended September 30, 2004:*   |       |       |       |        |       |             |       |             |       |
| Operating  revenues                           |       | 212,650    |       | 7,561       |       | —           |       | 220,211          |       |
| Operating  expenses                           |       | 201,397    |       | 4,273       |       | 4,515            |       | 210,185          |       |
| Depreciation  and amortization                |       | 6,694      |       | 406         |       | 8                |       | 7,108            |       |
| Interest  expense                             |       | —     |       | 145         |       | (111             | )          | 34               |       |
| Income  (loss) before income taxes            |       | 11,295     |       | (1,913      | )          | 1,543            |       | 10,925           |       |
| Capital  expenditures                         |       | 5,042      |       | 64          |       | 5                |       | 5,111            |       |
|                                               |            |            |            |             |            |                  |            |                  |            |  |  |  |  |

 

13.   Commitmentsand Contingencies

 

*Saab Leasing Litigation*

 

On October 4, 2002, Fairbrook Leasing, Inc., Lambert Leasing, Inc.and Swedish Aircraft Holdings AB (“Saab Leasing”) filed a declaratory judgmentaction against Mesaba relating to 20 Saab 340A (“340A”) aircraft leased byMesaba.  Saab Leasing sought a judicial declaration that the terms of theleases applicable to each of the 340A aircraft are governed by a March 7,1996 term sheet proposal rather than the parties’ subsequent agreements andconduct.  In a December 8, 2003 order, the District Court declaredthe term sheet proposal a binding preliminary agreement requiring Mesaba tonegotiate in good faith toward the execution of long-term agreements for eachof the 340A aircraft.  Mesaba appealed the District Court’s ruling.

 

On August 13, 2004, relying on the District Court’s declaratoryjudgment ruling, Saab Leasing filed a separate action in the District Courtalleging approximately $35 million in damages for past due and future aircraftlease obligations.  Mesaba denies the allegations in Saab Leasing’scomplaint and contends that it has fulfilled and will continue to fulfill itsexisting obligations.

 

16

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On May 19, 2005, the U.S. Court of Appeals for the Eighth Circuitaffirmed the District Court’s declaratory judgment ruling.  Despite theEighth Circuit’s ruling, Mesaba believes, based on advice from its legalcounsel, that it has defenses in the damages case that will limit Saab Leasing’sability to recover damages.  Nevertheless, there can be no assurance thatthe District Court in the damages case will agree with Mesaba’s analysis. Therefore, the ultimate outcome of this dispute cannot be predicted withcertainty.  On September 9, 2005,the District Court heard oral arguments on Saab Leasing’s and Mesaba’s cross-motionsfor summary judgment.  The District Courthas not yet ruled on these motions.

 

On October 14, 2005, Mesaba notified the District Court thatMesaba applied for debtor protection under Chapter 11 of the Bankruptcy Codeand that such application operates to automatically stay the continuation ofthe Saab Leasing matter.  On October 27,2005, Saab Leasing filed with the Bankruptcy Court a motion for relief from theautomatic stay.  If Saab Leasing’s motionis granted by the Bankruptcy Court, the District Court will be allowed toproceed and rule on the cross motions for summary judgment.  The hearing on Saab Leasing’s motion forrelief from the automatic stay is scheduled for November 14, 2005.  In any event, the amount of any damages awardto Saab Leasing would be deemed an unsecured prepetition claim againstMesaba.  As of September 30, 2005,the Company did not establish an accrual with regard to this litigation.

 

*Other Litigation Matters*

 

Mesaba is also a defendant in various lawsuits arising in the ordinarycourse of business. While the outcome of these lawsuits and proceedings cannotbe predicted with certainty, it is the opinion of the Company’s managementbased on current information and legal advice that the ultimate disposition ofthese suits will not have a material adverse effect on the financial statementsas a whole.

 

*Guaranty*

 

Mesaba currently leases a facility at the Cincinnati/Covington airport.  In October 2005, Mesaba indicated thatit intends to close this facility due to the reduced number of Avros that willrequire maintenance in the future. Accordingly, Mesaba filed a motion with the Bankruptcy Court to rejectthe lease associated with this facility. The motion will be heard on November 28, 2005.  As previously disclosed in the Company’spublic filings, Holdings has unconditionally guaranteed full and prompt paymentof the ground lease and the bonds associated with the initial financing of thefacility.  In accordance with thisguaranty, Holdings made the required bond and ground lease payments due in November 2005.  If Holdings is unable to find an alternatesublessee for the facility or successfully negotiate a satisfactory resolutionfor the repayment of the bonds, Holdings could be required to pay the fullamount of the bonds outstanding, which is currently approximately $13.0million, as well as continue to make the monthly payments under the groundlease through September 2029.  Theground lease payment is currently approximately $0.1 million per year.  As of September 30, 2005, the Company hadnot established an accrual related to this guaranty.

 

14.  Restatements

 

*Accounting for Aircraft Leases*

 

Subsequentto the issuance of its consolidated financial statements for the year ended March 31,2004, the Company determined that it had incorrectly accounted for certainaircraft leases that contained reduced rent obligations over a portion of thelease term.  This resulted in anunderstatement of other assets, net, other noncurrent liabilities and aircraftrents and an overstatement of retained earnings, shareholders’ equity and netincome in prior periods.  Although theCompany does not believe that this error resulted in a material misstatement ofthe Company’s consolidated financial statements for any prior periods, theeffects of correcting the error as of December 31, 2004, would have had amaterial effect on the Company’s results of operations for that period.  As a result, the condensed consolidatedfinancial statements for the periods ended September 30, 2004 have beenrestated from the amounts previously reported.

 

Asummary of the significant effects of this restatement on the Company’s interimcondensed consolidated financial statements for the three and six months ended September 30,2004 is as follows, in thousands, except per share information:

 

17

----

 
| ** **                                | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **September 30, 2004** | ** ** | **September 30, 2004** | ** ** |
| ** **                                | ** ** | **As Previously**           | ** ** | **As**                      | ** ** | **As Previously** | ** ** | **As** | ** ** |
| ** **                                | ** ** | **Reported**                | ** ** | **Restated**                | ** ** | **Reported** | ** ** | **Restated** | ** ** |
| Consolidated  balance sheets:             |       |                        |       |                        |       |   |   |   |   |
| Other  assets, net                        |       | $                           | 7,052      |                        | $          | 7,558 |   | $ | 7,052 |   | $ | 7,558 |   |
| Total assets                              |       | 272,625                     |       | 273,131                     |       | 272,625 |   | 273,131 |   |
| Other  noncurrent liabilities             |       | 5,428                       |       | 6,690                       |       | 5,428 |   | 6,690 |   |
| Retained  earnings                        |       | 122,872                     |       | 122,116                     |       | 122,872 |   | 122,116 |   |
| Total  shareholders’ equity          |       | 192,555                     |       | 191,799                     |       | 192,555 |   | 191,799 |   |
| Consolidated  Statements of operations:   |       |                        |       |                        |       |   |   |   |   |
| Aircraft  rents                           |       | 25,722                      |       | 25,796                      |       | 50,754 |   | 50,902 |   |
| Total  operating expenses                 |       | 110,537                     |       | 106,664                     | *          | 217,638 |   | 210,185 | * |
| Operating  income                         |       | 7,576                       |       | 7,502                       |       | 10,174 |   | 10,026 |   |
| Income  before provision for income taxes |       | 8,108                       |       | 8,034                       |       | 11,073 |   | 10,925 |   |
| Net income                                |       | 4,781                       |       | 4,737                       |       | 7,688 |   | 7,600 |   |
| Earnings per  common share - basic        |       | 0.23                        |       | 0.23                        |       | 0.38 |   | 0.37 |   |
| Earnings per  common share - diluted      |       | 0.23                        |       | 0.23                        |       | 0.37 |   | 0.36 |   |
|                                           |            |                             |            |                             |            |  |  |  |  |  |  |  |  |

 

----

*Includes effect of restatement foraccounting for certain pass-through costs discussed below.

 

*Accounting for Pass-Through Costs*

 

Subsequent to the issuance of its consolidated financial statements forthe year ended March 31, 2005 and the quarter ended June 30, 2005,the Company’s management determined that two categories of pass-through costsunder the ASA with Northwest were not presented in accordance with EmergingIssues Task Force (“EITF”)  No. 99-19, “Reporting Revenue Gross as aPrincipal vs. Net as an Agent” and EITF No. 01-14, “Income StatementCharacterization of Reimbursements Received for ‘Out-of-Pocket’ ExpensesIncurred.”  First, the Company determined that certain landing feesreimbursed by Northwest had not been recognized in the Company’s consolidatedstatements of operations but should have been recorded as both operatingrevenue and operating expense in prior periods.  Second, the Companydetermined that aircraft fuel purchased from Northwest for the Saabs shouldhave been shown as a reduction of revenue rather than as an operating expensein prior periods.  As a result of these misstatements, passengerrevenues, aircraft fuel expense, and landing fees expense have beenrestated from amounts previously reported. The restatement had no effect onpreviously reported operating income, income before income taxes, net income,earnings per share, net cash flows or the Company’s financial condition.

 

TheCompany intends to include restated condensed consolidated financial statementsfor the fiscal 2005 interim periods in its Quarterly Reports on Form 10-Qfiled prospectively, and to include restated consolidated financial statementsfor fiscal 2005 and 2004 in its Annual Report on Form 10-K for the yearending March 31, 2006 filed prospectively.

