Pinnacle Airlines 10Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended June 30, 2009
	or
¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from__________ to__________

Commission File Number 001-31898

PINNACLE AIRLINES CORP.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	03-0376558 (I.R.S. Employer Identification No.)

1689 Nonconnah Blvd, Suite 111 Memphis, Tennessee (Address of principal executive offices)	38132 (Zip Code)

901-348-4100

(Registrant's telephone number, including area code)

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

Yes x

No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨

No ¨

Indicate by check mark whether the registrant is a larger accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer x

Non-accelerated filer ¨	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨

No x

As of August 1, 2009, 18,342,334 shares of common stock were outstanding.

Table of Contents

Part I. Financial Information

Item 1. Financial Statements

Condensed Consolidated Statements of Operations (Unaudited)************************	3

Condensed Consolidated Balance Sheets (Unaudited)********************************	5

Condensed Consolidated Statements of Cash Flows (Unaudited)***********************	6

Notes to Condensed Consolidated Financial Statements (Unaudited) *******************	7


Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition	21

Item 3. Quantitative and Qualitative Disclosures about Market Risk************************	37

Item 4. Controls and Procedures****************************************************	38

Part II. Other Information

Item 1. Legal Proceedings*********************************************************	38

Item 1A. Risk Factors************************************************************	38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds***********************	38

Item 3. Defaults Upon Senior Securities**********************************************	38

Item 4. Submission of Matters to a Vote of Security Holders*****************************	39

Item 5. Other Information*********************************************************	39

Item 6. Exhibits*****************************************************************	40

Part 1. Financial Information

Item 1. Financial Statements

Pinnacle Airlines Corp.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

	Three Months Ended June 30,
	2009			2008
				(Restated)
Operating revenues
Regional airline services	$	209,212		$	219,013
Other		2,051			2,141
Total operating revenues		211,263			221,154
Operating expenses
Salaries, wages and benefits		55,757			55,761
Aircraft rentals		30,094			32,507
Ground handling services		22,196			23,672
Aircraft maintenance, materials and repairs		24,800			23,775
Other rentals and landing fees		17,925			17,310
Aircraft fuel		5,254			14,899
Commissions and passenger related expense		5,227			7,430
Depreciation and amortization		8,782			6,609
Other		17,512			24,106
Impairment and aircraft retirement charges		1,533			12,619
Total operating expenses		189,080			218,688

Operating income		22,183			2,466

Operating income as a percentage of operating revenues		10.5	%		1.1	%
Nonoperating (expense) income
Interest income		759			1,724
Interest expense		(12,930	)		(11,241	)
Net investment loss		(334	)		(8,675	)
Miscellaneous (expense) income , net		(12	)		148
Total nonoperating expense		(12,517	)		(18,044	)
Income (loss) before income taxes		9,666			(15,578	)
Income tax (expense) benefit		(3,673	)		2,664
Net income (loss)	$	5,993		$	(12,914	)

Basic and diluted earnings (loss) per share	$	0.33		$	(0.72	)

Shares used in computing basic earnings (loss) per share		17,970			17,869
Shares used in computing diluted earnings (loss) per share		17,979			17,869

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

Pinnacle Airlines Corp.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except per share data)

	Six Months Ended June 30,
	2009			2008
				(Restated)
Operating revenues
Regional airline services	$	415,136		$	420,172
Other		3,949			5,323
Total operating revenues		419,085			425,495
Operating expenses
Salaries, wages and benefits		112,597			109,204
Aircraft rentals		60,586			66,028
Ground handling services		48,658			51,061
Aircraft maintenance, materials and repairs		49,489			45,649
Other rentals and landing fees		36,328			32,754
Aircraft fuel		9,771			26,772
Commissions and passenger related expense		10,054			14,255
Depreciation and amortization		17,363			10,980
Other		33,141			46,922
Impairment and aircraft retirement charges		1,980			12,619
Total operating expenses		379,967			416,244

Operating income		39,118			9,251

Operating income as a percentage of operating revenues		9.3	%		2.2	%
Nonoperating (expense) income
Interest income		1,665			4,038
Interest expense		(22,723	)		(18,437	)
Net investment loss		(289	)		(8,675	)
Miscellaneous income (expense), net		344			(26	)
Total nonoperating expense		(21,003	)		(23,100	)
Income (loss) before income taxes		18,115			(13,849	)
Income tax benefit		6,721			2,171
Net income (loss)	$	24,836		$	(11,678	)

Basic and diluted earnings (loss) per share	$	1.38		$	(0.65	)

Shares used in computing basic earnings (loss) per share		17,968			17,864
Shares used in computing diluted earnings (loss) per share		17,974			17,864

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

Pinnacle Airlines Corp.

Condensed Consolidated Balance Sheets

(in thousands, except share data)


	June 30, 2009			December 31, 2008
Assets	(Unaudited)			(Restated)
Current assets
Cash and cash equivalents	$	94,209		$	69,469
Restricted cash		4,758			5,417
Receivables, net		30,420			31,619
Spare parts and supplies, net		17,827			17,106
Prepaid expenses and other assets		6,136			8,160
Assets held for sale		1,020			2,786
Deferred income taxes, net of allowance		10,495			13,908
Income taxes receivable		33,708			31,117
Total current assets		198,573			179,582
Property and equipment
Flight equipment		754,831			721,499
Aircraft pre-delivery payments		10,022			5,721
Other property and equipment		46,480			46,218
Less accumulated depreciation		(69,381	)		(53,507	)
Net property and equipment		741,952			719,931

Investments		116,433			116,900
Deferred income taxes, net of allowance		588			40,847
Other assets		329,141			33,724
Debt issuance costs, net		3,409			3,711
Goodwill		18,422			18,422
Intangible assets, net		13,751			14,585
Total assets	$	1,422,269		$	1,127,702

Liabilities and stockholders’ equity
Current liabilities
Current maturities of long-term debt	$	33,878		$	32,116
Bank line of credit		-			8,275
Credit facility		85,767			-
Senior convertible notes		102,504			10,754
Pre-delivery payment facility		-			4,075
Accounts payable		25,579			30,431
Deferred revenue		24,363			23,851
Accrued expenses and other current liabilities		54,513			74,669
Total current liabilities		326,604			184,171

Senior convertible notes		-			97,683
Noncurrent pre-delivery payment facility		4,910			-
Long-term debt, less current maturities		513,741			502,741
Credit facility		-			90,000
Deferred revenue, net of current portion		185,349			192,191
Other liabilities		303,597			5,182

Commitments and contingencies

Stockholders’ equity
Common stock, $0.01 par value; 40,000,000 shares authorized; 22,792,426 and 22,514,782 shares issued, respectively		228			225
Treasury stock, at cost, 4,450,092 shares		(68,152	)		(68,152	)
Additional paid-in capital		120,803			119,610
Accumulated other comprehensive loss		(10,870	)		(17,172	)
Retained earnings		46,059			21,223
Total stockholders’ equity		88,068			55,734
Total liabilities and stockholders’ equity	$	1,422,269		$	1,127,702

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

Pinnacle Airlines Corp.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

	Six Months Ended June 30,
	2009			2008
Operating activities				(Restated)

Net income (loss)	$	24,836		$	(11,678	)
Adjustments to reconcile net income to cash provided by operating activities:
Impairment charges		-			10,557
Depreciation and amortization		20,260			12,232
Loss on ineffective portion of derivative		1,424			-
Net investment loss		334			8,675
Interest accretion, net		3,948			4,696
Gain on debt extinguishment		(1,861	)		-
Excess of insurance proceeds over cost basis of aircraft		(842	)		-
Deferred income taxes		42,255			5,538
Recognition of deferred revenue		(11,600	)		(12,500	)
Other		4,921			4,901
Changes in operating assets and liabilities:
Restricted cash		659			379
Receivables		1,200			(3,576	)
Prepaid expenses and other assets		(588	)		(1,074	)
Insurance proceeds		2,350			1,606
Hedge related payments		-			(20,463	)
Spare parts and supplies		(1,898	)		(4,769	)
Income taxes receivable		(2,591	)		(11,149	)
Accounts payable and accrued expenses		(5,969	)		12,924
Change in unrecognized tax benefits and related interest		(19,356	)		-
Increase in deferred revenue		5,270			2,742
Cash provided by (used in) operating activities		62,752			(959	)
Investing activities
Purchases of property and equipment		(5,498	)		(19,505	)
Insurance proceeds related to property and equipment		3,576			-
Proceeds from sales of property and equipment		-			142
Purchases of auction rate securities		-			(82,200	)
Proceeds from auction rate securities redemptions and sales		5,650			132,950
Cash provided by investing activities		3,728			31,387
Financing activities
Proceeds from debt		526			91,810
Payments on debt, bank line of credit, credit facility and pre-delivery payment facility		(41,352	)		(61,462	)
Purchase of Series A Preferred Share		-			(20,000	)
Other financing activities		(914	)		(2,333	)
Cash (used in) provided by financing activities		(41,740	)		8,015
Net increase in cash and cash equivalents		24,740			38,443
Cash and cash equivalents at beginning of period		69,469			26,785
Cash and cash equivalents at end of period	$	94,209		$	65,228
Noncash investing and financing activities
Property and equipment acquired through the issuance of debt	$	48,477		$	331,345
Debt retired with insurance proceeds		15,424			-
Unrealized gain on auction rate securities		(4,598	)		-

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

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INDEX

1. Description of Business and Basis of Presentation

Pinnacle Airlines Corp. and its wholly owned subsidiaries, Pinnacle Airlines, Inc. and Colgan Air, Inc., are collectively referred to in this report as the “Company,” except as otherwise noted. The Company’s subsidiaries will be referred to as “Pinnacle” for Pinnacle Airlines, Inc. and “Colgan” for Colgan Air, Inc.

Pinnacle operates an all-regional jet fleet providing regional airline capacity to Delta Air Lines, Inc. and its subsidiaries (“Delta”) at its hub airports in Atlanta, Detroit, Memphis, and Minneapolis/St. Paul. At June 30, 2009, Pinnacle operated 124 Canadair Regional Jet (“CRJ”)-200 aircraft under Delta brands with approximately 695 daily departures to 116 cities in 34 states, the District of Columbia and four Canadian provinces. Pinnacle also operated a fleet of 16 CRJ-900 aircraft as a Delta Connection carrier with approximately 91 daily departures to 34 cities in 17 states, the District of Columbia, Belize, Mexico, Turks and Caicos Islands, and the U.S. Virgin Islands.

Colgan operates an all-turboprop fleet under a regional airline capacity purchase agreement with Continental Airlines, Inc. (“Continental”), and also under revenue pro-rate agreements with Continental, United Air Lines, Inc. (“United”) and US Airways Group, Inc. (“US Airways”). As of June 30, 2009, Colgan operated a fleet of 14 Q400 aircraft under a capacity purchase agreement with Continental, providing 90 daily departures to 17 cities in 11 states, the District of Columbia and two Canadian provinces. Colgan also operated 34 Saab aircraft under its pro-rate operations with approximately 234 daily departures to 43 destinations in ten states and the District of Columbia.

These interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the Company's financial position, the results of its operations and its cash flows for the periods indicated. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.

All amounts contained in the notes to the condensed consolidated financial statements are presented in thousands, with the exception of years, per share amounts and number of aircraft. Certain reclassifications have been made to conform prior year financial information to the current period presentation. In addition, certain prior period amounts have been restated to conform with the provisions of the newly adopted Financial Accounting Standards Board Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1”). See Note 4 for further discussion of FSP APB 14-1.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

1. Description of Business and Basis of Presentation (continued)

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 established standards for accounting for and disclosing subsequent events (events that occur after the balance sheet date, but before financial statements are issued or are available to be issued). SFAS 165 requires an entity to disclose the date subsequent events were evaluated and whether that evaluation took place on the date financial statements were issued or were available to be issued. This standard is effective for interim and annual periods ending after June 15, 2009. The adoption of SFAS 165 did not have a material impact on the Company’s statement of operations or balance sheet. For the three months ended June 30, 2009, the Company has considered subsequent events through August 7, 2009, which is the date its Condensed Consolidated Financial Statements were filed with the Securities and Exchange Commission on Form 10-Q.

2. Liquidity Discussion

As discussed in greater detail in Note 4, the Company has outstanding $109,000 of its 3.25% senior convertible notes (“the Notes”) with a final maturity date in February 2025. However, the holders of the outstanding Notes may contractually tender them to the Company on February 15, 2010 (the “Put Date”) for a cash payment equal to the $109,000 par amount. The Company has undertaken several initiatives to increase its cash resources by the Put Date.

On July 30, 2009, the Company completed a $25,000, three-year term loan financing secured by its pool of spare rotable and expendable aircraft parts (the “Spare Parts Loan”). The Spare Parts Loan includes a financial covenant to maintain certain liquidity levels at the end of each month and at specified times preceding the maturity date or call date of certain other indebtedness. See Note 4 for further discussion of the Spare Parts Loan.

In addition, the Company owns $128,050 par amount of auction rate securities (“ARS”). Due to unprecedented events in the credit markets during 2008, these investments became illiquid and suffered a decline in fair value. In reaction to the failure of the ARS market, the bank that structured and sold the Company the portfolio of ARS provided a $90,000 short-term credit facility (the “Credit Facility”), of which $85,767 was outstanding and available for borrowing at June 30, 2009. The Credit Facility currently expires in January 2010 and is collateralized by the Company’s ARS portfolio. The Company is in discussions with this bank to settle this matter through a sale of the Company’s ARS to the bank at a discount to par. The Company expects that this settlement could result in additional cash proceeds after repayment of the related Credit Facility, but the amount and timing of this settlement is still subject to final negotiation.

