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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.

For the fiscal year ended December 31, 2001
-----------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.


For the transition period from to
-------------------- --------------------

Commission file number 1-13934
-----------------------

MIDWEST EXPRESS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Wisconsin 39-1828757
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

6744 South Howell Avenue
Oak Creek, Wisconsin 53154
(Address of Principal executive offices)
(Zip code)

414-570-4000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, $.01 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
- ------------------------------- ---------------------------------------
(Title of class) (Names of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None
----------------
(Title of class)

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

Yes X No
--------- --------

Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]

Aggregate market value of voting and nonvoting common equity held by
nonaffiliates as of March 8, 2002: $266.9 million. As of March 8, 2002 there
were 13,831,796 shares of Common Stock, $.01 par value, of the registrant
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for registrant's Annual Meeting of
Shareholders to be held on April 24, 2002 are incorporated by reference in Part
III Items 10, 11 and 12.





MIDWEST EXPRESS HOLDINGS, INC.
FORM 10-K
For the fiscal year ended December 31, 2001

TABLE OF CONTENTS


PART I Page

Item 1. Business 1

Item 2. Properties 11

Item 3. Legal Proceedings 13

Item 4. Submission of Matters to a Vote of Security Holders 13

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 14

Item 6. Selected Financial Data 15

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17

Item 7A. Quantitative and Qualitative Disclosures about Market Risk 30

Item 8. Financial Statements and Supplementary Data 30

Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 57

PART III

Item 10. Directors and Executive Officers of the Registrant 58

Item 11. Executive Compensation 58

Item 12. Security Ownership of Certain Beneficial Owners and
Management 58

Item 13. Certain Relationships and Related Transactions 58

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 58

SIGNATURES 59

EXHIBIT INDEX 60






PART I

Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements that may
state the Company's or management's intentions, hopes, beliefs, expectations or
predictions for the future. Statements containing words such as "expect,"
"anticipate," "believe," "estimate," "goal," "objective" or similar words are
intended to identify forward-looking statements. It is important to note that
the Company's actual results could differ materially from those projected
results due to factors that include but are not limited to uncertainties related
to general economic factors, industry conditions, scheduling developments,
government regulations, labor relations, aircraft maintenance and refurbishment
schedules, potential delays related to acquired aircraft, fuel costs,
competitive developments, interest rates, the meeting of certain financial
covenants, potential aircraft incidents, terrorist attacks or fear of terrorist
attacks, and other world events. Additional information concerning factors that
could cause actual results to differ materially from those in the
forward-looking statements is contained from time to time in the Company's SEC
filings, including but not limited to the Company's prospectus dated May 23,
1996 included in the Registration Statement on Form S-1 No. 333-03325.


ITEM 1. BUSINESS

Background

Midwest Express Holdings, Inc. was reincorporated under the laws of the State of
Wisconsin in 1996. Midwest Express Holdings, Inc. is a holding company and its
principal subsidiary is Midwest Express Airlines, Inc. ("Midwest Express").

Midwest Express operates a single-class, premium service passenger jet airline
that caters to business travelers and serves major destinations throughout the
United States from Milwaukee, Wisconsin; Omaha, Nebraska; and Kansas City,
Missouri.

Midwest Express evolved out of Kimberly-Clark Corporation's ("Kimberly-Clark")
desire to provide a convenient and cost-effective way to meet its internal
transportation needs. Kimberly-Clark began daily, nonstop aircraft shuttle
service in October 1982 for its employees traveling between offices in two
cities. Key management personnel from Kimberly-Clark who successfully operated
the shuttle service became the senior management of Midwest Express.

Midwest Express began commercial operations in June 1984 with two DC-9-10
aircraft, serving three destinations from Milwaukee's General Mitchell
International Airport. Milwaukee, as Midwest Express' original base of
operations, has been the main focus of its route structure. Midwest Express
established Omaha as its second base of operations in May 1994, and established
Kansas City as its third base of operations in September 2000.

Astral Aviation, Inc. ("Astral"), a wholly owned subsidiary of Midwest Express,
d/b/a Skyway Airlines, The Midwest Express Connection, began operations in early
1994 by taking over routes that Mesa Airlines, Inc. ("Mesa") had operated as a
commuter feed system under a marketing agreement between Mesa and Midwest
Express. Under the agreement, Mesa operated the system beginning in 1989 as
"Skyway Airlines" using Midwest Express' airline code.

On September 27, 1995, the stock of Midwest Express was transferred to Midwest
Express Holdings, Inc. in connection with the initial public offering
("Offering") by Kimberly-Clark of shares of common stock of Midwest Express
Holdings, Inc. Following the Offering, Kimberly-Clark retained 20% of the shares
of outstanding common stock of the Company, which it subsequently sold in a
secondary public offering consummated on May 23, 1996. As used herein, unless
the context otherwise requires, the "Company" refers to Midwest Express
Holdings, Inc. and its respective predecessors, including Midwest Express
Airlines, Inc. when operated as a subsidiary of Kimberly-Clark.

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Corporate Structure

The Company and Midwest Express have their principal executive offices in Oak
Creek, Wisconsin. Both entities are Wisconsin corporations. As described above,
Midwest Express has one operating airline subsidiary, Astral. In addition to
Astral, Midwest Express has the following subsidiaries:

o Midwest Express Services - Omaha, Inc., a Nebraska corporation, was
established as a profit center to better track revenues and costs
generated at the Omaha station. Revenue is generated from aircraft
turn costs charged to Midwest Express and Astral, and from aircraft
ground handling and freight handling contracts for other airlines in
Omaha.

o YX Properties, LLC, is a wholly owned subsidiary of Midwest Express
Services - Omaha, Inc. This Nebraska limited liability company owns
all of the intellectual and intangible property of Midwest Express and
Astral, such as airport slots, trademarks and certain proprietary
training material and copyrights. YX Properties licenses this
intellectual and intangible property to Midwest Express and Astral.
These airport slots, trademarks, copyrights and other intellectual
property rights are important to the business, but no single airport
slot, trademark, copyright or other intellectual property right is
material to the business as a whole.

o Midwest Express Services - Kansas City, Inc., a Missouri corporation,
was established as a profit center to better track revenues and costs
generated at the Kansas City station. Revenue is generated from
aircraft turn costs charged to Midwest Express and Astral and from
airport ground handling contracts for other airlines in Kansas City.

Route Structure and Scheduling

Bases of Operation

Midwest Express currently has three bases of operations - Milwaukee, Omaha and
Kansas City. As of December 31, 2001, Midwest Express served 26 cities and was
the only carrier providing nonstop service between Milwaukee and more than 75%
of its core jet routes. Although nine other jet airlines serve Milwaukee's
airport, these carriers generally provide nonstop flights only between Milwaukee
and their respective hubs.

From Omaha, Midwest Express provides nonstop service to Milwaukee, Kansas City,
Newark, Ronald Reagan Washington National ("Washington National") and Orlando
(weekends). Passengers in Omaha can travel to most other cities in the Midwest
Express and Astral route systems via connections in Milwaukee. Although 10 other
jet airlines serve Omaha's airport, these carriers (other than Southwest
Airlines) generally provide nonstop flights only between Omaha and their
respective hubs.

From Kansas City, Midwest Express provides nonstop service to Milwaukee,
Atlanta, Boston, Des Moines, New Orleans, New York La Guardia, Omaha, San
Antonio, Washington Dulles International ("Washington Dulles") and Washington
National. Passengers in Kansas City can travel to most other cities throughout
the route systems of Midwest Express and Astral via connections through
Milwaukee. Twelve other jet airlines serve Kansas City's airport.

Astral Operations

Although Astral's operation is independent from Midwest Express - including
separate pilot, flight attendant, aircraft maintenance and customer service
personnel - Midwest Express coordinates Astral's routes and schedules to
complement Midwest Express service by providing passengers on short-haul,
low-density routes the ability to connect to Midwest Express flights in
Milwaukee without switching carrier systems. To enhance aircraft utilization and
profitability, Astral also seeks to identify short-haul, low-density,
point-to-point routes where there is likely to be consistent demand for air
service even though there is no Milwaukee connection. As of December 31, 2001,
Astral offered flights in 27 markets.

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Shortly after the terrorist attacks of September 11, the Company changed from
DC-9 jet service to 32-seat regional jet service on some flights serving
Appleton, Madison, Hartford and Raleigh-Durham, which allowed for the
continuation of jet service with significantly reduced passenger loads. In first
quarter 2002, three of the four cities reverted back primarily to DC-9 jet
service, while Raleigh-Durham continues to be operated by Astral.

Business Environment

The terrorist attacks of September 11 had a significant adverse impact on the
operating environment of U.S. commercial aviation. Additional terrorist attacks,
or fear of terrorist attacks, even if not made directly on the Company or the
airline industry, may have a significant adverse impact on the Company. Changes
related to terrorism that impact the Company's business include: added operating
and airport security regulations, other additional regulatory requirements,
increased insurance costs, restrictive capital and lending markets, and changes
in the competitive landscape. The Company continues to assimilate the new
requirements in the impacted areas of the business, but the basic nature of the
Company's business and product remains the same.

Customer Service

Overall

Midwest Express caters primarily to business travelers and higher yield leisure
travelers by providing a travel experience that includes both premium tangible
amenities and a higher level of customer service at competitive fares. The
tangible amenities include two-across wide leather seats, quality food served on
china, complimentary wine or champagne, and baked-onboard chocolate chip cookies
on select flights. The service includes personal attention by Midwest Express
employees at each phase of the travel experience. Midwest Express has
consistently been recognized as the best U.S. airline by travel publications and
frequent flyer surveys, including Conde Nast Traveler and the Zagat Airline
Survey.

Premium Seating

Each Midwest Express aircraft is configured with two leather-covered seats on
each side of the aisle that are larger than coach seats on most other airlines
(21 inches wide at the seat cushion, compared to standard coach seats that are
17 to 18 inches wide). The pitch between seats is 33 to 34 inches, compared to
standard coach pitch, which averages about 31 inches. There are no middle seats.
The number of seats in each aircraft is about 20% less than the number of seats
that major airlines typically install in the same type of aircraft.

Dining Services

Onboard meal service is a key part of the Company's strategy and brand
definition. Meal service is offered on most Midwest Express flights and on
select Astral regional jet flights. The high quality of Midwest Express cuisine
has been recognized repeatedly in customer surveys. Midwest Express offers
complimentary champagne on breakfast flights and complimentary wine on other
flights. Midwest Express spends more than twice as much per revenue passenger
meal than the industry average for major carriers.

Fare Pricing and Revenue Management

Airlines generally offer a range of fares that are distinguished by restrictions
on use, such as the time of day and day of the week, length of stay, and minimum
advance booking period. Midwest Express and Astral generally offer the same
range of fares that their competitors offer, although there are exceptions in
particular markets, where Midwest Express will discount certain categories of
fares or charge a premium compared to its competitors.

The number of seats an airline offers in each fare category is also an important
factor in pricing. Midwest Express monitors the inventory and pricing of
available seats with a computer-assisted revenue management system. The

3


system enables Midwest Express' revenue management analysts to examine Midwest
Express and Astral's historical demand, and increases the analysts' opportunity
to establish the optimal allocation of the number of seats made available for
sale at various fares. The analysts then monitor each flight to adjust seat
allocations and actual booking levels, with the objective of maximizing revenues
by optimizing the number of passengers and the fares paid on future flights.

Marketing

Travel Agency Relationships and Ticket Sales

During 2001 Midwest Express sold approximately 60% of its tickets through travel
agents compared to 75% in 2000. This decrease represents more ticket sales in
2001 than in 2000 from direct sales via the Company's reservation centers, Web
site and ticket counters. The Company has in place a per-transaction cap on
travel agent commissions; on September 21, 2001, it lowered these caps to $10
for a one-way ticket and $20 per roundtrip ticket. The caps are applied on a
base commission of 5% - a commission structure similar to that of most other
airlines.

The Company maintains its own reservations center at its headquarters in
Milwaukee and a second call center in Kansas City. Like many travel agencies,
the Company's reservation centers provide airline information, make reservations
and sell tickets for Midwest Express and Astral flights through a computer
reservation system . In first quarter 2002, the Company entered into a five-year
contract extension to use SABRE's computer reservation system.

Frequent Flyer Program

The Company operates a Frequent Flyer program (the "Frequent Flyer program")
under which mileage credits are earned by flying on Midwest Express, Astral or
other participating airlines (Frontier, Virgin Atlantic and Northwest) and by
using the services of participating hotels (Hilton, Hyatt, Loews, Radisson,
Raffles, Baymont, Swissotel and Wyndham), car rental firms (Avis, Hertz and
National), Sprint telecommunications, Midwest Express MasterCard(R) and other
program partners. Members can redeem Frequent Flyer program miles for travel on
Midwest Express or Astral, or other participating airlines. In addition to free
travel, miles can be redeemed at participating hotels, car rental firms and
other program partners. The program is designed to enhance customer loyalty, and
thereby retain and increase the business of frequent travelers by offering
incentives for their continued patronage. In addition to the Frequent Flyer
program, the Company also offers the Frequent Flyer Plus program, which provides
additional benefits and rewards to members flying at least 20,000 miles or 25
one-way trips in a calendar year.

The Company's Frequent Flyer program includes a marketing agreement whereby
members in Northwest Airlines' WorldPerks Frequent Flyer program and the Midwest
Express Frequent Flyer program maintain their separate accounts, but can redeem
award travel on either carrier. The Company also offers the Midwest Express
MasterCard Program in conjunction with Elan Financial Services ("Elan"). The
program allows Midwest Express to offer a co-branded credit card to induce
cardholders to become Frequent Flyers. The Company generates income by selling
Frequent Flyer program miles to Elan, which in turn awards the miles to
cardholders for purchases made with their credit cards. The Company has decided
to transition the co-branded credit card program to Juniper Bank in 2002.

Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), issued by the
Securities and Exchange Commission in December 1999. SAB 101 provides guidance
on the application of accounting principles generally accepted in the United
States of America to revenue recognition in financial statements. Prior to the
issuance of SAB 101, the Company recognized all revenue and accrued all
incremental costs from Frequent Flyer miles sold to partners when the mileage
was sold, which was consistent with most major airlines. Beginning January 1,
2000, as a result of adopting SAB 101, the Company changed its method used to
account for the sale of Frequent Flyer program mileage credits to participating
partners such as credit card companies, hotels and car rental agencies. Under
the new accounting method, a portion of the revenue from the sale of Frequent
Flyer program mileage credits is deferred and recognized when transportation is

4


provided to the passenger. The Company believes the new method appropriately
matches revenues with the period in which services are provided.

As of year-end 2001 and 2000, the Company had approximately 1,442,000 and
1,308,000 members enrolled in its Frequent Flyer program, respectively. The
Company estimates that as of December 31, 2001 and 2000, the total available
awards under the Frequent Flyer program were 161,000 and 143,000, respectively,
after eliminating those accounts below the minimum award level. Free travel
awards redeemed were approximately 74,000 and 61,000 during 2001 and 2000,
respectively. Free travel awards accounted for approximately 6% of the Company's
total revenue passenger miles during 2001. Because Midwest Express controls the
number of seats available for free travel on each flight, it does not believe
that the use of Frequent Flyer program awards results in a significant
displacement of revenue passengers.

Miles accrued in a member's account will expire unless there is qualifying
activity in the Frequent Flyer program account within a 36-month period.
Qualifying activity includes flights on Midwest Express and/or Astral, or
accrued mileage from any program partner activity during the previous 36-month
period. If the account does not remain active, the mileage expires and the
account is considered inactive.

The Company accounts for its Frequent Flyer program obligations for travel miles
on the accrual basis using the incremental cost method. This method requires
accrual of the average incremental cost to provide roundtrip transportation to
one additional passenger. The incremental cost includes the cost of meals,
commissary, reservations and insurance. The incremental cost does not include a
contribution to overhead, aircraft cost or profit. The accrual is based on
estimated redemption percentages applied to actual mileage recorded in members'
accounts. For purposes of calculating the Frequent Flyer program accrual, the
Company anticipates that approximately 72% of outstanding awards will be
redeemed.


Codesharing Agreements

In 2001, Midwest Express continued a one-year renewable codeshare agreement with
American Eagle that was originally established in 1998. Under the agreement,
Midwest Express provides passengers with jet service to Los Angeles, Dallas/Ft.
Worth and Boston. As of December 31, 2001, American Eagle provided passengers
with connecting service from Los Angeles to six cities in California, from
Dallas/Ft. Worth to 27 cities in the southern and south central United States,
and from Boston to eight cities in the northeast. Both the Midwest Express and
American Eagle segments are designated in computer reservation systems with the
Midwest Express airline code.

Effective March 2001, Midwest Express entered into a five-year codeshare
agreement with Air Midwest, Inc., a wholly owned subsidiary of Mesa Air Group,
to provide passengers connecting service between Kansas City and select
Midwestern cities. As of December 31, 2001, Midwest Express provided passengers
with jet service to Kansas City and Air Midwest provided passengers with
connecting service from Kansas City to 15 Midwestern cities. Both the Midwest
Express and Air Midwest segments are designated in the computer reservation
systems with the Midwest Express airline code.

Related Business

The Company also offers ancillary airline services directly to customers,
including freight services and aircraft charters. The freight business consists
of transporting cargo, United States mail and counter-to-counter packages on
regular passenger flights.

Midwest Express operates a DC-9-30 jet aircraft configured specifically for the
purpose of providing charter services; in addition, in third quarter 2001 an
MD-80 series aircraft was allocated for charter use. The primary customers of
aircraft charter services are athletic teams, business groups and tour
operators.

5

The Company also generates revenue from inflight sales, from providing aircraft
ground handling and aircraft maintenance services for other airlines, and from
miscellaneous other services.

Competition

The Company competes with other air carriers on all routes it serves. Many of
the Company's competitors have elaborate route structures that transport
passengers to their hub airports for transfer to many destinations, including
those served by Midwest Express and Astral. Some competitors offer flights from
cities served by Midwest Express to more than one of their hub airports,
permitting them to compete in the Company's markets by offering multiple
routings. For many markets that Midwest Express serves from Milwaukee, Omaha and
Kansas City, the competition does not provide nonstop service, but that
condition could change. In some markets, Midwest Express and Astral also compete
against ground transportation.

The Company competes by offering premium airline services at competitive fares.
The Company accomplishes this by (i) carefully selecting markets, (ii) seeking
to generate premium yields through its service-oriented philosophy and rigorous
yield management, and (iii) operating in a cost efficient manner with
comprehensive service. The Company believes its efforts to identify favorable
markets and provide premium nonstop service enable the Company to generate a
high degree of loyalty among its passengers and to attract a larger percentage
of business travelers on its flights than higher volume carriers.

The Company has the largest market share of passengers in Milwaukee. In 2001,
the Company carried 36% of the passengers boarded in Milwaukee, while Northwest
Airlines, which has the second-largest share, carried 19%. In 2001, Midwest
Express carried 6% of the passengers boarded in Omaha, compared with 19% carried
by United Airlines and 18% by Southwest Airlines - the carriers with the two
largest market shares in Omaha. In 2001, Midwest Express carried 4% of the
passengers boarded in Kansas City, compared with 30% carried by Southwest
Airlines and 10% by Delta - the carriers with the two largest market shares in
Kansas City.

In addition to traditional competition among domestic carriers, the industry may
be subject to new forms of competition in the future. The development of video
teleconferencing and other methods of electronic communication may add a new
dimension of competition to the industry as businesses look for lower-cost
alternatives to air travel. General economic conditions and the effects of
September 11 attacks may also increase competition from these sources.

Employees

As of December 31, 2001, Midwest Express had 2,593 employees (476 of whom were
part-time and 43 of whom were intermittents) and Astral had 592 employees (161
of whom were part-time). The categories of employees were as indicated in the
following table:

Employees as of December 31, 2001
---------------------------------
Employee Categories Midwest Express Astral
------------------- --------------- ------
Flight Operations 377 190
Inflight 368 45
Passenger Services 741 228
Maintenance 522 71
Reservations and Marketing 366 -
Accounting and Finance 92 5
Administrative 127 53
------ ----
Total 2,593 592
====== ====

The Company makes extensive use of part-time employees to increase operational
flexibility. Given the size of Midwest Express and Astral's fleet and flight
schedules, the Company does not have continuous operations at many locations.
The use of part-time employees enables the Company to schedule employees when
they are needed. Part-time employees are eligible for most of the Company's
benefits programs, subject to certain restrictions and co-pay

6


requirements, because doing so enables the Company to attract quality employees
and reinforces the value the Company places on part-time employees.

