**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period endedSeptember 30, 2007**

 

**OR**

 

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

 

**For the transition period from           to**

 

**Commission File No:  0-17895**

 

**MAIRHOLDINGS, 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 to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes x   Noo

 

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

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

 

Yes o   Nox

 

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

 

| **Class**                              | ** ** | **Outstanding as of September 30, 2007** |
|----------------------------------------|------------|------------------------------------------|
| Common Stock, par value $.01 per share |       | 15,083,049                               |

 

 

----

 

# **CAUTIONARY NOTE REGARDING 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 of Financial Conditionand Results of Operations” and elsewhere in this report are forward-looking andare based upon information currently available to the Company. The Company,through its officers, directors or employees, may also from time to time makeoral forward-looking statements. In connection with the “safe harbor”provisions of the Private Securities Litigation Reform Act of 1995, the Companynotes that a variety of material risks and uncertainties could cause actualresults to differ materially from those contained in any forward-lookingstatement made by or on behalf of the Company. Many important factors thatcould cause such a difference are described under the caption “Risk Factors” inItem 1A of Part I of the Company’s Annual Report on Form 10-K, filed with theSecurities and Exchange Commission on June 19, 2007 and in “Risk Factors” inItem 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 onthe information currently available and speak only as of the date on which thisreport was filed with the United States Securities and Exchange Commission (the“SEC”).  Over time, actual results, performance or achievements willlikely differ from the anticipated results, performance or achievements thatare expressed or implied by the Company’s forward-looking statements, and suchdifferences might be significant and materially adverse to the Company’sshareholders.

 

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

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(in thousands, except shareinformation)**

**(Unaudited)**

** **
| ** **                                                                                                           | ** ** | **September 30** | ** ** | **March 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                           | ** ** | **2007**              | ** ** | **2007**          | ** ** |
| ASSETS                                                                                                               |       |                  |       |              |       |
| CURRENT ASSETS:                                                                                                      |       |                  |       |              |       |
| Cash and cash equivalents                                                                                            |       | $                     | 34,398     |              | $          | 28,593 |   |
| Short-term investments                                                                                               |       | 9,702                 |       | 26,068            |       |
| Accounts receivable, net of reserves of  $573 and $570                                                               |       | 3,905                 |       | 2,882             |       |
| Inventories, net                                                                                                     |       | 1,114                 |       | 650               |       |
| Prepaid expenses and deposits                                                                                        |       | 4,215                 |       | 4,592             |       |
| Restricted cash                                                                                                      |       | 708                   |       | 554               |       |
| Total current assets                                                                                                 |       | 54,042                |       | 63,339            |       |
|                                                                                                                 |       |                  |       |              |       |
| PROPERTY AND EQUIPMENT:                                                                                              |       |                  |       |              |       |
| Flight equipment                                                                                                     |       | 10,391                |       | 847               |       |
| Other property and equipment                                                                                         |       | 2,543                 |       | 1,724             |       |
| Less: Accumulated depreciation and  amortization                                                                     |       | (1,273                | )          | (891              | )          |
| Net property and equipment                                                                                           |       | 11,661                |       | 1,680             |       |
|                                                                                                                 |       |                  |       |              |       |
| NONCURRENT ASSETS:                                                                                                   |       |                  |       |              |       |
| Long-term investments                                                                                                |       | 14,651                |       | 11,357            |       |
| Other intangible assets, net                                                                                         |       | 1,804                 |       | 2,007             |       |
| Restricted cash                                                                                                      |       | 12,625                |       | 13,110            |       |
| Other assets, net                                                                                                    |       | 190                   |       | 197               |       |
|                                                                                                                 |       | $                     | 94,973     |              | $          | 91,690 |   |
|                                                                                                                 |       |                  |       |              |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                           |       |                  |       |              |       |
| CURRENT LIABILITIES:                                                                                                 |       |                  |       |              |       |
| Intercompany payable to Mesaba Aviation,  Inc.                                                                       |       | $                     | —     |              | $          | 813 |   |
| Accounts payable                                                                                                     |       | 2,487                 |       | 3,063             |       |
| Stock repurchase payable to Northwest  Airlines, Inc.                                                                |       | 11,274                |       | 10,905            |       |
| Accrued liabilities:                                                                                                 |       |                  |       |              |       |
| Payroll                                                                                                              |       | 1,316                 |       | 1,575             |       |
| Deferred income                                                                                                      |       | 628                   |       | 737               |       |
| Other current liabilities                                                                                            |       | 6,282                 |       | 6,310             |       |
| Total current liabilities                                                                                            |       | 21,987                |       | 23,403            |       |
|                                                                                                                 |       |                  |       |              |       |
| OTHER NONCURRENT LIABILITIES                                                                                         |       | 1,268                 |       | 1,081             |       |
| Total liabilities                                                                                                    |       | 23,255                |       | 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                                                                                                      |       | 35,970                |       | 35,438            |       |
| Accumulated other comprehensive income                                                                               |       | 11                    |       | —            |       |
| Retained earnings                                                                                                    |       | 35,586                |       | 31,618            |       |
| Total shareholders’ equity                                                                                      |       | 71,718                |       | 67,206            |       |
|                                                                                                                 |       | $                     | 94,973     |              | $          | 91,690 |   |

** **

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

----

 

**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(in thousands, except shareinformation)**

**(Unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **September 30**            | ** ** | **September 30**          | ** ** |
| ** **                                                 | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| OPERATING REVENUES:                                        |       |                             |       |                           |       |   |   |   |   |
| Passenger                                                  |       | $6,693                           |       | $3,780                         |       | $11,083 |   | $7,460 |   |
| Essential Air Service and other                            |       | 2,359                            |       | 2,403                          |       | 5,079 |   | 4,766 |   |
| Total operating revenues                                   |       | 9,052                            |       | 6,183                          |       | 16,162 |   | 12,226 |   |
| OPERATING EXPENSES:                                        |       |                             |       |                           |       |   |   |   |   |
| Wages and benefits                                         |       | 3,724                            |       | 2,834                          |       | 7,733 |   | 5,306 |   |
| Aircraft fuel                                              |       | 2,460                            |       | 1,516                          |       | 4,348 |   | 2,967 |   |
| Aircraft maintenance                                       |       | 1,133                            |       | 1,009                          |       | 2,208 |   | 1,920 |   |
| Aircraft rents                                             |       | 453                              |       | 453                            |       | 906 |   | 906 |   |
| Landing fees                                               |       | 275                              |       | 92                             |       | 452 |   | 187 |   |
| Insurance and taxes                                        |       | 340                              |       | 684                            |       | 668 |   | 1,359 |   |
| Depreciation and amortization                              |       | 387                              |       | 181                            |       | 589 |   | 359 |   |
| Administrative and other                                   |       | 3,707                            |       | 2,834                          |       | 7,149 |   | 6,436 |   |
| Total operating expenses                                   |       | 12,479                           |       | 9,603                          |       | 24,053 |   | 19,440 |   |
| Operating loss                                             |       | (3,427                           | )          | (3,420                         | )          | (7,891 | ) | (7,214 | ) |
| NONOPERATING INCOME (EXPENSE):                             |       |                             |       |                           |       |   |   |   |   |
| Damage claim income from Mesaba Aviation,  Inc.            |       | —                           |       | —                         |       | 9,429 |   | — |   |
| Interest income and other                                  |       | 1,068                            |       | 1,243                          |       | 2,722 |   | 2,559 |   |
| Interest expense                                           |       | (180                             | )          | (18                            | )          | (373 | ) | (34 | ) |
| Other nonoperating income, net                             |       | 888                              |       | 1,225                          |       | 11,778 |   | 2,525 |   |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| (Loss) income before benefit (provision)  for income taxes |       | (2,539                           | )          | (2,195                         | )          | 3,887 |   | (4,689 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| BENEFIT (PROVISION) FOR INCOME TAXES                       |       | 14                               |       | (341                           | )          | 81 |   | (341 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| NET (LOSS) INCOME                                          |       | $(2,525                          | )          | $(2,536                        | )          | $3,968 |   | $(5,030 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| NET (LOSS) INCOME PER SHARE:                               |       |                             |       |                           |       |   |   |   |   |
| (Loss) earnings per common share - basic                   |       | $(0.17                           | )          | $(0.12                         | )          | $0.26 |   | $(0.24 | ) |
| (Loss) earnings per common share - diluted                 |       | $(0.17                           | )          | $(0.12                         | )          | $0.26 |   | $(0.24 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                                      |       | 15,078                           |       | 20,592                         |       | 15,048 |   | 20,592 |   |
| Diluted                                                    |       | 15,078                           |       | 20,592                         |       | 15,098 |   | 20,592 |   |

