Attached files

file filename
EX-5.1 - REPUBLIC AIRWAYS HOLDINGS INCv177281_ex5-1.htm
EX-32.1 - REPUBLIC AIRWAYS HOLDINGS INCv177281_ex32-1.htm
EX-32.2 - REPUBLIC AIRWAYS HOLDINGS INCv177281_ex32-2.htm
EX-31.2 - REPUBLIC AIRWAYS HOLDINGS INCv177281_ex31-2.htm
EX-31.1 - REPUBLIC AIRWAYS HOLDINGS INCv177281_ex31-1.htm
EX-10.64 - REPUBLIC AIRWAYS HOLDINGS INCv177281_ex10-64.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 FOR THE TRANSITION PERIOD FROM ______________ TO _____________
 
  COMMISSION FILE NUMBER: 000-49697

REPUBLIC AIRWAYS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
(State or other jurisdiction of
incorporation or organization)
 
06-1449146
(I.R.S. Employer Identification Number)
 
8909 Purdue Road, Suite 300, Indianapolis, Indiana 46268
(Address of principal executive offices) (Zip Code)
 
(317) 484-6000
(Registrant’s telephone number, including area code)
 

 
Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, par value $.001 per share
 
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 x 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x 

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   £   No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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):
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
 Smaller reporting company o

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

The aggregate market value of Common Stock held by non-affiliates (based upon the closing sale price of the Common Stock on the NASDAQ National Market System (now the NASDAQ Global Market System) on June 30, 2009 was approximately $223,128,000.

Indicate the number of shares outstanding of the registrant’s Common Stock as of the latest practicable date: As of March 15, 2010, 34,598,683 shares of common stock were outstanding.
 
 DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive Proxy Statement to be used in connection with its 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
 



 
TABLE OF CONTENTS

 
Part I
   
       
Item 1.
Business     
 
4
Item 1A.
Risk Factors
 
15
Item 1B.
Unresolved Staff Comments
 
25
Item 2.
Properties   
 
26
Item 3.
Legal Proceedings
 
27
Item 4.
[Reserved]
 
27
       
 
Part II
   
       
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases Of Equity Securities
 
28
Item 6.
Selected Financial Data
 
30
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
32
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
47
Item 8.
Financial Statements and Supplementary Data
 
48
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
81
Item 9A.
Controls and Procedures
 
81
Item 9B.
Other Information
 
82
 
Part III
   
       
Item 10.
Directors, Executive Officers and Corporate Governance
 
83
Item 11.
Executive Compensation
 
83
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
83
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
83
Item 14.
Principal Accounting Fees and Services
 
83
       
 
Part IV
   
       
Item 15.
Exhibits, Financial Statements Schedules
 
84
Signatures
    94
       
EX-10.64
Employment Agreement by and between Republic Airways Holdings Inc. and Sean Menke, dated as of October 2, 2009
   
EX-23.1
Consent of Independent Registered Public Accounting Firm
   
Certification of Chief Executive Officer
   
Certification of Chief Financial Officer
   
Certification of Chief Executive Officer
   
Certification of Chief Financial Officer
   
 
2

 
Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements. Republic Airways Holdings Inc. (the “Company”) may, from time to time, make written or oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements encompass our beliefs, expectations, hopes or intentions regarding future events. Words such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” the negative of such terms or other terminology are used to identify forward-looking statements. All forward-looking statements included in this Annual Report on Form 10-K are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. Our results could differ materially from those anticipated in these forward-looking statements for many reasons, including, among others, the “Risk Factors” set forth herein.

3

 
PART I
 
ITEM 1. BUSINESS

General
 
Overview
 
We are a Delaware holding company organized in 1996 that offers scheduled passenger services through our wholly-owned operating subsidiaries:  Chautauqua Airlines, Inc., (“Chautauqua Airlines”), Shuttle America Corporation (“Shuttle America”), Republic Airline Inc. (“Republic Airline”), Frontier Airlines, Inc., and Lynx Airlines, Inc. (“Lynx”).  The Company acquired Midwest Air Group, Inc. (“Midwest”) and Frontier Airlines Holdings, Inc. (“Frontier”) on July 31, 2009 and October 1, 2009, respectively.  On November 3, 2009, Midwest Airlines, Inc. ceased to exist as an actual operating airline and we allowed its Department of Transportation (“DOT”) air carrier operating certificate to lapse.  Midwest’s branding, livery and route structure are all operated by our other operating subsidiaries.  We plan to fully integrate the operations of Midwest and Frontier as promptly as is feasible, which we anticipate will be substantially completed by the end of 2010.  Unless the context indicates otherwise, the terms “the Company,” “we,” “us,” or “our,” refer to Republic Airways Holdings Inc. and our subsidiaries.

As of December 31, 2009, our operating subsidiaries offered scheduled passenger service on approximately 1,600 flights daily to 121 cities in 44 states, Canada, Mexico, and Costa Rica under branded operations as Frontier and Midwest, and through fixed-fee code-share agreements with AMR Corp., the parent of American Airlines, Inc. (“American”), Continental Airlines, Inc. (“Continental”), Delta Air Lines, Inc. (“Delta”),  United Air Lines, Inc. (“United”), and US Airways, Inc. (“US Airways”) (collectively referred to as our “Partners”). Currently, we provide our Partners with fixed-fee regional airline services, operating as AmericanConnection, Continental Express, Delta Connection, United Express, or US Airways Express, including service out of their hubs and focus cities.

The following table outlines the type of aircraft our subsidiaries operate and their respective operations within our business units as of December 31, 2009:
 
Operating
 
Aircraft
 
Branded Operations
 
Fixed-Fee Code-Share Agreement Partners
 
Other
 
Number of
 
Subsidiaries
 
Size
 
Frontier / Midwest
 
American
 
Continental
 
Delta
 
United
 
US Airways
 
Unallocated
 
Aircraft
 
Chautauqua Airlines
 
37 to 50
 
6
 
15
 
22
 
24
 
7
 
9
 
4
 
87
 
Shuttle America
 
70 to 76
 
 
 
 
16
 
38
 
 
2
 
56
 
Republic Airline
 
70 to 99
 
27
 
 
 
 
 
58
 
 
85
 
Frontier
 
120 to 162
 
51
 
 
 
 
 
 
 
51
 
Lynx
 
74
 
11
 
 
 
 
 
 
 
11
 
Total number of operating aircraft
 
95
 
15
 
22
 
40
 
45
 
67
 
6
 
290
 

We have long-term, fixed-fee regional jet code-share agreements with each of our Partners that are subject to our maintaining specified performance levels. Pursuant to these fixed-fee agreements, which provide for minimum aircraft utilization at fixed rates, we are authorized to use our Partners' two-character flight designation codes to identify our flights and fares in our Partners' computer reservation systems, to paint our aircraft in the style of our Partners, to use their service marks and to market ourselves as a carrier for our Partners. Our fixed-fee agreements have historically limited our exposure to fluctuations in fuel prices, fare competition and passenger volumes. Our development of relationships with multiple major airlines has enabled us to reduce our dependence on any single airline, allocate our overhead more efficiently among our Partners and reduce the cost of our services to our Partners.

Midwest has a regional focus in Milwaukee and Kansas City, and Frontier has a regional focus in Denver.  Our branded operations expose us to changes in passenger demand, fare competition and fluctuations in fuel prices.  Midwest is the largest carrier in Milwaukee, and Frontier is the second largest carrier in Denver.  Each brand has a significant base of frequent flyer members and strong support in their local communities. 

Since acquiring the branded carriers, we have rebuilt the Milwaukee network to reconnect Midwest passengers to the west coast and Florida destinations and we have expanded operations in Denver now offering select point to point flying on Frontier Airlines.  In 2010, we will work to further integrate the two branded operations, which will allow for similar passenger experiences and lower the costs of our branded flying. 

During 2009, our operational fleet increased from 221 to 290 aircraft.  The acquisition of Frontier added 62 aircraft that are operated by Frontier and Lynx.  Additionally, during 2009, we took delivery of 11 E190 aircraft, which have been placed into branded service, three E175 aircraft, which were placed into service with Delta and six E135 aircraft which were placed into branded service.  We also returned 10 CRJ-200 aircraft to the lessor and subleased three E145 aircraft offshore.  As of December 31, 2009, our operational fleet was comprised of 51 Airbus aircraft ranging from 120 to 162 seats, 141 EJet aircraft ranging from 70-99 seats, 11 Q400 aircraft with 74 seats, 80 Embraer aircraft ranging from 37 to 50 seats, and seven CRJ-200 aircraft with 50 seats.  

4

 
In order to simplify our fleet and reduce expenses, we expect to remove our Q400 and CRJ-200 fleets in 2010. The remaining seven CRJ-200 aircraft will be removed from service for Continental and returned to the lessor by April 2010 and we expect to reduce the operations on the Q400 aircraft in April 2010 and eliminate all Q400 flying by September 2010.
 
 Markets and Routes

Markets
 
As of December 31, 2009, we offered scheduled passenger service on approximately 1,600 flights daily to 121 cities in 44 states, Canada, Mexico, and Costa Rica.

Fixed-fee Routes

Our Partners determine the routes that we operate for them, which are subject to certain parameters in our agreements.  The following table illustrates the flying done for each Partner as of December 31, 2009:
 
Partner
 
Hub and Focus Cities
American
 
St. Louis, MO (we expect operation to transfer to Chicago, IL in 2010)
Continental
 
Houston, TX (we expect operation to close in 2010) and Cleveland, OH
Delta
 
Atlanta, GA, Cincinnati, OH, and New York, NY
United
 
Chicago, IL, Denver, CO, and Washington D.C.
US Airways
 
Charlotte, NC, New York, NY, Philadelphia, PA, and Washington D.C.

Branded Routes

The following illustrates the routes we flew for our branded operations as of December 31, 2009:

routes

5

 
Maintenance of Aircraft and Training
 
Using a combination of Federal Aviation Administration (“FAA”) certified maintenance vendors and our own personnel and facilities; we maintain our aircraft on a scheduled and "as-needed" basis. We emphasize preventive maintenance and inspect our aircraft engines and airframes as required.

We have maintenance agreements for engines, auxiliary power units (“APU”) and other airframe components for our CRJ-200 aircraft, that cover the aircraft during the short-term leases, all of which expire by March 2010.  For our E140/145 aircraft, we have agreements to maintain the engines, APUs, avionics and wheels and brakes through October 2012, June 2013, December 2014 and June 2014, respectively.  For our E170/175 aircraft, we have agreements to maintain the avionics, wheels and brakes, APUs and engines through December 2014, February 2017, July 2019 and December 2014, respectively. Under these agreements, we are charged for covered services based on a fixed rate for each flight hour or flight cycle accumulated by the engines or airframes in our service during each month. The rates are subject to annual revisions, generally based on certain Bureau of Labor Statistics' labor and material indices.  We believe these agreements, coupled with our ongoing maintenance program, reduce the likelihood of unexpected levels of engine, APU, avionics and wheels and brakes maintenance expense during their term.

While we do not have long term maintenance agreements for our Airbus and Q400 fleets, we have made significant deposits with the aircraft lessors for future maintenance events which will reduce our future cash requirements.  As of December 31, 2009, we had maintenance deposits of $143.9 million.
 
We perform our heavy and routine maintenance projects at our facilities in Columbus, Denver, Indianapolis, Louisville, Milwaukee, Pittsburgh and St. Louis, and we perform routine maintenance services from select line maintenance stations.
 
6

 
All mechanics and avionics specialists employed by us have appropriate training and experience and hold required licenses issued by the FAA. We provide periodic in-house and outside training for our maintenance and flight personnel and also take advantage of manufacturers’ training programs that are offered when acquiring new aircraft.
 
We have agreements with Flight Safety International to provide for aircraft simulator training for our pilots. We have no current plans to acquire our own simulator in the near term and believe that Flight Safety or other third party vendors will be able to provide us with adequate and cost effective flight simulator training to provide training for our pilots.

Employees
 
As of December 31, 2009, we employed approximately 10,340 full-time equivalent employees. The following is a table of our principal collective bargaining agreements and their respective amendable dates as of December 31, 2009:
 
Employee
Group
 
Number of Full-
Time Equivalent
Employees
 
Representing Union
 
Amendable
Date
             
Pilots
 
1,849
 
International Brotherhood of Teamsters Airline Division Local 747
 
Oct-07
   
640
 
Frontier Airline Pilots Association ("FAPA")
 
Mar-12
   
125
 
United Transportation Union (Lynx)
 
*
             
Flight Attendants
 
1,474
 
International Brotherhood of Teamsters Airline Division Local 210
 
Sep-09
   
114
 
Association of Flight Attendants - CWA ("AFA-CWA")
 
*
             
Mechanics and tool room attendants
 
274
 
Teamsters Airline Division
 
Oct-11
Groomers and cleaners
 
87
 
Teamsters Airline Division
 
Sep-15
Dispatchers
 
82
 
Transport Workers Union of America Local 540
 
Jun-12
   
14
 
Transport Workers Union
 
Sep-12
             
Material Specialists
 
18
 
International Brotherhood of Teamsters
 
Oct-11
 

* Currently in negotiations
 
As of December 31, 2009, we had approximately 1,340 maintenance technicians and other maintenance related personnel, approximately 2,300 customer service personnel, and approximately 2,020 administration and support personnel, who are not currently represented by any union.  Because of the high level of unionization among our employees, we are subject to risks of work interruption or stoppage and/or the incurrence of additional expenses associated with union representation of our employees.  We have never experienced any work stoppages or other job actions and generally consider our relationship with our employees to be good.  The union contract for our pilots, except Frontier’s pilots and our flight attendants, is currently amendable.

Executive Officers of the Company
 
The following table sets forth information regarding our current executive officers, directors and key employees as of December 31, 2009:

Name
 
Age
 
Position
Bryan K. Bedford    
 
48
 
Chairman of the Board, President and Chief Executive Officer
Robert H. Cooper    
 
50
 
Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Wayne C. Heller    
 
51
 
Executive Vice President, Chief Operating Officer 
Sean E. Menke
 
41
 
Executive Vice President, Chief Marketing Officer
Lawrence J. Cohen    
 
54
 
Director
Douglas J. Lambert    
 
52
 
Director
Mark L. Plaumann    
 
54
 
Director
Richard P. Schifter
 
57
 
Director
Neal S. Cohen
 
49
 
Director
David N. Siegel
 
48
 
Director

Bryan K. Bedford joined us in July 1999 as our President and Chief Executive Officer and a member of our board of directors and became chairman of the board in August 2001. From July 1995 through July 1999, Mr. Bedford was the president and chief executive officer and a director of Mesaba Holdings, Inc., a publicly-owned regional airline. He has over 21 years of experience in the regional airline industry, and was named regional airline executive of the year in 1998 by Commuter and Regional Airline News and again in 2005 by Regional Airline World magazine. Mr. Bedford is a licensed pilot and a certified public accountant. He also served as the 1998 Chairman of the Regional Airline Association (RAA), and remains on the Board of Directors of the RAA.
 
7

 
Robert H. Cooper joined us in August 1999 as Vice President and Chief Financial Officer. In February 2002, he became executive vice president, chief financial officer, treasurer and secretary and assumed responsibility for all purchasing and material control. He was previously employed with Mesaba Holdings, Inc. from September 1995 through August 1999 as its vice president, chief financial officer and treasurer. Mr. Cooper is a certified public accountant. He has over 16 years experience in the regional airline industry. He has responsibility for financial accounting, treasury, public reporting, investor relations, human resources, information technology, purchasing and material control.
 
Wayne C. Heller joined us in August 1999 as Vice President—Flight Operations with responsibility for flight crew supervision, system control, flight safety and flight quality standards. In February 2002, he became Executive Vice President and Chief Operating Officer of Chautauqua, and assumed responsibility for all aircraft maintenance, records and engineering. From April 1996 until August 1999 he was employed by Mesaba Airlines, Inc., as its Director of System Operations Control. He is a licensed pilot and a licensed dispatcher and has over 28 years of regional airline experience in operations.

Sean E. Menke joined us in October 2009 as Executive Vice President and Chief Marketing Officer.  Previously, he served as Frontier’s President and Chief Executive Officer since September 2007.  Mr. Menke was the Executive Vice President - Commercial Strategy for Air Canada from May 2007 to August 2007, and was Executive Vice President and Chief Commercial Officer for Air Canada from July 2005 to May 2007.  Mr. Menke has over 16 years of aviation experience, including serving as Frontier’s Senior Vice President - Chief Operating Officer from July 2004 to July 2005, Senior Vice President - Marketing from November 2003 to June 2004, and Vice-President - Marketing and Planning from June 2000 to November 2003.  Mr. Menke held various positions with United Airlines, America West Airlines, and Western Pacific Airlines before his prior tenure at Frontier Airlines.  In January 2010, Mr. Menke resigned from the organization. He will remain in his position through April 2010.

Lawrence J. Cohen has been a director since June 2002. He is the owner and Chairman of Pembroke Companies, Inc., an investment and management firm that he founded in 1991. The firm makes investments in and provides strategic management services to real estate and specialty finance related companies. From 1989 to 1991, Mr. Cohen worked at Bear Stearns & Co. where he attained the position of Managing Director. From 1983 to 1989, Mr. Cohen served as first Vice President in the Real Estate Group of Integrated Resources, Inc. From 1980 to 1983, Mr. Cohen was an associate at the law firm of Proskauer Rose Goetz & Mendelsohn. Mr. Cohen is a member of the bar in both New York and Florida.

Douglas J. Lambert has been a director since August 2001. He is presently a Senior Director in the Debtor Advisory and Crisis Management Group of Alvarez & Marsal Inc. From 1994 to 2003, Mr. Lambert was a Senior Vice President of Wexford Capital LLC. From 1983 to 1994, Mr. Lambert held various financial positions with Integrated Resources, Inc.'s Equipment Leasing Group, including Treasurer and Chief Financial Officer. He is a certified public accountant.
 
Mark L. Plaumann has been a director since June 2002. He is presently a Managing-Member of Greyhawke Capital Advisors LLC, which he co-founded in 1998. From 1995 to 1998, Mr. Plaumann was a Senior Vice President of Wexford Capital LLC. From 1990 to 1995, Mr. Plaumann was employed by Alvarez & Marsal, Inc. as a Managing Director. From 1985 to 1990, Mr. Plaumann worked for American Healthcare Management, Inc., where he attained the position of President. From 1974 to 1985, Mr. Plaumann worked in both the audit and consulting divisions of Ernst & Young, where he attained the position of Senior Manager and he is a certified public accountant. Mr. Plaumann is the Chair of our Audit Committee, is an “audit committee financial expert” and is independent as defined under applicable SEC and Nasdaq rules.

Richard P. Schifter has been a director since July 2009.  He has been a partner at TPG Capital (formerly Texas Pacific Group) since 1994. Prior to joining TPG, Mr. Schifter was a partner at the law firm of Arnold & Porter in Washington, D.C., where he specialized in bankruptcy law and corporate restructuring and represented Air Partners in connection with the acquisition of Continental Airlines in 1993.  Mr. Schifter joined Arnold & Porter in 1979 and was a partner from 1986 through 1994.  Mr. Schifter also served on the Boards of Directors of Ryanair, PLC from 1996 through 2003, America West Holdings from 1994 to 2005, US Airways Group from 2005 to 2006 and Midwest Airlines from 2007 to 2009.

Neal S. Cohen has been a director since October 2009.  He is president and chief operating officer for Laureate Education, Inc. Previously, Mr. Cohen was executive vice president for international strategy and chief executive officer for regional airlines at Northwest Airlines.  In addition, Mr. Cohen had served as executive vice president and chief financial officer at Northwest Airlines. Prior to his tenure with Northwest Airlines, Mr. Cohen was executive vice president and chief financial officer for US Airways. Mr. Cohen has served as chief financial officer for various service and financial organizations as well as Sylvan Learning, the predecessor company of Laureate Education, Inc.

8

 
David N. Siegel has been a director since October 2009.  Mr. Siegel has commercial aviation experience spanning more than two decades including serving as the president and chief executive officer of US Airways and in senior executive roles at Northwest Airlines and Continental Airlines.  Most recently, Mr. Siegel was chairman and chief executive officer of Gate Gourmet Group, Inc., the world’s largest independent airline catering, hospitality and logistics company. Prior to Gate Gourmet Group, Mr. Siegel served as president, chief executive and member of the board of US Airways Group, Inc., and US Airways, Inc., the airline operating unit.  Prior to joining US Airways, Mr. Siegel was chairman and chief executive officer of Avis Rent A Car System, Inc., a subsidiary of Cendant Corp.  Mr. Siegel’s extensive experience in the airline industry includes seven years at Continental Airlines in various senior management roles, including president of its Continental Express subsidiary.

Business Strategy

Our vision is to provide safe, clean, reliable and cost efficient service with highly engaged and motivated employees.  We are focused on continuing to provide high quality performance as a fixed-fee operator with low-costs and a diverse number of partners.  We are committed to improving our cost structure on all branded operations to compete and win in competitive markets and utilize our fleet flexibility to optimize our network connectivity and revenues.  We believe the diversity in our operations provide us a platform for long-term sustainability, profitability, and growth.

Branded Operations

Our recent acquisitions of Midwest and Frontier provide us with route networks that are complimentary and present the opportunity to expand both networks beyond their historic capabilities.  The Midwest brand has earned its reputation as “The best care in the air®” by providing travelers with impeccable service and onboard amenities at competitive fares. Our commitment to offering personal, attentive service both on the ground and in the air has earned Midwest national and international recognition from frequent travelers and the airline industry, including Condé Nast Traveler, Travel+Leisure and the Zagat Airline Survey.  Frontier has created a widely recognized brand that distinguishes itself as a safe, reliable, low-fare airline focused on customer service and providing a high quality travel experience.  On our Frontier branded flights we offer our customers a differentiated product, with new Airbus and Embraer aircraft, comfortable passenger cabins that we configure with one class of seating, ample leg room, affordable pricing, and in-seat LiveTV with 24 channels of live television entertainment and three additional channels of current-run pay-per-view movies on most of our routes  We have implemented a full code-share between Midwest and Frontier providing a wider choice of travel destinations and additional flight options and connection possibilities, and our frequent flyer partnership allows members of the Midwest Miles and Frontier Early Rewards programs to earn and redeem miles on either airline.  Our frequent flyer programs have minimal overlap and we now have access to more than 2.7 million frequent flyers.

We plan to fully integrate the operations of Midwest and Frontier as promptly as is feasible, which we anticipate will be substantially completed by the end of 2010.  In addition, we are focused on harmonizing the best aspects of the Midwest and Frontier brands, which we believe will leverage our collective advantages and provide our customers with consistent product offerings, on-board experiences, and customer-facing touch points.

Fixed-Fee Operations

Code-Share Agreements

Through our subsidiaries, we have entered into code-share agreements with US Airways, American, Delta, United and Continental that authorize us to use their two-character flight designator codes ("US," "AA," "DL," "UA" and "CO") to identify our flights and fares in their computer reservation systems, to paint our aircraft with their colors and/or logos, to use their service marks and to market and advertise our status as US Airways Express, AmericanConnection, Delta Connection, United Express or Continental Express, respectively. Under the code-share agreements between our subsidiaries and each of US Airways, American, Delta, United and Continental, we are compensated on a fixed-fee basis on all of our US Airways Express, AmericanConnection, Delta Connection, United Express and Continental Express flights. In addition, under our code-share agreements, our passengers participate in frequent flyer programs of the Partners, and the Partners provide additional services such as reservations, ticket issuance, ground support services, commuter slot rights and airport facilities.

US Airways Code-Share Agreements

Under our fixed-fee Jet Services Agreements with US Airways, we operated, as of December 31, 2009, 9 E145 aircraft, 20 E170 aircraft and 38 E175 aircraft. As of December 31, 2009, we were providing 418 flights per day as US Airways Express.

9

 
In exchange for providing the designated number of flights and performing our other obligations under the code-share agreements, we receive compensation from US Airways three times each month in consideration for the services provided under the code-share agreements. We receive an additional amount per available seat mile flown and may also receive incentives or pay penalties based upon our performance, including fleet launch performance, on-time departure performance and completion percentage rates. In addition, certain operating costs are considered "pass through" costs whereby US Airways has agreed to reimburse us the actual amount of costs we incur for these items. Landing fees, passenger catering, passenger liability insurance and aircraft property tax costs are pass through costs and included in our fixed-fee services revenue. US Airways provides fuel directly for all of our US Airways operations.

The code-share agreement for the E145 aircraft terminates in July 2014.  The code-share agreement for the E170/175 aircraft terminates in September 2015 with respect to the 20 E170 aircraft and eight of the E175 aircraft.   The remaining 30 E175 aircraft terminate 12 years from each aircraft’s in-service date and therefore would terminate from February 2019 to July 2020. US Airways may terminate the code-share agreements at any time for cause upon not less than 90 days notice and subject to our right to cure under certain conditions.

Pursuant to a licensing agreement, we assigned 113 commuter slots at Ronald Reagan Washington National (DCA) Airport and 24 commuter slots at New York-LaGuardia (LGA) Airport to US Airways and these commuter slots are being operated by US Airways and US Airways Express carriers. Prior to the expiration of this agreement, US Airways has the right to repurchase all, but not less than all, of the DCA commuter slots at a predetermined price. The licensing agreement between us and US Airways for the LGA commuter slots expired on December 31, 2006, but we maintain a security interest in the LGA slots if US Airways fails to perform under the current licensing agreement.
 
The American Code-Share Agreement

As of December 31, 2009, we operated 13 E140 aircraft for American under a fixed-fee code-share agreement and provided 82 flights per day as AmericanConnection.

On October 23, 2008, we amended the code-share agreement to remove two E140 aircraft from service on June 1, 2009.  American reimburses us for the monthly rental fees unless the removed aircraft are sold, subleased or otherwise transferred as long as we are using commercially reasonable efforts to dispose of the removed aircraft. The amendment also provided for a two year extension on American's early termination option so that American may not early terminate the agreement prior to March 2012, and a rate reduction which became effective on April 1, 2009.

Under the code-share agreement, American retains all passenger, certain cargo and other revenues associated with each flight, and is responsible for all revenue-related expenses. We share revenue with American for certain cargo shipments. Additionally, certain operating costs are considered "pass through" costs and American has agreed to reimburse us the actual amount of costs we incur for these items. Fuel, landing fees, hull and liability insurance and aircraft property tax costs are pass through costs and included in our fixed-fee services revenue. Beginning in May 2009 we did not record fuel expense and the related revenue for the American operations.  Aircraft lease payments are also considered a pass through cost, but are limited to a specified amount.

If American terminates the code-share agreement for cause, American has a call option to require that we assign to American all of its rights under the leases of aircraft, and to lease to American the aircraft to the extent we own them, used at that time under the code-share agreement. If American exercises its call option, we are required to pay certain maintenance costs in transferring the aircraft to American's maintenance program.

The term of the American code-share agreement continues until February 1, 2013. However, American may terminate the code-share agreement without cause upon 180 days notice, provided that such notice may not be given prior to September 30, 2011. If American terminates the code-share agreement without cause, we have the right to put the leases of the aircraft, or to sell the aircraft to American to the extent owned by us, used under the code-share agreement to American. The agreement may be subject to termination for cause prior to that date under various circumstances.

The Delta Code-Share Agreements

As of December 31, 2009, we operated 24 E145 aircraft and 16 E175 aircraft for Delta under fixed-fee code-share agreements.  As of December 31, 2009, we provided 213 flights per day as Delta Connection.

The code-share agreements for the E145 and E175 aircraft terminate in May 2016 and January 2019, respectively, subject to certain extension rights. Delta may terminate the code-share agreements at any time, with or without cause, if it provides us 180 days written notice, provided that such notice shall not be given prior to November 2009 for the E145 regional jet code-share agreement and July 2015 for the E170 regional jet code-share agreement. With the respect to the E145 agreement, if Delta chooses to terminate any aircraft early, it may not reduce the number of aircraft in service to less than 12 during the 12-month period following the 180 day initial notice period unless it completely terminates the code-share agreement. We refer to this as Delta's partial termination right.

10

 
If Delta exercises this right under either agreement or if we terminate either agreement for cause, we have the right to require Delta either to purchase, sublease or assume the lease of aircraft leased by us with respect to any of the aircraft we previously operated for Delta under that agreement.  As of December 31, 2009, the Company estimates a payment of $184.0 million would be required from Delta should they exercise the early termination provision.  If we choose not to exercise our put right, or if Delta terminates either agreement for cause, they may require us to sell or sublease to them or Delta may assume the lease of aircraft leased by us with respect to any of the aircraft we previously operated for it under that agreement.
 
Certain of our operating costs are considered "pass through" costs, whereby Delta has agreed to reimburse us the actual amount of costs we incur for these items. Fuel, engine maintenance expenses, landing fees, passenger liability insurance, hull insurance, war risk insurance, de-icing costs, and aircraft property taxes are some of the pass through costs included in our fixed-fee services revenue. Beginning in June 2009 we did not record fuel expense and the related revenue for the Delta operations. Aircraft rent/ownership expenses are also considered a pass through cost, but the reimbursement is limited to specified amounts for certain aircraft.
 
The agreements may be subject to immediate or early termination under various circumstances.

The United Code-Share Agreements

As of December 31, 2009, we operated seven E145 aircraft and 38 E170 aircraft and provided 252 flights per day as United Express.  Five E170 aircraft were placed into service during 2009.  The seven E145 aircraft were removed from service in early January 2010.  Two of the aircraft are being returned to the lessor and the remaining five have been placed into our branded operations.

The fixed rates that we receive from United under the code-share agreements are annually adjusted in accordance with an agreed escalation formula. Additionally, certain of our operating costs are considered "pass through" costs whereby United has agreed to reimburse us the actual amount of costs we incur for these items.  Fuel and oil, landing fees, war risk insurance, liability insurance and aircraft property taxes are pass through costs and included in our fixed-fee services revenue.  United provides fuel directly in certain locations.

The E170 code-share agreement terminates on June 30, 2019.  The E145 code-share agreement was terminated effective January 2010.  United has the option of extending the E170 agreement for five years or less.  In addition, the code-share agreements may be terminated under certain conditions.

United has a call option to assume our ownership or leasehold interest in certain aircraft if we wrongfully terminate the code-share agreements or if United terminates the agreements for our breach for certain reasons.
 
The Continental Code-Share Agreement

As of December 31, 2009, we operated 15 E145 aircraft and seven CRJ-200 aircraft for Continental under a fixed-fee code-share agreement and provided 125 flights per day as Continental Express.  During 2009, we removed ten CRJ-200 aircraft and five E145 aircraft from the Continental agreement.  The CRJ-200 aircraft were returned to the lessor and the E145 aircraft are being subleased offshore.

The CRJ-200 aircraft are operated under the agreement on terms generally equivalent to our CRJ-200 leases that vary from two to three years.  The remaining CRJ aircraft will come out of service in the first quarter of 2010 and be returned to the lessor.  The E145 aircraft have a term of three to five years.  Under certain conditions, Continental may extend the term on the aircraft up to five additional years.

All fuel is purchased directly by Continental and is not charged back to Chautauqua Airlines.  Under the agreement, Continental purchases all capacity at predetermined rates and industry standard pass through costs.

The agreement may be subject to early termination under various circumstances.

11

 
Competition and Economic Conditions

 The airline industry is highly competitive.  Generally, the airline industry is highly sensitive to general economic conditions, in large part due to the discretionary nature of a substantial percentage of both business and pleasure travel. In the past, many airlines have reported decreased earnings or substantial losses resulting from periods of economic recession, heavy fare discounting, high fuel prices and other factors. Economic down turns combined with competitive pressures have contributed to a number of bankruptcies and liquidations among major and regional carriers and our recent acquisitions of branded carriers adds these risks to our business.

The principal competitive factors in the airline industry are fare pricing, customer service, flight schedules and aircraft types.  The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats.  We face significant competition with respect to routes, services and fares. Our domestic routes are subject to competition from carriers that provide service at low fares to destinations also served by us. In particular, we face significant competition at our hub airports in Milwaukee and Denver either directly at those airports or at the hubs of other airlines that are located in close proximity to our hubs.  Certain of our competitors are larger and have significant financial resources.  Our ability to compete effectively depends, in significant part, on our ability to maintain a cost structure that is competitive with other carriers.

The growth in the fixed fee business for regional carriers which occurred over the past decade has significantly diminished in recent times as major carriers have reduced capacity and as increased fuel prices have limited the cost efficiencies of small regional jets.  We believe future growth opportunities in the fixed-fee business will most likely come as contracts come up for renewal though competition for market share may lead to lower margins and higher risks.  If our Partners are negatively effected by economic conditions or higher fuel prices, they may file for bankruptcy or reduce the number of flights we operate in order to reduce their operating costs.

Regulatory Matters
 
Government Regulation

All interstate air carriers are subject to regulation by the Department of Transportation, referred to as the DOT, the Federal Aviation Administration, or FAA, the Transportation Security Administration, or TSA, and certain other governmental agencies. Regulations promulgated by the DOT primarily relate to economic aspects of air service, those of the TSA to security and those of the FAA to operations and safety. The FAA requires operating, airworthiness and other certifications; approval of personnel who may engage in flight maintenance or operations activities; record keeping procedures in accordance with FAA requirements; and FAA approval of flight training and retraining programs. Generally, governmental agencies enforce their regulations through, among other mechanisms, certifications, which are necessary for our continued operations, and proceedings, which can result in civil or criminal penalties or suspension or revocation of operating authority. The FAA can also issue maintenance directives and other mandatory orders relating to, among other things, grounding of aircraft, inspection of aircraft, installation of new safety-related items and the mandatory removal, replacement or modification of aircraft parts that have failed or may fail in the future.

We believe that we are operating in material compliance with FAA regulations and hold all necessary operating and airworthiness certificates and licenses. We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject. Our flight operations, maintenance programs, record keeping and training programs are conducted under FAA approved procedures.
 
The DOT allows local airport authorities to implement procedures designed to abate special noise problems, provided such procedures do not unreasonably interfere with interstate or foreign commerce or the national transportation system. Certain airports, including major airports at Boston, Washington, D.C., the New York area, Dallas, Philadelphia, Charlotte, Chicago, Los Angeles, San Diego, Orange County (California) and San Francisco, have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of such operations. In some instances, these restrictions have caused curtailments in service or increases in operating costs, and such restrictions could limit our ability to commence or expand our operations at affected airports. Local authorities at other airports are considering adopting similar noise regulations.
 
Pursuant to law and the regulations of the DOT, we must be actually controlled by United States citizens. In this regard, our President and at least two-thirds of our Board of Directors must be United States citizens and not more than 25% of our voting stock may be owned or controlled by foreign nationals, although subject to DOT approval the percentage of foreign economic ownership may be as high as 49%.

12

 
Environmental Regulation

The Airport Noise and Capacity Act of 1990 (ANCA) generally recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as such programs do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. The ANCA generally requires FAA approval of local noise restrictions on Stage 3 aircraft. While we have had sufficient scheduling flexibility to accommodate local noise restrictions imposed to date, our operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.

The Environmental Protection Agency (EPA) regulates operations, including air carrier operations, which affect the quality of air in the United States. We believe the aircraft in our fleet meet all emission standards issued by the EPA. We may become subject to additional taxes or requirements to obtain permits for green house gas emissions.

Safety and Health Regulation

The Company and its third-party maintenance providers are subject to the jurisdiction of the FAA with respect to the Company’s aircraft maintenance and operations, including equipment, ground facilities, dispatch, communications, flight training personnel, and other matters affecting air safety. To ensure compliance with its regulations, the FAA requires airlines to obtain, and the Company has obtained, operating, airworthiness, and other certificates. These certificates are subject to suspension or revocation for cause. In addition, pursuant to FAA regulations, the Company has established, and the FAA has approved, the Company’s operations specifications and a maintenance program for the Company’s aircraft, ranging from frequent routine inspections to major overhauls. The FAA, acting through its own powers or through the appropriate U.S. Attorney, also has the power to bring proceedings for the imposition and collection of fines for violation of the Federal Aviation Regulations.

The Company is subject to various other federal, state, and local laws and regulations relating to occupational safety and health, including Occupational Safety and Health Administration and Food and Drug Administration regulations.

Security Regulation

Pursuant to the Aviation and Transportation Security Act (the “Aviation Security Act”), the Transportation Security Administration (the “TSA”), a division of the U.S. Department of Homeland Security is responsible for certain civil aviation security matters. The Aviation Security Act addresses procedures for, among other things, flight deck security, the use of federal air marshals onboard flights, airport perimeter access security, airline crew security training, security screening of passengers, baggage, cargo, mail, employees, and vendors, training and qualifications of security screening personnel, provision of passenger data to U.S. Customs and Border Protection, and background checks. Under the Aviation Security Act, substantially all security screeners at airports are federal employees, and significant other elements of airline and airport security are overseen and performed by federal employees, including federal security managers, federal law enforcement officers, and federal air marshals.

TSA-mandated security procedures can have a negative effect on the Customer experience and the Company’s operations. For example, in 2006, the TSA implemented security measures regulating the types of liquid items that can be carried onboard aircraft. In 2009, the TSA introduced its Secure Flight Initiative. As part of that initiative, the Company has begun collecting additional Customer data. The Secure Flight Initiative was created to help reduce the number of passengers who are misidentified as possible terrorists because their names are similar to those of people on security watch lists. The program standardized how names are matched, as well as added age and gender to a passenger’s profile. Under the program, the Company is required to ask for  Customer names exactly as they appear on a government-issued photo ID such as a passport or driver’s license. In addition, the Company must ask Customers for their gender and date of birth. The TSA has also indicated its intent to expand its use of whole body imaging machines around the United States.
 