Labor Relations

Midwest Express pilots are represented by the Air Line Pilots Association
("ALPA"), a labor union, for representation in collective bargaining. In
February 2000, Midwest Express pilots ratified a five-year labor contract.

In April 1999, Midwest Express flight attendants elected the Association of
Flight Attendants ("AFA"), AFL-CIO, a labor union, for the purpose of
representation in collective bargaining. Negotiations began in January 2000. In
September 2000, AFA requested assistance from the National Mediation Board
("NMB"). In February 2002, AFA requested to be released from mediation by the
NMB. The NMB is currently evaluating AFA's request for a release and will meet
with both parties in late March 2002 and early April 2002 before deciding
whether to continue negotiations, proffer arbitration to both parties, or recess
the case without a release. If the NMB decides to proffer arbitration and either
side rejects binding arbitration, the parties will be released into a 30-day
cooling off period.

Astral's pilots are represented by ALPA for purposes of collective bargaining.
The current four-year contract expired in January 2002. The Company and ALPA are
currently in negotiations for a new contract. Regulation

General

The Department of Transportation ("DOT") has the authority to regulate economic
issues affecting air service including, among other things, air carrier
certification and fitness, insurance, deceptive and unfair competitive
practices, advertising, computer reservation systems, and other consumer
protection matters such as on-time performance, denied boarding and baggage
liability. It is also authorized to require reports from air carriers and to
inspect a carrier's books, records and property. The DOT has authority to
investigate and institute proceedings to enforce its economic regulations, and
may, in certain circumstances, assess civil penalties, revoke operating
authority and seek criminal sanctions.

In response to the terrorist attacks of September 11, 2001, Congress enacted the
Aviation and Transportation Security Act ("ATSA") of November 2001. ATSA created
the Transportation Security Administration, an agency within the DOT, to
oversee, among other things, aviation and airport security. The act provided for
the federalization of airport passenger, baggage, cargo, mail, employee and
vendor screening processes. The act also enhanced background checks, provided
federal air marshals aboard flights, improved flight deck security, enhanced
airline crew security training, improved training of security screening
personnel, and enhanced airport perimeter access, among other security measures.
The act also requires that all checked baggage be screened by explosive
detection systems by December 31, 2002. The Company is actively involved in the
industry's efforts to work with the DOT to ensure compliance with the act. This
act will result in increased costs, and may result in delays and service
disruption. Effective February 1, 2002, ATSA imposed a $2.50 per enplanement
security fee (subject to a $5.00 per one-way trip cap). This fee is collected by
air carriers and remitted to the government for payment for enhanced security.

The Federal Aviation Administration ("FAA") regulates the Company's aircraft
maintenance and operations, including flight operations, flight equipment,
aircraft noise, ground facilities, dispatch, communications, training, security,
weather observation, flight and duty time, crew qualifications, aircraft
registration and other matters affecting air safety. The FAA has the authority
to suspend temporarily or revoke permanently the authority of the Company or its
licensed personnel for failure to comply with regulations promulgated by the FAA
and to assess civil penalties for such failures.

The Company also is subject to regulation and/or oversight by federal agencies
other than the DOT and FAA. Antitrust laws are enforced by the U.S. Department
of Justice; labor relations are generally regulated by the Railway Labor Act,
which vests certain regulatory powers in the National Mediation Board with
respect to airlines and labor unions arising under collective bargaining
agreements; the use of radio facilities is regulated by the Federal

7



Communications Commission. Also, the Company is generally regulated by federal,
state and local laws relating to the protection of the environment and to the
discharge of materials into the environment. In addition, the Immigration and
Naturalization Service, the U.S. Customs Service, and the Animal and Plant
Health Inspection Service of the Department of Agriculture have jurisdiction
over inspection of the Company's aircraft, passengers and cargo to ensure the
Company's compliance with U.S. immigration, customs and import laws.

Maintenance

In compliance with FAA regulations, the Company's aircraft are subject to many
different levels of maintenance or "checks," and periodically go through
complete overhauls. The FAA monitors maintenance efforts with FAA
representatives typically on site.



8



Slots

The FAA's regulations currently permit the buying, selling, trading and leasing
of certain airline slots at Chicago's O'Hare, New York's La Guardia and Kennedy
International, and Washington National airports. A slot is an authorization to
schedule a takeoff or landing at the designated airport within a specified time
window. The FAA must be advised of all slot transfers and can disallow any such
transfer.

The FAA's slot regulations require the use of each slot at least 80% of the
time, measured on a bimonthly basis. Failure to comply with these regulations
without a waiver from the FAA (which is granted only in exceptional cases)
subjects the slot to recall by the FAA. In addition, the slot regulations
provide that the FAA may withdraw slots at any time and without compensation to
meet the DOT's operational needs (such as providing slots for international or
essential air transportation). The Company's ability to increase its level of
operations at these airports is affected by the number of slots available for
takeoffs and landings.

Aircraft Fuel

Because fuel costs constitute a significant portion of the Company's operating
costs (approximately 18% and 20% in 2001 and 2000, respectively), significant
changes in fuel costs can materially affect the Company's operating results.
Fuel prices continue to be susceptible to political events and other factors
that affect the supply of fuel, and the Company cannot predict the effect of
changes in near- or long-term fuel prices. In the event of a fuel supply
shortage resulting from a disruption of oil imports or otherwise, higher fuel
prices or curtailment of scheduled service could result. Changes in fuel prices
may have a marginally greater impact on the Company than on many of its
competitors because of the composition of the Company's fleet. See "Item 2.
Properties - Aircraft Equipment." The Company has periodically entered into
short-term option cap agreements in an attempt to reduce its exposure to jet
fuel price fluctuations. As of December 31, 2001, the Company has options to cap
fuel prices in the first, second and third quarters 2002. These agreements cover
50% of anticipated first quarter 2002 needs, 25% of anticipated second quarter
2002 needs, and 10% of anticipated third quarter 2002 needs.

Insurance

The Company carries types and amounts of insurance customary in the airline
industry, including coverage for general liability, passenger liability,
property damage, product liability, aircraft loss or damage, baggage and cargo
liability, and workers' compensation.

As a result of the terrorist attacks on September 11, 2001, aviation insurers
have significantly reduced the amount of insurance coverage available to
commercial air carriers for war-risk coverages (which include terrorism and
hijacking). In addition, insurance companies have significantly increased the
cost of this coverage, as well as aviation insurance in general. Given the
substantial increase in insurance costs and reduced availability, the federal
government provided insurance assistance under the Air Transportation Safety and
System Stabilization Act. This assistance included reimbursement for insurance
cost increases for 30 days after September 11, and the offering of FAA war-risk
insurance coverage to provide excess coverage limits that are no longer
available from the commercial insurance market at economically viable terms.

Commercial air carriers are required by the DOT to obtain appropriate aviation
insurance coverage. The effects of September 11 insurance losses, additional
terrorist acts or other unanticipated events could result in a future shortage
of available aviation insurance. In the event of such a shortage, curtailment or
discontinuation of scheduled service could result.


9


Seasonality

The Company's results of operations are impacted by the seasonality associated
with the airline industry. Any interim period is not necessarily representative
of results for the entire fiscal year. Generally quarterly operating income and;
to a lesser extent, revenues tend to be lower in the first and fourth quarters.

Executive Officers of the Company

The executive officers and other officers of the Company as of March 8, 2002,
together with their ages, positions and business experiences, are listed below:

NAME AGE POSITION

Timothy E. Hoeksema 55 Chairman of the Board, President, Chief
Executive Officer and Director

Robert S. Bahlman 43 Senior Vice President, Chief Financial Officer
and Controller

David C. Reeve 56 Senior Vice President-Operations

Carol N. Skornicka 60 Senior Vice President-Corporate Development,
General Counsel and Secretary

Christopher I. Stone 51 Senior Vice President-Human Resources

Thomas J. Vick 38 Senior Vice President and Chief Marketing
Officer

William E. Brown 39 Vice President-Technical Services

Michael W. Mooney 47 Vice President-Planning and Pricing

Dennis J. O'Reilly 46 Treasurer and Director of Investor Relations

Clifford C. Van Leuven 46 Vice President-Customer Service

Christopher D. White 39 Vice President-Safety and Regulatory Compliance


Timothy E. Hoeksema, has been a Director, Chairman of the Board, President and
Chief Executive Officer of the Company since 1983.

Robert S. Bahlman has served as the Senior Vice President, Chief Financial
Officer and Controller since 1999. Mr. Bahlman served as Senior Vice President,
Chief Financial Officer, Treasurer and Controller from 1998 to 1999; as Vice
President, Chief Financial Officer, Treasurer and Controller from 1996 to 1998;
as Controller from 1995 to 1996.

David C. Reeve has served as Senior Vice President of Operations of Midwest
Express since 1998. He served as President of Astral from 1997 to 2000, and has
served as Chairman of the Board at Astral since 1999. Before joining the
Company, Mr. Reeve was Director of Flight Operations for DHL Airways from 1991
to 1997.

Carol N. Skornicka has served as Senior Vice President of Corporate Development,
Secretary and General Counsel since 1998. Ms. Skornicka served as Vice
President, General Counsel and Secretary from 1996 to 1998.

Christopher I. Stone was appointed Senior Vice President of Human Resources in
2000. Before joining the Company, he served Hewitt Associates as Senior
Consultant from 1994 to 2000.

Thomas J. Vick was appointed Senior Vice President and Chief Marketing Officer
in April 2001. Before joining the Company, he served as Senior Vice President of
Account Strategy and Planning for Bierley & Partners from 1997 to April 2001,
and Vice President of the Hacek Group from 1995 to 1997.

10



William E. Brown has served as Vice President of Technical Services since 1999.
Before joining the company, he served American Airlines as Senior Manager Engine
Repair from 1998 to 1999, Composite Repair Manager from 1997 to 1998, MD-11 and
DC-10 Product Manager from 1995 to 1997.

Michael W. Mooney has served as Vice President of Planning and Pricing since
1999. Mr. Mooney served as Director of Planning and Pricing from 1993 to 1999.

Dennis J. O'Reilly has served as Treasurer and Director of Investor Relations
since February 1999. Mr. O'Reilly served as Assistant Treasurer from 1996 to
1999.

Clifford C. Van Leuven was appointed Vice President of Customer Service in 2001.
Mr. Van Leuven served as Director of Customer Service in 2000 and as Director of
Customer Service at Northwest Airlines from 1997 to 1999, and manager of
Customer Service from 1995 to 1996.

Christopher D. White has served as Vice President of Safety and Regulatory
Compliance since February 1999. Mr. White served as Director of Safety and
Regulatory Compliance from 1996 to 1999.


ITEM 2. PROPERTIES

Aircraft Equipment

As of December 31, 2001, Midwest Express had 35 McDonnell Douglas jet aircraft
in service, including seven DC-9-10, 16 DC-9-30, two MD-88 , seven MD-81 and
three MD-82 aircraft. All aircraft meet Stage III noise requirements. All owned,
unencumbered aircraft have been pledged as security under the revolving credit
agreement that the Company entered into August 31, 2001.

MIDWEST EXPRESS AIRCRAFT IN SERVICE

Type Seats Owned Leased Total
---- ----- ----- ------ -----
DC-9-10 60 7 0 7
DC-9-30 84* 6 10 16
MD-88 112 0 2 2
MD-81/82 116 8 2 10
--- --- ---
Total 21 14 35
=== === ===

* One aircraft is reconfigured to 60 seats and used primarily for charter
flights.

The two MD-81/82 aircraft leases and the two MD-88 aircraft leases expire in
2011. The 10 DC-9-30 operating leases currently expire as follows: three in
2004, three in 2006, two in 2007 and two in 2008. During 2001, Midwest Express
placed into service two MD-80 series aircraft previously operated by
Scandinavian Airlines System. The Company financed the acquisition and
refurbishment of these two aircraft with internal cash flows. The Company
retired one DC-9-10 aircraft in third quarter 2001.

The Company has one remaining owned MD-80 series aircraft to place in service.
Although refurbishment and modification have been temporarily suspended due to
reduced travel demand after September 11, it is expected this work will resume
in 2002. The aircraft is expected to enter service in either late 2002 or early
2003, and will be used to increase capacity on the Company's high-traffic
routes, expand service in existing markets or initiate service in new markets.

As of December 31, 2001, Astral's fleet consisted of 23 aircraft: 15 Beechcraft
1900D turboprop aircraft and eight Fairchild Dornier 328JET aircraft.

11

ASTRAL AIRCRAFT IN SERVICE
Type Seats Owned Leased Total
---- ----- ----- ------ -----
Beech 1900D 19 0 15 15
328JET 32 3 5 8
-- --- ---
Total 3 20 23
== === ===

Astral acquired 15 new Beech 1900D turboprop aircraft between January 11, 1994
and May 18, 1995. Each of these aircraft has 19 passenger seats. During 1996,
Astral sold and leased back these aircraft from a group of six financial
institutions, with lease terms of five to 12 years, and expiration dates ranging
from 2001 through 2008. In June 2001, five of the Beechcraft leases, scheduled
for expiration, were renewed until June 2004. The leases contain various renewal
options and termination clauses that the Company believes are customary in the
airline industry.

In 1999, Astral acquired five 32-passenger Fairchild Dornier 328JET aircraft.
The five aircraft were financed by operating leases from one financial
institution, with expiration dates all occurring in 2016. Four aircraft were
placed in service in late 1999; the fifth was placed in service in January 2000.
Three additional 328JET aircraft were acquired and placed in service during
January, April and June 2001. These aircraft are currently owned and financed
with debt.

In September 2001, the Company settled its pending arbitration with Fairchild
Dornier GmbH over the cancellation of the 428JET program. As a result of the
settlement, Astral intends to retain its existing aircraft of 328JETs and take
delivery of four more 328JET aircraft in 2002. One aircraft was received in
January of 2002 and one aircraft in February 2002; the others are expected to be
received in October and December 2002.

Facilities

The Company has secured long-term use of gates and maintenance facilities at
General Mitchell International Airport in Milwaukee. The Company is a signatory
to the airport master lease, which expires in 2010, for 19 gates at the
Milwaukee airport, including ticket counters, baggage handling and operations
space. In 1988, the Company completed construction of its maintenance facility
at the Milwaukee airport with a lease of land from the airport for an initial
term of five years ending March 31, 1993, with an option for the Company to
extend the lease for 11 successive renewal terms of five years each.

In October 1998, Midwest Express completed construction of a 97,000-square-foot
maintenance facility that is owned by Milwaukee County and located at General
Mitchell International Airport adjacent to the other maintenance facility. The
City of Milwaukee issued variable-rate demand industrial development revenue
bonds to finance the cost of the $7.9 million project. The Company's variable
rent payments are based on the current interest rate of the City of Milwaukee's
outstanding tax-exempt bonds over the 32-year lease term. The bonds are secured
by a letter of credit, pursuant to the Company's $55.0 million bank credit
facility.

In August 1997, the Company purchased its Oak Creek, Wisconsin headquarters
building, which it had previously leased. As part of the transaction, the
Company assumed $3.5 million of long-term debt. As of December 31, 2001, $2.7
million of long-term debt remained. In July 2000, the Company opened a new
55,000-square-foot training facility as an addition to its headquarters. The
Company funded this $6.9 million project with cash flow from operations in 2000.
The Company's headquarters is currently subject to a mortgage.

Midwest Express leases airport facilities (gates, operations space, ticket
counter) at each location it operates. In 14 of the 26 cities Midwest Express
served as of December 31, 2001, gates at the airport were leased directly from
the airport authority. In 12 cities, Midwest Express subleased gates from other
carriers.

Astral has secured long-term leases of facilities at General Mitchell
International Airport. Astral currently operates four gates at General Mitchell
International Airport in Milwaukee: one gate is leased directly from Milwaukee
County and the other three are subleased from Midwest Express. Astral owns its
10,000 square-foot headquarters building, which is located off airport grounds.
12


Astral also leases airport facilities at each location it operates unless the
airport also has Midwest Express service. Leases are for various terms and
contain other provisions that are customary in the industry.

On April 23, 2001, the Company completed a $7.0 million financing of a new
maintenance facility for Astral, located at General Mitchell International
Airport in Milwaukee. Occupancy of the new facility began February 1, 2002. The
facility is financed by 32-year tax-exempt, variable-rate demand industrial
development revenue bonds issued by the City of Milwaukee. To ensure the
tax-exempt status, Milwaukee County is the owner of the facility. The bonds are
secured by a letter of credit, pursuant to the Company's $55.0 million bank
credit facility.


ITEM 3. LEGAL PROCEEDINGS

The Company settled its pending arbitration with Fairchild Dornier GmbH
regarding the production of the 428JET during the third quarter 2001. As a
result of the settlement, Astral Aviation intends to retain its existing fleet
of eight Fairchild Dornier 328JETs and will receive four more. In first quarter
2002, the Company expects to receive and record a $46.0 million pretax gain
($29.0 million after tax) associated with the settlement. The gain, which
represents approximately 60% of the expected benefits of the settlement,
includes a cash payment and discounts on two 328JETs. Future benefits of the
remainder of the settlement will be recorded when received.

The Company is a party to routine litigation incidental to its business.
Management believes that none of this litigation is likely to have a material
adverse effect on the Company's consolidated financial position and results of
operations.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders during
fourth quarter 2001.


13



PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Market Price of Common Stock

The following table sets forth, for the periods indicated, the high and low
price per share of Midwest Express Holdings, Inc. common stock for the two most
recent fiscal years. The Company's common stock is traded on the New York Stock
Exchange (Symbol: MEH).


Fiscal 2001 Fiscal 2000
------------------- -------------------
Quarter High Low High Low
------- ------- ------- ------- -------

First $ 20.90 $ 14.15 $ 31.88 $ 22.06
Second $ 18.30 $ 15.10 $ 28.25 $ 19.63
Third $ 21.02 $ 8.82 $ 24.44 $ 18.44
Fourth $ 15.20 $ 10.00 $ 19.63 $ 13.63

As of December 31, 2001, the Company had 14,549,531 shares issued and 780
registered shareholders. The Company has not paid a dividend on its common stock
since its initial public offering in 1995 and has no intention to pay dividends
in the foreseeable future.


14





ITEM 6. SELECTED FINANCIAL DATA



Five-Year Financial and Operating Data
Midwest Express Holdings, Inc.
(Dollars in thousands, except per share amounts)


Years Ended 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------


Statement of Operations Data:
Total operating revenues $ 457,442 $ 480,021 $ 447,552 $ 388,874 $ 344,557
Total operating expenses (1) 495,486 473,143 386,800 333,219 306,087
--------- --------- --------- --------- ---------
Operating (loss) income (38,044) 6,878 60,752 55,655 38,470
Other income (expense), net (2) 16,304 (113) 68 (75) (162)
(Loss) income before cumulative
effect of accounting changes (14,918) 5,227 38,791 35,869 24,940
Cumulative effect of accounting changes,
net of applicable income taxes - (4,713) - - -
Net (loss) income (14,918) 514 38,791 35,869 24,940

(Loss) income per common share - basic:
- ---------------------------------------
(Loss) income before cumulative effect
of accounting changes (1.08) 0.37 2.75 2.54 1.76
Cumulative effect of accounting changes,
net of applicable income taxes - (0.33) - - -
--------- --------- --------- --------- ---------
Net (loss) income (1.08) 0.04 2.75 2.54 1.76

(Loss) Income per common share - diluted:
- -----------------------------------------
(Loss) Income before cumulative effect
of accounting changes (1.08) 0.37 2.71 2.51 1.74
Cumulative effect of accounting changes,
net of applicable income taxes - (0.33) - - -
--------- --------- --------- --------- ---------
Net (loss) income $ (1.08) $ 0.04 $ 2.71 $ 2.51 $ 1.74

Balance Sheet Data:
Property and equipment, net $ 256,506 $ 242,875 $ 211,449 $ 160,583 $ 89,156
Total assets 357,371 305,997 263,829 220,477 166,748
Long-term debt 35,097 2,886 3,068 3,206 3,333
Shareholders' equity $ 114,736 $ 129,276 $ 133,539 $ 97,632 $ 63,398

(1) Total operating expenses for 2001 includes an impairment loss of $8,839 related to the accelerated retirement
of eight Midwest Express DC-9-10 aircraft.