At June 30, 2009, the Company had $94,209 of unrestricted cash and cash equivalents. The Spare Parts Loan and the potential to obtain additional capital associated with its ARS portfolio will greatly enhance the Company’s efforts to increase its cash balance prior to the Put Date for the Notes. However, the Company also has general working capital requirements for its operations, and must also meet the minimum liquidity covenants contained in the Spare Parts Loan. Although management believes it will be able to meet these requirements if the Company successfully completes a settlement related to its ARS, no assurance can be given that the Company will complete a settlement, or that the combined resources (inclusive of a settlement) of the Company will be sufficient to meet its obligation related to the Notes, its working capital requirements, and its minimum liquidity covenants. For additional information regarding the Company’s liquidity, please refer to Management’s Discussion and Analysis included in Item 2 of this Form 10-Q.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

3. Code-Share Agreements with Partners

The Company’s operating contracts fall under two categories: capacity purchase agreements and revenue pro-rate agreements. The following is a summary of the percentage of regional airline services revenue attributable to each contract type and code-share partner for the three and six months ended June 30, 2009.

	Three Months Ended June 30, 2009
	Percentage of Regional Airline Services Revenue
Source of Revenue	Capacity Purchase Agreements	Pro-Rate Agreements	Total
Delta	73%	-	73%
Continental	8%	7%	15%
US Airways	-	4%	4%
United	-	6%	6%
Essential Air Service	-	2%	2%
Total	81%	19%	100%

	Six Months Ended June 30, 2009
	Percentage of Regional Airline Services Revenue
Source of Revenue	Capacity Purchase Agreements	Pro-Rate Agreements	Total
Delta	74%	-	74%
Continental	8%	7%	15%
US Airways	-	4%	4%
United	-	5%	5%
Essential Air Service	-	2%	2%
Total	82%	18%	100%

Recent Developments

In January 2009, the Company amended its capacity purchase agreement with Continental to operate an additional 15 Q400 aircraft, beginning in September 2010. These additional aircraft have scheduled delivery dates from August 2010 through April 2011.

4. Borrowings

Senior Convertible Notes

In February 2005, the Company completed the private placement of $121,000 principal amount of 3.25% senior convertible notes due February 15, 2025 (the "Notes"), of which $109,000 par amount remains outstanding as of June 30, 2009. If certain conditions are met, the Notes are convertible into a combination of cash and common stock equivalent to the value of 75.6475 shares of the Company’s common stock per $1 par amount of Notes, or a conversion price of $13.22 per share.

Beginning on February 15, 2010 the Company may redeem the Notes for cash, in whole or in part at any time or from time to time. The Company will give not less than 30 days’ or more than 60 days’ notice of redemption by mail to holders of the Notes. If the Company elects to redeem the Notes, it will pay a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to the redemption date. The holders of the Notes may require the Company to purchase all or a portion of their Notes for cash on February 15, 2010, February 15, 2015 and February 15, 2020 at a purchase price equal to 100% of their principal amount plus accrued and unpaid interest, if any. As a result, the entire obligation is shown as a current liability in the Company’s condensed consolidated balance sheet as of June 30, 2009.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

4. Borrowings (continued)

New Accounting Standard

In May 2008, the FASB affirmed Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP APB 14-1"), which became effective for and was adopted by the Company beginning January 1, 2009. FSP APB 14-1 changes the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. FSP APB 14-1 requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner that reflects the issuer's nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized. FSP APB 14-1 requires bifurcation of the value of the convertible instrument upon its issuance into the component that represented debt and the component that represented the imbedded equity option. The value of the imbedded equity option is reclassified to additional paid-in capital. The resulting discount on the par amount of the debt is recognized as interest expense in the Company’s consolidated statement of operations over the expected term of the debt.

FSP APB 14-1 requires retrospective application to the terms of instruments as they existed for all periods presented. The cumulative effect of the changes in accounting principle on periods prior to those presented is recognized as of the beginning of the first period presented with an offsetting adjustment made to the opening balance of retained earnings for that period. As a result, the Company recorded a net $12,565 reduction to the January 1, 2008 balance of retained earnings to apply the provisions of FSP APB 14-1 from the February 15, 2005 issuance date of the Notes.

The Company estimated the fair value of the Notes as of the date of issuance. The difference between the fair value and the principal amounts of the Notes was $44,046. This amount was retrospectively applied to the Company’s financial statements from the issuance date, and was retrospectively recorded as a debt discount and as an increase to additional paid-in capital, net of tax. The discount is being amortized over the expected five-year life of the Notes resulting in an increase to interest expense in historical and future periods. The following reconciles the Company’s consolidated statements of operations for the three and six months ended June 30, 2008 and its condensed consolidated balance sheet as of December 31, 2008, as originally reported to the restated statements contained in these financial statements.

	Three Months Ended June 30, 2008
	As Reported	Adjustments	Restated
Operating income	$ 2,466	$ -	$ 2,466

Nonoperating (expense) income
Interest income	1,724	-	1,724
Interest expense	(8,816)	(2,425)	(11,241)
Net investment loss	(8,675)	-	(8,675)
Miscellaneous income	148	-	148
Total nonoperating expense	(15,619)	(2,425)	(18,044)
Loss before income taxes	(13,153)	(2,425)	(15,578)
Income tax benefit	1,702	962	2,664
Net loss	$ (11,451)	$ (1,463)	$ (12,914)

Basic and diluted loss per share	$ (0.64)	$ (0.08)	$ (0.72)

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

4. Borrowings (continued)

	Six Months Ended June 30, 2008
	As Reported	Adjustments	Restated
Operating income	$ 9,251	$ -	$ 9,251

Nonoperating (expense) income
Interest income	4,038	-	4,038
Interest expense	(13,663)	(4,774)	(18,437)
Net investment loss	(8,675)	-	(8,675)
Miscellaneous expense	(26)	-	(26)
Total nonoperating expense	(18,326)	(4,774)	(23,100)
Loss before income taxes	(9,075)	(4,774)	(13,849)
Income tax benefit	277	1,894	2,171
Net loss	$ (8,798)	$ (2,880)	$ (11,678)

Basic and diluted loss per share	$ (0.49)	$ (0.16)	$ (0.65)

	As of December 31, 2008
	As Reported	Adjustments	Restated
Current deferred tax asset	$ 14,338	$ (430)	$ 13,908
Total current assets	180,012	(430)	179,582

Net property and equipment	717,971	1,959	719,930
Noncurrent deferred tax asset	45,004	(4,157)	40,847
Debt issuance costs, net	6,505	(2,794)	3,711
Total assets	1,133,122	(5,420)	1,127,702

Senior convertible notes	121,000	(12,563)	108,437

Additional paid-in capital	93,812	25,798	119,610
Retained earnings	39,878	(18,655)	21,223
Total liabilities and stockholders’ equity	$ 1,133,122	$ (5,420)	$ �� 1,127,702

In January 2009, the Company repurchased $12,000 par value of the Notes for $8,870 plus accrued and unpaid interest. The book value of that portion of the Notes at the time of the repurchase was $10,801. As a result, the Company recorded a gain on debt extinguishment of $1,931 during the three months ended March 31, 2009.

As a result of the adoption of FSP APB 14-1, interest expense increased by $2,545 and $5,059 for the three and six months ended June 30, 2009. Income before income taxes, net income and EPS decreased by $2,545, $1,539, and $0.09, respectively, for the three months ended June 30, 2009, and by $5,058, $3,058, and $0.17, respectively, for the six months ended June 30, 2009.

The unamortized discount of the liability component was $6,496 and $12,563 at June 30, 2009 and December 31, 2008, respectively. This discount will be amortized through February 15, 2010. The fair value of the Notes as of June 30, 2009 and December 31, 2008 was $90,470 and $80,465, respectively.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

4. Borrowings (continued)

The following table provides additional information about the Company’s Notes:

	Three Months Ended June 30,		Six Months Ended June 30,
	2009	2008	2009	2008
Effective interest rate on liability component	13.5%	13.5%	13.5%	13.5%
Interest cost recognized as amortization of the discount of liability component	2,449	2,386	4,867	4,696
Cash interest cost recognized (coupon interest)	886	983	1,778	1,966

Credit Facility

In March 2008, the Company entered into a revolving term loan (the “Credit Facility”) with Citigroup Global Markets, Inc. (“Citigroup”). The Credit Facility provided for advances up to $60,000 and is collateralized by the Company’s ARS portfolio. The Company amended the Credit Facility in June 2008, with the primary purpose of increasing the eligible amount for borrowing from $60,000 to $80,000, and again in November 2008 to increase the eligible amount for borrowing from $80,000 to $90,000. The agreement allowed up to $80,000 of the proceeds to be used to support the Company’s aircraft purchases and for general working capital purposes. The remaining $10,000, of which $5,767 was outstanding and available at June 30, 2009, was restricted for use to retire other outstanding debt, which the Company used to repurchase $12,000 par value of the Notes in January 2009 and to repay a portion of its pre-delivery deposit financing facility as aircraft delivered in December.

The Credit Facility is pre-payable at any time prior to maturity in January 2010. The first $80,000 of the Credit Facility carries an interest rate indexed to LIBOR, which was 2.3% as of June 30, 2009. The additional $5,767 carries an interest rate that is indexed to the Federal Funds Rate and was 2.7% at June 30, 2009. As of June 30, 2009 and December 31, 2008, the balance outstanding was $85,767 and $90,000, respectively. During the three months ended June 30, 2009, the Company made payments of $4,233 on the Credit Facility as a result of ARS redemptions received during the quarter. The Credit Facility includes both covenant and margin requirements, including a loan-to-par value ratio, a loan-to-fair value ratio, and a net worth test. Additionally, the Credit Facility includes a cross-default provision related to other indebtedness of the Company in excess of $5,000. The Company is in compliance with these covenants.

Line of Credit

The Company maintained a revolving line of credit with an institutional lender for a principal amount not to exceed $8,500 or 75% of the net unpaid balance of Colgan’s eligible accounts receivable. Amounts outstanding under this line of credit were $4,940 at December 31, 2008. This instrument had an interest rate of Prime plus 0.25%, which was 3.50% as of December 31, 2008. The line of credit expired on April 15, 2009, and the outstanding balance was paid in full. There were no amounts outstanding under the line of credit at June 30, 2009.

Long-Term Notes Payable

Included in long-term notes payable are borrowings from Export Development Canada (“EDC”) for owned aircraft. The borrowings are collateralized by the Company’s fleet of CRJ-900 and Q400 aircraft and bear interest rates ranging between 3.5% and 8.6% (inclusive of associated interest rate hedging activities) with maturities through the fourth quarter of 2023. Amounts outstanding were $527,304 and $512,575 June 30, 2009 and December 31, 2008. The fair value of the Company’s long-term notes payable as of June 30, 2009 and December 31, 2008 was $447,383 and $435,949, respectively. These estimates were based on either market prices or the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar liabilities.

As discussed in Note 11, one of the Company’s Q400 aircraft was destroyed in an accident on February 12, 2009. The insurance proceeds were used to retire the related debt of approximately $15,400 during the three months ended March 31, 2009.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

4. Borrowings (continued)

As previously discussed, on January 13, 2009, the Company amended its Continental CPA to operate an additional 15 Q400 aircraft beginning in September 2010. The aircraft have scheduled delivery dates from August 2010 through April 2011. In connection with this amendment, the Company executed a new pre-delivery payment financing facility with EDC for up to $35,600 on substantially similar terms to its other pre-delivery payment facilities. This instrument has an interest rate indexed to LIBOR, which was 4.13% as of June 30, 2009. Amounts outstanding under this facility were $4,910 at June 30, 2009 and December 31, 2008, and were classified as long-term.

Subsequent Event

On July 30, 2009, the Company completed a $25,000, three-year term loan financing with C.I.T. Leasing and funded by CIT Bank (the “Spare Parts Loan”). The Spare Parts Loan is secured by the Company’s pool of spare repairable, rotable and expendable parts and certain aircraft engines. The interest rate for the Spare Parts Loan is a variable rate, which for the first interest period is indexed to LIBOR and is 8.5%. The Spare Parts Loan requires that the Company maintain a minimum liquidity level at the end of every month and at specified times preceding the maturity date or call date of certain other indebtedness. The Spare Parts Loan also has standard provisions relating to the Company’s obligation to timely repay the indebtedness and maintenance of the collateral base relative to the outstanding principal amount of the borrowing. The proceeds of the Spare Parts Loan will be used by the Company to: (i) refinance the Notes by either purchasing such Notes in the open market or repaying such Notes should the holders of the Notes tender them to the Company on the Put Date; (ii) repay other Company indebtedness to the extent the Put Date is extended beyond the Spare Parts Loan’s maturity date; or (iii) purchase inventory and replacement spare parts.

5. Derivatives

As of June 30, 2009 and December 31, 2008, the Company had no outstanding interest rate derivatives. The tables below present the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the three and six months ended June 30, 2009:

Three Months Ended June 30,	Amount of Loss Reclassified from OCI into Income (Effective Portion) (2)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
2009	$ (782)	$ -
2008	$ (587)	$ -

Six Months Ended June 30,	Amount of Loss Reclassified from OCI into Income (Effective Portion) (2)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
2009	$ (1,598)	$ (1,424)(1)
2008	$ (784)	$ -

(1)	This charge is related to the debt that financed the Q400 aircraft that was destroyed in an accident during the three months ended March 31, 2009. The associated debt was repaid during the first quarter of 2009. This loss is included in miscellaneous nonoperating expense in the Company’s condensed consolidated statement of operations for the six months ended June 30, 2009.
(2)	Derivatives classified as cash flow hedges include interest rate swaps. Amounts reclassified from OCI into income are recorded in interest expense within the Company’s condensed consolidated statements of operations.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

5. Derivatives (continued)

The losses from settled interest rates swaps recorded in other comprehensive income (“OCI”), net of tax and amortization, within the condensed consolidated balance sheets were $15,841 and $17,752 as of June 30, 2009 and December 31, 2008, respectively. Included in the above total net realized losses from interest rate swaps as of June 30, 2009, are $3,042 in net unrealized losses that are expected to be amortized into earnings during the 12 months following June 30, 2009.

