GLUX Great Lakes Aviation Ltd (CE)

The Company

We were incorporated on October 25, 1979 as an Iowa corporation and became a publicly traded company in January 1994. We commenced scheduled air service operations on October 12, 1981. Great Lakes Airlines currently operates hubs at Denver, CO, Los Angeles, CA, Minneapolis, MN and Phoenix, AZ.

We are a regional airline operating as an independent carrier and as a code share partner with United Air Lines, Inc. (United or United Airlines) and Frontier Airlines, Inc. (Frontier or Frontier Airlines). Our code share agreements allow our mutual customers to purchase connecting flights through our code share partners and to share other benefits such as baggage transfer and frequent flyer benefits (in certain instances), while we maintain our own branding on our planes and ticket counters and our own designator code on all our flights. In addition to our code share agreements and independent branding, we have developed electronic ticketing (e-ticket) interline agreements with American Airlines, Delta Airlines, Frontier Airlines, United Airlines and U.S. Airways.

As of May 9, 2014, we served 30 airports in nine states with a fleet of six Embraer EMB-120 Brasilias and 28 Beech 1900D regional airliners.

As of March 31, 2014 the Company was not in compliance with the leverage coverage ratio financial covenant contained in the Company’s senior credit facility’s Credit Agreement. As a consequence the Company’s lenders have the right to declare our debt obligations of approximately $23.2 million to be immediately due and payable under the terms of the Credit Agreement.

Essential Air Service (“EAS”) Program

We derived approximately 47% of our total revenue from the EAS program in the three months ended March 31, 2014, which is administered by the United States Department of Transportation (DOT). The EAS program was instituted under the Airline Deregulation Act of 1978 (the “Deregulation Act”), which allowed airlines greater freedom to introduce, increase, and generally reduce or eliminate service to existing markets. Under the EAS program, certain communities are guaranteed specified levels of “essential air service.” In order to promote the provision of essential air services, the DOT may authorize the payment of federal subsidies to compensate an air carrier that is providing essential air services in otherwise unprofitable or minimally profitable markets.

The FAA Modernization and Reform Act of 2012 was enacted into law on February 14, 2012. This legislation provides for the authorization of the EAS program for federal fiscal years 2011 through 2015. Federal fiscal year 2015 ends on September 30, 2015. The FAA Modernization and Reform Act of 2012 reaffirmed the Congressional commitment to the continuance of the Essential Air Service program. The EAS program obtains a portion of the funding through annual Congressional appropriations.

An airline serving a community that qualifies for essential air services is required to give the DOT advance notice before the airline may terminate, suspend, or reduce service. Depending on the circumstances, the DOT may require the continuation of existing service until a replacement carrier is found. EAS rates are normally set for two-year periods for each city. Significant fluctuations in passenger traffic, fares and associated revenues, as well as fluctuations in fuel and other costs, may cause EAS routes to become unprofitable during these two-year terms. Near the end of the two year term for EAS service to a particular city, the DOT will request service proposals from the Company and competitive proposals from other airlines. Proposals, when requested, are evaluated on, among other things, the level of service provided, the amount of subsidy requested, the fitness of the applicant, and comments from the communities served.

As of May 9, 2014, we served 20 EAS communities on a subsidized basis.

Pilot Shortage

New Federal Aviation Administration (“FAA”), pilot qualification rules imposed as part of the Airline Safety and Federal Aviation Administration Extension Act of 2010 in combination with revised FAR Part 117 Flight Crewmember Flight and Duty Limitations and Rest Requirements, (“FAR Part 117”), have created an industry-wide shortage of qualified pilots and negatively affected our operations and financial condition.

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These new rules resulted in a greatly accelerated demand for qualified pilots as air carriers proceeded to increase pilot staffing requirements to compensate for the loss of crew efficiency due to the new rules. As a result, Great Lakes lost a large portion of its pool of qualified pilots with ATP certification to airlines operating aircraft with more seat availability and hence greater pilot earnings potential.

