** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

 

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

 

**For the quarterly period ended September 30, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO 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 1720** |
| **150 South Fifth Street**          |
| **Minneapolis, MN  55402**     |
| **(612) 333-0021**                  |

 

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

Yes ý    Noo

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

 

Yes o    Noý

 

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

 
| **Class**                              | ** ** | **Outstanding as of October  29,  2004** |
|----------------------------------------|------------|-----------------------------------------------|
| Common Stock Par value  $.01 per share |       | 20,482,609                                    |

 

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**CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements in this QuarterlyReport on Form 10-Q of MAIR Holdings, Inc. (the “Company”) under the caption“Management's Discussion and Analysis of Financial Condition and Results ofOperations” and elsewhere in this report are forward-looking and are based uponinformation currently available to the Company. The Company, through its officers, directors or employees, may also fromtime to time make oral forward-looking statements.  Any such statement is qualified by referenceto these cautionary statements.  Inconnection with the “safe harbor” provisions of the Private Securities LitigationReform Act of 1995, the Company is hereby identifying important factors thatcould cause actual results to differ materially from those contained in anyforward-looking statement made by or on behalf of the Company.  Many important factors that could cause sucha difference are described in the Company’s Annual Report on Form 10-K for theyear ended March 31, 2004 under the caption “Risk Factors Relating to theCompany and the Airline Industry.”

 

Undue reliance should not beplaced on the Company’s forward-looking statements because the matters theydescribe are subject to known and unknown risks, uncertainties and otherunpredictable factors, many of which are beyond the Company’s control.  The Company’s forward-looking statementsspeak only as of the date on which this report was filed with the United StatesSecurities and Exchange Commission.  Overtime, actual results, performance or achievements will likely differ from theanticipated results, performance or achievements that are expressed or impliedby the Company’s forward-looking statements, and such differences might besignificant and materially adverse to the Company’s shareholders.  

 

All subsequent written or oralforward-looking statements attributable to the Company or persons acting on theCompany’s behalf are expressly qualified by the 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

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**Part I.  FINANCIAL INFORMATION**

** **

**ITEM 1.  CONSOLIDATED FINANCIALSTATEMENTS**

** **

**MAIR HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

**(Unaudited)**

 
| ** **                                             | ** ** | **September 30** | ** ** | **March 31** | ** ** |
|--------------------------------------------------------|------------|------------------|------------|--------------|------------|
| ** **                                             | ** ** | **2004**         | ** ** | **2004**     | ** ** |
| ASSETS                                                 |       |             |       |         |       |
|                                                   |       |             |       |         |       |
| CURRENT ASSETS:                                        |       |             |       |         |       |
| Cash and cash equivalents                              |       | $                | 58,266     |         | $          | 54,561 |   |
| Short-term investments                                 |       | 70,231           |       | 67,285       |       |
| Accounts receivable, net of reserves of  $634 and $926 |       | 26,969           |       | 28,453       |       |
| Inventories, net                                       |       | 10,359           |       | 8,664        |       |
| Prepaid expenses and deposits                          |       | 6,790            |       | 5,381        |       |
| Deferred income taxes and other                        |       | 11,166           |       | 11,449       |       |
| Total current assets                                   |       | 183,781          |       | 175,793      |       |
|                                                   |       |             |       |         |       |
| PROPERTY AND EQUIPMENT:                                |       |             |       |         |       |
| Flight equipment                                       |       | 83,761           |       | 81,891       |       |
| Other property and equipment                           |       | 44,724           |       | 41,901       |       |
| Less: Accumulated depreciation and  amortization       |       | (89,874          | )          | (84,070      | )          |
| Net property and equipment                             |       | 38,611           |       | 39,722       |       |
|                                                   |       |             |       |         |       |
| NONCURRENT ASSETS:                                     |       |             |       |         |       |
| Long-term investments                                  |       | 37,656           |       | 38,084       |       |
| Goodwill                                               |       | 2,503            |       | 2,503        |       |
| Other intangible assets, net                           |       | 3,022            |       | 3,224        |       |
| Other assets, net                                      |       | 7,052            |       | 7,994        |       |
|                                                   |       | $                | 272,625    |         | $          | 267,320 |   |

 

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

 

3

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED BALANCE SHEETS (Continued)**

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

**(Unaudited)**

 
| ** **                                                                                                           | ** ** | **September 30** | ** ** | **March 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|--------------|------------|
| ** **                                                                                                           | ** ** | **2004**         | ** ** | **2004**     | ** ** |
| LIABILITIES  AND SHAREHOLDERS' EQUITY                                                                                |       |             |       |         |       |
|                                                                                                                 |       |             |       |         |       |
| CURRENT LIABILITIES:                                                                                                 |       |             |       |         |       |
| Accounts payable                                                                                                     |       | $                | 19,357     |         | $          | 18,981 |   |
| Accrued liabilities:                                                                                                 |       |             |       |         |       |
| Payroll                                                                                                              |       | 15,840           |       | 16,724       |       |
| Maintenance                                                                                                          |       | 18,526           |       | 20,724       |       |
| Deferred income                                                                                                      |       | 2,611            |       | 2,504        |       |
| Other current liabilities                                                                                            |       | 18,308           |       | 17,124       |       |
| Total current liabilities                                                                                            |       | 74,642           |       | 76,057       |       |
|                                                                                                                 |       |             |       |         |       |
| OTHER NONCURRENT LIABILITIES                                                                                         |       | 5,428            |       | 6,334        |       |
|                                                                                                                 |       |             |       |         |       |
| COMMITMENTS AND CONTINGENCIES                                                                                        |       |             |       |         |       |
|                                                                                                                 |       |             |       |         |       |
| SHAREHOLDERS' EQUITY:                                                                                                |       |             |       |         |       |
| Undesignated preferred stock, no specified  par value; 1,000,000 shares authorized, no shares issued and outstanding |       | —           |       | —       |       |
| Common stock, $.01 par value; 60,000,000  shares authorized, 20,482,609 and 20,375,372 shares issued and outstanding |       | 205              |       | 204          |       |
| Paid-in capital                                                                                                      |       | 53,041           |       | 52,995       |       |
| Warrants                                                                                                             |       | 16,500           |       | 16,500       |       |
| Accumulated other comprehensive income  (loss)                                                                       |       | (63              | )          | 46           |       |
| Retained earnings                                                                                                    |       | 122,872          |       | 115,184      |       |
| Total shareholders' equity                                                                                           |       | 192,555          |       | 184,929      |       |
|                                                                                                                 |       | $                | 272,625    |         | $          | 267,320 |   |

 

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

 

4

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                               | ** ** | **September 30**       | ** ** | **September 30**     | ** ** |
| ** **                               | ** ** | **2004**               | ** ** | **2003**             | ** ** | **2004** | ** ** | **2003** | ** ** |
| OPERATING REVENUES:                      |       |                   |       |                 |       |   |   |   |   |
| Passenger                                |       | $                      | 107,736    |                 | $          | 109,683 |   | $ | 208,704 |   | $ | 216,445 |   |
| Freight and other                        |       | 10,377                 |       | 7,779                |       | 19,108 |   | 15,050 |   |
| Total operating revenues                 |       | 118,113                |       | 117,462              |       | 227,812 |   | 231,495 |   |
|                                     |       |                   |       |                 |       |   |   |   |   |
| OPERATING EXPENSES:                      |       |                   |       |                 |       |   |   |   |   |
| Wages and benefits                       |       | 36,537                 |       | 36,555               |       | 71,837 |   | 71,783 |   |
| Aircraft fuel                            |       | 5,420                  |       | 5,759                |       | 10,531 |   | 11,476 |   |
| Aircraft maintenance                     |       | 21,315                 |       | 20,575               |       | 41,741 |   | 38,955 |   |
| Aircraft rents                           |       | 25,722                 |       | 26,764               |       | 50,754 |   | 53,542 |   |
| Landing fees                             |       | 1,810                  |       | 1,805                |       | 3,579 |   | 3,570 |   |
| Insurance and taxes                      |       | 2,331                  |       | 2,671                |       | 4,404 |   | 5,498 |   |
| Depreciation and amortization            |       | 3,355                  |       | 4,334                |       | 7,108 |   | 8,833 |   |
| Administrative and other                 |       | 14,047                 |       | 12,723               |       | 27,684 |   | 26,819 |   |
| Total operating expenses                 |       | 110,537                |       | 111,186              |       | 217,638 |   | 220,476 |   |
| Operating income                         |       | 7,576                  |       | 6,276                |       | 10,174 |   | 11,019 |   |
|                                     |       |                   |       |                 |       |   |   |   |   |
| NONOPERATING INCOME (EXPENSE):           |       |                   |       |                 |       |   |   |   |   |
| Interest income and other                |       | 548                    |       | 381                  |       | 933 |   | 740 |   |
| Interest expense                         |       | (16                    | )          | (21                  | )          | (34 | ) | (47 | ) |
| Government grant income                  |       |                   |       |                 |       |   |   | 2,646 |   |
| Nonoperating income, net                 |       | 532                    |       | 360                  |       | 899 |   | 3,339 |   |
| Income before provision for income taxes |       | 8,108                  |       | 6,636                |       | 11,073 |   | 14,358 |   |
|                                     |       |                   |       |                 |       |   |   |   |   |
| PROVISION FOR INCOME TAXES               |       | 3,327                  |       | 2,702                |       | 3,385 |   | 6,918 |   |
| NET INCOME                               |       | $                      | 4,781      |                 | $          | 3,934 |   | $ | 7,688 |   | $ | 7,440 |   |
|                                     |       |                   |       |                 |       |   |   |   |   |
| NET INCOME PER SHARE:                    |       |                   |       |                 |       |   |   |   |   |
| Earnings per common share - basic        |       | $                      | 0.23       |                 | $          | 0.19 |   | $ | 0.38 |   | $ | 0.37 |   |
| Earnings per common share - diluted      |       | $                      | 0.23       |                 | $          | 0.19 |   | $ | 0.37 |   | $ | 0.36 |   |
|                                     |       |                   |       |                 |       |   |   |   |   |
| WEIGHTED AVERAGE SHARES OUTSTANDING:     |       |                   |       |                 |       |   |   |   |   |
| Basic                                    |       | 20,471                 |       | 20,323               |       | 20,462 |   | 20,322 |   |
| Diluted                                  |       | 20,947                 |       | 20,540               |       | 20,960 |   | 20,414 |   |
|                                          |            |                        |            |                      |            |  |  |  |  |  |  |  |  |  |  |