6. Comprehensive Income (Loss)

The components of comprehensive income (loss), net of related taxes, for the three and six months ended June 30, 2009 and 2008 are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
				(Restated)						(Restated)

Net income (loss)	$	5,993		$	(12,914	)	$	24,836		$	(11,678	)
Adjustments:
Retired Pilots’ Insurance Benefit Plan unrealized actuarial gain, net of tax of $4 and $8 in 2009 and $27 and $31 in 2008		(5	)		(47	)		(12	)		(53	)
Change in cash flow hedge unrealized loss, net of tax of $262 and $1,042 in 2009 and $2,903 and $3,799 in 2008		468			4,448			1,910			(5,820	)
Unrealized gain on investments, net of tax of $194 in 2009 and $3,953 and $0 in 2008		4,404			6,002			4,404			-
Total comprehensive income (loss)	$	10,860		$	(2,511	)	$	31,138		$	(17,551	)

7. Earnings (Loss) Per Share

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
			(Restated)					(Restated)

Net income (loss)	$	5,993	$	(12,914	)	$	24,836	$	(11,678	)
Basic earnings (loss) per share	$	0.33	$	(0.72	)	$	1.38	$	(0.65	)
Diluted earnings (loss) per share	$	0.33	$	(0.72	)	$	1.38	$	(0.65	)

Share computation:
Weighted average number of shares outstanding for basic earnings per share		17,970		17,869			17,968		17,864
Senior convertible notes		-		-			-		-
Share-based compensation (1)		9		-			6		-
Weighted average number of shares outstanding for diluted earnings per share		17,979		17,869			17,974		17,864

(1)

During the three months ended June 30, 2009 and 2008 options to acquire 1,725 and 919 shares, respectively, were excluded from the computation of diluted EPS as their impact was anti-dilutive. During the six months ended June 30, 2009 and 2008 options to acquire 1,678 and 927 shares, respectively, were excluded from the computation of diluted EPS as their impact was anti-dilutive.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

8. Share-Based Compensation

In January 2009, the Company granted 626 stock options with an exercise price of $2.65 per share to members of its Board of Directors, its officers and certain other employees. These grants will vest ratably over three years. Total expense to be recognized over the vesting period, net of expected annual forfeitures of 4%, is $834. The following table presents the assumptions used and fair value for the 2009 equity grant:

			2009
Expected price volatility			58.3%
Risk-free interest rate			1.4%
Expected lives (years)			5.0
Dividend yield			0.0%
Expected annual forfeiture rate			4.0%
Exercise price of option grants			$ 2.65
Fair value of option grants			$ 1.33

In January 2009, the Company awarded 278 shares of restricted stock to certain officers and members of the Board of Directors. Using the straight-line method, the fair value of $738 is being expensed ratably over the three-year vesting period. The grant date fair value of these shares was $2.65 per share, which was the closing stock price on the date of grant.

During the three and six months ended June 30, 2009, the Company recognized $584 and $1,362, respectively, of share-based compensation expense, and $616 and $1,373, respectively, for the same periods of the prior year.

The following table provides certain information with respect to the Company’s stock options:

	Stock Options
	Shares	Weighted Average Exercise Price	Weighted Average Remaining Life	Aggregate Intrinsic Value
Outstanding at January 1, 2009	1,106	$ 13.09
Granted	626	2.65
Exercised	-	-
Expired	(5)	11.59
Forfeited	(8)	7.02
Outstanding at June 30, 2009	1,719	$ 9.32	7.4 years	$ -
Options exercisable at June 30, 2009	860	$ 12.57	5.8 years	$ -

The following table provides certain information with respect to the Company’s restricted stock:

	Restricted Stock
	Shares	Fair Value
Unvested at January 1, 2009	197	$ 2,599
Granted	278	738
Vested	(102)	(1,186)
Forfeited	-	-
Unvested at June 30, 2009	373	$ 2,151

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

9. Income Taxes

During the three months ended March 31, 2009, the Company reached agreement with the Internal Revenue Service (the “Service”) to resolve certain matters related to the Service’s examination of the Company’s federal income tax returns for calendar years 2003, 2004 and 2005. Previously, the Service had proposed a number of adjustments to the Company’s returns totaling approximately $35,000 of additional tax, plus accrued interest and penalties on these proposed adjustments.

The Company and the Service have agreed for the Company to pay approximately $3,000 of additional income tax and accrued interest in settlement of all open tax matters for these years. With this agreement, the Service has completed its examination of the Company’s federal tax filings for 2003, 2004 and 2005. The Company paid the settlement amount during the three months ended June 30, 2009. As a result of the completion of this examination, the Company recorded during the three months ended March 31, 2009 a reduction to income tax expense of $13,551 and a pre-tax reduction to interest expense of $2,926.

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

	Three Months Ended June 30,
	2009						2008 (Restated)
	Dollars			Percent			Dollars			Percent
Income tax (expense) benefit at statutory rate	$	(3,383	)		(35.0	)%	$	5,452			(35.0	)%
State income taxes, net of federal taxes		(181	)		(1.9	)%		314			(2.0	)%
Settlements		(105	)		(1.1	)%		-			-
Tax-exempt income		70			0.7	%		1,051			(6.7	)%
Meals and entertainment		(91	)		(0.9	)%		(315	)		2.0	%
Valuation allowance		74			0.8	%		(3,036	)		19.5	%
Other		(57	)		(0.6	)%		(802	)		5.1	%
Income tax (expense) benefit	$	(3,673	)		(38.0	)%	$	2,664			(17.1	)%

	Six Months Ended June 30,
	2009						2008 (Restated)
	Dollars			Percent			Dollars			Percent
Income tax (expense) benefit at statutory rate	$	(6,340	)		(35.0	)%	$	4,847			(35.0	)%
State income taxes, net of federal taxes		(282	)		(1.5	)%		359			(2.6	)%
Settlements		13,401			74.0	%		-			-
Tax-exempt income		219			1.2	%		1,250			(9.0	)%
Meals and entertainment		(246	)		(1.4	)%		(377	)		2.7	%
Valuation allowance		129			0.7	%		(3,036	)		21.9	%
Other		(160	)		(0.9	)%		(872	)		6.3	%
Income tax benefit	$	6,721			37.1	%	$	2,171			(15.7	)%

The Company provides for interest and penalties accrued related to unrecognized tax benefits in nonoperating expenses. As of June 30, 2009 and December 31, 2008, the Company had $306 and $3,692 of accrued interest and penalties, respectively.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

9. Income Taxes (continued)

The following table reconciles the Company’s beginning and ending unrecognized tax benefits balances:

	2009
Unrecognized tax benefits balance at January 1	$ 16,518
Increases/(decreases) for prior period positions	(1,525)
Increases/(decreases) for current period positions	-
Settlements	(14,446)
Lapses of statutes	-
Unrecognized tax benefits balance at June 30	$ 547

The amount of unrecognized tax benefits that would affect the Company’s effective tax rate if recognized was $547 as of June 30, 2009.

10. Investments and Fair Value Measurements

The Company invests excess cash balances primarily in short-term money market instruments. Investments in marketable securities are classified as available-for-sale and presented at their estimated fair values based on quoted market prices for those securities, in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Effective June 30, 2009, the Company adopted FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP FAS 115-2”). The adoption of FSP FAS 115-2 had no material effect on the Company’s financial statements.

At June 30, 2009, the Company’s investment portfolio included ARS with fair values of $116,433, net of recognized losses of $11,617. The majority of ARS are issued by U.S. states and political subdivisions of the states and typically have contractual maturities of more then ten years. Due to their current illiquid state and management’s intent to hold the investments until their fair values recover, the Company classified investments in ARS as noncurrent assets on the Company’s consolidated balance sheet at June 30, 2009. All income generated from these securities is earned from interest and dividends.

Fair Value Measurements

The Company’s borrowings and ARS holdings are required to be measured at fair value on a recurring basis, in accordance with SFAS No. 157, Fair Value Measurements (“SFAS 157”). The Company adopted the majority of the provisions of SFAS 157 on January 1, 2008 and fully adopted the standard on January 1, 2009. Effective June 30, 2009, the Company adopted FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”). The adoption of FSP FAS 157-4 had no material effect on the Company’s financial statements.

Due to events in the credit markets that predominantly began during the first quarter of 2008, there is no longer an active trading market for the Company’s ARS holdings. Therefore, the fair values of these ARS are estimated utilizing a discounted cash flow model. This model considers, among other items, the collateralization underlying the investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and an estimate of when the security is expected to have a successful auction or be called by the issuer. These securities were also compared, when possible, to other observable market data with similar characteristics to the securities held by the Company. Accordingly, since the Company’s initial adoption of SFAS 157 at January 1, 2008, these securities changed from Level 1 to Level 3 within SFAS 157’s hierarchy.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

10. Investments and Fair Value Measurements (continued)

The tables below present the Company’s assets and liabilities measured at fair value as of June 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

	Level 1	Level 2	Level 3	Balance at June 30, 2009
Assets
Investments in ARS	$ -	$ -	$ 116,433	$ 116,433

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

	Asset
	Auction Rate Securities
	Six Months Ended June 30,
	2009			2008
Balance at beginning of period	$	116,900		$	-
Transfers to Level 3		-			136,100
Total unrealized gains (losses)
Included in nonoperating expense		-			-
Included in other comprehensive income (“OCI”)		-			(9,955	)
Realized gains on redemptions, included in nonoperating expense(1)		44			-
Interest accretion		438			-
Redemptions (2)		(2,700	)		-
Balance at March 31	$	114,682		$	126,145

Transfers to Level 3		-			-
Total unrealized gains (losses)
Included in nonoperating expense		(966	)		(8,675	)
Included in OCI		4,598			9,955
Realized gains on redemptions, included in nonoperating expense(1)		632			-
Interest accretion		437			-
Redemptions (2)		(2,950	)		-
Balance at June 30	$	116,433		$	127,425

(1) The Company determines the cost basis for ARS redemptions using the specific identification method.
(2) Partial redemption of securities at par by the issuer.

Effective June 30, 2009, the Company adopted FASB Staff Position No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1”). FSP FAS 107-1 extends the disclosure requirements of Statement of Financial Accounting Standard No. 107, Disclosures about Fair Value of Financial Instruments, to interim financial statements. The adoption of FSP FAS 107-1 affects disclosures only and had no effect on the Company’s statement of operations, balance sheet, or statement of cash flows. The carrying amounts and estimated fair values of the Company’s borrowings, which are discussed in detail in Note 4, as of June 30, 2009 were as follows:

	Carrying Amount	Estimated Fair Value
Senior convertible notes	$ 102,504	$ 90,470
Credit facility	85,767	85,767
Pre-delivery payment financing facilities	4,910	4,910
Long-term notes payable, primarily related to owned aircraft	547,619	447,383

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

11. Commitments and Contingencies

Employees. The Company operates under several collective bargaining agreements with groups of its employees. Pinnacle has been involved in active negotiations with the Air Line Pilots Association (“ALPA”) since April 2005, when the collective bargaining agreement between the two parties became amendable. On August 4, 2009, Pinnacle and ALPA reached a tentative agreement to amend the collective bargaining agreement. The terms of the tentative agreement must be ratified by Pinnacle’s pilots before it becomes final. If ratified, the tentative agreement will: i) increase compensation for Pinnacle’s pilots to the industry average; ii) include a one-time signing bonus of approximately $10,000; and iii) become amendable five years from the date the final agreement is executed.

In late 2008, Colgan’s pilot group elected representation by ALPA. The Company and ALPA have not begun discussions or set a time table for discussions on a new collective bargaining agreement to cover Colgan’s pilot group.

Guarantees and Indemnifications. In the Company’s aircraft lease and financing agreements, including sublease agreements with Delta, the Company typically indemnifies the primary lessor or lender, financing parties, trustees acting on their behalf and other related parties against liabilities that arise from the manufacture, design, ownership, financing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the negligence of these indemnified parties, except for their gross negligence or willful misconduct.

The Company is party to numerous contracts and real estate leases in which it is common for it to agree to indemnify third parties for tort liabilities that arise out of or relate to the subject matter of the contract or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, the Company typically indemnifies the lessors and related third parties for any environmental liability that arises out of or relates to its use of the leased premises.

The Company expects that its levels of insurance coverage (subject to deductibles) would be adequate to cover most tort liabilities and related indemnities described above with respect to real estate it leases and aircraft it operates. The Company does not expect the potential amount of future payments under the foregoing indemnities and agreements to be material.

Litigation Contingencies. Colgan is a defendant in litigation related to the September 11, 2001 terrorist attacks. The Company expects that any adverse outcome from this litigation will be covered by insurance, and therefore, will have no material adverse effect on the Company’s financial statements as a whole.

On February 12, 2009, Colgan Flight 3407, operated for Continental under the Company’s Continental CPA, crashed in a neighborhood near the Buffalo Niagara International Airport in Buffalo, New York. All 49 people aboard, including 45 passengers and four members of the flight crew, died in the accident. Additionally, one individual died inside the home destroyed by the aircraft’s impact. Several lawsuits related to this accident have been filed against the Company, and additional litigation is anticipated. The Company carries aviation risk liability insurance and believes that this insurance is sufficient to cover any liability arising from this accident.

