Allegiant Travel Company - 10-Q quarterly report FY

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2009

OR

For the transition period from                        to                      

Commission File Number 001-33166

Allegiant Travel Company

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s Telephone Number, Including Area Code: (702) 851-7300

(Former name, former address and former fiscal year if changed since last report)

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 x  No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 Exchange Act).  Yes o  No x

The number of shares of the registrant’s common stock outstanding as of the close of business on November 1, 2009 was 19,860,184.

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PART 1. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share amounts)

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, in thousands, except share and per share amounts)

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation:  The accompanying unaudited condensed consolidated financial statements include Allegiant Travel Company (“Allegiant” or the “Company”) and its wholly owned operating subsidiaries, Allegiant Air LLC, Allegiant Vacations LLC, Allegiant Information Systems, Inc. and AFH, Inc.  The Company uses the equity method to account for SFB Fueling LLC, a 50% owned subsidiary of AFH, Inc.  All intercompany balances and transactions have been eliminated.

These unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

The interim results reflected in the unaudited condensed consolidated financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year.

We have evaluated subsequent events through November 6, 2009, which is the date these condensed consolidated financial statements were issued.

Reclassifications:  Certain reclassifications have been made to the prior period’s financial statements to conform to 2009 classifications.  These reclassifications had no effect on the previously reported net income.

Note 2 — Newly Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01, “Generally Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”).  All existing accounting standards are superseded.  All other accounting guidance not included in the Codification will be considered non-authoritative.  The Codification also includes all relevant Securities and Exchange Commission (“SEC”) guidance organized using the same topical structure in separate sections within the Codification.  Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.  Instead, it will issue Accounting Standards Updates (“ASU”) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.  The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented.  The Codification is effective for the Company’s third quarter 2009 interim consolidated financial statements and the principal impact on the Company’s consolidated financial statements is limited to having all future references to authoritative accounting literature be referenced in accordance with the Codification.  The Company has included in its disclosures the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC Topic 810).  The guidance is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This guidance is effective for interim and annual periods ending after November 15, 2009.  The Company does not expect the adoption of the new accounting guidance to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets” (ASC Topic 860) which will require more information about transfers of financial assets in situations where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This guidance is effective for interim and annual periods ending

after November 15, 2009. The Company does not expect the adoption of the guidance to have a material impact on its consolidated financial statements.

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Note 3 — Income Taxes

For the three and nine months ended September 30, 2009, the Company did not have any material unrecognized tax benefits.  The Company estimates that no significant unrecognized tax benefits will be recorded within the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  There was no significant accrued interest at September 30, 2009.  No penalties were accrued at September 30, 2009.

Note 4 — Stockholders’ Equity

In January 2009, the Company’s Board of Directors authorized a share repurchase program to acquire through open market purchases up to $25,000 of the Company’s common stock.  The repurchase program replaced a similar program the Board of Directors authorized in January 2008 which expired.  In July 2009, the Board of Directors authorized the Company to purchase up to an additional $10,000 of the Company’s common stock under the Company’s existing repurchase program.  As a result, the total amount authorized for share repurchase is $35,000 less the amounts applied to stock repurchases in 2009 to date.  During the nine month period ended September 30, 2009, the Company repurchased 637,902 shares under the program at an average cost of $38.26 per share for a total expenditure of $24,407.  During the three months ended September 30, 2009, the Company repurchased 172,377 shares through open market purchases at an average cost of $39.52 per share for a total expenditure of $6,813.  During the nine months ended September 30, 2008, under the expired program, the Company repurchased 553,700 shares through open market purchases at an average cost of $28.55 per share for a total expenditure of $15,809.  No share repurchases were made by the Company during the third quarter of 2008.

In March 2009, Allegiant Information Systems, Inc., a wholly owned subsidiary of the Company, completed a plan of merger with an organization that owned the exclusive rights to the travel applications of the software operating system the Company has used since its inception.  In consideration for the acquisition, the Company issued 41,450 shares of its unregistered common stock.

In May 2009, the Company completed a secondary offering for the sale of shares from certain existing stockholders.  The Company did not sell any shares in this underwritten offering.

Note 5 — Earnings Per Share

The following table sets forth the computation of net income per share, on a basic and diluted basis for the periods indicated (shares in table below in thousands):

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Results of Operations

Comparison of three months ended September 30, 2009 to three months ended September 30, 2008

The table below presents our operating expenses as a percentage of operating revenue for the periods indicated:

We recorded total operating revenue of $133.1 million, income from operations of $21.9 million and net income of $13.8 million for the three months ended September 30, 2009.  By comparison, for the same period in 2008, we recorded total operating revenue of $116.9 million, income from operations of $8.1 million and net income of $4.9 million.

Operating Revenue

Our operating revenue increased 13.9% to $133.1 million for the three months ended September 30, 2009 from $116.9 million for the same period in 2008 due to an increase in scheduled service passengers of 41.3% driven by a 47.5% increase in departures.  The scheduled service passenger growth resulted in increases in ancillary revenue of 46.0% and scheduled service revenue of 9.9%.  These increases were partially offset by a reduction in fixed fee contract revenue of $3.0 million.

System available seat miles (“ASMs”) increased by 42.7% as a result of a 41.9% increase in departures and a 0.4% increase in system average stage length.  The departure growth was driven by additional scheduled service routes into Phoenix, scheduled service to our new leisure destination of Los Angeles and additional service to other leisure destinations which were not operated in the same three month period during the prior year.

  System operating revenue per ASM (“RASM”) declined to 9.86 cents for the three months ended September 30, 2009 from 12.35 cents during the same period in 2008.    The decrease was mainly attributable to a reduction in our scheduled service average base fare of $19.23, or 22.3%, which was partially offset by an increase in ancillary revenue per passenger from $32.28 for the third quarter 2008 to $33.35 for the same period in 2009.  We decreased scheduled service base fares to maintain load factor in the face of industry wide lower fares and economic conditions.

Scheduled service revenue.  Scheduled service revenue increased 9.9% to $81.1 million for the three months ended September 30, 2009, from $73.8 million in the same period of 2008.  The change was a result of a 41.3% increase in the number of scheduled service passengers partially offset by a decrease in the scheduled service average base fare of $19.23 from $86.32 to $67.09.  Scheduled service passenger growth was driven by a 47.5% increase in scheduled service departures partially offset by a 3.9 percentage point reduction in scheduled service load factor.  Scheduled service departures increased from 6,223 to 9,181 quarter-over-quarter.  Of the increase, 697 departures were attributable to our new service to Los Angeles (not operated in 2008) and an increase of 572 departures to our Phoenix market as we added five new routes since the end of third quarter 2008.  We believe the impact of the current economic environment on air travel demand was the primary driver for the reduction in our scheduled service average base fare.

Fixed fee contract revenue.  Fixed fee contract revenue declined 20.8% to $11.3 million in the three months ended September 30, 2009 compared to $14.2 million in the same period of 2008.  The decrease in fixed fee revenue is attributable to a revised Harrah’s contract that went into effect January 1, 2009, a reduction in block hours for the Reno program and additional flying during the third quarter of 2008 under a contract with MLT Vacations that was not renewed.  Under the new Harrah’s contract, Harrah’s reimburses us for the entire amount of fuel costs incurred.  The per-block hour rate we charge Harrah’s is therefore reduced from the rate we charged under the previous Harrah’s contracts under which we had been responsible for a portion of the fuel expenses.  The decrease in revenue was partially offset by new fixed fee flying agreements for the Cuban Family Charter Program which started in June 2009, fixed fee flying for the Department of Defense as a participant in the Civil Reserve Air Fleet (“CRAF”) which started in April 2009 and an agreement with Beau Rivage Resorts, Inc.  As of October 2009, we have ceased flying under the Cuban Family Charter Program and expect other ad- hoc fixed fee flying opportunities to occupy the aircraft that had been dedicated to this program.  In addition, Harrah’s has advised us of its decision to close the Reno program in November 2009.  The Harrah’s program in Laughlin is expected to increase by a similar amount of flying previously operated from Reno.

Ancillary revenue.  Ancillary revenue increased 46.0% to $40.3 million in the three months ended September 30, 2009 up from $27.6 million in the same period of 2008.  The increase was primarily driven by a 41.3% increase in scheduled service passengers and

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a 3.3% increase in our ancillary revenue per scheduled passenger from $32.28 to $33.35.  The increase in ancillary revenue per scheduled passenger was due to higher prices charged for certain existing products, including our customer convenience fee, which increased from $11.50 to $13.50 in January 2009 and to $14.00 in July 2009.

Other revenue.  We generated other revenue of $0.4 million and $1.3 million during the three months ended September 30, 2009 and 2008, respectively.  The revenue was generated as a result of the April 2008 purchase of six MD-80 aircraft and three engines on lease to another airline.  These six aircraft have been gradually returned to us since they were purchased, with four having been placed into service as of September 30, 2009.  We expect to place into service the two remaining aircraft during the fourth quarter of 2009.  During the three months ended September 30, 2008 we generated lease revenue on all six aircraft compared to lease revenue on two aircraft during the same period in 2009.

Operating Expenses

Our operating expenses increased by 2.2% to $111.2 million during the three months ended September 30, 2009 compared to $108.8 million in the same period of 2008, despite a substantial 41.9% in system departure growth over the same periods.  The main driver of this modest increase in expense was a substantial 45.3% decrease in the system average per-gallon cost of fuel during the three months ended September 30, 2009 compared with the same period in 2008.  Also contributing to our ability to achieve substantial system departure growth with only a small increase in total operating expenses, a 20% increase in our aircraft utilization from 5.0 block hours per aircraft per day in the three months ended September 30, 2008 to 6.0 block hours per aircraft per day in the same period of 2009.  An increase in aircraft utilization spreads fixed costs across a greater number of aircraft operations.

We primarily evaluate our expense management by comparing our costs per passenger across different periods which enable us to assess trends in each expense category. The following table presents Operating expense per passenger for the indicated periods (“per-passenger costs”). The table also presents Operating expense per passenger, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by the number of passengers carried. This statistic provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors beyond our control.

Per-Passenger Costs

Our per-passenger costs decreased 25.6% primarily due to a $13.0 million decrease in fuel expense as a result of a 37.4% increase in the number of system passengers and a 45.3% reduction in average cost per gallon for the three months ended September 30, 2009 compared to the same period in 2008.

The following table presents unit costs, defined as Operating expense per ASM (“CASM”), for the indicated periods. The table also presents Operating CASM, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by available seat miles. As on a per passenger basis, excluding fuel on a per ASM basis provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility.

We do not believe CASM is the most appropriate measure by which to evaluate our cost management due to the evolving nature of our route network, our aggressive approach to managing capacity (i.e., ASMs) on a seasonal basis, and the low utilization of our fleet which results in many of our expenses being more fixed as opposed to varying significantly with our ASM production. We provide this table as a convenience because we recognize that CASM is widely used to compare costs in the airline industry.

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Cost Per ASM

Aircraft fuel expense.  Despite our significant quarter-over-quarter expansion of service, aircraft fuel expense decreased 22.9% to $43.8 million for the three months ended September 30, 2009, down from $56.8 million for the same period of 2008, primarily driven by a 45.3% decrease in the system average cost per gallon to $1.88 from $3.44.  System gallons consumed increased to 23.3 million from 16.5 million attributable to our 41.9% system departure growth.

Salary and benefits expense.  Salary and benefits expense increased 29.1% to $22.3 million for the three months ended September 30, 2009 up from $17.3 million for the same period of 2008 mainly as a result of a significant increase in accrued employee bonus expense and an 18.5% increase in the number of full-time equivalent employees.  The increase in accrued employee bonus expense was driven by the significant quarter-over-quarter increase in operating income.  We employed approximately 1,519 full-time equivalent employees at September 30, 2009 compared to 1,282 at September 30, 2008, in line with our fleet growth.  Excluding accrued employee bonus expense, stock compensation expense, and other incentives, our salary and benefits expense per full-time equivalent employee had only a slight increase of 3.7% year-over-year.

Station operations expense.  Station operations expense increased 34.6% to $13.9 million for the three months ended September 30, 2009 compared to $10.3 million for the same period of 2008 principally attributable to a 41.9% increase in system departures.  Our station operations expense per departure decreased 5.1% mostly as a result of our mix of flying.  Fixed fee flying consisted of 15.6% of our total system departures for the three months ended September 30, 2009 compared to 19.1% for the same period in 2008. The station costs related to our fixed fee flying programs are more costly than the rest of our system on a per-departure basis.

Maintenance and repairs expense.  Maintenance and repairs expense increased by 28.6% to $13.0 million for the three months ended September 30, 2009 up from $10.1 million for the same period of 2008.  The increase is largely attributable to the amount of scheduled heavy aircraft maintenance checks during the three months ended September 30, 2009 compared to those maintenance checks performed in the same period of 2008, along with an increase in repair costs of rotable parts due to our fleet growth.  As a result, our average maintenance and repairs expense per aircraft per month increased 8.1% to approximately $98,000 for the three months ended September 30, 2009 compared to approximately $91,000 for the same period in 2008.  The timing of maintenance events causes our maintenance and repairs expense to vary significantly from period to period.  We expect a substantial increase in the expense per aircraft per month as a result of engine and heavy airframe maintenance events scheduled during the fourth quarter of 2009.

Sales and marketing expense.  Sales and marketing expense increased 26.1% to $3.9 million for the three months ended September 30, 2009 compared to $3.1 million for the same period of 2008.  The increase is primarily as a result of advertising expenses from our route network expansion and additional sale promotions during the period, and an increase in credit card discount fees associated with the 9.9% increase in scheduled service revenue and 46.0% increase in ancillary revenue.

Aircraft lease rentals expense.  Aircraft lease rentals expense was relatively flat at $0.5 million for both three months ended September 20, 2009 and 2008.  Four aircraft were under operating lease agreements for the majority of each of the three month periods.

Depreciation and amortization expense.  Depreciation and amortization expense increased to $7.6 million for the three months ended September 30, 2009 from $6.2 million for the same period of 2008.  The increase was a result of reducing the depreciable lives of our engines at the beginning of 2009 and additional depreciation related to non-aircraft equipment purchases during 2009.

Other expense.  Other expense increased by 38.5% to $6.2 million during the three months ended September 30, 2009 compared to $4.5 million in the same period of 2008.  On a per passenger basis, other expense has remained flat as the quarter-over-quarter expense increase was in line with our passenger growth.

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Other (Income) Expense

Other (income) expense was relatively flat at $0.4 million for both the three months ended September 30, 2009 and 2008, as a result of a reduction in interest expense due to lower debt balances, offset by less interest income earned on cash balances in 2009 compared to the same period in 2008.

Income Tax Expense

Our effective income tax rate was 35.8% for the three months ended September 30, 2009 compared to 36.5% in the same period of 2008.  While we expect our tax rate to be fairly consistent in the near term, it will tend to vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items particular to a given year may also affect our tax rates. The lower effective tax rate for 2009 was largely attributable to the geographic mix of our flying and the impact this had on the state income tax portion of the tax provision, along with the impact of income tax deductions resulting from the exercise of incentive stock options.

Comparison of nine months ended September 30, 2009 to nine months ended September 30, 2008

The table below presents our operating expenses as a percentage of operating revenue for the periods indicated:

We recorded total operating revenue of $423.2 million, income from operations of $104.2 million and net income of $65.8 million for the nine months ended September 30, 2009.  By comparison, for the same period in 2008, we recorded total operating revenue of $381.6 million, income from operations of $27.2 million and net income of $17.2 million.

Operating Revenue

Our operating revenue increased 10.9% to $423.2 million for the nine months ended September 30, 2009 from $381.6 million for the same period in 2008 primarily due to a 50.5% increase in ancillary revenue and a 3.1% increase in scheduled service revenue as we increased scheduled service departures by 27.8% and scheduled service passengers by 28.3%.

ASMs increased by 22.3% as a result of a 23.0% increase in system departures and a 1.0% reduction in system average stage length.  We had a decrease in RASM of 9.3% from 11.24 cents for the nine months ended September 30, 2008 to 10.19 cents in the same period in 2009.  The decrease was mainly attributable to a 19.7% reduction in our scheduled service average base fare offset by an increase in ancillary revenue per passenger.  We decreased scheduled service base fares to maintain load factor in the face of industry wide lower fares and economic conditions.

Scheduled service revenue.  Scheduled service revenue increased 3.1% to $261.0 million for the nine months ended September 30, 2009, from $253.2 million in the same period of 2008.  The slight increase was a result of a 28.3% increase in the number of scheduled service passengers offset by a decrease in the scheduled service average base fare of $16.83 from $85.59 to $68.76.  Scheduled service passenger growth was driven primarily as a result of a 27.8% increase in scheduled service departures.  Scheduled service departures increased from 22,413 to 28,645 year-over-year.  Of the increase, 1,098 departures were attributable to our new service to Los Angeles (not operated in 2008) and there was also an increase of 1,284 in departures to our Phoenix market as we added six new routes since the end of the third quarter of 2008.  The impact of the current economic environment on air travel demand was the main driver for the reduction in our scheduled service average base fare.

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Fixed fee contract revenue.  Fixed fee contract revenue decreased 24.8% to $30.9 million during the nine months ended September 30, 2009 from $41.1 million for the same period of 2008.  Block hours under fixed fee agreements declined due to a decrease in flying for the Reno program and a reduction in flying in Tunica, which was a two aircraft program in 2008 and a single aircraft operation in 2009.  This caused a reduction in fixed fee revenue.  The other main cause of reduced fixed fee revenues was a revised Harrah’s contract, which went into effect January 1, 2009.  Under the new Harrah’s contract, Harrah’s reimburses us for the entire amount of fuel costs incurred.  The per-block hour rate we charge Harrah’s is therefore reduced from the rate we charged under the previous Harrah’s contracts under which we had been responsible for a portion of the fuel expenses.

Ancillary revenue.  Ancillary revenue increased 50.5% to $126.2 million for the nine months ended September 30, 2009 from $83.8 million for the same period in 2008, driven by a 28.3% increase in scheduled service passengers and an increase of 17.3% in our ancillary revenue per scheduled service passenger from $28.34 to $33.24.  The increase in ancillary revenue per scheduled service passenger was primarily due to higher prices charged for certain existing products, including our customer convenience fee, which increased from $11.50 to $13.50 in January 2009 and to $14.00 in July 2009.

Other revenue.  We generated other revenue of $5.2 million and $3.5 million during the nine months ended September 30, 2009 and 2008, respectively.  The revenue was generated as a result of the April 2008 purchase of six MD-80 aircraft and three engines on lease to another airline.  The six purchased aircraft have since been returned to us, with four of these aircraft having been placed in service as of September 30, 2009.  We expect to place in service the two remaining aircraft during the fourth quarter of 2009.  The revenue generated from these six leased aircraft included supplemental rents consisting of maintenance deposits.  Maintenance deposits of $4.2 million were recognized as revenue during the nine months ended September 30, 2009 when reimbursements for future maintenance events were not deemed probable, while none were recognized as revenue during the same period in 2008.

Operating Expenses

Our operating expenses declined by 10.0% to $319.0 million for the nine months ended September 30, 2009 compared to $354.4 million in the same period of 2008. We primarily evaluate our expense management by comparing our costs per passenger across different periods which enable us to assess trends in each expense category. The following table presents Operating expense per passenger for the indicated periods.

Per-Passenger Costs

Our per-passenger costs decreased 28.1% as a result of the 10.0% decrease in our total operating expense and a 25.1% increase in the number of system passengers carried for the nine months ended September 30, 2009 as compared with the same period of 2008.  A 48.8% decrease in the average cost per gallon of aircraft fuel was the main driver of our operating expense reduction and contributed to the 50.6% decline in aircraft fuel expense on a per-passenger basis.

The following table presents unit costs, defined as Operating CASM, and Operating CASM, excluding fuel, for the indicated periods.  We do not believe CASM is the most appropriate measure by which to evaluate our cost management due to the evolving nature of our route network, our aggressive approach to managing capacity (i.e., ASMs) on a seasonal basis, and the low utilization of our fleet which results in many of our expenses being more fixed as opposed to varying significantly with our ASM production. We provide this table as a convenience because we recognize that CASM is widely used to compare costs in the airline industry.

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Cost Per ASM

Aircraft fuel expense.  Despite our significant year-over-year expansion of service, aircraft fuel expense decreased 38.1% to $119.0 million for the nine months ended September 30, 2009, down from $192.4 million for the same period of 2008, primarily driven by a 48.8% decrease in the system average cost per gallon to $1.67 from $3.26.  System gallons consumed increased to 71.3 million from 59.0 million attributable to our 23.0% system departure growth.

Salary and benefits expense.  Salary and benefits expense increased 34.5% to $69.3 million for the nine months ended September 30, 2009 up from $51.6 million for the same period of 2008 mainly as a result of a significant increase in accrued employee bonus expense and an 18.5% increase in the number of full-time equivalent employees.  The increase in accrued employee bonus expense was driven by the significant year-over-year increase in operating income.  We employed approximately 1,519 full-time equivalent employees at September 30, 2009 compared to 1,282 at September 30, 2008, in line with our fleet growth.  Excluding accrued employee bonus expense, stock compensation expense, and other incentives, our salary and benefits expense per full-time equivalent employee remained relatively constant with only a slight decrease of 1.6% year-over-year.

Station operations expense.  Station operations expense increased 24.5% to $40.9 million in the nine months ended September 30, 2009 compared to $32.8 million in the same period of 2008 principally attributable to the impact of increased scheduled service departures of 27.8%.  Our station operations expense on a per-departure basis was relatively flat year-over-year with a 1.2% increase.

Maintenance and repairs expense.  Maintenance and repairs expense increased by 15.6% to $36.9 million for the nine months ended September 30, 2009 up from $31.9 million for the same period of 2008.  The increase is a result of more scheduled heavy aircraft maintenance checks performed and impact of our fleet growth on the repair of rotable aircraft parts for the nine months ended September 30, 2009 compared to the same period of 2008, offset by a decrease in the number of engine maintenance events.   Our average maintenance and repairs expense per aircraft per month remained constant for the nine months ended September 30, 2009 compared to the same period in 2008.  The timing of maintenance events cause our maintenance and repairs expense to vary significantly from period to period.

Sales and marketing expense.  Sales and marketing expense increased 15.0% to $12.8 million for the nine months ended September 30, 2009, compared to $11.1 million for the same period of 2008 as a result of advertising expenses associated with entrance into new markets including the new major leisure destination of Los Angeles which launched service in May 2009.

Aircraft lease rentals expense.  Aircraft lease rentals expense decreased by 42.3% to $1.4 million for the nine months ended September 30, 2009 down from $2.5 million for the same period of 2008.  Although four aircraft were under operating lease agreements for the majority of both nine month periods, the impact of lower lease rates for the period in 2009 primarily caused the reduction in rental expense.

Depreciation and amortization expense.  Depreciation and amortization expense increased to $21.8 million for the nine months ended September 30, 2009 from $17.2 million for the same period of 2008.  The increase was attributable to the impact of lowering the depreciable lives of our engines at the beginning of 2009 and additional depreciation related to non-aircraft equipment purchases during 2009.

Other expense.  Other expense increased by 12.8% to $16.9 million for the nine months ended September 30, 2009 compared to $15.0 million in same period of 2008.  The increase is primarily due to an increase of $1.1 million in losses attributable to engine dispositions and other expenses associated with our Company’s growth.

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Sources and Uses of Cash

Operating Activities:  During the nine months ended September 30, 2009, our operating activities provided $109.2 million of cash compared to $26.3 million during the same period of 2008.  The cash flows provided by operations for the period in 2009 were primarily the result of a 282.3%, or $48.6 million increase in net income and a significant increase in air traffic liability which results from passenger bookings for future travel.  During the same period in 2008, these numbers were at significantly lower levels.

Investing Activities:  Cash used in investing activities during the nine months ended September 30, 2009 was $107.2 million compared to $24.1 million of cash used in investing activities in the same period of 2008.  The primary uses of cash in investing activities during 2009, was the purchase of $106.8 million in available for sale short-term investments offset by proceeds of $29.0 million from the maturities of short-term investments during 2009.  We also used $25.7 million in investing activities for the purchase of property and equipment.  These purchases were comprised of $11.2 million for eight aircraft to be used for spare parts, expenditures of $9.6 million required for the induction of owned aircraft to enter our operating fleet which have come off lease with a third party during the period, and $4.9 million for the purchase of rotable and other parts.  Compared to the 2009 period, we used more cash for the purchase of property and equipment during the nine months ended September 30, 2008, with $49.2 million spent primarily for the purchase of six MD-80 aircraft in April 2008.

Financing Activities:  During the nine months ended September 30, 2009, we used $32.1 million in cash from financing activities compared to the use of $13.0 million during the same period of 2008.  We used cash of $24.4 million to repurchase common stock and $17.0 million to make principal payments on our debt obligations during the nine months ended September 30, 2009.  These financing activities during the period were partially offset by proceeds of $7.0 million attributable to a loan agreement secured by two previously unencumbered aircraft.  The financing activities for the nine months ended September 30, 2008 included $15.8 million to purchase common stock in open market purchases, the retirement of capital lease obligations and other debt repayments, offset by $25.6 million obtained from the financing of ten aircraft.

Commitments and Contractual Obligations

The following table discloses aggregate information about our contractual cash obligations as of September 30, 2009 and the periods in which payments are due (in thousands):

(1)  Long-term debt obligations include scheduled interest payments.

(2)  Operating lease obligations include aircraft operating leases, our office lease and leases of airport station property.

Critical Accounting Policies and Estimates

A description of our critical accounting policies is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.  There has been no material change to these policies during the three months ended September 30, 2009.

Recent Accounting Pronouncements

See related disclosure at “Item 1 — Unaudited Condensed Consolidated Financial Statements - Notes to Condensed Consolidated Financial Statements — Note 2 — Newly Issued Accounting Pronouncements.”

Special Note about Forward-Looking Statements

We have made forward-looking statements in this quarterly report on Form 10-Q, and in this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry

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(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during our quarter ending September 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1.  Legal Proceedings

We are subject to certain legal and administrative actions we consider routine to our business activities. We believe the ultimate outcome of any pending legal or administrative matters will not have a material adverse impact on our financial position, liquidity or results of operations.

Item 1A.  Risk Factors

We have evaluated our risk factors and determined there have been no further changes to our risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K filed on March 3, 2009 other than as updated in our quarterly report on Form 10-Q for the quarter ended March 31, 2009.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Our Repurchases of Equity Securities

The following table reflects repurchases of our common stock during the third quarter of 2009. On January 29, 2009, we announced a share repurchase program to acquire through open market purchases up to $25.0 million of our common stock over a period not to exceed 12 months.  In July 2009, we announced that our Board of Directors increased the authority to $35.0 million and eliminated the expiration date for the program.  During the nine months ended September 30, 2009, we have repurchased 637,902 shares of our common stock through open market purchases at an average cost of $38.26 per share for a total expenditure of $24.4 million.  During the three months ended September 30, 2009, we repurchased 172,377 shares at an average cost of $39.52 per share for a total expenditure of $6.8 million.

ISSUER PURCHASES OF EQUITY SECURITIES