**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended December 31, 2007**

 

**OR**

 

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

** **

**For the transition period from           to           **

 

**Commission File No:  0-17895**

 

**MAIR HOLDINGS, INC.**

 

Incorporated under the laws of Minnesota

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

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

 

Yes x   No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filing and large accelerated filer” in Rule 12b-2of the Exchange Act.  (Check one):

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

 

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

 

Yes o   No x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Class**                                     | ** **   | **Outstanding  as of December 31, 2007** |
|-----------------------------------------------|--------------|-----------------------------------------------|
| ***Common  Stock, par value $.01 per share*** | *** *** | ***15,083,049***                              |

 

 

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# ** **

# **CAUTIONARY NOTEREGARDING FORWARD-LOOKING STATEMENTS**

# ** **

Statementsin this Quarterly Report on Form 10-Q of MAIR Holdings, Inc. (“MAIR”or the “Company”) under the caption “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and elsewhere in this report areforward-looking and are based upon information currently available to theCompany.  The Company, through its officers,directors or employees, may also from time to time make oral forward-lookingstatements.  In connection with the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, theCompany notes that a variety of material risks and uncertainties could causeactual results to differ materially from those contained in any forward-lookingstatement made by or on behalf of the Company. Many important factors that could cause such a difference are describedunder the caption “Risk Factors” in Item 1A of Part I of the Company’sAnnual Report on Form 10-K, filed with the United States Securities andExchange Commission (the “SEC”) on June 19, 2007, as updated in Item 1A ofPart II of the Company’s Quarterly Report on Form 10-Q for the quarterended September 30, 2007, filed with the SEC on November 7, 2007 andin Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

Unduereliance should not be placed on the Company’s forward-looking statementsbecause the matters they describe are subject to known and unknown risks,uncertainties and other unpredictable factors, many of which are beyond theCompany’s control.  The Company’s forward-looking statements are based oninformation currently available and speak only as of the date on which thisreport was filed with the SEC.  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.

 

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

 

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**PART I.  FINANCIALINFORMATION**

 

**ITEM1.  CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands, except share information)**

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **December 31** | ** ** | **March 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                           | ** ** | **2007**             | ** ** | **2007**          | ** ** |
| ASSETS                                                                                                               |       |                 |       |              |       |
| CURRENT ASSETS:                                                                                                      |       |                 |       |              |       |
| Cash and cash equivalents                                                                                            |       | $                    | 19,981     |              | $          | 28,593 |   |
| Short-term investments                                                                                               |       | 5,404                |       | 26,068            |       |
| Accounts receivable, net of reserves of  $1,289 and $570                                                             |       | 3,373                |       | 2,882             |       |
| Inventories, net                                                                                                     |       | 1,459                |       | 650               |       |
| Prepaid expenses and deposits                                                                                        |       | 3,248                |       | 4,592             |       |
| Restricted cash                                                                                                      |       | 13,354               |       | 554               |       |
| Total current assets                                                                                                 |       | 46,819               |       | 63,339            |       |
|                                                                                                                 |       |                 |       |              |       |
| PROPERTY AND EQUIPMENT:                                                                                              |       |                 |       |              |       |
| Flight equipment                                                                                                     |       | 22,538               |       | 847               |       |
| Other property and equipment                                                                                         |       | 2,687                |       | 1,724             |       |
| Less: Accumulated depreciation and  amortization                                                                     |       | (1,822               | )          | (891              | )          |
| Net property and equipment                                                                                           |       | 23,403               |       | 1,680             |       |
|                                                                                                                 |       |                 |       |              |       |
| NONCURRENT ASSETS:                                                                                                   |       |                 |       |              |       |
| Long-term investments                                                                                                |       | 9,127                |       | 11,357            |       |
| Other intangible assets, net                                                                                         |       | 1,075                |       | 2,007             |       |
| Restricted cash                                                                                                      |       | —               |       | 13,110            |       |
| Other assets, net                                                                                                    |       | 190                  |       | 197               |       |
|                                                                                                                 |       | $                    | 80,614     |              | $          | 91,690 |   |
|                                                                                                                 |       |                 |       |              |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                           |       |                 |       |              |       |
| CURRENT LIABILITIES:                                                                                                 |       |                 |       |              |       |
| Intercompany payable to Mesaba Aviation,  Inc.                                                                       |       | $                    | —     |              | $          | 813 |   |
| Accounts payable                                                                                                     |       | 4,105                |       | 3,063             |       |
| Stock repurchase payable to Northwest  Airlines, Inc.                                                                |       | —               |       | 10,905            |       |
| Accrued liabilities:                                                                                                 |       |                 |       |              |       |
| Payroll                                                                                                              |       | 1,716                |       | 1,575             |       |
| Deferred income                                                                                                      |       | 465                  |       | 737               |       |
| Imairment charges                                                                                                    |       | 12,701               |       | —            |       |
| Other current liabilities                                                                                            |       | 3,747                |       | 6,310             |       |
| Total current liabilities                                                                                            |       | 22,734               |       | 23,403            |       |
|                                                                                                                 |       |                 |       |              |       |
| OTHER NONCURRENT LIABILITIES                                                                                         |       | 1,238                |       | 1,081             |       |
| Total liabilities                                                                                                    |       | 23,972               |       | 24,484            |       |
|                                                                                                                 |       |                 |       |              |       |
| 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, 15,083,049 and 15,008,285 shares issued and outstanding |       |                 |       |              |       |
|                                                                                                                 | 151        |                 | 150        |              |
| Paid-in capital                                                                                                      |       | 36,013               |       | 35,438            |       |
| Accumulated other comprehensive income                                                                               |       | 120                  |       | —            |       |
| Retained earnings                                                                                                    |       | 20,358               |       | 31,618            |       |
| Total shareholders’ equity                                                                                      |       | 56,642               |       | 67,206            |       |
|                                                                                                                 |       | $                    | 80,614     |              | $          | 91,690 |   |

 

