UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

or

For the transition period from _______ to ________

Commission file number: 0-25202

KITTY HAWK, INC.

(972) 456-2200
(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 þ No o

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

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o

     The number of shares of common stock, par value $0.000001 per share, outstanding at May 5, 2005 was 50,041,603.

KITTY HAWK, INC.

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KITTY HAWK, INC. AND SUBSIDIARIES

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

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)

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

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)

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

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

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

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KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     The accompanying condensed consolidated financial statements, which should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2004, are unaudited (except for the December 31, 2004 condensed consolidated balance sheet, which was derived from the Company’s audited consolidated balance sheet included in the aforementioned Form 10-K), but have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.

     The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments and incorporates any changes in such estimates and judgments into the accounting records underlying the Company’s consolidated financial statements. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

2. LEGAL PROCEEDINGS

     General Motors and Delphi Automotive were sued in Wayne County, Michigan by a number of air charter carriers in connection with air transportation services we arranged with them on behalf of General Motors and Delphi Automotive and for which the air charter carriers were not paid as a result of our bankruptcy. The air charter carriers are seeking to recover approximately $4.6 million from General Motors and Delphi Automotive. General Motors has named us as a third party defendant in the litigation and is seeking indemnification of up to $4.6 million against us. The parties agreed that the indemnification claim will be heard in the bankruptcy court in Fort Worth, Texas and that we will be dismissed from the litigation in Wayne County, Michigan. On November 3, 2004, the bankruptcy court granted our motion that General Motor’s claim for indemnification be denied in its entirety. General Motors has appealed the bankruptcy court’s dismissal of their claim. While we cannot predict the outcome of the appeal at this time, we believe this claim should have been discharged when our plan of reorganization was confirmed by the bankruptcy court. We will vigorously defend against General Motors’ appeal. No amounts have been accrued for this contingency.

     We are also subject to various legal proceedings and other claims which have arisen in the ordinary course of business. While the outcome of such legal proceedings and other claims cannot be predicted with certainty, our management does not believe that the outcome of any of these matters will have a material adverse effect on our business.

3. STOCK OPTIONS

     In September 2003, the Company’s stockholders approved the Kitty Hawk 2003 Long Term Equity Incentive Plan (the “Plan”). Options granted under the Plan are accounted for under the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations.

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     The Company is required to disclose the pro forma effect of accounting for stock options based on the fair value method. The Company uses the Black-Scholes option pricing model to calculate the fair value of options. The following weighted average assumptions have been used in determining the fair value of the options granted during the periods noted:

     Some of these assumptions are judgmental and highly sensitive in the determination of pro forma compensation expense. The following table illustrates the effect on net income and earnings per share if the Company had applied fair value accounting.

     The Plan provides for the issuance of up to 6,500,000 shares of common stock. In July 2004, the Company’s stockholders approved an additional 500,000 shares of common stock for grant under the Plan effective June 2005. The options granted generally have an exercise price equal to the quoted market price of the stock on the date of grant. The options granted vest over periods of 36 to 48 months. The options expire ten years from the date of grant, subject to earlier forfeiture provisions.

     The following table summarizes the stock option activity under the Plan for the three months ended March 31, 2005:

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     The following table summarizes information about the stock options outstanding at March 31, 2005:

4. OTHER ACCRUED EXPENSES

     Other accrued expenses consist of the following:

5. SEGMENT REPORTING

     The Company’s operations are comprised of two segments — an expedited scheduled freight network and a cargo airline. Each segment’s respective financial performance is detailed below. Each segment is currently evaluated on financial performance at the operating income line.

     The column labeled “other” consists of corporate activities. Business assets are owned by or allocated to each of the business segments. Assets included in the column labeled “other” include cash, allowance for doubtful accounts and the corporate headquarters building. The accounting policies of each segment are the same as those reported in Note 2 of the Annual Report on Form 10-K for the year ended December 31, 2004.

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6. EARNINGS PER SHARE

     In March 2003, the Company issued shares of common stock and warrants to purchase 9,814,886 shares of common stock to its former creditors in accordance with its Plan of Reorganization. Such warrants are treated as outstanding common shares for purposes of calculating loss per share because the exercise price of the warrants is nominal. As of March 31, 2005, warrants to purchase 1,271,971 shares of common stock remain outstanding. These warrants expire in 2013.

     For the three months ended March 31, 2005, the Company did not include outstanding options to purchase 3,916,105 shares of common stock in the diluted loss per share calculation since their effect was antidilutive due to the reported net loss. For the three months ended March 31, 2004, the Company did not include outstanding options to purchase 4,528,750 shares of common stock in the diluted loss per share calculation since their effect was antidilutive due to the reported net loss.