 

18

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A summary of the significant effects of thisrestatement on the Company’s interim condensed consolidated financialstatements for the three months ended June 30, 2005 is as follows, inthousands:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **June 30, 2005** | ** ** |
| ** **                             | ** ** | **As Previously**      | ** ** | **As** | ** ** |
| ** **                             | ** ** | **Reported**           | ** ** | **Restated** | ** ** |
| Consolidated statements of operations: |       |                   |       |   |   |
| Passenger  revenues                    |       | 107,539                |       | 103,783 |   |
| Total  operating revenues              |       | 118,439                |       | 114,683 |   |
| Aircraft  fuel                         |       | 5,658                  |       | 958 |   |
| Landing fees                           |       | 1,676                  |       | 2,620 |   |
| Total  operating expenses              |       | 119,357                |       | 115,601 |   |

 

A summary of the significant effects of thisrestatement on the Company’s interim condensed consolidated financialstatements for fiscal 2005 is as follows, in thousands:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** | **Three Months Ended**     | ** ** | **Nine Months Ended**      | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **June 30, 2004** | ** ** | **September 30, 2004** | ** ** | **September 30, 2004** | ** ** | **December 31, 2004** | ** ** | **December 31, 2004** | ** ** |
| ** **                             | ** ** | **As Previously**      | ** ** | **As**                      | ** ** | **As Previously**           | ** ** | **As**                     | ** ** | **As Previously**          | ** ** | **As** | ** ** | **As Previously** | ** ** | **As** | ** ** | **As Previously** | ** ** | **As** | ** ** |
| ** **                             | ** ** | **Reported**           | ** ** | **Restated**                | ** ** | **Reported**                | ** ** | **Restated**               | ** ** | **Reported**               | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Restated** | ** ** | **Reported** | ** ** | **Restated** | ** ** |
| Consolidated statements of operations: |       |                   |       |                        |       |                        |       |                       |       |                       |       |   |   |   |   |   |   |   |   |   |   |
| Passenger revenues                     |       | $                      | 100,968    |                        | $          | 97,314                      |       | $                          | 107,736    |                       | $          | 103,789 |   | $ | 208,704 |   | $ | 201,103 |   | $ | 104,267 |   | $ | 100,290 |   | $ | 312,971 |   | $ | 301,393 |   |
| Total operating revenues               |       | 109,699                |       | 106,045                     |       | 118,113                     |       | 114,166                    |       | 227,812                    |       | 220,211 |   | 115,512 |   | 111,535 |   | 343,324 |   | 331,746 |   |
| Aircraft fuel                          |       | 5,111                  |       | 550                         |       | 5,420                       |       | 640                        |       | 10,531                     |       | 1,190 |   | 5,474 |   | 680 |   | 16,005 |   | 1,870 |   |
| Landing fees                           |       | 1,769                  |       | 2,676                       |       | 1,810                       |       | 2,643                      |       | 3,579                      |       | 5,319 |   | 1,541 |   | 2,358 |   | 5,120 |   | 7,677 |   |
| Total operating expenses               |       | 107,175                |       | 103,521                     |       | 110,611                     |       | 106,664                    |       | 217,786                    |       | 210,185 |   | 113,666 |   | 109,689 |   | 331,452 |   | 319,874 |   |
|                                        |            |                        |            |                             |            |                             |            |                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

A summary of the significanteffects of this restatement on the Company’s consolidated financial statementsfor fiscal 2005 and 2004 is as follows, in thousands:

 
| ** **                             | ** ** | **Year Ended**     | ** ** | **Year Ended**     | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                             | ** ** | **March 31, 2005** | ** ** | **March 31, 2004** | ** ** |
| ** **                             | ** ** | **As Previously**  | ** ** | **As**             | ** ** | **As Previously** | ** ** | **As** | ** ** |
| ** **                             | ** ** | **Reported**       | ** ** | **Restated**       | ** ** | **Reported** | ** ** | **Restated** | ** ** |
|                                   |       |               |       |               |       |   |   |   |   |
| Consolidated statements of operations: |       |               |       |               |       |   |   |   |   |
| Passenger revenues                     |       | $                  | 413,855    |               | $          | 400,398 |   | $ | 417,300 |   | $ | 401,010 |   |
| Total operating revenues               |       | 456,067            |       | 442,610            |       | 449,079 |   | 432,789 |   |
| Aircraft fuel                          |       | 19,377             |       | 2,471              |       | 22,399 |   | 2,282 |   |
| Landing fees                           |       | 6,759              |       | 10,208             |       | 7,108 |   | 10,935 |   |
| Total operating expenses               |       | 447,428            |       | 433,971            |       | 445,053 |   | 428,763 |   |
|                                        |            |                    |            |                    |            |  |  |  |  |  |  |  |  |

 

19

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

*General*

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operationshas been updated to give effect to the restatements discussed in Note 14to the condensed consolidated financial statements included in Item 1, andshould be read in conjunction with the accompanying condensed consolidatedfinancial statements.  The Company’soperations and financial results are subject to various risks and uncertaintiesassociated with the airline industry.  See“Certain Risk Factors Relating to the Company and the Airline Industry” at theend of this Item 2.

 

*Overview*

 

The Company’s total operating revenues for the quarter ended September 30,2005 were $114.9 million, which represented a 0.6% increase over the quarterended September 30, 2004.  TheCompany’s operating expenses for the quarter ended September 30, 2005totaled $155.1 million, representing a 45.4% increase from the quarter ended September 30,2004.  As a result, the Company recordeda net loss of $25.5 million for the quarter ended September 30, 2005.  The increase in expenses was primarilyattributable to Mesaba’s charge of $31.9 million to establish a reserve on theunsecured prepetition receivables due from Northwest (net of certain offsettingliabilities) as a result of the September 14, 2005 bankruptcy filing ofNorthwest, as well as a $2.1 million charge to write off the unamortizedportion of warrants held by Northwest that expired in August 2005 uponsigning of a the ASA with Northwest and a $2.5 million goodwill impairmentcharge associated with Big Sky.

 

*Outlook*

 

As stated in the Notes to Condensed Consolidated Financial Statements,the Company’s financial results were, and will continue to be, directlyimpacted by the bankruptcy filings of Northwest and Mesaba.  Northwest’s missed payments to Mesaba priorto and following Northwest’s bankruptcy filing have resulted in Mesaba holdinga net unsecured prepetition claim against Northwest for approximately $31.9 millionas of September 30, 2005.  Inaddition to these missed payments, Northwest has also made certain fleetchanges that have directly affected Mesaba. Northwest removed nine Avros operated by Mesaba from Northwest’s flight schedule asof October 31, 2005.  Northwest hasalso indicated that it may terminate the leases on all of the remaining Avros onDecember 20, 2005, as well as remove ten of Mesaba’s Saabs from Northwest’sflight schedule in January 2006. These fleet changes have resulted in significant uncertainty regardingMesaba’s future revenue from Northwest. That uncertainty, along with Mesaba’s deteriorated liquidity as a resultof Northwest’s missed payments and offsets, resulted in Mesaba filing forbankruptcy protection under Chapter 11 of the Bankruptcy Code on October 13,2005.

 

Northwest’s removal of aircraft from Mesaba’s fleet has also forcedMesaba to adjust its costs to compensate for the loss in revenue.  Mesaba has begun to reduce its staffinglevels to realign its cost structure, and Mesaba will continue to makeadjustments to its workforce as it moves through its own bankruptcyproceeding.  Although certain of thesereductions may be made through voluntary employee leaves, Mesaba expects that themajority of these reductions will be obtained through involuntary furloughs.

 

Mesaba expects its third quarter fiscal 2006 revenue and earnings todecline significantly due to the removal of the nine Avros from its fleet.  If Northwest elects to remove the remaining26 Avros on December 20, 2005, the reduction in Mesaba’s revenue will besubstantially greater.  Because of thedifficulty of predicting the changes Northwest will ultimately make in itsfleet plans, Mesaba is unable to estimate the exact effect of Northwest’s fleetchanges on Mesaba’s revenue and earnings.

 

Northwest has indicated in various filings with the bankruptcy courtthat it is considering creating a new regional airline subsidiary to operateregional jet aircraft seating between 77 and 100 passengers. Further, Northwest’sfilings have indicated that it expects to outsource the operations of allregional jet aircraft seating up to 76 passengers to regional airlines such asMesaba. To the extent that Northwest adds additional regional aircraft configuredup to 76 seats to its network, Mesaba intends to compete to operate suchaircraft.  However, Mesaba also expectsthat its competitors, many with greater financial resources, will also seek tooperate such aircraft.

 

Although Mesaba expects that, prior to any assumption of the ASA duringNorthwest’s bankruptcy proceedings, Northwest will seek to renegotiate terms ofthe ASA, management plans and expects to be able to successfully renegotiatethe ASA and to continue its relationship as a regional airline partner withNorthwest.  However, given the risks anduncertainties associated with Northwest’s bankruptcy proceedings, there can beno assurance that management’s current plans and expectations will be realizedin the future.

 

20

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RESULTS OF OPERATIONS

 

**Three Months Ended September 30, 2005and 2004**

 

The Company’s consolidated net loss for the quarter ended September 30,2005 was $25.5 million, or $1.24 per basic and diluted share, compared with netincome of $4.7 million, or $0.23 per diluted share, for the quarter ended September 30,2004.  Comparative information onoperations for the three months ended September 30 was as follows:

 

***Mesaba***

 

Mesaba’s operating statistics for the three months ended September 30were as follows:

 
| ** **                                             | ** ** | **2005**  | ** ** | **2004**  | ** ** | **Change** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Passengers                                             |       | 1,500,221 |       | 1,480,917 |       | 1.3        | %          |
| Available seat miles (000s)                            |       | 760,568   |       | 799,503   |       | (4.9       | )%         |
| Revenue passenger miles (000s)                         |       | 515,432   |       | 536,760   |       | (4.0       | )%         |
| Load factor                                            |       | 67.8      | %          | 67.1      | %          | 0.7        | Pts        |
| Block hours flown                                      |       | 73,595    |       | 74,828    |       | (1.6       | )%         |
| Departures                                             |       | 53,190    |       | 53,539    |       | (0.7       | )%         |
| Revenue per ASM                                        |       | $         | 0.144      |      | $          | 0.138      |       | 4.6 | % |
| Cost per ASM                                           |       | $         | 0.195      |      | $          | 0.127      |       | 53.2 | % |
| Cost per ASM (excluding impairment and  other charges) |       | $         | 0.150      |      | $          | 0.127      |       | 18.0 | % |
| Aircraft in service (average)                          |       | 98        |       | 99        |       | (1         | )          |

 

Mesaba Operating Revenues  Totaloperating revenues decreased 0.4% in the second quarter of fiscal 2006 to $109.7million from $110.2 million in the prior year’s quarter.  The decrease isattributed to a $1.0 million decrease resulting from a 5.1% decrease in Avro blockhours and a $0.5 million decrease in incentive revenue.  These decreases were offset by a $0.9 millionincrease resulting from a 3.1% increase in the Saab reimbursement rate quarterover quarter, partially offset by a $0.6 million decrease in incentive revenue,and $0.6 million in additional ground handling revenue in Detroit andMinneapolis/St. Paul.