The Company has made significant investments to address the effect of security regulations, including investments in facilities, equipment, and technology to process Customers efficiently and restore the airport experience; however, the Company is not able to predict the ongoing impact, if any, that various security measures will have on Passenger revenues and the Company’s costs, both in the short-term and the long-term.

Additional Information

The Company files annual, quarterly and current reports and other information with the Securities and Exchange Commission (the "SEC" or the "Commission"). These materials can be inspected and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these materials may also be obtained by mail at prescribed rates from the SEC's Public Reference Room at the above address. Information about the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC's Internet site is www.sec.gov.
 
13

 
On our website, www.rjet.com/investorrelations.html, we provide free of charge our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as reasonably practicable after they have been electronically filed or furnished to the Securities and Exchange Commission. The code of ethics, adopted by our Board of Directors, which applies to all our employees, can also be found on our website, www.rjet.com/investorrelations.html. Our audit committee charter is also available on our website.
 
14


ITEM 1A. RISK FACTORS
 
The following risk factors, in addition to the information discussed elsewhere herein, should be carefully considered in evaluating us and our business:
 
Risks Related To Our Operations

We are dependent on our code-share relationships with our Partners.
 
We depend on relationships created by our regional jet fixed-fee code-share agreements with American, Continental, Delta, United and US Airways for all of our fixed-fee service revenues. Any material modification to, or termination of, our code-share agreements with any of these Partners could have a material adverse effect on our financial condition, results of our operations and the price of our common stock. Each of the code-share agreements contains a number of grounds for termination by our Partners, including our failure to meet specified performance levels. In addition, American may terminate its code-share agreement without cause upon 180 days notice, provided such notice may not be given prior to September 30, 2011. If American terminates its code-share agreement for cause, it has the right to require us to assign to them our leases of all E140 aircraft then operating under the code-share agreement or to lease such aircraft to them to the extent we own them. If American terminates our code-share agreement other than for cause, we have the right to require American to assume our leases of all E140 aircraft then operating under the code-share agreement, or to lease such jets from us to the extent we own them. Delta may partially or completely terminate its code-share agreement with respect to the E145 aircraft, with or without cause, on 180 days written notice at any time after November 2009, and may partially or completely terminate its code-share agreement with respect to the E170 aircraft, with or without cause, on 180 days written notice at any time after July 2015.  If Delta exercises this right under either agreement or if we terminate either agreement for cause, we have the right to require Delta either to purchase, sublease or assume the lease of aircraft leased by us with respect to any of the aircraft we previously operated for Delta under that agreement. If we choose not to exercise this right, or if Delta terminates either agreement for cause, Delta may require us to sell or sublease to it or Delta may assume the lease of aircraft leased by us with respect to any of the aircraft we previously operated for it under that agreement. If we wrongfully terminate our United code-share agreement, breach certain provisions thereof or fall below certain minimum operating thresholds for three consecutive months or any six month period in a rolling 12 month period, United can assume our ownership or leasehold interests in the aircraft we operate for them. Continental may terminate its code-share agreement with cause or if we breach certain provisions thereof including a breach of our guaranty granted to it.
 
In addition, because all of our fixed-fee service revenues are currently generated under the code-share agreements, if any one of them is terminated, our operating revenues and net income will be materially adversely affected unless we are able to enter into satisfactory substitute arrangements or, alternatively, utilize those aircraft in our branded operations, including obtaining the airport facilities and gates necessary to do so. We cannot assure you that we would be able to enter into substitute code-share arrangements, that any such substitute arrangements would be as favorable to us as the current code-share agreements or that we could successfully utilize those aircraft in our branded operations.

The ability to realize fully the anticipated benefits of our acquisition of Midwest and Frontier may depend on the successful integration of the businesses of Republic, Midwest, and Frontier.  

Our acquisition of Midwest and Frontier involved the combination of three companies which operated as independent private and public companies prior to the acquisitions. We are devoting significant attention and resources to integrating our business practices and operations in order to achieve the benefits of the acquisitions, including expected synergies. If we are unable to integrate our business practices and operations in a manner that allows us to achieve the anticipated revenue and cost synergies, or if achievement of such synergies takes longer or costs more than expected, the anticipated benefits of the acquisitions may not be realized fully or may take longer to realize than expected.  In addition, it is possible that the integration process could result in the loss of key employees, diversion of management’s attention, the disruption or interruption of, or the loss of momentum in our ongoing businesses or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers and employees or our ability to achieve the anticipated benefits of the acquisitions, or could reduce our earnings or otherwise adversely affect our business and financial results.

15

 
We may be unable to redeploy smaller aircraft removed from service.
 
Certain of our Partners have indicated a desire to schedule fewer 50 seat aircraft. To the extent that we agree to remove an E140/145 aircraft from service, we must either sell or sublease the aircraft to another party or redeploy it in order to cover our carrying expenses for that aircraft. Our inability to sell, sublease and/or redeploy aircraft that have been removed from service could have a material adverse effect on our financial condition, results of operations and the price of our common stock.
 
If the financial strength of any of our Partners decreases, our financial strength is at risk.
 
We are directly affected by the financial and operating strength of the Partners in our fixed-fee regional airline code-share business.  In the event of a decrease in the financial or operational strength of any of our Partners, such partner may be unable to make the payments due to us under its code-share agreement.  In addition, it may reduce utilization of our aircraft to the minimum levels specified in the code-share agreements and, it is possible that any code-share agreement with a code-share partner that files for reorganization under Chapter 11 of the bankruptcy code may not be assumed in bankruptcy and could be modified or terminated.  Any such event could have an adverse effect on our operations and the price of our common stock.  As of February 19, 2010, Standard & Poor’s and Moody’s, respectively, maintained ratings of B- and Caa1 for US Airways, B- and Caa1 for AMR Corp., the parent of American, B and B2 for Delta, B- and Caa1 for UAL Corp., the parent of United, and B and B2 for Continental.
 
Our Partners may expand their direct operation of aircraft thus limiting the expansion of our relationships with them.
 
We depend on major airlines such as our Partners to contract with us instead of purchasing and operating their own aircraft. However, some major airlines own their own regional airlines and operate their own aircraft instead of entering into contracts with us or other regional carriers. For example, American and Delta have acquired many aircraft which they fly under their affiliated carriers, American Eagle, with respect to American, and Comair, with respect to Delta. In addition, US Airways is operating aircraft through its PSA subsidiary. We have no guarantee that in the future our Partners will choose to enter into contracts with us instead of purchasing their own aircraft or entering into relationships with competing regional airlines. They are not prohibited from doing so under our code-share agreements. In addition, US Airways previously announced that, pursuant to an agreement with its pilots, US Airways will not enter into agreements with its regional affiliates to fly E190 and higher capacity aircraft and it is possible that our other partners will make the same decision. A decision by US Airways, American, Delta, United, or Continental to phase out our contract based code-share relationships as they expire and instead acquire and operate their own aircraft or to enter into similar agreements with one or more of our competitors could have a material adverse effect on our financial condition, results of operations and the price of our common stock.

Any labor disruption or labor strikes by our employees or those of our Partners would adversely affect our ability to conduct our business.
 
All of our pilots, customer service employees, flight attendants and dispatchers are represented by unions. Collectively, these employees represent approximately 45% of our workforce as of December 31, 2009. Although we have never had a work interruption or stoppage and believe our relations with our unionized employees are generally good, we are subject to risks of work interruption or stoppage and/or may incur additional administrative expenses associated with union representation of our employees. If we are unable to reach agreement with any of our unionized work groups on the amended terms of their collective bargaining agreements, we may be subject to work interruptions and/or stoppages. Any sustained work stoppages could adversely affect our ability to fulfill our obligations under our code-share agreements and could have a material adverse effect on our financial condition, results of operations and the price of our common stock.

Under the terms of our jet code-share agreement with US Airways, if we are unable to provide scheduled flights as a result of a strike by our employees, it is only required to pay us for certain fixed costs for specified periods. Under the terms of the code-share agreements with the remainder of our Partners, none of them are required to pay us any amounts during the period our employees are on strike and we are unable to provide scheduled flights. A sustained strike by our employees would require us to bear costs otherwise paid by our Partners.

In addition, a labor disruption other than a union authorized strike may cause us to be in material breach of our code-share agreements, all of which require us to meet specified flight completion levels during specified periods. Our Partners have the right to terminate their code-share agreements if we fail to meet these completion levels.

Our Partners may be restricted in increasing the level of business that they conduct with us, thereby limiting our growth.

In general, the pilots' unions of certain major airlines have negotiated collective bargaining agreements that restrict the number and/or size of regional aircraft that a particular carrier may operate. A "scope" clause in US Airways' current collective bargaining agreement with its pilots prevents US Airways from using more than 465 aircraft not flown by its pilots in its operations. There are no quantity limitations in the US Airways "scope" limitations for small aircraft. For purposes of this "scope" restriction, a small regional jet is defined as any aircraft configured with 78 or fewer seats. For purposes of this limitation, a large regional jet is an aircraft configured with 79 to 90 passenger seats. US Airways can outsource up to an additional 55 aircraft, including the E175 and C900, configured with more than 78 seats but less than 90 seats, subject to certain limitations. We cannot assure you that US Airways will contract with us to fly any additional aircraft. Our pilots union limited their approval to 80 additional aircraft for US Airways, which includes the 20 E170s and 38 E175s we currently operate for US Airways. A "scope" clause in American's current collective bargaining agreement with its pilots limits it from operating aircraft having 51 or more seats. A "scope" clause in Delta's current collective bargaining agreement with its pilots restricts it from operating aircraft having more than 70 to 76 seats and limits it from operating more than 175, or under certain circumstances, 200 aircraft having 70 to 76 seats. United's "scope" limitations restrict it from operating aircraft configured with more than 70 seats or any aircraft weighing more than 83,000 pounds. Continental's "scope" limitations restrict it from operating aircraft configured with more than 51 seats.
 
16

 
American's "scope" limitations further limit its partners, in our case Chautauqua, from operating aircraft with 51 or more seats even for partners other than American. Delta's "scope" limitations restrict its partners from operating aircraft with over 76 seats even if those aircraft are operated for an airline other than Delta. Neither US Airways, United nor Continental has similar "scope" limits on the size of aircraft we can operate for our other Partners.
 
We cannot assure you that these "scope" clauses will not become more restrictive in the future. Any additional limit on the number of aircraft we can fly for our Partners could have a material adverse effect on our expansion plans and the price of our common stock.
 
We have significant debt and off-balance sheet obligations and any inability to pay would adversely impact our operations.
 
The airline business is very capital intensive and, as a result, many airline companies are highly leveraged. During the years ended December 31, 2009 and 2008, our mandatory debt service payments totaled $278.3 million and $274.6 million, respectively, and our mandatory lease payments totaled $194.3 million and $137.6 million, respectively. We have significant lease obligations with respect to our aircraft, which aggregated approximately $1.6 billion and $1.0 billion at December 31, 2009 and 2008, respectively.  Airbus’ current aggregate list price for the eight A320 aircraft on firm order is $349 million.  We expect to acquire on credit a substantial portion of this value which will increase our mandatory lease and debt service payments.
 
We have a significant amount of variable interest rate debt.  Approximately $506.8 million of our debt as of December 31, 2009 is subject to variable market interest rates.  If rates increase significantly, our results and cash flows could be adversely impacted.  None of our debt was variable as of December 31, 2008.

There can be no assurance that our operations will generate sufficient cash flow to make such payments or that we will be able to obtain financing to acquire the additional aircraft or make other capital expenditures necessary for our expansion. If we default under our loan or lease agreements, the lender/lessor has available extensive remedies, including, without limitation, repossession of the respective aircraft and other assets and, in the case of large creditors, the effective ability to exert control over how we allocate a significant portion of our revenues. Even if we are able to timely service our debt, the size of our long-term debt and lease obligations could negatively affect our financial condition, results of operations and the price of our common stock in many ways, including:

· 
increasing the cost, or limiting the availability of, additional financing for working capital, acquisitions or other purposes;

· 
limiting the ways in which we can use our cash flow, much of which may have to be used to satisfy debt and lease obligations; and

· 
adversely affecting our ability to respond to changing business or economic conditions.
 
We may be unable to continue to comply with financial covenants in certain financing agreements, which, if not complied with, could materially and adversely affect our liquidity and financial condition.
 
We are required to comply with certain financial covenants under certain of our financing arrangements.  We are required to maintain a certain level of minimum unrestricted cash and maintain certain cash flow and working capital covenants.
 
As of December 31, 2009, we were in compliance with all our covenants, however, we believe it is probable that we will be unable to comply with certain of these covenants during 2010.  We are currently in discussions to renegotiate these covenants, however, our ability to renegotiate or obtain a waiver of, or otherwise mitigate, the impact of a default, could potentially provide for the accelerated repayment of principal totaling approximately $25 million and the discontinuation of the monthly pre-purchase of airline miles from our affinity card provider, which totals approximately $2.9 million per month.   If we are unable to successfully renegotiate the covenants, of which there can be no assurance or if a default were to occur and we were unable to obtain a waiver, or otherwise mitigate the impact of a default, our financial condition and liquidity could be materially and adversely affected.
    
We currently depend on Embraer and Airbus to support our fleet of jet aircraft.
 
We rely on Embraer as the manufacturer of substantially all of our regional jets and on Airbus as the manufacturer of our narrow-body jets.  Our risks in relying primarily on a single manufacturer for each aircraft type include: 
 
· 
the failure or inability of Embraer or Airbus to provide sufficient parts or related support services on a timely basis;

· 
the interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for these aircraft;

· 
the issuance of FAA directives restricting or prohibiting the use of Embraer or Airbus aircraft or requiring time-consuming inspections and maintenance; and
 
17

 
· 
the adverse public perception of a manufacturer as a result of an accident or other adverse publicity.
 
Our operations could be materially adversely affected by the failure or inability of Embraer, Airbus or any key component manufacturers to provide sufficient parts or related support services on a timely basis or by an interruption of fleet service as a result of unscheduled or unanticipated maintenance requirements for our aircraft.
 
Reduced utilization levels of our aircraft under the fixed-fee agreements would adversely impact our revenues, earnings and liquidity.
 
Our agreements with our Partners require each of them to schedule our aircraft to a minimum level of utilization.  However, the aircraft have historically been utilized more than the minimum requirement.  Even though the fixed-fee rates may adjust, either up or down, based on scheduled utilization levels or require a fixed amount per day to compensate us for our fixed costs, if our aircraft are at or below the minimum requirement (including taking into account the stage length and frequency of our scheduled flights) we will likely lose both the opportunity to recover a margin on the variable costs of flights that would have been flown if our aircraft were more fully utilized and the opportunity to earn incentive compensation on such flights.

Increases in our labor costs, which constitute a substantial portion of our total operating costs, will directly impact our earnings.
 
Labor costs constitute a significant percentage of our total operating costs, and we have experienced pressure to increase wages and benefits for our employees.  Under our code-share agreements, our reimbursement rates contemplate labor costs that increase on a set schedule generally tied to an increase in the consumer price index or the actual increase in the contract.  We are entirely responsible for our labor costs, and we may not be entitled to receive increased payments for our flights if our labor costs increase above the assumed costs included in the reimbursement rates.  As a result, a significant increase in our labor costs above the levels assumed in our reimbursement rates could result in a material reduction in our earnings.  We have collective bargaining agreements with our pilots, flight attendants, dispatchers, mechanics, material specialists and aircraft appearance agents.  We cannot assure you that future agreements with our employees’ unions will be on terms in line with our expectations or comparable to agreements entered into by our competitors, and any future agreements may increase our labor costs and reduce both our income and our competitiveness for future business opportunities.
 
Our credit card processors have the ability to increase their holdbacks in certain circumstances.  The initiation of such holdbacks likely would have a material adverse effect on our liquidity.

In our branded business, most of the tickets we sell are paid for by customers who use credit cards.  Our credit card processing agreements provide 100% holdback of receivables.  If circumstances were to occur that would allow our processor to increase their holdbacks, the negative impact on our liquidity likely would be material.
 
Our business could be harmed if we lose the services of our key personnel.

Our business depends upon the efforts of our chief executive officer, Bryan Bedford, and our other key management and operating personnel.  American can terminate its code-share agreement if we replace Mr.  Bedford without its consent, which cannot be unreasonably withheld.  We may have difficulty replacing management or other key personnel who leave and, therefore, the loss of the services of any of these individuals could harm our business.  We maintain a “key man” life insurance policy in the amount of $10 million for Mr.  Bedford, but this amount may not adequately compensate us in the event we lose his services.
 
We may experience difficulty finding, training and retaining employees.

The airline industry has from time to time experienced a shortage of qualified personnel, specifically pilots and maintenance technicians.  In addition, as is common with most of our competitors, we have, from time to time, faced considerable turnover of our employees.  Although our employee turnover has decreased significantly since September 11, 2001, our regional jet pilots, flight attendants and maintenance technicians sometimes leave to work for larger airlines, which generally offer higher salaries and more extensive benefit programs than regional airlines are financially able to offer.  Should the turnover of employees, particularly pilots and maintenance technicians, sharply increase, the result will be significantly higher training costs than otherwise would be necessary.  We cannot assure you that we will be able to recruit, train and retain the qualified employees that we need to carry out our expansion plans or to replace departing employees.  If we are unable to hire and retain qualified employees at a reasonable cost, we may be unable to complete our expansion plans, which could materially adversely affect our financial condition, results of operations and the price of our common stock.
 
18

 
Our acquisition of Midwest and Frontier affects the comparability of our historical financial results.

On July 31, 2009, the Company acquired Midwest and on October 1, 2009 the Company acquired Frontier upon its emergence from bankruptcy.  While our financial results for the year ended December 31, 2009 include the results of Midwest for five months and Frontier for three months, the results for the year ended December 31, 2008 and all prior periods do not.  None of our historical financial statements include Frontier’s results.  This complicates your ability to compare our results of operations and financial condition for periods that include Midwest’s and Frontier’s results with periods that do not.

We are vulnerable to increases in aircraft fuel costs.

High oil prices may have a significant adverse impact on the future results of operations.  We cannot predict the future cost and availability of fuel, or the impact of disruptions in oil supplies or refinery productivity based on natural disasters, which would affect our ability to compete.  The unavailability of adequate fuel supplies could have an adverse effect on our Midwest and Frontier operations.  In addition, larger airlines may have a competitive advantage because they pay lower prices for fuel, and other airlines, such as Southwest Airlines, may have substantial fuel hedges that give them a competitive advantage.  Because fuel costs are now a significant portion of our operating costs, substantial changes in fuel costs can materially affect our operating results.  Fuel prices continue to be susceptible to, among other factors, speculative trading in the commodities market, political unrest in various parts of the world, Organization of Petroleum Exporting Countries policy, the rapid growth of economies in China and India, the levels of inventory carried by the oil companies, the amounts of reserves built by governments, refining capacity, and weather.  These and other factors that impact the global supply and demand for aircraft fuel may affect our financial performance due to its high sensitivity to fuel prices.  A one-cent change in the cost of each gallon of fuel would impact our pre-tax income by approximately $2.4 million per year based on our current fleet and aircraft fuel consumption.
 
Since the acquisitions of Midwest and Frontier, fuel has become a major component of our operating expenses, accounting for 21.2% of our total operating expenses for the year ended December 31, 2009, on a pro forma basis, giving effect to the acquisitions on January 1, 2009.  Our ability to pass on increased fuel costs has been and may continue to be limited by economic and competitive conditions.

Midwest and Frontier depend heavily on the Milwaukee and Denver markets to be successful.

Our business strategy for Midwest and Frontier is focused on adding flights to and from our Milwaukee and Denver bases of operations.  Currently, 95% of our flights originate or depart from General Mitchell International Airport in Milwaukee, known as MKE, and Denver International Airport, known as DIA (this does not include seasonal non-hub flying to Mexico).  A reduction in our share of either market, increased competition, or reduced passenger traffic to or from Milwaukee or Denver could have an adverse effect on our financial condition and results of operations.  In addition, our dependence on a hub system operating out of DIA makes us more susceptible to adverse weather conditions and other traffic delays in the Rocky Mountain region than some of our competitors that may be better able to spread these traffic risks over larger route networks.

We face intense competition by United Airlines, Southwest Airlines and other airlines at DIA and by AirTran Airways, Southwest Airlines, and Delta Airlines at MKE.

The airline industry is highly competitive.  We compete with United in our hub in Denver, and we anticipate that we will compete with United in any additional markets we elect to serve in the future.  United and United’s regional airline affiliates are the dominant carriers out of DIA. In addition, Southwest Airlines started service to and from Denver in January 2006.  Southwest’s introductory fares were significantly below the fares Frontier was able to offer prior to its arrival.  Fare pressure exerted by Southwest on its announced routes and on any future expansion in Denver by Southwest will require us to be fare competitive, and may place additional downward pressure on our yields.  In addition, in the last four years Alaska Airlines, JetBlue Airways and AirTran Airways have commenced service at DIA.  These airlines have offered low introductory fares and compete on several of our routes.  Fare wars, predatory pricing, ‘‘capacity dumping,’’ in which a competitor places additional aircraft on selected routes, and other competitive activities could adversely affect us.  In Milwaukee, although Midwest is the dominant brand, we face competition from AirTran Airways, Southwest Airlines, and Delta Airlines.  The future activities of competing branded carriers in DIA, MKE and any other hub from which we operate may have a material adverse effect on our revenue and results of operations.

We experience high costs at DIA, which may impact our results of operations.

Our largest hub of flight operations is DIA where we experience high costs.  Financed through revenue bonds, DIA depends on landing fees, gate rentals, income from airlines and the traveling public, and other fees to generate income to service its debt and to support its operations.  Our cost of operations at DIA will vary as traffic increases or diminishes at the airport or as significant improvement projects are undertaken by the airport.  We believe that our operating costs at DIA substantially exceed those that other airlines incur at most hub airports in other cities, which decreases our ability to compete with other airlines with lower costs at their hub airports.

19

 
Our maintenance expenses may be higher than we anticipate and will increase as our fleet ages.

We bear the cost of all routine and major maintenance on our owned and leased aircraft.  Maintenance expenses comprise a significant portion of our operating expenses.  In addition, we are required periodically to take aircraft out of service for heavy maintenance checks, which can increase costs and reduce revenue.  We also may be required to comply with regulations and airworthiness directives the FAA issues, the cost of which our aircraft lessors may only partially assume depending upon the magnitude of the expense.  Although we believe that our owned and leased aircraft are currently in compliance with all FAA issued airworthiness directives, additional airworthiness directives likely will be required in the future, necessitating additional expense.
 
Because the average age of our Embraer aircraft is approximately 4.6 years old and that of our Airbus aircraft is approximately 5.6 years, our aircraft require less maintenance now than they will in the future.  We have incurred lower maintenance expenses because most of the parts on our aircraft are under multi-year warranties.  Our maintenance costs will increase significantly, both on an absolute basis and as a percentage of our operating expenses, as our fleet ages and these warranties expire.
 
Our landing fees may increase because of local noise abatement procedures and due to reduced capacity in the industry.

As a result of litigation and pressure from residents in the areas surrounding airports, airport operators have taken actions over the years to reduce aircraft noise.  These actions have included regulations requiring aircraft to meet prescribed decibel limits by designated dates, curfews during nighttime hours, restrictions on frequency of aircraft operations, and various operational procedures for noise abatement.  The Airport Noise and Capacity Act of 1990 recognized the right of airport operators with special noise problems to implement local noise abatement procedures as long as the procedures do not interfere unreasonably with the interstate and foreign commerce of the national air transportation system.  Although we are reimbursed by our Partners for landing fees, compliance with local noise abatement procedures may lead to increased landing fees for Midwest and Frontier.
 
An agreement between the City and County of Denver and another county adjacent to Denver specifies maximum aircraft noise levels at designated monitoring points in the vicinity of DIA with significant amounts payable by the city to the other county for each substantiated noise violation under the agreement.  DIA has incurred these payment obligations and likely will incur such obligations in the future, which it will pass on to us and other air carriers serving DIA by increasing landing fees.  Additionally, noise regulations could be enacted in the future that would increase our expenses and could have a material adverse effect on our operations.
 
In addition, the recent capacity reductions by all airlines have forced some airport authorities to increase lease rates and landing fees to adjust for lower volume.
 
Our ability to utilize net operating loss carry-forwards may be limited.

At December 31, 2009, we had estimated federal net operating loss carry-forwards (“NOLs”) of $1.1 billion for federal  income tax purposes that begin to expire in 2015.  We have recorded a valuation allowance for $558 million of those NOLs.  Section 382 of the Internal Revenue Code (“Section 382”) imposes limitations on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. In the event of an ownership change, utilization of our NOLs would be subject to an annual limitation under Section 382.  Any unused NOLs in excess of the annual limitation may be carried over to later years.

The imposition of a limitation on our ability to use our NOLs to offset future taxable income could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect and could cause such NOLs to expire unused, reducing or eliminating the benefit of such NOLs. Based on analysis that we performed, we believe we have not experienced a change in ownership as defined by Section 382, and, therefore, our NOLs are not currently under any Section 382 limitation, except for NOLs acquired from Midwest and Frontier.

The lack of marketing alliances could harm our business.

Many branded airlines have marketing alliances with other airlines, under which they market and advertise their status as marketing alliance partners.  Among other things, they share the use of two-letter flight designator codes to identify their flights and fares in the computerized reservation systems and permit reciprocity in their frequent flyer programs.  Midwest and Frontier do not have an extensive network of marketing partners.  The lack of marketing alliances puts us at a competitive disadvantage to global network carriers, whose ability to attract passengers through more widespread alliances, particularly on international routes, may adversely affect our passenger traffic and our results of operations.
 
20

 
We rely heavily on automated systems and technology to operate our Midwest and Frontier business and any failure of these systems could harm our business.

We are increasingly dependent on automated systems, information technology personnel and technology to operate our Midwest and Frontier business, enhance customer service and achieve low operating costs, including our computerized airline reservation system, telecommunication systems, website, check-in kiosks and in-flight entertainment systems.  Substantial or repeated system failures to any of the above systems could reduce the attractiveness of our services and could result in our customers purchasing tickets from another airline.  Any disruptions in these systems or loss of key personnel could result in the loss of important data, increase our expenses and generally harm our business.  In addition, we have experienced an increase in customers booking flights on our airline through third-party websites, which has increased our distribution costs.  If any of these third-party websites experiences system failure or discontinues listing our flights on its systems, our bookings and revenue may be adversely impacted.
 
We implement improvements to our website and reservations system from time to time.  Implementation of changes to these systems may cause operational and financial disruptions if we experience transition or system cutover issues, if the new systems do not perform as we expect them to, or if vendors do not deliver systems upgrades or other components on a timely basis.  Any such disruptions may have the effect of discouraging some travelers from purchasing tickets from us and increasing our reservations staffing.
 
We are at risk of losses stemming from an accident involving any of our aircraft.

While we have never had a crash causing death or serious injury over our 35 year history, it is possible that one or more of our aircraft may crash or be involved in an accident in the future, causing death or serious injury to individual air travelers and our employees and destroying the aircraft and the property of third parties.
 
In addition, if one of our aircraft were to crash or be involved in an accident we would be exposed to significant tort liability.  Such liability could include liability arising from the claims of passengers or their estates seeking to recover damages for death or injury.  There can be no assurance that the insurance we carry to cover such damages will be adequate.  Accidents could also result in unforeseen mechanical and maintenance costs.  In addition, any accident involving an aircraft that we operate could create a public perception that our aircraft are not safe, which could result in air travelers being reluctant to fly on our aircraft and a decrease in revenues.  Such a decrease could materially adversely affect our financial condition, results of operations and the price of our common stock.
 
Customer loyalty may be affected due to diminishing product differentiation.

The Company’s branded business strategy includes a premium travel experience at competitive fares.  The Company seeks to differentiate itself through better customer service throughout the customer’s travel experience.  Due to the current state of the airline industry in general, and the Company’s current state, it has been forced to reduce or suspend some of the amenities that helped it originally achieve differentiation.  Any loss of customers due to diminishing product differentiation could harm business.

Risks Associated with the Airline Industry

The airline industry is highly competitive.
 
Within the airline industry, we not only compete with major and other regional airlines, some of which are owned by or operated as partners of major airlines, but we also face competition from low-fare airlines and major airlines on many of our routes, including carriers that fly point to point instead of to or through a hub.

Some of our competitors are larger and have significantly greater financial and other resources than we do. Moreover, federal deregulation of the industry allows competitors to rapidly enter our markets and to quickly discount and restructure fares. The airline industry is particularly susceptible to price discounting because airlines incur only nominal costs to provide service to passengers occupying otherwise unsold seats.
 
In addition to traditional competition among airlines, the industry faces competition from video teleconferencing and other methods of electronic communication. New advances in technology may add a new dimension of competition to the industry as business travelers seek lower-cost substitutes for air travel.

If passengers perceive the operations of regional airlines as being unsafe, our business will be harmed.

In February 2009, Colgan Flight 3407, operating as Continental Connection, crashed on its approach into Buffalo, New York.  A total of 50 people were killed.  Since the date of this tragedy, there have been numerous press reports questioning some of the operating policies of regional airlines.  In response, there have also been legislative initiatives aimed at heightening safety requirements, such as The Airline Safety and Pilot Training Improvement Act of 2009, which was passed in October.  Although we have never had a crash causing death or serious injury in over 35 years of operations, should the public perceive our operations as less safe or should new legislation impose additional burdens on us, our financial condition, results of operations and the price of our common stock could be materially adversely effected.
 
21

 
High fuel costs would harm the airline industry.
 
While fuel is at or near three-year lows, a return to higher fuel prices would harm the airline industry’s financial condition and results of operations.  Fuel costs constitute a substantial portion of the total operating expenses of the airline industry.  Historically, fuel costs have been subject to wide price fluctuations based on geopolitical issues, supply and demand and other factors.  Fuel availability is also affected by demand for home heating oil, gasoline and other petroleum products.  Because of the effect of these events on the price and availability of fuel, the cost and future availability of fuel cannot be predicted with any degree of certainty.  Further, in the event of a fuel supply shortage or further increases in fuel prices, a curtailment of scheduled service could result.
 
The airline industry has been subject to a number of strikes, which could affect our business.

The airline industry has been negatively impacted by a number of labor strikes.  Any new collective bargaining agreement entered into by other carriers may result in higher industry wages and increase pressure on us to increase the wages and benefits of our employees.  Furthermore, since each of our Partners is a significant source of our operating revenues, any labor disruption or labor strike by the employees of any one of our Partners could have a material adverse effect on our financial condition, results of operations and the price of our common stock.
 
Airlines are often affected by certain factors beyond their control, including weather conditions, which can affect their operations.

Generally, revenues for airlines depend on the number of passengers carried, the fare paid by each passenger and service factors, such as the timeliness of departure and arrival.  During periods of fog, ice, low temperatures, storms or other adverse weather conditions, flights may be cancelled or significantly delayed.  For example, in 2005, Hurricane Wilma forced us to suspend some of our operations in Florida for a number of days.  In addition under our fixed-fee code-share agreements, our regional airline business are partially protected against cancellations due to weather or air traffic control, although these factors may affect our ability to receive incentive payments for flying more than the minimum number of flights specified in our code-share agreements.  Should we enter into pro-rate revenue sharing agreements in the future our regional airline business will not be protected against weather or air traffic control cancellations and our operating revenues could suffer as a result.  Our branded operations are not insulated against weather or air traffic control cancellations.
 
The airline industry has recently gone through a period of consolidation and transition; consequently, we have fewer potential Partners.

Since 1978 and continuing to the present, the airline industry has undergone substantial consolidation, and it may in the future undergo additional consolidation.  For example, in 2008, Delta and Northwest completed a merger.  Other recent developments include the domestic code-share alliance between United and US Airways, and the merger of America West and US Airways.  We, as well as our Partners, routinely monitor changes in the competitive landscape and engage in analysis and discussions regarding our strategic position, including potential alliances and business combination transactions.  Further consolidation could limit the number of potential partners with whom we could enter into code-share relationships.  Although none of our contracts with our Partners allow termination or are amendable in the event of consolidation, any additional consolidation or significant alliance activity within the airline industry could adversely affect our relationship with our Partners.
 
The global financial crisis may have an impact on our business and financial condition in ways that we currently cannot predict.

The credit crisis and related turmoil in the global financial system has had and may continue to have an impact on our business and our financial condition.  For example, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to do so, which could have an impact on our flexibility to react to changing economic and business conditions.  Moreover, our ability to sell excess aircraft may be restricted by a potential buyer’s inability to secure credit.
 
The global economic recession has resulted in weaker demand for air travel and may create challenges for us that could have a material adverse effect on our business and results of operations.

As the effects of the global economic recession have been felt in our domestic markets, we are experiencing significantly weaker demand for air travel.  Global economic conditions in 2009 substantially reduced U.S. airline industry revenues in 2009 compared to 2008.  Demand for air travel could remain weak or even continue to fall if the global economic recession continues for an extended period.  The weakness in the United States and international economies is having a significant negative impact on our results of operations and could continue to have a significant negative impact on our future results of operations.
 
22

 
The airline industry is heavily regulated.

Airlines are subject to extensive regulatory and legal compliance requirements, both domestically and internationally, that involve significant costs.  In the last several years, the FAA has issued a number of directives and other regulations relating to the maintenance and operation of aircraft that have required us to make significant expenditures.  FAA requirements cover, among other things, retirement of older aircraft, security measures, collision avoidance systems, airborne wind shear avoidance systems, noise abatement, commuter aircraft safety and increased inspection and maintenance procedures to be conducted on older aircraft.
 
We incur substantial costs in maintaining our current certifications and otherwise complying with the laws, rules and regulations to which we are subject.  We cannot predict whether we will be able to comply with all present and future laws, rules, regulations and certification requirements or that the cost of continued compliance will not significantly increase our costs of doing business.
 
The FAA has the authority to issue mandatory orders relating to, among other things, the grounding of aircraft, inspection of aircraft, installation of new safety related items and removal, replacement or modification of aircraft parts that have failed or may fail in the future.  A decision by the FAA to ground, or require time consuming inspections of or maintenance on, all or any of our Embraer or Airbus aircraft, for any reason, could negatively impact our results of operations.
 
In addition to state and federal regulation, airports and municipalities enact rules and regulations that affect our operations.  From time to time, various airports throughout the country have considered limiting the use of smaller aircraft, such as Embraer or Bombardier aircraft, at such airports.  The imposition of any limits on the use of Embraer or Bombardier aircraft at any airport at which we operate could interfere with our obligations under our code-share agreements and severely interrupt our business operations.
 
Additional laws, regulations, taxes and airport rates and charges have been proposed from time to time that could significantly increase the cost of airline operations or reduce revenues.  For instance, “passenger bill of rights” legislation was introduced in Congress that, if enacted, would have, among other things, required the payment of compensation to passengers as a result of certain delays and limited the ability of carriers to prohibit or restrict usage of certain tickets.  This legislation is not currently active but if it is reintroduced, these measures could have the effect of raising ticket prices, reducing revenue and increasing costs.  Several state legislatures have also considered such legislation, and the State of New York in fact implemented a “passenger bill of rights” that was overturned by a federal appeals court in 2008.  The DOT has imposed restrictions on the ownership and transfer of airline routes and takeoff and landing slots at certain high-density airports, including New York LaGuardia and Reagan National.  In addition, as a result of the terrorist attacks in New York and Washington, D.C. in September 2001, the FAA and the Transportation Security Administration (TSA) have imposed stringent security requirements on airlines.  We cannot predict what other new regulations may be imposed on airlines and we cannot assure you that laws or regulations enacted in the future will not materially adversely affect our financial condition, results of operations and the price of our common stock.

The Company’s results of operations fluctuate due to seasonality and other factors associated with the airline industry.

Due to greater demand for air travel during the summer months, revenues in the airline industry in the second and third quarters of the year are generally stronger than revenues in the first and fourth quarters of the year.  The Company’s results of operations generally reflect this seasonality, but have also been impacted by numerous other factors that are not necessarily seasonal including, among others, the imposition of excise and similar taxes, extreme or severe weather, air traffic control congestion, changes in the competitive environment due to industry consolidation and other factors and general economic conditions.  As a result, the Company’s quarterly operating results are not necessarily indicative of operating results for an entire year and historical operating results in a quarterly or annual period are not necessarily indicative of future operating results.

The airline industry is seasonal and cyclical resulting in unpredictable liquidity and earnings.

Because the airline industry is seasonal and cyclical, our earnings related to Midwest and Frontier will fluctuate and be unpredictable.  These operations primarily depend on passenger travel demand and seasonal variations.  Our weakest travel periods are generally during the quarters ending in March and December.  The airline industry is also a highly cyclical business with substantial volatility.  Our operating and financial results are likely to be negatively impacted by national or regional economic conditions in the U.S., and particularly in Colorado and Wisconsin.

We are in a high fixed cost business and any unexpected decrease in revenue would harm us.

