MAIR HOLDINGS INC - 10-Q Quarterly Report

Part I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MAIR HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

(Unaudited)

	December 31 2004			March 31 2004 (As restated- see Note 13)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	75,260		$	54,561
Short-term investments	49,849			67,285
Accounts receivable, net of reserves of $529 and $926	30,918			28,453
Inventories, net	10,353			8,664
Prepaid expenses and deposits	7,477			5,381
Deferred income taxes and other	11,237			11,449
Total current assets	185,094			175,793

PROPERTY AND EQUIPMENT:
Flight equipment	84,712			81,891
Other property and equipment	45,510			41,901
Less: Accumulated depreciation and amortization	(92,865		)	(84,070		)
Net property and equipment	37,357			39,722

NONCURRENT ASSETS:
Long-term investments	42,596			38,084
Goodwill	2,503			2,503
Other intangible assets, net	2,921			3,224
Other assets, net	7,076			8,440
	$	277,547		$	267,766

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

MAIR HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(in thousands, except share information)

(Unaudited)

	December 31 2004			March 31 2004 (As restated- see Note 13)

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	20,629		$	18,981
Accrued liabilities:
Payroll	15,432			16,724
Maintenance	17,810			20,724
Deferred income	2,891			2,504
Other current liabilities	19,637			17,124
Total current liabilities	76,399			76,057

OTHER NONCURRENT LIABILITIES	6,486			7,448

COMMITMENTS AND CONTINGENCIES (Note 11)

SHAREHOLDERS’ EQUITY:
Undesignated preferred stock, no specified par value; 1,000,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $.01 par value; 60,000,000 shares authorized, 20,572,339 and 20,375,372 shares issued and outstanding	206			204
Paid-in capital	54,527			52,995
Warrants	16,500			16,500
Accumulated other comprehensive income (loss)	(180		)	46
Retained earnings	123,609			114,516
Total shareholders’ equity	194,662			184,261
	$	277,547		$	267,766

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

MAIR HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share information)

(Unaudited)

	Three Months Ended December 31						Nine Months Ended December 31
	2004			2003 (As restated- see Note 13)			2004			2003 (As restated- see Note 13)
OPERATING REVENUES:
Passenger	$	104,267		$	107,161		$	312,971		$	323,606
Freight and other	11,245			8,166			30,353			23,216
Total operating revenues	115,512			115,327			343,324			346,822

OPERATING EXPENSES:
Wages and benefits	37,608			37,660			109,445			109,443
Aircraft fuel	5,474			5,707			16,005			17,183
Aircraft maintenance	21,963			21,399			63,704			60,354
Aircraft rents	25,814			26,591			76,716			80,281
Landing fees	1,541			1,867			5,120			5,437
Insurance and taxes	1,703			2,261			6,107			7,759
Depreciation and amortization	4,134			4,186			11,242			13,019
Administrative and other	15,429			15,057			43,113			41,876
Total operating expenses	113,666			114,728			331,452			335,352
Operating income	1,846			599			11,872			11,470

NONOPERATING INCOME (EXPENSE):
Interest income and other	819			523			1,752			1,263
Interest expense	(16		)	(37		)	(50		)	(84		)
Government grant income										2,646
Nonoperating income, net	803			486			1,702			3,825
Income before provision for income taxes	2,649			1,085			13,574			15,295

PROVISION FOR INCOME TAXES	1,156			370			4,481			7,228
NET INCOME	$	1,493		$	715		$	9,093		$	8,067

NET INCOME PER SHARE:
Earnings per common share - basic	$	0.07		$	0.04		$	0.44		$	0.40
Earnings per common share - diluted	$	0.07		$	0.03		$	0.43		$	0.39

WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	20,524			20,333			20,483			20,325
Diluted	21,123			20,522			20,996			20,451

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

MAIR HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended December 31
	2004			2003 (As restated- see Note 13)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	9,093		$	8,067
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,242			13,019
Amortization of investments	1,557			1,245
Amortization of deferred credits	(861		)	(1,597		)
Stock-based compensation	173			752
Changes in current operating items:
Accounts receivable	(2,465		)	9,462
Inventories	(1,689		)	20
Prepaid expenses and deposits	(2,096		)	(1,238		)
Accounts payable and other	1,197			18,696
Net cash provided by operating activities	16,151			48,426

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments	(63,331		)	(69,176		)
Sales of investments	74,304			30,638
Purchases of property and equipment	(7,514		)	(8,172		)
Net cash provided by (used in) investing activities	3,459			(46,710		)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of other noncurrent liabilities	(101		)	(214		)
Proceeds from issuance of common stock	1,190			179
Net cash provided by (used in) financing activities	1,089			(35		)

NET INCREASE IN CASH AND CASH EQUIVALENTS	20,699			1,681

CASH AND CASH EQUIVALENTS:
Beginning of period	54,561			62,140
End of period	$	75,260		$	63,821

SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during period for:
Interest	$	57		$	83
Income taxes	$	4,199		$	3,241

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

MAIR HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The condensed consolidated financial statements included herein have been prepared by MAIR Holdings, Inc. (the “Company” or “Holdings”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished in the condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which are, in the opinion of management, necessary for a fair presentation of such condensed consolidated financial statements. The Company’s business is seasonal and, accordingly, interim results are not indicative of results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2004, and the notes thereto, included in the Company’s Annual Report on Form 10-K as filed with the SEC.

1. Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Mesaba Aviation, Inc. (“Mesaba”) and Big Sky Transportation Co. (“Big Sky”). All significant intercompany transactions and balances have been eliminated in consolidation.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as well as the reported amounts of revenues and expenses. The most significant use of estimates relates to accrued maintenance expenses, aircraft property and equipment lives, inventory obsolescence reserves, valuation of goodwill and other intangible assets and accounting for income taxes. Ultimate results could differ from those estimates.

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

2. Business

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 Airlines, Inc., a wholly owned indirect subsidiary of Northwest Airlines Corporation (“Northwest”). As of December 31, 2004, Mesaba served 111 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 (“Saab”) for Northwest. This agreement provides for exclusive rights to designated service areas through June 30, 2007. Under the Airlink Agreement, Mesaba recognizes revenue for each completed “available seat mile” (“ASM”) (the number of seats available for passengers, multiplied by the number of miles those seats are flown). Under the Airlink Agreement, Mesaba purchases fuel, ground handling and other services from Northwest. Mesaba’s cost of fuel, including taxes and pumping fees, is 83.5 cents per gallon. Mesaba paid Northwest $7.8 million and $8.2 million for these services for the three months ended December 31, 2004 and 2003. Mesaba paid Northwest $26.0 million and $22.7 million for these services for the nine months ended December 31, 2004 and 2003. Either Northwest or Mesaba may terminate the Airlink Agreement on 365 days notice or it may be terminated immediately by either party if the other party disposes of a substantial part of its assets. The Airlink Agreement may also be terminated in the event of certain breaches or defaults.

