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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Commission file number 1-13934

MIDWEST AIR GROUP, INC.
(Exact name of registrant as specified in its charter)

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)

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

Yes     X       No          

As of April 19, 2005, there were 17,470,823 shares of Common Stock outstanding.

MIDWEST AIR GROUP, INC.
FORM 10-Q
For the period ended March 31, 2005

INDEX

1

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)

MIDWEST AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)

See notes to unaudited condensed consolidated financial statements.

2

MIDWEST AIR GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)

See notes to unaudited condensed consolidated financial statements.

3

MIDWEST AIR GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

See notes to unaudited condensed consolidated financial statements.

4

Midwest Air Group, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

5

Three Months Ended March 31, 2005

Three Months Ended March 31, 2004

6

The Company accounts for its fuel hedge derivative instruments as cash flow hedges, as defined in 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.” Therefore, all changes in the fair value of the derivative instruments that are considered effective are recorded in other comprehensive income until the underlying hedged fuel is consumed, when they are reclassified to the income statement as an offset of fuel expense. The Company does not purchase or hold any derivative financial instruments for trading purposes.

During 2004, the Company began hedging a portion of the price risk related to anticipated future jet fuel requirements, primarily through a collar option strategy. As of March 31, 2005, the Company had fuel hedge collars in place covering a percentage of the total fuel consumption for 2005. The collars for second quarter 2005 cover approximately 25% of the total estimated fuel consumption with an average ceiling price of $1.44 per gallon and an average floor price of $1.24 per gallon, which includes into-plane costs. As of March 31, 2005, there are collars in place that cover 21% and 17% of the estimated fuel consumption for the third and fourth quarters of 2005, respectively, and 5% of first quarter 2006. Ceiling prices are set on average at $1.47 and $1.49 per gallon, and floor prices are set on average at $1.28 and $1.30 per gallon for the third and fourth quarters of 2005, respectively. For first quarter 2006, the average ceiling price is $1.70 and the average floor price is $1.51. In first quarter 2005, the Company expensed a net amount of $0.1 million due to the price of jet fuel falling below the floor prices of some of the collars. As of March 31, 2005, the Company recorded $3.0 million in prepaid expenses and other assets for future fuel prices that may fall outside of the collar based on the anticipated cash flows from the fuel hedge collars with an offset to other comprehensive loss.

In first quarter 2004, the Company recorded $1.2 million (pre-tax) of aircraft lease expense for two leased DC-9 aircraft removed from Midwest Airlines service during the quarter.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123, which had allowed companies to choose between expensing stock options or showing proforma disclosure only. This standard is effective for the Company as of the fiscal year beginning after June 15, 2005 and will apply to all awards granted, modified, cancelled or repurchased after the effective date as well as the unvested portion of prior awards. On April 14, 2005, the SEC postponed adoption of SFAS No. 123R. The Company will adopt the standard effective January 1, 2006 and believes it will not have a material effect on the financial statements.

7

Midwest Airlines has received credit memos from certain suppliers associated with the delivery of each Boeing 717 aircraft to be used for the acquisition of aircraft spare parts and maintenance tooling, employee training, flight simulator rental, aircraft and engine lease payments, and engine maintenance agreements. As of March 31, 2005, unused credit memos totaled $2.4 million, compared with $5.8 million at March 31, 2004 and are recorded as other assets in the unaudited condensed consolidated balance sheets. Midwest Airlines will receive additional credit memos on the delivery of each subsequent Boeing 717 aircraft and will continue to use the credits as needed to pay for applicable services. The benefit of these credit memos is being recognized on the income statement over the term of the related leases, whereas the related credit memo asset is being depleted as purchases are made.

At March 31, 2005, the Company had two stock-based employee compensation plans and one stock plan for outside directors, which are described more fully in Note 6 of the Notes to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The Company has adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” 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 1995 Stock Option Plan in the condensed consolidated financial statements in this filing. Compensation expense was recognized for the difference between the fair value and exercise price as of the grant date for options issued under the 2003 All-Employee Stock Option Plan. See Note 5 for additional information.

