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

FORM 10-K

(Mark One)

For the transition period from                          to                         

Commission File No. 0-17895

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

Fifth Street Towers, Suite 1720
150 South Fifth Street
Minneapolis, Minnesota 55402
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (612) 333-0021

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01

        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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark 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. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý    No o

        The aggregate market value of voting stock held by nonaffiliates of the registrant as of June 12, 2003 was approximately $59,520,219.

        As of June 12, 2003, there were 20,320,641 shares of Common Stock of the registrant issued and outstanding.

Documents Incorporated By Reference

        Certain portions of the documents listed below have been incorporated by reference into the indicated part of this Form 10-K.

CAUTIONARY STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

        Statements in this Annual Report on Form 10-K under the caption "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as oral statements that may be made by the Company or its subsidiaries or by officers, directors or employees of the Company or its subsidiaries acting on the Company's behalf, that are not historical fact may constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements involve factors that could cause the actual results of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. The Company cautions the public not to place undue reliance on forward-looking statements, which may be based on assumptions and anticipated events that do not materialize. Factors which could cause the Company's actual results to differ from forward-looking statements include material changes in the relationship between the Company, its subsidiaries and Northwest Airlines; changes in Northwest Airlines' air service; reduced passenger and flight activity as a result of severe acute respiratory syndrome ("SARS") and the terrorist events of September 11, 2001; expenses associated with restructuring operations; a continued slow-down in the overall United States economy; increased operating costs due to the terrorist events of September 11, 2001; the impact of United States government programs on operations; changes in regulations affecting the airline industry, including Department of Transportation ("DOT"), Transportation Security Administration ("TSA"), and Federal Aviation Administration ("FAA") regulations or directives affecting airworthiness of aircraft; seasonal factors; labor relationships, including labor shortages, slow downs and/or work stoppages; ongoing legal proceedings; and unanticipated costs resulting from the acquisition of Big Sky Transportation Co.

PART I

Item 1. BUSINESS

        Mesaba Holdings, Inc. ("Holdings" or the "Company") is the holding company for Mesaba Aviation, Inc., a regional air carrier based in Minneapolis, Minnesota ("Mesaba") and Big Sky Transportation Co., a regional air carrier based in Billings, Montana ("Big Sky"), which was acquired by Holdings on December 1, 2002. Mesaba and Big Sky are each wholly owned subsidiaries of the Company.

Mesaba

        Mesaba operates as a regional air carrier providing scheduled passenger service as "Mesaba Airlines/Northwest Airlink" and "Mesaba Airlines/Northwest Jet Airlink" under two separate agreements with Northwest to 108 cities in the United States and Canada from Northwest's hub airports, Minneapolis/St. Paul, Detroit, and Memphis.

        Under the Airline Services Agreement (the "Airlink Agreement"), Mesaba operates Saab 340 jet-prop aircraft for Northwest. This agreement provides for exclusive rights to designated service areas and extends through June 30, 2007. Under the Airlink Agreement, Mesaba recognizes revenue for each completed available seat mile. Additionally, under the Airlink Agreement, Mesaba purchases fuel, ground handling, and other services from Northwest. Either Northwest or Mesaba may terminate the Airlink Agreement on 365 days notice. The Airlink Agreement may be terminated immediately by Mesaba or Northwest in the event that the other party is the subject of a bankruptcy proceeding or is divested of a substantial part of its assets. In the event of a breach of a non-monetary provision which remains uncured for a period of more than 30 days after receipt of written notification of such default, or the breach of a monetary provision which remains uncured for a period of more than 10 days after receipt of written notification of such default, the non-defaulting party may terminate the agreement. Northwest may also terminate the Airlink Agreement in the event of certain lease and other performance defaults; change in control events; revocation or failure to obtain DOT certification; failure to elect a chief executive officer of the Company and Mesaba reasonably acceptable to Northwest; or if more than 50% of the aircraft subject to the agreement are not operated for more than seven consecutive days or 25% of such aircraft are not operated for more than 21 consecutive days, other than as a result of the FAA grounding a specific aircraft type for all carriers.

        Under the Regional Jet Services Agreement (the "Jet Agreement"), Mesaba operates Avro RJ85 ("RJ85") regional jets for Northwest. This agreement extends through October 25, 2006, unless terminated earlier in accordance with its provisions. Under the Jet Agreement, Mesaba recognizes revenue for each block hour flown. Northwest provides fuel and airport and passenger related services at Northwest's expense. The Jet Agreement may be terminated immediately by Mesaba or Northwest in the event that the other party is the subject of a bankruptcy proceeding or is divested of a substantial part of its assets. In the event of a breach of a non-monetary provision which remains uncured for a period of more than 30 days after receipt of written notification of such default, or the breach of a monetary provision which remains uncured for a period of more than 10 days after receipt of written notification of such default, the non-defaulting party may terminate the agreement. Northwest may terminate the Jet Agreement as of the seventh anniversary of the effective date of the first jet aircraft lease if Northwest gives a termination notice to Mesaba not less than 180 days nor more than 365 days prior to such seventh anniversary, April 25, 2004. Northwest may also terminate the Jet Agreement in the event of certain lease and other performance defaults; change in control events; revocation or failure to obtain DOT certification; failure to elect a chief executive officer of the Company and Mesaba reasonably acceptable to Northwest; if more than 25% of the aircraft subject to the agreement are not operated for more than seven consecutive days, other than as a result of the FAA grounding all RJ85 aircraft for all carriers; or if there is a strike, cessation or interruption of work involving Mesaba pilots, flight attendants or mechanics providing jet service.

        Under the agreements, all flights that Mesaba operates are designated as Northwest flights using Northwest's designator code in all computer reservations systems, including the Official Airline Guide, with an asterisk and a footnote indicating that Mesaba is the carrier providing the service. In addition, flight schedules of Mesaba and Northwest are closely coordinated to facilitate interline connections, and Mesaba's passenger gate facilities at the Minneapolis/St. Paul International Airport, Detroit Metropolitan Airport and Memphis International Airport are integrated with Northwest's facilities in the main terminal buildings, rather than at the more remote commuter air terminals. Mesaba's jet aircraft are painted in the colors of Northwest Airlines and the jet-prop aircraft are painted in a distinctive "Northwest Airlink" configuration, with a Northwest Airlines logo in addition to Mesaba's name.

        Mesaba, through the agreements, receives ticketing and certain check-in, baggage, freight and aircraft handling services from Northwest at certain airports. In addition, Mesaba receives its computerized reservations services from

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Northwest. Northwest also performs all marketing, scheduling, yield management and pricing services for Mesaba's flights.

        Mesaba believes that its competitive position is enhanced as a result of its marketing and other agreements with Northwest.

Big Sky

        Big Sky provides service between Billings and Great Falls, Helena, Kalispell, and Missoula, MT; Casper and Gillette WY; Denver, CO; Bismarck and Williston ND; Boise, ID; and Spokane, WA, and between Spokane and Olympia WA. Big Sky operates daily scheduled flights that provide interline and online connecting services, as well as local market services. Big Sky markets its services under its two-letter code, GQ. Big Sky also has code-sharing agreements with Alaska Airlines/Horizon Airlines, America West Airlines, and Northwest Airlines, where its services are marketed jointly with those air carriers for connecting flights. Big Sky coordinates its flights with Alaska/Horizon at Billings, Boise, and Seattle, with America West at Billings, Boise, Denver, and Spokane, and with Northwest to facilitate code-share connections at Billings, Bismarck, Seattle, and Spokane.

        Big Sky also provides service between its Billings hub and seven communities in Central/Eastern Montana under contracts with the DOT's Essential Air Service ("EAS") program. The EAS program subsidizes air carriers to provide air service to designated rural communities throughout the country that could not otherwise economically justify that service on the basis of their passenger traffic. The DOT pays EAS subsidies for each departure in a covered market. Big Sky bids on the EAS contracts biannually with the rates per departure subject to negotiation with the DOT.

