UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: September 30, 2009

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number: 0-9827

PHI, Inc.

(Exact name of registrant as specified in its charter)

Louisiana	72-0395707
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2001 SE Evangeline Thruway
Lafayette, Louisiana	70508
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (337) 235-2452

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: þ No: o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes: o No: o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ 
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at October 30, 2009
Voting Common Stock	2,852,616 shares
Non-Voting Common Stock	12,458,992 shares

PHI, INC.

Index — Form 10-Q

Part I — Financial Information
Item 1.	Financial Statements — Unaudited
	Condensed Consolidated Balance Sheets — September 30, 2009 and December 31, 2008	3
	Condensed Consolidated Statements of Operations — Quarter and Nine months ended September 30, 2009 and 2008	4
	Condensed Consolidated Statements of Shareholders’ Equity — Nine months ended September 30, 2009 and 2008	5
	Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2009 and 2008	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	32
Part II — Other Information
Item 1.	Legal Proceedings	33
Item 1.A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
	Signatures	35
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)

	September 30,			December 31,
	2009			2008
ASSETS
Current Assets:
Cash	$	3,882		$	1,159
Short-term investments		73,925			42,121
Accounts receivable — net
Trade		103,575			104,912
Other		6,578			6,510
Inventories of spare parts — net		61,645			58,249
Other current assets		11,207			10,687
Income taxes receivable		628			982
Total current assets		261,440			224,620
Other		13,733			23,988
Property and equipment — net		532,079			528,574
Total assets	$	807,252		$	777,182
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	15,845		$	25,449
Accrued liabilities		36,401			25,193
Total current liabilities		52,246			50,642
Long-term debt		210,350			203,000
Deferred income taxes		73,215			65,175
Other long-term liabilities		6,269			5,969
Commitments and contingencies (Note 3)
Shareholders’ Equity:
Voting common stock		285			285
Non-voting common stock		1,246			1,245
Additional paid-in capital		291,403			291,262
Accumulated other comprehensive (loss) income		(15	)		45
Retained earnings		172,253			159,559
Total shareholders’ equity		465,172			452,396
Total liabilities and shareholders’ equity	$	807,252		$	777,182

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars, except per share data)
(Unaudited)

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Operating revenues, net	$	124,183	$	135,460	$	364,456	$	382,716
Gain on dispositions of assets, net		7		249		172		4,453
Other, principally interest income		53		29		181		532
		124,243		135,738		364,809		387,701
Expenses:
Direct expenses		100,972		110,370		308,011		318,353
Selling, general and administrative expenses		7,706		8,368		23,748		23,291
Interest expense		3,976		3,840		11,894		11,528
		112,654		122,578		343,653		353,172
Earnings before income taxes		11,589		13,160		21,156		34,529
Income tax expense		4,636		5,263		8,462		13,811
Net earnings	$	6,953	$	7,897	$	12,694	$	20,718
Weighted average shares outstanding:
Basic		15,312		15,277		15,306		15,277
Diluted		15,312		15,282		15,306		15,281
Net earnings per share:
Basic	$	0.45	$	0.52	$	0.83	$	1.36
Diluted	$	0.45	$	0.52	$	0.83	$	1.36

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Thousands of dollars and shares)
(Unaudited)

											Accumulated					Total
	Voting				Non-Voting				Additional		Other Com-					Share-
	Common Stock				Common Stock				Paid-in		prehensive			Retained		Holders’
	Shares		Amount		Shares		Amount		Capital		Income (Loss)			Earnings		Equity
Balance at December 31, 2008		2,853	$	285		12,449	$	1,245	$	291,262	$	45		$	159,559	$	452,396
Net earnings		—		—		—		—		—		—			12,694		12,694
Changes in pension plan assets and benefit obligations		—		—		—		—		—		(60	)		—		(60	)
Total comprehensive income																	12,634
Stock options exercised		—		—		10		1		141		—			—		142
Balance at September 30, 2009		2,853	$	285		12,459	$	1,246	$	291,403	$	(15	)	$	172,253	$	465,172

											Accumulated				Total
	Voting				Non-Voting				Additional		Other Com-				Share-
	Common Stock				Common Stock				Paid-in		prehensive		Retained		Holders’
	Shares		Amount		Shares		Amount		Capital		Income		Earnings		Equity
Balance at December 31, 2007		2,853	$	285		12,439	$	1,244	$	291,035	$	61	$	136,044	$	428,669
Net earnings		—		—		—		—		—		—		20,718		20,718
Changes in pension plan assets and benefit obligations		—		—		—		—		—		25		—		25
Total comprehensive income																20,743
Stock options exercised		—		—		10		1		227		—		—		228
Balance at September 30, 2008		2,853	$	285		12,449	$	1,245	$	291,262	$	86	$	156,762	$	449,640

     The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)

	Nine Months Ended
	September 30,
	2009			2008
Operating activities:
Net earnings	$	12,694		$	20,718
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		20,778			19,941
Deferred income taxes		8,040			13,102
Gain on asset dispositions, net		(172	)		(4,453	)
Other		697			689
Changes in operating assets and liabilities		(1,581	)		(19,582	)
Net cash provided by operating activities		40,456			30,415
Investing activities:
Purchase of property and equipment		(31,777	)		(55,737	)
Proceeds from asset dispositions		8,897			9,033
Purchase of short-term investments		(46,490	)		(27,722	)
Proceeds from sale of short-term investments		14,687			54,750
Refund (payment) of deposits on aircraft		9,600			(11,546	)
Net cash used in investing activities		(45,083	)		(31,222	)
Financing activities:
Proceeds from line of credit		10,350			3,800
Payment on line of credit		(3,000	)		(3,800	)
Proceeds from exercise of stock options		—			228
Net cash provided by financing activities		7,350			228
Increase (decrease) in cash and cash equivalents		2,723			(579	)
Cash, beginning of period		1,159			1,425
Cash, end of period	$	3,882		$	846
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	7,600		$	7,239
Income taxes paid	$	770		$	234
Accrued payables related to purchase of property and equipment	$	273		$	791

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General

The accompanying unaudited condensed consolidated financial statements include the accounts of PHI, Inc. and subsidiaries (“PHI” or the “Company”). In the opinion of management, these financial statements reflect all adjustments, consisting of only normal, recurring adjustments, necessary to present fairly the financial results for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and the accompanying notes.

The Company’s financial results, particularly as they relate to the Company’s Oil and Gas operations, are influenced by seasonal fluctuations as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Therefore, the results of operations for interim periods are not necessarily indicative of the operating results that may be expected for a full fiscal year.

Subsequent Events — The Company evaluated events of which its management was aware subsequent to September 30, 2009, through the date that this quarterly report was issued, November 9, 2009.

2. Segment Information

PHI is primarily a provider of helicopter services, including helicopter maintenance and repair services. We used a combination of factors to identify reportable segments as required by Accounting Standards Codification (“ASC”) 280, “Segment Reporting”, previously Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”. The overriding determination of our segments is based on how the chief operating decision-maker of our Company evaluates our results of operations. The underlying factors include customer bases, types of service, operational management, physical locations, and underlying economic characteristics of the types of work we perform.

A segment’s operating income is its operating revenues less its direct expenses and selling, general and administrative expenses. Each segment has a portion of selling, general and administrative expenses that are charged directly to the segment and a portion that is allocated. Direct charges represent the vast majority of the segment’s selling, general and administrative expenses. Allocated selling, general and administrative expenses are based primarily on total segment direct expenses as a percentage of total direct expenses. Unallocated overhead consists primarily of corporate selling, general, and administrative expenses that we do not allocate to the reportable segments.

Air Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in a disproportionate share of selling, general and administrative expenses compared to the Company’s other reportable segments.

Oil and Gas Segment. Our Oil and Gas segment provides helicopter services primarily for the major oil and gas production companies transporting personnel and/or equipment to offshore platforms in the Gulf of Mexico and the Democratic Republic of Congo. We currently operate 158 aircraft in this segment.

Operating revenue from the Oil and Gas segment is derived mainly from fixed-term contracts that include a fixed monthly rate for a particular model of aircraft, plus a variable rate for flight time. Most of our fixed-term contracts permit early termination by the customer generally without penalty. Operating costs for the Oil and Gas operations are primarily aircraft operations costs, including costs for pilots and

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maintenance personnel. Approximately 64% of our total operating revenue was generated by our Oil and Gas operations for the quarter and nine months ended September 30, 2009 and 2008.

Air Medical Segment. Our Air Medical segment provides transport services as an independent provider of emergency medical services and, to a lesser extent, under contract with certain hospitals. We operate at 50 locations in nine states as an independent provider and 15 locations in eight states under contract with hospitals, with 87 aircraft that are specially outfitted to accommodate emergency patients, medical personnel and emergency medical equipment. For the quarter ended September 30, 2009 and September 30, 2008, approximately 35% of our total operating revenues were generated by our Air Medical operations. For the nine months ended September 30, 2009, approximately 34% of our total operating revenues were generated by our Air Medical operations, compared to 35% for the nine months ended September 30, 2008.