The airline industry is characterized by low profit margins and high fixed costs primarily for personnel, fuel, aircraft ownership and lease costs and other rents.  The expenses of an aircraft flight do not vary significantly with the number of passengers carried and, as a result, a relatively small change in the number of passengers or in pricing would have a disproportionate effect on the operating and financial results of Midwest and Frontier and possibly on us as a whole.  We are often affected by factors beyond our control, including weather conditions, traffic congestion at airports and increased security measures, and irrational pricing from competitors, any of which could harm our operating results and financial condition.

23

 
Delays or cancellations due to adverse weather conditions or other factors beyond our control could adversely affect us.

Like other airlines, we are subject to delays caused by factors beyond our control, including adverse weather conditions, air traffic congestion at airports and increased security measures.  Delays frustrate passengers, reduce aircraft utilization and increase costs, all of which negatively affect profitability.  During periods of snow, rain, fog, hurricanes or other storms, or other adverse weather conditions, flights may be cancelled or significantly delayed.  Cancellations or delays due to weather conditions, traffic control problems and breaches in security could harm our operating results and financial condition.

Risks Related To Our Common Stock

Our stock price is volatile.
 
Since our common stock began trading on The NASDAQ National Market (now the NASDAQ Global Select Market) on May 27, 2004, the market price of our common stock has ranged from a low of $4.10 to a high of $23.88 per share.  The market price of our common stock may continue to fluctuate substantially due to a variety of factors, many of which are beyond our control, including:
 
· 
announcements concerning our Partners, competitors, the airline industry or the economy in general;
 
· 
strategic actions by us, our Partners or our competitors, such as acquisitions or restructurings;
 
· 
the results of our branded business;
 
· 
media reports and publications about the safety of our aircraft or the aircraft types we operate;
 
· 
new regulatory pronouncements and changes in regulatory guidelines;
 
· 
general and industry specific economic conditions, including the price of oil;
 
· 
changes in financial estimates or recommendations by securities analysts;
 
· 
sales of our common stock or other actions by investors with significant shareholdings or our Partners; and
 
· 
general market conditions.
 
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of particular companies.  These broad market fluctuations may adversely affect the trading price of our common stock.
 
In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities.  Any similar litigation against us could result in substantial costs, divert management’s attention and resources and harm our business.

Future sales of our common stock by our stockholders could depress the price of our common stock.
 
Sales of a large number of shares of our common stock or the availability of a large number of shares for sale could adversely affect the market price of our common stock and could impair our ability to raise funds in additional stock offerings.

Our incorporation documents and Delaware law have provisions that could delay or prevent a change in control of our company, which could negatively affect your investment.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could delay or prevent a change in control of our company that stockholders may consider favorable.  Certain of these provisions:

· 
authorize the issuance of up to 5,000,000 shares of preferred stock that can be created and issued by our board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of our common stock;
 
24

 
· 
limit the persons who can call special stockholder meetings;
 
· 
provide that a supermajority vote of our stockholders is required to amend our certificate of incorporation or bylaws; and
 
· 
establish advance notice requirements to nominate directors for election to our board of directors or to propose matters that can be acted on by stockholders at stockholder meetings.
 
These and other provisions in our incorporation documents and Delaware law could allow our board of directors to affect your rights as a stockholder by making it more difficult for stockholders to replace board members.  Because our board of directors is responsible for appointing members of our management team, these provisions could in turn affect any attempt to replace the current management team.  In addition, these provisions could deprive our stockholders of opportunities to realize a premium on the shares of common stock owned by them.
 
Our charter documents include provisions limiting voting by foreign owners.

Our certificate of incorporation provides that shares of capital stock may not be voted by or at the direction of persons who are not citizens of the United States if the number of such shares would exceed applicable foreign ownership restrictions. U.S. law currently requires that no more than 25% of the voting stock of our company or any other domestic airline may be owned directly or indirectly by persons who are not citizens of the United States.  However, up to 49% of the total equity of our company or any other domestic airline may be owned directly or indirectly by persons who are not citizens of the United States.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None
 
25

 
ITEM 2. PROPERTIES
 
Flight Equipment
 
As of December 31, 2009, we operated 290 aircraft as described in the following table:
 
Type
 
Total
Aircraft
 
Owned
 
Leased
 
Average Age
(in years)
 
Seats in
Standard
Configuration
E135/140LR
 
          21
  
         12
  
          9
  
                  6.0
  
44
E145LR (1)
 
          59
  
         25
  
        34
  
                  7.7
  
50
E170/175LR (2)
 
        130
  
       107
  
        23
  
                  3.3
  
70-86
E190LR
 
          11
  
           6
  
          5
  
                  0.3
  
99
CRJ-200
 
            7
  
          -
  
          7
  
                  2.9
  
50
A318
 
            9
  
           7
  
          2
  
                  5.5
  
120
A319
 
          38
  
           4
  
        34
  
                  5.8
  
136
A320
 
            4
  
           2
  
          2
  
                  4.1
  
162
Q400
 
          11
  
           6
  
          5
  
                  1.9
  
74
 
                   
Total
 
        290
  
       169
  
      121
  
 
  
 
 

(1) Four of these aircraft are used for charter service and as spares.

(2) Two of these aircraft are used for charter service and as spares.
 
In addition to the aircraft listed above, we subleased nine E145 aircraft to a foreign airline, we subleased four E190 aircraft to US Airways, and we have four Fairchild Regional Jet (“FRJ”) aircraft and five McDonnell Douglass (“MD80”) aircraft classified as held-for-sale.

All of our leased aircraft are leased by us pursuant to operating leases, with current lease expirations ranging from 2010 to 2024. We have fixed-price purchase options under most of these leases after nine to 14 years of the lease term. Furthermore, we have options to renew most of the leases for an additional three to four years, or purchase the leased aircraft at the conclusion of their current lease terms at fair market value.

Ground Operations and Properties

As of December 31, 2009, our facilities are summarized in the following table:

 
Square Feet
 
Location
Corporate Office - Republic
 
45,100
 
Indianapolis, IN
Training Facility
 
20,400
 
Plainfield, IN
Maintenance Hangar
 
110,500
 
Indianapolis, IN
Maintenance Hangar/Office
 
232,100
 
Columbus, OH
Maintenance Hangar
 
70,000
 
Louisville, KY
Maintenance Hangar/Office
 
86,000
 
Pittsburgh, PA
Maintenance Hangar/Office
 
35,940
 
St. Louis, MO
Corporate Office - Frontier
 
77,500
 
Denver, CO
Corporate Office - Lynx
 
20,000
 
Westminster, CO
Reservations Facility
 
16,000
 
Denver, CO
Reservations Facility
 
12,000
 
Las Cruces, NM (1)
Corporate Office - Midwest
 
120,000
 
Oak Creek, WI
Maintenance Hangar/Office
 
190,000
 
Oak Creek, WI
Maintenance Hangar/Office
 
93,000
 
Oak Creek, WI
 

(1)  This facility is expected to close in August 2010.
 
Our employees perform substantially all routine airframe and engine maintenance and periodic inspection of equipment. Our Partners or third parties provide ground support services and ticket handling services in all cities we serve our Partners and we provide ground support services and ticket handling services for the majority of our branded operations.
 
26

 
We lease all of our facilities subject to either long-term leases or on a month to month basis.

We believe that our current facilities, along with our planned additional facilities, are adequate for the current and foreseeable needs of our business.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are subject to certain legal and administrative actions, which we consider routine to our business activities. Management believes that the ultimate outcome of any pending legal matters will not have a material adverse effect on our financial position, liquidity or results of operations.
 
ITEM 4. [Reserved]

27

 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Price
 
Our common stock began trading on The NASDAQ National Market (now the NASDAQ Global Select Market) on May 27, 2004 and is traded under the symbol "RJET." Prior to that date, there was no public market for our common stock. The following table sets forth the high and low sales prices of our common stock for the periods indicated.
 
Year Ended December 31, 2008
 
High
   
Low
 
First Quarter
  $ 22.50     $ 19.02  
Second Quarter
    22.64       8.66  
Third Quarter
    12.77       6.68  
Fourth Quarter
    15.72       6.37  
                 
Year Ended December 31, 2009
               
First Quarter
  $ 10.94     $ 4.23  
Second Quarter
    8.34       4.10  
Third Quarter
    10.64       4.85  
Fourth Quarter
    10.29       6.39  
 
As of December 31, 2009 there were 4,192 stockholders of record of our common stock. We have never paid cash dividends on our common stock. The payment of future dividends is within the discretion of our board of directors and will depend upon our future earnings, our capital requirements, bank or other lender financing, financial condition and other relevant factors.

Performance Graph
 
chart

28

 
The above graph compares the performance of the Company from May 27, 2004 through December 31, 2009, against the performance of (i) the Composite Index for Nasdaq Stock Market (U.S. Companies) and (ii) an index of companies engaged in air transportation (SIC 4512 and 4513), including regional airlines, whose stocks trade on the Nasdaq, for the same period.
 
Below is a summary of the equity compensation plans as of December 31, 2009:
 
Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
   
Weighted-average exercise price of outstanding options, warrants and rights
   
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column A)
 
Equity compensation plans approved by security holders
                 
Options outstanding under the 2002 Equity Incentive Plan
    1,310,669     $ 15.27       29,715  
Options outstanding under the 2007 Equity Incentive Plan
    2,995,333       14.05       1,645,667  
Equity compensation plans not approved by security holders
    -       -       -  
Total
    4,306,002     $ 14.42       1,675,382  

Unregistered Sales of Equity Securities

None

29

 
ITEM 6. SELECTED FINANCIAL DATA
 
 The following selected financial data and operating statistics should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and related notes included in Item 8 of the Form 10-K.

   
Years Ended December 31,
 
   
2009 (1)
   
2008
   
2007
   
2006
   
2005
 
   
(in thousands, except share, per share and airline operating data)
 
Statement of Income Data:
                             
                               
Operating revenues:
                             
                               
Fixed-fee service
  $ 1,180,209     $ 1,462,211     $ 1,274,607     $ 1,118,226     $ 883,906  
Passenger service
    389,653       -       -       -       -  
Cargo and other
    72,356       17,544       18,070       24,852       21,115  
Total operating revenues    
    1,642,218       1,479,755       1,292,677       1,143,078       905,021  
Operating expenses:
                                       
Wages and benefits    
    342,364       252,336       226,521       175,483       143,826  
Aircraft fuel (2)
    236,620       327,791       296,573       325,500       278,923  
Landing fees and airport rents
    96,915       59,891       53,684       41,993       30,376  
Aircraft and engine rent    
    156,773       134,206       124,961       94,773       77,725  
Maintenance and repair    
    211,503       169,425       130,237       105,198       76,481  
Insurance and taxes    
    28,105       25,793       19,039       17,652       16,117  
Depreciation and amortization   
    163,584       133,206       106,594       92,228       64,877  
Promotion and sales
    36,265       -       -       -       -  
Goodwill impairment
    113,759       -       -       -       -  
Other impairment charges
    8,800       -       -       -       -  
Gain on bargain purchase
    (203,698 )     -       -       -       -  
Other    
    179,828       122,012       104,790       77,658       57,977  
                                         
Total operating expenses
    1,370,818       1,224,660       1,062,399       930,485       746,302  
                                         
Operating income
    271,400       255,095       230,278       212,593       158,719  
Other income (expense):
                                       
Interest expense
    (144,994 )     (131,856 )     (107,323 )     (91,128 )     (63,546 )
Other - net
    9,784       14,176       11,013       9,944       5,002  
                                         
Total other income (expense)
    (135,210 )     (117,680 )     (96,310 )     (81,184 )     (58,544 )
                                         
Income before income taxes
    136,190       137,415       133,968       131,409       100,175  
Income tax expense
    99,805       52,835       51,210       51,899       39,521  
                                         
Net income
    36,385       84,580       82,758       79,510       60,654  
Add: Net loss attributable to noncontrolling interest in Mokulele Flight Service Inc.
    3,270       -       -       -       -  
Net income of the Company
  $ 39,655     $ 84,580     $ 82,758     $ 79,510     $ 60,654  
Net income available for common stockholders per share:
                                       
     Basic    
  $ 1.15     $ 2.43     $ 2.05     $ 1.89     $ 1.69  
     Diluted    
  $ 1.13     $ 2.42     $ 2.02     $ 1.82     $ 1.66  
Weighted average common shares outstanding:
                                       
    Basic    
    34,598,683       34,855,190       40,350,256       42,149,668       35,854,249  
    Diluted    
    35,699,115       34,949,152       41,045,644       43,615,946       36,548,340  
                                         
Other Financial Data:
                                       
Net cash from:
                                       
     Operating activities
  $ 168,618     $ 242,287     $ 280,490     $ 229,147     $ 170,879  
     Investing activities
  $ 3,385     $ (81,938 )   $ (76,468 )   $ (114,510 )   $ (175,152 )
     Financing activities
  $ (144,127 )   $ (194,697 )   $ (235,546 )   $ (81,114 )   $ 120,058  
 
30

 
   
Years Ended December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Airline Operating Data:
                             
Passengers carried (000’s)
    22,984       18,918       16,287       12,666       9,137  
Revenue passenger miles  (000’s) (3)
    12,905,590       9,700,978       8,581,836       6,650,399       4,516,518  
Available seat miles (000’s) (4)
    17,116,528       13,213,701       11,511,795       9,154,719       6,559,966  
Passenger load factor (5)
    75.4 %     73.4 %     74.5 %     72.6 %     68.8 %
Revenue per available seat mile (6)
  $ 0.096     $ 0.112     $ 0.112     $ 0.125     $ 0.138  
Cost per available seat mile (7)
  $ 0.093     $ 0.103     $ 0.102     $ 0.112     $ 0.124  
Average passenger trip length (miles)
    562       513       527       525       494  
                                         
Number of aircraft in operations (end of period):
                                       
Regional Jets:
                                       
     Owned    
    150       142       131       109       90  
     Leased    
    78       79       88       62       52  
Airbus:
                                       
     Owned    
    13       -       -       -       -  
     Leased    
    38       -       -       -       -  
Q400:
                                       
     Owned    
    6       -       -       -       -  
     Leased    
    5       -       -       -       -  
Total aircraft
    290       221       219       171       142  
 
   
As of December 31,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
Consolidated Balance Sheet Data:
 
(in thousands)
 
Cash and cash equivalents
  $ 157,532     $ 129,656     $ 164,004     $ 195,528     $ 162,005  
Aircraft and other equipment—net
    3,418,160       2,692,410       2,308,726       1,889,717       1,662,236  
Total assets
    4,450,472       3,236,578       2,773,078       2,358,441       2,035,947  
Long-term debt, including current maturities
    2,789,419       2,277,845       1,913,580       1,568,803       1,413,440  
Total stockholders' equity
    517,880       475,939       426,086       508,829       424,698  
 

(1) The full year 2009 is not comparable to the years ended December 31, 2008, 2007, 2006  and 2005.  The results of operations for 2009 include Midwest beginning in August 2009 and Frontier in October 2009.

(2) As of December 31, 2009, approximately 89% of our aircraft fuel for our fixed fee business is supplied directly by our Partners, and thus we do not record expense or the related reimbursement revenue within our fixed-fee services revenue for those gallons of fuel.  United started directly supplying fuel for certain locations in January 2007.  All fuel related to the Continental and US Airways operations is directly supplied as well.  Prior to the acquisition of Midwest and Mokulele, all fuel was directly supplied by them.  Prior to the acquisition of Frontier, Frontier directly supplied fuel until the aircraft were removed from service during the second quarter of 2008.   Beginning in May 2009 and June 2009, we did not record fuel expense and the related revenue for the American and Delta operations, respectively.

(3) Passengers carried multiplied by miles flown.
 
(4) Passenger seats available multiplied by miles flown.
 
(5) Revenue passenger miles divided by available seat miles.
 
(6) Total airline operating revenues divided by available seat miles.
 
(7) Total operating and interest expenses excluding goodwill impairment and other impairment charges as well as the gain on bargain purchase divided by available seat miles. Total operating and interest expenses excluding goodwill impairment and other impairment charges as well as the gain on bargain purchase is not a calculation based on accounting principles generally accepted in the United States of America and should not be considered as an alternative to total operating expenses.   Cost per available seat mile utilizing this measurement is included as it is a measurement recognized by the investing public relative to the airline industry.
 
31

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

Overview

We are a Delaware holding company organized in 1996 that offers scheduled passenger services through our wholly-owned operating subsidiaries:  Chautauqua Airlines, Inc., (“Chautauqua Airlines”), Shuttle America Corporation (“Shuttle America”), Republic Airline Inc. (“Republic Airline”), Frontier Airlines, Inc., and Lynx Airlines, Inc. (“Lynx”).  The Company acquired Midwest Air Group, Inc. (“Midwest”) and Frontier Airlines Holdings, Inc. (“Frontier”) on July 31, 2009 and October 1, 2009, respectively.  On November 3, 2009, Midwest Airlines, Inc. ceased to exist as an actual operating airline and we allowed its Department of Transportation (“DOT”) air carrier operating certificate to lapse.  Midwest’s branding, livery and route structure are all operated by our other operating subsidiaries.  We plan to fully integrate the operations of Midwest and Frontier as promptly as is feasible, which we anticipate will be substantially completed by the end of 2010.  Unless the context indicates otherwise, the terms “the Company,” “we,” “us,” or “our,” refer to Republic Airways Holdings Inc. and our subsidiaries.

As of December 31, 2009, our operating subsidiaries offered scheduled passenger service on approximately 1,600 flights daily to 121 cities in 44 states, Canada, Mexico, and Costa Rica under branded operations as Frontier and Midwest, and through fixed-fee code-share agreements with AMR Corp., the parent of American Airlines, Inc. (“American”), Continental Airlines, Inc. (“Continental”), Delta Air Lines, Inc. (“Delta”),  United Air Lines, Inc. (“United”), and US Airways, Inc. (“US Airways”) (collectively referred to as our “Partners”). Currently, we provide our Partners with fixed-fee regional airline services, operating as AmericanConnection, Continental Express, Delta Connection, United Express, or US Airways Express, including service out of their hubs and focus cities.

The following table outlines the type of aircraft our subsidiaries operate and their respective operations within our business units as of December 31, 2009:
 
         
Branded Operations
                Number  
Operating
 
Aircraft
   
Frontier /
   
Fixed-Fee Code-Share Agreement Partners
   
Other
   
of
 
Subsidiaries
 
Size
   
Midwest
   
American
   
Continental
   
Delta
   
United
   
US Airways
   
Unallocated
   
Aircraft
 
Chautauqua Airlines
 
37 to 50
    6     15     22     24     7     9     4     87  
Shuttle America
 
70 to 76
                16     38         2     56  
Republic Airline
 
70 to 99
    27                     58         85  
Frontier
 
120 to 162
    51                             51  
Lynx
   
74
    11                             11  
Total number of operating aircraft
    95     15     22     40     45     67     6     290  
 
We have long-term, fixed-fee regional jet code-share agreements with each of our Partners that are subject to our maintaining specified performance levels. Pursuant to these fixed-fee agreements, which provide for minimum aircraft utilization at fixed rates, we are authorized to use our Partners' two-character flight designation codes to identify our flights and fares in our Partners' computer reservation systems, to paint our aircraft in the style of our Partners, to use their service marks and to market ourselves as a carrier for our Partners. Our fixed-fee agreements have historically limited our exposure to fluctuations in fuel prices, fare competition and passenger volumes. Our development of relationships with multiple major airlines has enabled us to reduce our dependence on any single airline, allocate our overhead more efficiently among our Partners and reduce the cost of our services to our Partners.

Midwest has a regional focus in Milwaukee and Kansas City, and Frontier has a regional focus in Denver.  Our branded operations expose us to changes in passenger demand, fare competition and fluctuations in fuel prices.  Midwest is the largest carrier in Milwaukee, and Frontier is the second largest carrier in Denver.  Each brand has a significant base of frequent flyer members and strong support in their local communities. 

Since acquiring the branded carriers, we have rebuilt the Milwaukee network to reconnect Midwest passengers to the west coast and Florida destinations and we have expanded operations in Denver now offering select point to point flying on Frontier Airlines.  In 2010, we will work to further integrate the two branded operations, which will allow for similar passenger experiences and lower the costs of our branded flying.  

During 2009, our operational fleet increased from 221 to 290 aircraft.  The acquisition of Frontier added 62 aircraft that are operated by Frontier and Lynx.  Additionally, during 2009, we took delivery of 11 E190 aircraft, which have been placed into branded service, three E175 aircraft, which were placed into service with Delta and six E135 aircraft which were placed into branded service.  We also returned 10 CRJ200 aircraft to the lessor and subleased three E145 aircraft offshore.  As of December 31, 2009, our operational fleet was comprised of 51 Airbus aircraft ranging from 120 to 162 seats, 141 EJet aircraft ranging from 70-99 seats, 11 Q400 aircraft with 74 seats, 80 Embraer aircraft ranging from 37 to 50 seats, and seven CRJ-200 aircraft with 50 seats.
 
32


In order to simplify our fleet and reduce expenses, we expect to remove our Q400 and CRJ-200 fleets in 2010. The remaining seven CRJ-200 aircraft will be removed from service for Continental and returned to the lessor by April 2010 and we expect to reduce the operations on the Q400 aircraft in April 2010 and eliminate all Q400 flying by September 2010.

Fleet Composition
 
The following table sets forth the number and type of aircraft in service and operated by us at the dates indicated:
 
   
December 31,
 
   
2009
   
2008
   
2007
 
Aircraft:
 
Total
   
Owned
   
Leased
   
Total
   
Owned
   
Leased
   
Total
   
Owned
   
Leased
 
Embraer E135 LR (1)
  6     1     5     -     -     -     17     15     2  
Embraer E140 LR    
  15     11     4     15     11     4     15     11     4  
Embraer E145 LR (2)
  59     25     34     62     27     35     62     27     35  
Embraer E170 LR (3)
  76     56     20     76     56     20     76     56     20  
Embraer E175 LR
  54     51     3     51     48     3     25     22     3  
Embraer E190 LR
  11     6     5     -     -     -     -     -     -  
Bombarier CRJ-200   
  7     -     7     17     -     17     24     -     24  
Airbus A318
  9     7     2     -     -     -     -     -     -  
Airbus A319
  38     4     34     -     -     -     -     -     -  
Airbus A320
  4     2     2     -     -     -     -     -     -  
Bombarier Q400
  11     6     5     -     -     -     -     -     -  
                                                       
Total (4)
  290     169     121     221     142     79     219     131     88  
 

(1)  Two of these aircraft were used for charter operations and as spares at December 31, 2007.

(2) Four, two and one of these aircraft were used for charter operations and as spares at December 31, 2009, 2008, and 2007, respectively.

(3)  Two of these aircraft were used for charter operations at December 31, 2009 and six of these aircraft were unassigned or not yet in use as of December 31, 2008.   

(4)  In addition to the aircraft listed above, as of December 31, 2009, we subleased nine E145 aircraft to an airline in Mexico, we subleased four E190 aircraft to US Airways, we have four FRJ aircraft and five MD80 aircraft classified as held-for-sale, and we have seven CRJ-200 aircraft that will be returned to the lessor by the end of Q1 2010.

Revenue
 
Fixed-Fee Service - Under our code-share arrangements with our Partners, we receive fixed-fees, as well as reimbursement of specified costs on a gross basis with additional possible incentives from our Partners for superior performance. For the years ended December 31, 2009, 2008 and 2007, all of our fixed-fee revenue was earned under our fixed-fee arrangements. The number of aircraft we operate and aircraft utilization are the most significant drivers of our revenue, as opposed to the number of passengers we carry or the fare the passengers pay.

Passenger Service - Branded passenger service includes passenger ticket revenue on our branded airlines: Frontier, Midwest, and Mokulele.  Unlike our fixed fee business, the most significant drivers of our revenue are the number of passengers we carry and the fare paid by the passenger.

Cargo and Other -  Cargo and other revenues is comprised principally of the revenue from the marketing component of the sale of our miles for our co-branded credit cards, sublease revenue, licensing revenue from slots leased to other airlines, charter revenue, cargo revenue, interline and ground handling fees, liquor sales, and excess baggage fees.
33

 
Operating Expenses

A brief description of the items included in our operating expenses line items follows.

Wages and Benefits
 
This expense includes not only wages and salaries, but also expenses associated with various employee benefit plans, employee incentives, stock compensation, and payroll taxes. These expenses will fluctuate based primarily on our level of operations, changes in wage rates for contract, and non-contract employees and changes in costs of our benefit plans.
 
Aircraft Fuel
 
As of December 31, 2009, the majority of our aircraft fuel for the fixed-fee operations is supplied directly by our code-share partners, and thus we do not record expense or the related revenue for those gallons of fuel.  Beginning in May 2009 and June 2009, we did not record fuel expense and the related revenue for the American and Delta operations, respectively.  We also did not pay for or record fuel expense and the related revenue for Continental or US Airways operations.  United has continued to increase the portion of flying for which they pay directly.   All fuel costs including into-plane fees and taxes are expensed as incurred for our branded operations.  Aircraft fuel also includes the realized and unrealized mark-to-market adjustments on fuel derivatives.

Landing Fees and Airport Rents
 
This expense consists of fees charged by airports for each aircraft landing and airport rental fees for ticket counter, gate and common space.   Under our fixed-fee agreements, we are reimbursed for the actual costs of landing fees.  Landing fees and airport rents are expensed as incurred for the branded operations.
 
Aircraft and Engine Rent
 
This expense consists of the costs of leasing aircraft and spare engines. The leased aircraft and spare engines are operated under long-term operating leases with third parties. Aircraft rent is reduced by the amortization of deferred credits received from the aircraft manufacturer for parts and training. The credits are deferred and amortized on a straight-line basis over the term of the respective lease of the aircraft.
 
Maintenance and Repair
 
Maintenance and repair expenses include all parts, materials, tooling and spares required to maintain our aircraft. We have entered into long-term maintenance "power-by-the-hour" service contracts with third-party maintenance providers under which we are charged fixed rates for each flight hour accumulated by all of our engines and some of the major airframe components. The effect of such contracts is to reduce the volatility of aircraft maintenance expense over the term of the contract.  All other maintenance is expensed as incurred under the direct expense method of accounting.
 
Insurance and Taxes
 
This expense includes the costs of passenger liability insurance, aircraft hull insurance, war risk insurance and all other insurance policies, other than employee welfare insurance. Additionally, this expense includes personal and real property taxes, including aircraft property taxes. Under our current fixed-fee agreements, we are reimbursed for the actual costs of passenger liability insurance, war risk insurance, aircraft hull insurance and property taxes, subject to certain restrictions. Under our US Airways and United fixed-fee agreements, we are reimbursed for the actual costs of such items other than aircraft hull insurance, which is reimbursed at agreed upon rates.
 
Depreciation and Amortization
 
 This expense includes the depreciation of all fixed assets, including aircraft, and the amortization of intangible assets with definite lives.

Promotion and Sales

This expense is incurred on our branded operation only and consists of advertising costs, reservation and booking fees, credit card processing fees and commissions.
 
34


Goodwill Impairment

Goodwill is required to be evaluated for impairment on an annual basis. If we determine that goodwill is impaired, we are required to write-off the amount of goodwill that is impaired.

Other Impairment Charges

Other intangibles with an indefinite life are required to be evaluated for impairment on an annual basis. If we determine other intangibles are impaired, we are required to write-off the amount of other intangibles that are impaired.  This expense includes the impairment of trade names and other intangible assets that were impaired during 2009.

Gain on Bargain Purchase

This represents the amount that the preliminary fair values of assets acquired exceeds the assumed liabilities and purchase price from the acquisition of Frontier.

Other
 
This expense includes the costs of crew training, crew travel, airport, passenger and ground handling related expenses, all hangar and administrative lease expenses, professional fees, and all other administrative and operational overhead expenses not included in other line items above. Additionally, if incurred, this expense will include accrued aircraft return costs, gains and losses on disposal of assets and bad debt expenses.
 
Results of Operations

The following tables sets forth information regarding the Company’s statistical performance for the years ended December 31, 2009, 2008, and 2007.
 
Operating Highlights - Fixed-Fee
 
Twelve Months Ended December 31,
 
   
2009
   
Change
   
2008
   
Change
   
2007
 
Fixed-fee service revenues, excluding fuel (000's)
  $ 1,089,051       -4.1 %   $ 1,135,431       15.7 %   $ 981,449  
Passengers carried
    18,783,773       -0.7 %     18,917,502       16.2 %     16,286,807  
Revenue passenger miles (000's) (1)
    9,560,637       -1.4 %     9,700,978       13.0 %     8,581,836  
Available seat miles (000's) (2)
    12,894,899       -2.4 %     13,213,701       14.8 %     11,511,795  
Passenger load factor (3)
    74.1 %  
0.7
pts     73.4 %  
-1.1
pts     74.5 %
Cost per available seat mile,
    8.36       -16.1 %     9.97       -0.2 %     9.99  
      including interest expense (cents) (4) (5)
                                       
Fuel cost per available seat mile (cents)
    0.71       -71.3 %     2.47       -3.5 %     2.56  
Cost per available seat mile, including
    7.65       2.0 %     7.50       0.9 %     7.43  
      interest expense and excluding fuel expense (cents) (5)
                                       
Operating aircraft at period end:
                                       
37-50 seats
    77       -16.3 %     92       -19.3 %     114  
70-86 seats
    112       -7.4 %     121       19.8 %     101  
Block hours (6)
    674,454       -8.9 %     740,403       8.9 %     679,718  
Departures
    396,559       -6.2 %     422,558       10.8 %     381,415  
Average daily utilization of each aircraft (hours) (7)
    10.1       0.0 %     10.1       -2.0 %     10.3  
Average length of aircraft flight (miles)
    494       -1.6 %     502       -3.8 %     522  
Average seat density
    66       6.5 %     62       6.9 %     58  


(1) 
Revenue passenger miles are the number of scheduled miles flown by revenue passengers.
   
(2) 
Available seat miles are the number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.
   
(3) 
Revenue passenger miles divided by available seat miles.
   
(4) 
Total operating and interest expenses divided by available seat miles.
   
(5) 
Costs (in all periods) exclude goodwill and other impairment expenses and other expenses not attributable to the fixed-fee segment (e.g. subleased aircraft and amortization of slots). Total operating and interest expenses excluding goodwill impairment and other impairment charges as well as the gain on bargain purchase is not a calculation based on accounting principles generally accepted in the United States of America and should not be considered as an alternative to total operating expenses.   Cost per available seat mile utilizing this measurement is included as it is a measurement recognized by the investing public relative to the airline industry.
   
(6)
Hours from takeoff to landing, including taxi time.
   
(7) 
Average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival).
 
35

 
Operating Highlights - Branded
 
Twelve Months
Ended (9)
 
   
December 31,
2009
 
Total revenues (000's)
  $ 444,312  
Passengers carried
    4,200,044  
Revenue passenger miles (000's) (1)
    3,344,953  
Available seat miles (000's) (2)
    4,221,629  
Passenger load factor (3)
    79.2 %
Total revenue per available seat mile (cents)
    10.52  
Passenger revenue per available seat mile (cents)
    9.23  
Cost per available seat mile (cents) (4) (5)
    11.44  
Fuel cost per available seat mile
    3.43  
Cost per available seat mile, excluding fuel expense (cents) (5)
    8.01  
Operating aircraft at period end:
       
     37-50 seats (6)
    11  
     70-99 seats
    38  
     120+ seats
    51  
Block hours (7)
    121,167  
Departures
    64,379  
Average daily utilization of each aircraft (hours) (8)
    10.7  
Average length of aircraft flight (miles)
    749  
Average seat density
    88  


(1) 
Revenue passenger miles are the number of scheduled miles flown by revenue passengers.
   
(2) 
Available seat miles are the number of seats available for passengers multiplied by the number of scheduled miles those seats are flown.
   
(3) 
Revenue passenger miles divided by available seat miles.
   
(4) 
Total operating and interest expenses divided by available seat miles.
   
(5) 
Costs exclude gain on bargain purchase and other impairment charges  and other expenses not attributable to the fixed-fee segment (e.g. subleased aircraft and amortization of slots). Total operating and interest expenses excluding goodwill impairment and other impairment charges as well as the gain on bargain purchase is not a calculation based on accounting principles generally accepted in the United States of America and should not be considered as an alternative to total operating expenses.   Cost per available seat mile utilizing this measurement is included as it is a measurement recognized by the investing public relative to the airline industry.
   
(6) 
Includes four aircraft operated by SkyWest Airlines under an agreement with Midwest, which terminated in January 2010.
   
(7) 
Hours from takeoff to landing, including taxi time.
   
(8) 
Average number of hours per day that an aircraft flown in revenue service is operated (from gate departure to gate arrival).
   
(9) 
Branded statistics include the results of Midwest and Frontier beginning in August and October 2009, respectively.  In addition, the table includes the results of Mokulele beginning in April 2009 until October 2009 when the Company deconsolidated Mokulele.
 
36


The following table sets forth information regarding the Company’s revenues and expenses for the years ended December 31, 2009, 2008, and 2007. Individual expense components are also expressed in cents per available seat mile (“ASM”).
 
Consolidated Results of Operations
 
Years ended December 31,
 
   
2009
   
2008
   
2007
 
   
Amount
   
Cents
per ASM
   
Amount
   
Cents
per ASM
   
Amount
   
Cents
per ASM
 
   
(in thousands)
         
(in thousands)
         
(in thousands)
       
OPERATING REVENUES:
                                   
Fixed-fee service
  $ 1,180,209           $ 1,462,211           $ 1,274,607        
Passenger service
    389,653             -             -        
Cargo and other
    72,356             17,544             18,070        
Total operating revenues
    1,642,218             1,479,755             1,292,677        
                                           
OPERATING EXPENSES:
                                         
Wages and benefits
    342,364       2.00       252,336       1.91       226,521       1.97  
Aircraft fuel
    236,620       1.38       327,791       2.48       296,573       2.58  
Landing fees and airport rents
    96,915       0.57       59,891       0.45       53,684       0.47  
Aircraft and engine rent
    156,773       0.92       134,206       1.02       124,961       1.08  
Maintenance and repair
    211,503       1.24       169,425       1.28       130,237       1.13  
Insurance and taxes
    28,105       0.16       25,793       0.20       19,039       0.16  
Depreciation and amortization
    163,584       0.96       133,206       1.01       106,594       0.93  
Promotion and sales
    36,265       0.21       -       -       -       -  
Goodwill impairment
    113,759       0.66       -       -       -       -  
Other impairment charges
    8,800       0.05       -       -       -       -  
Gain on bargain purchase
    (203,698 )     (1.19 )     -       -       -       -  
Other
    179,828       1.05       122,012       0.92       104,790       0.91  
Total operating expenses
    1,370,818       8.01       1,224,660       9.27       1,062,399       9.23  
                                                 
OPERATING INCOME
    271,400               255,095               230,278          
                                                 
OTHER INCOME (EXPENSE):
                                               
Interest expense
    (144,994 )     (0.85 )     (131,856 )     (1.00 )     (107,323 )     (0.93 )
Other - net
    9,784       0.06       14,176       0.11       11,013       0.10  
Total other income (expense)
    (135,210 )     (0.79 )     (117,680 )     (0.89 )     (96,310 )     (0.84 )
                                                 
INCOME BEFORE INCOME TAXES
    136,190               137,415               133,968          
                                                 
INCOME TAX EXPENSE
    99,805               52,835               51,210          
                                                 
NET INCOME
    36,385               84,580               82,758          
Add: Net loss attributable to noncontrolling interest in Mokulele Flight Service, Inc.
    (3,270 )             -               -          
NET INCOME OF THE COMPANY
  $ 39,655             $ 84,580             $ 82,758          
                                                 
Total operating and interest expense
  $ 1,515,812       8.86     $ 1,356,516       10.27     $ 1,169,722       10.16  
                                                 
Total operating and interest expense less fuel, goodwill impairment, other impairment charges and gain on bargain purchase
  $ 1,360,331       7.95     $ 1,028,725       7.79     $ 873,149       7.58  

2009 Compared to 2008

Operating revenue in 2009 increased by 11%, or $162.5 million, to $1.64 billion compared to $1.48 billion in 2008. Excluding reimbursement for fuel expense, which is a pass-through cost to our Partners, fixed-fee service revenues decreased 4.1% for 2009.  Block hour production for the fixed-fee business was down 8.9% in 2009 because of the reduction of aircraft operated for Continental.  Also, the aircraft operations for Midwest are reported as branded flying beginning in August 2009.  Branded revenues were $444.3 million, which represented passenger and ancillary revenues on our Midwest operations beginning in August 2009, Frontier operations beginning in October 2009, and Mokulele operations between April and October 2009.
 
Total operating and interest expenses, excluding fuel, goodwill impairment, and other impairment charges increased $331.6 million, to $1.36 billion for 2009 compared to $1.03 billion during 2008 due to the acquisitions of Midwest and Frontier.  The cost per available seat mile on total operating and interest expenses, excluding fuel charges, increased to 7.95¢ in 2009 compared to 7.79¢ in 2008.  Factors relating to the change in operating expenses are discussed below. 
 
Wages and benefits increased by 35.7%, or $90.1 million, to $342.4 million for 2009 compared to $252.3 million for 2008 due primarily to the acquisition of Midwest and Frontier.   Of the increase, $86.0 million relates to expenses at Midwest and Frontier.  The cost per available seat mile increased to 2.00¢ for 2009 compared to 1.91¢ in 2008. 
 