Had compensation costs for the Company’s stock option plans 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 and net loss per share for the three-month periods ended March 31, 2005 and 2004 would have been greater, as indicated in the proforma amounts below (in thousands, except per share amounts):

8

The following table is a reconciliation of the weighted average shares outstanding for the three-month periods ended March 31, 2005 and 2004 (in thousands):

In connection with the final restructuring agreements with certain aircraft lessors and lenders, the Company issued warrants to certain lessors and lenders that currently give the holders the right to purchase in the aggregate 1,571,467 shares of the Company’s common stock at an exercise price per share of $4.72. The warrants expire in August 2013. None of the warrants had been exercised as of March 31, 2005.

Due to accumulated losses and the inability to offset net operating losses against deferred tax liabilities, the Company no longer records federal income tax benefit on losses effective as of the second quarter of 2004. The effective tax rate decreased to 0.9% for the three-month period ended March 31, 2005 due to recording only state tax benefit. As of March 31, 2005, the Company has recorded federal net operating losses of $31.7 million, which will begin to expire in 2023 and approximately $9.6 million in state net operating losses, which will begin to expire in 2005. Due to the uncertainty of realizing the net operating losses, as of March 31, 2005, the Company has recorded a valuation allowance of $18.7 million on the federal net operating losses and $8.9 million on the state net operating losses.

9

The Company includes changes in the fair value of certain derivative financial instruments that qualify for hedge accounting and changes in minimum pension liabilities in comprehensive loss. For the three months ended March 31, 2005 and 2004, comprehensive loss was $12.3 million and $6.8 million, respectively. The difference between the net loss and comprehensive loss for the three months ended March 31, 2005 and 2004 is due to the required accounting for the Company’s changes in additional minimum pension liabilities and unrealized gains or losses on derivative financial instruments.

The Company has agreements with organizations that process credit card transactions arising from purchases of air travel tickets by customers of the Company. The Company has one such agreement with an organization that processes MasterCard/Visa transactions. The agreement with the organization that processes MasterCard/Visa transactions was amended in January 2002 to allow the credit card processor to create and maintain a reserve account that is funded by retaining cash that it otherwise would deliver to the Company (i.e., “restricted cash”). In the first quarter of 2005, the Company and the credit card processor agreed to an extension of the agreement until March 31, 2006. This extension includes a provision that eliminates the financial covenants previously required of the Company and allows the credit card processor to increase (up to 100%) or decrease the holdback percentage at any time. During first quarter 2005, the holdback amount was 90% of the credit card processor’s risk. As of March 31, 2005, the restricted cash amount was approximately $31.2 million.

The Company also has agreements with American Express, Diners Club and Discover. Of these credit card processors, only American Express had retained cash related to credit card processing, totaling $1.0 million (resulting in an aggregate of $32.2 million in restricted cash for MasterCard/Visa and American Express). If current industry conditions persist, other credit card processors may require holdbacks as well. The aggregate amount of the risk exposure of all the credit card processors (less amounts currently under holdback) as of March 31, 2005 was approximately $11.4 million.

10

The net periodic benefit cost of benefit pension plans for the three-month periods ending March 31, 2005 and 2004, respectively, includes the following (in thousands):

In first quarter 2005, the Company amended the Postretirement Welfare Plan (the “Plan”). The amendment reduced the ongoing annual expense by $1.1 million. The Company will amortize the effect of the amendment to the Plan on the recorded liability over the estimated remaining service period for the affected employees.

The Company previously disclosed in its financial statements for the year ended December 31, 2004, that it expected to contribute approximately $1.5 million to its qualified pension plan in September 2005. As of March 31, 2005, no contributions have been made.

At the Company’s annual meeting on April 20, 2005, shareholders approved the Midwest Air Group, Inc. 2005 Equity Incentive Plan and the Midwest Air Group, Inc. 2005 Non-Employee Director Stock Plan. Under the 2005 Equity Incentive Plan, awards can be granted in the form of stock options, stock appreciation rights and restricted stock. Only shares of stock can be issued under the 2005 Non-Employee Director Stock Plan.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In first quarter 2005 compared with first quarter 2004, revenue increased 10.6% on a 7.0 percentage point increase in load factor and a 20.7% increase in passenger traffic. The increase in revenue is due to increased passenger traffic from competitive pricing adjustments, and schedule and service enhancements announced in the first quarter of 2005. Unit costs (cost per available seat mile) increased 8.7% primarily due to a 35.8% unit cost increase in fuel. Even with the significant increase in revenue, higher-than-expected fuel prices and continuing overall poor revenue yield, caused in part by excess industry capacity, prevented the Company from returning to profitability.