 

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

 

5

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**MAIR HOLDINGS, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended  September 30** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                               |       |   |   |
| Net income                                                                         |       | $                                  | 7,688      |   | $ | 7,440 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                               |       |   |   |
| Depreciation and amortization                                                      |       | 7,108                              |       | 8,833 |   |
| Amortization of investments                                                        |       | 1,030                              |       | 814 |   |
| Amortization of deferred credits                                                   |       | (838                               | )          | (1,219 | ) |
| Stock-based compensation                                                           |       | (719                               | )          | 490 |   |
| Changes in current operating items:                                                |       |                               |       |   |   |
| Accounts receivable                                                                |       | 1,484                              |       | 10,334 |   |
| Inventories                                                                        |       | (1,695                             | )          | 278 |   |
| Prepaid expenses and deposits                                                      |       | (1,409                             | )          | (955 | ) |
| Accounts payable and other                                                         |       | (655                               | )          | 9,031 |   |
| Net cash provided by operating activities                                          |       | 11,994                             |       | 35,046 |   |
|                                                                               |       |                               |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                               |       |   |   |
| Purchases of investments                                                           |       | (33,549                            | )          | (41,351 | ) |
| Sales of investments                                                               |       | 29,795                             |       | 21,791 |   |
| Purchases of property and equipment                                                |       | (5,115                             | )          | (4,793 | ) |
| Net cash used in investing activities                                              |       | (8,869                             | )          | (24,353 | ) |
|                                                                               |       |                               |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |                               |       |   |   |
| Repayment of other noncurrent liabilities                                          |       | (67                                | )          | (100 | ) |
| Proceeds from issuance of common stock                                             |       | 647                                |       | 15 |   |
| Net cash provided by (used in) financing  activities                               |       | 580                                |       | (85 | ) |
|                                                                               |       |                               |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 3,705                              |       | 10,608 |   |
|                                                                               |       |                               |       |   |   |
| CASH AND CASH EQUIVALENTS:                                                         |       |                               |       |   |   |
| Beginning of period                                                                |       | 54,561                             |       | 62,140 |   |
| End of period                                                                      |       | $                                  | 58,266     |   | $ | 72,748 |   |
|                                                                               |       |                               |       |   |   |
| SUPPLEMENTARY CASH FLOW INFORMATION:                                               |       |                               |       |   |   |
| Cash paid during period for:                                                       |       |                               |       |   |   |
| Interest                                                                           |       | $                                  | 38         |   | $ | 47 |   |
| Income taxes                                                                       |       | $                                  | 3,488      |   | $ | 347 |   |
|                                                                                    |            |                                    |            |  |  |  |  |  |  |

 

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

 

6

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**MAIR HOLDINGS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The consolidated financialstatements included herein have been prepared by MAIR Holdings, Inc. (the“Company” or “Holdings”), without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission (“SEC”).  The information furnished in the consolidatedfinancial statements includes normal recurring adjustments and reflects alladjustments, which are, in the opinion of management, necessary for a fairpresentation of such consolidated financial statements.  The Company’s business is seasonal and,accordingly, interim results are not indicative of results for a fullyear.  Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of America(“GAAP”) have been condensed or omitted pursuant to such rules and regulations,although the Company believes that the disclosures are adequate to make theinformation presented not misleading.  Itis suggested that these consolidated financial statements be read inconjunction with the consolidated financial statements for the year ended March31, 2004, and the notes thereto, included in the Company’s Annual Report onForm 10-K as filed with the SEC.

 

1.       Basis of Presentation

 

The consolidated financialstatements include the accounts of the Company and its wholly ownedsubsidiaries, Mesaba Aviation, Inc. (“Mesaba”) and Big Sky Transportation Co.(“Big Sky”).  All significantintercompany transactions and balances have been eliminated in consolidation.

 

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

 

Certain balances in the fiscal 2004 consolidated financial statementshave been reclassified to conform to the fiscal 2005 presentation.  These reclassifications had no impact on netincome or shareholders’ equity as previously reported.

 

2.       Business

 

*Mesaba*

Mesaba operates as a regionalair carrier providing scheduled passenger service as “Mesaba Airlines/NorthwestAirlink” and “Mesaba Airlines/Northwest Jet Airlink” under two separateagreements with Northwest Airlines, Inc., a wholly owned indirect subsidiary ofNorthwest Airlines Corporation (“Northwest”). As of September 30, 2004, Mesaba served 104 cities in the United Statesand Canada from Northwest’s hub airports located in Minneapolis/St. Paul, Detroitand Memphis.

 

Under the Airline ServicesAgreement (the “Airlink Agreement”), Mesaba operates Saab 340 jet-prop aircraft(“Saab”) for Northwest.  This agreementprovides for exclusive rights to designated service areas through June 30, 2007.  Under the Airlink Agreement, Mesabarecognizes revenue for each completed “available seat mile” (“ASM”) (the numberof seats available for passengers, multiplied by the number of miles thoseseats are flown).  Under the AirlinkAgreement, Mesaba purchases fuel, ground handling and other services fromNorthwest.  Mesaba’s cost of fuel,including taxes and pumping fees, is 83.5 cents per gallon.  Mesaba paid Northwest $9.9 million and $7.6million for these services for the three months ended September 30, 2004 and 2003.  Mesaba paid Northwest $18.2 million and $14.5million for these services for the six months ended September 30, 2004 and2003.  Either Northwest or Mesaba mayterminate the Airlink Agreement on 365 days notice or it may be terminatedimmediately by either party for certain provisions provided for in the AirlinkAgreement.

 

Under the Regional Jet ServicesAgreement (the “Jet Agreement”), Mesaba operates Avro RJ85 regional jets (“RJ85”)for Northwest through April 25, 2007.  Underthe Jet Agreement, Mesaba recognizes revenue for each “block hour” flown (theelapsed time between aircraft departing and arriving at a gate).  Under the Jet Agreement, Northwest providesfuel and airport and passenger related services at Northwest’s expense.  The Jet Agreement may be terminatedimmediately by Mesaba or Northwest in accordance with certain provisionsprovided for in the Jet Agreement.  

 

Under the agreements, allMesaba flights appear in Northwest’s schedules and Mesaba receives ticketingand certain check-in, baggage and freight-handling services from Northwest atcertain airports.  Mesaba also benefitsfrom its relationship with Northwest through advertising and marketingprograms.  The Airlink and Jet Agreementsprovide for certain incentive 

 

7

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payments from Northwest toMesaba based on achievement of certain operational or financial goals.  Such incentives totaled $1.9 million and $0.7million for the three months ended September 30, 2004 and 2003.  Incentives totaled $3.1 million and $2.5million for the six months ended September 30, 2004 and 2003.  The incentive payments are included inpassenger revenues in the accompanying consolidated statements ofoperations.  Approximately $23.1 millionor 85.7% and $21.1 million or 74.1% of the September 30, 2004 and March 31, 2004accounts receivable balances in the accompanying consolidated balance sheets weredue from Northwest.  Substantially all ofMesaba’s operating revenue was from Northwest. As of September 30, 2004 and March 31, 2004, Mesaba owed Northwest lessthan $0.1 million and $1.0 million, primarily for fuel.

