Overview

The Company operates in three business segments. The overnight air cargo segment, comprised of its Mountain Air Cargo, Inc. ("MAC") and CSA Air, Inc. ("CSA") subsidiaries, operates in the air express delivery services industry. The ground equipment sales segment, comprised of its Global Ground Support, LLC ("GGS") subsidiary, manufactures and provides mobile deicers and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers. The ground support services segment, comprised of its Global Aviation Services, LLC ("GAS") subsidiary, provides ground support equipment maintenance and facilities maintenance services to domestic airlines. Each business segment has separate management teams and infrastructures that offer different products and services. The Company evaluates the performance of its operating segments based on operating income. Prior to the quarter ended September 30, 2008, the Company had reported two operating segments, previously combining GGS and GAS into a single segment. The Company has modified the prior periods segment information to conform to the current period presentation.

(In thousands)
                           Three Months Ended September 30,                      Six Months Ended September 30,
                             2008                       2007                      2008                      2007

Overnight Air
Cargo Segment:
  FedEx            $   11,561            48 %   $  9,504          55 %   $   21,017          45 %   $ 18,016          54 %
Ground Equipment Sales
Segment:
  Military              2,462            10 %        899           5 %       11,258          25 %      6,628          20 %
  Commercial -
Domestic                6,388            27 %      6,370          37 %        7,896          17 %      7,826          23 %
  Commercial -
International           1,860             8 %        416           2 %        2,897           6 %        515           2 %
                       10,710            45 %      7,685          44 %       22,051          48 %     14,969          45 %

Ground Support
Services Segment        1,741             7 %        223           1 %        3,361           7 %        223           1 %
                   $   24,012           100 %   $ 17,412         100 %   $   46,429         100 %   $ 33,208         100 %

MAC and CSA are short-haul express airfreight carriers and provide air cargo services to one primary customer, FedEx Corporation ("FedEx"). MAC will also on occasion provide maintenance services to other airline customers and the military. Under the terms of dry-lease service agreements, which currently cover all of the 87 revenue aircraft, the Company receives a monthly administrative fee based on the number of aircraft operated and passes through to its customer certain cost components of its operations without markup. The cost of fuel, flight crews, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer as cargo and maintenance revenue, at cost. As a result, the fluctuating cost of fuel has not had any direct impact on our air cargo operating results. Pursuant to such agreements, FedEx determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by the Company. These agreements are renewable on two to five-year terms and may be terminated by FedEx at any time upon 30 days' notice. The Company believes that the short term and other provisions of its agreements with FedEx are standard within the airfreight contract delivery service industry. FedEx has been a customer of the Company since 1980. Loss of its contracts with FedEx would have a material adverse effect on the Company.

MAC and CSA combined contributed approximately $21,017,000 and $18,016,000 to the Company's revenues for the six-month periods ended September 30, 2008 and 2007, respectively, a current year increase of $3,001,000 (17%).

GGS manufactures and supports aircraft deicers and other specialized industrial equipment on a worldwide basis. GGS manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons. GGS also provides fixed-pedestal-mounted deicers. Each model can be customized as requested by the customer, including single operator configuration, fire suppressant equipment, open basket or enclosed cab, a patented forced-air deicing nozzle and on-board glycol blending system to substantially reduce glycol usage, color and style of the exterior finish. GGS also manufactures four models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft, and has developed a line of decontamination equipment and other special purpose mobile equipment. GGS competes primarily on the basis of the quality, performance and reliability of its products, prompt delivery, customer service and price. In June 1999, GGS was awarded a four-year contract to supply deicing equipment to the United States Air Force. In June 2003 GGS was awarded a three-year extension of that contract and a further three-year extension was awarded in June 2006.

GGS contributed approximately $22,051,000 and $14,969,000 to the Company's revenues for the six-month periods ended September 30, 2008 and 2007, respectively. The $7,082,000 (47%) increase in revenues was due to an increase in the number of military deicing units delivered, an increase in the number of commercial catering trucks and a smaller increase in the number of international commercial orders completed during the current period. At September 30, 2008, GGS's order backlog was $18.6 million compared to $25.3 million at March 31, 2008 and $17.3 million at September 30, 2007.

GAS was formed in September 2007 to operate the aircraft ground support equipment and airport facility maintenance services business of the Company. GAS recently finalized a three-year maintenance services contract with a large domestic airline. GAS is providing aircraft ground support equipment and airport facility maintenance services at a number of locations. Currently, GAS supports 36 customers with aircraft ground support equipment and airport maintenance facilities at 16 domestic airports and supports 18 additional airports through traveling technicians.