Costs were negatively impacted by two significant transactions in the first quarter of 2005. Midwest Airlines recorded a $0.7 million liability for severance payments for outplaced workers. Due to the settlement of the Dornier Aviation (North America) Inc. Liquidating Trust (“DANA”) litigation, Midwest Connect recorded expenses of $0.9 million, which reflects the settlement amount. First quarter 2004 results include $1.2 million from costs related to the disposition of DC-9 aircraft.

Midwest Airlines revenue improved 9.5%, or $8.2 million, in first quarter 2005 compared with first quarter 2004. In the first quarter of 2005, total revenue per available seat mile increased 4.2% – the combination of a 6.9 percentage point increase in load factor and a 4.3% decrease in revenue yield. The increase in revenue was due to increased passenger traffic from competitive fare pricing changes; however, the increase in passenger revenue was partially offset by a decline in charter revenue due to the cancellation of the National Hockey League 2004-2005 season. Unit costs increased 8.2% in first quarter 2005 compared with first quarter 2004, primarily due to an increase in fuel prices from an average of $1.17 per gallon in first quarter 2004 to an average of $1.59 per gallon in first quarter 2005.

Midwest Connect revenue improved 16.1%, or $2.7 million, in first quarter 2005 compared with first quarter 2004. In the first quarter of 2005, total revenue per available seat mile increased 5.0% – the combination of an 8.5 percentage point increase in load factor and a 10.6% decrease in revenue yield. Also, passenger traffic increased more than 29%. Unit costs at Midwest Connect increased 7.9%, primarily due to the increase in fuel prices and the DANA litigation settlement.

12

Fuel prices were substantially higher than expected during the first quarter of 2005, with price increases occurring throughout the quarter and continuing into the second quarter. Fuel consumption totaled approximately 22.0 million gallons in the first quarter of 2005, an increase from the 20.9 million gallons used during the first three months of 2004, primarily due to a 7.7% increase in scheduled service operations (one take-off and landing); however, the increase was partially offset by the Company’s use of a greater number of more fuel-efficient Boeing 717 aircraft. Each penny change in fuel price currently results in a change of approximately $220,000 to quarterly operating results.

The Company continues to adjust to changes in competition and industry pricing initiatives, particularly in the Milwaukee market. In the first quarter of 2005, Northwest Airlines announced that by June 2005 it will add additional flights from Milwaukee to Denver, Boston, Kansas City and New York. This is the sixth expansion by Northwest in Milwaukee in the last two years. However, the Company’s share of passenger enplanements in Milwaukee as of March 2005 increased 4.1 percentage points year over year, to 42.8%. The Company intends to vigorously compete in the changing environment by offering what it believes are superior airline services at competitive fares.

During the first quarter of 2005, the Company placed into service one Boeing 717 aircraft. The Company plans to place three additional Boeing 717 aircraft into service in 2005.

During the first quarter of 2005, the Company’s unrestricted cash position increased $3.2 million to $84.7 million, primarily due to seasonal fluctuations in the business and implementation of cost-saving and cash management initiatives.

Looking forward, several initiatives will be implemented in 2005 to help the Company achieve its strategic plan. These initiatives include a redesigned dining services program and onboard video entertainment, the consolidation of Midwest Airlines and Midwest Connect ground handling services in Milwaukee, and schedule and service enhancements. These initiatives should contribute positively to helping the Company to reach its goal to be cash flow neutral in 2005.

Subsequent sections contain a more detailed discussion of revenue and cost comparisons for the first quarter.

13

Operating Statistics

The following table provides selected operating statistics for Midwest Airlines and Midwest Connect.

(1) Passenger, cargo and other transport-related revenue divided by scheduled service ASMs.

Note: All statistics exclude charter operations except the following: total available seat miles ("ASMs"), cost per total ASM, into-plane fuel cost, number of employees and aircraft in service. Aircraft acquired but not yet placed into service are excluded from the aircraft in service statistic. Numbers in this table may not be recalculated due to rounding.

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The following table provides operating revenues and expenses for the Company expressed as cents per total ASM, including charter operations, and as a percentage of total revenues:

Note: Numbers, percents and totals in this table may not be recalculated due to rounding.