 

Cancellation of the Airlink or Jet Agreements or Northwest’s failure tomake timely payment of amounts owed to Mesaba or to otherwise materiallyperform under the Airlink or Jet Agreements would have a material adverseeffect on Mesaba’s and the Company’s operations, financial position and cashflows.  Northwest and Mesaba reviewcontract compliance on a periodic basis.

 

*Big Sky*

Big Sky operates as a regionalair carrier based in Billings, Montana, primarily providing scheduledpassenger, airfreight, express package and charter services.  As of September 30, 2004, Big Sky providedscheduled air service to 18 communities in Montana, North Dakota, Washingtonand Idaho.  Big Sky operates dailyscheduled flights providing interline and online connecting services and localmarket services.  Big Sky also hascode-sharing agreements with Alaska Airlines, America West Airlines andNorthwest, where its services are marketed jointly with those air carriers forconnecting flights.  Big Sky participatesin the Essential Air Service ("EAS") program with the U.S. Departmentof Transportation ("DOT").  TheEAS program subsidizes air carriers to provide air service to designated ruralcommunities throughout the country that could not otherwise economicallyjustify that service based on its passenger traffic.  The DOT pays EAS subsidies for each departurein a covered market.  Big Sky purchasedfuel from Northwest for $0.5 million for the three months ended September 30,2004 and 2003.  Big Sky purchased fuelfrom Northwest for $0.9 million for the six months ended September 30, 2004 and2003.  

 

3.       Goodwill and Other Intangibles

 

In December 2002, the Company acquired BigSky for $3.2 million, net of cash acquired of $0.3 million.  The excess of the Big Sky purchase price overthe fair market value of the net assets acquired was allocated to certainidentifiable intangible assets, including Big Sky’s pilot labor contract and anair carrier certificate, and to goodwill. Goodwill and other intangible assets and related accumulatedamortization were as follows, in thousands:

 
| ** **                    | ** ** | **September 30, 2004** | ** ** | **March 31, 2004** | ** ** |
|-------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                    | ** ** | ** **             | ** ** | **Accumulated**    | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Gross**              | ** ** | **Amortization**   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived assets:      |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Air carrier certificate       |       | $                      | 925        |               |       |   |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Goodwill                      |       | 2,503                  |       |               |       | 2,503 |   | 2,503 |   |   |   | 2,503 |   |
| Amortizable intangible asset: |       |                   |       |               |       |   |   |   |   |   |   |   |   |
| Pilot labor contract          |       | 2,840                  |       | (743               | )          | 2,097 |   | 2,840 |   | (541 | ) | 2,299 |   |
|                          |       | $                      | 6,268      |               | $          | (743 | ) | $ | 5,525 |   | $ | 6,268 |   | $ | (541 | ) | $ | 5,727 |   |
|                               |            |                        |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizable intangible asset is amortized over its estimated periodof benefit.  Intangible assetamortization expense for the three and six months ended September 30, 2004 and2003 was $0.1 million and $0.2 million.  Goodwilland the intangible assets are evaluated for impairment annually, at a minimum,or on an interim basis if events or circumstances indicate a possible inabilityto realize the carrying amounts.  Theevaluation includes future cash flow projections, strategic modeling and othermanagement assumptions.  During thefourth quarter of fiscal 2004, the Company completed its annual impairment testof goodwill and other intangible assets and determined that no impairmentcharge was necessary.  The Companycontinues to monitor goodwill and the intangible assets at Big Sky forimpairment, particularly in light of its recent operating performance.

 

4.       Investments

 

Investments consist principallyof municipal securities and are classified as available-for-sale.  Fair value of investments is determined basedon quoted market prices.  Available-for-saleinvestments are reported at fair value with unrealized gains and lossesexcluded from operations and reported as a separate component of shareholders’equity, except for other-than-temporary

 

8

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impairments, which are reportedas a charge to current operations and result in a new cost basis for theinvestment.  The Company classifiesinvestments with an original maturity date of less than 90 days as cashequivalents.  Investments with anoriginal maturity date of more than 90 days that mature within one year areclassified as short-term investments and greater than one year as long-terminvestments.  As of September 30, 2004and March 31, 2004, cash, cash equivalents, short-term and long-terminvestments totaled $166.2 million and $159.9 million.

 

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

 
| ** **              | ** ** | **September 30, 2004** | ** ** | **March 31, 2004** | ** ** |
|-------------------------|------------|------------------------|------------|--------------------|------------|
| Amortized cost          |       | $                      | 108,004    |               | $          | 105,280 |   |
| Gross unrealized gains  |       | 41                     |       | 127                |       |
| Gross unrealized losses |       | (158                   | )          | (38                | )          |
| Fair value              |       | $                      | 107,887    |               | $          | 105,369 |   |
|                         |            |                        |            |                    |            |  |  |  |

 

For the three and six monthsended September 30, 2004 and 2003, gross realized gains and losses wereinsignificant as the Company generally held the fully amortized bonds tomaturity.

 

5.       Stock Options

 

The Company accounts for itsstock-based compensation plans using the intrinsic value method prescribedunder Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations.  The Company has issued stock options to keyemployees and directors.  As such, theCompany records compensation expense for stock options and awards only if theexercise price is less than the fair market value of the stock on themeasurement date.

 

For purposes of the pro formadisclosures of compensation expense under Statement of Financial AccountingStandards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFASNo. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,”the Company uses the Black-Scholes option model to estimate the fair value ofoptions not subject to variable plan accounting.

 

The following informationsummarizes the pro forma effects assuming compensation for such awards had beenrecorded based upon the estimated fair value for the periods ended September 30,in thousands, except per share information:

 
| ** **                                                                                                                                    | ** ** | **Three Months Ended  September 30** | ** ** | **Six Months Ended  September 30** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as reported                                                                                                                        |       | $                                    | 4,781      |                               | $          | 3,934 |   | $ | 7,688 |   | $ | 7,440 |   |
| Add (deduct): stock-based employee  compensation expense (income) included in reported net income, net of related  tax effects                |       | 12                                   |       | 291                                |       | (421 | ) | 254 |   |
| Deduct: total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (293                                 | )          | (353                               | )          | (681 | ) | (658 | ) |
| Pro forma net income                                                                                                                          |       | $                                    | 4,500      |                               | $          | 3,872 |   | $ | 6,586 |   | $ | 7,036 |   |
|                                                                                                                                          |       |                                 |       |                               |       |   |   |   |   |
| Earnings per share – basic:                                                                                                              |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                    | 0.23       |                               | $          | 0.19 |   | $ | 0.38 |   | $ | 0.37 |   |
| Pro forma                                                                                                                                     |       | $                                    | 0.22       |                               | $          | 0.19 |   | $ | 0.32 |   | $ | 0.35 |   |
| Earnings per share – diluted:                                                                                                            |       |                                 |       |                               |       |   |   |   |   |
| As reported                                                                                                                                   |       | $                                    | 0.23       |                               | $          | 0.19 |   | $ | 0.37 |   | $ | 0.36 |   |
| Pro forma                                                                                                                                     |       | $                                    | 0.21       |                               | $          | 0.19 |   | $ | 0.31 |   | $ | 0.34 |   |

 

9

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In December 2002, the Company repriced stockoptions to purchase 745,000 shares of the Company’s common stock with exerciseprices ranging from $9.05 to $18.00 to an exercise price of $5.97, which representedthe fair market value on the date of the repricing.  In accordance with Financial AccountingStandards Board (“FASB”) Interpretation No. 44, “Accounting for CertainTransactions Involving Stock Compensation,” the Company has adopted variableplan accounting for these options from the date of the repricing.  As a result of the repricing, for the threemonths ended September 30, 2004 and 2003, the Company recorded compensationexpense of less than $0.1 million and $0.5 million.  For the six months ended September 30, 2004, theCompany recorded a reduction to compensation expense of $0.7 million.  For the six months ended September 30, 2003, theCompany recorded compensation expense of $0.5 million.

 

6.       Earnings Per Share

 

Basic earnings per common shareis computed by dividing net income by the weighted average number of shares ofcommon stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the sumof the weighted average number of shares of common stock outstanding plus alladditional common stock that would have been outstanding if potentiallydilutive common shares related to stock options and warrants had beenissued.  Stock options and warrants withan exercise price exceeding the fair market value of the Company’s common stockare considered antidilutive and are excluded from the calculation.  