As an independent provider, we bill for our services on the basis of a flat rate plus a variable charge per loaded mile, regardless of aircraft model. Revenues are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when the services are provided. Contractual allowances and uncompensated care are estimated based on historical collection experience by payor category. The main payor categories are Medicaid, Medicare, Insurance, and Self-Pay. Payor mix and changes in reimbursement rates are the factors most subject to sensitivity and variability in calculating our allowances. We compute a historical payment analysis of accounts paid in full, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance.

Provisions for contractual discounts and estimated uncompensated care for Air Medical operations are as follows:

	Revenue
	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Gross billings		100	%		100	%		100	%		100	%
Provision for contractual discounts		51	%		46	%		53	%		47	%
Provision for uncompensated care		12	%		12	%		10	%		11	%

Net reimbursement per transport from commercial payors generally do increase when a rate increase is implemented. Net reimbursement from certain commercial payors, as well as Medicare and Medicaid, do not increase proportionately with rate increases.

Amounts attributable to Medicaid, Medicare, Insurance and Self Pay as a percentage of net Air Medical revenues are as follows:

	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Medicaid		10	%		11	%		12	%		11	%
Medicare		18	%		17	%		18	%		17	%
Insurance		70	%		67	%		67	%		67	%
Self-Pay		2	%		5	%		3	%		5	%

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We also have a limited number of contracts with hospitals under which we receive a fixed monthly rate for aircraft availability and an hourly rate for flight time. Those contracts generated approximately 15% and 11% of the segment’s revenues for the quarter ended September 30, 2009 and 2008, and 15% and 12% for the nine months ended September 30, 2009 and 2008, respectively.

Technical Services Segment. The Technical Services segment provides helicopter repair and overhaul services for customer owned aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above cost. This segment also conducts flight operations unrelated to the other segments. We currently operate four aircraft for the National Science Foundation in Antarctica under this segment.

Approximately 1% of our total operating revenues for the quarter ended September 30, 2009 and September 30, 2008 were generated by our Technical Services operations. For the nine months ended September 30, 2009, approximately 2% of our total operating revenues were generated by our Technical Services operations, compared to 1% for the nine months ended September 30, 2008.

9

Summarized financial information concerning our reportable operating segments for the quarter and nine months ended September 30, 2009 and 2008 is as follows:

	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(Thousands of dollars)						(Thousands of dollars)
Segment operating revenues, net
Oil and Gas	$	79,216		$	86,689		$	233,011		$	243,352
Air Medical		43,321			47,534			125,042			133,105
Technical Services		1,646			1,237			6,403			6,259
Total operating revenues, net		124,183			135,460			364,456			382,716
Segment direct expenses (1)
Oil and Gas		65,690			68,074			191,937			192,157
Air Medical		34,023			41,125			111,521			121,494
Technical Services		1,259			1,171			4,553			4,702
Total direct expenses		100,972			110,370			308,011			318,353
Segment selling, general and administrative expenses
Oil and Gas		285			321			991			976
Air Medical		1,795			2,045			4,903			6,237
Technical Services		24			15			41			49
Total selling, general and administrative expenses		2,104			2,381			5,935			7,262
Total direct and selling, general and administrative expenses		103,076			112,751			313,946			325,615
Net segment profit
Oil and Gas		13,241			18,294			40,083			50,219
Air Medical		7,503			4,364			8,618			5,374
Technical Services		363			51			1,809			1,508
Total		21,107			22,709			50,510			57,101
Other, net (2)		60			278			353			4,985
Unallocated selling, general and administrative costs (1)		(5,602	)		(5,987	)		(17,813	)		(16,029	)
Interest expense		(3,976	)		(3,840	)		(11,894	)		(11,528	)
Earnings before income taxes	$	11,589		$	13,160		$	21,156		$	34,529

(1) Included in direct expenses and unallocated selling, general, and administrative costs are the depreciation expense amounts below:

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
	(Thousands of dollars)				(Thousands of dollars)
Oil and Gas	$	4,142	$	3,915	$	12,492	$	11,394
Air Medical		1,985		2,054		5,939		6,097
Technical Services		14		16		125		135
Total	$	6,141	$	5,985	$	18,556	$	17,626
Unallocated SG&A	$	736	$	770	$	2,222	$	2,315

(2) Consists of gains on disposition of property and equipment, and other income.

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3. Commitments and Contingencies

Environmental Matters — We have recorded an aggregate estimated liability of $0.2 million as of September 30, 2009 and December 31, 2008 for environmental remediation costs that are probable and estimable. The Company has conducted environmental surveys of its former Lafayette facility, which it vacated in 2001, and has determined that limited soil and groundwater contamination exists at the facility. The Company has installed groundwater monitoring wells at the facility and periodically monitors and reports on the contamination. The Company previously submitted a Louisiana Risk Evaluation/Corrective Action Plan (“RECAP”) Standard Site Assessment Report to the Louisiana Department of Environmental Quality (“LDEQ”) fully delineating the extent and type of contamination and updated the report to include recent analytical data. LDEQ is reviewing the assessment report. Once LDEQ completes its review and reports on whether all contamination has been fully defined, a risk evaluation in accordance with RECAP will be submitted and evaluated by LDEQ. At that point, LDEQ will establish what cleanup standards must be met at the site. When the process is complete, the Company will be in a position to develop an appropriate remediation plan and determine the resulting cost of remediation. The Company has not recorded any estimated liability for remediation and contamination and, based upon the May 2003 Site Assessment Report, the April 2006 update and ongoing monitoring, it believes the ultimate remediation costs for the former Lafayette facility will not be material to its consolidated financial position, results of operations, or cash flows.

Legal Matters — The Company is named as a defendant in various legal actions that have arisen in the ordinary course of business and have not been finally adjudicated. In the opinion of management, the amount of the ultimate liability with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

As previously reported, the Company is involved in Federal Court litigation in the Western District of Louisiana with the Office and Professional Employees International Union (“OPEIU”), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. The pilots commenced a strike in September 2006, and a court-approved return to work process began in January 2007 for those pilots who had not already returned to work or left the Company’s employment, and this was essentially completed in April 2007. Pilots continue to work under the terms and conditions of employment set forth in the final implementation proposals made by the Company at the end of collective bargaining negotiations in August 2006. A trial date on strike-related matters has been postponed from June 29, 2009 until July 6, 2010. Management does not expect the outcome of this litigation to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

Superior Offshore International Inc. v. Bristow Group Inc., ERA Helicopters, LLC, Seacor Holdings Inc., ERA Group Inc., ERA Aviation, Inc., and PHI, Inc., Civil Action No. 1:09-cv-00438 on the docket of the United States District Court for the District of Delaware. This purported class action was filed on June 12, 2009, on behalf of a class defined to include all direct purchasers of offshore helicopter services in the Gulf of Mexico from the defendants at any time from January 1, 2001 through December 31, 2005. The suit alleges that the defendants acted jointly to fix, maintain, or stabilize prices for offshore helicopter services during the above time frame in violation of the federal antitrust laws. The plaintiff seeks unspecified treble damages, injunctive relief, costs, and attorneys’ fees. Defendants’ motion to dismiss filed on September 4, 2009 is pending. The outcome of this matter cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in this matter.

Operating Leases — We lease certain aircraft, facilities, and equipment used in our operations. The related lease agreements, which include both non-cancelable and month-to-month terms, generally provide for fixed monthly rentals, and certain real estate leases also include renewal options. We generally pay all insurance, taxes, and maintenance expenses associated with these leases. Several leases contain fair value purchase options.

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At September 30, 2009, we had approximately $226.1 million in aggregate commitments under operating leases of which approximately $7.9 million is payable through December 31, 2009, and a total of $31.7 million is payable over the twelve months ending September 30, 2010. The total lease commitments include $209.7 million for aircraft and $19.1 million for facility lease commitments, primarily for our facilities in Lafayette, Louisiana.

Purchase Commitments — At September 30, 2009, we had an order for two additional transport category aircraft at an approximate cost of $43.5 million with delivery dates in late 2009. These aircraft are planned for service in the Oil and Gas segment. Approximately $3.0 million of deposits on aircraft purchase commitments are included in other assets at September 30, 2009.

4. Long-term Debt

The $200 million 7.125% Senior Notes mature April 15, 2013, and interest is payable semi-annually on April 15 and October 15. The notes contain restrictive covenants, including limitations on indebtedness, liens, dividends, repurchases of capital stock and other payments affecting restricted subsidiaries, issuance and sales of restricted subsidiary stock, dispositions of proceeds of asset sales, and mergers and consolidations and sales of assets. At September 30, 2009, the market value of the notes was approximately $188.5 million, based on quoted market indicators. We were in compliance with the covenants applicable to these notes as of September 30, 2009.