Second Quarter Highlights

We have experienced two excellent quarters to begin this fiscal year, general economic and industry conditions continue to be a major concern for our company. We are delighted with these quarterly results, but remain cautious about the remainder of the fiscal year. In these difficult times, we are dedicated to conserving cash, watching costs, tightening our credit policies and maintaining our customer and vendor relationships.

Revenues for GGS for the quarter ended September 30, 2008 were up 39% over the comparable prior year quarter. GGS operated at unusually high production levels for the second quarter as a result of the significant backlog at March 31, 2008. Delivery of deicers to the military dropped significantly from the first quarter of this fiscal year, but were still considerably above the number of units delivered to the military in the comparable quarter of the prior year. In the quarter, GGS also produced and delivered a high volume of commercial catering trucks, which offset lower than normal domestic commercial deicing truck deliveries in the quarter. In addition, GGS delivered an increased number of deicing and other commercial units to international customers in the quarter. GGS's gross margin percentage for the quarter was consistent with the comparable quarter of a year ago, and down 5-1/2% from the first quarter of this fiscal year, due to a less profitable customer, product and accessory mix.

Our fleet of ATR aircraft is now reaching its first cycle of heavy maintenance since they were acquired and converted to freighter configuration. As a result, maintenance hours have increased this quarter leading to increased revenues and profitability in our air cargo segment.

During the quarter ended September 30, 2008, revenues from our GAS subsidiary totaled $3,361,000. This new line of business continues to expand its customer base. GAS's main challenges continue to be its ability to add additional customers to optimally utilize our staffing capacity at existing locations, to selectively add new stations, and to manage accounts receivable in a difficult operating environment and industry.

Critical Accounting Policies and Estimates

The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the U.S. requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company's estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The most significant estimates made by management include allowance for doubtful accounts receivable, reserves for excess and obsolete inventories, warranty reserves, deferred tax asset valuation, stock based compensation and retirement benefit obligations.

Following is a discussion of critical accounting policies and related management estimates and assumptions.

Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable in the amount of $411,000 and $268,000, respectively, as of September 30, 2008 and March 31, 2008, was established based on management's estimates of the collectability of accounts receivable. The required allowance is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of outstanding accounts receivables associated with a discontinued business segment. The estimates can be affected by changes in the financial strength of the aviation industry, customer credit issues or general economic conditions.

Inventories. The Company's inventories are valued at the lower of cost or market. Reserves for excess and obsolete inventories in the amount of $946,000 and $908,000, respectively, as of September 30, 2008 and March 31, 2008, are based on assessment of the marketability of slow-moving and obsolete inventories. Estimates are subject to volatility and can be affected by reduced equipment utilization, existing supplies of used inventory available for sale, the retirement of aircraft or ground equipment and changes in the financial strength of the aviation industry.

Deferred Taxes. Company judgment of the recoverability of certain of these deferred tax assets is based primarily on estimates of current and expected future earnings and tax planning.

Stock Based Compensation. The Company adopted Statement of Financial Accounting Standards No. 123(R), Accounting for Stock-Based Compensation ("SFAS 123(R)") as of April 1, 2006, using the modified prospective method of adoption, which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period. The compensation cost we record for these awards is based on their fair value on the date of grant. The Company continues to use the Black Scholes option-pricing model as its method for valuing stock options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate and dividend yield.

Retirement Benefits Obligation. The Company currently determines the value of retirement benefits assets and liabilities on an actuarial basis using a 4.0% discount rate. Values are affected by current independent indices, which estimate the expected return on insurance policies and the discount rates used. Changes in the discount rate used will affect the amount of pension liability as well as pension gain or loss recognized in other comprehensive income.

Revenue Recognition. Cargo revenue is recognized upon completion of contract terms and maintenance revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and title has passed to customers.

Seasonality

GGS's business has historically been seasonal. The Company has continued its efforts to reduce GGS's seasonal fluctuation in revenues and earnings by increasing military and international sales and broadening its product line to increase revenues and earnings throughout the year. In June 1999, GGS was awarded a four-year contract to supply deicing equipment to the United States Air Force, and GGS has been awarded two three-year extensions on the contract. Although sales remain somewhat seasonal, this diversification has lessened the seasonal impacts and allowed the Company to be more efficient in its planning and production. The air cargo segment of business has, historically, not been susceptible to seasonal trends.