The Airline Safety and Federal Aviation Administration Extension Act of 2010 was enacted in August 2010. Among many other pilot training directives, the legislation mandated that first officers (co-pilots) obtain an Airline Transport Pilot certification (“ATP”) prior to being qualified to perform crewmember duties in scheduled airline passenger service under FAR Part 121 regulatory requirements. A key factor to enable a pilot to receive an ATP certificate is the accumulation of 1,500 flight hours.

Furthermore, the legislation directed the FAA Administrator to conduct a rule making proceeding, to identify specific academic training courses that would provide for exemptions to the 1,500 hour requirement. The FAA published the final rule in the Federal Register on July 15, 2013. These rules became effective August 1, 2013. As a result of the rule making process, first officers may be eligible to receive a “restricted privileges” ATP with a minimum of 750 hours if they were a military pilot, 1,000 hours if they have received a bachelor’s degree from an accredited educational institution with an aviation major and 1,250 hours if they have received an associate’s degree from an accredited educational institution with an aviation major. It should be noted that accredited educational institutions provide very limited actual flight experience and that graduates from these institutions typically will have received between 250 to 350 hours of actual flight time.

These new pilot qualification rules have severed the historical path in which pilots have had the opportunity to build enough hours so they could advance their careers. Great Lakes has historically provided this career path for more than 32 years. Prior to this new rule, regulatory requirements provided for pilots to become eligible as first officers for a FAR Part 121 air carrier with a minimum of 250 hours of experience. The new rules also mandate that a first officer must have 1,000 hours as a FAR Part 121 first officer in an air carrier operation prior to being eligible to serve as a captain in a FAR Part 121 airline. As an alternative, the rule provides for captain eligibility under FAR Part 121 for pilots who accumulate 1,000 hours of pilot in command time in a FAR Part 135 operation.

The current supply of pilot candidates who qualify under the new regulations is severely limited. It is difficult for Great Lakes, which operates Beech 1900D turboprop aircraft, to compete for qualified pilots with other airlines operating 50 seat regional jets and larger equipment.

As a result, we have had to reduce scheduled departures by suspending service to multiple communities eligible for Essential Air Service, and other non-EAS markets. These actions resulted in a reduction of revenue and operating expenses. The rate of expense reduction will inherently lag the revenue drop-off as the Company aggressively adjusts its operating expenditures to match the new level of operations.

In April of 2013, Great Lakes submitted a written proposal to the FAA seeking authority to operate Beech 1900D aircraft in a nine seat passenger configuration utilizing FAR Part 135 pilot hiring requirements, while maintaining and complying with all other FAR Part 121 operational and maintenance standards.

On March 18, 2014, the Company received from the FAA new operations specifications allowing the Company to hire pilots under FAR Part 135 regulatory requirements. This will allow us to restore first officer staffing levels while maintaining FAR Part 121 hiring, training and employment standards as we have always done as a Part 121 carrier.

EAS Program Activity Subsequent to January 1, 2014

Primarily as a result of the pilot shortage, the company suspended EAS service to the following cities since January 1, 2014:

Moab and Vernal, UT

Pueblo, AZ

Clovis, NM

Devils Lake, and Jamestown, ND

Ft. Dodge and Mason City, IA

Ironwood, MI

Thief River Falls, MN

Hays and Great Bend, KS

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In addition to the EAS subsidized cities above, in March of 2014, the Company terminated service to Dickinson and Williston, ND which were not EAS subsidized cities.