 

Mesaba Operating Expenses  Total operating expenses increased 45.5% inthe second quarter of fiscal 2006 to $148.0 million from $101.7 million in theprior year quarter.  The increase inexpenses was primarily due to a charge of $31.9 million to establish a reserveon the unsecured prepetition receivables due from Northwest (net of certainoffsetting liabilities) as a result of the September 2005 bankruptcyfiling of Northwest.  The charge reflectsprepetition amounts due from Northwest for services provided by Mesaba prior tothe date Northwest filed its bankruptcy petition.  Additional increases in expenses were due to$4.6 million in start-up expenses associated with Mesaba adding the CRJaircraft to its fleet.  Mesaba’s operatingcosts per ASM for the three months ended September 30 were as follows:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 5.0      | ¢     | 4.3      | ¢     |
| Aircraft maintenance          |       | 2.9      |       | 2.6      |       |
| Aircraft rents                |       | 3.4      |       | 3.2      |       |
| Landing fees                  |       | 0.3      |       | 0.3      |       |
| Insurance and taxes           |       | 0.2      |       | 0.2      |       |
| Depreciation and amortization |       | 0.4      |       | 0.4      |       |
| Administrative and other      |       | 2.8      |       | 1.7      |       |
| Impairment and other charges  |       | 4.5      |       | —   |       |
|                          |       | 19.5     | ¢     | 12.7     | ¢     |

 

21

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Wages and benefits increased 10.4% to $38.3 million in the secondquarter of fiscal 2006 from $34.7 million in the prior year quarter, primarily dueto increased ground handling wages from additional ground handling activity andCRJ preparation which did not result in any additional ASMs, increased pilotwage rates and increased health and dental expense.

 

Aircraft maintenance, excluding wages and benefits, increased 6.8% to $22.0million in the second quarter of fiscal 2006 from $20.6 million in the prioryear quarter, partially due to a $1.7 million increase resulting from the periodicstructural inspections of aircraft required by the FAA, maintenance costs andrelated costs and a $1.2 million increase in repairs to rotables.  The increase was offset by a $1.6 millionreduction in repairs to landing gear.

 

Aircraft rents remained relatively constant quarter-over-quarter.

 

Landing fees remained relatively constant quarter-over quarter.  Although Northwest is responsible for the Avrolanding fees for Mesaba’s operations, Mesaba pays several airports directly andNorthwest reimburses Mesaba for such payments. The reimbursement from Northwest for these Avro landing fees was $0.8million for each of the three months ended September 30, 2005 and 2004,and is recorded as passenger revenue in the accompanying condensed consolidatedstatements of operations.

 

Insurance and taxes decreased 15.0% to $1.7 million in the second quarterof fiscal 2006 from $2.0 million in the prior year quarter due primarily toinsurance rate reductions.

 

Depreciation and amortization remained relatively constantquarter-over-quarter.

 

Administrative and other expenses increased 57.1% to $20.9 million inthe second quarter of fiscal 2006 from $13.3 million in the prior year quarterprimarily due to increased consulting costs and training costs incurred for theCRJ certification, contingency planning for Northwest’s mechanics’ strike and bankruptcyplanning, as well as higher ground handling costs.

 

Impairment charges of $34.0 million were recorded in second quarter offiscal 2006 as a result of the $31.9 million charge to establish a reserve onthe unsecured prepetition receivables due from Northwest (net of certainoffsetting liabilities) and the $2.1 million write-off of the warrants relatedto the prior airline services agreements.

 

Mesabaincurred fuel expenditures of $4.8 million, or 0.6 cents per ASM, in the secondquarter of fiscal 2006.  In accordancewith Emerging Issues Task Force (“EITF”) Issue No. 99-19, “ReportingRevenue Gross as a Principal vs. Net as an Agent,” these costs are classifiedas a reduction from revenue in the accompanying condensed consolidatedstatement of operations.  Aircraft fuelremained relatively constant quarter-over-quarter.  Mesaba’s actual cost of fuel for theSaab aircraft, including taxes and pumping fees, was 83.5 cents per gallon forboth periods.  This price is 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’s operating statistics for the three months ended September 30were as follows:

 
| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Passengers                                            |       | 30,328   |       | 22,188   |       | 36.7       | %          |
| Available seat miles (000s)                           |       | 20,172   |       | 16,099   |       | 25.3       | %          |
| Revenue passenger miles (000s)                        |       | 8,714    |       | 5,602    |       | 55.6       | %          |
| Load factor                                           |       | 43.2     | %          | 34.8     | %          | 8.4        | pts        |
| Block hours flown                                     |       | 5,331    |       | 4,438    |       | 20.1       | %          |
| Departures                                            |       | 5,672    |       | 5,227    |       | 8.5        | %          |
| Revenue per ASM                                       |       | $        | 0.256      |     | $          | 0.245      |       | 4.5 | % |
| Cost per ASM                                          |       | $        | 0.434      |     | $          | 0.292      |       | 48.6 | % |
| Cost per ASM (excluding impaiment and other  charges) |       | $        | 0.316      |     | $          | 0.292      |       | 8.2 | % |
| Aircraft in service (average)                         |       | 10       |       | 11       |       | (1         | )          |

 

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Big Sky Operating Revenues  Total operating revenues increased 30.0% to$5.2 million in the second quarter of fiscal 2006 from $4.0 million in theprior year quarter due to a $1.1 million quarter over quarter increase inpassenger revenue as a result of increased passengers and average passengerfares.  During the quarter, the passengerload factor increased 8.4 points and the average passenger fare increased$5.95.

 

Big Sky Operating Expenses  Total operating expenses increased 85.1% inthe second quarter of fiscal 2006 to $8.7 million from $4.7 million in theprior year quarter as a result of the $2.5 million goodwill impairment, thecost associated with incremental flying and the impact of higher fuelprices.  The average system fuel priceper gallon rose 44 cents, from $1.74 in the second quarter of fiscal 2005 to$2.18 in the second quarter of fiscal 2006.

 

***Consolidated***

 

Nonoperating Income (Expense)  Nonoperating income increased to $1.1 millionin the second quarter of fiscal 2006 from $0.5 million in the prior yearquarter due to interest income that increased as a result of additional fundsinvested at higher interest rates.

 

Provision for Income Taxes  The Company’s effective tax rate was 34.8% inthe second quarter of fiscal 2006 as compared to 41.0% in the prior year quarter.  The Company adjusts its effective tax ratequarterly based on forecasted operating results in the fiscal year.  The rate is affected principally by the level of nondeductible expensesrelative to projected taxable income.

 

In connection with the $31.9 million provisionfor loss associated with the Northwest bankruptcy filing, the Company recordeda deferred tax benefit of $11.3 million, which represents the future federaland state income tax deductions provided to the Company from this loss.  Managementis currently evaluating the extent to which this deduction could impact itsfiscal 2006 taxable loss.

 

As of September 30, 2005, the Company hasnot recorded a valuation allowance on this deferred tax benefit or on any ofthe Company’s other deferred tax assets as the Company believes that it is morelikely than not that all of the deferred tax assets will be realized.  The Company made this assessment based on theweight of the available evidence, which consisted principally of the following: (1) taxable income in prior carrybackyears (estimated to aggregate approximately $18 million in fiscal 2005 and2004), (2) tax-planning strategies (including switching the Company’sinvestment portfolio from tax-exempt municipal securities to taxableinvestments), and (3) estimated future taxable income exclusive ofreversing temporary differences and carryforwards.  Ultimate realization of approximately $16.5million of deferred tax assets is based upon tax-planning strategies andestimated future taxable income.  TheCompany will be required to update its estimates of future taxable income basedupon additional information management obtains as Mesaba completes itsbankruptcy reorganization plan.  As aresult, realization of the Company’s deferred tax assets will be dependent uponthe Company’s ability to generate sufficient future taxable income within the20 year carryforward period, and those estimates could change materially infuture periods as all available evidence, both positive and negative, isassessed.

 

**Six Months Ended September 30, 2005 and2004**

 

The Company’s consolidated net loss for the six months ended September 30,2005 was $24.3 million, or $1.18 per basic and diluted share, compared with netincome of $7.6 million, or $0.36 per diluted share, for the six months ended September 30,2004.  Comparative information onoperations for the six months ended September 30 was as follows:

 

***Mesaba***

 

Mesaba’s operating statistics for the six months ended September 30were as follows:

 
| ** **                                             | ** ** | **2005**  | ** ** | **2004**  | ** ** | **Change** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Passengers                                             |       | 3,001,266 |       | 2,877,255 |       | 4.3        | %          |
| Available seat miles (000s)                            |       | 1,526,586 |       | 1,514,217 |       | 0.8        | %          |
| Revenue passenger miles (000s)                         |       | 1,030,241 |       | 1,016,959 |       | 1.3        | %          |
| Load factor                                            |       | 67.5      | %          | 67.2      | %          | 0.3        | Pts        |
| Block hours flown                                      |       | 145,329   |       | 143,691   |       | 1.1        | %          |
| Departures                                             |       | 106,227   |       | 103,960   |       | 2.2        | %          |
| Revenue per ASM                                        |       | $         | 0.144      |      | $          | 0.140      |       | 2.9 | % |
| Cost per ASM                                           |       | $         | 0.169      |      | $          | 0.132      |       | 28.2 | % |
| Cost per ASM (excluding impairment and  other charges) |       | $         | 0.147      |      | $          | 0.132      |       | 11.3 | % |
| Aircraft in service (average)                          |       | 98        |       | 97        |       | 1          |       |

 

Mesaba Operating Revenues  Totaloperating revenues increased 3.4% in fiscal 2006 to $219.9 million from $212.7million in the prior year period.  The increase is attributed to a $1.5million increase resulting from a 1.7% increase in Avro flying due to thereturn to service of five Avros that had been grounded in the prior year, a $3.4million increase due to a 0.3%

 

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increasein additional Saab ASMs and a 3.1% increase in the Saab reimbursement rate yearover year and a $2.4 million increase in additional ground handling revenue inDetroit and Minneapolis/St. Paul.

 

Mesaba Operating Expenses  Total operating expenses increased 28.3% infiscal 2006 to $258.3 million from $201.4 million in the prior year period.  The increase in expenses was due to theadditional Avro and Saab flying and start-up expenses associated with Mesabaadding the CRJ aircraft to its fleet, and the $31.9 million charge to establisha reserve on the unsecured prepetition receivables due from Northwest (net ofcertain offsetting liabilities) as a result of the September 2005 Northwestbankruptcy filing.  Mesaba’s operatingcosts per ASM for the six months ended September 30 were as follows:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 5.0      | ¢     | 4.5      | ¢     |
| Aircraft maintenance          |       | 2.9      |       | 2.7      |       |
| Aircraft rents                |       | 3.3      |       | 3.3      |       |
| Landing fees                  |       | 0.3      |       | 0.3      |       |
| Insurance and taxes           |       | 0.2      |       | 0.2      |       |
| Depreciation and amortization |       | 0.5      |       | 0.4      |       |
| Administrative and other      |       | 2.5      |       | 1.8      |       |
| Impairment and other charges  |       | 2.2      |       | —   |       |
|                          |       | 16.9     | ¢     | 13.2     | ¢     |

 

Wages and benefits increased 9.7% to $75.5 million in fiscal 2006 from$68.8 million in the prior year period, primarily due to increased groundhandling wages from additional ground handling activity and CRJ preparationwhich did not result in any additional ASMs, increased wages due to additionalflying and increased health and dental expense. These increases were partially offset by favorable year-over-year costsassociated with the 401(k) benefit plan due to increased costs in the prioryear.