** **

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

4

----

** **

**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(in thousands)**

**(Unaudited)**

** **
| ** **                                                                            | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **September 30**          | ** ** |
| ** **                                                                            | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |                           |       |   |   |
| Net income (loss)                                                                     |       | $                              | 3,968      |   | $ | (5,030 | ) |
| Adjustments to reconcile net income (loss)  to net cash used in operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                         |       | 589                            |       | 359 |   |
| Amortization of deferred credits                                                      |       | (54                            | )          | (45 | ) |
| Stock-based compensation                                                              |       | 86                             |       | 215 |   |
| Amortization of investment discounts                                                  |       | (372                           | )          | (676 | ) |
| Mesaba Aviation, Inc. tax payable  settlement                                         |       | (813                           | )          | — |   |
| Deferred income taxes                                                                 |       | —                         |       | 351 |   |
| Changes in current operating items:                                                   |       |                           |       |   |   |
| Accounts receivable                                                                   |       | (1,023                         | )          | 878 |   |
| Income tax receivable                                                                 |       | —                         |       | 414 |   |
| Inventories                                                                           |       | (464                           | )          | (384 | ) |
| Prepaid expenses and deposits                                                         |       | 377                            |       | 504 |   |
| Accounts payable and other                                                            |       | (1,638                         | )          | (611 | ) |
| Net cash provided by (used in) operating  activities                                  |       | 656                            |       | (4,025 | ) |
|                                                                                  |       |                           |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |                           |       |   |   |
| Purchases of investments                                                              |       | (15,394                        | )          | (22,936 | ) |
| Sales of investments                                                                  |       | 28,838                         |       | 28,995 |   |
| Purchases of property and equipment                                                   |       | (10,006                        | )          | (189 | ) |
| Sale of property and equipment                                                        |       | 83                             |       | — |   |
| Decrease (increase) in restricted cash                                                |       | 331                            |       | (13,110 | ) |
| Net cash provided by (used in) investing  activities                                  |       | 3,852                          |       | (7,240 | ) |
|                                                                                  |       |                           |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                  |       |                           |       |   |   |
| Increase in intercompany payable to Mesaba  Aviation, Inc.                            |       | —                         |       | 197 |   |
| Payment of long term debt and capital  leases                                         |       | (44                            | )          | (48 | ) |
| Issuance of line of credit                                                            |       | 983                            |       | — |   |
| Proceeds from exercise of stock options                                               |       | 358                            |       | — |   |
| Net cash provided by financing activities                                             |       | 1,297                          |       | 149 |   |
|                                                                                  |       |                           |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                 |       | 5,805                          |       | (11,116 | ) |
| CASH AND CASH EQUIVALENTS:                                                            |       |                           |       |   |   |
| Beginning of period                                                                   |       | 28,593                         |       | 47,135 |   |
| End of period                                                                         |       | $                              | 34,398     |   | $ | 36,019 |   |
|                                                                                  |       |                           |       |   |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                                  |       |                           |       |   |   |
| Cash paid during the year for:                                                        |       |                           |       |   |   |
| Interest                                                                              |       | $                              | 180        |   | $ | 21 |   |
| Income taxes                                                                          |       | 142                            |       | (316 | ) |
|                                                                                  |       |                           |       |   |   |
| SUPPLEMENTARY NON-CASH ACTIVITY:                                                      |       |                           |       |   |   |
| Capital expenditures in accounts payable                                              |       | $                              | 430        |   | $ | — |   |

** **

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

5

----

 

**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 the SEC.The information furnished in the condensed consolidated financial statementsincludes normal recurring adjustments, unless otherwise noted, and reflects alladjustments that are, in the opinion of management, necessary for the fairpresentation of such condensed consolidated financial statements. The Company’sbusiness is seasonal and, accordingly, interim results are not indicative ofresults for a full year. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) havebeen condensed or omitted pursuant to such rules and regulations, although theCompany believes that the disclosures are adequate to make the informationpresented not misleading. These condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements forthe year ended March 31, 2007, and the notes thereto, included in the Company’sAnnual Report on Form 10-K filed with the SEC on June 19, 2007.

 

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

 

*Basisof 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 theholding company for Mesaba Aviation, Inc., (“Mesaba”), a regional air carrierbased in Minneapolis, Minnesota. The Company’s condensed consolidated financialstatements include the accounts of MAIR and Big Sky. All intercompanytransactions and balances have been eliminated in consolidation.

 

Mesabafiled a voluntary petition for relief under Chapter 11 of the United StatesBankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Courtfor the District of Minnesota (“Bankruptcy Court”) on October 13, 2005 (“thePetition Date”), after which Mesaba operated its business as a debtor-in-possessionpursuant to the Bankruptcy Code. On April 24, 2007 (the “Exit Date”), Mesaba’sbankruptcy plan of reorganization became effective and Mesaba exited bankruptcyas a wholly-owned subsidiary of Northwest Airlines, Inc. (“Northwest”), and, therefore,is no longer owned by MAIR.

 

MAIRhas accounted for Mesaba’s financial results under the equity method ofaccounting from the Petition Date until the Exit Date. In accordance withAccounting Principles Board (“APB”) Opinion No. 18, **The Equity Method of Accounting forInvestments in Common Stock****, MAIR** evaluated whether its investment inMesaba had experienced an other-than-temporary impairment as of March 31, 2006.MAIR’s evaluation utilized a market and income approach, including a discountedcash flow analysis, and concluded that its remaining investment in Mesaba hadexperienced an other-than-temporary impairment. Accordingly, effective March31, 2006, MAIR recorded an $8.9 million impairment charge to write off itsremaining equity investment in Mesaba. The impairment charge was recorded in “Impairmentand other charges” in the fiscal 2006 consolidated statement of operations.

 

Forthe fiscal year ended March 31, 2007, Mesaba reported a net loss of $71.3million. MAIR did not record any of these losses experienced by Mesaba in MAIR’sconsolidated financial statements due to MAIR not having any furtherobligations to fund any of Mesaba’s additional losses.

 

Forthe period from April 1, 2007 through the Exit Date, Mesaba reported net incomeof $83.5 million. Upon Mesaba’s emergence from bankruptcy and the correspondingtransfer of MAIR’s equity in Mesaba to Northwest, MAIR lost its ability tosignificantly influence Mesaba; therefore, the Company did not record anyportion of Mesaba’s income under the equity 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 theapplication of GAAP in the preparation of financial statements. However, SOP90-7 does require that the financial statements, for periods including andsubsequent to the filing of the Chapter 11 petition, distinguish transactionsand events that are directly associated with the reorganization from theongoing operations of the business.

 

6

----

 

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 2007 settlement of MAIR’s proof of claim in Mesaba’sbankruptcy proceedings (see Note 3), MAIR may be responsible for certain ofMesaba’s tax obligations incurred through the Exit Date for those states inwhich MAIR and Mesaba historically filed a unitary tax return.  AlthoughMAIR does not believe there is any remaining tax exposures, under thesettlement between MAIR and Mesaba, Mesaba agreed to relinquish its right tothe $0.8 million intercompany tax balance to allow MAIR to use these funds topay any Mesaba tax obligations that taxing authorities may seek to collect fromMAIR. The reversal of the liability amount was recorded within other income forthe three month period ended June 30, 2007.

 

**Operations**

 

*Big Sky*

BigSky operates as a regional air carrier based in Billings, Montana, providingscheduled passenger, freight, express package and charter services. As ofSeptember 30, 2007, Big Sky provided scheduled air service to 30 communities inthe United States and Canada. Big Sky operates as a Delta Connection carrierfor Delta Air Lines, Inc. (“Delta”) in the east, with service to and fromBoston, and in the west, Big Sky operates daily scheduled flights providinginterline and online connecting services and local market services. Big Skyalso has code-sharing agreements with Alaska Airlines, Horizon Air, US Air andNorthwest, where its services in the west are marketed jointly with those aircarriers for connecting flights.