Route System

Mesaba

        The following sets forth certain information with respect to Mesaba's scheduled route system for June 2003:

        Cities served from Minneapolis/St. Paul: Aberdeen, SD; Appleton, WI; Bemidji, MN; Bismarck, ND; Brainerd, MN; Cedar Rapids, IA; Cincinnati, OH; Des Moines, IA; Duluth, MN; Eau Claire, WI; Fargo, ND; Flint, MI; Grand Forks, ND; Green Bay, WI; Greensboro, NC; Hibbing, MN; Houghton/Hancock, MI; International Falls, MN; LaCrosse, WI; Lincoln, NE; Madison, WI; Mason City, IA; Moline, IL; Norfolk, VA; Oklahoma City, OK; Omaha, NE; Peoria, IL; Pittsburgh, PA; Rapid City, SD; Regina, Saskatchewan; Rhinelander, WI; Rochester, MN; Saginaw, MI; St. Cloud, MN; St. Louis, MO; Sioux City, IA; Sioux Falls, SD; South Bend, IN; Thunder Bay, Ontario; Traverse City, MI; Waterloo, IA; Watertown, SD; Wausau, WI; White Plains, NY; Winnipeg, Manitoba.

        Cities served from Detroit: Akron/Canton, OH; Allentown, PA; Alpena, MI; Appleton, WI; Binghamton, NY; Birmingham, AL; Bloomington, IL; Buffalo, NY; Champaign, IL; Charleston, SC; Charleston, WV; Charlotte, NC; Cincinnati, OH; Cleveland, OH; Columbus, OH; Dayton, OH; Des Moines, IA; Elmira, NY; Erie, PA; Evansville, IN; Flint, MI; Fort Wayne, IN; Grand Rapids, MI; Kalamazoo, MI; Knoxville, TN; Lexington, KY; London, Ontario; Louisville, KY; Marquette, MI; Middletown, PA; Moline, IL; Montreal, Quebec; Muskegon, MI; Oklahoma City, OK; Omaha, NE; Ottawa, Ontario; Pellston, MI; Pittsburgh, PA; Portland, ME; Roanoke, VA; Rochester, NY; Saginaw, MI; South Bend, IN; State College, PA; Toledo, OH; Traverse City, MI; Tri-cities, TN; Wausau, WI; White Plains, NY.

        Cities served from Memphis: Alexandria, LA; Atlanta, GA; Birmingham, AL; Chattanooga, TN; Cincinnati, OH; Columbus, MS; Dallas, TX; Evansville, IN; Fayetteville, AR; Fort Smith, AR; Fort Walton Beach, FL; Grand Rapids, MI; Greenville, MS; Huntsville, AL; Kansas City, MO; Knoxville, TN; Lafayette, LA; Laurel, MS; Lexington, KY; Little Rock, AR; Madison, WI; Monroe, LA; Montgomery, AL; Muscle Shoals, AL; Nashville, TN; Oklahoma City, OK; Paducah, KY; Pensacola, FL; Springfield, MO; St. Louis, MO; Tri-cities, TN; Tulsa, OK; Tupelo, MS.

        Mesaba flies to Aspen, CO on a seasonal basis from Minneapolis/St. Paul and Memphis.

        Mesaba works closely with Northwest to coordinate flight schedules and to facilitate connections between Mesaba and Northwest.

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Big Sky

        The following sets forth certain information with respect to Big Sky's scheduled route system for June 2003:

        Cities served from the Billings hub: Bismarck, ND; Boise, ID; Casper, WY; Denver, CO; Gillette, WY; Glasgow, MT; Glendive, MT; Great Falls, MT; Havre, MT; Helena, MT; Kalispell, MT; Lewistown, MT; Miles City, MT; Missoula, MT; Sidney, MT; Spokane, WA; Williston, ND; Wolf Point, MT. Non-hub routes are flown between Moses Lake, WA and Seattle, WA, and between Olympia, WA, and Spokane, WA.

        From time to time, Big Sky reviews the feasibility of expanding the frequency of its service to airports currently being served, as well as initiating passenger service to additional cities generally within its service area.

Aircraft

Mesaba

        The following table sets forth certain information as to Mesaba's passenger aircraft fleet as of June 1, 2003:

        Mesaba leases or sub-leases its Avro RJ85 aircraft from Northwest under operating leases with initial terms of up to 10 years. The Jet Agreement allows Mesaba to return aircraft to Northwest upon the occurrence of certain events. The Avro RJ85 aircraft are pressurized jet airplanes with galleys, dual class cabins, standup headroom, lavatories, Airborne Communications Addressing and Reporting System, radar, ground proximity warning, traffic collision avoidance and de-icing systems.

        Mesaba leases all of its Saab 340 aircraft, either directly from aircraft leasing companies or through sub-leases with Northwest under operating leases with initial terms of up to 17 years. The Airlink Agreement allows Mesaba to return aircraft to Northwest upon the occurrence of certain events. The Saab 340 aircraft are pressurized jet-prop airplanes with galleys, standup headroom, lavatories, radar, global positioning, ground proximity warning, traffic collision avoidance and de-icing systems.

        All of Mesaba's aircraft comply fully with all current Federal Aviation Regulations issued by the FAA.

        As of June 1, 2003, Mesaba's existing fleet of Avro RJ85 and Saab 340 aircraft had remaining lease terms of one month to 13 years. The current aggregate monthly lease payments for all Mesaba aircraft is approximately $9.1 million.

Big Sky

        The following table sets forth certain information as to Big Sky's passenger aircraft fleet as of June 1, 2003.

        Big Sky leases eight of its Metro III and all Metro 23 aircraft from leasing companies and one Metro III from a municipality under operating leases with initial terms of up to six years. Two of the leases allow Big Sky to return the aircraft to the lessor upon the occurrence of certain events, and five of the leases contain purchase options. The Metro aircraft are pressurized jet-prop airplanes with radar, ground proximity warning, traffic collision avoidance and de-icing systems.

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        All of Big Sky's aircraft comply fully with all current Federal Aviation Regulations issued by the FAA.

        As of June 1, 2003, Big Sky's existing fleet of Metro III and Metro 23 aircraft had remaining lease terms of six months to 54 months. The current aggregate monthly leases payments for all Big Sky aircraft is approximately $0.2 million.

Competition

        The airline industry is highly competitive as a result of the Airline Deregulation Act of 1978 (the "Deregulation Act"). In general, the Deregulation Act increased competition by eliminating restrictions on fares and route selection. The Deregulation Act also contributed to the withdrawal of national and major carriers from short-haul markets by allowing them to more easily obtain additional long-haul routes, which can be more efficiently and profitably served by larger jet aircraft. Elimination of barriers to entry into new markets, however, also creates greater potential for competing service by other carriers operating small, fuel-efficient aircraft on short-haul routes serving small and medium-sized cities. Mesaba and Big Sky compete with other regional airlines on most routes they serve. Mesaba and Big Sky also face competition from regional carriers offering service to alternative hubs for connecting flights. No assurance can be given that other carriers, including major carriers, will not institute competing service on routes served by Mesaba or Big Sky.

        Competitive factors in the airline industry generally include fares, frequency and dependability of service, convenience of flight schedules, type of aircraft flown, airports served, relationships with travel agents, and efficiency and reliability of reservations systems and ticketing services. The compatibility of flight schedules with those of other airlines and the ability to offer through fares and convenient inter-airline flight connections are also important competitive factors. The Company believes its subsidiaries are competitive with respect to each of such factors because of their established reputation, cost structure, aircraft fleet which is properly suited for the small and medium-sized cities served.

Fuel

        The Company believes that the following arrangements assure an adequate supply of fuel for current and future operations for both Mesaba and Big Sky.

Mesaba

        Mesaba has arrangements with Northwest and five fuel suppliers for its fuel requirements. Certain provisions of the Airlink Agreement protect Mesaba from fluctuations in aviation fuel prices while the Jet Agreement requires Northwest to provide jet fuel, at Northwest's expense, to Mesaba.

Big Sky

        Big Sky purchases a majority of its fuel under a fuel agreement with Northwest. Big Sky purchases the balance of its fuel under arrangements with two fuel suppliers. None of these arrangements provide protection from fluctuations in fuel prices.

Fares

Mesaba

        Mesaba derives its passenger revenues by selling its capacity to Northwest at predetermined rates. Mesaba is primarily paid by Northwest per available seat mile under the Airlink Agreement and per completed block hour under the Jet Agreement.

Big Sky

        Big Sky generates its passenger revenues from passenger ticket sales through participation in Airline Reporting Corp. clearinghouse for travel agencies, its own reservations center in Billings, a ticket by mail program, and a bulk ticketing program that targets sales of ten or more tickets to corporations and government agencies. Big Sky has ticketing and baggage agreements with all major airlines that serve its region, which allow its services to be sold by those airlines. Big Sky establishes its passenger fares on a market by market basis utilizing a combination of factors including the cost of providing

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the service based upon projected passenger level, the competitive price of alternative means of transportation including both air and surface, and the distance between markets. Big Sky also employs the use of discounts off of the base fares for advance ticket purchases and other special needs passengers that are common throughout the airline industry.