(2) Other income (expense), net for 2001 includes recognition of $16,340 related to amounts claimed under the Air
Transportation Safety and System Stabilization Act for federal grant money received for losses related to the
September 11 terrorist events.





15



Five-Year Financial and Operating Data
Midwest Express Holdings, Inc.
(Dollars in thousands, except per share amounts)


Years Ended 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------


Selected Operating and Other Data (1):
Midwest Express Airlines, Inc.:
- -------------------------------
Revenue passenger miles (000s) 1,973,606 1,974,485 1,958,510 1,623,659 1,409,528
Available seat miles (000s) 3,231,872 3,163,247 2,993,765 2,498,543 2,198,179
Passenger load factor 61.1% 62.4% 65.4% 65.0% 64.1%
Revenue yield (cents per RPM) 17.6 19.3 18.5 19.2 19.4
Revenue per scheduled service ASMs (2) 11.2 12.6 12.7 13.1 13.1
Cost per total ASM (cents per mile) (4) 12.8 13.0 11.5 11.8 12.1
Aircraft in service at year-end (3) 35 34 32 27 24
Average aircraft utilization (hours
per day) 7.9 8.5 8.8 9.1 9.3
Number of FTE employees at year-end 2,348 2,857 2,449 2,133 1,889

Astral Aviation, Inc., d/b/a Skyway Airlines
- --------------------------------------------
Revenue passenger miles (000s) 150,819 112,610 84,517 77,547 69,277
Available seat miles (000s) 312,209 247,623 170,428 160,772 158,912
Passenger load factor 48.3% 45.5% 49.6% 48.2% 43.6%
Revenue yield (cents per RPM) 44.5 52.4 52.7 52.9 55.1
Revenue per scheduled service ASMs (2) 21.5 23.9 26.3 26.9 24.1
Cost per total ASM (cents per mile) 23.2 25.5 25.2 23.7 23.8
Aircraft in service at year-end (3) 23 20 19 15 15
Average aircraft utilization (hours per
day) 7.2 7.5 8.2 8.1 7.7
Number of FTE employees at year-end 512 523 424 322 277

(1) Revenue passenger miles, available seat miles, passenger load factor and revenue yield are for scheduled
service operations. The other statistics include charter operations.

(2) Passenger, cargo and other transport-related revenue divided by schedule service ASMs (expressed in cents).

(3) Aircraft acquired but not yet placed in service are excluded from the aircraft in service statistics.

(4) Excluding impairment loss.





16




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

2001 Overview

The Company's 2001 operating loss was $(38.0) million, which reflects a decrease
in operating income of $44.9 million from 2000 operating income of $6.9 million.
Net loss for the year was $(14.9) million, which reflects a decrease in net
income of $15.4 million from 2000 net income of $0.5 million. Net loss per
diluted share in 2001 was $(1.08). In 2000, net income per diluted share was
$0.04.

The Company's financial results were significantly impacted by the weak economy
and the aftermath of the events of September 11, 2001. Following the terrorist
attacks, the nation's air transportation system was temporarily shut down,
resulting in the cancellation of more than 1,000 Midwest Express and Astral
flights. Following the resumption of service, travel demand declined
dramatically and the Company decreased the number of flights it planned to
operate.

To support the airline industry, the federal government enacted the Air
Transportation Safety and System Stabilization Act. This legislation included
support to passenger airlines in the form of a $4.5 billion grant, $10 billion
in loan guarantees and assistance with increased insurance costs. The Company
recorded $16.3 million as non-operating income in 2001 associated with the grant
received pursuant to the legislation.

Capacity, as measured by scheduled service available seat miles ("ASMs"),
increased 3.9% in 2001. Capacity increased 2.2% at Midwest Express and 26.1% at
Astral. Astral's capacity increase was due to the addition of three new regional
jets into scheduled service, as well as the fact that a number of Midwest
Express routes were shifted to smaller Astral aircraft to more efficiently
handle fourth quarter 2001 decreased passenger levels. 2001 capacity was
significantly impacted by flight cancellations in the third quarter, primarily
due to the September 11 terrorist attacks and capacity reductions thereafter as
a result of low passenger volume. First quarter 2002 capacity is expected to
decline 8-10% from first quarter 2001. Flight schedules and aircraft utilization
for the remainder of 2002 will depend on travel demand; however, the Company
expects to gradually increase capacity beginning in March 2002 as additional
operations to Washington National are restored and flight frequency is increased
in other markets to meet increasing demand for travel.

The Company's total revenue in 2001 decreased $22.6 million, or 4.7%, from 2000
to $457.4 million. The decrease in revenue was primarily attributable to a 7.4%
decrease in revenue yield. The Company experienced a substantial decline in
high-yield business travel during the year due to the slowing economy. This
problem was compounded by the events of September 11, which resulted in
substantial declines in business and leisure travel.

The Company's operating expenses increased by $22.3 million, or 4.7%, in 2001 to
$495.5 million. Although the Company realized savings from lower fuel prices and
companywide cost-reduction efforts, costs were adversely impacted by lower
aircraft utilization, higher labor costs and aircraft impairment charges. Cost
changes are further explained in the sections that follow.

17

The following table provides operating revenues and expenses for the Company
expressed as cents per total available seat miles, including charter operations,
and as a percentage of total operating revenues for 2001, 2000 and 1999.



2001 2000 1999
---- ---- ----
Per Per Per
Total Total Total
ASM % ASM % ASM %
----- --- ----- --- ----- ---

Operating revenues:
Passenger service 11.56(cent) 90.5% 12.76(cent) 91.5% 12.75(cent) 90.9%
Cargo 0.25 2.0% 0.32 2.3% 0.37 2.7%
Other 0.96 7.5% 0.86 6.2% 0.91 6.4%
----- ----- ----- ----- ----- -----
Total operating revenues 12.77 100.0% 13.94 100.0% 14.03 100.0%

Operating expenses:
Salaries, wages and
benefits 4.67 36.6% 4.41 31.6% 3.95 28.2%
Aircraft fuel and oil 2.43 19.0% 2.72 19.5% 1.67 11.9%
Commissions 0.66 5.2% 0.74 5.3% 0.96 6.8%
Dining services 0.72 5.7% 0.73 5.2% 0.75 5.3%
Station rental/
landing/other 1.02 8.0% 1.01 7.3% 0.96 6.8%
Aircraft maintenance 1.40 10.9% 1.58 11.3% 1.44 10.3%
Depreciation and
amortization 0.58 4.6% 0.49 3.6% 0.41 2.9%
Aircraft rentals 0.69 5.4% 0.71 5.1% 0.63 4.5%
Impairment loss 0.25 1.9% - - - -
Other 1.41 11.0% 1.35 9.7% 1.35 9.7%
----- ----- ----- ----- ----- -----
Total operating expenses 13.83(cent) 108.3% 13.74(cent) 98.6% 12.12(cent) 86.4%
===== ===== ===== ===== ===== =====
Total ASMs (millions) 3,582.4 3,443.7 3,190.4


Note: Numbers in this table may not be recalculated due to rounding.

Year Ended December 31, 2001 Compared With
Year Ended December 31, 2000

Operating Revenues

Company operating revenues totaled $457.4 million in 2001, a $22.6 million, or
4.7%, decrease from 2000. Passenger revenues accounted for 90.5% of total
revenues and decreased $25.2 million, or 5.7%, from 2000 to $414.2 million in
2001.

Midwest Express passenger revenue decreased $33.3 million, or 8.8%, from 2000 to
$347.1 million in 2001. Revenue yield decreased 8.7% due to decreased business
travel as a result of the slowing economy, increased competition in some markets
and lower fares after September 11 that were used to stimulate travel demand.
Load factor decreased from 62.4% in 2000 to 61.1% in 2001.

Astral passenger revenue increased $8.1 million, or 13.7%, from 2000 to $67.1
million in 2001. Traffic, as measured by revenue passenger miles, increased
33.9%. Load factor increased from 45.5% in 2000 to 48.3% in 2001. Revenue yield
decreased 15.1%, from $0.52 in 2000 to $0.44 in 2001, due to decreased business
travel as a result of the slowing economy, a revised mix of longer flights with
lower yields, and lower fares after September 11 that were used to stimulate
travel demand.

Revenue from cargo, charter and other services increased $2.6 million in 2001.
This fluctuation was primarily attributable to a $2.7 million increase in
Frequent Flyer program partnership revenue, primarily from the sale of Frequent
Flyer miles, a $1.2 million increase in charter sales and a $1.2 million
increase in service charge fees, offset by a $2.2 million decrease in cargo
revenue. Mail volumes decreased in 2001 as more mail was transported by ground
transportation or dedicated freight carriers. In addition, cargo revenue
decreased because of the weak economy and a reduction in mail volume following
September 11 due to tighter security requirements that limit the weight of mail
that can be transported.
18


Operating Expenses

2001 operating expenses increased $22.3 million, or 4.7%, from 2000. The
increase was primarily the result of higher labor costs, an increase in
depreciation and amortization, and an $8.8 million asset impairment charge
associated with eight owned DC-9-10 aircraft. These increases were offset by
lower fuel costs and lower aircraft maintenance costs. Cost per ASM (excluding
the impairment charge) increased 1.0% at Midwest Express and decreased 9.0% at
Astral in 2001. The Company's cost per total ASM increased 0.7%, from 13.7(cent)
in 2000 to 13.8(cent) in 2001.

Salaries, Wages and Benefits
Salaries, wages and benefits increased $15.6 million, or 10.3%, from 2000 to
$167.3 million in 2001. Labor costs increased 6.0% on a cost per ASM basis.
Increased labor costs were primarily the result of increased labor rates ($9.0
million) at Midwest Express and Astral. The majority of the labor rate increases
were for customer service and maintenance employees at Midwest Express,
effective in second quarter 2001. These rate adjustments were implemented based
on industry salary surveys and management's desire to increase pay scales to
maintain a competitive position in the industry. Other factors causing the
change in salaries, wages and benefits were increased headcount ($4.6 million)
and increased benefit costs ($3.3 million), primarily due to higher medical
insurance costs. These increases were partially offset by a $1.6 million
decrease in overtime pay.

Aircraft Fuel and Oil
Aircraft fuel and oil and associated taxes decreased $6.8 million, or 7.2%, in
2001. Costs decreased 10.8% on a cost per ASM basis. Into-plane fuel prices
decreased 9.0% per gallon, averaging 91.5(cent) per gallon in 2001 versus $1.01
per gallon in 2000, resulting in an $8.8 million favorable pre-tax price
variance. Fuel consumption increased 2.0% in 2001. The Company entered into
option cap agreements for about 15% of its fourth quarter fuel volume, with no
material impact on earnings. As of December 31, 2001, prices for future fuel
purchases have been capped through the third quarter of 2002 as follows: 50% of
first quarter, 25% of second quarter and 10% of third quarter anticipated fuel
requirements. 2002 caps are at prices higher than what the Company was paying in
fourth quarter 2001. Fuel costs in January 2002 trended downward, averaging
71.3(cent) per gallon.

Commissions
Commissions decreased $1.8 million, or 7.2%, from 2000 to $23.6 million in 2001.
This category includes travel agent commissions and credit card commissions. The
decrease was primarily due to a 5.7% decrease in passenger revenue. In addition,
on September 21, 2001, the Company implemented a new travel agent commission
structure that caps travel agent commissions at lower levels. In 2001, the
Company realized an increase in use of the Company's Web site for travel
bookings. Commission costs decreased 10.8% on a cost per total ASM basis.

Dining Services
Dining service costs increased $0.9 million, or 3.4%, from 2000 to $25.9 million
in 2001. The increase was due to a 3.2% increase in food and services prices.
Total dining service costs per Midwest Express passenger (including food,
beverage, linen, catering equipment and supplies) increased from $12.08 in 2000
to $12.47 in 2001. Future dining service costs are expected to decrease as
roundtrip catering is implemented on most flights. Roundtrip catering allows
meals to be loaded only at the origin city of a roundtrip route, as opposed to
loading the aircraft with meals at both cities on the route.

Station Rental, Landing and Other Fees
Station rental, landing and other fees increased $1.5 million, or 4.4%, from
2000 to $36.4 million in 2001. Midwest Express operated 0.5% fewer flight
segments and Astral operated 4.0% more flight segments, causing the net
increase. Airport costs were favorably impacted by abnormally good weather in
fourth quarter 2001 and a reduction in costs at the Milwaukee airport following
the September 11 terrorist attacks.

Aircraft Maintenance Materials and Repairs
Maintenance costs decreased by $4.2 million, or 7.8%, from 2000 to $50.1 million
in 2001. Aircraft maintenance costs decreased 11.3% on a cost per total ASM
basis. Costs at Midwest Express decreased $5.8 million, or 12.8%, in 2001


19



while costs at Astral increased $1.6 million, or 19.1%. The decrease at Midwest
Express was primarily due to lower engine repair costs, lower purchased
maintenance costs and cost savings realized through the MSG-3 program, whereby
major airframe maintenance events are divided into smaller, more frequent events
that result in fewer duplicate tasks, and airframe maintenance costs are
expensed as they are incurred. Costs at Astral increased as a result of three
additional regional jets entering scheduled service during 2001.

Depreciation and Amortization
Depreciation and amortization increased $3.9 million, or 23.2%, from 2000 to
$20.9 million in 2001. The increase was primarily the result of depreciation
associated with one additional owned MD-80 series aircraft and three additional
owned regional jets placed in service during 2001.

Aircraft Rentals
Aircraft rental costs increased $0.3 million, or 1.1%, from 2000 to $24.8
million in 2001. The costs associated with the addition of one leased MD-80
aircraft were mostly offset by the reduction in lease costs due to lower
interest rates for three DC-9 aircraft and five Beechcraft 1900D aircraft.

Other Operating Expenses
Other operating expenses increased $4.1 million, or 8.7%, from 2000 to $50.7
million in 2001. Other operating expenses consist of advertising and promotion,
insurance, legal fees, property taxes, consulting services, crew hotel rooms,
reservation booking fees, administration and other items. 2001 expenses were
favorably impacted by a $1.0 million property tax refund associated with the
first six months of 2001, resulting from legislation in the State of Wisconsin
that exempted hub airlines from property tax. 2001 costs included a $0.5 million
loss on the retirement of one DC-9-10 aircraft (due to significantly reduced
capacity following September 11) and a $0.7 million gain on the sale of the
former Astral maintenance hangar. In 2000, other expenses were favorably
impacted by a nonrecurring $2.7 million settlement of a sales and use tax
dispute on meals boarded on aircraft in Wisconsin. Other significant cost
increases in 2001 included higher legal fees ($1.1 million), due primarily to
the Fairchild Dornier dispute, and higher crew hotel room costs. These increases
were offset by lower professional and financial services costs ($1.6 million),
due to fewer consulting services costs incurred in 2001. On a cost per total ASM
basis, other operating costs increased 4.5%.

Impairment Loss
In the second quarter 2001, the Company recorded an $8.8 million impairment
charge associated with the write-down in carrying value of eight owned DC-9-10
aircraft that the Company intends to retire earlier than originally planned. In
connection with this decision, the Company performed evaluations to determine,
in accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," whether future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition of these
aircraft would be less than the aggregate carrying amounts. As a result of the
evaluation, the Company determined that the estimated future cash flows expected
to be generated by these aircraft would be less than their carrying amounts,
resulting in an impairment, as defined by SFAS No. 121. Consequently, the
original cost basis of these aircraft was reduced to reflect the fair market
value at the date of the decision, resulting in an $8.8 million (pre-tax)
impairment loss, and the remaining depreciable lives were adjusted for the new
retirement schedule. In determining the fair market value of these assets, the
Company considered market trends in aircraft dispositions, data from third
parties and management estimates. Depreciation on these aircraft going forward
will be almost unchanged as the shorter life was offset by the decrease in cost
basis.

Interest Income and Interest Expense

Interest income reflects interest earned on the Company's cash and cash
equivalents. Interest expense consists of mortgage interest associated with the
Company's headquarters building, interest on the short-term note payable, and on
the Company's long-term debt, a secured bank credit facility. Interest expense
increased in 2001 due to an increase in use of the Company's credit facility and
interest costs associated with the debt financing of three regional jet aircraft
and one MD-80 series aircraft.

20


Other Income (Expense)

To support the airline industry, the federal government implemented the Air
Transportation Safety and System Stabilization Act. This legislation included
support to passenger airlines in the form of a $4.5 billion grant, $10 billion
in loan guarantees, and assistance with increased insurance costs. The Company
recorded non-operating income of $16.3 million in 2001 associated with federal
government grant support. Of the amount claimed, the Company received $13.9
million as of December 31, 2001 and expects to receive the remaining $2.4
million in 2002. The amount recorded represents the total amount claimed since
incurred losses prior to December 31, 2001 were in excess of this amount.

(Credit) Provision for Income Taxes

Income tax credit for 2001 was $(8.8) million, a $11.8 million decrease from the
2000 provision of $3.1 million. The effective tax rates for 2001 and 2000 were
(37.0%) and 36.4%, respectively. For purposes of calculating the Company's
income tax expense and effective tax rate, the Company treats amounts payable to
an affiliate of Kimberly-Clark under a tax allocation and separation agreement
entered into in connection with the Company's initial public offering as if they
were payable to taxing authorities.

Net (Loss) Income

Net loss for 2001 was $(14.9) million, which reflects a decrease of $15.4
million from 2000 net income of $0.5 million. The net income (loss) margin
decreased from 0.1% in 2000 to (3.3)% in 2001.


Year Ended December 31, 2000 Compared with
Year Ended December 31, 1999

Operating Revenues

The Company's operating revenues totaled $480.0 million for 2000, a $32.5
million, or 7.3% increase over 1999. Passenger revenues accounted for 91.5% of
total revenues and increased $32.6 million, or 8.0%, from 1999 to $439.4
million. The increase was primarily attributable to a 5.7% increase in revenue
yield and a 2.2% increase in passenger volume, as measured by revenue passenger
miles.

Midwest Express passenger revenue increased $18.1 million, or 5.0%, from 1999 to
$380.4 million. This increase was caused by a 4.2% increase in revenue yield and
an increase of 0.8% in passenger volume. Total Midwest Express capacity, as
measured by scheduled service ASMs, increased 5.7% due to additional aircraft in
service during 2000. Capacity was constrained by a shortage of trained pilots to
support the Company's growth plan, by compliance with the new FAA-mandated crew
rest/reserve rules, and by an increase in flight cancellations. Load factor
decreased from 65.4% in 1999 to 62.4% in 2000 due to poor performance of the
Indianapolis operation, a threat of a pilot's strike in the first quarter, and
increased competition on some routes.

Astral passenger revenue increased $14.5 million, or 32.5%, from 1999 to $59.0
million. Traffic increased 33.2% on a 45.3% increase in capacity due to the
operation of five regional jets during most of 2000. Load factor decreased from
49.6% in 1999 to 45.5% in 2000.

The Company's revenue from cargo, charter and other services decreased $0.1
million, or 0.3%, in 2000. Although charter revenues increased $1.2 million in
2000, anticipated revenues were constrained when the dedicated charter aircraft
was extensively damaged by a third party in early November and a majority of
charter services were subcontracted to other airlines. Mail volumes decreased in
2000 as more mail was transported by ground transportation or dedicated freight
carriers. Freight volumes declined because of increased competition.