 

BigSky participates in the Essential Air Service (“EAS”) program with theDepartment of Transportation (“DOT”). The EAS program subsidizes air carriersto provide air service to designated rural communities throughout the countrythat could not otherwise economically justify that service based on theirpassenger traffic. The DOT pays EAS subsidies for each departure in a coveredmarket. During the three months ended September 30, 2007 and 2006, Big Skyrecognized revenue from EAS subsidies of $2.2 and $2.1 million, respectively. Duringthe six months ended September 30, 2007 and 2006, Big Sky recognized revenuefrom EAS subsidies of $4.4 and $4.3 million, respectively, reflecting theimpact of the addition of Watertown, Massena and Ogdensburg, New York service,offset by the elimination of subsidy at Sheridan, Wyoming and the terminationof service at Moses Lake, Washington.

 

OnMarch 12, 2007, Big Sky and Delta executed a Hosted Prorate Agreement governingthe Boston operation. On the same date, Big Sky entered into a purchaseagreement to purchase eight Beechcraft 1900D (“Beechcraft”) aircraft. Big Skytook delivery of the first aircraft on July 7, 2007. At October 31, 2007, fiveaircraft and spare parts costing approximately $16 million had been deliveredto Big Sky. Although Big Sky intended to obtain independent financing for theaircraft, Big Sky has been unable to obtain commercially reasonable independentfinancing without a guaranty by MAIR. As a result, MAIR is providing the debtfinancing to allow Big Sky to acquire the eight aircraft. Big Sky will continueto seek independent financing for the aircraft and will repay the funds to MAIRas soon as commercially reasonable debt or lease rates are available to theairline.

 

Asa part of Big Sky’s Delta connection service, Big Sky was awarded a two yearcontract from the DOT to provide EAS service between Massena, Ogdensburg andWatertown, New York to Boston, Massachusetts. This service began in April 2007.Currently Big Sky provides Delta connection service to ten cities in thenortheast United States and two cities in Canada with a fleet of eightBeechcraft aircraft. In October and November 2007, Big Sky took delivery ofthree Beechcraft aircraft. During the remainder of fiscal year 2008, Big Sky isscheduled to increase this operation by adding two additional aircraft andproviding service to other similar communities.

 

*RecentDevelopments*

BigSky was recently awarded an EAS contract to provide service between Cincinnati,Ohio and Cape Girardeau, Missouri and between Jackson, Tennessee, andOwensboro, Kentucky. Big Sky intends to begin this service as a Delta connectioncarrier in November 2007.

 

7

----

 

*Use ofEstimates*

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 ofestimates relates to the allowance for doubtful accounts, aircraft property andequipment lives, inventory obsolescence reserves, valuation of other intangibleassets and accounting for income taxes. Ultimate results could differ fromthose estimates.

 

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

 

TheCompany purchased Big Sky in December 2002. The excess of the Big Sky purchaseprice over the fair market value of the net assets acquired was allocated tocertain identifiable intangible assets, including Big Sky’s pilot laborcontract and its air carrier certificate, and to goodwill. Goodwill and theintangible assets are evaluated for impairment annually, at a minimum, or on aninterim basis if events or circumstances indicate a possible inability torealize the carrying amounts.

 

Intangibleassets and related accumulated amortization were as follows, in thousands:

 
| ** **                          | ** ** | **September 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **Accumulated**                  | ** ** | **Accumulated**              | ** ** |
| ** **                          | ** ** | **Gross**                        | ** ** | **Amortization**             | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived intangible assets: |       |                             |       |                         |       |   |   |   |   |   |   |   |   |
| Air carrier certificate             |       | $                                | 925        |                         |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Amortizable intangible asset:       |       |                             |       |                         |       |   |   |   |   |   |   |   |   |
| Pilot labor contract                |       | 2,840                            |       | (1,961                       | )          | 879 |   | 2,840 |   | (1,758 | ) | 1,082 |   |
|                                |       | $                                | 3,765      |                         | $          | (1,961 | ) | $ | 1,804 |   | $ | 3,765 |   | $ | (1,758 | ) | $ | 2,007 |   |
|                                     |            |                                  |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theamortizable intangible asset is being amortized over its estimated period ofbenefit. Based on the current amount of intangible assets subject toamortization, estimated amortization expense for each of the succeeding threefiscal years will be $0.4 million per year. During the fourth quarter of fiscal2007, the Company completed its annual impairment test of intangible assets anddetermined that no impairment charge was necessary.

 

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

 

OnFebruary 28, 2006, as a part of Mesaba’s bankruptcy proceedings, MAIR filed aproof of claim against Mesaba for $55.2 million, with no recognition of thisclaim in the Company’s consolidated financial statements due to the significantuncertainty of any amount being ultimately collected. The following tablesummarizes MAIR’s claim against Mesaba, in thousands:

 
| Management fees                                                        |   | $      | 2,875  |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|
| Guaranty of principal and accrued interest  on Cincinnati hangar bonds |   | 13,015 |   |
| Guaranty of Cincinnati hangar lease                                    |   | 4,501  |   |
| Capital contribution to Mesaba                                         |   | 31,755 |   |
| Federal and state income taxes                                         |   | 3,080  |   |
|                                                                   |   | $      | 55,226 |   |

 

InApril 2007, the Bankruptcy Court approved a compromise for MAIR’s $55.2 milliondamage claim under which Mesaba allowed MAIR a claim of up to $6.2 millionrelating to repayment of the guaranty of Mesaba’s hangar lease at theCincinnati/Northern Kentucky International Airport and management fees. Additionally,pursuant to a Stock Purchase Agreement (the “SPA”) between MAIR and Northwest,Northwest assigned its $7.3 million allowed claim against Mesaba to MAIR. Therefore,as of the Exit Date, MAIR’s total unsecured creditors’ claim in Mesaba’sbankruptcy totaled $13.5 million.

 

InJuly 2007, the liquidating trust made an interim distribution of 70% to allclaimholders with allowed claims. MAIR received $9.4 million of its $13.5million claim, which reflects the 70% interim distribution of its claim. 

 

8

----

 

MAIRrecorded these amounts as “Damage claim income from Mesaba Aviation, Inc.”within the condensed consolidated statement of operations. The remaining $4.1million, or 30%, of MAIR’s unsecured claim is considered a contingent gain andwill be recorded as the Company receives additional disbursements from theliquidating trust after the remaining Mesaba disputed claims are resolved (seeNote 11).

 

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

 

Investmentsconsist principally of government, agency, corporate and municipal securitiesand are classified as available-for-sale. Fair value of investments isdetermined based on quoted market prices. The Company classifies investmentswith an original maturity of more than 90 days that mature within one year asshort-term and greater than one year as long-term.

 

Asof September 30, 2007 and March 31, 2007, cash, cash equivalents, short-termand long-term investments totaled $58.8 million and $66.0 million, respectively.

 

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

 
| ** **              | ** ** | **September  30, 2007** | ** ** | **March 31, 2007** | ** ** |
|-------------------------|------------|-------------------------|------------|--------------------|------------|
| Amortized cost          |       | $                       | 24,354     |               | $          | 37,409 |   |
| Gross unrealized gains  |       | 134                     |       | 50                 |       |
| Gross unrealized losses |       | (135                    | )          | (34                | )          |
| Fair value              |       | $                       | 24,353     |               | $          | 37,425 |   |

 

Forthe three and six months ended September 30, 2007 and 2006, the Company’s grossrealized gains and losses were insignificant.

 

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

 

SFASNo. 109, *Accounting for Income Taxes*, requiresthat all available evidence, both positive and negative be considered todetermine whether, based on the weight of that evidence, a valuation allowanceis needed. Future realization of the tax benefits of an existing deductibletemporary difference or carryforward ultimately depends on the existence ofsufficient taxable income of the appropriate character within the carryback orcarryforward periods available under 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 Companyrecorded a $0.1 million tax benefit for the six months ended September 30, 2007due to the reversal of tax contingency reserves previously established and therealization of state income tax refunds received for prior periods and a refundof interest from an Internal Reveue Service (“IRS”) audit. The Company will berequired to update its estimates of future taxable income based upon additionalinformation management obtains, and the Company will continue to evaluate therealizability of the deferred tax assets on a quarterly 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 andMesaba was offset by the utilization of net operating loss (“NOL”)carryforwards from prior periods.

