The consolidated condensed financial statements include the accounts of Covenant Transportation Group, Inc., a Nevada holding company, and its wholly-owned subsidiaries. References in this report to "we," "us," "our," the "Company," and similar expressions refer to Covenant Transportation Group, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Except for certain historical information contained herein, this report contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended that involve risks, assumptions, and uncertainties that are difficult to predict. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of earnings, revenues, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Such statements may be identified by the use of terms or phrases such as "expects," "estimates," "projects," "believes," "anticipates," "intends," and "likely," and similar terms and phrases. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Readers should review and consider the factors that could cause or contribute to such differences including, but not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in our form 10-K for the year ended December 31, 2008, as supplemented in Part II below.

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

Executive Overview

We are the eleventh largest truckload carrier in the United States measured by fiscal 2008 revenue, based on industry information provided by Transport Topics, a publication of the American Trucking Associations, Inc. We focus on targeted markets where we believe our service standards can provide a competitive advantage. We are a major carrier for transportation companies such as freight forwarders, less-than-truckload carriers, and third-party logistics providers that require a high level of service to support their businesses, as well as for traditional truckload customers such as manufacturers, retailers, and food and beverage shippers. We also generate revenue through a subsidiary that provides freight brokerage services.

The lackluster freight environment negatively impacted every subsidiary's freight revenues during the quarter. Weighted average tractors decreased 9.4% to 3,099 in the 2009 period from 3,421 in the 2008 period. Our non-asset based freight brokerage revenue declined year-over-year because of closure of a large company store in October 2008.

Our consolidated operating freight revenues decreased to $133.3 million for the third quarter of 2009, an 18.2% decrease from $162.9 million in the third quarter of 2008. Similarly, consolidated operating freight revenues decreased to $384.7 million for the nine months ended September 30, 2009, an 18.5% decrease from $471.9 million for the same period in 2008. Lower fuel prices resulted in fuel surcharge revenues of $19.7 million during the third quarter of 2009, compared with $49.6 million for the third quarter of 2008. Fuel surcharge revenues also decreased for the nine months ended September 30, 2009 to $46.2 million, compared with $131.0 million for the same period in 2008.

Freight revenue, which for these purposes excludes fuel surcharges, decreased 18.2% in the third quarter of 2009 from the third quarter of 2008, while the decrease of freight revenue for the nine months ended September 30, 2009 from the same period in 2008 was 18.5%. The decreased level of freight revenue was primarily attributable to the reduction in loads and continued severe pressure on freight rates as a result of the economic recession. We measure freight revenue because management believes that fuel surcharges tend to be a volatile source of revenue and the removal of such surcharges affords a more consistent basis for comparing results of operations from period to period.

In anticipation of lower freight volumes, we proactively reduced our average tractor fleet prior to the third quarter of 2009. With the assistance of the fleet reduction, we did experience a 0.8% increase in average miles per tractor in the third quarter of 2009 versus the 2008 quarter. However, freight rates, measured by average freight revenue per total mile, decreased by 9.4% compared with the third quarter of 2008. As a result, average freight revenue per tractor per week, our primary measure of asset productivity, decreased 8.6%, to $2,971 for the quarter ended September 30, 2009, from $3,252 for the same period of 2008, and 8.9%, to $2,886 in the first nine months of 2009, from $3,168 in the same period of 2008.

Additional items of note included the following:

Operating income of $1.8 million and an operating ratio of 98.6%, compared with an operating loss of $0.7 million and ? an operating ratio of 100.4% in the third quarter of 2008;

Non-cash impairment charge of $11.6 million (with no tax benefit) relating to the write-off of our investment in and ? write-down of our note receivable from Transplace, Inc.;

? Operating expenses in our asset-based operations declined 17 cents per mile, or 11.8%, compared with the third quarter of 2008 and 4 cents per mile or 3%, compared with the second quarter of 2009; and

? Net loss of $13.6 million, or ($0.96) per basic and diluted share (including the impairment charge), compared with a net loss of $3.4 million, or ($0.24) per basic and diluted share in the third quarter of 2008.