7. RELATED PARTY TRANSACTIONS

     The Company has various agreements and relationships with beneficial owners of 5% or more of the Company’s common stock. See “Item 13. Certain Relationships and Related Transactions” of the Company’s Annual Report of Form 10-K for the year ended December 31, 2004 for information on these agreements and relationships.

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

     The information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q complements the information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2004. Please refer to the information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2004 for additional information regarding our financial condition, changes in financial condition and results of operations.

Executive Overview

     Kitty Hawk is a holding company and currently operates through its two wholly-owned subsidiaries, Kitty Hawk Cargo and Kitty Hawk Aircargo. During the three months ended March 31, 2005, we generated 97.7% of our revenue from Kitty Hawk Cargo’s scheduled freight network and 2.3% of our revenue from Kitty Hawk Aircargo’s cargo airline.

     Scheduled Freight Network. Through Kitty Hawk Cargo, we operate a major independent city-to-city scheduled freight network serving selected cities in the continental U.S. and Canada and San Juan, Puerto Rico, providing expedited and time-definite freight services. In addition, we have business alliances that allow us to provide expedited freight services to Alaska, Hawaii and Mexico.

     Expedited freight includes freight of varying sizes and weights and includes freight transit times from a few hours or overnight to as long as two, three or four days. We generally compete in the heavy weight and oversized, next-morning and two-day expedited freight segment of the U.S. freight transportation industry.

     As an independent freight network, we typically do not transport freight from shippers to our cargo facilities or from our cargo facilities to recipients. As a result, we primarily provide freight services to freight forwarders and logistics companies who either transport the freight to and from our cargo facilities in the origin and destination cities we serve or arrange for others to provide these services. For an additional fee, we also offer on a limited basis an airport-to-door delivery option to our customers and occasionally arrange for the initial pick up of freight from shippers by contracting with local cartage agents in major metropolitan areas of the continental U.S.

     Our scheduled freight network business relies on customers who need expedited or time-definite delivery on an as-needed basis. As the freight is shipped on an as-needed basis, we do not have long-term contracts with our customers. Without long-term customer contracts, the overall demand for our expedited freight services is primarily influenced by the health of the U.S. economy which is cyclical in nature, the seasonality of the industries generating the freight we transport in our network and the availability and cost of alternative expedited freight services. Because of the foregoing factors, the amount of freight shipped in our scheduled freight network can fluctuate significantly.

     A significant portion of the freight transported in our network relates to the automotive, electronics, telecom and related infrastructure equipment, apparel and other durable goods and equipment industries. The demand for the products produced by these industries and, in turn, the demand for our scheduled freight network services for the transportation of freight from these industries has historically trended in relationship to the strength of the U.S. economy. Furthermore, these industries tend to be seasonal in nature and, as a result, our business is also seasonal with the third and fourth quarters historically being the highest demand and strongest revenue quarters.

     In addition, the demand for our expedited freight services is impacted by the availability and cost of other expedited freight transportation alternatives including services provided by integrated freight carriers and trucking networks. In general, our competitors are impacted by the same economic cyclicality and seasonality trends as we experience in our scheduled freight network. As a result, we believe we experience similar demand and supply relationships as our competitors. To the extent our customers can secure expedited freight services with acceptable service levels at a lower cost than the freight services provided by our scheduled freight network, the demand for our scheduled freight network can be materially adversely affected.

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     Cargo Airline. Kitty Hawk Aircargo, our cargo airline, provides air freight transportation services for Kitty Hawk Cargo’s scheduled freight network. During the three months ended March 31, 2005, Kitty Hawk Aircargo provided 100% of the revenue block hours flown in Kitty Hawk Cargo’s scheduled freight network.

     In addition, when Kitty Hawk Aircargo’s aircraft are not being used in our scheduled freight network, Kitty Hawk Aircargo provides air freight transportation services which include the aircraft, crew, maintenance and insurance, also known as ACMI, and ad-hoc charters for a variety of customers. By providing such operations, Kitty Hawk Aircargo improves the utilization of its aircraft and generates additional revenue when its aircraft would otherwise be idle. During the three months ended March 31, 2005, ACMI and ad-hoc charters generated approximately 2.3% of our revenues.

     On May 5, 2005, Kitty Hawk Aircargo operated six owned Boeing 727-200 cargo aircraft and 11 Boeing 727-200 cargo aircraft available under an aircraft and engine use agreement. On May 4, 2004, Kitty Hawk Aircargo entered into ten year operating leases for seven Boeing 737-300SF cargo aircraft. We took delivery of the first Boeing 737-300SF cargo aircraft in March 2005 and placed it into revenue service during May 2005. We took delivery of the second Boeing 737-300SF cargo aircraft in April 2005 and expect to place it into revenue service during May 2005. We expect to take delivery of the remaining five aircraft during the remainder of 2005. Our current fleet composition plan assumes that the seven Boeing 737-300SF leased aircraft will replace certain of our currently operating Boeing 727-200 cargo aircraft which we expect to remove from revenue service as these Boeing 727-200 cargo aircraft come due for their next heavy maintenance event.