 

TheCompany’s adoption of the provisions of the Financial Accounting StandardsBoard (“FASB”) Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes,* (“FIN 48”) on April 1, 2007 did not impact theCompany’s consolidated financial statements. As of the adoption, the totalamount of unrecognized tax benefits for uncertain tax positions was $0.5million, which is classified as non-current liabilities. Of this amount, $0.3million would affect the Company’s effective tax rate if recognized. It is notexpected that the amount of unrecognized tax benefit will significantly changewithin the next twelve months.

 

9

----

 

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

 

TheCompany and its subsidiaries file a consolidated federal income tax return andvarious state income tax returns. As of the date of adoption of FIN 48, theCompany is generally no longer subject to U.S. federal and state income taxexaminations by tax authorities for years prior to fiscal 2004.

 

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

 

EffectiveApril 1, 2006, the Company adopted the fair value recognition provisions ofSFAS 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 unvested portionof previously granted awards outstanding on April 1, 2006. Results for priorperiods 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 periodicallybased on the extent to which actual forfeitures differ, or are expected todiffer, from the previous estimate. 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.

 

*StockOption 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 of 300,000or 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 Company establishes the risk-free interestrate using the U.S. Treasury yield curve as of the grant date. The expectedvolatility assumption is set based primarily on historical volatility. Foroptions granted, the Company amortizes the fair value on a straight-line basisover the vesting period of the options.

 

Foreach of the three months ended September 30, 2007 and 2006, SFAS 123R’s fairvalue method resulted in additional expense in the amount of $0.1 millionrelated to stock options. For the six months ended September 30, 2007 and 2006,SFAS 123R’s fair value method resulted in additional expense in the amount of$0.1 million and $0.2 million, respectively, related to stock options. Theseamounts are included in the “Wages and benefits” caption in the accompanyingcondensed consolidated statements of operations for the three and six monthsended September 30, 2007 and 2006. SFAS 123R also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required prior toSFAS 123R. As the Company currently has no excess tax benefits related to SFAS123R, its adoption has not affected the Company’s condensed consolidatedstatement of cash flows. The impact of adopting SFAS 123R on future resultswill depend on, among other things, levels of stock options granted in thefuture, actual forfeiture rates and the timing of option exercises.

 

10

----

 

Asummary of stock option activity since the Company’s most recent fiscal yearend 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                               |       | 60,000          |       | 5.97         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Balance at September 30, 2007                     |       | 1,323,354       |       | 6.96         |       | 4.2             |       | $                       | 14         |            | 1,237,104  |         | 6.94       |            | 3.9        |                    | $          | 3 |   |
| Vested or expected to vest at September 30,  2007 |       | 1,103,354       |       | 6.72         |       | 5.5             |       | $                       | 350        |            |       |         |       |            |       |                    |       |   |
|                                                   |            |                 |            |              |            |                 |            |                         |            |                 |            |              |            |                 |            |                         |            |  |  |

 

Theaggregate intrinsic value of options outstanding at September 30, 2007 iscalculated as the difference between the exercise price of the underlyingoption and the market price of the common stock. The aggregate intrinsic valueof options exercised during the three and six months ended September 30, 2007was immaterial. The total fair value of options vested during the three monthsended September 30, 2007 was $0.2 million.

 

*Unrecognized Compensation*

Asof September 30, 2007, the Company had $0.2 million of total unrecognizedcompensation cost related to non-vested stock option compensation arrangementsgranted under all equity compensation plans. Total unrecognized compensationwill be adjusted for future changes in estimated forfeitures. The Companyexpects to recognize the cost over a weighted average period of two years.

 

**7.****             ****Earnings (Loss) Per Share**

 

Basicearnings (loss) per common share is computed by dividing net income (loss) bythe weighted average number of shares of common stock outstanding during theyear. Diluted earnings per share is computed by dividing net income (loss) bythe sum of the weighted average number of shares of common stock outstandingplus all additional common stock that would have been outstanding ifpotentially dilutive common shares related to stock options and warrants hadbeen exercised. Stock options and warrants with an exercise price exceeding thefair market value of the Company’s common stock at period end are consideredantidilutive and are excluded from the calculation.

 

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

 
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                | ** ** | **September 30**            | ** ** | **September 30**          | ** ** |
| ** **                                                                                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net (loss) income                                                                         |       | $                                | (2,525     | )                              | $          | (2,536 | ) | $ | 3,968 |   | $ | (5,030 | ) |
| For earnings per share - basic:                                                           |       |                             |       |                           |       |   |   |   |   |
| Weighted average number of issued shares  outstanding                                     |       | 15,078                           |       | 20,592                         |       | 15,048 |   | 20,592 |   |
| Effect of dilutive securities:                                                            |       |                             |       |                           |       |   |   |   |   |
| Computed shares outstanding under stock  option plans utilizing the treasury stock method |       | —                           |       | —                         |       | 50 |   | — |   |
| For earnings per share - diluted:                                                         |       |                             |       |                           |       |   |   |   |   |
| Weighted average common and potentially  dilutive common shares outstanding               |       | 15,078                           |       | 20,592                         |       | 15,098 |   | 20,592 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| (Loss) earnings per share - basic                                                         |       | $                                | (0.17      | )                              | $          | (0.12 | ) | $ | 0.26 |   | $ | (0.24 | ) |
| (Loss) earnings per share - diluted                                                       |       | $                                | (0.17      | )                              | $          | (0.12 | ) | $ | 0.26 |   | $ | (0.24 | ) |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Antidilutive options and warrants                                                         |       | 778                              |       | 1,582                          |       | 778 |   | 1,582 |   |

 

11

----

 

**8.****             ****Consolidated ComprehensiveIncome/(Loss)**

 

Thefollowing table presents the calculation of comprehensive income/(loss) for theperiods ended September 30, in thousands:

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                         | ** ** | **September 30**            | ** ** | **September 30**          | ** ** |
| ** **                                                         | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net (loss) income                                                  |       | $                                | (2,525     | )                              | $          | (2,536 | ) | $ | 3,968 |   | $ | (5,030 | ) |
| Unrealized losses on investments classified  as available for sale |       | 81                               |       | 312                            |       | 11 |   | 208 |   |
| Comprehensive (loss) income                                        |       | $                                | (2,444     | )                              | $          | (2,224 | ) | $ | 3,979 |   | $ | (4,822 | ) |

 

12

----

 

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

 

TheCompany follows the provisions of SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information*. SFAS No.131 establishes annual and interim reporting standards for an enterprise’sbusiness segments and related disclosures about its products, services,geographic areas and major customers. The method for determining whatinformation to report is based upon the way management organizes the operatingsegments within the Company for making operating decisions and assessingfinancial performance. Although Mesaba has been deconsolidated from the Company’sconsolidated financial statements as of the Petition Date, the segmentinformation presented below continues to include Mesaba until the Exit Date, inaccordance with SFAS No. 131 and related guidance for equity-method investees. Mesaba’sresults of operations after the Petition Date are included in the “Eliminations”column.

 

Operatingsegment information for Mesaba, Big Sky and MAIR were as follows, in thousands:

 
| ** **                                | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **MAIR** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------|------------|----------|------------|------------------|------------|------------------|------------|
| *Three Months Ended September 30, 2007*   |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | —     |             | $          | 9,052    |       | $                | —     |             | $          | — |   | $ | 9,052 |   |
| Operating expenses                        |       | —     |       | 10,924           |       | 1,555    |       | —           |       | 12,479           |       |
| Depreciation and amortization             |       | —     |       | 382              |       | 5        |       | —           |       | 387              |       |
| Interest expense                          |       | —     |       | 119              |       | 168      |       | (107             | )          | 180              |       |
| (Loss) income before income taxes         |       | —     |       | (1,987           | )          | (552     | )          | —           |       | (2,539           | )          |
| Capital expenditures                      |       | —     |       | 9,632            |       | —   |       | —           |       | 9,632            |       |
| Current assets                            |       | —     |       | 13,683           |       | 46,576   |       | (6,217           | )          | 54,042           |       |
| Total assets                              |       | —     |       | 27,311           |       | 111,985  |       | (44,323          | )          | 94,973           |       |
| Current liabilities                       |       | —     |       | 11,153           |       | 17,070   |       | (6,236           | )          | 21,987           |       |
| Total shareholders’ equity           |       | —     |       | 15,135           |       | 94,675   |       | (38,092          | )          | 71,718           |       |
| *Three Months Ended September 30, 2006*   |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 71,178     |             | $          | 6,183    |       | $                | 58         |             | $          | (71,236 | ) | $ | 6,183 |   |
| Operating expenses                        |       | 77,209     |       | 7,045            |       | 2,616    |       | (77,267          | )          | 9,603            |       |
| Depreciation and amortization             |       | 2,429      |       | 176              |       | 5        |       | (2,429           | )          | 181              |       |
| Interest expense                          |       | —     |       | 125              |       | —   |       | (107             | )          | 18               |       |
| Reorganization items, net                 |       | 3,153      |       | —           |       | —   |       | (3,153           | )          | —           |       |
| (Loss) income before income taxes         |       | (8,810     | )          | (981             | )          | (1,214   | )          | 8,810            |       | (2,195           | )          |
| Capital expenditures                      |       | 277        |       | 110              |       | —   |       | (277             | )          | 110              |       |
| Current assets                            |       | 62,095     |       | 3,515            |       | 81,375   |       | (65,909          | )          | 81,076           |       |
| Total assets                              |       | 95,046     |       | 7,366            |       | 128,800  |       | (114,192         | )          | 117,020          |       |
| Current liabilities                       |       | 40,328     |       | 7,796            |       | 8,016    |       | (44,142          | )          | 11,998           |       |
| Total shareholders’ equity (deficit) |       | (6,100     | )          | (1,460           | )          | 120,784  |       | (9,232           | )          | 103,992          |       |
| *Six Months Ended September 30, 2007*     |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 14,842     |             | $          | 16,162   |       | $                | —     |             | $          | (14,842 | ) | $ | 16,162 |   |
| Operating expenses                        |       | 15,831     |       | 20,318           |       | 3,735    |       | (15,831          | )          | 24,053           |       |
| Depreciation and amortization             |       | 433        |       | 580              |       | 9        |       | (433             | )          | 589              |       |
| Interest expense                          |       | —     |       | 216              |       | 335      |       | (178             | )          | 373              |       |
| (Loss) income before income taxes         |       | 83,528     |       | (4,365           | )          | 8,252    |       | (83,528          | )          | 3,887            |       |
| Capital expenditures                      |       | —     |       | 10,002           |       | 4        |       | —           |       | 10,006           |       |
| *Six Months Ended September 30, 2006*     |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 154,618    |             | $          | 12,226   |       | $                | 117        |             | $          | (154,735 | ) | $ | 12,226 |   |
| Operating expenses                        |       | 162,284    |       | 13,708           |       | 5,849    |       | (162,401         | )          | 19,440           |       |
| Depreciation and amortization             |       | 4,983      |       | 349              |       | 10       |       | (4,983           | )          | 359              |       |
| Interest expense                          |       | —     |       | 239              |       | —   |       | (205             | )          | 34               |       |
| Reorganization items, net                 |       | 1,325      |       | —           |       | —   |       | (1,325           | )          | —           |       |
| (Loss) income before income taxes         |       | (8,217     | )          | (1,713           | )          | (2,976   | )          | 8,217            |       | (4,689           | )          |
| Capital expenditures                      |       | 1,245      |       | 189              |       | —   |       | (1,245           | )          | 189              |       |

 

13

----

 

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

 

*SaabLeasing Litigation*

In2002, Fairbrook Leasing, Inc., Lambert Leasing, Inc. and Swedish AircraftHoldings AB (“Saab Leasing”) filed a declaratory judgment action against Mesabarelating to 20 Saab 340A (“340A”) aircraft leased by Mesaba.  In 2003, theDistrict Court declared that the term sheet relating to the leases for the 340Aaircraft was a binding preliminary agreement requiring Mesaba to negotiate ingood faith toward the execution of long-term agreements for each of the 340Aaircraft.  Although Mesaba appealed this ruling, while the appeal waspending, Saab Leasing (relying on the District Court’s declaratory judgmentruling) filed a separate action in the District Court alleging approximately$35 million in damages for past due and future aircraft leaseobligations.  While the damages action was pending, the U.S. Court ofAppeals for the Eighth Circuit affirmed the District Court’s declaratoryjudgment ruling. On July 6, 2006, the District Court in the damages actiongranted Mesaba’s motion for partial summary judgment, ruling that Saab Leasingis not eligible to receive damages for the majority of its claims againstMesaba.

 

Becausethe potential damages for the remaining claim against Mesaba are notsignificant, Mesaba never established any accrual with regard to thislitigation within its condensed financial statements. Mesaba was unable toreach a settlement with Saab Leasing within the context of Mesaba’s bankruptcyproceedings; thus, Mesaba consented to lift the automatic stay and allow SaabLeasing to appeal the District Court’s July 2006 ruling to the Eighth CircuitCourt of Appeals (the “Circuit Court”). The Circuit Court heard oral argumentson the appeal on October 18, 2007, but has not yet ruled on the matter. Mesaba’sliquidating trust is funding litigation expenses related to this appeal andwill be required to fund any amounts that may be due to Saab Leasing if theDistrict Court’s ruling is reversed. Any such payments by Mesaba’s liquidatingtrust would ultimately reduce the distribution MAIR is entitled to receive fromthe estate.

 

*Goldman Credit Bankruptcy Claim*

GoldmanSachs Credit Partners, L.P. (“Goldman Credit”) is the largest creditor inMesaba’s bankruptcy proceedings, and it holds approximately $58 million indisputed claims asserted by itself or purchased from other creditors. All ofGoldman Credit’s disputed claims are for aircraft and equipment leases thatwere rejected by Mesaba.  Goldman Credit has asserted that the stipulatedloss provisions of the applicable leases, under which liquidated damages arecalculated, should apply to determine the total claim amount due to GoldmanCredit.  Mesaba’s liquidating trustee instead believes that the claimallowed to Goldman Credit should reflect actual damages suffered, which is theamount related to Goldman Credit’s claim that is recorded in Mesaba’sliabilities subject to compromise.  Mesaba’s bankruptcy estate has filedfor summary judgment with the Bankruptcy Court asserting that the liquidateddamages constitute unenforceable penalties. The Bankruptcy Court heard oralarguments on the motion on September 10, 2007, but has not yet ruled on the motion. Mesaba’s liquidating trust will be funding the litigation expenses related tothe Goldman Credit claim and will be responsible for making a distribution toGoldman Credit following resolution of the claim.  Any such payments fromMesaba’s liquidating trust would ultimately reduce the distribution MAIR isentitled 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 sinceNovember 2005.  In April 2006, in exchange for the bondholders forbearingacceleration of the bonds, MAIR delivered a letter of credit to the bondholdersto assure payment of the bonds.  Subsequently, Mesaba assumed and assignedthe related ground lease to MAIR.  The Airport Board consented to theassignment of the ground lease. Since Mesaba vacated the hangar in October2005, MAIR has been seeking other sublessors to 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 a sublease forthe property.  Any rent MAIR receives from a future sublessor would offsetthe lease payments that MAIR is required to make. As of December 31, 2005, MAIRrecorded a $4.8 million liability with respect to the lease and guaranty, whichassumed that the facility would remain vacant for two years, during which timeMAIR would continue to make the bond and lease payments, and that thereafterMAIR would be able to sublease the facility at a 20% discount.  AtSeptember 30, 2007, this accrued liability totaled $2.8 million.  If MAIRis unable to find an alternate sublessee for the facility by November 2008, thebondholders have the right to call the bonds, and MAIR may be required torecord an additional charge and liability of up to $10.0 million. MAIRcontinues to reassess this reserve as material developments occur.

 

14

----

 

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 will continue through July 2029 and willincrease at scheduled intervals in accordance with the terms of the bonddocuments.  The bondholder agreement and the letter of credit provide thatthe amount of the letter of credit will automatically decrease each July in accordancewith 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), ifthe bondholders receive notice from First Interstate Bank of the bank’s intentnot to 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, ifMAIR fails to provide a report to the bondholders each quarter identifying thesteps MAIR has taken to identify a tenant for the facility or if MAIR commitsany event of default under its guaranty of Mesaba’s bond obligations.  Thecash supporting the letter of credit was classified as “Restricted cash” on theCompany’s condensed consolidated balance sheet at September 30, 2007 and March31, 2007.