Financial Highlights

We had operating revenue of $13.1 million for the three-month period ending March 31, 2014, a 54.5% decrease compared to operating revenue of $29.5 million for the three-month period ending March 31, 2013. We realized an $8.3 million decrease in passenger revenue and public service revenue decreased $8.0 million compared to the prior year period. The $8.0 million or 54.5% period-over-period decrease in passenger revenues and the $8.0 million or 56.5% was primarily attributable to a reduction of scheduled service primarily attributable to a 61.7% reduction in number of pilots created by the industry-wide shortage of qualified pilots. This shortage of qualified pilots, resulted in a 56.0% decrease in available seat miles and 59.6% decrease in departures which resulted in 48.3% decrease in revenue passengers carried.

We had an operating loss of $5.8 million for the three-month period ending March 31, 2014, compared to an operating loss of $1.0 million for the three-month period ending March 31, 2013. The $4.8 million increase in operating loss is attributable to a $16.4 million decrease in operating revenue, partially offset by a $11.6 million decrease in operating expenses. We realized a net loss of $4.3 million for the three-month period ending March 31, 2014, compared to net loss of $1.3 million for the three-month period ending March 31, 2013. The increase in net loss is primarily a result of a $16.4 million decrease in operating revenue partially offset by a $11.6 million decrease in operating expenses, a $0.1 million decrease in interest expense and a $1.6 million increase in income tax benefit.

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Results of Operations for the Three Months Ended March 31, 2014 and 2013

The following table sets forth certain financial information regarding our results of operations for the three months ended March 31, 2014 and 2013.

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Comparison of First Quarter 2014 to First Quarter 2013

Passenger Revenues . Passenger revenues were $6.9 million in the first quarter of 2014, a decrease of 54.5% from $15.2 million in the first quarter of 2013. The $8.3 million quarter-over-quarter decrease in passenger revenues was attributable to the curtailment of operations due to a severe shortage of available qualified pilots in combination with a reduction of scheduled service in markets that were experiencing diminishing year-over-year load factors and lower revenue passenger mile (RPM) yields.

Public Service Revenues. Public service revenues collected through the EAS Program decreased 56.5% to $6.2 million during the first quarter of 2014, as compared to $14.2 million during the first quarter of 2013. The decrease in public service revenue was mostly due a 59.6% decrease departures due to the industry-wide shortage of qualified pilots. At March 31, 2014 and March 31, 2013, we served 22 and 33 communities, respectively, on a subsidized basis under the EAS Program.

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Other Revenues. Other revenues declined 56.1%, mainly due to decline of cargo revenues resulting from 59.6% decline in departures during the first quarter of 2014 compared to the first quarter of 2013.

Operating Expenses. Total operating expenses were $18.9 million, or 47.6 cents per ASM, in the first quarter of 201, as compared to $30.5 million, or 33.8 cents per ASM in the first quarter of 2013.

Salaries, Wages, and Benefits . Salaries, wages, and benefits were $6.0 million in the first quarter of 2014, a decrease of 31.6% from $8.8 million in the first quarter of 2013. The decrease in salaries, wages, and benefits was mostly attributable to the decreased number of employees as a result of the decreased operations due to the industry-wide shortage of qualified pilots.

Aircraft Fuel Expense . Aircraft fuel and into-plane expense was $4.4 million, or 11.1 cents per ASM, in the first quarter of 2014. In comparison, our aircraft fuel and into-plane expense for the first quarter of 2013 was $10.0 million, or 11.1 cents per ASM. The 56.3% decrease in our aircraft fuel expense was attributable to a reduction in fuel consumption which was the result of a 56.0% decrease in ASMs.

The average cost of fuel decreased from $3.82 per gallon in the first quarter of 2013 to $3.75 per gallon in the first quarter of 2014. At first quarter 2014 rates of consumption, a one-cent increase or decrease in the price per gallon of fuel will increase or decrease our fuel expense by approximately $47,000 annually.

Aircraft Maintenance, Materials, and Component Repairs . Aircraft maintenance, materials, and component repairs expense was $4.4 million during the first quarter of 2014, which was a 43.0% decrease from $3.2 million during the first quarter of 2013. The decrease was primarily attributable to the reduction of component repairs and the timing of engine overhaul expenses resulting from the reduced operations.