     The Boeing 737-300SF cargo aircraft has higher ownership costs in the form of lease costs and insurance costs than our current fleet of Boeing 727-200 cargo aircraft. In addition, the Boeing 737-300SF cargo aircraft has approximately 30% less cargo capacity as compared to our current fleet of Boeing 727-200 cargo aircraft. We believe the Boeing 737-300SF cargo aircraft generally has lower operating costs than our Boeing 727-200 cargo aircraft as a result of significantly lower jet fuel consumption rates, lower crew costs from operating with a two person crew instead of three as well as lower landing fees and reduced long-term maintenance costs.

     We intend to deploy the Boeing 737-300SF cargo aircraft in situations in which we can take advantage of its lower operating cost and improved performance characteristics and in situations for which its capacity is better suited than the Boeing 727-200 cargo aircraft. Furthermore, our objective is to develop a fleet operating and utilization schedule that largely offsets the higher lease and insurance costs of the Boeing 737-300SF cargo aircraft by achieving higher average utilization per cargo aircraft in our operations as compared to the Boeing 727-200 cargo aircraft. During 2005, as we transition our scheduled freight network operations to include the Boeing 737-300SF cargo aircraft, we expect the utilization levels and lower operating costs of our Boeing 737-300SF cargo aircraft will likely not fully offset the higher lease and insurance costs of the Boeing 737-300SF cargo aircraft as compared to our Boeing 727-200 cargo aircraft. Our inability to achieve sufficient utilization of the Boeing 737-300SF cargo aircraft in our operations could have a material adverse effect on our results of operations.

     Jet Fuel Costs. One of our most significant and variable costs is jet fuel. Our scheduled freight network bears the increases in jet fuel costs. Therefore, we seek to recapture the increase in jet fuel costs through increasing our prices to our customers and/or through temporary fuel surcharges. We include these fuel surcharges in our scheduled freight revenue. Historically, we have been able to largely offset the rising costs of jet fuel through these fuel surcharges and/or by raising our prices to our customers. However, if due to competitive pressures or other reasons, we are unable to raise our fuel surcharge and/or our prices, we may be forced to absorb increases in jet fuel costs. In addition, as we attempt to recapture the increase in jet fuel costs through increasing our prices to our customers and/or through temporary fuel surcharges, our customers may seek lower cost freight transportation alternatives to our scheduled freight network. If jet fuel prices remain at recent historically high levels for an extended period, and we are unable to continue to maintain or raise our fuel surcharge and/or our prices sufficiently and/or customers seek lower cost freight transportation alternatives, our financial condition and results of operations could be materially adversely affected. The rising cost of jet fuel increases our working capital requirements because we pay for fuel in advance of providing air freight transportation services and typically do not recover these increases through our fuel surcharges or raising prices to our customers until the billing for the air freight transportation service is collected, which averages between 30 to 45 days after the service is performed.

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     We purchase jet fuel from various suppliers at current market prices. We do not currently have any long-term contracts for jet fuel, nor do we currently have any agreements to hedge against increases in the price of jet fuel. From time to time, we review the price and availability of jet fuel. If we have the opportunity and ability to enter into long-term supply contracts for jet fuel or arrangements to hedge against changes in jet fuel prices, we may enter into such agreements or arrangements. During the three months ended March 31, 2005, our jet fuel averaged $1.56 per gallon as compared to $1.17 per gallon for the three months ended March 31, 2004. Jet fuel costs per gallon include the cost of jet fuel and the cost of all taxes, fees and surcharges necessary to deliver the jet fuel into the aircraft. During the three months ended March 31, 2005, we used between 2.3 million and 2.8 million gallons of jet fuel per month, depending on the mix of aircraft employed in our network and the amount, origin and destination of freight shipped and the number of days the network operated during each month. At current levels of operations in our expedited scheduled freight business, each $0.01 change in the price per gallon of jet fuel results in a change in our annual fuel cost of approximately $309,000.

     Seasonality. Our business is seasonal in nature. In a typical year, demand for our expedited freight services is highest in the third and fourth quarters of the year and weakest in the first and second quarters.