Results of Operations

Second Quarter 2009 Compared to Second Quarter 2008

Consolidated revenue increased $6,601,000 (38%) to $24,012,000 for the three-month period ended September 30, 2008 compared to its equivalent 2007 period. The increase in revenues resulted from a number of factors. Revenues in the air cargo segment were up $2,057,000 (22%) primarily as a result of increased flight and maintenance department costs passed through to its customer at cost, increases in the number of maintenance labor hours as well as the maintenance labor rate, quarter over quarter. As noted in previous filings, the Company received approval from its customer for an 8.5% increase in its maintenance billable hour rate in June 2007 and an additional 4% increase in January 2008. Revenues in the ground equipment segment increased $3,025,000 (39%) to $10,710,000 as a result of a significant increase in the number of deicing units delivered to the military during the second quarter of fiscal 2009, as well as a significant order and delivery of commercial catering trucks in the three-month period ended September 30, 2008. In addition, GAS provided revenues of $1,742,000 during the three-month period ended September 30, 2008, compared to revenue of $223,000 in the prior year at its inception.

Operating expenses increased $5,430,000 (33%) to $21,994,000 for the three-month period ended September 30, 2008 compared to its equivalent 2007 period. The increase was due to a number of factors. Operating expenses in the air cargo segment were up $1,752,000 (22%) primarily as a result of increased flight and maintenance departments costs passed through to its customer at cost. Ground equipment segment operating costs increased $2,137,000 (36%) driven primarily by the current quarter's increase in units sold. The ground support services segment reported a $1,136,000 increase in operating expenses directly related to the increased revenue provided by GAS this quarter. General and administrative expenses increased $420,000 to $2,666,000 for the three-month period ended September 30, 2008 compared to its equivalent 2007 period. The increase was comprised of additional expenses associated with the GAS operations in the current year and a reduction in general and administrative expense of $170,000 in the quarter ended September 30, 2007 resulting from the Sautter Crane settlement in September 2007.

Pretax earnings increased $1,201,000 for the three-month period ended September 30, 2008 compared to 2007, due to the above-stated increase in revenues in all segments and the resulting margins generated. The Company has been able to add the additional revenue with lesser increases in overhead and administrative costs, so that the majority of the additional operating income has resulted in bottom line profit to the Company.

During the three-month period ended September 30, 2008, the Company recorded $714,000 income tax expense, which resulted in an estimated annual tax rate of 35.1%, which approximates the rate of 35.6% for the comparable quarter in 2007. The estimated annual effective tax rates for both periods differ from the U. S. federal statutory rate of 34% primarily due to the effect of state income taxes offset by permanent tax differences, including the federal production deduction.

First Six Months of 2009 Compared to First Six Months of 2008

Consolidated revenue increased $13,221,000 (40%) to $46,429,000 for the six-month period ended September 30, 2008 compared to its equivalent 2007 period. The increase in revenues resulted from a number of factors. Revenues in the air cargo segment were up $3,000,000 (17%) primarily as a result of increased flight and maintenance department costs passed through to its customer at cost, increases in the number of maintenance labor hours as well as the maintenance labor rate, quarter over quarter. As noted in previous filings, the Company received approval from its customer for an 8.5% increase in its maintenance billable hour rate in June 2007 and an additional 4% increase in January 2008. Revenues in the ground equipment segment increased $7,082,000 (47%) to $22,051,000 as a result of a significant increase in the number of deicing units delivered to the military during the first six months of fiscal 2009, as well as a significant order and delivery of commercial catering trucks in the six-month period ended September 30, 2008. In addition, GAS provided revenues of $3,361,000 during the six-month period ended September 30, 2008, compared to revenue of $223,000 in the prior year at its inception.

Operating expenses increased $10,938,000 (35%) to $42,330,000 for the six-month period ended September 30, 2008 compared to its equivalent 2007 period. The increase was also due to a number of factors. Operating expenses in the air cargo segment were up $2,358,000 (15%) primarily as a result of increased flight and maintenance departments costs passed through to its customer at cost. Ground equipment segment operating costs increased $5,002,000 (45%) driven primarily by the current quarter's increase in units sold. The ground support services segment reported a $2,378,000 increase in operating expenses directly related to the increased revenue provided by GAS this quarter. General and administrative expenses increased $1,226,000 to $5,810,000 for the six-month period ended September 30, 2008 compared to its equivalent 2007 period. The increase was comprised of additional expenses associated with the GAS operations in the current year and a reduction in general and administrative expense of $170,000 in the six-month period ended September 30, 2007 resulting from the Sautter Crane settlement in September 2007.

Non-operating income was a net income amount of $22,100 for the six-month period ended September 30, 2008 compared to a net expense amount of $7,800 in the equivalent 2007 period. Interest expense decreased by $86,000 as the Company elected to utilize its available cash to pay off the chassis inventory flooring in the current year. Investment income also declined by $56,000, as a result of lesser rates of return on cash investments as well as a reduced average investment balance.

Pretax earnings increased $2,313,000 for the six-month period ended September 30, 2008 compared to 2007, due to the above-stated increase in revenues in all segments and the resulting margins generated. The Company has been able to add the additional revenue with lesser increases in overhead and administrative costs, so that a significant portion of the additional operating income has resulted in bottom line profit to the Company.