 

The following table reconcilesthe number of shares utilized in the consolidated earnings per sharecalculations for the periods ended September 30, in thousands, except per share information:

 
| ** **                                                                                                  | ** ** | **Three Months Ended  September 30** | ** ** | **Six Months Ended  September 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                                                                  |       | $                                    | 4,781      |                               | $          | 3,934 |   | $ | 7,688 |   | $ | 7,440 |   |
| For earnings per common share - basic:                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Weighted average number of issued shares  outstanding                                                       |       | 20,471                               |       | 20,323                             |       | 20,462 |   | 20,322 |   |
| Effect of dilutive securities:                                                                              |       |                                 |       |                               |       |   |   |   |   |
| Computed shares outstanding under the  Company’s stock option plan utilizing the treasury stock method |       | 358                                  |       | 217                                |       | 370 |   | 92 |   |
| Computed shares outstanding under warrants  issued utilizing the treasury stock method                      |       | 118                                  |       | —                             |       | 128 |   | — |   |
| For earnings per common share - diluted:                                                                    |       |                                 |       |                               |       |   |   |   |   |
| Weighted average common shares and common  share equivalents outstanding                                    |       | 20,947                               |       | 20,540                             |       | 20,960 |   | 20,414 |   |
| Earnings per share – basic                                                                             |       | $                                    | 0.23       |                               | $          | 0.19 |   | $ | 0.38 |   | $ | 0.37 |   |
| Earnings per share – diluted                                                                           |       | $                                    | 0.23       |                               | $          | 0.19 |   | $ | 0.37 |   | $ | 0.36 |   |
|                                                                                                        |       |                                 |       |                               |       |   |   |   |   |
| Antidilutive options and warrants                                                                           |       | 3,505                                |       | 4,510                              |       | 3,505 |   | 4,530 |   |

 

10

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7.       Consolidated Comprehensive Income

 

The following table presentsthe calculation of comprehensive income. Comprehensive income has no impact on reported net income.  The components of comprehensive income forthe periods ended September 30 are as follows, in thousands:

 
| ** **                                           | ** ** | **Three Months Ended  September 30** | ** ** | **Six Months Ended  September 30** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                           |       | $                                    | 4,781      |                               | $          | 3,934 |   | $ | 7,688 |   | $ | 7,440 |   |
| Unrealized gains (losses) on investments  classified |       |                                 |       |                               |       |   |   |   |   |
| as available for sale, net of tax                    |       | 58                                   |       | (23                                | )          | (109 | ) | (23 | ) |
| Comprehensive income                                 |       | $                                    | 4,839      |                               | $          | 3,911 |   | $ | 7,579 |   | $ | 7,417 |   |
|                                                      |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

8.       Segment Information

 

The Company follows theprovisions of SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information.”  SFAS No. 131 establishesannual and interim reporting standards for an enterprise’s business segmentsand related disclosures about its products, services, geographic areas andmajor customers.  The method fordetermining what information to report is based upon the way managementorganizes the operating segments within the Company for making operatingdecisions and assessing financial performance. Operating segment information for Mesaba, Big Sky and Holdings for the periodsended September 30 were as follows, in thousands:

 
| ** **                             | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **Holdings and Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|------------|------------|-------------|------------|-------------------------------|------------|------------------|------------|
| Three Months Ended September 30, 2004: |       |       |       |        |       |                          |       |             |       |
| Operating revenues                     |       | $          | 114,161    |        | $          | 3,952                         |       |             |       | $ | 118,113 |   |
| Depreciation and amortization          |       | 3,152      |       | 199         |       | $                             | 4          |             | 3,355      |   |
| Interest expense                       |       |       |       | 68          |       | (52                           | )     | 16               |       |
| Income (loss) before income taxes      |       | 8,723      |       | (824        | )          | 209                           |       | 8,108            |       |
| Capital expenditures                   |       | 2,105      |       | 34          |       | 5                             |       | 2,144            |       |
| Total assets at end of period          |       | 120,877    |       | 9,931       |       | 141,817                       |       | 272,625          |       |
| Three Months Ended September 30, 2003: |       |       |       |        |       |                          |       |             |       |
| Operating revenues                     |       | 112,976    |       | 4,486       |       |                          |       | 117,462          |       |
| Depreciation and amortization          |       | 4,141      |       | 192         |       | 1                             |       | 4,334            |       |
| Interest expense                       |       |       |       | 82          |       | (61                           | )     | 21               |       |
| Income (loss) before income taxes      |       | 7,084      |       | (603        | )          | 155                           |       | 6,636            |       |
| Capital expenditures                   |       | 2,323      |       | 19          |       | 10                            |       | 2,352            |       |
| Total assets at end of period          |       | 114,774    |       | 10,806      |       | 136,063                       |       | 261,643          |       |
| Six Months Ended September 30, 2004:   |       |       |       |        |       |                          |       |             |       |
| Operating revenues                     |       | 220,251    |       | 7,561       |       |                          |       | 227,812          |       |
| Depreciation and amortization          |       | 6,694      |       | 406         |       | 8                             |       | 7,108            |       |
| Interest expense                       |       |       |       | 145         |       | (111                          | )     | 34               |       |
| Income (loss) before income taxes      |       | 11,443     |       | (1,913      | )          | 1,543                         |       | 11,073           |       |
| Capital expenditures                   |       | 5,042      |       | 68          |       | 5                             |       | 5,115            |       |
| Six Months Ended September 30, 2003:   |       |       |       |        |       |                          |       |             |       |
| Operating revenues                     |       | 222,845    |       | 8,650       |       |                          |       | 231,495          |       |
| Depreciation and amortization          |       | 8,446      |       | 383         |       | 4                             |       | 8,833            |       |
| Interest expense                       |       |       |       | 160         |       | (113                          | )     | 47               |       |
| Income (loss) before income taxes      |       | 14,855     |       | (1,077      | )          | 580                           |       | 14,358           |       |
| Capital expenditures                   |       | 4,757      |       | 26          |       | 10                            |       | 4,793            |       |
|                                        |            |            |            |             |            |                               |            |                  |            |  |  |  |  |

 

9.       Nonoperating Income

 

In April 2003, Congress enactedthe Emergency Wartime Supplemental Appropriations Act.  Among other items, the legislation included a$2.3 billion government grant to U.S. airlines. In accordance with this Act, in the first quarter of fiscal 2004, Mesabarecognized $2.3 million as “nonoperating income” and Big Sky recognized $0.3million as “nonoperating

 

11

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income” and $0.2 million as areduction of “administrative and other expense” in the accompanyingconsolidated statements of operations.  

 

10.    Income Taxes

 

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

 

11.    New Accounting Pronouncements

 

In October 2004, the FASB reached a tentativeconclusion on SFAS 123(R), “Share-BasedPayment”, which would require all public companies accounting forshare-based payment transactions to account for these types of transactionsusing a fair-value-based method.  SFAS 123(R)would eliminate the ability to account for share-based compensationtransactions using APB Opinion No. 25. SFAS 123(R) also requires the tax benefits associated with theseshared based payments be classified as financing activities in the statement ofcash flows rather than operating activities as is currently permitted.  SFAS 123(R) becomes effective forinterim or annual periods beginning after June 15, 2005.  SFAS 123(R) offers alternative methodsof adopting this final rule.  The Companyhas not yet determined which method it will use nor has it determined the financialstatement impact.

 

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensuson Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments” regarding disclosure about unrealizedlosses on available for sale debt and equity securities accounted for under SFASNo. 115 “Accounting for Certain Investments in Debt and EquitySecurities”.  The guidance for evaluatingwhether an investment is other than temporarily impaired should be applied in suchevaluations made in reporting periods beginning after June 15, 2004.  The recognition and measurement guidance hasbeen delayed and the disclosure guidance remains in effect.  The Company does not expect theimplementation of EITF 03-1 to have a material effect on its consolidatedfinancial statements.

 

 

**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND**

**RESULTS OF OPERATIONS**

 

The Company’s operations and financial results are subject to variousrisks and uncertainties associated with the airline industry.  Some of these factors are described in theCompany’s Annual Report on Form 10-K for the year ended March 31, 2004 underthe caption “Risk Factors Relating to the Company and the Airline Industry.”

 

RESULTS OF OPERATIONS

 

**Three Months Ended September 30, 2004 and 2003**

The Company’s consolidated net income for the quarter ended September30, 2004 was $4.8 million, or $0.23 per diluted share, compared with net incomeof $3.9 million, or $0.19 per diluted share, for the quarter ended September 30,2003.  Comparative information onoperations for the three months ended September 30 was as follows:  

 

12

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***Mesaba***

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

 
| ** **                      | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|
| Passengers                      |       | 1,480,917 |       | 1,537,022 |       |
| Available seat miles (000's)    |       | 799,502   |       | 776,364   |       |
| Revenue passenger miles (000's) |       | 536,760   |       | 495,981   |       |
| Load factor                     |       | 67.1      | %          | 63.9      | %          |
| Departures                      |       | 53,539    |       | 58,320    |       |
| Revenue per ASM                 |       | $         | 0.143      |      | $          | 0.146 |   |
| Cost per ASM                    |       | $         | 0.132      |      | $          | 0.136 |   |
| Aircraft in service (average)   |       | 99        |       | 105       |       |
|                                 |            |           |            |           |            |  |  |  |

 

Mesaba Operating Revenues  Total operating revenues increased 1.0% inthe second quarter of fiscal 2005 to $114.2 million from $113.0 million in theprior year quarter primarily due to increased ground handling revenue inDetroit and Minneapolis/St Paul, which was partially offset by a decrease inpassenger revenue.  The decrease inpassenger revenue was driven by the removal of five Saab A model aircraft fromthe fleet, which was partially offset by increased RJ85 utilization.