     Since November 2004, we believe our expedited freight services have been negatively impacted by the rapidly changing and record high cost of jet fuel which has resulted in our charging our customers higher total prices as we increased the existing fuel surcharge and raised our prices to offset these costs. In addition, we believe our expedited freight services were also negatively impacted by the overall record high price of energy which may have had a dampening effect upon the U.S. economy and, in particular, industries which produce the type of freight transported in our scheduled freight network such as the automotive industry. We believe these factors contributed to lower customer demand for our expedited freight services and downward pressure on our yields. In response to this decrease in demand for freight in our scheduled freight network, we reduced our planned capacity in the scheduled freight network where feasible and implemented other cost containment measures. During the first month of the second quarter of 2005, we believe our expedited scheduled freight business continued to be negatively impacted by these factors.

     Fixed Costs. Our scheduled freight network and cargo airline have significant fixed costs which cannot be materially reduced in the short term. Operating the scheduled freight network requires the operation of the scheduled freight network hub with a certain minimum amount of aircraft and trucking operations. Once chargeable weight and corresponding revenue reaches the break-even point, each additional dollar of revenue contributes a relatively high percentage to operating income. However, if chargeable weight and corresponding revenue does not reach the break-even point, the operations will sustain losses which could be significant depending on the amount of the deficit. Therefore, we typically have seasonal working capital needs in the first and second quarters of the year to the extent that our revenues do not allow us to cover our costs. Since our expedited freight business is both seasonal and tied to the economic trends of the U.S. economy, we may also incur additional working capital needs during the third and fourth quarters of the year.

Capital Requirements, Capital Resources and Liquidity

     Capital Requirements. In addition to our normal operating cash requirements, we believe our cash requirements for the remainder of 2005 include, but are not limited to, projected capital expenditures of $2.1 million, including complying with FAA Airworthiness Directives on our fleet of Boeing 727-200 cargo aircraft and investments in information technology. We also expect to have approximately $2.5 million of cash requirements for integration expenses, capital expenditures, and additional lease deposits during the remainder of 2005 to integrate the Boeing 737-300SF cargo aircraft into our fleet. Our working capital is also affected by the rising cost of jet fuel because we pay for fuel in advance of providing air freight transportation services and typically do not recover these increases through our fuel surcharge until the billing for the air freight transportation service is collected, which is usually between 30 to 45 days after the service is performed.

     Capital Resources. At March 31, 2005, our net working capital was $22.8 million as compared to $25.6 million at December 31, 2004. The decrease in working capital was primarily due to the $2.1 million net loss generated during the quarter ended March 31, 2005 and $1.9 million of capital expenditures during the quarter ended March 31, 2005.

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     Credit Facility. We have a $10.0 million revolving credit facility with Wells Fargo Business Credit, or WFB. Unless earlier terminated, the Credit Facility matures on March 22, 2007 and automatically renews for successive one-year periods thereafter unless terminated by us or WFB by giving the other party 90 days written notice prior to the next maturity date. The Credit Facility bears interest at an annual rate equal to WFB’s prime rate plus a margin of 1.0%. In addition we incur a fee computed at an annual rate of 2.0% of the face amount of each letter of credit issued under the Credit Facility. The Credit Facility is secured by substantially all of our receivables and personal property, other than airframes, aircraft engines and aircraft parts.

     Availability under the Credit Facility is subject to a borrowing base equal to the lesser of $10.0 million and 85% of eligible receivables. WFB may reject any receivable deemed ineligible in the exercise of its business judgment. On May 5, 2005, we had $1.9 million borrowed under the Credit Facility and $1.4 million of outstanding letters of credit, and a borrowing base of $10.0 million.

     The Credit Facility provides for specified events of default that allow WFB to terminate the Credit Facility and accelerate any payments due by us, including if we suffer a material adverse change in our business or financial condition. In addition, the Credit Facility requires us to meet certain financial and operating covenants, limits capital expenditures other than required maintenance on our aircraft, and restricts our ability to commit to or enter into any new aircraft operating leases unless certain financial covenants are met.

     Effective as of January 31, 2005, we entered into an amendment to the Credit Facility that eliminated the monthly net loss covenant, modified the minimum quarterly year-to-date net income (loss) covenant levels and the minimum quarterly year-to-date net worth covenant and established a minimum liquidity requirement that requires us to maintain $3.0 million in liquid assets at all times. We are in compliance with all requirements of the Credit Facility as of March 31, 2005.

     Although the Credit Facility has a final maturity date of March 22, 2007, we classify any balances outstanding under the Credit Facility as current pursuant to EITF Issue 95-22, as the agreement contains a subjective acceleration clause if in the opinion of the lenders there is a material adverse change in our business, and provides the lenders direct access to our cash receipts.

     Liquidity. Currently, our primary source of liquidity is our cash and cash equivalents and cash flow from operations. In addition, we may supplement our liquidity by accessing our $10.0 million Credit Facility with WFB.