21


Operating Expenses
2000 operating expenses increased $86.3 million, or 22.3%, from 1999 primarily
due to higher fuel prices and increased labor and aircraft maintenance costs.
Aircraft utilization decreased significantly in the second half of the year due
to flight cancellations related to poor weather, maintenance issues and a
shortage of trained pilots to support the Company's growth plan and comply with
the revised FAA-mandated crew rest/reserve rules. Because of this, Midwest
Express operated only 1.9% more flights during the year, although it had two
additional aircraft in service. Astral had similar issues with higher fuel
prices and low utilization. The regional jets operated at about 70% utilization,
but had the infrastructure to support full utilization. Offsetting higher costs
in most categories were lower commission costs and no profit sharing. On a cost
per total ASM basis, Midwest Express' operating expenses increased 12.7%, from
11.5(cent) to 13.0(cent) in 2000; cost per total ASM at Astral increased 1.5%,
from 25.2(cent) to 25.5(cent).

Salaries, Wages and Benefits
Salaries, wages and benefits increased $25.5 million, or 20.2%, from 1999 to
$151.7 million in 2000. On a cost per total ASM basis, these costs increased
11.4%, from 4.0(cent) in 1999 to 4.4(cent) in 2000. The labor cost increase
reflected the addition of 507 full-time equivalent employees (408 at Midwest
Express and 99 at Astral) from 1999 and increases in labor rates. Midwest
Express added employees throughout the organization to support the two
additional aircraft placed in service. Midwest Express also added mechanics to
support growth, and to complete aircraft modifications and repairs more
efficiently. Pilot costs at Midwest Express increased due to a 2.5% contract
signing bonus, increased wage rates associated with the new contract, and the
implementation of the new FAA-mandated interpretation of crew rest/reserve
rules, which added the equivalent of 18 pilots with no increased flying. These
increases were partially offset by a $4.8 million reduction in the profit
sharing and management incentive plan costs.

Aircraft Fuel and Oil
Aircraft fuel and oil and associated taxes increased $40.5 million, or 76.1%,
from 1999 to $93.7 million in 2000. Into-plane fuel prices increased 63.7% in
2000, averaging $1.01 per gallon in 2000 versus 61.4(cent) per gallon in 1999,
generating a $36.1 million unfavorable price variance. The Company managed the
price risk of fuel to some extent by purchasing commodity options that establish
ceiling prices. The Company hedged 25% of first quarter 2000 fuel prices.

Commissions
Commissions decreased $5.1 million, or 16.7%, from 1999 to $25.4 million in
2000. The decrease was primarily due to a new commission rate structure that
reduced base travel agent commissions from 8% to 5% effective October 1999. In
addition, the Company realized savings due to increased travel booked directly
through its reservations centers, Midwest Express Web site, other travel-related
Web sites and ticket counters.

Dining Services
The Company's dining services costs increased $1.2 million, or 5.0%, from 1999
to $25.1 million in 2000. The increase was primarily due to a 4.1% increase in
food and services prices. Total dining services costs (including food,
beverages, linen, catering equipment and supplies) increased from $11.60 per
Midwest Express passenger in 1999 to $12.08 in 2000.

Station Rental, Landing and Other Fees
Station rental, landing and other fees increased $4.4 million, or 14.4%, from
1999 to $34.9 million in 2000. The increase was caused by 14.8% more flight
segments at Astral and higher airport costs throughout the system. On a cost per
ASM basis, these costs increased 6.0%.

Aircraft Maintenance Materials and Repair
The Company's aircraft maintenance, materials and repairs increased by $8.2
million, or 17.8%, from 1999 to $54.3 million in 2000. Midwest Express'
maintenance costs increased $5.9 million, or 14.7%, to $45.8 million, and
Astral's maintenance costs increased $2.4 million, or 38.3%, to $8.5 million.
The Company's aircraft maintenance costs increased 9.1% on a cost per total ASM
basis. The increase was attributable to higher-than-expected costs for engine
repairs, increased costs associated with transition to the new MSG-3 aircraft
maintenance program, and higher use of contract labor.

22


Depreciation and Amortization
Depreciation and amortization increased $3.8 million, or 28.7%, from 1999 to
$17.0 million in 2000. The increase was primarily the result of the depreciation
associated with two additional MD-80 aircraft placed into service, aircraft
noise hushkits, and capital spending associated with the start-up of the
regional jet program. Depreciation increased 19.3% on a cost per total ASM basis
due to lower aircraft utilization.

Aircraft Rentals
Aircraft rental costs increased $4.5 million, or 22.5%, from 1999 to $24.5
million in 2000. The increase from 1999 was primarily the result of Astral
leasing five new regional jets and Midwest Express completing a sale/leaseback
on one MD-80 aircraft in September 1999. On a cost per total ASM basis, these
costs increased 13.4%.

Other Operating Expenses
Other operating expenses increased by $3.4 million, or 7.8%, from 1999 to $46.6
million in 2000. The increase was due to cost increases in advertising, aircraft
simulator rentals, Frequent Flyer program expenses, crew hotel rooms, charter
costs and other items. This increase was partially offset by a nonrecurring $2.7
million favorable settlement of a sales and use tax dispute on meals boarded on
aircraft in Wisconsin. On a cost per ASM basis, these costs decreased 0.1%.

Interest Income and Interest Expense

Interest income reflects interest earned on the Company's cash and cash
equivalents. Interest expense consists of mortgage interest associated with the
Company's headquarters building and interest on the short-term note payable.

Provision for Income Taxes

Income tax expense in 2000 was $0.3 million, a decrease of $22.6 million from
1999. The effective tax rates for 2000 and 1999 were 36.4% and 37.1%,
respectively.

Cumulative Effect of Accounting Changes

The Company's cumulative effect of accounting changes, net of applicable tax,
totaled ($4.7) million. The charge was ($7.8) million, net of tax, for a change
in accounting methods for Frequent Flyer partner miles, partially offset by a
$3.1 million, net of tax, adjustment for major airframe maintenance due to the
Company's transition to dividing major maintenance events into smaller, more
frequent events, and to expense all airframe maintenance costs as they are
incurred.

Net Income

Net income for 2000 was $0.5 million, a decrease of $38.3 million from 1999. The
net income margin decreased from 8.7% in 1999 to 0.1% in 2000.

Critical Accounting Policies and Estimates

The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires the Company to make estimates, assumptions and judgments that affect
amounts of assets and liabilities reported in the consolidated financial
statements, the disclosure of contingent assets and liabilities as of the date
of the financial statements and reported amounts or revenues and expenses during
the year. The Company believes its estimates and assumptions are reasonable;
however, future results could differ from those estimates under different
assumptions or conditions.

Critical accounting policies are policies that reflect material judgment and
uncertainty and may result in materially different results using different
assumptions or conditions. The Company identified the following critical
accounting

23



policies and estimates: revenue recognition, Frequent Flyer revenue and
impairment of long-lived assets. For a detailed discussion of accounting
policies, refer to the notes to the consolidated financial statements.

Revenue Recognition
Passenger revenue, related commissions, if any, and cargo revenues are
recognized in the period when the service is provided. A portion of the revenue
from the sale of Frequent Flyer mileage credit is deferred and recognized when
transportation is provided to the passenger. Contract maintenance revenue is
recognized when work is completed and invoiced. The estimated liability for
sold, but unused, tickets is included in current liabilities as air traffic
liability. The amount of commissions associated with unearned revenue is
included in current assets as prepaid commissions.

Frequent Flyer Revenue
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), issued by the
Securities and Exchange Commission in December 1999. SAB 101 provides guidance
on the application of generally accepted accounting principles to revenue
recognition in financial statements. Prior to the issuance of SAB 101, the
Company recognized all revenue from Frequent Flyer miles sold to partners, net
of the incremental cost of providing future air travel, when the mileage credits
were sold, which was consistent with most major airlines. Beginning January 1,
2000, as a result of adopting SAB 101, the Company changed its method used to
account for participating partners such as credit card companies, hotels and car
rental agencies. Under the new accounting method, a portion of the revenue from
the sale of Frequent Flyer mileage credits is deferred and recognized when
transportation is provided to the passenger. The Company believes the new method
appropriately matches revenues with the period in which services are provided.

The estimated incremental cost of providing future transportation in conjunction
with travel miles under the Company's Frequent Flyer program is accrued based on
estimated redemption percentages applied to actual mileage recorded in members'
accounts. The ultimate cost will depend on the actual redemption of Frequent
Flyer miles and may be greater or less than amounts accrued at December 31,
2001.

Impairment of Long-Lived Assets
The Company records impairment charges on long-lived assets used in operations
when events and circumstances indicate the assets may be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
their carrying amount. During the second quarter 2001, the Company decided to
accelerate the retirement of eight Midwest Express DC-9-10 aircraft. In
connection with this decision, the Company performed evaluations to determine,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," whether future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition of these
aircraft would be less than the aggregate carrying amounts. As a result of the
evaluation, the Company determined that the estimated future cash flows expected
to be generated by these aircraft would be less than their carrying amount,
resulting in an impairment as defined by SFAS No. 121. Consequently, the
original cost bases of these assets were reduced to reflect the fair market
value at the date of the decision, resulting in an $8.8 million (pre-tax)
impairment loss, and the remaining depreciable lives were adjusted for the new
retirement schedule. In determining the fair market value of these assets, the
Company considered market trends in aircraft dispositions, data from third
parties and management estimates.


Liquidity and Capital Resources

The Company's cash and cash equivalents totaled $46.9 million at December 31,
2001, compared with $15.7 million at December 31, 2000. The increased cash
position was primarily generated from $10.5 million in proceeds associated with
a sale/leaseback of an MD-80 series aircraft and an additional $8.1 million from
the debt financing of an MD-80 series aircraft, an $18.0 million draw on the
Company's revolving bank credit facility, and $13.9 million in grant money
associated with the federal government's Air Transportation Safety and System
Stabilization Act. An additional $2.4 million in grant money is expected to be
received in the first quarter of 2002.

24

Net cash provided by operating activities totaled $22.8 million during 2001. Net
cash used in investing activities totaled $58.6 million, due to capital
expenditures of $60.4 million, including $1.6 million of purchase deposits on
flight equipment.

As of December 31, 2001, the Company had a working capital deficit of $61.4
million versus a $69.1 million deficit on December 31, 2000. The working capital
deficit is primarily due to the Company's air traffic liability (which
represents deferred revenue for advance bookings, whereby passengers have
purchased tickets for future flights and revenue is recognized when the
passenger travels) and the Frequent Flyer program liability. Because of this,
the Company expects to operate at a working capital deficit, which is not
unusual for the industry.

As of December 31, 2001, the Company had a $55.0 million bank credit facility.
The credit facility, scheduled to expire August 30, 2002, is secured by, with
certain exceptions, substantially all non-aircraft personal property assets of
the Company and by certain aircraft. The credit facility agreement requires
quarterly compliance of certain financial covenants. The fees and borrowing
costs under the agreement are higher than they were prior to August 31, 2001,
which is the date the facility became effective. The interest rate on borrowings
under the facility is LIBOR plus 250 basis points. That interest rate spread and
certain fees and costs are subject to reduction based upon improved financial
covenant performance.

As of December 31, 2001, the Company had borrowings under the facility totaling
$38.0 million. The Company made a $10.0 million payment of principal in
connection with the amendment in January 2002 that reduced borrowings to $28.0
million. In addition, as of December 31, 2001, letters of credit totaling
approximately $16.8 million were outstanding under the credit facility, reducing
the available credit by that amount. The letters of credit are primarily used to
support financing of the Company's maintenance facilities and for other
purposes.

The availability of the $55.0 million under the credit facility is subject to a
calculation based on the valuation of certain elements of the collateral that
provide security for the credit facility. The credit facility agreement was
amended in January 2002 to change the way that calculation is done. As a result,
the Company may obtain credit of up to $45.0 million on the basis of personal
property assets and, if the Company mortgages its headquarters real estate to
the banks, additional credit of up to $10.0 million on the basis of the
headquarters real estate. Consequently, unless the Company provides a mortgage
of its headquarters property, the Company may not obtain credit under the credit
facility exceeding $45.0 million. Prior to mortgaging the headquarters real
estate to the banks, the Company must obtain the consent of the mortgage lender
holding a first mortgage on the headquarters. If the Company obtains that
consent and proceeds to give a second mortgage to the banks, then the amount of
additional credit that will become available to the Company will be reduced by
the amount of the prior mortgage and limited by the appraised value of the
headquarters property. As a result, even if the Company satisfies the conditions
to obtaining additional credit on the basis of the headquarters real estate, it
is unlikely that the amount of that additional credit would equal the $10.0
million of potential additional credit availability.

As of December 31, 2001, the Company was in compliance with the financial
covenants contained in the bank credit agreement. The Company also expects to
meet the covenants for the first quarter 2002 and for the remaining term of the
agreement. If the Company is not able to comply with the covenants, it expects
to be able to negotiate a waiver for the noncompliance. If the Company is not
able to comply with the covenants and the relevant banks do not agree to modify
them, then the $44.8 million outstanding in January 2002, which includes
outstanding letters of credit under the credit agreement, could become
immediately due and payable. Further, the credit agreement expires August 30,
2002. The Company must be able to extend or replace the credit agreement through
its existing banks and/or new banks at or before the time it expires, because
all amounts then outstanding under the credit agreement would otherwise become
due and payable.

The Company has agreements with organizations that process credit card
transactions arising from purchases of air travel tickets by customers of the
Company. Among them is an agreement with an organization that processes
Mastercard/Visa transactions; this organization is also a lender under the bank
credit facility. This agreement was amended in January 2002 to allow the credit
card processor to create and maintain a reserve account that it funded by
retaining cash that it otherwise would deliver to the Company under the
agreement.
25


Credit card processors have financial risk associated with tickets purchased for
travel in the future because the processor generally forwards the cash related
to the purchase to the Company soon after the purchase is completed, the air
travel generally occurs after that time, and the processor would have liability
if the Company does not ultimately deliver the travel. As a result of this
amendment, the credit card processor has retained cash representing 75 percent
of the credit card processor's risk exposure (determined on a daily basis), or
approximately $20.0 million. The 75 percent level is the maximum that the credit
card processor may withhold unless a specified triggering event occurs under the
credit card processing agreement, at which time the credit card processor may
increase the reserve to 100 percent of its risk exposure. The triggering events
include failure of the Company to meet certain liquidity or leverage-type
covenants, breaches of the Company's obligations under the card processing
agreement and default under the bank credit facility agreement. The Company
anticipates meeting all required credit card processing agreement covenants for
the first quarter 2002. The credit card processing agreement is secured by a
second priority lien, with certain exceptions, on substantially all non-aircraft
personal property assets of the Company and certain aircraft.

Capital spending totaled $60.4 million for the year ended December 31, 2001.
Capital expenditures consisted primarily of aircraft acquisition and
refurbishment costs ($50.0 million), engine overhauls and spare parts. The
Company expects to spend approximately $15.0 million on capital expenditures in
2002, primarily related to refurbishment of an aircraft, engine overhauls and
spare parts, and costs associated with improving and maintaining the Company's
information technology systems.

During 1999, the Company signed a purchase agreement to acquire four MD-80
series aircraft. The Company has taken delivery of three of the aircraft and
financed the delivery using internal cash flow. The Company terminated the
contract to purchase the fourth aircraft, based on a soft economy and desire to
focus on Boeing 717 aircraft scheduled to begin arriving in February 2003.

In June 2001, one MD-80 series aircraft was debt-financed for seven years at a
fixed interest rate. In July 2001, the Company completed a sale and leaseback of
an MD-80 series aircraft. The term of the operating lease is 10 years. Three
328JETs were partially debt-financed in 2001, each for a period up to 32 months
at fixed rates. The 328JETs will likely be refinanced for longer terms when the
initial financing comes due in 2003.

The Company's Board of Directors has authorized a $30.0 million common stock
repurchase program. As of December 31, 2001, the Company has repurchased a total
of 842,015 shares of common stock at a cost of $17.0 million. No shares were
repurchased during 2001.

In October 1998, Midwest Express took occupancy of a newly constructed
maintenance facility that is leased from Milwaukee County and located at General
Mitchell International Airport. To finance the $7.9 million project, the City of
Milwaukee issued tax-exempt, variable-rate demand industrial development revenue
bonds. The Company's variable lease payments are based on the current interest
rate of the City of Milwaukee's outstanding bonds over the 32-year lease term.
The bonds are secured by a letter of credit, pursuant to the Company's $55.0
million credit facility. Interest payments made to bondholders and amortization
of principal are recorded as rent expense.

On April 23, 2001, the Company completed a $7.0 million financing of a new
maintenance facility for Astral located at General Mitchell International
Airport. Construction was completed and occupancy of the new maintenance
facility occurred in February 2002. The facility is financed by 32-year
tax-exempt, variable-rate demand industrial development revenue bonds issued by
the City of Milwaukee. To ensure the tax-exempt status, Milwaukee County is the
owner of the facility. The bonds are secured by a letter of credit, pursuant to
the Company's $55.0 million credit facility. Interest payments made to
bondholders and amortization of principal are recorded as rent expense.

Given the uncertainties associated with the aftermath of the events of September
11, and economic conditions in general and those of the airline industry in
particular, the Company continues to operate in a highly unpredictable
environment. The Company's credit facility expires on August 30, 2002 (see Note
6). The Company believes that it will be able to renegotiate this credit
facility at terms acceptable to the Company. In the event the Company cannot

26

renegotiate the credit facility with the current collateral arrangements, the
Company would have the option of applying for a federal loan guarantee pursuant
to the Air Transportation Safety and System Stabilization Act. The Company
believes that it would qualify for guarantees to support substantially all of
the outstanding amounts at December 31, 2001. Based upon the current general
economic and industry outlook, the Company believes its existing cash and cash
equivalents, cash flow from operations, funds available from and the renewal of
credit facilities (See Note 6), federal government grant money, and Fairchild
arbitration settlement proceeds (see Note 10) will be adequate to meet its
current and anticipated working capital requirements. If these sources are
inadequate or become unavailable, the Company will pursue additional funds
through the mortgage of unencumbered assets, recovery of amounts withheld
related to credit card transactions and funds available with the benefit of
federal loan guarantees. The Company believes that all of these sources will be
adequate to meet its current and anticipated working capital requirements
through 2002. These beliefs take into consideration the Company's results of
operations in 2002 through February 2002 and are based on a number of
assumptions including without limitation the following: (a) the Company benefits
from favorable business developments during the remainder of 2002 consistent
with historical seasonal patterns, (b) there is no further material
deterioration in general economic conditions or the airline industry in
particular, (c) there are no material adverse political developments or domestic
events, (d) there is no material change in the competitive environment; and (e)
there are no further material increases in costs associated with new FAA
security directives or the Aviation and Transportation Security Act. Actual
results could differ in a material and adverse manner depending upon the
ultimate validity of these assumptions.

Regardless, two new aircraft programs (Boeing 717 and Embraer regional jets)
discussed in the Pending Developments section will require substantial cash and
short-term financing for progress payments followed by long-term financing upon
or after delivery. Availability of the requisite cash and financing cannot be
assured. Long-term financing transactions would not be consummated until close
to the aircraft delivery dates. Consummation of financing will be subject to,
among other things, general economic conditions and the Company's financial
condition at the time. These agreements are not included in the contractual
obligation schedule shown below.

The following table of material debt and lease commitments at December 31, 2001,
summarizes the effect these obligations are expected to have on the Company's
cash flow in the future periods set forth below (in thousands):


Related Cash Outflows
---------------------

Contractual Obligations Total 2002 2003 2004 2005 2006 Thereafter
- ----------------------- ----- ---- ---- ---- ---- ---- ----------


Long-term debt (excluding
interest) $ 37,111 $ 2,013 $18,194 $ 8,938 $ 1,048 $ 1,131 $ 5,786
Aircraft operating leases 199,472 25,870 25,141 22,671 21,029 19,985 84,776
Non-aircraft operating
leases 54,521 4,286 3,945 3,726 3,391 2,876 36,297
All capital leases 0 0 0 0 0 0 0
-------- ------- ------- ------- ------- ------- ---------
Total $291,104 $32,170 $47,280 $35,335 $25,468 $23,992 $126,859
======== ======= ======= ======= ======= ======= ========



Pending Developments

Capacity Reduction - Due to the events of September 11 and their aftermath, the
Company reduced its flight schedule to closer align with expected travel demand.
First quarter 2002 capacity is expected to decline 8-10% from first quarter
2001. Flight schedules and aircraft utilization for the remainder of 2002 will
depend on travel demand. The Company expects to gradually increase capacity
beginning in March 2002 as additional operations to Washington National are
restored and flight frequency is increased in other markets to meet increasing
demand for travel.