Segment Revenue

We operate two distinct, but complementary, business segments. Our asset-based truckload services segment consists of Covenant Transport, Inc., SRT, and Star Transportation. This segment generates the majority of our revenue by transporting freight for our customers. Generally, we are paid by the mile or by the load for our services. The main factors that affect our revenue are the revenue per mile we receive from our customers, the percentage of miles for which we are compensated, the number of tractors operating, and the number of miles we generate with our equipment. These factors relate to, among other things, the U.S. economy, inventory levels, the level of truck capacity in our markets, specific customer demand, competition, the percentage of team-driven tractors in our fleet, driver availability, and our average length of haul.

Our asset-based truckload services also derive revenue from fuel surcharges, loading and unloading activities, equipment detention, and other accessorial services. We measure revenue before fuel surcharges, or "freight revenue," because we believe that fuel surcharges tend to be a volatile source of revenue. We believe the exclusion of fuel surcharges affords a more consistent basis for comparing the results of operations from period to period.

We operate tractors driven by a single driver and also tractors assigned to two-person driver teams. Our single driver tractors generally operate in shorter lengths of haul, generate fewer miles per tractor, and experience more non-revenue miles, but the lower productive miles are expected to be offset by generally higher revenue per loaded mile and the reduced employee expense of compensating only one driver. We expect operating statistics and expenses to shift with the mix of single and team operations.

In our brokerage operations, also known as Covenant Transport Solutions, Inc., we derive revenue from arranging loads for other carriers. We provide freight brokerage services directly and through freight brokerage agents, who are paid a commission for the freight brokerage service they provide. The brokerage segment has helped us continue to serve customers when we lacked capacity in a given area or when the load has not met the operating profile of one of our asset-based subsidiaries.

RESULTS OF SEGMENT OPERATIONS

Comparison of Three and Nine Months Ended September 30, 2009 to Three and Nine
Months Ended September 30, 2008

The following tables summarize our segment information:

                                           Three months ended           Nine months ended
  (in thousands except per share data)        September 30,               September 30,
                                           2009          2008          2009          2008
  Revenues:

  Asset-Based Truckload Services         $ 140,694     $ 195,872     $ 396,110     $ 562,810
  Brokerage Services                        12,354        16,673        34,797        40,134

  Total                                  $ 153,048     $ 212,545     $ 430,907     $ 602,944
  Operating Income (Loss):

  Asset-Based Truckload Services         $   5,125     $   4,268     $   7,287     $   1,195
  Brokerage Services                          (519 )         459          (266 )         568
  Unallocated Corporate Overhead            (2,777 )      (5,447 )     (10,973 )     (12,333 )

  Total                                  $   1,829     $    (720 )   $  (3,952 )   $ (10,570 )

Our asset-based truckload services segment revenue decreased 28.2%, to $140.7 million during the third quarter 2009, compared with $195.9 million in 2008. Similarly, this segment's revenue decreased 29.6%, to $396.1 million for the nine month period ended September 30, 2009, compared to $562.8 million for the comparable period in 2008. Lower fuel prices resulted in fuel surcharge revenue of $19.7 million in the third quarter of 2009 versus $49.6 million in the 2008 quarter and $46.2 million in the nine months ended September 30, 2009, versus $131.0 million in the 2008 period. The decrease in revenue is related to a decrease in rates, total miles and a decrease in fleet size related to the weakened economy in 2009. Excluding unallocated corporate overhead, operating income for the segment was $5.1 million for the third quarter of 2009, compared to operating income of $4.3 million for the same period of 2008, and operating income of $7.3 million for the nine months ended September 30, 2009 compared to operating income of $1.2 million for the same 2008 period primarily due to lower net fuel expenses and cost savings initiatives.

Our brokerage segment revenue decreased 25.9%, to $12.4 million for the third quarter of 2009, from $16.7 million for the same period of 2008. Brokerage revenue decreased 13.3% to $34.8 million for the nine months ended September 30, 2009 compared to $40.1 million for the same period in the prior year. The decreases were primarily attributable to a reduction in the portion of revenue attributable to fuel surcharges and less volume due to the closure of a large company store in October 2008. Excluding unallocated corporate overhead, operating loss for our brokerage segment was $0.5 million and $0.3 million for the three and nine month periods ended September 30, 2009, respectively, compared to an operating income of $0.5 and $0.6 million for the comparable 2008 periods. The decreases are a result of an increase in bad debt expense of $0.3 from the comparable 2008 periods, an increase in purchased transportation expense per revenue dollar, lower load volumes and a reduction in fuel surcharge revenue.