Effective August 5, 2009, we executed a new credit agreement with a syndicate of three commercial banks, which replaced the prior facility, providing a $75 million revolving credit facility maturing in September 2011. As of September 30, 2009, we had $10.4 million in borrowings and $5.1 million in letters of credit outstanding under the facility. The interest rate is the prime rate plus 100 basis points. The interest rate through September 30, 2009 was 3.25%. Other terms are substantially similar to the prior facility. The new facility includes covenants related to working capital and funded debt to net worth identical to the previous credit agreement, and the consolidated net worth covenant was increased from $400 million to $425 million. As of September 30, 2009, we were in compliance with these covenants.

5. Valuation Accounts

We have established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, current market conditions, and other information. The allowance for doubtful accounts was approximately $0.1 million at September 30, 2009 and December 31, 2008.

Revenues related to emergency flights generated by the Company’s Air Medical segment are recorded net of contractual allowances under agreements with third party payors and uncompensated care when the services are provided. The allowance for contractual discounts was $37.5 million and $37.6 million as of September 30, 2009 and December 31, 2008, respectively. The allowance for uncompensated care was $27.6 million and $20.8 million as of September 30, 2009 and December 31, 2008, respectively.

The allowance for contractual discounts and estimated uncompensated care as a percentage of gross accounts receivable are as follows:

	September 30,			December 31,
	2009			2008
Gross Accounts Receivable		100	%		100	%
Allowance for Contractual Discounts		36	%		35	%
Allowance for Uncompensated Care		26	%		20	%

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We have also established valuation reserves related to obsolete and excess inventory. The inventory valuation reserves were $8.0 million and $7.9 million at September 30, 2009 and December 31, 2008, respectively.

6. Employees

Employee Incentive Compensation — In 2002, we implemented the employee incentive compensation plan for non-executive and non-represented employees. For calendar year 2007, the represented pilots were added to this plan as part of the final implementation proposals made by the Company at the end of the collective bargaining negotiations in August 2006. The plan allows us to pay up to 8.25% of earnings before income taxes upon achieving a specified earnings threshold. During 2004, we implemented the management incentive compensation plan for certain corporate and business unit management employees. The management incentive compensation plan was amended August 5, 2008, to include safety components, in addition to certain earnings targets as provided in the prior plan.

The amount expensed for 2008 under both the employee incentive compensation plan and the management incentive compensation plan was $1.0 million. For the nine months ended September 30, 2009, we expensed an estimated incentive compensation expense of $0.5 million compared to $0.8 million for the nine months ended September 30, 2008.

We also have a Safety Incentive Plan related to Occupational Safety and Health Administration recordable incidents, for which we expensed and paid $0.5 million for 2008. For the nine months ended September 30, 2009, we expensed $0.4 million.

7. Fair Value Measurements

The Company adopted ASC 820, “Fair Value Measurements and Disclosures”, previously SFAS No. 157, “Fair Value Measurements,” beginning in its 2008 fiscal year and there was no material impact to its consolidated financial statements. ASC 820 applies to all assets and liabilities that are being measured and reported on a fair value basis. ASC 820 requires new disclosure that establishes a framework for measuring fair value in Generally Accepted Accounting Principles (“GAAP”), and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The following table summarizes the valuation of our short-term investments and financial instruments by the above ASC 820 pricing levels as of the valuation dates listed:

	September 30, 2009		December 31, 2008
	Quoted prices in		Quoted prices in
	active markets for		active markets for
	Identical Assets		Identical Assets
	(Level 1)		(Level 1)
	(Thousands of dollars)
Short-term investments	$	73,925	$	42,121
Investments in other assets		3,692		3,297
Total	$	77,617	$	45,418

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The Company holds it short-term investments in a money market fund consisting mainly of government backed securities, which is classified as a short-term investment. In accordance with ASC 320, “Investments-Debt and Equity Securities,” these short-term investments are classified as available for sale. The Company has not recorded any unrealized gains or losses associated with short-term investments as the carrying value approximates fair value at September 30, 2009 and December 31, 2008. Investments included in other assets consist mainly of investment funds that are highly liquid and diversified. These investments are amounts related to the liability for the Officers’ Deferred Compensation Plan.

8. Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Codification 105, “Generally Accepted Accounting Principles,” previously SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” This statement, which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

As a result of implementation of the Codification during the quarter ended September 30, 2009, previous references to new accounting standards and literature are no longer applicable. In the current quarter financial statements, management provided reference to both new and old guidance to assist in understanding the impacts of recently adopted accounting literature, particularly for guidance adopted since the beginning of the current fiscal year but prior to the Codification.

In December 2008, FASB issued ASC 715 “Compensation-Retirement Benefits,” previously FASB Staff Position (“FSP”) No. SFAS 132(R)-1, which amends SFAS No. 132(R), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this standard shall be provided for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this standard are not required for earlier periods that are presented for comparative purposes. Management does not currently expect that implementation of this standard will have an impact on our consolidated financial statements.

14

9. Shareholders’ Equity

We had an average of 15.3 million common shares outstanding for the quarters and nine months ended September 30, 2009 and 2008.

10. Comprehensive Income

The following table summarizes the components of total comprehensive income (net of taxes):

	Quarter Ended					Nine Months Ended
	September 30,					September 30,
	2009			2008		2009			2008
	(Thousands of dollars)					(Thousands of dollars)
Net earnings	$	6,953		$	7,897	$	12,694		$	20,718
Changes in pension plan assets and benefit obligations		(1	)		22		(60	)		25
Comprehensive income	$	6,952		$	7,919	$	12,634		$	20,743

11. Condensed Consolidating Financial Information

Our 7.125% Senior Notes are fully and unconditionally guaranteed on a joint and several, senior basis by all of our wholly-owned Guarantor Subsidiaries.

The following supplemental condensed financial information sets forth, on a consolidated basis, the balance sheet, statement of operations, and statement of cash flows information for PHI, Inc. (“Parent Company Only”) and the Guarantor Subsidiaries. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenues and expenses.

15

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)

	September 30, 2009
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)		Eliminations			Consolidated
ASSETS
Current Assets:
Cash	$	3,173		$	709	$	—		$	3,882
Short-term investments		73,925			—		—			73,925
Accounts receivable — net		98,480			11,673		—			110,153
Intercompany receivable		—			65,451		(65,451	)		—
Inventories of spare parts — net		61,645			—		—			61,645
Other current assets		11,196			11		—			11,207
Income taxes receivable		628			—		—			628
Total current assets		249,047			77,844		(65,451	)		261,440
Investment in subsidiaries and other		68,951			—		(68,951	)		—
Other assets		13,574			159		—			13,733
Property and equipment-net		515,307			16,772		—			532,079
Total assets	$	846,879		$	94,775	$	(134,402	)	$	807,252
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	15,338		$	507	$	—		$	15,845
Accrued liabilities		30,731			5,670		—			36,401
Intercompany payable		65,451			—		(65,451	)		—
Total current liabilities		111,520			6,177		(65,451	)		52,246
Long-term debt		210,350			—		—			210,350
Deferred income taxes and other long-term liabilities		59,837			19,647		—			79,484
Shareholders’ Equity:
Paid-in capital		292,934			2,674		(2,674	)		292,934
Accumulated other comprehensive loss		(15	)		—		—			(15	)
Retained earnings		172,253			66,277		(66,277	)		172,253
Total shareholders’ equity		465,172			68,951		(68,951	)		465,172
Total liabilities and shareholders’ equity	$	846,879		$	94,775	$	(134,402	)	$	807,252

(1) Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

16

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Thousands of dollars)
(Unaudited)

	December 31, 2008
	Parent		Guarantor
	Company		Subsidiaries
	Only(1)		(1) (2)		Eliminations			Consolidated
ASSETS
Current Assets:
Cash	$	559	$	600	$	—		$	1,159
Short-term investments		42,121		—		—			42,121
Accounts receivable — net		97,618		13,804		—			111,422
Intercompany receivable		—		57,722		(57,722	)		—
Inventories of spare parts — net		58,249		—		—			58,249
Other current assets		10,671		16		—			10,687
Income taxes receivable		982		—		—			982
Total current assets		210,200		72,142		(57,722	)		224,620
Investment in subsidiaries and other		65,227		—		(65,227	)		—
Other assets		23,761		227		—			23,988
Property and equipment-net		511,986		16,588		—			528,574
Total assets	$	811,174	$	88,957	$	(122,949	)	$	777,182
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	25,174	$	275	$	—		$	25,449
Accrued liabilities		20,886		4,307		—			25,193
Intercompany payable		57,722		—		(57,722	)		—
Total current liabilities		103,782		4,582		(57,722	)		50,642
Long-term debt		203,000		—		—			203,000
Deferred income taxes and other long-term liabilities		51,996		19,148		—			71,144
Shareholders’ Equity:
Paid-in capital		292,792		2,674		(2,674	)		292,792
Accumulated other comprehensive income		45		—		—			45
Retained earnings		159,559		62,553		(62,553	)		159,559
Total shareholders’ equity		452,396		65,227		(65,227	)		452,396
Total liabilities and shareholders’ equity	$	811,174	$	88,957	$	(122,949	)	$	777,182

(1)	Certain revisions were made to conform to the current period’s presentation.
(2)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.