 

*OtherCommitments*

InFebruary 2005, Big Sky obtained a revolving line of credit in the principalamount of $250,000 from First Interstate Bank of Billings. In March 2006, theprincipal amount available under the line increased to $370,000. The line ofcredit charges a variable interest rate based on the prime rate published inthe *Wall Street Journal*. At September 30,2007, the rate was 7.75% on outstanding borrowings of $355,140. The line ofcredit is collateralized by Big Sky’s inventory, accounts receivable andequipment and is scheduled to mature in June 2008.

 

InSeptember 2007, Big Sky obtained a revolving line of credit in the principalamount of $1,000,000 from First Interstate Bank of Billings. The line of creditcharges a fixed rate of 5.5% on outstanding borrowings at September 30, 2007 of$998,000. The line of credit is collateralized by a cash certificate of depositand is scheduled to mature in September 2008.

 

BigSky recorded $0.7 million of restricted cash at September 30, 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 Big Sky established a $0.1 million certificate ofdeposit supporting a customs bond required for the June 2007 service betweenBoston, 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 (“WellsFargo”). The letter of credit is in the amount of $1.9 million and is for thebenefit of Mesa Air Group (“Mesa”), who may draw on the letter of credit if BigSky fails to perform its obligations under the Beechcraft aircraft leases. Theletter of credit automatically renews each year unless MAIR notifies Mesa thatit does not intend to renew it. If MAIR does not renew the letter of credit,Big Sky’s leases with Mesa will increase by approximately $0.5 million peryear.

 

*MAIRPledge for Big Sky*

InAugust 2006, MAIR entered into a pledge agreement with U.S. Bank, pursuant towhich MAIR pledged $0.8 million in exchange for U.S. Bank reducing the amountof funds that it holds back from Big Sky when credit card payments areprocessed.  U.S. Bank processes payments for Big Sky tickets made with variouscredit cards.  In the past, and consistent with industry practice, U.S.Bank held back a specified portion of those credit card payments until thetickets had been used.  MAIR agreed to pledge its cash in lieu of therequired 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 be returned90 days after the held back amounts total the requisite level pursuant to U.S.Bank’s credit card processing policies.  Because MAIR has the right torequest a release of its collateral and to terminate the pledge agreement, theamount of cash pledged is not recorded as restricted cash.

 

15

----

 

**11.****      ****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, Mesabaagreed to file a plan of reorganization under which Mesaba’s existing equitywould be cancelled and new equity would be issued to Northwest, making Mesaba awholly-owned operating subsidiary 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’screditors’ committee conducted an auction on January 29, 2007, after which TheGoldman Sachs Group, Inc. (“Goldman Sachs”) and Mesaba entered into a forwardcontract by which Goldman Sachs purchased the $145 million claim forapproximately $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 bankruptcy court’s February 27, 2007 orderallowing the $145 million claim and Mesaba’s Bankruptcy Court’s April 9, 2007approval of Mesaba’s plan of reorganization, Goldman Sachs funded the $125million purchase price on the Exit Date. Mesaba exited bankruptcy on the ExitDate, and all of the outstanding stock of Mesaba is now owned by Northwest. Onthe Exit Date, Mesaba recorded $125 million as “Income from Claim in NorthwestAirlines, 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 approvingMesaba’s plan of reorganization, MAIR worked with Mesaba’s creditors’ committeeto resolve the majority of Mesaba’s creditors’ claims. MAIR estimates thatthese remaining creditors’ claims will total approximately $90 million, whichamount includes MAIR’s $13.5 million unsecured creditors’ claim. MAIR recorded$9.4 million of its unsecured creditors’ claim as other income during thequarter 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 ofcreditors’ claims includes the liquidating trustee’s assessment of the value atwhich each of these claims should be resolved. 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 eventthe total allowed creditors’ claims exceed $125 million, MAIR would not receiveany distributions for its equity ownership of Mesaba. In such event, theliquidating trust assets would be distributed pro-rata to all of Mesaba’sunsecured creditors, including MAIR. MAIR has not recorded the contingentresidual equity interest in the trust due to the uncertainty of the ultimateamount to be received.

 

**12.****      ****New Accounting Pronouncements**

 

InSeptember 2006, FASB issued SFAS No. 157, *Fair Value Measurements*(“SFASNo. 157”), to define fair value, establish a framework for measuring fair valuein accordance with GAAP, and expand disclosures about fair value measurements. SFASNo. 157 will be effective for the Company beginning April 1, 2008. The Companyis in the process of determining what effect, if any, the adoption 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 and Financial Liabilities*(“SFAS 159”). SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currentlyrequired to be measured at fair value. SFAS 159 is effective for fiscal yearsbeginning April 1, 2008. The Company is in the process of determining whateffect, if any, the adoption of SFAS 159 will have on its financial statements.

 

16

----

 

**13.****      ****Subsequent Events**

 

InJanuary 2007, MAIR and Northwest entered into the SPA under which MAIRrepurchased from Northwest all of the common stock of MAIR owned by Northwest. Specifically,MAIR purchased 5,657,113 shares of stock from Northwest at a purchase price of$6.25 per share. The closing for the stock purchase occurred on March 12, 2007,at which time MAIR paid Northwest $4.25 per share, or approximately $24million, and Northwest returned all of the shares to MAIR for cancellation. OnOctober 22, 2007, MAIR paid Northwest the remaining $2.00 per share, orapproximately $11.3 million.

 

**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

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

 

*Overview*

WithMesaba’s bankruptcy behind it, MAIR continued its focus on stabilizing andimproving Big Sky’s operations. MAIR determined that any future plans for theCompany are best served by Big Sky first achieving profitability. To that end,during the quarter, Big Sky continued executing its expansion plan as a Deltaconnection carrier. Specifically, Big Sky began service in four new markets inthe northeast United States. As a part of this new service, Big Sky tookdelivery of three additional aircraft, bringing Big Sky’s fleet of Beechcraftto 13. MAIR continues to believe that this expansion will assist Big Sky inleveraging its fixed costs over more aircraft to reach sustained profitabilityby the end of the fiscal year. MAIR believes that the successful execution ofBig Sky’s strategy will best serve the Company’s goal of maximizing value forthe benefit of the Company’s shareholders.

 

MAIRalso ended the quarter with approximately $59 million in cash and investmentson its balance sheet, an amount that exceeds what is required for Big Sky’soperations. During the past year, MAIR’s Board of Directors reviewed variousoptions for the use of the Company’s cash and ultimately identified Big Sky’sDelta expansion opportunity as an attractive option. MAIR’s Board of Directorsis now actively reviewing the appropriate timing and method to distribute cashnot required for operations to the Company’s shareholders, with the expectationthat any such distribution will be made after Big Sky achieves monthlyprofitability.

 

Finally,to maximize the potential value to MAIR as Mesaba’s former equity holder, MAIRcontinues to play an active role in Mesaba’s liquidating trust created by itsbankruptcy plan of reorganization. MAIR expects that all distributions from thetrust should be made by the end of fiscal 2008. MAIR presently intends todistribute to its shareholders the funds it receives from the liquidatingtrust.

 

**RESULTSOF OPERATIONS**

 

**ThreeMonths Ended September 30, 2007 and 2006**

TheCompany reported a consolidated net loss of $2.5 million, or $0.17 per basicand diluted share, for the quarter ended September 30, 2007, compared to a netloss of $2.5 million, or $0.12 per basic and diluted share, for the quarterended September 30, 2006. The net loss was primarily due to operating losses atMAIR and Big Sky, offset by interest income at MAIR.

