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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended June 30, 2011
   
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 001-33166

Allegiant Travel Company
(Exact Name of Registrant as Specified in Its Charter)

Nevada
 
20-4745737
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
     
8360 S. Durango Drive,
   
Las Vegas, Nevada
 
89113
(Address of Principal Executive Offices)
 
(Zip Code)

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


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

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

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

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

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

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

The number of shares of the registrant’s common stock outstanding as of the close of business on August 1, 2011 was 19,056,760.



 
 

 
 
Allegiant Travel Company

Form 10-Q
June 30, 2011

INDEX

PART I. FINANCIAL INFORMATION
   
     
ITEM 1. Unaudited Condensed Consolidated Financial Statements                                                                                                                                                   
 
3
     
·  Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010
 
3
     
·  Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010 (unaudited)
 
4
     
·  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)
 
5
     
·  Notes to Condensed Consolidated Financial Statements (unaudited)
 
6
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
12
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                 
 
23
     
ITEM 4. Controls and Procedures                                                                                                                                                 
 
24
     
PART II. OTHER INFORMATION                                                                                                                                                 
 
24
     
ITEM 1. Legal Proceedings                                                                                                                                                 
 
24
     
ITEM 1A. Risk Factors                                                                                                                                                 
 
24
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                                 
 
25
     
ITEM 6. Exhibits                                                                                                                                                 
 
25


 
2

 
PART 1. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share amounts)
   
June 30,
   
December 31,
 
   
2011
   
2010
 
   
(unaudited)
       
             
Current assets:
           
Cash and cash equivalents
  $ 172,204     $ 113,293  
Restricted cash
    20,383       21,287  
Short-term investments
    145,109       37,000  
Accounts receivable, net
    9,430       7,852  
Expendable parts, supplies and fuel, net of allowance for obsolescence of $260
  and $170 at June 30, 2011 and December 31, 2010, respectively
    17,052       13,383  
Prepaid expenses
    26,126       24,071  
Deferred income taxes
    98       -  
Other current assets
    1,543       2,517  
Total current assets
    391,945       219,403  
Property and equipment, net
    294,329       267,298  
Investment in and advances to unconsolidated affiliates, net
    5,123       1,983  
Deposits and other assets
    10,581       12,582  
Total assets
  $ 701,978     $ 501,266  
                 
Current liabilities:
               
Current maturities of long term debt
  $ 6,195     $ 16,532  
Accounts payable
    39,229       24,759  
Accrued liabilities
    18,594       23,679  
Air traffic liability
    141,882       101,397  
Deferred income taxes
    297       246  
Total current liabilities
    206,197       166,613  
Long-term debt and other long-term liabilities:
               
Long term debt, net of current maturities
    136,142       11,604  
Deferred income taxes
    31,304       25,314  
Total liabilities
    373,643       203,531  
Stockholders' equity:
               
Common stock, par value $.001, 100,000,000 shares authorized;
  21,542,685 and 21,455,634 shares issued;
  19,051,260 and 19,005,821 shares outstanding, as of June 30, 2011
  and December 31, 2010, respectively
    22       21  
Treasury stock, at cost, 2,491,425 and 2,449,813 shares at June 30, 2011
  and December 31, 2010, respectively
    (97,713 )     (95,913 )
Additional paid in capital
    183,968       180,704  
Accumulated other comprehensive income (loss)
    23       (9 )
Retained earnings
    242,035       212,932  
Total stockholders' equity
    328,335       297,735  
Total liabilities and stockholders' equity
  $ 701,978     $ 501,266  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 
ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except for per share amounts)
 
   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
OPERATING REVENUE:
                       
Scheduled service revenue
  $ 133,309     $ 107,452     $ 261,842     $ 217,886  
Ancillary revenue:
                               
Air-related charges
    45,991       43,501       91,307       86,151  
Third party products
    8,291       7,152       15,280       12,094  
Total ancillary revenue
    54,282       50,653       106,587       98,245  
Fixed fee contract revenue
    9,470       9,903       21,492       21,170  
Other revenue
    3,388       342       3,759       686  
Total operating revenue
    200,449       168,350       393,680       337,987  
                                 
OPERATING EXPENSES:
                               
Aircraft fuel
    86,454       62,222       165,641       119,588  
Salary and benefits
    29,884       26,764       60,749       52,656  
Station operations
    16,553       15,493       33,026       31,175  
Maintenance and repairs
    20,132       14,669       36,347       27,439  
Sales and marketing
    5,407       4,118       10,657       9,201  
Aircraft lease rentals
    330       571       645       1,078  
Depreciation and amortization
    10,156       8,351       20,046       17,042  
Other
    10,821       8,081       18,030       15,482  
Total operating expenses
    179,737       140,269       345,141       273,661  
OPERATING INCOME
    20,712       28,081       48,539       64,326  
                                 
OTHER (INCOME) EXPENSE:
                               
(Earnings) loss from unconsolidated affiliates, net
    (20 )     (33 )     (14 )     109  
Interest income
    (386 )     (344 )     (662 )     (755 )
Interest expense
    2,235       655       3,031       1,404  
Total other (income) expense
    1,829       278       2,355       758  
INCOME BEFORE INCOME TAXES
    18,883       27,803       46,184       63,568  
PROVISION FOR INCOME TAXES
    6,934       10,241       17,082       23,406  
NET INCOME
  $ 11,949     $ 17,562     $ 29,102     $ 40,162  
Earnings per share to common stockholders:
                 
Basic
  $ 0.63     $ 0.88     $ 1.53     $ 2.02  
Diluted
  $ 0.62     $ 0.87     $ 1.52     $ 1.99  
Weighted average shares outstanding used in computing earnings per share to common stockholders:                                
Basic
    18,931       19,805       18,920       19,805  
Diluted
    19,131       20,170       19,116       20,070  

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

 
4

 
ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
   
Six months ended June 30,
 
   
2011
   
2010
 
             
OPERATING ACTIVITIES:
           
Net income
  $ 29,102     $ 40,162  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    20,046       17,042  
Loss on aircraft and other equipment disposals
    3,816       1,468  
Provision for obsolescence of expendable parts, supplies and fuel
    90       90  
Amortization of deferred financing costs and original issue discount
    150       -  
Stock compensation expense
    2,387       2,140  
Deferred income taxes
    5,943       (2,271 )
Excess tax benefits from stock option exercises
    (173 )     (667 )
Changes in certain assets and liabilities:
               
Restricted cash
    904       (2,570 )
Accounts receivable
    (1,578 )     (631 )
Expendable parts, supplies and fuel
    (3,759 )     (3,781 )
Prepaid expenses
    (2,055 )     (23,891 )
Other current assets
    (303 )     459  
Accounts payable
    14,514       5,951  
Accrued liabilities
    (5,299 )     (8,472 )
Air traffic liability
    40,485       28,271  
Net cash provided by operating activities
    104,270       53,300  
INVESTING ACTIVITIES:
               