17

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)

				For the quarter ended September 30, 2009
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)		Eliminations			Consolidated
Operating revenues, net	$	109,088		$	15,095	$	—		$	124,183
Management fees		603			—		(603	)		—
Gain on dispositions of assets, net		7			—		—			7
Other, principally interest income		53			—		—			53
		109,751			15,095		(603	)		124,243
Expenses:
Direct expenses		88,393			12,579		—			100,972
Management fees		—			603		(603	)		—
Selling, general and administrative expenses		7,193			513		—			7,706
Equity in net income of consolidated subsidiaries		(840	)		—		840			—
Interest expense		3,976			—		—			3,976
		98,722			13,695		237			112,654
Earnings before income taxes		11,029			1,400		(840	)		11,589
Income tax expense		4,076			560		—			4,636
Net earnings	$	6,953		$	840	$	(840	)	$	6,953

	For the quarter ended September 30, 2008
	Parent
	Company			Guarantor
	Only(2)			Subsidiaries(1) (2)		Eliminations			Consolidated
Operating revenues, net	$	117,647		$	17,813	$	—		$	135,460
Management fees		712			—		(712	)		—
Gain on disposition of assets, net		249			—		—			249
Other, principally interest income		29			—		—			29
		118,637			17,813		(712	)		135,738
Expenses:
Direct expenses		96,405			13,965		—			110,370
Management fees		—			712		(712	)		—
Selling, general, and administrative expenses		7,421			947		—			8,368
Equity in net income of consolidated subsidiaries		(2,069	)		—		2,069			—
Interest expense		3,840			—		—			3,840
		105,597			15,624		1,357			122,578
Earnings before income taxes		13,040			2,189		(2,069	)		13,160
Income taxes		5,143			120		—			5,263
Net earnings	$	7,897		$	2,069	$	(2,069	)	$	7,897

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.
(2)	Certain revisions were made to conform to the current period’s presentation.

18

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Thousands of dollars)
(Unaudited)

	For the nine months ended September 30, 2009
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)		Eliminations			Consolidated
Operating revenues, net	$	314,821		$	49,635	$	—		$	364,456
Management fees		1,985			—		(1,985	)		—
Gain on dispositions of assets, net		172			—		—			172
Other, principally interest income		181			—		—			181
		317,159			49,635		(1,985	)		364,809
Expenses:
Direct expenses		268,149			39,862		—			308,011
Management fees		—			1,985		(1,985	)		—
Selling, general and administrative expenses		22,190			1,558		—			23,748
Equity in net income of consolidated subsidiaries		(3,738	)		—		3,738			—
Interest expense		11,894			—		—			11,894
		298,495			43,405		1,753			343,653
Earnings before income taxes		18,664			6,230		(3,738	)		21,156
Income tax expense		5,970			2,492		—			8,462
Net earnings	$	12,694		$	3,738	$	(3,738	)	$	12,694

	For the nine months ended September 30, 2008
	Parent
	Company			Guarantor
	Only(2)			Subsidiaries(1) (2)		Eliminations			Consolidated
Operating revenues, net	$	325,863		$	56,853	$	—		$	382,716
Management fees		2,274			—		(2,274	)		—
Gain on disposition of assets, net		4,453			—		—			4,453
Other, principally interest income		532			—		—			532
		333,122			56,853		(2,274	)		387,701
Expenses:
Direct expenses		276,049			42,304		—			318,353
Management fees		—			2,274		(2,274	)		—
Selling, general, and administrative expenses		20,517			2,774		—			23,291
Equity in net income of consolidated subsidiaries		(8,219	)		—		8,219			—
Interest expense		11,528			—		—			11,528
		299,875			47,352		5,945			353,172
Earnings before income taxes		33,247			9,501		(8,219	)		34,529
Income taxes		12,529			1,282		—			13,811
Net earnings	$	20,718		$	8,219	$	(8,219	)	$	20,718

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.
(2)	Certain revisions were made to conform to the current period’s presentation.

19

PHI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)

	For the nine months ended September 30, 2009
	Parent
	Company			Guarantor
	Only			Subsidiaries(1)			Eliminations		Consolidated
Net cash provided by operating activities	$	38,740		$	1,716		$	—	$	40,456
Investing activities:
Purchase of property and equipment		(30,170	)		(1,607	)		—		(31,777	)
Proceeds from asset dispositions		8,897			—			—		8,897
Purchase of short-term investments, net		(31,803	)		—			—		(31,803	)
Refund of deposits on aircraft		9,600			—			—		9,600
Net cash used in investing activities		(43,476	)		(1,607	)		—		(45,083	)
Financing activities:
Proceeds from line of credit		10,350			—			—		10,350
Payment on line of credit		(3,000	)		—			—		(3,000	)
Net cash provided by financing activities		7,350			—			—		7,350
Increase in cash		2,614			109			—		2,723
Cash, beginning of period		559			600			—		1,159
Cash, end of period	$	3,173		$	709		$	—	$	3,882

	For the nine months ended September 30, 2008
	Parent
	Company			Guarantor
	Only(2)			Subsidiaries(1) (2)			Eliminations		Consolidated
Net cash provided by operating activities	$	28,250		$	2,165		$	—	$	30,415
Investing activities:
Purchase of property and equipment		(53,785	)		(1,952	)		—		(55,737	)
Proceeds from asset dispositions		9,033			—			—		9,033
Proceeds from sale of short-term investments, net		27,028			—			—		27,028
Payment of deposits on aircraft		(11,546	)		—			—		(11,546	)
Net cash used in investing activities		(29,270	)		(1,952	)		—		(31,222	)
Financing activities:
Proceeds from line of credit		3,800			—			—		3,800
Payment on line of credit		(3,800	)		—			—		(3,800	)
Proceeds from exercise of stock options		228			—			—		228
Net cash provided by financing activities		228			—			—		228
(Decrease) increase in cash		(792	)		213			—		(579	)
Cash, beginning of period		1,004			421			—		1,425
Cash, end of period	$	212		$	634		$	—	$	846

(1)	Foreign subsidiaries represent minor subsidiaries and are included in the guarantors’ subsidiaries amounts.
(2)	Certain revisions were made to cash flows provided by (used in) operating and investing activities to conform to the current period’s presentation.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, 2008, management’s discussion and analysis, risk factors and other information contained therein.

Forward-Looking Statements

All statements other than statements of historical fact contained in this Form 10-Q and other periodic reports filed by PHI, Inc. (the “Company” or “PHI”) 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 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, 2008 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.

Overview

Operating revenues for the three months ended September 30, 2009 were $124.2 million, compared to $135.5 million for the three months ended September 30, 2008, a decrease of $11.3 million. Oil and Gas operating revenues decreased $7.5 million for the quarter ended September 30, 2009 due to a decrease in medium aircraft revenue related primarily to a decrease in flight hour activity on the continental shelf. There were also decreases in revenue as a result of the completion of a foreign contract in 2008, and decreases in revenue related to fuel charges. 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. These amounts were offset in part by an increase in revenue for medium aircraft related to deepwater activity and an increase in light aircraft flight hours and revenues also in the Gulf of Mexico. Operating revenues in the Air Medical segment decreased $4.2 million due to decreased patient transports in the independent provider programs. We believe this decrease is primarily attributable to the current economic environment. Also contributing to the decrease was the closure in 2009 of six bases that were generating less than acceptable transport volumes. We did not incur any significant costs as a result of these closures.

Flight hours for the quarter ended September 30, 2009 were 37,647 compared to 39,483 for the quarter ended September 30, 2008. Oil and Gas segment’s flight hours decreased 874 hours due to a decrease in

21

activity on the continental shelf of the Gulf of Mexico. There was a decrease of 962 flight hours in the Air Medical segment for the quarter ended September 30, 2009 due to an 820 decrease in patient transports in the independent provider programs as mentioned above, of which approximately 385 related to the base closures. We believe the remaining decrease in transports was primarily attributable to the current economic environment.

Net segment profit for the Oil and Gas segment was $13.2 million for the quarter ended September 30, 2009, compared to $18.3 million for the quarter ended September 30, 2008. The decrease of $5.1 million was due to decreased medium aircraft revenue due to decreased activity on the continental shelf and a decrease in foreign contract revenues. These amounts were offset in part by an increase in revenue for medium aircraft related to deepwater activity in the Gulf of Mexico.

Net segment profit for the Air Medical segment was $7.5 million for the quarter ended September 30, 2009, compared to $4.4 million for the quarter ended September 30, 2008. The $3.1 increase was due to a $7.1 million decrease in direct expense in the Air Medical segment related to termination of the warranty program for certain aircraft and cost savings related to the closing of six bases, discussed further in the Segment Discussion below. In addition, there was increased hospital-based contract revenue, offset in part by a decrease in revenue in the independent provider programs due to decreased transports as previously mentioned.

Net earnings for the quarter ended September 30, 2009 were $7.0 million, or $0.45 per diluted share, compared to $7.9 million for the quarter ended September 30, 2008, or $0.52 per diluted share. Pre-tax earnings were $11.6 million for the quarter ended September 30, 2009, compared to $13.2 million for the same period in 2008. The decrease was primarily due to a decrease in medium aircraft revenue related to a decrease in activity on the continental shelf, completion of a foreign contract in 2008 and a decrease in revenue related to fuel charges. These amounts were offset in part by an increase in revenue for medium aircraft related to deepwater activity. Earnings for the quarter ended September 30, 2009 included a $4.9 million pre-tax credit included in direct expenses related to the termination of a manufacturer’s warranty program for a certain model aircraft. Earnings for the quarter ended September 30, 2008 included a $1.6 million pre-tax credit included in direct expenses related to the termination of a manufacturer’s warranty program for a certain model aircraft, and a $0.2 million pre-tax gain on disposition of assets.

Operating revenues for the nine months ended September 30, 2009 were $364.5 million, compared to $382.7 million for the same period in 2008, a decrease of $18.2 million. Oil and Gas operating revenues decreased $10.4 million. There was a decrease in flight hours and revenues for medium aircraft as a result of a voluntary grounding of certain aircraft in the first quarter related to a January 4, 2009 accident, and a decrease in revenue related to fuel charges. 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. There was also a decrease in medium aircraft revenue due to a decrease in activity on the continental shelf, and a decrease in foreign contract revenues due to completion of a foreign contract in 2008. These amounts were offset in part by an increase for medium aircraft related to deepwater activity and an increase in flight hours and revenues for light aircraft in the Oil and Gas segment. Air Medical operating revenues decreased $8.1 million due to a 1,939 decrease in patient transports in the independent provider programs primarily related to the closure of six bases, resulting in a decrease of 1,055 transports, as well as the effects of the current economic environment, which we believe primarily caused the remaining 884 decrease in transports.

Flight hours for the nine months ended September 30, 2009 were 111,956, a decrease of 1,304 flight hours, compared to 113,620 for the nine months ended September 30, 2008. Oil and Gas segment flight hours increased 1,268 due to increased light aircraft flight hours, offset by a decrease in medium aircraft flight hours in the Gulf of Mexico, and a decrease in flight hours in our foreign operations due to completion of a contract in 2008. The decrease in medium aircraft flight hours year-to-date September 30, 2009 is due primarily to the voluntary grounding of medium aircraft in January 2009, related to the

22

accident as mentioned above. Air Medical segment flight hours decreased 2,247 flight hours due to decreased patient transports in the independent provider programs due to the reasons mentioned above.

Oil and Gas segment’s operating income was $40.1 million for the nine months ended September 30, 2009, compared to $50.2 million for the nine months ended September 30, 2008. The decrease of $10.1 million was primarily due to decreased revenues related to activity on the continental shelf, and decreased foreign contract revenues. Oil and Gas segment operating income was also adversely affected in the first quarter of 2009 due to the decrease in operating revenues associated with the voluntary grounding of certain aircraft related to a January 4, 2009 accident.

Net segment profit for the Air Medical segment was $8.6 million for the nine months ended September 30, 2009, compared to $5.4 million for the nine months ended September 30, 2008. The increase of $3.2 million was primarily due to a $10.0 million decrease in direct expense in the Air Medical segment related to termination of the warranty program for certain aircraft, cost savings related to the closing of six bases, and other items discussed in the Segment Discussion below.

Net earnings for the nine months ended September 30, 2009 were $12.7 million, or $0.83 per diluted share, compared to $20.7 million for the nine months ended September 30, 2008, or $1.36 per diluted share. Pre-tax earnings were $21.2 million for the nine months ended September 30, 2009, compared to $34.5 million for the same period in 2008. The decrease in earnings is primarily due to decreased revenues related to decreased activity on the continental shelf and decreased revenues as a result of the completion of a foreign contract. Earnings for the nine months ended September 30, 2009 included a $4.9 million pre-tax credit included in direct expenses related to termination of the warranty program for certain aircraft. Earnings for the nine months ended September 30, 2008 included a pre-tax gain on disposition of assets, net, of $4.5 million, an aggregate insurance charge of $2.1 million, and a $1.6 million credit due to termination of the warranty program for certain aircraft included in direct expenses.

At September 30, 2009, we had an order for two additional transport category aircraft at an approximate cost of $43.5 million with delivery dates in late 2009. These aircraft are planned for service in the Oil and Gas segment. We intend to fund these aircraft with operating leases, cash, and/or our revolving credit facility.

23

Operating Statistics

The following tables present certain non-financial operational statistics for the quarter and nine months ended September 30, 2009 and 2008:

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2009		2008		2009		2008
Flight hours:
Oil and Gas		28,749		29,623		85,470		84,202
Air Medical (1)		8,898		9,860		26,108		28,355
Technical Services		—		—		378		703
Total		37,647		39,483		111,956		113,260
Air Medical Transports (2)		5,226		6,046		15,529		17,468

	September 30,
	2009		2008
Aircraft operated at period end:
Oil and Gas (3)		163		152
Air Medical (4)		87		88
Technical Services		4		4
Total		254		244

(1)	Flight hours include 2,342 flight hours associated with hospital-based contracts, compared to 2,044 flight hours in the prior year quarter. For the nine months ended September 30, 2009 and 2008, flight hours associated with hospital-based contracts were 6,575 and 5,518 respectively.
(2)	Represents individual patient transports for the period.
(3)	Includes nine aircraft as of September 30, 2009 and 2008 that are customer owned.
(4)	Includes eight aircraft as of September 30, 2009 and seven aircraft as of September 30, 2008 that are customer owned.

Results of Operations

Quarter Ended September 30, 2009 compared with Quarter Ended September 30, 2008

Combined Operations

Revenues — Operating revenues for the three months ended September 30, 2009 were $124.2 million, compared to $135.5 million for the three months ended September 30, 2008, a decrease of $11.3 million. Oil and Gas operating revenues decreased $7.5 million for the quarter ended September 30, 2009 due to a decrease in medium aircraft revenue resulting from a decrease in activity on the continental shelf. There were also decreases in foreign contract revenue and revenue related to fuel charges. 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. These amounts were offset in part by an increase in revenue for medium aircraft related to deepwater activity in the Gulf of Mexico. Operating revenues in the Air Medical segment decreased $4.2 million due to an 820 decrease in patient transports in the independent provider programs, of which approximately 385 related to base closures. We believe the remaining decrease in transports was primarily attributable to the current economic environment.

Total flight hours were 37,647 for the three months ended September 30, 2009, compared to 39,483 for the three months ended September 30, 2008. Flight hours in the Oil and Gas segment were 28,749 for the three months ended September 30, 2009, compared to 29,623 for three months ended September 30, 2008, a decrease of 874 flight hours. There was a decrease in medium aircraft flight hours related to a decrease in activity on the continental shelf, and also a decrease due to completion of a foreign contract.

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Air Medical segment flight hours for the three months ended September 30, 2009 were 8,898 compared to 9,860 for the three months ended September 30, 2008, a decrease of 962 flight hours. This decrease was related to reduced patient transport volume related to the closure of six bases and current economic conditions. We did not incur any significant costs as a result of these closures.

Other Income and Gains — Gain on dispositions of assets was less than $0.1 million for the three months ended September 30, 2009, and $0.2 million for the three months ended September 30, 2008. These amounts represent gains and losses on sales of assets that no longer meet our strategic needs.

Other income was less than $0.1 million for the three months ended September 30, 2009 and September 30, 2008.

Direct Expenses — Direct operating expense was $101.0 million for the three months ended September 30, 2009, compared to $110.4 million for the three months ended September 30, 2008, a decrease of $9.4 million. This decrease was primarily due to decreased fuel expense ($5.0 million) due to reduced per-gallon fuel costs compared to the prior year quarter, and decreased aircraft warranty costs ($4.7 million) due to a $4.9 million credit related to termination of the warranty program for certain aircraft. These decreases were offset by increases in other items, net ($0.3 million).

Selling, General, and Administrative Expenses — Selling, general and administrative expenses were $7.7 million for the three months ended September 30, 2009, compared to $8.4 million for the three months ended September 30, 2008. This decrease is primarily due to decreased legal fees ($0.2 million), decreased expenses for outside medical personnel ($0.2 million), and a decrease in rent and other base costs ($0.6 million) primarily resulting from the base closures.