37

 
Aircraft fuel expense decreased 27.8%, or $91.2 million, to $236.6 million for 2009 compared to $327.8 million for 2008.  Beginning in May 2009 and June 2009, we did not record fuel expense and the related revenue for the American and Delta operations, respectively.  We also did not pay for or record fuel expense and the related revenue for Continental or US Airways operations.  United has continued to increase the portion of flying for which they pay directly.  These decreases were partially offset by fuel expense of $144.9 million related to Midwest and Frontier operations.  The cost per gallon for fuel used in the branded operation was $2.15 in 2009.  The unit cost decreased to 1.38¢ in 2009 compared to 2.48¢ in 2008.
 
Landing fees and airport rents increased by 61.8%, or $37.0 million, to $96.9 million in 2009 compared to $59.9 million in 2008.  This was due to the acquisition of Frontier and Midwest during the year, which accounted for $34.3 million of additional expense in 2009.  Our fixed-fee agreements provide for a direct reimbursement of landing fees.  The unit cost was 0.57¢ in 2009 compared to 0.45¢ in 2008.

Aircraft and engine rent increased by 16.8%, or $22.6 million, to $156.8 million in 2009 compared to $134.2 million in 2008.   Midwest and Frontier accounted for additional expense of $37.7 million.  This was partially offset by a decrease in rents on the CRJ aircraft of $15.1 million.  The unit cost decreased to 0.92¢ for 2009 compared to 1.02¢ for 2008.

Maintenance and repair expenses increased by 24.8%, or $42.1 million, to $211.5 million in 2009 compared to $169.4 million for 2008 due mainly to the acquisition of Midwest and Frontier and engine limited life parts for the fixed-fee small jets.  Midwest and Frontier maintenance expenses for the year were $24.2 million.  The fixed-fee maintenance expenses increased for the large jets due mainly to a 17% increase in block hours, or a $31.5 million increase in expense, offset by a decrease in small jet expenses of $4.5 million that includes $11.7 million of engine limited life parts.  The unit cost decreased to 1.24¢ in 2009 compared to 1.28¢ in 2008.
 
Insurance and taxes increased 9.0%, or $2.3 million, to $28.1 million in 2009 compared to $25.8 million in 2008. Midwest and Frontier expenses are $6.3 million, which is offset by decreases on the fixed-fee operations for property taxes of $3.1 million and liability insurance of $0.6 million.  Our fixed-fee agreements generally provide for a direct reimbursement of insurance and property taxes.  The unit cost decreased to 0.16¢ in 2009 compared to 0.20¢ in 2008.
 
Depreciation and amortization increased 22.8%, or $30.4 million, to $163.6 million in 2009 compared to $133.2 million in 2008 due mainly to $22.1 million of depreciation from Midwest and Frontier.  Additionally, depreciation on EJet aircraft increased on aircraft purchased during 2008 and 2009. The unit cost decreased to 0.96¢ in 2009 compared to 1.01¢ in 2008.

Promotion and sales expenses of $36.3 million were included as a result of the acquisitions of Midwest, Mokulele, and Frontier to our branded services.  All of these expenses relate to the branded operations only.  The unit cost was 0.21¢ in 2009.

Goodwill impairment and other impairment charges of $122.6 million in 2009 is primarily a result of goodwill impairment during the first quarter from the fixed-fee services as well as goodwill impairment during the fourth quarter that was generated from the acquisition of Midwest.  The unit cost was 0.71¢ in 2009.

The gain on bargain purchase of $203.7 million is related to the acquisition of Frontier.  The unit benefit was 1.19¢.

Other expenses increased 47.4%, or $57.8 million, to $179.8 million in 2009 from $122.0 million in 2008.  Of the increase, $58.0 million related to expenses from Frontier and Midwest.  The unit cost increased to 1.05¢ in 2009 compared to 0.92¢ in 2008. 
 
Interest expense increased 10.0% or $13.1 million, to $145.0 million in 2009 from $131.9 million in 2008 primarily due to $12.6 million of expense from Midwest and Frontier. The unit cost decreased to 0.85¢ in 2009 compared to 1.00¢ in 2008. 
 
We incurred income tax expense of $99.8 million during 2009, compared to $52.8 million in 2008. The effective tax rates for 2009 and 2008 were 73.3% and 38.4%, respectively, which were higher than the statutory rate due primarily to the non-deductible goodwill impairment in 2009 and state income taxes and non-deductible meals and entertainment expense, primarily for our flight crews in 2009 and 2008.  

2008 Compared to 2007

Operating revenue in 2008 increased by 14.5%, or $187.1 million, to $1.48 billion compared to $1.29 billion in 2007. Excluding reimbursement for fuel expense, which is a pass-through cost to our Partners, fixed-fee service revenues increased 15.6% for 2008.  The increase was due primarily to fixed-fee revenue earned from the addition of 26 E175 aircraft that were placed into service throughout 2008.  Partially offsetting this increase was the removal of fifteen 37-seat aircraft from Delta, seven 50-seat aircraft from Continental and two 37-seat aircraft from charter operations.  These aircraft, which are being sold or returned to the lessor, were removed during the last six months of 2008.
 
38

 
Total operating and interest expenses, excluding fuel increased by 17.8%, or $155.6 million, to $1.03 billion for 2008 compared to $873.1 million during 2007 due to the increase in flight operations. The cost per available seat mile on total operating and interest expenses, excluding fuel charges, increased to 7.79¢ in 2008 compared to 7.58¢ in 2007.  Factors relating to the change in operating expenses are discussed below. 
 
Wages and benefits increased by 11.4%, or $25.8 million, to $252.3 million for 2008 compared to $226.5 million for 2007 due primarily to a $20.7 million increase in flight crew and maintenance operations wage expenses to support the increase in regional jet operations.  Overhead and stock compensation expense increased $3.2 million while payroll taxes and benefits increased $2.2 million in 2008.  The cost per available seat mile decreased to 1.91¢ for 2008 compared to 1.97¢ in 2007. 
 
Aircraft fuel expense increased 10.5%, or $31.2 million, to $327.8 million for 2008 compared to $296.6 million for 2007 due to a 34% increase in the average fuel price per gallon from $2.40 in 2007 to $3.21 in 2008, partially offset by a 17% decrease in gallons consumed due to United paying for fuel directly for more locations in 2008.  The unit cost decreased to 2.48¢ in 2008 compared to 2.58¢ in 2007.
 
Landing fees increased by 11.6%, or $6.2 million, to $59.9 million in 2008 compared to $53.7 million in 2007. The increase is due mainly to a 10% increase in departures. Our fixed-fee agreements provide for a direct reimbursement of landing fees. The unit cost was 0.45¢ in 2008 compared to 0.47¢ in 2007.

Aircraft and engine rent increased by 7.4%, or $9.2 million, to $134.2 million in 2008 compared to $125.0 million in 2007 due to a $6.2 million increase in aircraft rents of CRJ-200 aircraft, which are on short-term leases and a $3.2 million increase in aircraft rents of 70-seat aircraft.  The unit cost decreased to 1.02¢ for 2008 compared to 1.08¢ for 2007.

Maintenance and repair expenses increased by 30.1%, or $39.2 million, to $169.4 million in 2008 compared to $130.2 million for 2007 due mainly to the addition of 26 E175 aircraft in 2008, which resulted in a $12.9 million increase in long-term maintenance agreement expenses.  Long-term maintenance agreement expenses for the 50-seat jets increased $7.7 million.  Additionally, repair expenses on parts not under warranty or not included under long term contracts increased $9.7 million for the fleet.  Scheduled heavy maintenance events for the fleet also increased by $5.4 million.  The unit cost increased to 1.28¢ in 2008 compared to 1.13¢ in 2007.
 
Insurance and taxes increased 35.5%, or $6.8 million, to $25.8 million in 2008 compared to $19.0 million in 2007. Property taxes increased $5.6 million and insurance increased due to the increase in regional jet operations. Our fixed-fee agreements generally provide for a direct reimbursement of insurance and property taxes.  The unit cost increased to 0.20¢ in 2008 compared to 0.16¢ in 2007.
 
Depreciation and amortization increased 25.0%, or $26.6 million, to $133.2 million in 2008 compared to $106.6 million in 2007 due mainly to $24.6 million of additional depreciation on E175 aircraft purchased during 2007 and 2008. The unit cost increased to 1.01¢ in 2008 compared to 0.93¢ in 2007.

Other expenses increased 16.4%, or $17.2 million, to $122.0 million in 2008 from $104.8 million in 2007, due primarily to $13.8 million of expenses related to costs associated with the return of aircraft on lease and the preparation of aircraft removed from fixed-fee service for future sale. Additionally, there was a $1.5 million increase in passenger catering costs and other operational expenses to support the increased regional jet operations. The unit cost increased to 0.92¢ in 2008 compared to 0.91¢ in 2007. 
 
Interest expense increased 22.9% or $24.5 million, to $131.9 million in 2008 from $107.3 million in 2007 primarily due to interest on debt related to the financing aircraft purchased during 2007 and 2008. The weighted average interest rate decreased from 6.2% in 2007 to 6.1% in 2008. The unit cost increased to 1.00¢ in 2008 compared to 0.93¢ in 2007. 
 
We incurred income tax expense of $52.8 million during 2008, compared to $51.2 million in 2007. The effective tax rates for 2008 and 2007 were 38.4% and 38.2%, respectively, which were higher than the statutory rate due to state income taxes and non-deductible meals and entertainment expense, primarily for our flight crews.  

Liquidity and Capital Resources
 
2009 compared to 2008

As of December 31, 2009, we had total cash of $350.2 million of which $157.5 million was unrestricted.  At December 31, 2009, we had a working capital deficit of $155.2 million.   The Company currently anticipates that its unrestricted cash on hand, the cash generated from operations, and other financings will be sufficient to meet its anticipated working capital and capital expenditure requirements for at least the next 12 months.
 
39


Working capital deficits are customary for airlines since the air traffic liability and a portion of the deferred frequent flyer revenue are classified as current liabilities.  Our liquidity depends to a large extent on the financial strength of our Partners in relation to our fixed-fee business  and the number of passengers who fly in our branded passenger service, the fares they pay, our operating and capital expenditures, our financing activities, the amount of cash holdbacks imposed by our credit card processors, and the cost of fuel.  We cannot predict what the effect on our business might be from the extremely competitive environment we are operating in or from events that are beyond our control, such as volatile fuel prices, the economic recession, the global credit and liquidity crisis, weather-related disruptions, the impact of airline bankruptcies or consolidations, U.S. military actions or acts of terrorism. 
  
Net cash provided by operating activities was $168.6 million in 2009 compared to $242.3 million in 2008.  The $73.7 million decrease in operating cash flows is primarily attributable to the lower operating margin associated with our branded operations and the related reductions in our net income period over period of $44.9 million.

Net cash provided by (used in) investing activities was $3.4 million in 2009 compared to ($81.9) million in 2008.  During 2009, the Company acquired and debt financed 3 E175 aircraft and 10 E190 aircraft.  The total debt related to these aircraft of $280.0 million was obtained from banks at terms of 10 to 15 years and fixed interest rates ranging from 2.80% to 2.94% and variable rates at LIBOR plus a margin.  Cash used in the acquisition of aircraft and other equipment, net of aircraft deposits totaled $25.5 million in 2009 and $59.2 million in 2008.  The Company has lease financed all other aircraft deliveries during 2009.  The Company received proceeds from the sale of its E135 assets and other equipment totaling $72.9 million in 2009 compared to $52.9 million in 2008.  Additionally, the Company funded notes receivable of approximately $61.1 million (to Frontier, US Airways, Midwest, and Mokulele) in 2009 compared to $55 million in 2008.  Additionally, the Company acquired new businesses Midwest and Frontier, net of cash acquired totaling $23.3 million.

Net cash used in financing activities was $144.1 million in 2009 compared to $194.7 million in 2008.  During 2009, the Company received proceeds of $75.1 million from the refinancing of aircraft and issuance of debt compared to $6.7 million in 2008.  During 2009, the Company made principal repayments of $145.7 million and retired $70.9 million of aircraft debt totaling $216.6 million compared to repayments of $113.6 million and retirements of $50.0 million totaling $163.6 million in 2008.  During the prior year, the Company repurchased $39.4 million of treasury stock and there were no treasury stock repurchases in 2009.

2008 compared to 2007

Net cash provided by operating activities was $242.3 million in 2008 compared to $280.5 million in 2007.  The decrease of $38.2 million is primarily attributable to the receipt of cash from the sale of the Company’s $44.6 million Delta pre-petition claim in 2007 offset by an increase in cash used for working capital needs of $11.3 million.

Net cash used in investing activities was $81.9 million in 2008 compared to $76.5 million in 2007.  During 2008, the Company acquired and debt financed 26 E175 aircraft.  The total debt related to these aircraft of $526.2 million was obtained from banks at terms of 5 to 15 years and interest rates ranging from 2.73% to 6.91%.  Cash used in the acquisition of aircraft and other equipment, net of aircraft deposits totaled $59.2 million in 2008 and $40.9 million in 2007.  The Company received proceeds of $52.9 million in 2008 and $15.8 million in 2007 from the sale of aircraft and other equipment.  The increase of $37.1 million is primarily related to the increase in proceeds from the sale of two E135 aircraft in 2008.  In addition, the Company originated loans to Frontier Airlines, Midwest, Mokulele and US Airways totaling $55.0 million in 2008.

Net cash used in financing activities was $194.7 million in 2008.  During 2008, the Company received proceeds of $6.7 million from the refinancing of six E175 aircraft.  The Company received proceeds of $5.8 million related to the settlement of interest rate swaps and incurred $4.6 million of debt issue costs.  The Company received proceeds of $0.3 million related to the exercise of stock options by employees and non-employee directors.  The Company made payments on debt of $113.6 million and additional payments of $50.0 million related to the early extinguishment of debt on the E135 sold in 2008.  The early extinguishment of debt resulted in a $6.0 million gain for 2008.  The Company repurchased 2,265,539 shares of its common stock on the open market or through privately negotiated transactions at a weighted average purchase price of $17.39 for total consideration of $39.4 million in 2008 under the December 2007 Board of Director’s authorization, which closed in December 2008.

Other liquidity initiatives

The Company has contracts with bankcard processors that require full collateralization of bankcard funds equal to the air traffic liability associated with the estimated amount of bankcard transactions plus related passenger taxes.  As of December 31, 2009 that amount totaled $159.7 million.
 
40


On October 30, 2009, the Company entered into a credit agreement with Airbus Financial Services (“Airbus”).  In accordance with the agreement, Airbus provided a $25 million term loan to Frontier.  The loan is scheduled to be repaid in twelve quarterly installments with interest beginning in January 2010.  Interest on the note is the three-month LIBOR rate plus a margin and the note is secured by certain assets of Frontier.

The Company has co-branded credit card arrangements with MasterCard issuing banks.  One of the affinity credit card agreements provides the Company with a fixed fee for each new account, which varies based on the type of account, and a percentage of the annual renewal fees that the bank receives.  The Company receives an increased fee for new accounts it solicits.  The Company also receives fees for the purchase of frequent flier miles awarded to the credit card customers. During 2009, the Company amended this agreement whereas the credit card company agreed to pre-purchase miles.  In October 2009, the Company received $35 million in cash from the bank related to its pre-purchase of miles.   These fees are to be used to compensate the Company for fees otherwise earned under the agreement.  In addition, the Company will pay to the bank interest on the value of the outstanding pre-purchased miles at an adjustable rate of LIBOR plus a margin.  This purchase is recorded as debt in the consolidated balance sheet.
    
We are required to comply with certain financial covenants under certain of our financing arrangements.  We are required to maintain a certain level of minimum unrestricted cash and maintain certain cash flow and working capital covenants.
 
As of December 31, 2009, we were in compliance with all our covenants, however, we believe it is probable that we will be unable to comply with certain of these covenants during 2010.  We are currently in discussions to renegotiate these covenants, however, our ability to renegotiate or obtain a waiver of, or otherwise mitigate, the impact of a default, could potentially provide for the accelerated repayment of principal totaling approximately $25 million and the discontinuation of the monthly pre-purchase of airline miles from our affinity card provider, which totals approximately $2.9 million per month.   If we are unable to successfully renegotiate the covenants, of which there can be no assurance or if a default were to occur and we were unable to obtain a waiver, or otherwise mitigate the impact of a default, our financial condition and liquidity could be materially and adversely affected.
    
Letters of Credit

As we enter new markets, increase the amount of space we lease, or add leased aircraft, we are often required to provide the airport authorities and lessors with a letter of credit.  We also provide letters of credit for our workers’ compensation insurance.  As of December 31, 2009, we had outstanding letters of credit totaling $31.8 million, all of which are cash collateralized.

Hedging Transactions

Our fuel hedge contracts are comprised of purchased call option agreements.   Under a purchased call option agreement, we have the right to buy a certain quantity of fuel from the writer of the option, at a specified price (the strike price) up to a specified date (the expiration date).  These fuel hedges have been designated as trading instruments and as such, realized and mark to market adjustments are included in aircraft fuel expense.  Our results of operations for the year ended December 31, 2009 include non-cash mark to market derivative losses of $0.1 million.  We paid $3.3 million in fuel hedge premiums and had cash settlement receipts for fuel derivative contracts of $3.6 million.  

We entered into the following call agreements prior to December 31, 2009 which are still outstanding:
 
Date
 
Product
 
Notional volume
(gallons per month)
 
Period
covered
 
Price
(per gallon
or barrel)
 
Percentage of
estimated fuel
purchases
 
7-Dec-09
 
Gulf Coast Jet A
 
2,856,000
 
Q2 2010
 
$2.34/gallon
 
14.3%
 
7-Dec-09
 
Gulf Coast Jet A
 
2,940,000
 
Q3 2010
 
$2.43/gallon
 
14.3%
 

We entered into the following call agreements subsequent to December 31, 2009 for the second and third quarters of 2010:
 
Date
 
Product
 
Notional volume
(gallons per month)
 
Period
covered
 
Price
(per gallon
or barrel)
 
Percentage of
estimated fuel
purchases
 
13-Jan-10
 
Gulf Coast Jet A
 
2,100,000
 
Q2 2010
 
$2.34/gallon
 
10.5%
 
13-Jan-10
 
Gulf Coast Jet A
 
2,100,000
 
Q3 2010
 
$2.43/gallon
 
10.2%
 
5-Feb-10
 
Gulf Coast Jet A
 
2,100,000
 
Q3 2010
 
$2.23/gallon
 
10.2%
 
5-Feb-10
 
Gulf Coast Jet A
 
2,100,000
 
Q4 2010
 
$2.23/gallon
 
10.3%
 

Aircraft Leases and Other Off-Balance Sheet Arrangements
 
We have significant obligations for aircraft and engines that are classified as operating leases and, therefore, are not reflected as liabilities on our balance sheet. Aircraft leases expire between 2010 and 2024. As of December 31, 2009, our total mandatory payments under operating leases for aircraft aggregated approximately $1.58 billion and total minimum annual aircraft rental payments for the next 12 months under all non-cancelable operating leases is approximately $233.1 million. Other non-cancelable operating leases consist of engines, terminal space, operating facilities, office space and office equipment. The leases expire through 2033. As of December 31, 2009, our total mandatory payments under other non-cancelable operating leases aggregated approximately $206.3 million. Total minimum annual other rental payments for the next 12 months are approximately $44.5 million.
 
41

 
Purchase Commitments
 
As of December 31, 2009, the Company had firm orders to purchase eight A320 aircraft that have scheduled delivery dates beginning in February 2013 and continuing through November 2014. The current total list price of the eight aircraft is $349.0 million.  During the year ended December 31, 2009, the Company made aircraft deposits in accordance with the aircraft commitments of $5.5 million. The Company also has a commitment to acquire eight spare aircraft engines with a current list price of approximately $41.9 million.  The Company expects to take delivery of three engines per year during 2010 and 2011 and two engines in 2012.  These commitments are subject to customary closing conditions.

We expect to fund future capital and funding commitments through internally generated funds, third-party aircraft financings, and debt and other financings.
 
Our contractual obligations and commercial commitments at December 31, 2009, include the following (in thousands):
 
   
Payments Due By Period
 
                     
Beyond
       
 
2010
     
2011-2012
     
2013-2014
   
2014
   
Total
 
Long-term debt (including interest)
  $ 372,046     $ 688,375     $ 720,558     $ 1,909,320     $ 3,690,299  
Operating leases
    277,632       472,084       435,426       598,483       1,783,625  
Tax liability for uncertain tax positions
    -       -       -       6,268       6,268  
Debt or lease financed aircraft plus rotables under purchase obligations (8)
    -       31,590       329,353       -       360,943  
Engines under firm orders (8)
    15,580       17,246       9,092       -       41,918  
Other long-term commitments
    16,782       29,395       27,172       -       73,349  
                                         
Total contractual cash obligations
  $ 682,040     $ 1,238,690     $ 1,521,601     $ 2,514,071     $ 5,956,402  
 
The Company has maintenance agreements for engines, auxiliary power units (“APU”) and other airframe components for our CRJ-200 aircraft that cover the aircraft during the short-term leases, all of which expire by March 2010.  For E140/145 aircraft, the Company has agreements to maintain the engines, APUs, avionics and wheels and brakes through October 2012, June 2013, December 2014 and June 2014, respectively.  For E170/175 aircraft, the Company has agreements to maintain the avionics, wheels and brakes, APUs and engines through December 2014, February 2017, July 2019, and December 2014, respectively. Under these agreements, the Company is charged for covered services based on a fixed rate for each flight hour or flight cycle accumulated by the engines or airframes in our service during each month. The rates are subject to annual revisions, generally based on certain Bureau of Labor Statistics' labor and material indices.  The Company believes these agreements, coupled with our ongoing maintenance program, reduce the likelihood of unexpected levels of engine, APU, avionics and wheels and brakes maintenance expense during their term.

While the Company does not have long term maintenance agreements for Airbus and Q400 fleets, it has made significant deposits with the aircraft lessors for future maintenance events which will reduce future cash requirements.  As of December 31, 2009 we had maintenance deposits of $143.9 million.

Total payments under these long-term maintenance agreements were $96.0 million, $101.9 million, and $76.8 million, for the years ended December 31, 2009, 2008 and 2007, respectively. 
 
Cash payments for interest were approximately $134.8 million in 2009. Tax payments in 2009 were not significant and we are not expecting significant tax payments in 2010.

Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.
 
42

 
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are sufficiently sensitive to result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the notes to the consolidated financial statements.
 
·  
Revenue Recognition (Fixed-fee service) Under our fixed-fee arrangements with our Partners, the Company receives fixed-fees for our capacity purchase agreements, as well as reimbursement of specified “pass-through” costs on a gross basis with additional possible incentives from our Partners for superior service. These revenues are recognized in the period the service is provided, and we perform an estimate of the profit component based upon the information available at the end of the accounting period.
 
The reimbursement of specified costs, known as “pass-through costs”, may include aircraft ownership cost, passenger liability and hull insurance, aircraft property taxes, fuel, landing fees and catering. All revenue recognized under these contracts is presented at the gross amount billed for reimbursement.
 
Under the Company’s code-share agreements, the Company is reimbursed an amount per aircraft designed to compensate the Company for certain aircraft ownership costs.  The Company has concluded that a component of its fixed-fee service revenues under the agreement discussed above is rental income, inasmuch as the agreement identifies the “right of use” of a specific type and number of aircraft over a stated period of time. The amount deemed to be rental income during 2009, 2008 and 2007 was $358.2 million, $348.4 million, and $310.3 million, respectively, and has been included in fixed-fee service revenues in the Company’s consolidated statements of income.
 
Revenue Recognition (Passenger Service) –Passenger service revenues are recognized when the transportation is provided or after the tickets expire (which is either immediately upon the scheduled departure of the flight or up to thirteen months after the date of issuance depending on the type of ticket purchased), and are net of excise taxes, passenger facility charges and security fees.  Passenger service revenues that have been deferred are included in the accompanying consolidated balance sheets as air traffic liability.    Included in passenger service revenue are change fees imposed on passengers for making schedule changes to non-refundable tickets.  Change fees are recognized as revenue at the time the change is made for the passenger as these fees are a separate transaction that occur subsequent to the date of the original ticket sale.  Certain passenger tickets include a bundle of services such as bag fees and other buy-on-board services and these revenues are included in passenger service revenue as part of the bundled ticket price.  During the year ended December 31, 2009, no unused tickets were recognized as revenue since the air traffic liability was recorded at fair value as of July 31, 2009 for Midwest and October 1, 2009 for Frontier, which included the impact of estimated breakage.
 
The Company is required to charge certain taxes and fees on passenger tickets.  These taxes and fees include U.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and departure taxes.  These taxes and fees are legal assessments on the customer, for which the Company has an obligation to act as a collection agent.  Because the Company is not entitled to retain these taxes and fees, such amounts are not included in passenger service revenue.  The Company records a liability when the amounts are collected and reduces the liability when payments are made to the applicable government agency or operating carrier.
     
·
Frequent Flyer Programs—The Company has frequent flyer programs that offer incentives to travel on its airlines and promote customer loyalty.  The programs allow participants to earn mileage credits by flying on Midwest or Frontier as well as participating airlines and through participating companies, such as credit card companies, hotels, and car rental agencies.  The Company also sells mileage credits to other airlines and to nonairline businesses.  The mileage credits may be redeemed for free air travel on Midwest, Frontier, or other airlines, as well as hotels, rental cars, and other awards.

Mileage Credits – The Company has agreements with its co-branded credit card partner that requires its partner to purchase miles as they are awarded to the co-branded partner cardholders.  The air transportation element for the awarded miles are included in deferred frequent flyer revenue at the estimated fair value of the air transportation element and the residual marketing element is recorded as other revenue when the miles are awarded.  The deferred frequent flyer revenue is subsequently recognized as passenger service revenue when the transportation is provided.

Earned Mileage Credits The Company also defers the portion of the sales proceeds that represents the estimated fair value of the air transportation for mileage credits awarded and recognizes that amount as passenger service revenue when the mileage credit is redeemed and the transportation is provided.  The fair value of the air transportation component is determined utilizing the deferred revenue method as further described below.  The initial revenue deferral is presented as deferred frequent flyer revenue in the consolidated balance sheets.  When recognized, the revenue related to the air transportation component is classified as passenger service revenue in the Company’s consolidated statements of income.
 
The Company’s accounting policy for its frequent flyer program is the deferred revenue method.  The deferred revenue method is to record the frequent flyer obligation by allocating an equivalent weighted-average ticket value to each outstanding mile based on projected redemption patterns for available award choices when such miles are consumed.  Such value is estimated assuming redemptions on our branded airlines, other airlines, and other redemption choices and by estimating the relative proportions of awards to be redeemed by class of service and redemption choices.  The estimation of the value of each award mile requires the use of several significant assumptions for which significant management judgment is required.  For example, management must estimate how many miles are projected to be redeemed on the Company’s airlines versus on other airline partners.  Since the equivalent ticket value on miles redeemed on our brands and on other carriers can vary greatly, this assumption can materially affect the calculation of the weighted-average ticket value from period to period.
 
43

 
Management must also estimate the expected redemption patterns of Midwest and Frontier customers who have a number of different award choices when redeeming their miles, each of which can have materially different estimated values. Such choices include different classes of service and award levels.  Customer redemption patterns may also be influenced by program changes, which occur from time to time, introducing new award choices or making material changes to the terms of existing award choices.  Management must often estimate the probable impact of such program changes on future customer behavior, which requires the use of significant judgment.  Management uses historical customer redemption patterns as the best single indicator of future redemption behavior in making its estimates, but changes in customer mileage redemption behavior patterns, which are not consistent with historical behavior can result in historical changes to deferred frequent flyer revenue balances and to recognized revenue.

The Company measures its deferred revenue obligation using all awarded and outstanding miles, regardless of whether or not the customer has accumulated enough miles to redeem an award.  Eventually these customers will accumulate enough miles to redeem awards, or their account will deactivate after a period of inactivity, in which case the Company will recognize the related revenue when the miles expire as passenger service revenue.

Current and future changes to the expiration policy, or to program rules and program redemption opportunities, may result in material changes to the deferred frequent flyer revenue balance as well as recognized revenue from the program.

The Company also sells points in its frequent flyer programs to third parties.  The travel portion of the sale is recognized as part of the deferred frequent flyer revenue liability.  The remaining portion, referred to as the marketing component, is recognized as Cargo and Other Revenue in the month the miles are sold.
 
·  
Aircraft Leases. The Company has aircraft that are leased from third parties. In order to determine the proper classification of a lease as either an operating lease or a capital lease, the Company must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management in making computations as required by existing accounting standards that determine whether the lease is classified as an operating lease or a capital lease. All of the Company’s aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the term of the related leases. Additionally, operating leases are not reflected in the Company’s consolidated balance sheet and accordingly, neither a lease asset nor an obligation for future lease payments is reflected in the Company’s consolidated balance sheet. The Company is responsible for all other maintenance costs of its aircraft and must meet specified return conditions upon lease expiration for both the airframes and engines.

·  
Impairments to Long-Lived Assets. We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. We review, at least annually, the estimated useful lives and residual values for our definite lived assets.  As a result of the Company’s annual impairment test for the indefinite-lived other intangible assets the Company recorded an impairment for the trade names.  The calculation of the fair value of the trade names was determined primarily using a discounted cash flow analysis.  Management determined that this fair value measurement would be classified as Level 3 in the fair value hierarchy.  These trade names are included in the Branded reportable operating segment. The Company also recorded an impairment for other indefinite-lived intangible assets that were included in the Fixed-fee reportable operating segment. These impairment losses are include in other impairment loses in the consolidated statements of income.
 
·  
Impairments to Goodwill.  Goodwill is required to be tested for impairment at the reporting unit level on an annual basis and between annual tests if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.  The following table reflects the changes in the carrying amount of goodwill for the years ended December 31, 2009 and 2008 (in thousands):

   
Gross Carrying
             
   
Amount
   
Impairment
   
Net
 
Balance at January 1, 2008 and December 31, 2008
  $ 13,335     $ -     $ 13,335  
                         
Impairment
    -       (13,335 )     (13,335 )
Midwest Acquisistion
    100,424       (100,424 )     -  
                         
Balance at December 31, 2009
  $ 113,759     $ (113,759 )   $ -  
 
44


During 2008 and prior to the acquisition of Midwest in July 2009, the Company had one reporting unit and all of the goodwill of $13.3 million was assigned to that unit.
 
In assessing the recoverability of goodwill, the Company makes a determination of the fair value of its business.  Fair value is determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to their present value, and a market approach, which estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the regional airline industry.  An impairment loss will generally be recognized when the carrying amount of the net assets of the business exceeds its estimated fair value.  The valuation methodology and underlying financial information included in the Company’s determination of fair value require significant judgments to be made by management.  These judgments include, but are not limited to, market valuation comparisons to similar airlines, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows.  Changes in such estimates or the application of alternative assumptions could produce significantly different results.
  
During the first quarter of 2009, the Company performed an interim test of its goodwill.  Factors deemed by management to have collectively constituted a potential triggering event included record high fuel prices, a softening US economy and the differences between market capitalization of our stock as compared to the book value of equity.  As a result of the testing, the Company determined that the goodwill was completely impaired and recorded an impairment charge during the first quarter of 2009 to write-off the full value of goodwill.
 
The Company’s acquisition of Midwest resulted in approximately $100.4 million of goodwill which was assigned to the Company’s branded operations reporting unit.  As of December 31, 2009, the Company performed its annual assessment of the recoverability of its goodwill.  The branded operations reporting unit book value of invested capital exceeded its fair value by approximately $200 million.  The Company determined the fair value of the branded invested capital utilizing the income, market, and cost approach.  The Company's fair value calculations for goodwill are classified within Level 3 of the fair value hierarchy as defined in ASC Topic 820, Fair Value Measurements and Disclosures.  As a result of failing Step One, the Company was required to perform Step Two of the ASC Topic 350 goodwill impairment testing methodology.
      
In Step Two of the impairment testing, the Company determined the implied fair value of goodwill of the reporting unit by allocating the fair value of the reporting unit determined in Step One to all the assets and liabilities of the reporting unit.  The Company utilized its recent valuations of tangible and intangible assets related to the branded operations reporting unit to determine the fair value assets and liabilities.  As a result of the Step Two testing, the Company determined that goodwill was impaired and recorded a full impairment charge on December 31, 2009, the Company’s annual assessment date.  In addition, as a result of the Step Two analysis the Company reduced the value of its tradenames allocated to the branded operations reporting unit by $6.8 million.

Factors attributable to the impairment of goodwill and intangible assets consisted of the following: increased competition in our key markets including Denver and Milwaukee, current economic conditions and forecasts within the United States, volatility of fuel prices, and other related factors.

·  
Aircraft Maintenance and Repair. The Company charges expenses as incurred under the direct expense method. Engines and certain airframe component overhaul and repair costs are subject to power-by-the-hour contracts with external vendors and are expensed as the aircraft are flown.  As a result of the acquisition of Frontier, the Company acquired deposits related to leased aircraft at Frontier.  The Company has determined that it is probable that all maintenance deposits will be refunded through qualifying maintenance activities.  Maintenance deposits for the five leased Q400 Lynx Aviation aircraft are fully refundable if all return conditions are satisfied and the Company is not in default under the terms of the agreement.   Deposits are reimbursed based on the specific event for each specified deposit, as determined by the lease. The projected ultimate cost was based on actual historical repair invoices as well as estimates.  This analysis was performed by lease and by deposit type. As of December 31, 2009, the Company anticipates no unused excess amounts to be expensed based on this analysis.  The Company will continue to evaluate whether it is probable the deposits will be returned to reimburse the costs of the maintenance activities incurred.  As the Company makes future payments, if the deposits are less than probable of being returned, they will be recognized as additional expense at that time.

·  
Income Taxes. The Company has generated significant net operating losses (“NOLs”) for federal income tax purposes primarily from accelerated depreciation on owned aircraft.  Certain of our NOLs generated prior to July 2005 and acquired from Midwest and Frontier are subject to an annual limitation under Internal Revenue Code Section 382 (“IRC 382”). The annual limitation is based upon the enterprise value of the Company on the IRC 382 ownership change date multiplied by the applicable long-term tax exempt rate. If the utilization of deferred tax assets, and other carry forwards becomes uncertain in future years, we will be required to record a valuation allowance for the deferred tax assets not expected to be utilized.
 
·  
Intangible Assets - Commuter Slots. The Company acquired commuter slots during 2005 at the New York-LaGuardia and Ronald Reagan Washington National airports from US Airways.  The licensing agreement with the Company and US Airways for the LaGuardia commuter slots expired on December 31, 2006, but we maintain a security interest in the LaGuardia slots if US Airways fails to perform under the current licensing agreement. The estimated useful lives of these commuter slots were determined based upon the period of time cash flows are expected to be generated by the commuter slots and by researching the estimated useful lives of commuter slots or similar intangibles by other airlines. In addition, an estimated residual value was determined using estimates of the expected fair value of the commuter slots at the end of the expected useful life. The residual value will be assessed annually for impairment. The estimated useful lives are also reviewed annually.
 
45

 
As a result of the acquisitions of Frontier and Midwest during the year ended December 31, 2009, the Company acquired slots at the New York, LaGuardia, Ronald Reagan Washington National and Newark Liberty International airports.  Management concluded these slots were indefinite lived assets given the nature of the assets and existing and pending legislation regarding slots at the aforementioned airports.
 
Quarterly Information (unaudited)
 
The following table sets forth summary quarterly financial information for the years ended December 31, 2009 and 2008.

   
Quarters Ended
 
   
March 31
   
June 30
   
September 30
   
December 31
 
   
(dollars in thousands, except net income per share)
 
2009
                       
Operating revenues
  $ 325,305     $ 319,962     $ 359,627     $ 637,324  
Operating income
    44,767       53,638       36,595       136,400  
Net income of the Company
    2,160       14,117       3,271       20,107  
Net income per share:
                               
Basic
  $ 0.06     $ 0.41     $ 0.09     $ 0.58  
Diluted
  $ 0.06     $ 0.41     $ 0.09     $ 0.55  
Weighted average number of shares outstanding:
                               
Basic
    34,448,683       34,448,683       34,448,683       34,598,683  
Diluted
    34,448,683       34,448,683       34,528,690       37,217,661  
                                 
2008
                               
Operating revenues
  $ 363,883     $ 391,372     $ 385,248     $ 339,252  
Operating income
    65,813       65,761       60,204       63,317  
Net income of the Company
    20,151       28,431       17,007       18,992  
Net income per share:
                               
Basic
  $ 0.56     $ 0.82     $ 0.50     $ 0.56  
Diluted
  $ 0.55     $ 0.81     $ 0.50     $ 0.56  
Weighted average number of shares outstanding:
                               
Basic
    36,237,981       34,854,532       34,169,104       34,174,167  
Diluted
    36,561,294       34,977,671       34,169,104       34,174,167  
 
New Accounting Standards
 
Effective January 1, 2009, the Company adopted ASC Topic 805, “Business Combinations,” which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.  ASC Topic 805 also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Effective January 1, 2009, the Company adopted the revision to ASC Topic 810-10, “Consolidation,” which revised the Topic to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  In addition, ASC Topic 260-10, “Earnings per Share,” was revised so that earnings-per-share data will continue to be calculated the same way those data were calculated before this Statement was issued.  The adoption of this ASC Topic had no impact on the consolidated financial statements and was applied during 2009 for the noncontrolling interest from the Mokulele acquisition.

In June 2009, the FASB issued ASC Topic 105, “Generally Accepted Accounting Principles,” as the authoritative source of generally accepted accounting principles in the United States.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws are also sources of authoritative GAAP for SEC registrants.  ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of the ASC Topic did not have an impact on the Company’s financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards.
 
46


In October 2009, the FASB issued an Accounting Standards Update (ASU No. 2009-13) pertaining to multiple-deliverable revenue arrangements. The new guidance will affect accounting and reporting for companies that enter into multiple-deliverable revenue arrangements with their customers when those arrangements are within the scope of ASC 605-25 “Revenue Recognition – Multiple Element Arrangements”.  The new guidance will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  The new guidance will be effective for the Company prospectively for revenue arrangements entered into or materially modified on or after January 1, 2011, with early adoption permitted. We are currently evaluating the impact that ASU No. 2009-13 will have on our consolidated financial statements.

In February 2010, the FASB issued Accounting Standards Update 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, which revised the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  The adoption did not have a material impact on the Company’s consolidated results of operations or financial condition, except the Company no longer needs to disclose the date subsequent events are evaluated through.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We have been and are subject to market risks, including commodity price risk (such as, to a limited extent, aircraft fuel prices) and interest rate risk.
 
Interest Rates

Our earnings can be affected by changes in interest rates due to amount of cash and securities held and variable rate debt. At December 31, 2009, approximately $506.8 million of our outstanding debt was at variable interest rates.  However, at December 31, 2008 and 2007 all of our long-term debt was fixed rate debt.  A one hundred basis point change in the LIBOR rate would increase or decrease interest expense by $5.1 million.
 
We currently intend to finance the acquisition of aircraft through the manufacturer, third-party leases or long-term borrowings. Changes in interest rates may impact the actual cost to us to acquire these aircraft. To the extent we place these aircraft in service under our code-share agreements our reimbursement rates may not be adjusted higher or lower to reflect any changes in our aircraft rental rates.

Aircraft Fuel Price Risk

Our results of operations are materially impacted by changes in aircraft fuel prices. In an effort to manage our exposure to this risk, we periodically purchase call options on crude oil. We do not hold or issue any derivative financial instruments for trading purposes. These fuel hedges do not qualify for hedge accounting, and, as such, realized and unrealized non-cash mark-to-market adjustments are included in aircraft fuel expense.  A one dollar change in price per barrel of crude oil will increase or decrease our fuel expense by $5.7 million.  A one-cent change in the cost of each gallon of fuel would impact our pre-tax income by approximately $2.4 million per year based on our current fleet and aircraft fuel consumption.
 
47



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
REPUBLIC AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
    49  
         
Consolidated Balance Sheets as of December 31, 2009 and 2008
    50  
         
Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007
    51  
         
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007
    52  
         
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
    53  
         
    54  
 
48


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Republic Airways Holdings Inc.
Indianapolis, Indiana

We have audited the accompanying consolidated balance sheets of Republic Airways Holdings Inc. and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2009.  We have also audited the internal control over financial reporting of the Company as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Annual Report on Internal Control Over Financial Reporting included in Item 9A, management excluded from its assessment the internal control over financial reporting at Midwest Air Group, Inc. and subsidiaries (“Midwest”) and Frontier Airlines Holdings, Inc. and subsidiaries (“Frontier”), which were acquired on July 31, 2009 and October 1, 2009, respectively, and whose financial statements constitute collectively 28% and 26%, respectively, of total assets and revenues of the consolidated financial statement amounts as of and for the year ended December 31, 2009. Accordingly, our audit did not include the internal control over financial reporting at Midwest and Frontier. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting 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 from material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements including examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Republic Airways Holdings Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

As discussed in Note 1 to the consolidated financial statements, substantially all fixed-fee service revenues are derived from code-share agreements with US Airways, Inc., Delta Air Lines, Inc., AMR Corp., the parent of American Airline, Inc., United Air Line, Inc., and Continental Airlines, Inc.

/s/ DELOITTE & TOUCHE LLP
Indianapolis, Indiana
March 16, 2010
 
49


REPUBLIC AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008
(In thousands, except share and per share amounts)
 
   
2009
   
2008
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 157,532     $ 129,656  
Restricted cash
    192,700       1,209  
Receivables—net of allowance for doubtful accounts of $743 and $2,054, respectively
    69,510       25,303  
Inventories—net
    81,391       51,885  
Prepaid expenses and other current assets
    42,568       17,924  
Notes receivable—net
    -       54,394  
Assets held for sale
    25,649       82,959  
Deferred income taxes
    21,023       7,406  
                 
Total current assets
    590,373       370,736  
Aircraft and other equipment—net
    3,418,160       2,692,410  
Maintenance deposits
    143,868       438  
Other intangible assets—net
    166,025       48,276  
Other assets
    132,046       111,383  
Goodwill
    -       13,335  
                 
Total
  $ 4,450,472     $ 3,236,578  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Current portion of long-term debt
  $ 243,259     $ 196,301  
Accounts payable
    106,178       33,042  
Air traffic liability
    138,242       -  
Deferred frequent flyer revenue
    46,213       -  
Accrued liabilities
    211,632       126,742  
                 
Total current liabilities
    745,524       356,085  
Long-term debt—less current portion
    2,546,160       2,081,544  
Deferred frequent flyer revenue
    108,545       -  
Deferred credits and other non current liabilities
    97,788       89,182  
Deferred income taxes
    434,575       233,828  
                 
Total liabilities
    3,932,592       2,760,639  
                 
Commitments and contingencies
               
                 
Republic Airways Holdings Inc. Stockholders' Equity:
               
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued
    -       -  
      or outstanding
               
Common stock, $.001 par value; one vote per share; 150,000,000 shares authorized;
    44       44  
      43,931,116 and 43,781,116 shares issued and 34,598,683 and 34,448,683 shares
               
      outstanding, respectively
               
Additional paid-in capital
    299,257       297,376  
Treasury stock, 9,332,433 shares at cost
    (181,820 )     (181,820 )
Accumulated other comprehensive loss
    (2,172 )     (2,577 )
Accumulated earnings
    402,571       362,916  
                 
Total Republic Airways Holdings Inc. stockholders' equity
    517,880       475,939  
Noncontrolling interests in Mokulele Flight Service, Inc. ("MFSI")
    -       -  
                 
Total equity
    517,880       475,939  
                 
Total
  $ 4,450,472     $ 3,236,578  
 
See accompanying notes to consolidated financial statements.
 
50

 
REPUBLIC AIRWAYS HOLDINGS, INC. AND SUBSIDIAIRES
CONSOLIDATED SATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
(In thousands, except per share amounts)
 
   
2009
   
2008
   
2007
 
OPERATING REVENUES:
                 
   Fixed-fee service
  $ 1,180,209     $ 1,462,211     $ 1,274,607  
   Passenger service
    389,653       -       -  
   Cargo and other
    72,356       17,544       18,070  
                         
Total operating revenues
    1,642,218       1,479,755       1,292,677  
                         
OPERATING EXPENSES:
                       
   Wages and benefits
    342,364       252,336       226,521  
   Aircraft fuel
    236,620       327,791       296,573  
   Landing fees and airport rents
    96,915       59,891       53,684  
   Aircraft and engine rent
    156,773       134,206       124,961  
   Maintenance and repair
    211,503       169,425       130,237  
   Insurance and taxes
    28,105       25,793       19,039  
   Depreciation and amortization
    163,584       133,206       106,594  
   Promotion and sales
    36,265       -       -  
   Goodwill impairment
    113,759       -       -  
   Other impairment charges
    8,800       -       -  
   Gain on bargain purchase
    (203,698 )     -       -  
   Other
    179,828       122,012       104,790  
                         
Total operating expenses
    1,370,818       1,224,660       1,062,399  
                         
OPERATING INCOME
    271,400       255,095       230,278  
                         
OTHER INCOME (EXPENSE):
                       
   Interest expense
    (144,994 )     (131,856 )     (107,323 )
   Other-net
    9,784       14,176       11,013  
                         
Total other income (expense)
    (135,210 )     (117,680 )     (96,310 )
                         
INCOME BEFORE INCOME TAXES
    136,190       137,415       133,968  
                         
INCOME TAX EXPENSE
    99,805       52,835       51,210  
                         
NET INCOME
    36,385       84,580       82,758  
Add: Net loss attributable to noncontrolling interest in Mokulele Flight Service Inc.
    3,270       -       -  
NET INCOME OF THE COMPANY
  $ 39,655     $ 84,580     $ 82,758  
                         
NET INCOME PER COMMON SHARE - BASIC
  $ 1.15     $ 2.43     $ 2.05  
                         
NET INCOME PER COMMON SHARE - DILUTED
  $ 1.13     $ 2.42     $ 2.02  
 
See accompanying notes to consolidated financial statements.
 
51

 
REPUBLIC AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(In thousands)
 
         
Republic Airways Holdings Inc. Stockholders
             
                                 
Accumulated
                   
   
Other
         
Additional
               
Other
                   
   
Comprehensive
   
Common
   
Paid-In
         
Treasury
   
Comprehensive
   
Accumulated
   
Noncontrolling
       
   
Income
   
Stock
   
Capital
   
Warrants
   
Stock
   
Loss
   
Earnings
   
Interest
   
Total
 
Balance at January 1, 2007
        $ 43     $ 281,826     $ 8,574     $ -     $ (3,877 )   $ 222,263     $ -       508,829  
Stock compensation expense
 
 
              3,119                                               3,119  
Exercise of employee stock options
 
 
              8,182                                               8,182  
Net income
  $ 82,758                                               82,758               82,758  
Treasury stock repurchases
                                    (142,411 )                             (142,411 )
Reclassification adjustment for loss realized on derivatives, net of tax
    868                                       868                       868  
Cummulative effect of change in accounting principle (FIN 48)
                                                    (2,367 )             (2,367 )
Delta warrants surrender, net of tax
                            (8,574 )                     (24,318 )             (32,892 )
Comprehensive income
  $ 83,626                                                                  
Balance at December 31, 2007
            43       293,127       -       (142,411 )     (3,009 )     278,336       -       426,086  
Stock compensation expense
                    3,925                                               3,925  
Exercise of employee stock options
            1       324                                               325  
Net income
  $ 84,580                                               84,580               84,580  
Treasury stock repurchases
                                    (39,409 )                             (39,409 )
Reclassification adjustment for loss realized on derivatives, net of tax
    432                                       432                       432  
Comprehensive income
  $ 85,012                                                                  
Balance at December 31, 2008
            44       297,376       -       (181,820 )     (2,577 )     362,916       -       475,939  
Stock compensation expense
                    5,151                                               5,151  
Decrease in Republic's APIC for purchase of Mokulele Flight Services, Inc. common stock from noncontrolling interest
                    (3,270 )                                     3,270       -  
Net income
  $ 36,385                                               39,655       (3,270 )     36,385  
Reclassification adjustment for loss realized on derivatives, net of tax
    405                                       405                       405  
Comprehensive income
  $ 36,790                                                                  
Balance at December 31, 2009
          $ 44     $ 299,257     $ -     $ (181,820 )   $ (2,172 )   $ 402,571     $ -     $ 517,880  

See accompanying notes to consolidated financial statements.
 
52


REPUBLIC AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(In thousands)
 
   
2009
   
2008
   
2007
 
OPERATING ACTIVITIES:
                 
Net income
  $ 36,385     $ 84,580     $ 82,758  
Adjustments to reconcile net income to net cash from operating activities:
                       
Goodwill and other impairment charges
    122,559       -       -  
Gain on bargain purchase
    (203,698 )     -       -  
Depreciation and amortization
    163,584       133,206       106,594  
Debt issue costs and other amortization
    8,375       7,078       6,764  
Curtailment gain and non-cash pension expense
    (7,500 )     -       -  
Warrant amortization
    (10,781 )     (15,953 )     102  
Loss on aircraft and other equipment disposals
    4,906       4,749       255  
Realized gain on interest rate swap
    -       (5,785 )     -  
Gain on extinguishment of debt
    -       (5,980 )     -  
Stock compensation expense
    5,151       3,925       3,119  
Deferred income taxes
    101,713       49,339       51,090  
Other, net
    1,397       (1,547 )     (1,761 )
Changes in certain assets and liabilities:
                       
Restricted cash
    9,604       -       -  
Receivables
    (4,260 )     2,281       (7,944 )
Inventories
    (15,595 )     (8,212 )     (11,419 )
Prepaid expenses and other current assets
    (3,560 )     (7,996 )     1,554  
Accounts payable
    (6,309 )     (2,158 )     11,299  
Air traffic liability
    (15,692 )     -       -  
Deferred frequent flyer liability
    7,548       -       -  
Accrued liabilities
    (13,695 )     16,006       4,022  
Deferred revenue (Delta pre-petition claim)
    -       -       44,590  
Other, net
    (11,514 )     (11,246 )     (10,533 )
                         
Net cash from operating activities
    168,618       242,287       280,490  
                         
INVESTING ACTIVITIES:
                       
Purchase of aircraft and other equipment
    (39,997 )     (127,832 )     (99,545 )
Proceeds from sale of aircraft and other equipment
    72,869       52,945       15,798  
Aircraft deposits
    (5,506 )     (20,884 )     (51,414 )
Aircraft deposits returned
    14,459       68,623       58,681  
Funding of notes receivable
    (61,117 )     (55,032 )     -  
Acquisition of Frontier, net of cash acquired
    25,193       -       -  
Acquisition of Midwest, net of cash acquired
    (1,894 )     -       -  
Other, net
    (622 )     242       12  
                         
Net cash from investing activities
    3,385       (81,938 )     (76,468 )
                         
FINANCING ACTIVITIES:
                       
Payments on debt
    (145,709 )     (113,565 )     (93,475 )
Proceeds from refinancing of aircraft and issuance of debt
    75,123       6,700       -  
Payments on early extinguishment of debt
    (70,887 )     (49,969 )     -  
Proceeds from exercise of stock options    
    -       325       8,182  
Payments for debt issue costs
    (2,654 )     (4,564 )     (7,842 )
Proceeds on settlement of interest rate swaps
    -       5,785       -  
Purchase of treasury stock
    -       (39,409 )     (142,411 )
                         
Net cash from financing activities
    (144,127 )     (194,697 )     (235,546 )
                         
Net changes in cash and cash equivalents
    27,876       (34,348 )     (31,524 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    129,656       164,004       195,528  
                         
CASH AND CASH EQUIVALENTS AT END OF YEAR
  $ 157,532     $ 129,656     $ 164,004  
 
See accompanying notes to consolidated financial statements.
 
53

 
REPUBLIC AIRWAYS HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 and 2007
 
1.
ORGANIZATION & BUSINESS
 
We are a Delaware holding company organized in 1996 that offers scheduled passenger services through our wholly-owned operating subsidiaries:  Chautauqua Airlines, Inc., (“Chautauqua Airlines”), Shuttle America Corporation (“Shuttle America”), Republic Airline Inc. (“Republic Airline”), Frontier Airlines, Inc., and Lynx Airlines, Inc. (“Lynx”).  The Company acquired Midwest Air Group, Inc. (“Midwest”) and Frontier Airlines Holdings, Inc. (“Frontier”) on July 31, 2009 and October 1, 2009, respectively.  On November 3, 2009, Midwest Airlines, Inc. ceased to exist as an actual operating airline and we allowed its Department of Transportation (“DOT”) air carrier operating certificate to lapse.  Midwest’s branding, livery and route structure are all operated by our other operating subsidiaries.  We plan to fully integrate the operations of Midwest and Frontier as promptly as is feasible, which we anticipate will be substantially completed by the end of 2010.  Unless the context indicates otherwise, the terms “the Company,” “we,” “us,” or “our,” refer to Republic Airways Holdings Inc. and our subsidiaries.

As of December 31, 2009, our operating subsidiaries offered scheduled passenger service on approximately 1,600 flights daily to 121 cities in 44 states, Canada, Mexico, and Costa Rica under branded operations as Frontier and Midwest, and through fixed-fee code-share agreements with AMR Corp., the parent of American Airlines, Inc. (“American”), Continental Airlines, Inc. (“Continental”), Delta Air Lines, Inc. (“Delta”),  United Air Lines, Inc. (“United”), and US Airways, Inc. (“US Airways”) (collectively referred to as our “Partners”). Currently, we provide our Partners with fixed-fee regional airline services, operating as AmericanConnection, Continental Express, Delta Connection, United Express, or US Airways Express, including service out of their hubs and focus cities.

The following table outlines the type of aircraft our subsidiaries operate and their respective operations within our business units as of December 31, 2009:
 
         
Branded Operations
   
Fixed-Fee Code-Share Agreement Partners
   
Other
   
Number
 
Operating
Subsidiaries
 
Aircraft
Size
   
Frontier /
Midwest
   
American
   
Continental
   
Delta
   
United
   
US
Airways
   
Unallocated
   
of
Aircraft
 
Chautauqua Airlines
 
37 to 50
      6       15       22       24       7       9       4       87  
Shuttle America
 
70 to 76
                        16       38             2       56  
Republic Airline
 
70 to 99
      27                               58             85  
Frontier
 
120 to 162
      51                                           51  
Lynx
 
74
      11                                           11  
Total number of operating aircraft
      95       15       22       40       45       67       6       290  
 
We have long-term, fixed-fee regional jet code-share agreements with each of our Partners that are subject to our maintaining specified performance levels. Pursuant to these fixed-fee agreements, which provide for minimum aircraft utilization at fixed rates, we are authorized to use our Partners' two-character flight designation codes to identify our flights and fares in our Partners' computer reservation systems, to paint our aircraft in the style of our Partners, to use their service marks and to market ourselves as a carrier for our Partners. Our fixed-fee agreements have historically limited our exposure to fluctuations in fuel prices, fare competition and passenger volumes. Our development of relationships with multiple major airlines has enabled us to reduce our dependence on any single airline, allocate our overhead more efficiently among our Partners and reduce the cost of our services to our Partners.

US Airways Code-Share Agreements

The code-share agreement for the E145 aircraft terminates in July 2014.  The code-share agreement for the E170/175 aircraft terminates in September 2015 with respect to the 20 E170 aircraft and eight of the E175 aircraft.   The remaining 30 E175 aircraft terminate 12 years from each aircraft’s in-service date and therefore would terminate from February 2019 to July 2020. US Airways may terminate the code-share agreements at any time for cause upon not less than 90 days notice and subject to our right to cure under certain conditions.

The American Code-Share Agreement

The term of the American code-share agreement continues until February 1, 2013. However, American may terminate the code-share agreement without cause upon 180 days notice, provided that such notice may not be given prior to September 30, 2011. If American terminates the code-share agreement without cause, we have the right to put the leases of the aircraft, or to sell the aircraft to American to the extent owned by us, used under the code-share agreement to American. The agreement may be subject to termination for cause prior to that date under various circumstances.
 
54


The Delta Code-Share Agreements

The code-share agreements for the E145 and E170/175 aircraft terminate in May 2016 and January 2019, respectively, subject to certain extension rights. Delta may terminate the code-share agreements at any time, with or without cause, if it provides us 180 days written notice, provided that such notice shall not be given prior to November 2009 for the E145 regional jet code-share agreement and July 2015 for the E170/175 regional jet code-share agreement. With the respect to the E145 agreement, if Delta chooses to terminate any aircraft early, it may not reduce the number of aircraft in service to less than 12 during the 12-month period following the 180 day initial notice period unless it completely terminates the code-share agreement. We refer to this as Delta's partial termination right.

If Delta exercises this right under either agreement or if we terminate either agreement for cause, we have the right to require Delta either to purchase, sublease or assume the lease of aircraft leased by us with respect to any of the aircraft we previously operated for Delta under that agreement.

The United Code-Share Agreements

The E170 code-share agreement terminates on June 30, 2019.  The E145 code-share agreement was terminated effective January 2010.  The E145 aircraft are being transitioned to our branded business unit or returned to lessor during the first quarter of 2010.  United has the option of extending the E170 agreement for five years or less.  In addition, the code-share agreements may be terminated under certain conditions.

United has a call option to assume our ownership or leasehold interest in certain aircraft if we wrongfully terminate the code-share agreements or if United terminates the agreements for our breach for certain reasons.
 
The Continental Code-Share Agreement

The CRJ-200 aircraft are operated under the agreement on terms generally equivalent to our CRJ-200 leases that vary from two to three years.  The remaining CRJ aircraft will come out of service in the first quarter of 2010 and be returned to the lessor.  The E145 aircraft have a term of three to five years.  Under certain conditions, Continental may extend the term on the aircraft up to five additional years.

Branded Operations

Our Midwest brand has a regional focus in Milwaukee and Kansas City, and our Frontier brand has a regional focus in Denver.  Our branded operations expose us to changes in passenger demand, fare competition and fluctuations in fuel prices.  Midwest is the largest carrier in Milwaukee, and Frontier is the second largest carrier in Denver.  Each brand has a significant base of frequent flyer members and strong support in their local communities. 

During 2009, our operational fleet increased from 221 to 290 aircraft.  The acquisition of Frontier added 62 aircraft that are operated by Frontier and Lynx.  Additionally, during 2009, we took delivery of 11 E190 aircraft, which have been placed into branded service, three E175 aircraft, which were placed into service with Delta and six E135 aircraft which were placed into branded service.  We also returned 10 CRJ200 aircraft to the lessor and subleased three E145 aircraft offshore.  

In order to simplify our fleet and reduce expenses, we expect to remove our Q400 and CRJ-200 fleets in 2010. The remaining seven CRJ-200 aircraft will be removed from service for Continental and returned to the lessor by April 2010 and we expect to reduce the operations on the Q400 aircraft in April 2010 and eliminate all Q400 flying by September 2010.

Concentrations

As of December 31, 2009, substantially all fixed-fee service revenues are derived from code-share agreements with US Airways, Delta, American, United, and Continental.  Termination of any of these code-share agreements could have a material adverse effect on the Company’s financial position, results of operations and cash flows.

During the years ended December 31, 2009, 2008, and 2007, Delta was approximately 19%, 29% and 33%, US Airways was approximately 33%, 25%, and 22%, and United was approximately 29%, 21%, and 24% of the Company’s fixed-fee service revenue, respectively.

Frontier and Midwest operate primarily out of the Denver and Milwaukee airports with 95% of our flights originating or departing from the Milwaukee or Denver airports.  A reduction in the Company’s market share, increased competition, or reduced passenger traffic to or from these airports could have an adverse effect on our financial position and results of operations.  In addition, our dependence on a hub system operating out of these airports makes us more susceptible to adverse weather conditions and other traffic delays than some of our competitors that may be able to spread these traffic risks over larger route networks.
 
55


2. 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Consolidation—The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly-owned subsidiaries, Chautauqua Airlines, Shuttle America, Republic Airline, Frontier and Midwest.  The Company’s financial statements include the results of operations and cash flows for Midwest and Frontier beginning August 1, 2009 and October 1, 2009, respectively.  The Company’s financial statements include the results of operations and cash flows for Mokulele Flight Services, Inc. (“MFSI or Mokulele”) beginning April 1, 2009 through October 16, 2009.  Intercompany transactions and balances are eliminated in consolidation.
 
Risk Management—As part of our risk management strategy, the Company periodically purchases crude oil option contracts in order to manage our exposure to the effect of changes in the price of aircraft fuel.  Prices for crude oil are normally correlated to aircraft fuel, making derivatives of crude oil effective at providing short-term protection against sharp increases in average fuel prices.  The Company does not hold or issue any derivative financial instruments for speculative trading purposes.  The Company chose not to designate these derivatives as hedges, and, as such, realized and unrealized mark-to-market adjustments are included in aircraft fuel expense in the consolidated statements of income.

The Company has recorded within accumulated other comprehensive loss settlements of derivative transactions from prior periods.  Such amounts are reclassified to interest expense over the term of the respective aircraft debt.  During 2009, 2008 and 2007, the Company reclassified $0.7 million, $0.7 million, and $0.8 million to interest expense, respectively. The Company expects to reclassify $0.6 million to interest expense for the year ending December 31, 2010.

In March 2008, in anticipation of financing the purchase of E175 aircraft on firm order with the manufacturer, the Company entered into 21 interest rate swap agreements for a notional amount of $420 million.  In April 2008, the Company terminated the interest rate swap agreements resulting in a gain and cash proceeds of $5.8 million, which is recorded in other income, net in the consolidated statement of income in 2008.

Cash and Cash Equivalents—Cash equivalents consist of money market funds and short-term, highly liquid investments with maturities of three months or less when purchased. Substantially all of our cash is on hand with three banks.
 
Supplemental Statement of  Cash Flow Information:
 
 
Years ended December 31,
 
(amounts in 000's)
 
2009
   
2008
   
2007
 
CASH PAID FOR INTEREST AND INCOME TAXES:
                 
Interest paid-net of amount capitalized
  $ 134,700     $ 122,355     $ 105,818  
Income taxes paid-net of refunds
    (319 )     483       1,388  
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
                       
Parts, training and lease credits received from aircraft manufacturer
    (1,710 )     (14,900 )     (12,540 )
Liabilities assumed in Mokulele transaction
    9,300       -       -  
Liabilities removed in Mokulele deconsolidation
    6,800       -       -  
Conversion of Mokulele note to equity
    3,000       -       -  
Liabilities assumed in Midwest acquisition
    182,000       -       -  
Liabilities assumed in Frontier acquisition
    757,700       -       -  
Convertible debt issued in Midwest acquisition
    25,000       -       -  
Frontier debtor-in-possession loan settled upon acquisition
    43,104       -       -  
US Airways note receivable and accrued interest applied to aicraft purchases
    35,228       -       -  
Aircraft, inventories, and other equipment purchased through direct financing arrangements
    315,272       526,200       438,252  
Engines received and not yet paid
    8,124       6,283       3,281  
Refinancing of aircraft
    -       139,145       -  
Fair value of warrants surrendered by Delta
    -       -       49,103  
Engines contributed in settlement of liability
    6,400       -       -  

 
56


Restricted Cash —Restricted cash primarily consists of funds held as collateral for bankcard and credit card processors and are invested in money market accounts or held by credit card processors directly.  These contracts with the processors require a holdback of funds equal to a certain percentage of the air traffic liability associated with the estimated amount of bankcard transactions. The Company also maintains restricted amounts for satisfying debt and lease payments due within the next year and certificates of deposit that secure certain letters of credit issued for workers compensation claim reserves and certain airport authorities.  Restricted cash is carried at cost, which management believes approximates fair value.  Restricted cash consisted of the following as of December 31, 2009 and 2008:
 
   
December 31,
 
($ in 000's)
 
2009
   
2008
 
Funds held for holdback of customer sales
  $ 159,704     $ -  
Funds held for cash supported letters of credit and deposits on charter flights
    31,811       -  
Other
    1,185       1,209  
Total
  $ 192,700     $ 1,209  

Inventories consist of spare parts and supplies, which are charged to expense as they are used in operations. Inventories are valued at the lower of cost or net realizable value using either the average cost or first-in first-out methods.  An allowance for obsolescence is provided to reduce inventory to estimated net realizable value. As of December 31, 2009 and 2008, this reserve was $5.8 million and $3.6 million, respectively.
 
Prepaid Expenses and Other Current Assets consist of prepaid expenses, primarily fuel, deposits, facility and engine rent, and commissions, and other current assets, primarily the fair value of derivative contracts.  Passenger traffic commissions are expensed when the transportation is provided and the related revenue is recognized.

Notes Receivable—Interest income is recognized on an accrual basis and is generally suspended for notes receivable at the date when a full recovery of income and principal becomes doubtful.  Interest income recognition is resumed when notes receivable become contractually current and performance is demonstrated to be resumed.  The Company’s accounting policy used to estimate whether an allowance for loan losses was necessary was based on management’s judgment and assessment of counterparty’s financial condition, the counterparty’s performance under the existing obligations within the loan, and an assessment of the underlying collateral security, if any.

Assets Held for Sale are reported at the lower of their carrying value or estimated fair value less costs to sell.  We expect to sell all such assets during the next twelve months.
 
Aircraft and Other Equipment is carried at cost. Incentives received from the aircraft manufacturer are recorded as reductions to the cost of the aircraft.  Depreciation for aircraft is computed on a straight-line basis, to an estimated residual value, over the estimated useful life of 16.5 to 25 years. Depreciation for other equipment, including rotable parts, is computed on a straight-line basis, to an estimated residual value, over the estimated useful lives of three to 25 years. Leasehold improvements are amortized over the expected life or lease term, whichever is shorter. Interest related to deposits on aircraft on firm order from the manufacturer is capitalized. The Company capitalized approximately $0.1 million, $2.2 million, and $4.1 million of interest for  the years ended December 31, 2009, 2008 and 2007, respectively.
 
Goodwill and Other Intangible Assets that have indefinite useful lives are not amortized but are tested if a triggering event occurred or at least annually for impairment.  Intangible assets that have finite useful lives are amortized over their useful lives to an estimated residual value and reviewed for impairment at least annually.  See Note 8, Other Intangible Assets and Note 9, Goodwill, for further information.

Other Assets consists primarily of prepaid aircraft rent, debt issue costs, and aircraft lease and other long-term deposits. Debt issue costs are capitalized and are amortized using the effective interest method, to interest expense over the term of the related debt.

Long-Lived Assets—Management reviews long-lived assets for possible impairment, if there is a triggering event that detrimentally affects operations. The primary financial indicator used by the Company to assess the recoverability of its long-lived assets held and used is undiscounted future cash flows from operations. The amount of impairment, if any, is measured based on estimated fair value or projected future cash flows using a discount rate reflecting the Company's average cost of funds.

Deferred Credits and Other Non Current Liabilities consist primarily of credits for parts and training from the aircraft and engine manufacturers, deferred gains from the sale and leaseback of aircraft and spare jet engines, unfavorable leases assumed from acquisitions of businesses, and deferred revenue from the Delta warrant surrender and pre-petition claim. Deferred credits are amortized on a straight-line basis as a reduction of aircraft or engine rent expense over the term of the respective leases.  The deferred revenue is amortized as an adjustment to fixed-fee services revenue based on the weighted average aircraft in service over the life of the Delta agreements.
 
57


Comprehensive Income—The Company reports comprehensive income in accordance with Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components in financial statements. The Company had accumulated other comprehensive loss relating to treasury lock agreements of $2.2 million, $2.6 million, and $3.0 million, net of tax, at December 31, 2009, 2008 and 2007, respectively.

Income TaxesThe Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts for existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in future years in which those temporary differences are expected to be recovered or settled. The measurement of deferred tax assets is adjusted by a valuation allowance, if necessary, to recognize the future tax benefits to the extent, based on available evidence; it is more likely than not they will be realized.
 
Aircraft Maintenance and Repair is charged to expense as incurred under the direct expense method. Engines and certain airframe component overhaul and repair costs are subject to power-by-the-hour contracts with external vendors and are expensed as the aircraft are flown.  As a result of the acquisition of Frontier, the Company acquired deposits related to leased aircraft at Frontier.  The Company has determined that it is probable that all maintenance deposits will be refunded through qualifying maintenance activities.  Maintenance deposits for the five leased Q400 Lynx Aviation aircraft are fully refundable if all return conditions are satisfied and the Company is not in default under the terms of the agreement.   Deposits are reimbursed based on the specific event for each specified deposit, as determined by the lease. The projected ultimate cost was based on actual historical repair invoices as well as estimates.  This analysis was performed by lease and by deposit type. As of December 31, 2009, the Company anticipates no unused excess amounts to be expensed based on this analysis.  The Company will continue to evaluate whether it is probable the deposits will be returned to reimburse the costs of the maintenance activities incurred.  As the Company makes future payments, if the deposits are less than probable of being returned, they will be recognized as additional expense at that time.

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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Such management estimates include, but are not limited to, recognition of revenue, including deferred revenue from the frequent flyer program, fair value of assets acquired and liabilities assumed in business combinations, fair value of the reporting units of the Company, valuation of goodwill and long-lived assets, valuation of notes receivable, provision for accrued aircraft return costs and valuation of deferred tax assets. Under the code-share agreements, the Company estimates operating costs for certain “pass through” costs and records revenue based on these estimates. Actual results could differ from those estimates.

Fixed-fee Service Revenues—Under our fixed-fee arrangements with our Partners, the Company receives fixed-fees for our capacity purchase agreements, as well as reimbursement of specified “pass-through” costs on a gross basis with additional possible incentives from our Partners for superior service. These revenues are recognized in the period the service is provided, and we perform an estimate of the profit component based upon the information available at the end of the accounting period.

The reimbursement of specified costs, known as “pass-through costs”, may include aircraft ownership cost, passenger liability and hull insurance, aircraft property taxes, fuel, landing fees and catering. All revenue recognized under these contracts is presented at the gross amount billed for reimbursement.

Under the Company’s code-share agreements, the Company is reimbursed an amount per aircraft designed to compensate the Company for certain aircraft ownership costs.  The Company has concluded that a component of its fixed-fee service revenues under the agreement discussed above is rental income, inasmuch as the agreement identifies the “right of use” of a specific type and number of aircraft over a stated period of time. The amount deemed to be rental income during 2009, 2008 and 2007 was $358.2 million, $348.4 million, and $310.3 million, respectively, and has been included in fixed-fee service revenues in the Company’s consolidated statements of income.

Passenger Service RevenuesPassenger service revenues are recognized when the transportation is provided or after the tickets expire (which is either immediately upon the scheduled departure of the flight or up to thirteen months after the date of issuance depending on the type of ticket purchased), and are net of excise taxes, passenger facility charges and security fees.  Passenger service revenues that have been deferred are included in the accompanying consolidated balance sheets as air traffic liability.    Included in passenger service revenue are change fees imposed on passengers for making schedule changes to non-refundable tickets.  Change fees are recognized as revenue at the time the change is made for the passenger as these fees are a separate transaction that occur subsequent to the date of the original ticket sale.  Certain passenger tickets include a bundle of services such as bag fees and other buy-on-board services and these revenues are included in passenger service revenue as part of the bundled ticket price.  During the year ended December 31, 2009, no unused tickets were recognized as revenue since the air traffic liability was recorded at fair value as of July 31, 2009 for Midwest and October 1, 2009 for Frontier, which included the impact of estimated breakage.
 
58


The Company is required to charge certain taxes and fees on passenger tickets.  These taxes and fees include U.S. federal transportation taxes, federal security charges, airport passenger facility charges and foreign arrival and departure taxes.  These taxes and fees are legal assessments on the customer, for which the Company has an obligation to act as a collection agent.  Because the Company is not entitled to retain these taxes and fees, such amounts are not included in passenger service revenue.  The Company records a liability when the amounts are collected and reduces the liability when payments are made to the applicable government agency or operating carrier.

Cargo and Other Revenues—Cargo and other revenues consist primarily of the marketing component of our co-branded credit cards, charter and cargo revenues, interline and ground handling fees, on-board sales of LiveTV, liquor and food, excess bag fees, lease revenue for aircraft subleased  under operating leases and revenue from commuter slots leased to US Airways at Ronald Reagan Washington National Airport.

Frequent Flyer ProgramsThe Company has frequent flyer programs that offer incentives to travel on its airlines and promote customer loyalty.  The programs allow participants to earn mileage credits by flying on Midwest or Frontier as well as participating airlines and through participating companies, such as credit card companies, hotels, and car rental agencies.  The Company also sells mileage credits to other airlines and to nonairline businesses.  The mileage credits may be redeemed for free air travel on Midwest, Frontier, or other airlines, as well as hotels, rental cars, and other awards.

Mileage Credits – The Company has agreements with its co-branded credit card partner that requires its partner to purchase miles as they are awarded to the co-branded partner cardholders.  The air transportation element for the awarded miles are included in deferred frequent flyer revenue at the estimated fair value of the air transportation element and the residual marketing element is recorded as other revenue when the miles are awarded.  The deferred frequent flyer revenue is subsequently recognized as passenger service revenue when the transportation is provided.

Earned Mileage Credits – The Company also defers the portion of the sales proceeds that represents the estimated fair value of the air transportation for mileage credits awarded and recognizes that amount as passenger service revenue when the mileage credit is redeemed and the transportation is provided.  The fair value of the air transportation component is determined utilizing the deferred revenue method as further described below.  The initial revenue deferral is presented as deferred frequent flyer revenue in the consolidated balance sheets.  When recognized, the revenue related to the air transportation component is classified as passenger service revenue in the Company’s consolidated statements of income.

The Company’s accounting policy for its frequent flyer program is the deferred revenue method.  The deferred revenue method is to record the frequent flyer obligation by allocating an equivalent weighted-average ticket value to each outstanding mile based on projected redemption patterns for available award choices when such miles are consumed.  Such value is estimated assuming redemptions on our branded airlines, other airlines, and other redemption choices and by estimating the relative proportions of awards to be redeemed by class of service and redemption choices.  The estimation of the value of each award mile requires the use of several significant assumptions for which significant management judgment is required.  For example, management must estimate how many miles are projected to be redeemed on the Company’s airlines versus on other airline partners.  Since the equivalent ticket value on miles redeemed on our brands and on other carriers can vary greatly, this assumption can materially affect the calculation of the weighted-average ticket value from period to period.