     At March 31, 2005, cash and cash equivalents were $13.3 million as compared to $16.3 million at December 31, 2004 and we had $6.8 million of unused availability under the Credit Facility compared to $7.7 million at December 31, 2004. Of the $13.3 million in cash and cash equivalents at March 31, 2005, a minimum of $3.0 million is required to be maintained at all times under the current covenants of the Credit Facility. The decrease in cash and cash equivalents of $3.0 million is a result of using $2.0 million to fund our operations and a net $1.1 million used in investing activities, which included $1.9 million for the acquisition of operating assets offset by $0.1 million of proceeds from the sale of idle assets and $0.7 million recovery of restricted cash. In addition, we generated $0.1 million from the exercise of outstanding stock options and warrants to acquire stock in the first quarter of 2005. At May 5, 2005, we had $10.7 million of cash and cash equivalents on hand, of which we are required to maintain a minimum balance of $3.0 million in liquid assets at all times, and $6.6 million of unused availability under our Credit Facility.

     We believe that our cash flow from operations, availability under our Credit Facility and cash on hand will be sufficient to meet our anticipated cash requirements for the next 12 months. However, if the demand for our expedited freight services continues to be negatively impacted by our having to charge our customers higher total prices due to the record high cost of jet fuel or by a continuing general dampening of the U.S. economy, and in particular the industries which produce the type of freight transported in our scheduled fright network, we may need to supplement our current sources of liquidity over the next 12 months and/or we may need to seek modifications to our Credit Facility. All of our assets besides aircraft and aircraft parts are encumbered under the Credit Facility, and our owned aircraft and aircraft parts have limited value and marketability. There can be no assurance that we will be able to supplement our existing sources of liquidity or make modifications to our Credit Facility if such actions become necessary.

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Results of Operations

     Revenue. Included in our revenue are the following major categories:

	•	Scheduled freight revenue, which is generated from freight transportation services provided by our expedited scheduled freight network. It also includes revenue generated from our fuel and security surcharges. The fuel surcharge seeks to mitigate the increases in our fuel expense resulting from higher fuel prices. The security surcharge seeks to mitigate the increased costs of security measures that have been implemented as a result of regulations adopted by the TSA.
	•	ACMI revenue, which is generated from short to medium-term contracts with third parties by our cargo airline under which we generally provide the aircraft, crew, maintenance and insurance; and
	•	Miscellaneous revenue, which is generated from ad-hoc charters provided by our cargo airline, maintenance revenue and freight handling services provided for third parties.

     Cost of Revenue. Included in our cost of revenue are the following major categories:

•

Flight Expense, which consists of costs related to the flight operations of our cargo airline, including:

	•	flight crew member wages, benefits, training and travel;
	•	operating usage and lease expense for Trust Agreement and leased aircraft operated and flown by Kitty Hawk Aircargo;
	•	insurance costs related to aircraft operated and flown by Kitty Hawk Aircargo; and
	•	flight operations and airline management costs, including associated wages and benefits.

•

Transportation Expense, which consists of costs related to the physical movement of freight between our cargo facilities and which is not otherwise classified as flight expense, including:

	•	third party aircraft charter expense;
	•	aircraft ground operating costs, such as landing and parking fees charged by airports and the cost of deicing aircraft;
	•	trucking expenses for cities in our expedited scheduled freight network that are not served by our aircraft; and
	•	pickup and/or final delivery expenses as directed by customers.

	•	Fuel Expense, which consists of the all-inclusive cost of all jet fuel consumed in our expedited scheduled freight network and on ad-hoc charters that include jet fuel in the charter service, and the cost of all taxes, fees and surcharges necessary to deliver the jet fuel into the aircraft.
	•	Maintenance Expense, which consists of costs to maintain airframes and aircraft engines operated by our cargo airline, including:

	•	wages and benefits for maintenance, records and maintenance management personnel;
	•	costs for contract mechanics at cargo facility outstations;
	•	costs of aircraft parts and supplies; and
	•	accruals for maintenance of airframes and engines during 2004.

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•

Freight Handling Expense, which consists of costs to handle the loading and unloading of freight on aircraft and trucks operating within our expedited scheduled freight network, including:

	•	wages and benefits for our Fort Wayne, Indiana hub sort and ramp operations personnel;
	•	contract services to warehouse, load and unload aircraft principally at outstation cargo facilities; and
	•	wages and benefits for our outstation cargo facility personnel and field operations managers.