Under the Regional Jet Services Agreement (the “Jet Agreement”), Mesaba operates Avro RJ85 regional jets (“RJ85”) for Northwest through April 25, 2007. Under the Jet Agreement, Mesaba recognizes revenue for each “block hour” flown (the elapsed time between aircraft departing and arriving at a gate). Under the Jet Agreement, Northwest provides fuel and airport and passenger related services at Northwest’s expense. The Jet Agreement may be terminated immediately by Mesaba or Northwest if the other party disposes of a substantial part of its assets. The Jet Agreement may also be terminated in the event of certain breaches or defaults.

Under the agreements, all Mesaba flights appear in Northwest’s schedules 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 and Jet Agreements provide for certain incentive payments from Northwest to Mesaba based on achievement of certain operational or financial goals. For the three months ended December 31, 2004, Mesaba reduced its revenue by $0.1 million. Incentives totaled $1.4 million for the three months ended December 31, 2003. Incentives totaled $3.0 million and $3.9 million for the nine months ended December 31, 2004 and 2003. The incentive payments are included in passenger revenues in the accompanying condensed consolidated statements of operations. Approximately $26.3 million or 85.0% and $21.1 million or 74.1% of the December 31, 2004 and March 31, 2004 accounts receivable balances in the accompanying condensed consolidated balance sheets were due from Northwest. Substantially all of Mesaba’s operating revenue was from Northwest. As of December 31, 2004 and March 31, 2004, Mesaba owed Northwest $1.5 million and $1.0 million, primarily for fuel and ground handling services.

Cancellation of the Airlink or Jet Agreements or Northwest’s failure to make timely payment of amounts owed to Mesaba or to otherwise materially perform under the Airlink or Jet Agreements for any reason 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.

Big Sky

Big Sky operates as a regional air carrier based in Billings, Montana, primarily providing scheduled passenger, airfreight, express package and charter services. As of December 31, 2004, Big Sky provided scheduled air service to 18 communities in Montana, North Dakota, Washington and Idaho. Big Sky operates daily scheduled flights providing interline and online connecting services and local market services. Big Sky also has code-sharing agreements with Alaska Airlines, America West Airlines and Northwest, 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 based on its passenger traffic. The DOT pays EAS subsidies for each departure in a covered market. Big Sky purchased fuel from Northwest for $0.3 million and $0.4 million for the three months ended December 31, 2004 and 2003. Big Sky purchased fuel from Northwest for $1.3 million and $1.4 million for the nine months ended December 31, 2004 and 2003.

3. Goodwill and Other Intangibles

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

	December 31, 2004							March 31, 2004
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Indefinite-lived assets:
Air carrier certificate	$	925				$	925	$	925				$	925
Goodwill	2,503					2,503		2,503					2,503
Amortizable intangible asset:
Pilot labor contract	2,840		(844		)	1,996		2,840		(541		)	2,299
	$	6,268	$	(844	)	$	5,424	$	6,268	$	(541	)	$	5,727

The amortizable intangible asset is amortized over its estimated period of benefit. Intangible asset amortization expense for the three and nine months ended December 31, 2004 and 2003 was $0.1 million and $0.3 million. Goodwill and the intangible assets are evaluated for impairment annually, at a minimum, or on an interim basis if events or circumstances indicate a possible inability to realize the carrying amounts. The evaluation includes future cash flow projections, strategic modeling and other management assumptions. During the fourth quarter of each fiscal year, the Company completes its annual impairment test of goodwill and other intangible assets. The Company continues to monitor goodwill and the intangible assets at Big Sky for impairment.

4. Investments

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 with an original maturity date of less than 90 days as cash equivalents. Investments with an original maturity date of more than 90 days that mature within one year are classified as short-term investments and greater than one year as long-term investments. As of December 31, 2004 and March 31, 2004, cash, cash equivalents, short-term and long-term investments totaled $167.7 million and $159.9 million.

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

	December 31, 2004			March 31, 2004
Amortized cost	$	92,750		$	105,280
Gross unrealized gains	2			127
Gross unrealized losses	(307		)	(38		)
Fair value	$	92,445		$	105,369

For the three and nine months ended December 31, 2004 and 2003, gross realized gains and losses were insignificant as the Company generally held the fully amortized bonds to maturity.

5. Stock Options

The Company accounts for its stock-based compensation plans using the intrinsic value method prescribed under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has issued stock options to key employees and directors. As such, the Company records compensation expense for stock options and awards only if the exercise price is less than the fair market value of the stock on the measurement date.

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

The following information summarizes the pro forma effects assuming compensation for such awards had been recorded based upon the estimated fair value for the periods ended December 31, in thousands, except per share information:

	Three Months Ended December 31						Nine Months Ended December 31
	2004			2003			2004			2003
Net income as reported	$	1,493		$	715		$	9,093		$	8,067
Add: stock-based employee compensation expense included in reported net income, net of related tax effects	503			172			116			397
Deduct: stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(275		)	(365		)	(983		)	(966		)
Pro forma net income	$	1,721		$	522		$	8,226		$	7,498

Earnings per common share – basic:
As reported	$	0.07		$	0.04		$	0.44		$	0.40
Pro forma	$	0.08		$	0.03		$	0.40		$	0.37
Earnings per common share – diluted:
As reported	$	0.07		$	0.03		$	0.43		$	0.39
Pro forma	$	0.08		$	0.03		$	0.39		$	0.37

In December 2002, the Company repriced stock options to purchase 745,000 shares of the Company’s common stock with exercise prices ranging from $9.05 to $18.00 to an exercise price of $5.97, which represented the fair market value on the date of the repricing. As of December 31, 2004, 514,782 repriced options were outstanding. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” the Company has adopted variable plan accounting for these options from the date of the repricing. As a result of the repricing, for the three months ended December 31, 2004 and 2003, the Company recorded compensation expense of $0.9 million and $0.3 million. For the nine months ended December 31, 2004 and 2003, the Company recorded compensation expense of $0.2 million and $0.8 million.

6. Earnings Per Share

Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding plus all additional common stock that would have been outstanding if potentially dilutive common shares related to stock options and warrants had been issued. Stock options and warrants with an exercise price exceeding the fair market value of the Company’s common stock are considered antidilutive and are excluded from the calculation.

