Discovery Air - Making Ideas Fly

President and CEO’s Comments

Financial Highlights

• Consolidated revenues of $25.9 million for Q1 2011 represent a 1% year over year increase from Q1 2010. While year over year revenues were similar, Q1 2011’s revenue composition reflects a substantial change from Q1 2010. The Corporation’s Northern Services segment recorded a 32% increase in revenues due largely to a significant increase in demand for services from its resource-based customers. Resource-based revenues increased by 87% from the prior period. The Corporation also benefited from a year over year increase in demand for airborne forest fire management and suppression services during the current quarter. Quarterly revenues in the Government Services segment decreased by 25% due to reduced flight hour demand from the Department of National Defence and Canadian Forces. Revenue from this customer is subject to month to month variability due to short-term shifts in priorities within a year, and the flight hour demand in the first quarter is not necessarily indicative of flight hour demand over the full year.

• The Corporation’s Q1 2011 EBITDA of $1.5 million increased from $0.7 million in Q1 2010. The positive variance was attributable to the Corporation incurring in the comparative quarter last year $1.2 million in relocation costs.  Adjusted EBITDA, which normalizes for these non-recurring costs, was $1.5 million in Q1 2011 compared to $1.8 million in Q1 2010. The negative variance was largely attributable to lower revenues from the Government Services segment.

• The Corporation’s loss of $3.9 million in Q1 2011 represents a $1.2 million positive variance from Q1 2010, attributable to the relocation costs noted above and to a one-time financing charge of $0.8 million incurred in Q1 2010 to establish an operating line of credit, and to fees to amend existing long-term debt arrangements related to covenant reporting.

•  The Corporation continues to closely monitor its costs, working capital and levels of capital investments to ensure liquidity is maintained at a level sufficient to fund operations and desirable capital expenditures. As at Q1 2011, working capital of $13.7 million improved from Q1 2010’s working capital balance of $11.9 million due to reduced draws on the Corporation’s operating line of credit.

•  On June 9, 2010, the Corporation successfully renewed its operating line of credit for a twelve month term. Conditions were substantially consistent with those previously applicable, except for an amendment to include a stand-by fee of 75 basis points per annum on amounts authorized but not drawn; and an amendment to include a prepayment fee of $156,000 payable if the facility is paid in full on or before December 9, 2010.

 The table below summarizes selected financial information for the current and comparative quarters:

    ------------------------------------- ----------- ----------- 
    (thousands of dollars,
    except per share amounts)                 Q1 2011     Q1 2010
    ------------------------------------- ----------- ----------- 
    Results of operations
      Revenue                             $   25,914  $   25,566  
      Operating expenses                  $   24,401  $   23,728 
      ----------------------------------------------- ------------
      Earnings before
       undernoted items                   $    1,513  $    1,838  

      Interest expense                    $    3,658  $    3,499  
      Amortization                        $    3,368  $    3,398  
      Relocation of
       corporate office                   $       51  $    1,173  
      Financing transaction
       costs                              $        -  $      830  
      Loss                                $   (3,924) $   (5,121) 
      Basic and diluted
       loss per share                     $    (0.03) $    (0.04) 

    Financial position and
     liquidity
      Total assets                        $  263,721  $  268,333
      Total long-term debt                $  145,291  $  144,137
      Cash provided by
       operations                         $  (9,815)  $  (11,919)  
      Working capital                         13,666  $   11,936  

    Key non-GAAP performance
     measures*
      Adjusted earnings
       (loss)                             $   (3,888) $  (4,293)  
      EBITDAR                             $     3,008 $    2,017  
      Adjusted EBITDAR                    $     3,059 $    3,190  
      EBITDA                              $     1,462 $      665  
      EBITDA margin                                6%         3%         
      Justed EBITDA                       $     1,513 $    1,838
      Adjusted EBITDA margin                       6%         7%