MD-80 Series Aircraft - The Company has one remaining owned MD-80 series
aircraft that has not been placed in service. The refurbishment process for this
aircraft has been temporarily suspended and will be completed after travel
demand dictates the need for more capacity.

Boeing 717 Aircraft - In April 2001, the Company signed a memorandum of
understanding for firm orders for 20 new Boeing 717 aircraft, with purchase
rights for an additional 30 aircraft. The purchase agreement for the aircraft
was signed in September 2001. Under the purchase agreement, delivery of the 20
aircraft is scheduled to begin in February 2003. These aircraft will be used to
expand service in existing and new markets, and also eventually replace the DC-9
aircraft in the Midwest Express fleet.

27

Regional Jet Aircraft - Astral operates 32-passenger Fairchild Dornier 328JET
regional jets. In September 2001, the Company settled its pending arbitration
with Fairchild Dornier GmbH over the cancellation of the 428JET program. In
first quarter 2002, the Company expects to receive and record a $46.0 million
pre-tax gain ($29.0 million after tax) associated with the settlement. The gain,
which represents a majority of the potential gain from benefits of the
settlement, includes a cash payment and substantial discounts on two 328JETs -
the ninth and tenth in its regional jet fleet - that were received in January
and February 2002. Two additional 328JET aircraft are scheduled for delivery in
October and December 2002. Future benefits of the remainder of the settlement
will be recorded when received.

In April 2001, the Company signed a memorandum of understanding placing firm
orders for 20 new Embraer regional jets, with options to purchase 20 additional
aircraft; in August 2001, the parties signed a purchase agreement relating to
this order. The firm order is valued at $400 million. Under this purchase
agreement, delivery of the 20 aircraft was scheduled to begin in January 2003.
In March 2002, the Company reached agreement with Embraer to delay delivery of
the first aircraft until January 2004. This delay will allow the Company to
concentrate on the introduction of Boeing 717 aircraft to the Midwest Express
fleet in 2003 and also provide additional time for the Company to evaluate
financing alternatives for aircraft acquisitions. The Company plans to use the
new Embraer regional jets to expand service in existing and new markets. These
regional jets are expected to provide Astral with flexibility to serve markets
with differing capacity demands.

Insurance - Due to the events of September 11, aviation insurance carriers have
significantly increased the premiums for aviation insurance, as well as war-risk
coverage (insurance coverage available to commercial air carriers for liability
to persons other than employees or passengers for claims resulting from acts of
terrorism, war or similar events). The Company believes premiums for 2002 will
increase approximately $5 million over 2001 levels.

Labor Relations - In April 1999, Midwest Express flight attendants elected the
Association of Flight Attendants ("AFA"), AFL-CIO, a labor union, for the
purpose of representation in collective bargaining. Negotiations began in
January 2000. In September 2000, AFA requested assistance from the National
Mediation Board ("NMB"). In February 2002, AFA requested to be released from
mediation by the NMB. The NMB is currently evaluating AFA's request for a
release and will meet with both parties in late March 2002 and early April 2002
before deciding whether to continue negotiations, proffer arbitration to both
parties, or recess the case without a release. If the NMB decides to proffer
arbitration and either side rejects binding arbitration, the parties will be
released into a 30-day cooling off period.

In June 2001, Astral pilots, represented by the Air Line Pilots Association
("ALPA"), a labor union in collective bargaining, began mediated negotiations.
The Astral pilots' contract expired in January 2002. Negotiations between the
Company and ALPA are currently in progress.

Loan Guarantees - The Company is evaluating whether to apply for federal loan
guarantees provided for in the Air Transportation Safety and System
Stabilization Act legislation. The Company is also evaluating various uses for
the funds the Company might borrow with the benefit of these guarantees. There
is no certainty that a loan guarantee application would be approved and at terms
acceptable to the Company.

New Accounting Standards - In August 2001, the Financial Accounting Standards
Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 is effective for the Company on January 1,
2002, and supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of." Under SFAS No. 144, impairment
is recognized if the long-lived asset is not recoverable from expected
undiscounted cash flows and is measured by the amount the carrying value of the
asset exceeds its fair value. In addition, SFAS No. 144 allows the analysis to
be applied to a group of assets. For long-lived assets to be abandoned, the
remaining depreciable life of the long-lived asset may need to be revised. For
long-lived assets to be sold, SFAS No. 144 clarifies the classification of the
long-lived asset and the criteria for such treatment. The Company has not
completed its assessment of the impact of SFAS No. 144 on its consolidated
financial statements.

28


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposures include commodity price risk (i.e.
aircraft fuel prices) and interest rate risk. The Company's operating results
are significantly impacted by changes in the price and availability of aircraft
fuel. The Company manages the price risk of fuel primarily by purchasing
commodity options that establish ceiling prices. Those options are recorded at
their fair market value, and the changes in fair market value are recorded in
the consolidated statement of operations in accordance with Statement of
Financial Accounting Standards ("SFAS"), No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and the corresponding amendments under SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities." For 2001, aircraft fuel and oil and associated taxes (including the
effect of any of the Company's options) represented 17.5% of the Company's total
operating expenses. Based on the Company's fiscal 2002 fuel consumption estimate
of 90 million gallons, a one-cent change in the average annual price per gallon
of aircraft fuel would increase the Company's fuel expense by approximately $0.9
million. Currently, the Company has options in place for 50%, 25% and 10% of its
projected aircraft fuel purchases in the first quarter 2002, second quarter
2002, and third quarter 2002, respectively.

Exposure to interest rate risk relates primarily to the Company's cash
equivalents and short-term investment portfolios, and its interest expense from
floating debt instruments. The risk associated with the Company's long-term debt
is the potential increase in variable interest rates. As of December 31, 2001,
the Company had approximately $38.0 million of short-and long-term debt that was
subject to changes in interest rates. A 100 basis point change in interest rates
would have an annual pre-tax financial impact of $0.4 million.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Financial Statements

Page 31 Report of Management
Page 32 Independent Auditors' Report
Page 33 Consolidated Statements of Operations
Page 34 Consolidated Balance Sheets
Page 35 Consolidated Statements of Cash Flows
Page 36 Consolidated Statements of Shareholders' Equity
Page 37 Notes to Consolidated Financial Statements

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not applicable, not required or the information has been furnished
elsewhere.


29



REPORT OF MANAGEMENT



To the Shareholders of Midwest Express Holdings, Inc.:

The management of Midwest Express Holdings, Inc., is responsible for the
preparation, content, integrity and objectivity of the consolidated financial
statements and other information contained in this annual report filed on Form
10-K. The consolidated financial statements were prepared using accounting
principles generally accepted in the United States of America, applied on a
consistent basis. The statements have been audited by Deloitte & Touche LLP,
independent auditors, whose report appears on the next page.

The Company maintains a system of internal control that is supported by written
policies and procedures, and is monitored by management and the internal audit
function. Although all internal controls have inherent limitations, including
the possibility of circumvention and overriding controls, management believes
the Company's internal controls provide reasonable assurance as to the integrity
and reliability of the financial statements, and that its assets are safeguarded
against unauthorized acquisition, use or disposition. Management takes
appropriate actions to correct deficiencies as they are identified.

The Audit Committee of the Board of Directors is composed entirely of outside
directors. The Committee meets periodically with the Company's management and
internal audit function and with its independent auditors to review auditing,
internal control and financial reporting matters.

Based on its assessment of internal control as of December 31, 2001, management
believes its internal controls over the preparation of financial statements and
the safeguarding of assets are effective.



/s/ Timothy E. Hoeksema

Timothy E. Hoeksema
Chairman, President and Chief Executive Officer



/s/ Robert S. Bahlman

Robert S. Bahlman
Senior Vice President, Chief Financial Officer and Controller


30



INDEPENDENT AUDITORS' REPORT



To the Shareholders and Board of Directors of Midwest Express Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Midwest Express
Holdings, Inc. and its subsidiary as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Midwest Express Holdings, Inc. and
its subsidiary as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note 13 to the consolidated financial statements, Midwest
Express Holdings, Inc. changed its methods of accounting for major airframe
maintenance as well as Frequent Flyer revenue in 2000.



/s/ Deloitte & Touche LLP

Milwaukee, Wisconsin
January 23, 2002


31

CONSOLIDATED STATEMENTS OF OPERATIONS

MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2001 2000 1999
---------- ---------- ----------
Operating revenues:
Passenger service $ 414,155 $ 439,376 $ 406,803
Cargo 8,844 11,092 11,912
Other 34,443 29,553 28,837
---------- ---------- ----------
Total operating revenues 457,442 480,021 447,552
---------- ---------- ----------
Operating expenses:
Salaries, wages and benefits 167,300 151,667 126,167
Aircraft fuel and oil 86,957 93,709 53,226
Commissions 23,582 25,406 30,499
Dining services 25,929 25,076 23,892
Station rental, landing and
other fees 36,426 34,897 30,510
Aircraft maintenance materials
and repairs 50,069 54,283 46,076
Depreciation and amortization 20,945 17,006 13,211
Aircraft rentals 24,780 24,508 20,014
Impairment loss 8,839 - -
Other 50,659 46,591 43,205
---------- ---------- ----------
Total operating expenses 495,486 473,143 386,800
---------- ---------- ----------
Operating (loss) income (38,044) 6,878 60,752
---------- ---------- ----------
Other income (expense):
Interest income 1,044 1,863 1,117
Interest expense (2,984) (339) (270)
Other, net 16,304 (113) 68
---------- ---------- ----------
Total other income (expense) 14,364 1,411 915
---------- ---------- ----------
(Loss) Income before income tax
(credit) provision and cumulative
effect of accounting changes (23,680) 8,289 61,667
(Credit) Provision for income taxes (8,762) 3,062 22,876
---------- ---------- ----------
(Loss) Income before cumulative
effect of accounting changes (14,918) 5,227 38,791
Cumulative effect of accounting
changes, net of applicable income
taxes of $2,768 - (4,713) -
---------- ---------- ----------
Net (Loss) Income $ (14,918) $ 514 $ 38,791
========== ========== ==========

(Loss) Income per common share - basic:
(Loss) Income before cumulative
effect of accounting changes $ (1.08) $ 0.37 $ 2.75
Cumulative effect of accounting
changes, net of applicable
income taxes - (0.33) -
---------- ---------- ----------
Net (Loss) Income $ (1.08) $ 0.04 $ 2.75
========== ========== ==========

(Loss) Income per common share - diluted:
(Loss) Income before cumulative
effect of accounting changes $ (1.08) $ 0.37 $ 2.71
Cumulative effect of accounting
changes, net of applicable
income taxes - (0.33) -
---------- ---------- ----------
Net (Loss) Income $ (1.08) $ 0.04 $ 2.71
========== ========== ==========
32

CONSOLIDATED BALANCE SHEETS

MIDWEST EXPRESS HOLDINGS, INC.
AS OF DECEMBER 31, 2001 AND 2000
(DOLLARS IN THOUSANDS) 2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 46,923 $ 15,703
Accounts receivable, less allowance for
doubtful accounts of $149 in 2001 and
$226 in 2000 21,783 15,850
Inventories 7,568 7,988
Prepaid expenses:
Commissions 2,128 2,491
Other 2,699 2,606
-------- --------
Total prepaid expenses 4,827 5,097
Deferred income taxes 9,392 9,351
-------- --------
Total current assets 90,493 53,989
-------- --------
Property and equipment, net 256,506 242,875
Landing slots and leasehold rights, less
accumulated amortization of $3,260 in
2001 and $2,878 in 2000 3,490 3,872
Purchase deposits on flight equipment 3,500 1,900
Other assets, net 3,382 3,361
-------- --------
Total assets $357,371 $305,997
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 15,864 $ 6,216
Notes payable 38,000 20,000
Current maturities of long-term debt 2,013 182
Air traffic liability 55,812 54,440
Accrued liabilities:
Vacation pay 6,021 5,718
Scheduled maintenance expense 4,980 6,914
Frequent Flyer awards 2,570 2,281
Other 26,612 27,374
-------- --------
Total current liabilities 151,872 123,125
-------- --------
Long-term debt 35,097 2,886
Deferred income taxes 22,932 21,694
Noncurrent scheduled maintenance expense 6,521 7,566
Accrued pension and other postretirement
benefits 10,368 7,909
Deferred Frequent Flyer partner revenue 8,215 7,517
Other noncurrent liabilities 7,630 6,024
-------- --------
Total liabilities 242,635 176,721
-------- --------

Commitments and contingencies (Notes 2, 5 and 10)

Shareholders' equity:
Preferred stock, without par value,
5,000,000 shares authorized, no shares
issued or outstanding - -
Common stock, $.01 par value, 25,000,000
shares authorized, 14,549,531 shares issued 145 145
Additional paid-in capital 11,702 11,609
Treasury stock, at cost; 718,056 shares in
2001 and 742,680 shares in 2000 (15,706) (15,991)
Retained earnings 118,595 133,513
-------- --------
Total shareholders' equity 114,736 129,276
-------- --------
Total liabilities and shareholders' equity $357,371 $305,997
======== ========

See notes to consolidated financial statements.


33

CONSOLIDATED STATEMENTS OF CASH FLOWS

MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS) 2001 2000 1999
---------- --------- ---------
Operating activities:
Net (loss) income $ (14,918) $ 514 $ 38,791
Items not involving the use of cash:
Depreciation and amortization 20,945 17,006 13,211
Impairment loss 8,839 - -
Deferred income taxes 1,197 2,747 1,470
Cumulative effect of accounting
changes, net - 4,713 -
Other, net 4,059 5,674 5,565
Changes in operating assets and
liabilities:
Accounts receivable (3,777) (2,845) (629)
Inventories 420 (718) (3,250)
Prepaid expenses 270 (452) 1,713
Accounts payable 9,648 1,420 (168)
Deferred Frequent Flyer partner revenue 698 1,151 -
Accrued liabilities (5,942) 3,811 789
Air traffic liability 1,372 9,897 1,143
--------- -------- --------
Net cash provided by operating activities 22,811 42,918 58,635
--------- -------- --------
Investing activities:
Capital expenditures (58,171) (56,209) (67,206)
Purchase deposits on flight equipment (1,600) 100 (2,983)
Proceeds from sale of property and
equipment 1,745 243 89
Other, net (549) (410) (1,438)
--------- -------- --------
Net cash used in investing activities (58,575) (56,276) (71,538)
--------- -------- --------
Financing activities:
Proceeds from aircraft financing 35,080 - -
Proceeds from debt issuance 18,000 20,000 -
Proceeds from sale and leaseback
transactions 10,500 - 15,951
Purchase of treasury stock - (5,982) (4,253)
Other, net 3,404 (1,006) 3,799
--------- -------- --------
Net cash provided by financing activities 66,984 13,012 15,497
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents 31,220 (346) 2,594
Cash and cash equivalents, beginning of
year 15,703 16,049 13,455
--------- -------- --------
Cash and cash equivalents, end of year $ 46,923 $ 15,703 $ 16,049
========= ======== ========
Supplemental cash flow information:
Cash (received) paid for:
Income taxes* $ (8,608) $ 2,294 $ 20,668
Interest $ 2,692 $ 259 $ 270
Supplemental schedule of investing
activities:
Accrued capital expenditures $ 637 $ 1,034 $ 1,372
Transfer of flight equipment from
purchase deposits to property and
equipment $ - $ - $ 14,366
Spare parts credit $ 2,156 $ - $ 1,350

* Included in taxes paid are amounts paid to Kimberly-Clark in accordance with
the Tax Agreement totaling $1,689 in 2001, $1,866 in 2000 and $4,047 in 1999.

34



CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(DOLLARS IN THOUSANDS)

Common Additional Total
Stock, $.01 Paid-in Treasury Retained Shareholders'
par value Capital Stock Earnings Equity
----------- ---------- ---------- -------- -------------


Balances at December 31, 1998 $ 145 $ 9,680 $ (6,401) $ 94,208 $ 97,632
Net income - - - 38,791 38,791
Purchase of 147,100 shares of treasury
stock - - (4,253) - (4,253)
Issuance (receipt) of common stock upon
exercise of stock options and related
tax benefits - 1,395 (104) - 1,291
Other - 72 6 - 78
------- -------- --------- -------- ---------

Balances at December 31, 1999 145 11,147 (10,752) 132,999 133,539
Net income - - - 514 514
Purchase of 276,290 shares of treasury stock - - (5,982) - (5,982)
Issuance of common stock upon exercise
of stock options and related tax benefits - 324 667 - 991
Other - 138 76 - 214
------- -------- --------- -------- ---------

Balances at December 31, 2000 145 11,609 (15,991) 133,513 129,276
Net (loss) - - - (14,918) (14,918)
Issuance of common stock upon exercise
of stock options and related tax benefits - 23 182 - 205
Other - 70 103 - 173
------- -------- --------- -------- ---------

Balances at December 31, 2001 $ 145 $ 11,702 $ (15,706) $118,595 $ 114,736
======= ======== ========= ======== =========



35



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


MIDWEST EXPRESS HOLDINGS, INC.
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

Note 1. Business and Basis of Presentation

Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Midwest Express Holdings, Inc. (the "Company") and its subsidiary, which is
wholly owned. All significant intercompany accounts and transactions have been
eliminated in consolidation.

Nature of Operations
Midwest Express Airlines, Inc. ("Midwest Express") is a U.S. air carrier
providing scheduled passenger service to 26 destinations in the United States.
Midwest Express also provides aircraft charter services, air freight and other
airline services. In May 1994, Midwest Express established Omaha, Nebraska, as
its first base of operations outside of Milwaukee, and currently provides
nonstop jet service between Omaha and five destinations. In September 2000,
Midwest Express established Kansas City, Missouri, as its third base of
operations and currently provides nonstop jet service between Kansas City and 10
destinations. Astral Aviation, Inc., doing business as Skyway Airlines, The
Midwest Express Connection ("Astral"), provides regional scheduled passenger
service to cities primarily in the midwest. Astral is a wholly owned subsidiary
of Midwest Express.

NOTE 2. SEPTEMBER 11, 2001 IMPACT

As a result of the unprecedented financial losses that all airlines incurred due
to the September 11, 2001 terrorist attacks, the President signed into law the
Air Transportation Safety and System Stabilization Act on September 22, 2001.
This Act provides financial support to air carriers for direct and incremental
losses incurred as a result of September 11. Support was provided in the form of
a $5.0 billion grant ($4.5 billion for passenger carriers and $0.5 billion for
cargo carriers), $10.0 billion in loan guarantees, assistance with increased
insurance costs and delayed federal excise tax payments. The grant provided
assistance with direct losses incurred as a result of the September 11 air
transportation system shutdown and the continuing incremental losses incurred
through December 31, 2001. Loan guarantees will be extended to air carriers that
are unable to obtain the same credit that was available to them prior to
September 11. Insurance assistance is being provided to mitigate the effects of
reduced insurance coverage and significantly increased premiums.

The Company was severely impacted by the terrorist attacks of September 11.
Following the attacks, the air transportation system was temporarily shut down,
resulting in the cancellation of more than 1,000 Midwest Express and Astral
flights. The Company estimates that the events of September 11 negatively
impacted operating income for the year by approximately $18.0 million. This
resulted from a combination of lost revenue from canceled flights, lower load
factors and revenue yield on flights operated, and costs incurred during and
after the temporary shutdown.

The Company recognized non-operating income of $16.3 million in 2001 associated
with amounts claimed under the Air Transportation Safety and System
Stabilization Act. Of the amount claimed, the Company received $13.9 million as
of December 31, 2001 and expects to receive the remaining $2.4 million in 2002.
The amount recorded represents the total amount claimed since the incurred
losses prior to December 31, 2001 were in excess of this amount. Because revenue
will remain depressed for an unknown length of time, the Company has taken a
number of initiatives to reduce costs. The Company implemented schedule changes
that eliminated service, reduced flight frequency, used smaller aircraft in some
markets and transitioned service from Midwest Express to Astral in some markets.
The result of these schedule changes for the last four months of 2001 is a
capacity reduction of about 20% compared to the pre-September 11 operations
plan. The Company plans to begin re-adding some capacity in March 2002 as travel
demand warrants.