Expenses and Profitability

The main factors that impact our profitability on the expense side are the variable costs of transporting freight for our customers. The variable costs include fuel expense, driver-related expenses, such as wages, benefits, training, and recruitment, and independent contractor and third party carrier costs, which we record as purchased transportation. Expenses that have both fixed and variable components include maintenance and tire expense and our total cost of insurance and claims. These expenses generally vary with the miles we travel, but also have a controllable component based on safety, fleet age, efficiency, and other factors. Our main fixed cost is the acquisition and financing of long-term assets, primarily revenue equipment and operating terminals. In addition, we have other mostly fixed costs, such as certain non-driver personnel expenses.

Our main measure of profitability is operating ratio, which we define as operating expenses, net of fuel surcharge revenue, divided by total revenue, less fuel surcharge revenue.

Revenue Equipment

At September 30, 2009, we operated 3,114 tractors and 8,127 trailers. Of such tractors, 2,689 were owned, 347 were financed under operating leases, and 78 were provided by independent contractors, who provide and drive their own tractors. Of such trailers, 2,038 were owned, 5,889 were financed under operating leases and 200 were financed under capital leases. We finance a portion of our tractor fleet and most of our trailer fleet with off-balance sheet operating leases. These leases generally run for a period of three years for tractors and five to seven years for trailers. At September 30, 2009, our fleet had an average tractor age of 1.96 years and an average trailer age of 4.79 years.

Independent contractors (owner-operators) provide a tractor and a driver and are responsible for all operating expenses in exchange for a fixed payment per mile. We do not have the capital outlay of purchasing or leasing the tractor. The payments to independent contractors and the financing of equipment under operating leases are recorded in revenue equipment rentals and purchased transportation. Expenses associated with owned equipment, such as interest and depreciation, are not incurred, and for independent contractors, driver compensation, fuel, and other expenses are not incurred. Because obtaining equipment from independent contractors and under operating leases effectively shifts financing expenses from interest to "above the line" operating expenses, we evaluate our efficiency using net margin as well as operating ratio.

RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2009 TO THREE MONTHS ENDED
SEPTEMBER 30, 2008

The following table sets forth the percentage relationship of certain items to
total revenue and freight revenue:

                         Three months ended                                Three months ended
                            September 30,                                     September 30,
                         2009           2008                               2009           2008
Total revenue              100.0 %       100.0 %  Freight revenue (1)        100.0 %       100.0 %
Operating expenses:                               Operating expenses:
Salaries, wages, and                              Salaries, wages, and
related expenses            34.9          31.0    related expenses            40.1          40.4
Fuel expense                25.3          35.2    Fuel expense (1)            14.3          15.5
Operations and                                    Operations and
maintenance                  5.9           5.5    maintenance                  6.8           7.1
Revenue equipment                                 Revenue equipment
rentals and                                       rentals and
purchased                                         purchased
transportation              12.9          11.7    transportation              14.8          15.3
Operating taxes and                               Operating taxes and
licenses                     1.7           1.5    licenses                     1.9           2.0
Insurance and claims         5.3           5.6    Insurance and claims         6.0           7.3
Communications and                                Communications and
utilities                    0.9           0.8    utilities                    1.0           1.0
General supplies and                              General supplies and
expenses                     3.8           3.0    expenses                     4.4           4.0
Depreciation and                                  Depreciation and
amortization                 8.1           6.0    amortization                 9.3           7.8
Total operating                                   Total operating
expenses                    98.8         100.3    expenses                    98.6         100.4
Operating income                                  Operating income
(loss)                       1.2          (0.3 )  (loss)                       1.4          (0.4 )
Other expense, net           9.9           1.6    Other expense, net          11.3           2.1
Loss before income                                Loss before income
taxes                       (8.7 )        (1.9 )  taxes                       (9.9 )        (2.5 )
Income tax expense                                Income tax expense
(benefit)                    0.2          (0.3 )  (benefit)                    0.3          (0.4 )

(1) Freight revenue is total revenue less fuel surcharge revenue. Fuel surcharge revenue is shown netted against the fuel expense category ($19.7 million and $49.6 million in the three months ended September 30, 2009 and 2008, respectively).