 

Mesaba Operating Expenses  Total operating expenses decreased 0.3% inthe second quarter of fiscal 2005 to $105.5 million from $105.9 million in theprior year quarter.  Mesaba’s operatingcosts per ASM for the three months ended September 30 were as follows:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 4.3      | ¢     | 4.4      | ¢     |
| Aircraft fuel                 |       | 0.6      |       | 0.7      |       |
| Aircraft maintenance          |       | 2.6      |       | 2.6      |       |
| Aircraft rents                |       | 3.2      |       | 3.4      |       |
| Landing fees                  |       | 0.2      |       | 0.2      |       |
| Insurance and taxes           |       | 0.3      |       | 0.3      |       |
| Depreciation and amortization |       | 0.4      |       | 0.5      |       |
| Administrative and other      |       | 1.6      |       | 1.5      |       |
| Total                         |       | 13.2     | ¢     | 13.6     | ¢     |

 

Wages and benefits increased 3.2% to $34.7 million in the secondquarter of fiscal 2005 from $33.6 million in the prior year quarter primarily dueto increased ground handling wages and the impact of higher pilot wages undertheir new contract signed in January 2004, which was partially offset by areduction in mechanic wages and health and dental claims costs.

 

Aircraft fuel decreased 7.8% to $4.8 million in the second quarter offiscal 2005 from $5.2 million in the prior year quarter due to the reduction inthe number of Saab block hours flown. Provisions of the Airlink Agreement with Northwest protect Mesaba fromchanges in fuel prices.  Mesaba’s actualcost of fuel, including taxes and pumping fees, was 83.5 cents per gallon forboth periods.  Northwest is responsiblefor fuel for Mesaba’s RJ85 operations.

 

Aircraft maintenance, excluding wages and benefits, increased 3.8% to $20.6million in the second quarter of fiscal 2005 from $19.9 million in the prioryear quarter due to heavy maintenance and costs incurred to continue tomaintain the fleet as it ages.    

 

Aircraft rents decreased 3.3% to $25.2 million in the second quarter offiscal 2005 from $26.1 in the prior year quarter due to the return of five Saabaircraft to the leasing company and the reduction of one RJ85.

 

Landing fees remained relatively constant quarter-over-quarter due to areduction in Saab departures offset by increased rates.  Northwest is responsible for landing fees forMesaba’s RJ85 operations.

 

Insurance and taxes decreased 18.7% to $2.0 million in the secondquarter of fiscal 2005 from $2.5 million in the prior year quarter dueprimarily to fewer aircraft, the recognition of favorable property tax credits andlower insurance rates.

 

13

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Depreciation and amortization decreased 23.9% to $3.2 million in the secondquarter of fiscal 2005 compared to $4.1 million in the prior year quarter dueprimarily to reduced capital spending over the last several years.  The reduction is because fewer capitalexpenditures are required to maintain the fleet versus investing in theinfrastructure to grow the fleet in previous years.

 

Administrative and other expenses increased 4.3% to $13.3 million inthe second quarter of fiscal 2005 compared to $12.8 million in the prior yearquarter due to increased facilities and stations rent, costs related to groundhandling revenue and the fiscal 2004 temporary suspension of TransportationSecurity Administration security costs. The increased costs were partially offset by reduced pilot trainingcosts.

 

***Big Sky***

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

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Passengers                           |       | 22,188   |       | 30,055   |       |
| Available seat miles (000’s)    |       | 16,099   |       | 20,425   |       |
| Revenue passenger miles (000’s) |       | 5,602    |       | 7,604    |       |
| Load factor                          |       | 34.8     | %          | 37.2     | %          |
| Departures                           |       | 5,227    |       | 6,294    |       |
| Revenue per ASM                      |       | $        | 0.245      |     | $          | 0.220 |   |
| Cost per ASM                         |       | $        | 0.292      |     | $          | 0.245 |   |
| Aircraft in service (average)        |       | 11       |       | 13       |       |

 

Big Sky Operating Revenues  Total operating revenues decreased 11.9% to $4.0million in the second quarter of fiscal 2005 from $4.5 million in the prioryear quarter due to a reduction in unprofitable flying.

 

Big Sky Operating Expenses  Total operating expenses decreased 6.1% inthe second quarter of fiscal 2005 to $4.7 million from $5.0 million in theprior year quarter due to a decrease in variable costs related to the reductionin operations, partially offset by increased fuel costs. 

 

***Consolidated***

Nonoperating Income (Expense)  Nonoperating income increased to $0.5 millionin the second quarter of fiscal 2005 from $0.4 million in the prior year quarterprimarily due to increased interest income, as a result of additional fundsinvested at higher interest rates.

 

Provision for Income Taxes  The Company’s effective tax rate was 41.0% forthe second quarter of fiscal 2005 as compared to 40.7% in the prior year quarter.  The Company adjusts its effective tax ratequarterly based on forecasted operating results in the fiscal year.  The rate is affected principally by the level of nondeductible expensesrelative to projected taxable income.

 

**Six Months Ended September 30, 2004 and 2003**

The Company’s consolidated net income for the six months ended September30, 2004 was $7.7 million, or $0.37 per diluted share, compared with net incomeof $7.4 million, or $0.36 per diluted share, for the six months ended September30, 2003.  Comparative information onoperations for the six months ended September 30 was as follows:  

 

14

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***Mesaba***

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

 
| ** **                      | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|---------------------------------|------------|-----------|------------|-----------|------------|
| Passengers                      |       | 2,877,255 |       | 2,988,302 |       |
| Available seat miles (000's)    |       | 1,514,218 |       | 1,490,913 |       |
| Revenue passenger miles (000's) |       | 1,016,959 |       | 933,267   |       |
| Load factor                     |       | 67.2      | %          | 62.6      | %          |
| Departures                      |       | 103,960   |       | 114,117   |       |
| Revenue per ASM                 |       | $         | 0.145      |      | $          | 0.149 |   |
| Cost per ASM                    |       | $         | 0.138      |      | $          | 0.141 |   |
| Aircraft in service (average)   |       | 98        |       | 106       |       |
|                                 |            |           |            |           |            |  |  |  |

 

Mesaba Operating Revenues  Total operating revenues decreased 1.2% in fiscal2005 to $220.3 million from $222.8 million in the prior year period primarilydue to a decrease in passenger revenue that was driven by a combination of theremoval of six Saab A model aircraft from the fleet and decreased Saabutilization.  The decrease was partiallyoffset by increased RJ85 utilization and increased ground handling revenue inDetroit and Minneapolis/St Paul.  

 

Mesaba Operating Expenses  Total operating expenses decreased 0.7% in fiscal2005 to $208.9 million from $210.3 million in the prior year period.  Mesaba’s operating costs per ASM for the sixmonths ended September 30 were as follows:

 
| ** **                    | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
| Wages and benefits            |       | 4.5      | ¢     | 4.5      | ¢     |
| Aircraft fuel                 |       | 0.6      |       | 0.7      |       |
| Aircraft maintenance          |       | 2.7      |       | 2.5      |       |
| Aircraft rents                |       | 3.3      |       | 3.5      |       |
| Landing fees                  |       | 0.2      |       | 0.2      |       |
| Insurance and taxes           |       | 0.2      |       | 0.3      |       |
| Depreciation and amortization |       | 0.4      |       | 0.6      |       |
| Administrative and other      |       | 1.9      |       | 1.8      |       |
| Total                         |       | 13.8     | ¢     | 14.1     | ¢     |

 

Wages and benefits increased 3.5% to $68.8 million in fiscal 2005 from$66.4 million in the prior year period primarily due to an accrual of $1.1million for contributions to be made to Mesaba’s 401(k) benefit plan, increasedground handling wages and the impact of higher pilot wages under their newcontract signed in January 2004, which were partially offset by a reduction in mechanicwages and health and dental claims costs.