Purchase of short-term investments
    (212,013 )     (49,915 )
Proceeds from maturities of short-term investments
    103,938       159,746  
Purchase of property and equipment, including pre-delivery deposits
    (51,246 )     (63,294 )
Proceeds from sale of property and equipment
    230       -  
Investment in unconsolidated affiliates, net
    (3,140 )     (463 )
Decrease in deposits and other assets
    5,608       28  
Net cash (used in) provided by investing activities
    (156,623 )     46,102  
FINANCING ACTIVITIES:
               
Cash dividends paid to shareholders
    -       (14,942 )
Excess tax benefits from stock option exercises
    173       667  
Proceeds from exercise of stock options
    1,047       2,881  
Proceeds from exercise of warrants
    -       715  
Proceeds from the issuance of long term debt
    132,000       -  
Repurchase of common stock
    (1,800 )     (13,149 )
Principal payments on long term debt
    (17,831 )     (11,693 )
Payments for deferred financing costs
    (2,325 )     -  
Net cash provided by (used in) financing activities
    111,264       (35,521 )
Net change in cash and cash equivalents
    58,911       63,881  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    113,293       90,239  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 172,204     $ 154,120  
                 
NON-CASH TRANSACTIONS:
               
Deposits applied against flight equipment purchase
  $ 1,277     $ -  

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5

 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, in thousands, except share and per share amounts)

Note 1 — Summary of Significant Accounting Policies

Basis of Presentation:  The accompanying unaudited condensed consolidated financial statements include the accounts of Allegiant Travel Company (the “Company”) and its wholly-owned operating subsidiaries. Investments in affiliates in which ownership interest ranges from 20 to 50 percent and provide the Company the ability to exercise significant influence over operating and financial policies are accounted for under the equity method. All intercompany balances and transactions have been eliminated.

These unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission.

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

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

Reclassifications:  Certain reclassifications have been made to the prior period’s financial statements to conform to 2011 classifications.  These reclassifications had no effect on the previously reported net income.

Note 2 — Newly Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income,” which amends Topic 220 in the FASB Accounting Standards Codification (“ASC”) for the presentation of comprehensive income in the financial statements.  This new guidance allows companies the option to present other comprehensive income in either a single continuous statement or in two separate but consecutive statements. Under both alternatives, companies will be required to present each component of net income and comprehensive income.  The adoption of this updated guidance will impact the presentation of the Company’s consolidated financial statements, but it will not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  This requirement will become effective on a retrospective basis at the beginning of the Company’s 2012 fiscal year.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”),” which amends Topic 820 in the ASC and relates to a major convergence project of the FASB and the International Accounting Standards Board to improve IFRS and U.S. GAAP.  This new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between IFRS and U.S. GAAP.  The new guidance also changes some fair value measurement principles and enhances disclosure requirements related to activities in Level 3 of the fair value hierarchy.  The amendments are to be applied prospectively and are effective for annual periods beginning after December 15, 2011.  The Company is currently evaluating the guidance and has not yet determined the impact on its consolidated financial statements.
 
In September 2009, the Financial Accounting Standards Board (“FASB”) ratified Emerging Issues Task Force Issue No. 08-01, “Revenue Arrangements with Multiple Deliverables” (“EITF 08-1”).  EITF 08-1 updates the current guidance pertaining to multiple-element revenue arrangements included in ASC Topic 605 and changes the allocation methods used in determining how to account for multiple payment streams.  It also results in the ability to separately account for more deliverables and potentially less revenue deferrals.  This accounting standard is effective for new revenue arrangements entered into by the Company after January 1, 2011.  Adoption of the new accounting guidance has not had a material effect on the Company’s consolidated financial statements.
 
Note 3 — Short-Term Investments

The Company’s investments in marketable debt and equity securities are classified as available-for-sale and are reported at fair market value with the net unrealized gain or (loss) reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Short-term investments consisted of the following:

 
6

 
 
   
As of June 30, 2011
   
As of December 31, 2010
 
         
Gross Unrealized
               
Gross Unrealized
       
   
Cost
   
Gains
   
(Losses)
   
Market Value
   
Cost
   
Gains
   
(Losses)
   
Market Value
 
Debt securities issued by states of the United States and political subdivisions of the states
  $ 73,571     $ 44     $ (7 )   $ 73,608     $ 32,140     $ 2     $ (10 )   $ 32,132  
Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies
    2,703       -       -       2,703       -       -       -       -  
Commercial paper
    42,902       24       (8 )     42,918       -       -       -       -  
Corporate debt securities
    25,898       -       (18 )     25,880       4,870       -       (2 )     4,868  
Total
  $ 145,074     $ 68     $ (33 )   $ 145,109     $ 37,010     $ 2     $ (12 )   $ 37,000  
 
The cost of marketable securities sold is determined by the specific identification method with any realized gains or losses reflected in income.  The Company had no realized gains or losses during the three and six months ended June 30, 2011 and 2010.

The Company believes unrealized losses related to debt securities are not other-than-temporary. Debt securities in an unrealized loss position primarily included investments in municipal bonds and corporate debt securities.

Short-term investments had the following maturities as of June 30, 2011:

Maturities
 
Amount
 
Year 2011
 
$
79,437
 
Year 2012
 
65,672
 
Thereafter
 
 
Total
 
$
145,109
 
 
 
 
7

 
Note 4 — Long-Term Debt

Long-term debt consists of the following:
 
 
   
As of June 30,
   
As of December 31,
 
   
2011
   
2010
 
             
             
Senior secured term loan facility, interest at LIBOR plus 4.25% with LIBOR floor of 1.5%, due March 2017   $ 124,095     $ -  
Notes payable, secured by aircraft, interest at 6.28%, due March 2015     6,608       -  
Notes payable, secured by aircraft, interest at 6.26%, due August 2014     11,634       13,224  
Notes payable, secured by aircraft, interest at 6%, due April 2012     -       6,437  
Notes payable, secured by aircraft, interest at 8.5%, due November 2011     -       6,209  
Notes payable, secured by aircraft, interest at 6.8%, due June 2011     -       1,616  
Notes payable, secured by aircraft, interest at 6%, due at varying dates through February 2011     -       650  
Total long-term debt
    142,337       28,136  
Less current maturities
    (6,195 )     (16,532 )
Long-term debt, net of current maturities
  $ 136,142     $ 11,604  
 
Senior Secured Term Loan Facility
 
On March 10, 2011, the Company borrowed $125,000 under a senior secured term loan facility (the “Term Loan”).  The Term Loan matures on March 10, 2017, bears interest based on the London Interbank Offered Rate (“LIBOR”) or prime rate with interest payable quarterly or more frequently until maturity and includes a LIBOR floor of 1.5%.  The Term Loan is secured by all property and assets of the Company with certain exceptions.  The Term Loan contains a maximum leverage covenant for the Company, maximum annual capital expenditures and other affirmative and negative covenants.  In addition to quarterly principal payments equal to 0.25% of the initial loan, the Term Loan also provides for mandatory and optional prepayment provisions.  In connection with the borrowing under the Term Loan, the Company made early payments in February 2011 of all existing debt obligations secured by its MD-80 aircraft.  Proceeds from the Term Loan will also be used for the funding of future capital expenditure programs and general corporate purposes.

As of June 30, 2011, management believes the Company was in compliance with all covenants under the Term Loan.

Other

In March 2011, the Company borrowed $7,000 under a loan agreement secured by one Boeing 757-200 aircraft purchased in February 2011.  The note payable issued under the loan agreement bears interest at 6.28% per annum and is payable in monthly installments through March 2015.  
 
Note 5 — Stockholders’ Equity

The Company is authorized by the Board of Directors to acquire the Company’s stock through open market purchases under its share repurchase program.  During the three months ended June 30, 2011, the Company repurchased 34,323 shares through open market purchases at an average cost of $43.49 per share for a total expenditure of $1,493.  No share repurchases were made under the program during the first quarter of 2011.  During the six months ended June 30, 2010, the Company repurchased 252,648 shares through open market purchases at an average cost of $51.98 per share for a total expenditure of $13,133.  During the three months ended June 30, 2010, the Company repurchased 197,046 shares at an average cost of $52.18 per share for a total expenditure of $10,281.  As of June 30, 2011, the Company had $44,934 in unused stock repurchase authority remaining under the Board approved program.

 
8

 
Note 6 – Comprehensive Income

The components of comprehensive income included the following:

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income
  $ 11,949     $ 17,562     $ 29,102     $ 40,162  
Other comprehensive income (loss):
                               
Unrealized gain (loss) on short-term investments, net of tax
    40       (26 )     32       (103 )
Total comprehensive income
  $ 11,989     $ 17,536     $ 29,134     $ 40,059  
 
Note 7 — Fair Value Measurements

Fair value measurements accounting standards define fair value, establish a consistent framework for measuring fair value, and require disclosures for each major asset and liability category and class of investment measured at fair value on either a recurring or a nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is established in accounting standards. The hierarchy prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of June 30, 2011, the Company held cash equivalents and short-term investments that are required to be measured at fair value on a recurring basis. Cash equivalents and short-term investments consist of short-term, highly liquid, income-producing investments.  Cash equivalents have maturities of three months or less, while the short-term investments have maturities of greater than three months. The Company uses the market approach valuation technique to determine fair value for these cash equivalents and short-term investments.  The assets classified as Level 1 consist of money market funds for which original cost approximates fair value.  The assets classified as Level 2 consist of municipal debt securities, U.S. government corporation agency debt securities and commercial paper which are valued using quoted market prices or alternative pricing sources including transactions involving identical or comparable assets and models utilizing market observable inputs.
 
Assets measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010 were as follows:
 
 
9

 
 
          Fair Value Measurements at Reporting Date Using  
             
Description
   
June 30,
2011
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
                         
Cash equivalents
                       
    Money market funds
  $ 80,859     $ 80,859     $ -     $ -  
    Municipal debt securities
    67,878       -       67,878       -  
    Commercial paper
    3,000       -       3,000       -  
        Total cash equivalents
    151,737       80,859       70,878       -  
Short-term investments
                               
    Corporate debt securities
    25,880       -       25,880       -  
    Municipal debt securities
    73,608       -       73,608       -  
    Commercial paper
    42,918       -       42,918       -  
    Government debt securities
    2,703       -       2,703       -  
         Total short-term investments
    145,109       -       145,109       -  
                                 
Total cash equivalents and short-term investments
  $ 296,846     $ 80,859     $ 215,987     $ -  
                                 
 
 
           
Fair Value Measurements at Reporting Date Using
 
                         
Description
   
December 31,
2010
   
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
                         
Cash equivalents
                       
    Money market funds
  $ 4,390     $ 4,390     $ -     $ -  
    Municipal debt securities
    100,127       -       100,127       -  
        Total cash equivalents
    104,517       4,390       100,127       -  
Short-term investments
                               
    Corporate debt securities
  $ 4,868       -       4,868       -  
    Municipal debt securities
    32,132       -       32,132       -  
         Total short-term investments
    37,000       -       37,000       -  
                                 
Total cash equivalents and short-term investments
  $ 141,517     $ 4,390     $ 137,127     $ -  
 
There were no significant transfers between Level 1 and Level 2 assets for the three or six month periods ended June 30, 2011 and 2010.

The carrying value for all long-term debt, including current maturities, owed by the Company as of June 30, 2011 and December 31, 2010, approximates fair value.

 
10

 
Note 8 — Income Taxes

For the three and six months ended June 30, 2011, the Company did not have any material changes to its unrecognized tax benefits.  The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  There was no significant accrued interest or penalties at June 30, 2011.

Note 9 — Earnings Per Share

Basic and diluted earnings per share are computed pursuant to the two-class method.  Under this method, the Company attributes net income to two classes, common stock and unvested restricted stock awards.  Unvested restricted stock awards granted to employees under the Company’s Long-Term Incentive Plan are considered participating securities as they receive non-forfeitable rights to cash dividends at the same rate as common stock.

Diluted net income per share is calculated using the more dilutive of two methods.  Under both methods, the exercise of employee stock options, stock purchase warrants and stock appreciation rights are assumed using the treasury stock method.  The assumption of vesting of restricted stock, however, differs:

 
1.
Assume vesting of restricted stock using the treasury stock method.

 
2.
Assume unvested restricted stock awards are not vested, and allocate earnings to common shares and unvested restricted stock awards using the two-class method.
 
Both methods resulted in the same diluted net income per share for the three months ended June 30, 2011 and 2010 and for the six months ended June 30, 2011.  For the six months ended June 30, 2010, the second method above which assumes unvested awards are not vested was used in the computation because it was more dilutive than the first method above which assumes vesting of awards using the treasury stock method.  The following table sets forth the computation of net income per share, on a basic and diluted basis for the periods indicated (shares in table below in thousands):
 
     
Three months ended June 30,
   
Six months ended June 30,
 
     
2011
   
2010
   
2011
   
2010
 
Basic:
                       
 
Net income
  $ 11,949     $ 17,562     $ 29,102     $ 40,162  
 
Less:  Net income allocated to participating securities
    (73 )     (110 )     (165 )     (207 )
 
Net income attributable to common stock
  $ 11,876     $ 17,452     $ 28,937     $ 39,955  
 
Net income per share, basic
  $ 0.63     $ 0.88     $ 1.53     $ 2.02  
                                   
Weighted-average shares outstanding
    18,931       19,805       18,920       19,805  
                                   
Diluted:
                               
 
Net income
    11,949       17,562       29,102       40,162  
 
Less:  Net income allocated to participating securities
    -       -       -       (204 )
 
Net income attributable to common stock
    11,949       17,562       29,102       39,958  
 
Net income per share, diluted
  $ 0.62     $ 0.87     $ 1.52     $ 1.99  
                                   
Weighted-average shares outstanding
    18,931       19,805       18,920       19,805  
Dilutive effect of stock options, stock purchase warrants, restricted stock and stock appreciation rights
    200       365       196       313  
Adjusted weighted-average shares outstanding under treasury stock method
    19,131       20,170       19,116       20,118  
Participating securities excluded under two-class method
    N/A       N/A       N/A       (48 )
Adjusted weighted-average shares outstanding under two-class method
    N/A       N/A       N/A       20,070  
 
Note 10 — Commitments and Contingencies

The Company is subject to certain legal and administrative actions it considers routine to its business activities. The Company believes the ultimate outcome of any pending legal or administrative matters will not have a material adverse impact on its financial position, liquidity or results of operations.

 
11

 
In March 2010, the Company entered into a purchase contract for six Boeing 757-200 aircraft.  As of June 30, 2011, the Company has taken ownership of four of these aircraft.  As of June 30, 2011, the remaining contractual obligations under the purchase agreement were $19,500, to be paid in 2011 upon taking ownership of the remaining aircraft.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis presents factors that had a material effect on our results of operations during the three and six month periods ended June 30, 2011 and 2010.  Also discussed is our financial position as of June 30, 2011 and December 31, 2010. You should read this discussion in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q and our consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2010.  This discussion and analysis contains forward-looking statements. Please refer to the section below entitled “Special Note About Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Second quarter 2011 results

During the second quarter of 2011, we earned net income of $11.9 million on operating revenues of $200.4 million and achieved a 10.3% operating margin despite significantly higher fuel costs.  We attained quarterly operating revenues greater than $200.0 million for the first time in our history.  Capacity management contributed to a 92.0% scheduled service load factor and quarterly total average fare of $128.30.  The quarterly total average fare increased $20.76 year-over-year, which more than offset the $15.08 fuel expense per passenger increase we experienced during the second quarter of 2011 compared to the same period in 2010.  Rising crude oil prices and the expansion of crack spreads have pushed our system average fuel cost per gallon up 41.2%, from $2.28 for the second quarter of 2010 to $3.22 for the same period in 2011.

Our continued strong revenue results were driven by a 27.5% increase in scheduled service revenue per available seat mile (“PRASM”).  In addition to the PRASM increase, strong third party ancillary product sales for hotel rooms contributed to a 21.9% increase in total scheduled service revenue and ancillary revenue per ASM (“TRASM”) for the second quarter of 2011 compared with the same period of 2010.  We believe our unit revenue production was due to a strong leisure demand environment, changes to our pricing strategy and our aggressive capacity management.

During the second quarter of 2011, our operating expense per passenger, excluding fuel increased $9.20, or 18.2%, to $59.81, due primarily to restriction of capacity and increases in maintenance and repairs expense and salary and benefits expense and losses from the disposal of one MD-87 aircraft and impairment of engine values in our consignment program.  Maintenance and repairs expense increased 37.2% primarily driven by increased engine overhauls for the quarter compared to the prior year.  In late 2010, we decided to alter our approach to engine overhauls and replacements and now expect to manage our engines through a combination of performing service overhauls on some units and purchasing engines to replace others.  Pilot and flight attendant agreements entered into in May and July of 2010, respectively, continue to be the largest driver of an 11.7% increase in salary and benefits expense.

Aircraft

Operating Fleet

There were no changes to our operating fleet during the second quarter of 2011.  The following table sets forth the number and type of aircraft in service and operated by us at the dates indicated:

   
June 30, 2011
 
December 31, 2010
 
June 30, 2010
 
   
Own(a)
 
Lease
 
Total
 
Own(a)
 
Lease
 
Total
 
Own(a)(c)
 
Lease(b)
 
Total
 
MD82/83/88s
 
47
 
2
 
49
 
47
 
2
 
49
 
43
 
4
 
47
 
MD87s
 
2
 
0
 
2
 
3
 
0
 
3
 
3
 
0
 
3
 
Total
 
49
 
2
 
51
 
50
 
2
 
52
 
46
 
4
 
50
 
 

(a)
Does not include aircraft owned, but not yet added to our operating fleet.  See below for further information on our aircraft not yet in our operating fleet.
   
(b)
In February 2010, we exercised purchase options on two aircraft under operating leases.  In October 2010, we took ownership of these aircraft.
   
(c)
Includes two aircraft subject to capital leases as of June 30, 2010.  In September 2010, we exercised early purchase options and took ownership of these two aircraft.
 
 
12

 
MD-80 Aircraft not in service

As of June 30, 2011, four of our MD-80 aircraft previously in storage are being prepared for revenue service and are the first of our MD-80 aircraft being modified to a 166 seat reconfiguration.  These aircraft are expected to enter revenue service in the third quarter of 2011, but are not expected to increase the number of in-service aircraft as they will replace in-service MD-80 aircraft which will then undergo seat reconfiguration.  We expect to maintain 51 MD-80 aircraft in our operating fleet through the completion of our seat reconfiguration program.  At completion of the program, our operating fleet is expected to increase by four MD-80 aircraft and will include a total of 55 MD-80 aircraft.  There are also an additional four MD-80 aircraft in storage which could be used for future growth requirements.

Boeing 757-200 Aircraft

As of June 30, 2011, we owned four Boeing 757-200 aircraft.  Three of these aircraft have been leased out to third parties on a short term basis.  The expected return dates of these aircraft, under their respective leases, are through the third quarter of 2012.  

In July 2011, we obtained approval from the Federal Aviation Administration (“FAA”) to begin operating the Boeing 757-200 aircraft type in our operating fleet.  We have begun revenue service for one Boeing 757-200 aircraft on two existing Las Vegas routes.  In addition to the three Boeing 757-200 aircraft currently leased out to third parties, we are committed to the purchase of two Boeing 757-200 aircraft which is expected to take place during the fourth quarter of 2011, with introduction of these aircraft into our fleet during the first quarter of 2012.  We have now focused our efforts on gaining flag carrier status and completing the ETOPS certification process in order to launch service with our Boeing 757-200 aircraft to Hawaii in the second half of 2012.

Network

As of June 30, 2011, we offered scheduled service from 62 small cities on 162 routes primarily into our six major leisure destinations.  Changes in our route network during the second quarter of 2011 included the initiation of service on two routes to Orlando and the discontinuance of one route to Las Vegas.  The following shows the number of destinations and small cities served and routes operated as of the dates indicated:
 
   
As of June 30,
   
As of December 31,
   
As of June 30,
 
   
2011
   
2010
   
2010
 
                   
Major leisure destinations
    6       6       6  
Other leisure destinations
    5       5       5  
Small cities served
    62       62       58  
Total cities served
    73       73       69  
                         
Routes to Las Vegas
    45       45       40  
Routes to Orlando airports (a)
    29       29       30  
Routes to Phoenix
    28       27       21  
Routes to Tampa Bay/St. Petersburg
    21       20       20  
Routes to Los Angeles (includes Long Beach)
    17       17       14  
Routes to Ft. Lauderdale
    7       7       5  
Other routes
    15       15       13  
Total routes
    162       160       143  
 
 
(a)
In February 2011, we consolidated our Orlando operations back to our original operational base at Orlando Sanford International Airport.

 
13

 
Trends and Uncertainties

Global financial concerns and instability in oil producing countries continue to drive high energy prices.  We anticipate these high energy prices to continue in the near term and in an effort to drive higher unit revenues we currently plan to continue to moderate our capacity.  Our low fixed, high variable cost structure allows us to flex up our aircraft utilization to maximize profitability during peak periods and flex down when we experience revenue softness or in this high fuel cost environment.  We believe the additional seats from both our MD-80 seat reconfiguration program and the Boeing 757-200 aircraft being added to our operating fleet will allow for conservative growth in this current fuel environment.  Once fuel prices begin to moderate, we expect to return to our historical growth rates.

As we have disclosed in the past, we view 2011 as a transition year for us.  We continue to invest significant capital into aircraft and aircraft improvements.  These include capital expenditures for the purchase of the two remaining Boeing 757-200 under contract and the 166 seat reconfiguration program of our MD-80 aircraft.  The Boeing 757-200 aircraft and the seat reconfiguration program will provide opportunities for significant revenue growth if we can maintain our high load factors at acceptable fares.  In addition, we will incur maintenance and repairs expenses associated with increased engine overhauls from our new MD-80 engine maintenance strategy.  Furthermore, we continue our focus on revenue growth from third party products and are committed to the enhancement of software capabilities to provide additional product offerings.  
 
We believe our cash flow from operations along with the proceeds received under the senior secured term loan facility (“Term Loan”) in the first quarter of 2011 will provide more than adequate liquidity resources to meet the funding needs from these capital investments to support future growth.

RESULTS OF OPERATIONS

Comparison of three months ended June 30, 2011 to three months ended June 30, 2010

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

   
Three Months Ended June 30,
 
   
2011
   
2010
 
Total operating revenue
    100.0 %     100.0 %
Operating expenses:
               
Aircraft fuel
    43.1       37.0  
Salary and benefits
    14.9       15.9  
Station operations
    8.3       9.2  
Maintenance and repairs
    10.1       8.7  
Sales and marketing
    2.7       2.4  
Aircraft lease rentals
    0.1       0.3  
Depreciation and amortization
    5.1       5.0  
Other
    5.4       4.8  
Total operating expenses
    89.7 %     83.3 %
Operating margin
    10.3 %     16.7 %

Operating Revenue

Our operating revenue increased 19.1% to $200.4 million for the three months ended June 30, 2011 from $168.4 million for the same period of 2010 primarily driven by a 19.2% increase in our average total fare from $107.63 to $128.30.  These strong revenue results were produced with no scheduled service passenger growth or departure growth.  We believe a stronger demand environment, changes in our pricing strategy and aggressive capacity management contributed to the increased fare performance.  The average total fare of $128.30 increased sequentially from the $125.22 during first quarter of 2011 to be our single highest quarter average fare.

Scheduled service revenue.  Scheduled service revenue increased 24.1% to $133.3 million for the three months ended June 30, 2011, from $107.5 million in the same period of 2010.  The increase was primarily driven by a 24.6% increase in the scheduled service average base fare.

Ancillary revenue.  Ancillary revenue increased 7.2% to $54.3 million for the three months ended June 30, 2011 up from $50.7 million in the same period of 2010, driven by a 7.7% increase in ancillary revenue per scheduled passenger from $34.48 to $37.13.  The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

   
Three months ended
       
   
June 30,
       
   
2011
   
2010
   
% Change
 
Air-related charges
  $ 31.45     $ 29.61       6.2 %
Third party products
    5.68       4.87       16.6 %
Total ancillary revenue per scheduled service passenger
  $ 37.13     $ 34.48       7.7 %

 
14

 
The following table details the calculation of ancillary revenue from third party products. Third party products consist of revenue from the sale of hotel rooms, ground transportation (rental cars and hotel shuttle products), attraction and show tickets and fees we receive from other merchants selling products through our website:

   
Three months ended
       
   
June 30,
       
(in thousands)
 
2011
   
2010
   
% Change
 
Gross ancillary revenue - third party products
  $ 29,547     $ 25,859       14.3%  
Cost of goods sold
    (20,046 )     (17,609 )     13.8%  
Transaction costs (a)
    (1,210 )     (1,098 )     10.2%  
Ancillary revenue - third party products
  $ 8,291     $ 7,152       15.9%  
As percent of gross ancillary revenue - third party
    28.1 %     27.7 %   0.4 pp  
 

(a)   Includes credit card fees and travel agency commissions

During the three months ended June 30, 2011, we generated gross revenue of $29.5 million from third party products, which resulted in net revenue of $8.3 million.  Third party products increased on a per-passenger basis primarily as a result of increased hotel room production and margin expansion compared to the same period in the prior year.  The largest contributor to the year-over-year increase was for hotel room sales in leisure destinations outside of Las Vegas.

Fixed fee contract revenue.  Fixed fee contract revenue decreased 4.4% to $9.5 million for the three months ended June 30, 2011, from $9.9 million in the same period of 2010.  The number of total fixed fee block hours flown was relatively flat with a reduction in block hours flown under the Caesars Entertainment Inc. (“Caesars”) agreement, offset by an increase in flying under other agreements including Apple Vacations (flying began in December 2010) and Peppermill Resorts Inc. (flying began in January 2011).  The decreased fixed fee revenue on flat total block hours was driven by lower per-block hour rate from certain fixed fee agreements as a result of higher fuel costs which are reimbursed to us.

Other revenue.  We generated other revenue of $3.4 million for the three months ended June 30, 2011 compared to $0.3 million in the same period of 2010 primarily from lease revenue for aircraft and flight equipment.  In the first quarter of 2011, we leased three Boeing 757-200 aircraft to third parties on a short term basis.  The expected return dates of these aircraft, under their respective leases, are through the third quarter of 2012.

Operating Expenses

Our operating expenses increased 28.1% to $179.7 million for the three months ended June 30, 2011 compared to $140.3 million in the same period of 2010 largely due to a 38.9% increase in our fuel expense and a 37.2% increase in maintenance and repairs expense.  We primarily evaluate our expense management by comparing our costs per passenger across different periods which enables us to assess trends in each expense category.

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

   
Three Months Ended
June 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
Aircraft fuel
  $ 55.43     $ 40.35       37.4 %  
Salary and benefits
    19.16       17.35       10.4    
Station operations
    10.61       10.05       5.6    
Maintenance and repairs
    12.91       9.51       35.8    
Sales and marketing
    3.47       2.67       29.8    
Aircraft lease rentals
    0.21       0.37       (43.2 )  
Depreciation and amortization
    6.51       5.42       20.2    
Other
    6.94       5.24       32.4    
Operating expense per passenger
  $ 115.24     $ 90.96       26.7 %  
Operating expense per passenger, excluding fuel
  $ 59.81     $ 50.61       18.2 %  

 
15

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

   
Three Months
Ended June 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
Aircraft fuel
    5.48 ¢     3.89 ¢     41.1 %  
Salary and benefits
    1.90       1.66       13.4    
Station operations
    1.05       0.97       8.5    
Maintenance and repairs
    1.28       0.92       39.1    
Sales and marketing
    0.34       0.26       33.3    
Aircraft lease rentals
    0.02       0.04       (50.0 )  
Depreciation and amortization
    0.64       0.52       23.5    
Other
    0.69       0.50       36.0    
Operating expense per ASM (CASM)
    11.40 ¢     8.76 ¢     30.1 %  
CASM, excluding fuel
    5.92 ¢     4.87 ¢     21.6 %  

Our CASM, excluding fuel, increased 21.6%, primarily from increases in maintenance and repairs expense, salary and benefits expense and losses from the disposal of one MD-87 aircraft and impairment of engine values in our consignment program.  A 3.6% reduction in average departures per aircraft per day and a 2.4% decrease in system average stage length also contributed to a decrease in ASMs and an increase in CASM, excluding fuel.
 
Aircraft fuel expense.  Aircraft fuel expense increased $24.2 million or 38.9% to $86.5 million for the three months ended June 30, 2011 up from $62.2 million in the same period of 2010, primarily driven by 41.2% increase in the system average cost per gallon from $2.28 to $3.22.  The expansion of crack spreads for jet fuel continued to impact our system average cost per gallon during the second quarter of 2011.  There was a slight decrease in gallons consumed, from 27.3 million to 26.9 million as system departures were relatively flat, year-over-year.

Salary and benefits expense.  Salary and benefits expense increased 11.7% to $29.9 million for the three months ended June 30, 2011 up from $26.8 million in the same period of 2010 despite the effect of a reduced number of employees.  Our salary and benefits expense per full-time equivalent employee increased 17.4% year-over-year primarily as a result of our new pilot and flight attendant compensation agreements which went into effect in May and July 2010, respectively, along with higher medical insurance premiums and increased 401(k) contributions and employer taxes.  The number of full-time equivalent employees decreased from 1,639 at June 30, 2010 to 1,559 at June 30, 2011 driven by the outsourcing of our station operations in Las Vegas.

Station operations expense.  Station operations expense increased 6.8% to $16.6 million for the three months ended June 30, 2011 compared to $15.5 million in the same period of 2010.  With system departures relatively flat year-over-year, our station operations expense per departure increased 6.3% from the outsourcing of our station operations in Las Vegas, along with increases in ground handling fees at several airports where we operate.  Our station operations expense per departure in Las Vegas is offset by lower salary and benefits expense from our reduced number of full-time equivalent employees.

Maintenance and repairs expense.  Maintenance and repairs expense increased 37.2% to $20.1 million for the three months ended June 30, 2011 compared to $14.7 million in the same period of 2010.  The increase was primarily a result of increased engine overhauls and repairs of $2.3 million during the quarter compared to the prior year, along with the repair of rotable parts and usage of expendable parts associated with our increase in average number of aircraft in service to 51.0 for the three months ended June 30, 2011 compared to 47.9 in the same period of 2010.  The increase in engine overhauls and repairs was driven by a new MD-80 engine maintenance strategy which began in late 2010.  Prior to that, fewer engine overhauls were performed and instead were replaced with engines acquired in the secondary market.

Sales and marketing expense.  Sales and marketing expense increased 31.3% to $5.4 million for the three months ended June 30, 2011 compared to $4.1 million for the same period of 2010.  The increase was primarily due to higher credit card transaction costs associated with the 18.7% increase in scheduled service revenue and ancillary revenue and an increase in advertising expenses.

 
16

 
Aircraft lease rentals expense.  Aircraft lease rentals decreased to $0.3 million in the first quarter of 2011 from $0.6 million in the same period of 2010.  Two aircraft were under operating lease agreements during the three months ended June 30, 2011 while four aircraft were under operating lease agreements for the same period of 2010.

Depreciation and amortization expense.  Depreciation and amortization expense increased to $10.2 million for the three months ended June 30, 2011 from $8.4 million for the same period of 2010, an increase of 21.6%, primarily driven by a 6.5% increase in the average number of operating aircraft and the depreciation expense from three leased Boeing 757-200 aircraft. We will begin to depreciate our fourth Boeing 757-200 aircraft in third quarter 2011 as it entered service in July 2011. Excluding depreciation for non revenue service aircraft (three leased Boeing 757-200 aircraft), depreciation expense per aircraft would have been in line with our year-over-year growth in number of in service aircraft.
 
Other expense.  Other expense increased by 33.9% to $10.8 million for the three months ended June 30, 2011 compared to $8.1 million in the same period of 2010.  The increase was primarily driven from the write-down of engine values in our consignment program and losses associated with one MD-87 aircraft we permanently grounded during the quarter and the disposal of one engine.

Other (Income) Expense

Other (income) expense increased from a $0.3 million net other expense for the three months ended June 30, 2010 to $1.8 million net other expense for the same period in 2011.  The increase was due to a $1.6 million increase in interest expense for the second quarter in 2011 associated with the $125.0 million borrowed under the Term Loan in March 2011.

Income Tax Expense

Our effective income tax rate was 36.7% for the three months ended June 30, 2011compared to 36.8% for the same period of 2010.  While we expect our tax rate to be fairly consistent in the near term, it will tend to vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items during interim periods may also affect our tax rates.

Comparison of six months ended June 30, 2011 to six months ended June 30, 2010

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

   
Six Months Ended June 30,
 
   
2011
   
2010
 
Total operating revenue
    100.0 %     100.0 %
Operating expenses:
               
Aircraft fuel
    42.1       35.4  
Salary and benefits
    15.4       15.6  
Station operations
    8.4       9.2  
Maintenance and repairs
    9.2       8.1  
Sales and marketing
    2.7       2.7  
Aircraft lease rentals
    0.2       0.3  
Depreciation and amortization
    5.1       5.0  
Other
    4.6       4.6  
Total operating expenses
    87.7 %     81.0 %
Operating margin
    12.3 %     19.0 %

Operating Revenue

Our operating revenue increased 16.5% to $393.7 million for the six months ended June 30, 2011 from $338.0 million for the same period in 2010 primarily driven by a 13.3% increase in our total average fare from $111.88 to $126.77, a 2.9% increase in scheduled service passengers and a 2.3% increase in departures.  We believe stronger travel demand, changes in our pricing strategy and aggressive capacity management contributed to the strength in total average fare.

Scheduled service revenue.  Scheduled service revenue increased 20.2% to $261.8 million for the six months ended June 30, 2011, from $217.9 million in the same period of 2010.  The increase was primarily driven by a 16.8% increase in the scheduled service average base fare for the six months ended June 30, 2011 compared to the same period of 2010, along with a 2.9% increase in the number of scheduled service passengers.

 
17

 
Ancillary revenue.  Ancillary revenue increased 8.5% to $106.6 million for the six months ended June 30, 2011 up from $98.2 million in the same period of 2010, driven by a 2.9% increase in scheduled service passengers and a 5.5% increase in ancillary revenue per scheduled passenger from $34.77 to $36.68.  The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

   
Six months ended
       
   
June 30,
       
   
2011
   
2010
   
% Change
 
Air-related charges
  $ 31.42     $ 30.49       3.1%  
Third party products
    5.26       4.28       22.9%  
Total ancillary revenue per scheduled service passenger
  $ 36.68     $ 34.77       5.5%  

The following table details the calculation of ancillary revenue from third party products:

   
Six months ended
       
   
June 30,
       
(in thousands)
 
2011
   
2010
   
% Change
 
Gross ancillary revenue - third party
  $ 56,084     $ 48,349       16.0%  
Cost of goods sold
    (38,362 )     (33,977 )     12.9%  
Transaction costs (a)
    (2,442 )     (2,278 )     7.2%  
Ancillary revenue - third party products
  $ 15,280     $ 12,094       26.3%  
As percent of gross ancillary revenue - third party
    27.2 %     25.0 %   2.2 pp  
 

(a)   Includes credit card fees and travel agency commissions

During the six months ended June 30, 2011, we generated gross revenue of $56.1 million from third party products, which resulted in net revenue of $15.3 million.  Third party products increased on a per-passenger basis primarily as a result of increased sales of hotel rooms and margin expansion as compared to the same period in the prior year.

Fixed fee contract revenue.  Fixed fee contract revenue was relatively flat year-over-year with $21.5 million during the six months ended June 30, 2011 compared to $21.2 million for the same period of 2010.  The flatness in fixed fee contract revenue was primarily due to decreased block hours flown under our fixed fee flying agreement with Caesars from 4,006 block hours in the six months ended June 30, 2010 to 2,810 block hours for the same period of 2011 offset by an increase in other fixed fee flying programs and ad-hoc flying.

Other revenue. We generated other revenue of $3.8 million for the six months ended June 30, 2011 compared to $0.7 million in the same period of 2010 primarily from lease revenue for aircraft and flight equipment.  In the first quarter of 2011, we leased three Boeing 757-200 aircraft to third parties on a short term basis.  The expected return dates of these aircraft, under their respective leases, are through the third quarter of 2012.

Operating Expenses

Our operating expenses increased by 26.1% to $345.1 million for the six months ended June 30, 2011 compared to $273.7 million in the same period of 2010. We primarily evaluate our expense management by comparing our costs per passenger across different periods which enable us to assess trends in each expense category. The following table presents Operating expense per passenger for the indicated periods.

   
Six Months Ended
June 30,
   
Percentage
 
   
2011
   
2010
   
Change
 
Aircraft fuel
  $ 53.43     $ 40.14       33.1 %  
Salary and benefits
    19.59       17.67       10.9    
Station operations
    10.65       10.46       1.8    
Maintenance and repairs
    11.72       9.21       27.3    
Sales and marketing
    3.44       3.09       11.3    
Aircraft lease rentals
    0.21       0.36       (41.7 )  
Depreciation and amortization
    6.47       5.72       13.1    
Other
    5.82       5.20       11.9    
Operating expense per passenger
  $ 111.33     $ 91.85       21.2 %  
Operating expense per passenger, excluding fuel
  $ 57.90     $ 51.71       12.0 %  

 
18

 
The following table presents unit costs, defined as Operating CASM, and Operating CASM, excluding fuel, for the indicated periods.

   
Six Months
Ended June 30,
   
Percentage
 
   
2010
   
2009
   
Change
 
Aircraft fuel
    5.19 ¢     3.79 ¢     40.9 %  
Salary and benefits
    1.90       1.66       (1.2 )  
Station operations
    1.03       0.99       3.1    
Maintenance and repairs
    1.14       0.87       2.4    
Sales and marketing
    0.33       0.29       (9.4 )  
Aircraft lease rentals
    0.02       0.03          
Depreciation and amortization
    0.63       0.54       8.0    
Other
    0.56       0.49       28.9    
Operating expense per ASM (CASM)
    10.80 ¢     8.66 ¢     16.7 %  
CASM, excluding fuel
    5.62 ¢     4.88 ¢     15.2 %  

Our CASM, excluding fuel, increased 15.2%, primarily from increases in maintenance and repairs expense, salary and benefits expense and losses from the disposal of one MD-87 aircraft and impairment of engine values in our consignment program. A 3.6% reduction in average departures per aircraft per day and 1.8% decrease in system average stage length also contributed to flat ASMs and an increase in CASM, excluding fuel.

Aircraft fuel expense.  Aircraft fuel expense increased $46.1 million or 38.5% to $165.6 million for the six months ended June 30, 2011 up from $119.6 million in the same period of 2010, primarily driven by 36.3% increase in the system average cost per gallon from $2.23 to $3.04.  The expansion of crack spreads for jet fuel continued to impact our system average cost per gallon during the first six months of 2011.  System departure growth of 2.5% resulted in an increase in gallons consumed to 54.4 million from 53.7 million.

Salary and benefits expense.  Salary and benefits expense increased 15.4% to $60.7 million for the six months ended June 30, 2011 up from $52.7 million in the same period of 2010.  Our salary and benefits expense per full-time equivalent employee increased 21.3% year-over-year primarily as a result of our new pilot and flight attendant compensation agreements which went into effect in May and July 2010, respectively, along with higher medical insurance premiums and increased 401(k) contributions and employer taxes.  The number of full-time equivalent employees decreased from 1,639 at June 30, 2010 to 1,559 at June 30, 2011 driven by the outsourcing of our station operations in Las Vegas.

Station operations expense.  Station operations expense increased 5.9% to $33.0 million for the six months ended June 30, 2011 compared to $31.2 million in the same period of 2010 as a result of a 2.5% increase in system departures and a 3.3% increase in station operations expense per departure.  The increase in station operations expense per departure was attributable to increases in ground handling fees at several airports where we operate along with outsourcing of our station operations in Las Vegas.  Our station operations expense per departure in Las Vegas is offset by salary and benefits expense from a lower number of full-time equivalent employees.

Maintenance and repairs expense.  Maintenance and repairs expense increased 32.5% to $36.4 million for the six months ended June 30, 2011 compared to $27.4 million in the same period of 2011.  The increase was primarily a result of increased engine overhauls and repairs of $3.0 million during the six month period compared to the prior year, along with the repair of rotable parts and usage of expendable parts associated with an increase in average number of our aircraft in service to 51.0 for the six months ended June 30, 2011 compared to 47.1 in the same period of 2010.  The increase in engine overhauls and repairs was driven by a new MD-80 engine maintenance strategy which began in late 2010.  Prior to that, fewer engine overhauls were performed and instead were replaced with engines acquired in the secondary market.

Sales and marketing expense.  Sales and marketing expense increased 15.8% to $10.7 million for the six months ended June 30, 2011 compared to $9.2 million for the same period of 2010.  The increase was primarily due to higher credit card transaction costs associated with the 16.5% increase in scheduled service revenue and ancillary revenue and an increase in advertising expenses.

 
19

 
Aircraft lease rentals expense.  Aircraft lease rentals decreased to $0.6 million in the six months ended June 30, 2011 from $1.1 million in the same period of 2010.  Two aircraft were under operating lease agreements during the six months ended June 30, 2011 while four aircraft were under operating lease agreements for the same period of 2010.

Depreciation and amortization expense.  Depreciation and amortization expense increased to $20.0 million for the six months ended June 30, 2011 from $17.0 million for the same period of 2010, an increase of 17.6%, primarily driven by a 8.3% increase in the average number of operating aircraft and the additional depreciation expense from three of our Boeing 757-200 aircraft.  We leased three Boeing 757-200 aircraft to third parties during the first quarter of 2011.
 
Other expense.  Other expense increased by 16.5% to $18.0 million for the six months ended June 30, 2011 compared to $15.5 million in the same period of 2010.  The increase was primarily driven from losses associated with one MD-87 aircraft we permanently grounded during the second quarter and the disposal of one engine, along with the write-down of engine values in our consignment program.

Other (Income) Expense

Other (income) expense increased from a $0.8 million net other expense for the six months ended June 30, 2010 to $2.4 million net other expense for the same period in 2011.  The increase was due to a $1.6 million increase in interest expense for the six months ended June 30, 2011 associated with the $125.0 million borrowed under the Term Loan in March 2011.

Income Tax Expense

Our effective income tax rate was 37.0% for the six months ended June 30, 2011 compared to 36.8% for the same period of 2010.  While we expect our tax rate to be fairly consistent in the near term, it will tend to vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items during interim periods may also affect our tax rates.
 
Comparative Consolidated Operating Statistics

The following tables set forth our operating statistics for the three and six months ended June 30, 2011 and 2010:

   
Three months ended June 30,
   
Percent
 
   
2011
   
2010
   
Change*
 
                     
Operating statistics (unaudited):
                   
Total system statistics:
                   
Passengers
    1,559,619       1,542,110       1.1    
Revenue passenger miles (RPMs) (thousands)
    1,401,610       1,418,387       (1.2 )  
Available seat miles (ASMs) (thousands)
    1,576,791       1,601,126       (1.5 )  
Load factor
    88.9 %     88.6 %     0.3    
Operating revenue per ASM (RASM)** (cents)
    12.71       10.51       20.9    
Operating expense per ASM (CASM) (cents)
    11.40       8.76       30.1    
Fuel expense per ASM (cents)
    5.48       3.89       40.9    
Operating CASM, excluding fuel (cents)
    5.92       4.87       21.6    
Operating expense per passenger
  $ 115.24     $ 90.96       26.7    
Fuel expense per passenger
  $ 55.43     $ 40.35       37.4    
Operating expense per passenger, excluding fuel
  $ 59.81     $ 50.61       18.2    
Departures
    12,430       12,364       0.5    
Block hours
    28,277       28,619       (1.2 )  
Average stage length (miles)
    848       869       (2.4 )  
Average number of operating aircraft during period
    51.0       47.9       6.5    
Total aircraft in service at end of period
    51       50       2.0    
Average departures per aircraft per day
    2.7       2.8       (3.6 )  
Average block hours per aircraft per day
    6.1       6.6       (7.6 )  
Full-time equivalent employees at end of period 
    1,559       1,639       (4.9 )  
Fuel gallons consumed (thousands)
    26,868       27,315       (1.6 )  
Average fuel cost per gallon
  $ 3.22     $ 2.28       41.2    

 
20

 
Scheduled service statistics:
                   
Passengers
    1,462,126       1,468,939       (0.5 )  
Revenue passenger miles (RPMs) (thousands)
    1,323,051       1,356,693       (2.5 )  
Available seat miles (ASMs) (thousands)
    1,438,659       1,477,455       (2.6 )  
Load factor
    92.0 %     91.8 %     0.2    
Departures
    10,789       10,824       (0.3 )  
Average passengers per departure
    136       136          
Block hours
    25,470       25,953       (1.9 )  
Yield (cents)
    10.08       7.92       27.3    
Scheduled service revenue per ASM (PRASM) (cents)
    9.27       7.27       27.5    
Total ancillary revenue per ASM** (cents)
    3.77       3.43       9.9    
Total revenue per ASM (TRASM)** (cents)
    13.04       10.70       21.9    
Average fare — scheduled service
  $ 91.17     $ 73.15       24.6    
Average fare — ancillary air-related charges
  $ 31.45     $ 29.61       6.2    
Average fare — ancillary third party products
  $ 5.68     $ 4.87       16.6    
Average fare — total
  $ 128.30     $ 107.63       19.2    
Average stage length (miles)
    889       910       (2.3 )  
Fuel gallons consumed (thousands)
    24,329       24,756       (1.7 )  
Average fuel cost per gallon
  $ 3.47     $ 2.42       43.4    
Percent of sales through website during period
    87.9 %     88.3 %     (0.4 )  
 

* Except load factor and percent of sales through website, which is percentage point change
** Various components of these measures do not have a direct correlation to ASMs.  These figures are provided on a per ASM basis so as to facilitate comparison with airlines reporting revenues on a per ASM basis.

   
Six months ended June 30,
   
Percent
 
   
2011
   
2010
   
Change*
 
                     
Operating statistics (unaudited):
                   
Total system statistics:
                   
Passengers
    3,100,240       2,979,569       4.0    
Revenue passenger miles (RPMs) (thousands)
    2,851,721       2,792,143       2.1    
Available seat miles (ASMs) (thousands)
    3,194,577       3,158,312       1.1    
Load factor
    89.3 %     88.4 %     0.9    
Operating revenue per ASM (RASM)** (cents)
    12.32       10.70       15.1    
Operating expense per ASM (CASM) (cents)
    10.80       8.66       24.7    
Fuel expense per ASM (cents)
    5.19       3.79       36.9    
Operating CASM, excluding fuel (cents)
    5.62       4.88       15.2    
Operating expense per passenger
  $ 111.33     $ 91.85       21.2    
Fuel expense per passenger
  $ 53.43     $ 40.14       33.1    
Operating expense per passenger, excluding fuel
  $ 57.90     $ 51.71       12.0    
Departures
    24,667       24,064       2.5    
Block hours
    57,644       56,863       1.4    
Average stage length (miles)
    866       882       (1.8 )  
Average number of operating aircraft during period
    51.0       47.1       8.3    
Total aircraft in service end of period
    51       50       2.0    
Average departures per aircraft per day
    2.7       2.8       (3.6 )  
Average block hours per aircraft per day
    6.2       6.7       (7.5 )  
Full-time equivalent employees at period end
    1,559       1,639       (4.9 )  
Fuel gallons consumed (thousands)
    54,414       53,718       1.3    
Average fuel cost per gallon
  $ 3.04     $ 2.23       36.3    

 
21

 
Scheduled service statistics:
                   
Passengers
    2,906,324       2,825,549       2.9    
Revenue passenger miles (RPMs) (thousands)
    2,683,861       2,664,659       0.7    
Available seat miles (ASMs) (thousands)
    2,903,687       2,904,001       0.0    
Load factor
    92.4 %     91.8 %     0.6    
Departures
    21,392       20,905