For the quarter ended September 30, 2009, total revenue decreased $59.5 million, or 28.0%, to $153.0 million from $212.5 million in the 2008 period. Total revenue includes $19.7 million and $49.6 million of fuel surcharge revenue in the 2009 and 2008 periods, respectively. For comparison purposes in the discussion below, we use freight revenue (total revenue less fuel surcharge revenue) when discussing changes as a percentage of revenue. We believe removing this sometimes volatile source of revenue affords a more consistent basis for comparing the results of operations from period to period.

Freight revenue decreased $29.6 million, or 18.2%, to $133.3 million in the three months ended September 30, 2009, from $162.9 million in the same period of 2008. The decreased level of freight revenue for the quarter was primarily attributable to the reduction in loads and continued severe pressure on freight rates as a result of the economic recession. In anticipation of lower freight volumes, we proactively decreased our weighted average tractors by 9.4% in the 2009 period as compared to the 2008 period. With the assistance of the fleet reduction, we did experience a 0.8% increase in average miles per tractor versus the 2008 quarter. However, freight rates, measured by average freight revenue per total mile, decreased by 9.4% compared with the third quarter of 2008. As a result, average freight revenue per tractor per week, our primary measure of asset productivity, decreased 8.6%, to $2,971 for the quarter ended September 30, 2009, from $3,252 for the same period of 2008.

Salaries, wages, and related expenses decreased $12.4 million, or 18.8%, to $53.4 million in the 2009 period, from $65.8 million in the 2008 period. As a percentage of freight revenue, salaries, wages, and related expenses decreased slightly to 40.1% in the 2009 period, from 40.4% in the 2008 period. Driver pay decreased $9.4 million to $37.1 million in the 2009 period, from $46.5 million in the 2008 period. The decrease was primarily attributable to lower driver wages as a result of the decrease in approximately 9.3 million company miles during the period and a decrease in driver pay per mile. Our payroll expense for employees, other than over-the-road drivers, decreased $2.4 million to $9.7 million from $12.2 million primarily due to staff reductions. Additionally, workers' compensation costs were $0.8 million higher in the 2009 period than the 2008 period primarily as a result of a benefit in the 2008 quarter related to several large claims settling for less than originally estimated.

Fuel expense, net of fuel surcharge revenue of $19.7 million in the 2009 period and $49.6 million in the 2008 period, decreased $6.2 million, or 24.5%, to $19.1 million in the 2009 period, from $25.3 million in the 2008 period. As a percentage of freight revenue, net fuel expense decreased to 14.3% in the 2009 period from 15.5% in the 2008 period.

The Company receives a fuel surcharge on its loaded miles from most shippers; however, this does not cover the entire increase in fuel prices for several reasons, including the following: surcharges cover only loaded miles we operated during the quarter; surcharges do not cover miles driven out-of-route by our drivers; and surcharges typically do not cover refrigeration unit fuel usage or fuel burned by tractors while idling. Moreover, most of our business during the third quarter relating to shipments obtained from freight brokers did not carry a fuel surcharge. Finally, fuel surcharges vary in the percentage of reimbursement offered, and not all surcharges fully compensate for fuel price increases even on loaded miles.

The rate of fuel price increases also can have an impact on results. Most fuel surcharges are based on the average fuel price as published by the U.S. Department of Energy ("DOE") for the week prior to the shipment. In times of rapidly escalating fuel prices, the lag time causes under-recovery. Lag time was not a significant factor during the third quarter of 2009. As of September 30, 2009, we entered into forward futures swap contracts, which pertain to 2.5 million gallons or approximately 4% percent of our projected January through December 2010 fuel requirements. Under these contracts, we pay a fixed rate per gallon of heating oil and receive the monthly average price of New York heating oil. We currently have no derivatives in place for fuel price fluctuations occurring in the remainder of 2009.