Interest Expense — Interest expense was $4.0 million for the three months ended September 30, 2009, compared to $3.8 million for the three months ended September 30, 2008.

Income Taxes — Income tax expense for the three months ended September 30, 2009 was $4.7 million compared to $5.3 million for the three months ended September 30, 2008. The effective tax rate was 40% for the three months ended September 30, 2009 and 2008.

Net Earnings — Our net earnings for the three months ended September 30, 2009 was $7.0 million compared to $7.9 million for the three months ended September 30, 2008. Earnings before income taxes for the three months ended September 30, 2009 were $11.6 million compared to $13.2 million for the same period in 2008. Earnings per diluted share were $0.45 for the current quarter compared to earnings per diluted share of $0.52 for the prior year quarter. The decrease for the quarter ended September 30, 2009 is primarily related to a decrease in medium aircraft revenue due to a decrease in activity on the continental shelf, and completion of a foreign contract in 2008. The quarter ended September 30, 2009 included a pre-tax credit of $4.9 million related to the termination of the warranty program for certain aircraft. There was a $1.6 million credit for termination of a warranty program in the prior year quarter, and a $0.2 million pre-tax gain on disposition of assets. We had 15.3 million common shares outstanding during the three months ended September 30, 2009 and 2008.

Segment Discussion

Oil and Gas — Oil and Gas segment revenues were $79.2 million for the three months ended September 30, 2009, compared to $86.7 million for the three months ended September 30, 2008, a decrease of $7.5 million. Flight hours were 28,749 for the current quarter compared to 29,623 for the same quarter in the prior year. The decrease in revenue is due to a decrease in medium aircraft revenue due to a decrease in activity on the continental shelf, decreased foreign contract revenues, and a decrease in revenue related to fuel charges. 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. These amounts were offset in part by an increase in revenue for medium aircraft related to deepwater activity and increased light aircraft flight

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hours and revenues in the Gulf of Mexico, which operate at lower rates and margins as compared to medium aircraft.

The number of aircraft in the segment was 163 at September 30, 2009, compared to 152 aircraft at September 30, 2008. We have sold or disposed of two aircraft in the Oil and Gas segment since September 30, 2008, consisting of one light and one medium aircraft. We also transferred four medium aircraft from the Air Medical segment since September 30, 2008, and transferred one fixed wing aircraft to the Air Medical segment since September 30, 2008. We have added 10 new aircraft to the Oil and Gas segment since September 30, 2008, consisting of four light, two medium, and four heavy. We have two transport category aircraft on order for delivery in 2009. The additional heavy aircraft are for deepwater applications.

Direct expense in our Oil and Gas segment was $65.7 million for the three months ended September 30, 2009, compared to $68.1 million for the three months ended September 30, 2008, a decrease of $2.4 million. There were decreases in aircraft warranty costs ($1.6 million), due to the $1.3 million credit related to termination of the warranty program for certain aircraft, and fuel expense ($4.0 million) as the cost of fuel has declined compared to the prior year quarter. Total fuel cost is included in direct expense and reimbursement of a portion of fuel costs above a contracted per-gallon amount is included in revenue. These decreases were offset by an increase in aircraft rent ($1.7 million) related to additional aircraft on lease, and insurance expense ($0.7 million) due to additional aircraft added to the fleet and also due to an increase in rates. Other items increased, net ($0.8 million).

Our Oil and Gas segment’s operating income was $13.2 million for the three months ended September 30, 2009, compared to $18.3 million for the three months ended September 30, 2008. Operating margins were 17% for the three months ended September 30, 2009, compared to 21% for the three months ended September 30, 2008. The decrease in operating income and operating margin is due to decreased revenues as discussed above. These amounts were offset in part by an increase in revenue for medium aircraft related to deepwater activity in the Gulf of Mexico. 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. The variable portion is driven by flight hours.

Air Medical — Air Medical segment revenues were $43.3 million for the three months ended September 30, 2009, compared to $47.5 million for the three months ended September 30, 2008, a decrease of $4.2 million. The decrease was due to reduced patient transports in the independent provider programs ($6.2 million) related to the closure in 2009 of six locations and the current economic environment, offset by an increase in revenue from hospital-based contracts ($1.1 million), primarily due to an increase in the number of contracts. Total patient transports were 5,226 for the three months ended September 30, 2009, compared to 6,046 for the three months ended September 30, 2008, a decrease of 820 transports. There was a decrease of approximately 385 transports due to the base closures. We believe the remaining decrease in transports was primarily attributable to the current economic environment.

Flight hours were 8,898 for the three months ended September 30, 2009, compared to 9,860 for the three months ended September 30, 2008. The number of aircraft in the segment was 87 at September 30, 2009, compared to 88 at September 30, 2008. Since September 30, 2008, we transferred four medium aircraft to the Oil and Gas segment. We added two light aircraft in the Air Medical segment, including one customer-owned aircraft. We also added one fixed wing aircraft to the segment.

Direct expense in our Air Medical segment was $34.0 million for the three months ended September 30, 2009, compared to $41.1 million for the three months ended September 30, 2008. The $7.1 million decrease was due to a decrease in employee compensation costs ($2.2 million) due to the closure of six base locations and reductions in support personnel. Aircraft warranty costs decreased ($3.2 million) due to the $3.6 million credit related to termination of the warranty program related to a certain aircraft. Fuel expense decreased ($1.0 million) due to reduced per-gallon fuel costs compared to the prior year quarter, and other items decreased, net ($0.7 million).

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Selling, general and administrative expenses were $1.8 million for the three months ended September 30, 2009, compared to $2.0 million for the three months ended September 30, 2008. The $0.2 million decrease is due to decreased costs for outside medical personnel in the Air Medical segment. Air Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in higher selling, general and administrative expenses as compared to our other reportable segments.

Our Air Medical segment’s operating income was $7.5 million for the three months ended September 30, 2009, compared to $4.4 million for the three months ended September 30, 2008. Operating margin was 17% for the three months ended September 30, 2009 compared to 9% for the three months ended September 30, 2008. The improvement in operating income and operating margin is primarily attributable to the credit of $3.6 million related to the termination of a manufacturer’s warranty program.

Technical Services — Technical Services revenues were $1.6 million for the three months ended September 30, 2009, compared to $1.2 million for the three months ended September 30, 2008. Direct expenses in our Technical Services segment were $1.3 million for the three months ended September 30, 2009, compared to $1.2 million for the three months ended September 30, 2008. The increase in revenue and operating income is due to increased activity. Our Technical Services segment’s operating income was $0.4 million for the three months ended September 30, 2009, compared to $0.1 million for the three months ended September 30, 2008.

Nine months Ended September 30, 2009 compared with Nine months Ended September 30, 2008

Combined Operations

Revenues — Operating revenues for the nine months ended September 30, 2009 were $364.5 million, compared to $382.7 million for the same period in 2008, a decrease of $18.2 million. Oil and Gas operating revenues decreased $10.3 million. There was a decrease in flight hours and revenues for medium aircraft as a result of a voluntary grounding of certain aircraft in the first quarter related to the January 4, 2009 accident, and a decrease in revenue related to fuel charges. 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. There was also a decrease in medium aircraft revenue due to a decrease in activity on the continental shelf, and a decrease in foreign contract revenues due to completion of a contract in 2008. These were offset in part by an increase in revenue for medium aircraft related to deepwater activity and an increase in flight hours and revenues for light aircraft in the Oil and Gas segment, which operate at lower rates and margins as compared to medium aircraft. Air Medical operating revenues decreased $8.1 million due to decreased patient transports in the independent provider programs resulting from the closure during 2009 of six bases and the effects of the current economic environment. We did not incur any significant costs as a result of these closures.

Total flight hours were 111,956 for the nine months ended September 30, 2009, compared to 113,260 for the nine months ended September 30, 2008. Flight hours in the Oil and Gas segment were 85,470 for the nine months ended September 30, 2009, compared to 84,202 for the nine months ended September 30, 2008. Although flight hours increased for the nine months ended September 30, 2009, revenue decreased as the hourly rate for light aircraft is significantly less than the rate for larger aircraft. Air Medical segment flight hours for the nine months ended September 30, 2009 were 26,108, compared to 28,355 for the nine months ended September 30, 2008, a decrease of 2,247 flight hours. This decrease was related to a decrease of 1,939 patient transports in the independent provider programs, of which approximately 1,055 related to base closures. We believe the remaining decrease in transports was primarily attributable to the current economic environment.

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Other Income and Gains — Gain on dispositions of assets was $0.2 million for the nine months ended September 30, 2009, compared to a gain of $4.5 million for the nine months ended September 30, 2008. These amounts represent gains on sales of aircraft that no longer meet our strategic needs.

Other income was $0.2 million for the nine months ended September 30, 2009, compared to $0.5 million for the nine months ended September 30, 2008. Recent decreases in interest rates have affected interest income.