Management must also estimate the expected redemption patterns of Midwest and Frontier customers who have a number of different award choices when redeeming their miles, each of which can have materially different estimated values. Such choices include different classes of service and award levels.  Customer redemption patterns may also be influenced by program changes, which occur from time to time, introducing new award choices or making material changes to the terms of existing award choices.  Management must often estimate the probable impact of such program changes on future customer behavior, which requires the use of significant judgment.  Management uses historical customer redemption patterns as the best single indicator of future redemption behavior in making its estimates, but changes in customer mileage redemption behavior patterns, which are not consistent with historical behavior can result in historical changes to deferred frequent flyer revenue balances and to recognized revenue.

The Company measures its deferred revenue obligation using all awarded and outstanding miles, regardless of whether or not the customer has accumulated enough miles to redeem an award.  Eventually these customers will accumulate enough miles to redeem awards, or their account will deactivate after a period of inactivity, in which case the Company will recognize the related revenue when the miles expire as passenger service revenue.

Current and future changes to the expiration policy, or to program rules and program redemption opportunities, may result in material changes to the deferred frequent flyer revenue balance as well as recognized revenue from the program.
 
59


The Company also sells points in its frequent flyer programs to third parties.  The travel portion of the sale is recognized as part of the deferred frequent flyer revenue liability.  The remaining portion, referred to as the marketing component, is recognized as Cargo and Other Revenue in the month the miles are sold.

Promotion and Sales includes commissions, promotions, reservation system fees, advertising, and other similar costs.  The Company expenses the costs of advertising expense in the year incurred.  Advertising expense was $2.8 million for the year ended December 31, 2009.  No advertising expense was incurred in the years ended December 31, 2008 or 2007.

Lease Return ConditionsThe Company must meet specified return conditions upon lease expiration for both the airframes and engines.  The Company estimates lease return conditions specified in leases and accrues these amounts as contingent rent ratably over the lease term while the aircraft are operating once such costs are probable and reasonably estimable.  These expenses are included in accrued liabilities in the consolidated balance sheets.

Retirement and Benefit PlansThe Company uses an annual December 31 measurement date for purposes of calculations of plan assets and obligations and all other related measurements.

Defined Benefit PlansMidwest has two defined benefit plans.  The Pilots’ Supplemental Pension Plan is a qualified defined benefit plan and provides retirement benefits to Midwest pilots covered by their collective bargaining agreement. The Pilots’ Nonqualified Supplemental Pension Plan is a nonqualified defined benefit plan that provides Midwest pilots with annuity benefits for salary in excess of IRS salary limits that cannot be covered by the qualified Pilots’ Supplemental Pension Plan.

Other Postretirement PlansMidwest has Postretirement Health Care and Life Insurance Benefits plans that allow retirees to participate in unfunded health care and life insurance benefit plans. Benefits are based on years of service and age at retirement. The plans are principally noncontributory for current retirees and are contributory for most future retirees.  Midwest also has a Pilots’ Severance Plan that provides certain benefits to a select group of pilots based on the pilot’s age and years of service at termination.

Warrants—Warrants issued to non-employees and Partners are accounted for at fair value on the measurement date as deferred charges and credits to stockholders’ equity. Warrants surrendered in a non-monetary transaction are recorded at fair value on the measurement date as reductions to deferred charges and stockholders’ equity. The deferred charges for warrants were amortized as a reduction of fixed-fee services revenue over the terms of the code-share agreements.

In March 2007, the Company amended its agreements with Delta and  in return for these amended terms, Delta agreed to surrender its warrants for 3,435,000 shares of the Company’s common stock, and the Company was granted a pre-petitioned, unsecured, general claim in the amount of $91.0 million in Delta's Chapter 11 bankruptcy case. Key terms of the amended agreements include the removal of all 15 thirty-seven seat ERJ-135 aircraft beginning in September 2008 at a rate of 2 aircraft per month, and effective May 1, 2007, an approximate 3% permanent reduction of block hour fees charged on Chautauqua Airlines’ remaining 24 fifty seat ERJ-145 and Shuttle America's 16 seventy seat ERJ-170 aircraft. In April 2007, the Company sold the $91.0 million pre-petition claim to a third party for $44.6 million in cash. As a result of the Delta amendment, the Company recorded deferred revenue of $44.6 million, which represented the net realizable value of the pre-petition claim on the approval date by the Bankruptcy Court. In addition, the Company recorded deferred revenue on the surrender of the warrants from Delta of $42.7 million, which was net of the previously recorded unamortized deferred charge of $6.4 million. Stockholders' equity was reduced by $32.9 million, net of tax, resulting from the surrender of the warrants and their retirement. The deferred revenue for the proceeds of the pre-petition claim and the gain on the surrender of the warrants totaling $87.3 million is being amortized as an adjustment to revenue over the term of the agreements with Delta.  As of December 31, 2009, the remaining deferred revenue is being amortized on a straight-line basis until 2016.
 
60


Net Income per Common Share is based on the weighted average number of shares outstanding during the period.  The following is a reconciliation of the diluted net income per common share computations (amounts in thousands):
 
   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
Net income of the Company
  $ 39,655     $ 84,580     $ 82,758  
Reduction in interest expense from convertible note (net of tax)
    517       -       -  
                         
Net income of the Company for diluted net income per common share calculation
  $ 40,172     $ 84,580     $ 82,758  
                         
Weighted-average common shares outstanding for basic net income per common share
    34,599       34,855       40,350  
Effect of dilutive convertible note
    1,041       -       -  
Effect of dilutive employee stock options and warrants
    59       94       695  
                         
Adjusted weighted-average common shares outstanding and assumed conversions for diluted net income per common share
    35,699       34,949       41,045  

Employee stock options of 4.2 million, 3.5 million, and 1.4 million were not included in the calculation of diluted net income per common share due to their anti-dilutive impact for the years ended December 31, 2009, 2008, and 2007, respectively.  The convertible note has a $25.0 million face value and is convertible in whole or in part, at the option of the holder, for up to 2.5 million shares of the Company’s common stock.
 
Fair Value of Financial Instruments—The carrying amounts reported in the consolidated balance sheets for restricted cash, receivables, notes receivable, and accounts payable approximate fair values because of their immediate or short-term maturity of these financial instruments.

Segment Information—Historically, the Company has always considered its operations as one operating and reportable segment, fixed-fee services.  During 2009, the Company acquired Mokulele, Midwest, and Frontier, and the Company reassessed the number of segments of the Company and determined that the Company has three reportable operating segments:  fixed-fee service, branded passenger service, and other.  Additional information about segment reporting is presented in Note 17.
 
New Accounting Standards—Effective January 1, 2009, the Company adopted ASC Topic 805, “Business Combinations,” which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree.  ASC Topic 805 also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Effective January 1, 2009, the Company adopted the revision to ASC Topic 810-10, “Consolidation,” which revised the Topic to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  In addition, ASC Topic 260-10, “Earnings per Share,” was revised so that earnings-per-share data will continue to be calculated the same way those data were calculated before this Statement was issued.  The adoption of this ASC Topic had no impact on the consolidated financial statements and was applied during 2009 for the noncontrolling interest from the Mokulele acquisition.

In June 2009, the FASB issued ASC Topic 105, “Generally Accepted Accounting Principles,” as the authoritative source of generally accepted accounting principles in the United States.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws are also sources of authoritative GAAP for SEC registrants.  ASC Topic 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of the ASC Topic did not have an impact on the Company’s financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards.

In October 2009, the FASB issued an Accounting Standards Update (ASU No. 2009-13) pertaining to multiple-deliverable revenue arrangements. The new guidance will affect accounting and reporting for companies that enter into multiple-deliverable revenue arrangements with their customers when those arrangements are within the scope of ASC 605-25 “Revenue Recognition – Multiple Element Arrangements”.  The new guidance will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method.  The new guidance will be effective for the Company prospectively for revenue arrangements entered into or materially modified on or after January 1, 2011, with early adoption permitted. We are currently evaluating the impact that ASU No. 2009-13 will have on our consolidated financial statements.
 
61


In February 2010, the FASB issued Accounting Standards Update 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements, which revised the general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  The adoption did not have a material impact on the Company’s consolidated results of operations or financial condition, except the Company no longer needs to disclose the date subsequent events are evaluated through.

Reclassification— The Company reclassified certain prior year amounts to conform to current year presentation.  The Company separated the December 31, 2008 balance sheet financial statement line item of intangible assets and other assets, net of $160.1 million to create three separate financial statement lines items of other intangible assets, net for $48.3 million, maintenance deposits for $0.4 million, and other assets for $111.4 million due to the significant other intangible assets and maintenance deposits acquired in the Company’s business acquisitions during the current year.  The Company also combined the two statements of income financial statement line items of charter and ground handling and other to create one combined statement of income financial statement line item titled cargo and other revenue as these separate line items were no longer individually significant due to the acquisitions in the current year.

3. 
FAIR VALUE MEASUREMENTS

ASC Topic 820, “Fair Value Measurements and Disclosures” requires disclosures about how fair value is determined for assets and liabilities and a hierarchy for which these assets and liabilities must be grouped is established.  The Topic establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
  
  Level 1
quoted prices in active markets for identical assets or liabilities;
     
 
Level 2
quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability; or
     
  Level 3
unobservable inputs, such as discounted cash flow models or valuations.
   
The Company only fair values fuel derivatives on a recurring basis.  The fuel derivatives as of December 31, 2009 were fair valued at $2.8 million, are included in prepaid expenses and other current assets, and are classified as Level 2 in the fair value hierarchy.

4. 
ACQUISITIONS AND DIVESTITURES

Frontier Airlines Holdings, Inc.
 
On October 1, 2009, pursuant to the terms of the amended and restated investment agreement, as amended (the “Investment Agreement”), dated as of August 13, 2009, the Company completed its acquisition of Frontier.  The Company purchased 1,000 newly issued shares of common stock, constituting all of the outstanding shares of Frontier, in connection with its emergence from bankruptcy. Under the Investment Agreement, the Company served as equity plan sponsor for Frontier’s plan of reorganization and paid $108.8 million and relinquished its rights to any distribution on account of the Company’s allowed general unsecured claims against Frontier of $150 million arising out of Frontier’s rejection of the fixed-fee code-share agreement.

The acquisition of Frontier provided the Company additional revenue diversity from its traditional fixed-fee services and allowed it to expand operations into branded passenger service.  The Company accounted for the acquisition in accordance with ASC Topic 805, whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed from Frontier based on their estimated fair values as of the closing date.   The Company is still in the process of evaluating the fair value of the air traffic liability, the deferred frequent flyer revenue, and the income tax implications of the transaction, and will likely complete its purchase price allocation process during the second or third quarter of 2010.

As a result of the preliminary purchase allocation, the Company has recognized a bargain purchase gain of $203.7 million.  Management believes that the significant gain on bargain purchase from the acquisition of Frontier is due primarily to the following factors:

· 
Republic was the largest unsecured creditor with a claim of $150.0 million and Republic would have received a significant portion of any payment made to the pool of unsecured creditors if another bidder would have successfully outbid Republic during the auction process
 
62

 
· 
Frontier was in bankruptcy and operates in a heavily regulated industry
 
· 
The airline industry is highly volatile and subject to significant fluctuation in one of its largest expenses, aircraft fuel
 
· 
The Denver market is highly competitive
 
· 
The illiquidity in the credit market may have kept other bidders from potentially coming forward to bid against Republic in the auction process because of their inability to obtain financing
 
· 
General recessionary economy
 
· 
There was only one other bidder in the auction process and their bid became nonbinding
 
· 
Frontier has significant net operating losses, net of Section 382 limitations, that Republic will be able to apply to future taxable income
 
· 
Frontier has a significant amount of operating leases that require significant cash flows for several years and the operating leases have return conditions that will potentially require significant cash flow at the end of the leases
 
· 
The aircraft acquired are used aircraft and therefore will require more maintenance in future periods
 
· 
The acquired business is expected to generate losses from continued operations for several months

The Company has included operating revenues from Frontier of $266.1 million and net loss before income taxes of $16.5 million for the period from October 1, 2009 to December 31, 2009.  Transaction costs of $1.1 million for the year ended December 31, 2009, related to the Company’s acquisition of Frontier are included in other operating expenses.

The following table represents a preliminary allocation of the total consideration to tangible and intangible assets acquired and liabilities assumed from Frontier based on Republic’s preliminary estimate of their respective fair values (rounded to the nearest hundred):
 
($ in 000's)
 
Amount
 
Total purchase consideration
  $ 108,800  
         
Assets acquired:
       
Current assets *
  $ 318,700  
Aircraft and other equipment—net
    487,900  
Other intangible assets
    83,300  
Other assets
    180,300  
Total assets acquired
  $ 1,070,200  
         
Liabilities assumed:
       
Current liabilites
  $ 298,800  
Long-term liabilities
    360,500  
Deferred income taxes
    98,400  
Total liabilities assumed
  $ 757,700  
         
Gain on bargain purchase
  $ (203,700 )
 

*
Current assets include $37,000 of cash injected into Frontier from Republic.
 
63


The following table summarizes the identifiable intangible assets acquired:
 
($ in 000's)
 
Weighted-Average
Amortization
Period
 
Fair Value
at Acquisition
Date
 
Indefinite-lived intangible assets:
         
Airport slots
 
Indefinite
  $ 5,800  
Frontier trade name
 
Indefinite
    23,600  
             
Total indefinite-lived intangible assets
      $ 29,400  
             
Definite-lived intangible assets:
           
Affinity credit card programs
 
7.7 years
  $ 47,600  
Leasehold interests
 
6.2 years
    6,300  
             
Total definite-lived intangible assets
 
7.5 years
  $ 53,900  
Total identifiable intangible assets
      $ 83,300  

Midwest Air Group, LLC

On July 31, 2009, pursuant to the terms of the Agreement and Plan of Merger, dated as of June 23, 2009, among the Company, RJET Acquisition, Inc. and Midwest, as amended (the “Merger Agreement”), RJET Acquisition, Inc. merged with and into Midwest (the “Merger”) with Midwest continuing as the surviving corporation and becoming a wholly-owned subsidiary of the Company.  Pursuant to the Merger Agreement, at the effective time of the Merger, the shares of Midwest that were outstanding immediately prior to the effective time of the Merger were converted into the right to receive an aggregate amount in cash equal to $1.00.  In connection with the closing of the Merger, the Company also consummated the transactions contemplated by the Investment Agreement, dated June 23, 2009 (the “Midwest Investment Agreement”), among TPG Midwest US V, LLC, TPG Midwest International V, LLC (together, the “TPG Entities”) and the Company.  Pursuant to the Midwest Investment Agreement, at the effective time of the Merger, the Company purchased from the TPG Entities their $31.0 million secured note from Midwest, for approximately $6.0 million in cash and issued the TPG Entities an 8% convertible note having a principal amount of $25.0 million and a five-year maturity and convertible by the TPG Entities in whole or in part, from time to time, prior to maturity into 2,500,000  shares of the Company’s common stock, subject to adjustment in certain circumstances.

The acquisition of Midwest provided the Company additional revenue diversity from its traditional fixed-fee services and allowed it to expand operations into branded passenger service.  The Company accounted for the acquisition in accordance with ASC Topic 805, whereby the purchase price paid was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed from Midwest based on their estimated fair values as of the closing date.   The Company is still in the process of evaluating the fair value of the air traffic liability, the deferred frequent flyer revenue, and the income tax implications of the transaction, and will likely complete its purchase price allocation process during the second or third quarter of 2010.

As a result of the preliminary purchase allocation, the Company has recognized goodwill of $100.4 million.  None of the goodwill generated is deductible for tax purposes.  All of the goodwill was assigned to the Branded reportable segment on the date of acquisition and all of the goodwill was impaired as of December 31, 2009, as discussed further in Note 9.

The Company has included operating revenues from Midwest of $163.2 million and net loss before income taxes of $116.4 million for the period from August 1, 2009 to December 31, 2009.  Transaction costs of $1.4 million for the year ended December 31, 2009, related to the Company’s acquisition of Midwest are included in other operating expenses.
 
64


The following table represents a preliminary allocation of the total consideration to tangible and intangible assets acquired and liabilities assumed from Midwest based on Republic’s preliminary estimate of their respective fair values (rounded to the nearest hundred):
 
($ in 000's)
 
Amount
 
Total purchase consideration
     
Cash
  $ 6,000  
Convertible note
    25,000  
Assumed debt
    34,300  
Total purchase consideration
  $ 65,300  
         
Assets acquired:
       
Current assets
  $ 81,800  
Deferred income taxes
    3,000  
Aircraft and other equipment—net
    9,800  
Other intangible assets
    48,100  
Other assets
    4,200  
Total assets acquired
  $ 146,900  
         
Liabilities assumed:
       
Current liabilites
  $ 122,500  
Other liabilities
    59,500  
Total liabilities assumed
  $ 182,000  
         
Goodwill
  $ 100,400  

The following table summarizes the identifiable intangible assets acquired:
 
($ in 000's)
 
Weighted-Average
Amortization
Period
 
Fair Value
at Acquisition
Date
 
Indefinite-lived intangible assets:
         
Airport slots
      $ 21,825  
Midwest trade name
        11,400  
             
Total indefinite-lived intangible assets
      $ 33,225  
             
Definite-lived intangible assets:
           
Affinity credit card programs
 
2.0 years
  $ 12,100  
Cargo contracts
 
13.0 years
    2,800  
             
Total definite-lived intangible assets
 
4.1 years
  $ 14,900  
Total identifiable intangible assets
      $ 48,125  
 
65


Pro forma Information (unaudited)

The following unaudited pro forma combined results of operations give effect to the acquisition of Midwest and Frontier as if they had occurred at the beginning of the periods presented. The unaudited pro forma combined results of operations do not purport to represent Republic’s consolidated results of operations had the acquisition occurred on the dates assumed, nor are these results necessarily indicative of the Company’s future consolidated results of operations. We expect to realize significant benefits from integrating the operations of the Company, Midwest, and Frontier. The unaudited pro forma combined results of operations do not reflect these benefits or costs.
 
   
December 31,
 
 in (000's), except per share amounts
 
2009
   
2008
 
Operating revenues
  $ 2,683,541     $ 3,467,614  
Net income (loss) of the Company
    4,741       (630,942 )
Basic earnings per share
  $ 0.14     $ (18.10 )
Diluted earnings per share
  $ 0.13     $ (18.10 )

Mokulele Flight Services Inc.

In October 2008, the Company entered into a loan agreement with Mokulele under which we were to provide up to $8.0 million, with an interest rate of 10%, payable monthly.  The loan agreement was provided to Mokulele in the form of a revolving line of credit, convertible at the Company’s option, to as much as 45% of the common stock of Mokulele.  The loan was collateralized by all of Mokulele’s unencumbered assets and a pledge of the equity holdings of Mokulele’s majority shareholders.  The loan was scheduled to mature in October 2010.  Due to the uncertainty of whether or not the Company would receive value equal to the carrying value of the Mokulele note, the Company recorded a valuation allowance of $1.5 million in December 2008.

In March 2009, the Company and certain shareholders of Mokulele agreed to participate in a restructuring of Mokulele.  Under this agreement, the Company agreed to convert $3.0 million of our $8.0 million loan to equity and invest an additional $3.0 million of cash in exchange for 50% ownership of Mokulele’s common stock and three of the five Mokulele Board of Directors’ seats.  The recapitalization effectively provided us control of Mokulele and its Hawaii inter island passenger service.  Accordingly, we accounted for the recapitalization of  Mokulele as a business combination.  The Company assigned preliminary fair values to the assets acquired and liabilities assumed and the transaction resulted in no goodwill.  The Company acquired approximately $4.1 million of current assets, $9.3 million of aircraft and other equipment, and $0.4 million of other long-term assets and assumed $9.3 million of liabilities.  The Company did not incur any significant transaction costs associated with its acquisition of Mokulele.  The effect of Mokulele’s operations for the last twelve days of March 2009 have not been included in the Company’s results of operations, as they were immaterial.  Additionally, pro forma revenues, earnings and net income per common share were immaterial for disclosure for each of the two years ended December 31, 2009.

In July 2009, the Company invested an additional $7.5 million in Mokulele, increasing its ownership in the operation from 55% to an 89% interest.  The change in ownership of Mokulele resulting from the July 2009 additional investment was accounted for as an equity transaction that decreased our additional paid-in capital by $3.3 million as well as reduced noncontrolling interests by $3.3 million.  In addition, the fixed-fee code-share agreement was amended to provide for either Mokulele or us to early terminate the fixed-fee code-share agreement with 90 days prior written notice and the remaining $1.5 million in aircraft security deposits held by us would be forfeited by Mokulele on the termination date.  The amendment also provided that the fourth aircraft would not be delivered and Mokulele forfeited a $0.5 million security deposit to the Company.

On October 16, 2009, the Company entered into an agreement with Mesa Air Group, Inc. (“Mesa”) to form Mo-Go, LLC (“Mo-Go”), a new business venture that will provide commercial airline services in Hawaii.  Pursuant to the agreement, Mesa will own 75% of Mo-Go and the former Mokulele shareholders, including Republic, own the remaining 25%.  Immediately prior to consummation of the transaction with Mesa, the Company forgave certain indebtedness of Mokulele, and agreed to voluntarily terminate our existing capacity purchase agreement with Mokulele.  Additionally, current Mokulele shareholders will be obligated to fund up to $1.5 million to capitalize Mo-Go, all of which is expected to come from Republic.

The Company deconsolidated Mokulele in the fourth quarter and began accounting for its investment in Mo-Go under the equity method of accounting.  As of the date of the transaction, and subsequent to the forgiveness of the Mokulele note and forfeiture of the remaining security deposits by Mokulele,  Mokulele had approximately $9.9 million of assets, of which $7.3 million related to aircraft and other equipment, and had liabilities of $6.8 million.  The deconsolidation resulted in a loss of $3.1 million which is included in other operating expenses.  The fair value of the investment in Mokulele is $0.3 million which is recorded in other assets in the consolidated balance sheet.  We do not expect any significant continuing involvement in Mo-Go.

The Company has included operating revenues from Mokulele of $15.0 million and net loss before income taxes of $12.9 million for the period from April 1, 2009 to October 16, 2009.  Transaction costs were immaterial for the year ended December 31, 2009 related to the Company’s acquisition of Mokulele.
 
66


The following schedule shows the effect of changes in Republic’s ownership interest in Mokulele on Republic’s equity (in thousands):
 
Net Income Attributable to Republic and Transfers to Noncontrolling Interests
For the year ended December 31, 2009
 
   
Amount
 
Net income attributable to Republic
  $ 39,655  
Decrease in Republic's additional paid-in capital for purchase of Mokulele common shares
    (3,270 )
Change from net income attributable to Republic and tranfers to noncontrolling interest
  $ 36,385  

5. 
NOTES RECEIVABLE

At December 31, 2008, notes receivable consisted of the following (in thousands):
 
Note receivable from Midwest
  $ 24,776  
Note receivable from Frontier, including interest of $821
    13,321  
Note receivable from US Airways, including interest of $181
    10,181  
Note receivable from Mokulele, including interest of $86 (See Note 4)
    7,616  
Total notes receivable    
    55,894  
         
Less:  Valuation allowance on notes receivable
    (1,500 )
Total notes receivable, net
  $ 54,394  
 
In August 2008, the Company, in participation with two other creditors, provided Frontier a debtor-in-possession (“DIP”) financing commitment of $30.0 million. The Company funded its portion of this commitment of $12.5 million in August 2008. In March 2009, the Company agreed to a firm commitment for $40 million in post-petition DIP financing to Frontier.  The new DIP facility refinanced the existing DIP loan that was set to mature in April 2009.  As a condition to the loan, Frontier agreed to allow the Company’s damage claim in the amount of $150.0 million arising out of Frontier’s rejection of the Airline Services Agreement, dated January 11, 2007, by and among Frontier and Republic.  Republic acquired Frontier on October 1, 2009 and the DIP loan was repaid with the cash infusion from Republic into Frontier.
 
In September 2008, the Company entered into an amended and restated senior secured credit agreement with Midwest.  Under the agreement, the Company made a one year term loan to Midwest in the amount of $25.0 million, with interest at 10.25% which was payable monthly.   The note was scheduled to mature in October 2009.  In July 2009, the Company acquired Midwest and the note was eliminated in consolidation.

In October 2008, the Company entered into a credit agreement with US Airways.  Under the agreement, we agreed to make a term loan to US Airways in the amount of $10.0 million, with interest at LIBOR plus a margin, which was payable quarterly.  The principal was initially due in October 2009.  We agreed to make an additional term loan of up to $25.0 million which if drawn by US Airways would extend the maturity date to October 2011, and require periodic quarterly principal payments beginning in October 2009.  In October 2009, the Company entered into an agreement to acquire 10 Embraer 190AR jets from US Airways.  Subject to this agreement, Republic agreed to apply the full balance of its $35.0 million loan from US Airways toward the purchase of the aircraft and assume the remaining debt on the aircraft.

6. 
ASSETS HELD FOR SALE

Assets held for sale consisted of the following aircraft and flight equipment as of December 31 (in thousands):
 
   
2009
   
2008
 
Nine Embraer E135 Aircraft
  $ -     $ 82,959  
Four Fairchild 328 Regional Jets
    11,520       -  
Five McDonnell Douglas MD-80 Aicraft
    2,300       -  
Flight equipment
    11,829       -  
Assets held for sale
  $ 25,649     $ 82,959  
 
67


The assets held for sale as of December 31, 2008 were sold for a loss of $3.5 million which was recognized and recorded in other operating expenses in the consolidated statements of income.  These assets are included in the Other segment in Note 17.  One of the nine ERJs was not sold and placed back into operations in the branded service segment during 2009.  The assets held for sale as of December 31, 2009 consist of assets acquired from Midwest and Frontier that will not be used in operations.

7. 
AIRCRAFT AND OTHER EQUIPMENT

Aircraft and other equipment, excluding aircraft held for sale, consist of the following as of December 31 (in thousands):
 
   
2009
   
2008
 
Aircraft
  $ 3,670,816     $ 2,936,311  
Flight equipment
    256,200       134,459  
Office equipment and leasehold improvements
    53,563       24,866  
Total aircraft and other equipment    
    3,980,579       3,095,636  
Less accumulated depreciation and amortization
    (562,419 )     (403,226 )
Aircraft and other equipment—net
  $ 3,418,160     $ 2,692,410  

Aircraft and other equipment depreciation and amortization expense for the years ended December 31, 2009, 2008 and 2007 was $159.0 million, $132.8 million, and $106.2 million, respectively.

8. 
OTHER INTANGIBLE ASSETS

As of December 31, 2008, other intangible assets consisted of a gross carrying value of $47.5 million (accumulated amortization of $1.2 million) for airport slots that are being leased to US Airways and $2.0 million of indefinite-lived intangible assets.  These slots are being amortized over a weighted-average amortization period of 25 years to an estimated residual value of $37.8 million.

The Company assigned the right of use for these commuter slots to US Airways which will continue to be operated by US Airways Express carriers until the expiration or termination of the amended and restated Chautauqua Jet Service Agreement (“JSA”) dated as of April 26, 2005 between US Airways and Chautauqua or the Republic JSA, whichever is later, at an agreed rate. Prior to the expiration of the agreement to license the commuter slots, US Airways has the right to repurchase all, but not less than all, of the DCA commuter slots at a predetermined price.

The acquisitions of Frontier and Midwest created several new intangible assets.  Other intangible assets as of December 31, 2009 consist of the following (in thousands):
 
   
As of December 31, 2009
   
   
Gross carrying
amount
   
Accumulated
amoritzation
 
Weighted-Average
Amortization
Period
Indefinite-lived intangible assets:
             
   Airport slots
  $ 27,625          
   Trade names
    28,200          
Total indefinite-lived intangible assets
  $ 55,825          
Definite-lived intangible assets:
               
   Airport slots leased to US Airways
  $ 47,536     $ 1,648  
25.0 years
   Affinity credit card programs
    59,704       4,143  
6.6 years
   Other
    9,100       349  
8.3 years
Total definite-lived intangible assets
  $ 116,340     $ 6,140  
14.2 years
Intangible assets - net
  $ 172,165            

The aggregated amortization expense for the years ended December 31, 2009 and 2008 was $4.6 million and $0.4 million, respectively.  The estimated aggregate amortization expense for the next five years is expected to be $14.2 million, $11.6 million, $7.9 million, $7.3 million and $7.3 million, respectively.
 
68


During the year ended December 31, 2009, the Company recorded an impairment loss of $6.8 million for the trade names as a result of the Company’s annual impairment test for indefinite-lived intangible assets.  The impairment reduced the carrying amount of the trade names from $35.0 million to $28.2 million.  The calculation of the fair value of the trade names was determined primarily using a discounted cash flow analysis (relief from royalty method).  Management determined that this fair value measurement would be included as Level 3 in the fair value hierarchy.  These trade names are included in the Branded reportable operating segment. The Company also recorded an impairment of $2.0 million for other indefinite-lived intangible assets that were included in the Fixed-fee reportable operating segment during the year ended December 31, 2009.  These impairment losses are included in other impairment losses in the consolidated statements of income.

9. 
GOODWILL
   
Goodwill is required be tested for impairment at the reporting unit level on an annual basis and between annual tests if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.  

During 2008 and prior to the acquisition of Midwest in July 2009, the Company had one reporting unit and all of the goodwill of $13.3 million was assigned to that unit. 

In assessing the recoverability of goodwill, the Company makes a determination of the fair value of its business.  Fair value is determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to their present value, and a market approach, which estimates fair value using market multiples of various financial measures compared to a set of comparable public companies in the regional airline industry.  An impairment loss will generally be recognized when the carrying amount of the net assets of the business exceeds its estimated fair value.  The valuation methodology and underlying financial information included in the Company’s determination of fair value require significant judgments to be made by management.  These judgments include, but are not limited to, market valuation comparisons to similar airlines, long term projections of future financial performance and the selection of appropriate discount rates used to determine the present value of future cash flows.  Changes in such estimates or the application of alternative assumptions could produce significantly different results. 

During the first quarter of 2009, the Company performed an interim test of its goodwill.  Factors deemed by management to have collectively constituted a potential triggering event included record high fuel prices, a softening US economy and the differences between market capitalization of our stock as compared to the book value of equity.  As a result of the testing, the Company determined that the goodwill was completely impaired and recorded an impairment charge during the first quarter of 2009 to write-off the full value of goodwill.

The Company’s acquisition of Midwest resulted in approximately $100.4 million of goodwill which was assigned to the Company’s branded operations reporting unit.  As of December 31, 2009, the Company performed its annual assessment of the recoverability of its goodwill.  The branded operations book value of invested capital exceeded its fair value by approximately $200 million.  The Company determined the fair value of the branded invested capital utilizing the income, market, and cost approach.  The Company's fair value calculations for goodwill are classified within Level 3 of the fair value hierarchy as defined in ASC Topic 820, Fair Value Measurements and Disclosures.  As a result of failing Step One, the Company was required to perform Step Two of the ASC Topic 350 goodwill impairment testing methodology.
      
In Step Two of the impairment testing, the Company determined the implied fair value of goodwill of the reporting unit by allocating the fair value of the reporting unit determined in Step One to all the assets and liabilities of the reporting unit.  The Company utilized its recent valuations of tangible and intangible assets related to the branded operations reporting unit to determine the fair value assets and liabilities.  As a result of the Step Two testing, the Company determined that goodwill was impaired and recorded a full impairment charge on December 31, 2009, the Company’s annual assessment date.  In addition, as a result of the Step Two analysis the Company reduced the value of its tradenames allocated to the branded operations reporting unit by $6.8 million.

The gross and net carrying value of goodwill was $13.3 million at January 1, 2008 and December 31, 2008.  The changes in the carrying amount of goodwill for the year ended December 31, 2009 are as follows (in thousands):
    
   
Fixed-fee
   
Branded
   
Total
 
Gross goodwill balance as of January 1, 2009
  $ 13,335     $ -     $ 13,335  
Accumulated impairment losses
    -       -       -  
Net goodwill balance as of January 1, 2009
  $ 13,335     $ -     $ 13,335  
                         
Changes in goodwill during the year:
                       
   Goodwill acquired
  $ -     $ 100,424     $ 100,424  
   Goodwil impaired
    (13,335 )     (100,424 )     (113,759 )
Balance as of December 31, 2009
  $ -     $ -     $ -  
 
69


10. 
ACCRUED LIABILITIES

Accrued liabilities consist of the following as of December 31 (in thousands):
 
   
2009
   
2008
 
Accrued wages, benefits and related taxes
  $ 57,593     $ 14,971  
Accrued maintenance
    38,655       29,823  
Accrued property taxes
    13,965       9,250  
Accrued interest payable
    21,866       19,054  
Accrued liabilities to Partners
    10,143       9,506  
Deferred revenue
    20,242       16,495  
Accrued landing fees and airport rents
    6,280       5,592  
Accrued aircraft return costs
    2,884       7,266  
Accrued excise and other taxes
    17,452       -  
Accrued station costs
    6,089       -  
Other
    16,463       14,785  
Total accrued liabilities
  $ 211,632     $ 126,742  

11. 
DEBT

 Debt consists of the following as of December 31 (in thousands):
 
Secured debt:
 
2009
   
2008
 
Promissory notes payable, collateralized by aircraft, bearing interest at fixed rates ranging from 2.73% to 8.49% at December 31, 2009 with semi-annual principal and interest payments totaling $75.2 million through 2024.
  $ 2,194,320     $ 2,277,845  
 
               
Promissory notes payable, collateralized by aircraft, bearing interest at variable rates based on LIBOR plus a margin, ranging from 1.88% to 4.98% at December 31, 2009 with semi-annual principal and interest payments totaling $24.6 million through 2020.
    506,773       -  
                 
Promissory notes payable, collateralized by aircraft that is held for sale, bearing interest at 5%, due December 31, 2010.
    15,000       -  
                 
Promissory note payable, collateralized by eligible spare parts and equipment, bearing interest at a variable rate of LIBOR plus a margin, 6.75% as of December 31, 2009, due in 12 quarterly installments beginning in January 2010.
    25,000       -  
                 
Discount on debt
    (14,763 )     -  
Total secured debt by aircraft and parts
    2,726,330       2,277,845  
                 
Unsecured debt:
               
Convertible note payable, bearing interest at a fixed rate of 8%, due in full in 2014.
    25,000       -  
                 
Debt from affinity credit card program bank, bearing interest of 2.23% as of December 31, 2009 (LIBOR plus 2%), principal due monthly for twelve months beginning in 2016.
    35,000       -  
                 
Other
    3,089       -  
Total unsecured debt
    63,089       -  
                 
Total debt
    2,789,419       2,277,845  
Current portion (including debt related to assets held for sale)
    (243,259 )     (196,301 )
Long term debt, less current portion
  $ 2,546,160     $ 2,081,544  
 
The Company has outstanding letters of credit totaling $31.8 million and $12.3 million as of December 31, 2009 and 2008, respectively, that is collateralized by restricted cash.

The $25 million convertible note is convertible at the option of the holder, in whole or in part, prior to maturity for up to 2,500,000 shares of the Company’s common stock.  The convertible debt does not allow for cash settlement, and there is no embedded derivative.

We are required to comply with certain financial covenants under certain of our financing arrangements.  We are required to maintain a certain level of minimum unrestricted cash and maintain certain cash flow and working capital covenants.
 
70

 
As of December 31, 2009, we were in compliance with all our covenants, however, we believe it is probable that we will be unable to comply with certain of these covenants during 2010.  We are currently in discussions to renegotiate these covenants, however, our ability to renegotiate or obtain a waiver of, or otherwise mitigate, the impact of a default, could potentially provide for the accelerated repayment of principal totaling approximately $25 million and the discontinuation of the monthly pre-purchase of airline miles from our affinity card provider, which totals approximately $2.9 million per month.

The discount on debt is from the application of purchase accounting from the Frontier and Midwest acquisitions.  The discount will be amortized to interest expense using the effective interest method through January 2023.

Future maturities of debt are payable, or expect to be payable as assets held for sale are sold, as follows for the years ending December 31 (in thousands):
   
2010
  $ 244,318  
2011
    205,396  
2012
    217,006  
2013
    245,119  
2014
    272,925  
Thereafter
    1,619,418  
Total
  $ 2,804,182  
 
During the year ended December 31, 2009, the Company acquired 13 aircraft through debt financing totaling approximately $280.0 million. The debt was obtained from banks and the aircraft manufacturer for ten to fifteen year terms at fixed interest rates ranging from 2.80% to 2.94% and variable interest rates based on LIBOR plus a spread of 1.65%.

The fair value of long term debt is estimated based on discounting expected cash flows at the rates currently offered to the Company for debt with similar remaining maturities and reflective of credit spreads. As of December 31, 2009 and 2008 respectively, the carrying value of long-term debt was greater than its fair value by approximately $56 million and $130 million.

12.  
COMMITMENTS

As of December 31, 2009, the Company leased 124 aircraft and 26 spare engines with varying terms extending through 2024 and terminal space, operating facilities and office equipment with terms extending through 2033 under operating leases. The components of rent expense for the years ended December 31 are as follows (in thousands):
 
   
2009
   
2008
   
2007
 
Aircraft and engine rent
  $ 156,773     $ 134,206     $ 124,961  
Other
    26,023       7,072       6,008  
Total rent expense
  $ 182,796     $ 141,278     $ 130,969  
 
The Company has long-term maintenance agreements with an avionics equipment manufacturer and maintenance provider that has a guaranteed minimum annual flight hour requirement. The minimum guaranteed amount based on the Company's current operations is $4.2 million per year through December 2014 for the E145 family of aircraft and $9.4 million per year through December 2014 for the E170 family of aircraft. The liability for this guarantee is immaterial.