The Company has recorded a related liability of approximately $300,000 in other non-current liabilities on its condensed consolidated balance sheet at June 30, 2009 related to potential claims associated with this accident. This liability is offset in its entirety by a corresponding long-term receivable, recorded in other assets on the condensed consolidated balance sheet that the Company expects to receive from insurance carriers as claims are resolved. These estimates may be revised as additional information becomes available.

Pinnacle Airlines Corp.

Notes to Condensed Consolidated Financial Statements

(all amounts in thousands, except per share data)

11. Commitments and Contingencies (continued)

Disputes with Codeshare Partners. The Company is currently engaged in discussions with Delta involving the interpretation of various components of its CRJ-200 Airline Services Agreement with Delta (the “CRJ-200 ASA”). If the parties are unable to reach a mutually agreeable resolution related to these matters, the parties may elect to resolve the issues through arbitration. The potential outcome of these disputed matters ranges from an annual increase in the payments received from Delta of approximately $2,800 to a decrease in payments received from Delta of as much as $4,000. Adverse determinations in these matters could result in a loss to the Company of up to $12,000 for disputed amounts accruing through June 30, 2009. The Company has denied any liability with respect to these matters. No amounts have been accrued as the Company does not believe any loss is probable.

12. Segment Reporting

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires disclosures related to components of a company for which separate financial information is available to and regularly evaluated by the company’s chief operating decision maker (“CODM”) when deciding how to allocate resources and in assessing performance.

The Company’s two operating segments consist of its two subsidiaries, Pinnacle Airlines, Inc. (“Pinnacle”) and Colgan Air, Inc. (“Colgan”). Corporate overhead costs incurred by Pinnacle Airlines Corp. are allocated to the operating costs of each subsidiary.

The following represents the Company’s segment data for the periods indicated:

	Three Months Ended June 30,					Six Months Ended June 30,
	2009		2008			2009		2008
			(restated)					(restated)
Operating revenues:
Pinnacle	$	154,550	$	155,705		$	309,924	$	310,102
Colgan		56,713		65,449			109,161		115,393
Consolidated	$	211,263	$	221,154		$	419,085	$	425,495

Operating income (loss):
Pinnacle	$	16,995	$	15,405		$	30,896	$	27,736
Colgan		5,188		(12,939	)		8,222		(18,485	)
Consolidated	$	22,183	$	2,466		$	39,118	$	9,251

The following represents the Company’s segment assets:

	June 30, 2009		December 31, 2008
Total assets:			(restated)
Pinnacle	$	629,293	$	582,176
Colgan		661,718		388,990
Unallocated		131,258		156,536
Consolidated	$	1,422,269	$	1,127,702

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

Forward-Looking Statements

Certain statements in this Current Report on Form 10-Q (or otherwise made by or on the behalf of Pinnacle Airlines Corp.) contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Private Securities Litigation Reform Act of 1995. Such statements represent management's beliefs and assumptions concerning future events. When used in this document and in documents incorporated by reference, forward-looking statements include, without limitation, statements regarding financial forecasts or projections, our expectations, beliefs, intentions or future strategies that are signified by the words "expects," "anticipates," "intends," "believes" or similar language. These forward-looking statements are subject to risks, uncertainties and assumptions that could cause our actual results and the timing of certain events to differ materially from those expressed in the forward-looking statements. All forward-looking statements included in this Report are based on information available to us on the date of this Report. It is routine for our internal projections and expectations to change as the year or each quarter in the year progress, and therefore it should be clearly understood that the internal projections, beliefs and assumptions upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we may not inform you if they do. Our policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter.

Many important factors, in addition to those discussed in this Report, could cause our results to differ materially from those expressed in the forward-looking statements. Some of the potential factors that could affect our results are described in “Overview and Outlook.” In light of these risks and uncertainties, and others not described in this Report, the forward-looking events discussed in this Report might not occur, might occur at a different time, or might cause effects of a different magnitude or direction than presently anticipated.

General

The following management’s discussion and analysis describes the principal factors affecting the Company’s results of operations, liquidity, capital resources and contractual cash obligations. This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and our Annual Report on Form 10-K for the year ended December 31, 2008 (“Annual Report”), which include additional information about our business practices, significant accounting policies, risk factors, and the transactions that underlie our financial results.

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

Overview and Outlook

The results of operations at both of our airlines subsidiaries improved during the second quarter of 2009. During the quarter, Pinnacle increased its operating income by $1.6 million and Colgan improved its operating income by $18.1 million, as compared to the second quarter of 2008. As more fully discussed below under “Results of Operations,” these improvements came about through, among other things, the full implementation of our new capacity purchase agreements with Delta and Continental, a significant decrease in the cost of fuel incurred by Colgan, and the restructuring of Colgan’s pro-rate operations. While we expect these improvements to continue in the third and fourth quarters of 2009, there are a number of items, as more fully discussed below, which could negatively affect our operating income during the second half of the year. For the remainder of 2009, we intend to focus on controlling costs, maintaining our strong operational reliability at both of our operating subsidiaries, and strengthening our balance sheet.

We are focused on building our cash balance throughout 2009 in advance of the first date that holders of our remaining outstanding $109.0 million par amount 3.25% senior convertible notes (the “Notes”) may contractually require us to repay the Notes. Although the Notes have a final maturity date in 2025, holders of the Notes may tender them to us on February 15, 2010 (the “Put Date”) for a cash payment equal to the $109.0 million par amount plus accrued interest. We are in the process of completing key transactions to increase our cash resources by the Put Date, including those discussed below.

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

On July 30, 2009, we completed a three-year term loan financing for $25 million (the “Spare Parts Loan”). The Spare Parts Loan is secured by our pool of spare repairable, rotable and expendable parts and certain aircraft engines. The interest rate for the Spare Parts Loan is a variable rate, which for the first interest period is indexed to LIBOR and is 8.5%. The Spare Parts Loan requires that we maintain a minimum liquidity level at the end of every month and at specified times preceding the maturity date or call date of certain other indebtedness.

We own $128.1 million par amount of auction rate securities (“ARS”). Due to unprecedented events in the credit markets during 2008, these investments became illiquid and suffered a decline in fair value. In reaction to the failure of the ARS market, the bank that structured and sold to us our portfolio of ARS provided us with a $90.0 million short-term credit facility, of which $85.8 million was outstanding at June 30, 2009, collateralized by our ARS. We are in discussions with this bank to settle this matter through a sale of our ARS to the bank at a discount to par. We expect that settlement with the bank could result in additional cash proceeds after repayment of the related $85.8 million credit facility, but the amount and timing of this settlement is still subject to final negotiation.

The regional airline industry is facing a period of slower growth and pressure from major airline partners to reduce costs and potentially reduce some regional airline capacity. A number of our competitors have recently announced reduced utilization by their major airline partners, resulting in furloughs. While we do not expect significant adjustments in our fleet size or a significant reduction in utilization of our existing fleet in the second half of 2009, we do expect significant cost pressure to continue during this period of low growth. Specifically, we anticipate higher costs in 2009 resulting from an expected new collective bargaining agreement with our pilots at Pinnacle, reduced employee attrition resulting in higher levels of flight crew staffing, higher health care costs, increased landing fees and facility rental expense at the airports that we serve, and general inflationary pressure within the rest of our cost structure.

Further magnifying the effect of these anticipated cost pressures, we did not receive an increase in the rates for 2009 that Delta pays us under our CRJ-200 ASA. The CRJ-200 ASA contains a provision to adjust rates annually (subject to a cap on the increase and a floor of zero) based on the change in the Producers Price Index (“PPI”), as published by the United States Department of Labor, Bureau of Labor Statistics. The PPI declined from December 2007 to December 2008, resulting in no change to our rates for 2009 under our CRJ-200 ASA.

In addition, our pro-rate operations are susceptible to changes in passenger demand and fuel price volatility. We took a number of steps during 2008 to eliminate unprofitable markets, reduce costs, and increase revenue in our remaining pro-rate markets. These steps and lower fuel prices have significantly reduced the operating losses of our pro-rate operations. Additionally, the airline industry is experiencing the effects of the current recessionary environment in the United States. Industry passenger revenue declined dramatically during the first half of 2009, and our pro-rate operations were negatively affected by this drop. We cannot predict how severely the recessionary environment will affect us in the second half of 2009, but we do expect continued year-over-year declines in the unit revenue of our pro-rate operations.

We have begun planning a relocation of Colgan’s headquarters from Manassas, Virginia to Memphis, Tennessee. We believe that relocating Colgan’s leadership team and system operations control center to our headquarters will enhance the financial and operational performance of Colgan long-term due to a lower cost of living and the sharing of operational and safety “best practices” between Pinnacle and Colgan. In addition, we are negotiating with state and local authorities to obtain certain long-term incentives that will help offset the cost of relocating Colgan’s headquarters. Although we have not finalized our plans, we expect the cost of relocation, training and infrastructure associated with this move to be as much as $3 million. We expect to finalize our relocation plans in the third quarter, and begin relocating components of Colgan’s administrative functions before year-end.

We have undertaken an internal initiative to generate a mix of cost savings and additional revenue opportunities of at least $10.0 million. We expect to achieve this objective through a combination of reducing our operating costs, adjusting capacity in our pro-rate operations to match the demand environment, and increasing ancillary third-party business such as ground handling. We estimate that we achieved approximately $2.6 million of cost savings from this initiative during the second quarter of 2009. There can be no assurance that we will attain our target of at least $10.0 million in improvements for the full year 2009. We believe it is critical to reduce our costs not only to increase our current profitability and improve our liquidity, but to also remain competitive long term in the regional airline industry.

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

Pinnacle has been involved in negotiations with the Air Line Pilots Association (“ALPA”) since April 2005, when the collective bargaining agreement between the two parties became amendable. On August 4, 2009, Pinnacle and ALPA reached a tentative agreement to amend the collective bargaining agreement. The terms of the tentative agreement must be ratified by Pinnacle’s pilots before it becomes final. If ratified, the tentative agreement will increase compensation for Pinnacle’s pilots to the industry average, which is consistent with our company-wide philosophy of industry-average pay and benefits. In addition, the tentative agreement calls for a one-time signing bonus of approximately $10 million. A portion of this signing bonus will be paid upon ratification of the final agreement, while the remainder will be paid during the second quarter of 2010. If ratified, the agreement would become amendable five years from the date the final agreement is executed. We expect this tentative agreement to substantially increase Pinnacle’s salaries, wages and benefits costs, although we believe our cost structure will generally remain competitive with the regional airline industry. In addition, Colgan’s pilots recently elected representation by ALPA. We have not begun discussions or set a timeline with ALPA to commence negotiations of a collective bargaining agreement covering Colgan’s pilots.

During 2009 we are also positioning ourselves for additional profitable growth opportunities in 2010 and beyond. We recently agreed with Continental to expand our Continental CPA by acquiring 15 Q400 aircraft from August 2010 through April 2011. We also acquired an additional 15 Q400 options from the aircraft manufacturer, thereby increasing the total remaining number of our Q400 options to 30. These options, if exercised, provide for the delivery of 15 Q400s in 2011 and the remaining 15 in 2013. The Q400 aircraft has become a very competitive product within the regional airline industry. The purchase price of the Q400 is significantly less than that of comparably sized regional jets, and the Q400 uses up to 30% less fuel. As a result, we can offer our airline partners a large, passenger-friendly regional aircraft with a lower operating cost than that of similar regional jets.

In addition to growing Colgan with the Q400 aircraft, we are positioning ourselves to capitalize on long-term opportunities to increase the number of regional jets that we operate at Pinnacle. Capacity purchase agreements for over 400 50-seat regional jet aircraft at our competitors are set to expire between 2009 and 2015. While many of these regional jets will likely no longer operate within the networks of the major U.S. airlines, we believe some of these contracts will be renewed or offered to other regional airlines and some will be replaced with larger regional jets. We intend to actively compete to obtain profitable regional jet flying during this period of transition within the industry, and we believe our history of strong operating performance with a competitive cost structure will position us to succeed. Our capacity purchase contracts do not begin to expire until December 2017.

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

Results of Operations

The following represents our results of operations, by segment and consolidated, for the three months ended June 30, 2009. A discussion of our results of operations as compared to the same period in 2008 follows.

	Three Months Ended June 30, 2009
	Pinnacle			Colgan			Consolidated
	(in thousands)
Operating revenues
Regional airline services	$	152,549		$	56,663		$	209,212
Other		2,001			50			2,051
Total operating revenues		154,550			56,713			211,263

Operating expenses
Salaries, wages and benefits		42,085			13,672			55,757
Aircraft rentals		29,203			891			30,094
Ground handling services		19,447			2,749			22,196
Aircraft maintenance, materials and repairs		14,495			10,305			24,800
Other rentals and landing fees		12,820			5,105			17,925
Aircraft fuel		-			5,254			5,254
Commissions and passenger related expense		847			4,380			5,227
Depreciation and amortization		5,067			3,715			8,782
Other		13,591			3,921			17,512
Impairment and aircraft retirement charges		-			1,533			1,533
Total operating expenses		137,555			51,525			189,080

Operating income		16,995			5,188			22,183

Operating margin		11.0	%		9.1	%		10.5	%

Nonoperating income (expense)
Interest income								759
Interest expense								(12,930	)
Net investment loss								(334	)
Miscellaneous expense, net								(12	)
Total nonoperating expense								(12,517	)
Income before income taxes								9,666
Income tax expense								(3,673	)
Net income							$	5,993

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

	Six Months Ended June 30, 2009
	Pinnacle			Colgan			Consolidated
	(in thousands)
Operating revenues
Regional airline services	$	306,080		$	109,056		$	415,136
Other		3,844			105			3,949
Total operating revenues		309,924			109,161			419,085

Operating expenses
Salaries, wages and benefits		85,022			27,575			112,597
Aircraft rentals		58,360			2,226			60,586
Ground handling services		42,561			6,097			48,658
Aircraft maintenance, materials and repairs		28,885			20,604			49,489
Other rentals and landing fees		26,376			9,952			36,328
Aircraft fuel		-			9,771			9,771
Commissions and passenger related expense		2,059			7,995			10,054
Depreciation and amortization		9,882			7,481			17,363
Other		25,883			7,258			33,141
Impairment and aircraft retirement charges		-			1,980			1,980
Total operating expenses		279,028			100,939			379,967

Operating income		30,896			8,222			39,118

Operating margin		10.0	%		7.5	%		9.3	%

Nonoperating income (expense)
Interest income								1,665
Interest expense								(22,723	)
Net investment loss								(289	)
Miscellaneous income, net								344
Total nonoperating expense								(21,003	)
Income before income taxes								18,115
Income tax benefit								6,721
Net income							$	24,836

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

The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three months ended June 30, 2009 compared to the same period in 2008. As discussed in Note 4 in Item 1 of this Form 10-Q, certain prior year amounts have been restated to comply with the provisions of the newly adopted Financial Accounting Standards Board Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).

Consolidated and Segmented Results of Operations

Consolidated

	Three Months Ended June 30,												Six Months Ended June 30,
	2009			2008 (Restated)			$ Change			% Change			2009			2008 (Restated)			$ Change			% Change
	(in thousands)
Total operating revenue	$	211,263		$	221,154		$	(9,891	)		(4	)%	$	419,085		$	425,495		$	(6,410	)		(2	)%
Total operating expenses		189,080			218,688			(29,608	)		(14	)%		379,967			416,244			(36,277	)		(9	)%
Operating income		22,183			2,466			19,717			800	%		39,118			9,251			29,867			323	%
Operating margin		10.5	%		1.1	%	9.4 pts.							9.3	%		2.2	%	7.1 pts.

Total nonoperating expense		(12,517	)		(18,044	)		5,527			(31	)%		(21,003	)		(23,100	)		2,097			(9	)%

Income (loss) before income taxes		9,666			(15,578	)		25,244			(162	)%		18,115			(13,849	)		31,964			(231	)%
Income tax (expense) benefit		(3,673	)		2,664			(6,337	)		(238	)%		6,721			2,171			4,550			210	%
Net income (loss)	$	5,993		$	(12,914	)	$	18,907			(146	)%	$	24,836		$	(11,678	)	$	36,514			(313	)%

Several nonrecurring items affected both operating and nonoperating expense for the three and six months ended June 30, 2009. During the three months ended March 31, 2009, we recorded a decrease in operating expense of $0.8 million ($0.5 million net of tax) related to the excess of property insurance proceeds received over the cost basis of the aircraft destroyed in Flight 3407. This was offset by aircraft retirement charges related to Beech aircraft at our Colgan subsidiary of $1.5 million ($1.0 million net of tax) for the three months ended June 30, 2009 and $2.0 million ($1.3 million net of tax) for the six months ended June 30, 2009.

During March 2009, we reached settlement with the IRS regarding our examination for tax years 2003 through 2005. As a result, we recorded a reduction to income tax expense during the three months ended March 31, 2009 of $13.6 million and a reduction to interest expense of $2.9 million ($1.7 million net of tax) to reverse the related reserves previously recorded. In addition, we recorded during the three months ended March 31, 2009 a gain of $1.9 million ($1.1 million net of tax) on the extinguishment of $12.0 million par amount of our senior convertible notes, and a $1.4 million ($0.9 million net of tax) charge to interest expense for the previously unrecognized hedge related loss for the debt related to the aircraft destroyed in Flight 3407. During the three months ended June 30, 2009, we also recorded a net loss of $0.3 million ($0.3 million net of tax) related to the impairment of certain of our auction rate securities.

During the three and six months ended June 30, 2008, we recorded a charge of $12.6 million ($8.1 million net of tax) related to the impairment of Colgan’s goodwill and certain charges necessary to retire several of Colgan’s aircraft associated with its pro-rate operations. In addition, we recorded an impairment charge of $8.7 million ($8.3 million net of tax) to record our portfolio of auction rate securities at its fair value.

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

The following summarizes the nonrecurring items affecting our results for the three and six months ended June 30, 2009 and 2008 (in thousands):

	Three Months Ended June 30, 2009				Three Months Ended June 30, 2008
	Pre-tax		Net of tax		Pre-tax		Net of tax
Impairment and aircraft retirement charges	$	1,533	$	992	$	12,619	$	8,139
Net investment loss		334		320		8,675		8,309
Total nonrecurring charges	$	1,867	$	1,312	$	21,294	$	16,448

	Six Months Ended June 30, 2009						Six Months Ended June 30, 2008
	Pre-tax			Net of tax			Pre-tax		Net of tax
Impairment and aircraft retirement charges	$	1,980		$	1,280		$	12,619	$	8,139
Excess of property insurance proceeds over cost basis of aircraft		(835	)		(540	)		-		-
Net investment loss		289			277			8,675		8,309
Ineffective portion of hedge		1,424			921			-		-
Reversal of interest on tax reserves		(2,719	)		(1,719	)		-		-
Gain on debt extinguishment		(1,857	)		(1,122	)		-		-
IRS settlement		-			(13,551	)		-		-
Total nonrecurring charges	$	(1,718	)	$	(14,454	)	$	21,294	$	16,448

Operating Revenues

Operating revenue of $211.3 million and $419.1 million for the three and six months ended June 30, 2009 decreased $9.9 million, or 4%, and $6.4 million, or 2%, respectively, compared to the same periods 2008. Changes in our capacity purchase related operating revenue are primarily caused by changes in our operating fleet size and aircraft utilization. Changes in our pro-rate related operating revenue are primarily caused by the average load factor, average passenger fare, and average incentive payments we receive from our partners and under our Essential Air Service agreements. These changes are discussed in greater detail within our segmented results of operations.

Operating Expenses

For the three and six months ended June 30, 2009, operating expenses decreased by $29.6 million and $36.3 million, or 14% and 9%, respectively, as compared to the same periods in 2008, primarily due to the decrease in fuel expense and gallons consumed at our Colgan subsidiary, along with the impairment of Colgan’s goodwill and other intangible assets during the three months ended June 30, 2008. This change and others are discussed in greater detail within our segmented results of operations.

Nonoperating Expense

Net nonoperating expense of $12.5 million for the three months ended June 30, 2009 decreased by approximately $5.5 million as compared to the same period in 2008. The decrease is primarily related to the $8.7 million auction rate securities impairment charge recorded in 2008. This was offset by a $1.7 million increase in interest expense, primarily related to the addition of CRJ-900 and Q400 aircraft to our fleet throughout 2008. In addition, interest income decreased $1.0 million, primarily due to the decrease in interest rates on our auction rate securities portfolio.

Net nonoperating expense of $21.0 million for the six months ended June 30, 2009 decreased by approximately $2.1 million as compared to the same period in 2008. In addition to the nonrecurring items discussed above, the decrease is primarily related to the $8.7 million auction rate securities impairment charge recorded in 2008. This was offset by a $4.3 million increase in interest expense, primarily related to the addition of CRJ-900 and Q400 aircraft to our fleet throughout 2008. In addition, interest income decreased $2.3 million due to the decrease in interest rates on our auction rate securities portfolio.

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

Income Tax Expense

For the three and six months ended June 30, 2009, we recorded an income tax expense of $3.7 million and an income tax benefit of $6.7 million, respectively. As previously discussed, we recently reached settlement with the IRS regarding our examination for tax years 2003 through 2005. The IRS had proposed a number of adjustments to our returns totaling approximately $35.0 million of additional tax, plus accrued interest and penalties on these proposed adjustments. The Company agreed to pay approximately $3 million of additional income tax and accrued interest in settlement of all open tax matters for the years examined. As a result, we recorded a reduction to income tax expense of $13.6 million during the six months ended June 30, 2009 to reduce our accrued income tax reserves pursuant to the settlement.

Pinnacle Operating Statistics

	Three Months Ended June 30,									Six Months Ended June 30,
	2009			2008			Change			2009			2008			Change
Other Data:
Revenue passengers (in thousands)		2,778			2,726			2	%		5,163			5,151			0	%
Revenue passenger miles (“RPMs”)(in thousands)		1,211,030			1,287,429			(6	)%		2,301,384			2,386,709			(4	)%
Available seat miles (“ASMs”) (in thousands)		1,548,790			1,622,264			(5	)%		3,129,301			3,116,125			0	%
Passenger load factor		78.2	%		79.4	%	(1.2) pts.				73.5	%		76.6	%	(3.1) pts.
Operating revenue per ASM (in cents)		9.98			9.60			4	%		9.90			9.95			(1	)%
Operating cost per ASM (in cents)		8.88			8.65			3	%		8.92			9.06			(2	)%
Operating revenue per block hour	$	1,452		$	1,390			4	%	$	1,437		$	1,384			4	%
Operating cost per block hour	$	1,292		$	1,252			3	%	$	1,294		$	1,260			3	%
Block hours		106,475			112,051			(5	)%		215,715			224,112			(4	)%
Departures		68,826			67,810			1	%		135,456			133,789			1	%
Average daily utilization (block hours)		8.29			8.97			(8	)%		8.38			8.95			(6	)%
Average stage length (miles)		427			468			(9	)%		439			461			(5	)%

Number of operating aircraft (end of period)
CRJ-200		124			126			(2	)%
CRJ-900		16			9			78	%
Employees (end of period)		4,060			4,144			(2	)%

Pinnacle Operating Revenues

	Three Months Ended June 30,										Six Months Ended June 30,
	2009		2008		$ Change			% Change			2009		2008		$ Change			% Change
	(in thousands)
Operating Revenues
Regional airline services
CRJ-200	$	135,827	$	145,457	$	(9,630	)		(7	)%	$	273,455	$	292,898	$	(19,443	)		(7	)%
CRJ-900		16,722		8,162		8,560			105	%		32,625		11,973		20,652			172	%
Other		2,001		2,086		(85	)		(4	)%		3,844		5,231		(1,387	)		(27	)%
Total operating revenues	$	154,550	$	155,705	$	(1,155	)		(1	)%	$	309,924	$	310,102	$	(178	)		(0	)%

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

Regional Airline Services

For the three months ended June 30, 2009, revenue earned under our CRJ-200 ASA of $135.8 million decreased by $9.6 million, or 7%, compared to the same period in 2008. For the six months ended June 30, 2009, revenue earned under our CRJ-200 ASA of $273.5 million decreased by $19.4 million, or 7%, compared to the same period in 2008. Revenue earned under our CRJ-200 ASA was adversely affected by the return of several CRJ-200 aircraft pursuant to the terms of our CRJ-200 ASA. During the three and six months ended June 30, 2009, we operated 4% and 6% fewer average CRJ-200 aircraft than the same periods in 2008.

Revenue earned under the CRJ-900 DCA was $16.7 million for the three months ended June 30, 2009, an increase of $8.6 million, or 105%, as compared to the same period in 2008. Revenue earned under the CRJ-900 DCA was $32.6 million for the six months ended June 30, 2009, an increase of $20.7 million, or 172%, as compared to the same period in 2008. During the three and six months ended June 30, 2009, we operated 114% and 195% more average CRJ-900 aircraft than the same periods in 2008. As of June 30, 2009, we operated 16 CRJ-900 aircraft under our DCA, as compared to the nine CRJ-900 aircraft we operated under the DCA at June 30, 2008.

Other Revenue

Other revenue decreased $0.1 million, or 4%, and $1.4 million, or 27%, for the three months and six months ended June 30, 2009, as compared to the same periods in 2008. These decreases were primarily related to a decline in revenue earned from providing certain ground handling services to third parties and baggage handling services to Delta at its Memphis hub.

Pinnacle Operating Expenses

	Three Months Ended June 30,												Six Months Ended June 30,
	2009			2008			$ Change			% Change			2009			2008			$ Change			% Change
	(in thousands)
Operating expenses
Salaries, wages and benefits	$	42,085		$	41,425		$	660			2	%	$	85,022		$	81,989			3,033			4	%
Aircraft rentals		29,203			30,567			(1,364	)		(4	)%		58,360			62,157			(3,797	)		(6	)%
Ground handling services		19,447			20,490			(1,043	)		(5	)%		42,561			43,999			(1,438	)		(3	)%
Aircraft maintenance, materials and repairs		14,495			11,734			2,761			24	%		28,885			23,635			5,250			22	%
Other rentals and landing fees		12,820			12,951			(131	)		(1	)%		26,376			25,443			933			4	%
Commissions and passenger related expense		847			1,643			(796	)		(48	)%		2,059			3,575			(1,516	)		(42	)%
Depreciation and amortization		5,067			3,364			1,703			51	%		9,882			5,744			4,138			72	%
Other		13,591			18,126			(4,535	)		(25	)%		25,883			35,824			(9,941	)		(28	)%
Total operating expenses		137,555			140,300			(2,745	)		(2	)%		279,028			282,366			(3,338	)		(1	)%

Operating income	$	16,995		$	15,405		$	1,590			10	%	$	30,896		$	27,736			3,160			11	%

Operating margin		11.0	%		9.9	%	1.1 pts.							10.0	%		8.9	%	1.1 pts.

Salaries, wages and benefits increased by $0.7 million, or 2%, and $3.0 million, or 4%, respectively, for the three and six months ended June 30, 2009 as compared to the same periods in 2008. These increases were due to the increase in wage rates and benefits for existing employees, primarily as a result of an increase in health care and insurance costs as compared to the same period in 2008. Additionally, we are currently experiencing a decline in employee productivity, primarily related to a decrease in flight crew attrition. These increases are offset by a 2% decrease in the number of employees, primarily ground operations personnel. Currently, in comparison to prior years, we are outsourcing more ground handling services and baggage handling.

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

Aircraft rental expense decreased $1.4 million, or 4%, and $3.8 million, or 6%, during the three and six months ended June 30, 2009 as compared to the same periods in 2008. This decrease relates to decreases of 4% and 6% in the average number of CRJ-200 aircraft, which are leased from Delta, operated during 2009 as compared to 2008. As previously discussed, aircraft rentals are reimbursable expenses under our CRJ-200 ASA, and as a result of the fewer average number of CRJ-200 aircraft in our fleet, revenue under our CRJ-200 ASA decreased by $1.5 million and $4.1 million for the three and six months ended June 30, 2009.

Aircraft maintenance, materials and repairs expenses increased $2.8 million, or 24%, and $5.3 million, or 22%, for the three and six months ended June 30, 2009 as compared to the same periods in 2008. These increases are attributable to additional maintenance related to the aging of our CRJ-200 fleet as the majority of our CRJ-200 aircraft are no longer covered under warranty. We are also incurring additional maintenance expense on our CRJ-200 fleet for specific maintenance programs and upgrades recommended by the manufacturer associated with engine fan blade replacement and adjustments to the motor controlling deployment of the wing flaps. We expect additional maintenance costs associated with these programs throughout 2009.

Commissions and passenger related expense decreased by $0.8 million, or 48%, and by $1.5 million, or 42%, respectively, for the three and six months ended June 30, 2009 as compared to the same periods in 2008. This is primarily related to the decrease in the number of airport locations we staff under our CRJ-200 ASA. As a result, we do not incur the same level of passenger related expenses, as these are now paid directly by our outsourced ground handlers.

Depreciation and amortization expense increased by $1.7 million and $4.1 million, respectively, for the three and six months ended June 30, 2009 as compared to the same periods in 2008. This is primarily related to depreciation on our fleet of CRJ-900 aircraft, the majority of which were added to our fleet in 2008.

Other expense decreased by $4.5 million, or 25%, and $9.9 million, or 28%, for the three and six months ended June 30, 2009 as compared to the same periods in 2008. This decrease is primarily related to decreases in costs related to crew training. As previously discussed, we are experiencing low levels of attrition within our flight crews and are not currently hiring or training new crew members and as a result, flight crew related costs decreased by $2.9 million and $4.8 million, respectively, for the three and six months ended June 30, 2009. The remainder of the decrease is attributable to the fleet expansion expenses we incurred in the first half of 2008 as we were bringing the CRJ-900 operations online, and a decrease in professional services costs related to our systems integration project in 2008.

Colgan Operating Statistics

	Three Months Ended June 30,									Six Months Ended June 30,
	2009			2008			Change			2009			2008			Change

Pro-rate Agreements:
Revenue passengers (in thousands)		305			377			(19	)%		553			726			(24	)%
RPMs (in thousands)		53,010			68,681			(23	)%		95,614			132,785			(28	)%
ASMs (in thousands)		114,768			153,540			(25	)%		225,791			300,169			(25	)%
Passenger load factor		46.2	%		44.7	%	1.5 pts.				42.3	%		44.2	%	(1.9) pts.
Passenger yield (in cents)		73.02			77.99			(6	)%		76.03			75.55			1	%
Operating revenue per ASM (in cents)		33.73			34.89			(3	)%		32.20			33.42			(4	)%
Operating revenue per block hour	$	1,720		$	1,692			2	%	$	1,627		$	1,614			1	%
Block hours		22,507			31,653			(29	)%		44,683			62,140			(28	)%
Departures		20,018			26,292			(24	)%		39,638			51,348			(23	)%
Fuel consumption (in thousands of gallons)		2,772			3,931			(29	)%		5,404			7,617			(29	)%
Average price per gallon	$	1.90		$	3.79			(50	)%	$	1.81		$	3.51			(48	)%
Average fare	$	127		$	142			(11	)%	$	131		$	138			(5	)%

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

	Three Months Ended June 30,									Six Months Ended June 30,
	2009			2008			Change			2009			2008			Change

Capacity Purchase Agreement:
Revenue passengers (in thousands)		405			286			42	%		734			376			95	%
RPMs (in thousands)		113,096			80,278			41	%		202,801			104,895			93	%
ASMs (in thousands)		157,299			115,053			37	%		306,763			149,019			106	%
Passenger load factor		71.9	%		69.8	%	2.1 pts.				66.1	%		70.4	%	(4.3) pts.
Operating revenue per ASM (in cents)		11.41			10.28			11	%		11.85			10.05			18	%
Operating revenue per block hour	$	1,531		$	1,338			14	%	$	1,550		$	1,304			19	%
Block hours		11,726			8,838			33	%		23,461			11,485			104	%
Departures		7,666			5,692			35	%		15,134			7,406			104	%

Total Colgan:
Block hours		34,233		40,491	(15	)%		68,144		73,625	(7	)%
Departures		27,684		31,984	(13	)%		54,772		58,754	(7	)%
ASMs (in thousands)		272,067		268,593	1	%		532,554		449,188	19	%
Total operating cost per ASM (in cents)		18.94		29.18	(35	)%		18.95		29.78	(36	)%
Total operating cost per block hour	$	1,505	$	1,936	(22	)%	$	1,481	$	1,818	(19	)%

Average daily utilization (block hours)		7.84		7.76	1	%		7.72		7.52	3	%
Average stage length (miles)		221		213	4	%		219		206	6	%
Number of operating aircraft (end of period)
Saab 340		34		40	(15	)%
Beech 1900		-		5	(100	)%
Q400		14		13	8	%
Employees		1,334		1,427	(7	)%

Colgan Operating Revenue

	Three Months Ended June 30,										Six Months Ended June 30,
	2009		2008		$ Change			% Change			2009		2008		$ Change			% Change
	(in thousands)
Operating Revenues
Regional airline services
Pro-rate and EAS	$	38,708	$	53,565	$	(14,857	)		(28	)%	$	72,694	$	100,320	$	(27,626	)		(28	)%
Capacity purchase agreement		17,955		11,829		6,126			52	%		36,362		14,981		21,381			143	%
Other		50		55		(5	)		(9	)%		105		92		13			14	%
Total operating revenues	$	56,713	$	65,449	$	(8,736	)		(13	)%	$	109,161	$	115,393	$	(6,232	)		(5	)%

Total operating revenue for the three and six months ended June 30, 2009 of $56.7 million and $109.2 million, decreased by $8.7 million, or 13%, and $6.2 million, or 5%, respectively, from the same periods in 2008. The primary reason for this decrease is the decrease in our pro-rate operations, offset by an increase in revenue earned under our Continental CPA.

Revenue earned under our pro-rate and Essential Air Service (“EAS”) agreements decreased by $14.9 million, or 28%, and $27.6 million, or 28%, respectively, during the three and six months ended June 30, 2009. This decrease is attributable to a decrease in ASMs of 25% as compared to 2008, which resulted from the retirement of 11 of our Saab and Beech aircraft in conjunction with eliminating certain markets within our pro-rate agreements. As of June 30, 2009, we operated 34 Saab aircraft under pro-rate agreements, as compared to 40 Saab and 5 Beech aircraft at June 30, 2008. In addition, during the three and six months ended June 30, 2009, we experienced decreases of 3% and 4% in revenue per available seat mile in our remaining markets, which was attributable to decreases in average fares, offset by increases in load factor.

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

Revenue under our Continental CPA for the three and six months ended June 30, 2009 increased by $6.1 million, or 52%, and $21.4 million, or 143%, due to the increase in Q400 aircraft in our fleet. The average number of Q400 aircraft in our fleet during the three and six months ended June 30, 2009 increased by 42% and 124%, respectively, as compared to the same periods in 2008. In addition, CPA revenue during the three and six months ended June 30, 2008 was negatively affected by performance penalties incurred as we were bringing the new fleet online. As a result, CPA revenue for the three and six months ended June 30, 2009 increased by $0.8 million and $1.3 million, respectively, as compared to the same periods in 2008.

Colgan Operating Expenses

	Three Months Ended June 30,												Six Months Ended June 30,
	2009			2008			$ Change			% Change			2009			2008			$ Change			% Change
	(in thousands)
Operating expenses
Salaries, wages and benefits	$	13,672		$	14,336		$	(664	)		(5	)%	$	27,575		$	27,215			360			1	%
Aircraft rentals		891			1,940			(1,049	)		(54	)%		2,226			3,871			(1,645	)		(42	)%
Ground handling services		2,749			3,182			(433	)		(14	)%		6,097			7,062			(965	)		(14	)%
Aircraft maintenance, materials and repairs		10,305			12,041			(1,736	)		(14	)%		20,604			22,014			(1,410	)		(6	)%
Other rentals and landing fees		5,105			4,359			746			17	%		9,952			7,311			2,641			36	%
Aircraft fuel		5,254			14,899			(9,645	)		(65	)%		9,771			26,772			(17,001	)		(64	)%
Commissions and passenger related expense		4,380			5,787			(1,407	)		(24	)%		7,995			10,680			(2,685	)		(25	)%
Depreciation and amortization		3,715			3,245			470			14	%		7,481			5,236			2,245			43	%
Other		3,921			5,980			(2,059	)		(34	)%		7,258			11,098			(3,840	)		(35	)%
Impairment of goodwill and aircraft lease return costs		1,533			12,619			(11,086	)		(88	)%		1,980			12,619			(10,639	)		(84	)%
Total operating expenses		51,525			78,388			(26,863	)		(34	)%		100,939			133,878			(32,939	)		(25	)%

Operating income	$	5,188		$	(12,939	)	$	18,127			140	%	$	8,222		$	(18,485	)		26,707			(144	)%

Operating margin		9.1	%		(19.8	)%	28.9 pts.							7.5	%		(16.0	)%	23.5 pts.

Salaries, wages and benefits decreased by $0.7 million, or 5%, and increased by $0.4 million, or 1%, during the three and six months ended June 30, 2009 as compared to the same periods in 2008. The primary reason for this fluctuation is a 7% decrease in headcount, primarily due to the elimination of pro-rate markets previously discussed, offset by wage rate and benefit increases for existing employees. Additionally, we are currently experiencing a decline in employee productivity, primarily related to a decrease in flight crew attrition.

Aircraft rentals decreased by $1.0 million, or 54%, and $1.6 million, or 42%, for the three and six months ended June 30, 2009. This decrease is attributable to the return of eight leased Saab and Beech aircraft.

Ground handling services decreased by $0.4 million, or 14%, and $1.0 million, or 14%, during the three and six months ended June 30, 2009, as compared to the same periods in 2008. This was primarily attributable to the decrease in departures in our pro-rate operations. The increase in our Q400 operations had no effect on ground handling services expense, as ground handling services associated with our Q400 operations are provided at no cost under the Continental CPA.

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

Aircraft maintenance, materials and repairs expenses decreased by $1.7 million, or 14%, and $1.4 million, or 6%, respectively, for the three and six months ended June 30, 2009 as compared to the same periods in 2008. During the three months ended June 30, 2008, we recorded $1.2 million of maintenance accruals that were later reversed during the three months ended September 30, 2008. We recorded no similar accruals during the three months ended June 30, 2009. The remaining decrease is related to the removal of 11 Saab and Beech aircraft from our fleet. These aircraft were out of warranty and required more maintenance expense than our new fleet of Q400 aircraft, which are currently covered under warranty.

Other rentals and landing fees increased by $0.7 million, or 17%, and $2.6 million, or 36%, for the three and six months ended June 30, 2009, as compared to the same periods in 2008. Landing fees increased as a result of operating the larger Q400 aircraft. In addition, we are now serving markets with significantly higher landing fee rates, such as Newark/Liberty International Airport. Most airports in our network have also increased their rates as a result of an overall reduction in industry-wide capacity.

Aircraft fuel expense decreased by $9.6 million, or 65%, and $17.0 million, or 64%, for the three and six months ended June 30, 2009 as compared to the same periods in 2008. This decline is primarily related to the decrease in the average price of fuel. Colgan’s average price paid per gallon decreased 50% and 48%, respectively, during the three and six months ended June 30, 2009, as compared to the same periods in 2008. In addition, gallons consumed decreased by 29% for the three and six months ended June 30, 2009, due to the retirement of several of our Saab and Beech aircraft in conjunction with the elimination of certain markets operated under pro-rate agreements. Aircraft fuel associated with our Q400 operations is provided at no cost under the Continental CPA.

Commissions and passenger related expenses decreased by $1.4 million, or 24%, and by $2.7 million, or 25%, for the three and six months ended June 30, 2009 as compared to the same periods in the 2008. This is primarily attributable to the 19% and 24% decreases in passengers carried by our pro-rate operations.

Depreciation and amortization expense increased by $0.5 million, or 14%, and $2.2 million, or 43%, for the three and six months ended June 30, 2009, as compared to the same periods in 2008. This is primarily related to depreciation expense related to the Q400 aircraft, which were added to our in fleet throughout 2008.

Other expenses decreased by $2.1 million, or 34%, and by $3.8 million, or 35%, during the three and six months ended June 30, 2009, as compared to the same periods in 2008. This was primarily related to low levels of flight crew attrition, which reduced levels of training as experienced flight crews are retained. As a result, crew overnight accommodations expense and pilot training expense decreased by $2.3 million and $3.2 million during the three and six months ended June 30, 2009, as compared to the same periods in 2008, primarily as a result of reduced levels of training in 2009.

Impairment and aircraft retirement charges of $1.5 million and $2.0 million for the three and six months ended June 30, 2009 related to certain maintenance costs necessary to restore certain Saab and Beech aircraft to a condition suitable for return to the lessor. In the three months ended June 30, 2008, impairment and aircraft retirement charges of $12.6 million primarily related to the impairment of Colgan’s goodwill.

Liquidity and Capital Resources

We generate cash primarily by providing regional airline and related services to our code-share partners and passengers. As of June 30, 2009, we had cash and cash equivalents of $94.2 million. Net cash provided by operations was $62.8 million for the three months ended June 30, 2009. This included a 2008 federal income tax refund of approximately $33 million that we received on April 1, 2009. We do not anticipate making federal income tax payments in 2009 and 2010 due to the accelerated depreciation recognized for tax purposes related to our newly acquired CRJ-900 and Q400 aircraft, and we anticipate a similar federal tax refund in 2010 related to the 2009 tax year.

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

As of June 30, 2009, we had $128.1 million par amount of Auction Rate Securities instruments (“ARS”), which are currently illiquid. In response to the failure of the ARS market, the bank that structured and sold to us our ARS portfolio provided us with a margin loan facility (the “Credit Facility”). The Credit Facility had an initial maximum borrowing amount of $60.0 million but was subsequently amended twice to increase the borrowing amount up to $90.0 million. The Credit Facility is pre-payable at any time prior to maturity. The interest rate on $80.0 million under the Credit Facility is indexed to LIBOR and was 2.3% at June 30, 2009. The interest rate on the remaining $10.0 million (of which $5.8 million was available and drawn as of June 30, 2009) under the Credit Facility is indexed to the Federal Funds Rate and was 2.7% at June 30, 2009. In February 2009, we amended the Credit Facility to, among other items, extend the maturity date to January 31, 2010. The Credit Facility includes both financial covenant and margin requirements, with which we remain fully compliant, as discussed in Note 4, Borrowings, in Item 1 of this Form 10-Q. Amounts outstanding under the Credit Facility as of June 30, 2009 were $85.8 million.

In February 2005, we issued $121.0 million principal amount of our 3.25% senior convertible notes due 2025 (the “Notes”). The Notes bear interest at the rate of 3.25% per year, payable in cash semiannually in arrears on February 15 and August 15 of each year. The Notes are convertible into a combination of cash and common stock at a conversion price of approximately $13.22. The Notes are convertible in any quarter subsequent to a quarter in which the closing price of our common stock exceeds $15.86 for 20 of the last 30 trading days. This condition was not met during the first quarter of 2009, and consequently the Notes are not convertible at this time. Holders of the Notes have the right on February 15, 2010 (the “Put Date”) to require us to repurchase the Notes at the current outstanding par value of $109.0 million plus accrued and unpaid interest. As a result, the entire $102.5 million carrying amount of the Notes is classified as a current liability on our condensed consolidated balance sheet as of June 30, 2009. In January 2009, we repurchased $12.0 million par amount of the Notes for approximately $8.9 million plus accrued interest, resulting in the current outstanding par amount of $109.0 million.

We are in discussions with the bank that structured and sold to us our ARS portfolio to settle this matter through a sale of our ARS to the bank at a discount to par. We expect that settlement with the bank could result in additional cash proceeds after repayment of the Credit Facility, but the amount and timing of this settlement is still subject to final negotiation.

At June 30, 2009, we had approximately $94 million of unrestricted cash and cash equivalents. The Spare Parts Loan and the potential to obtain additional capital associated with the ARS portfolio will greatly enhance our efforts to increase our cash balance prior to the Put Date for the Notes. However, we also have general working capital requirements for our operations, and we must also meet the minimum liquidity covenants contained in the Spare Parts Loan. Although we believe we will be able to meet these requirements if we successfully complete a settlement related to our ARS, no assurance can be given that we will complete a settlement, or that our combined resources (inclusive of a settlement) will be sufficient to meet our obligation related to the Notes, our working capital requirements, and our minimum liquidity covenants.

In February 2007 we entered into a purchase agreement for up to 25 firm and 20 option Q400 aircraft with Bombardier, Inc. Under the agreement, we were obligated to purchase a minimum of 15 Q400 regional aircraft, which we satisfied during 2008. In January 2009, we modified the purchase agreement to exercise our right to purchase the remaining ten firm Q400 aircraft and five of the option Q400 aircraft, which will be delivered between August 2010 and April 2011. The contractual obligations table in our 2008 Form 10-K included amounts related to this purchase commitment. We also secured additional options to acquire 15 Q400 option aircraft that would be delivered in 2013. Upon completion of this amendment, we now have optional rights to acquire a total of 30 Q400 aircraft, 15 of which would deliver in 2011 and 15 of which would deliver in 2013.

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

In April 2007, Delta assigned to us its rights to purchase 16 CRJ-900 aircraft from Bombardier, Inc. As of June 30, 2009, we had accepted delivery of all 16 of these aircraft. Under the DCA, Delta has the right to require us to purchase and operate an additional seven CRJ-900 aircraft.

We are required to make pre-delivery payments to Bombardier for the 15 firm Q400 aircraft that we have on order, which will be made from January 2009 to October 2010. Approximately 85% of the remaining pre-delivery payments to be made in 2009 and 2010 will be financed under a pre-delivery payment financing facility provided by Export Development Canada (“EDC”). The remaining amount of approximately $5 million will be funded through our internal capital resources. This unfinanced portion of our pre-delivery payment requirements is not scheduled to be paid until the second quarter of 2010 after the Put Date related to our senior convertible notes previously discussed. The interest rate associated with this pre-delivery payment facility is indexed to LIBOR, and was 4.1% as of June 30, 2009. The outstanding balance of these borrowings as of June 30, 2009 was $4.9 million. As each aircraft is delivered to us, we repay the associated borrowings.

Upon delivery of our CRJ-900 and Q400 aircraft, we obtained long-term financing, ranging from 10 to 15 years, for 85% of the aircraft purchase price, the balance of which was $527.3 million at June 30, 2009. We have also obtained a commitment from EDC to finance 85% of the purchase price of the remaining aircraft on order from the delivery date of each aircraft. In addition to utilizing EDC’s offer for debt financing, we expect to seek operating lease financing for some of our remaining Q400 deliveries to reduce the amount of initial capital required to obtain the aircraft and to potentially more favorably utilize certain income tax benefits.

We maintained a revolving line of credit with an institutional lender for a principal amount not to exceed $8.5 million or 75% of the net unpaid balance of our Colgan subsidiary’s eligible accounts receivable. This facility matured on April 15, 2009 and all amounts outstanding were repaid.

We reached a settlement agreement with the Internal Revenue Service (the “Service”) concerning their examination of our federal income tax returns for 2003, 2004, and 2005. The Service had initially proposed a number of adjustments to the Company’s returns totaling approximately $35 million of additional tax, plus accrued interest and penalties on these proposed adjustments. We agreed to pay approximately $3 million of additional income tax and accrued interest in settlement of all open tax matters for these years. We paid this settlement amount during the second quarter of 2009. With this agreement, the Service has completed its examination of our federal tax filings for 2003, 2004 and 2005.

Operating activities. Net cash provided by operating activities was $62.8 million during the six months ended June 30, 2009. This is primarily attributable to the approximately $33 million tax refund we received in April 2009. The remaining increase was due to cash generated from our operations. Net cash used in operating activities was $1.0 million during the six months ended June 30, 2008. This was due primarily to the $20.5 million in hedge related payments. This decrease in cash was offset by various changes in our operating assets and liabilities.

Investing activities. Net cash provided by investing activities for the six months ended June 30, 2009 was $3.7 million. This was primarily attributable to insurance proceeds of $3.6 million and proceeds from redemptions of ARS of $5.7 million, offset by $5.5 million in cash purchases of property and equipment.

Net cash provided by investing activities for the six months ended June 30, 2008 was $31.4 million. This was primarily attributable to net proceeds of investments in ARS of $50.8 million, offset by $19.4 million in cash purchases of property and equipment, primarily consisting of flight equipment.

We expect non-aircraft cash capital expenditures for the remainder of 2009 to be approximately $2 million. We expect to fund the non-aircraft capital expenditures with existing cash resources and cash flows generated from our operations.

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

Financing activities. Net cash used in financing activities for the six months ended June 30, 2009 totaled $41.7 million. This was primarily related to $8.9 million used to repurchase a portion of the Company’s Notes, $8.3 million paid upon the maturity of our line of credit, $4.2 million repaid on our credit facility, $4.1 million for the repayment of pre-delivery payment financing facilities for the last two CRJ-900 aircraft that were delivered in April 2009, and $15.4 million in principal repayments on other debt obligations.

Net cash provided by financing activities for the six months ended June 30, 2008 totaled $8.0 million. During the six months of 2008, we received $91.8 million in debt proceeds, primarily related to the Credit Facility. This was offset by $61.5 million of principal payments on debt obligations, primarily related to our pre-delivery payment facilities, and the $20.0 million purchase of our Series A Preferred Share from Northwest Airlines, Inc. on January 4, 2008.

Deferred tax asset. We have recorded a deferred tax asset of $11.1 million related to future tax benefits. This primarily relates to future tax benefits we will receive for our deferred CRJ-200 ASA revenue. We are recognizing the deferred CRJ-200 ASA revenue over the 11-year term of the CRJ-200 ASA.

Guarantees and indemnifications. We maintain certain standby letter of credit facilities for various vendors. As of June 30, 2009 and December 31, 2008, we had approximately $3.0 million outstanding under these facilities, which are collateralized by $3.0 million that we have invested in certificates of deposit or similar instruments. Total amounts invested in certificates of deposit and other similar instruments were $4.8 million and $5.4 million at June 30, 2009 and December 31, 2008, respectively.

We are party to numerous contracts and real estate leases in which it is common for us to agree to indemnify third parties for tort liabilities that arise out of or relate to the subject matter of the contract or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, we typically indemnify the lessors and related third parties for any environmental liability that arises out of or relates to our leased premises.

In our aircraft lease agreements, we typically indemnify the prime lessor, financing parties, trustees acting on their behalf and other related parties against liabilities that arise from the manufacture, design, ownership, financing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the negligence of these indemnified parties, except for their gross negligence or willful misconduct.

We expect that we would be covered by insurance (subject to deductibles) for most tort liabilities and related indemnities described above with respect to real estate we lease and aircraft we operate.

We do not expect the potential amount of future payments under the foregoing indemnities and agreements to be material.

Off-Balance Sheet Arrangements. None of our operating lease obligations are reflected on our consolidated balance sheets. We are responsible for all maintenance, insurance and other costs associated with these leased assets; however, the lease agreements do not include a residual value guarantee, fixed price purchase option or other similar guarantees. We have no other off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Because the majority of our contracts are capacity purchase agreements, our exposure to market risks such as commodity price risk (e.g., aircraft fuel prices) is primarily limited to our pro-rate operations, which comprise 19% of our consolidated revenues. With our 2007 acquisition of Colgan and our contracts with Delta and Continental that include the purchase of aircraft, we are exposed to commodity price and interest rate risks as discussed below.

Commodity Price Risk

Our pro-rate operations include exposure to certain market risks primarily related to aircraft fuel, which recently has been extremely volatile. Aviation fuel expense is a significant expense for any air carrier, and even marginal changes in the cost of fuel greatly affect a carrier’s profitability. Standard industry contracts do not generally provide protection against fuel price increases, nor do they ensure availability of supply. While our capacity purchase agreements require that fuel be provided to us at no cost, thereby reducing our overall exposure to fuel price fluctuations, our pro-rate code-share agreements with Continental, US Airways, and United expose us to fuel price risk. Slightly offsetting our fuel risk, our agreement with Continental provides for an adjustment to the pro-rate revenue we receive from Continental based on projected changes in fuel prices. For the projected annualized fuel consumption related to these agreements, each ten percent change in the price of jet fuel amounts to an approximate $2.1 million change in annual fuel costs.

Interest Rate Risk

Aircraft financing. We are exposed to interest rate risk from the time of entering into purchase commitments until the delivery of aircraft, at which time we receive permanent, fixed-rate financing for each aircraft. As of June 30, 2009, we accepted delivery of all of 16 CRJ-900 aircraft. In January 2009, we entered into a purchase agreement for 15 firm Q400 aircraft with Bombardier, which will be delivered between August 2010 and April 2011. Should interest rates change by 100 basis points before we take delivery, and assuming that we do not hedge the anticipated debt on the remaining Q400 aircraft, aggregate interest expense in the first year of financing would change by approximately $3.0 million.

Credit Facility. We are also exposed to interest rate risk on our revolving term loan with Citigroup (the “Credit Facility”), the balance of which was $85.8 million as of June 30, 2009. Should interest rates change by 100 basis points, aggregate interest expense related to the Credit Facility over its remaining term would change by approximately $0.5 million.

Investment income. Our earnings are affected by fluctuations in interest rates due to the impact those changes have on the amount of interest income we earn from our investments, which primarily consists of ARS and taxable money market securities. We do not purchase or hold any derivative financial instruments to protect against the effects of changes in interest rates on our interest income. Based on our current ARS balance and other taxable money market securities, a 100 basis point change in interest rates would result in an increase or decrease in annual investment income of approximately $2.2 million. See Note 10 in Item 1 of this Form 10-Q for additional information about ARS.