Direct Expenses — Direct operating expense was $308.0 million for the nine months ended September 30, 2009, compared to $318.4 million for the nine months ended September 30, 2008, a decrease of $10.4 million. Direct expense decreased $10.0 million in the Air Medical segment and $0.2 million in the Oil and Gas segment.

The decrease in total direct expense was due to decreased fuel costs ($13.0 million) due to a decrease in fuel costs per-gallon compared to the prior year. Fuel costs in the Oil and Gas segment are invoiced to the customer based on costs above a certain contracted amount and are included in revenue. Aircraft warranty costs decreased ($5.1 million) as a result of the $4.9 million credit related to termination of the warranty program for certain aircraft. These decreases were offset by increases in aircraft lease expense ($3.7 million), aircraft insurance ($1.5 million), aircraft depreciation ($0.9 million), and aircraft parts usage ($1.2 million) due to aircraft deliveries in 2008 and 2009. Other items, net, also increased ($0.5 million). These items are discussed in more detail in the Segment Discussion below.

Selling, General, and Administrative Expenses — Selling, general and administrative expenses were $23.7 million for the nine months ended September 30, 2009, compared to $23.3 million for the nine months ended September 30, 2008. Legal fees increased ($1.1 million) related to the pending case with the pilots’ union, and employee compensation costs increased ($0.6 million) primarily due to compensation rate increases. These increases were offset by decreases in third party services ($0.9 million) and other base costs ($0.7 million).

Interest Expense — Interest expense was $11.9 million for the nine months ended September 30, 2009, compared to $11.5 million for the nine months ended September 30, 2008.

Income Taxes — Income tax expense for the nine months ended September 30, 2009 was $8.5 million compared to $13.8 million for the nine months ended September 30, 2008. The effective tax rate was 40% for the nine months ended September 30, 2009 and 2008.

Net Earnings — Our net earnings for the nine months ended September 30, 2009 was $12.7 million compared to $20.7 million for the nine months ended September 30, 2008. Earnings before income taxes for the nine months ended September 30, 2009 were $21.2 million compared to $34.5 million for the same period in 2008. Earnings per diluted share were $0.83 for the nine months ended September 30, 2009, compared to earnings per diluted share of $1.36 for the prior year period. The decrease for the nine months ended September 30, 2009 is related to decreased revenues due to decreased activity on the continental shelf, and decreased revenues as a result of the completion of a foreign contract in 2008. Earnings for the nine months ended September 30, 2009 included a $4.9 million pre-tax credit included in direct expenses related to termination of the manufacturer’s warranty program for certain aircraft. Included in earnings before income taxes for the nine months ended September 30, 2008 are gains on disposition of assets of $4.5 million, and a $1.6 million credit included in direct expenses as a result of termination of a manufacturer’s warranty program for certain aircraft. These amounts were offset by a $2.1 million charge for our aviation insurance and workers’ compensation related to accidents during the period. We had 15.3 million common shares outstanding during the nine months ended September 30, 2009 and 2008.

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Segment Discussion

Oil and Gas — Oil and Gas segment revenues were $233.0 million for the nine months ended September 30, 2009, compared to $243.4 million for the nine months ended September 30, 2008, a decrease of $10.4 million. Flight hours were 85,470 for the nine months ended September 30, 2009 compared to 84,202 for the same period in 2008. There was a decrease in flight hours and revenues for medium aircraft as a result of a voluntary grounding of certain aircraft in the first quarter related to the January 4, 2009 accident, and a decrease in revenue related to fuel charges. 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. There was also a decrease in medium aircraft revenue due to a decrease in activity on the continental shelf, and a decrease in foreign contract revenues due to completion of a contract in 2008. These amounts were offset in part by an increase in revenue for medium aircraft related to deepwater activity and an increase in flight hours and revenues for light aircraft in the Oil and Gas segment, which operate at lower rates and margins as compared to medium aircraft.

Direct expense in our Oil and Gas segment was $192.0 million for the nine months ended September 30, 2009, compared to $192.2 million for the nine months ended September 30, 2008, a decrease of $0.2 million. Employee compensation expense increased ($2.5 million) primarily due to a compensation rate increase. Primarily as a result of additional aircraft in the fleet, we experienced increases in aircraft lease expense ($4.7 million), aircraft depreciation ($1.1 million), aircraft parts usage ($0.9 million) and aircraft insurance ($1.3 million). These increases were offset by a decrease in fuel expense ($10.3 million) as a result of a decrease in per-gallon fuel costs. Total fuel costs is included in direct expense and reimbursement of a portion of fuel costs above a contracted per-gallon amount is included in revenue.

Selling, general and administrative expenses were $1.0 million for the nine months ended September 30, 2009 and 2008.

Our Oil and Gas segment’s operating income was $40.1 million for the nine months ended September 30, 2009, compared to $50.2 million for the nine months ended September 30, 2008. Operating margins were 17% for the nine months ended September 30, 2009, compared to 21% for the nine months ended September 30, 2008. The reduction in operating income and margin is due to decreased medium aircraft revenue due to the voluntary grounding of certain aircraft following the accident in January 2009, and also due to a decrease in activity on the continental shelf, and decreased foreign contract revenues. 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 $125.0 million for the nine months ended September 30, 2009, compared to $133.1 million for the nine months ended September 30, 2008, a decrease of $8.1 million or 6%. The decrease was related to decreased patient transports in the independent provider programs and also due to the closure of six locations. Patient transports were 15,529 for the nine months ended September 30, 2009, compared to 17,468 for the nine months ended September 30, 2008, a decrease of 1,939. Patient transports decreased by approximately 1,055 due to the base closures. We believe the remaining decrease in transports was primarily attributable to the current economic environment. There was an increase in hospital-based contracts for the period ended September 30, 2009, due to additional contract awards. Flight hours were 26,108 for the nine months ended September 30, 2009, compared to 28,355 for the nine months ended September 30, 2008.

Direct expense in our Air Medical segment was $111.5 million for the nine months ended September 30, 2009, compared to $121.5 million for the nine months ended September 30, 2008. The $10.0 million decrease was due to decreases in employee compensation costs ($3.1 million) primarily due to a decrease in personnel related to independent provider programs closed since September 30, 2008 and also due to a reduction in support personnel. Fuel expense decreased ($2.7 million) due to a decrease in fuel costs,

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aircraft warranty costs decreased ($3.7 million) due to the credit related to the termination of the warranty program for certain aircraft, and other items decreased, net ($0.5 million).

Selling, general and administrative expenses were $4.9 million for the nine months ended September 30, 2009, compared to $6.2 million for the nine months ended September 30, 2008. The decrease is due to a reduction in personnel, and expenses related to outside medical personnel services. Air Medical operations are headquartered in Phoenix, Arizona, where we maintain significant separate facilities and administrative staff dedicated to this segment. Those costs are charged directly to the Air Medical segment, resulting in higher selling, general and administrative expenses as compared to our other reportable segments.

Our Air Medical segment’s operating income was $8.6 million for the nine months ended September 30, 2009, compared to $5.4 million for the nine months ended September 30, 2008. The operating margin was 7% for the nine months ended September 30, 2009, compared to 4% for the nine months ended September 30, 2008. The increases in operating income and margins are due to the decreases in direct expenses described above.

Operating margins in our Air Medical segment have been lower compared to our other segments. There have been cost reductions recently and six locations have been closed. We will continue to focus efforts on this segment to improve earnings. Margins in this segment can also be affected by adverse weather conditions, which reduces volume, and by the payor mix.

Technical Services — Technical Services revenues were $6.4 million for the nine months ended September 30, 2009, compared to $6.3 million for the nine months ended September 30, 2008. Direct expenses in our Technical Services segment were $4.6 for the nine months ended September 30, 2009, compared to $4.7 million for the nine months ended September 30, 2008. Our Technical Services segment’s operating income was $1.8 million for the nine months ended September 30, 2009, compared to $1.5 million for September 30, 2008. Operating margins were 28% for the nine months ended September 30, 2009, compared to 24% for the nine months ended September 30, 2008.

Technical Services provides maintenance and repairs performed for our existing customers that own their aircraft. These services are generally labor intensive with higher operating margins as compared to other segments. In addition, the Technical Services segment also conducts flight operations which are unrelated to the other segments. Those flight operations are typically conducted in the first and fourth quarters each year.

Liquidity and Capital Resources

General

Our ongoing liquidity requirements arise primarily from the funding of working capital needs, the acquisition or leasing of aircraft, the maintenance and refurbishment of aircraft, improvement of facilities, and acquisition of equipment and inventory. Our principal sources of liquidity historically have been net cash provided by our operations and borrowings under our revolving credit facility, as augmented by the issuance of our Senior Notes in 2002, which were refinanced in 2006, and the sale of non-voting common stock in 2005 and 2006. To the extent we do not use cash, short-term investments or borrowings to finance our aircraft acquisitions, we can typically enter into operating leases to fund these acquisitions. The continued credit crisis and related turmoil in the global financial system have contributed to causing an increase in our operating lease financing costs. The leases we have entered into in the first nine months of 2009 are approximately 100 basis points higher than in 2008. We cannot predict what additional future effects the credit crisis may have on our business and financial condition.