 

17

----

 

*Big Sky*

BigSky’s operating statistics for the three months ended September 30 were asfollows:

 
| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                                    |       | 58,805   |       | 30,699   |       | 91.6              | %          |
| Available seat miles (“ASM”) (000s) |       | 28,526   |       | 22,156   |       | 28.8              | %          |
| Revenue passenger miles (000s)                |       | 14,843   |       | 9,081    |       | 63.5              | %          |
| Load factor                                   |       | 52.0     | %          | 41.0     | %          | 11.0              | pts        |
| Block hours flown                             |       | 8,226    |       | 5,609    |       | 46.7              | %          |
| Departures                                    |       | 7,564    |       | 5,717    |       | 32.3              | %          |
| Revenue per ASM                               |       | $        | 0.317      |     | $          | 0.279             |       | 13.6 | % |
| Cost per ASM                                  |       | $        | 0.383      |     | $          | 0.318             |       | 20.4 | % |
| Aircraft in service (average)                 |       | 12       |       | 10       |       | 20.0              | %          |

 

BigSky Operating Revenues

Total operating revenues increased 46.8% to $9.1 million in the secondquarter of fiscal 2008 from $6.2 million in the prior year quarter as a resultof a 91.6% increase in passengers due to the Delta connection service thatbegan in April 2007, offset by a lower average fare of $114 in fiscal 2008compared to $123 in fiscal 2007.

 

Big Sky Operating Expenses

Total operating expenses in the second quarter of fiscal 2008 increased55.1% to $10.9 million from $7.0 million in the prior year period, primarilydue to increased fuel cost, increased flying period-over-period and theassociated cost of the Delta connection service which began in April 2007.

 

The following table compares components of the operating expenses andoperating cost per ASM for the three months ended September 30:

 
| ** **                    | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2007**                    | ** ** | **2006**                                  | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Wages and benefits            |       | $                           | 3,217      |                                      | $          | 2,280 |   | $ | 937 |   | 41.1 | % | 11.3 | ¢ | 10.3 | ¢ |
| Aircraft fuel                 |       | 2,460                       |       | 1,516                                     |       | 944 |   | 62.3 | % | 8.6 |   | 6.8 |   |
| Aircraft maintenance          |       | 1,133                       |       | 1,009                                     |       | 124 |   | 12.3 | % | 4.0 |   | 4.6 |   |
| Aircraft rents                |       | 453                         |       | 453                                       |       | — |   | 0.0 | % | 1.6 |   | 2.0 |   |
| Landing fees                  |       | 275                         |       | 92                                        |       | 183 |   | 198.9 | % | 1.0 |   | 0.4 |   |
| Insurance and taxes           |       | 127                         |       | 108                                       |       | 19 |   | 17.6 | % | 0.4 |   | 0.5 |   |
| Depreciation and amortization |       | 382                         |       | 176                                       |       | 206 |   | 117.0 | % | 1.3 |   | 0.8 |   |
| Administrative and other      |       | 2,877                       |       | 1,411                                     |       | 1,466 |   | 103.9 | % | 10.1 |   | 6.4 |   |
|                          |       | $                           | 10,924     |                                      | $          | 7,045 |   | $ | 3,879 |   | 55.1 | % | 38.3 | ¢ | 31.8 | ¢ |

 

Wages and benefits increased $0.9 million, or 41.1%, as a result ofadditional staffing and training requirements in flight, maintenance andstations for the Delta connection service.

 

In the second quarter of fiscal 2008, Big Sky experienced a 62.3%increase in fuel expense as a result of a 46.7% increase in block hoursperiod-over-period and a higher average price of jet fuel, from $2.35 pergallon in the second quarter of fiscal 2007 to $2.60 per gallon in the secondquarter of fiscal 2008.

 

Aircraft maintenance increased 12.3% as a result of increased flyingassociated with Big Sky’s Delta connection service.

 

Landing fees increased 198.9% as a result of the increased level ofoperations and higher landing fee charges associated with Big Sky’s Deltaconnection service.

 

Depreciation and amortization increased 117.0% to $0.4 million in thesecond quarter of fiscal 2008 from $0.2 million in the second quarter of fiscal2007, due to three aircraft purchased in the second quarter of fiscal 2008.

 

18

----

 

During the second quarter of fiscal 2008, administrative and otherexpenses increased $1.5 million, or 103.9%, from the second quarter of fiscal2007, primarily due to station and passenger related costs associated with theDelta connection service.

 

*MAIR*

 

MAIROperating Expenses

Totaloperating expenses in the second quarter of fiscal 2008 decreased to $1.6million from $2.6 million in the prior year period, primarily due to decreasedlegal and professional fees from Mesaba’s bankruptcy in fiscal 2008 compared tofiscal 2007.

 

*ConsolidatedOperating Loss*

Operatingloss for the second quarter of fiscal 2008 remained constant with the prioryear quarter at $3.4 million. The operating loss was due to the results of MAIRand Big Sky described above.

 

*ConsolidatedNonoperating Income*

Nonoperatingincome, net decreased to $0.9 million in the second quarter of fiscal 2008 from$1.2 million in the prior year quarter, primarily as a result of an increase ininterest expense.

 

*ConsolidatedProvision for Income Taxes*

TheCompany recorded a minimal tax benefit on its net loss for the three monthsended September 30, 2007 for interest received from an IRS audit. The Companycontinues to record a full valuation allowance against its remaining deferredtax assets due to the uncertainty regarding the ultimate realization of thoseassets.

 

**SixMonths Ended September 30, 2007 and 2006**

TheCompany reported consolidated net income of $4.0 million, or $0.26 per basicand diluted share, for the six months ended September 30, 2007, compared to anet loss of $5.0 million, or $0.24 per basic and diluted share, for the sixmonths ended September 30, 2006. The net income was primarily due to the $9.4million in damage claims, offset by operating losses at MAIR and Big Sky.

 

*Big Sky*

BigSky’s operating statistics for the six months ended September 30 were asfollows:

 
| ** **                     | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                     |       | 99,795   |       | 60,268   |       | 65.6              | %          |
| Available seat miles (000s)    |       | 51,540   |       | 44,341   |       | 16.2              | %          |
| Revenue passenger miles (000s) |       | 25,896   |       | 17,463   |       | 48.3              | %          |
| Load factor                    |       | 50.2     | %          | 39.4     | %          | 10.8              | pts        |
| Block hours flown              |       | 14,856   |       | 11,189   |       | 32.8              | %          |
| Departures                     |       | 14,019   |       | 11,682   |       | 20.0              | %          |
| Revenue per ASM                |       | $        | 0.314      |     | $          | 0.276             |       | 13.8 | % |
| Cost per ASM                   |       | $        | 0.394      |     | $          | 0.309             |       | 27.5 | % |
| Aircraft in service (average)  |       | 11       |       | 10       |       | 10.0              | %          |

 

BigSky Operating Revenues

Total operating revenues increased 32.8% to $16.2 million in fiscal2008 from $12.2 million in the prior year period as a result of a 65.6%increase in passengers offset by a lower average fare.

 

Big Sky Operating Expenses

Total operating expenses in fiscal 2008 increased 48.2% to $20.3million from $13.7 million in the prior year period, primarily due to increasedfuel cost, increased flying period-over-period and the associated cost of theDelta connection service which began in April 2007.

 

19

----

 

The following table compares components of the operating expenses andoperating cost per ASM for the six months ended September 30:

 
| ** **                    | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|-------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | **2007**                    | ** ** | **2006**                                  | ** ** | **$** | ** Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Wages and benefits            |       | $                           | 6,324      |                                      | $          | 4,417 |   | $ | 1,907 |   | 43.2 | % | 12.3 | ¢ | 10.0 | ¢ |
| Aircraft fuel                 |       | 4,348                       |       | 2,967                                     |       | 1,381 |   | 46.5 | % | 8.4 |   | 6.7 |   |
| Aircraft maintenance          |       | 2,208                       |       | 1,920                                     |       | 288 |   | 15.0 | % | 4.3 |   | 4.3 |   |
| Aircraft rents                |       | 906                         |       | 906                                       |       | — |   | 0.0 | % | 1.8 |   | 2.0 |   |
| Landing fees                  |       | 452                         |       | 187                                       |       | 265 |   | 141.7 | % | 0.9 |   | 0.4 |   |
| Insurance and taxes           |       | 240                         |       | 211                                       |       | 29 |   | 13.7 | % | 0.5 |   | 0.5 |   |
| Depreciation and amortization |       | 580                         |       | 349                                       |       | 231 |   | 66.2 | % | 1.1 |   | 0.8 |   |
| Administrative and other      |       | 5,260                       |       | 2,751                                     |       | 2,509 |   | 91.2 | % | 10.1 |   | 6.2 |   |
|                          |       | $                           | 20,318     |                                      | $          | 13,708 |   | $ | 6,610 |   | 48.2 | % | 39.4¢ |   | 30.9 | ¢ |

 

Wages and benefits increased $1.9 million, or 43.2%, as a result ofadditional staffing and training requirements in flight, maintenance andstations for the Boston operation.