Depreciation and amortization . Depreciation and amortization expense was $1.6 million during the first quarter of 2014 which was consistent with $1.6 million in the first quarter of 2013.

Other Rentals and Landing Fees Expense . Other rentals and landing fees expense was $1.4 million during the first quarter of 2014, which was a decrease from $2.0 million during the first quarter of 2013. The decrease was mainly attributable to decreased landing fees resulting from the 59.6% reduction in departures along with reduced hub rental expense.

Other Operating Expenses . Other operating expenses were $3.6 million, or 9.2 cents per ASM during the first quarter of 2014, which was a decrease from $4.9 million, or 5.4 cents per ASM during the first quarter of 2013. The decrease was mainly attributable to decreases in pilot related expenses of $578,000, deicing expenses of $315,000, insurance expense of $158,000, passenger related expenses of $137,000 and other expenses of $167,000. These were partially offset by increased legal and professional fees of $128,000.

Interest Expense . We incurred interest expense of $1.0 million in the first quarter of 2014, compared to $1.1 million in the first quarter of 2013 as a result of reducing our long-term debt.

Income Tax Expense. For the three months ended March 31, 2014, we recorded an income tax benefit of $2.5 million and for the three months ended March 31, 2013, we recorded an income tax expense of $0.9 million. Our estimated effective federal and state income tax rate is 36.5% for the three months ended March 31, 2014.

Seasonality

Seasonal factors, related to weather conditions and changes in passenger demand, generally affect our monthly passenger enplanements. We have historically shown a higher level of passenger enplanements in the May through October period as compared with the November through April period for many of the cities served. These seasonal factors have generally resulted in reduced revenues, lower operating income, and reduced cash flow for us during

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the November through April period. As a result of such factors, our revenues and earnings have shown a corresponding increase during the May through October period. EAS revenues are generated under subsidy per departure rates established by the DOT and we realize revenue as departures are performed. Inherently, most of our EAS revenues, other than winter weather related cancellations, are not affected by seasonality, but certain EAS markets do receive summer season increased departures which are eligible for subsidy revenue.

Liquidity, Financing and Capital Resources

As a result of not being in compliance under our senior credit facility and the uncertainty of our liquidity position for the next 12 months, all borrowings (approximately $23.2 million) under our senior credit facility are classified as current maturities as of March 31, 2014, Thus, we had negative working capital of $9.9 million and a current ratio of 0.66:1 at March 31, 2014, compared to negative working capital of $4.4 million and a current ratio of 0.86:1 at December 31, 2013.

We have historically used debt to finance the purchase of aircraft. On November 16, 2011, we entered into a financing agreement with our lenders. Terms of the financing include a four-year term loan in the amount of $24 million and a revolving loan credit facility in which we may borrow up to $10 million.

At March 31, 2014, our outstanding principal balance on the term loan was $14.2 million and we had borrowed $9.0 million under the revolving credit facility.

Pursuant to the terms of a pledge and security agreement and an aircraft security agreement, our obligations to the lenders identified in the Credit Agreement are secured by substantially all assets of the Company, including all owned aircraft.

For the three months ending March 31, 2014, we invested $0.6 million of cash in aircraft, engines, rotable parts and other equipment, mostly represented by rotable parts acquisitions. We do not expect to acquire additional aircraft or engines in the foreseeable future.

At March 31, 2014 the Company has no aircraft lease obligations.

At March 31, 2014, the Company was not in compliance with financial covenants contained in the Credit Agreement, and it is not expected that the Company will be in compliance throughout the balance of 2014. As a result of such non-compliance our lenders have the right to declare all borrowings (approximately $23.2 million) immediately due and payable.

On April 1, 2014 the Company and its Lenders entered into a Third Amendment and Forbearance Agreement which terminated on April 30, 2014. The Company is in negotiations with its lenders on extending the term of the Forbearance Agreement. Until the Company is able to hire a sufficient number of qualified pilots, restructure its current debt obligations, and obtain additional cash funding sources, it is expected that the Company will not have sufficient liquidity to service its obligations. The Company is in discussions with its lenders and pursuing additional sources of financing and/or sales of assets.

Sources and Uses of Cash . As of March 31, 2014, our cash balance was $3.3 million. We made principal payments on term debt of $1.0 million.

Cash Provided by Operating Activities . During the three months ended March 31, 2014, our cash used by operating activities was $1.6 million. During the three months we generated a net loss of $4.3 million and recorded non-cash depreciation and amortization of $1.6 million. Other sources of cash included a reduction in accounts receivable of $3.1 million, a reduction in inventory of $0.8 million and a combined reduction in prepaid expenses, other current assets and other assets of $1.4 million. Uses of cash included $2.5 million of deferred tax benefit, a reduction in accounts payable of $0.8 million and reductions in accrued interest, unearned revenue and other liabilities of $0.4 million.

Cash Flows from Investing Activities . During the first three months of 2014, we invested $0.6 million for the purchase of replacement aircraft rotable components and other property and equipment.

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Cash Flows from Financing Activities . During the first three months of 2014, we utilized $1.0 million of cash to reduce our outstanding notes payable and long-term debt balances.

Forward-Looking Statements

This Quarterly Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Great Lakes Aviation, Ltd. (Great Lakes, we, our, its, it or the Company) notes that certain statements in this Form 10-Q and elsewhere are forward-looking and provide other than historical information. Our management may also make oral, forward-looking statements from time to time. These forward-looking statements include, among others, statements concerning our general business strategies, financing decisions, and expectations for funding expenditures and operations in the future. The words “may,” “will,” “believe,” “plan,” “continue,” “could,” “should,” “hope,” “estimate,” “project,” “intend,” “expect,” “anticipate” and similar expressions reflected in such forward-looking statements are based on reasonable assumptions, and none of the forward-looking statements contained in this Form 10-Q or elsewhere should be relied on as predictions of future events. Such statements are necessarily dependent on assumptions, data, or methods that may be incorrect or imprecise, and may be incapable of being realized. The risks and uncertainties that are inherent in these forward-looking statements could cause actual results to differ materially from those expressed in or implied by these statements.

Factors that could cause results to differ materially from the expectations reflected in any forward-looking statements include:

1) our ability to hire and retain sufficient pilots to service existing routes and expand into other profitable routes;

2) our ability to restructure our current debt obligations and covenants and obtain additional sources of capital to provide for operating cash requirements either through additional financings and/or sales of assets;

3) the receipt of sufficient passenger revenues on the routes that we serve;

4) the continuation of Essential Air Service and our ability to capitalize on it;

5) the level of regulatory and environmental costs;

6) airline industry and broader economic conditions;

7) the continued connection capacity at our hubs and activities of our code share partners;

8) our ability to monetize our net operating loss carry forwards;

9) the incidence of domestic or international terrorism and military actions;

10) competition from other airlines and ground transportation companies;

11) the volatility of fuel costs;

12) the incidence of labor disruptions or strikes;

13) our ability to retain key personnel;

14) the incidence of aircraft accidents;

15) the incidence of technological failures or attacks;

16) maintenance costs related to aging aircraft;

17) the limited market for our securities;

18) the volatility of the market price of our common stock;

19) our concentration of stock ownership and control of the company by our Chairman and President;

20) our ability to timely remediate any deficiencies in our internal controls;

21) no expectation of dividend;

22) anti-takeover provisions and other restrictions in our credit agreements.

Readers are cautioned not to attribute undue certainty on the forward-looking statements contained herein, which speak only as of the date hereof. Changes may occur after that date, and we do not undertake to update any forward-looking statements except as required by law in the normal course of our public disclosure practices.

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