15

Three Months Ended March 31, 2005 Compared With
Three Months Ended March 31, 2004

Operating Revenues

Company operating revenues totaled $112.0 million in first quarter 2005, a $10.7 million, or 10.6%, increase from first quarter 2004. Passenger revenues accounted for 86.2% of total revenues and increased $12.6 million, or 15.0%, from first quarter 2004 to $96.6 million. The increase is attributable to a 20.7% increase in passenger volume, as measured by scheduled service revenue passenger miles, as well as a 7.0 percentage point increase in load factor. The increase was partially offset by a 4.7% decrease in revenue yield. The decrease in revenue yield was due primarily to competitive fare adjustments made during the first quarter of 2005 to stimulate traffic.

Midwest Airlines passenger revenue increased $10.1 million, or 14.9%, from 2004 to $77.9 million. The increase was primarily the result of a 20.1% increase in passenger volume, as measured by scheduled service revenue passenger miles. The increase in volume was partially offset by a decrease in revenue yield of 4.3% due to the factors described above. Load factor increased from 63.6% in 2004 to 70.5% in 2005. Capacity, as measured by scheduled service ASMs, increased 8.4%, primarily due to a 6.3% increase in the number of segments (one take-off and landing).

Midwest Connect passenger revenue increased $2.5 million, or 15.7%, from first quarter 2004 to $18.6 million. Passenger volume increased 29.4% in first quarter 2005 compared with the same period in 2004, but this increase was partially offset by a 10.6% decrease in revenue yield due to the factors described above. Load factor increased 8.5 percentage points during this same period. Unit costs at Midwest Connect increased 7.9%, primarily due to the increase in fuel prices and the DANA litigation settlement.

Revenue from cargo, charter and other services decreased $1.9 million in first quarter 2005. Revenue from charter sales accounted for the majority of the change and decreased 53.1% versus first quarter 2004, primarily due to the cancellation of the National Hockey League 2004-2005 season. The decrease was partially offset by an increase in other transport, non-transport and mail revenue.

Operating Expenses

First quarter 2005 operating expenses increased $16.4 million, or 14.7%, from first quarter 2004. The majority of the increase was due to total aircraft fuel and oil increasing $10.7 million, or 43.4%, to $35.2 million for the first quarter of 2005. Additionally, operating expenses increased due to a $2.7 million increase in aircraft maintenance material and repair costs resulting from a $1.3 million increase in engine costs related to the addition of four Boeing 717 aircraft, as well as a 7.7% increase in scheduled service operations, and an increase in purchased maintenance costs due to the increase in scheduled service operations and an increase in repair costs. Total operating costs per total ASM (unit costs) increased 8.7% to 11.5¢ in first quarter 2005.

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Salaries, wages and benefits increased $1.5 million, or 4.2%, from first quarter 2004 to $36.5 million. The labor cost increase is primarily due to an increase in wage and fringe benefit rates ($1.4 million), as well as severance accruals for outplaced workers ($0.7 million), which were partially offset by a decrease in head count ($0.7 million). On a cost per total ASM basis, labor costs decreased 1.3% to 3.3¢ in 2005.

Aircraft fuel, oil and associated taxes increased $10.7 million, or 43.4%, from first quarter 2004 to $35.2 million. Into-plane fuel prices increased 35.7% in first quarter 2005, averaging $1.59 per gallon versus $1.18 per gallon in first quarter 2004, and resulted in a $9.3 million (pre-tax) unfavorable price impact (calculated by applying 2004 prices to actual gallons consumed in 2005 and comparing the result with actual 2005 expense). Fuel consumption increases resulted in a $1.4 million (pre-tax) unfavorable impact in the quarter (calculated by applying 2004 prices to the actual change in gallons consumed in 2005 relative to 2004), primarily as a result of an increase in the number of block hours (the time between aircraft gate departure and aircraft gate arrival).

Commissions for travel agents and commissions related to credit card transactions increased $0.5 million, or 19.8%, from first quarter 2004 to $2.9 million. The majority of the increase was due to a 20.7% increase in passenger traffic and an increase in credit card commissions. Commissions as a percentage of passenger revenue increased from 2.9% in first quarter 2004 to 3.0% in first quarter 2005.

