This discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto as well as our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2011, management's discussion and analysis, risk factors and other information contained therein.

All statements other than statements of historical fact contained in this Form 10-Q and other periodic reports filed by PHI, Inc. ("PHI" or the "Company" or "we" or "our") under the Securities Exchange Act of 1934 and other written or oral statements made by it or on its behalf, are forward-looking statements. When used herein, the words "anticipates", "expects", "believes", "goals", "intends", "plans", "projects" and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements are based on a number of assumptions about future events and are subject to significant risks, uncertainties, and other factors that may cause the Company's actual results to differ materially from the expectations, beliefs, and estimates expressed or implied in such forward-looking statements. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, no assurance can be given that such assumptions will prove correct or even approximately correct. Factors that could cause the Company's results to differ materially from the expectations expressed in such forward-looking statements include but are not limited to the following: unexpected variances in flight hours, the effect on demand for our services caused by volatility of oil and gas prices and the level of exploration and production activity in the Gulf of Mexico, the effect on the demand for our services as a result of the Macondo incident, the effect on our operating costs of volatile fuel prices, the availability of capital required to acquire aircraft, environmental risks, hurricanes and other adverse weather conditions, the activities of our competitors, changes in government regulation, unionization, operating hazards, risks related to operating in foreign countries, the ability to obtain adequate insurance at an acceptable cost and the ability of the Company to develop and implement successful business strategies. For a more detailed description of risks, see the "Risk Factors" section in Item 1.A. of our Form 10-K for the year ended December 31, 2011 and in Part II Item 1.A. of our subsequently filed quarterly reports on Form 10-Q (the "SEC Filings"). All forward-looking statements in this document are expressly qualified in their entirety by the cautionary statements in this paragraph and the Risk Factors section of our SEC Filings. PHI undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Operating revenues for the three months ended June 30, 2012 were $160.6 million, compared to $136.0 million for the three months ended June 30, 2011, an increase of $24.6 million. Oil and Gas segment operating revenues increased $14.2 million for the quarter ended June 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues resulting mainly from the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $10.2 million primarily due to an increase in revenues in the independent provider programs of $8.8 million. This increase was due to increased patient transports, improvement in the payor mix, and also due to rate increases implemented in the prior and current years. Operating revenues related to hospital based contracts increased $1.3 million due to a new contract that began in the third quarter of 2011.

Flight hours for the quarter ended June 30, 2012 were 40,180 compared to 38,734 for the quarter ended June 30, 2011. Oil and Gas segment flight hours increased 836 hours due to increases in medium and heavy aircraft flight hours related to improvements in deepwater drilling activity subsequent to the Macondo incident. Air Medical segment flight hours increased 610 hours for the quarter ended June 30, 2012. Individual patient transports in the Air Medical segment were 4,922 for the quarter ended June 30, 2012, compared to transports of 4,525 for the quarter ended June 30, 2011.

Net Oil and Gas segment profit was $14.3 million for the quarter ended June 30, 2012, compared to $9.5 million for the quarter ended June 30, 2011. The increase of $4.8 million was primarily due to increased revenues of $14.2 million, primarily in medium and heavy aircraft revenue, partially offset by an increase in direct expense of $9.5 million, discussed further in the Segment Discussion below.

Net segment profit for the Air Medical segment was $9.8 million for the quarter ended June 30, 2012, compared to $4.6 million for the quarter ended June 30, 2011. The increase in segment profit in the Air Medical segment was primarily due to increased revenues, as discussed above and in the Segment Discussion below.

Net earnings for the quarter ended June 30, 2012 was $6.1 million, or $0.38 per diluted share, compared to net earnings of $0.7 million for the quarter ended June 30, 2011, or $0.05 per diluted share. Pre-tax earnings were $10.1 million for the quarter ended June 30, 2012, compared to pre-tax earnings of $1.2 million for the same period in 2011.

Year to date operating revenues for June 30, 2012 were $298.6 million, compared to $255.6 million for the six months ended June 30, 2011, an increase of $43.0 million. Oil and Gas operating revenues increased $29.7 million for the six months ended June 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues, resulting mainly from the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $14.0 million primarily due to increased revenues in the independent provider programs, primarily due to increased patient transports, improvement in the payor mix, and rate increases implemented in the prior and current years.