Regulation

        Pursuant to the Federal Aviation Act of 1958, as amended (the "Aviation Act"), the DOT, principally through the FAA, has certain regulatory authority over the operations of all air carriers. The jurisdiction of the FAA extends primarily to the safety and operational provisions of the Aviation Act, while the responsibility of the DOT involves principally the regulation of certain economic aspects of airline operations.

        FAA Regulation.    Mesaba and Big Sky hold "Air Carrier Certificates" from the FAA, under Part 119 of the Federal Aviation Regulation, permitting Mesaba and Big Sky to conduct flight operations in compliance with Part 121 of the Federal Aviation Regulations. The Part 121 regulations are the same regulatory requirements applied to major airlines. The FAA regulations to which Mesaba and Big Sky are subject to are extensive and include, among other items, regulation of aircraft maintenance and operations, equipment, ground facilities, dispatch, communications, training, weather observation, flight personnel and other matters affecting air safety. To ensure compliance with its regulations, the FAA requires airlines to obtain operating, airworthiness and other certificates that are subject to suspension or revocation for cause. Mesaba and Big Sky hold all certificates necessary for their operations.

        DOT Regulation.    Mesaba and Big Sky each hold a Certificate of Public Convenience and Necessity under Section 401 of the Aviation Act. As certificated carriers, Mesaba and Big Sky are required to file certain additional quarterly reports with the DOT, including a report of aircraft operating expenses and related statistics. The Certificate of Public Convenience and Necessity is a prerequisite for operations with aircraft larger than 60 seats.

        Other Regulation.    Under the Noise Control Act of 1972 and the Aviation Safety and Noise Abatement Act of 1979, the FAA has authority to monitor and regulate aircraft engine noise. Management of Mesaba and Big Sky believe that their aircraft comply with or are exempt from such regulations and that Mesaba and Big Sky comply with standards for aircraft exhaust emissions and fuel storage facilities issued by the Environmental Protection Agency. Mesaba and Big Sky are also required to comply with the drug-testing program adopted under Part 14 CFR by the DOT. As a foreign carrier operating in Canada, Mesaba is subject to regulation by the Canadian Department of Transport and has been issued Foreign Air Carrier Operating Certificates by such agency. Because Northwest maintains certain contracts with the Department of Defense (the "DOD"), Mesaba is subject to periodic inspections by the DOD.

Insurance

        The Company and its subsidiaries carry the types of insurance customary in the airline industry, including coverage for public liability, passenger liability, property damage, aircraft loss or damage, baggage and cargo liability, and workers' compensation. The Company and its subsidiaries believe that their insurance coverages are adequate as to amounts and risks covered. There can be no assurance that the insurance carried would be sufficient to protect Mesaba and Big Sky adequately in the event of a catastrophic accident or event.

Aircraft Maintenance

        Mesaba and Big Sky employ their own aircraft, avionics and engine maintenance staff that perform substantially all routine maintenance to their aircraft and engines. Major overhauls on their airframes, engines, and other rotable parts on Saab 340, RJ85 and Metro aircraft are performed internally or at FAA authorized facilities.

Airport and Terminal Facilities and Services

        Mesaba's ticket counter and baggage-handling space is leased from local airport authorities or other airlines at all of the airports served. In 58 of the cities it serves, Mesaba receives support services under agreements with Northwest. In accordance with the Airlink Agreement, Mesaba pays local airport authorities for the use of landing fields at rates that are based on the number of flights per day, fixed fees, or on the number of aircraft landings and aircraft weight. Mesaba does not pay landing fees under the Jet Agreement.

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        Big Sky has airport counter, baggage, and ramp space for ground services and customer services at 14 cities currently served. Big Sky contracts for ground handling services from other airlines or service providers at eight of the airports it serves.

Properties

Holdings

        The Company's executive offices are located in downtown Minneapolis. The Company leases approximately 2,000 square feet of office space for approximately $4,000 per month including expenses. The term of the lease runs through September 2003.

Mesaba

        Mesaba's principal executive offices and maintenance facility are currently located at the Minneapolis/Saint Paul International Airport. Mesaba leases approximately 293,000 square feet of office/hangar facilities, ramp, parking and unimproved land at the airport under separate ground and facilities leases with the Metropolitan Airports Commission ("MAC"). Mesaba's Minneapolis facility contains approximately 83,000 square feet of office, shop, and hangar space. Mesaba is obligated to make payments of approximately $52,000 per month under the leases. Mesaba has entered into an agreement with the MAC to terminate these leases in September 2003 to accommodate planned runway construction. As part of the runway expansion plan, Mesaba will relocate its primary executive offices and maintenance hangar facilities to the western side of the airport and has entered into an Aircraft Hangar Facility Lease Agreement with the MAC with payments commencing in October 2003. Under this agreement, Mesaba will lease approximately 366,000 square feet of maintenance facilities, maintenance offices, ramp, parking and unimproved land, of which approximately 87,000 square feet will be the new maintenance hangar facility. This Aircraft Hangar Facility Lease Agreement will have a term of 25 years from the date of Mesaba's occupancy of the premises under which Mesaba will be obligated to make payments of approximately $111,000 per month. Mesaba will also relocate its principal executive offices to a new location in Eagan, Minnesota and has entered into a lease agreement with the Spectrum Investment Group with payments commencing in January 2004. Under this agreement, Mesaba will lease approximately 33,000 square feet of office space. Mesaba will be obligated to make payments of approximately $35,000 per month under the lease for this office facility and the lease will have a term of 10 years from the lease commencement date.

        Mesaba leases approximately 497,000 square feet of facilities, ramp, parking and unimproved land at the Cincinnati/Northern Kentucky Airport under separate ground and facilities leases. The facilities lease covers approximately 126,000 square feet of hangar and maintenance space and Mesaba pays monthly rentals of approximately $92,000 until July 1, 2029 as part of Special Facilities Bond financing provided by the Cincinnati/Northern Kentucky Airport Authority. The ground lease has a 30-year term concurrent with the facilities lease. Monthly lease payments of approximately $10,500 are required under the ground lease.

        Mesaba leases approximately 334,000 square feet of ramp, parking and unimproved land at the Detroit Metropolitan Airport. The ground lease has a 20-year term with monthly lease payments of approximately $10,000. Lease payments are subject to an annual adjustment on January 1 each year based upon the percentage change in an index published by the Bureau of Labor Statistics of the U.S. Department of Commerce.

        Mesaba leases approximately 38,000 square feet of hangar and office space located on approximately 102,000 square feet of land and parking areas of which Mesaba is ground lessee, at the Central Wisconsin Airport in Mosinee, Wisconsin. Mesaba pays approximately $3,000 per month under the terms of the ground and facility lease, which expire on December 31, 2011, subject to two 10-year renewal options.

        Mesaba subleases approximately 21,000 square feet of office and training support space at the Pan-Am International Flight Academy in Eagan, Minnesota for its flight operations training center. Mesaba pays approximately $21,000 per month under the terms of this sublease which has a term of 15 years and expires in January 2017.

Big Sky

        Big Sky's main hangar and principal offices are located at the Billings Logan International Airport. The main facility consists of a 12,000 square foot building that can hold three Metro aircraft for maintenance, a parts warehouse, back shop

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area, and two floors of offices. A two story building adjacent to the hangar houses Big Sky's executive offices. These buildings are situated on approximately 83,000 square feet of land owned by the City of Billings and leased to Big Sky on long-term facility and ground leases. The facility lease has a 20 year term and the ground lease has a 26 year term. The combined monthly payment under these leases is approximately $7,000.

Employees

        As of June 1, 2003, the Company and its subsidiaries employed approximately 3,750 employees.

Mesaba

        As of June 1, 2003, Mesaba employed approximately 3,500 persons, of whom 1,450 were station managers, station agents and line services personnel, 850 were pilots, 540 were flight attendants, 360 were management, administrative and clerical personnel, and 300 were aircraft maintenance personnel. Approximately 1,000 of Mesaba's employees are part-time.

