UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Or

Commission File Number 001-31898

PINNACLE AIRLINES CORP.

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

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

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

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

Table of Contents

Part I Financial Information

Item 1. Financial Statements

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

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

1

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

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

2

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

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

3

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

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

4

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

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

5

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

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

1. Basis of Presentation

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

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

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

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

2. Change in Ownership and Public Offering

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

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

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

6

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

3. Airline Services Agreement

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

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

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

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

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

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

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

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

7

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

3. Airline Services Agreement (continued)

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

4. Note Payable and Dividends to Northwest

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

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

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

5. Earnings Per Share

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

8

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

5. Earnings Per Share (continued)

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

6. Stock-Based Compensation

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

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

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

7. Line of Credit with Northwest

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

9

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

8. Related Party Transactions

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

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

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

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

9. Income Taxes

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

10

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

9. Income Taxes (continued)

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

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

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

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