Flight hours for the six months ended June 30, 2012 were 74,245 compared to 71,172 for the six months ended June 30, 2011. Oil and Gas segment's flight hours increased 2,297 hours due to an increase in medium and heavy aircraft flight hours. Air Medical segment flight hours increased 788 hours for the six months ended June 30, 2012. Individual patient transports in the Air Medical segment were 8,968 for the six months ended June 30, 2012, compared to transports of 8,560 for the six months ended June 30, 2011, an increase of 408 transports.

Net Oil and Gas segment profit was $26.3 million for the six months ended June 30, 2012, compared to $16.5 million for the six months ended June 30, 2011. The increase of $9.8 million was primarily due to increased revenues of $29.7, primarily in medium and heavy aircraft revenue, partially offset by an increase in direct expense of $19.9 million, discussed further in the Segment Discussion.

Net segment profit for the Air Medical segment was $13.2 million for the six months ended June 30, 2012, compared to $5.4 million for the six months ended June 30, 2011. The increase in segment profit in the Air Medical segment was primarily due to the increased revenues in the independent provider programs.

Net earnings for the six months ended June 30, 2012 was $8.2 million, or $0.53 per diluted share, compared to net loss of $1.9 million for the six months ended June 30, 2011, or $0.13 per diluted share. Pre-tax earnings were $13.7 million for the six months ended June 30, 2012, compared to pre-tax loss of $3.2 million for the same period in 2011.

Our Oil and Gas segment continues to improve with additional deepwater drilling activity by our customers, with such activity projected to exceed pre-Macondo levels in the next 18 months and require us to provide additional medium and heavy aircraft.

Also, in our Air Medical segment, we have recently commenced the startup of several projects, including the project below, which collectively we believe will have a favorable effect on net segment profit particularly in 2013 and 2014.

In April 2012, our subsidiary PHI Air Medical, L.L.C. entered into a three-year contract with the Saudi Red Crescent Authority ("SRCA") to provide helicopter emergency medical services in the Kingdom of Saudi Arabia. The contract calls for us to place eight medium aircraft in service during 2012, along with support staff, and to operate and maintain the aircraft for the contract term. In connection with the contract, we have entered into an aircraft purchase agreement, pursuant to which we would purchase and then sell seven new aircraft to the company that will lease them to the SRCA, after we complete and configure the aircraft for use in emergency medical services. Funds for the purchase of the aircraft have been deposited into an escrow account by the company that will lease the aircraft to SRCA. As of August 1, 2012, all seven of the new aircraft have been delivered by the manufacturer to PHI. The contract envisions a transition of the program over time to qualified Saudi personnel, and pursuant to the contract we will provide training services to SRCA's qualified pilots, technicians, paramedics and communications specialists. The SRCA project is expected to commence flight operations in September 2012, with two aircraft in service at that time.

Operating Statistics

The following tables present certain non-financial operational statistics for
the quarters and six months ended June 30, 2012 and 2011:



                                          Quarter Ended           Six Months Ended
                                            June 30,                  June 30,
                                        2012         2011         2012         2011
         Flight hours:
         Oil and Gas                    30,833       29,997       56,547       54,250
         Air Medical (1)                 9,347        8,737       17,148       16,360
         Technical Services                 -            -           550          562

         Total                          40,180       38,734       74,245       71,172


         Air Medical Transports (2)      4,922        4,525        8,968        8,560

                  Oil and Gas (3)                      164       164
                  Air Medical (4)                       93        88
                  Technical Services                     6         5

                  Total (3) (4)                        263       257

(1) Flight hours include 2,685 flight hours associated with hospital-based contracts, compared to 2,560 flight hours in the prior year quarter, and 4,798 flight hours year-to-date, compared to 4,686 in the prior year-to-date.

(2) Represents individual patient transports for the period.

(3) Includes nine aircraft as of June 30, 2012 and 2011 that are customer owned.

(4) Includes six aircraft as of June 30, 2012 and seven aircraft as of June 30, 2011 that are customer owned.

Quarter Ended June 30, 2012 compared with Quarter Ended June 30, 2011

Combined Operations

Revenues - Operating revenues for the three months ended June 30, 2012 were $160.6 million, compared to $136.0 million for the three months ended June 30, 2011, an increase of $24.6 million. Oil and Gas operating revenues increased $14.2 million for the quarter ended June 30, 2012, related primarily to increased medium and heavy aircraft flight hours and revenues. Operating revenues in the Air Medical segment increased $10.2 million primarily due to increased revenues in the independent provider programs due to improvements in the payor mix, rate increases implemented in the prior and current years, and increased patient transports.

Flight hours for the quarter ended June 30, 2012 were 40,180 compared to 38,734 for the quarter ended June 30, 2011. Oil and Gas segment's flight hours increased 836 hours due to increases in medium and heavy aircraft flight hours. Air Medical segment flight hours increased 610 hours for the quarter ended June 30, 2012, due to increased flight hours in the independent provider programs. Individual patient transports in the Air Medical segment were 4,922 for the quarter ended June 30, 2012, compared to transports of 4,525 for the quarter ended June 30, 2011.

Other Income and Gains - Gains on asset dispositions were $0.7 million for the three months ended June 30, 2012, compared to $0.1 million for the three months ended June 30, 2011.

Direct Expenses - Direct operating expense was $134.1 million for the three months ended June 30, 2012, compared to $120.4 million for the three months ended June 30, 2011, an increase of $13.7 million. Aircraft rent increased ($3.2 million) due to the acquisition of four heavy aircraft in 2011 and two heavy aircraft in 2012 funded with operating leases. We also experienced increases in aircraft warranty costs ($1.7 million), employee compensation expenses ($9.5 million), and component repair costs ($1.6 million). Aircraft parts usage decreased ($2.8 million) due to a decrease in parts usage for light aircraft. Other items increased, net ($0.5 million).

Selling, General, and Administrative Expenses - Selling, general and administrative expenses were $9.7 million for the three months ended June 30, 2012, compared to $7.7 million for the three months ended June 30, 2011. The $2.0 million increase is due to increased legal and audit expenses ($0.5 million), increased employee compensation expenses ($0.9 million), increased contract services ($0.1 million), increased travel costs ($0.1 million), and other items, net ($0.4 million).

Interest Expense - Interest expense was $7.4 million for the three months ended June 30, 2012, compared to $6.8 million for the three months ended June 30, 2011. The increase is due to the increased balance on the revolving credit facility.

Income Taxes - Income tax expense for the three months ended June 30, 2012 was $4.0 million compared to $0.5 million for the three months ended June 30, 2011. The effective tax rate was 40% for the three months ended June 30, 2012, and the three months ended June 30, 2011.

Net Earnings - Net income for the three months ended June 30, 2012 was $6.1 million compared to net income of $0.7 million for the three months ended June 30, 2011. Earnings before income taxes for the three months ended June 30, 2012 was $10.1 million compared to earnings before tax of $1.2 million for the same period in 2011. Earnings per diluted share was $0.38 for the current quarter compared to earnings per diluted share of $0.05 for the prior year quarter. We had 15.3 million weighted average common shares outstanding during the three months ended June 30, 2012 and 2011. The increase in earnings before taxes for the quarter ended June 30, 2012 is primarily due to increased revenues and segment operating profit in the Oil and Gas and Air Medical segments.

Segment Discussion

Oil and Gas - Oil and Gas segment revenues were $104.4 million for the three months ended June 30, 2012, compared to $90.2 million for the three months ended June 30, 2011, an increase of $14.2 million. Flight hours were 30,833 for the current quarter compared to 29,997 for the same quarter in the prior year. The increase in revenue is primarily due to increased medium and heavy aircraft flight hours and revenues, due to an increase in deepwater drilling activity compared to the same period in 2011 when there was no significant deepwater drilling activity due to the Deepwater Horizon incident.

The number of aircraft in the segment was 164 at June 30, 2012 and June 30, 2011. We have sold or disposed of three light and one medium aircraft in the Oil and Gas segment since June 30, 2011. We added eleven new aircraft to the Oil and Gas segment since June 30, 2011, consisting of four light, three medium and four heavy aircraft. Inter-segment aircraft transfers account for the remaining amount.

Direct expense in our Oil and Gas segment was $89.3 million for the three months ended June 30, 2012, compared to $79.8 million for the three months ended June 30, 2011, an increase of $9.5 million. Aircraft rent expense increased ($2.5 million) due to the acquisition of four heavy aircraft in 2011 and two heavy aircraft in 2012, funded with operating leases. Employee compensation expenses increased ($7.5 million) due to compensation rate increases and an increase in the number of employees in the Oil and Gas segment. Aircraft warranty costs increased ($2.2 million) due to increased flight hours. Component repair costs increased ($1.0 million) and aircraft parts usage decreased ($3.2 million). Other items decreased, net ($0.5 million).

Our Oil and Gas segment profit was $14.3 million for the quarter ended June 30, 2012, compared to $9.5 million for the quarter ended June 30, 2011. Operating margins (segment profit divided by operating revenues) were 14% for the three months ended June 30, 2012, compared to 11% for the three months ended June 30, 2011. The increase in segment profit of $4.8 million was primarily due to increased revenues of $14.2 million, partially offset by increased direct expenses of $9.5 million as previously discussed. The Oil and Gas segment revenues are primarily driven by contracted aircraft and flight hours. Costs are primarily fixed, and are driven by the number of aircraft, and a portion is variable which is driven by flight hours.

Air Medical - Air Medical segment revenues were $54.4 million for the three months ended June 30, 2012, compared to $44.2 million for the three months ended June 30, 2011, an increase of $10.2 million. The increase was primarily due to increased revenue of $8.8 million in the independent provider programs related to improved payor mix, rate increases implemented in 2011 and 2012, and increased patient transports. Operating revenues related to hospital based contracts increased $1.3 million due to a new contract that began in the third quarter of 2011. Total patient transports were 4,922 for the three months ended June 30, 2012, compared to 4,525 for the three months ended June 30, 2011.

Flight hours were 9,347 for the three months ended June 30, 2012, compared to 8,737 for the three months ended June 30, 2011. The number of aircraft in the segment was 93 at June 30, 2012 and 88 at June 30, 2011. Since June 30, 2011, we added one medium aircraft related to a hospital contract. We also acquired one fixed wing aircraft, and sold or disposed of two fixed wing and two light aircraft. Inter-segment aircraft transfers account for the remaining amount.

Direct expense in our Air Medical segment was $42.8 million for the three months ended June 30, 2012, compared to $38.8 million for the three months ended June 30, 2011. There was an increase in employee compensation expense ($1.9 million) due to additional employees and rate increases. There was also increases in aircraft rent ($0.7 million) and aircraft depreciation ($0.2 million) due to additional aircraft added to the fleet. Aircraft warranty costs increased ($0.1 million) and component repair costs increased ($0.7 million). Other items increased, net ($0.4 million).

Selling, general and administrative expenses were $1.7 million for the three months ended June 30, 2012, compared to $0.9 million for the three months ended June 30, 2011. The $0.8 million increase is primarily due to increased employee compensation expenses, legal and audit expenses, and contract services costs.

Our Air Medical segment's profit was $9.8 million for the quarter ended June 30, 2012, compared to $4.6 million for the quarter ended June 30, 2011. Operating margins were 18% for the three months ended June 30, 2012, compared to 10% for the three months ended June 30, 2011. The improvement in segment operating income was primarily due to an increase in transports, increase in rates in 2011 and 2012, closure of unprofitable bases, and cost reductions.

Technical Services - Technical Services revenues were $1.7 million for the three months ended June 30, 2012, compared to $1.6 million for the three months ended June 30, 2011. Direct expenses in our Technical Services segment were $2.0 million for the three months ended June 30, 2012, compared to $1.9 million for the three months ended June 30, 2011. Our Technical Services segment's operating loss was $0.3 million for the three months ended June 30, 2012 and the three months ended June 30, 2011.

Six Months Ended June 30, 2012 compared with Six Months Ended June 30, 2011

Combined Operations

Revenues - Operating revenues for the six months ended June 30, 2012 were $298.6 million, compared to $255.6 million for the six months ended June 30, 2011, an increase of $43.0 million. Oil and Gas operating revenues increased $29.7 million for the six months ended June 30, 2012, related primarily to

increased medium and heavy aircraft revenue due to increased flight hours due to the continuing improvement in deepwater drilling activity since the Macondo incident in 2010. Operating revenues in the Air Medical segment increased $14.0 million primarily due to increased revenues in the independent provider programs due to increased patient transports, improved payor mix and rate increases.

Flight hours for the six months ended June 30, 2012 were 74,245 compared to 71,172 for the six months ended June 30, 2011. Oil and Gas segment's flight hours increased 2,297 hours due to an increase in deepwater drilling activity in the Gulf of Mexico. Air Medical segment flight hours increased 788 hours for the six months ended June 30, 2012, primarily due to increased flight hours in the independent provider programs. Transports in the independent provider programs were 8,968 for the six months ended June 30, 2012, compared to 8,560 transports for the six months ended June 30, 2011.

Other Income and Gains - Gain on dispositions of assets was $0.7 million for the six months ended June 30, 2012, compared to a gain of $0.2 million for the six months ended June 30, 2011. These amounts represent gains on sales of aircraft that no longer meet our strategic needs.

Other income was $0.4 million for the six months ended June 30, 2012, compared to $0.6 million for the six months ended June 30, 2011.

Direct Expenses - Direct operating expense was $252.8 million for the six months ended June 30, 2012, compared to $228.7 million for the six months ended June 30, 2011, an increase of $24.1 million. There was an increase in employee compensation expense ($12.9 million) due to additional employees and rate increases as compared to the prior year. We also experienced increases in aircraft rent ($4.5 million) and aircraft depreciation ($1.6 million) due to additional aircraft added to the fleet. Other increases included fuel expense ($2.5 million) due to increased flight hours, particularly in medium and heavy aircraft, aircraft warranty costs ($3.9 million), and component repair costs ($4.4 million). There were decreases in aircraft parts usage ($3.8 million), aircraft insurance ($1.6 million), and other items, net ($0.3 million).

Selling, General, and Administrative Expenses - Selling, general and administrative expenses were $18.5 million for the six months ended June 30, 2012, compared to $17.3 million for the six months ended June 30, 2011. The $1.2 million increase was primarily due to increased employee compensation expense ($1.9 million), partially offset by decreases in legal and accounting fees ($0.5 million), and other items (0.2 million).

Interest Expense - Interest expense was $14.6 million for the six months ended June 30, 2012, compared to $13.8 million for the six months ended June 30, 2011. This increase is due to the increased balance on the revolving credit facility.

Income Taxes - Income tax expense for the six months ended June 30, 2012 was $5.5 million compared to income tax benefit of $1.3 million for the six months ended June 30, 2011. The effective tax rate was 40% for the six months ended June 30, 2012 and 2011.

Net Earnings - Our net earnings for the six months ended June 30, 2012 was $8.2 million compared to net losses of $1.9 million for the six months ended June 30, 2011. Earnings per diluted share was $0.53 for the six months ended June 30, 2012, compared to a net loss per diluted share of $0.13 for the prior year period. We had 15.3 million common shares outstanding during the six months ended June 30, 2012 and 2011. Earnings before taxes for the six months ended June 30, 2012 was $13.7 million, compared to a loss before income taxes of $3.2 million for the same period in 2011. The increase in earnings before income taxes for the six months ended June 30, 2012 compared to the prior year period was primarily due to an increase in Oil and Gas segment earnings of $9.8 million and an increase in Air Medical segment earnings of $7.8 million.

Segment Discussion

Oil and Gas - Oil and Gas segment revenues were $197.4 million for the six months ended June 30, 2012, compared to $167.7 million for the six months ended June 30, 2011, an increase of $29.7 million. Flight hours were 56,547 for the six months ended June 30, 2012, compared to 54,250 for the same period in 2011. The increase in Oil and Gas revenues was related primarily to increased medium and heavy aircraft flight hours and revenue due to increased deepwater drilling activity in the Gulf of Mexico. In 2011 there was no significant deepwater drilling activity following the Macondo incident in 2010.

Direct expense in our Oil and Gas segment was $169.3 million for the six months ended June 30, 2012, compared to $149.4 million for the six months ended June 30, 2011, an increase of $19.9 million. Employee compensation expense increased ($11.4 million) due to an increase in employees and rate increases. Fuel expense increased ($2.5 million) as a result of increased flight hours. Total fuel cost is included in direct expense and reimbursement of a portion of these costs above a contracted per-gallon amount is included in revenue. Aircraft rent expense increased ($3.5 million) and aircraft depreciation increased ($1.2 million) due to additional aircraft added to the fleet. Aircraft warranty costs also increased ($3.8 million), and component repair costs increased ($2.8 million). There were decreases in aircraft parts usage ($4.3 million) and other items, net ($1.0 million).

Selling, general and administrative expenses were $1.8 million for the six months ended June 30, 2012 and June 30, 2011.

Our Oil and Gas net segment profit was $26.3 million for the six months ended June 30, 2012, compared to $16.5 million for the six months ended June 30, 2011. The $9.8 million increase was due to the increase in revenues of $29.7 million, . . .