	•	Depreciation and Amortization, which consists of depreciation and amortization expenses for our owned airframes and aircraft engines and freight-handling equipment.
	•	Operating Overhead Expense, which consists of direct overhead costs related to operating our expedited scheduled freight network and cargo airline, including:

	•	wages and benefits for operational managers and customer service personnel of Kitty Hawk Cargo;
	•	expedited scheduled freight network sales and marketing expenses;
	•	rent and utilities;
	•	bad debt expense;
	•	general operational office expenses; and
	•	induction costs related to the Boeing 737-300SF cargo aircraft.

     General and Administrative Expenses. General and administrative expenses consist of salaries, benefits and expenses for executive management (other than operational management of Kitty Hawk Aircargo and Kitty Hawk Cargo), information technology, human resources, accounting, finance, legal and corporate communications personnel. In addition, costs for corporate governance, strategic planning, financial planning and asset management are included in general and administrative expenses. Also included are costs associated with the performance based compensation program, legal and professional fees and consulting fees.

Critical Accounting Policies

     For a discussion of our critical accounting policies refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2004. There have been no material changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2004.

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS 123R, “Share-Based Payment,” which replaces Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FAS 123.” SFAS 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method and generally would require that such transactions be accounted for using a fair-value-based method and recognized as expense over the period during which an employee is required to provide services in exchange for the award. SFAS 123R is effective for annual periods beginning after June 15, 2005. Although we have not yet determined the impact of applying the

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various provisions of SFAS 123R, we expect our reported earnings will be lower than they would have been if SFAS 123R did not apply.

QUARTER ENDED MARCH 31, 2005 COMPARED TO QUARTER ENDED MARCH 31, 2004

     The following table presents, for the periods indicated, condensed consolidated statement of operations data expressed as a percentage of total revenue:

Revenue

     General. The following table presents, for the periods indicated, the components of our revenue in dollars and as a percentage of our total revenue and the percentage change from period-to-period:

     Scheduled Freight. For the quarter ended March 31, 2005, the $0.4 million decrease in our scheduled freight revenue was due to a 6.6% decrease in our chargeable weight offset by an increase of 5.9% in our average yield as compared to the quarter ended March 31, 2004.

     Our yield increase was due to an increase in the fuel surcharge, the implementation of a security surcharge and a revised pricing structure. The gross yield increase resulting from the increase in fuel and security surcharges and the revised pricing structure was partially offset by competitive pricing pressures and a higher proportion of our chargeable weights from lower yielding markets.

     Our chargeable weight decrease was due to reduced demand during the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004. We believe the decrease in demand experienced during the quarter ended March 31, 2005 as compared the quarter ended March 31, 2004 was primarily due to the high cost of jet fuel which resulted in our charging our customers higher total prices as we increased the existing fuel surcharge and/or prices to offset these costs and a general dampening of the U.S. economy, and in particular, the industries which produce the type of freight transported in our scheduled freight network. This general decrease in demand experienced during the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004 was

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partially offset by an increase in chargeable weight resulting from our second quarter 2004 expansion into San Juan, Puerto Rico.

     ACMI. For the quarter ended March 31, 2005, we generated $0.5 million of ACMI revenue while we generated no ACMI revenue for the quarter ended March 31, 2004.

     Miscellaneous. For the quarter ended March 31, 2005, our miscellaneous revenue resulted from flying ad-hoc charter services for several customers which generated $0.3 million of revenue. Our miscellaneous revenue for the quarter ended March 31, 2004 included $0.5 million from flying ad-hoc charter services.

Cost of Revenue

     General. The following table presents, for the periods indicated, the components of our cost of revenue in dollars and as a percentage of total revenue and the percentage change from period-to-period:

     Flight Expense. For the quarter ended March 31, 2005, flight expense decreased $0.6 million, or 8.1%, compared to the quarter ended March 31, 2004. This decrease was primarily a result of a lower aircraft lease expense and lower aircraft insurance expense offset by higher crew costs per revenue block hour flown.

     Our aircraft lease expense decreased $1.0 million and our aircraft insurance costs decreased $0.1 million due to the expiration of four aircraft leases on May 8, 2004. Our aircraft flew a total of 0.1%, or 9 less revenue block hours for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004. Our cargo airline flew 55, or 0.9%, less block hours for the scheduled freight network offset by 46, or 28.6%, more block hours for our ACMI and ad-hoc charter customers for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004. Crew costs increased $0.5 million due in part to higher travel, longevity pay increases, and slightly higher paid versus flown hours.

     Transportation Expense. For the quarter ended March 31, 2005, transportation expense increased $0.1 million, or 3.6%, from the quarter ended March 31, 2004. This increase is comprised of a $0.3 million increase in trucking expense incurred due to additional road feeder markets, the offering of our new airport-to-door delivery option, and higher fuel surcharges assessed by the truck carriers offset in part by a $0.2 million decrease in aircraft ground operating costs during the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004.