During the six-month period ended September 30, 2008, the Company recorded $1,459,000 income tax expense, which resulted in an estimated annual tax rate of 35.4%, which approximates the rate of 35.6% for the comparable six month period in 2007. The estimated annual effective tax rates for both periods differ from the U. S. federal statutory rate of 34% primarily due to the effect of state income taxes offset by permanent tax differences, including the federal production deduction.

As of September 30, 2008 the Company's working capital amounted to $16,057,000, an increase of $957,000 compared to March 31, 2008. The change was due to a combination of factors including net earnings, an increase in inventories, a decrease in accounts receivable, the classification of the aircraft term loan from long-term to current, as it matures in April 2009 and the classification of the $788,000 deferred retirement obligation from long-term to current as it may be paid out beginning in July 2009. The increase in inventories is the result of the increased production levels in the ground equipment segment. We believe these increased inventory levels are appropriate for the current and planned levels of production. Accounts receivable have decreased by $1,991,000 from March 31, 2008, but remain high compared to the historical levels ($8,750,000 at September 30, 2007). This can be attributed to the much higher level of revenues than is typical for our second quarter as well as the new revenues and accounts receivable generated by GAS. The Company has increased its allowance for doubtful accounts by $143,000 since March 31, 2008, primarily related to the increase in revenues and accounts receivable generated by GAS, primarily with domestic airline customers.

In August 2008, the expiration date of the Company's $7,000,000 secured long-term revolving credit line was extended to August 31, 2010. The revolving credit line contains customary events of default, a subjective acceleration clause and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. The credit facility is secured by substantially all of the Company's assets. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. As of September 30, 2008, the Company was in compliance with all of the restrictive covenants. The amount of credit available to the Company under the agreement at any given time is determined by an availability calculation, based on the eligible borrowing base, as defined in the credit agreement, which includes the Company's outstanding receivables, inventories and equipment, with certain exclusions. At September 30, 2008, $7,000,000 was available under the terms of the credit facility and no amounts were outstanding.

Amounts advanced under the credit facility bear interest at the 30-day "LIBOR" rate plus 137 basis points. The LIBOR rate at September 30, 2008 was 3.93%. The Company is exposed to changes in interest rates on its line of credit with respect to any borrowings outstanding under the line of credit. However, because the Company's outstanding balance under the line of credit was minimal during the quarter ended September 30, 2008, changes in the LIBOR rate during that period would have had a minimal affect on its interest expense for the quarter.

The Company assumes various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements such as debt and lease agreements.

The respective six-month periods ended September 30, 2008 and 2007 resulted in the following changes in cash flow: operating activities provided $1,796,000 and used $1,353,000 in 2008 and 2007, respectively, investing activities used $85,000 and $225,000 in 2008 and 2007, respectively, and financing activities used $787,000 and provided $552,000 in 2008 and 2007, respectively. Net cash increased $924,000 and decreased $1,026,000 during the six-months ended September 30, 2008 and 2007, respectively.

Cash provided by operating activities was $3,149,000 more for the six-months ended September 30, 2008 compared to the similar 2007 period, resulting from a significant increase in net earnings and increased accounts receivable collections, offset by increased inventory levels in the current six-month period.

Cash used by investing activities for the six-months ended September 30, 2008 was $139,000 less than the comparable period in 2007 primarily due to a reduced amount of capital expenditures in the current six-month period.

Cash used by financing activities was $1,339,000 more in the 2008 six-month period than in the corresponding 2007 period principally due to the Company using $713,000 in the stock repurchase program in the prior period, with no similar program in the current period and the Company borrowing $1,947,000 under the line of credit in the prior period, with no borrowings in the current period.

There are currently no commitments for significant capital expenditures. The Company's Board of Directors on August 7, 1998 adopted the policy to pay an annual cash dividend, based on profitability and other factors, in the first quarter of each fiscal year, in an amount to be determined by the Board. The Company paid a $0.30 per share cash dividend in June 2008.

The Company is subject to significant contingencies associated with the February 28, 2005 de-icing boom collapse in Philadelphia and resulting litigation. These matters are described in Note 11 to the Notes to Condensed Consolidated Financial Statements (Unaudited), included in Part I, Item 1 of this report, which is incorporated herein by reference.

Impact of Inflation

The Company believes that the recent increases in inflation have not had a material effect on its operations, because increased costs to date have been passed on to its customers. Under the terms of its air cargo business contracts the major cost components of its operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed, without markup by its customer. Significant increases in inflation rates could, however, have a material impact on future revenue and operating income.