 

In fiscal 2008, Big Sky experienced a 46.5% increase in fuel expense asa result of a 32.8% increase in block hours year-over-year and a higher averageprice of jet fuel, from $2.24 per gallon in fiscal 2007 to $2.55 per gallon infiscal 2008.

 

Aircraft maintenance increased 15.0% as a result of increased flyingassociated with Big Sky’s Delta operations.

 

Landing fees increased 141.7% as a result of the increased level ofoperations and higher landing fee charges associated with Big Sky’s Deltaconnection service.

 

Depreciation and amortization increased 66.2% to $0.6 million in fiscal2008 from $0.3 million in fiscal 2007, primarily due to aircraft purchased inthe second quarter of fiscal 2008, along with systems, equipment and fixturesto support the Delta connection service.

 

During fiscal 2008, administrative and other expenses increased $2.5million, or 91.2%, from fiscal 2007, primarily due to training costs foradditional staffing, station and passenger related costs at the new Deltaconnection locations.

 

*MAIR*

 

MAIROperating Expenses

Totaloperating expenses in fiscal 2008 decreased to $3.7 million from $5.8 millionin the prior year period, primarily due to decreased legal and professionalfees from Mesaba’s bankruptcy in fiscal 2008 compared to fiscal 2007.

 

*ConsolidatedOperating Loss*

Operatingloss for fiscal 2008 increased to $7.9 million from $7.2 million in the prioryear period due to the results of MAIR and Big Sky described above.

 

*ConsolidatedNonoperating Income*

Nonoperatingincome, net increased to $11.8 million in fiscal 2008 from $2.5 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.

 

*ConsolidatedProvision for Income Taxes*

TheCompany recorded $0.1 million of tax benefit on its income for the six monthsended September 30, 2007. The Company utilized certain deferred tax assets inthe quarter to offset taxable income. The associated valuation allowanceagainst those deferred tax assets was therefore removed. The Company continuesto record a full valuation allowance against its remaining deferred tax assetsdue to the uncertainty regarding the ultimate realization of those assets. Thebenefit recorded is due to the reversal of tax contingency reserves previouslyestablished and the realization of state income tax refunds received for priorperiods.

 

20

----

 

**Liquidityand Capital Resources**

 

*Overview*

Unrestrictedcash, cash equivalents and investments decreased 10.9% to $58.8 million atSeptember 30, 2007 from $66.0 million at March 31, 2007. The decrease wasprimarily due to funding the start-up costs for Big Sky’s Boston operationincluding the purchase of three additional Beechcraft aircraft. The Company’sworking capital decreased to $32.0 million at September 30, 2007 compared toworking capital of $39.9 million at March 31, 2007.

 

TheCompany’s liquidity will continue to be affected by Big Sky’s purchase of theremaining Beechcraft aircraft to support its Delta operation and by MAIR’sfinal payment to Northwest of the remaining amount due for the purchase of allof Northwest’s stock in MAIR. MAIR paid Northwest approximately $24 million ofthe aggregate purchase price, or $4.25 per share, upon the initial closing of thetransaction in March 2007. MAIR paid the remaining purchase price,approximately $11.3 million or $2.00 per share, on October 22, 2007.

 

*OperatingActivities*

Netcash provided by operating activities for the six months ended September 30,2007 was $0.7 million, primarily due to net income of $4.0 million anddepreciation and amortization of $0.6 million, offset by decreases in accountspayable and other of $1.6 million and $0.8 million for the Mesaba tax payablesettlement, and increases in accounts receivable of $1.0 million andinventories of $0.5 million.

 

*InvestingActivities*

Netcash provided by investing activities for the six months ended September 30,2007 was $3.9 million, primarily due to net sales of investments of $13.4million, offset primarily by net purchases of property and equipment of $9.9million.

 

*FinancingActivities*

Netcash provided by financing activities for the six months ended September 30,2007 was $1.3 million primarily due to the establishment of the Big Sky line ofcredit of $1.0 million and $0.4 million in proceeds from the exercise of stockoptions, 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. Absentadverse factors outside the control of the Company, management believes currentliquidity and funds from operations will provide adequate resources for meetingthe Company’s obligations through the end of fiscal 2008.

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

Inits 2007 Annual Report on Form 10-K filed with the SEC on June 19, 2007, theCompany identified the critical accounting policies which affect its moresignificant estimates and assumptions used in preparing its consolidatedfinancial statements. The Company has not changed these policies from thosepreviously disclosed in its Annual Report on Form 10-K.

 

**NEWACCOUNTING PRONOUNCEMENTS**

 

SeeITEM 1. Condensed Consolidated Financial Statements – Note 12. New AccountingPronouncements.

 

## ***ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK***

## *** ***

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

 

21

----

 

*AircraftFuel*

BigSky is subject to fluctuations in fuel prices. A hypothetical 10% increase inthe September 30, 2007 cost per gallon of fuel, assuming projected fiscal 2008usage at Big Sky, would result in an increase to aircraft fuel expense ofapproximately $3.3 million in fiscal 2008. As of September 30, 2007, Big Skyhad no fuel hedges in place for fiscal 2008.

 

*InterestRates*

TheCompany’s earnings are affected by changes in interest rates due to the impactthose changes have on its interest income from cash equivalents and short andlong-term investments. If interest rates were to increase by 100 basis pointsfor a full year, based on the Company’s cash equivalents, short-term andlong-term investments balance at September 30, 2007, the Company’s interestincome from cash equivalents, short-term and long-term investments wouldincrease by approximately $0.6 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 in achievingits stated goals under all potential future conditions; over time, control maybecome inadequate because of changes in conditions, or the degree of compliancewith the policies or procedures may deteriorate. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

Asof September 30, 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 inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended).  Based upon that evaluation, the Chief ExecutiveOfficer and acting Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of the date of suchevaluation.

 

*Changes in Internal Controls*

Duringthe quarter ended September 30, 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.

 

22

----

 

# **PART II. OTHER INFORMATION**

# ** **

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

## *** ***

Certainlegal proceedings in which the Company is involved are discussed in Note 13, “Commitmentsand Contingencies,” to the consolidated financial statements included inPart I, Item 8, of the Company’s Annual Report on Form 10-K for thefiscal year ended March 31, 2007, filed with the SEC on June 19, 2007. Therehave been no further material developments in the Company’s legal proceedingssince the disclosures contained in such report. Unless otherwise indicated, allproceedings discussed in the Company’s earlier reports filed with the SECremain outstanding. Reference also is made to Note 10, “Commitments andContingencies,” 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, “Risk Factors,” of the Company’s Annual Reporton Form 10-K for the fiscal year ended March 31, 2007, filed with the SEC onJune 19, 2007.

 

*If Big Sky is not awarded western United States EAS routes,its revenue will decrease substantially*.

 

BigSky recently rebid for all of its western United States EAS routes.  Ifthe DOT does not award these EAS routes to Big Sky, all of the revenue from BigSky’s western operations will be at risk, as Big Sky would be unable to supportits western operations absent these EAS subsidies.  In such event, if BigSky is not able to redeploy the aircraft utilized in the western United Statesto alternative markets, the Company’s financial condition and results ofoperations would be materially and adversely affected.

 

*The markets in which Big Sky provides its Delta connectionservice are unproven, and Big Sky may not achieve profitability*.

 

Todate, Big Sky has successfully introduced its new Delta connection service inthe northeastern United States.  However, Big Sky’s Delta connectionservice began in April 2007, and Big Sky cannot project how these markets willperform for the remainder of the fiscal year.  The cyclical nature of theairline industry, as well as other events outside of the control of Big Sky,could affect the profitability of Big Sky’s Delta connection service. Additionally, both Big Sky and Delta have the right to terminate the HostedProrate Agreement at any time by providing six months notice. If the Deltamarkets fail to perform as expected, or if Delta terminates the agreement, BigSky’s financial condition and results of operations could be materially andadversely affected.

 

**ITEM 6.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.                          |

 

23

----

 

**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:  November 7, 2007 | By:                                                  |  /s/  Paul F. Foley |   |
|                     | President,  Chief Executive Officer and acting Chief |
|                     | Financial  Officer                                   |
|                          |                                                      |  |  |  |

 

24

----