36


The Company reduced employee headcount to lower costs. In May 2001, the Company
completed permanent layoffs of approximately 250 full-time-equivalent employees;
the Company recorded charges of $1.1 million related to the workforce reduction.
The $1.1 million charge includes salaries, wages and benefits, legal, severance
costs and outplacement services. All amounts were paid as of December 31, 2001.
Subsequent to September 11, the Company furloughed approximately 550
full-time-equivalent employees: 450 at Midwest Express and 100 at Astral. The
Company implemented a salary freeze for all employees except pilots' wages which
are covered by a collective bargaining agreement. The Company asked the pilots
for similar wage concessions, but has been unsuccessful in securing these
concessions to date. Effective October 1, 2001, the Company also temporarily
suspended matching contributions to employee 401(k) programs.

Additional cost reductions include the implementation of a new commission
structure for travel agents that caps commissions at lower levels beginning in
September 2001, changes to the dining services program to comply with new
security directives and implement roundtrip catering on most flights (whereby
meals for both segments of a roundtrip route are loaded at the origin city), and
reduced advertising and promotional spending.

The Company's credit facility requires compliance with certain financial
covenants (see Note 6). The Company expects to meet the covenants for the
remainder of the agreement. If the Company is not able to comply with the
covenants, it expects to be able to negotiate a waiver for the noncompliance.

Given the uncertainties associated with the aftermath of the events of September
11 and economic conditions in general and those of the airline industry in
particular, the Company continues to operate in a highly unpredictable
environment. The Company's credit facility expires on August 30, 2002 (see Note
6). The Company believes that it will be able to renegotiate this credit
facility at terms acceptable to the Company. In the event the Company cannot
renegotiate the credit facility with the current collateral arrangements, the
Company would have the option of applying for a federal loan guarantee pursuant
to the Air Transportation Safety and System Stabilization Act. The Company
believes that it would qualify for guarantees to support substantially all of
the outstanding amounts at December 31, 2001. Based upon the current general
economic and industry outlook, the Company believes its existing cash and cash
equivalents, cash flow from operations, funds available from and the renewal of
credit facilities (See Note 6), federal government grant money, and Fairchild
arbitration settlement proceeds (see Note 10) will be adequate to meet its
current and anticipated working capital requirements. If these sources are
inadequate or become unavailable, the Company will pursue additional funds
through the mortgage of unencumbered assets, recovery of amounts withheld
related to credit card transactions and funds available with the benefit of
federal loan guarantees. The Company believes that all of these sources will be
adequate to meet its current and anticipated working capital requirements
through 2002.

NOTE 3. ACCOUNTING POLICIES

The accounting policies of the Company conform to accounting principles
generally accepted in the United States of America and to accounting practices
generally followed in the airline industry. Significant policies followed are
described below.

Cash and Cash Equivalents
The Company considers all highly liquid investments with purchased maturities of
three months or less to be cash equivalents. They are carried at cost, which
approximates market.

Inventories
Inventories consist primarily of aircraft maintenance parts, maintenance
supplies and fuel stated at the lower of cost on the first-in, first-out (FIFO)
method or market, and are expensed when used in operations.

Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method applied to each unit of property for financial reporting
purposes and by use of accelerated methods for income tax purposes. Aircraft are
depreciated to estimated residual values, and any gain or loss on disposal is
reflected in income.

37


The depreciable lives for the principal asset categories are as follows:
Asset Category Depreciable Life
-------------- ----------------
Flight equipment 10 to 15 years
Other equipment 5 to 8 years
Office furniture and equipment 5 to 20 years
Buildings 40 years
Building improvements Lesser of 20 years or remaining life
of building or lease

Other Assets
Airport takeoff and landing slots have historically appreciated in value, and
are occasionally traded, sold or leased among airlines. The cost of takeoff and
landing slots is amortized on the straight-line method over 20 years consistent
with industry practice. The cost of airport leasehold rights is amortized on the
straight-line method over the term of the lease. The cost of capitalized
software is amortized on the straight-line method over five years or less.

Impairment of Long-Lived Assets
The Company records impairment charges on long-lived assets used in operations
when events and circumstances indicate the assets may be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
their carrying amount. During the second quarter 2001, the Company decided to
accelerate the retirement of eight Midwest Express DC-9-10 aircraft. In
connection with this decision, the Company performed evaluations to determine,
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," whether future cash flows (undiscounted and without interest
charges) expected to result from the use and eventual disposition of these
aircraft would be less than the aggregate carrying amounts. As a result of the
evaluation, the Company determined that the estimated future cash flows expected
to be generated by these aircraft would be less than their carrying amount,
resulting in an impairment as defined by SFAS No. 121. Consequently, the
original cost bases of these assets were reduced to reflect the fair market
value at the date of the decision, resulting in an $8.8 million (pre-tax)
impairment loss, and the remaining depreciable lives were adjusted for the new
retirement schedule. In determining the fair market value of these assets, the
Company considered market trends in aircraft dispositions, data from third
parties and management estimates.

The Federal Aviation Administration has designated John F. Kennedy International
Airport ("Kennedy") and La Guardia Airport ("La Guardia") in New York, O'Hare
International Airport ("O'Hare") in Chicago and Ronald Reagan Washington
National Airport ("Washington National") in Washington, D.C. as "high density
traffic airports" and has limited the number of departure and arrival slots at
these airports. In April 2000, legislation was signed eliminating slot
restrictions beginning in 2001 at O'Hare and in 2007 at La Guardia and Kennedy.
The Company operates slots at La Guardia and Reagan National. As a result of the
passage of this


38


legislation, the Company adjusted the book life of its La Guardia slots in 2000.
The affect of the adjustment on the asset was immaterial.

Revenue Recognition
Passenger revenue, related commissions, if any, and cargo revenues are
recognized in the period when the service is provided. A portion of the revenue
from the sale of Frequent Flyer miles is deferred and recognized when
transportation is provided to the passenger. Contract maintenance revenue is
recognized when work is completed and invoiced. The estimated liability for
sold, but unused, tickets is included in current liabilities as air traffic
liability. The amount of commissions associated with unearned revenue is
included in current assets as prepaid commissions.

Advertising Expense
Advertising costs are charged to expense when incurred. Advertising expense for
the years ended December 31, 2001, 2000 and 1999 was $6.9 million, $6.9 million
and $5.6 million, respectively.

Concentrations of Risk
Certain of the Company's employees are covered under various collective
bargaining agreements. The Astral pilots' contract expired in January 2002. The
Company and ALPA are currently in negotiations for a new contract. The Midwest
Express pilots' contract expires in February 2005. These contracts represent
5.8%, and 9.5% respectively, of the Company's employees at December 31, 2001.

Fair Value of Financial Instruments
The Company believes the carrying value of its financial instruments (cash and
cash equivalents, accounts receivable, accounts payable, and long-term debt) is
a reasonable estimate of the fair value of these instruments due to their
short-term nature or variable interest rate. The carrying value of derivative
instruments have been marked to market based upon the fair value of similar
instruments as of the balance sheet date.

Maintenance and Repair Costs
Routine maintenance and repair costs for owned and leased aircraft are charged
to expense when incurred. Effective January 1, 2000, the Company changed its
accounting policy associated with major maintenance on airframes in conjunction
with the Company's efforts to divide major maintenance events into smaller, more
frequent events; as a result, the Company expenses airframe maintenance costs as
they are incurred. In the past, major airframe costs were either (1) accrued to
expense on the basis of estimated future costs and estimated flight hours
between major maintenance events, or (2) capitalized when incurred and amortized
on the basis of estimated flight hours until the next major maintenance event.
Costs associated with major maintenance on aircraft engines will continue to use
the deferral or accrual method. The actual maintenance and repair costs to be
incurred could differ from the Company's estimates.

In June 2001, the Company entered into a contract with FiatAvio S.p.A to provide
all major maintenance for MD-80 aircraft engines. This agreement allows the
Company to expense engine maintenance based on a fixed flight hour rate that
covers all scheduled and certain unscheduled maintenance events. This contract
is expected to provide long-term stabilization of engine operations costs on the
MD-80 fleet.

Frequent Flyer Program
Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), issued by the
Securities and Exchange Commission in December 1999. SAB 101 provides guidance
on the application of generally accepted accounting principles to revenue
recognition in financial statements. Prior to the issuance of SAB 101, the
Company recognized all revenue from Frequent Flyer miles sold to partners, net
of the incremental cost of providing future air travel, when the mileage was
sold, which was consistent with most major airlines. Beginning January 1, 2000,
as a result of

39


adopting SAB 101, the Company changed its method used to account for the sale of
Frequent Flyer mileage credits to participating partners such as credit card
companies, hotels and car rental agencies. Under the new accounting method, a
portion of the revenue from the sale of Frequent Flyer mileage credits is
deferred and recognized when transportation is provided to the passenger. The
Company believes the new method appropriately matches revenues with the period
in which services are provided.

The estimated incremental cost of providing future transportation in conjunction
with miles earned by travel under the Company's Frequent Flyer program is
accrued based on estimated redemption percentages applied to actual mileage
recorded in members' accounts. The ultimate cost will depend on the actual
redemption of Frequent Flyer miles and may be greater or less than amounts
accrued at December 31, 2001.

Postretirement Health Care and Life Insurance Benefits
The costs of health care and life insurance benefit plans for retired employees
are accrued over the working lives of employees in accordance with SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."

Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes ("SFAS 109")." SFAS No. 109 requires that deferred
income taxes be determined under the asset and liability method. Deferred income
taxes have been recognized for the future tax consequences of temporary
differences by applying enacted statutory tax rates applicable to differences
between the financial reporting and the tax bases of assets and liabilities.

Leases
Rental obligations under operating leases for aircraft, facilities and equipment
are charged to expense on the straight-line method over the term of the lease.

Derivative Instruments and Hedging Activities
On January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended, which requires that all
derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
The cumulative effect of adopting SFAS No. 133 was not material to the Company's
consolidated financial statements. The Company does not hold or issue derivative
instruments for trading purposes; the Company does utilize option contracts to
cap a portion of its exposure for aircraft fuel. At December 31, 2001, the
Company had such contracts in place for 50%, 25%, and 10% of its projected
aircraft fuel purchases in the first quarter of 2002, second quarter of 2002,
and third quarter of 2002, respectively.

The primary objective of the Company's derivative instrument policy is to
mitigate the Company's exposure to the fluctuation in aircraft fuel prices. The
Company enters into option cap arrangements, which allow it to cap the price of
a specified number of gallons of aircraft fuel. At December 31, 2001, the
Company's option cap arrangements were valued at $0.9 million and are included
in other prepaid expenses in the consolidated balance sheet. Settlement costs
and changes in the fair value of these arrangements are included in aircraft
fuel expenses in the consolidated statement of operations.

The Company elected not to account for the current contracts as hedges; however,
it may do so for future contracts. Hedge effectiveness is determined by how
closely the changes in the fair value of the hedging instrument offset the
changes in the fair value of the hedged item. Hedge accounting is permitted only
if the hedging relationship is expected to be highly effective at the inception
of the hedge and on an ongoing basis. The change in fair value of the effective
portion of the hedge is included in other comprehensive income until the period
in which the related aircraft fuel purchases are consumed and recognized as an
expense. Any ineffective portions are to be recognized in earnings immediately.
In calculating the ineffective portion of hedge performance under SFAS No. 133,
all changes in the time value component related to any option premiums paid are
included in the calculation and are recognized as income during the life of the
contract.

40


Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the year. Future results could differ from those
estimates.

New Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
is effective for the Company on January 1, 2002, and supercedes SFAS No 121
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." Under SFAS No.144, impairment is recognized if the long-lived
asset is not recoverable from expected undiscounted cash flows and is measured
by the amount the carrying value of the asset exceeds its fair value. In
addition, SFAS No. 144 allows the analysis to be applied to a group of assets.
For long-lived assets to be abandoned, the remaining depreciable life of the
long-lived asset may need to be revised. For long-lived assets to be sold, SFAS
No. 144 clarifies the classification of the long-lived asset and the criteria
for such treatment. The Company has not completed its assessment of the impact
of SFAS No. 144 on its consolidated financial statements.

NOTE 4. PROPERTY AND EQUIPMENT

As of December 31, 2001 and 2000, property and equipment consisted of the
following (in thousands):

2001 2000
---------- ---------
Flight equipment $ 306,241 $ 262,119
Other equipment 15,446 13,922
Buildings and improvements 25,473 26,379
Office furniture and equipment 18,587 16,203
Construction in progress 16,062 31,460
--------- ---------
381,809 350,083
Less accumulated depreciation (125,303) (107,208)
--------- ---------
Property and equipment, net $ 256,506 $ 242,875
========= =========

Note 5. Leases

The Company leases aircraft, terminal space, office space and warehouse space.
Future minimum lease payments required under operating leases having initial or
remaining non-cancelable lease terms in excess of one year as of December 31,
2001 were as follows (in thousands):

Year ended December 31,
2002 $ 30,156
2003 29,086
2004 26,397
2005 24,420
2006 22,861
2007 and thereafter 121,073
---------
$ 253,993
=========



41


As of December 31, 2001, Midwest Express had 14 jet aircraft in service financed
by operating leases. These leases have expiration dates ranging from 2004
through 2011 and can generally be renewed, based on the fair market value at the
end of the lease term, for one to three years. All of the leases include
purchase options at or near the end of the lease term at fair market value, but
generally not in excess of the lessor's defined cost of the aircraft.

As of December 31, 2001, Astral's 15 turboprop aircraft were financed under
operating leases with initial lease terms of five to 12 years, and expiration
dates ranging from 2004 through 2008. These leases permit renewal for various
periods at rates approximating fair market value and purchase options at or near
the end of the lease term at fair market value.

In the fourth quarter 1999, the Company entered into lease agreements to finance
the acquisition of five Fairchild Dornier 328JETs. The leases run for a term of
16.5 years, with expiration of all leases occurring in 2016. These leases permit
renewal for various periods at rates approximating fair market value and
purchase options at or near the end of the lease term at fair market value.

On April 23, 2001, the Company completed a $7.0 million financing of a new
maintenance facility for Astral located at General Mitchell International
Airport. Construction was completed and occupancy of the new maintenance
facility occurred in February 2002. The facility is financed by 32-year
tax-exempt, variable-rate demand industrial development revenue bonds issued by
the City of Milwaukee. To ensure the tax-exempt status, Milwaukee County is the
owner of the facility. The bonds are secured by a letter of credit, pursuant to
the Company's $55.0 million credit facility. Interest payments made to
bondholders and amortization of principal are recorded as rent expense.

In October 1998, Midwest Express moved into a newly constructed maintenance
facility that is owned by Milwaukee County and located at General Mitchell
International Airport. To finance the $7.9 million project, the City of
Milwaukee issued variable-rate demand industrial development revenue bonds. The
Company's variable rent payments are based on the current interest rate of the
City of Milwaukee's outstanding bonds over the 32-year lease term. The bonds are
secured by a letter of credit, pursuant to the Company's $55.0 million credit
facility.

Rent expense for all operating leases, excluding landing fees, was $39,021,000,
$38,259,000 and $31,096,000 for 2001, 2000 and 1999, respectively.

NOTE 6. FINANCING AGREEMENTS

As of December 31, 2001, the Company had a $55.0 million secured bank credit
facility. The credit facility, scheduled to expire August 30, 2002 (see Note 2)
is secured by, with certain exceptions, substantially all non-aircraft personal
property assets of the Company and by certain aircraft. The credit facility
agreement requires quarterly compliance of certain financial covenants. The fees
and borrowing costs under the agreement are higher than they were prior to
August 31, 2001, which is the date the facility became effective. The interest
rate on borrowings under the facility is LIBOR plus 250 basis points (4.5% as of
December 31, 2001). That interest rate spread and certain fees and costs are
subject to reduction based upon improved financial covenant performance.

As of December 31, 2001, the Company had borrowings under the facility totaling
$38.0 million. The Company made a $10.0 million payment of principal in
connection with the amendment in January 2002 that reduced borrowings to $28.0
million. In addition, as of December 31, 2001, letters of credit totaling
approximately $16.8 million were outstanding under the credit facility, reducing
the available credit by that amount. The letters of credit are primarily used to
support financing of the Company's maintenance facilities and for other
purposes.

The availability of the $55.0 million under the credit facility is subject to a
calculation based on the valuation of certain elements of the collateral for the
credit facility. The credit facility agreement was amended in January 2002 to
change the way that calculation is done. As a result, the Company may obtain
credit of up to $45.0 million on the basis of personal property assets, and if
the Company mortgages its headquarters real estate to the banks, additional
credit of up to the collateral basis of the headquarters real estate but not
more than $10.0 million.

42


As of December 31, 2001, the Company was in compliance with the financial
covenants contained in the bank credit agreement. The Company also expects to
meet the covenants for the first quarter 2002 and for the remaining term of the
agreement. If the Company is not able to comply with the covenants and the
relevant banks do not agree to modify them, then the $44.8 million outstanding
in January 2002, which includes outstanding letters of credit, under the credit
agreement could become immediately due and payable. Further, the credit
agreement expires August 30, 2002. The Company must be able to extend or replace
the credit agreement through its existing banks and/or new banks at or before
the time it expires, because all amounts then outstanding under the credit
agreement would otherwise become due and payable.

The Company has agreements with organizations that process credit card
transactions arising from purchases of air travel tickets by customers of the
Company. Among them is an agreement with an organization that processes
Mastercard/Visa transactions; this organization is also a lender under the bank
credit facility. This agreement was amended in January 2002 to allow the credit
card processor to create and maintain a reserve account that it funded by
retaining cash that it otherwise would deliver to the Company under the
agreement. Credit card processors have financial risk associated with tickets
purchased for travel in the future because the processor generally forwards the
cash related to the purchase to the Company soon after the purchase is
completed, the air travel generally occurs after that time, and the processor
would have liability if the Company does not ultimately deliver the travel. As a
result of this amendment, the credit card processor has retained cash
representing 75 percent of the credit card processor's risk exposure (determined
on a daily basis), or approximately $20.0 million. The 75 percent level is the
maximum that the credit card processor may withhold unless a specified
triggering event occurs under the credit card processing agreement, at which
time the credit card processor may increase the reserve to 100 percent of its
risk exposure. The triggering events include failure of the Company to meet
certain liquidity or leverage-type covenants, breaches of the Company's
obligations under the card processing agreement and default under the bank
credit facility agreement. The Company anticipates meeting all required credit
card processing agreement covenants for the first quarter 2002. The credit card
processing agreement is secured by a second priority lien, with certain
exceptions, on substantially all non-aircraft personal property assets of the
Company and certain aircraft.

The amounts discussed above are being withheld due to the lack of
collateralization to mitigate the credit card processor's financial risk. The
Company believes it has the ability to recover substantially all of the funds
withheld, if needed, by obtaining a letter of credit that would eliminate the
exposure to the credit card processors.

Three 328JETs were debt-financed in 2001, each for a period up to 32 months at
fixed interest rates ranging from 5.58% to 5.92% for the first 26 to 28 months.
The interest rates revert to a variable rate for the last few months of the
financing agreement. The Company expects to refinance these 328JETs for longer
terms when the initial financing expires in 2003. In June 2001, one MD-80 series
aircraft was debt-financed for $8.1 million


43




over seven years at a fixed interest rate of 7.39%. Future maturities of
long-term debt on these aircraft for the next five years are as follows (in
thousands):

Year ended December 31,
2002 $ 1,800
2003 17,961
2004 8,685
2005 774
2006 833
2007 and thereafter 4,171

In August 1997, the Company purchased its headquarters building, which it had
previously leased. As part of the transaction, the Company assumed $3.5 million
of long-term debt. The mortgage note has an interest rate of 8.25% and is
payable in monthly installments through April 2011. Future maturities of
long-term debt on the headquarters building for the next five years are as
follows (in thousands):

Year ended December 31,
2002 $ 213
2003 233
2004 253
2005 274
2006 298
2007 and thereafter 1,615

Substantially all of the Company's fixed assets are pledged as collateral for
the above financing arrangements.


44




Note 7. Net (Loss) Income Per Share

Reconciliations of the numerator and denominator of the basic and diluted net
(loss) income per share computations are summarized as follows (in thousands,
except per share amounts):

2001 2000 1999
---- ---- ----
Net (Loss) Income Per Share - Basic:
(Loss) income before cumulative effect
of accounting changes $ (14,918) $ 5,227 $ 38,791
Cumulative effect of accounting
changes, net - (4,713) -
--------- -------- --------
Net (loss) income (numerator) $ (14,918) $ 514 $ 38,791
========= ======== ========

Weighted average shares outstanding
(denominator) 13,829 13,947 14,121
========= ======== ========
Net (loss) income per share - basic $ (1.08) 0.04 2.75
========= ======== ========

Net (Loss) Income Per Share - Diluted:
(Loss) income before cumulative effect
of accounting changes $ (14,918) $ 5,227 $ 38,791
Cumulative effect of accounting
changes, net - (4,713) -
--------- -------- --------

Net (loss) income (numerator) $ (14,918) $ 514 $ 38,791
========= ======== ========

Weighted average shares outstanding 13,829 13,947 14,121
Effect of dilutive securites:
Stock options (1) - 109 160
Shares issuable under the 1995 Stock
Plan for Outside Directors (1) - 11 12
--------- -------- --------
Weighted average shares outstanding
assuming dilution (denominator) 13,829 14,067 14,293
========= ======== ========
Net (loss) income per share - diluted $ (1.08) $ 0.04 $ 2.71
========= ======== ========


(1) Stock options outstanding and shares issuable under the 1995
Stock Plan for Outside Directors of 45 and 12, respectively,
were excluded from the 2001 calculation as their effect was
anti-dilutive.

NOTE 8. SHAREHOLDERS' EQUITY

In 1996, the Board of Directors adopted a shareholder rights plan and made a
dividend distribution of one Preferred Share Purchase Right ("Right") on each
outstanding share of the Company's common stock. As a result of the 3-for-2
stock splits effected in May 1997 and 1998, four-ninths of a Right is now
associated with each share of common stock. The Rights are exercisable only if a
person or entity acquires 15% or more of the common stock of the Company or
announces a tender offer for 15% or more of the common stock. Each Right
initially entitles its holder to purchase one one-hundredth share of the
Company's Series A Preferred Stock at an exercise price of $100, subject to
adjustment. If a person or entity acquires 15% or more of the Company's common
stock, then each Right will entitle the holder to purchase, at the Right's
then-current exercise price, Company common stock valued at twice the exercise
price. The Board of Directors is also authorized to reduce the 15% threshold
referred to above to not less than 10%. The Rights expire in 2006.

Under the Company's 1995 Stock Option Plan, the Compensation Committee of the
Board of Directors may grant options, at its discretion, to certain employees to
purchase shares of common stock. An aggregate of 2,548,900 shares of common
stock is reserved for issuance under the Plan, of which 962,475 are available
for future grants at December 31, 2001. Under the Plan, options granted have an
exercise price equal to 100% of the fair market value of the underlying stock at
the date of grant. Granted options become exercisable at the rate of 30% after
the first year, 30% after the second year and the remaining 40% after the third
year, unless otherwise determined, and have a maximum term of 10 years.

45




Transactions with respect to the Plan have been adjusted to reflect the effect
of the two stock splits and are summarized as follows:

Weighted
Average
Shares Price
-------- --------

Options outstanding at December 31, 1998 761,975 $ 18.49
Granted 309,250 29.27
Exercised (77,150) 11.01
Forfeited (72,850) 27.62
---------
Options outstanding at December 31, 1999 921,225 22.02
Granted 286,100 23.83
Exercised (61,850) 11.69
Forfeited (80,510) 28.30
---------
Options outstanding at December 31, 2000 1,064,965 22.63
Granted 353,075 18.21
Exercised (15,750) 10.32
Forfeited (6,490) 25.93
---------

Options outstanding at December 31, 2001 1,395,800 21.63
=========

Options exercisable with their weighted average exercise price as of December
31, 2001, 2000 and 1999 were: 769,055 options at $21.71; 548,710 options at
$18.83 and 391,200 options at $14.76, respectively.

Options exercisable at December 31, 2001 consisted of:

Exercise Price Number of Options
-------------- -----------------

$ 8.00 134,000
14.00 22,500
15.14 22,500
16.11 157,325
17.28 6,000
18.28 1,800
19.28 3,600
21.84 1,290
23.66 540
24.25 1,080
24.50 68,400
25.00 2,160
25.94 4,890
26.78 4,890
29.22 129,580
30.28 2,700
30.52 195,750
31.00 2,580
32.56 2,580
33.63 4,890
--------- -------
769,055


46




The following table summarizes information concerning options outstanding at
December 31, 2001:

Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Range of Exercise Prices Outstanding Life Price
- ------------------------ ----------- ----------- --------

$8.00 134,000 3.7 years $ 8.00
$10.00-$14.99 55,700 7.2 years 14.22
$15.00-$19.99 523,200 7.7 years 17.65
$20.00-$24.99 229,300 8.1 years 24.44
$25.00-$29.99 236,600 7.2 years 28.89
$30.00-$34.99 217,000 6.2 years 30.68
--------- --------- -----
Options outstanding at
December 31, 2001 1,395,800 7.1 years $21.63
========= ========= ======

The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). The Company has elected to continue
to follow the provisions of Accounting Principles Board No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations; accordingly, no
compensation cost has been reflected for the stock option plan in the
consolidated financial statements.

Had compensation costs for the Company's stock option plan been determined based
on their fair value at the grant dates for awards under those plans consistent
with the method of SFAS 123, the Company's net (loss) income and net (loss)
income per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share amounts):

2001 2000 1999
---- ---- ----
Net (loss) income:
As reported $ (14,918) $ 514 $ 38,791
Pro forma $ (16,886) $ (1,382) $ 36,920
Net (loss) income per share - basic:
As reported $ (1.08) $ 0.04 $ 2.75
Pro forma $ (1.22) $ (0.10) $ 2.61

Net (loss) income per share - diluted:
As reported $ (1.08) $ 0.04 $ 2.71
Pro forma $ (1.22) $ (0.10) $ 2.58


For purposes of these disclosures, the fair value of each option granted was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:

2001 2000 1999
---- ---- ----
Expected volatility 37.4% 32.2% 30.9%
Risk-free interest rate 4.3% 5.0% 6.5%
Forfeiture rate 1.5% 2.0% 5.0%
Dividend rate 0.0% 0.0% 0.0%
Expected life in years 7.9 7.2 5.0

Based on these assumptions, the weighted average fair value of options granted
in each of the last three years are: $9.14 in 2001, $10.89 in 2000, and $11.58
in 1999.


47




Note 9. Income Taxes

The (credit) provision for income taxes for the years ended December 31, 2001,
2000 and 1999 consisted of the following (in thousands):

2001 2000 1999
---- ---- ----
Current (credit) provision:
Federal $ (10,063) $ (2,506) $ 18,122
State 104 53 3,284
--------- -------- --------
Deferred provision:
Federal 1,079 2,204 1,272
State 118 543 198
--------- -------- --------
1,197 2,747 1,470
--------- -------- --------
(Credit) provision for income taxes $ (8,762) $ 294 $ 22,876
========= ========= ========


A reconciliation of income taxes at the U.S. federal statutory tax rate to the
effective tax rate follows:

2001 2000 1999
---- ---- ----
(Credit) tax at statutory U.S. tax rates (35.0)% 35.0% 35.0%
State income taxes, net of federal
benefit (3.8) 3.8 3.8
Valuation allowance 4.6 - -
Other, net (2.8) (2.4) (1.7)
----- ---- ----
(Credit) provision for income taxes (37.0)% 36.4% 37.1%
===== ==== ====

Deferred tax assets and liabilities resulting from temporary differences
comprise the following (in thousands):

2001 2000
---- ----
Current deferred income tax assets
attributable to:
Frequent Flyer $ 5,319 $ 4,662
Accrued liabilities 2,403 2,235
Maintenance expense liability 1,633 2,443
Other 37 11
--------- ---------
Net current deferred tax assets $ 9,392 $ 9,351
========= =========

Noncurrent deferred income tax
(liabilities) assets attributable to:
Excess of tax over book depreciation $ (38,343) $ (31,569)
Maintenance expense liability 2,413 2,800
Frequent Flyer 3,039 2,781
Pension liability 2,766 2,094
Net operating loss carry forwards 4,393 -
Valuation allowance (2,000) -
Other 4,800 2,200
--------- ---------
Net noncurrent deferred tax liablities $ (22,932) $ (21,694)
========= =========

As of December 31, 2001, the Company has state net operating loss carryforwards
of approximately $55 million, which will begin to expire in the year ending
December 31, 2015. As of December 31, 2001, the Company has federal net
operating loss carry forwards of approximately $8 million, which will begin to
expire in the year ending December 31, 2021. In 2001, the Company recorded a
valuation allowance on the state net operating loss carry forwards of $2 million
based on the Company's best estimates.

In connection with the Company's initial public offering in 1995 (the
"Offering"), the Company, Midwest Express, Astral and Kimberly-Clark entered
into a Tax Allocation and Separation Agreement ("Tax Agreement"). Pursuant to
the Tax Agreement, the Company is treated for tax purposes as if it purchased
all of Midwest Express' assets at the time of the Offering, and as a result, the
tax bases of Midwest Express' assets were increased to the deemed purchase price
of the assets. The tax on the amount of the gain on the deemed asset purchase
was paid by Kimberly-Clark. This additional basis is expected to result in
increased income tax deductions and, accordingly, may reduce income taxes
otherwise payable by the Company. Pursuant to the Tax Agreement, the Company
will pay to Kimberly-Clark


48


the amount of the tax benefit associated with this additional basis (retaining
10% of the tax benefit), as realized on a quarterly basis, calculated by
comparing the Company's actual taxes to the taxes that it would have owed had
the increase in basis not occurred. In the event of certain business
combinations or other acquisitions involving the Company, tax benefit amounts
thereafter will not take into account, under certain circumstances, income,
losses, credits or carryovers of businesses other than those historically
conducted by Midwest Express or the Company. Except for the 10% benefit, the
effect of the Tax Agreement is to put the Company in the same financial position
it would have been in had there been no increase in the tax bases of Midwest
Express' assets. The effect of the retained 10% benefit is reflected in the
consolidated financial statements as a reduction in the Company's provision for
income taxes.

NOTE 10. COMMITMENTS AND CONTINGENCIES

In February 1997, Midwest Express agreed to pay $9.25 million over 15 years for
the naming rights to the Midwest Express Center, an 800,000 square-foot
convention center in Milwaukee that opened in July 1998. As of December 31,
2001, the Company had remaining cash payments on this commitment of $5.5
million. In November 1999, the Company signed a purchase agreement to acquire
four MD-80 series aircraft previously operated by Scandinavian Airlines System
("SAS"). One aircraft was delivered in September 2000, one in February 2001 and
one in June 2001. The Company has decided to terminate the contract to purchase
the fourth aircraft; that decision was the result of the soft economy and desire
to focus on the Boeing 717 aircraft deliveries beginning in 2003. After
refurbishment and modification, one aircraft entered scheduled service in June
2001 while another aircraft was placed in charter service in November 2001. The
refurbishment process for the last MD-80 series aircraft has been temporarily
suspended and will be completed after travel demand dictates the need for more
capacity.

The Company settled its pending arbitration with Fairchild Dornier GmbH
regarding the production of the 428JET during the third quarter 2001. As a
result of the settlement, Astral intends to retain its existing fleet of eight
Fairchild Dornier 328JETs and will receive four more. In first quarter 2002, the
Company expects to receive and record a $46.0 million pre-tax gain ($29.0
million after tax) associated with the settlement. The gain, which represents
approximately 60% of the expected benefits of the settlement, includes a cash
payment and substantial discounts on two 328JETs. Future benefits of the
remainder of the settlement will be recorded when received.

In April 2001, the Company signed a memorandum of understanding for firm orders
for 20 new Boeing 717 aircraft, with purchase rights for an additional 30
aircraft. The purchase agreement for the aircraft was signed in September 2001.
Under the purchase agreement, delivery of the 20 aircraft is scheduled to begin
in February 2003. These aircraft will be used to expand service in existing and
new markets, and also eventually replace the DC-9 aircraft in the Midwest
Express fleet.

In April 2001, the Company signed a memorandum of understanding placing firm
orders for 20 new Embraer regional jets, with options to purchase 20 additional
aircraft; in August 2001, the parties signed a purchase agreement relating to
this order. The firm order is valued at $400 million. Under this purchase
agreement, delivery of the 20 aircraft was scheduled to begin in January 2003.
Subsequently, the Company reached agreement with Embraer to delay delivery of
the first aircraft until January 2004. This delay will allow the Company to
concentrate on the introduction of Boeing 717 aircraft to the Midwest Express
fleet in 2003 and also provide additional time for the Company to evaluate
financing alternatives for aircraft acquisitions. The Company plans to use the
new Embraer regional jets to expand service in existing and new markets. These
regional jets are expected to provide Astral with flexibility to serve markets
with differing capacity demands.

The Company is party to routine litigation incidental to its business.
Management believes that none of this litigation is likely to have a material
adverse effect on the Company's consolidated financial statements.



49


NOTE 11. RETIREMENT AND BENEFIT PLANS

Qualified Defined Benefit Plans
In 2001, Midwest Express had one qualified defined benefit plan; the Pilot's
Supplemental Pension Plan. This plan provides retirement benefits to Midwest
Express pilots represented by their collective bargaining agreement.

In 2000, there was an additional qualified defined benefit retirement plan
("Midwest Express Pension Plan") that provided benefits to substantially all
employees. This plan was terminated on March 31, 2000 and replaced by a money
purchase plan, a qualified defined contribution retirement plan that is
currently providing retirement benefits to substantially all employees. The
money purchase plan ("Retirement Account Plan") was adopted effective April 1,
2000. The benefits under the Midwest Express Pension Plan prior to March 31,
2000 were paid to employees in December 2000. Employees had the option to have
the lump sum of the Midwest Express Pension Plan benefit transferred to the new
Retirement Account Plan or to receive annuity payments.

Nonqualified Defined Benefit Plans
Nonqualified defined benefit plans consist of an "Executive Supplemental Plan"
and a "Pilots Nonqualified Supplemental Pension Plan." The Executive
Supplemental Plan provides annuity benefits for salary in excess of IRS salary
limits that could not be applied in the qualified Salaried Employees' Retirement
Plan. The Executive Supplemental Plan was terminated as of March 31, 2000;
however, benefits remain frozen in this account while the Company evaluates
alternatives.
The other Midwest Express nonqualified defined benefit plan is the Pilots'
Nonqualified Supplemental Pension Plan. This plan provides Midwest Express
pilots with annuity benefits for salary in excess of Internal Revenue Service
(IRS) salary limits that cannot be covered by the qualified Pilots' Supplemental
Pension Plan.

The following table sets forth the funded status of the plans as of December 31
(in thousands):

Midwest Express Midwest Express
Qualified Nonqualified
Defined Defined
Benefit Plans Benefit Plans
------------------- ----------------
2001 2000 2001 2000
------- --------- ------ --------
Change in Benefit Obligation
Net benefit obligation at
beginning of year $ 4,680 $ 26,812 $ 856 $ 1,343
Service cost 539 1,111 7 29
Interest cost 443 2,442 60 118
Plan amendments - 4,104 - 225
Actuarial loss (gain) 1,116 634 (23) (19)
Curtailment (gain) - (9,874) - (840)
Settlement loss - 6,408 - -
Gross benefits paid - (26,957) - -
------- -------- ----- -------

Net benefit obligation at end
of year $ 6,778 $ 4,680 $ 900 $ 856
======= ======== ===== =======


50



Midwest Express Midwest Express
Qualified Nonqualified
Defined Defined
Benefit Plans Benefit Plans
------------------- ------------------
2001 2000 2001 2000
------- --------- -------- --------
Change in Plan Assets
Fair value of assets at beginning
of year $ - $ 22,329
Actual return on plan assets 2 452
Employer contributions 543 4,176
Gross benefits paid - (26,957)
------- --------
Fair value of plan assets at end
of year $ 545 $ -
======= ========

Funded status at end of year $(6,233) $ (4,680) $ (900) $ (856)
Unrecognized net actuarial loss
(gain) 1,133 - (17) -
Unrecognized prior service cost 3,598 3,887 197 213
------- -------- ------- -------
Accrued benefit liability $(1,502) $ (793) $ (720) $ (643)
======= ======== ======= =======

Weighted-average assumptions
Discount rate
7.25% 7.75% 7.25% 7.75%
Expected return on plan assets
9.00% 10.00%
Rate of compensation increase
5.44% 4.25% 4.50% 4.25%
Rate of compensation increase
5.44% 4.25% 4.50% 4.25%

The net periodic benefit cost of benefit pension plans for the years ending
December 31, 2001, 2000 and 1999, respectively, includes the following (in
thousands):

Midwest Express
Midwest Express Qualified Nonqualified
Defined Benefit Plans Defined Benefit Plans
---------------------------- ---------------------
2001 2000 1999 2001 2000 1999
------- -------- -------- ----- ------ ----
Components of Net
Periodic Benefit
Cost

Service cost $ 539 $ 1,111 $ 3,266 $ 7 $ 29 $ 68
Interest cost 443 2,442 2,092 60 118 106
Expected return
on assets (19) (2,241) (1,802)
Amortization of:
Transition obligation - 6 23 - 1 4
Prior service cost 289 217 (2) 16 13 5
Actuarial loss (gain) - - 409 (7) 20 36
------ ------- ------- ---- ----- ----
Total net periodic
benefit cost $1,252 $ 1,535 $ 3,986 $ 76 $ 181 $219

FAS 88 charges
Curtailment (credit) - (8,232) - - (342) -
Settlement charge - 8,237 - - - -
------ ------- ------- ---- ----- ----
Total net periodic
benefit cost $1,252 $ 1,540 $ 3,986 $ 76 $(161) $219
====== ======= ======= ==== ===== ====


Postretirement Health Care and Life Insurance Benefits
Midwest Express allows retirees to participate in unfunded health care and life
insurance benefit plans. Benefits are based on years of service and age at
retirement. The plans are principally non-contributory for current retirees, and
are contributory for most future retirees.

51




The following table sets forth the status of the plans as of December 31, 2001
and 2000 respectively (in thousands):

2001 2000
---- ----
Change in Benefit Obligation
Net benefit obligation at beginning of year $ 4,604 $ 3,580
Service cost 573 443
Interest cost 389 310
Plan amendments - 298
Actuarial loss (gain) 329 (25)
Gross benefits paid (6) (2)
------- -------
Net benefit obligation at end of year $ 5,889 $ 4,604
======= =======

Change in Plan Assets
Fair value of assets at beginning of year $ - $ -
Employer contributions 6 2
Gross benefits paid (6) (2)
------- -------
Fair value of plan assets at end of year $ - $ -
======= =======

Funded status at end of year $(5,889) $(4,604)
Unrecognized net actuarial loss 1,101 484
Unrecognized prior service cost - 298
------- -------
Accrued benefit liability $(4,788) $(3,822)
======= =======

Weighted-average assumptions
Discount rate
7.25% 7.75%
Rate of compensation increase 4.38% 4.25%

The net periodic benefit cost of postretirement health care and life insurance
benefits for the years ending December 31, 2001, 2000 and 1999, respectively
includes the following (in thousands):

2001 2000 1999
---- ---- ----
Components of Net Periodic
Benefit Cost
Service cost $ 573 $ 443 $ 430
Interest cost 389 310 266
Actuarial loss 10 7 37
------ ------ ------
Total net periodic benefit cost $ 972 $ 760 $ 733
====== ====== ======

The preset limit on the Company's annual payment toward retiree healthcare has
been reached; all costs above this preset cap are paid by retirees.