The following table reconciles the number of shares utilized in the condensed consolidated earnings per share calculations for the periods ended December 31, in thousands, except per share information:

	Three Months Ended December 31				Nine Months Ended December 31
	2004		2003		2004		2003
Net income	$	1,493	$	715	$	9,093	$	8,067
For earnings per common share - basic:
Weighted average number of issued shares outstanding	20,524		20,333		20,483		20,325
Effect of dilutive securities:
Computed shares outstanding under the Company’s stock option plan utilizing the treasury stock method	424		189		369		126
Computed shares outstanding under warrants issued utilizing the treasury stock method	175		—		144		—
For earnings per common share - diluted:
Weighted average common shares and potentially dilutive common shares	21,123		20,522		20,996		20,451
Earnings per common share – basic	$	0.07	$	0.04	$	0.44	$	0.40
Earnings per common share – diluted	$	0.07	$	0.03	$	0.43	$	0.39

Antidilutive options and warrants	3,505		4,490		3,505		4,490

7. Consolidated Comprehensive Income

The following table presents the calculation of comprehensive income. The components of comprehensive income for the periods ended December 31 are as follows, in thousands:

	Three Months Ended December 31							Nine Months Ended December 31
	2004				2003			2004			2003
Net income	$		1,493		$	715		$	9,093		$	8,067
Unrealized losses on investments classified as available for sale, net of tax	(136			)	(40		)	(46		)	(63		)
Comprehensive income	$	1,357			$	675		$	9,047		$	8,004

8. Segment Information

The Company follows the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” SFAS No. 131 establishes annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services, geographic areas and major customers. The method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. Operating segment information for Mesaba, Big Sky and Holdings for the periods ended December 31 were as follows, in thousands:

	Mesaba		Big Sky			Holdings and Eliminations			Consolidated
Three Months Ended December 31, 2004:
Operating revenues	$	111,794	$	3,718					$	115,512
Depreciation and amortization	3,947		183			$	4		4,134
Interest expense	—		65			(49		)	16
Income (loss) before income taxes	3,703		(495		)	(559		)	2,649
Capital expenditures (sales)	2,435		(36		)	—			2,399
Total assets at end of period	118,209		9,332			150,006			277,547
Three Months Ended December 31, 2003:
Operating revenues	111,221		4,106						115,327
Depreciation and amortization	3,954		230			2			4,186
Interest expense	—		75			(38		)	37
Income (loss) before income taxes	2,117		(1,092		)	60			1,085
Capital expenditures (sales)	3,391		(16		)	4			3,379
Total assets at end of period	134,452		10,669			132,709			277,830
Nine Months Ended December 31, 2004:
Operating revenues	332,045		11,279						343,324
Depreciation and amortization	10,641		589			12			11,242
Interest expense	—		210			(160		)	50
Income (loss) before income taxes	14,998		(2,408		)	984			13,574
Capital expenditures	7,477		32			5			7,514
Nine Months Ended December 31, 2003:
Operating revenues	334,066		12,756						346,822
Depreciation and amortization	12,400		613			6			13,019
Interest expense	—		235			(151		)	84
Income (loss) before income taxes	16,824		(2,169		)	640			15,295
Capital expenditures	8,148		10			14			8,172

9. Nonoperating Income

In April 2003, Congress enacted the Emergency Wartime Supplemental Appropriations Act. Among other items, the legislation included a $2.3 billion government grant to U.S. airlines. In accordance with this Act, in the first quarter of fiscal 2004, Mesaba recognized $2.3 million as “nonoperating income” and Big Sky recognized $0.3 million as “nonoperating income” and $0.2 million as a reduction of “administrative and other expense” in the accompanying condensed consolidated statements of operations.

10. Income Taxes

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

11. Commitments and Contingencies

On October 4, 2002, Fairbrook Leasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“Saab Leasing”) filed a declaratory judgment action against Mesaba relating to 20 Saab 340A (“340A”) aircraft leased by Mesaba. Saab Leasing sought a judicial declaration that the terms of the leases applicable to each of the 340A aircraft are governed by a March 7, 1996 term sheet proposal rather than the short-term leases subsequently executed by the parties. The case was brought in the United States District Court for the District of Minnesota (“District Court”). On December 8, 2003, the District Court issued an order declaring that the term sheet proposal constitutes a binding contract that required Mesaba to execute or negotiate in good faith toward the execution of long-term leases on each of the 340A aircraft. The District Court concluded that the term sheet proposal is ambiguous with respect to whether lease extensions contemplated by that document are at Mesaba’s option or Saab Leasing’s option. Mesaba has appealed the District Court’s summary judgment ruling. On August 13, 2004, Saab Leasing filed a complaint in the District Court alleging damages in the form of aircraft lease payments they contend are due or will become due based upon the District Court’s summary judgment ruling in the declaratory judgment action. Saab Leasing alleges approximately $35 million in past due and future aircraft lease obligations. Mesaba denies the allegations in Saab Leasing’s complaint and contends that it has fulfilled and will continue to fulfill its existing lease obligations. The ultimate outcome of this dispute cannot be predicted with certainty.

12. New Accounting Pronouncements

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” which requires all public companies accounting for share-based payment transactions to account for these types of transactions using a fair-value-based method. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. SFAS 123(R) also requires the tax benefits associated with these shared-based payments to be classified as financing activities in the statement of cash flows rather than operating activities as is currently permitted. SFAS 123(R) becomes effective for interim or annual periods beginning after June 15, 2005.

The Company expects to adopt SFAS 123(R) on April 1, 2005, the beginning of its first quarter of fiscal 2006, using the modified-prospective method. Under this transition method, the Company will record compensation expense for all awards it grants on a straight-line basis over the vesting period. In addition, the Company will record compensation expense for the unvested portion of previously granted awards that remain outstanding at the date of the adoption. The Company has not completed its assessment of the impact of the standard on its financial condition or results of operations.

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” regarding disclosure about unrealized losses on available for sale debt and equity securities accounted for under SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities”. The guidance for evaluating whether an investment is other than temporarily impaired should be applied in such evaluations made in reporting periods beginning after June 15, 2004. The recognition and measurement guidance has been delayed and the disclosure guidance remains in effect. The Company does not expect the implementation of EITF 03-1 to have a material effect on its consolidated financial statements.

13. Restatement

During the fourth quarter of fiscal 2005, the Company determined that it had incorrectly accounted for certain aircraft leases that contained reduced rent obligations over a portion of the lease term. This resulted in an understatement of other assets, net, other noncurrent liabilities and aircraft rents and an overstatement of retained earnings, shareholders’ equity and net income in prior periods. Although the Company does not believe that this error resulted in a material misstatement of the Company’s consolidated financial statements for any annual or interim periods as presented below, the effects of correcting the error currently would have had a material effect on the Company’s results of operations for the third quarter of fiscal 2005. The Company has restated the accompanying condensed consolidated financial statements as of March 31, 2004 and for the three and nine months ended December 31, 2003 to record aircraft rents on a straight-line basis over the lease terms.

The Company intends to include restated consolidated financial statements for fiscal 2004 and 2003 in its Annual Report on Form 10-K for the year ending March 31, 2005, and to include restated consolidated financial statements for the fiscal 2005 interim periods in its Quarterly Reports on Form 10-Q filed prospectively.