 

Aircraft fuel decreased 9.3% to $9.3 million in fiscal 2005 from $10.3million in the prior year period due primarily to a reduction in the number ofSaab block hours flown.  Provisions ofthe Airlink Agreement with Northwest protect Mesaba from changes in fuelprices.  Mesaba’s actual cost of fuel,including taxes and pumping fees, was 83.5 cents per gallon for bothperiods.  Northwest is responsible forfuel for Mesaba’s RJ85 operations.

 

Aircraft maintenance, excluding wages and benefits, increased 7.4% to $40.4million in fiscal 2005 from $37.6 million in the prior year period due to heavymaintenance and costs incurred to continue to maintain the fleet as it ages.  

 

Aircraft rents decreased 4.9% to $49.7 million in fiscal 2005 from $52.3in the prior year period due to the return of six Saab aircraft to the leasingcompany, the permanent reduction of one RJ85 year-over-year and the temporaryparking of five RJ85s that were returned to service in the first quarter of fiscal2005.

 

Landing fees remained relatively constant period-over-period due to areduction in Saab departures offset by increased rates.  Northwest is responsible for landing fees forMesaba’s RJ85 operations.

 

Insurance and taxes decreased 26.1% to $3.8 million in fiscal 2005 from$5.1 million in the prior year period due primarily to fewer aircraft, therecognition of favorable property tax credits and lower insurance rates.

 

15

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Depreciation and amortization decreased 20.7% to $6.7 million in fiscal2005 compared to $8.4 million in the prior year period due primarily to reducedcapital spending over the last several years. The reduction is because fewer capital expenditures are required tomaintain the fleet versus investing in the infrastructure to grow the fleet inprevious years.

 

Administrative and other expenses decreased 0.4% to $26.7 million infiscal 2005 compared to $26.8 million in the prior year period primarily due toreduced pilot training costs and legal fees, which was offset by increased groundhandling costs and the fiscal 2004 temporary suspension of TSA security costs.

 

***Big Sky***

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

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Passengers                           |       | 43,362   |       | 57,932   |       |
| Available seat miles (000’s)    |       | 31,340   |       | 42,007   |       |
| Revenue passenger miles (000’s) |       | 11,093   |       | 14,923   |       |
| Load factor                          |       | 35.4     | %          | 35.5     | %          |
| Departures                           |       | 10,115   |       | 13,098   |       |
| Revenue per ASM                      |       | $        | 0.241      |     | $          | 0.206 |   |
| Cost per ASM                         |       | $        | 0.298      |     | $          | 0.234 |   |
| Aircraft in service (average)        |       | 12       |       | 13       |       |

 

 

Big Sky Operating Revenues  Total operating revenues decreased 12.6% to $7.6million in fiscal 2005 from $8.7 million in the prior year period due to a reductionin unprofitable flying.

 

Big Sky Operating Expenses  Total operating expenses decreased 5.0% infiscal 2005 to $9.3 million from $9.8 million in the prior year period due to adecrease in variable costs related to the reduction in operations, partially offsetby increased fuel costs. 

 

***Consolidated***

Nonoperating Income (Expense)  Nonoperating income decreased to $0.9 millionin fiscal 2005 from $3.3 million in the prior year period primarily due to thereceipt of $2.6 million in fiscal 2004 related to government reimbursements ofsecurity costs under the Emergency Wartime Supplemental Appropriations Act,which was partially offset in fiscal 2005 by increased interest income, as aresult of the investment of additional funds.

 

Provision for Income Taxes  The Company’s effective tax rate was 30.6% infiscal 2005 as compared to 48.2% in fiscal 2004.  During the first quarter of fiscal 2005, theCompany received verification of a final settlement with the Internal RevenueService (“IRS”) concerning the IRS’ examination of the Company’s fiscal 1995and 1996 income tax returns.  As a resultof this settlement, the Company reduced its income tax payable and taxprovision by $1.2 million in the first quarter of fiscal 2005.  Without this one-time adjustment, theCompany’s effective tax rate would have been 41.4%.  The Company adjusts its effective tax ratequarterly based on forecasted operating results for the fiscal year.  The rate is affected principally by the level of nondeductible expensesrelative to projected taxable income.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash, cash equivalents andinvestments increased 3.9% to $166.2 million at September 30, 2004 from $159.9 millionat March 31, 2004.  The Company's workingcapital increased to $109.1 million with a current ratio of 2.5 at September 30,2004 compared to $99.7 million and 2.3 at March 31, 2004.  

 

Investments consist principallyof municipal securities and are classified as available-for-sale.  Fair value of investments is determined basedon quoted market prices.  Available-for-saleinvestments are reported at fair value with unrealized gains and lossesexcluded from operations and reported as a separate component of shareholders'equity, except for other-than-temporary impairments, which are reported as acharge to current operations and result in a new cost basis for theinvestment.  The Company classifiesinvestments with an original maturity date of less than 90 days as cashequivalents.  Investments 

 

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with an original maturity dateof more than 90 days that mature within one year are classified as short-term investmentsand greater than one year as long-term investments.

 

Approximately $27.0 million or 85.7%of the Company's accounts receivable balance as of September 30, 2004 was duefrom Northwest.  Cancellation of theAirlink or Jet Agreements or Northwest's failure to make timely payment of amountsowed to Mesaba or to otherwise materially perform under the Airlink or JetAgreements for any reason would have a material adverse effect on Mesaba and theCompany's operations, financial position and cash flows. 

 

As of September 30, 2004, Mesaba'sfleet consisted of 99 aircraft covered under operating leases with remainingterms of up to 12 years and aggregate monthly lease payments of approximately$8.7 million.  Mesaba leases or subleasesits Saab aircraft, either directly from aircraft leasing companies or through PinnacleAirlines Corp. under operating leases with initial terms of up to seven yearsor through subleases with Northwest under operating leases with initial termsof up to 17 years.  Mesaba leases itsRJ85 aircraft from Northwest under operating leases with initial terms of up to10 years.  There is no reason to believethat Mesaba’s revenues from the Airlink and Jet Agreements will not continue tobe sufficient to fund its aircraft lease obligations.  If the Airlink Agreement terminates, then theSaab aircraft leases will simultaneously terminate.  Likewise, if the Jet Agreement terminates,then the RJ85 aircraft leases will simultaneously terminate.  

 

As of September 30, 2004, Big Sky's fleetconsisted of 12 aircraft covered under operating leases with remaining terms oftwo months to 29 months and aggregate monthly lease payments of approximately$0.2 million.  Big Sky leases 11 of itsaircraft from leasing companies and one aircraft from a municipality underoperating leases with initial terms of up to six years.  Five of the leases allow Big Sky to returnthe aircraft to the lessor upon the occurrence of certain events and containpurchase options.  Funding of the monthlyminimum lease payments is dependent on continued passenger boardings andultimately Big Sky’s operations.  AtSeptember 30, 2004, three Metro 23 aircraft were pending sale by the lessor.  Big Sky has agreed to early leaseterminations to facilitate this transaction. One sale became final during October 2004 and the remaining two areexpected to be finalized in November 2004.

 

The Company’s airline fleetoperating leases do not contain any guaranteed lease residual provisions forwhich there would be a potential contingency at the termination of the leaseperiod.  

 

The Company has historicallyrelied on cash and cash equivalents, investments and internally generated fundsto support its working capital requirements. Absent adverse factors outside the control of the Company, managementbelieves current liquidity and funds from operations will be adequate resourcesfor meeting current operations and non-aircraft capital needs for the remainderof fiscal 2005.

 

Cash and cash equivalents increased6.8% to $58.3 million at September 30, 2004 from $54.6 million at March 31,2004.  A summary of cash flow activity isas follows:

 

*Operating Activities*

Net cash provided by operationsfor the six months ended September 30, 2004 was $12.0 million.  The primary sources of cash were fromoperations, which generated $7.7 million of net income and $6.6 million ofnon-cash items, primarily depreciation and amortization.  The primary use of cash was $2.3 million ofnet payments for current operating items.

 

*Investing Activities*

Net cash used by investing forthe six months ended September 30, 2004 was $8.9 million.  Cash that was generated from operations andcash on hand were the sources for investing activities.  The investing activities were net purchasesof short and long-term investments of $3.8 million and purchases of property, plantand equipment of $5.1 million.

 

*Financing Activities*

Net cash provided by financing forthe six months ended September 30, 2004 was $0.6 million.  This was primarily due to the issuance ofCompany common stock upon the exercise of stock options.

* *

OUTLOOK

For the remainder of fiscal 2005, the Companyestimates year-over-year ASMs at Mesaba will be up 4% in the third quarter and15% in the fourth quarter.  The projectedincrease year-over-year for the fourth fiscal quarter is due to Mesaba beingshut down for two days in January 2004 during final pilot contract negotiationsand five RJ85s temporarily removed from scheduled service during the fourthquarter of fiscal 2004.  

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of theCompany's consolidated financial statements in conformity with generallyaccepted accounting principles requires the use of estimates, judgments andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the consolidated financial statements, revenues and expenses duringthe reporting period and related disclosures of contingent assets andliabilities in the consolidated financial statements and the accompanyingnotes.  The SEC has defined a company'smost critical accounting policies as the ones that are most important to theportrayal of the company's financial condition and results, and which requirethe company to make its most difficult and subjective judgments, often as aresult of the need to make estimates of matters that are inherentlyuncertain.  Based on this definition, theCompany has identified its critical accounting policies to include thosediscussed in the following paragraphs. The Company also has other key accounting policies, which involve theuse of estimates, judgments and assumptions. See Note 2 “Summary of Significant Accounting Policies” in the Notes tothe Consolidated Financial Statements, included in the Company’s Annual Reporton Form 10-K filed with the SEC for the year ended March 31, 2004, foradditional discussion of these items.  

 

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

 

*Aircraft Property and Equipment*—Estimated lives are usedto record depreciation on aircraft property and equipment.  Aircraft utilization, Airlink and JetAgreement contractual lives, technology and changes in business strategy mayaffect the economic lives used to record depreciation by Mesaba or BigSky.  The foregoing may also affectdepreciation rates, impairment or both. Management of Mesaba and Big Sky regularly review the estimated usefullives and salvage values for aircraft property and equipment. 

 

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

 

*Aircraft Maintenance*—Estimated maintenance costs and anticipatedaircraft activity are used to determine maintenance reserves.  Changes in maintenance contracts, parts andlabor costs and aircraft activity may affect the maintenance reserves.  Management of Mesaba and Big Sky regularlyreview airplane activity, expected aircraft return dates, changes in itsmaintenance contracts and parts and labor costs for maintenance reserves. 

 

*Goodwill and Other Intangible Assets*—The excess of the Big Sky purchase price over the fair market value ofthe net assets acquired was allocated to certain identifiable intangibleassets, including Big Sky’s pilot labor contract and its air carriercertificate and goodwill.  Goodwilland other intangible assets are evaluated for impairment annually, at aminimum, or on an interim basis if events or circumstances indicate a possibleinability to realize the carrying amounts. The evaluation includes future cash flow projections, strategic modelingand other management assumptions.  Duringthe fourth quarter of fiscal 2004, the Company completed its annual impairmenttest of goodwill and other intangible assets and determined that no impairmentcharge was necessary.  The Companycontinues to monitor goodwill and the intangible assets at Big Sky forimpairment, particularly in light of its recent operating performance.

 

*Income Taxes*—TheCompany’s effective tax rate is based on expected income, statutory tax ratesand tax planning opportunities available in the various jurisdictions in whichthe Company operates.  In the event thatthere is a significant unusual or one-time item recognized, or expected to berecognized, in the Company’s operating results, the tax attributable to thatitem is separately calculated andrecorded at the same time as the unusual or one-time item.  Significant judgment is required indetermining the Company’s effective tax rate and in evaluating its taxpositions.  The Company establishesreserves when, despite its belief that the tax return positions are fullysupportable, certain positions are likely to be challenged and that it may notsucceed.  The Company adjusts thesereserves in light of changing facts and circumstances, such as the closing of atax audit.  The effective tax rateincludes the impact of reserve provisions and changes to reserves that areconsidered appropriate, as well as related interest.  This rate is then applied to the Company’squarterly operating results. 

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In October 2004, the FASB reached a tentativeconclusion on SFAS 123(R), “Share-BasedPayment”, which would require all public companies accounting forshare-based payment transactions to account for these types of transactionsusing a fair-value-based method.  SFAS 123(R)would eliminate the ability to account for share-based compensationtransactions using 

 

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APB Opinion No. 25.  SFAS 123(R) also requires the taxbenefits associated with these shared based payments be classified as financingactivities in the statement of cash flows rather than operating activities asis currently permitted.  SFAS 123(R)becomes effective for interim or annual periods beginning after June 15,2005.  SFAS 123(R) offersalternative methods of adopting this final rule.  The Company has not yet determined whichmethod it will use nor has it determined the financial statement impact.

 

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensuson Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and ItsApplication to Certain Investments” regarding disclosure about unrealizedlosses on available for sale debt and equity securities accounted for under SFASNo. 115 “Accounting for Certain Investments in Debt and EquitySecurities”.  The guidance for evaluatingwhether an investment is other than temporarily impaired should be applied insuch evaluations made in reporting periods beginning after June 15, 2004.  The recognition and measurement guidance hasbeen delayed and the disclosure guidance remains in effect.  The Company does not expect theimplementation of EITF 03-1 to have a material effect on its consolidatedfinancial statements.

 

 

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

 

The Company’s principal market risksare the availability and price of jet fuel and changes in interest rates.

 

Mesaba and Big Sky have notexperienced difficulties with fuel availability.  As a part of the Airlink Agreement, Northwestbears the economic risk of fuel price fluctuations for Mesaba’s fuelrequirements.  As part of the JetAgreement, Northwest provides all fuel at its expense to support Mesaba’s jetoperations.  Big Sky is subject tofluctuations in fuel prices, but currently fuel expense is not a material costin relation to the Company’s total operating expenses.  The Company expects that its results ofoperations will not be materially affected by fuel price volatility.

 

The Company’s investment policyrequires purchasing investments in high credit quality issuers and limits theamount of credit exposure to any one issuer. The Company’s investments principally consist of municipal securitieswith varying maturity dates, all of which are two years or less.  Because of the credit criteria within theCompany’s investment policies, the primary market risk associated with theseinvestments is interest rate risk.  TheCompany does not use derivative financial instruments to manage interest raterisk or to speculate on future changes in interest rates.

 

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

*Evaluation of Disclosure Controls and Procedures*

As of the end of the period covered by this report, the Companyconducted an evaluation under the supervision and with the participation of theCompany's management, including the Company's Chief Executive Officer and ChiefFinancial Officer, regarding the effectiveness of the design and operation ofthe Company's disclosure controls and procedures pursuant to Rules 13a-15(b) ofthe Securities Exchange Act of 1934 (the "Exchange Act").  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company'sdisclosure controls and procedures are effective to ensure that informationthat is required to be disclosed by the Company in reports that it files underthe Exchange Act is recorded, processed, summarized and reported within thetime period specified in the rules of the Securities Exchange Commission.

 

*Changes in Internal Controls*

There were no changes in the Company's internal control over financialreporting that occurred during the period covered by this report that havematerially affected, or are reasonably likely to materially affect, theCompany's internal control over financial reporting. 

 

 

**Part II. OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

On October 4, 2002,Fairbrook Leasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB(“Saab”) filed a declaratory judgment action against Mesaba relating to 20 Saab340A aircraft leased by Mesaba.  Saab soughta judicial declaration that the terms of the leases applicable to each of the340A aircraft are governed by a March 7, 1996 term sheet proposal rather thanthe short-term leases subsequently executed by the parties.  The case was brought in the United StatesDistrict Court for the District of Minnesota (“District Court”).  On December 8, 2003, the District Courtissued an order

 

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declaring that the termsheet proposal constitutes a binding contract that required Mesaba to executeor negotiate in good faith toward the execution of long-term leases on each ofthe 340A aircraft.  The District Courtconcluded that the term sheet proposal is ambiguous with respect to whetherlease extensions contemplated by that document are at Mesaba’s option or Saab’soption.  Mesaba has appealed the DistrictCourt’s summary judgment ruling.  OnAugust 13, 2004, Saab filed a complaint in the District Court alleging damagesin the form of aircraft lease payments they contend are due or will become duebased upon the District Court’s summary judgment ruling in the declaratoryjudgment action.  Saab allegesapproximately $35 million in past due and future aircraft leaseobligations.  Mesaba denies theallegations in Saab’s complaint and contends that it has fulfilled and willcontinue to fulfill its existing lease obligations.  The ultimate outcome of this dispute cannotbe predicted with certainty.

 

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

The Company filed with the SECa definitive proxy statement dated July 15, 2004 in connection with its annualmeeting of shareholders held on August 18, 2004.  At the annual meeting, the Company’sshareholders elected the following persons as Class One directors, each for aterm of three years:

 
| ** **           | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|---------------|------------|--------------------|------------|
| Pierson M. Grieve    |       | 19,273,365    |       | 575,120            |       |
| Raymond W. Zehr, Jr. |       | 19,275,101    |       | 573,384            |       |

 

The Company’s shareholders alsoratified the appointment of Deloitte & Touche LLP as the Company’sindependent registered public accounting firm for the fiscal year ending March31, 2005 with 19,426,042 votes “for”, 414,390 votes “against” and 8,053abstentions.  There were no brokernon-votes.