        The Air Line Pilots Association ("ALPA") represents Mesaba's pilots. The pilots are currently working under an agreement reached June 1, 1996, with an amendable date of June 1, 2002. Mesaba is currently negotiating with the ALPA under Section 6 of the Railway Labor Act for a new agreement. See Item 3, "Legal Proceedings."

        The Aircraft Mechanics Fraternal Association ("AMFA") represents Mesaba's mechanics. The mechanics are currently working under an agreement reached August 22, 1999, with a term of four years. Mesaba is currently negotiating with the AMFA under Section 6 of the Railway Labor Act for a new agreement.

        The Transportation Workers Union ("TWU") represents Mesaba's dispachers. The dispatchers are currently working under an agreement reached May 26, 2000, with a term of five years.

        The Association of Flight Attendants ("AFA") represents Mesaba's flight attendants. The flight attendants are currently working under an agreement effective April 1, 2002, with a term of four years.

Big Sky

        As of June 1, 2003, Big Sky employed 240 persons, of whom 92 were station managers, station agents, reservationists and line service personnel, 76 were pilots, 46 were management, administrative and clerical personnel, and 26 were aircraft maintenance personnel. Approximately 60 of Big Sky's employees are part-time.

        The United Transport Union ("UTU") represents Big Sky's pilots and dispatchers under separate agreements which became effective December 2, 2002, with terms of seven years for each agreement.

        The International Association of Machinists and Aerospace Workers ("IAM") represents Big Sky's mechanics. The mechanics are working under an agreement reached May 2, 2000, with a term of three years. Big Sky is currently negotiating with the IAM under Section 6 of the Railway Labor Act for a new agreement.

        The Railway Labor Act precludes any job action without a formal declaration of an impasse by the National Mediation Board, which has not occurred in any of the ongoing negotiations. Any work stoppage, whether from a failure to enter into a new collective bargaining agreement or otherwise, could have a material adverse impact on Mesaba or Big Sky. Neither Mesaba nor Big Sky have had any work stoppages and management, in general, believes that their relations with their employees are good.

Cyclicality and Seasonality

        The airline industry generally is subject to cyclical moves in the economy. Because both personal discretionary travel and business travel may be expected to decline during periods of economic weakness, the airline industry tends to experience poorer financial results during such periods. The terrorist events of September 11, 2001 had a profound negative impact on air travel and concerns over further terrorist activity continue to affect demand. The Iraq war and SARS have also affected the major airlines as consumer demand has declined.

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        Seasonal factors, primarily weather conditions and passenger demand, historically have affected Big Sky's monthly passenger boardings. Big Sky has historically shown a higher level of passenger boardings in the July through December period as compared with the January through June period for many of the cities served. As a result of such factors, Big Sky's revenues and earnings historically have been greater during the July through December period.

        Mesaba's cyclicality is tied to the business and operating decisions of Northwest. Operations of the major airlines continue to be impacted by the rapid growth of low cost airlines and the advent of internet travel web sites which enable consumers to find travel alternatives. As a result of the general factors described above, Mesaba has historically shown greater revenues and earnings in the first and second fiscal quarters. Northwest has historically seen increased leisure travel during these periods on domestic and international routes which contributed to an increased number of flights for Mesaba.

EXECUTIVE OFFICERS OF THE COMPANY AND SUBSIDIARIES

        The following table sets forth certain information regarding the executive officers of the Company.

        Carl R. Pohlad is a director and Chairman of the Board of Directors. Mr. Pohlad has been Chairman of the Board, President and a director of Marquette Financial Companies, formerly Marquette Bancshares, Inc., since 1993. Prior to 1993, Mr. Pohlad was President and Chief Executive Officer of Marquette Bank Minneapolis and Bank Shares Incorporated. Mr. Pohlad is also an owner, director and the President of CRP Sports, Inc., the managing general partner of the Minnesota Twins baseball club, and is a director of Genmar Holdings, Inc.

        Paul F. Foley is a director and President and Chief Executive Officer of the Company. Mr. Foley has been President and Chief Executive Officer of the Company since October 1999 and also served as President and Chief Executive Officer of Mesaba from October 1999 to September 2002. Prior to joining the Company, Mr. Foley was Vice President of Operations Support at Atlas Air, Inc. from December 1996 to September 1999, and Group Vice President of Operations, North America, at LSG Lufthansa Service/Sky Chefs from January 1992 to December 1996.

        Robert E. Weil has been Vice President, Chief Financial Officer and Treasurer of the Company since January 2000 and also served as Vice President, Chief Financial Officer of Mesaba from January 2000 to September 2002. Mr. Weil was the Managing Director of Finance—Ground Operations for Northwest Airlines from December 1997 until joining the Company. He also held the position of Controller—Ground Operations and held various other finance positions at Northwest since 1991.

        The following table sets forth certain information regarding the executive officers of Mesaba Aviation.

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        John G. Spanjers was named President of Mesaba in September 2002 after becoming Chief Operating Officer in June 2002. Mr. Spanjers joined Mesaba as the Vice President, Flight Operations in November 1999 and held that position until June 2002. Mr. Spanjers was the Director Performance Engineering for Northwest from April 1997 until November 1999. Mr. Spanjers also held various other positions within the System Operations Control organization at Northwest since June 1988. Prior to that, Mr. Spanjers held various operational positions within the regional and charter airline industry.

        Randy W. Strobel was named Vice President, Finance in September 2002. Previously Mr. Strobel was Controller of Mesaba after joining Mesaba in October 2001. Before joining Mesaba, Mr. Strobel was an independent financial consultant from March 2000 to September 2001 and the Director of Finance for Excelsior-Henderson Motorcycle Manufacturing Company from August 1998 to February 2000. Prior to that, Mr. Strobel was a senior audit and business advisory manager for Arthur Andersen LLP.

        Scott R. Bussell was named Vice President, Technical Operations in May 2000. Mr. Bussell joined Mesaba in October 1995 as Director of Maintenance. Before joining Mesaba in 1995, Mr. Bussell held the position of Director of Maintenance for Renown Aviation in Roswell, NM. From 1977 to 1994, Mr. Bussell held numerous positions in technical operations while employed at Continental Airlines and Frontier Airlines in Denver, CO.

        Jeffrey W. Wehrenberg was named Vice President, Ground Operations in January 2003. Mr. Wehrenberg joined Mesaba in September 2000 as Director of Systems Operations Control and subsequently became Vice President, Minneapolis Hub Operations in March 2001. Before joining Mesaba, Mr. Wehrenberg held the position of Senior Vice President and Chief Operating Officer at TransMeridian Airlines from May 1999 to August 2000. He also was President and Chief Operating Officer at Chicago Express Airlines between November 1998 and May 1999 and served in a variety of senior operational positions with Express Airlines I, between 1995 and 1998, including Vice President of Customer Service and Vice President and General Manager of the company's northern region.

        William T. Poerstel was named Vice President, Flight Operations in January 2003. Previously, Mr. Poerstel was Vice President, Detroit Hub Operations from May 2002 to December 2002. Before joining Mesaba, Mr. Poerstel held various positions at United Airlines from 1986 to April 2002, most recently as Quality Service Director. He also served as UAL/US Airways Integration Program Director—Operations, System Workload Manager, Manager Aircraft Maintenance Operations, and Manager Hangar Maintenance for United.

        Robert T. Meekin was named Vice President, People and Processes in March 2001. Before joining Mesaba, Mr. Meekin held the position of Director of Organization Development for Becton Dickinson. Mr. Meekin held numerous positions in human resource management and organizational development at Becton Dickinson since 1997, The Perrier Group of America from 1992 to 1997 and Exxon Corporation from 1987 to 1992.

        The following table sets forth certain information regarding the executive officers of Big Sky Transportation Co.

        Kim B. Champney was named President and Chief Executive Officer in January 1998. Before joining Big Sky, Mr. Champney held the position of Vice President of Business Development at Merlin Express in San Antonio, Texas from 1993 to 1997 and Director of Airlines Planning for DHL Airways in Cincinnati, Ohio from 1990 to 1993.

        Craig Denney was named Executive Vice President and Chief Operating Officer in December 1995, and prior to that held several senior management positions at Big Sky from 1978 to 1995. Before joining Big Sky, Mr. Denney held the position of transportation agent for Northwest Airlines in Great Falls and Butte, Montana from 1974 to 1978.

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Item 2. PROPERTIES

        See information provided under the captions "Business—Aircraft," "—Airport and Terminal Facilities and Services," and "—Properties" in Item 1 herein.