A summary of the significant effects of the restatement on the Company’s interim condensed consolidated financial statements for fiscal 2005 is as follows, in thousands, except per share information:

	Three Months Ended June 30, 2004				Three Months Ended September 30, 2004				Six Months Ended September 30, 2004
	As Previously Reported		As Restated		As Previously Reported		As Restated		As Previously Reported		As Restated
Consolidated balance sheets:
Other assets, net	$	7,482	$	7,958	$	7,052	$	7,558	$	7,052	$	7,558
Total assets	263,308		263,784		272,625		273,131		272,625		273,131
Other noncurrent liabilities	5,889		7,077		5,428		6,690		5,428		6,690
Retained earnings	118,091		117,379		122,872		122,116		122,872		122,116
Total shareholders’ equity	187,751		187,039		192,555		191,799		192,555		191,799
Statements of operations:
Aircraft rents	25,032		25,106		25,722		25,796		50,754		50,902
Total operating expenses	107,101		107,175		110,537		110,611		217,638		217,786
Operating income	2,598		2,524		7,576		7,502		10,174		10,026
Income before provision for income taxes	2,965		2,891		8,108		8,034		11,073		10,925
Net income	2,907		2,863		4,781		4,737		7,688		7,600
Earnings per common share - basic	0.14		0.14		0.23		0.23		0.38		0.37
Earnings per common share - diluted	0.14		0.14		0.23		0.23		0.37		0.36

A summary of the significant effects of the restatement on the Company’s interim condensed consolidated financial statements for fiscal 2004 is as follows, in thousands, except per share information:

	Three Months Ended June 30, 2003				Three Months Ended September 30, 2003				Six Months Ended September 30, 2003				Three Months Ended December 31, 2003				Nine Months Ended December 31, 2003
	As Previously Reported		As Restated		As Previously Reported		As Restated		As Previously Reported		As Restated		As Previously Reported		As Restated		As Previously Reported		As Restated

Consolidated balance sheets:
Other assets, net	$	15,067	$	15,424	$	14,532	$	14,919	$	14,532	$	14,919	$	14,906	$	15,323	$	14,906	$	15,323
Total assets	256,734		257,091		266,423		266,810		266,423		266,810		277,413		277,830		277,413		277,830
Other noncurrent liabilities	6,141		7,033		5,515		6,481		5,515		6,480		6,845		7,885		6,845		7,885
Retained earnings	114,017		113,482		117,951		117,372		117,951		117,372		118,710		118,087		118,710		118,087
Total shareholders’ equity	181,451		180,916		185,892		185,313		185,892		185,313		187,012		186,389		187,012		186,389
Statements of operations:
Aircraft rents	26,778		26,852		26,764		26,838		53,542		53,690		26,517		26,591		80,059		80,281
Total operating expenses	109,290		109,364		111,186		111,260		220,476		220,624		114,654		114,728		335,130		335,352
Operating income	4,743		4,669		6,276		6,202		11,019		10,871		673		599		11,692		11,470
Income before provision for income taxes	7,722		7,648		6,636		6,562		14,358		14,210		1,159		1,085		15,517		15,295
Net income	3,506		3,462		3,934		3,890		7,440		7,352		759		715		8,199		8,067
Earnings per common share - basic	0.17		0.17		0.19		0.19		0.37		0.36		0.04		0.04		0.40		0.40
Earnings per common share - diluted	0.17		0.17		0.19		0.19		0.36		0.36		0.04		0.03		0.40		0.39

A summary of the significant effects of the restatement on the Company’s annual consolidated financial statements for fiscal 2004 and 2003 is as follows, in thousands, except per share information:

	Year Ended March 31, 2004				Year Ended March 31, 2003
	As Previously Reported		As Restated		As Previously Reported		As Restated
Consolidated balance sheets:
Other assets, net	$	7,994	$	8,440	$	7,873	$	8,200
Total assets	267,320		267,766		250,642		250,969
Other noncurrent liabilities	6,334		7,448		6,344		7,161
Retained earnings	115,184		114,516		110,511		110,020
Total shareholders’ equity	184,929		184,261		177,945		177,454
Statements of operations:
Aircraft rents	105,163		105,460		107,547		107,844
Total operating expenses	444,756		445,053		448,252		448,549
Operating income	4,323		4,026		8,628		8,331
Income before provision for income taxes	8,756		8,459		8,887		8,590
Net income	4,673		4,496		4,329		4,151
Earnings per common share - basic	0.23		0.22		0.21		0.20
Earnings per common share - diluted	0.23		0.22		0.21		0.20

The restatement also resulted in a decrease in retained earnings and shareholders’ equity as of April 1, 2002 of $0.3 million.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations has been updated to give effect to the restatement as discussed in Note 13 to the condensed consolidated financial statements included in Item 1, and should be read in conjunction with the accompanying condensed consolidated financial statements. The Company’s operations and financial results are subject to various risks and uncertainties associated with the airline industry. See “Risk Factors Relating to the Company and the Airline Industry” at the end of this Item 2.

RESULTS OF OPERATIONS

Three Months Ended December 31, 2004 and 2003

The Company’s consolidated net income for the quarter ended December 31, 2004 was $1.5 million, or $0.07 per diluted share, compared with net income of $0.7 million, or $0.03 per diluted share, for the quarter ended December 31, 2003. Comparative information on operations for the three months ended December 31 was as follows:

Mesaba

Mesaba’s operating statistics for the three months ended December 31 were as follows:

	2004			2003
Passengers	1,412,966			1,469,604
Available seat miles (000s)	793,269			760,478
Revenue passenger miles (000s)	511,531			466,544
Load factor	64.5		%	61.3		%
Departures	52,423			56,239
Revenue per ASM	$	0.141		$	0.146
Cost per ASM	$	0.136		$	0.144
Aircraft in service (average)	99			102

Mesaba Operating Revenues Total operating revenues increased 0.5% in the third quarter of fiscal 2005 to $111.8 million from $111.2 million in the prior year quarter primarily due to increased ground handling revenue in Detroit and Minneapolis/St Paul. This was partially offset by a decrease in passenger revenue, which was driven by the removal of five Saab A model aircraft from the fleet, partially offset by increased RJ85 block hours.

Mesaba Operating Expenses Total operating expenses decreased 0.9% in the third quarter of fiscal 2005 to $108.2 million from $109.2 million in the prior year quarter. Mesaba’s operating costs per ASM for the three months ended December 31 were as follows:

	2004		2003
Wages and benefits	4.4	¢	4.6	¢
Aircraft fuel	0.6		0.7
Aircraft maintenance	2.7		2.7
Aircraft rents	3.2		3.4
Landing fees	0.2		0.2
Insurance and taxes	0.2		0.3
Depreciation and amortization	0.5		0.5
Administrative and other	1.8		2.0
Total	13.6	¢	14.4	¢

Wages and benefits decreased 0.8% to $34.9 million in the third quarter of fiscal 2005 from $35.2 million in the prior year quarter primarily due to the $2.7 million retroactive pilot compensation accrued in the prior year resulting from the pilots’ contract signed in January 2004 and reduced employee incentive compensation due to reduced operational performance. This was mostly offset by increased ground handling wages due to increased ground handling activity, increased pilot wages due to the new pilots’ contract and increased benefit costs related to the 401(k) benefit plan and health and dental plans.

Aircraft fuel decreased 7.0% to $4.8 million in the third quarter of fiscal 2005 from $5.2 million in the prior year quarter due to the reduction in the number of Saab block hours flown. 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 for both periods. Northwest is responsible for fuel for Mesaba’s RJ85 operations.