     Fuel Expense. For the quarter ended March 31, 2005, fuel expense increased $2.7 million, or 29.8%, as compared to the quarter ended March 31, 2004. Fuel expense is comprised of two elements: our average cost per gallon and the number of gallons consumed. Our average cost per gallon of fuel increased $0.39, or 33.9%, for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004. The number of gallons used for the quarter ended March 31, 2005 decreased by approximately 0.1 million gallons, or 1.9%, as compared to the quarter ended March 31, 2004. The decrease in fuel consumption is primarily due to slightly fewer block hours flown and a higher relative usage of aircraft which consume less fuel per block hour flown.

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     Maintenance Expense. For the quarter ended March 31, 2005, maintenance expense decreased $0.8 million, or 24.6%, as compared to the quarter ended March 31, 2004.

     Included in maintenance expense for the quarter ended March 31, 2004 is a $1.2 million charge to maintenance expense at March 31, 2004 to meet the estimated additional lease return obligations on four Boeing 727-200 cargo aircraft which were returned during the second and third quarters of 2004, an increase of $0.2 million related to Pratt Whitney JT8D-9A engine maintenance reserves and a $0.5 million reversal of excess airframe maintenance reserves at March 31, 2004 on one Boeing 727-200 cargo airframe that completed a heavy maintenance event in March 2004.

     If not for the net $0.9 million increase from the items listed above in 2004, maintenance expense would have increased $0.1 million, or 5.0%, for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004.

     Freight Handling Expense. For the quarter ended March 31, 2005, freight handling expense decreased $0.2 million, or 3.5%, as compared to the quarter ended March 31, 2004. The decrease in freight handling expense was due to a 6.6% decrease in chargeable weight. Freight handling expense increased 3.6% on a chargeable weight basis for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004 due to the fixed cost components of our aircraft and freight handling contracts.

     Depreciation and Amortization. For the quarter ended March 31, 2005, depreciation and amortization expense was flat as compared to the quarter ended March 31, 2004. We incurred lower depreciation expense for engines during the quarter ended March 31, 2005 as compared to March 31, 2004 due to a number of engines becoming fully depreciated during 2004. This decrease in engine depreciation expense was offset by higher airframe depreciation expense for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004 due to the investment in 2004 and 2005 of capitalized airframe maintenance events and airworthiness directives.

     Operating Overhead Expense. For the quarter ended March 31, 2005, operating overhead increased $0.3 million, or 11.1%, as compared to the quarter ended March 31, 2004. During the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004, we incurred $0.5 million of costs related to the induction of the Boeing 737-300SF cargo aircraft. This increase was offset by a $0.1 million reduction in our bad debt expense due to the collection of a previously reserved receivable and a $0.1 million reduction in our allowance for doubtful accounts as compared to March 31, 2004 based on our estimate of uncollectible accounts receivable.

Gross Profit

     As a result of the foregoing, for the quarter ended March 31, 2005, we recognized a gross loss of $0.4 million compared to a gross profit of $1.2 million for the quarter ended March 31, 2004.

General and Administrative Expense

     General and administrative expense decreased $0.7 million, or 24.0%, for the quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004. The decrease is primarily due to incurring $0.4 million less in performance based compensation for eligible employees and executive officers, and $0.3 million in lower professional fees related to tax return preparation, bankruptcy proceedings and the shareholder rights agreement.

Other (Income) Expense

     Other income for the quarter ended March 31, 2005 resulted primarily from $0.4 million related to the recovery of retroactive adjustments on our worker’s compensation policy related to the 1998 and 1999 policy years which were pre-bankruptcy and resulted partially from our discontinued operations and $0.1 million related to the recovery of a 2001 customer accounts receivable balance which was reserved during their bankruptcy proceedings. Other income for the quarter ended March 31, 2004 relates primarily to interest income on notes receivable and our invested cash balances.

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Income Taxes

     For the quarter ended March 31, 2005, we recognized no tax benefit because we continue to provide a full valuation allowance on our deferred tax assets.

     Contractual Obligations

     The following table sets forth our contractual obligations as of May 5, 2005 for the periods shown (dollars in thousands):

     Forward-Looking Statements

     This quarterly report on Form 10-Q contains “forward-looking statements” concerning our business, operations and financial performance and condition. When we use the words “estimates,” “expects,” “forecasts,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions, we intend to identify forward-looking statements.

     We have based our forward-looking statements on our current assumptions and expectations about future events. We have expressed our assumptions and expectations in good faith, and we believe there is a reasonable basis for them. However, we cannot assure you that our assumptions or expectations will prove to be accurate.

