UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

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
(337) 235-2452
(Address, including zip code and telephone number of principal executive office)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Voting Common Stock		The NASDAQ Global Market
Non-Voting Common Stock		The NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: o   No: þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: o   No: þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     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. (Check one):

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

     The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2008 was $614,751,172 based upon the last sales prices of the voting and non-voting common stock on June 30, 2008, as reported on the NASDAQ Global Market.

     The number of shares outstanding of each of the registrant’s classes of common stock, as of February 27, 2009 was:

Voting Common Stock		2,852,616 shares.
Non-Voting Common Stock		12,448,992 shares.

Documents Incorporated by Reference

     Portions of the registrant’s definitive Information Statement for the 2009 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

PHI, INC.

INDEX — FORM 10-K

PART I
Item 1.		Business		1
Item 1A.		Risk Factors		4
Item 1B.		Unresolved Staff Comments		10
Item 2.		Properties		11
Item 3.		Legal Proceedings		12
Item 4.		Submission of Matters to a Vote of Security Holders		13
PART II
Item 5.		Market for Registrant’s Common Equity, Related Shareholders Matters and Issuer Purchases of Equity Securities		13
Item 6.		Selected Financial Data		15
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk		26
Item 8.		Financial Statements and Supplementary Data		27
		PHI, Inc. and Consolidated Subsidiaries:
		Report of Independent Registered Public Accounting Firm		27
		Consolidated Balance Sheets — Years ended December 31, 2008 and 2007		28
		Consolidated Statements of Operations — Years ended December 31, 2008, 2007 and 2006		29
		Consolidated Statements of Shareholders’ Equity — Years ended December 31, 2008, 2007, and 2006		30
		Consolidated Statements of Cash Flows — Years ended December 31, 2008, 2007, and 2006		31
		Notes to Consolidated Financial Statements		32
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		56
Item 9A.		Controls and Procedures		56
		Report of Independent Registered Public Accounting Firm		57
Item 9B.		Other Information		58
PART III
Item 10.		Directors, Executive Officers and Corporate Governance		58
Item 11.		Executive Compensation		58
Item 12.		Security Ownership of Certain Beneficial Owners and Management		58
Item 13.		Certain Relationships, Related Transactions and Director Independence		58
Item 14.		Principal Accounting Fees and Services		58
PART IV
Item 15.		Exhibits, Financial Statement Schedules		59
		Signatures		62
EX-10.1
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Forward-Looking Statements

All statements other than statements of historical fact contained in this Form 10-K 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 1A below. 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 below. PHI undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

ITEM 1.		BUSINESS

General

Since our incorporation in 1949, our primary business has been the safe and reliable transportation of personnel and, to a lesser extent, parts and equipment, to, from, and among offshore platforms for customers engaged in the oil and gas exploration, development, and production industry, principally in the Gulf of Mexico. We are a leading provider of helicopter transportation services in the Gulf of Mexico. We also provide helicopter services to the oil and gas industry internationally, and to non-oil and gas customers such as health care providers and U.S. governmental agencies such as the National Science Foundation. We also provide air medical transportation for hospitals and emergency service agencies where we operate as an independent provider of medical services. We also provide helicopter maintenance and repair services to certain customers. At December 31, 2008, we owned or operated approximately 249 aircraft domestically and internationally.

Description of Operations

We operate in three business segments: Oil and Gas, Air Medical, and Technical Services. For financial information regarding our operating segments and the geographic areas in which they operate, see Note 10 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.

Oil and Gas. Our Oil and Gas segment, headquartered in Lafayette, Louisiana, 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, Angola, and the Democratic Republic of Congo. We currently operate 153 aircraft in this segment.

Oil and gas exploration and production companies and other offshore oil service companies use our services primarily for routine transportation of personnel and equipment, to transport personnel during medical and safety emergencies, and to evacuate personnel during the threat of hurricanes and other adverse weather conditions. Most of our customers have entered into contracts for transportation services for a term of one year or longer, although some hire us on an “ad hoc” or “spot” basis.

Most of our Oil and Gas aircraft are available for hire by any customer, but some are dedicated to individual customers. Our helicopters have flight ranges up to 495 miles with a 30-minute fuel reserve and thus are capable of servicing many of the deepwater oil and gas operations from 50 to 200 miles offshore. (See Item 2 — Properties, for specific information by aircraft model.)

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. Operating costs for the Oil and Gas operations are primarily aircraft operation costs, including costs for pilots and maintenance personnel.

Operating revenues from the Oil and Gas segment accounted for 64%, 64%, and 66% of consolidated operating revenues during the years ended December 31, 2008, 2007, and 2006, respectively.

Air Medical. We provide air medical transportation services for hospitals and emergency service agencies where we operate as an independent provider of medical services in 17 states using approximately 90 aircraft at 73 separate locations. Our Air Medical operations are headquartered in Phoenix, Arizona. The Air Medical segment’s operating revenues accounted for 34%, 34%, and 32% of consolidated operating revenues for the years ended December 31, 2008, 2007, and 2006, respectively.

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, by category. The allowance percentages calculated are applied to the payor categories, and the necessary adjustments are made to the revenue allowance. The allowance for contractual discounts was $36.1 million, $31.9 million, and $29.9 million as of December 31, 2008, 2007, and 2006, respectively. The allowance for uncompensated care was $22.5 million, $19.1 million, and $20.1 million as of December 31, 2008, 2007, and 2006, respectively.

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

		Revenue												Accounts Receivable
		Year Ended December 31,												Year Ended December 31,
		2008				2007				2006				2008				2007				2006
Gross billings			100	%			100	%			100	%			100	%			100	%			100	%
Provision for contractual discounts			47	%			44	%			42	%			35	%			33	%			32	%
Provision for uncompensated care			11	%			12	%			12	%			20	%			20	%			22	%

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

		Year Ended December 31,
		2008				2007				2006
Medicaid			11	%			10	%			11	%
Medicare			18	%			16	%			14	%
Insurance			67	%			71	%			70	%
Self Pay			4	%			3	%			5	%

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 generate approximately 8% of the segment’s revenues.

Technical Services. The Technical Services segment provides helicopter repair and overhaul services for flight operations customers that own their aircraft. Costs associated with these services are primarily labor, and customers are generally billed at a percentage above cost. We also operate six aircraft for the National Science Foundation in Antarctica under this segment.

Operating revenues from the Technical Services segment accounted for 2% of consolidated operating revenues for the years ended December 31, 2008, 2007, and 2006.

Seasonal Aspects

Seasonality affects our operations in three principal ways: weather conditions are generally poorer in December, January, and February; tropical storms and hurricanes are prevalent in the Gulf of Mexico in late summer and early fall; and reduced daylight hours restrict our operations in winter, which result in reduced flight hours. When a tropical storm or hurricane is about to enter or begins developing in the Gulf of Mexico, flight activity may temporarily increase because of evacuations of offshore workers, but during the storms, we are unable to operate in the area of the storm and can incur significant expense in moving our aircraft to safer locations. For a more detailed discussion of these events, see the “Adverse Weather Conditions” paragraph in the “Risk Factors” section of Item 1A. Our operating results vary from quarter to quarter, depending on seasonal factors and other factors outside of our control. As a result, full year results are not likely to be a direct multiple of any particular quarter or combination of quarters.

Inventories

We carry a significant inventory of aircraft parts to support the maintenance and repair of our helicopters. Many of these inventory items are parts that have been removed from aircraft, refurbished according to manufacturers and FAA specifications, and returned to inventory. The cost to refurbish these parts is expensed as incurred. We use systematic procedures to estimate the value of these used parts, which include consideration of their condition and continuing utility. The carrying values of inventory reported in our financial statements are affected by these estimates and may change from time to time if our estimated values change.

Customers

Our principal customers are major integrated energy companies and independent exploration and production companies. We also serve oil and gas service companies, hospitals and medical programs under the independent provider model, government agencies, and other aircraft owners and operators. Our largest customer is in our Oil and Gas segment and accounted for 14%, 15%, and 17% of operating revenues for the years ended December 31, 2008, 2007, and 2006, respectively. Also, another customer also in our Oil and Gas segment accounted for 13%, 14%, and 10% of operating revenues for the years ended December 31, 2008, 2007, and 2006, respectively. We have entered into contracts with most of our customers for terms of at least one year, although most contracts include provisions permitting earlier termination.

Competition

Our business is highly competitive in each of our markets, and many of our contracts are awarded after competitive bidding. Factors that impact competition include safety, reliability, price, availability of appropriate aircraft and quality of service. Some of our competitors recently have undertaken expansion and/or upgrades of their fleets.

We are a leading operator of helicopters in the Gulf of Mexico. There are two major and several small competitors operating in the Gulf of Mexico market. Although most oil companies traditionally contract for most specialty services associated with offshore operations, including helicopter services, certain of our customers and potential customers in the oil industry operate their own helicopter fleets, or have the capability to do so if they so elect.

In the air medical market, we compete against national and regional firms, and there is usually more than one competitor in each local market. In addition, we compete against hospitals that operate their own helicopters and, in some cases, against ground ambulances as well.

Employees

As of December 31, 2008, we employed approximately 2,330 full-time employees and 52 part-time employees, including approximately 690 pilots, 813 aircraft maintenance personnel, and 431 medical support staff.

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 terminated, 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 November 3, 2008 until June 29, 2009. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management does not expect the outcome of this litigation to have a material adverse effect on our financial conditions, results of operations, or cash flows.

Environmental Matters

We are subject to federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage, recycling, and disposal of toxic and hazardous wastes. Operating and maintaining helicopters requires that we use, store, and dispose of materials that are subject to federal and state environmental regulation. We periodically conduct environmental site surveys at our facilities, and determine whether there is a need for environmental remediation based on these surveys.

Availability of SEC filings and other information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to any of these reports are available free of charge through our web site: www.phihelico.com. These reports are available as soon as reasonably practicable after we file them with the Securities and Exchange Commission (“SEC”). You may also read and copy any of the materials that we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is www.sec.gov.

ITEM 1A.		Risk Factors

All phases of our operations are subject to significant uncertainties, risks, and other influences. Important factors that could cause our actual results to differ materially from anticipated results or other expectations include the following:

RISKS INHERENT IN OUR BUSINESS

The failure to maintain our safety record would seriously harm our ability to attract new customers and maintain our existing customers.