Aircraft maintenance, excluding wages and benefits, increased 5.2% to $21.5 million in the third quarter of fiscal 2005 from $20.4 million in the prior year quarter due to increased costs associated with expendable parts and repair costs incurred to continue to maintain the fleet as it ages.

Aircraft rents decreased 2.7% to $25.3 million in the third quarter of fiscal 2005 from $26.0 in the prior year quarter due to the return of five Saab aircraft and the reduction of one RJ85.

Landing fees decreased 17.6% to $1.5 million in the third quarter of fiscal 2005 from $1.8 in the prior year quarter due to the recognition of an airport landing fee refund and a reduction in Saab departures offset by increased rates. Northwest is responsible for landing fees for Mesaba’s RJ85 operations.

Insurance and taxes decreased 23.8% to $1.5 million in the third quarter of fiscal 2005 from $1.9 million in the prior year quarter due primarily to fewer insured aircraft and lower insurance rates.

Depreciation and amortization decreased 0.2% to $3.9 million in the third quarter of fiscal 2005 compared to $4.0 million in the prior year quarter due primarily to reduced capital spending over the last several years. The reduction is because fewer capital expenditures are required to maintain the fleet versus investing in the infrastructure to grow the fleet in previous years.

Administrative and other expenses remained relatively constant at $14.8 million in both quarters due to increased consulting costs incurred to comply with the requirements of the Sarbanes-Oxley Act, which was offset by reduced costs related to third party Saab ground handling, legal fees and pilot training.

Big Sky

Big Sky’s operating statistics for the three months ended December 31 were as follows:

	2004			2003
Passengers	22,350			25,755
Available seat miles (000s)	14,101			17,394
Revenue passenger miles (000s)	5,563			6,519
Load factor	39.5		%	37.5		%
Departures	4,813			5,325
Revenue per ASM	$	0.264		$	0.236
Cost per ASM	$	0.303		$	0.294
Aircraft in service (average)	8			10

Big Sky Operating Revenues Total operating revenues decreased 9.4% to $3.7 million in the third quarter of fiscal 2005 from $4.1 million in the prior year quarter due to a reduction in unprofitable flying.

Big Sky Operating Expenses Total operating expenses decreased 16.5% in the third quarter of fiscal 2005 to $4.3 million from $5.1 million in the prior year quarter due to a decrease in variable costs related to the reduction in operations, partially offset by increased fuel costs.

Consolidated

Nonoperating Income (Expense) Nonoperating income increased to $0.8 million in the third quarter of fiscal 2005 from $0.5 million in the prior year quarter primarily due to increased interest income as a result of additional funds invested at higher interest rates.

Provision for Income Taxes The Company’s effective tax rate was 43.6% in the third quarter of fiscal 2005 as compared to 34.1% in the prior year quarter. The Company adjusts its effective tax rate quarterly based on forecasted operating results in the fiscal year. The rate is affected principally by the level of nondeductible expenses relative to projected taxable income.

Nine Months Ended December 31, 2004 and 2003

The Company’s consolidated net income for the nine months ended December 31, 2004 was $9.1 million, or $0.43 per diluted share, compared with net income of $8.1 million, or $0.39 per diluted share, for the nine months ended December 31, 2003. Comparative information on operations for the nine months ended December 31 was as follows:

Mesaba

Mesaba’s operating statistics for the nine months ended December 31 were as follows:

	2004			2003
Passengers	4,290,221			4,457,906
Available seat miles (000s)	2,307,486			2,251,391
Revenue passenger miles (000s)	1,528,490			1,399,811
Load factor	66.2		%	62.2		%
Departures	156,383			170,305
Revenue per ASM	$	0.144		$	0.148
Cost per ASM	$	0.137		$	0.142
Aircraft in service (average)	98			104

Mesaba Operating Revenues Total operating revenues decreased 0.6% in fiscal 2005 to $332.0 million from $334.1 million in the prior year period primarily due to a decrease in passenger revenue that was driven by a combination of the removal of six Saab A model aircraft from the fleet and decreased Saab utilization. The decrease was partially offset by increased RJ85 utilization and increased ground handling revenue in Detroit and Minneapolis/St Paul.

Mesaba Operating Expenses Total operating expenses decreased 0.8% in fiscal 2005 to $317.2 million from $319.7 million in the prior year period. Mesaba’s operating costs per ASM for the nine months ended December 31 were as follows:

	2004		2003
Wages and benefits	4.5	¢	4.5	¢
Aircraft fuel	0.6		0.7
Aircraft maintenance	2.7		2.6
Aircraft rents	3.3		3.5
Landing fees	0.2		0.2
Insurance and taxes	0.2		0.3
Depreciation and amortization	0.5		0.6
Administrative and other	1.7		1.8
Total	13.7	¢	14.2	¢

Wages and benefits increased 2.0% to $103.7 million in fiscal 2005 from $101.6 million in the prior year period primarily due to increased ground handling wages and 401(k) benefit plan expenses, which were partially offset by a reduction in mechanic wages and health and dental claims costs.

Aircraft fuel decreased 8.5% to $14.1 million in fiscal 2005 from $15.5 million in the prior year period due primarily to a reduction in the number of Saab block hours flown. 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 for both periods. Northwest is responsible for fuel for Mesaba’s RJ85 operations.

Aircraft maintenance, excluding wages and benefits, increased 6.6% to $61.8 million in fiscal 2005 from $58.0 million in the prior year period due to increased costs associated with performing heavy maintenance and overhauls of landing gear for both fleets, which were partially offset by reductions in engine maintenance costs.

Aircraft rents decreased 4.1% to $75.2 million in fiscal 2005 from $78.5 in the prior year period due to the return of six Saab aircraft, the reduction of one RJ85 year-over-year and the temporary parking of five RJ85s that were returned to service in the first quarter of fiscal 2005.

Landing fees decreased 4.6% to $4.9 million in fiscal 2005 from $5.2 million in the prior year period due to the recognition of an airport landing fee refund and a reduction in Saab departures offset by increased rates. Northwest is responsible for landing fees for Mesaba’s RJ85 operations.

Insurance and taxes decreased 25.5% to $5.2 million in fiscal 2005 from $7.0 million in the prior year period due primarily to fewer insured aircraft and lower insurance rates.

Depreciation and amortization decreased 14.2% to $10.6 million in fiscal 2005 compared to $12.4 million in the prior year period due primarily to reduced capital spending over the last several years. The reduction is because fewer capital expenditures are required to maintain the fleet versus investing in the infrastructure to grow the fleet in previous years.

Administrative and other expenses decreased 0.1% to $41.5 million in fiscal 2005 compared to $41.6 million in the prior year period primarily due to reduced pilot training costs, third party Saab ground handling costs and legal fees, which was offset by increased consulting costs incurred to comply with the requirements of the Sarbanes-Oxley Act and costs associated with the growth of Mesaba’s ground handling business.