3

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except share information)**

**(Unaudited)**

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **December 31**             | ** ** | **December 31**            | ** ** |
| ** **                                        | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| OPERATING REVENUES:                               |       |                             |       |                            |       |   |   |   |   |
| Passenger                                         |       | $                                | 6,971      |                            | $          | 3,544 |   | $ | 18,054 |   | $ | 11,004 |   |
| Essential Air Service and other                   |       | 2,897                            |       | 2,408                           |       | 7,977 |   | 7,174 |   |
| Total operating revenues                          |       | 9,868                            |       | 5,952                           |       | 26,031 |   | 18,178 |   |
| OPERATING EXPENSES:                               |       |                             |       |                            |       |   |   |   |   |
| Wages and benefits                                |       | 4,245                            |       | 2,842                           |       | 11,978 |   | 8,148 |   |
| Aircraft fuel                                     |       | 3,208                            |       | 1,144                           |       | 7,556 |   | 4,111 |   |
| Aircraft maintenance                              |       | 1,276                            |       | 845                             |       | 3,484 |   | 2,765 |   |
| Aircraft rents                                    |       | 453                              |       | 453                             |       | 1,359 |   | 1,359 |   |
| Landing fees                                      |       | 286                              |       | 75                              |       | 738 |   | 262 |   |
| Insurance and taxes                               |       | 316                              |       | 319                             |       | 984 |   | 1,678 |   |
| Depreciation and amortization                     |       | 663                              |       | 176                             |       | 1,252 |   | 535 |   |
| Administrative and other                          |       | 4,089                            |       | 2,533                           |       | 11,238 |   | 8,969 |   |
| Impairment and other charges                      |       | 10,962                           |       | —                          |       | 10,962 |   | — |   |
| Total operating expenses                          |       | 25,498                           |       | 8,387                           |       | 49,551 |   | 27,827 |   |
| Operating loss                                    |       | (15,630                          | )          | (2,435                          | )          | (23,520 | ) | (9,649 | ) |
| NONOPERATING INCOME (EXPENSE):                    |       |                             |       |                            |       |   |   |   |   |
| Damage claim income from Mesaba Aviation,  Inc.   |       | —                           |       | —                          |       | 9,429 |   | — |   |
| Interest income and other                         |       | 129                              |       | 1,330                           |       | 2,850 |   | 3,889 |   |
| Interest expense                                  |       | (68                              | )          | (16                             | )          | (440 | ) | (50 | ) |
| Other nonoperating income, net                    |       | 61                               |       | 1,314                           |       | 11,839 |   | 3,839 |   |
|                                              |       |                             |       |                            |       |   |   |   |   |
| Loss before benefit (provision) for income  taxes |       | (15,569                          | )          | (1,121                          | )          | (11,681 | ) | (5,810 | ) |
|                                              |       |                             |       |                            |       |   |   |   |   |
| BENEFIT (PROVISION) FOR INCOME TAXES              |       | 340                              |       | (10                             | )          | 421 |   | (351 | ) |
|                                              |       |                             |       |                            |       |   |   |   |   |
| NET LOSS                                          |       | $                                | (15,229    | )                               | $          | (1,131 | ) | $ | (11,260 | ) | $ | (6,161 | ) |
|                                              |       |                             |       |                            |       |   |   |   |   |
| NET LOSS PER SHARE:                               |       |                             |       |                            |       |   |   |   |   |
| Loss per common share - basic                     |       | $                                | (1.01      | )                               | $          | (0.05 | ) | $ | (0.75 | ) | $ | (0.30 | ) |
| Loss per common share - diluted                   |       | $                                | (1.01      | )                               | $          | (0.05 | ) | $ | (0.75 | ) | $ | (0.30 | ) |
|                                              |       |                             |       |                            |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:              |       |                             |       |                            |       |   |   |   |   |
| Basic                                             |       | 15,083                           |       | 20,592                          |       | 15,083 |   | 20,592 |   |
| Diluted                                           |       | 15,083                           |       | 20,592                          |       | 15,083 |   | 20,592 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **December 31**            | ** ** |
| ** **                                                                    | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                         |       |                            |       |   |   |
| Net loss                                                                      |       | $                               | (11,260    | ) | $ | (6,161 | ) |
| Adjustments to reconcile net loss to net  cash used in  operating activities: |       |                            |       |   |   |
|                                                                          |       |                            |       |   |
| Depreciation and amortization                                                 |       | 1,252                           |       | 535 |   |
| Amortization of deferred credits                                              |       | (72                             | )          | (81 | ) |
| Stock-based compensation                                                      |       | 129                             |       | 298 |   |
| Amortization of investment discounts                                          |       | (423                            | )          | (983 | ) |
| Mesaba Aviation, Inc. tax payable  settlement                                 |       | (813                            | )          | — |   |
| Deferred income taxes                                                         |       | —                          |       | 202 |   |
| Impairment charges                                                            |       | 10,962                          |       | — |   |
| Changes in current operating items:                                           |       |                            |       |   |   |
| Accounts receivable                                                           |       | (491                            | )          | 335 |   |
| Income tax receivable                                                         |       | —                          |       | 941 |   |
| Inventories                                                                   |       | (809                            | )          | (522 | ) |
| Prepaid expenses and deposits                                                 |       | 1,344                           |       | 683 |   |
| Payable to Northwest Airlines, Inc.                                           |       | (11,314                         | )          | — |   |
| Accounts payable and other                                                    |       | (88                             | )          | 756 |   |
| Net cash used in operating activities                                         |       | (11,583                         | )          | (3,997 | ) |
|                                                                          |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                         |       |                            |       |   |   |
| Purchases of investments                                                      |       | (15,469                         | )          | (31,138 | ) |
| Sales of investments                                                          |       | 38,711                          |       | 40,984 |   |
| Purchases of property and equipment                                           |       | (22,195                         | )          | (233 | ) |
| Sale of property and equipment                                                |       | 202                             |       | — |   |
| Decrease (increase) in restricted cash                                        |       | 310                             |       | (13,110 | ) |
| Net cash provided by (used in) investing  activities                          |       | 1,559                           |       | (3,497 | ) |
|                                                                          |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                          |       |                            |       |   |   |
| Payment of long term debt and capital  leases                                 |       | 71                              |       | (47 | ) |
| Issuance of line of credit                                                    |       | 983                             |       | — |   |
| Proceeds from exercise of stock options                                       |       | 358                             |       | 3,005 |   |
| Net cash provided by financing activities                                     |       | 1,412                           |       | 2,958 |   |
|                                                                          |       |                            |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                     |       | (8,612                          | )          | (4,536 | ) |
| CASH AND CASH EQUIVALENTS:                                                    |       |                            |       |   |   |
| Beginning of period                                                           |       | 28,593                          |       | 47,135 |   |
| End of period                                                                 |       | $                               | 19,981     |   | $ | 42,599 |   |
|                                                                          |       |                            |       |   |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                          |       |                            |       |   |   |
| Cash paid during the year for:                                                |       |                            |       |   |   |
| Interest                                                                      |       | $                               | 66         |   | $ | 44 |   |
| Income taxes                                                                  |       | 133                             |       | (6,549 | ) |
|                                                                          |       |                            |       |   |   |
| SUPPLEMENTARY NON-CASH ACTIVITY:                                              |       |                            |       |   |   |
| Capital expenditures in accounts payable                                      |       | $                               | 547        |   | $ | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

Thecondensed consolidated financial statements included herein have been preparedby the Company without audit, pursuant to the rules and regulations of theSEC.  The information furnished in thecondensed consolidated financial statements includes normal recurringadjustments, unless otherwise noted, and reflects all adjustments that are, inthe opinion of management, necessary for the fair presentation of suchcondensed consolidated financial statements. The Company’s business is seasonal and, accordingly, interim results arenot indicative of results for a full year. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted pursuant to such rules and regulations, although the Companybelieves that the disclosures are adequate to make the information presentednot misleading.  These condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements for the year ended March 31, 2007, andthe notes thereto, included in the Company’s Annual Report on Form 10-Kfiled with the SEC on June 19, 2007.

 

**1.****             ****Basis of Presentation, CorporateOrganization and Business**

 

*Basis of Presentation and Corporate Organization*

MAIRis the holding company for Big Sky Transportation Co. (“Big Sky”), a regionalair carrier based in Billings, Montana. Until April 24, 2007, MAIR was also the holding company for MesabaAviation, Inc., (“Mesaba”), a regional air carrier based in Minneapolis,Minnesota.  The Company’s condensed consolidatedfinancial statements include the accounts of MAIR and Big Sky.  All intercompany transactions and balanceshave been eliminated in consolidation.

 

Mesabafiled a voluntary petition for relief under Chapter 11 of the United States BankruptcyCode (the “Bankruptcy Code”) in the United States Bankruptcy Court for theDistrict of Minnesota (“Bankruptcy Court”) on October 13, 2005 (the “PetitionDate”), after which Mesaba operated its business as a debtor-in-possessionpursuant to the Bankruptcy Code.  On April 24,2007 (the “Exit Date”), Mesaba’s bankruptcy plan of reorganization becameeffective and Mesaba exited bankruptcy as a wholly-owned subsidiary ofNorthwest Airlines, Inc. (“Northwest”), and, therefore, is no longer ownedby MAIR.

 

**Operations**

 

*Big Sky*

BigSky operates as a regional air carrier based in Billings, Montana, providingscheduled passenger, freight, express package and charter services.  In April 2007, Big Sky began operatingas a Delta connection carrier for Delta Air Lines, Inc. (“Delta”) in theeast, with service to and from Boston. However, a combination of unusually bad weather, disappointing revenueand record-high fuel prices disrupted Big Sky’s operations to the point wherethey were no longer financially viable. As a result, Big Sky and Delta mutually agreed to cease the easternoperations effective January 7, 2008. Big Sky also announced that it is seeking to transition its westernoperations to another carrier and sell its operating assets.  Big Sky’s western operations involve providinginterline and online connecting services and local market services throughdaily scheduled flights.  Big Sky has acode-sharing agreement with Northwest, where its services in the west aremarketed jointly.  As of February 6,2008, Big Sky provided scheduled air service to ten communities in Montana.

 

BigSky participates in the Essential Air Service (“EAS”) program with theDepartment of Transportation (“DOT”). The EAS program subsidizes air carriers to provide air service todesignated rural communities throughout the country that could not otherwiseeconomically justify that service based on their passenger traffic.  The DOT pays EAS subsidies for each departurein a covered market. During the three months ended December 31, 2007 and2006, Big Sky recognized revenue from EAS subsidies of $2.8 and $1.9 million,respectively.  During the nine monthsended December 31, 2007 and 2006, Big Sky recognized revenue from EASsubsidies of $7.2 and $6.2 million, respectively.

 

Asa part of its Delta connection service, Big Sky entered into an agreement topurchase eight Beechcraft 1900D (“Beechcraft”) aircraft and related spare parts.  At December 31, 2007, seven aircraft andspare parts costing approximately $21.8 million had been delivered to BigSky.  Although Big Sky intended to obtainindependent financing for the aircraft, Big Sky was unable to obtaincommercially reasonable independent financing without a guaranty by 

 

6

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MAIR.  As a result, MAIR provided the debt financingto allow Big Sky to acquire the seven aircraft. Because Big Sky ended its Delta connection service on January 7,2008, Big Sky, with the seller’s consent, elected not to purchase the eighthand final aircraft under the purchase agreement.  Effective January 7, 2008, Big Sky hasclassified these seven aircraft as held for sale and is now in the process ofidentifying buyers.  Big Sky believesthat there is currently a strong global market for these aircraft.  However, there is no assurance that marketconditions will not deteriorate before Big Sky is able to sell the aircraft.

 

*Use of Estimates*

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities, as well asthe reported amounts of revenues and expenses. The most significant use of estimates relates to the allowance fordoubtful accounts, aircraft property and equipment lives, inventory obsolescencereserves, valuation of other intangible assets and accounting for incometaxes.  Ultimate results could differfrom those estimates.

 

**2.****             ****Intangible Assets**

 

TheCompany 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 certainidentifiable intangible assets, including Big Sky’s pilot labor contract andits air carrier certificate, and to goodwill. Goodwill and the intangible assets are evaluated for impairmentannually, at a minimum, or on an interim basis if events or circumstancesindicate a possible inability to realize the carrying amounts.

 

Intangible assets and related accumulated amortization were as follows,in thousands:

 
| ** **                          | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Accumulated**                 | ** ** | **Accumulated**              | ** ** |
| ** **                          | ** ** | **Gross**                       | ** ** | **Amortization**             | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived intangible assets: |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| Air carrier certificate             |       | $                               | 925        |                         |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Airport slots                       |       | 150                             |       |                         |       | 150 |   | — |   |   |   | — |   |
| Amortizable intangible asset:       |       |                            |       |                         |       |   |   |   |   |   |   |   |   |
| Pilot labor contract                |       | —                          |       | —                       |       | — |   | 2,840 |   | (1,758 | ) | 1,082 |   |
|                                |       | $                               | 1,075      |                         | $          | — |   | $ | 1,075 |   | $ | 3,765 |   | $ | (1,758 | ) | $ | 2,007 |   |
|                                     |            |                                 |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Duringthe third quarter of fiscal 2008, Big Sky purchased three slots at theWestchester County Airport in White Plains, New York with the intent to provideair service to Boston, Massachusetts in January 2008.  Presently the slots are being offered forsale.