     A number of risks and uncertainties could cause our actual results to differ materially from the forward-looking statements contained in this quarterly report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements are set forth in this quarterly report on Form 10-Q. These risks, uncertainties and other important factors include, among others:

	•	loss of key suppliers, significant customers or key management personnel;
	•	increased competition, including the possible impact of any mergers, alliances or combinations of competitors;
	•	changes in the cost and availability of jet fuel and our ability to recapture increases in the cost of jet fuel through the use of fuel surcharges;
	•	limitations upon financial and operating flexibility due to the terms of our credit facility;
	•	change in our capital resources and liquidity;
	•	financial costs and operating limitations imposed by both the current and the potential additional future unionization of our workforce;
	•	payment defaults by our customers;

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	•	writedowns of the value of our parts, airframes or aircraft engines
	•	changes in the cost of airframe or aircraft engine maintenance and in our maintenance reserves;
	•	changes in general economic conditions;
	•	changes in the cost and availability of ground handling and storage services;
	•	changes in the cost and availability of aircraft or replacement parts;
	•	changes in our business strategy or development plans;
	•	changes in government regulation and policies, including regulations affecting maintenance requirements for, and availability of, aircraft;
	•	foreign political instability and acts of war or terrorism;
	•	adverse litigation judgments or awards;
	•	the ability to integrate efficiently the Boeing 737-300SF cargo aircraft into our operations;
	•	future delays in receiving or placing the Boeing 737-300SF cargo aircraft into revenue service;
	•	the ability to negotiate reasonably economical maintenance agreements to maintain our cargo aircraft;
	•	findings of environmental contamination; and
	•	limitations in our ability to offset income with our future deductible tax attributes.

     The impact of any terrorist activities or international conflicts on the U.S. and global economies in general, or the transportation industry in particular, could have a material adverse effect on our business and liquidity. Other factors may cause our actual results to differ materially from the forward-looking statements contained in this quarterly report on Form 10-Q. These forward-looking statements speak only as of the date of this quarterly report on Form 10-Q and, except as required by law, we do not undertake any obligation to publicly update or revise our forward-looking statements. We caution you not to place undue reliance on these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We have not experienced any significant changes in our market risk since the disclosures made in “Item 7A: Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

     Evaluation of Disclosure Controls and Procedures. The term “disclosure controls and procedures” is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, and they have concluded that as of that date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

     Changes in Internal Controls. We maintain a system of internal controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. There were no changes to our internal controls that have materially affected, or are likely

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to materially affect, internal controls subsequent to the date of their evaluation by our Chief Executive Officer and our Chief Financial Officer, including any corrective actions with regard to significant deficiencies and material weaknesses.

     We are currently undergoing a comprehensive effort to ensure compliance with the new regulations under Section 404 of the Sarbanes-Oxley Act that take effect for our fiscal year ending December 31, 2005 if we become an accelerated filer in fiscal year 2005 or for our fiscal year ending December 31, 2006 if we do not become an accelerated filer in fiscal year 2005. This effort includes internal control documentation and review under the direction of senior management. In the course of its ongoing evaluation, our management has identified certain areas requiring improvement, which we are addressing.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     General Motors. General Motors and Delphi Automotive were sued in Wayne County, Michigan by a number of air charter carriers in connection with air transportation services we arranged with them on behalf of General Motors and Delphi Automotive and for which the air charter carriers were not paid as a result of our bankruptcy. The air charter carriers are seeking to recover approximately $4.6 million from General Motors and Delphi Automotive. General Motors has named us as a third party defendant in the litigation and is seeking indemnification of up to $4.6 million against us. The parties agreed that the indemnification claim will be heard in the bankruptcy court in Fort Worth, Texas and that we will be dismissed from the litigation in Wayne County, Michigan. On November 3, 2004, the bankruptcy court granted our motion that General Motor’s claim for indemnification be denied in its entirety. General Motors has appealed the bankruptcy court’s dismissal of their claim. While we cannot predict the outcome of the appeal at this time, we believe this claim should have been discharged when our plan of reorganization was confirmed by the bankruptcy court. We will vigorously defend against General Motors’ appeal. No amounts have been accrued for this contingency.

     Other. We are also subject to various legal proceedings and other claims which have arisen in the ordinary course of business. While the outcome of such legal proceedings and other claims cannot be predicted with certainty, our management does not believe that the outcome of any of these matters will have a material adverse effect on our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Not applicable.

ITEM 5. OTHER INFORMATION

     Not applicable.

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ITEM 6. EXHIBITS

     The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.

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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, on May 9, 2005.

	KITTY HAWK, INC.
	By:	/s/ RANDY S. LEISER
		Randy S. Leiser
		Vice President - Finance and Chief Financial Officer (Authorized officer and principal financial officer)

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