Big Sky

Big Sky’s operating statistics for the nine months ended December 31 were as follows:

	2004			2003
Passengers	65,712			83,687
Available seat miles (000s)	45,441			59,401
Revenue passenger miles (000s)	16,656			21,442
Load factor	36.7		%	36.1		%
Departures	14,928			18,423
Revenue per ASM	$	0.248		$	0.215
Cost per ASM	$	0.300		$	0.252
Aircraft in service (average)	8			10

Big Sky Operating Revenues Total operating revenues decreased 11.6% to $11.3 million in fiscal 2005 from $12.8 million in the prior year period due to a reduction in unprofitable flying.

Big Sky Operating Expenses Total operating expenses decreased 8.9% in fiscal 2005 to $13.6 million from $15.0 million in the prior year period due to a decrease in variable costs related to the reduction in operations, partially offset by increased fuel costs.

Consolidated

Nonoperating Income (Expense) Nonoperating income decreased to $1.7 million in fiscal 2005 from $3.8 million in the prior year period primarily due to the receipt of $2.6 million in fiscal 2004 related to government reimbursements of security costs under the Emergency Wartime Supplemental Appropriations Act, which was partially offset in fiscal 2005 by increased interest income, as a result of the investment of additional funds.

Provision for Income Taxes The Company’s effective tax rate was 33.0%, year to date, in fiscal 2005 as compared to 47.3% in fiscal 2004. During the first quarter of fiscal 2005, the Company received verification of a final settlement with the IRS concerning the IRS’ examination of the Company’s fiscal 1995 and 1996 income tax returns. As a result of this settlement, the Company reduced its income tax provision by $1.2 million in the first quarter of fiscal 2005. Without this one-time adjustment, the Company’s effective tax rate would have been 41.9%. The Company adjusts its effective tax rate quarterly based on forecasted operating results for the fiscal year. The rate is affected principally by the level of nondeductible expenses relative to projected taxable income.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and investments increased 4.9% to $167.7 million at December 31, 2004 from $159.9 million at March 31, 2004. The Company’s working capital increased to $108.7 million with a current ratio of 2.4 at December 31, 2004 compared to working capital of $99.7 million and a current ratio of 2.3 at March 31, 2004.

Investments consist principally of municipal securities and are classified as available-for-sale. Fair value of investments is determined based on quoted market prices. 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 with an original maturity date of less than 90 days as cash equivalents. Investments with an original maturity date of more than 90 days that mature within one year are classified as short-term investments and greater than one year as long-term investments.

Approximately $26.3 million or 85.0% of the Company’s accounts receivable balance as of December 31, 2004 was due from Northwest. Cancellation of the Airlink or Jet Agreements or Northwest’s failure to make timely payment of amounts owed to Mesaba or to otherwise materially perform under the Airlink or Jet Agreements for any reason would have a material adverse affect on Mesaba and the Company’s operations, financial position and cash flows.

As of December 31, 2004, Mesaba’s fleet consisted of 99 aircraft covered under operating leases with remaining terms of up to 12 years and aggregate monthly lease payments of approximately $8.6 million. Mesaba leases or subleases its Saab aircraft, either directly from aircraft leasing companies or through Pinnacle Airlines Corp. under operating leases with initial terms of up to seven years or through subleases with Northwest under operating leases with initial terms of up to 17 years. Mesaba leases its RJ85 aircraft from Northwest under operating leases with initial terms of up to 10 years. The Company believes that Mesaba’s revenues from the Airlink and Jet Agreements will continue to be sufficient to fund its aircraft lease obligations. If the Airlink Agreement terminates, then the Company’s obligation to continue to pay Saab aircraft leases will simultaneously terminate. Likewise, if the Jet Agreement terminates, then the Company’s obligation to continue to pay RJ85 aircraft leases will simultaneously terminate.

As of December 31, 2004, Big Sky’s fleet consisted of ten aircraft covered under operating leases with remaining terms of two months to 29 months and aggregate monthly lease payments of approximately $0.2 million. Big Sky leases all of its aircraft from leasing companies. Five of the leases allow Big Sky to return the aircraft to the lessor upon the occurrence of certain events and contain purchase options. Funding of the monthly minimum lease payments is dependent on continued passenger boardings, Big Sky’s operations and potentially, funding from the Company. At the request of the lessor, Big Sky agreed to terminate the lease for one Metro, which was sold in January 2005, leaving nine aircraft in Big Sky’s fleet.

In January 2005, Big Sky entered a letter of intent to lease 10 Beechcraft B1900D aircraft from Mesa Airlines, Inc., a wholly owned subsidiary of Mesa Air Group, Inc. Big Sky intends to begin flying the B1900D aircraft during March 2005. The Metro fleet will be removed from service during 2005. Big Sky will attempt to obtain early termination on the remaining Metro aircraft through subleases or sales.

The Company’s aircraft operating leases do not contain any guaranteed lease residual provisions for which there would be a potential contingency at the termination of the lease period.

The Company has historically relied on cash and cash equivalents, investments and internally generated funds to support its working capital requirements. Absent adverse factors outside the control of the Company, management believes current liquidity and funds from operations will be adequate resources for meeting current operations and non-aircraft capital needs through fiscal 2006.

Cash and cash equivalents increased 37.9% to $75.3 million at December 31, 2004 from $54.6 million at March 31, 2004. A summary of cash flow activity is as follows:

Operating Activities

Net cash provided by operations for the nine months ended December 31, 2004 was $16.2 million. The primary sources of cash were from operations, which generated $9.1 million of net income and $12.1 million of non-cash expenses, primarily depreciation and amortization. The primary use of cash was $5.1 million of net payments for current operating items.

Investing Activities

Net cash provided by investing for the nine months ended December 31, 2004 was $3.5 million. The sources of cash for investing activities were the net sales of short-term investment and operating activities. The primary uses of cash were the net purchases of short and long-term investments, including variable securities classified as cash equivalents and purchases of property, plant and equipment of $7.5 million.

Financing Activities

Net cash provided by financing for the nine months ended December 31, 2004 was $1.1 million. This was primarily due to the issuance of Company common stock upon the exercise of stock options for $1.2 million, which was offset by the repayment of debt for $0.1 million.

OUTLOOK

For the remainder of fiscal 2005, the Company estimates year-over-year ASMs at Mesaba will be up 15% in the fourth quarter. The projected increase year-over-year for the fourth fiscal quarter is due to Mesaba being shut down for two days in January 2004 during final pilot contract negotiations and five RJ85s temporarily removed from scheduled service.

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 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, included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended March 31, 2004, for additional discussion of these items.

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 or the remaining terms of the Airlink and Jet Agreements are used to record depreciation on aircraft property and equipment. Aircraft utilization, Airlink and Jet Agreement contractual lives, technology and changes in business strategy may affect the economic lives used to record depreciation by Mesaba or Big Sky. The foregoing may also affect 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 maintenance contracts and parts and labor costs for maintenance reserves.