A favorable safety record is one of the primary factors a customer reviews in selecting an aviation provider. If we fail to maintain our safety and reliability record, our ability to attract new customers and maintain our current customers will be materially adversely affected.

Helicopter operations involve risks that may not be covered by our insurance or may increase the cost of our insurance.

The operation of helicopters inherently involves a high degree of risk. Hazards such as aircraft accidents, collisions, fire and adverse weather are hazards that must be managed by providers of helicopter services and may result in loss of life, serious injury to employees and third parties, and losses of equipment and revenues.

We maintain hull and liability insurance on our aircraft, which insures us against physical loss of, or damage to, our aircraft and against certain legal liabilities to others. In addition, we carry war risk, expropriation, confiscation and nationalization insurance for our aircraft involved in international operations. In some instances, we are covered by indemnity agreements from our customers in lieu of, or in addition to, our insurance. Our aircraft are not insured for loss of use.

While we believe that our insurance and indemnification arrangements provide reasonable protection for most foreseeable losses, they do not cover all potential losses and are subject to deductibles, retentions, coverage limits and coverage exceptions such that severe casualty losses, or the expropriation or confiscation of significant assets could materially and adversely affect our financial condition or results of operations. The occurrence of an event that is not fully covered by insurance could have a material adverse impact on our financial condition, results of operations, and cash flows.

Our operations are affected by adverse weather conditions and seasonal factors.

We are subject to three types of weather-related or seasonal factors:

•		the tropical storm and hurricane season in the Gulf of Mexico;
•		poor weather conditions that often prevail during winter and can develop in any season; and
•		reduced daylight hours during the winter months.

Poor visibility, high winds and heavy precipitation can affect the operation of helicopters and significantly reduce our flight hours. A significant portion of our operating revenue is dependent on actual flight hours and a substantial portion of our direct costs is fixed. Thus, prolonged periods of adverse weather can materially and adversely affect our operating revenues and net earnings.

In the Gulf of Mexico, the months of December, January and February have more days of adverse weather conditions than the other months of the year. Also, June through November is tropical storm and hurricane season in the Gulf of Mexico, with August and September typically being the most active months. During tropical storms, we are unable to operate in the area of the storm and can incur significant expense in moving our aircraft to safer locations. In addition, as most of our facilities are located along the Gulf of Mexico coast, tropical storms and hurricanes may cause substantial damage to our property, including helicopters that we are unable to relocate.

Because the fall and winter months have fewer hours of daylight, our flight hours are generally lower at those times, which typically results in a reduction in operating revenues during those months. Currently, only 112 of the 153 helicopters used in our oil and gas operations are equipped to fly under instrument flight rules, or IFR, which enables these aircraft, when manned by IFR-rated pilots and co-pilots, to operate when poor visibility or darkness prevents flight by aircraft that can fly only under visual flight rules, or VFR. Not all of our pilots are IFR rated.

We may not be able to obtain acceptable customer contracts covering some of our new helicopters, and there will be a delay between the time that a helicopter is delivered to us and the time that it can begin generating revenues.

Many of our new helicopters used in oil and gas operations may not be covered by customer contracts when they are placed into service, and we cannot assure you as to when we will be able to utilize these new helicopters or on what terms. In addition, with respect to those helicopters that will be covered by customer contracts when they are placed into service, our contract terms generally are too short to recover our cost of purchasing the helicopter at current rates. Thus, we are subject to the risk that we will be unable to recoup our investment in the helicopters.

Once a new helicopter is delivered to us, we generally spend between two and three months installing mission-specific and/or customer-specific equipment before we place it into service. As a result, there can be a significant delay between the delivery date for a new helicopter and the time that it is able to generate revenues for us.

There is also a possibility that our customers may request helicopters in lieu of our existing helicopters, which could adversely affect the utilization of our existing fleet.

Our contracts generally can be terminated or downsized by our customers without penalty.

Most of our fixed-term contracts contain provisions permitting early termination by the customer, sometimes with as little as 30 days’ notice for any reason and generally without penalty. In addition, many of our contracts permit our customers to decrease the number of aircraft under contract with a corresponding decrease in the fixed monthly payments without penalty. As a result, you should not place undue reliance on our customer contracts or the terms of those contracts.

Increased governmental regulations could increase our costs or reduce our ability to operate successfully.

Our operations are regulated by a number of federal and state agencies. All of our flight operations are regulated by the Federal Aviation Administration, or FAA. Aircraft accidents are subject to the jurisdiction of the National Transportation Safety Board. Standards relating to workplace health and safety are monitored by the federal Occupational Safety and Health Administration, or OSHA. We are also subject to various federal and state environmental statutes.

The FAA has jurisdiction over many aspects of our business, including personnel, aircraft and ground facilities. We are required to have an Air Taxi Certificate, granted by the FAA, to transport personnel and property in our helicopters. This certificate contains operating specifications that allow us to conduct our present operations, but it is potentially subject to amendment, suspension or revocation in accordance with procedures set forth in the Federal Aviation Act. The FAA conducts regular inspections regarding the safety, training and general regulatory compliance of our U.S. aviation operations. Additionally, the FAA requires us to file reports confirming our continued compliance.

FAA regulations require that at least 75% of our voting securities be owned or controlled by citizens of the U.S. or one of its possessions, and that our president and at least two-thirds of our directors be U.S. citizens. Our Chief Executive Officer and all of our directors are U.S. citizens, and our organizational documents provide for the automatic reduction in voting power of each share of voting common stock owned or controlled by a non-U.S. citizen if necessary to comply with these regulations.

We are subject to significant regulatory oversight by OSHA and similar state agencies. We are also subject to the Communications Act of 1934 because of our ownership and operation of a radio communications flight-following network throughout the Gulf of Mexico.

Numerous other federal statutes and rules regulate our offshore operations and those of our customers, pursuant to which the federal government has the ability to suspend, curtail or modify certain or all offshore operations. A suspension or substantial curtailment of offshore oil and gas operations for any prolonged period would have an immediate and materially adverse effect on us. A substantial modification of current offshore operations could adversely affect the economics of such operations and result in reduced demand for our services.

The helicopter services business is highly competitive.

All segments of our business are highly competitive. Many of our contracts are awarded after competitive bidding, and the competition for those contracts generally is intense. The principal aspects of competition are safety, price, reliability, availability and service.

We have two major competitors and several small competitors operating in the Gulf of Mexico, and most of our customers and potential customers could operate their own helicopter fleets if they chose to do so.

Our Air Medical segment competes for business primarily under the independent provider model and, to a lesser extent, under the hospital-based model. Under the independent provider model, we have no contracts and no fixed revenue stream, but must compete for transport referrals on a daily basis with other independent operators in the area. Under the hospital-based model, we contract directly with the hospital to provide their transportation services, with the contracts typically awarded on a competitive bid basis. Under both models, we compete against national and regional companies, and there is usually more than one competitor in each local market. In addition, we compete against hospitals that operate their own helicopters and, in some cases, against ground ambulances as well.

Our air medical operations expose us to numerous special risks, including collection risks, high start-up costs and potential medical malpractice claims.

We expanded our Air Medical operations significantly from 2004 to 2006. These operations are highly competitive and expose us to a number of risks that we do not encounter in our oil and gas operations. For instance, the fees for our air medical services generally are paid by individual patients, insurance companies, or government agencies such as Medicare and Medicaid. As a result, our profitability in this business depends not only on our ability to generate an acceptable volume of patient transports, but also on our ability to collect our transport fees. We are not permitted to refuse service to patients based on their inability to pay.

We employ paramedics, nurses, and other medical professionals for these operations, which can give rise to medical malpractice claims against us, which, if not fully covered by our medical malpractice insurance, could materially adversely affect our financial condition and results of operations.

Our international operations are subject to political, economic and regulatory uncertainty.

Our international operations, which represented approximately 4% of our total operating revenues for the year ended December 31, 2008, are subject to a number of risks inherent in operating in lesser developed countries, including:

•		political, social and economic instability;
•		terrorism, kidnapping and extortion;
•		potential seizure or nationalization of assets;
•		import-export quotas; and
•		currency fluctuations or devaluation.

Additionally, our competitiveness in international markets may be adversely affected by government regulation, including regulations requiring:

•		the awarding of contracts to local contractors;
•		the employment of local citizens; and
•		the establishment of foreign subsidiaries with significant ownership positions reserved by the foreign government for local ownership.

Our failure to attract and retain qualified personnel could adversely affect us.

Our ability to attract and retain qualified pilots, mechanics, nurses, paramedics and other highly trained personnel will be an important factor in determining our future success. Many of our customers require pilots of aircraft that service them to have inordinately high levels of flight experience. The market for these experienced and highly trained personnel is extremely competitive. Accordingly, we cannot assure you that we will be successful in our efforts to attract and retain such persons. Some of our pilots and mechanics, and those of our competitors, are members of the U.S. military reserves and could be called to active duty. If significant numbers of such persons are called to active duty, it would reduce the supply of such workers, possibly curtailing our operations and likely increasing our labor costs.

RISKS SPECIFIC TO OUR COMPANY

We are highly dependent on the offshore oil and gas industry.

Approximately 64% of our 2008 operating revenue was attributable to helicopter support for offshore oil and gas exploration and production companies. Our business is highly dependent on the level of activity by oil and gas companies, particularly in the Gulf of Mexico. The level of activity by our customers operating in the Gulf of Mexico depends on factors that we cannot control, such as:

•		the supply of, and demand for, oil and natural gas and market expectations regarding supply and demand;
•		weather-related or other natural causes;
•		actions of OPEC, and Middle Eastern and other oil producing countries, to control prices or change production levels;
•		general economic conditions in the United States and worldwide;
•		war, civil unrest or terrorist activities;
•		governmental regulation; and
•		the price and availability of alternative fuels.

Any substantial or extended decline in the prices of oil and natural gas could depress the level of helicopter activity in support of exploration and production activity, and thus have a material adverse effect on our business, results of operations and financial condition.

Additionally, the Gulf of Mexico is generally considered to be a mature area for oil and gas exploration, which may result in a continuing decrease in activity over time. This could materially adversely affect our business, results of operations and financial condition. In addition, the concentrated nature of our operations subjects us to the risk that a regional event could cause a significant interruption in our operations or otherwise have a material affect on our profitability.

