Summary of PINNACLE AIRLINES CORP

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

As with the second quarter of 2009, our results of operations improved substantially year-over-year during the third quarter of 2009. Our consolidated operating income improved by $3.8 million as compared to the third 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, partially offset by a decline in unit revenue in Colgan's pro-rate operations. Our net income in 2009 is also substantially increased as a result of our settlement with the Internal Revenue Service related to their review of our tax filings for 2003, 2004, and 2005. We recorded a nonrecurring increase in net income of $13.6 million from this settlement.

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

In addition to improvements in our operating and net income, we have completed a number of transactions during 2009 to increase our liquidity in advance of the date that holders of our remaining outstanding 3.25% senior convertible notes (the "Notes") may require us to repurchase them. Holders of the Notes have an option on February 15, 2010 (the "Put Date") to require us to repurchase the then outstanding Notes for the par amount plus accrued interest. Because of this impending obligation in February 2010, we have focused on increasing our liquidity and reducing the amount of the Notes outstanding through secondary market repurchases. During the third quarter of 2009, we completed a $25 million term loan collateralized by our pool of spare rotable and expendable inventory and certain spare engines (the "Spare Parts Loan"). In addition, we entered into a settlement agreement (the "ARS Settlement") with a financial institution that sold us our portfolio of auction rate securities ("ARS"). The ARS Settlement increased our cash balance by approximately $27 million. As a result of these transactions and positive operating cash flow of $84.0 million for the first nine months of 2009, we have substantially increased our liquidity position. We used this increase in liquidity to repurchase $12 million par amount of the Notes in the first quarter of 2009 and approximately $78 million par amount of the Notes during the third quarter of 2009. Approximately $31 million par amount of the Notes remains outstanding as of September 30, 2009.

In addition to the initiatives outlined above, we expect to receive a federal income tax refund in the first half of 2010 totaling approximately $40 million related to our 2009 federal income tax return. Although we likely will not receive this refund until after the Put Date on the Notes, receipt of this refund will further enhance our liquidity position.

As a result of these accomplishments, we believe we have sufficient resources to repay the remaining outstanding $31.0 million par amount of Notes on the Put Date. However, we may not have sufficient liquidity to meet the month-end minimum unrestricted cash and cash equivalents requirements contained in some of our financing agreements (primarily the Spare Parts Loan) after the Put Date until we receive our 2009 federal income tax refund (for additional information regarding this minimum cash requirement test, please refer to Notes 2 and 4 of our condensed consolidated financial statements, which are contained in Item 1 of this Form 10-Q). We are in discussions with several parties about the possibility of a short-term credit facility to bridge the period between the Put Date and receipt of our 2009 federal income tax refund. To the extent we are unsuccessful in sourcing a short-term credit facility or otherwise increasing liquidity to meet our month-end minimum cash requirements, we will seek a temporary waiver of the requirement from our lender; however no assurance can be given at this time that such a waiver can be obtained.

We are in discussions with Delta regarding certain disputed contractual items in our CRJ-200 ASA. Specifically, Delta has challenged a one-time adjustment to our block hour, cycle and fixed payment rates that was to become effective January 1, 2006. The impact of Delta's assertion could be a cumulative adjustment of as much as $11.0 million from 2006 through September 30, 2009, and a rate decrease of approximately $3.0 million annually until the next contractually scheduled rate adjustment on January 1, 2013. The parties have agreed to arbitrate this dispute, and we expect arbitration proceedings to begin shortly.

In addition, Delta has asserted that it may materially alter the payments related to Pinnacle's ground handling in the majority of the airports where Pinnacle operates, which would result in a decrease of Pinnacle's 2009 operating income of approximately $1.1 million. This disputed amount could change in future periods due to potential changes in the mix of cities in which Pinnacle operates. In August 2009, Delta began to apply its interpretation of ground handling to the monthly wires that Pinnacle received, resulting in a net reduction of payments to Pinnacle of approximately $0.3 million for August and September. In addition, Delta asserted that Pinnacle owes Delta a retroactive payment of approximately $4 million related to this ground handling issue. We believe Delta's assertions are invalid, and we continue to discuss this dispute with Delta. If we are unable to resolve this dispute through discussions, we may jointly seek arbitration with Delta or pursue other legal options.

Finally, Delta has disputed its obligation to fully reimburse Pinnacle for its aviation insurance premiums. During the second quarter of 2009, Delta requested that Pinnacle exit the Delta aviation insurance program and independently source its own aviation insurance. Effective July 1, 2009, Pinnacle obtained its own independent insurance program at a cost significantly higher than what it was allocated by Delta under the Delta insurance program. Delta has asserted that it is not obligated to reimburse the full costs of Pinnacle's independent insurance program, despite the fact that both Pinnacle's CRJ-200 ASA and CRJ-900 DCA require full reimbursement. Delta has not reimbursed Pinnacle for approximately $1.5 million related to the third quarter of 2009. We expect insurance premiums in future quarters to be approximately the same amount. We believe Delta's assertion is without merit, and we are reviewing our legal options to enforce our rights under our operating contracts with Delta.

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

Our pro-rate operations, which account for approximately 20% of our consolidated revenue, 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, and in fact, our pro-rate operations were profitable during the second and third quarters of 2009. However, the airline industry is experiencing the effects of the current recessionary environment in the United States. Industry passenger revenue has declined dramatically during 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 fourth quarter of 2009 and in 2010. Further, our pro-rate operations are still susceptible to seasonal demand fluctuations, with passenger demand materially weaker during the fourth and first quarter of each year as compared to the seasonally high demand we typically experience in the second and third quarters of each year. Similar to prior years, we do not expect to earn a significant amount of operating income from our pro-rate operations during the fourth quarter of 2009 or the first quarter of 2010. Accordingly, similar to prior years, we expect a decline in our consolidated operating and net income as compared to our recent results in the second and third quarters of 2009.

We are in the process of relocating 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. We expect the cost of relocation, training and infrastructure associated with this move to be as much as $3 million, and we incurred approximately $0.4 million of this cost during the third quarter of 2009. We expect Colgan's headquarters relocation to be completed early in the first quarter of 2010.

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. However, Pinnacle's pilots did not ratify the tentative agreement. The National Mediation Board now controls the timing of further negotiations with ALPA, and we do not yet have information as to when further negotiations will take place. The failed tentative agreement provided for an increase in 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 failed tentative agreement called for a one-time signing bonus of approximately $10.2 million. While we cannot predict what the terms of a new tentative agreement will contain, we do expect any new tentative agreement to substantially increase Pinnacle's salaries, wages and benefits costs.

Colgan's pilots also elected representation by ALPA in late 2008, and we recently began negotiations with ALPA. It is too early in the negotiation process for us to predict the timing or impact of a new collective bargaining agreement with ALPA covering Colgan's pilots.

Throughout 2009 we have been 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.