 

Dueto continued losses and the recent announcement that Big Sky is seeking to transitionits remaining operations to another carrier, the Company determined that aninterim impairment test of intangible assets was necessary at December 31,2007.  Based on the results of theinterim test performed at December 31, 2007 the Company determined that BigSky’s pilot labor contract was impaired and recorded an impairment charge ofapproximately $0.8 million.  The impairmentcharge was recorded in “Impairment charges” in the accompanying consolidatedstatement of operations.  Based on itsanalysis, the Company believes Big Sky’s air carrier certificate and airportslots continue to have value and are not impaired.

 

**3.****             ****MAIR’s Proof of Claim in Mesaba’sBankruptcy**

 

On February 28, 2006, as a part of Mesaba’s bankruptcyproceedings, MAIR filed a proof of claim against Mesaba, with no recognition ofthis claim in the Company’s consolidated financial statements due to thesignificant uncertainty of any amount being ultimately collected.  In April 2007, the Bankruptcy Courtapproved a compromise for MAIR’s damage claim under which Mesaba allowed MAIR aclaim of up to $6.2 million relating to repayment of the guaranty of Mesaba’shangar lease at the Cincinnati/Northern Kentucky International Airport andmanagement fees.  Additionally, pursuantto a Stock Purchase Agreement between MAIR and Northwest, Northwest assignedits $7.3 

 

7

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million allowed claim against Mesaba to MAIR.  Therefore, as of the Exit Date, MAIR’s totalunsecured creditors’ claim in Mesaba’s bankruptcy totaled $13.5 million.

 

InJuly 2007, the liquidating trust made an interim distribution of 70% toall claimholders with allowed undisputed claims.  MAIR received $9.4 million of its $13.5million claim, which reflects the 70% interim distribution of its claim.  MAIR recorded these amounts as “Damage claimincome from Mesaba Aviation, Inc.” within the condensed consolidatedstatement of operations.  The remaining $4.1million, or 30%, of MAIR’s unsecured claim is considered a contingent gain and willbe recorded as the Company receives additional disbursements from theliquidating trust after the remaining Mesaba disputed claims are resolved (seeNote 12).

 

**4.****             ****Investments**

 

Investmentsconsist principally of government, agency, corporate and municipal securitiesand are classified as available-for-sale. Fair value of investments is determined based on quoted marketprices.  The Company classifiesinvestments with an original maturity of more than 90 days that mature withinone year as short-term and greater than one year as long-term.

 

Asof December 31, 2007 and March 31, 2007, cash, cash equivalents,short-term and long-term investments totaled $34.5 million and $66.0 million, respectively.

 

Amortized cost, gross unrealized gains and losses and fair value ofshort and long-term investments classified as securities available for salewere as follows, in thousands:

 
| ** **              | ** ** | **December 31, 2007** | ** ** | **March 31, 2007** | ** ** |
|-------------------------|------------|---------------------------------|------------|------------------------------|------------|
| Amortized cost          |       | $                               | 14,651     |                         | $          | 37,409 |   |
| Gross unrealized gains  |       | 124                             |       | 50                           |       |
| Gross unrealized losses |       | (244                            | )          | (34                          | )          |
| Fair value              |       | $                               | 14,531     |                         | $          | 37,425 |   |

 

Forthe three and nine months ended December 31, 2007 and 2006, the Company’sgross realized gains and losses were insignificant.

 

**5.****             ****Income Taxes**

 

SFASNo. 109, *Accounting for Income Taxes*,requires that all available evidence, both positive and negative be consideredto determine whether, based on the weight of that evidence, a valuationallowance is needed.  Future realizationof the tax benefits of an existing deductible temporary difference or carryforwardultimately depends on the existence of sufficient taxable income of theappropriate character within the carryback or carryforward periods availableunder the tax law.

 

TheCompany has performed such an analysis, and a full valuation allowance wasprovided at the end of fiscal 2006. The Company continues to record a fullvaluation allowance against its remaining deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.  The Company recorded a $0.3 million taxbenefit for the three months ended December 31, 2007.  The Company recorded a $0.4 million taxbenefit for the nine months ended December 31, 2007 due to the reversal oftax contingency reserves previously established and the realization of stateincome tax refunds received for prior periods and a refund of interest from anInternal Revenue Service (“IRS”) audit. The Company will be required to update its estimates of future taxableincome based upon additional information management obtains, and the Companywill continue to evaluate the realizability of the deferred tax assets on aquarterly basis.

 

TheCompany will file a consolidated federal income tax return which will includeMesaba’s income through the Exit Date. Taxable income for both the Company and Mesaba will be offset by theutilization of net operating loss carryforwards from prior periods.

 

TheCompany’s adoption of the provisions of the Financial Accounting Standards Board(“FASB”) Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes,* (“FIN 48”) on April 1, 2007 did not impactthe Company’s 

 

8

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consolidatedfinancial statements. As of the adoption, the total amount of unrecognized taxbenefits for uncertain tax positions was $0.5 million, which is classified asnon-current liabilities.  Of this amount,$0.3 million would affect the Company’s effective tax rate if recognized.  It is not expected that the amount ofunrecognized tax benefit will significantly change within the next twelvemonths.

 

TheCompany’s continuing practice is to classify interest and penalties, if any, onuncertain tax positions as components of the provision for income taxes.  The total amount of interest and penaltyaccrued as of April 1, 2007 was $0.1 million.

 

TheCompany and its subsidiary file a consolidated federal income tax return andvarious state income tax returns.  As ofthe date of adoption of FIN 48, the Company is generally no longer subject toU.S. federal and state income tax examinations by tax authorities for yearsprior to fiscal 2004.

 

**6.****             ****Stock-Based Compensation**

 

EffectiveApril 1, 2006, the Company adopted the fair value recognition provisionsof SFAS No. 123R, *Share-Based Payment,*(“SFAS 123R”),**using the modified prospective transition method.Under that transition method, compensation expense that the Company recognizesbeginning on that date includes expense associated with the fair value of allawards granted on and after April 1, 2006, and expense for the unvestedportion of previously granted awards outstanding on April 1, 2006. Resultsfor prior periods have not been restated.

 

UnderSFAS 123R, forfeitures are estimated at the time of valuation and reduceexpense ratably over the vesting period. This estimate is adjusted periodically based on the extent to whichactual forfeitures differ, or are expected to differ, from the previousestimate.  Under SFAS No. 123, *Accounting for Stock-Based Compensation*and APB 25, *Accounting for Stock Issued to Employees,*theCompany elected to account for forfeitures when awards are actually forfeited,at which time all previous pro forma expense will be reversed to reduce proforma expense for that period.

 

*Stock Option Plans*

TheCompany has approved stock option plans for key employees, directors,consultants and advisors to the Company.  Options have been granted andare presently outstanding under the Company’s 1994 Stock Option Plan, 1996Director Stock Option Plan and 2000 Stock Incentive Plan.  The 2000 StockIncentive Plan has a provision that automatically increases the authorizedshares available for grant on September 1 of each year by the lesser of300,000 or 1% of the then outstanding common shares.  Under the plans, thecompensation committee of the board of directors grants the options anddetermines the vesting and exercise periods at the time of the award.  Thepurchase price of the stock for non-qualified and incentive stock options isdetermined at the time of the award and is equal to the fair market value atthe time of the award.

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following assumptions:  risk-free interest rate, stock pricevolatility and expected life.  The Companyestablishes the risk-free interest rate using the U.S. Treasury yield curve asof the grant date.  The expectedvolatility assumption is set based primarily on historical volatility.  For options granted, the Company amortizesthe fair value on a straight-line basis over the vesting period of the options.

 

Forthe nine months ended December 31, 2007 and 2006, SFAS 123R’s fair valuemethod resulted in additional expense in the amount of $0.1 million and $0.3million, respectively, related to stock options.  These amounts are included in the “Wages andbenefits” caption in the accompanying condensed consolidated statements ofoperations for the three and nine months ended December 31, 2007 and2006.  SFAS 123R also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow asrequired prior to SFAS 123R.  As theCompany currently has no excess tax benefits related to SFAS 123R, its adoptionhas not affected the Company’s condensed consolidated statement of cash flows.The impact of adopting SFAS 123R on future results will depend on, among otherthings, levels of stock options granted in the future, actual forfeiture ratesand the timing of option exercises.

 

9

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A summary of stock option activity since the Company’s most recentfiscal year end is as follows:

 
| ** **                                                      | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **              | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **              | ** ** |
|-----------------------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------|------------|
| ** **                                                      | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **              | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **              | ** ** |
| ** **                                                      | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**           | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**           | ** ** |
| ** **                                                      | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**           | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**           | ** ** |
| ** **                                                      | ** ** | **Outstanding** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**               | ** ** | **Exercisable** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**               | ** ** |
| ** **                                                      | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **(in thousands)** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **(in thousands)** | ** ** |
| Balance at  March 31, 2007                                 |       | 1,458,118       |       | 6.87         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Granted                                                         |       | —          |       | —       |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Exercised                                                       |       | 74,764          |       | 5.97         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Expired / Cancelled                                   |       | 548,354         |       | 7.13         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Balance at  December 31, 2007                              |       | 835,000         |       | 6.78         |       | 4.9             |       | $                       | —     |            | 763,750    |         | 6.76       |            | 4.7        |                    | $          | — |   |
| Vested or  expected to vest at December 31, 2007 |       | 835,000         |       | 6.78         |       | 4.9             |       | $                       | —     |            |       |         |       |            |       |                    |       |   |
|                                                                 |            |                 |            |              |            |                 |            |                         |            |                 |            |              |            |                 |            |                         |            |  |  |

 

Theaggregate intrinsic value of options outstanding at December 31, 2007 iscalculated as the difference between the exercise price of the underlyingoption and the market price of the common stock.  The aggregate intrinsic value of optionsexercised during the three and nine months ended December 31, 2007 was zero. The total fair value of options vestedduring the nine months ended December 31, 2007 was $0.2 million.

 

*Unrecognized Compensation*

As of December 31, 2007, the Company had $0.2million of total unrecognized compensation cost related to non-vested stockoption compensation arrangements granted under all equity compensationplans.  Total unrecognized compensationwill be adjusted for future changes in estimated forfeitures.  The Company expects to recognize the costover a weighted average period of two years.

 

**7.****             ****Loss Per Share**

 

Basicloss per common share is computed by dividing net loss by the weighted averagenumber of shares of common stock outstanding during the year.  Diluted earnings per share is computed bydividing net loss by the sum of the weighted average number of shares of commonstock outstanding plus all additional common stock that would have beenoutstanding if potentially dilutive common shares related to stock options andwarrants had been exercised.  Stockoptions and warrants with an exercise price exceeding the fair market value ofthe Company’s common stock at period end are considered antidilutive and areexcluded from the calculation.

 

Thefollowing table reconciles the number of shares utilized in the condensedconsolidated loss per share calculations for the periods ended December 31,in thousands, except per share data:

 
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **December 31**             | ** ** | **December 31**            | ** ** |
| ** **                                                                                | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss                                                                                  |       | $                                | (15,229    | )                               | $          | (1,131 | ) | $ | (11,260 | ) | $ | (6,161 | ) |
| For loss per share - basic:                                                               |       |                             |       |                            |       |   |   |   |   |
| Weighted average number of issued shares  outstanding                                     |       | 15,083                           |       | 20,592                          |       | 15,083 |   | 20,592 |   |
| Effect of dilutive securities:                                                            |       |                             |       |                            |       |   |   |   |   |
| Computed shares outstanding under stock  option plans utilizing the treasury stock method |       |                             |       |                            |       |   |   |   |   |
|                                                                                      | —     |                             | —     |                            | —     |   | — |   |
| For loss per share - diluted:                                                             |       |                             |       |                            |       |   |   |   |   |
| Weighted average common and potentially  dilutive common shares outstanding               |       |                             |       |                            |       |   |   |   |   |
|                                                                                      | 15,083     |                             | 20,592     |                            | 15,083     |   | 20,592 |   |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Loss per share - basic                                                                    |       | $                                | (1.01      | )                               | $          | (0.05 | ) | $ | (0.75 | ) | $ | (0.30 | ) |
| Loss per share - diluted                                                                  |       | $                                | (1.01      | )                               | $          | (0.05 | ) | $ | (0.75 | ) | $ | (0.30 | ) |
|                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Antidilutive options and warrants                                                         |       | 835                              |       | 1,537                           |       | 790 |   | 1,582 |   |

 

 

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**8.****             ****Consolidated Comprehensive Loss**

 

The following table presents the calculation of comprehensive loss forthe periods ended December 31, in thousands:

 
| ** **                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                        | ** ** | **December 31**             | ** ** | **December 31**            | ** ** |
| ** **                                                        | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss                                                          |       | $                                | (15,229    | )                               | $          | (1,131 | ) | $ | (11,260 | ) | $ | (6,161 | ) |
| Unrealized gains on investments classified  as available for sale |       | 109                              |       | 11                              |       | 120 |   | 219 |   |
| Comprehensive loss                                                |       | $                                | (15,120    | )                               | $          | (1,120 | ) | $ | (11,140 | ) | $ | (5,942 | ) |

 

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**9.****             ****Segment Information**

 

The Company follows the provisions of SFAS No. 131, *Disclosures about 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 majorcustomers.  The method for determiningwhat information to report is based upon the way management organizes theoperating segments within the Company for making operating decisions andassessing financial performance. Although Mesaba has been deconsolidated from the Company’s consolidatedfinancial statements as of the Petition Date, the segment information presentedbelow continues to include Mesaba until the Exit Date, in accordance with SFAS No. 131and related guidance for equity-method investees.  Mesaba’s results of operations after thePetition Date are included in the “Eliminations” column.

 

Operating segment information for Mesaba, Big Sky and MAIR were asfollows, in thousands:

 
| ** **                                | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **MAIR** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------|------------|----------|------------|------------------|------------|------------------|------------|
| *Three Months Ended December 31, 2007*    |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | —     |             | $          | 9,868    |       | $                | —     |             | $          | — |   | $ | 9,868 |   |
| Operating expenses                        |       | —     |       | 14,302           |       | 11,196   |       | —           |       | 25,498           |       |
| Depreciation and amortization             |       | —     |       | 656              |       | 7        |       | —           |       | 663              |       |
| Interest expense                          |       | —     |       | 388              |       | 40       |       | (360             | )          | 68               |       |
| Loss before income taxes                  |       | —     |       | (5,403           | )          | (10,166  | )          | —           |       | (15,569          | )          |
| Capital expenditures                      |       | —     |       | 12,185           |       | 4        |       | —           |       | 12,189           |       |
| Current assets                            |       | —     |       | 8,783            |       | 43,738   |       | (5,702           | )          | 46,819           |       |
| Total assets                              |       | —     |       | 33,427           |       | 100,591  |       | (53,404          | )          | 80,614           |       |
| Current liabilities                       |       | —     |       | 17,814           |       | 13,624   |       | (8,704           | )          | 22,734           |       |
| Total shareholders’ equity (deficit) |       | —     |       | (3,571           | )          | 86,718   |       | (26,505          | )          | 56,642           |       |
| *Three Months Ended December 31, 2006*    |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 60,489     |             | $          | 5,952    |       | $                | 58         |             | $          | (60,547 | ) | $ | 5,952 |   |
| Operating expenses                        |       | 66,033     |       | 6,525            |       | 1,920    |       | (66,091          | )          | 8,387            |       |
| Depreciation and amortization             |       | 2,158      |       | 170              |       | 6        |       | (2,158           | )          | 176              |       |
| Interest expense                          |       | 86         |       | 117              |       | —   |       | (187             | )          | 16               |       |
| Reorganization items, net                 |       | 25,491     |       | —           |       | —   |       | (25,491          | )          | —           |       |
| Loss before income taxes                  |       | (30,753    | )          | (692             | )          | (429     | )          | 30,753           |       | (1,121           | )          |
| Capital expenditures                      |       | 366        |       | 33               |       | 10       |       | (366             | )          | 43               |       |
| Current assets                            |       | 62,257     |       | 3,987            |       | 87,767   |       | (67,131          | )          | 86,880           |       |
| Total assets                              |       | 89,028     |       | 7,706            |       | 132,355  |       | (109,234         | )          | 119,855          |       |
| Current liabilities                       |       | 43,110     |       | 8,863            |       | 11,916   |       | (47,984          | )          | 15,905           |       |
| Total shareholders’ equity (deficit) |       | (36,897    | )          | (2,152           | )          | 120,439  |       | 21,565           |       | 102,955          |       |
| *Nine Months Ended December 31, 2007*     |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 14,842     |             | $          | 26,030   |       | $                | —     |             | $          | (14,841 | ) | $ | 26,031 |   |
| Operating expenses                        |       | 15,831     |       | 34,620           |       | 14,931   |       | (15,831          | )          | 49,551           |       |
| Depreciation and amortization             |       | 433        |       | 1,236            |       | 16       |       | (433             | )          | 1,252            |       |
| Interest expense                          |       | —     |       | 604              |       | 375      |       | (539             | )          | 440              |       |
| Income (Loss) before income taxes         |       | 83,528     |       | (9,768           | )          | (13,017  | )          | (72,424          | )          | (11,681          | )          |
| Capital expenditures                      |       | —     |       | 22,187           |       | 8        |       | —           |       | 22,195           |       |
| *Nine Months Ended December 31, 2006*     |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 215,107    |             | $          | 18,178   |       | $                | 175        |             | $          | (215,282 | ) | $ | 18,178 |   |
| Operating expenses                        |       | 228,317    |       | 20,233           |       | 7,769    |       | (228,492         | )          | 27,827           |       |
| Depreciation and amortization             |       | 7,141      |       | 519              |       | 16       |       | (7,141           | )          | 535              |       |
| Interest expense                          |       | 86         |       | 356              |       | —   |       | (392             | )          | 50               |       |
| Reorganization items, net                 |       | 26,816     |       | —           |       | —   |       | (26,816          | )          | —           |       |
| Loss before income taxes                  |       | (38,970    | )          | (2,405           | )          | (3,405   | )          | 38,970           |       | (5,810           | )          |
| Capital expenditures                      |       | 1,596      |       | 223              |       | 10       |       | (1,596           | )          | 233              |       |

 

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** **

**10.****      ****Commitments and Contingencies**

 

*Saab Leasing Litigation*

In2002, Fairbrook Leasing, Inc., Lambert Leasing, Inc. and SwedishAircraft Holdings AB (“Saab Leasing”) filed a declaratory judgment actionagainst Mesaba relating to 20 Saab 340A (“340A”) aircraft leased byMesaba.  In 2003, the District Court declared that the term sheet relatingto the leases for the 340A aircraft was a binding preliminary agreementrequiring Mesaba to negotiate in good faith toward the execution of long-termagreements for each of the 340A aircraft.  Although Mesaba appealed thisruling, while the appeal was pending, Saab Leasing (relying on the DistrictCourt’s declaratory judgment ruling) filed a separate action in the DistrictCourt alleging approximately $35 million in damages for past due and futureaircraft lease obligations.  While the damages action was pending, theU.S. Court of Appeals for the Eighth Circuit (the “Circuit Court”) affirmed theDistrict Court’s declaratory judgment ruling. On July 6, 2006, the District Court in the damages action grantedMesaba’s motion for partial summary judgment, ruling that Saab Leasing is noteligible to receive damages for the majority of its claims against Mesaba.

 

Becausethe potential damages for the remaining claim against Mesaba were notsignificant, Mesaba never established any accrual with regard to thislitigation within its condensed financial statements.  Mesaba was unable to reach a settlement withSaab Leasing within the context of Mesaba’s bankruptcy proceedings; thus,Mesaba consented to lift the automatic stay and allow Saab Leasing to appealthe District Court’s July 2006 ruling to the Circuit Court.  The Circuit Court heard oral arguments on theappeal on October 18, 2007, but has not yet ruled on the matter.  Mesaba’s liquidating trust is fundinglitigation expenses related to this appeal and will be required to fund anyamounts that may be due to Saab Leasing if the District Court’s ruling isreversed.  Any such payments by Mesaba’s liquidatingtrust would ultimately reduce the distribution MAIR is entitled to receive fromthe estate.

 

*Goldman Credit Bankruptcy Claim*

Goldman Sachs Credit Partners, L.P. (“Goldman Credit”) is the largestcreditor in Mesaba’s bankruptcy proceedings, and it holds approximately $58million in disputed claims asserted by itself or purchased from othercreditors.  All of Goldman Credit’sdisputed claims are for aircraft and equipment leases that were rejected byMesaba.  Goldman Credit has asserted that the stipulated loss provisionsof the applicable leases, under which liquidated damages are calculated, shouldapply to determine the total claim amount due to Goldman Credit.  Mesaba’sliquidating trustee instead believes that the claim allowed to Goldman Credit shouldreflect actual damages suffered, which is the amount related to Goldman Credit’sclaim that is recorded in Mesaba’s liabilities subject to compromise.  Mesaba’sbankruptcy estate has filed for summary judgment with the Bankruptcy Courtasserting that the liquidated damages constitute unenforceable penalties.  The Bankruptcy Court heard oral arguments onthe motion on September 10, 2007, but has not yet ruled on themotion.  Mesaba’s liquidating trust will be funding the litigationexpenses related to the Goldman Credit claim and will be responsible for makinga distribution to Goldman Credit following resolution of the claim.  Anysuch payments from Mesaba’s liquidating trust would ultimately reduce thedistribution MAIR is entitled to receive from the estate.

 

*Guaranty*

Priorto its bankruptcy, Mesaba leased a facility at the Cincinnati/Northern KentuckyInternational Airport, but vacated the facility and ceased making the requiredlease payments on it in November 2005.  In 1999, MAIR unconditionallyguaranteed full and prompt payment of the ground lease and the bonds associatedwith the initial financing of the facility.  In accordance with thisguaranty, MAIR has made the required bond and ground lease payments due since November 2005. In April 2006, in exchange for the bondholders forbearing acceleration ofthe bonds, MAIR delivered a letter of credit to the bondholders to assurepayment of the bonds.  Subsequently, Mesaba assumed and assigned therelated ground lease to MAIR.  The Airport Board consented to theassignment of the ground lease.  SinceMesaba vacated the hangar in October 2005, MAIR has been seeking other sublesseesto lease the facility.

 

InAugust 2007, MAIR and the bondholders amended the original forbearance to allowMAIR until November 1, 2008 to identify a new tenant and execute asublease for the property.  Any rent MAIR receives from a future sublesseewould offset the lease payments that MAIR is required to make.  As of December 31, 2005, MAIR recorded a$4.8 million liability with respect to the lease and guaranty, which assumedthat the facility would remain vacant for two years, during which time MAIRwould continue to make the bond and lease payments, and that thereafter MAIRwould be able to sublease the facility at a 20% discount.  As of December 31,2007, MAIR recorded an additional $10.2 million liability, which assumed thatMAIR would pay the bondholders in full on or before November 1, 2008, but thatMAIR 

 

13

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mayreceive value for its rights under the ground lease.  This impairment charge was based on recent negotiationsbetween MAIR and the bondholders to pay off the remaining bond balance andnegotiations between MAIR and the airport regarding the ground lease.

 

Theletter of credit required under the forbearance agreement was issued by FirstInterstate Bank of Billings and is currently fully collateralized by MAIR’scash account held at First Interstate Bank.  Under the agreement with thebondholders, MAIR is obligated to maintain the letter of credit until allobligations under the bonds are satisfied.  MAIR’s annual obligations withrespect to the bonds and the ground lease for the facility total approximately$1.2 million, and those obligations are scheduled to continue through July 2029and will increase at scheduled intervals in accordance with the terms of thebond documents.  The bondholder agreement and the letter of credit providethat the amount of the letter of credit will automatically decrease each July inaccordance with the redemption schedule for the bonds.

 

Thebondholders may draw on the letter of credit upon the occurrence of an event ofdefault under its agreement with MAIR, including if MAIR fails to make anypayment when due, if MAIR fails to provide evidence that the letter of credithas been renewed annually (or if MAIR fails to renew the letter of credit), if thebondholders receive notice from First Interstate Bank of the bank’s intent notto renew the letter of credit, if the bonds become subject to mandatoryredemption, if MAIR fails to comply with the terms of its agreement with thebondholders, if First Interstate Bank’s credit rating is lowered and MAIR failsto deliver an alternate letter of credit, if MAIR fails to consummate asublease or assignment of the lease with the airport by November 1, 2008,if MAIR fails to provide a report to the bondholders each quarter identifyingthe steps MAIR has taken to identify a tenant for the facility or if MAIRcommits any event of default under its guaranty of Mesaba’s bondobligations.  The cash supporting the letter of credit was classified as “Restrictedcash” on the Company’s condensed consolidated balance sheet at December 31,2007 and March 31, 2007.

 

*Other Commitments*

In February 2005, Big Sky obtained a revolving line of credit inthe principal amount of $250,000 from First Interstate Bank of Billings.  In March 2006, the principal amountavailable under the line increased to $370,000. The line of credit charges a variable interest rate based on the primerate published in the *Wall Street Journal*.  At December 31, 2007, the rate was 7.25%on outstanding borrowings of $369,140. The line of credit is collateralized by Big Sky’s inventory, accountsreceivable and equipment and is scheduled to mature in June 2008.

 

In September 2007, Big Sky obtained a revolving line of credit inthe principal amount of $1,000,000 from First Interstate Bank of Billings.  The line of credit charges a fixed rate of 5.5%on outstanding borrowings at December 31, 2007 of $1.0 million.  The line of credit is collateralized by acash certificate of deposit and is scheduled to mature in September 2008.

 

BigSky recorded $0.7 million of restricted cash at December 31, 2007 forcertificates of deposit supporting letters of credit of $0.4 million forworkers’ compensation insurance and $0.2 million for aircraft fuel and airportlease agreements.  In May 2007 BigSky established a $0.1 million certificate of deposit supporting a customs bondrequired for the June 2007service between Boston, Massachusetts and Quebec City and Fredericton, Canada.

 

Inconnection with Big Sky’s leasing of the Beechcraft aircraft, in April 2005,MAIR entered into a letter of credit agreement with Wells Fargo Bank, N.A.  The letter of credit is in the amount of $1.9million and is for the benefit of Mesa Air Group (“Mesa”), who may draw on theletter of credit if Big Sky fails to perform its obligations under theBeechcraft aircraft leases.  The letterof credit automatically renews each year unless MAIR notifies Mesa that it doesnot intend to renew it.  If MAIR does notrenew the letter of credit, Big Sky’s leases with Mesa will increase byapproximately $0.5 million per year.

 

*MAIR Pledge for Big Sky*

In August 2006, MAIR entered into a pledge agreement with U.S.Bank, pursuant to which MAIR pledged $0.8 million in exchange for U.S. Bankreducing the amount of funds that it holds back from Big Sky when credit cardpayments are processed.  U.S. Bank processes payments for Big Sky ticketsmade with various credit cards.  In the past, and consistent with industrypractice, U.S. Bank held back a specified portion of those credit card paymentsuntil the tickets had been used.  MAIR agreed to pledge its cash in lieuof the required hold back, which subsequently freed up those funds for Big Sky’suse.  Under the pledge agreement, MAIR is free to request a release of itscollateral at any time.  Following such a request, U.S. Bank would againbegin holding back amounts from Big Sky, and MAIR’s collateral would bereturned 90 

 

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days after the held back amounts total the requisite level pursuant toU.S. Bank’s credit card processing policies.  Because MAIR has the rightto request a release of its collateral and to terminate the pledge agreement,the amount of cash pledged is not recorded as restricted cash.

 

**11.****      ****Accounting for Mesaba’s Financial Results**

 

MAIRhas accounted for Mesaba’s financial results under the equity method ofaccounting from the Petition Date until the Exit Date.  In accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 18, **The Equity Method of Accounting for Investments inCommon Stock****,MAIR** evaluated whether its investment in Mesaba hadexperienced an other-than-temporary impairment as of March 31, 2006.  MAIR’s evaluation utilized a market andincome approach, including a discounted cash flow analysis, and concluded thatits remaining investment in Mesaba had experienced an other-than-temporaryimpairment.  Accordingly, effective March 31,2006, MAIR recorded an $8.9 million impairment charge to write off itsremaining equity investment in Mesaba. The impairment charge was recorded in “Impairment and other charges” inthe fiscal 2006 consolidated statement of operations.

 

For the fiscal year ended March 31, 2007, Mesaba reported a netloss of $71.3 million.  MAIR did notrecord any of these losses experienced by Mesaba in MAIR’s consolidatedfinancial statements due to MAIR not having any further obligations to fund anyof Mesaba’s additional losses.

 

Forthe period from April 1, 2007 through the Exit Date, Mesaba reported netincome of $83.5 million.  Upon Mesaba’semergence from bankruptcy and the corresponding transfer of MAIR’s equity inMesaba to Northwest, MAIR lost its ability to significantly influence Mesaba;therefore, the Company did not record any portion of Mesaba’s income under theequity method of accounting.

 

Theprovisions of Statement of Position 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code* (“SOP 90-7”),applied to Mesaba’s financial statements while Mesaba operated under theprovisions of Chapter 11 of the Bankruptcy Code.  SOP 90-7 does not change the application ofGAAP in the preparation 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.

 

Sincethe Petition Date, intercompany balances between MAIR and Mesaba have not beeneliminated. As of March 31, 2007, MAIR had an intercompany tax payable toMesaba of $0.8 million and Mesaba had an equal intercompany tax receivable fromMAIR.  As a result of the April 2007settlement of MAIR’s proof of claim in Mesaba’s bankruptcy proceedings (seeNote 3), MAIR may be responsible for certain of Mesaba’s tax obligationsincurred through the Exit Date for those states in which MAIR and Mesabahistorically filed a unitary tax return.  Although MAIR does not believethere is any remaining tax exposures, under the settlement between MAIR andMesaba, Mesaba agreed to relinquish its right to the $0.8 million intercompanytax balance to allow MAIR to use these funds to pay any Mesaba tax obligationsthat taxing authorities may seek to collect from MAIR.  The reversal of the liability amount wasrecorded within other income for the three month period ended June 30,2007.

 

**12.****      ****Mesaba Plan of Reorganization**

 

OnJanuary 22, 2007, Mesaba and Northwest entered into a Stock Purchase andReorganization Agreement (the “SPRA”), under which Northwest agreed to allowMesaba a $145 million claim in Northwest’s bankruptcy case.  In exchange, Mesaba agreed to file a plan ofreorganization under which Mesaba’s existing equity would be cancelled and newequity would be issued to Northwest, making Mesaba a wholly-owned operatingsubsidiary of Northwest.

 

TheSPRA authorized Mesaba to monetize its $145 million claim against Northwest toprovide Mesaba’s bankruptcy estate with cash to satisfy creditors’ claims.  Mesaba’s creditors’ committee conducted anauction on January 29, 2007, after which The Goldman Sachs Group, Inc.(“Goldman Sachs”) and Mesaba entered into a forward contract by which GoldmanSachs purchased the $145 million claim for approximately $125 million.  The closing of the sale to Goldman Sachs wascontingent upon Northwest’s bankruptcy court allowing the $145 million claimand upon Mesaba’s plan of reorganization being approved by its own BankruptcyCourt.  Following Northwest’s bankruptcycourt’s February 27, 2007 order allowing the $145 million claim and Mesaba’sBankruptcy Court’s April 9, 2007 approval of Mesaba’s plan 

 

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ofreorganization, Goldman Sachs funded the $125 million purchase price on theExit Date.  Mesaba exited bankruptcy on theExit Date, and all of the outstanding stock of Mesaba is now owned byNorthwest.  On the Exit Date, Mesabarecorded $125 million as “Income from Claim in Northwest Airlines, Inc. bankruptcy.”

 

Theentire $125 million purchase price from Goldman Sachs was placed in aliquidating trust, and the proceeds from the liquidating trust will ultimatelybe used to satisfy Mesaba’s creditors’ claims. Prior to the order approving Mesaba’s plan of reorganization, MAIRworked with Mesaba’s creditors’ committee to resolve the majority of Mesaba’screditors’ claims.  The liquidatingtrustee estimates that these remaining creditors’ claims will totalapproximately $90 million, which amount includes MAIR’s $13.5 million unsecuredcreditors’ claim.  MAIR recorded $9.4 millionof its unsecured creditors’ claim as other income during the quarter ended June 30,2007 as previously discussed in Note 3.

 

TheSaab litigation and the Goldman Credit claim are the two major claims in Mesaba’sbankruptcy that remain open (see Note 10). The $90 million estimate of creditors’ claims includes the liquidatingtrustee’s assessment of the value at which each of these claims should beresolved.  If the $90 million estimate ofcreditors’ claims is correct, Mesaba’s creditors would be paid in full,including interest, and MAIR would then receive approximately $34 million forits equity interest in Mesaba from the liquidating trust.  However, in the event the total allowedcreditors’ claims exceed $125 million, MAIR would not receive any distributionsfor its equity ownership of Mesaba.  Insuch event, the liquidating trust assets would be distributed pro-rata to allof Mesaba’s unsecured creditors, including MAIR.  MAIR has not recorded the contingent residualequity interest in the trust due to the uncertainty of the ultimate amount tobe received.

 

**13.****      ****New Accounting Pronouncements**

 

InSeptember 2006, FASB issued SFAS No. 157, *Fair ValueMeasurements*(“SFAS No. 157”), to define fair value, establisha framework for measuring fair value in accordance with GAAP, and expanddisclosures about fair value measurements. SFAS No. 157 will be effective for the Company beginning April 1,2008. The Company is in the process of determining what effect, if any, theadoption of SFAS No. 157 will have on its financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities* (“SFAS 159”). SFAS 159 permits entities tochoose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. SFAS 159 iseffective for fiscal years beginning April 1, 2008. The Company is in theprocess of determining what effect, if any, the adoption of SFAS 159 will haveon its financial statements.

 

**14.****      ****Subsequent Events**

 

Asdiscussed in Note 1, on January 7, 2008 Big Sky ceased its easternoperations as a Delta connection carrier and began seeking to transfer itsremaining operations to another air carrier.  In preparation fortransition, and in accordance with the federal law requiring notice to eligibleemployees of a plant shutdown, Big Sky has delivered notices to a number ofemployees indicating that it will cease its remaining western operations on March 8,2008.  Big Sky will continue to assess its ability to operate through thedate on which another carrier takes over the Montana EAS routes.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the accompanying consolidated financial statements.

 

*Overview*

Duringthe second quarter of fiscal 2008, MAIR determined that any future plans for theCompany would be best served by Big Sky first achieving profitability.  It was MAIR’s expectation that during thethird quarter, Big Sky would continue executing its expansion plan as a Deltaconnection carrier and ultimately move towards monthly profitability.  However, a combination of factors, includingunusually bad weather, disappointing revenue and record-high fuel prices,resulted in Big Sky sustaining substantial losses in November and December of2007.  Therefore, on December 19,2007, Big Sky announced that it had mutually agreed with Delta to ceaseoperations in the east.  This decisionfurther led to a decision to seek to transfer Big Sky’s remaining westernoperations to another carrier.  In theinterim, Big Sky is continuing to operate in the west with four aircraft whileanother air carrier prepares to take over the Montana EAS routes.  While Big Sky desires to continue itsoperations as it seeks to transition them to another carrier, it will continueto assess whether such continued operations are feasible in light of Big Sky’sfinancial situation.

 

MAIRended the quarter with approximately $33.6 million in cash and investments onits balance sheet.  MAIR’s Board ofDirectors is continuing to actively review the appropriate timing and method todistribute cash not required for operations to the Company’s shareholders.  The timing and amount of such a distributionmay be affected by the events occurring at Big Sky.

 

Additionally,to maximize the potential value to MAIR as Mesaba’s former equity holder, MAIR continuesto play an active role in Mesaba’s liquidating trust created by its bankruptcy planof reorganization.  MAIR expects that alldistributions from the trust will be made during the first half of fiscal 2009.  MAIR presently intends to distribute to itsshareholders the funds it receives from the liquidating trust.

 

**RESULTS OF OPERATIONS**

 

**Three Months Ended December 31, 2007 and 2006**

TheCompany reported a consolidated net loss of $15.2 million, or $1.01 per basicand diluted share, for the quarter ended December 31, 2007, compared to a netloss of $1.1 million, or $0.05 per basic and diluted share, for the quarterended December 31, 2006. The net loss was primarily due to impairmentcharges of $11.0 million for the Cincinnati hangar, Big Sky’s pilot laborcontract and operating losses at MAIR and Big Sky, offset by interest income atMAIR.

 

*Big Sky*

Big Sky’s operating statistics for the three months ended December 31were as follows:

 
| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                                    |       | 61,464   |       | 26,611   |       | 131.0             | %          |
| Available seat miles (“ASM”) (000s) |       | 31,689   |       | 20,149   |       | 57.3              | %          |
| Revenue passenger miles (000s)                |       | 15,638   |       | 7,782    |       | 101.0             | %          |
| Load factor                                   |       | 49.3     | %          | 38.6     | %          | 10.7              |  pts  |
| Block hours flown                             |       | 9,537    |       | 5,327    |       | 79.0              | %          |
| Departures                                    |       | 8,385    |       | 5,244    |       | 59.9              | %          |
| Revenue per ASM                               |       | $        | 0.311      |     | $          | 0.295             |       | 5.4 | % |
| Cost per ASM                                  |       | $        | 0.451      |     | $          | 0.324             |       | 39.2 | % |
| Aircraft in service (average)                 |       | 16       |       | 10       |       | 60.0              | %          |

 

Big Sky Operating Revenues

Total operating revenues increased 65.0% to $9.9 million in the thirdquarter of fiscal 2008 from $6.0 million in the prior year quarter as a resultof a 131.0% increase in passengers due to the Delta connection service thatbegan in April 2007, offset by a lower average fare of $113 in fiscal 2008compared to $133 in fiscal 2007.

 

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Big Sky Operating Expenses

Total operating expenses in the third quarter of fiscal 2008 increased 119.2%to $14.3 million from $6.5 million in the prior year period, primarily due toincreased fuel cost, increased flying period-over-period and other costs associatedwith the Delta connection service which began in April 2007.

 

The following table compares components ofthe operating expenses and operating cost per ASM for the three months ended December 31:

 
| ** **                    | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2007**                    | ** ** | **2006**                                  | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Wages and benefits            |       | $                           | 3,846      |                                      | $          | 2,304 |   | $ | 1,542 |   | 66.9 | % | 12.1 | ¢ | 11.4 | ¢ |
| Aircraft fuel                 |       | 3,208                       |       | 1,144                                     |       | 2,064 |   | 180.4 | % | 10.1 |   | 5.7 |   |
| Aircraft maintenance          |       | 1,276                       |       | 845                                       |       | 431 |   | 51.0 | % | 4.0 |   | 4.2 |   |
| Aircraft rents                |       | 453                         |       | 453                                       |       | — |   | 0.0 | % | 1.4 |   | 2.2 |   |
| Landing fees                  |       | 286                         |       | 75                                        |       | 211 |   | 281.3 | % | 0.9 |   | 0.4 |   |
| Insurance and taxes           |       | 132                         |       | 108                                       |       | 24 |   | 22.2 | % | 0.4 |   | 0.6 |   |
| Depreciation and amortization |       | 656                         |       | 170                                       |       | 486 |   | 285.9 | % | 2.1 |   | 0.8 |   |
| Administrative and other      |       | 3,668                       |       | 1,426                                     |       | 2,242 |   | 157.2 | % | 11.6 |   | 7.1 |   |
| Impairment charges            |       | 777                         |       | —                                    |       | 777 |   | N/M |   | 2.5 |   | 0.0 |   |
|                          |       | $                           | 14,302     |                                      | $          | 6,525 |   | $ | 7,777 |   | 119.2 | % | 45.1 | ¢ | 32.4 | ¢ |

 

Wages and benefits increased $1.5 million, or66.9%, as a result of additional staffing and training requirements in flight,maintenance and stations for the Delta connection service.

 

In the third quarter of fiscal 2008, Big Sky experienced a 180.4%increase in fuel expense as a result of a 79.0% increase in block hoursperiod-over-period and a higher average price of jet fuel, from $1.88 pergallon in the third quarter of fiscal 2007 to $2.93 per gallon in the thirdquarter of fiscal 2008.

 

Aircraft maintenance increased 51.0% as a result of increased flyingassociated with Big Sky’s Delta connection service.

 

Landing fees increased 281.3% as a result of the increased level ofoperations and higher landing fee charges associated with Big Sky’s Deltaconnection service.

 

Depreciation and amortization increased 285.9% to $0.7 million in the thirdquarter of fiscal 2008 from $0.2 million in the third quarter of fiscal 2007,due to aircraft purchased in fiscal 2008.

 

During the third quarter of fiscal 2008, administrative and otherexpenses increased $2.2 million, or 157.2%, from the third quarter of fiscal2007, primarily due to station and passenger related costs associated with theDelta connection service.

 

During the third quarter of fiscal 2008, Big Sky recorded a $0.8million impairment charge for its pilot labor contract.

 

*MAIR*

 

MAIR Operating Expenses

Totaloperating expenses in the third quarter of fiscal 2008 increased to $11.2million from $1.9 million in the prior year period, primarily due to impairmentcharges of $10.2 million recorded for the Cincinnati hangar, offset by lowerlegal and professional fees in fiscal 2008 than those recorded in fiscal 2007from Mesaba’s bankruptcy.

 

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*Consolidated Operating Loss*

Operating loss for the third quarter of fiscal 2008 increased to $15.6million from the prior year quarter of $2.4 million.  The operating loss was due to the results ofMAIR and Big Sky described above.

 

*Consolidated Nonoperating Income*

Inthe third quarter of fiscal 2008, the Company recorded nonoperating income of$0.1 million, as a result of $0.6 million of costs related to Big Sky’s shutdown of its eastern operations offset by interest income, compared tononoperating income of $1.3 million in the prior year quarter.

 

*ConsolidatedProvision for Income Taxes*

TheCompany recorded a $0.3 million tax benefit on its net loss for the threemonths ended December 31, 2007 for interest received from an IRS audit.  The Company continues to record a fullvaluation allowance against its remaining deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.

 

**Nine Months Ended December 31, 2007 and 2006**

TheCompany reported a consolidated net loss of $11.3 million, or $0.75 per basicand diluted share, for the nine months ended December 31, 2007, comparedto a net loss of $6.2 million, or $0.30 per basic and diluted share, for the ninemonths ended December 31, 2006. The net loss was primarily due to operatinglosses at MAIR and Big Sky, offset by proceeds of $9.4 million for MAIR’s claimin Mesaba’s bankruptcy.

 

*Big Sky*

Big Sky’s operating statistics for the nine months ended December 31were as follows:

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                     |       | 161,259  |       | 86,879   |       | 85.6              | %          |
| Available seat miles (000s)    |       | 83,229   |       | 64,490   |       | 29.1              | %          |
| Revenue passenger miles (000s) |       | 41,534   |       | 25,245   |       | 64.5              | %          |
| Load factor                    |       | 49.9     | %          | 39.1     | %          | 10.8              | pts        |
| Block hours flown              |       | 24,393   |       | 16,516   |       | 47.7              | %          |
| Departures                     |       | 22,404   |       | 16,926   |       | 32.4              | %          |
| Revenue per ASM                |       | $        | 0.313      |     | $          | 0.282             |       | 11.0 | % |
| Cost per ASM                   |       | $        | 0.416      |     | $          | 0.314             |       | 32.2 | % |
| Aircraft in service (average)  |       | 13       |       | 10       |       | 30.0              | %          |

 

Big Sky Operating Revenues

Total operating revenues increased 42.9% to $26.0 million in fiscal2008 from $18.2 million in the prior year period as a result of an 85.6%increase in passengers offset by a lower average fare.

 

Big Sky Operating Expenses

Total operating expenses in fiscal 2008 increased 71.1% to $34.6million from $20.2 million in the prior year period, primarily due to increasedfuel cost, increased flying period-over-period and other costs associated with theDelta connection service which began in April 2007.

 

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The following table compares components ofthe operating expenses and operating cost per ASM for the nine months ended December 31:

 
| ** **                    | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2007**                    | ** ** | **2006**                                  | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Wages and benefits            |       | $                           | 10,170     |                                      | $          | 6,721 |   | $ | 3,449 |   | 51.3 | % | 12.2 |  ¢ | 10.4 | ¢ |
| Aircraft fuel                 |       | 7,556                       |       | 4,111                                     |       | 3,445 |   | 83.8 | % | 9.1 |   | 6.4 |   |
| Aircraft maintenance          |       | 3,484                       |       | 2,765                                     |       | 719 |   | 26.0 | % | 4.2 |   | 4.3 |   |
| Aircraft rents                |       | 1,359                       |       | 1,359                                     |       | — |   | 0.0 | % | 1.6 |   | 2.1 |   |
| Landing fees                  |       | 738                         |       | 262                                       |       | 476 |   | 181.7 | % | 0.9 |   | 0.4 |   |
| Insurance and taxes           |       | 372                         |       | 319                                       |       | 53 |   | 16.6 | % | 0.4 |   | 0.5 |   |
| Depreciation and amortization |       | 1,236                       |       | 519                                       |       | 717 |   | 138.2 | % | 1.5 |   | 0.8 |   |
| Administrative and other      |       | 8,928                       |       | 4,177                                     |       | 4,751 |   | 113.7 | % | 10.8 |   | 6.5 |   |
| Impairment charges            |       | 777                         |       | —                                    |       | 777 |   | N/M |   | 0.9 |   | 0.0 |   |
|                          |       | $                           | 34,620     |                                      | $          | 20,233 |   | $ | 14,387 |   | 71.1 | % | 41.6 | ¢ | 31.4 | ¢ |

 

Wages and benefits increased $3.4 million, or51.3%, as a result of additional staffing and training requirements in flight,maintenance and stations for the Boston operation.

 

In fiscal 2008, Big Sky experienced a 83.8% increase in fuel expense asa result of a 47.7% increase in block hours year-over-year and a higher averageprice of jet fuel, from $2.24 per gallon in fiscal 2007 to $2.69 per gallon infiscal 2008.

 

Aircraft maintenance increased 26.0% as a result of increased flyingassociated with Big Sky’s Delta operations.

 

Landing fees increased 181.7% as a result of the increased level ofoperations and higher landing fee charges associated with Big Sky’s Deltaconnection service.

 

Depreciation and amortization increased 138.2% to $1.2 million in fiscal2008 from $0.5 million in fiscal 2007, primarily due to aircraft purchased infiscal 2008, along with systems, equipment and fixtures to support the Deltaconnection service.

 

During fiscal 2008, administrative and other expenses increased $4.8million, or 113.7%, from fiscal 2007, primarily due to training costs foradditional staffing, station and passenger related costs at the new Deltaconnection locations.