Moreover, companies in the oil and gas exploration and production industry continually seek to implement cost-savings measures. As part of these measures, oil and gas companies have attempted to improve operating efficiencies with respect to helicopter support services. For example, certain oil and gas companies have pooled helicopter services among operators, reduced staffing levels by using technology to permit unmanned production installations and decreased the frequency of transportation of employees offshore by increasing the lengths of shifts offshore. The continued implementation of such measures could reduce demand for helicopter services and have a material adverse effect on our business, results of operations and our financial condition.

Our pilot workforce is represented by the Office and Professional Employees International Union, with which the Company is engaged in strike-related litigation.

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 terminated, 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 November 3, 2008 until June 29, 2009. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management does not expect the outcome of this litigation to have a material adverse effect on our financial conditions, results of operations, or cash flows.

We depend on a small number of large oil and gas industry customers for a significant portion of our revenues, and our credit exposure within this industry is significant.

We derive a significant amount of our revenue from a small number of major and independent oil and gas companies. For the year ended December 31, 2008, 14% of our revenues were attributable to our largest customer. We also had a second customer that accounted for 13% of revenues for the year ended December 31, 2008. The loss of one of our significant customers, if not offset by revenues from new or other existing customers, would have a material adverse effect on our business and operations. In addition, this concentration of customers may impact our overall credit risk in that these entities may be similarly affected by changes in economic and other conditions.

The current credit crisis may have an adverse impact on our business and financial condition in ways that we currently cannot predict.

The continued credit crisis and related turmoil in the global financial system may have an adverse impact on our business and our financial conditions. We cannot predict our ability to obtain lease financing due to the current credit crisis, and this could limit our ability to fund our future growth and operations. While we are able to currently obtain proposals and lease financing, we cannot predict future availability nor the effects on pricing for lease financing. We currently are obtaining operating lease proposals at a cost that is approximately 75 to 100 basis points higher as compared to a year ago.

General economic conditions and recent market events may expose our Company to new risks.

Recent events in the financial markets have contributed to severe volatility in the securities markets, a severe liquidity crisis in the global credit markets, and unprecedented government intervention. In such an environment, significant additional risks may exist for the Company. The recent instability in the financial markets has led the U.S. government to take a number of unprecedented actions designed to support certain financial and other institutions and segments of the financial market that have experienced extreme volatility, and in some cases, a lack

of liquidity. There can be no assurance that this intervention will improve market conditions, that such conditions will not continue to deteriorate, or that further government intervention will or will not occur.

Our Chairman of the Board and Chief Executive Officer is also our principal stockholder and has voting control of the Company.

Al A. Gonsoulin, our Chairman of the Board and Chief Executive Officer, beneficially owns stock representing approximately 52% of our total voting power. As a result, he exercises control over the election of all of our directors and the outcome of all matters requiring a stockholder vote. This ownership also may delay or prevent a change in our management or a change in control of us, even if such changes would benefit our other stockholders and were supported by a majority of our stockholders.

Our substantial indebtedness could adversely affect our financial condition and impair our ability to operate our business.

We are a highly leveraged company and, as a result, have significant debt service obligations. As of December 31, 2008, our total long-term indebtedness was $203.0 million, consisting of $200 million of our 7.125% Senior Notes due 2013 and $3.0 million borrowed under our revolving credit facility due 2010. Our debt to equity ratio at December 31, 2008 was 0.45 to 1.00, as compared to 0.47 to 1.00 at December 31, 2007. We also have significant operating lease commitments, detailed in Note 9 to our financial statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

At December 31, 2008, we had $3.0 million in borrowings and $5.1 million in letters of credit outstanding under our revolving line of credit. As of December 31, 2008, availability for borrowings under our revolving credit facility was $41.8 million.

Our substantial indebtedness could have significant negative consequences to us that you should consider. For example, it could:

•		require us to dedicate a substantial portion of our cash flow from operations to pay principal of, and interest on, our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures or other general corporate purposes, or to carry out other aspects of our business plan;
•		increase our vulnerability to general adverse economic and industry conditions and limit our ability to withstand competitive pressures;
•		limit our flexibility in planning for, or reacting to, changes in our business and future business opportunities;
•		place us at a competitive disadvantage compared to our competitors that have less debt; and
•		limit our ability to obtain additional financing for working capital, capital expenditures and other aspects of our business plan.

Our ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which we are unable to control. When our 7.125% Senior Notes come due in 2013, we will likely need to enter into new financing arrangements at that time to repay those notes. We may be unable to obtain that financing on favorable terms, which could adversely affect our business, financial condition and results of operations. For more information on our indebtedness, please see the financial statements included elsewhere herein.

Our stock has a low trading volume.

Our common stock is listed for trading on The NASDAQ Global Market under the symbol “PHIIK” for our non-voting common stock and “PHII” for our voting common stock. Both classes of common stock have low trading volume. As a result, a stockholder may not be able to sell shares of our common stock at the time, in the amounts, or at the price desired.

We do not pay dividends.

We have not paid any dividends on our common stock since 1999 and do not anticipate that we will pay dividends on our common stock in the foreseeable future. In addition, our ability to pay dividends is restricted by the

indenture governing our 7.125% Senior Notes due 2013. See Note 4 to the Consolidated Financial Statements.

Provisions in our articles of incorporation and by-laws and Louisiana law make it more difficult to effect a change in control of us, which could discourage a takeover of our company and adversely affect the price of our common stock.

Although an attempted takeover of our company is unlikely by virtue of the ownership by our Chief Executive Officer of more than 50% of the total voting power of our capital stock, there are also provisions in our articles of incorporation and by-laws that may make it more difficult for a third party to acquire control of us, even if a change in control would result in the purchase of your shares at a premium to the market price or would otherwise be beneficial to you. For example, our articles of incorporation authorize our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult for, or discourage, a third party to acquire us.

In addition, provisions of our by-laws, such as giving the board the exclusive right to fill all board vacancies, could make it more difficult for a third party to acquire control of us. In addition to the provisions contained in our articles of incorporation and by-laws, the Louisiana Business Corporation Law (“LBCL”), includes certain provisions applicable to Louisiana corporations, such as us, which may be deemed to have an anti-takeover effect. Such provisions give stockholders the right to receive the fair value of their shares of stock following a control transaction from a controlling person or group and set forth requirements relating to certain business combinations. Our descriptions of these provisions are only abbreviated summaries of detailed and complex statutes. For a complete understanding of the statutes, you should read them in their entirety.

The LBCL’s control share acquisition statute provides that any person who acquires “control shares” will be able to vote such shares only if the right to vote is approved by the affirmative vote of at least a majority of both (i) all the votes entitled to be cast by stockholders and (ii) all the votes entitled to be cast by stockholders excluding “interested shares.” The control share acquisition statute permits the articles of incorporation or by-laws of a company to exclude from the statute’s application acquisitions occurring after the adoption of the exclusion. Our by-laws do contain such an exclusion; however, our board of directors or stockholders, by an amendment to our by-laws, could reverse this exclusion.

ITEM 1B.		UNRESOLVED STAFF COMMENTS

None.

ITEM 2.		PROPERTIES

Aircraft

Information regarding our owned and leased aircraft fleet and 16 customer-owned aircraft as of December 31, 2008 is set forth in the following table:

																Appr. Range
Manufacturer		Type		Number in Fleet		Engine		Passengers				Cruise Speed (mph)				(miles)(2)
Light Aircraft
Bell		206 / 407		100		Turbine			4 — 6				130 — 150				300 — 420
Eurocopter		BK-117 / BO-105		8		Twin Turbine			4 — 6				135				255 — 270
Eurocopter		EC-135 (1)		35		Twin Turbine			7				143				382
Aerospatiale		AS350 B2 / B3		23		Turbine			5				140				337 — 385
Medium Aircraft
Bell		212 (1) / 222 (1)
		230 (1) / 412 (1) / 430 (1)		16		Twin Turbine			8 — 13				115 — 160				300 — 370
Sikorsky		S-76 (1) A++, C+, C++		47		Twin Turbine			12				150				400
Transport Aircraft
Sikorsky		S-92A(1)		11		Twin Turbine			19				160				495
		Total Helicopters		240
Fixed Wing
Rockwell(3)		Aero Commander		2		Turboprop			6				300 — 340				1,200 — 1,600
Lear Jet(4)		31A(1)		1		Turbojet			8				527				1,437
Cessna(4)		Conquest 441 (1)		3		Turboprop			6				330				1,200
Beech(4)		King Air(1)		3		Turboprop			8				300				1,380
		Total Fixed Wing		9
		Total Aircraft		249

Of the 249 aircraft listed, we own 210 and lease 23. Additionally, we operate 16 aircraft owned by customers also included in the table above.

We sell aircraft whenever they (i) become obsolete or (ii) do not fit into future fleet plans.

Facilities

Our principal facilities are located on property leased from the Lafayette Airport Commission at Lafayette Regional Airport in Lafayette, Louisiana. The lease covers approximately 28 acres and two buildings, with an aggregate of approximately 256,000 square feet, housing our main operational, executive, and administrative offices and the main repair and maintenance facility. The lease for this facility commenced in 2001, expires in 2021 and contains three five-year renewal options following the expiration date.

We own our Boothville, Louisiana operating facility. The property has a 23,000 square foot building, a 7,000 square foot hangar, and landing pads for 35 helicopters.

We also lease property for an Executive and Marketing office in Houston, Texas and 12 additional bases to service the oil and gas industry throughout the Gulf of Mexico. Those bases that represent a significant investment in leasehold improvements and are particularly important to our operations are:

Facility		Lease Expiration		Area		Facilities		Comments
Morgan City (Louisiana)		June 30, 2013		53 acres		Operational and maintenance facilities, landing pads for 46 helicopters		Options to extend to June 30, 2018
Intracoastal City (Louisiana)		December 31, 2010		18 acres		Operational and maintenance facilities, landing pads for 45 helicopters		Options to extend to December 31, 2010
Houma-Terrebonne Airport (Louisiana)		July 31, 2017		91 acres		Operational and maintenance facilities, landing pads for 30 helicopters		Facility under four separate leases, of which two contain options to extend thru 2027
Galveston (Texas)		May 31, 2021		4 acres		Operational and maintenance facilities, landing pads for 30 helicopters		Lease period to May 31, 2021 with certain cancellation provisions
Fourchon (Louisiana)		February 28, 2013		8 acres		Operational and maintenance facilities, landing pads for 10 helicopters		Facility under three separate leases, of which two contain options to extend thru 2026 and 2028.

Our other operations-related facilities in the United States are located at New Orleans and Lake Charles, Louisiana; at Port O’Connor and Sabine Pass, Texas; and at Theodore, Alabama.

We also operate from offshore platforms that are provided without charge by the owners of the platforms, although in certain instances we are required to indemnify the owners against loss in connection with our use of their facilities.

We also lease office and hangar space for our Air Medical operations in Phoenix, Arizona. The two buildings are held under separate leases and collectively provide 5,000 square feet of hangar space and 26,000 square feet of office space. These leases have a term to May 31, 2012 and contain options to extend for an additional five years. Other Air Medical bases are located in California, Indiana, Kentucky, Maryland, New Jersey, New Mexico, Texas and Virginia. Other bases for our International and other Air Medical operations are generally furnished by customers.

ITEM 3.		LEGAL PROCEEDINGS

We have been named as a defendant in various legal actions that have arisen in the ordinary course of our 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 our consolidated financial condition, 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 OPEIU (the Office and Professional Employees International Union), the union representing domestic pilots, over claims of bad faith bargaining and issues relating to the return to work of striking pilots. 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 November 3, 2008 until June 29, 2009. It is not possible to assess the outcome of that litigation, as these matters are still in the discovery stage. However, management does not expect the outcome of this litigation to have a material adverse effect on our financial conditions, results of operations, or cash flows.

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

None.

PART II

ITEM 5.		MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our voting and non-voting common stock trades on The NASDAQ Global Market, under the symbols PHII and PHIIK, respectively. The following table sets forth the range of high and low sales prices per share, as reported by NASDAQ, for our voting and non-voting common stock for the fiscal quarters indicated.

		Voting								Non-Voting
Period		High				Low				High				Low
January 1, 2008 to March 31, 2008		$	33.38			$	26.08			$	33.18			$	28.06
April 1, 2008 to June 30, 2008			42.00				30.50				40.69				32.14
July 1, 2008 to September 30, 2008			42.78				33.65				41.74				35.17
October 1, 2008 to December 31, 2008			39.74				12.20				36.99				8.82
January 1, 2007 to March 31, 2007		$	34.10			$	23.45			$	33.30			$	25.03
April 1, 2007 to June 30, 2007			32.16				26.04				30.72				25.02
July 1, 2007 to September 30, 2007			34.00				19.94				34.69				27.02
October 1, 2007 to December 31, 2007			34.49				28.85				35.38				28.39

We have not paid dividends on either class of our common stock since 1999 and do not expect to pay dividends in the foreseeable future.

In addition, the indenture governing our 7.125% Senior Notes due 2013 restricts the payment of dividends. See Note 4 to the Consolidated Financial Statements.

As of February 27, 2009, there were approximately 837 holders of record of our voting common stock and 58 holders of record of our non-voting common stock.

Stock Performance Graph

The information included under the caption “Stock Performance Graph” in this Item 5 of this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specially incorporate it by reference into such a filing.

The following performance graph compares PHI’s cumulative total stockholder return on its voting common stock for the last five years with the cumulative total return on the Russell 2000 Index, the Oil Service Index, and a peer group, assuming the investment of $100 on January 1, 2004, at closing prices on December 31, 2003, and reinvestment of dividends. The Russell 2000 Index consists of a broad range of publicly-traded companies with small market capitalizations of $0.5 billion to $1.07 billion, and is published daily in the Wall Street Journal. The Oil Service Sector Index is a price-weighted index composed of the common stocks of 15 companies that provide oil drilling and production services, oil field equipment, support services, and geophysical/reservoir services. The peer group companies are Bristow Group, Inc.; Tidewater, Inc.; Gulfmark Offshore, Inc.; Seacor Holdings, Inc.; and Air Methods Corp.

Cumulative Total Returns as of December 31,

Index		2003				2004				2005				2006				2007				2008
PHI			100.00				105.22				126.53				134.69				126.61				57.18
Peer Group			100.00				127.59				158.01				208.34				251.83				145.29
OSX			100.00				131.92				193.87				212.77				321.03				129.21
Russell 2000			100.00				135.25				139.75				163.50				159.01				89.68

ITEM 6.		SELECTED FINANCIAL DATA

The selected financial data presented below for each of the past five fiscal periods should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this Annual Report.

		Year Ended
		December 31,
		2008				2007				2006				2005				2004
		(Thousands)
Income Statement Data
Operating revenues		$	509,514			$	446,406			$	413,118			$	363,610			$	291,308
Gain on disposition of assets, net			4,468				34,953				1,910				1,173				2,569
Net earnings (loss) (1) (2) (3)			23,515				28,218				(667	)			14,154				3,972
Net earnings (loss) per share
Basic			1.54				1.85				(0.05	)			1.76				0.74
Diluted			1.54				1.85				(0.05	)			1.76				0.72
Weighted average shares outstanding
Basic			15,295				15,279				13,911				8,040				5,383
Diluted			15,301				15,288				13,911				8,063				5,486
Cash Flow Data
Net cash provided by operating activities		$	43,798			$	25,226			$	30,324			$	28,020			$	10,905
Net cash used in investing activities			(47,292	)			(19,464	)			(178,928	)			(137,464	)			(18,594	)
Net cash provided by (used in) financing activities			3,228				(5,157	)			146,388				108,947				8,275
Balance Sheet Data (4)
Current assets		$	224,620			$	230,029			$	307,689			$	224,265			$	128,405
Working capital			173,978				176,633				254,099				162,527				88,716
Property and equipment, net			528,574				484,119				369,465				311,678				253,241
Total assets			777,182				741,296				700,970				549,209				394,173
Total debt			203,000				200,000				205,500				204,300				210,275
Shareholders’ equity			452,396				428,669				400,125				239,051				109,975

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Consolidated Financial Statements and the related Notes included elsewhere in this report.

Overview

Operating revenues for 2008 were $509.5 million compared to $446.4 million for 2007, an increase of $63.1 million. Oil and Gas operating revenues increased $38.0 million for 2008 due to an increase in medium and heavy contracted aircraft and increased flight hours. Operating revenues in the Air Medical segment increased $25.1 million for 2008 due to increased patient transports in the independent provider programs and additional contract awards in hospital-based programs.

All segments experienced an increase in flight hours in 2008, with total flight hours of 150,686 for 2008 compared to 140,369 for 2007, an increase of 7%. The number of aircraft in service at December 31, 2008 was 249 compared to 237 at December 31, 2007. Seventeen new aircraft were delivered in 2008, nine aircraft were sold or disposed, and four customer-owned aircraft were added to the Air Medical segment.

Oil and Gas segment’s operating profit was $64.7 million for the year ended December 31, 2008, compared to $34.5 million for the year ended December 31, 2007. The increase of $30.2 million was primarily due to the increased operating revenues and higher margins from the increase in transport category and medium aircraft, which primarily serve the Gulf of Mexico deepwater market and attract higher rates. Additionally, 2007 was adversely affected by the pilots’ strike. Our Air Medical segment’s operating income was $5.1 million for the year ended December 31, 2008, compared to operating income of $4.0 million for the year ended December 31, 2007. The $1.1 million increase is due to the increased patient transports in the independent provider programs and additional contract awards in hospital-based programs.

Net earnings for 2008 were $23.5 million, or $1.54 per diluted share, compared to earnings of $28.2 million for 2007, or $1.85 per diluted share. Pre-tax earnings were $38.6 million for 2008 compared to earnings of $45.7 million in 2007. Pre-tax gain on disposition of assets, net, was $4.5 million in 2008, compared to $35.0 million in 2007.

In the fourth quarter of 2008, the Company recorded a non-cash charge for the impairment of goodwill totaling $2.7 million related to a 2004 acquisition as part of planned expansion in the Air Medical segment. In accordance with Statement of Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangibles Assets,” the Company performed its required annual impairment test for goodwill using a discounted cash flow analysis supported by comparative market multiples to determine the fair values of the Air Medical segment compared to their book values. The test as of December 31, 2008, indicated that the book values for the Air Medical segment exceeded the fair values of the segment on that basis. The impairment charge is driven by adverse equity market conditions that caused a decrease in current market multiples as of December 31, 2008, compared with the test performed as of December 31, 2007. The charge for goodwill impairment does not impact the Company’s normal business operations. The Company does not have any goodwill recorded at December 31, 2008, after this charge described above.

In the third quarter of 2008, flight hours and revenues in both our Oil and Gas segment in Louisiana and Texas, and Air Medical segment in Texas were adversely affected by Hurricanes Gustav and Ike. Following the hurricanes, there was increased flight time as customers were inspecting and repairing their facilities offshore, although, net, there was a substantial reduction in flight time related to the hurricanes. We also incurred damages to certain facilities as a result of the hurricanes. We believe these damages will be covered by insurance. We also incurred the cost of evacuating our affected Oil and Gas bases and the cost of evacuating aircraft.

On January 4, 2009, there was a fatal accident involving a medium transport helicopter in the Oil and Gas segment. The cause of the accident is unknown and is under investigation by the Company and the National Transportation Safety Board (“NTSB”). The impact of this accident on our business or insurance premium costs over the longer term cannot be predicted with any certainty.

Notwithstanding this accident, we maintain one of the best safety records in our industry, based on NTSB and the Federal Aviation Administration (“FAA”) data.

Effective July 1, 2007, we changed the estimated residual value of certain aircraft from 40% to 54%. We believe the revised amounts reflect our historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on our experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for the year ended December 31, 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).

In 2008, we took delivery of one transport category aircraft, four medium aircraft and four light aircraft for service in the Oil and Gas segment. We also took delivery of eight light aircraft for service in the Air Medical segment. At December 31, 2008, we had orders for five additional transport category aircraft, and two light aircraft. We took delivery of the two light aircraft subsequent to December 31, 2008 for service in the Air Medical segment. The remaining aircraft on order are for service in the Oil and Gas segment. We intend to enter into operating leases to fund the remaining aircraft.

Results of Operations

The following table presents segment operating revenues, expenses and earnings (loss) before income taxes, along with certain non-financial operational statistics, for the years ended December 31, 2008, 2007 and 2006:

		Year Ended
		December 31,
		2008				2007				2006
		(Thousands of dollars)
Segment operating revenues
Oil and Gas		$	324,147			$	286,118			$	270,707
Air Medical			174,739				149,590				133,397
Technical Services			10,628				10,698				9,014
Total operating revenues			509,514				446,406				413,118
Segment direct expenses(1)
Oil and Gas			258,160				250,110				228,797
Air Medical			160,910				137,703				130,412
Technical Services			6,883				6,608				7,063
Total direct expenses			425,953				394,421				366,272
Segment selling, general and administrative expenses
Oil and Gas			1,335				1,531				1,150
Air Medical			8,716				7,883				7,384
Technical Services			76				59				38
Total selling, general and administrative expenses			10,127				9,473				8,572
Total segment direct and selling, general and administrative expenses			436,080				403,894				374,844
Net segment profit (loss)
Oil and Gas			64,652				34,477				40,760
Air Medical			5,113				4,004				(4,399	)
Technical Services			3,669				4,031				1,913
Total			73,434				42,512				38,274
Other, net (2)			4,990				40,051				9,946
Unallocated selling, general and administrative expenses			(21,530	)			(20,753	)			(19,267	)
Interest expense			(15,515	)			(16,121	)			(17,243	)
Goodwill impairment charge (3)			(2,747	)			—				—
Loss on debt restructuring			—				—				(12,790	)
Earnings (loss) before income taxes		$	38,632			$	45,689			$	(1,080	)
Flight hours
Oil and Gas			112,341				107,812				119,503
Air Medical			36,732				31,341				29,980
Technical Services			1,613				1,216				1,497
Total			150,686				140,369				150,980
Air Medical Transports			22,647				21,710				20,808
Aircraft operated at period end
Oil and Gas			153				156				164
Air Medical			90				77				68
Technical Services			6				4				4
Total (4)			249				237				236

		Year Ended December 31,
		2008				2007				2006
O&G		$	15,408			$	16,860			$	17,332
Air Medical			8,283				8,651				8,937
Tech Services			276				642				162
Total			23,967				26,153				26,431
Unallocated SG&A		$	2,977			$	3,861			$	3,800

Year Ended December 31, 2008 compared with Year Ended December 31, 2007

Combined Operations

Operating Revenues — Operating revenues for 2008 were $509.5 million compared to $446.4 million for 2007, an increase of $63.1 million, or 14%. Operating revenues increased in the Oil and Gas segment by $38.0 million primarily due to an increase in contracted medium and heavy aircraft, which primarily serve the Gulf of Mexico deepwater market and attract higher rates, increased flight hours, and also due to the adverse affect of the pilots’ strike on 2007 operating revenues. Operating revenues in the Air Medical segment also increased $25.1 million in 2008 due to increased patient transports in the independent provider programs and additional contract awards in hospital-based programs. These items are discussed in more detail in the Segment Discussion below.

Other Income and Losses — Gain on equipment dispositions were $4.5 million for 2008 compared to $35.0 million for 2007. These amounts represent gains and losses on sales of aircraft and related parts inventory that no longer meet our strategic needs. Other income, which primarily represents interest income on unspent proceeds from our April 2006 stock offering, was $0.5 million for 2008, compared to $5.1 million for 2007. This decrease resulted from a decrease in short-term investments as a substantial portion of these proceeds have now been spent acquiring new aircraft.

Direct Expenses — Direct expense was $425.9 million for 2008 compared to $394.4 million for 2007, an increase of $31.5 million, or 8%. Direct expense in the Air Medical segment increased $23.2 million primarily due to additional hospital-based programs commenced in 2008. We also recorded a $2.7 million pre-tax goodwill impairment charge related to the acquisition of a company related to the Air Medical segment expansion in 2004. Oil and Gas segment direct expense increased $8.0 million due to increased flight hours. There was also a $0.3 million increase in the Technical Services segment direct expenses. These items are discussed in more detail in the Segment Discussion below.

Selling, General and Administrative Expenses — Selling, general and administrative expenses were $31.7 million for 2008 compared to $30.2 million for 2007, an increase of $1.5 million, or 5%. This increase resulted from increased employee costs ($1.8 million), offset by a decrease in other items, net ($0.3 million).

Interest Expense — Interest expense was $15.5 million for 2008, compared to $16.1 million for 2007 due to a decrease in borrowings under our line of credit.

Goodwill Impairment — In the fourth quarter of 2008, the Company recorded a non-cash charge for the impairment of goodwill totaling $2.7 million related to a 2004 acquisition as part of planned expansion in the Air Medical segment. The impairment charge is driven by adverse equity market conditions that caused a decrease in current market multiples as of December 31, 2008, compared with the annual impairment test performed as of December 31, 2007. The charge for goodwill impairment does not impact the Company’s normal business operations. The Company does not have any goodwill recorded at December 31, 2008, after this charge described above.

Income Taxes — Income tax expense for 2008 was $15.1 million, compared to income tax expense of $17.5 million for 2007. The effective tax rate was 39% for 2008, compared to 38% for 2007. The effective tax rate increased 1% in 2008 from 2007. This increase was the result of reduced Federal Hurricane disaster tax credits available in 2008 (0.3%) and increased state income taxes due to legislation providing for a new Texas income tax (0.5%).

Net Earnings — Our net earnings for 2008 were $23.5 million, compared to earnings of $28.2 million for 2007. Earnings before tax for 2008 were $38.6 million compared to earnings before tax of $45.7 million in 2007. Earnings per diluted share were $1.54 for 2008 as compared to earnings per diluted share of $1.85 for 2007. Included in earnings before tax for 2008 are gains on disposition of assets of $4.5 million, compared to $35.0 million for 2007. The increase in net earnings for 2008 is due to increased revenues and earnings of the medium and heavy aircraft in the Oil and Gas segment, as mentioned previously.

Segment Discussion

Oil and Gas — Oil and Gas segment revenues for 2008 were $324.1 million compared to $286.1 million for 2007, an increase of $38.0 million or 13%. The increase was due to an increase in contracted medium and heavy aircraft and

increased flight hours and also due to the adverse affect of the pilots’ strike on 2007 operating revenues. Segment flight hours were 112,341 for 2008 compared to 107,812 for 2007, an increase of 4,529 hours.

The number of aircraft in the segment at December 31, 2008 was 153 compared to 156 aircraft at December 31, 2007. In 2008, we sold or disposed of seven aircraft in the Oil and Gas segment, consisting of five light and two medium aircraft. We also transferred three light aircraft to the Air Medical segment and two light aircraft to the Technical Services segment. We have added nine new aircraft to the Oil and Gas segment during 2008, consisting of four light, four medium, and one heavy aircraft. We have a total of five aircraft on order for delivery in 2009 for the Oil and Gas segment. For further information on our aircraft, see Item 2 — Properties contained in this
Form 10-K.

Direct expense in the Oil and Gas segment increased $8.1 million in 2008 compared to 2007 due to increased fuel expenses ($9.5 million) as a result of additional flight hours and rising fuel costs. 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. Aircraft warranty costs also increased ($4.5 million) due to additional aircraft added to the fleet. All new aircraft come with a manufacturer’s warranty that covers defective parts. The increase in our warranty cost is related to an additional warranty that we purchase from the manufacturer on certain aircraft to cover replacement or refurbishment of aircraft parts in accordance with manufacturer specifications. We pay a monthly fee to the manufacturer based on flight hours for the aircraft that are covered under this warranty. In return, the manufacturer provides replacement parts required for maintaining the aircraft. Aircraft parts usage decreased ($3.7 million) due to additional aircraft being on the manufacturer’s warranty program and also due to the decreased average age of the aircraft fleet that is a result of the recent acquisitions of new aircraft. There was also a decrease in aircraft depreciation expense ($1.5 million) due to the change in residual values of the aircraft as previously discussed, and other items, net, decreased ($0.7 million).

Selling, general and administrative expenses were $1.3 million for the year ended December 31, 2008, compared to $1.5 million for the prior year.

Our Oil and Gas segment’s operating income was $64.7 million for the year ended December 31, 2008, compared to $34.5 million for the year ended December 31, 2007. The increase of $30.2 million was due to the increase in operating revenues of $38.0 million, offset by the increase in operating expenses of $8.1 million, for the reasons described above. Operating margins were 20% for the year ended December 31, 2008, compared to 12% for the year ended December 31, 2007. The increase in operating margins was due to the increase in heavy and medium contracted aircraft and flight hours which primarily serve the Gulf of Mexico deepwater market and attract higher rates. In addition, 2007 was adversely affected by the pilots’ strike. Oil and gas prices declined substantially in the second half of 2008, and while we have not experienced any substantial adverse effect to date, we may in the future.

Air Medical — Air Medical segment revenues were $174.7 million for 2008 compared to $149.6 million for 2007, an increase of $25.1 million. The increase was primarily related to the increase in patient transports, which totaled 22,647 for 2008 compared to 21,710 transports for 2007, and increased hospital-based contracts. Flight hours were 36,732 for the year ended December 31, 2008, compared to 31,341 for the year ended December 31, 2007.

The number of aircraft in the segment was 90 at December 31, 2008, compared to 77 at December 31, 2007. In 2008, we transferred three light aircraft to the Air Medical segment from the Oil and Gas segment, and added eight new light aircraft. We also added four customer-owned light aircraft. We sold or disposed of two light aircraft. At December 31, 2008, we had two aircraft on order for the Air Medical segment that have since been delivered.

Direct expense in our Air Medical segment was $160.9 million for 2008 compared to $137.7 million for 2007. The $23.2 million increase was primarily due to increases in employee compensation costs ($12.2 million) primarily due to an increase in personnel related to additional hospital-based contracts and also due in part to employee costs associated with independent provider programs opened or commenced during 2007 and operational for all of 2008. There were also compensation rate increases in the Air Medical segment. Fuel expenses increased ($1.9 million) due primarily to increased fuel costs per gallon, aircraft parts usage increased ($1.2 million), and component repair costs increased ($1.4 million). There was also an increase in insurance expense ($0.7 million) as a result of a charge for the retention portion of the aviation insurance and a workers’ compensation amount related to accidents in the Air Medical segment in the second quarter of 2008. Aircraft warranty costs increased ($1.4 million) net of a $1.5 million credit for termination of a manufacturer’s warranty program. Base costs, which include fees for outside medical personnel and billing and collection services, increased ($4.2 million) due to increased revenues and additional locations. We also recorded a $2.7 million pre-tax goodwill impairment charge related to the acquisition of a company related to the Air Medical segment expansion in 2004.

Selling, general and administrative expenses were $8.7 million for the year ended December 31, 2008, compared to $7.9 million for the year ended December 31, 2007. 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 $5.1 million for the year ended December 31, 2008, compared to operating income of $4.0 million for the year ended December 31, 2007. Operating margins were 3% in the year ended December 31, 2008 and December 31, 2007. Relative to our Air Medical segment in 2008 and first quarter 2009, we have seen some adverse impact in certain regions due to the current economic conditions.

As discussed in our June 30, 2008, Form 10-Q, there were two accidents in the Air Medical segment during the quarter ended June 30, 2008. We believe losses and potential losses from these accidents, including losses from death or injury to persons and damage to or loss of our aircraft, are fully covered by our aviation hull and liability and workers’ compensation insurance policies, subject to retentions. Accordingly, we do not expect to incur any material additional costs directly relating to these accidents. The National Transportation Safety Board (“NTSB”) published findings on one of these accidents and is continuing to investigate the other. The impact of these accidents on our business or insurance premium costs over the longer term cannot be predicted with any certainty. As mentioned in the Overview, notwithstanding these accidents, we have one of the best safety records in our industry, based on NTSB and the Federal Aviation Administration (“FAA”) data.

Technical Services — Technical Services revenues were $10.6 million for the year ended December 31, 2008, compared to $10.7 million for the year ended December 31, 2007. Direct expense was $6.9 million for the year ended December 31, 2008, compared to $6.6 million for the year ended December 31, 2007.

The Technical Services segment had operating income of $3.7 million for the year ended December 31, 2008, compared to $4.0 million for the year ended December 31, 2007. Operating margins in the Technical Services segment were 35% for the year ended December 31, 2008, compared to 38% for the same period in 2007. Technical Services includes maintenance and repairs performed primarily for our existing customers that own their aircraft. These services are generally labor intensive with higher operating margins as compared to other segments.

Year Ended December 31, 2007 compared with Year Ended December 31, 2006

Combined Operations

Operating Revenues — Operating revenues for 2007 were $446.4 million compared to $413.1 million for 2006, an increase of $33.3 million, or 8%. Operating revenues increased in the Oil and Gas segment $15.4 million primarily due to an increase in medium and heavy aircraft flight hours and contractual rate increases in our domestic operations. Operating revenues in the Air Medical segment also increased $16.2 million in 2007 due to rate increases and increased patient transports. Revenues in the Technical Services segment increased $1.7 million due to an increase in activity. These items are discussed in more detail in the Segment Discussion below.

Other Income and Losses — Gain on equipment dispositions were $35.0 million for 2007 compared to $1.9 million for 2006. These amounts represent gains and losses on sales of aircraft and related parts inventory that no longer meet our strategic needs. We expect a substantial reduction in this amount prospectively. Other income, which primarily represents interest income on unspent proceeds from our April 2006 stock offering, was $5.1 million for 2007, compared to $8.0 million for 2006. This decrease resulted from a decrease in short-term investments as a substantial portion of these proceeds have now been spent acquiring new aircraft.

Direct Expenses — Direct expense was $394.4 million for 2007 compared to $366.3 million for 2006, an increase of $28.1 million, or 8%. Direct expense in the Oil and Gas segment increased $21.3 million, primarily due to increased employee costs ($7.9 million), aircraft lease expense ($6.2 million), and aircraft warranty costs ($7.2 million). Air Medical direct expense increased $7.3 million due to increased employee costs ($4.4 million), aircraft warranty costs ($1.4 million), and outside services expenses ($2.2 million). Technical Services direct expense decreased $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 $30.2 million for 2007 compared to $27.8 million for 2006, an increase of $2.4 million, or 9%. This increase resulted from

increased employee costs ($1.0 million), franchise taxes ($0.4 million), outside services ($0.2 million) primarily related to the Air Medical segment, legal fees ($0.3 million), and other items, net ($0.5 million).

Interest Expense — Interest expense was $16.1 million for 2007, compared to $17.2 million for 2006 due to a decrease in borrowings under our line of credit.

Income Taxes — Income tax expense for 2007 was $17.5 million, compared to income tax benefit of $0.4 million for 2006. The effective tax rate was 38% for 2007 and 2006.

Net Earnings — Our net earnings for 2007 was $28.2 million, compared to a net loss of $0.7 million for 2006. Earnings before tax for 2007 were $45.7 million compared to losses before tax of $1.1 million in 2006. Earnings per diluted share were $1.85 for 2007 as compared to losses per diluted share of $0.05 for 2006. Included in earnings before tax for 2007 are gains on disposition of assets of $35.0 million, compared to $1.9 million for 2006. The loss for 2006 included a loss on debt restructuring charge of $12.8 million related to the early call premium and associated costs for redemption of our 9 3/8% Senior Notes.

Segment Discussion

Oil and Gas — Oil and Gas segment revenues for 2007 were $286.1 million compared to $270.7 million for 2006, an increase of $15.4 million or 6%. The increase was due to an increase in medium and heavy aircraft flight hours and contractual rate increases. These increases were partially offset by a decrease in light aircraft flight hours due to competitive pricing pressures. Segment revenues were also adversely affected by less than optimal pilot staffing levels due to the residual effects of the strike and competition for pilots from the military and other companies. Segment flight hours were 107,812 for 2007 compared to 119,503 for 2006, a decrease of 11,691 hours. The number of aircraft in the segment at December 31, 2007 was 156 compared to 164 aircraft at December 31, 2006. In 2007, we sold or disposed of 22 aircraft in the Oil and Gas segment, consisting of nine light, nine medium and four heavy aircraft. We also transferred three light aircraft to the Air Medical segment. We added 17 new aircraft to the Oil and Gas segment during 2007, consisting of five light, 10 medium, and two heavy aircraft. We had a total of 32 aircraft on order for delivery in 2008 and 2009 for the Oil and Gas segment, although we transferred eight of the light aircraft on order to the Air Medical segment in 2008 as growth opportunities materialized. For further information on our aircraft, see Item 2 — Properties contained in this Form 10-K.

Direct expense in the Oil and Gas segment increased by $21.3 million due to increased employee costs ($7.9 million) due primarily to compensation increases including pilot overtime costs and other contract labor costs related to the strike, and incentive and safety compensation accruals. We also experienced increased aircraft lease expense ($6.2 million) and aircraft warranty costs ($7.2 million) due to additional aircraft added to the fleet. All new aircraft come with a manufacturer’s warranty that covers defective parts. The increase in our warranty cost is related to an additional warranty that we purchase from the manufacturer on certain aircraft to cover replacement or refurbishment of aircraft parts in accordance with manufacturer specifications. We pay a monthly fee to the manufacturer based on flight hours for the aircraft that are covered under this warranty. In return, the manufacturer provides replacement parts required for maintaining the aircraft. Depreciation expense decreased $0.2 million due to the change in residual value of certain aircraft effective July 1, 2007, as discussed in the Overview.

Selling, general and administrative expenses were $1.5 million for the year ended December 31, 2007, compared to $1.2 million for the prior year.

Our Oil and Gas segment’s operating income was $34.5 million for the year ended December 31, 2007, compared to $40.8 million for the year ended December 31, 2006. The decrease of $6.3 million was due to the increase in operating expenses of $21.3 million, partially offset by the increase in operating revenues of $15.4 million, for the reasons described above. Operating margins were 12% for the year ended December 31, 2007, compared to 15% for the year ended December 31, 2006, primarily due to pilot staffing levels resulting in reduced flight hours and lower revenues and increases in certain direct expenses, such as pilot overtime costs and other contract labor costs.

Air Medical — Air Medical segment revenues were $149.6 million for 2007 compared to $133.4 million for 2006, an increase of $16.2 million. The increase was primarily related to rate increases and an increase in patient transports, which totaled 21,710 for 2007 compared to 20,808 transports for 2006. Flight hours were 31,341 for the year ended December 31, 2007, compared to 29,980 for the year ended December 31, 2006. The number of aircraft in the segment was 77 at December 31, 2007, compared to 68 at December 31, 2006. In 2007, we transferred three light aircraft to the Air Medical segment from the Oil and Gas segment, and added 12 new aircraft, consisting of 11 light

and one fixed wing aircraft. We sold four medium and two light aircraft. At December 31, 2007, we had a total of four aircraft on order for delivery in 2008 for the Air Medical segment.

Air Medical direct expense increased $7.3 million due to increased employee costs ($4.4 million) due primarily to compensation increases including incentive and safety compensation accruals, aircraft warranty costs increases ($1.4 million) due to additional aircraft added to manufacturers’ warranty programs, and increased outside services expenses ($2.2 million) related to medical director fees and collection expenses. In addition to expected flight operation costs, the Air Medical segment incurs additional costs for necessary medical personnel. Other items decreased, net ($0.7 million).

Selling, general and administrative expenses was $7.9 million for the year ended December 31, 2007, compared to $7.4 million for the year ended December 31, 2006. 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 $4.0 million for the year ended December 31, 2007, compared to an operating loss of $4.4 million for the year ended December 31, 2006. Operating margins increased to 3% in the year ended December 31, 2007, compared to a loss in the same period in 2006. Segment revenues and expenses were affected in 2006 by the pilots’ strike. The increases in the current year in operating income and margin are a result of recovery from the effects of the strike, along with rate increases initiated in 2007 and increased patient transports related to the expansion of new locations in the segment from 2005 to 2007. Operating margins were lower in this segment compared to our other segments as it takes some time for these new locations to grow revenues to a level that will cover their costs and produce operating income. Operating margins may also be affected by the mix of payors in any period.

Technical Services — Technical Services revenues were $10.7 million for the year ended December 31, 2007, compared to $9.0 million for the year ended December 31, 2006. The $1.7 million increase was due to increased activity in the segment.

Direct expense was $6.6 million for the year ended December 31, 2007, compared to $7.1 million for the year ended December 31, 2006.

The Technical Services segment had operating income of $4.0 million for the year ended December 31, 2007, compared to $1.9 million for the year ended December 31, 2006. Operating margins in the Technical Services segment were 38% for the year ended December 31, 2007, compared to 21% for the same period in 2006. Technical Services includes maintenance and repairs performed primarily for our existing customers that own their aircraft. These services are generally labor intensive with higher operating margins as compared to other segments.

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 in recent years 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 may have an adverse impact on our business and our financial condition. We cannot predict our ability to obtain lease financing due to the current credit crisis, and this could limit our ability to fund our future growth and operations. While we are able to currently obtain proposals and lease financing, we cannot predict future availability nor the effects on pricing for lease financing. We currently are obtaining operating lease proposals at a cost that is approximately 75 to 100 basis points higher as compared to a year ago.

Cash Flow

Our cash position was $1.2 million at December 31, 2008, compared to $1.4 million at December 31, 2007. Short-term investments were $42.1 million at December 31, 2008, compared to $63.0 million at December 31, 2007. Working capital was $174.0 million at December 31, 2008, as compared to $176.6 million at December 31, 2007, a decrease of $2.6 million. The decrease in working capital was primarily a result of a decrease in short-term investments of $20.9 million, an increase in accounts receivable of $13.3 million due to increased revenues, an increase in inventory of $2.4 million, and a decrease in accounts payable and accrued expenses of $2.8 million. The decrease in short-term investments was due to the acquisition of aircraft.

Net cash provided by operating activities was $43.8 million for 2008, compared to $25.2 million for 2007, an increase of $18.6 million. This increase was due to an increase in cash provided from operations, primarily as a result of increased earnings from the Oil and Gas segment.

Net cash used in investing activities was $47.3 million for 2008, compared to $19.5 million for 2007, an increase of $27.8 million. Capital expenditures were $77.6 million for 2008 compared to $159.7 million for 2007. Capital expenditures for 2008 included $69.0 million for aircraft purchases, upgrades, and refurbishments. Capital expenditures for 2007 included $149.3 million for aircraft purchases, upgrades, and refurbishments. Gross proceeds from aircraft and other sales were $18.4 million for 2008 compared to $58.1 million for 2007.

In 2008, we funded new aircraft deliveries with cash or short term investments for twelve aircraft for a total cost of $43.3 million, and we funded with operating leases five new aircraft deliveries with aircraft cost of $58.2 million. In 2007, we funded new aircraft deliveries with cash or short term investments for 27 aircraft for a total cost of $131.5 million, and we funded with operating leases three new aircraft deliveries with aircraft cost of $45.4 million.

Financing Activities

In December 2008, we executed an operating lease for three aircraft. We took delivery in early 2009 of two light aircraft, which we purchased. We expect to fund the remaining five 2009 aircraft deliveries with operating leases. The first of these deliveries is scheduled for March 2009, and we have received proposals for that funding. In general, the rates for operating leases have increased approximately 75 to 100 basis points compared to conditions prior to the credit market crisis.

Credit Facility

We have a $50 million revolving credit facility with a commercial bank that expires on September 1, 2010. At December 31, 2008, there were $3.0 million in borrowings and $5.1 million in letters of credit outstanding under the facility. The facility includes covenants related to working capital, funded debt to net worth, and consolidated net worth. As of December 31, 2008, we were in compliance with these covenants.

Contractual Obligations

The table below sets out our contractual obligations as of December 31, 2008 related to operating lease obligations, credit facility, and the 7.125% Senior Notes due 2013. The operating leases are not recorded as liabilities on the balance sheet, but payments are treated as an expense as incurred. Each contractual obligation included in the table contains various terms, conditions, or covenants which, if 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 lease obligations			191,410				22,823				23,424				24,692				25,360				25,725				69,386
Other lease obligations			20,186				3,257				2,891				2,364				1,761				1,374				8,539
Long term debt			203,000				—				3,000				—				—				200,000				—
		$	414,596			$	26,080			$	29,315			$	27,056			$	27,121			$	227,099			$	77,925

Estimated interest costs on the debt obligations set forth above, without considering any additional debt that may be obtained relative to purchase commitments for aircraft, are $14.2 million for our Senior Notes for 2009 and each successive year through 2013, including amortization of debt issuance costs, and $0.1 million for borrowing under our credit facility for 2009, and less than $0.1 million for 2010.

At December 31, 2008, we had an order for five additional transport category aircraft, with scheduled delivery dates throughout 2009. The approximate cost for these aircraft is $107.2 million. We intend to fund these aircraft with operating leases.

At December 31, 2008, we also had orders for two additional light aircraft with a total cost of $7.8 million. These aircraft were delivered in January 2009, and we purchased them using our short-term investments.

We believe that cash flow from operations will be sufficient to fund operating requirements and required interest payments on our long-term debt for the next twelve months. We have capital requirements for aircraft on order totaling $107.2 million in 2009, which we intend to fund with operating leases.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to allowances for doubtful accounts, inventories of spare parts, long-lived assets, income taxes, and self-insurance liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates, and the differences may be material. We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.

Revenues related to Air Medical services are recorded net of contractual allowances under agreements with third party payors and estimated uncompensated care when services are provided. We estimate contractual allowances and uncompensated care 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 an 18 month 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. For the year ended December 31, 2008, as a percent of gross billings, we wrote off 3% more as compared to the year ended December 31, 2007. There were no material adjustments to the estimated amounts recorded for the years ended December 31, 2007 and 2006.

We maintain a significant parts inventory to service our own aircraft along with the aircraft and components of customers. Portions of that inventory are used parts that are often exchanged with parts removed from aircraft or components and reworked to a useable condition. We use systematic procedures to estimate the valuation of the used parts, which includes consideration of their condition and continuing utility. If our valuation of these parts should be significantly different from amounts ultimately realizable or if we discontinue using or servicing certain aircraft models, then we may have to record a write-down of our inventory. We also record provisions against inventory for obsolete and slow-moving parts, relying principally on specific identification of such inventory. If we fail to identify such parts, additional provisions may be necessary.

Our principal long-lived assets are aircraft. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by comparing the carrying amount of an asset to the future undiscounted net cash flows that we expect the asset to generate. When an asset is determined to be impaired, we recognize the impairment amount, which is the amount by which the carrying value of the asset exceeds its estimated fair value.

Similarly, we report assets that we expect to sell at the lower of the carrying amount or fair value less costs to sell. Future adverse market conditions or poor operating results could result in an inability to recover the current carrying value of certain long-lived assets, thereby possibly requiring an impairment charge in the future.

Effective July 1, 2007, we changed the estimated residual value of certain aircraft from 40% to 54%. We believe the revised amounts reflect our historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on our experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).

We must make estimates for certain of our liabilities and expenses, losses, and gains related to self-insured programs, insurance deductibles, and good-experience premium returns. Our group medical insurance program is largely self-insured, and we use estimates to record our periodic expenses related to that program. We also carry deductibles on our workers’ compensation program and aircraft hull and liability insurance, and poor experience or higher accidents rates could result in additional recorded losses.

We estimate what our effective tax rate will be for the full year and record a quarterly income tax expense in accordance with the anticipated effective annual tax rate. As the year progresses, we continually refine our estimate based upon actual events and income before income taxes by jurisdiction during the year. This process may result in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax expense during the quarter in which the change in estimate occurs so that the year-to-date expense equals the annual rate.

Goodwill

Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. In accordance with the provisions of SFAS No. 142, goodwill is reviewed for impairment annually, as of December 31 for the most recent completed fiscal year, or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level using a two-step process. The first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step of the impairment test is not required. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.

In the fourth quarter of 2008, the Company recorded a non-cash charge for the impairment of goodwill totaling $2.7 million related to a 2004 acquisition as part of planned expansion in the Air Medical segment. The Company performed its required annual impairment test for goodwill using a discounted cash flow analysis supported by comparative market multiples to determine the fair values of the Air Medical segment compared to their book values. The test as of December 31, 2008, indicated that the book values for the Air Medical segment exceeded the fair values of the segment on that basis. The impairment charge is primarily driven by adverse equity market conditions that caused a decrease in current market multiples as of December 31, 2008, compared with the test performed as of December 31, 2007. The Company does not have any goodwill recorded at December 31, 2008, after this charge described above.

New Accounting Pronouncements

For a discussion of new accounting pronouncements applicable to the Company, see Note 1 to the Consolidated Financial Statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the past we made limited use of derivative financial instruments to manage interest rate risk. When used, all derivatives for interest rate risk management were closely monitored by our senior management. We do not hold derivatives for trading purposes and we do not use derivatives with leveraged or complex features. Derivative instruments were transacted either with creditworthy major financial institutions or over national exchanges. The Company has not engaged in activities involving financial derivatives during the years 2008, 2007, and 2006.

The market value of the Senior Notes will vary as changes occur in market interest rates, the remaining maturity of the Senior Notes, and our credit-worthiness. At December 31, 2008, the market value of the Notes was $118.0 million. A hypothetical 100 basis-point increase in the Senior Notes imputed rate at December 31, 2008 would have resulted in a market value decline of approximately $4.0 million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
PHI, Inc.
Lafayette, Louisiana

We have audited the accompanying consolidated balance sheets of PHI, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PHI, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

New Orleans, Louisiana
March 16, 2009

PHI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share data)

		December 31,				December 31,
		2008				2007
ASSETS
Current Assets:
Cash and cash equivalents		$	1,159			$	1,425
Short-term investments			42,121				62,970
Accounts receivable — net
Trade			104,912				95,111
Other			6,510				2,973
Inventories of spare parts — net			58,249				55,831
Other current assets			10,687				11,194
Income taxes receivable			982				525
Total current assets			224,620				230,029
Other			23,988				27,148
Property and equipment — net			528,574				484,119
Total Assets		$	777,182			$	741,296
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	25,449			$	28,454
Accrued liabilities			25,193				24,942
Total current liabilities			50,642				53,396
Long-term debt			203,000				200,000
Deferred income taxes			65,175				51,644
Other long-term liabilities			5,969				7,587
Commitments and contingencies (Note 9)
Shareholders’ Equity:
Voting common stock — par value of $0.10;
12,500,000 shares authorized, 2,852,616 issued and outstanding			285				285
Non-voting common stock — par value of $0.10;
Shares authorized:
2008 — 25,000,000; 2007 — 12,500,000;
Issued and outstanding:
2008 — 12,448,992; 2007 — 12,438,992			1,245				1,244
Additional paid-in capital			291,262				291,035
Accumulated other comprehensive income			45				61
Retained earnings			159,559				136,044
Total shareholders’ equity			452,396				428,669
Total Liabilities and Shareholders’ Equity		$	777,182			$	741,296

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

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

		Year Ended				Year Ended				Year Ended
		December 31,				December 31,				December 31,
		2008				2007				2006
Operating revenues		$	509,514			$	446,406			$	413,118
Gain on disposition of assets, net			4,468				34,953				1,910
Other, principally interest income			522				5,098				8,036
			514,504				486,457				423,064
Expenses:
Direct expenses			425,953				394,421				366,272
Selling, general and administrative expenses			31,657				30,226				27,839
Interest expense			15,515				16,121				17,243
Goodwill impairment charges			2,747				—				—
Loss on debt restructuring			—				—				12,790
			475,872				440,768				424,144
Earnings (loss) before income taxes			38,632				45,689				(1,080	)
Income tax expense (benefit)			15,117				17,471				(413	)
Net earnings (loss)		$	23,515			$	28,218			$	(667	)
Earnings (loss) per share:
Basic		$	1.54			$	1.85			$	(0.05	)
Diluted		$	1.54			$	1.85			$	(0.05	)
Weighted average shares outstanding:
Basic			15,295				15,279				13,911
Diluted			15,301				15,288				13,911

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

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

																						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, 2005			2,853			$	285				7,418			$	742			$	129,531			$	—			$	108,493			$	239,051
Net loss			—				—				—				—				—				—				(667	)			(667	)
Changes in pension plan assets and benefit obligations			—				—				—				—				—				77				—				77
Total comprehensive loss																															(590	)
Stock issuance, net			—				—				4,867				487				160,235				—				—				160,722
Stock options exercised			—				—				139				13				929				—				—				942
Balance at December 31, 2006			2,853				285				12,424				1,242				290,695				77				107,826				400,125
Net earnings			—				—				—				—				—				—				28,218				28,218
Changes in pension plan assets and benefit obligations			—				—				—				—				—				(16	)			—				(16	)
Total comprehensive income																															28,202
Stock options exercised			—				—				15				2				340				—				—				342
Balance at December 31, 2007			2,853				285				12,439				1,244			$	291,035				61				136,044				428,669
Net earnings			—				—				—				—				—				—				23,515				23,515
Changes in pension plan assets and benefit obligations			—				—				—				—				—				(16	)			—				(16	)
Total comprehensive income																															23,499
Stock options exercised			—				—				10				1				227				—				—				228
Balance at December 31, 2008			2,853			$	285				12,449			$	1,245			$	291,262			$	45			$	159,559			$	452,396

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

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

		Year Ended				Year Ended				Year Ended
		December 31,				December 31,				December 31,
		2008				2007				2006
Operating activities:
Net earnings (loss)		$	23,515			$	28,218			$	(667	)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Depreciation and amortization			26,944				30,047				30,297
Goodwill impairment			2,747				—				—
Deferred income taxes			13,531				16,498				(1,631	)
Gain on asset dispositions			(4,468	)			(34,953	)			(1,910	)
Loss on debt restructuring			—				—				12,790
Other			922				868				806
Changes in operating assets and liabilities:
Accounts receivable			(13,338	)			(8,790	)			1,985
Inventories			(2,418	)			(1,492	)			(7,473	)
Income taxes receivable			(457	)			110				(213	)
Other assets			1,208				(1,824	)			177
Accounts payable and accrued liabilities			(2,754	)			(2,100	)			(6,679	)
Other long-term liabilities			(1,634	)			(1,356	)			2,842
Net cash provided by operating activities			43,798				25,226				30,324
Investing activities:
Purchase of property and equipment			(77,590	)			(159,715	)			(123,253	)
Proceeds from asset dispositions			18,394				58,105				36,809
Purchase of short-term investments			(43,976	)			(134,241	)			(186,339	)
Proceeds from sale of short-term investments			64,826				224,685				99,450
Other			(8,946	)			(8,298	)			(5,595	)
Net cash used in investing activities			(47,292	)			(19,464	)			(178,928	)
Financing activities:
Proceeds of debt issuance — Senior Notes			—				—				200,000
Premium and costs to retire debt early			—				—				(10,208	)
Repayment of Senior Notes			—				—				(200,000	)
Debt issuance costs			—				—				(4,857	)
Payments on long-term debt			—				—				(1,000	)
Proceeds from line of credit			15,800				37,200				181,900
Payments on line of credit			(12,800	)			(42,700	)			(179,700	)
Proceeds from stock issuance			—				—				161,155
Less related fees and expenses			—				—				(433	)
Proceeds from exercise of stock options			228				343				—
Other			—				—				(469	)
Net cash provided by (used in) financing activities			3,228				(5,157	)			146,388
(Decrease) increase in cash and cash equivalents			(266	)			605				(2,216	)
Cash and cash equivalents, beginning of year			1,425				820				3,036
Cash and cash equivalents, end of year		$	1,159			$	1,425			$	820
Supplemental Disclosures Cash Flow Information
Accrued payables related to purchases of property and equipment		$	1,510			$	1,906			$	—

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

PHI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
		Nature of Operations, Basis of Consolidation, and Other General Principles
		Since its inception, PHI, Inc.’s primary business has been to transport personnel and, to a lesser extent, parts and equipment, to, from and among offshore facilities for customers engaged in the oil and gas exploration, development, and production industry. The Company also provides air medical transportation services for hospitals and medical programs, and aircraft maintenance services to third parties.
		The consolidated financial statements include the accounts of PHI, Inc. and its subsidiaries (“PHI” or the “Company”) after the elimination of all intercompany accounts and transactions.
		A principal stockholder has substantial control. Al A. Gonsoulin, Chairman of the Board and Chief Executive Officer, beneficially owns stock representing approximately 52% of the total voting power. As a result, he exercises control over the election of PHI’s directors and the outcome of matters requiring a stockholder vote.
		Revenue Recognition
		The Company recognizes revenue related to aviation transportation services after the services are performed or the contractual obligations are met. Aircraft maintenance services revenues are recognized at the time the repair or services work is completed. 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 when the services are provided.
		Use of Estimates
		The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
		Significant Estimates Include:

Allowance for doubtful accounts,

Estimates of contractual allowances applicable to billings in the Air Medical segment,

Valuation reserve related to obsolete and excess inventory,

Depreciable lives and salvage values of property and equipment,

Valuation allowance for deferred tax assets,

Insurance reserves for hull liability, health care insurance claims, and workers’ compensation liability

Impairment of long-lived assets.

		Cash Equivalents
		The Company considers cash equivalents to include demand deposits. Substantially all of the Company’s cash and cash equivalents are maintained in one financial institution in amounts that typically exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant credit risk.
		Short-term Investments
		Short-term investments consist primarily of investment funds, which represent funds available for current operations. In accordance with SFAS No. 115, “Accounting for Certain Investments in 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 December 31, 2008 and 2007.

		Investments included in Other Assets as detailed in Note 7 are comprised of mutual funds. These investments are amounts related to the liability for the Officers’ Deferred Compensation Plan.
		Inventories of Spare Parts
		The Company’s inventories are stated at the lower of average cost or market and consist primarily of spare parts. Portions of the Company’s inventories are used parts that are often exchanged with parts removed from aircraft, reworked to a useable condition according to manufacturers’ and FAA specifications, and returned to inventory. The Company uses systematic procedures to estimate the valuation of the used parts, which includes consideration of their condition and continuing utility. Reusable aircraft parts are included in inventory at the average cost of comparable parts. The rework costs are expensed as incurred. The Company also records an allowance for obsolete and slow-moving parts, relying principally on specific identification of such inventory. Valuation reserves related to obsolescence and slow-moving inventory were $7.9 million and $7.5 million at December 31, 2008 and 2007, respectively.
		Property and Equipment
		The Company records its property and equipment at cost less accumulated depreciation. For financial reporting purposes, the Company uses the straight-line method to compute depreciation based upon estimated useful lives of five to fifteen years for flight equipment and three to ten years for other equipment. Leasehold improvements are amortized over the shorter of the life of the respective lease, or the asset, and range from six to ten years. The salvage value used in calculating depreciation of aircraft ranges from 25% to 54%. The Company uses accelerated depreciation methods for tax purposes. The cost of scheduled inspections and modifications for flight equipment are charged to maintenance expense as incurred. Modifications that enhance the operating performance or extend the useful lives of the aircraft are capitalized and depreciated over the remaining life of the asset. Upon selling or otherwise disposing of property and equipment, the Company removes the cost and accumulated depreciation from the accounts and reflects any resulting gain or loss in earnings at the time of sale or other disposition.
		Effective July 1, 2007, the Company changed the estimated residual value of certain aircraft from 40% to 54%. The Company believes the revised amounts reflect its historical experience and more appropriately match costs over the estimated useful lives and salvage values of these assets. The change in residual values of certain aircraft was based on the Company’s experience in sales of such aircraft and industry data which indicated that these aircraft were retaining on average a salvage value of at least 54% by model type. The effect of this change for the year ended December 31, 2007 was a reduction in depreciation expense of $1.6 million ($1.0 million after tax or $0.07 per diluted share).
		The Company reviews its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to future undiscounted net cash flows that it expects the asset to generate. When an asset is determined to be impaired, the Company recognizes that impairment amount, which is measured by the amount that the carrying value of the asset exceeds its fair value. Similarly, the Company reports assets that it expects to sell at the lower of the carrying amount or fair value less costs to sell.
		Self-Insurance
		The Company maintains a self-insurance program for a portion of its health care costs. Self-insurance costs are accrued based upon the aggregate of the liability for reported claims and the estimated liability for claims incurred but not reported. The Company’s insurance retention is $250,000 per claim through December 31, 2008. As of December 31, 2008 and 2007, the Company had $1.7 million and $1.5 million, respectively, of accrued liabilities related to health care claims.
		The Company has an offshore insurance captive to realize savings in reinsurance costs on its insurance premiums. Amounts paid to the captive in 2008 and 2007 totaled $3.1 million and $1.5 million,