Station rentals and landing fees increased $0.4 million, or 3.4% from first quarter 2004 to $11.4 million. The increase is primarily due to an increase in ground handling and landing fees ($0.3 million) and trip interruption expenses ($0.1 million).

Aircraft maintenance material and repair costs increased $2.7 million, or 30.7% from first quarter 2004 to $11.3 million. The increase is primarily due to a $1.3 million increase in engine costs related to the addition of four Boeing 717 aircraft, as well as a 7.7% increase in scheduled service operations. Additionally, purchased maintenance increased $1.0 million due to the increase in scheduled service operations and an increase in repair costs.

Depreciation and amortization decreased $0.4 million, or 8.1%, from first quarter 2004 to $4.2 million. On a cost per total ASM basis, these costs decreased 12.9%. Depreciation was lower as the owned DC-9 fleet was essentially replaced quarter over quarter with leased Boeing 717 aircraft.

Aircraft rental costs increased $1.7 million, or 17.4%, from first quarter 2004 to $11.6 million. These costs increased $2.9 million related to the addition of four leased Boeing 717 aircraft to the Midwest Airlines fleet quarter over quarter. Included in the first quarter 2004 balance is $1.2 million associated with the disposition of DC-9 aircraft. On a cost per total ASM basis, these costs increased 11.2%.

17

Other operating expenses decreased $0.5 million, or 3.9%, from first quarter 2004 to $13.0 million. The cost decreases were primarily due to a decrease in charter expenses as a result of the cancellation of the National Hockey League 2004-2005 season ($0.8 million) and a reduction in advertising expenses ($0.5 million), which were partially offset by an increase in legal costs ($0.8 million), including the DANA litigation settlement amount. On a cost per total ASM basis, other operating expenses decreased 9.0%.

Credit for Income Taxes

Income tax credit for first quarter 2005 was $0.1 million, a $3.8 million decrease from the 2004 credit of $3.9 million. The effective tax rates for the first quarters of 2005 and 2004 were 0.9% and 36.5%, respectively. Due to accumulated losses, the Company discontinued recording federal income tax benefit on losses beginning with second quarter 2004.

Net Loss

Net loss for first quarter 2005 was $15.9 million, an increase of $9.1 million from the first quarter 2004 net loss.

Liquidity and Capital Resources

The Company’s unrestricted cash and cash equivalents totaled $84.7 million at March 31, 2005, compared with $81.5 million at December 31, 2004. At March 31, 2005, the restricted cash balance was $36.8 million, compared with $29.1 million on December 31, 2004. The restricted cash balance primarily consists of holdback amounts, insurance deposits and collateral for letters of credit. The change in restricted cash is primarily due to an increase in volume related to the credit card processing agreement for MasterCard/Visa transactions.

The increase of $3.2 million in the unrestricted cash balance from December 31, 2004 to March 31, 2005 reflects seasonal fluctuations in the business and the realization of savings from cost-saving and cash management initiatives. The increase was partially offset by an increase in the amount of cash held back by the processor of MasterCard/Visa transactions due to an increase in volume. As noted in Note 10 to the condensed consolidated financial statements, the credit card processor can increase (up to 100%) or decrease the holdback amount at any time.

As of March 31, 2005, the Company had a working capital surplus of $24.0 million compared with a $30.5 million surplus on December 31, 2004. The reduction in working capital as of March 31, 2005 is primarily related to an increase in air traffic liability (liability for airline tickets purchased but not yet used), as well as an increase in accounts payable and various other accrued liabilities due to cash management strategies.

Operating Activities

Net cash provided by operations for the three months ended March 31, 2005 totaled $4.1 million. This is primarily related to the change in accounts payable, accrued liabilities, restricted cash and air traffic liability. The change also reflects the effects of credits related to the acquisition of Boeing 717 aircraft. Midwest Airlines has used credit memos from certain suppliers associated with the delivery of each Boeing 717 aircraft for the acquisition of aircraft spare parts and maintenance tooling, employee training, flight simulator rental, aircraft and engine lease payments, and engine maintenance agreements. As of March 31, 2005, unused credit memos totaled $2.4 million and are recorded as Other Assets in the condensed consolidated balance sheet. For the most part, credits available for aircraft lease payments have been used up and, in the future, the Company expects it will make lease payments primarily from cash flows from operations. Midwest Airlines will receive additional credit memos on the delivery of each subsequent Boeing 717 aircraft, and will continue to use the credits as needed to pay for applicable services. The income statement benefit of these credit memos is being recognized over the term of the leases.

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Investing Activities

Net cash used in investing activities for the three months ended March 31, 2005 totaled $1.8 million. This is primarily due to a decrease in aircraft purchase deposits that had been returned for the one Boeing 717 delivery in 2005, which was offset by an increase in aircraft purchase deposits and pre-delivery progress payments related to future deliveries of Boeing 717 aircraft and an increase in capital expenditures. Capital spending totaled $2.6 million for the quarter; however, non-cash incentives were used for a portion of such spending, with a cash outlay of $2.0 million for the quarter ended March 31, 2005. Capital expenditures consisted primarily of costs associated with the acquisition of additional spare parts for the Boeing 717 fleet and dining services equipment.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2005 was $0.9 million, primarily related to the return of progress payments to Kreditanstalt fur Wiederaufbau Bank (“KfW”) associated with one Boeing 717 aircraft delivered to the Company during 2005. The progress payments were originally provided to The Boeing Company (“Boeing”) by KfW on behalf of Rolls-Royce Deutschland Ltd. & Co. KG (“Rolls-Royce”). The change from 2004 is also due to a reduction in the remaining lease obligation for the DC-9 aircraft retirements in accordance with the agreement terms.

In second quarter 2002, Midwest Airlines entered into a loan agreement to fund pre-delivery progress payments to Boeing for the Boeing 717 aircraft. Midwest Airlines also entered into a loan agreement with KfW with the assistance of Rolls-Royce. Rolls-Royce agreed to guarantee this loan agreement on behalf of Midwest Airlines. This agreement is discussed in more detail in Note 4 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. As of March 31, 2005, the Company owed $13.6 million under the loan agreement. The Company expects that the debt associated with this financing transaction will continue to trend downward, as the firm aircraft delivery schedule is nearly completed.

With the KfW loan agreement and a commitment from Boeing Capital Corporation (“BCC”) to finance Boeing 717 aircraft, the Company believes it has requisite financing for the remaining firm aircraft deliveries under the Boeing 717 program. Although BCC is able to terminate its financing commitment if it deems the Company has experienced a material adverse change and the commitment is subject to other conditions, the Company does not anticipate that the financing commitment will be terminated or that it will be unable to meet the conditions.

19

The Company maintains a qualified defined benefit plan, the Pilots’ Supplemental Pension Plan (the “Qualified Plan”), which provides supplemental retirement benefits to Midwest Airlines pilots, and an unfunded nonqualified defined benefit plan to provide Midwest Airlines pilots with annuity benefits for salary in excess of amounts permitted to be paid under the provisions of the tax law to participants in the Qualified Plan. The method used to determine the market-related value of plan assets is the prior year’s market-related value of assets, adjusted by contributions, disbursements, expected return on investments and 20% of investment gains (losses) during the five prior years. As of March 31, 2005, the Qualified Plan assets were invested primarily in equities and fixed income instruments. Additional discussion of Qualified Plan investment strategy is included in Note 10 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

As discussed in Note 4 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, the Company issued promissory notes (the “Basic Moratorium Notes”) to its lessors and lenders as part of the restructuring lease and debt agreements. The aggregate principal amount of these notes is $7.5 million. Principal and interest (fixed at 10%) on these Basic Moratorium Notes are payable, in arrears, in 36 monthly installments. As of March 31, 2005, the Company owed $5.6 million under the Basic Moratorium Notes.

As a result of the restructuring of the lease and debt agreements, the Company significantly reduced its obligations compared with the obligations under the previous lease and debt agreements. Included in the restructured agreements are clauses that would make the Company’s obligations, under certain default situations, increase to the amounts under the previous agreements. Such defaults include the Company filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The amount of such contingent obligation of the Company is approximately $27.7 million as of March 31, 2005. This contingent obligation terminates in July 2006.

2005 and Beyond

The current weak revenue environment and volatile nature of fuel prices make it difficult to accurately project cash flow from operations for the remainder of 2005 and beyond. Absent adverse factors outside the control of the Company – such as terrorist attacks or fear of terrorist attacks, further substantial deterioration in the industry revenue environment from first quarter 2005 revenue environment, or the failure of fuel prices to decline from first quarter 2005 prices, the Company believes current liquidity and cash flow from operations will be sufficient to fund current operations through 2005. Key cash flow items for 2005 and beyond include:

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Forward-Looking Statements

This Form 10-Q filing, particularly the “Pending Developments” section below and the “Overview” and “2005 and Beyond” sections above, contain forward-looking statements that may state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions for the future. In the following discussion and elsewhere in the report, 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 projected results due to the risk factors described in the “Risk Factors” section of Part 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 and the following:

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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 Securities and Exchange Commission filings. The Company assumes no obligation, and disclaims any obligation, to update information contained in this Quarterly Report on Form 10-Q, including forward-looking statements, as a result of facts, events or circumstances after the date of the report.

Pending Developments

Property Tax Exemption – On November 7, 2003, a Dane County, Wisconsin, circuit court, in an action brought by Northwest Airlines, Inc., against the State of Wisconsin, declared invalid the Wisconsin statute that provides the hub airline exemption from Wisconsin ad valorem property taxes. Savings to the Company from the exemption had been approximately $2.0 million annually. However, the Company estimates savings could be as high as $7.0 million annually by 2010. The State of Wisconsin has appealed the ruling. The Company has intervened in the case and joined in the appeal. The appellate court has certified the case to the Wisconsin Supreme Court and the case has been accepted. The Company believes the appeal will be successful and has not recorded any reserve with respect to this matter.

Litigation – In December 2003, Dornier Aviation (North America) Inc. Liquidating Trust filed litigation against Skyway, disputing the validity of $3.5 million of credit memorandums used by the Company to purchase aircraft parts and services. The credit memorandums obtained by the Company were associated with the acquisition of the Fairchild 328JET aircraft and through subsequent resolution of Dornier’s cancellation of the 428JET program. In the first quarter of 2005, the Company engaged in mediation and agreed to settle the matter by paying Dornier Aviation (North America) $850,000, which was paid in April 2005.

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Regional Services Alliance – In April 2004, Skyway announced that it is in discussions with Delta Air Lines to operate Delta Connection’s Fairchild 328JET fleet. The discussions are a step toward expansion of Skyway’s business model to operate aircraft for airlines in addition to Midwest Airlines. To date, Skyway, while operating as Midwest Connect, has provided connections to Midwest Airlines and point-to-point service in select Midwestern markets. The Company assumes no obligation, and disclaims any obligation, to update the status of these discussions until the parties reach an agreement or terminate their discussions.

Change to New York Stock Exchange Listing Standards – The Company’s common stock is listed on the New York Stock Exchange. If the Company does not comply with the listing standards of the New York Stock Exchange, then the Exchange may initiate the delisting process. The risk of delisting is greater if the New York Stock Exchange adopts a proposal to modify its listing standards to increase the dollar thresholds for the average total market capitalization and the average shareholders’ equity that a listed company is required to maintain. Delisting could materially reduce the liquidity of the Company’s common stock and could result in a corresponding material reduction in the price of the Company’s common stock. The lack of liquidity could make it more difficult for the Company to raise capital in the future.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Except as discussed below, there have been no material changes in the Company’s market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosure about Market Risk of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

At April 30, 2005, 25% of second and third quarter 2005 estimated fuel consumption is hedged at a ceiling price ranging from $1.44 to $1.51 per gallon and a floor price ranging from $1.24 to $1.32 per gallon, which includes into-plane costs. The purpose of these hedges is to provide protection from rapidly escalating prices. Additionally, there are hedges in place for fourth quarter 2005 for approximately 22% and first quarter 2006 for approximately 10% of total expected fuel usage.

As of April 30, 2005, all the Company’s fuel collar agreements were with one counterparty. The limited number of counterparties exposes the Company to financial risk in the event of nonperformance by the counterparty. The Company does not expect the counterparty to fail to meet its obligations. To manage this risk, the Company will periodically review and consider other counterparties to potentially limit the Company’s exposure to a single counterparty.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Company’s chairman of the board, president and chief executive officer and the Company’s senior vice president and chief financial officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

(b) Changes in internal controls. There was no change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 6. Exhibits

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SIGNATURES

Pursuant to the requirements 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.

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EXHIBIT INDEX
MIDWEST AIR GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2005

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