During the third quarter of 2009, the DOE's national average cost of diesel fuel decreased $1.72 per gallon compared with the third quarter of 2008. On a gross basis, the Company's fuel expense decreased $36.1 million, or 48.2%, versus the third quarter of 2008, while miles operated by Company-owned trucks decreased approximately 8.7%. Accordingly, the Company's net cost of fuel decreased by $6.2 million, or approximately $0.04 per company-owned truck mile. In addition to lower diesel fuel prices, multiple operating improvements that improved fuel efficiency contributed to these decreases.

Operations and maintenance, consisting primarily of vehicle maintenance, repairs, and driver recruitment expenses, decreased $2.4 million to $9.1 million in the 2009 period from $11.6 million in the 2008 period. The decrease resulted from decreased tractor maintenance costs, as a result of fewer tractors and less miles. Additionally, tire expense decreased as a result of our tire replacement cycle whereby the expense in the 2008 period was $0.9 million more than the 2009 period. Additionally, expenses related to tolls and unloading are less in the 2009 period than the 2008 period, due to the reduction in miles, and driver recruitment expenses are less as a result of the decreased demand for drivers. As a percentage of freight revenue, operations and maintenance decreased to 6.8% in the 2009 period from 7.1% in the 2008 period.

Revenue equipment rentals and purchased transportation decreased $5.2 million, or 20.8%, to $19.7 million in the 2009 period, from $24.9 million in the 2008 period. As a percentage of freight revenue, revenue equipment rentals and purchased transportation expense decreased to 14.8% in the 2009 period from 15.3% in the 2008 period. Payments to third-party transportation providers primarily from Covenant Transport Solutions, our brokerage subsidiary, were $11.0 million in the 2009 period, compared to $14.0 million in the 2008 period, mainly due to decreased loads and lower fuel costs passed on to those providers. Tractor and trailer equipment rental and other related expenses decreased to $6.0 million in 2009 from $7.7 million in 2008. We had 347 tractors and 5,889 trailers financed under operating leases at September 30, 2009, compared with 647 tractors and 6,000 trailers financed under operating leases at September 30, 2008. Payments to independent contractors decreased $0.6 million, or 18.7%, to $2.7 million in the 2009 period from $3.3 million in the 2008 period, mainly due to a decrease in the size of the independent contractor fleet and the reduction in fuel costs which is a component of the related expense. This expense category will fluctuate with the number of loads hauled by independent contractors and handled by our brokerage segment and the percentage of our fleet financed with operating leases, as well as the amount of fuel surcharge revenue passed through to the independent contractors and third-party carriers.

Operating taxes and licenses decreased $0.7 million, or 21.8%, to $2.6 million in the 2009 period from $3.3 million in the 2008 period as a result of fewer licensed tractors. As a percentage of freight revenue, operating taxes and licenses essentially held constant at 1.9% in the 2009 period and 2.0% in the 2008 period.

Insurance and claims, consisting primarily of premiums and deductible amounts for liability, physical damage, and cargo damage insurance and claims, decreased $3.9 million, or 32.7%, to approximately $8.1 million in the 2009 period from approximately $12.0 million in the 2008 period. As a percentage of freight revenue, insurance and claims expense decreased to 6.0% in the 2009 period from 7.3% in the 2008 period. These decreases were the result of the lowest quarterly number of DOT reportable accidents per million miles since the Company started tracking the statistics in 2001 and also reduced severity.

In general for casualty claims, we currently have insurance coverage up to $50.0 million per claim. We renewed our casualty program as of April 1, 2009. We are generally self-insured on an occurrence/per claim basis for personal injury and property damage claims for amounts up to the first $4.0 million, workers' compensation up to the first $1.25 million and cargo up to the first $1.0 million. Insurance and claims expense varies based on the frequency and severity of claims, the premium expense, the level of self-insured retention, the development of claims over time, and other factors. With our significant self-insured retention, insurance and claims expense may fluctuate significantly from period to period, and any increase in frequency or severity of claims could adversely affect our financial condition and results of operations.

Communications and utilities expense decreased to $1.4 million in the 2009 period from $1.7 million in the 2008 period. As a percentage of freight revenue, communications and utilities expense remained constant at 1.0% in the 2009 and 2008 periods.

General supplies and expenses, consisting primarily of headquarters and other terminal facilities expenses, decreased $0.5 million to $5.9 million in the 2009 . . .