Item 3. LEGAL PROCEEDINGS

        On June 2, 2003, the ALPA, collective bargaining representative of Mesaba's pilots, filed a complaint for injunction and declaratory relief against Mesaba relating to the parties' progress in negotiating a new collective bargaining agreement. The lawsuit is pending in the United States District Court for the District of Minnesota. The ALPA is requesting a judicial declaration that Mesaba is not conferring and bargaining exclusively with the ALPA, not meeting its duty to make and maintain an agreement, and refusing to bargain in good faith. Mesaba will file responsive pleadings consistent with its belief that the ALPA's claims are without merit. The ultimate outcome of this lawsuit cannot be predicted with certainty.

        As previously disclosed in the Company's Form 10-Q for the quarter ended December 31, 2002, Fairbrook Leasing, Inc., Lambert Leasing, Inc., and Swedish Aircraft Holdings AB ("Saab") filed a declaratory judgment action against Mesaba relating to 20 Saab 340A aircraft leased by Mesaba. The lawsuit was filed on October 4, 2002 and is pending in the United States District Court for the District of Minnesota. Saab is requesting a judicial declaration that the terms of the leases applicable to each of the Saab 340A aircraft are governed by a March 7, 1996 term sheet proposal rather than the short-term leases subsequently executed by the parties. Mesaba has counterclaimed to resolve a dispute relating to the return conditions applicable to the Saab 340A aircraft. Mesaba believes that Saab's claims are without merit and has brought a summary judgment motion asking the court to rule that the term sheet proposal is not a binding contract. The ultimate outcome of this lawsuit cannot be predicted with certainty.

        As previously reported in the Company's Form 10-Q for the quarter ended December 31, 2002, Mesaba has brought suit in the United States District Court for the District of Minnesota against Federal Insurance Company, a subsidiary of The Chubb Corporation, for coverage of the business interruption, extra expense and construction costs for the Detroit hangar that was destroyed due to a severe storm in May 2000. On December 19, 2002, the Court granted Mesaba's motion for summary judgment with respect to coverage of a portion of the reconstruction costs. Specifically, the Court ordered that Mesaba is entitled to the cost of installation of an updated fire suppression system in the reconstructed hangar. The parties are in discussion regarding a possible settlement of the claims. The ultimate outcome of this lawsuit cannot be predicted with certainty.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING FOURTH QUARTER OF FISCAL YEAR

        There were no matters submitted to a vote of the Company's shareholders during the three month period ended March 31, 2003.

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PART II

Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock is traded under the symbol "MAIR" on the Nasdaq National Market.

        The following table sets forth the range of high and low sale prices for the Company's Common Stock and the dividends per share for each of the fiscal quarters of the two years ended March 31, 2003. Quotations for such periods are as reported by Nasdaq for National Market issues. The Company has not issued cash dividends since September 1995.

Stock Quotations

        On June 20, 2003, the number of holders of record of Common Stock was 749.

        The transfer agent for the Company's Common Stock is Wells Fargo Bank Minnesota, National Association, 161 North Concord Exchange, South St. Paul, Minnesota, 55075-0738, telephone: (651) 450-4064.

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Item 6. SELECTED FINANCIAL DATA AND STATISTICAL COMPARISON

        The following table sets forth selected financial data with respect to the Company as of the dates and for the periods indicated. The selected financial data has been derived from the audited consolidated financial statements. The financial data set forth below should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7.

(1)

Statement of operations data includes the results of operations of Big Sky since the date of acquisition, December 1, 2002.

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(1)

"Available seat miles" are determined by multiplying the number of seats available for passengers by the number of miles flown.

(2)

"Revenue passenger miles" are determined by multiplying the number of fare paying passengers carried by the distance flown.

(3)

"Load factor" is determined by dividing revenue passenger miles by available seat miles.

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

Results of Operations for the Fiscal Years Ended March 31, 2003 and 2002

Earnings Summary

        The Company reported net income of $4.3 million or $0.21 per diluted share for fiscal 2003, compared to $7.8 million or $0.38 per diluted share in fiscal 2002. Weighted average common shares and common share equivalents outstanding were 20.4 million and 20.6 million in fiscal 2003 and fiscal 2002, respectively. On December 1, 2002, the Company acquired all the outstanding shares of Big Sky and accounted for the transaction using the purchase method of accounting. As such, the Company has consolidated Big Sky's results of operations from the acquisition date to March 31, 2003. For the period since being acquired, Big Sky generated operating revenues of $5.8 million and operating expenses of $7.8 million. Due to the fact that year-over-year and full year information for Big Sky is not included, a detailed discussion of Big Sky's operating results and statistics is not presented.

        Operating Revenues.    Total operating revenues increased 8.2% in fiscal 2003 to $451.1 million from $416.9 million in fiscal 2002. The increase is attributable to an increase of approximately 6% in completed available seat miles under the Airlink Agreement and 1% in block hours flown under the Jet Agreement, the elimination of certain concessions granted to Northwest following September 11, 2001 and an increase in ground handling activities resulting from the change in operations with two new terminals in Minneapolis/St. Paul and Detroit.

        Operating Expenses.    Total operating expenses in fiscal 2003 increased 5.8% to $440.4 million from $416.1 million in fiscal 2002. The cost per available seat mile ("CASM") increased 2.6% to $0.156 from $0.152. The significant change in unit cost year over year was due to the increased wages associated with the change in operations with two new terminals in Minneapolis/St. Paul and Detroit, increased aircraft maintenance costs associated with maintaining an aging fleet, increased aircraft rents associated with a greater number of aircraft on lease and increased insurance costs following the terrorist events of September 11, 2001.

        The following table compares components of operating cost per available seat mile ("ASM") for the years ended March 31, 2003 and 2002:

        Wages and benefits increased 5.7% to $132.0 million in fiscal 2003 from $125.0 million in fiscal 2002. The increase is the result of increased ground handling personnel for the two new terminals in Minneapolis/St. Paul and Detroit and increased health and dental costs.

        Aircraft fuel decreased 2.7% to $21.9 million in fiscal 2003 from $22.5 million in fiscal 2002. The decrease is attributable to decreased fuel consumption. Provisions of the Airlink Agreement with Northwest protect Mesaba from changes in fuel prices. Mesaba's actual cost of fuel including taxes and pumping fees was 83.5 cents per gallon in both fiscal 2003 and fiscal 2002. Northwest is responsible for fuel for the jet operation.

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        Aircraft maintenance costs, excluding wages and benefits, increased 7.5% to $81.9 million for fiscal 2003 from $76.2 million for fiscal 2002. Aircraft maintenance costs increased due to the costs associated with maintaining an aging aircraft fleet and revisions to Mesaba's estimate of expected overhaul costs.

        Aircraft rents increased 5.0% to $106.7 million in fiscal 2003 from $101.6 million in fiscal 2002. This increase is attributable to the full year impact of the 11 additional Saab 340 aircraft that were delivered between the last quarter of fiscal 2002 and the first two quarters of fiscal 2003, netted against the return of eight Saab 340 aircraft during the third and fourth quarters of fiscal 2003. Also contributing to the increase are higher rental rates for the aircraft added in fiscal 2003 versus aircraft disposed of in the same period.

        Landing fees increased 8.9% to $7.2 million in fiscal 2003 from $6.6 million in fiscal 2002. The increase is primarily attributable to higher landing fees charged by airports due to new airport facilities and higher costs of airport operation. Northwest is responsible for landing fees for the jet operation.

        Insurance and taxes increased 79.4% to $14.9 million in fiscal 2003 from $8.3 million in fiscal 2002. The increase is primarily attributable to increased rates and surcharges for aircraft hull insurance and passenger liability insurance imposed after September 11, 2001.

        Depreciation and amortization decreased 6.1% to $18.6 million in fiscal 2003 compared to $19.8 million in fiscal 2002. The lower level of depreciation and amortization resulted from reduced and delayed capital spending.

        Administrative and other expenses increased 1.9% to $57.2 million in fiscal 2003 from $56.2 million in fiscal 2002. The change is attributable to a full-year impact of increased security costs following September 11, 2001, offset by reduced crew costs associated with fewer departures in fiscal 2003.

        Consolidated Operating Income.    Operating income totaled $8.6 million in fiscal 2003, as compared to $0.8 million in fiscal 2002. The Company's operating margin increased to 1.9% in fiscal 2003 from 0.2% in fiscal 2002.