Qualified Defined Contribution Plans
Midwest Express makes monthly contributions to substantially all employees'
accounts under the Retirement Account Plan. Company contributions vary based on
the age of the employee. In addition, under the new Retirement Account Plan,
some employees who were participants in the Midwest Express Pension Plan on
March 31, 2000 may receive additional transition benefits each year.

Company contributions under the Retirement Account Plan are limited to the
extent required by tax provisions. To the extent contributions to the Retirement
Account Plan are limited under tax law, any excess will be paid pursuant to
supplemental retirement arrangements. The amount expensed and reflected in the
accompanying consolidated statements of operations was $4,568,000 and $3,110,000
in 2001 and 2000, respectively.

The Company has two voluntary defined contribution investment plans covering
substantially all employees. Under these plans, the Company matches a portion of
an employee's contributions. Amounts expensed and reflected in the accompanying
consolidated statements of operations were $2,012,000, $2,437,000 and $1,642,000
in 2001, 2000 and 1999, respectively. Effectively October 1, 2001, the Company
temporarily suspended matching contributions to 401(k) programs following the
events of September 11.

52


Profit Sharing Plans
The Company has three profit sharing plans: an employee profit sharing plan for
substantially all employees of Midwest Express, an employee profit sharing plan
for substantially all employees of Astral, and an Annual Incentive Plan for key
management employees. Company contributions for all plans are based primarily on
achieving specified levels of profitability. The Company expensed $0, $75,000
and $4,951,000 under these plans during 2001, 2000 and 1999, respectively.

NOTE 12. SEGMENT REPORTING

Midwest Express and Astral constitute the two reportable segments of the
Company. The Company's reportable segments are strategic units that are managed
independently because they provide different services with different cost
structures and marketing strategies. No single customer accounted for more than
10% of revenue. The accounting policies of the reportable segments are the same
as those described in Note 3.

Midwest Express offers jet service to 26 destinations throughout the United
States by offering single-class, premium service at competitive coach fares. As
of December 31, 2001, Midwest Express operated a fleet of 35 aircraft - 23
DC-9s, 10 MD-81/82s and two MD-88s.

Astral offers point-to-point service in select markets and increases traffic for
Midwest Express by providing passengers with connecting service to jet flights.
As of December 31, 2001, Astral operated a fleet of 15 Beech 1900D turboprop
aircraft and eight Fairchild Dornier 328JETs.

Revenue for passengers who travel on both carriers within a single itinerary is
allocated to each entity based on a formula that is dependent on the fare type
paid by the passenger. There were 166,380, 138,382 and 100,848 passengers in
2001, 2000 and 1999, respectively, under the aforementioned pricing agreement.

Although Astral is independent from an operational perspective, Midwest Express
performs a number of services for Astral including, but not limited to,
coordinating aircraft scheduling, pricing, reservations, yield management,
advertising and fuel procurement. Astral is charged a marketing service fee for
these services - 8.3%, 8.5% and 9% of the revenue for passengers who travel
exclusively on Astral and approximately $1.16, $1.15 and $2.00 per passenger for
passengers who connect between the carriers for the years ended December 31,
2001, 2000, and 1999, respectively. These service charges comprise a majority of
the intercompany revenue and expense between the two segments.

Midwest Express also performs treasury functions for Astral, including centrally
controlling cash. Astral earns interest income at market rates for any cash
managed by Midwest Express. This interest income comprises the intercompany
interest income and expense shown as eliminations in the following information.
The total asset elimination consists primarily of the intercompany payable and
receivable balances.


53




Reportable segments, as defined by SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision-maker in deciding resource allocation and assessing
performance.

Midwest
2001 Express Astral Elimination Consolidated
- ---- -------- -------- ----------- ------------
Operating revenues $395,335 $67,304 $ (5,197) $457,442
Operating (loss) (32,820) (5,224) - (38,044)
Depreciation and amortization
expense 18,221 2,724 - 20,945
Interest income 1,793 - (749) 1,044
Interest expense 2,984 749 (749) 2,984
(Loss) before income tax
(credit) (19,227) (4,453) - (23,680)
Income tax (credit) (7,114) (1,648) - (8,762)
Total assets 338,322 52,747 (33,698) 357,371
Capital expenditures
(including purchase deposits
on flight equipment) 37,649 22,122 - 59,771

Midwest
2000 Express Astral Elimination Consolidated
- ---- -------- -------- ----------- ------------
Operating revenues $425,125 $59,257 $ (4,361) $480,021
Operating income (loss) 10,860 (3,982) - 6,878
Depreciation and amortization
expense 15,661 1,345 - 17,006
Interest income 1,863 599 (599) 1,863
Interest expense 938 - (599) 339
Income (loss) before income
taxes and accounting change 11,672 (3,383) - 8,289
Provision (credit) for income
taxes 4,319 (1,257) - 3,062
Cumulative effect of
accounting changes, net (4,713) - - (4,713)
Total assets 282,452 24,291 (746) 305,997
Capital expenditures
(including purchase deposits
on flight equipment) 42,156 13,953 - 56,109

Midwest
1999 Express Astral Elimination Consolidated
- ---- -------- -------- ----------- ------------
Operating revenues $406,127 $44,887 $ (3,462) $447,552
Operating income 58,847 1,905 - 60,752
Depreciation and amortization
expense 12,336 875 - 13,211
Interest income 1,033 706 (622) 1,117
Interest expense 892 - (622) 270
Income before income taxes 58,854 2,813 - 61,667
Provision for income taxes 21,869 1,007 - 22,876
Total assets 253,354 25,406 (14,931) 263,829
Capital expenditures
(including purchase deposits
on flight equipment) 66,894 3,295 - 70,189


NOTE 13. CUMULATIVE EFFECT OF ACCOUNTING CHANGES

Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), issued by the
Securities and Exchange Commission in December 1999. SAB 101 provides guidance
on the application of generally accepted accounting principles to revenue
recognition in financial statements. Prior to the issuance of SAB 101, the
Company recognized all revenue from Frequent Flyer miles sold to partners, net
of the incremental cost of providing future air travel, when the mileage was
sold, which was consistent with most major airlines. Beginning January 1, 2000,
as a result of adopting SAB 101, the Company changed its method used to account
for the sale of Frequent Flyer mileage credits to participating partners such as
credit card companies, hotels and car rental agencies. The cumulative effect of
the change in accounting method was $(7.8) million (net of taxes of $4.6
million). Under the new accounting method, a portion of the revenue from the
sale of Frequent Flyer mileage credits is deferred and recognized when
transportation is provided to the passenger. The Company believes the new method
appropriately matches revenues with the period in which services are provided.

54


Effective January 1, 2000, the Company also changed its accounting policy
associated with major maintenance on airframes in conjunction with the Company's
efforts to divide major maintenance events into smaller, more frequent events;
as a result, the Company expenses airframe maintenance costs as they are
incurred. The cumulative effect of the change in accounting policy was $3.1
million (net of taxes of $1.8 million). In the past, major airframe costs were
either (1) accrued to expense on the basis of estimated future costs and
estimated flight hours between major maintenance events, or (2) capitalized when
incurred and amortized on the basis of estimated flight hours until the next
major maintenance event. Costs associated with major maintenance on aircraft
engines will continue to use the deferral or accrual method.

The pro forma results, assuming that accounting changes were applied
retroactively, are shown below (in thousands, except per share data):

Twelve months ended December 31, 1999

As Previously
Pro Forma Reported
--------- -------------
Net Income $ 38,094 $ 38,791
Earnings per common share - basic $ 2.70 $ 2.75
Earnings per common share - diluted $ 2.67 $ 2.71

NOTE 14. VALUATION AND QUALIFYING ACCOUNTS

Balance Additions
at Charged Deductions Balance
Beginning to from at End
of Year Expense Reserve of Year
----------------------------------------------
Allowance for doubtful accounts:
Year ended December 31, 2001 $226,000 $133,000 $(210,000) $149,000
Year ended December 31, 2000 $166,000 $127,000 $ (67,000) $226,000
Year ended December 31, 1999 $251,000 $123,000 $(208,000) $166,000
Valuation allowance for deferred
tax assets:
Year ended December 31, 2001 $2,000,000 $2,000,000


55



NOTE 15. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)



(In Thousands, Except Per Share Data)
Three Months Ended
2001 March 31 June 30 September 30 December 31
- ---- -------- -------- ------------ -----------

Operating revenues $118,929 $135,499 $109,091 $ 93,923
Operating expenses (1) 129,111 140,219 121,615 104,541
Other income (expense), net (2) (11) (11) 8,255 8,071
Operating (loss) (10,182) (4,720) (12,524) (10,618)
(Loss) before income taxes (10,412) (5,089) (4,863) (3,316)
Income tax (credit) (3,852) (1,883) (1,799) (1,228)
Net (loss) (6,560) (3,206) (3,064) (2,088)
(Loss) per share - basic:
Net (loss) (0.47) (0.23) (0.22) (0.15)
(Loss) per share - diluted:
Net (loss) (0.47) (0.23) (0.22) (0.15)

2000 March 31 June 30 September 30 December 31
- ---- -------- -------- ------------ -----------
Operating revenues $106,764 $125,818 $127,027 $120,412
Operating expenses 109,391 112,413 120,556 130,783
Operating (loss) income (2,627) 13,405 6,471 (10,371)
(Loss) income before income
taxes and cumulative effect of
accounting changes (2,486) 14,025 6,857 (10,107)
Income tax (credit) provision (924) 5,185 2,540 (3,739)
(Loss) income before cumulative
effect of accounting changes (1,562) 8,840 4,317 (6,368)
Cumulative effect of accounting
changes, net of applicable
income taxes of $2,768 (4,713) - - -
Net (loss) income (6,275) 8,840 4,317 (6,368)
(Loss) income per share - basic:
(Loss) income before cumulative
effect of accounting changes (0.11) 0.63 0.31 (0.46)
Cumulative effect of accounting
changes, net (0.34) - - -
-------- -------- -------- ---------
Net (loss) income (0.45) 0.63 0.31 (0.46)
(Loss) income per share -
diluted:
(Loss) income before cumulative
effect of accounting changes (0.11) 0.63 0.31 (0.46)
Cumulative effect of accounting
changes, net (0.34) - - -
-------- -------- -------- ---------
Net (loss) income (0.45) 0.63 0.31 (0.46)

(1) Operating expenses for the three month period ended June 30, 2001 include an
impairment loss of $8,839 related to accelerated retirement of eight Midwest
Express DC-9-10 aircraft.

(2) Other income (expense), net for the three month periods ended September 30,
2001 and December 30, 2001 include $8,269 and $8,071, respectively, for
amounts claimed under the Air Transportation Safety and System Stabilization
Act for grant money received for losses related to the September 11 terrorist
attacks.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

Not applicable.


56


PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to this item, except for certain information on
executive officers (which appears in Part I of this report), is incorporated
herein by reference to pages 2 to 3 of the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 24, 2002.


ITEM 11. EXECUTIVE COMPENSATION

The information required in this item is set forth under the heading "Executive
Compensation," incorporated herein by reference, to pages 7 through 13 of the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
April 24, 2002.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required in this Item is set forth under the heading "Stock
Ownership of Management and Others," incorporated herein by reference to pages 5
and 6 of the definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on April 24, 2002.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Ulice Payne, Jr. a current director and nominee, is a partner of the law firm
Foley & Lardner. The Company retained Foley & Lardner to provide various legal
services to the Company during 2001 and has retained Foley & Lardner to provide
legal services for 2002.


PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements:

Included in Item 8 of Part II of this Form 10-K are the following: Report of
Management, Independent Auditors' Report, Consolidated Statement of Operations,
Consolidated Balance Sheets, Consolidated Statement of Cash Flows, Consolidated
Statement of Shareholders' Equity and Notes to Consolidated Financial
Statements.

(a)(2) Financial Statement Schedules:

Schedules not included have been omitted because they are not applicable.

(b) Reports on Form 8-K:

The Company did not file any reports on Form 8-K during the fourth quarter of
2001.

(c) Exhibits:

The Exhibits filed or incorporated by reference herewith are as specified in the
Exhibit Index.

57


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

MIDWEST EXPRESS HOLDINGS, INC.
-----------------------------------------
Registrant

March 25, 2002 By /s/ TIMOTHY E. HOEKSEMA
- ------------------------ ---------------------------------------
Timothy E. Hoeksema
Chairman of the Board, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 25, 2002.

/s/ TIMOTHY E. HOEKSEMA Chairman of the Board of Directors,
- --------------------------------- President and Chief Executive Officer
Timothy E. Hoeksema (Principal Executive Officer)

/s/ ROBERT S. BAHLMAN Senior Vice President, Chief Financial
- --------------------------------- Officer and Controller (Principal
Robert S. Bahlman Financial and Accounting Officer)

/s/ JOHN F. BERGSTROM Director
- ---------------------------------
John F. Bergstrom

/s/ JAMES G. GROSKLAUS Director
- ---------------------------------
James G. Grosklaus

/s/ ULICE PAYNE, JR. Director
- ---------------------------------
Ulice Payne, Jr.

/s/ SAMUEL K. SKINNER Director
- ---------------------------------
Samuel K. Skinner

/s/ ELIZABETH T. SOLBERG Director
- ---------------------------------
Elizabeth T. Solberg

/s/ RICHARD H. SONNENTAG Director
- ---------------------------------
Richard H. Sonnentag

/s/ FREDERICK P. STRATTON, JR. Director
- ---------------------------------
Frederick P. Stratton, Jr.

Director
- ---------------------------------
David H. Treitel

/s/ JOHN W. WEEKLY Director
- ---------------------------------
John W. Weekly


58








EXHIBIT INDEX
MIDWEST EXPRESS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

Exhibit Description

(3.1) Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form 8-B
filed May 2, 1996 (File No. 1-13934)).
(3.2) Bylaws of the Company as amended through April 29, 1999
(incorporated by reference to Exhibit 3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999 (file no.
1-13934)).
(3.3) Articles of Amendment relating to Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form 8-B filed May 2, 1996
(File No. 1-13934)).
(4.1) Rights Agreement, dated February 14, 1996, between the Company and
U.S. Bank National Association (d/b/a) Firstar Bank, National
Association as successor in interest to Firstar Trust Company
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form 8-A filed February 15, 1996 (File
No. 1-13934)).
(4.2) Amendment to the Rights Agreement, dated April 19, 1996, between
the Company and U.S. Bank National Association (d/b/a) Firstar Bank
N.A., National Association as successor in interest to Firstar
Trust Company (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-B filed May 2, 1996
(File No. 1-13934)).
(10.1) Lease Agreement between Milwaukee County and Midwest Express, dated
May 12, 1988 (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (File No. 33-95212)
(the "S-1")).
(10.2) Airline Lease as amended, between Milwaukee County and Midwest
Express, dated October 1, 1984 (incorporated by reference to
Exhibit 10.5 to the S-1).
(10.3) Omaha Airport Authority Agreement and Lease at Eppley Airfield with
Midwest Express between the Airport Authority of the City of Omaha
and Midwest Express (incorporated by reference to Exhibit 10.6 to
the S-1).
(10.4) Airline Lease, as amended, between Milwaukee County and Astral,
dated November 23, 1994 (incorporated by reference to Exhibit 10.7
to the S-1).
(10.5) Lease Agreement between Milwaukee County and Phillip Morris
Incorporated, dated October 7, 1982, to which Astral has succeeded
as lessee (incorporated by reference to Exhibit 10.8 to the S-1).
(10.6) Tax Allocation and Separation Agreement among Kimberly-Clark
Corporation, K-C Nevada, Inc., the Company, Midwest Express and
Astral dated September 27, 1995 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 (File No. 1-13934)).
(10.7) Guarantee Fee Agreement between Kimberly-Clark Corporation and the
Company dated September 27, 1995 (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 (File No. 1-13934)).
(10.8) Employee Matters Agreement between Kimberly-Clark Corporation and
the Company dated September 27, 1995 (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995 (File No. 1-13934)).
(10.9) Tenth Amendment to Airline Lease between Milwaukee County and
Midwest Express, dated August 18, 1997 (incorporated by reference
to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 (File No. 1-13934)).
(10.10) Eleventh Amendment to Airline Lease between Milwaukee County and
Midwest Express, dated December 17, 1997 (incorporated by reference
to Exhibit 10.10 to the Company's Annual Report of Form 10-K for
the year ended December 31, 1997 (File No. 1-13934)).
(10.11) Twelfth Amendment to Airline Lease, as amended between Milwaukee
County and Midwest Express, dated April 21, 1998 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report of Form
10-Q for the quarter ended March 31, 1998 (File No. 1-13934)).
(10.12)+ Assignment of Rights Agreement between Dolphin Trade & Finance, LTD
and Midwest Express, dated November 14, 1997 (incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (File No. 1-13934)).

59



(10.13)* Midwest Express Holdings, Inc. 1995 Stock Option Plan, as amended
through February 13, 1997 (incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-8 (File No.
333-44253)).
(10.14) Midwest Express Holdings, Inc. 1995 Stock Plan for Outside
Directors, as amended through February 20, 2002.
(10.15)* Annual Incentive Compensation Plan, amended through February 11,
1998 (incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1997
(File No. 1-13934)).
(10.16)* Supplemental Benefits Plan (incorporated by reference to Exhibit
10.19 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 1-13934)).
(10.17)* Form of Key Executive Employment and Severance Agreement between
the Company and each of Timothy E. Hoeksema and Carol N. Skornicka
(incorporated by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 (File No.
1-13934)).
(10.18)* Form of Key Executive Employment and Severance Agreement between
the Company and each of Robert S. Bahlman, David C. Reeve and
Dennis J. O'Reilly (incorporated by reference to Exhibit 10.21 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 1-13934)).
(10.19) Thirteenth Amendment to Airline Lease, as amended between Milwaukee
County and Midwest Express, dated April 5, 1999 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 (File No. 1-13934)).
(10.20) Fourteenth Amendment to Airline Lease, as amended between Milwaukee
County and Midwest Express, dated June 15, 1999 (incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 (File No. 1-13934)).
(10.21) Fifteenth Amendment to Airline Lease, as amended between Milwaukee
County and Midwest Express, dated February 16, 2000 (incorporated
by reference to Exhibit 10 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000 (File no. 1-13934)).
(10.22) Seventeenth Amendment to Airline Lease, as amended between
Milwaukee County and Midwest Express, dated June 29, 2000
(incorporated by reference to Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2000 (File
no. 1-13934)).
(10.23) Sixteenth Amendment to Airline Lease, as amended between Milwaukee
County and Midwest Express, dated January 1, 2001 (incorporated by
reference to Exhibit 10.23 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000 (File No. 1-139394)).
(10.24)* Amendment to Midwest Express Holdings, Inc. 1995 Stock Option Plan,
as approved by the Company's shareholders on April 25, 2001
(incorporated by reference to Appendix B to the Notice of Annual
Meeting and Proxy Statement of Midwest Express Holdings, Inc. for
the Annual Meeting of the Shareholders on April 25, 2001
(incorporated by reference to Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2001 (File No.
1-3934)).
(10.25) Senior Secured Revolving Credit Agreement dated as of August 31,
2001, among Midwest Express Holdings, Inc., the several lenders
from time to time parties thereto and U.S. Bank National
Association (d/b/a) Firstar Bank, N.A. (incorporated by reference
to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001 (File No. 1-13934)).
(10.26) First Amendment to Senior Secured Revolving Credit Agreement, dated
as of January 9, 2002, by and among Midwest Express Holdings, Inc.,
the lenders party thereto and U.S. Bank National Association.
(10.27) Eighteenth Amendment to Airline Lease, as amended between Milwaukee
County and Midwest Express, dated July 27, 2001.
(21) List of Company subsidiaries (incorporated by reference to Exhibit
21 to the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-139344)).
(23) Consent of Deloitte & Touche LLP, Independent Auditors.

- -------------

* A management contract or compensatory plan or arrangement.

+ Portions of this exhibit have been redacted and are subject to a
confidential treatment request filed with the Secretary of Securities and
Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended. The redacted material was filed separately with
the Securities and Exchange Commission.

60