 

Aircraft maintenance, excluding wages and benefits, increased 9.2% to $44.1million in fiscal 2006 from $40.4 million in the prior year period, partiallydue to a $1.8 million increase in repairs to rotables, a $0.8 million increase resultingfrom periodic structural inspections of aircraft required by the FAA and a $2.0million increase in costs related to expendables, power plant, wheels and brakes.  The increase was offset by a $1.0 millionreduction in repairs to landing gear.

 

Aircraft rents increased 1.5% to $50.6 million in fiscal 2006 from $49.9million in the prior year period due to the return to service of five Avros thathad been grounded in the prior year.  TheAvros were out of service from January 2004 to May 2004.

 

Landing fees remained relatively constant year-over-year.  Although Northwest is responsible for theAvro landing fees for Mesaba’s operations, Mesaba pays several airportsdirectly and Northwest reimburses Mesaba for such payments.  The reimbursement from Northwest for theseAvro landing fees was $1.7 million for each of the six months ended September 30,2005 and 2004, and is also recorded as passenger revenue in the accompanyingcondensed consolidated statements of operations.

 

Insurance and taxes decreased 13.2% to $3.3 million in fiscal 2006 from$3.8 million in the prior year period primarily to insurance rate reductions.

 

Depreciation and amortization remained relatively constantyear-over-year.

 

Administrative and other expenses increased 45.3% to $38.8 million infiscal 2006 from $26.7 million in the prior year period primarily due toincreased consulting costs and training costs incurred for CRJ certification, forcontingency planning for Northwest’s mechanics’ strike and bankruptcy planning,as well as higher ground handling costs.

 

Impairment charges of $34.0 million were recorded in fiscal 2006 as aresult of the $31.9 million charge to establish a reserve for the unsecuredprepetition receivables due from Northwest (net of certain offsettingliabilities) as a result of the September 2005 bankruptcy filing byNorthwest and a $2.1 million write-off of the warrants related to the prior airservices agreements.

 

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Mesabaincurred fuel expenditures of $9.5 million, or 0.6 cents per ASM, in fiscal2006.  In accordance with EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal vs. Net as an Agent,” these costs areclassified as a reduction from revenue in the accompanying condensedconsolidated statement of operations. Aircraft fuel remained relatively constant quarter-over-quarter.  Mesaba’s actual cost of fuel for theSaab aircraft, including taxes and pumping fees, was 83.5 cents per gallon forboth periods. This price is fixed under the terms of the ASA, therebyinsulating Mesaba from fluctuations in the market price of fuel.  Northwest is responsible for all fuel forMesaba’s Avro operations.

 

***Big Sky***

 

Big Sky’s operating statistics for the six months ended September 30were as follows:

 
| ** **                                             | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Passengers                                             |       | 56,555   |       | 43,362   |       | 30.4       | %          |
| Available seat miles (000s)                            |       | 37,311   |       | 31,340   |       | 19.1       | %          |
| Revenue passenger miles (000s)                         |       | 16,214   |       | 11,093   |       | 46.2       | %          |
| Load factor                                            |       | 43.5     | %          | 35.4     | %          | 8.1        | pts        |
| Block hours flown                                      |       | 9,932    |       | 8,608    |       | 15.4       | %          |
| Departures                                             |       | 10,705   |       | 10,115   |       | 5.8        | %          |
| Revenue per ASM                                        |       | $        | 0.260      |     | $          | 0.241      |       | 7.9 | % |
| Cost per ASM                                           |       | $        | 0.378      |     | $          | 0.299      |       | 26.4 | % |
| Cost per ASM (excluding impairment and  other charges) |       | $        | 0.314      |     | $          | 0.299      |       | 5.0 | % |
| Aircraft in service (average)                          |       | 10       |       | 12       |       | (2         | )          |
|                                                   |       |     |       |     |       |       |       |

 

Big Sky Operating Revenues  Total operating revenues increased 27.6% to$9.7 million in fiscal 2006 from $7.6 million in the prior year period.  A 15.4% increase in block hours generated 19.4%more available seat miles and 46.2% more revenue passenger miles year overyear.  Flight completion improved from 92.0%in 2004 to 97.0% in 2005, attributed to the new Beechcraft 1900D aircraft.  New service was added between Boise, Idahoand Bozeman, Montana, and a new EAS route was added connecting Sheridan,Wyoming and Denver, Colorado.

 

Big Sky Operating Expenses  Total operating expenses increased 51.6% infiscal 2006 to $14.1 million from $9.3 million in the prior year period due toan increased level of flying generated by both new service and improved flightcompletion, the $2.5 million goodwill impairment and the cost associated withincremental flying.  The average fuelprice year over year increased 44 cents to $2.12 per gallon in fiscal 2006 from$1.68 per gallon in fiscal 2005.

 

***Consolidated***

 

Nonoperating Income (Expense)  Nonoperating income increased to $3.9 millionin fiscal 2006 from $0.9 million in the prior year due to a $1.8 million arbitrationsettlement with a prior investment advisor and interest income that increased asa result of additional funds invested at higher interest rates.

 

Provision for Income Taxes The Company’s effective tax rate was 34.8%in fiscal 2006 as compared to 30.4% in the prior year.  The Company adjusts its effective tax ratequarterly based on forecasted operating results in the fiscal year.  The rate is affected principally by the level of nondeductible expensesrelative to projected taxable income.

 

In the second quarterof fiscal 2005, the Company reduced its income tax payable and tax provision by$1.2 million as it received verification of a final settlement with the IRSconcerning its examination of the Company’s fiscal 1995 and 1996 tax returns.  Without this adjustment, the Company’seffective tax rate would have been 42.4%.

 

In connection with the $31.9 million provisionfor loss associated with the Northwest bankruptcy filing, the Company recordeda deferred tax benefit of $11.3 million, which represents the future federaland state income tax deductions provided to the Company from this loss. Management is currently evaluating the extent to which this deductioncould impact its fiscal 2006 taxable loss.

 

As of September 30, 2005, the Company hasnot recorded a valuation allowance on this deferred tax benefit or on any ofthe Company’s other deferred tax assets as the Company believes that it is morelikely than not that all of the deferred tax assets will be realized.  The Company made this assessment based on theweight of the available evidence, which consisted principally of the following: (1) taxable income in prior carrybackyears (estimated to aggregate approximately $18 million in fiscal 2005 and2004), (2) tax-planning strategies (including switching the Company’sinvestment portfolio from tax-exempt municipal securities to taxableinvestments), and (3) estimated future taxable income exclusive ofreversing temporary differences and carryforwards.  Ultimate realization of approximately $16.5million of deferred tax assets is based upon tax-planning strategies andestimated future taxable income.  TheCompany will be required to update its estimates of future taxable income basedupon additional information management obtains as Mesaba completes itsbankruptcy reorganization plan.  As aresult, realization of the Company’s deferred tax assets will be dependent uponthe Company’s ability to generate sufficient future taxable income within the20 year carryforward period, and those estimates could change materially infuture periods as all available evidence, both positive and negative, isassessed.

 

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LIQUIDITY AND CAPITAL RESOURCES

 

Unrestricted cash, cash equivalents and investments decreased 16.1% to$143.4 million at September 30, 2005 from $170.9 million at March 31,2005.  The Company’s working capital increasedto $106.6 million with a current ratio of 2.1 at September 30, 2005compared to working capital of $105.3 million and a current ratio of 2.3 at March 31,2005.

 

Unrestricted investments consist principally of municipal securitiesand are classified as available-for-sale. Available-for-sale investments are reported at fair value withunrealized gains and losses excluded from operations and reported as a separatecomponent of shareholders’ equity, except for other-than-temporary impairments,which are reported as a charge to current operations and result in a new costbasis for the investment.  The Companyclassifies investments with an original maturity date of more than 90 days thatmature within one year as short-term and greater than one year as long-term.

 

Approximately $25.1 million, or 86.7%, of Mesaba’s accounts receivablebalance as of September 30, 2005 was due from Northwest, and thisreceivable is not collateralized.  Thisamount represented postpetition receivables and was collected from Northwest inOctober 2005 (net of certain offsetting liabilities).  The Company’s business is sensitive to eventsand risks affecting Northwest.  On September 14,2005, Northwest filed for bankruptcy protection under Chapter 11 of theBankruptcy Code.  Prior to and followingits bankruptcy filing, Northwest missed payments to Mesaba, resulting in Mesabaholding an unsecured prepetition claim against Northwest for approximately $31.9million.  Northwest has also madesignificant fleet changes affecting Mesaba, including removing nine Avrosoperated by Mesaba from service effective October 31, 2005, proposingfuture fleet changes that could remove all of Mesaba’s remaining Avros fromservice effective December 20, 2005 and removing ten Saabs from Mesaba’sfleet in January 2006.  Northwest’sfailure to make timely payment of amounts owed to Mesaba and to otherwiseperform in accordance with the ASA has had a material adverse effect on theCompany’s results of operations and financial condition.  For a detailed discussion of the Company’srisks related to Northwest and Northwest’s bankruptcy, see “Certain RiskFactors Related to the Company and the Airline Industry” at the end of thisItem 2.  On October 13, 2005 Mesabafiled for bankruptcy protection under Chapter 11 of the Bankruptcy Code.  Mesaba’s future liquidity will depend on thereorganization plan it adopts, among other items.

 

As of September 30, 2005, Mesaba’s fleet consisted of 100 aircraftcovered under operating leases with remaining terms of up to 11 years andaggregate monthly lease payments of approximately $8.5 million.  The two CRJs delivered to Mesaba in September 2005require lease payments of approximately $0.2 million per month.  Mesaba leases or subleases its Saab aircraft,either directly from aircraft leasing companies or through Pinnacle AirlinesCorp. (“Pinnacle”), under operating leases with initial terms of up to sevenyears or through subleases with Northwest under operating leases with initialterms of up to 17 years.  Mesaba subleasesits Avros and CRJs from Northwest under operating leases with initial terms ofup to ten years.  If the ASA terminates,the Company’s obligation to continue to pay aircraft leases will simultaneouslyterminate.  Additionally, becauseNorthwest and Mesaba have both filed for bankruptcy protection, both Northwest’sand Mesaba’s aircraft-related lease obligations are impacted by Section 1110of the Bankruptcy Code.  Generally, underSection 1110, actions to collect aircraft-related prepetition liabilitiesare automatically stayed for 60 days after the Petition Date (in Northwest’scase until November 13, 2005, and in Mesaba’s case until December 12,2005), except under two conditions: (a) the debtor may extend the 60-dayperiod by agreement with the relevant financier and with court approval; or (b) thedebtor may agree to perform all of the obligations under the applicable leaseor financing and cure any defaults as required under the Bankruptcy Code.  If Northwest, in its bankruptcy, rejectscertain leases for aircraft operated by Mesaba or alters the fleet to beoperated by Mesaba, Mesaba could reject the leases related to such aircraft inits own Chapter 11 case.

 

As of September 30, 2005, Big Sky’s operating fleet consisted often operating aircraft and five nonoperating aircraft covered under operatingleases with remaining terms of one month to 59 months and aggregate monthlylease payments of approximately $0.6 million. Big Sky leases all of its aircraft. Five of the leases for two operating and three nonoperating aircraftallow Big Sky to return the aircraft to the lessor upon the occurrence ofcertain events and contain purchase options. Funding of the monthly minimum lease payments is dependent on continuedpassenger boardings, Big Sky’s operations and, potentially, funding from Holdings.

 

The aircraft operating leases for Mesaba and Big Sky do not contain anyguaranteed lease residual provisions for which there would be a potentialcontingency at the termination of the lease period.

 

Holdings has sufficient cash and liquidity to meet its obligations.

 

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Unrestricted cash and cash equivalents increased 6.1% to $61.5 millionat September 30, 2005 from $58.0 million at March 31, 2005.  A summary of cash flow activity is asfollows:

 

*Operating Activities*

 

Net cash used for operations for the six months ended September 30,2005 was $28.2 million, primarily due to a net loss of $24.3 million, anincrease in accounts receivable of $31.9 million, an increase in accountspayable and other of $13.5 million and an increase in inventories of $1.2million.  These uses of cash were offsetby the provision for loss associated with Northwest’s bankruptcy filing of$31.9 million and depreciation and amortization of $0.2 million.

 

*Investing Activities*

 

Net cash provided by investing for the six months ended September 30,2005 was $31.7 million.  The sources ofcash for investing activities were the net sales of short-term investments of$30.3 million and the establishment of an irrevocable tax trust of $7.1 million.  The primary uses of cash were the net purchasesof short and long-term investments, and purchases of property and equipment of$5.7 million.

 

*Financing Activities*

 

Net cash used by financing for the six months ended September 30,2005 was not significant.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of the Company’s consolidated financial statements inconformity with generally accepted accounting principles requires the use ofestimates, judgments and assumptions that affect the reported amounts of assetsand liabilities as of the date of the consolidated financial statements,revenues and expenses during the reporting period and related disclosures ofcontingent assets and liabilities in the consolidated financial statements andthe accompanying notes.  The SEC hasdefined a company’s most critical accounting policies as the ones that are mostimportant to the portrayal of the company’s financial condition and results,and which require the company to make its most difficult and subjectivejudgments, often as a result of the need to make estimates of matters that areinherently uncertain.  Based on thisdefinition, the Company has identified its critical accounting policies toinclude those discussed in the following paragraphs.  The Company also has other key accountingpolicies, which involve the use of estimates, judgments and assumptions.

 

Management believes that its estimates and assumptions are reasonable,based on information presently available; however, changes in these estimates,judgments and assumptions will occur as a result of future events, and,accordingly, actual results could differ from amounts estimated.

 

*Allowance for Doubtful Accounts*

 

TheCompany grants trade credit to certain approved customers and performs a monthlyanalysis of outstanding trade receivables to assess the likelihood ofcollection. For balances where the Company does not expect full payment ofamounts owed, an allowance is recorded to adjust the trade receivable tomanagement’s best estimate of the amount the Company will ultimately collect.

 

As discussed in Note 3, Northwest filed for protection under Chapter 11of the Bankruptcy Code on September 14, 2005.  As of September 30, 2005, Northwest owedMesaba approximately $58.1 million under the ASA and related agreements. Ofthis amount, $31.9 million represented prepetition receivables and $26.2million represented postpetition receivables. After analyzing thecollectibility of the prepetition receivables, the Company concluded that aprovision of $31.9 million was necessary for amounts Mesaba may not ultimatelycollect from Northwest. The postpetition receivables were collected fromNorthwest in October 2005 (net of certain offsetting liabilities).

 

Asdiscussed in Note 3, there is a significant amount of uncertainty surroundingthe Northwest and Mesaba bankruptcy processes, which may include negotiationswith Northwest regarding Mesaba’s ASA. As such, it is reasonably likely thatthe prepetition amounts Mesaba ultimately collects will be different, potentiallyby a material amount, than the Company’s current estimate.  In futureperiods, the Company will appropriately revise its estimate of recoverableamounts as it becomes aware of new information.

 

*Aircraft Property and Equipment*—Estimatedlives are used to record depreciation on aircraft property and equipment.  Aircraft utilization, ASA contractual lives,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 orboth.  Management of Mesaba and Big Skyregularly review the estimated useful lives and salvage values for aircraftproperty and equipment.

 

*Excess and Obsolete Inventories*—Estimatedrecovery percentages are used to record obsolescence reserves for partsinventories.  Aircraft utilization, partsavailability and changes in parts cost may affect the valuation of partsinventories and

 

27

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obsolescence reserve levels.  Management of Mesaba and Big Sky regularlyreview recovery percentages, reserve levels and inventory valuations for partsinventories.

 

*Aircraft Maintenance*—Estimatedmaintenance costs and anticipated aircraft activity are used to determinemaintenance reserves.  Changes inmaintenance contracts, parts and labor costs and aircraft activity may affectthe maintenance reserves.  Management ofMesaba and Big Sky regularly review airplane activity, expected aircraft returndates, changes in maintenance contracts and parts and labor costs formaintenance reserves.

 

*Goodwill and Other Intangible Assets*—The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certainidentifiable intangible assets, including Big Sky’s pilot labor contract andits air carrier certificate and goodwill. The recoverability of goodwill ($2.5 million) and otherintangible assets ($2.7 million) is evaluated annually, at a minimum, or on aninterim basis if events or circumstances indicate a possible inability torealize the carrying amounts.  Theevaluation includes future cash flow projections, strategic modeling and othermanagement assumptions.  During the secondquarter of fiscal 2006, the Company completed an interim impairment test ofgoodwill and other intangible assets. Based on the results of the test, the Company recorded an impairmentcharge of approximately $2.5 million as of September 30, 2005.  Theimpairment amount was determined by comparing the fair value of the intangibleassets to the current carrying value. Fair value was derived using a discountedcash flow analysis.  Because the fairvalue was less than the carrying value of the assets, the Company recorded animpairment charge to reduce the carrying value of the assets to fair value.

 

*Income Taxes*—The Company’s effective tax rate was 32.9%, 46.8% and 51.7% in fiscal2005, 2004 and 2003, respectively.  TheCompany’s effective tax rate is based on expected income, statutory tax ratesand tax planning opportunities available in the various jurisdictions in whichthe Company operates.  In the event thatthere is a significant unusual or one-time item recognized, or expected to berecognized, in the Company’s operating results, the tax attributable to thatitem would be separately calculated and recorded at the same time as theunusual or one-time item.  Significantjudgment is required in determining the Company’s effective tax rate and inevaluating its tax positions.  TheCompany establishes reserves when, despite its belief that the tax returnpositions are fully supportable, certain positions are likely to be challengedand may not succeed.  The Company adjuststhese reserves in light of changing facts and circumstances, such as theclosing of a tax audit.  The effectivetax rate includes the impact of reserve provisions and changes to reserves thatare considered appropriate, as well as related interest.  This rate is then applied to the Company’squarterly operating results.

 

Significant management judgment is requiredin determining the provision for income taxes, deferred tax assets andliabilities and any valuation allowance recorded against net deferred taxassets.  For financial reportingpurposes, a valuation allowance is recorded to offset deferred tax assets that,more likely than not, will not be realized based on the Company’s projectedfuture taxable income, the timing of expiring net operating losses and theCompany’s tax planning strategies.  Inthe future, subsequent revisions to the estimated net realizable value of thesedeferred tax assets could cause the Company to record a valuation allowance onall or a portion the deferred tax assets. This could cause the provision for income taxes to vary significantlyfrom period to period, although the Company’s cash payments would remainunaffected until the benefit of the net operating losses is completely utilizedor expires unused.

 

*Workers Compensation Insurance*—TheCompany estimates the ultimate cost of an on-the-job injury at the time of theinjury to determine its workers compensation insurance reserves.  The Company uses the services of itsinsurance carrier and outside broker to assist in determining the reservelevels.  Injury severity, cost of careand the insurance contract affect the ultimate cost and ultimate reservesrecorded.  Management of Mesaba and BigSky regularly review workers compensation activity with outside consultants forany changes in the workers compensation reserve.

 

*Health and Dental Insurance*—TheCompany estimates the amount of incurred but not reported health and dentalclaims to determine its health and dental insurance reserves.  The Company uses the services of itsinsurance carrier and outside broker to assist in determining the reservelevels.  Historical claims experience, claimsseverity and cost of care affect the ultimate cost and ultimate reservesrecorded.  Management of Mesaba and BigSky regularly review health and dental claims activity with outside consultantsfor any changes in the health and dental insurance reserve.

 

*Property Taxes*—Estimatedproperty tax values and assessments are used to record property tax reservesfor the various jurisdictions in which the Company operates.  Aircraft and parts values, aircraft flightactivity, ground equipment values and the location of personnel may affect theultimate property tax obligation. Management of Mesaba and Big Sky periodically review the above items forany changes in the property tax reserves.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

InDecember 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment,” which requiresall public companies accounting for share-based payment transactions to accountfor these types of transactions using a fair-value-based method.  SFAS No. 123(R) eliminates theability to account for share-based compensation transactions using APB Opinion No. 25.  SFAS No. 123(R) also requires thetax benefits associated with these share-based payments to be classified asfinancing activities in the statement of cash flows rather than operatingactivities as is currently permitted. SFAS No. 123(R) becomes effective as of the beginningof the first****fiscal year beginning after June 15,2005.

 

TheCompany expects to adopt SFAS No. 123(R) on April 1, 2006 using themodified-prospective method.  Under thistransition method, the Company will record compensation expense for all awardsit grants on a straight-line basis over the

 

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vestingperiod.  In addition, the Company willrecord compensation expense for the unvested portion of previously grantedawards that remain outstanding at the date of the adoption.  The Company has not completed its assessmentof the impact of the standard on its financial condition or results of operations.

 

**CertainRisk Factors Relating to the Company and the Airline Industry**

 

The Company’s operations and financial results are subject to variousrisks and uncertainties, some of which are described below.  The Company could also be adversely affectedby additional risks and uncertainties not presently known or believed to bematerial.

 

**Risks Related to Mesaba’s Bankruptcy**

 

*Mesaba’s successful operation duringbankruptcy and its successful emergence from bankruptcy will depend on Mesaba’srelationship with its creditors’ committee.*

 

The United States Trustee for the District of Minnesota has appointedan official committee of unsecured creditors (the “Creditors’ Committee”). TheCreditors’ Committee and its legal representatives have a right to be heard onall matters that come before the Bankruptcy Court concerning Mesaba’sreorganization. There can be no assurance that the Creditors’ Committee willsupport Mesaba’s positions or its plan of reorganization, and any disagreementsbetween the Creditors’ Committee and Mesaba could protract the Chapter 11process, hinder Mesaba’s ability to operate during the Chapter 11 process anddelay Mesaba’s emergence from Chapter 11.

 

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

 

In order for Mesaba to emerge from bankruptcy, the Bankruptcy Court mustapprove a reorganization plan for Mesaba. The reorganization plan will be subject to a vote by certain classes ofcreditors, including Mesaba’s secured creditors and unsecured creditors.  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 vote of adissenting class of creditors.  Inaddition to the voting requirements for confirmation, Mesaba will have tosatisfy other provisions of the Bankruptcy Code in order to confirm itsreorganization plan, including showing that the plan is feasible.  If Mesaba is unable to meet these confirmationrequirements, it may be unable to emerge from bankruptcy.

 

*If Mesaba rejects the lease associated withits Cincinnati/Northern Kentucky airport facility, Holdings may be required topay the full amount of the remaining lease payments due.*

 

Mesaba currently leases a facility at the Cincinnati/Covingtonairport.  Mesaba has indicated that itintends to close this facility due to the reduced number of Avros that willrequire maintenance.  Mesaba filed amotion with the bankruptcy court to reject the lease associated with thisfacility.  The motion will be heard on November 28,2005.  As previously disclosed in theCompany’s public filings, Holdings has unconditionally guaranteed full andprompt payment of the ground lease and the bonds associated with the initialfinancing of the facility.  In accordancewith this guaranty, Holdings made the required bond and ground lease paymentsdue in November 2005.  If Holdingsis unable to find an alternate sublessee for the facility or successfullynegotiate a satisfactory resolution for the repayment of the bonds, Holdingscould be required to pay the full amount of the bonds outstanding, which iscurrently approximately $13.0 million, as well as continue to make the monthly paymentsunder the ground lease through September 2029.  The annual ground lease payment is currentlyapproximately $0.1 million.

 

*Any court-approved reorganization by Mesabacould result in Holdings losing all or a portion of its equity in Mesaba.*

 

In general, the absolute priority rule in the Bankruptcy coderequires that all of the debtor’s creditors must be paid in full, otherwise theequity holders in the debtor are not entitled to retain their equity interests,unless certain exceptions to the absolute priority rule are met.  Mesaba is early in its bankruptcy process,and it will be some time before Mesaba proposes a reorganization plan.  However, the outcome of any vote on Mesaba’sreorganization plan as will as the term and conditions of the plan itself willdetermine whether Holdings risks losing some or all of its ownership in Mesabadue to the application of the absolute priority rule.

 

*The amount of any debtor-in-possessionfinancing provided by Holdings to Mesaba will be at risk, and Holdings cannotguarantee that such financing will be repaid.*

 

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Holdings has proposed to provide an aggregate of $35 million ofdebtor-in-possession financing to Mesaba. The first $15 million of such financing will be fully collateralized, butthe subsequent $20 million may not be fully collateralized and is subject toMesaba providing a satisfactory plan of reorganization prior to January 31,2006.  If the collateral securing thefinancing is of insufficient value or drops in value subsequent to closing thedebtor-in-possession financing, any foreclosure by Holdings on the collateral securingthe loan would not provide full repayment to Holdings.  Additionally, if Mesaba is unable tosuccessfully reorganize through bankruptcy, the repayment of anydebtor-in-possession financing provided by Holdings will be at significant risk.

 

*Mesaba may need exit financing to emerge frombankruptcy, and there is no assurance Mesaba can obtain exit financing.*

 

The terms of the debtor-in-possession financing provided to Mesaba by Holdingsrequire such financing to be repaid upon Mesaba’s exit from bankruptcy.  Accordingly, Mesaba will need to provide forthe repayment of the debtor-in-possession financing through a source of exitfinancing or through some other means. There is no assurance that such exit financing will be available toMesaba upon its exit from bankruptcy or that Mesaba will have the means torepay the debtor-in-possession financing without exit financing.

 

**Risks Related to Mesaba’s Relationship withNorthwest**

 

*Mesaba is dependent on its relationship withNorthwest as its major customer, and the loss of this relationship wouldsubstantially harm the Company’s financial results.*

 

During fiscal 2005, Northwest accounted for 92.7% of Mesaba’s operatingrevenues.  Additionally, Mesabaconsistently carries a receivable due from Northwest between $20 million to $30million that is not collateralized.  Dueto Northwest’s missed payments prior to and following its bankruptcy filing, asof September 30, 2005, Mesaba recorded an impairment charge to reflect thereceivable due from Northwest through September 13, 2005, the date ofNorthwest’s bankruptcy filing. Further, all of Mesaba’s contracts withNorthwest are now at risk, as Northwest has the option to assume or reject eachof such contracts in connection with its bankruptcy proceeding.  Northwest may also attempt to renegotiate Mesaba’scontracts through bankruptcy.  Mesaba iscurrently continuing to operate flights for Northwest, but the exact nature ofMesaba’s future relationship with Northwest may not be known until such time asNorthwest adopts its bankruptcy reorganization plan.  If Northwest assumes the ASA, the prepetitionamounts owed to Mesaba would become an administrative claim, and Mesaba couldreceive payment in full.  If Northwestrejects the ASA, the prepetition amounts owed to Mesaba would remain anunsecured claim, and Mesaba would likely receive only a small percentage of theamounts owed to it, and even then would only receive such amounts after a planof reorganization is approved by Northwest’s bankruptcy court.

 

*In connection with the ASA, Mesaba incurred significantexpenses in connection with bringing the CRJ aircraft into its fleet, and itmay not receive revenue to offset these expenses if Northwest does not deliverall 15 of the CRJs.*

 

Mesaba placed two CRJ aircraft into service in October 2005.  As of September 30, 2005, Holdings and Mesabahave incurred approximately $7.3 million in expenses related to adding the CRJaircraft to Mesaba’s fleets.  Northwesthas already notified Mesaba that it will be unable to meet the delivery schedule underthe ASA for the remaining 13 CRJs.  IfNorthwest is unable to deliver the remaining 13 CRJs to Mesaba, there is no assurancethat Mesaba will realize sufficient revenue in the future to offset thesestart-up expenses.

 

*If either Mesaba or Northwest rejects the ASAin bankruptcy, or the ASA is otherwise terminated, the Company could lose itssignificant sources of revenue and earnings, Mesaba’s aircraft, access toairport facilities and the services Northwest provides.*

 

Any termination of the ASA would allow Northwest the right to terminateMesaba’s aircraft leases and subleases covered by the agreements.  Northwest would also be allowed to takeimmediate possession of the aircraft.  Asa result, Mesaba and the Company would have no significant sources of revenueor earnings.  Additionally, Mesaba riskslosing the use of Northwest’s systems, airport facilities and other servicesthat support Mesaba’s operations.  Mesabamay not be able to find replacement services, or it may not be able to findsuch services on terms or conditions as favorable as those received fromNorthwest.

 

*Northwest has not guaranteed that it will growMesaba’s regional fleet, and Northwest could opt to operate new regionalaircraft with its own new subsidiary or utilize other regional airlines.*

 

Aside from Northwest’s obligation to deliver 15 CRJs to Mesaba, whichNorthwest may be unable to do, the ASA does not provide that Mesaba’s fleetwill grow beyond its existing size. Additionally, the ASA does not prohibit Northwest from

 

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contracting with other regional airlines to provide the same servicesthat Mesaba currently provides. Northwest currently has an airline services agreement with Pinnacle, andPinnacle serves many of the same cities as Mesaba.  Northwest, as a part of its ownreorganization plan, has also disclosed its intention to form a new subsidiaryto operate regional aircraft.  Northwestcould choose to expand its agreement with Pinnacle in competition withMesaba.  Northwest could also choose toestablish relationships with other regional airlines or to replace regionalairlines with a separate Northwest subsidiary that would operate regionalflights.

 

**Risks Related to the Company’s Business andOperations**

 

*Mesaba’s and Big Sky’s success is dependenton their ability to obtain all necessary aircraft, engines, parts and relatedmaintenance and support from various aircraft manufacturers and vendors.*

 

Mesaba and Big Sky are dependent on various aircraft manufacturers andother vendors to provide sufficient parts and related maintenance and supportservices on a timely basis. Additionally, Mesaba and Big Sky rely on various engine manufacturersfor parts, repair and overhaul services and other types of supportservices.  Mesaba’s bankruptcy filingcould further impact Mesaba’s ability to obtain necessary parts andservices.  The failure of aircraft orengine manufacturers and other vendors to provide parts or related services ona timely, cost-effective basis could materially and adversely affect theCompany’s business, financial condition and results of operations.

 

*Because Mesaba is unable to pass alongincreased operating costs, Mesaba’s earnings will be negatively affected as itsfleets continue to age.*

 

As Mesaba’s fleet of aircraft age, the cost of maintaining the aircraftwill likely increase.  Because manyaircraft components are required to be replaced after specified numbers offlight hours or take-off and landing cycles, and because new aviationtechnology may be required to be retrofitted, the cost to maintain agingaircraft will generally exceed the cost to maintain newer aircraft.  Any material increase in such costs will havea material adverse effect on the Mesaba’s business, financial condition andresults of operations.

 

*If Mesaba loses certain of its groundhandling business, the Company’s results of operations could be materiallyaffected.*

 

Mesaba performs various ground handling services for Northwest andPinnacle at Minneapolis, 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 any long-term agreementswith Northwest or Pinnacle.  If Northwestor Pinnacle terminate Mesaba’s ground handling services, the Company’sfinancial results would be materially affected, both through a loss of revenueand increased transition expenses.

 

*Mesaba and Big Sky could incur significantcosts if they experience difficulty finding, training and retaining employees.*

 

Mesaba’s and Big Sky’s businesses are labor-intensive and require largenumbers of pilots, flight attendants, maintenance technicians and otherpersonnel.  The airline industry has fromtime to time experienced a shortage of qualified personnel, specifically pilotsand maintenance technicians.  In addition,as is common with most airline competitors, Mesaba and Big Sky have facedturnover of their employees.  Forexample, Mesaba’s and Big Sky’s pilots, flight attendants and maintenancetechnicians 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, Mesabaand 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.

 

*Mesaba and Big Sky could be adverselyaffected by the highly competitive nature of the airline industry.*

 

The airline industry is highly competitive, and Northwest competes notonly with other regional carriers, but also with low-cost airlines and majorairlines on many of its routes, including the routes that Mesaba flies.  Some of these competitors are significantlylarger and possess greater resources than Northwest.  Moreover, any new entry in the markets Mesabaserves could lessen the economic benefits Northwest derives from servicingthese markets.  Finally, Big Sky alsocompetes with low-cost and regional carriers on its routes, and it faces thesame competitive challenges described above.

 

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*The ability of Mesaba or Big Sky to diversifywithin the airline industry may be limited by the terms of various collectivebargaining agreements and by other airlines’ business agreements.*

 

Mesaba’s labor collective bargaining agreement with its own pilots currentlylimits the types of aircraft Big Sky may fly. Although this limitation will be the subject of Mesaba’s negotiationswith its pilots, there is no guarantee that the pilots will agree to any modifications.  Mesaba’s and Big Sky’s ability to provideregional service to other major air carriers may also be limited by thosecarriers’ existing relationships with other regional operators.  Additionally, many of the labor collectivebargaining agreements of major airlines, including Northwest, contain scopeclause restrictions that limit the airlines’ ability to add new regionaljets.  Northwest has publicly announcedthat it is seeking relief from its pilots’ union to obtain flexibility inallowing feeder carriers to operate additional types of aircraft.  However, there is no guarantee that Northwestwill obtain this flexibility, nor is there any guarantee that Mesaba or Big Skywill be selected to provide additional regional air services in the eventNorthwest obtains such flexibility.

 

*Mesaba’s and Big Sky’s compliance withvarious regulations governing the airline industry can be costly, and Mesabaand Big Sky could be harmed if they fail to comply with such regulations.*

 

Airlines are subject to extensive regulatory and legal requirementsthat involve significant compliance costs that result in increased costs forpassengers and the airline.  The FAA, DOTand Transportation Security Administration periodically propose additionallaws, regulations, taxes and airport rates 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:

 

•      warningletters;

•      fines;

•      injunctions;

•      ordersrelating to grounding of aircraft, inspection of aircraft, installation of newsafety-related items and removal and replacement of certain aircraft parts; or

•      criminalprosecutions.

 

*Future terrorist attacks, other world events,general economic conditions and other factors beyond the Company’s controlcould substantially harm the Company.*

 

The terrorist attacks of September 11, 2001 and the prolonged unrestin the Middle East materially affected and continue to affect the airlineindustry.  Concerns about furtherterrorist attacks have had a negative impact on air travel demand.  In addition, security procedures introducedat airports since the attacks have increased the inconvenience of air travel,both in reality and in customer perception, leading to further reduction indemand.  Additional terrorist attacks,the fear of such attacks or continued conflict in Iraq or other countries couldfurther affect the airline industry and could cause general instability infinancial markets.

 

Because a substantial portion of air travel, including business travel,is discretionary, the industry tends to experience adverse financial resultsduring general economic downturns.  Softeconomic conditions continue to put pressure on the profitability of theindustry.  Any general decline inpassenger traffic may harm the Company’s business.

 

Mesaba’s and Big Sky’s operations are also subject to delays caused byfactors beyond their control, including air traffic congestion at airports,adverse weather conditions and increased security measures.  Such delays frustrate passengers, reduceaircraft utilization and increase costs, all of which may affect profitabilityand harm the Company’s financial condition and results of operations.

 

*Mesaba and Big Sky are increasingly dependentupon technology in their operations, and any failure of such technology couldadversely affect them.*

 

Mesaba and Big Sky have made, and will continue to make, substantialinvestments 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.

 

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*Any airline accident in which Mesaba or BigSky is involved could subject Mesaba or Big Sky to substantial liability andseriously harm the Company’s financial condition and results of operations.*

 

An accident involving Mesaba or Big Sky aircraft could result ininjuries and loss of life and therefore result in significant claims frominjured persons and surviving relatives. An accident could also result in substantial property damage, loss ofaircraft from service and adverse publicity for the affected airline.  Airlines are required by the DOT to carryliability insurance.  Although Mesaba andBig Sky believe their liability insurance is in amounts and of the typegenerally consistent with industry practice, substantial claims resulting froman accident in excess of insurance coverage would harm the Company’s businessand financial results.  Any resultingclaims would also be costly to defend and could harm Mesaba’s or Big Sky’sreputation.  Moreover, any aircraftaccident, even if fully insured or not directly involving Mesaba or Big Sky,could cause a public perception that flying is less safe or reliable than othertransportation alternatives, which could harm the Company’s financial conditionand results of operations.

 

*Mesaba is in collective bargainingdiscussions with its employee groups to address changing needs, and any inabilityto reach consensual agreements may result in Mesaba seeking relief from thebankruptcy court.*

 

Labor costs are a significant component of Mesaba’s and Big Sky’sexpenses, comprising 34.7% of Mesaba’s and Big Sky’s total operating expensesin fiscal 2005.  Several of Mesaba’s andBig Sky’s employee groups have separate bargaining agreements and may makedemands that would increase operating expenses, adversely affectingprofitability.  Mesaba is currentlynegotiating with its mechanics for a new agreement.  The existing agreement became amendable in August 2003.  Mesaba is also currently negotiating with itsdispatchers, whose agreement became amendable in May 2005.  Mesaba’s flight attendant agreement issubject to being open for negotiations in December 2005.  The pilot agreement is not scheduled to beopen for negotiations for several years. However, because of the Chapter 11 bankruptcy at Mesaba, Mesaba isengaged in discussions with all of its unions to address the need for contractsthat are consistent with changing company and industry conditions.  If consensual agreements are not reached in atimeframe that Mesaba deems necessary, Mesaba may seek relief from itsagreements as permitted by the Bankruptcy Code. In addition, Big Sky’s agreements remain subject to the Railway LaborAct process.  Any failure by Mesaba orBig Sky to successfully negotiate their collective bargaining agreements couldhave an adverse effect on the Company’s financial condition and results ofoperations.

 

**Risks Related to the Company’s Stock**

 

*Together, certain of the Company’sshareholders own or have the right to acquire a significant portion of theCompany’s stock and could ultimately control decisions regarding the Company.*

 

Northwest owns 27.5% of the Company’s common stock.  Northwest also owns a warrant to purchase anaggregate of 4,112,500 shares of the Company’s common stock, subject to certainvesting restrictions related to the future delivery by Northwest of CRJaircraft.  Additionally, several othershareholders also own significant blocks of the Company’s common stock.  Because the parties described above currentlyown a large portion of the Company’s stock, 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 result, some investors may be unwilling to purchase the Company’scommon stock.  In addition, if the demandfor the Company’s common stock is reduced because of these shareholders’control of the Company, the price of the Company’s common stock could bematerially depressed.

 

*Future sales of the Company’s common stock byits shareholders could depress the price of the Company’s stock.*

 

Sales of a large number of shares of the Company’s common stock or theavailability of a large number of shares for sale could adversely affect the marketprice of the Company’s common stock.  Asof October 31, 2005, the Company had 20,591,840 shares of common stockoutstanding.  Several of the Company’sshareholders own substantial blocks of the Company’s common stock.  Additionally, along with the shares of stockit currently owns, Northwest could own an additional large block of the Company’scommon stock upon exercise of its warrants. In connection with the ASA, the Company entered into a registrationrights agreement to register the shares of stock owned by Northwest (includingthose shares underlying its warrant).  Althoughthe registration statement has not been filed, following such registration,future sales of those shares, or future sales of other large blocks of theCompany’s common stock that are already registered, could substantially depressthe Company’s stock price.

 

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*Any future exercises of warrants by Northwestcould substantially dilute the Company’s common stock.*

 

As of September 30, 2005, Northwest held a warrant exercisable foran aggregate of 4,112,500 shares of the Company’s common stock at an exercise priceof $8.74 per share.  To date, thiswarrant has not vested, and it will not begin to vest until Northwest delivers15 CRJs to Mesaba.  Upon the warrant’svesting, holders of the Company’s common stock could experience substantialownership dilution if Northwest elects to exercise its warrant.

 

*The Company’s stock price may continue to bevolatile.*

 

In the past two fiscal years, the market price of the Company’s commonstock has ranged from a low of $4.50 per share to a high of $10.11 pershare.  Because the Company’s stock isthinly traded, its market price is sensitive and may continue to experiencesubstantial fluctuations due to a variety of factors, including the following:

 

•      failureof the Company’s operating results to meet analysts’ or investors’ expectationsin any quarter;

•      securitiesanalysts’ estimates;

•      materialannouncements by the Company, Northwest or the Company’s, Mesaba’s or Big Sky’scompetitors;

•      publicsales of a substantial number of shares of the Company’s common stock;

•      regulatoryactions; or

•      generalmarket conditions.

 

*Anti-takeover provisions of the Company’sarticles of incorporation and bylaws and of Minnesota law could discourage,delay or prevent a change in control.*

 

The Company’s articles of incorporation and bylaws, along withMinnesota law, could discourage, delay or prevent persons from acquiring orattempting to acquire the Company.  TheCompany’s articles of incorporation authorize the board of directors, withoutaction by the Company’s shareholders, to designate and issue preferred stock inone or more series, with such rights, preferences and privileges as the boardof directors shall determine.  TheCompany’s articles of incorporation and bylaws also mandate a classified boardof directors, which makes changing control of the board more difficult.  The Company’s bylaws grant the board ofdirectors the authority to adopt, amend or repeal all or any of such bylaws,subject to the power of the shareholders to change or repeal such bylaws.  The Company’s bylaws also limit who may callmeetings of the Company’s shareholders.