        Consolidated Nonoperating Income.    Nonoperating income decreased to $0.3 million for fiscal 2003 from $15.3 million in fiscal 2002. Fiscal 2003 nonoperating income represents the offsetting impact of the recognition of a $3.0 million writedown of an investment in a WorldCom bond and interest income earned on the Company's remaining investments. In fiscal 2002, nonoperating income of $15.3 million was due primarily to the recognition of the $12.5 million in U.S. government grant proceeds.

        Consolidated Provision for Income Taxes.    The provision for income taxes decreased 44.9% to $4.6 million in fiscal 2003 from $8.3 million in fiscal 2002. The Company's blended effective tax rate was 51.3% in fiscal 2003 as compared to 51.4% in fiscal 2002. The effective tax rate remained constant due to a similar change in the level of nondeductible expenses being applied over the Company's earnings.

Results of Operations for the Fiscal Years Ended March 31, 2002 and 2001

Earnings Summary

        The Company reported net income of $7.8 million or $0.38 per diluted share for the fiscal year ended March 31, 2002, compared to $19.8 million or $0.94 per diluted share in fiscal 2001. Weighted average common shares and common share equivalents outstanding were 20.6 million and 20.9 million in fiscal 2002 and fiscal 2001, respectively.

        Operating Revenues.    Total operating revenues decreased 5.2% in fiscal 2002 to $416.9 million from $439.8 million in fiscal 2001, and revenue passenger miles decreased 8.9% to 1,571,042 from 1,725,460. Total revenue per available seat mile ("RASM") increased to $0.152 in fiscal 2002 from $0.149 in fiscal 2001. Mesaba's average passenger load factor was 57.3% in fiscal 2002 compared to 58.5% in fiscal 2001. The decrease in revenue passenger miles is directly attributable to the impact of the events of September 11, 2001 and the economic recession. Other revenue increased 58.8% due to increased ground-handling activities.

        Operating Expenses.    Total operating expenses in fiscal 2002 increased 1.4% to $416.1 million from $410.5 million in fiscal 2001. Mesaba's cost per available seat mile ("CASM") increased 9.4% to $0.152 from $0.139. Available seat miles decreased 7.1% to 2,739,946 in fiscal 2002 from 2,948,239 in fiscal 2001. The significant change in unit cost year over year was due to the relationship of fixed operating costs to reduced flight activity, the impact of Mesaba's restructuring initiatives, and increases in landing fees, insurance and security.

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        The following table compares components of Mesaba's operating cost per ASM for the years ended March 31, 2002 and 2001:

        Wages and benefits increased 9.5% to $125.0 million in fiscal 2002 from $114.1 million in fiscal 2001. The increase is a result of several factors including higher health insurance costs, management salaries, employee incentive pay due to Mesaba's strong operating performance, workers compensation claims, and additional ground handling activities. Normal wage and benefit increases also contributed to the increased expenses. Overall, personnel levels (measured on a full time equivalent basis at the fiscal year end) decreased to approximately 3,300 from 3,400.

        Aircraft fuel costs decreased 13.2% to $22.5 million in fiscal 2002 from $25.9 million in fiscal 2001. The decrease is attributable to the reduced jet-prop flight activity after September 11, 2001. Provisions of the Airlink Agreement with Northwest protect Mesaba from changes in fuel prices. Mesaba's actual cost of fuel, including taxes and pumping fees, was 83.5 cents per gallon in fiscal 2002 and 2001 per the Airlink Agreement. Northwest provides fuel for the jet operation at its expense.

        Aircraft maintenance costs, excluding wages and benefits, decreased 2.8% to $76.2 million in fiscal 2002 from $78.4 million in fiscal 2001. This decrease was primarily due to reduced fleet utilization after September 11, 2001, which lowered flight hour based maintenance costs. The decrease was offset by an increase in rotable repair costs due to the aging of the fleet.

        Aircraft rents increased 1.5% to $101.6 million for fiscal 2002 from $100.0 million in fiscal 2001. This increase is primarily attributable to the full year impact of the three additional RJ85 aircraft that were delivered during the first quarter of fiscal 2001, the addition of five Saab 340 aircraft that were received during the fourth quarter of fiscal 2002 offset by the return of three Saab 340 aircraft at the end of the third quarter of fiscal 2002.

        Landing fees increased 4.0% to $6.6 million in fiscal 2002 from $6.3 million in fiscal 2001. The increase is primarily attributable to higher landing fees charged by airports after September 11, 2001. Northwest provides landing fees for the jet operation at its expense.

        Insurance and taxes increased 55.8% to $8.3 million in fiscal 2002 from $5.3 million in fiscal 2001. The increase is primarily attributable to increased rates and surcharges imposed after September 11, 2001.

        Depreciation and amortization totaled $19.8 million in fiscal 2002 compared to $17.8 million in fiscal 2001. The higher level of depreciation and amortization resulted from the purchase of spare aircraft parts, ground service equipment, computer systems, and maintenance facility improvements.

        Administrative and other expenses decreased 10.3% to $56.2 million in fiscal 2002 from $62.6 million in fiscal 2001. The significant change in year over year costs are the $0.8 million restructuring charge in fiscal 2002 which was offset by reduced pilot training, reduced outside services, and fewer passenger accommodation charges due to the high levels of operational performance.

        Operating Income.    Operating income totaled $0.8 million for fiscal 2002, as compared to $29.3 million a year ago. Mesaba's

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operating margin decreased to 0.2% in fiscal 2002 from 6.7% in fiscal 2001. Fiscal 2002 operating margins decreased due to lower aircraft utilization after September 11, 2001 and the economic recession, increased variable expenses such as insurance, security, and landing fees and static fixed fiscal 2001 expenses such as aircraft rents.

        Nonoperating Income.    Nonoperating income increased to $15.3 million in fiscal 2002 from $5.6 million in fiscal 2001 as a result of Mesaba's recognition of the $12.5 million federal grant in fiscal 2002. This was offset by lower interest income due to lower interest rates and lower average levels of funds available for investment as a result of the extended payment terms Mesaba granted Northwest for the three months ended December 31, 2001. Nonoperating income in fiscal 2002 included a $0.9 million charge to write-off aircraft components. Nonoperating income in fiscal 2001 included a $0.7 million one-time charge to reclassify the Detroit hangar capital lease to an operating lease.

        Provision for Income Taxes.    The provision for income taxes decreased 45.7% to $8.3 million in fiscal 2002 from $15.2 million in fiscal 2001. The Company's blended effective tax rate was 51.4% for fiscal 2002 as compared to 43.5% in fiscal 2001. Mesaba adjusts its effective tax rate quarterly based on forecasted operating results for the fiscal year. The effective tax rate increased due to consistent levels of nondeductible expenses being applied over less pre-tax earnings.

Liquidity and Capital Resources

        The Company's working capital decreased to $103.5 million with a current ratio of 2.7 at March 31, 2003 compared to $117.8 million and 3.6 at March 31, 2002. Cash and cash equivalents increased 94.9% to $60.9 million at March 31, 2003 from $31.3 million at March 31, 2002 due primarily to cash from operations of $34.1 million, a net decrease in the Company's investments of $6.8 million, the $3.2 million net purchase price for Big Sky, net property and equipment additions of $7.4 million, debt repayments of $0.6 million and the issuance of common stock of $0.1 million. The Company's current ratio and level of cash and cash equivalents has fluctuated from March 31, 2002 due to changes in the Company's investment strategy and portfolios. In February 2002, the Company implemented a new investment policy which reduced investment concentration from ten percent to five percent and allowed its investment managers to purchase investments with a maximum maturity of two years from one year and an average portfolio life to one year from six months. Long term investments increased $17.7 million to $21.8 million at March 31, 2003 compared to $4.1 million at March 31, 2002.

        Investments consist principally of municipal securities and corporate bonds and are classified as available-for-sale as of March 31, 2003 and 2002. Available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of shareholders' equity, except for other-than-temporary impairments, which are reported as a charge to current operations and result in a new cost basis for the investment. The Company classifies investments that mature within one year as short term. Investments with maturities greater than one year are classified as long term.

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        Because of the uncertainty surrounding the WorldCom bankruptcy proceedings and market valuation of WorldCom bonds, the Company recorded an other-than-temporary impairment loss of $3.0 million on its investment in a WorldCom bond in fiscal 2003. In March 2003, the Company sold its investment in WorldCom for $0.8 million which resulted in a gain of approximately $0.4 million, which is recorded in interest income and other in the consolidated statements of operations.