 

 

**ITEM 6.  EXHIBITS**

 
| 3A  | Restated  Articles of Incorporation. Incorporated by reference to Exhibit 4.1 to the Company’s  Form 8-K filed August 27, 2003.                                                                                                                                                                                                                                                     |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3C  | Bylaws.  Incorporated by reference to Exhibit 3.2 to the Form S-4, Registration No.  333-22977.                                                                                                                                                                                                                                                                                          |
| 4A  | Specimen  certificate for shares of the Common Stock of the Company. Incorporated by  reference to Exhibit 4.2 to the Company’s Form 8-K filed August 27, 2003.                                                                                                                                                                                                                     |
| 4B  | Common Stock  Purchase Warrant dated October 25, 1996 issued to Northwest Airlines, Inc.  Incorporated by reference to Exhibit 4A to the Company’s 10-Q for the quarter  ended September 30, 1996.                                                                                                                                                                                  |
| 4C  | Common Stock  Purchase Warrant dated October 17, 1997 issued to Northwest Airlines, Inc.  Incorporated by reference to Exhibit 4A to the Company’s 10-Q for the quarter  ended September 30, 1997.                                                                                                                                                                                  |
| 9A  | Shareholder’s  Agreement regarding election of representative of Northwest Aircraft Inc. to  Board of Directors. Incorporated by reference to Exhibit 9A to Mesaba’s  Registration Statement on Form S-1, Registration No. 33-820.                                                                                                                                             |
| 10A | FAA Air  Carrier Operating Certificate. Incorporated by reference Exhibit 10A to  Mesaba’s Form 10-K for the year ended March 31, 1989.                                                                                                                                                                                                                                             |
| 10B | CAB Part 298  Registration. Incorporated by reference to Exhibit 10G to Mesaba’s Form 10-K  for the year ended March 31, 1987.                                                                                                                                                                                                                                                      |
| 10C | Airline  Services Agreement between Mesaba Aviation, Mesaba Holdings, Inc. and Northwest  Airlines, Inc. dated July 1, 1997 (certain potions of this agreement are  subject to an order granting confidential treatment pursuant to Rule 24b-2).  Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q for the  quarter ended September 30, 1997.                    |
| 10D | Regional Jet  Services Agreement between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and  Northwest Airlines, Inc., dated October 25, 1996 (certain provisions of this  agreement are subject to an order granting confidential treatment pursuant to  Rule 24b-2). Incorporated by reference to Exhibit 10A to the Company’s Form  10-Q for the quarter ended September 30, 1996. |
| 10E | Foreign Air  Carrier Operating Certificates issued May 6, 1991 by the Canadian Department  of Transport. Incorporated by reference to Exhibit 10H to the Company’s Form  10-K for the year ended March 31, 1991.                                                                                                                                                                    |

 

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| 10F | Special  Facilities Lease dated as of August 1, 1990 between Charter County of Wayne,  State of Michigan and Mesaba Aviation, Inc. Incorporated by reference to  Exhibit 10B to the Company’s Form 10-Q for the quarter ended September 30,  1990.                                                                                                                                                   |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10G | Ground Lease  dated August 1, 1990 between Charter County of Wayne, State of Michigan and  Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10C to the  Company’s Form 10-Q for the quarter ended September 30,1990.                                                                                                                                                                       |
| 10H | Letter  Agreement dated December 24, 1992 relating to the repurchase of shares of  Common Stock from Northwest Aircraft, Inc. Incorporated by reference to  Exhibit 10EE to the Company’s Form 10-K for the year ended March 31, 1993.                                                                                                                                                               |
| 10I | DOT  Certificate of Public Convenience and Necessity dated October 26, 1992.  Incorporated by reference to Exhibit 10FF of the Company’s Form 10-K for the  year ended March 31, 1993.                                                                                                                                                                                                               |
| 10J | Stock  Purchase Agreement between the Company and Carl R. Pohlad dated as of October  18, 1993. Incorporated by reference to Exhibit 10 of the Company’s Form 8-K  dated October 19, 1993.                                                                                                                                                                                                           |
| 10K | Term Sheet  Proposal for the Acquisition of Saab 340 Aircraft by Mesaba Aviation, Inc.  dated March 7, 1996 (certain portions of this document have been deleted  pursuant to an application for confidential treatment under Rule 24b-2).  Incorporated by reference to Exhibit 10U to the Company’s Form 10-K/A for the  year ended March 31, 1996.                                                |
| 10L | Letter  Agreement regarding Saab 340B Plus Acquisition Financing dated March 7, 1996  (certain portions of this document have been deleted pursuant to an  application for confidential treatment under Rule 24b-2). Incorporated by  reference to Exhibit 10V to the Company’s Form 10-K/A for the year ended  March 31, 1996.                                                                      |
| 10M | Letter  Agreement of October 25, 1996 relating to Regional Jet Services Agreement  between Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions  of this document have been deleted pursuant to an application for  confidential treatment under Rule 24b-2). Incorporated by reference to  Exhibit 10A to the Company’s Form 10-Q/A for the quarter ended September 30,  1996.      |
| 10N | Amendment  No. 1 to Regional Jet Services Agreement dated April 1, 1998 between Mesaba  Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain  portions of this document have been deleted pursuant to an application for  confidential treatment under rule 24b-2). Incorporated by reference to  Exhibit 10A to the Company’s Form 10-Q for the quarter ended June 30, 1998. |
| 10O | Amendment  No. 2 to Regional Jet Services Agreement dated June 2, 1998 between Mesaba  Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain  portions of this document have been deleted pursuant to an application for  confidential treatment under rule 24b-2). Incorporated by reference to  Exhibit 10B to the Company’s Form 10-Q for the quarter ended June 30, 1998.  |
| 10P | Lease  Agreement, dated as of July 1, 1999, between Kenton County Airport Board and  Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10AA to the  Company’s Form 10-K for the year ended March 31, 2000.                                                                                                                                                                                  |
| 10Q | Ground  Lease, dated as of September 1, 1999, between Kenton County Airport Board and  Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10BB to the  Company’s Form 10-K for the year ended March 31, 2000.                                                                                                                                                                                |
| 10R | Letter  Agreement, dated November 20, 2001, between Mesaba Holdings, Inc., Mesaba  Aviation, Inc. and Northwest Airlines, Inc. relating to service expansion and  rate reductions. Incorporated by reference to the Company’s Form 8-K filed  November 23, 2001.                                                                                                                                     |
| 10S | Agreement  and Plan of Merger among Mesaba Holdings, Inc. Ranger Acquisition Corp. and  Big Sky Transportation Co. dated September 26, 2002. Incorporated by  reference to the Company’s Form 8-K filed September 27, 2002.                                                                                                                                                                          |
| 10T | Aircraft  Hangar Facility Lease Agreement between Metropolitan Airports Commission  Minneapolis - St. Paul and Mesaba Aviation, Inc. dated September 30, 2002.  Incorporated by reference to Exhibit 10Y to the Company’s Form 10-Q filed  August 14, 2003.                                                                                                                                          |
| 10U | Lease  between Spectrum Investment Group, L.L.C. and Mesaba Aviation, Inc. entered  into as of April 25, 2003. Incorporated by reference to Exhibit 10Z to the  Company’s Form 10-Q filed August 14, 2003.                                                                                                                                                                                           |
| 10V | Amendment to  Regional Jet Services Agreement, dated October 7, 2003. Incorporated by  reference to Exhibit 10.1 to the Company’s Form 8-K/A filed October 9, 2003.                                                                                                                                                                                                                                  |
| 10W | Amendment to  Regional Jet Services Agreement, dated December 15, 2003. Incorporated by  reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 15,  2003.                                                                                                                                                                                                                            |
| 10X | Amendment to  Regional Jet Services Agreement, dated February 2, 2004. Incorporated by  reference to Exhibit 10.1 to the Company’s Form 8-K filed February 3, 2004.                                                                                                                                                                                                                                  |
| 10Y | Management  Compensation Agreement, executed October 21, 2004, by and between MAIR  Holdings, Inc. and Paul F. Foley. Incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K filed October 22, 2004.                                                                                                                                                                                   |

 

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| 21   | Subsidiaries.  Incorporated by reference to Exhibit 21 to the Company’s Form 10-Q for the  quarter ended December 31, 2002. |
|------|----------------------------------------------------------------------------------------------------------------------------------|
| 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   | Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.                                        |

 

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SIGNATURES

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf of the undersigned, thereunto duly authorized.

 
|                      | MAIR Holdings,  Inc.                                       |
|---------------------------|------------------------------------------------------------|
|                      |                                                       |
| Dated:  November 15, 2004 | By:                                                        | /s/ Robert  E. Weil |
|                      | Robert E.  Weil                                            |
|                      | Vice  President, Chief Financial Officer and Treasurer     |
|                      | (principal  financial officer and an authorized signatory) |

 

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EXHIBIT INDEX

 
| 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. Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.                           |

 

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