 

As a public corporation, the Company is prohibited by the Minnesota BusinessCorporation Act, except under certain specified circumstances, from engaging inany merger, significant sale of stock or assets or business combination withany shareholder or group of shareholders who own at least 10% of the Company’scommon stock.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The Company’s principal market risks are the availability and price ofjet fuel and changes in interest rates.

 

The Company believes that Mesaba’s arrangements for fuel with Northwestassure an adequate supply of fuel for current and future operations, providedthat Northwest does not experience a supply shortage.  As a part of the ASA, the fuel price forMesaba’s Saabs is fixed at 83.5¢ per gallon; thus, Northwest bears the economicrisk of fuel price fluctuations for Mesaba’s Saab fuel requirements.  Northwest provides all fuel at its expense tosupport Mesaba’s Avro operations.  BigSky is subject to fluctuations in fuel prices.

 

The Company does not hold long-term interest-sensitive assets andtherefore is not exposed to significant interest rate fluctuations for itsassets.  The Company does not purchase orhold any derivative financial instruments for trading or speculative purposes.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls Procedures*

 

The Company’s management does not expect that itsdisclosure controls and procedures will prevent all errors and all fraud. Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Thedesign of any system of controls also is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions; over time, control may become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures maydeteriorate. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

 

As of September 30, 2005, the Company conducted an evaluationunder the supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer,regarding the effectiveness of the design and operation of the Company’sdisclosure controls and procedures (as that term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended).  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of the date of suchevaluation.

 

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*Changes in Internal Controls*

 

During the quarter ended September 30, 2005, there were no changesin internal controls over financial reporting that had a material effect oninternal control over financial reporting or were reasonably likely to have amaterial effect on internal control over financial reporting.

 

*Management’s Consideration of theRestatement*

 

Managementhas considered, among other things, the control deficiency related to theaccounting for certain pass-through costs, which resulted in the need torestate the Company’s previously issued financial statements as disclosed inNote 14 of Notes to Condensed Consolidated Financial Statements in thisQuarterly Report on Form 10-Q. After reviewing and analyzing theSecurities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 99,“Materiality,” Accounting Principles Board Opinion No. 28, “InterimFinancial Reporting” paragraph 29 and SAB Topic 5-F, “Accounting Changes NotRetroactively Applied Due to Immateriality,” and taking into consideration (i) thatthe restatement adjustments did not have a material impact on the consolidatedfinancial statements of prior interim or annual periods taken as a whole; (ii) thatthe restatement adjustments had no effect on previously reportedoperating income, income before income taxes, net income, earnings per share,net cash flows or the Company’s financial condition in any prior interim or annual periods; and (iii) thatthe Company decided to include restated condensed consolidated financialstatements for the fiscal 2005 interim periods in its Quarterly Reports on Form 10-Qfiled prospectively, and to include restated consolidated financial statementsfor fiscal 2005 and 2004 in its Annual Report on Form 10-K for the yearending March 31, 2006 filed prospectively, management concluded that thecontrol deficiency that resulted in the restatement of the prior periodconsolidated financial statements was not itself a material weakness.  Furthermore, management concluded that thecontrol deficiency that resulted in the restatement, when aggregated with otherdeficiencies, did not constitute a material weakness.

 

**Part II.  OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Incorporated by reference to Note 13, “Commitments and Contingencies”of the Company’s Notes to Condensed Consolidated Financial Statements,contained in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

As described more fully in Note 3, “Northwest and Mesaba BankruptcyFilings” of the Company’s Notes to Condensed Consolidated Financial Statements,contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, onOctober 13, 2005, Mesaba Aviation, Inc. filed for bankruptcyprotection under Chapter 11 of the United States Bankruptcy Code in the UnitedStates District Court for the District of Minnesota.

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

As described in the Company’s Current Report on Form 8-K, filedwith the Securities and Exchange Commission on September 2, 2005, inconnection with the ASA between Mesaba and Northwest and pursuant to a separateagreement between the Company and Northwest, the Company issued to Northwest anAmended and Restated Warrant (the “Warrant”). The Warrant has a term of ten years and is exercisable for an aggregateof 4,112,500 shares of the Company’s common stock at an exercise price of $8.74per share.  Sixty percent of the sharesissuable upon exercise of the Warrant will vest upon delivery of the fifteenthCRJ to Mesaba, and an additional four percent of the shares will vest with eachsubsequent delivery of the next ten CRJs. As described in Part I of this Quarterly Report on Form 10-Q,Northwest has indicated that it may be unable to meet the delivery schedule forthe CRJs, so it is unclear when or if any or all of the Warrant will vest.  The issuance of the Warrant was exempt fromregistration pursuant to Section 4(2) of the Securities Act of 1933.

 

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**ITEM 6. EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1                 |       | Amended and Restated Articles of  Incorporation. Incorporated by reference to Exhibit 4.1 to the Company’s  Form 8-K filed on August 27, 2003.                                                                                                                                                                                                                       |
| 3.2                 |       | Bylaws. Incorporated by reference to Exhibit 3.2  to the Company’s Form 10-K filed June 14, 2005.                                                                                                                                                                                                                                                                    |
| 4.1                 |       | Specimen certificate for shares of the  Common Stock of the Company. Incorporated by reference to Exhibit 4.2 to  the Company’s Form 8-K filed August 27, 2003.                                                                                                                                                                                                      |
| 4.2                 |       | Amended and Restated Warrant dated August 29,  2005 issued to Northwest Airlines, Inc. Filed herewith.                                                                                                                                                                                                                                                                         |
| 4.3                 |       | Registration Rights Agreement dated as of August 29,  2005 among MAIR Holdings, Inc., Northwest Airlines, Inc., Boeing  Capital Loan Corporation and U.S. Bank National Association. Filed herewith.                                                                                                                                                                      |
| 10.1                |       | 1994 Stock Option Plan. Incorporated by  reference to Exhibit 10.1 to the Company’s Form 10-K filed June 14,  2005.                                                                                                                                                                                                                                                  |
| 10.2                |       | 1996 Directors’ Option Plan. Incorporated  by reference to Exhibit 10.2 to the Company’s Form 10-K filed June 14,  2005.                                                                                                                                                                                                                                        |
| 10.3                |       | 2000 Stock Incentive Plan. Incorporated by  reference to Exhibit 10.3 to the Company’s Form 10-K filed June 14,  2005.                                                                                                                                                                                                                                               |
| 10.4                |       | Mesaba Aviation, Inc. 2003 Incentive  Award Plan. Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-K  filed June 14, 2005.                                                                                                                                                                                                                    |
| 10.5                |       | Airline Services Agreement dated as of August 29,  2005 between Mesaba Aviation, Inc. and Northwest Airlines, Inc.  (certain portions of this document have been deleted pursuant to an  application for confidential treatment under Rule 24b-2). Filed  herewith.                                                                                                  |
| 10.6                |       | Agreement dated as of August 29, 2005  between MAIR Holdings, Inc. and Northwest Airlines, Inc. (certain  portions of this document have been deleted pursuant to an application for  confidential treatment under Rule 24b-2). Filed herewith                                                                                                                       |
| 10.7                |       | Special Facilities Lease dated as of June 1,  1990 between Charter County of Wayne, State of Michigan and Mesaba Aviation, Inc.  Filed herewith.                                                                                                                                                                                                                               |
| 10.8                |       | Ground Lease dated May 18, 1990  between Charter County of Wayne, State of Michigan and Mesaba Aviation, Inc.  Filed herewith.                                                                                                                                                                                                                                                 |
| 10.9                |       | Stock Purchase Agreement between the  Company and Carl R. Pohlad dated as of October 18, 1993. Incorporated by  reference to Exhibit 10.10 to the Company’s Form 10-K filed June 14,  2005.                                                                                                                                                                     |
| 10.10               |       | Term Sheet Proposal for the Acquisition of  Saab 340 Aircraft by Mesaba Aviation, Inc. dated March 7, 1996  (certain portions of this document have been deleted pursuant to an  application for confidential treatment under Rule 24b-2). Incorporated  by reference to Exhibit 10U to the Company’s Form 10-K/A for the  year ended March 31, 1996. |
| 10.11               |       | Letter Agreement regarding Saab 340B Plus  Acquisition Financing dated March 7, 1996 (certain portions of this  document have been deleted pursuant to an application for confidential  treatment under Rule 24b-2). Incorporated by reference to Exhibit 10V  to the Company’s Form 10-K/A for the year ended March 31, 1996.                             |
| 10.12               |       | Lease Agreement, dated as of July 1,  1999, between Kenton County Airport Board and Mesaba Aviation, Inc.  Incorporated by reference to Exhibit 10AA to the Company’s Form 10-K  for the year ended March 31, 2000.                                                                                                                                        |
| 10.13               |       | Ground Lease, dated as of September 1,  1999, between Kenton County Airport Board and Mesaba Aviation, Inc.  Incorporated by reference to Exhibit 10BB to the Company’s Form 10-K  for the year ended March 31, 2000.                                                                                                                                      |
| 10.14               |       | Aircraft Hangar Facility Lease Agreement  between Metropolitan Airports Commission Minneapolis - St. Paul and Mesaba  Aviation, Inc. dated September 30, 2002. Incorporated by reference  to Exhibit 10Y to the Company’s Form 10-Q for the quarter ended June 30,  2003.                                                                                  |
| 10.15               |       | Lease between Spectrum Investment Group,  L.L.C. and Mesaba Aviation, Inc. entered into as of April 25, 2003.  Incorporated by reference to Exhibit 10Z to the Company’s Form 10-Q  for the quarter ended June 30, 2003.                                                                                                                                   |

 

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| **Exhibit  Number** | ** ** | **Document Description**                                                                                                                                                                                                                     |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                   |
| 10.16               |       | Management Compensation Agreement between  the Company and Paul F. Foley, dated October 1, 2004. Incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on October 22, 2004. |
| 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 the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf of theundersigned, thereunto duly authorized.

 
|                          | MAIR Holdings, Inc.                                                                                                         |
|-------------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                             |
|                          |                                                                                                                             |
| Dated: November 14, 2005 | 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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