        As of March 31, 2003, Mesaba's fleet consisted of 107 aircraft covered under operating leases with remaining terms of less than a month to 13 years and aggregate monthly lease payments of approximately $9.1 million. Mesaba has the ability to return to the lessor up to 10 turbo-prop aircraft which, if all were returned, would reduce Mesaba's aggregate monthly lease payment by a total of $0.3 million. Mesaba leases all of its Saab 340 aircraft, either directly from aircraft leasing companies or through subleases with Northwest under operating leases with original terms of up to 17 years. Mesaba leases its RJ85 aircraft from Northwest under operating leases with terms of up to 10 years. Continued funding of the monthly minimum lease payments is ensured as long as the current operating contracts with Northwest are in effect.

        As of March 31, 2003, Big Sky's fleet consisted of 15 aircraft covered under operating leases with remaining terms of six months to 54 months and aggregate monthly lease payments of approximately $0.2 million. Big Sky's leases 14 of its aircraft from leasing companies and an aircraft from a municipality under operating leases with initial terms of up to six years. Two of the leases allow Big Sky to return the aircraft to the lessor upon the occurrence of certain events, and five of the leases contain purchase options. Funding of the monthly minimum lease payments is dependent on continued passenger boardings and ultimately the operations of the Company.

        Approximately 73% of the Company's accounts receivable balance as of March 31, 2003 was due from Northwest. Loss of Mesaba's affiliation with Northwest or Northwest's failure to make timely payment of amounts owed to Mesaba or to otherwise materially perform under the Airlink or Jet Agreement for any reason would have a material adverse effect on the Company's operations and financial results.

        The following table summarizes the Company's commitments to make long-term debt and lease payments for the years ending March 31:

(1)

Amounts represent minimum lease payments with initial or remaining terms of more than one year. See Notes 5 and 10 to the consolidated financial statements for additional discussion of operating leases.

(2)

Amounts represent principal payments only. See Note 6 to the consolidated financial statements for additional discussion of long-term debt and future maturities.

(3)

See Note 10 to the consolidated financial statements for additional discussion of the capital lease.

Outlook

        The economic outlook for the Company is dependent on business and consumer behavior which continues to be affected by lingering threats of terrorist activity post September 11, 2001, continued economic weakness, increased political unrest in the Middle East and ongoing health alerts such as SARS. These factors are likely to persist throughout fiscal 2004.

        Management believes the Company is in a sound financial position at the beginning of fiscal 2004 with a combined cash, cash equivalent and investments balance of approximately $123.1 million. Mesaba and Big Sky expect to continue to concentrate on excellent operating performance including four key measures: completion factor, on-time arrival, safety, and operating costs. Careful resource management including aggressive cost control measures with significance placed on finalization of a viable labor contract with both Mesaba's pilots and

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mechanics will contribute positively to the Company's financial performance. Cost control measures will continue to be closely monitored through various cost metrics.

        In fiscal 2004, the Company will also focus on exploring additional growth opportunities with its existing subsidiaries. These include expansion of Big Sky's business and opportunities to expand Mesaba's flight schedule with Mesaba's business partner, Northwest. Management believes that the Company's internal capital base is a strong foundation to invest in such growth. Management currently believes that the Company's cash, cash equivalents, and investments, as well as cash generated from operations will be sufficient to meet operating expenses, debt service requirements and capital expenditures through fiscal 2004.

Critical Accounting Policies and Estimates

        The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, revenues and expenses during the reporting period and related disclosures of contingent assets and liabilities in the consolidated financial statements and the accompanying notes. The U.S. Securities and Exchange Commission ("SEC") has defined a company's most critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified its critical accounting policies to include those discussed in the following paragraphs. The Company also has other key accounting policies, which involve the use of estimates, judgments and assumptions. See Note 2 "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements for additional discussion of these items.

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        Management believes that its estimates and assumptions are reasonable, based on information presently available; however, changes in these estimates, judgments and assumptions will occur as a result of future events, and accordingly actual results could differ from amounts estimated.

        Aircraft Property and Equipment—Estimated lives are used to record depreciation on aircraft property and equipment. Aircraft utilization, technology, and changes in the business strategy may affect the economic lives used to record depreciation by Mesaba or Big Sky. The foregoing may also impact depreciation rates, impairment, or both. Management of Mesaba and Big Sky regularly review the estimated useful lives and salvage values for aircraft property and equipment.

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

        Aircraft Maintenance—Estimated maintenance costs and anticipated aircraft activity are used to determine maintenance reserves. Changes in maintenance contracts, parts and labor costs and aircraft activity may affect the maintenance reserves. Management of Mesaba and Big Sky regularly review airplane activity, expected aircraft return dates, changes in its maintenance contracts and parts and labor costs for maintenance reserves.

New Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses how goodwill and other intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition and after they have been initially recognized. The provisions of SFAS No. 142 were required to be applied starting with fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 on April 1, 2002 and the adoption did not have a material impact on the Company's consolidated results of operations, financial position or cash flows because the Company did not have any goodwill or other intangible assets at the time of adoption. With the acquisition of Big Sky Transportation Co. on December 1, 2002, the Company recorded goodwill and intangible assets, both of which will be evaluated for impairment annually in accordance with SFAS No. 142 and SFAS No. 144.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which was required to be adopted for fiscal years beginning after December 15, 2001. SFAS No. 144 establishes accounting and reporting standards for the impairment or disposal of long-lived assets. The Company adopted SFAS No. 144 on April 1, 2002 and the adoption did not have a material effect on the Company's consolidated results of operations, financial position or cash flows.

        In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which required all gains and losses from extinguishment of debt to be classified as an extraordinary item. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with early adoption encouraged. The Company will adopt SFAS No. 145 as of April 1, 2003. The adoption of SFAS No. 145 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue 94-3. The Company will be required to adopt SFAS No. 146 effective for any exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.

        In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements for a guarantor's accounting for and disclosure of certain issued and outstanding guarantees. The initial recognition and initial measurement provisions of FIN 45 are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company's consolidated results of

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operations, financial position or cash flows.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS No. 148 did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. The Company provided the annual disclosures required by SFAS No. 148 for the year ended March 31, 2003 in Note 1 to the consolidated financial statements. The Company will provide the interim disclosures required by SFAS No. 148 beginning in the first quarter of fiscal 2004.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

        The Company's principal market risks are the availability and price of jet fuel and changes in interest rates.

        Mesaba and Big Sky have not experienced difficulties with fuel availability. As a part of the Airlink Agreement, Northwest bears the economic risk of fuel price fluctuations for Mesaba's fuel requirements. As part of the Jet Agreement, Northwest provides all fuel at its expense to support Mesaba's jet operations. Big Sky is subject to fluctuations in fuel prices, but currently fuel expense is not a material cost in relation to the Company's total operating expenses. The Company expects that its results of operations will not be materially affected by fuel price volatility.

        The Company does not hold long-term interest sensitive assets and therefore is not exposed to interest rate fluctuations for its assets. The Company does not purchase or hold any derivative financial instruments for trading purposes.

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The consolidated financial statements of the Company and the related independent auditors' report and report of independent public accountants are included in this Form 10-K on the pages indicated below:

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INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Mesaba Holdings, Inc.
Minneapolis, Minnesota

        We have audited the accompanying consolidated balance sheets of Mesaba Holdings, Inc. and subsidiaries (the Company) as of March 31, 2003 and the related consolidated statements of operations, shareholders' equity and cash flows for the year ended March 31, 2003. 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 audit. The consolidated financial statements of the Company as of March 31, 2002 and for each of the two years then ended, before the change in composition of its reportable segments and inclusion of disclosures as discussed in Note 9, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated May 2, 2002.

        We conducted our audit 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 audit provides a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Mesaba Holdings, Inc. and subsidiaries as of March 31, 2003 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

        As discussed above, the consolidated financial statements of the Company as of March 31, 2002, and for the years ended March 31, 2002 and 2001, were audited by other auditors who have ceased operations. As described in Note 9, the Company changed the composition of its reportable segments in fiscal 2003, and the amounts disclosed in the fiscal 2002 and 2001 consolidated financial statements relating to reportable segments have been restated to conform to the fiscal 2003 composition of reportable segments. We audited the adjustments that were applied to the restated disclosures for reportable segments reflected in the fiscal 2002 and 2001 consolidated financial statements. Our procedures included (1) comparing the adjustment amounts of segment income before income taxes and total assets to the Company's underlying analysis obtained from management, and (2) testing the mathematical accuracy of the reconciliations of segment amounts to the consolidated financial statements. In our opinion, such adjustments have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the fiscal 2002 and 2001 consolidated financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the fiscal 2002 and 2001 financial statements taken as a whole.