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Cash Flow

Our cash position was $3.9 million at September 30, 2009 compared to $1.2 million at December 31, 2008. Short-term investments were $74.0 million at September 30, 2009, compared to $42.1 million at December 31, 2008. Working capital was $209.2 million at September 30, 2009, as compared to $174.0 million at December 31, 2008, an increase of $35.2 million. The increase in working capital was due to an increase in cash and cash equivalents of $2.7 million, an increase in short-term investments of $31.8 million due in part to receipt of proceeds from aircraft sales and dispositions ($8.9 million) and from refunds of deposits on aircraft ($9.6 million). Additionally, accounts receivable decreased $1.3 million due to decreased revenues, and a decrease in days outstanding. There was also an increase in inventory of $3.4 million, an increase in prepaid expenses of $0.3 million, and an increase in accounts payable and accrued liabilities of $1.6 million.

Net cash provided by operating activities was $40.5 million for the nine months ended September 30, 2009, compared to $30.4 million for the nine months ended September 30, 2008, an increase of $10.1 million. There was a decrease in net earnings of $8.0 million. There was also a decrease in accounts receivable of $1.3 million at September 30, 2009 compared to an increase of $22.0 million at September 30, 2008, resulting in an increase of $23.3 million in cash from operating activities. Additionally, other assets increased $1.4 million in the current nine-month period compared to a decrease of $0.9 million in the prior nine-month period, resulting in a decrease in cash from operating activities of $2.3 million. Accounts payable and accrued liabilities increased $1.6 million compared to an increase of $5.3 million in the same period of 2008, resulting in a decrease in cash from operating activities of $3.7 million.

Capital expenditures were $31.8 million for the nine months ended September 30, 2009 compared to $55.7 million for the nine months ended September 30, 2008. Capital expenditures for 2009 included $26.8 million for aircraft purchases, upgrades, and refurbishments. Capital expenditures for 2008 included $48.9 million for aircraft purchases, upgrades, and refurbishments. Gross proceeds from aircraft sales and dispositions were $8.9 million for the nine months ended September 30, 2009 compared to $9.0 million for the nine months ended September 30, 2008.

Credit Facility

Effective August 5, 2009, we executed a new credit agreement with a syndicate of three commercial banks, which replaced the prior facility, providing a $75 million revolving credit facility maturing in September 2011. The interest rate is the prime rate plus 100 basis points. At September 30, 2009, we had $10.4 million in borrowings and $5.1 million in letters of credit outstanding under that facility. The weighted average effective interest rate on our revolving credit facility 3.25% for both the three and nine months ended September 30, 2009. The new facility includes covenants related to working capital and funded debt to net worth, identical to the previous credit agreement, and the consolidated net worth covenant was increased from $400 million to $425 million. As of September 30, 2009, we were in compliance with the covenants under our credit agreement.

Contractual Obligations

At September 30, 2009, we had an order for two additional transport category aircraft at an approximate cost of $43.5 million with delivery dates in late 2009. The aircraft are planned for service in the Oil and Gas segment. We intend to fund these aircraft with operating leases, cash, or the revolving credit facility. We have a $2.0 million deposit with the manufacturer for these two aircraft.

The table below sets out our contractual obligations as of September 30, 2009 related to our revolving credit facility, operating lease obligations, the 7.125% Senior Notes due 2013, as well as our aircraft purchase commitments. The operating leases are not recorded as liabilities on our balance sheet. Each contractual obligation included in the table contains various terms, conditions, and covenants that, if

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violated, accelerate the payment of that obligation. We currently lease 23 aircraft included in the lease obligations below.

	Payment Due by Year
													Beyond
	Total		2009		2010		2011		2012		2013		2013
					(Thousands of dollars)
Aircraft purchase obligations (1)	$	43,517	$	43,517	$	—	$	—	$	—	$	—	$	—
Aircraft lease obligations		209,671		6,976		28,504		29,772		30,439		30,804		83,176
Other lease obligations		19,093		880		3,343		2,851		1,951		1,445		8,623
Long-term debt		210,350		—		—		10,350		—		200,000		—
	$	482,631	$	51,373	$	31,847	$	42,973	$	32,390	$	232,249	$	91,799

1) These commitments are for aircraft that we intend to fund from operating leases, cash, or our revolving credit facility.

New Accounting Pronouncements

For a discussion of applicable new accounting pronouncements, see Note 8 to the Condensed Consolidated Financial Statements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The fair market value of our 7.125% Senior Notes will vary as changes occur to general market interest rates, the remaining maturity of the notes, and our credit worthiness. At September 30, 2009, the market value of the notes was approximately $188.5 million, based on quoted market indications. The recent global credit and financial crisis has caused sharp decreases in demand and market prices for high-yield notes such as ours. Our earnings are subject to changes in short-term interest rates due to the variable interest rate on our revolving credit facility. Based on the $10.4 million in borrowings outstanding at September 30, 2009, a ten percent increase in the interest rate to 3.85% would reduce our annual pre-tax earnings by an amount less than $0.1 million.

Item 4. CONTROLS AND PROCEDURES

The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, including to ensure that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

With respect to the previously reported litigation involving the union representing our domestic pilots, the trial date on strike-related matters has been postponed from June 29, 2009 to July 6, 2010; otherwise, there have been no material developments regarding those proceedings.

Superior Offshore International Inc. v. Bristow Group Inc., ERA Helicopters, LLC, Seacor Holdings Inc., ERA Group Inc., ERA Aviation, Inc., and PHI, Inc., Civil Action No. 1:09-cv-00438 on the docket of the United States District Court for the District of Delaware. This purported class action was filed on June 12, 2009, on behalf of a class defined to include all direct purchasers of offshore helicopter services in the Gulf of Mexico from the defendants at any time from January 1, 2001 through December 31, 2005. The suit alleges that the defendants acted jointly to fix, maintain, or stabilize prices for offshore helicopter services during the above time frame in violation of the federal antitrust laws. The plaintiff seeks unspecified treble damages, injunctive relief, costs, and attorneys’ fees. Defendants’ motion to dismiss filed on September 4, 2009 is pending. The outcome of this matter cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in this matter.

For information regarding Legal Proceedings, see Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2008 (“2008 Form 10-K”).

Item 1. A. RISK FACTORS

Potential health care legislation and regulations could have a material impact on our business.

The federal and state governments continue to seriously consider many broad-based legislative and regulatory proposals that could materially impact various aspects of the health care system. The proposals vary, and include a public health plan that would compete with public and private health plans for individual and small business customers, individual insurance requirements, the expansion of eligibility under existing Medicaid and/or Federal Employees Health Benefit Plan programs, minimum medical benefit ratios for health plans, mandatory issuance of insurance coverage, and requirements that would limit the ability of health plans and insurers to vary premiums based on assessments of underlying risk. While certain of these measures would adversely affect collection rates in our Air Medical operations, at this time we cannot predict the extent of the impact of these proposals on our business or results of operations.

Item 1.A. “Risk Factors” of our 2008 Form 10-K includes a discussion of our other risk factors.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Item 5. OTHER INFORMATION

None.

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Item 6. EXHIBITS

(a) Exhibits

3.1	(i)	Composite Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to PHI’s Report on Form 10-Q filed on August 7, 2008).
	(ii)	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.1 to PHI’s Report on Form 8-K filed December 18, 2007).

4.1	Amended and Restated Loan Agreement dated as of March 31, 2008 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 4.1 to PHI’s Report on Form 10-Q filed on May 8, 2008).
4.2	First Amendment dated as of August 5, 2009 to Amended and Restated Loan Agreement dated as of March 31, 2008 by and among PHI, Inc., Air Evac Services, Inc., PHI Tech Services, Inc. (formerly Evangeline Airmotive, Inc.), and International Helicopter Transport, Inc. and Whitney National Bank (incorporated by reference to Exhibit 4.2 to PHI’s Report on Form 10-Q filed on August 10, 2009).
4.3	Indenture dated April 12, 2006 among PHI, Inc., the Subsidiary Guarantors named therein and The Bank of New York, as Trustee (incorporated by reference to Exhibit 10.2 to PHI’s Report on Form 8-K filed on April 13, 2006).
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chairman and Chief Executive Officer.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Michael J. McCann, Chief Financial Officer.
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Al A. Gonsoulin, Chairman and Chief Executive Officer.
32.2	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Michael J. McCann, Chief Financial Officer.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PHI, Inc.
November 9, 2009	By:	/s/ Al A. Gonsoulin
		Al A. Gonsoulin
		Chairman and Chief Executive Officer
November 9, 2009	By:	/s/ Michael J. McCann
		Michael J. McCann
		Chief Financial Officer

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