Senior convertible notes. While we pay interest on the Notes at a fixed rate of 3.25%, the fair value of the Notes is sensitive to changes in interest rates and to changes in the market price of our common stock. Interest rate changes may result in increases or decreases in the fair value of the Notes due to differences between market interest rates and rates in effect at the inception of the obligation. The fair value of the Notes may also increase or decrease with differences between the current market price of our common stock and the market price on the original issuance date of the Notes. Unless we elect to repurchase additional Notes in the open market, changes in their fair value have no impact on our consolidated financial statements as a whole. The estimated fair value of the Notes on July 31, 2009 was approximately $90.5 million, based on quoted market prices.

Item 4. Controls and Procedures

The Company, under the supervision and participation of its management, including the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and completely and accurately reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There has been no change in our internal control over financial reporting during the three months ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

Pinnacle and Colgan are defendants in various ordinary and routine lawsuits incidental to our business. While the outcome of these lawsuits and proceedings cannot be predicted with certainty, it is the opinion of our management, based on current information and legal advice, that the ultimate disposition of these suits will not have a material adverse effect on our financial statements as a whole.

September 11, 2001 Litigation. Colgan is a defendant in litigation resulting from the September 11, 2001 terrorist attacks. The Company believes it will prevail in this litigation; any adverse outcome from this litigation is expected to be covered by insurance and would therefore have no material adverse effect on the Company’s financial position, results of operations and cash flows.

Colgan Flight 3407. On February 12, 2009, Colgan Flight 3407, operated for Continental under the Company’s Continental CPA, crashed in a neighborhood near the Buffalo Niagara International Airport in Buffalo, New York. All 49 people aboard, including 45 passengers and four members of the flight crew, died in the accident. Additionally, one individual died inside the home destroyed by the aircraft’s impact, increasing the total fatality count to 50 individuals. Several lawsuits related to this accident have been filed against the Company, and additional litigation is anticipated. We carry aviation risk liability insurance and believe that this insurance is sufficient to cover any liability arising from this accident.

Item 1A. Risk Factors

There are no material changes to the risk factors described under the title “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

The Company’s Annual Meeting of Stockholders was held on May 21, 2009. The following Class II directors were elected to our Board of Directors:

Nominee	Votes For	Votes Withheld

Donald J. Breeding	15,429,839	290,281
Susan M. Coughlin	15,436,749	283,371
R. Philip Shannon	15,433,320	286,800

A proposal to amend the 2003 Stock Incentive Plan was voted on by stockholders as follows:

Votes For	Votes Against	Votes Abstaining

6,965,928	4,725,240	6,448

A proposal to ratify the appointment by the Audit Committee of the Board of Directors of Ernst & Young LLP as the principal independent auditors for 2009 was voted on by stockholders as follows:

Votes For	Votes Against	Votes Abstaining

15,604,342	105,299	10,479

The following directors’ terms of office as a director continued after the Annual Meeting: Donald J. Breeding, Susan M. Coughlin, Ian Massey, James E. McGehee, Jr., Thomas S. Schreier, Jr., Alfred T. Spain, R. Philip Shannon, Nicholas R. Tomassetti and Philip H. Trenary.

Item 5. Other Information

None.

Item 6. Exhibits

Index of Exhibits

Certain portions of the exhibits described below have been omitted. The Company has filed and requested confidential treatment for non-public information with the Securities and Exchange Commission.

The following exhibits are filed as part of this Form 10-Q.

Exhibit

Number Description

3.1	Second Amended and Restated Certificate of Incorporation of Pinnacle Airlines Corp. (the “Registrant”) (Incorporated by reference to the Registrant’s Registration Statement Form S-1 (Registration No. 333-83359), as amended (the “S-1”) initially filed on February 25, 2002)

3.2	Certificate of Correction Filed to Correct a Certain Error in the Second Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to the S-1)

3.3	Amended and Restated Bylaws, dated January 14, 2003, of the Registrant (Incorporated by reference to the S-1)

4.1	Specimen Stock Certificate (Incorporated by reference to the S-1)

4.2	Rights Agreement between the Registrant and EquiServe Trust Company, N.A., as Rights Agent (Incorporated by reference to the S-1)

4.3	Indenture, 3.25% Senior Convertible Notes due 2025, dated as of February 8, 2005, by and between the Registrant and Deutsche Bank National Trust Company (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 8, 2005)

4.4

Registration Rights Agreement made pursuant to the Purchase Agreement dated February 3, 2005, dated as of February 8, 2005, by and among the Registrant, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Raymond James & Associates, Inc. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 8, 2005)

10.1#

Loan Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc, the Registrant, and First Tennessee Bank National Association (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 23, 2005)

10.2	Sublease Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.2.1

Form of First Amendment to Sublease Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.2#

Guaranty Agreement between Pinnacle Airlines, Inc. and First Tennessee Bank National Association (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 23, 2005)

10.3	Engine Lease Agreement between Pinnacle Airlines, Inc., the Registrant, and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.3.1

Form of First Amendment to Engine Lease Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.4#

Revolving Credit Note dated as of June 16, 2005 between Pinnacle Airlines, Inc. and First Tennessee Bank National Association (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 23, 2005)

10.5#

Security Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc. and First Tennessee Bank National Association (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 23, 2005)

10.6#

Negative Pledge Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc. and First Tennessee Bank National Association (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 23, 2005)

10.7#

Negative Pledge Agreement dated as of June 16, 2005 between the Registrant and First Tennessee Bank National Association (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 23, 2005)

10.8†

Pinnacle Airlines Corp. 2003 Stock Incentive Plan (Incorporated by reference to the S-1)

10.9	Form of Incentive Stock Option Agreement for options granted under the Pinnacle Airlines Corp. 2003 Stock Incentive Plan (Incorporated by reference to the S-1)

10.10†

Pinnacle Airlines, Inc. Annual Management Bonus Plan (Incorporated by reference to the S-1)

Exhibit

Number Description

10.11

Amended and Restated Sublease Agreement dated as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (SBN Facilities) (Incorporated by reference to the S-1)

10.12

Sublease Agreement dated as of August 1, 2002 between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (TYS Facilities) (Incorporated by reference to the S-1)

10.13

Form of Amended and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (DTW Facilities) (Incorporated by reference to the S-1)

10.14

Form of Amended and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (MEM Facilities) (Incorporated by reference to the S-1)

10.15

Form of Amended and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (MSP Facilities) (Incorporated by reference to the S-1)

10.16

Intentionally omitted

10.17

Intentionally omitted

10.18

Lease Guaranty issued by the Registrant to Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.19

Sublease Guaranty issued by the Registrant to Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.20

Airline Services Agreement dated as of March 1, 2002 among the Registrant, Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.21

Airline Services Agreement dated as of January 14, 2003 among the Registrant, Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.21.1

Amendment No. 1 dated as of September 11, 2003 to the Airline Services Agreement dated as of January 14, 2003 among the Registrant, Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.21.2

Form of Amendment No. 2 dated as of November 26, 2003 to the Airline Services Agreement dated as of January 14, 2003 among the Registrant, Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.22

Form of Amended and Restated Ground Handling Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.23

Form of Amended and Restated Information Technology Services Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.24

Form of Amended and Restated Family Assistance Services Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.25

Form of Amended and Restated Manufacturer Benefits Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.26

Form of Amended and Restated Preferential Hiring Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.27

Purchase Agreement, Senior Convertible Notes due 2025, dated as of February 3, 2005, by and among, the Registrant., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Raymond James & Associates, Inc. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 8, 2005)

10.28†

Second Amended and Restated Management Compensation Agreement between Pinnacle Airlines, Inc. and Philip H. Trenary (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 16, 2008)

10.29†

Amended and Restated Management Compensation Agreement between Pinnacle Airlines, Inc. and Peter D. Hunt (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 16, 2008)

10.30†

Amended and Restated Management Compensation Agreement between Pinnacle Airlines, Inc. and Douglas W. Shockey (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 16, 2008)

10.31†

Form of Indemnity Agreement between the Registrant and its directors and officers (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 1, 2006)

10.32

Assignment of Claim Agreement between Pinnacle Airlines, Inc. and Goldman Sachs Credit Partners, L.P., dated as of October 5, 2006 (Incorporated by reference to the Registrant’s Form 10-K filed on March 8, 2007)

Exhibit

Number Description

10.40

Assumption and Claim Resolution Agreement between Pinnacle Airlines, Inc., the Registrant, and Northwest Airlines, Inc., dated as of December 20, 2006 (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 3, 2007)

10.41

Amended and Restated Airline Services Agreement by and among Pinnacle Airlines, Inc., the Registrant, and Northwest Airlines, Inc., dated December 15, 2006, effective as of January 1, 2007 (Incorporated by reference to the Registrant’s Form 10-K filed on March 8, 2007)

10.42

Amendment No. 1 dated as of November 21, 2007 to the Amended and Restated Airline Services Agreement by and among Pinnacle Airlines, Inc., the Registrant, and Northwest Airlines, Inc., dated December 15, 2006

10.43

CF34-3B1 Engine Hourly Rate Program Repair and Services Agreement between Northwest Airlines, Inc. and Standard Aero Ltd., dated as of September 1, 2007 (Incorporated by reference to the Registrant’s Form 10-K filed on March 17, 2008)

10.50

Stock Purchase Agreement, dated as of January 18, 2007, by and among Colgan Air, Inc. and the Registrant (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 24, 2007)

10.60

Capacity Purchase Agreement between Continental Airlines, Inc., the Registrant, and Colgan Air, Inc., dated as of February 2, 2007 (Incorporated by reference to the Registrant’s Form 10-Q filed on November 2, 2007)

10.61

Purchase Agreement between Bombardier Inc. and the Registrant, relating to the purchase of twenty-five (25) Bombardier Q400 series aircraft, dated as of February 17, 2007 (Incorporated by reference to the Registrant’s Form 10-K filed on March 17, 2008)

10.62

Form of Loan Agreement, between the Registrant and Export Development Canada, for the financing of Q400 and CRJ-900 aircraft (Incorporated by reference to the Registrant’s Form 10-K filed on March 17, 2008)

10.65

Delta Connection Agreement among Delta Air Lines, Inc., the Registrant, and Pinnacle Airlines, Inc., dated as of April 27, 2007 (Incorporated by reference to the Registrant’s Form 10-Q filed on November 2, 2007)

10.66

Purchase Agreement between Bombardier Inc. and Pinnacle Airlines, Inc, relating to the purchase of sixteen (16) Bombardier CRJ-900 series aircraft, dated as of April 26, 2007 (Incorporated by reference to the Registrant’s Form 10-K filed on March 17, 2008)

10.70

Credit Facility Agreement between Citigroup Global Markets, Inc. and the Registrant, dated as of March 11, 2008 (Incorporated by reference to the Registrant’s Form 10-Q filed on May 8, 2008)

10.71

Amendment No. 1, dated as of June 18, 2008, to the Credit Facility Agreement between the Registrant, and Citigroup Global Markets, Inc., dated as of March 11, 2008 (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 20, 2008)

10.72

Amendment No. 1, dated as of March 2, 2009, to the Amended and Restated Loan Agreement between the Registrant and Citigroup Global Markets, Inc., dated as of November 5, 2008 (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on March 5, 2009)

10.73

Third Amendment, dated as of January 13, 2009, to the Capacity Purchase Agreement between Continental Airlines, Inc., the Registrant, and Colgan Air, Inc., dated as of February 2, 2007

10.74

Loan Agreement, dated as of January 30, 2009, between Colgan Air, Inc., and Export Development Canada

10.75

Change Order No. 16, dated as of January 13, 2009, and Change Order No. 18, dated as of February 6, 2009, to the Purchase Agreement between Bombardier Inc. and the Registrant, relating to the purchase of Bombardier Q400 series aircraft, dated as of February 17, 2007

10.76

United Express Agreement, dated as of November 1, 2008, between United Air Lines, Inc. and Colgan Air, Inc.

10.99.1#

Form of Promissory Note issued by Pinnacle Airlines, Inc. to Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.99.2#

Form of Guaranty of Promissory Note issued by Registrant to Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.99.3#

Revolving Credit Facility dated as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

Exhibit

Number Description

10.99.4#

First Amendment dated as of February 5, 2003 to Revolving Credit Facility dated as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.99.5#

Second Amendment dated as of November 28, 2003 to Revolving Credit Facility dated as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the S-1)

10.99.6#

Third Amendment dated as of December 13, 2004 to Revolving Credit Facility dated as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 16, 2004)

10.99.7#

Fourth Amendment dated as of February 8, 2005 to Revolving Credit Facility dated as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 8, 2005)

10.99.8#

Guaranty dated as of January 14, 2003 issued by Registrant to Northwest Airlines, Inc. (Incorporated by reference to the S-1)

21.1	List of Subsidiaries (Incorporated by reference to the S-1)

23.1 Consent of Independent Registered Public Accounting Firm

31.1* Certification of Chief Executive Officer

31.2* Certification of Chief Financial Officer

32* Certifications of CEO and CFO

*	Filed herewith

†	Management contract or compensatory plan or arrangement

# �� Cancelled agreement referenced in this Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PINNACLE AIRLINES CORP.
By:	/s/ Philip H. Trenary
	Philip H. Trenary
Date: August 7, 2009	President and Chief Executive Officer



By:	/s/ Peter D. Hunt
	Peter D. Hunt
Date: August 7, 2009	Vice President and Chief Financial Officer

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Pinnacle Airlines (PNCL) Inactive 10-Q2009 Q2 Quarterly report

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