Goodwill and Other Intangible Assets—The excess of the Big Sky purchase price over the fair market value of the net assets acquired was allocated to certain identifiable intangible assets, including Big Sky’s pilot labor contract and its air carrier

certificate and goodwill. Goodwill and other intangible assets are evaluated for impairment annually, at a minimum, or on an interim basis if events or circumstances indicate a possible inability to realize the carrying amounts. The evaluation includes future cash flow projections, strategic modeling and other management assumptions. During the fourth quarter of fiscal 2004, the Company completed its annual impairment test of goodwill and other intangible assets and determined that no impairment charge was necessary. The Company continues to monitor goodwill and the intangible assets at Big Sky for impairment, particularly in light of its recent operating performance.

Income Taxes—The Company’s effective tax rate is based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. In the event that there is a significant unusual or one-time item recognized, or expected to be recognized, in the Company’s operating results, the tax attributable to that item is separately calculated and recorded at the same time as the unusual or one-time item. Significant judgment is required in determining the Company’s effective tax rate and in evaluating its tax positions. The Company establishes income tax reserves if it believes that a position it has taken in a tax return may be subject to challenge. The Company adjusts these reserves in light of changing facts and circumstances, such as the closing of a tax audit. The effective tax rate includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as related interest. This rate is then applied to the Company’s quarterly operating results.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment”, which requires all public companies accounting for share-based payment transactions to account for these types of transactions using a fair-value-based method. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25. SFAS 123(R) also requires the tax benefits associated with these shared based payments be classified as financing activities in the statement of cash flows rather than operating activities as is currently permitted. SFAS 123(R) becomes effective for interim or annual periods beginning after June 15, 2005.

Certain Risk Factors Relating to the Company and the Airline Industry

The Company’s operations and financial results are subject to various risks and uncertainties, some of which are described below and in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004. The Company could also be adversely affected by additional risks and uncertainties not presently known or believed to be material.

Dependence on Relationship with Northwest

During the nine months ended December 31, 2004, 93.1% of the Company’s operating revenues were earned from Northwest. As a result, the Company’s business is sensitive to events and risks affecting Northwest. The Company’s business could be adversely affected by events such as a reorganization by Northwest through Chapter 11 bankruptcy proceedings, an inability by Northwest to reduce labor expenses and other costs, continued and unsustainable operating losses at Northwest, changes in Northwest’s business plan or model, employee strike or job actions, significant curtailment of service, continued volatility of fuel costs and terrorist events. Loss of the Company’s business relationship with Northwest or Northwest’s failure to make timely payment of amounts owed to the Company would have a material adverse effect on the Company’s operations, financial position and cash flows.

Terrorist Events

The terrorist attacks of September 11, 2001 materially affected and continue to affect the airline industry. Concerns about further terrorist attacks have had a negative impact on air travel demand. In addition, security procedures introduced at

airports since the attacks have increased the inconvenience of air travel, both in reality and in customer perception, leading to further reduction in demand.

Government Regulations

Airlines are subject to extensive regulatory and legal requirements that involve significant compliance costs that result in increased costs for passengers and the Company. Additional laws, regulations, taxes and airport rates and charges are proposed periodically. If adopted, these measures could have the effect of raising ticket prices, reducing revenue, increasing costs and reducing demand for air travel, any of which could have a material adverse effect on the Company’s business.

Effect of General Economic Conditions

Because a substantial portion of air travel, including business travel, is discretionary, the industry tends to experience adverse financial results during general economic downturns. Soft economic conditions continue to put pressure on the profitability of the industry. Any general decline in passenger traffic may harm the Company’s business.

Aircraft Accident

An accident involving Company aircraft could result in injuries and loss of life and the Company could experience significant claims from injured persons and surviving relatives. An accident could also result in substantial property damage, loss of aircraft from service and adverse publicity for the Company. Airlines are required by the DOT to carry liability insurance. Although the Company believes its liability insurance is in amounts and of the type generally consistent with industry practice, substantial claims resulting from an accident in excess of insurance coverage would harm business and financial results. Moreover, any aircraft accident, even if fully insured or not directly involving Mesaba or Big Sky, could cause a public perception that flying is less safe or reliable than other transportation alternatives, which could harm the Company’s financial condition and results of operations.

Failure to Successfully Expand Business

The Company’s strategy to expand and grow its business depends on many factors, some of which are beyond control of the Company. The Company cannot be certain that it will be able to successfully expand its business and the failure to do so could harm the Company’s financial condition and results of operations.

Collective Bargaining Agreements

Labor costs are a significant component of the Company’s expenses. Several of the Company’s employee groups have separate bargaining agreements and may make demands that would increase operating expenses, adversely affecting profitability. Further, if the Company were unable to reach agreement on the terms of any collective bargaining agreement or were to experience widespread employee dissatisfaction, there could be work slowdowns or stoppages. Mesaba is currently negotiating with the Aircraft Mechanics Fraternal Association for a new agreement. The existing agreement became amendable in August 2003. Mesaba is also currently negotiating with the Transportation Workers Union. The existing agreement will become amendable in May 2005.

Factors Beyond Company Control

The Company’s operations are subject to delays caused by factors beyond its control, including air traffic congestion at airports, adverse weather conditions and increased security measures. Delays frustrate passengers, reduce aircraft utilization and increase costs, all of which affect profitability and harm the Company’s financial condition and results of operations.

ITEM 3. 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’s investment policy requires purchasing investments in high credit quality issuers and limits the amount of credit exposure to any one issuer. The Company’s investments principally consist of municipal securities with varying maturity dates, all of which are two years or less. Because of the credit criteria within the Company’s investment policies, the primary market risk associated with these investments is interest rate risk. The Company does not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

During the fourth quarter of fiscal 2005, the Company determined that it had incorrectly accounted for certain aircraft leases that contained reduced rent obligations over a portion of the lease term. As a result, the Company has restated its condensed consolidated financial statements as of March 31, 2004 and for the three and nine months ended December 31, 2003 to record aircraft rents on a straight-line basis over the lease terms. The Company is presently evaluating and testing the Company’s internal controls over financial reporting. Based on the results of the evaluation and testing, the Company will implement corrective action to its internal control procedures where required to improve the effectiveness of internal controls. The Company intends to complete the process of testing and remediation by the end of fiscal year 2005. See Note 13 to the condensed consolidated financial statements included in this report.

As of the end of the period covered by this report, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. The Company’s management is working to identify and implement corrective actions where required to improve the effectiveness of the Company’s disclosure controls and procedures. Specifically, the Company is implementing the following measures:

• reviewing financial controls and procedures for accounting for leases;

• additional training of the Company’s legal and accounting staff on complex accounting matters, including the accounting for leases;

• modifying financial controls and procedures to ensure appropriate treatment of the accounting for leases at the inception of the lease.

Based in part on the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, December 31, 2004, the Company’s disclosure controls and procedures were not effective to ensure that the information that is required to be disclosed by the Company in reports that it files under the Exchange Act are recorded, processed, summarized and reported within the time period specified in the rules of the Securities and Exchange Commission.