The Company has maintenance agreements for engines, auxiliary power units (“APU”) and other airframe components for our CRJ-200 aircraft, that cover the aircraft during the short-term leases, all of  which expire by March 2010.  For E140/145 aircraft, the Company has agreements to maintain the engines, APUs, avionics and wheels and brakes through October 2012, June 2013, December 2014 and June 2014, respectively.  For E170/175 aircraft, the Company has agreements to maintain the avionics, wheels and brakes, APUs and engines through December 2014, February 2017, July 2019, and December 2014, respectively. Under these agreements, the Company is charged for covered services based on a fixed rate for each flight hour or flight cycle accumulated by the engines or airframes in our service during each month. The rates are subject to annual revisions, generally based on certain Bureau of Labor Statistics' labor and material indices.  The Company believes these agreements, coupled with our ongoing maintenance program, reduce the likelihood of unexpected levels of engine, APU, avionics and wheels and brakes maintenance expense during their term.  Certain of these agreements contain minimum guarantee amounts, penalty provisions for either the early removal of aircraft or agreement termination for activity levels below the minimums.  The liabilities for these guarantees are immaterial.
 
71


Total payments under these long-term maintenance agreements were $96.0 million, $101.9 million, and $76.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.

While the Company does not have long term maintenance agreements for its Airbus and Q400 fleets, it has made significant deposits with the aircraft lessors for future maintenance events which will reduce future cash requirements.  As of December 31, 2009 we had maintenance deposits of $143.9 million.

As part of the Company's lease agreements, the Company typically indemnifies the lessor of the respective aircraft against liabilities that may arise due to changes in benefits from tax ownership or tax laws of the respective leased aircraft. The Company has not recorded a liability for these indemnifications because they are not estimable. The Company is responsible for all other maintenance costs of its aircraft and must meet specified return conditions upon lease expiration for both the air frames and engines. The Company recorded a liability for the return conditions of $2.9 million as of December 31, 2009, for the CRJ-200 aircraft being returned to the lessor.  The Company will record a liability for lease return conditions for the remaining leased aircraft once it is probable and estimable.

Future minimum payments under non-cancelable operating leases are as follows for the years ending December 31 (in thousands):
 
   
Aircraft
   
Other
   
Total
 
2010
  $ 233,141     $ 44,490     $ 277,631  
2011
    216,900       20,977       237,877  
2012
    213,858       20,349       234,207  
2013
    208,869       18,968       227,837  
2014
    189,307       18,283       207,590  
Thereafter
    515,252       83,228       598,480  
   Total
  $ 1,577,327     $ 206,295     $ 1,783,622  

As of December 31, 2009, the Company has subleased nine E145 aircraft to a foreign airline and subleased four E190 aircraft to US Airway.  As of December 31, 2009, the total amount of minimum rentals to be received in the future under noncancelable subleases is $75.6 million.  During the years ended December 31, 2009, 2008, and 2007, the Company recognized $12.2 million, $7.8 million and $8.2 million of sublease income that is included in cargo and other revenue in the consolidated statements of income.

As of December 31, 2009, the Company had firm orders to purchase eight A320 aircraft.  The current total list price of the aircraft on firm order is $349 million.  To complete the purchase of the eight Airbus aircraft scheduled for delivery starting in February 2013, the Company must secure additional aircraft financing totaling approximately $280 million, assuming debt financing versus lease financing would be used to acquire these aircraft.  The Company also has a commitment to acquire eight spare aircraft engines with a current list price of approximately $41.9 million. These commitments are subject to customary closing conditions.

In February 1997, Midwest agreed to pay $9.3 million over 15 years for the naming rights to the Midwest Airlines Center, an 800,000-square-foot convention center in Milwaukee that opened in July 1998.  As of December 31, 2009, the Company had remaining payments on this commitment of $2.4 million.

13.  
CONTINGENCIES

The Company is subject to certain legal and administrative actions which management considers routine to their business activities. As of December 31, 2009, management believes, after consultation with legal counsel, the ultimate outcome of any pending legal matters will not have a material adverse effect on the Company's financial position, liquidity or results of operations.

American may terminate the code-share agreement without cause upon 180 days notice on or after September 30, 2011.  If American exercises this right, it is required to reimburse us for certain costs and the Company and American have certain "put" and "call" rights with respect to the aircraft we operate for them.
 
If Delta exercises its partial termination right or if we terminate the code-share agreement because of Delta's bankruptcy or insolvency, a breach of the agreement by Delta or because of an event of force majeure has occurred that continues for at least two consecutive months, we may require Delta to either purchase or sublease any of the terminated aircraft we own at a specified price or to assume the lease of any aircraft that we lease. If we choose not to exercise this "put" right upon any termination by Delta, Delta has the right to require us to sell or sublease to them the terminated aircraft we own for a specified amount or to assume the leases of the terminated aircraft that we lease. Delta may also exercise this "call" right if it terminates the code-share agreement for any of the reasons set forth above.
 
72


United has a call option to assume our ownership or leasehold interest in certain aircraft if we wrongfully terminate the code-share agreements or if United terminates the agreements for our breach of certain reasons.
 
As of December 31, 2009, approximately 45% of the Company's workforce is employed under union contracts. The union contract for our pilots, except Frontier’s pilots and our flight attendants, is currently amendable.

14.  
CAPITAL STOCK AND STOCK OPTIONS

In March 2007, the Company purchased from WexAir RJET LLC 2,000,000 shares of its holdings in the Company’s common stock, par value $.001 per share, at a price of $20.50 per share, for total consideration of $41.0 million. The transaction was recorded as treasury stock on the Company’s consolidated balance sheet.

In August 2007, the Company’s Board of Directors authorized the purchase of up to $100.0 million of the Company’s common stock.  The buy-back program provided for the shares to be purchased on the open market or through privately-negotiated transactions from time-to-time during the twelve month period following the authorization.  Under the authorization, the timing and amount of purchase would be based upon market conditions, securities law limitations and other factors.  The stock buy-back program did not obligate the Company to acquire any specific number of shares in any period, and could be modified, suspended, extended or discontinued at any time without prior notice. The Company purchased 4,994,159 shares of which 4,555,000 were purchased from WexAir LLC and the remainder were purchased on the open market at a weighted average stock price of $20.02 for total consideration of $100.0 million. This authorization was closed in November 2007.

In December 2007, the Company’s Board of Directors authorized the purchase of up to $100.0 million of the Company’s common stock for a twelve month period immediately following the authorization.   As of December 31, 2007, pursuant to this authorization, the Company purchased 72,735 shares on the open market at a weighted average stock price of $19.42 for total consideration of $1.4 million.  During 2008, the Company repurchased 2,253,039 shares for total consideration of $39.2 million. The December 2007 authorization closed on December 14, 2008.  In addition, the Company repurchased 12,500 shares of its common stock related to a non-employee Director’s exercise of vested options for total consideration of $0.2 million.

Employee Stock Options
 
The 2002 and 2007 Equity Incentive Plan provides for the granting of up to 5,000,000 shares of which 29,715 and  1,645,667, respectively, shares of our common stock remain available for issuance under the plan as of December 31, 2009. Stock options granted typically vest ratably over the term of the employment agreements or between 36 and 48 months and are granted with exercise prices equal to market prices on the date of grant. The options normally expire ten years from the date of grant.  Options are typically granted to officers and key employees selected by the Compensation Committee of the Board of Directors and have exercise prices ranging from $4.10 to $20.27.

Non-employee Director Stock Options 
 
The Company also granted options for non-employee directors on the day prior to commencement of the Company’s initial public offering at a price equal to the fair market value of the common stock on the date of the grant. These options vested over a 3 year period with 1/24 of the shares vesting monthly for the first 12 months and 1/48 of the shares vesting monthly over the remaining 24 months. Additionally, non-employee directors receive 2,500 options on the first trading day after each annual meeting of stockholders at which he or she is re-elected as a non-employee director. These options vest ratably over 12 months of continuous service. The non-employee options are exercisable until 10 years from the date of grant. 
 
73


The following table summarizes option activity under the stock option plans as of December 31, 2009:
 
   
Options
   
Weighted
Average
Exercise Price
   
Aggregate
Intrinsic Value
   
Weighted Average
Contractual Term
(in years)
 
Outstanding at January 1, 2009
    3,847,668     $ 15.80              
Granted
    540,000       4.73              
Exercised
    -       -              
Forfeited
    (81,666 )     15.37              
Outstanding at December 31, 2009
    4,306,002     $ 14.42     $
1,512,250
       7.74  
                                 
Vested or expected to vest at December 31, 2009
    3,580,577     $ 15.37     $
1,336,527
       6.59  
                                 
Exercisable at December 31, 2009
    2,744,940     $ 16.03     $
196,579
       7.08  
 
The intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $0, $0.1 million, and $7.1 million, respectively.

There were 1,707,752 and 1,029,995 options exercisable at December 31, 2008 and 2007 respectively. The weighted average exercise price for the options exercisable at December 31, 2008 and 2007 was $16.24 and $14.63, respectively. The remaining contractual life for the options outstanding at December 31, 2008 and 2007 was 7.34 years and 7.58 years, respectively.

During the years ended December 31, 2009, 2008 and 2007, $4.2 million ($2.6 million net of tax), $3.6 million ($2.2 million net of tax) and $2.7 million ($1.6 million net of tax), respectively, was charged to expense relating to the stock option plans. The Company has a policy of issuing new common shares to satisfy the exercise of stock options.  At December 31, 2009 there was $6.7 million of unrecognized stock-based employee compensation expense for unvested stock options, and the expected remaining expense period is 3.8 years. The Company did not recognize excess tax benefits related to stock option exercises in 2009, 2008 or 2007 since the Company did not have taxable income during these years.

The weighted average grant date fair value of options granted in 2009, 2008 and 2007 was $2.32, $5.36, and $5.30, respectively. The Company estimates the fair value of stock options issued using the Black-Scholes option pricing model. Expected volatilities are based on the historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. Dividends were based on an estimated dividend yield. The risk-free rates for the periods within the contractual life of the option are based on the U.S. Treasury rates in effect at the time of the grant. The forfeiture rate is based on historical information and management’s best estimate of future forfeitures. The expected term of options granted is derived from historical exercise experience and represents the period of time the Company expects options granted to be outstanding. Option valuation models require the input of subjective assumptions including the expected volatility and lives. Actual values of grants could vary significantly from the results of the calculations.

The following assumptions were used to value stock option grants during the following periods:
 
   
December 31,
 
   
2009
   
2008
   
2007
 
Dividend yield
    -       -       -  
Expected volatility
    58%-63 %     39%-53 %     37%-38 %
Risk-free interest rate
    2.2%-2.9 %     1.7%-3.2 %     4.3%-5.1 %
Expected life (in years)
    4-5       4-5       2-7  

Restricted Stock Grants

Restricted stock awards have been granted to certain of our officers, directors, and key employees.  Restricted stock awards are grants of shares of our common stock which typically vest over time (generally three years).
 
Compensation expense for our restricted stock grants was $1.0 million, $0.3 million, and $0.4 million during the years ended December 31, 2009, 2008 and 2007, respectively.  As of December 31, 2009, we have $3.9 million in total unrecognized future compensation expense that will be recognized over the next four years relating to awards for 349,875 restricted shares which were outstanding but which had not yet vested.
 
74

 
A summary of restricted stock activity under the aforementioned plan is as follows:
 
   
Restricted Stock
 Awards
 
Unvested at January 1, 2009
    279,000  
Vested
    (79,125 )
Issued
    150,000  
Surrendered
    -  
Unvested at December 31, 2009
    349,875  

The grant date weighted-average fair value per share of restricted stock awards granted during the years ended December 31, 2009, 2008, and 2007, was $8.59, $12.70 and $18.59, respectively.  The total fair value of shares vested during the years ended December 31, 2009, 2008, and 2007, was $1.0 million, $0.4 million, and $0.3 million, respectively.

15.  
INCOME TAXES

The components of the provision for income tax expense for the years ended December 31 are as follows (in thousands):
 
   
2009
   
2008
   
2007
 
Federal: 
                 
Deferred
  $ 92,931     $ 46,616     $ 45,102  
Total Federal
    92,931       46,616       45,102  
                         
State:
                       
Current
    (1,101 )     2,092       120  
Deferred 
    7,966       1,880       5,094  
Total State
    6,865       3,972       5,214  
                         
Valuation allowance
    (807 )     1,404       -  
Expense for uncertain tax positions
    816       843       894  
Income tax expense
  $ 99,805     $ 52,835     $ 51,210  

A reconciliation of income tax expense at the applicable federal statutory income tax rate to the tax provision as reported for the years ended December 31 are as follows (in thousands):
 
   
2009
   
2008
   
2007
 
Federal income tax expense at statutory rate
  $ 47,667     $ 48,095     $ 46,799  
State income tax expense, net of federal benefit
    4,086       2,569       3,489  
Goodwill impairment
    43,228       -       -  
Valuation allowance
    (807 )     1,404       -  
Other
    5,631       767       922  
Income tax expense
  $ 99,805     $ 52,835     $ 51,210  
 
75


The components of deferred tax assets and liabilities as of December 31 are as follows (in thousands):
 
   
2009
   
2008
 
DEFERRED TAX ASSETS:
           
Current:
           
Deferred frequent flyer revenue
  $ 17,561     $ -  
Nondeductible reserves and accruals
    14,277       7,406  
Total
    31,838       7,406  
Valuation allowance
    (10,815 )     -  
                 
Total current deferred tax assets
  $ 21,023     $ 7,406  
                 
Noncurrent:
               
Nondeductible accruals and deferred revenue
  $ 35,374     $ 42,301  
Deferred frequent flyer revenue
    41,247       -  
Deferred gain on Delta warrant
    11,999       16,794  
Federal and state net operating loss carryforwards, net of liability for uncertain tax positions
    413,523       165,977  
AMT credits
    10,256       1,128  
Prepaid rent
    13,901       18,094  
Deferred credits and sale leaseback gain
    10,867       9,771  
Other
    11,509       7,456  
Total
    548,676       261,521  
Valuation allowance
    (190,156 )     (9,523 )
                 
Total noncurrent deferred tax assets
    358,520       251,998  
DEFERRED TAX LIABILITIES:
               
Noncurrent:
               
Other intangible assets, including slot amortization
    (51,564 )     (5,604 )
Maintenance deposits
    (54,283 )     -  
Stock basis difference in subsidiary from gain on bargain purchase
    (77,405 )     -  
Accelerated depreciation and fixed asset basis differences for tax purposes    
    (609,843 )     (480,222 )
                 
Total noncurrent deferred tax liabilities
    (793,095 )     (485,826 )
Total net noncurrent deferred tax liabilities
  $ (434,575 )   $ (233,828 )

The Company adopted the provisions of ASC 740, Income Taxes, (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB 109) on January 1, 2007.  The total amount of unrecognized tax benefits as of the date of the adoption was $3,515, of which the Company had previously recorded $1,148 for income tax contingencies prior to adoption.  Accordingly, the Company recognized a $2,367 increase in the liability for the unrecognized tax benefits which was accounted for as a reduction to retained earnings and an increase to net noncurrent deferred tax liability.   All of the unrecognized tax benefits as of December 31, 2009, if recognized, would affect the effective tax rate.  The Company monitors ongoing tax cases related to its unrecognized tax benefits.   In addition, the tax years 2001 through 2005 are currently open and could potentially be adjusted due to an ongoing Internal Revenue Service audit of the Company. Any adjustments could potentially increase or decrease the Company's net operating losses and change the FIN 48 liability. It is expected that the audit will be completed during 2010 and the Company’s 2006 through 2008 tax years would remain subject to examination by major tax jurisdictions due to our net operating loss carryforwards.
 
76


The following table reconciles the Company’s tax liability for uncertain tax positions for the year ended December 31 (in thousands):
 
   
2009
   
2008
   
2007
 
Balance at January 1,
  $ 5,252     $ 4,409     $ 3,515  
Additions based on tax positions taken in current year
    816       843       894  
Additions based on acquisitions in current year
    200       -       -  
Additions for tax positions taken in prior years
    -       -       -  
Reductions for tax positions of prior years
    -       -       -  
Settlements with tax authorities
    -       -       -  
Balance at December 31,
  $ 6,268     $ 5,252     $ 4,409  
 
The following table reconciles the Company’s valuation allowance for the year ended December 31 (in thousands):
 
   
2009
   
2008
   
2007
 
Balance at January 1,
  $ 9,523     $ 8,119     $ 8,119  
Additions based on current year acquisitions and 382 limitation
    192,255       -       -  
Additions (deductions) for change in current year analysis
    (807 )     1,404       -  
Balance at December 31,
  $ 200,971     $ 9,523     $ 8,119  

During 2009, Republic acquired Midwest and Frontier.  The future use of the net operating losses (“NOLs”) acquired from both companies are limited based on Internal Revenue Code Section 382 due to the change in control that occurred from the acquisitions.  Management evaluated the deferred tax assets and determined that more likely than not, certain deferred tax assets would not be utilized and therefore a valuation allowance was required.  The net operating losses generated by the Company after the change in control date do not have a related valuation allowance.  Management may take a one-time election during 2010 to reduce the NOLs acquired and the related valuation allowance when the tax returns are filed.  Therefore, the NOLs deferred tax asset and related valuation allowance may decrease significantly when these tax returns are filed during 2010. As of December 31, 2009, the Company has federal NOL carryforwards totaling $1.1 billion, which begin expiring in 2015, and of which approximately $558 million are not expected to be realized prior to expiration mostly due to the limitations under Internal Revenue Code Section 382.  Therefore, a valuation allowance has been recorded for these net operating loss carryforwards.

Deferred tax assets include benefits expected to be realized from the utilization of alternative minimum tax (“AMT”) credit carryforwards of $10.2 million, which do not expire.  A valuation allowance of $5.5 million has been recorded against AMT credit carryforwards that were acquired during the current year as these credits are not expected to be realized.  

In connection with Midwest’s initial public offering in 1995 (the “Offering”), Midwest and Kimberly-Clark entered into a Tax Allocation and Separation Agreement (“Tax Agreement”).  Pursuant to the Tax Agreement, Midwest is treated for tax purposes as if it purchased all of Midwest’s assets at the time of the Offering, and as a result, the tax basis of Midwest’s assets were increased to the deemed purchase price of the assets.  The tax on the amount of the gain on the deemed asset purchase was paid by Kimberly-Clark.  Midwest would pay to Kimberly-Clark 90% of the amount of the tax benefit associated with this additional basis (retaining 10% of the tax benefit).  In the event of certain business combination or other acquisitions involving Midwest, tax benefit amounts thereafter will not take into account, under certain circumstances, income, losses, credits, or carryovers of businesses other than those historically conducted by Midwest.  These tax benefits will not be realized by the Company as the losses are limited based on Section 382 and a full valuation allowance has been recorded for these NOLs.  Therefore, management has determined that no liability is necessary related to this Tax Agreement.

16.  
RETIREMENT AND BENEFIT PLANS
 
Defined Contributions Plans — Shuttle America, Chautauqua Airlines, and Republic Airlines have a defined contribution retirement plan covering substantially all eligible employees.  The Company matches up to 6% of eligible employees' wages. Employees are generally vested in matching contributions after three years of service with the Company. Employees are also permitted to make pre-tax contributions of up to 90% (up to the annual Internal Revenue Code limit) and after-tax contributions of up to 10% of their annual compensation. The Company's expense under this plan was $3.8 million, $3.2 million, and $2.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Frontier has established a Retirement Savings Plan under section 401(k) of the Internal Revenue Code (“Frontier 401(k) Plan”).  Participants may contribute from 1% to 60% of their pre-tax annual compensation up to the maximum amount allowed under the Internal Revenue Code.  Participants are immediately vested in their voluntary contributions.  Frontier’s Board of Directors had elected to match 50% of participant contributions up to 10% of salaries for the participants of the 401(k) Plan. Frontier suspended the match effective June 1, 2008.  Future matching contributions, if any, will be determined annually by the Board of Directors.  Participants vest in employer contributions made to the Frontier 401(k) Plan based upon their years of service with Frontier.  Vesting generally occurs at the rate of 20% per year, beginning after the first year of service, so that a participant will be fully vested after five years of service.  Upon termination of employment with Frontier, each participant will be entitled to receive the vested portion of his or her account balance.  There was no expense for the year ended December 31, 2009.
 
77


Frontier also has established the Frontier Airlines, Inc. Pilots Retirement Plan (“the FAPA Plan”) for pilots covered under the collective bargaining agreement with the Frontier Airlines Pilots’ Association. The FAPA Plan is a defined contribution retirement plan.  Frontier contributes up to 6% of each eligible and active participant’s compensation.  Contributions begin after a pilot has reached two years of service and the contributions vest immediately.  Participants are entitled to begin receiving distributions of all vested amounts beginning at age 59 ½.  During the period from October 1, 2009 to December 31, 2009, Frontier recognized compensation expense associated with the contributions to the FAPA Plan of $1.1 million.

Midwest has two voluntary defined contribution investment plans covering substantially all employees.  Under these plans, Midwest matches a portion of an employee’s contributions if certain thresholds are met.  No expense was incurred for 2009.

Qualified Defined Benefit Plan — Midwest has one qualified defined benefit plan, the Pilots’ Supplemental Pension Plan. This plan provides retirement benefits to Midwest pilots covered by their collective bargaining agreement.

As a result of the remeasurement on the acquisition date of July 31, 2009, all previously existing unrecognized net actuarial gains or losses and unrecognized prior service costs were eliminated for the plans as of July 31, 2009.  During 2009, curtailment gains were recognized within wages and benefits in the consolidated statement of income due to employee layoffs, furloughs, and other workforce reductions and reduced the obligation as of December 31, 2009.


The following table  sets forth the status of the plan as of December 31, 2009 (in thousands):
 
   
Midwest Qualified
Defined-Benefit Plan
 
Change in Projected Benefit Obligation
 
Period From
August 1, 2009 to
December 31, 2009
 
Net benefit obligation — beginning of period
  $ 9,678  
Service cost
    204  
Interest cost
    245  
Actuarial gain
    (69 )
Gross benefits paid
    (89 )
Curtailments
    1,442  
Settlements
    -  
Net projected obligation — end of period
  $ 11,411  
         
Change in Plan Assets
       
         
Fair value of assets — beginning of period
  $ 8,267  
Actual return on plan assets
    866  
Employer contributions
    -  
Gross benefits paid
    (89 )
Fair value of plan assets — end of period
  $ 9,044  
Accrued benefit liability (recorded in deferred credits and other noncurrent liabilities)
  $ (2,367 )
 
The accumulated benefit obligation as of December 31, 2009 is $9.4 million.  The net periodic benefit cost of defined benefit pension plan for the year ended December 31, 2009 was $1.0 million.
 
78


The expected long-term rate of return on these plan assets was 8.0% in 2009.  The return on plan assets reflects the weighted average of the expected long-term rates of return for the broad categories of investments held in the plan. The expected long-term rate of return is adjusted when there are fundamental changes in expected returns on the plan investments; this adjustment takes into account consideration from the actuary regarding long-term market conditions and investment management performance. All of the Plan Assets would be classified as Level 1 of the fair value hierarchy.

Nonqualified Defined Benefit Plan — Midwest has one nonqualified defined benefit plan, the Pilots’ Nonqualified Supplemental Pension Plan. This plan provides Midwest pilots with annuity benefits for salary in excess of IRS salary limits that cannot be covered by the qualified Pilots’ Supplemental Pension Plan.  The plan does not have a projected benefit obligation, plan assets, or accrued liability as of December 31, 2009.  The Company recognized net periodic benefit income of $0.1 million during the period from August 1, 2009 to December 31, 2009.

Postretirement Health Care and Life Insurance Benefits — Midwest allows retirees to participate in unfunded health care and life insurance benefit plans. Benefits are based on years of service and age at retirement. The plans are principally noncontributory for current retirees and are contributory for most future retirees.  During 2009, curtailment gains were recognized due to employee layoffs, furloughs, and other workforce reductions, and reduced the obligation as of December 31, 2009.
 
Pilots’ Severance Plan — Midwest provides certain benefits to a select group of pilots based on the pilot’s age and years of service at termination. During 2009, curtailment gains were recognized as income within wages and benefits in the consolidated statement of income due to employee layoffs, furloughs, and other workforce reductions, and reduced the obligation as of December 31, 2009.  The increased retirement age for commercial pilots from 60 to 65 has the effect of a reduced liability reflected in the actuarial gain disclosed in the following table.

The status of the postretirement plans as of December 31, 2009 is as follows (in thousands):
 
   
Postretirement Health Care and Life Insurance Benefits
   
Pilots’ Severance Plan
 
Projected Change in Benefit Obligation
 
Period From
August 1, 2009 to
December 31, 2009
   
Period From
August 1, 2009 to
December 31, 2009
 
Net benefit obligation — beginning of period
  $ 3,739     $ 4,709  
Service cost
    86       110  
Interest cost
    95       120  
Actuarial (gain) loss
    578       (60 )
Curtailment gain
    (4,273 )     (4,879 )
Gross benefits paid
    (72 )     -  
Net projected obligation — end of period
  $ 153     $ -  

The net periodic benefit cost (income) of the plans for the period from August 1, 2009 to December 31, 2009, includes the following (in thousands):
 
Components of Net Period Benefit Cost (Income)
 
Postretirement Health Care and Life Insurance Benefits
   
Pilots’ Severance Plan
 
Service cost
  $ 86     $ 110  
Interest cost
    95       120  
Settlement gain
    -       (60 )
Curtailment gain
    (3,694 )     (4,879 )
          Net period benefit benefit income
  $ (3,513 )   $ (4,709 )

As a result of the Postretirement Health Care and Life Insurance Benefits Plan, a current liability $0.1 million and a non-current liability of $0.1 million are recorded in the consolidated balance sheets as a component of accrued liabilities and deferred credits and other non current liabilities, respectively.
 
79


Expected Cash Flows – In 2010, no significant employer contributions are expected for the defined benefit plans.  Expected future benefit payments for the next five years are as follows (in thousands):
 
Expected Benefit Payments
 
Pension Benefits
   
Other Benefits
 
             
2010
  $ 343     $ 37  
2011
    426       27  
2012
    524       16  
2013
    636       13  
2014
    758       13  
Thereafter
    5,960       40  

17.  
OPERATING SEGMENT INFORMATION

ASC Topic 280, “Segments Reporting,” requires disclosures related to components of a company for which separate financial information is available that is evaluated regularly by a company’s chief operating decision maker in deciding the allocation of resources and assessing performance.  Prior to 2009, the Company considered its operations as one segment.  Due to the Company’s acquisitions of Midwest and Frontier, the Company concluded that it had three reportable segments, fixed-fee service, branded passenger service, and other.
 
Fixed-fee services are typically operated under an agreement with a domestic network airline partner.  As of December 31, 2009, substantially all fixed-fee service revenues are derived from code-share agreements with US Airways, Delta, American, United, and Continental.  Termination of any of these code-share agreements could have a material adverse effect on the Company’s financial position, results of operations and cash flows.  During the years ended December 31, 2009, 2008, and 2007, Delta was approximately 19%, 29% and 33%, US Airways was approximately 33%, 25%, and 22%, and United was approximately 29%, 21%, and 24% of the Company’s fixed-fee service revenue, respectively.  During the year ended December 31, 2009, the Company recorded an impairment of goodwill and other impairment charges of $13.3 million and $2.0 million, respectively, related to the fixed-fee service segment.
 
The Company’s branded operations relate to the passenger service revenues and expenses generated under the Company’s brands: Frontier and Midwest.  During the year ended December 31, 2009, the Company recorded an impairment of goodwill and other impairment charges of $100.4 million and $6.8 million, respectively, related to the branded operations segment. As a result of the preliminary purchase allocation from the acquisition of Frontier, the Company recognized a bargain purchase of $203.7 million related to the branded operations segment.
 
The Other segment consists of slot leasing activities, charter operations, and idle or unallocated aircraft not currently assigned to the fixed-fee or branded operations.  The Other segment also includes the activities associated with subleasing activities, and the related aircraft rents, depreciation expense and interest expense on idle, unallocated, or subleased aircraft.
 
The Company evaluates segment performance based on several factors, of which the primary financial measure is income (loss) before income taxes. However, the Company does not manage the business or allocate resources solely based on segment operating income or loss, and scheduling decisions of the Company’s chief operating decision maker are based on each segment’s contribution to the overall network.  Substantially all intersegment revenues and expenses are eliminated within the segments.  Total operating revenues of fixed-fee service and branded passenger service include some amounts classified as cargo and other revenue on consolidated statements of income.  The Company allocates assets and liabilities by aircraft assigned to each segment.
 
Financial information for the year ended December 31, 2009 for the Company’s operating segments is as follows (in thousands):
 
Year Ended December 31, 2009
 
Fixed-fee
   
Branded
   
Other
   
Total
 
Total operating revenue
  $ 1,180,362     $ 444,312     $ 17,544     $ 1,642,218  
Aircraft fuel
    91,310       144,933       377       236,620  
Depreciation and amortization     132,435       21,934       9,215       163,584  
Income (loss) before income taxes
    86,659       57,938       (8,407 )     136,190  
Total assets
    2,548,962       1,672,736       228,774       4,450,472  
Total debt
    1,830,701       780,231       193,250       2,804,182  
 
Segment financial information for the years ended December 31, 2008 and 2007 for the Company’s operating segments is as follows (in thousands):
 
Year Ended December 31, 2008
 
Fixed-fee
   
Other
   
Total
 
Total operating revenue
  $ 1,461,774     $ 17,981     $ 1,479,755  
Aircraft fuel
     326,343       1,448       327,791  
Depreciation and amortization     125,096       8,110       133,206  
Income (loss) before income taxes
    147,079       (9,664 )     137,415  
Total assets
    3,076,100       160,478       3,236,578  
Total debt
    2,137,852       139,993       2,277,845  
 
Year Ended December 31, 2007
 
Fixed-fee
   
Other
   
Total
 
Total operating revenue
  $ 1,276,555     $ 16,122     $ 1,292,677  
Aircraft fuel
    295,104       1,469       296,573  
Depreciation and amortization     103,750       2,844       106,594  
Income before income taxes
    126,370       7,598       133,968  
Total assets
    2,693,384       79,694       2,773,078  
Total debt
     1,887,454        26,126       1,913,580  
 
80

 
18.  
VALUATION AND QUALIFYING ACCOUNTS
 
($ in 000's)
Description
 
Balance at Beginning of Year
   
Additions Charged to Expense
   
Deductions
   
Balance at End of Year
 
Allowance for doubtful accounts receivables:
                       
12/31/2009
  $ 2,054     $ 327     $ (1,638 )(1)     743  
12/31/2008
    897       1,333       (176 )(1)     2,054  
12/31/2007
    340       607       (50 )(1)     897  
                                 
Valuation allowance on notes receivable:
                               
12/31/2009
  $ 1,500     $ 3,000     $ (4,500 )(2)   $ -  
12/31/2008
    -       1,500       -       1,500  
12/31/2007
    -       -       -       -  
 

(1) 
 Uncollectible accounts written off net of recoveries, if any.  
 
(2) 
 Valuation allowance from Mokulele notes receivable was eliminated upon consolidation of Mokulele.

19.  
SUBSEQUENT EVENTS

On February 4, 2010, the Company announced it will transition the regional service provided by Lynx Aviation Bombardier Q400 turboprop aircraft to Embraer 170 and 190 regional jet service provided by Republic Airlines. The Company will remove three Bombardier Q400 turboprop aircraft from service effective April 6, 2010. Another three aircraft will be removed from service on April 19, 2010.  The remaining five leased aircraft will be gradually taken out of service starting in July 2010 and returned to the lessor.  Service will continue to all current Lynx destinations with the exception of Fargo, N.D., and Tulsa, Okla., where the Company will cease operations on April 5.  The Company expects operations at Lynx Aviation to be phased out by mid-September.  These changes will result in the reduction in April 2010 of approximately 175 positions at Lynx Aviation.

On February 25, 2010, the Company entered into a purchase agreement with Bombardier for the purchase of 40 CS300 jets and the option to purchase up to an additional 40 aircraft.  In connection with the purchase agreement, the Company also signed an exclusive 15-year maintenance contract with Pratt & Whitney for support of the aircraft engines.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not Applicable
 
ITEM 9A. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures.
 
We maintain "disclosure controls and procedures", as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation, as of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control

During the year ended December 31, 2009, we did not make any changes in our internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
81


Management’s Annual Report on Internal Control Over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposed in accordance with accounting principles generally accepted in the United States of America.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies may deteriorate.
 
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 using the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on that evaluation, the Company’s management concluded that our internal control over financial reporting was effective as of December 31, 2009.

On July 31, 2009 and October 1, 2009, we completed our acquisition of Midwest Air Group, Inc. and Frontier Airlines Holdings, Inc., respectively. As permitted by the Securities and Exchange Commission, management has elected to exclude Midwest and Frontier from management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009. Combined assets and revenues of Midwest and Frontier  represent 28% and 26%, respectively, of our total assets and total revenues as reported in our consolidated financial statements as of and for the year ended December 31, 2009.

The Company's effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, which also audited our Consolidated Financial Statements. Deloitte & Touche LLP’s report on the Company's effectiveness of internal control over financial reporting appears on page 49.
 
ITEM 9B. OTHER INFORMATION
 
Not applicable.
 
82


PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors

The information set forth under the caption "Proposal No. 1—Election of Directors" in the Company's definitive Proxy Statement to be used in connection with the 2010 Annual Meeting of Stockholders is incorporated herein by reference. 
 
Executive Officers

See "Part I—Executive Officers of the Company."
 
Code of Ethics
 
We have adopted a Code of Ethics within the meaning of Item 406(b) of SEC Regulation S-K. This Code of Ethics applies to our principal executive officer, principal financial officer and principal accounting officer. This Code of Ethics is publicly available on our website at www.rjet.com. If we make substantive amendments to this Code of Ethics or grant any waiver, including any implicit waiver, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K within four days of such amendment or waiver.

Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s executive officers and directors, and persons who beneficially own more than ten percent of the Company’s common stock, to file initial reports of ownership and reports of changes in ownership with the SEC and the National Association of Securities Dealers, Inc. Executive officers, directors, and greater than ten percent beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based upon a review of the copies of such forms furnished to the Company and written representations from the Company’s executive officers, directors and greater, we believe that during fiscal  2009 all Section 16(a) filing requirements applicable to its executive officers, directors and greater than ten percent beneficial owners were complied with except for one late filing with respect to one transaction by each of Neil S. Cohen and David N. Siegel.
 
Corporate Governance
 
The information set forth under the caption "Corporate Governance" in the Company's definitive Proxy Statement to be used in connection with the 2010 Annual Meeting of Shareholders is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be used in connection with the 2010 Annual Meeting of Stockholders is incorporated herein by reference. 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information set forth under the caption "Beneficial Ownership of Common Stock by Certain Stockholders and Management" in the Company's definitive Proxy Statement to be used in connection with the 2010 Annual Meeting of Stockholders is incorporated herein by reference. 
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information set forth under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement to be used in connection with the 2010 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information set forth under "Audit Matters" in the Company's definitive proxy statement to be used in connection with the 2010 Annual Meeting of Stockholders is incorporated herein by reference.
 
83


PART IV
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
 
(a)  Documents filed as part of this report:
 
Report of Independent Registered Public Accounting Firm, Financial Statements: Consolidated Balance Sheets as of December 31, 2009 and 2008, Consolidated Statements of Income for the years ended December 31, 2009, 2008 and 2007, Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007, Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2009, 2008 and 2007 and Notes to Consolidated Financial Statements.
 
(b)  Exhibits
  
Exhibit No.
 
Description
  1.1
 
Form of Purchase Agreement.(viii)
  3.1
 
Amended and Restated Certificate of Incorporation.(i)
  3.2
 
Amended and Restated Bylaws.(xxxi)
  4.1
 
Specimen Stock Certificate.(i)
10.1
 
2002 Equity Incentive Plan.(xxv)
10.1(a)
 
Restricted Stock Agreement.(xxi)
10.1(b)
 
2007 Equity Incentive Plan.(xxv)
10.2
 
Form of Option Agreement for Non-Employee Directors.(i)
10.3
 
Form of Option Agreement for Officers.(i)
10.3(a)
 
Stock Option Agreement Pursuant to the Republic Airways Holdings Inc. 2002 Equity Incentive Plan, by and between Republic Airways Holdings Inc. and Bryan K. Bedford, dated as of December 27, 2004.(v)
10.3(b)
 
Stock Option Agreement Pursuant to the Republic Airways Holdings Inc. 2002 Equity Incentive Plan, by and between Republic Airways Holdings Inc. and Bryan K. Bedford, dated as of December 27, 2004.(v)
10.3(c)
 
Stock Option Agreement Pursuant to the Republic Airways Holdings Inc. 2002 Equity Incentive Plan, by and between Republic Airways Holdings Inc. and Robert Hal Cooper, dated as of December 27, 2004.(v)
10.3(d)
 
Stock Option Agreement Pursuant to the Republic Airways Holdings Inc. 2002 Equity Incentive Plan, by and between Republic Airways Holdings Inc. and Robert Hal Cooper, dated as of December 27, 2004.(v)
10.3(e)
 
Stock Option Agreement Pursuant to the Republic Airways Holdings Inc. 2002 Equity Incentive Plan, by and between Republic Airways Holdings Inc. and Wayne C. Heller, dated as of December 27, 2004.(v)
10.3(f)
 
Stock Option Agreement Pursuant to the Republic Airways Holdings Inc. 2002 Equity Incentive Plan, by and between Republic Airways Holdings Inc. and Wayne C. Heller, dated as of December 27, 2004.(xxiii)
10.4†
 
Amended and Restated Regional Jet Air Services Agreement, dated as of June 12, 2002, by and between AMR Corporation and Chautauqua Airlines, Inc.(i)
10.4(a)
 
Letter Agreement between AMR Corporation and Chautauqua Airlines, Inc. dated July 30, 2002.(i)
10.4(b)†
 
Side Letter Agreement, dated as of March 26, 2003, by and between AMR Corporation and Chautauqua Airlines, Inc.(i)
10.4(c)†
 
Amendment to Amended and Restated Air Services Agreement, by and between AMR Corporation and Chautauqua Airlines, Inc., dated as of October 28, 2003.(i)
10.4(d)†
 
Amendment to the Amended and Restated Air Services Agreement, by and between AMR Corporation and Chautauqua Airlines, Inc., dated as of October 23, 2008. (xxxiv)
10.5
 
Office Lease Agreement, by and between College Park Plaza, LLC and Republic Airways Holdings Inc., dated as of April 23, 2004.(i)
10.6†
 
Chautauqua Jet Service Agreement, by and between US Airways, Inc. and Chautauqua Airlines, Inc., dated as of March 19, 1999.(i)
10.6(a)†
 
First Amendment to the Chautauqua Jet Service Agreement, by and between US Airways, Inc. and Chautauqua Airlines, Inc., dated as of September 6, 2000.(i)
10.6(b)†
 
Second Amendment to the Chautauqua Jet Service Agreement, by and between US Airways, Inc. and Chautauqua Airlines, Inc., dated as of September 20, 2000.(i)
 
84

 
10.6(c)†
 
Third Amendment to the Chautauqua Jet Service Agreement, by and between US Airways, Inc. and Chautauqua Airlines, Inc., dated as of July 11, 2001.(i)
10.6(d)†
 
Fourth Amendment to the Chautauqua Jet Service Agreement, by and between US Airways, Inc. and Chautauqua Airlines, Inc., dated as of December 18, 2002.(i)
10.6(e)†
 
Amended and Restated Chautauqua Jet Service Agreement between US Airways, Inc. and Chautauqua Airlines, Inc. dated April 26, 2005.(xiii)
10.6(f)†
 
First Amendment to Amended and Restated Chautauqua Jet Service Agreement, by and between US Airways, Inc. and Chautauqua Airlines, Inc., dated as of July 21, 2006.(xix)
10.7
 
Agreement between Chautauqua Airlines, Inc. and Teamsters Airline Division Local 747 representing the Pilots of Chautauqua Airlines, dated as of October 17, 2003.(i)
10.8
 
Agreement between Chautauqua Airlines, Inc. and the Flight Attendants of Chautauqua Airlines, Inc. as represented by the Airline Division, International Brotherhood of Teamsters, AFL-CIO, dated as of March 9, 1999.(i)
10.9
 
Agreement between Chautauqua Airlines, Inc. and the Flight Dispatchers in the employ of Chautauqua Airlines, Inc. as represented by Transport Workers Union of America, AFL-CIO, dated as of June 1, 2007.(xxvi)
10.1
 
Agreement between Chautauqua Airlines, Inc. and the Passenger and Fleet Service Employees in the service of Chautauqua Airlines, Inc. as represented by the International Brotherhood of Teamsters, dated as of December 15, 1999.(i)
10.11
 
Agreement among Republic Airways Holdings Inc., Chautauqua Airlines, Inc. and Solitair Corp., dated as of February 12, 2002.(i)
10.12†
 
EMB-145LR Amended and Restated Purchase Agreement Number GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of April 19, 2002.(i)
10.12(a)†
 
Partial Assignment and Assumption of Purchase Agreement GCT-025/98, by and between Republic Airways Holdings Inc. and Solitair Corp., and consented to by Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of April 18, 2002.(i)
10.12(b)†
 
Amendment Number 1 to Amended and Restated Purchase Agreement GCT-025/98 between Republic Airways Holdings Inc and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of June 7, 2002.(i)
10.12(c)†
 
Amendment Number 2 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of July 25, 2002.(i)
10.12(d)†
 
Amendment Number 3 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of December 18, 2002.(i)
10.12(e)†
 
Amendment Number 4 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of May 30, 2003.(i)
10.12(f)†
 
Amendment Number 5 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of September 30, 2003.(i)
10.12(g)†
 
Amendment Number 6 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of October 31, 2003.(i)
10.12(h)†
 
Amendment Number 7 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of December 31, 2003.(i)
10.12(i)†
 
Amendment Number 8 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of February 16, 2004.(i)
10.12(j)†
 
Amendment Number 9 to Amended and Restated Purchase Agreement GCT-025/98, by and between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of May 24, 2004.(viii)
10.12(l)†
 
Amendment Number 10 to Amended and Restated Purchase Agreement GCT-025/98, by and between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of January 17, 2005.(vii)
10.12(m)†
 
Amendment No. 11 to Amended and Restated Purchase Agreement GCT-025/98, by and between Embraer-Empresa Brasilicica de Aeronautica S.A. and Republic Airways Holdings Inc., dated May 31, 2005.(xiii) 
10.13†
 
Amended and Restated Letter Agreement GCT-026/98, by and between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airways Holdings Inc., dated as of April 19, 2002.(i)
10.13(a)†
 
Amendment Number 1 to Amended and Restated Letter Agreement GCT-026/98 between Republic Airways Holdings Inc and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of June 7, 2002.(i)
10.13(b)†
 
Amendment Number 2 to Amended and Restated Letter Agreement GCT-026/98 between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of July 25, 2002.(i)
10.13(c)†
 
Amendment Number 3 to Amended and Restated Letter Agreement GCT-026/98 between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of August 29, 2002.(i)
 
85

 
10.13(d)†
 
Amendment Number 4 to Amended and Restated Letter Agreement GCT-026/98 between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of December 10, 2002.(i)
10.13(e)†
 
Amendment Number 5 to Amended and Restated Letter Agreement GCT-026/98 between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of April 30, 2003.(i)
10.13(f)†
 
Amendment Number 6 to Amended and Restated Letter Agreement GCT-026/98 between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of May 30, 2003.(i)
10.13(g)†
 
Amendment Number 7 to Amended and Restated Letter Agreement GCT-026/98 between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of December 31, 2003.(i)
10.13(h)†
 
Amendment Number 8 to Amended and Restated Letter Agreement GCT-026/98 between Republic Airways Holdings Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of March 22, 2004.(i)
10.14
 
Amended and Restated Registration Rights Agreement, dated as of June 7, 2002, by and among Republic Airways Holdings Inc., Imprimis Investors, LLC, Wexford Spectrum Fund I, L.P., Wexford Offshore Spectrum Fund, Wexford Partners Investment Co. LLC, WexAir LLC, and Delta Air Lines, Inc.(i)
10.15
 
Loan and Security Agreement, by and between Fleet Capital Corporation and Chautauqua Airlines, Inc., dated as of December 9, 1998.(i)
10.16
 
Consolidated Amendment No. 1 to Loan and Security Agreement, by and between Fleet Capital Corporation and Chautauqua Airlines, Inc., dated as of March 27, 2002.(i)
10.16(a)†
 
Amendment No. 3 to Loan and Security Agreement, by and between Fleet Capital Corporation and Chautauqua Airlines, Inc., dated as of October 30, 2003.(i)
10.16(b)
 
Amendment No. 4 to Loan and Security Agreement, by and between Fleet Capital Corporation and Chautauqua Airlines, Inc., dated as of January 9, 2004.(i)
10.16(c)
 
Amendment No. 8 to Loan and Security Agreement, by and between Bank of America, N.A. (successor by assignment to Fleet Capital Corporation) and Chautauqua Airlines, Inc., dated as of November 2, 2005.(xvi)
10.16(d)
 
Amendment No. 9 to Loan and Security Agreement, by and between Bank of America, N.A. (successor by assignment to Fleet Capital Corporation) and Chautauqua Airlines, Inc., dated as of January 12, 2006.(xvii)
10.16(e)
 
Amendment No. 10 to Loan and Security Agreement, by and between Bank of America, N.A. (successor by assignment to Fleet Capital Corporation) and Chautauqua Airlines, Inc., dated as of March 22, 2006.(xvii)
10.16(f)
 
Joinder and Consolidated Amendment to Loan and Security Agreement, by and among Bank of America, N.A., Chautauqua Airlines, Inc., Republic Airways Holdings Inc., Republic Airline Inc. and Shuttle America Corporation, dated as of May 15, 2006.(xviii)
10.16(g)
 
Amendment No. 2 to Loan and Security Agreement, by and among Bank of America, N.A. Chautauqua Airlines, Inc., Republic Airways Holdings Inc., Republic Airline Inc. and Shuttle America Corporation, dated as of March 21, 2007.(xxiv)
10.17
 
Amendment No. 1 to the Term Note, dated as of March 27, 2002, by and between Fleet Capital Corporation and Chautauqua Airlines, Inc.(i)
10.18
 
Lease Agreement by and between the Indianapolis Airport Authority and Chautauqua Airlines, Inc. dba US Airways Express, dated as of June 17, 1994.(i)
10.18(a)
 
First Amendment to Office Lease Agreement, by and between the Indianapolis Airport Authority and Chautauqua Airlines, Inc., dated as of July 17, 1998.(i)
10.18(b)
 
Second Amendment to Office Lease Agreement, by and between the Indianapolis Airport Authority and Chautauqua Airlines, Inc., dated as of October 2, 1998.(i)
10.18(c)
 
Third Amendment to Office Lease Agreement, by and between the Indianapolis Airport Authority and Chautauqua Airlines, Inc., dated as of November 6, 1998.(i)
10.18(d)
 
Fourth Amendment to Office Lease Agreement, by and between the Indianapolis Airport Authority and Chautauqua Airlines, Inc., dated as of September 3, 1999.(i)
10.19
 
Letter Agreement by and between the Indianapolis Airport Authority and Chautauqua Airlines, Inc., dated as of July 17, 2000, amending Lease Agreement for office space.(i)
10.20†
 
Loan Agreement between Chautauqua Airlines, Inc. and Agкncia Especial de Financiamento Industrial (FINAME), dated as of December 27, 2001. There are fourteen additional Loan Agreements which are substantially identical in all material respects except as indicated on the exhibit.(i)
10.21
 
Aircraft Security Agreement between Chautauqua Airlines, Inc. as Borrower and JPMorgan Chase Bank as Security Trustee, dated as of December 27, 2001. There are fourteen additional Aircraft Security Agreements which are substantially identical in all material respects except as indicated on the exhibit.(i)
 
86

 
10.22
 
Security Agreement Supplement No. 1 between Chautauqua Airlines, Inc. as Borrower and JPMorgan Chase Bank as Security Trustee, dated as of January 17, 2002. There are fourteen additional Security Agreement Supplements No. 1 which are substantially identical in all material respects except as indicated on the exhibit.(i)
10.23†
 
Securities Account Control Agreement among Chautauqua Airlines, Inc. as Debtor, AgкnciaEspecial de Financiamento Industrial (FINAME) as Lender, and JPMorgan Chase Bank as Securities Intermediary and Security Deposit Trustee, dated as of December 27, 2001. There are fourteen additional Securities Account Control Agreements which are substantially identical in all material respects except as indicated on the exhibit.(i)
10.24†
 
Security Deposit Agreement, among Chautauqua Airlines, Inc. as Debtor, Agкncia Especial de Financiamento Industrial (FINAME) as Lender, and JPMorgan Chase Bank as Securities Intermediary and Security Deposit Trustee, dated as of December 27, 2001. There are fourteen additional Security Deposit Agreements which are substantially identical in all material respects except as indicated on the exhibit.(i)
10.25†
 
Funding Agreement between Chautauqua Airlines, Inc. and Agкncia Especial de Financiamento Industrial (FINAME), dated as of December 27, 2001. There are eleven additional Funding Agreements which are substantially identical in all material respects except as indicated on the exhibit.(i)
10.25(a)†
 
First Amendment to the Funding Agreement, dated as of June 11, 2002, by and between Chautauqua Airlines, Inc. and Agкncia Especial de Financiamento Industrial.(i)
10.26
 
Agreement, dated as of June 7, 2002, by and between Republic Airways Holdings Inc. and Delta Air Lines, Inc.(i)
10.27
 
Amendment No. 1 to Agreement between Republic Airways Holdings Inc. and Delta Air Lines, Inc., dated October 1, 2003.(i)
10.28
 
Warrant to purchase shares of common stock of Republic Airways Holdings Inc. issued to Delta Air Lines, Inc., dated as of June 7, 2002.(i)
10.28(a)
 
Warrant to purchase shares of common stock of Republic Airways Holdings Inc. issued to Delta Air Lines, Inc., dated as of February 7, 2003.(i)
10.28(b)
 
Warrant to purchase shares of common stock of Republic Airways Holdings Inc. issued to Delta Air Lines, Inc., dated as of October 1, 2003.(i)
10.28(c)
 
Warrant to purchase shares of common stock of Republic Airways Holdings Inc. issued to Delta Air Lines, Inc., dated as of March 10, 2004.(i)
10.28(d)
 
Warrant Surrender Agreement, by and between Republic Airways Holdings Inc. and Delta Air Lines, Inc., dated as of December 22, 2004.(iv)
10.28(e)
 
Form of Warrant to Purchase Shares of Common Stock of Republic Airways Holdings Inc. issued to Delta Air Lines, Inc., dated as of December 22, 2004.(iv)
10.29
 
Form of warrant to purchase shares of common stock of Republic Airways Holdings Inc. issued to Delta Air Lines, Inc.(i)
10.3
 
Form of warrant to purchase shares of common stock of Republic Airways Holdings Inc. issued to Delta Air Lines, Inc.(i)
10.31†
 
Delta Connection Agreement, dated as of June 7, 2002, by and among Delta Air Lines, Inc., Chautauqua Airlines, Inc., and Republic Airways Holdings Inc.(i)
10.31(a)†
 
Amendment No. 1 to Delta Connection Agreement, dated as of February 7, 2003, by and among Delta Air Lines, Inc., Chautauqua Airlines, Inc., and Republic Airways Holdings Inc.(i)
10.31(b)†
 
Amendment Number Two to Delta Connection Agreement, dated September 30, 2003, by and among Delta Air Lines, Inc., Chautauqua Airlines, Inc. and Republic Airways Holdings Inc.(i)
10.31(c)†
 
Amendment Number Three to Delta Connection Agreement, dated March, 2004, by and among Delta Air Lines, Inc., Chautauqua Airlines, Inc. and Republic Airways Holdings Inc.(i)
10.31(d)†
 
Amendment No. 4 to Delta Connection Agreement by and among Delta Air Lines, Inc., Chautauqua Airlines, Inc. and Republic Airways Holdings Inc., dated as of August 12, 2004.(iii)
10.31(e)†
 
Amendment Number Five to Delta Connection Agreement, as amended, among Delta Air Lines, Inc., Chautauqua Airlines, Inc. and Republic Airways Holdings Inc., dated as of December 22, 2004.(iv)
10.31(f)†
 
Amendment Number Six to Delta Connection Agreement, by and among Delta Air Lines, Inc., Chautauqua Airlines, Inc. and Republic Airways Holdings Inc., dated as of March 12, 2007.(xxiii)
10.31(g)†
 
Letter Agreement, by and among Delta Airlines, Inc., Republic Airways Holdings Inc., Chautauqua Airlines, Inc. and Shuttle America Corp., dated as of July 28, 2008.(xxxiii)
10.32
 
Amended Promissory Note of Republic Airways Holdings Inc. (FKA Wexford Air Holdings Inc.) (FKA Wexford III Corp.), dated as of May 14, 2003, in favor of WexAir LLC in the principal amount of $20,391,996.04.(i)
 
87

 
10.33
 
Second Amended and Restated Employment Agreement by and between Bryan K. Bedford and Republic Airways Holdings Inc., dated as of July 1, 2003.(i)
10.33(a)
 
Amendment No. 1 to Second Amended and Restated Employment Agreement, by and between Bryan K. Bedford and Republic Airways Holdings Inc., dated as of December 27, 2004.(v)
10.33(b)
 
Amendment No. 2 to Second Amended and Restated Employment Agreement, by and between Bryan K. Bedford and Republic Airways Holdings Inc., dated as of February 20, 2007. (xx)
10.33(c)
 
Amendment No. 3 to Second Amended and Restated Employment Agreement, by and between Bryan K. Bedford and Republic Airways Holdings Inc., dated as of September 5, 2007. (xxvii)
10.33(d)
 
Amendment No. 4 to Second Amended and Restated Employment Agreement dated as of June 22, 2009 by and between Republic Airways Holdings Inc. and Bryan K. Bedford. (xli)
10.33(e)
 
Amendment No. 5 to Second Amended and Restated Employment Agreement dated as of October 29, 2009 by and between the Company and Bryan K. Bedford. (xlii)
10.34
 
Second Amended and Restated Employment Agreement by and between Robert Cooper and Republic Airways Holdings Inc., dated as of August 1, 2003.(i)
10.34(a)
 
Amendment No. 1 to Second Amended and Restated Employment Agreement, by and between Robert Hal Cooper and Republic Airways Holdings Inc., dated as of December 27, 2004.(v)
10.34(b)
 
Amendment No. 2 to Second Amended and Restated Employment Agreement, by and between Robert Hal Cooper and Republic Airways Holdings Inc., dated as of February 20, 2007. (xx)
10.34(c) 
 
Amendment No. 3 to Second Amended and Restated Employment Agreement, by and between Robert Hal Cooper and Republic Airways Holdings Inc., dated as of September 5, 2007.(xxvii)
10.34(d)
 
Amendment No. 4 to Second Amended and Restated Employment Agreement dated as of June 22, 2009 by and between Republic Airways Holdings Inc. and Robert Hal Cooper. (xli)
10.34(e)
 
Amendment No. 5 to Second Amended and Restated Employment Agreement dated as of October 29, 2009 by and between the Company and Robert Hal Cooper. (xlii)
10.35(a)
 
Amendment No. 1 to Second Amended and Restated Employment Agreement, by and between Wayne C. Heller and Chautauqua Airlines, Inc., dated as of December 27, 2004.(v)
10.35(b)
 
Amendment No. 2 to Second Amended and Restated Employment Agreement, by and between Wayne C. Heller and Republic Airways Holdings Inc., dated as of February 20, 2007. (xx)
10.35(c)
 
Amendment No. 3 to Second Amended and Restated Employment Agreement, by and between Wayne C. Heller and Republic Airways Holdings Inc., dated as of September 5, 2007. (xxvii)
10.35(d)
 
Amendment No. 4 to Second Amended and Restated Employment Agreement dated as of June 22, 2009 by and between Republic Airways Holdings Inc. and Wayne C. Heller. (xli)
10.35(e)
 
Amendment No. 5 to Second Amended and Restated Employment Agreement dated as of October 29, 2009 by and between the Company and Wayne C. Heller. (xlii)
10.37
 
Office/Shop Space Permit by and between Signature Combs and Chautauqua Airlines, Inc., dated as of January 16, 2001.(i)
10.38
 
Hangar and Office Lease by and between AMR Combs, Inc. and Chautauqua Airlines, Inc., dated as of December 22, 1998.(i)
10.39†
 
Purchase Agreement DCT-014/2004, by and between Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of March 19, 2004.(i)
10.39(a)†
 
Amendment No. 1 to Purchase Agreement DCT-014/2004, by and between Embraer — Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of April 28, 2004.(ii)
10.39(b)†
 
Amendment No. 2 to Purchase Agreement DCT-014/2004 between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of dated July 8, 2004.(iii)
10.39(c)†
 
Amendment No. 3 to Purchase Agreement DCT-014/2004 between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of July 30, 2004.(iii)
10.39(d)†
 
Amendment No. 4 to Purchase Agreement DCT-014/2004 between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of August 11, 2004.(iii)
10.39(e)†
 
Amendment No. 5 to Purchase Agreement DCT-014/2004 between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of September 29, 2004.(iii)
10.39(f)†
 
Amendment No. 6 to Purchase Agreement DCT-014/2004 between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of November 9, 2004.(viii)
10.39(g)†
 
Amendment No. 7 to Purchase Agreement DCT-014/2004 between Embraer-Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of December 23, 2004.(viii)
 
88

 
10.39(h)†
 
Amendment No. 8 to Purchase Agreement DCT-014/2004, by and between Embraer—Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of February 28, 2005. (x)
10.39(i)†
 
Amendment No. 9 to Purchase Agreement DCT-014/2004, by and between Embraer—Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of March 31, 2005. (x)
10.39(j)†
 
Amendment No. 10 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasilicica de Aeronautica S.A. and Republic Airline Inc., dated as of April 30, 2005. (xiii)
10.39(k)†
 
Amendment No. 11 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of August 30, 2005. (xv)
10.39(l)†
 
Amendment No. 12 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of October 7, 2005.(xvi)
10.39(m)†
 
Amendment No. 13 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of October 18, 2005.(xvi)
10.39(n)†
 
Amendment No. 14 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of November 9, 2005.(xvi)
10.39(o)†
 
Amendment No. 15 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of April 24, 2006.(xviii)
10.39(p)†
 
Amendment No. 16 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of July 21, 2006.(xix)
10.39(q)†
 
Amendment No. 17 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of November 14, 2006.(xxi)
10.39(r)†
 
Amendment No. 18 to Purchase Agreement DCT-014/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of January 12, 2007.(xxiv)
10.39(s)†
 
Amendment No. 19 to Purchase Agreement DCT-014/2004 by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of June 22, 2007.(xxvi)
10.39(t)†
 
Amendment No. 20 to Purchase Agreement DCT-014/2004 by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of October 18, 2007.(xxx)
10.39(u)†
 
Amendment No. 21 to Purchase Agreement DCT-014/2004 by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of June 5, 2008.(xxxiii)
10.39(v)†
 
Amendment No. 22 to Purchase Agreement DCT-014/2004 by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of September 5, 2008.(xxxiv)
10.39(w)†
 
Amendment No. 23 to Purchase Agreement DCT-014/2004 by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of November 10, 2008.
10.40†
 
Letter Agreement DCT-015/2004, by and between Republic Airline Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of March 19, 2004.(i)
10.40(a)†
 
Amendment No. 1 to Letter Agreement DCT-015/2004, by and between Republic Airline Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of July 8, 2004.(viii)
10.40(b)†
 
Amendment No. 2 to Letter Agreement DCT-015/2004, by and between Republic Airline Inc. and Embraer-Empresa Brasileira de Aeronбutica S.A., dated as of December 23, 2004.(viii)
10.40(c)†
 
Amendment No. 3 to Letter Agreement DCT-015/2004, by and between Embraer—Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of February 28, 2005.(x)
10.40(d)†
 
Amendment No. 4 to Letter Agreement DCT-015/2004, by and between Embraer—Empresa Brasileira de Aeronбutica S.A. and Republic Airline Inc., dated as of April 13, 2005.(x)
10.40(e)†
 
Amendment No. 5 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasilicica de Aeronautica S.A. and Republic Airline Inc., dated as of April 30, 2005.(xiii)
10.40(f)†
 
Amendment No. 6 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline, Inc., dated as of October 18, 2005.(xvi)
10.40(g)†
 
Amendment No. 7 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline, Inc., dated as of November 9, 2005.(xvi)
10.40(h)†
 
Amendment No. 8 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of July 21, 2006.(xix)
10.40(i)†
 
Amendment No. 9 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of September 19, 2006.(xxi)
10.40(j)†
 
Amendment No. 10 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline Inc., dated as of November 14, 2006.(xxi)
 
89

 
10.40(k)†
 
Amendment No. 11 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline inc., dated as of May 29, 2007.(xxvi)
10.40(l)†
 
Amendment No. 12 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline inc., dated as of June 22, 2007.(xxvi)
10.40(m)†
 
Amendment No. 13 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline inc., dated as of October 18, 2007.(xxx)
10.40(n)†
 
Amendment No. 14 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline inc., dated as of June 5, 2008.(xxxiii)
10.40(o)†
 
Amendment No. 15 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline inc., dated as of September 5, 2008.(xxxiv)
10.40(p)†
 
Amendment No. 16 to Letter Agreement DCT-015/2004, by and between Embraer-Empresa Brasileira de Aeronautica S.A. and Republic Airline inc., dated as of November 10, 2008.
10.41†
 
United Express Agreement, by and between United Air Lines, Inc. and Shuttle America Corp., dated as of December 28, 2006.(xxi)
10.41(a)†
 
First Amendment to United Express Agreement, by and between United Air Lines, Inc. and Shuttle America Corp., dated as of August 21, 2007.(xxx)
10.42
 
Amendment No. 1 to United Express Agreement, by and between United Air Lines, Inc. and Chautauqua Airlines, Inc., dated as of July 6, 2004.(ii)
10.43†
 
Letter Agreement, by and between United Air Lines, Inc. and Republic Airways Holdings Inc., dated as of February 13, 2004.(i)
10.43(a)†
 
Letter Agreement, by and between United Air Lines, Inc. and Republic Airways Holdings Inc., dated as of July 7, 2004.(ii)
10.44
 
Lease Agreement, by and between Chautauqua Airlines, Inc. and the Indianapolis Airport Authority, dated as of December 17, 2004.(viii)
10.45†
 
Delta Connection Agreement, dated as of January 13, 2005, by and among Delta Air Lines, Inc., Republic Airline Inc. and Republic Airways Holdings Inc.(vi)
10.45(a)†
 
Amendment Number One to Delta Connection Agreement, by and among Delta Air Lines, Inc., Shuttle America Corp. (as assignee of Republic Airline Inc.) and Republic Airways Holdings Inc., dated as of March 12, 2007. (xxiii)
10.45(b)†
 
Amendment Number Two to Delta Connection Agreement, by and among Delta Airlines, Inc., Shuttle America Corp. (as assignee of Republic Airline Inc.) and Republic Airways Holdings Inc., dated as of August 21, 2007.(xxx)
10.45(c)†
 
Letter Agreement, by and among Delta Airlines, Inc., Republic Airways Holdings Inc., Chautauqua Airlines, Inc. and Shuttle America Corp., dated as of March 12, 2007.(xxiii)
10.46
 
Stock Purchase Agreement, dated May 6, 2005, by and among Republic Airways Holdings, inc., Shuttle America Corporation and Shuttle Acquisition LLC.(ix)
10.47
 
Promissory Note in the principal amount of $1,000,000 dated May 6, 2005, made by Republic Airways Holdings Inc. payable to Shuttle Acquisition LLC.(ix)
10.48† 
 
Investment Agreement dated as of March 15, 2005 among Wexford Capital LLC, Republic Airways Holdings Inc., US Airways Group, Inc. and US Airways, Inc.(x)
10.49 
 
Letter dated June 23, 2005 from US Airways Group, Inc. and US Airways, Inc.(xi)
10.50 
 
Amendment No. 3 to United Express Agreement between United Airlines, Inc. and Republic Airline Inc. and Amendment No. 2 to United Express Agreement between United Airlines, Inc. and Chautauqua Airlines, Inc. dated as of June 22, 2005.(xii)
10.51 
 
Agreement between Chautauqua Airlines, Inc. and the Flight Attendants in the service of Chautauqua Airlines, Inc. as represented by the International Brotherhood Of Teamsters, AFL-CIO, dated as of September 1, 2005.(xiv)
10.52(a)†
 
Republic Jet Service Agreement, by and between US Airways, Inc. and Republic Airline Inc., dated as of September 2, 2005.(xv)
10.52(b)†
 
Amendment Number One to Republic Jet Service Agreement, by and between US Airways, Inc. and Republic Airline Inc., dated as of September 21, 2005.(xv)
10.52(c)†
 
Second Amendment to Republic Jet Service Agreement, by and between US Airways, Inc. and Republic Airline Inc., dated as of July 21, 2006.(xix)
10.52(d)†
 
Third Amendment to Republic Jet Service Agreement, by and between US Airways, Inc. and Republic Airline Inc., dated as of December 19, 2006.(xxi)
 
90

 
10.53†  
 
Global Aircraft Transaction Agreement, by and between Republic Airways Holdings Inc. and US Airways, Inc., dated as of September 21, 2005.(xv)
10.54† 
 
Commuter Slot Option Agreement, by and between Republic Airways Holdings Inc. and US Airways, Inc., dated as of September 22, 2005.(xv)
10.55†
 
Capacity Purchase Agreement, by and between Continental Airlines, Inc., Republic Airways Holdings Inc. and Chautauqua Airlines, Inc., dated as of July 21, 2006.(xix)
10.55(a)†
 
First Amendment to the Capacity Purchase Agreement, by and among Continental Airlines, Inc., Republic Airways Holdings Inc. and Chautauqua Airlines, Inc., dated as of January 8, 2007.(xxiv)
10.56
 
Amended and Restated Secured Super Priority Debtor In Possession Credit Agreement dated April 1, 2009. (xxxv)
10.56(a)
 
Second Amended and Restated Investment Agreement dated August 13, 2009 by and among Frontier Airlines Holdings, Inc. and its subsidiaries, Frontier Airlines, Inc. and Lynx Aviation, Inc. (xxxvi)
10.56(b) ††
 
Credit Agreement among Frontier Airlines, Inc., Republic Airways Holdings Inc., Lynx Aviation, Inc. and Airbus Financial Services, dated as of October 30, 2009. (xxxvii)
10.57
 
Evidence of Transfer of Claim by Republic Airways Holdings Inc. in favor of JPMorgan Chase Bank, N.A., dated as of April 11, 2007.(xxiv)
10.58
 
Stock Purchase Agreement, dated as of March 16, 2007, by and between Republic Airways Holdings Inc. and WexAir LLC.(xxii)
10.59
 
Stock Purchase Agreement, dated as of September 4, 2007, by and between Republic Airways Holdings Inc. and WexAir RJET LLC.(xxvii)
10.6
 
Stock Purchase Agreement, dated as of September 11, 2007, by and between Republic Airways Holdings Inc. and WexAir RJET LLC.(xxviii)
10.61
 
Stock Purchase Agreement, dated as of October 26, 2007, by and between Republic Airways Holdings Inc. and WexAir RJET LLC.(xxix)
10.62†
 
Airline Services Agreement, among Midwest Airlines, Inc., Republic Airline Inc., Midwest Air Group, Inc. (in a limited capacity) and Republic Airways Holdings Inc. (in a limited capacity), dated September 3, 2008.(xxxiv)
10.62(a)
 
Amended and Restated Senior Secured Credit Agreement, among Midwest Airlines, Inc., Midwest Air Group, Inc., its subsidiaries, Wells Fargo Bank Northwest, National Association and the lenders party thereto, dated as of September 3, 2008.
10.62(b)
 
Amendment No. 1 to Amended and Restated Senior Secured Credit Agreement, among Midwest Airlines, Inc., Midwest Air Group, Inc., its subsidiaries, Wells Fargo Bank Northwest, National Association and the lenders party thereto, dated as of October 28, 2008.
10.62(c)
 
Amendment No. 1 to Airline Services Agreement, among Midwest Airlines, Inc., Republic Airline Inc., Midwest Air Group, Inc. and Republic Airways Holdings Inc., dated May 15, 2009. (xxxviii)
10.62(d)
 
Amendment No. 3 to the Amended and Restated Senior Secured Credit Agreement, dated as of September 3, 2008, among Midwest Airlines, Inc., Midwest Air Group, Inc., each of the subsidiaries of Midwest from time to time party thereto, each lender from time to time party thereto (including Republic Airways Holdings Inc.), Wells Fargo Bank Northwest, National Association, as administrative agent and Wells Fargo, as collateral agent, dated as of June 2, 2009. (xxxix)
10.62(e)
 
Amendment No. 2 to the Airline Services Agreement dated as of September 3, 2008 among Midwest Airlines, Inc., Republic Airline Inc., Midwest Air Group, Inc. and Republic Airways Holdings Inc., dated as of June 3, 2009. (xxxix)
10.62(f)
 
Agreement and Plan of Merger, by and among Republic Airways Holdings Inc., RJET Acquisition, Inc. and Midwest Air Group, Inc., dated as of June 23, 2009. (xl)
10.62(g)
 
Investment Agreement, by and among TPG Midwest US V, LLC, TPG Midwest International V, LLC and Republic Airways Holdings Inc., dated as of June 23, 2009. (xl)
10.63†
 
Credit Agreement, by and between US Airways, Inc. and Republic Airways Holdings Inc., dated as of October 20, 2008.(xxxiv)
10.63(a)
 
Amendment to the Credit Agreement, by and between US Airways, Inc. and Republic Airways Holdings Inc., dated as of December 19, 2008.
10.64
 
Employment Agreement by and between Republic Airways Holdings Inc. and Sean Menke, dated as of October 2, 2009 
21.1
 
Subsidiaries of Republic Airways Holdings Inc.(i)
23.1
 
Consent of Deloitte & Touche LLP.
31.1
 
Certification by Bryan K. Bedford pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
 
91

 
31.2
 
Certification by Robert H. Cooper pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1
 
Certification by Bryan K. Bedford pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
 
Certification by Robert H. Cooper pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Portions of the indicated document have been afforded confidential treatment and have been filed separately with the Commission as required by Rule 406.
††
 
A request for confidential treatment was filed for certain portions of the indicated document. Confidential portions have been omitted and filed separately with the Commission as required by Rule 406.
(i)
 
Incorporated by reference to the Registrant’s Registration Statement on Form S-1, File No. 333-84092, which was declared effective on May 26, 2004.
(ii)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
(iii)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.
(iv)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 29, 2004.
(v)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 30, 2004.
(vi)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 20, 2005.
(vii)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 21, 2005.
(viii)
 
Incorporated by reference to the Registrant’s Registration Statement on Form S-1, File No. 333-122033, which was declared effective on February 1, 2005.
(ix)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 9, 2005
 (x)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
 (xi)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 28, 2005.
 (xii)
 
Incorporated by reference to the Registrant’s Registration Statement on Form S-3, file No. 333-126357, which was declared effective on July 18, 2005.
 (xiii)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
 (xiv)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 7, 2005.
 (xv)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.
(xvi)
 
Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005.
(xvii)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
(xviii)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
(xix)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
(xx)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 26, 2007.
(xxi)
 
Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006.
(xxii)
 
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 19, 2007.
(xxiii) 
 
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on March 30, 2007.
(xxiv) 
 
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
(xxv)
 
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on June 8, 2007.
(xxvi) 
 
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007.
(xxvii)
 
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on September 5, 2007.
(xxviii)
 
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on September 12, 2007.
(xxix)
 
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on October 29, 2007.
 
92

 
(xxx)
 
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
(xxxi)
 
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on December 10, 2007.
(xxxii)
 
Incorporated by reference to the Registrant's Current Report on Form 8-K filed on August 7, 2008.
(xxxiii)
 
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on August 11, 2008.
(xxxiv)
 
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q filed on November 4, 2008.
(xxxv)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on May 11, 2009.
(xxxvi)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q filed on November 9, 2009.
(xxxvii)
 
Incorporated by reference to Registrant’s Current Report on Form 8-K filed November 5, 2009.
(xxxviii)
 
Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 5, 2009.
(xxix)
 
Incorporated by reference to Registrant’s Quarterly Report on Form 10-Q filed on August 6, 2009.
(xl)
 
Incorporated by reference to Registrant’s Current Report on Form 8-K filed on June 24, 2009.
(xli)
 
Incorporated by reference to Registrant’s Current Report on Form 8-K filed on June 26, 2009.
(xlii)
 
Incorporated by reference to Registrant’s Current Report on Form 8-K filed November 2, 2009.
 
93


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
REPUBLIC AIRWAYS HOLDINGS INC.
 
 
(Registrant)
 
     
Dated: March 16, 2010
By:
/s/ Bryan K. Bedford  
   
Bryan K. Bedford
 
   
Chairman of the Board, Chief Executive Officer and President
 
   
(principal executive officer)
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
 
Title
 
Date
         
/s/ Bryan K. Bedford
       
Bryan K. Bedford
 
Chairman of the Board, Chief Executive Officer and President (Principal Executive Officer)
 
March 16, 2010
         
/s/ Robert H. Cooper
       
Robert H. Cooper
 
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
 
March 16, 2010
         
/s/ Lawrence J. Cohen
       
Lawrence J. Cohen
 
Director
 
March 16, 2010
         
/s/ Neal S. Cohen
       
Neal S. Cohen
 
Director
 
March 16, 2010
         
/s/ Douglas J. Lambert
       
Douglas J. Lambert
 
Director
 
March 16, 2010
         
/s/ Mark L. Plaumann
       
Mark L. Plaumann
 
Director
 
March 16, 2010
         
/s/ Richard P. Schifter
       
Richard P. Schifter
 
Director
 
March 16, 2010
         
/s/ David N. Siegel
       
David N. Siegel
 
Director
 
March 16, 2010
 
94