 

During fiscal 2008, Big Sky recorded a $0.8 million impairment chargefor its pilot labor contract.

 

*MAIR*

 

MAIR Operating Expenses

Totaloperating expenses in fiscal 2008 increased to $14.9 million from $7.8 millionin the prior year period, primarily due to the $10.2 million impairment chargerecorded for the Cincinnati hangar, offset by lower legal and professional feesin fiscal 2008 than those recorded in fiscal 2007 from Mesaba’s bankruptcy.

 

*Consolidated Operating Loss*

Operating loss for fiscal 2008 increased to $23.5 million from $9.6million in the prior year period due to the results of MAIR and Big Skydescribed above.

 

*Consolidated Nonoperating Income*

Nonoperatingincome, net increased to $11.8 million in fiscal 2008 from $3.8 million in theprior year period, primarily as a result of MAIR recording $9.4 million for itsdamage claim in Mesaba’s bankruptcy offset by increased interest expense.

 

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*ConsolidatedProvision for Income Taxes*

TheCompany recorded $0.4 million of tax benefit on its income for the nine monthsended December 31, 2007.  Theassociated valuation allowance against those deferred tax assets was thereforeremoved.  The Company continues to recorda full valuation allowance against its remaining deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.  The benefit recorded is due to the reversalof tax contingency reserves previously established and the realization of stateincome tax refunds received for prior periods.

 

**Liquidity and Capital Resources**

 

*Overview*

Unrestrictedcash, cash equivalents and investments decreased 47.7% to $34.5 million at December 31,2007 from $66.0 million at March 31, 2007. The decrease was primarily due to funding the start-up costs for Big Sky’sBoston operation, including the purchase of seven additional Beechcraft aircraft,as well as the final payment to Northwest of the remaining amount due for thepurchase of Northwest’s stock in MAIR. MAIR paid Northwest approximately $24 million of the aggregate purchaseprice, or $4.25 per share, upon the initial closing of the transaction in March 2007.  MAIR paid the remaining purchase price,approximately $11.3 million or $2.00 per share, on October 22, 2007.  The Company’s working capital decreased to $24.1million at December 31, 2007 compared to working capital of $39.9 millionat March 31, 2007.

 

TheCompany’s liquidity will continue to be affected by the costs associated with transitioningBig Sky’s remaining operations to another carrier and the sale of Big Sky’sowned aircraft and other operating assets.

 

*Operating Activities*

Netcash used for operating activities for the nine months ended December 31,2007 was $11.6 million, primarily due to a net loss of $11.3 million and thepayment to Northwest of $11.3 million, offset by $11.0 million of impairmentcharges, $1.3 million of depreciation and amortization and $1.3 million ofprepaid expenses.

 

*Investing Activities*

Netcash provided by investing activities for the nine months ended December 31,2007 was $1.6 million, primarily due to net sales of investments of $23.2million, offset primarily by net purchases of property and equipment of $22.0million.

 

*Financing Activities*

Netcash provided by financing activities for the nine months ended December 31,2007 was $1.4 million primarily due to Big Sky’s establishment and draws on thebank line of credit of $1.0 million and $0.4 million in proceeds from theexercise of stock options, offset by $0.1 million of payment of long term debt.

 

*Outlook*

TheCompany has historically relied on cash and cash equivalents, investments andinternally generated funds to support its working capital requirements.  Absent adverse factors outside the control ofthe Company, management believes current liquidity and funds from operationswill provide adequate resources for meeting the Company’s future obligations.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Inits 2007 Annual Report on Form 10-K filed with the SEC on June 19,2007, the Company identified the critical accounting policies which affect itsmore significant estimates and assumptions used in preparing its consolidatedfinancial statements.  The Company hasnot changed these policies from those previously disclosed in its Annual Reporton Form 10-K.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

SeeITEM 1. Condensed Consolidated Financial Statements – Note 13.  New Accounting Pronouncements.

 

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## *** ***

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

## *** ***

TheCompany’s principal market risks are the availability and price of jet fuel andchanges in interest rates, as discussed below.

 

*Aircraft Fuel*

BigSky is subject to fluctuations in fuel prices. A hypothetical 10% increase in the December 31, 2007 cost pergallon of fuel, assuming projected fiscal 2008 usage at Big Sky, would resultin an increase to aircraft fuel expense of approximately $0.1 million in theremainder of fiscal 2008.  As of December 31,2007, Big Sky had no fuel hedges in place for fiscal 2008.

 

*Interest Rates*

TheCompany’s earnings are affected by changes in interest rates due to the impactthose changes have on its interest income from cash equivalents and short andlong-term investments.  If interest rateswere to increase by 100 basis points for a full year, based on the Company’scash equivalents, short-term and long-term investments balance at December 31,2007, the Company’s interest income from cash equivalents, short-term andlong-term investments would increase by approximately $0.3 million.

 

TheCompany does not purchase or hold any derivative financial instruments fortrading or speculative purposes.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls Procedures*

TheCompany’s management does not expect that its disclosure controls andprocedures will prevent all errors and all fraud. A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected. The design of any system ofcontrols also is based in part upon certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions; over time,control may become inadequate because of changes in conditions, or the degreeof compliance with the policies or procedures may deteriorate. Because of theinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

 

Asof December 31, 2007, the Company conducted an evaluation under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and acting 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 Chief Executive Officer and acting ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of the date of such evaluation.

 

*Changes in Internal Controls*

Duringthe quarter ended December 31, 2007, there were no changes in internalcontrols over financial reporting that had a material effect on internalcontrol over financial reporting or were reasonably likely to have a materialeffect on internal control over financial reporting.

 

# **PART II. OTHERINFORMATION**

# ** **

## ***ITEM 1.  LEGAL PROCEEDINGS***

## *** ***

Certain legal proceedings in which the Company is involved arediscussed in Note 13, “Commitments and Contingencies,” to the consolidatedfinancial statements included in Part I, Item 3, of the Company’sAnnual Report on Form 10-K for the fiscal year ended March 31, 2007,filed with the SEC on June 19, 2007. On January 17, 2008, MAIR’s litigation against the Air Line PilotsAssociation (“ALPA”) was dismissed. Because management determined that MAIR would not be pursuing anyactivities potentially prohibited by MAIR’s letter agreement with ALPA, theparties agreed to jointly request a dismissal. Aside from the ALPA litigation being dismissed, there have been nofurther 

 

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material developments in the Company’s legal proceedings since thedisclosures contained in the Form 10-K. Unless otherwise indicated, all proceedings discussed in the Company’searlier reports filed with the SEC remain outstanding.  Reference also is made to Note 10, “Commitmentsand Contingencies,” in Part I, Item 1, of this Quarterly Report on Form 10-Q.

 

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

 

Exceptas provided below, there have been no material changes in the risk factorspreviously disclosed in Item 1A of the Company’s Annual Report on Form 10-Kfor the fiscal year ended March 31, 2007, filed with the SEC on June 19,2007, and in Item 1A of the Company’s Quarterly Report on Form 10-Q forthe quarter ended September 30, 2007, filed with the SEC on November 7,2007.

 

*Big Sky could incur unanticipated costs associated with transitioningits operations to another carrier, and certain of Big Sky’s creditors may seekto recover from MAIR*.

In the process of transferring its westernoperations to another carrier, Big Sky will ultimately be required to close itsoffices and make arrangements to satisfy its accounts payable.  It is possible that this process will resultin additional costs being incurred by Big Sky. Additionally, although Big Sky is seeking to transfer its operations toanother carrier, there can be no assurance that in doing so, Big Sky will berelieved of its existing liabilities, including aircraft, airport and officeleases.  Although MAIR has not guaranteedany of Big Sky’s obligations, if Big Sky is unable to pay for its existingliabilities and the costs associated with closing its operations, some of BigSky’s creditors may seek to recover from MAIR. Any such actions could reduce the amount of cash that MAIR has availableto distribute to its shareholders.

 

*Big Sky could have difficulty continuing its operationsthrough an orderly transition if it experiences substantial employee loss.*

Currently, Big Sky intends to continue operatingits EAS routes while its seeks to transfer its operations to another carrier.  However, many of Big Sky’s employees may makearrangements for other employment before Big Sky intends to cease operations.  In such event, Big Sky could experience ashortage of employees such that Big Sky is forced to accelerate the date onwhich it ceases operations.

 

*If Big Sky is unable to sell the seven Beechcraft aircraftit owns for a price equal to what Big Sky paid for the aircraft, Big Sky may beunable to repay MAIR for the purchase of the aircraft*.

To support its eastern operations, Big Sky borrowedfunds from MAIR to purchase seven Beechcraft aircraft, and MAIR has a securityinterest in the aircraft.  Current marketconditions indicate that there is a strong global market for the aircraft.  However, if Big Sky suffers a loss whenselling the aircraft, Big Sky will not be able to repay MAIR the full amount ofthe loan.

 

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**ITEM6.  EXHIBITS**

 

# **EXHIBIT INDEX**

 
| **Exhibit********Number** | ** ** | **Document Description**                                                                                                |
|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                    |
| 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**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                          | MAIR  Holdings, Inc.                                              |               |
|-------------------------------|------------------------------------------------------------------------|--------------------|
|                          |                                                                   |               |
|                          |                                                                   |               |
| Dated:  February 6, 2007 | By:                                                                    | /s/  Paul F. Foley |   |
|                          | President,  Chief Executive Officer and acting Chief Financial Officer |
|                               |                                                                        |                    |  |

 

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