Changes in Internal Controls Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, except as a result of the restatement discussed above, the Company has made and expects to continue to make improvements to the process for accounting for leases.

Part II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS

3A		Restated Articles of Incorporation. Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed August 27, 2003.
3C		Bylaws. Incorporated by reference to Exhibit 3.2 to the Form S-4, Registration No. 333-22977.
4A		Specimen certificate for shares of the Common Stock of the Company. Incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed August 27, 2003.
4B		Common Stock Purchase Warrant dated October 25, 1996 issued to Northwest Airlines, Inc. Incorporated by reference to Exhibit 4A to the Company’s 10-Q for the quarter ended September 30, 1996.
4C		Common Stock Purchase Warrant dated October 17, 1997 issued to Northwest Airlines, Inc. Incorporated by reference to Exhibit 4A to the Company’s 10-Q for the quarter ended September 30, 1997.
9A		Shareholder’s Agreement regarding election of representative of Northwest Aircraft Inc. to Board of Directors. Incorporated by reference to Exhibit 9A to Mesaba’s Registration Statement on Form S-1, Registration No. 33-820.
10A		FAA Air Carrier Operating Certificate. Incorporated by reference Exhibit 10A to Mesaba’s Form 10-K for the year ended March 31, 1989.

10B		CAB Part 298 Registration. Incorporated by reference to Exhibit 10G to Mesaba’s Form 10-K for the year ended March 31, 1987.
10C		Airline Services Agreement between Mesaba Aviation, Mesaba Holdings, Inc. and Northwest Airlines, Inc. dated July 1, 1997 (certain potions of this agreement are subject to an order granting confidential treatment pursuant to Rule 24b-2). Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q for the quarter ended September 30, 1997.
10D		Regional Jet Services Agreement between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc., dated October 25, 1996 (certain provisions of this agreement are subject to an order granting confidential treatment pursuant to Rule 24b-2). Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q for the quarter ended September 30, 1996.
10E		Foreign Air Carrier Operating Certificates issued May 6, 1991 by the Canadian Department of Transport. Incorporated by reference to Exhibit 10H to the Company’s Form 10-K for the year ended March 31, 1991.
10F		Special Facilities Lease dated as of August 1, 1990 between Charter County of Wayne, State of Michigan and Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10B to the Company’s Form 10-Q for the quarter ended September 30, 1990.
10G		Ground Lease dated August 1, 1990 between Charter County of Wayne, State of Michigan and Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10C to the Company’s Form 10-Q for the quarter ended September 30,1990.
10H		Letter Agreement dated December 24, 1992 relating to the repurchase of shares of Common Stock from Northwest Aircraft, Inc. Incorporated by reference to Exhibit 10EE to the Company’s Form 10-K for the year ended March 31, 1993.
10I		DOT Certificate of Public Convenience and Necessity dated October 26, 1992. Incorporated by reference to Exhibit 10FF of the Company’s Form 10-K for the year ended March 31, 1993.
10J		Stock Purchase Agreement between the Company and Carl R. Pohlad dated as of October 18, 1993. Incorporated by reference to Exhibit 10 of the Company’s Form 8-K dated October 19, 1993.
10K		Term Sheet Proposal for the Acquisition of Saab 340 Aircraft by Mesaba Aviation, Inc. dated March 7, 1996 (certain portions of this document have been deleted pursuant to an application for confidential treatment under Rule 24b-2). Incorporated by reference to Exhibit 10U to the Company’s Form 10-K/A for the year ended March 31, 1996.
10L		Letter Agreement regarding Saab 340B Plus Acquisition Financing dated March 7, 1996 (certain portions of this document have been deleted pursuant to an application for confidential treatment under Rule 24b-2). Incorporated by reference to Exhibit 10V to the Company’s Form 10-K/A for the year ended March 31, 1996.
10M		Letter Agreement of October 25, 1996 relating to Regional Jet Services Agreement between Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions of this document have been deleted pursuant to an application for confidential treatment under Rule 24b-2). Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q/A for the quarter ended September 30, 1996.
10N		Amendment No. 1 to Regional Jet Services Agreement dated April 1, 1998 between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions of this document have been deleted pursuant to an application for confidential treatment under rule 24b-2). Incorporated by reference to Exhibit 10A to the Company’s Form 10-Q for the quarter ended June 30, 1998.
10O		Amendment No. 2 to Regional Jet Services Agreement dated June 2, 1998 between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc. (certain portions of this document have been deleted pursuant to an application for confidential treatment under rule 24b-2). Incorporated by reference to Exhibit 10B to the Company’s Form 10-Q for the quarter ended June 30, 1998.
10P		Lease Agreement, dated as of July 1, 1999, between Kenton County Airport Board and Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10AA to the Company’s Form 10-K for the year ended March 31, 2000.
10Q		Ground Lease, dated as of September 1, 1999, between Kenton County Airport Board and Mesaba Aviation, Inc. Incorporated by reference to Exhibit 10BB to the Company’s Form 10-K for the year ended March 31, 2000.
10R		Letter Agreement, dated November 20, 2001, between Mesaba Holdings, Inc., Mesaba Aviation, Inc. and Northwest Airlines, Inc. relating to service expansion and rate reductions. Incorporated by reference to the Company’s Form 8-K filed November 23, 2001.
10S		Agreement and Plan of Merger among Mesaba Holdings, Inc. Ranger Acquisition Corp. and Big Sky Transportation Co. dated September 26, 2002. Incorporated by reference to the Company’s Form 8-K filed September 27, 2002.

Class		Outstanding as of January 31, 2005
Common Stock Par value $.01 per share		20,572,539

10T		Aircraft Hangar Facility Lease Agreement between Metropolitan Airports Commission Minneapolis - St. Paul and Mesaba Aviation, Inc. dated September 30, 2002. Incorporated by reference to Exhibit 10Y to the Company’s Form 10-Q filed August 14, 2003.
10U		Lease between Spectrum Investment Group, L.L.C. and Mesaba Aviation, Inc. entered into as of April 25, 2003. Incorporated by reference to Exhibit 10Z to the Company’s Form 10-Q filed August 14, 2003.
10V		Amendment to Regional Jet Services Agreement, dated October 7, 2003. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K/A filed October 9, 2003.
10W		Amendment to Regional Jet Services Agreement, dated December 15, 2003. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 15, 2003.
10X		Amendment to Regional Jet Services Agreement, dated February 2, 2004. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed February 3, 2004.
10Y		Management Compensation Agreement, executed October 21, 2004, by and between MAIR Holdings, Inc. and Paul F. Foley. Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed October 22, 2004.
21		Subsidiaries. Incorporated by reference to Exhibit 21 to the Company’s Form 10-Q for the quarter ended December 31, 2002.
31.1		Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
31.2		Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.

	MAIR Holdings, Inc.


Dated: February 14, 2005	By:	/s/ Robert E. Weil
	Robert E. Weil
	Vice President, Chief Financial Officer and Treasurer
	(principal financial officer and an authorized signatory)

31.1		Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

31.2		Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

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

Common Stock Par value $.01 per share

20,572,539