DELOITTE & TOUCHE LLP

Minneapolis, Minnesota
May 7, 2003 (June 2, 2003 as to Note 15)

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NOTICE: THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT RELATES TO PRIOR YEARS' FINANCIAL STATEMENTS. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

REPORT OF THE INDEPENDENT PUBLIC ACCOUNTANTS

To Mesaba Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Mesaba Holdings, Inc. (a Minnesota corporation) and Subsidiary as of March 31, 2002 and 2001, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Mesaba Holdings, Inc. and Subsidiary as of March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002, in conformity with accounting principles generally accepted in the United States.

Arthur Andersen LLP

Minneapolis, Minnesota,
May 2, 2002

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MESABA HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share information)

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

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MESABA HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share information)

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

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MESABA HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

For the Years Ended March 31, 2003, 2002 and 2001

(in thousands, except share information)

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

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MESABA HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

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

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MESABA HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(In thousands, except per share information and otherwise noted)

1.     Corporate Organization and Business:

Corporate Organization

        The consolidated financial statements include the accounts of Mesaba Holdings, Inc. (the "Company" or "Holdings") and its subsidiaries, Mesaba Aviation, Inc., a regional carrier based in Minneapolis, Minnesota ("Mesaba") and Big Sky Transportation Co., a regional air carrier based in Billings, Montana ("Big Sky"). Big Sky was acquired by Holdings on December 1, 2002 (see Note 3). All significant intercompany balances and transactions have been eliminated in consolidation.

Business

        Mesaba operates as a regional air carrier providing scheduled passenger service as "Mesaba Airlines/Northwest Airlink" and "Mesaba Airlines/Northwest Jet Airlink" under two separate agreements with Northwest Airlines, Inc. ("Northwest") to 108 cities in the United States and Canada from Northwest's hub airports located in, Minneapolis/St. Paul, Detroit, and Memphis.

        Under the Airline Services Agreement (the "Airlink Agreement"), Mesaba operates Saab 340 jet-prop aircraft for Northwest. The Airlink Agreement provides for exclusive rights to designated service areas and extends through June 30, 2007. Under the Airlink Agreement, Mesaba recognizes revenue for each completed available seat mile. Additionally, under the Airlink Agreement, Mesaba purchases fuel, ground handling and other services from Northwest. The Company paid to Northwest $22,195, $25,469, and $28,738 in fiscal 2003, 2002, and 2001, respectively, for these services. Either Northwest or Mesaba may terminate the Airlink Agreement on 365 days notice or may be terminated immediately by either party for certain provisions provided for in the Airlink Agreement.

        Under the Regional Jet Services Agreement (the "Jet Agreement"), Mesaba operates Avro RJ85 ("RJ85") regional jets for Northwest. The Jet Agreement extends through October 25, 2006, unless terminated earlier in accordance with its provisions. Under the Jet Agreement, Mesaba recognizes revenue for each block hour flown. Northwest provides fuel and airport and passenger related services. The Jet Agreement may be terminated immediately by Mesaba or Northwest in accordance with certain provisions provided in the Jet Agreement. Northwest may terminate the Jet Agreement on April 25, 2004 with at least 180 days or up to 365 days prior notice.

        Under the agreements, all Mesaba flights appear in Northwest's timetables and Mesaba receives ticketing and certain check-in, baggage and freight-handling services from Northwest at certain airports. Mesaba also benefits from its relationship with Northwest through advertising and marketing programs. The Airlink Agreement and Jet Agreement provide for certain incentive payments from Northwest to Mesaba based on achievement of certain operational or financial goals. Such incentives totaled $4,945, $3,717, and $3,165 in fiscal 2003, 2002, and 2001, respectively and are included in passenger revenues in the accompanying consolidated statements of operations. Approximately 73% and 69% of the March 31, 2003 and 2002 accounts receivable balances in the accompanying consolidated balance sheets are due from Northwest. Substantially all of the operating revenue recognized in fiscal 2003, 2002, and 2001 was from Northwest.

        Loss of Mesaba's affiliation with Northwest or Northwest's failure to make timely payment of amounts owed to Mesaba or to otherwise materially perform under the Airlink or Jet Agreements would have a material adverse effect on Mesaba's and the Company's operations, financial position and cash flows. Northwest and Mesaba review contract compliance on a periodic basis. There are significant related party transactions between Northwest and Mesaba disclosed throughout the Notes to the Consolidated Financial Statements.

        Big Sky operates as a regional air carrier based in Billings, Montana, primarily providing scheduled passenger, airfreight, express package and charter services. Big Sky operates daily scheduled flights providing interline and online connecting services and local market services.

        Big Sky provides scheduled air service to 22 communities in Montana, North Dakota, Washington, Colorado, Wyoming, and

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Idaho via Big Sky's Billings, Montana hub. Big Sky also has code-sharing agreements with Alaska Airlines/Horizon Airlines, America West Airlines and Northwest Airlines, where its services are marketed jointly with those air carriers for connecting flights. Big Sky participates in the Essential Air Service ("EAS") program with the U.S. Department of Transportation ("DOT"). The EAS program subsidizes air carriers to provide air service to designated rural communities throughout the country that could not otherwise economically justify that service on the basis of its passenger traffic. The DOT pays EAS subsidies for each departure in a covered market.

2.     Summary of Significant Accounting Policies:

Use of Estimates

        The preparation of 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 and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. The most significant use of estimates relates to accrued maintenance expenses, aircraft property and equipment lives, and inventory obsolescence reserves. Ultimate results could differ from those estimates.

Cash and Cash Equivalents

        Cash equivalents consist primarily of U.S. government securities and interest-bearing deposits with original maturities of less than 90 days and are stated at cost, which approximates fair value. Cash and cash equivalents also include assets held as collateral for outstanding letters of credit and as security for a certain lease facility. At March 31, 2003 $2.0 million was held as collateral.

Investments

        Investments consist principally of municipal securities and corporate bonds and are classified as available-for-sale as of March 31, 2003 and 2002. Available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of shareholders' equity, except for other-than-temporary impairments, which are reported as a charge to current operations and result in a new cost basis for the investment.

Inventories

        Inventories are stated at the lower of cost or market and consist of expendable aircraft service parts and fuel. Expendable parts are charged to maintenance as used. A provision is recorded to reduce inventories to the estimated net realized value, if required. As of March 31, 2003 and 2002, this reserve balance was $2.0 and $1.5 million, respectively.

Property and Equipment

        Property and equipment are stated at cost. Additions, improvements or major renewals are capitalized, while expenditures that do not enhance or extend the assets useful life are charged to operating expense as incurred. Depreciation is computed on a straight-line basis for financial reporting purposes over estimated useful lives of 3-36 years. Leasehold improvements are amortized over the life of the lease or the remaining estimated useful life of the asset. Depreciation and amortization expense on property and equipment totaled $17,058, $17,689 and $15,488 in fiscal 2003, 2002 and 2001, respectively.

Airframe and Engine Maintenance

        Routine maintenance, airframe and engine overhauls are charged to expense as incurred, except engine overhaul costs covered by third-party maintenance agreements and airframe inspections, which are accrued based on the hours flown. Modifications that enhance the operating performance or extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated useful life of the asset.

Other Assets

Warrants—

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        In connection with the Jet Agreement, as amended, Mesaba paid Northwest contract rights fees in fiscal 1997 and 1999 in the form of warrants to purchase the Company's common stock. Contract rights totaled $11,700 and related accumulated amortization totaled $7,740 and $6,609 as of March 31, 2003 and 2002, respectively. Prior to fiscal 2002, Mesaba amortized the contract rights over six years to coincide with the earliest date on which the Jet Agreement could be terminated by Northwest. Effective April 1, 2001, Mesaba changed the amortization period to 10 years on a prospective basis to coincide with the term of the Jet Agreement, because management does not believe that Northwest will exercise early termination. The warrants issued in connection with the Jet Agreement consisted of the following as of March 31, 2003 and 2002: