UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Or

Commission File Number 001-31898

PINNACLE AIRLINES CORP.

901-348-4100
(Registrant’s telephone number, including area code)

Indicate by check mark whether 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.

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

As of October 25, 2004, [21,892,060] shares of common stock were outstanding.

Table of Contents

Part I Financial Information

Item 1. Financial Statements

Pinnacle Airlines Corp.
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

1

Pinnacle Airlines Corp.
Condensed Consolidated Statements of Income (Unaudited)
(in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

2

Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Pinnacle Airlines Corp.
Condensed Consolidated Balance Sheets
(in thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Pinnacle Airlines Corp.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)

     Pinnacle Airlines Corp. (the “Company”) operates through its wholly owned subsidiary, Pinnacle Airlines, Inc., as a regional airline that provides airline capacity to Northwest Airlines, Inc. (“Northwest”), a wholly owned indirect subsidiary of Northwest Airlines Corporation. The Company operates as a Northwest Airlink carrier at Northwest’s domestic hub airports in Detroit, Minneapolis/St. Paul and Memphis. The Company currently operates an all-regional jet fleet of 109 Canadair Regional Jet (“CRJ”) aircraft and offers scheduled passenger service with 636 daily departures to 100 cities in 34 states plus the District of Columbia, and four Canadian provinces.

1. Basis of Presentation

     These interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.

     In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the Company’s financial position, the results of its operations and its cash flows for the periods indicated. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

     The term “block hours” refers to the elapsed time between an aircraft leaving a gate and arriving at a gate, and the term “cycle” refers to an aircraft’s departure and corresponding arrival. “Available seat miles” represents the number of seats available for passengers, multiplied by the number of miles those seats are flown.

     Certain prior year amounts have been reclassified to conform to current year classifications.

2. Change in Ownership and Public Offering

     On January 15, 2003, Northwest transferred all of the outstanding common stock of Pinnacle Airlines, Inc. to Pinnacle Airlines Corp., in exchange for 21,892 shares of the Pinnacle Airlines Corp. common stock, which constitutes all of its outstanding common stock, and one share of Series A preferred stock. In January 2003 and September 2003, Northwest contributed 12.9% and 75.7%, respectively, of the shares of Pinnacle Airlines Corp. common stock to the Northwest Airlines Pension Plan for Contract Employees, the Northwest Airlines Pension Plan for Pilot Employees and the Northwest Airlines Pension Plan for Salaried Employees (collectively, the “Northwest Airlines Pension Plan.”)

     The Series A preferred stock has a stated value and liquidation preference of $100. The Series A preferred stock gives Northwest the right to appoint two directors to the Company’s board of directors. No dividends are payable to the shareholder of the Series A preferred stock, and it is redeemable by the Company, at its option, for an amount equal to the liquidation preference, only upon or following the occurrence of certain events, including the sale or other disposition of the Series A preferred stock or the termination or expiration of the airline services agreement between the Company and Northwest.

     On November 25, 2003, the Company completed an initial public offering (the “Offering”) of its common stock, par value $.01 per share. In the Offering, the Northwest Airlines Pension Plan sold the 19,400 shares that it received during 2003. The Company did not receive any proceeds from the Offering.

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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)

3. Airline Services Agreement

     The Company and Northwest operate under an Airline Services Agreement (“ASA”), effective March 1, 2002, pursuant to which the Company provides regional airline services to Northwest. The terms of the ASA are materially different from the terms of the historical arrangement between the Company and Northwest. The initial agreement provided for a term from March 1, 2002, through February 29, 2012 and would have increased the Company’s fleet to 95 regional jets by December 31, 2004. During 2003, the Company and Northwest entered into certain amendments to the ASA that, among other things, extended the term of the agreement through December 31, 2017, eliminated incentive payments based on certain performance criteria, lowered the Company’s target operating margin from 14% to 10% effective December 1, 2003, and provided for an increase in the size of the Company’s fleet to 129 regional jets by December 31, 2005.

     Under the ASA, the Company receives the following payments from Northwest:

     Reimbursement payments. The Company receives monthly reimbursements for all expenses relating to: passenger aircraft fuel; basic aircraft rentals; aviation liability, war risk and hull insurance; third-party deicing services; CRJ third-party engine and airframe maintenance; hub and maintenance facility rentals; passenger security costs; ground handling in cities where Northwest has ground handling operations; Detroit landing fees; and property taxes. Since the Company is reimbursed by Northwest for the actual expenses incurred for these items, the Company has no financial risk associated with these cost fluctuations.

     Payments based on pre-set rates. The Company is entitled to receive semi-monthly payments for each block hour and cycle it operates and a monthly fixed cost payment based on the size of its fleet. These payments are designed to cover all of the Company’s expenses incurred with respect to the ASA that are not covered by the reimbursement payments.

     The substantial majority of these expenses relate to labor costs, line maintenance and ground handling costs in cities where Northwest does not have ground handling operations, landing fees in cities other than Detroit, overhead and depreciation.

     Margin payments. The Company receives a monthly margin payment based on the revenues described above calculated to achieve a target operating margin. The target operating margin for the ten months ended December 31, 2002, and the eleven months ended November 30, 2003 was 14%. Following the Offering, the Company and Northwest amended the ASA (as discussed above) to lower the Company’s target operating margin to 10%, effective December 1, 2003. Under the amended ASA, the Company’s target operating margin will be reset to a market-based percentage in 2008, but the reset target operating margin will be no lower than 8% and no higher than 12%.

     The portion of any margin payments attributable to the reimbursement payments will always be equal to the targeted operating margin for the relevant period. However, since the payments based on pre-set rates are not based on the actual expenses incurred, if the Company’s expenses are not covered by these payments, its actual operating margin could differ from its target operating margin.

     Through 2007, if the Company’s actual costs that are intended to be covered by the revenues the Company receives based on pre-set rates deviate from the expected costs used in developing those pre-set rates, and as a result its annual operating margin is below the 9% floor or above the 11% ceiling for each year through 2005, or below the 8% floor or above the 12% ceiling for 2006 and 2007, a year-end adjustment in the form of a payment by Northwest or by the Company will be made to adjust the Company’s operating margin to the floor or ceiling. Specified amounts are excluded when determining whether the Company’s annual operating margin is below the floor or above the ceiling.

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Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)

3. Airline Services Agreement (continued)

     Beginning in 2008, Northwest will not guarantee the Company a minimum operating margin, although the Company will still be subject to a margin ceiling above the revised target-operating margin. If the Company’s actual operating margin for any year beginning with 2008 exceeds the revised target operating margin by up to five percentage points, the Company will make a year-end adjustment payment to Northwest in an amount equal to half of the excess. In addition, should the Company’s actual operating margin exceed the targeted operating margin by more than five percentage points, the Company will pay Northwest all of the excess above five percent. If necessary, the Company will record an amount each quarter to reflect the Company’s right to receive or the Company’s obligation to pay this operating margin adjustment payment, and any net payment will be made annually.

4. Note Payable and Dividends to Northwest

     On January 14, 2003, the Company issued a $200,000 note payable to Northwest as a dividend. The note payable required quarterly principal payments of $5,000 beginning in March 2003 and continuing through September 2009 with a final payment of the outstanding principal and interest due in December 2009. The note payable also required monthly payments to the extent that the Company’s cash equivalents balance exceeds $40,000. This note accrues interest at the rate of 3.4%, which is payable quarterly.

     In the event that the Company does not satisfy its obligations under the note, Northwest has the right to set off any such amounts against its payment obligations to the Company under the ASA. Should Northwest terminate the ASA prior to December 2009, all outstanding principal and interest would become immediately due and payable to Northwest.

     Immediately following the Offering, Northwest made a capital contribution to the Company in the amount of $50,000. The contribution of capital was used by the Company to reduce the outstanding principal balance on the note payable. The Company and Northwest subsequently amended the note payable to reflect an outstanding principal balance of $135,000 and quarterly principal payments were lowered to $3,000. The amended note payable also requires monthly principal payments to the extent that the Company’s cash and cash equivalents balance exceeds $50,000. No other significant changes were made to the terms of the note payable.

5. Earnings Per Share

     The following table sets forth the computation of basic and diluted earnings per share:

8

Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)

5. Earnings Per Share (continued)

     Options to purchase 759 shares of common stock were excluded from the diluted EPS calculation for the three and nine months ended September 30, 2004, because the effect would be anti-dilutive.

6. Stock-Based Compensation

     The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations (“APB 25”), and complies with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB 25, if the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Since the Company’s stock options have all been granted with exercise prices at the market price of the underlying stock on the date of grant, no compensation expense has been recognized under APB 25.

     An initial grant of 858 stock options to purchase the Company’s common stock occurred in November 2003. These options vest over four years in annual increments of 25% and will expire ten years after the grant date. For the three months ended September 30, 2004, 131 of previously granted options were forfeited. In September 2004, an additional 32 stock options to purchase the Company’s common stock were granted to members of the Board of Directors under the 2003 Stock Incentive Plan at an exercise price of $10.23. These options vest one year after the grant date and will expire ten years after the grant date.

     The following table illustrates the effect on net income and income per share, assuming the compensation costs for the Company’s stock option and purchase plans had been determined using the fair value method as required under SFAS No. 123:

7. Line of Credit with Northwest

     In January 2003, the Company obtained a Revolving Credit Facility (“Revolver”) from Northwest, which allows for borrowings up to $50,000. The term of the Revolver extends through December 31, 2005. The Revolver accrues interest at the rate of 1% plus a margin that is equal to the higher of the most recent prime rate offered by JP Morgan Chase Bank, or the most recent overnight federal funds rate offered to JP Morgan Chase Bank plus .5%. Under the terms of the Revolver, the Company must continue to operate under the ASA and is prevented from issuing or declaring dividends or incurring any additional debt without the approval of Northwest. The interest rate was 5.75% and 5.0% at September 30, 2004 and 2003, respectively. The Revolver contains certain affirmative and negative covenants regarding the operation of the Company. As of September 30, 2004 and December 31, 2003 the Company was in compliance with all covenants contained in the Revolver.

9

Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)

8. Related Party Transactions

     Northwest is a related party of the Company. As previously noted, the Company generates substantially all of its revenue from its ASA with Northwest under which the Company uses the “NW” two-letter designator code in displaying its schedules on all flights in the automated airline reservation systems used throughout the industry. Under this agreement, the Company uses the name “Northwest Airlink.” Northwest leases the Company all of its regional jets, provides certain borrowings to the Company and is the owner of 2,492 shares of the Company’s common stock and the Company’s Series A preferred stock.

     Amounts recorded in the Company’s condensed consolidated statements of income for transactions with Northwest are as follows:

     Nets amounts due from Northwest as of September 30, 2004 and December 31, 2003 were $21,177 and $17,123, respectively. The net amounts at September 30, 2004 and December 31, 2003 include $715 and $936, respectively, for amounts due to the Company to satisfy its lease commitments for the Saab aircraft. Of these amounts, $468 and $719, respectively, were classified as other non-current assets in the Company’s condensed consolidated balance sheets.

     As discussed in Note 11, the Company subleases certain Saab aircraft to Mesaba Airlines (“Mesaba”), another Northwest regional carrier, and obtains ground handling services at certain cities where Mesaba has existing operations. Additionally, as provided in the ASA with Northwest, the Company provides certain ground handling services at selected cities to Mesaba. Ground handling services obtained from Mesaba for the three months ended September 30, 2004 and 2003, totaled $4,017 and $2,704, respectively. Services obtained for the nine months ended September 30, 2004 and 2003, were $11,343 and $8,713, respectively. Ground handling services provided to Mesaba for the three months ended September 30, 2004 and 2003, totaled $231 and $1,065, respectively. Amounts provided for the nine months ended September 30, 2004 and 2003, were $1,093 and $4,072, respectively. These amounts are included in other operating revenue in the Company’s condensed consolidated statements of income.

9. Income Taxes

     During the three months ended September 30, 2004, the Company lowered its 2004 income tax expense by approximately $1.7 million following reductions in the Company’s previous estimates of its tax obligations for 2003 and 2004.

10

Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)

9. Income Taxes (continued)

     The reduction in the Company’s estimates occurred following the filing of its 2003 state and federal income tax returns and was primarily due to changes in the expected allocation of taxable income to those states where the Company has operations.

     The change in estimates reduced the Company’s income tax expense by approximately $1.7 million for the three months ended September 30, 2004. This change in estimates increased the Company’s basic and diluted EPS by approximately $0.08 for the three months ended September 30, 2004.

     The change in estimates reduced the Company’s income tax expense for the nine months ended September 30, 2004 by approximately $1.1 million, which is the change in estimate attributable to the Company’s 2003 income tax expense. This change in estimates increased the Company’s basic and diluted EPS by approximately $0.05 for the nine months ended September 30, 2004.

     The following summarizes the significant components of the Company’s income tax expense for the periods indicated:

10. Manufacturer Credits

     The Company purchases from Northwest certain manufacturer credits to acquire flight equipment, spare parts and supplies and maintenance services. Under its operating agreement with Northwest, the Company may decline to purchase credits that it does not plan to utilize within 180 days. The Company had available manufacturer credits of $3,622 and $3,645 at September 30, 2004 and December 31, 2003, respectively, which are included in prepaid expenses and other assets.

11

Pinnacle Airlines Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(all amounts in thousands, except per share data)

10. Manufacturer Credits (continued)

     The Company purchased manufacturer credits from Northwest in the amount of $3,106 and $0, for the three months ended September 30, 2004 and 2003, respectively. For the nine months ended September 30, 2004 and 2003, the Company purchased manufacturer credits of $4,386 and $10,053, respectively.

11. Commitments and Contingencies

     The Company leases all of its aircraft and certain aircraft equipment, buildings and office equipment under capital and noncancelable operating leases that expire in various years through 2017. The Company subleases its CRJ aircraft from Northwest under operating leases that expire December 31, 2017. The operating lease agreements contain certain requirements of the Company regarding the payment of taxes on the aircraft, acceptable use of the aircraft, the level of insurance to be maintained, the maintenance procedures to be performed and the condition of the aircraft upon its return to Northwest. The monthly operating lease rates include certain fleet management costs of Northwest and are not representative of the rates paid by Northwest to third-party lessors. Northwest reimburses the Company’s aircraft rental expense in full under the ASA.

     The Company transferred 11 Saab turboprops to Mesaba during 2002. The Company entered into an aircraft sublease agreement with Mesaba with respect to these Saab aircraft and two engines that it leases from third parties. The term of the sublease will continue for the remainder of the term of the Company’s subleases with the third-party sublessors, subject to its right to terminate the sublease in the event of default by Mesaba. Amounts received from Northwest and Mesaba are consistent with amounts paid by the Company to third party lessors of the Saab aircraft.

     The following summarizes approximate minimum future rental payments, by year and in the aggregate, required under capital leases and noncancelable operating leases with initial or remaining lease terms in excess of one year as of September 30, 2004:

12. Subsequent Event

     On October 14, 2004, a repositioning flight operated by the Company was involved in an accident near Jefferson City, Missouri. The flight, which was enroute to Minneapolis, Minnesota, was not carrying any passengers or flight attendants. The two pilots operating the aircraft did not survive the accident. The National Transportation Safety Board is currently investigating the accident and the Company is fully cooperating with the investigation. The Company is currently assessing the costs that may be associated with the event. The Company does not expect that these costs will have a material impact on its operating results, cash flows and financial position.

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

General

     The following discussion and analysis describes the principal factors affecting the results of operations, liquidity, capital resources and contractual cash obligations, as well as the critical accounting policies, of the Company. This should be read in conjunction with the accompanying unaudited financial statements and our Annual Report on Form 10-K for the year ended December 31, 2003 (“Annual Report”), which include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

     Our website address is www.nwairlink.com. All of our filings with the SEC are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.

Overview

     Our available seat miles (“ASMs”), block hours and cycles increased by approximately 58%, 56% and 42%, respectively, during the three months ended September 30, 2004, compared to the same period in 2003. Our ASMs, block hours and cycles increased by approximately 58%, 53% and 38%, respectively, during the nine months ended September 30, 2004, compared to the same period in 2003. The increases were driven primarily by the growth in our fleet of Canadair Regional Jets (“CRJs”), 8 and 33 of which were added during the three and nine months ended September 30, 2004, respectively. By adding 39 aircraft since September 30, 2003, we have grown our fleet by 56% to include 109 CRJs at September 30, 2004.

     Operating revenue increased by $48.4 million, or 40%, and $124.5 million, or 38%, for the three and nine months ended September 30, 2004, respectively, over the same period in 2003. Operating income for the three and nine months ended September 30, 2004 were $18.5 million and $49.8 million, respectively, which represented increases of $2.0 million and $3.2 million, respectively, over the same periods in 2003.

     Net income for the three and nine months ended September 30, 2004 were $12.6 million and $30.4 million, respectively, which represented increases of $3.9 million and $5.1 million, respectively, over the same periods in 2003. Since December 31, 2003, our balance of cash and cash equivalents has increased by $6.6 million to $38.1 million.

     Our net income for the three and nine months ended September 30, 2004, were favorably affected by $1.7 million and $1.1 million, respectively, associated with reductions in our estimate of 2003 and 2004 tax obligations. The reduction in estimates occurred following the filing of our 2003 state and federal income tax returns and were primarily due to changes in the expected allocation of our taxable income to states where we operate.

     Our 2004 passenger revenue and operating income were negatively affected by the reduction in our target operating margin from 14% to 10%, which occurred at the time of the Offering. The growth in passenger revenue and operating income for the three months ended September 30, 2004 would have been approximately 48% and 64%, respectively, had the target margin been 10% for the same period in 2003. The growth in passenger revenue and operating income for the nine months ended September 30, 2004 would have been approximately 46% and 55%, respectively, had the target margin been 10% for the same period in 2003.

13

Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

     Under the ASA, Northwest bears the economic risk of price fluctuations in aircraft fuel. We are reimbursed in full by Northwest at the lower of the actual cost of our passenger fuel (including taxes and fees) or $0.78 per gallon; any excess over $0.78 is borne by Northwest and does not yield a margin to us.

     The following reconciles our passenger revenue and operating income as reported in accordance with generally accepted accounting principles (“GAAP”) for the three and nine months ended September 30, 2003 to passenger revenue and operating income as if our target operating margin had been 10% for the same periods.

     We believe that this information is useful as it indicates more clearly our comparative year-to-year operating results. None of this information should be considered a substitute for any measures prepared in accordance with GAAP. We have included this reconciliation of non-GAAP financial measures to our most comparable GAAP financial measures included herein.

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Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

Outlook

     The number of aircraft we operate will continue to have the largest effect on the growth of our passenger revenue, which is derived solely from our operating agreement with Northwest. Northwest has continued to indicate its commitment to regional jets as a part of its core strategy. Accordingly, we have not revised our forecasted growth in fleet size, passenger revenue and operating income for the remainder of 2004. We continue to forecast that our fleet will grow to 114 CRJs by the end of 2004 and 129 by the end of 2005.

     We continue to focus on strong operational performance and cost efficiencies in order to be well positioned to compete for the remaining 175 CRJs that Northwest has on option. Northwest has made no announcement regarding the exercise of options or placement of these aircraft with any regional carrier. We remain the only Northwest Airlink operator of 44-seat and 50-seat CRJs.

Results of Operations

     The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three and nine months ended September 30, 2004 compared to the same periods ended September 30, 2003. All amounts are in thousands except per share data.

Revenue

     As noted in the discussion of our ASA, we are reimbursed for certain operating expenses necessary to provide regional airline capacity to Northwest and receive payments based on pre-set rates for fixed costs, completed block hours and completed cycles. We also receive margin payments on those items that are intended to achieve a target operating margin. Our operating results are not affected by any seasonality trends historically associated with the airline industry.

Comparison of Three Months Ended September 30, 2004 to Three Months Ended September 30, 2003

     The following is a summary of our passenger revenue by type, which includes margin, (in thousands):

     The increase in passenger revenue of $48.6 million was caused primarily by the addition of 39 aircraft to our fleet of CRJs. The increase in revenue associated with expense reimbursements of $32.8 million was largely due to increases in aircraft rentals, aircraft fuel and ground handling, which increased with our level of operations. This increase in our fleet and the corresponding increase in CRJ block hours and cycles of 56% and 42%, respectively, accounted for an increase of $15.7 million in passenger revenue based on pre-set rates.

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Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

Operating Expenses

     The following summarizes our operating expenses, reimbursed and unreimbursed, as provided under the terms of our ASA (in thousands):

     The increase in operating expenses during the three months ended September 30, 2004 was predominately due to the growth in our level of operations. Total operating expenses increased by $46.5 million, or 45%, which is comprised of increases in reimbursed and unreimbursed expenses of approximately 48% and 39%, respectively.

     Salaries, wages and benefits increased by $5.2 million primarily due to the increase in the number of pilots and flight attendants of 37% and 43%, respectively, as well as wage rate and benefit increases. An increase in other employee benefits, primarily the cost of employee insurance, accounted for the remaining increase in salaries, wages and benefits, as overall headcount increased 16%.

     Aircraft fuel increased $7.9 million, or 53%, due to the 56% increase in block hours and a 17% increase in the average length of our flight, which was partially offset by a slight improvement in our fuel burn efficiency.

     Aircraft maintenance, materials and repairs expenses that are reimbursed by Northwest increased principally due to an increase in volume-driven expenses, which normally represent approximately 50% of our maintenance, materials, and repair costs. The remaining increases in maintenance expense, both unreimbursed and reimbursed, were due mainly to the increase in our level of operations and the expiration of warranty on a portion of the fleet.

     Aircraft rentals increased by $19.9 million, or 56%, due to the addition of 39 CRJ aircraft to our fleet.

     Ground handling services increased by $6.1 million, or 52%, due primarily to the 42% increase in the number of departures performed. The increase in ground handling expense per departure was caused by a change in the mix of cities where we provide passenger service.

     Other rentals and landing fees increased due to an increase in landing fees of approximately $2.4 million, which is due largely to our increased level of operations and a change in the mix of cities where we provide passenger service.

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Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

     Government reimbursements related to a refund of previously paid passenger screening costs received in May 2003. Because we are reimbursed for passenger screening costs, we distributed 100% of the funds received to Northwest.

     Other expenses reimbursed by Northwest decreased primarily due to a decrease in property taxes of $0.8 million. Reductions in amounts previously estimated for property tax obligations were the cause of the decrease. The increase in unreimbursed other expenses was driven by our increased level of operations, most notably an increase of $0.9 million of expenses associated with overnight travel of our pilots and flight attendants, and $0.8 million of expenses associated with new pilot training. Additionally, $0.3 million of the increase is attributable to directors and officers insurance coverage.

Nonoperating Expenses

     The decrease in interest expense was due to our reduced level of borrowings from Northwest. Since September 30, 2003, the note payable owed to Northwest has been reduced by $62.0 million due primarily to the $50.0 million reduction at the time of the Offering. Additionally, borrowings under the line of credit with Northwest decreased by $19.8 million from September 30, 2003 to September 30, 2004.

Income Taxes

     During the three months ended September 30, 2004, we lowered our income tax expense by approximately $1.7 million due to reductions in amounts we previously estimated for our tax obligations for 2004 and 2003.

     The reduction in estimates occurred following the filing of our 2003 state and federal income tax returns and was primarily due to changes in the expected allocation of our taxable income to those states where we operate.

     The change in estimates reduced our 2004 estimated income tax expense by approximately $1.7 million for the three months ended September 30, 2004. For the three months ended September 30, 2004, this change in estimates increased our basic and diluted EPS by approximately $0.08.

     A more detailed discussion of this change in estimate is included in Note 9 to our condensed consolidated financial statements.

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Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended September 30, 2003

     The following is a summary of our passenger revenue by type, which includes margin, (in thousands):

     The increase in passenger revenue of $127.5 million was caused primarily by the addition of 39 aircraft to our fleet of CRJs. This increase in our fleet and the corresponding increase in CRJ block hours and cycles of 53% and 38%, respectively, accounted for an increase of $38.9 million in increased passenger revenue based on pre-set rates.

     The increase in revenue associated with expense reimbursements of $88.6 million was largely due to increases in aircraft rentals, aircraft fuel and ground handling, which increased with our level of operations.

Operating Expenses

     The following summarizes our operating expenses, reimbursed and unreimbursed, as provided under the terms of our ASA (in thousands):

     The increase in operating expenses during the nine months ended September 30, 2004 was predominately due to the growth in our level of operations. Total operating expenses increased by $121.3 million, or 43%, which is comprised of increases in reimbursed and unreimbursed expenses of approximately 48% and 33%, respectively.

     Salaries, wages and benefits increased by $13.6 million primarily due to the increase in the number of pilots and flight attendants of 37% and 43%, respectively, as well as wage rate and benefit increases. An increase in other employee benefits, primarily the cost of employee insurance, accounted for the remaining increase in salaries, wages and benefits.

18

Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

     Aircraft fuel increased $20.0 million, or 52%, due to the 53% increase in block hours and a 19% increase in the average length of our flights, which was partially offset by a slight improvement in our fuel efficiency.

     Aircraft maintenance, materials and repairs expenses that are reimbursed by Northwest increased principally due to required heavy airframe maintenance checks being performed on our CRJ aircraft. This accounted for approximately $1.8 million of the increase in reimbursed maintenance expenses. Heavy airframe maintenance checks were performed on 23 aircraft during the nine months ended September 30, 2004 and 10 are scheduled for the remainder of the year. The remaining increases in maintenance expense, both unreimbursed and reimbursed, were due mainly to the increase in our level of operations and the expiration of warranty on a portion of the fleet.

     Aircraft rentals increased by $51.0 million, or 52%, due to the addition of 39 CRJ aircraft to our fleet.

     Ground handling services increased by $14.4 million, or 45%, due primarily to the 38% increase in the number of departures performed. The increase in ground handling expense per departure was caused by a change in the mix of cities where we provide passenger service.

     Other rentals and landing fees increased due to an increase in landing fees of approximately $5.1 million, or approximately 55%, which is due largely to our increased level of operations and a change in the mix of cities where we provide passenger service.

     Government reimbursements related to a refund of previously paid passenger screening costs received in May 2003. Because we are reimbursed for passenger screening costs, we distributed 100% of the funds received to Northwest.

     Other expenses that are reimbursed by Northwest increased primarily due to increases in property taxes of $0.6 million and incremental passenger screening costs of $0.3 million. The increase in unreimbursed other expenses was driven by our increased level of operations, most notably an increase of $2.4 million of expenses associated with new pilot training and $1.9 million of expenses associated with overnight travel for our pilots and flight attendants. Additionally, $0.8 million of the increase is attributable to directors and officers insurance coverage.

Nonoperating Expenses

     The decrease in interest expense was due to our reduced level of borrowings from Northwest. Since September 30, 2003, the note payable owed to Northwest has been reduced by $62.0 million due primarily to the $50.0 million reduction at the time of the Offering. Additionally, borrowings under the line of credit with Northwest decreased by $19.8 million from September 30, 2003 to September 30, 2004.

     Miscellaneous income consists of a gain of $0.3 million recorded in connection with the sale of Saab equipment during the nine months ended September 30, 2004.

Income Taxes

     During the nine months ended September 30, 2004, we lowered our income tax expense by approximately $1.1 million due to reductions in amounts we previously estimated for our tax obligations for 2003.

     The reduction in our estimates occurred following the filing of our 2003 state and federal income tax returns and was primarily due to changes in the expected allocation of our taxable income to those states where we operate.

     The change in estimates reduced our 2004 income tax expense for the nine months ended September 30, 2004 by approximately $1.1 million, which is the change in estimate attributable to our 2003 income tax expense. This change in estimates increased our basic and diluted EPS by approximately $0.05 for the nine months ended September 30, 2004.

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Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

Certain Statistical Information

     Information with respect to our operating expense components (amounts in thousands) as a percentage of revenue and as cents per ASM is as follows:

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Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

Certain Statistical Information (continued)

     The following table summarizes certain operational statistics for the three months and nine months ended September 30, 2004 and 2003:

(1)

Revenue passenger miles represents the number of miles flown by revenue passengers.

(2)

Passenger load factor equals revenue passenger miles divided by available seat miles.

Liquidity and Capital Resources

     As of September 30, 2004, we had $38.1 million in cash and cash equivalents. Net cash provided by operating activities for the nine months ended September 30, 2004 and September 30, 2003 was $25.6 million and $25.6 million, respectively.

     Cash used for investing activities for the nine months ended September 30, 2004 and September 30, 2003 was $5.0 million and $10.0 million, respectively. The decrease is due to the timing of purchases of rotable (renewable) parts. During the three months ended September 30, 2004, we lowered our forecasted capital expenditures for 2004 from approximately $16.0 million to approximately $9.0 million, which will be funded with cash flows from our current operations.

     Cash used for financing activities for the nine months ended September 30, 2004 was $19.6 million more than the same period in 2003, due primarily to the 2003 borrowings under our line of credit with Northwest of $24.8 million.

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Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

Liquidity and Capital Resources (continued)

     As of September 30, 2004, we had $45.0 million of available borrowings under our revolving credit facility with Northwest, which had an interest rate of 5.75%.

     We have significant lease and sublease obligations for aircraft that are classified as operating leases on our balance sheet. We are responsible for all maintenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value or other guarantees to our lessors. We have no other significant off-balance sheet arrangements.

     The following chart details our debt and lease obligations on a pro forma basis at September 30, 2004. Operating lease information includes scheduled deliveries of the 20 additional aircraft we will receive through December 2005 at the basic aircraft rental rate provided in the ASA. Under our ASA, amounts relating to operating leases will be directly reimbursed by Northwest.

(1)		Contractual obligations for the remainder of 2004
(2)		Borrowings outstanding as of September 30, 2004, under our revolving credit facility with Northwest, which expires December 31, 2005.
(3)		As of September 30, 2004, our obligations relating to operating leases, excluding future scheduled deliveries of aircraft under the ASA, were as follows (in thousands):

Critical Accounting Policies

     The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

     Information regarding our “Critical Accounting Policies” can be found in our Annual Report on page 27. In addition, Note 2 to the consolidated financial statements in our Annual Report contains a summary of our significant accounting policies.

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Management’s Discussion and Analysis of Results of Operations and Financial Condition (continued)

Forward Looking Statements

     Statements in this Form 10-Q report contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Act of 1934, as amended, or the Exchange Act, which represent our management’s beliefs and assumptions concerning future events. When used in this document and in documents incorporated by reference, forward-looking statements include, without limitation, statements regarding financial forecasts or projections, our expectations, beliefs, intentions or future strategies that are signified by the words “expects”, “anticipates”, “intends”, “believes” or similar language. These forward-looking statements are subject to risks, uncertainties and assumptions that could cause our actual results and the timing of certain events to differ materially from those expressed in the forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date of this report. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections, beliefs and assumptions upon which we base our expectations may change prior to the end of each quarter or the year.

     Although these expectations may change, we may not inform you if they do. Our policy is generally to provide our expectations not more than once per quarter, and not to update that information until we deem it appropriate.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk