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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 March 31, 2010

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)

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

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

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

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

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

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

The number of shares of the registrant’s common stock outstanding as of the close of business on May 3, 2010 was 19,917,510.

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Allegiant Travel Company

Form 10-Q

March 31, 2010

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ALLEGIANT TRAVEL COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share amounts)

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

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ALLEGIANT TRAVEL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

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

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ALLEGIANT TRAVEL COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

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

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ALLEGIANT TRAVEL COMPANY

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 provides 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, 2009, 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.

Comprehensive Income:  Comprehensive income is comprised of changes in the fair value of short-term investments and marketable securities deemed to be available-for-sale by management.

Reclassifications:  Certain reclassifications have been made to the prior period’s financial statements to conform to 2010 classifications.  These reclassifications had no effect on the previously reported net income.  In particular, the Company’s condensed consolidated statements of income reflect additional detail presented within operating revenue of the ancillary revenue categories of air-related charges and third party products.

Note 2 — Newly Issued Accounting Pronouncements

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.  The Company is currently evaluating the requirements of this pronouncement and has not yet determined the impact and likely timing of such impact that this standard will have on its consolidated financial statements.

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

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Fair Value Measurements Disclosures,” which amends Subtopic 820-10 of the FASB Accounting Standards Codification to require new disclosures for fair value measurements and provides clarification for existing disclosure requirements. More specifically, this update will require (a) an entity to disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the level of disaggregation used for classes of assets and liabilities measured

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at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. Certain provisions requiring new disclosures and clarifications of existing disclosures of the guidance are effective for interim and reporting periods beginning after December 15, 2009. Certain other provisions for new disclosures are effective for fiscal years beginning after December 15, 2010.  Adoption of those provisions of the accounting guidance that became effective for this interim period presented has resulted in new fair value disclosures.  See related fair value disclosures in Note 8 — Fair Value Measurements.

Note 3 — Income Taxes

For the three months ended March 31, 2010, the Company did not have any material unrecognized tax benefits.  The Company estimates that no significant unrecognized tax benefits will be recorded within the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  There was no significant accrued interest at March 31, 2010.  No penalties were accrued at March 31, 2010.

Note 4 — Stockholders’ Equity

In January 2010, the Board of Directors increased to $25,000 the remaining authority under the Company’s existing share repurchase program (share repurchase program approved in January 2009) to acquire the Company’s stock through open market purchases.  During the three months ended March 31, 2010, the Company repurchased 55,602 shares through open market purchases at an average cost of $51.29 per share for a total expenditure of $2,852.  No share repurchases were made under the plan during the first quarter of 2009.  As of March 31, 2010, the Company had a total of $22,148 in unused stock repurchase authority remaining under the plan.

Note 5 — Earnings Per Share

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

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Note 6 — Long-Term Debt

The carrying value of the Company’s debt approximates fair value. These fair value estimates were based on the discounted amount of future cash flows using the Company’s current incremental rate of borrowing for similar liabilities.

Note 7 — 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 comprehensive income in stockholders’ equity. Short-term investments consisted of the following:

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 months ended March 31, 2010 or 2009.

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

Short-term investments had the following maturities as of March 31, 2010:

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Note 8 — 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 March 31, 2010, 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 and U.S. government corporation and agency debt securities 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 March 31, 2010 and December 31, 2009 were as follows (in thousands):

There were no significant transfers between Level 1 and Level 2 assets for the three month periods ended March 31, 2010 and 2009.

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Note 9 — Financial Instruments and Risk Management

Airline operations are inherently dependent on energy, and are therefore impacted by changes in jet fuel prices. Aircraft fuel expense represented approximately 43.0% and 34.2% of the Company’s operating expenses for the three months ended March 31, 2010 and 2009, respectively.

Prior to 2008, the Company entered into financial derivative contracts to manage a limited portion of its risk of fuel price volatility.  These financial derivative instruments were not purchased or held for trading purposes. The Company suspended this hedging strategy in 2007 and the last contract settled in January 2008.  As of March 31, 2010 and 2009, the Company had no fuel derivative instruments.

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.

The Company entered into purchase agreements for 20 MD-80 aircraft during the fourth quarter of 2009.  The Company placed one of these aircraft into service during the first quarter of 2010.  The Company expects to place 14 of the remaining aircraft into service by the end of 2011, with five aircraft to be used for spare engines and rotable parts.    As of March 31, 2010, the remaining contractual obligations under these purchase agreements total $19,025 to be paid during 2010 upon delivery of the remaining aircraft.

In March 2010, the Company entered into a purchase contract for six Boeing 757 aircraft with delivery dates from 2010 to 2011.  The Company expects two of these aircraft to enter operating service in fourth quarter 2010 with the remaining four aircraft to be added to the Company’s operating fleet in 2011 and 2012.  As of March 31, 2010, the remaining contractual obligations under the purchase agreement will be paid upon delivery of the aircraft, with $9,775 to be paid during 2010 and $29,325 to be paid during 2011.

Note 11 — Subsequent Events

On April 26, 2010, our Board of Directors declared a one-time cash dividend of $0.75 per share on our outstanding common stock. This dividend will be payable on June 1, 2010, to stockholders of record on May 14, 2010.  The Company estimates the total payment of the dividend to be approximately $14,938 based on the shares of our outstanding common stock as of the close of business on May 3, 2010.

During April 2010, the Company repurchased 190,562 shares through open market purchases under its existing share repurchase program at an average cost of $52.28 per share for a total expenditure of $9,963. 

On May 3, 2010, 162,500 shares of our common stock were issued through the exercise of warrants.  These warrants were issued to a placement agent in connection with the private placement of equity in 2005.

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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 month periods ended March 31, 2010 and 2009.  Also discussed is our financial position as of March 31, 2010 and December 31, 2009. 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, 2009.  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.

OVERVIEW

We are a leisure travel company focused on residents of small cities in the United States.  We operate a low-cost passenger airline allowing us to sell air travel both on a stand-alone basis and bundled with hotel rooms, rental cars and other travel related services.  Our business model emphasizes low operating costs, diversified revenue sources, and the transport of passengers from small cities to leisure destinations.  Our route network, pricing philosophy, product offering and advertising are all intended to appeal to leisure travelers and make it attractive for them to purchase air travel and related services from us.

We provide limited frequency nonstop scheduled service to leisure destinations. We provide service primarily to Las Vegas (Nevada), Orlando (Florida), Phoenix (Arizona), Tampa/St. Petersburg (Florida), Los Angeles (California) and Ft. Lauderdale (Florida), six of the most popular leisure destinations in the United States, along with limited service to other leisure destinations.

We fly charter (“fixed fee”) services under long-term contracts (primarily for Harrah’s Entertainment Inc.) and on an on-demand “ad-hoc” basis.

First quarter 2010 results

During the first quarter of 2010, we earned net income of $22.6 million on operating revenues of $169.6 million and achieved a 21.4% operating margin.  We achieved these results despite a 71.8% increase in fuel expense driven by an increase in our system average fuel cost per gallon from $1.47 for the first quarter of 2009 to $2.17 for the same period of 2010.  Our operating revenue increased 19.4%, as a result of a 10.3% increase in scheduled service departures, a 9.2% increase in our scheduled service air fare and a 15.4% increase in ancillary revenue. Our scheduled service air fare increased from $74.52 to $81.41 year-over-year while our ancillary air fare increased from $34.09 to $35.08 in the same period.

We generated $68.8 million in net cash from operating activities during the quarter, and despite capital expenditures related to the expansion of our fleet, principal debt repayments, and stock repurchases, we ended the quarter with $249.2 million in unrestricted cash and short-term investments, up from $231.5 million as of December 31, 2009.

In March 2010, we entered into a purchase contract for six Boeing 757 aircraft with delivery dates from 2010 to 2011. These aircraft will provide us the ability to serve longer haul markets, including possible service to Hawaii after we receive regulatory approval for extended over water operations.  We took delivery of two of these aircraft during the first quarter, we expect to receive our operating authority by the end of the year and to put the aircraft in service shortly thereafter. The remaining four aircraft are expected to be added to our operating fleet in 2011 and 2012.

Fleet

During the first quarter of 2010, we placed one MD-80 aircraft into service which increased our operating fleet to 47 aircraft at March 31, 2010.  The following table sets forth the number and type of aircraft in service and operated by us at the dates indicated:

(a)          Does not include aircraft owned, but not yet added to our operating fleet.

(b)         Includes two aircraft subject to capital leases for each of the periods presented.

(c)          In February 2010, we exercised purchase options on two aircraft under operating leases and expect to take ownership of the aircraft in November 2010.

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In April 2010, we placed an additional MD-83 aircraft into service in conjunction with the permanent withdrawal of one MD-80 aircraft (130-seat MD-87) from our operating fleet.  Our 130-seat MD-87 aircraft are exclusively used for flying fixed fee programs and this withdrawal has reduced the number of this type of aircraft in our operating fleet to three aircraft.  We expect to place three additional MD-83 aircraft, acquired from the recent purchase agreements we entered into in the fourth quarter of 2009, into our operating fleet by the end of the second quarter of 2010 which will increase our operating fleet to 50 operating aircraft.

Network

As of March 31, 2010, we offered scheduled service from 57 small cities on 134 routes primarily into our six major leisure destinations. Changes in our route network during the first quarter of 2010 were primarily a result of shifting routes from ten of our small cities from Orlando Sanford International Airport to Orlando International Airport.  The following shows the number of destinations and small cities served as of the dates indicated:

Trends and Uncertainties

The economic problems of the past two years are still evident. During 2009, consumers substantially reduced their outlays resulting in a significant reduction in air fares and air travel demand.  We are seeing improvements and experienced some recovery in the first quarter of 2010 in our scheduled service base fare, which increased year-over-year from $74.52 to $81.41.  This represented the second quarter in a row with a sequential increase in scheduled service base fare.   Ancillary revenue per passenger also increased sequentially by $2.30, from $32.78 for the fourth quarter of 2009 to $35.08 for the first quarter of 2010.  Although these recent unit revenue trends reflect improvements in the demand for airline travel, it is uncertain whether the recovery in fares will be sustained in future quarters.

Aircraft fuel expense in the first quarter of 2010 at 43.0% continues to represent a significant portion of our overall operating expenses.  Our average fuel cost per gallon was $2.17 during the first quarter of 2010 compared to $1.47 for the same period of 2009.  Fuel availability is subject to periods of market surplus and shortage and is affected by demand for heating oil, gasoline and other petroleum products. The cost of fuel cannot be predicted with any degree of certainty and further fuel cost volatility will most likely have a significant impact on our future results of operations.

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Our new operational base at Grand Rapids, Michigan opened in April 2010. The aircraft base in Grand Rapids is our second small city base. We believe basing aircraft in a small city provides us with additional scheduling options including better departure times and the ability to facilitate service to destinations where bases are currently not in place. We currently operate routes from Grand Rapids to five of our major leisure destinations, as well as seasonal service to Myrtle Beach, South Carolina, which began in April 2010. Our seasonal service to Myrtle Beach from two other small cities proved to be successful in 2009 and we have scheduled expansion of this service during 2010 as part of our capacity growth for the summer season.

Looking forward, we expect moderate growth for 2010 with capacity growth largely attributable to new routes being added to our network, utilization of our new aircraft bases and an increase in seasonal flying.  We have made a number of key investments to provide for future growth, including purchasing additional MD-80 aircraft, a contract for the purchase of six 757s for our planned Hawaii service, and the continuing development of a new automation platform.  As we have in the past, we will continue to quickly adjust and adapt our business in response to changing economic conditions and new opportunities to achieve desirable margins.

RESULTS OF OPERATIONS

Comparison of three months ended March 31, 2010 to three months ended March 31, 2009

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

We recorded total operating revenue of $169.6 million, income from operations of $36.2 million and net income of $22.6 million for the first quarter of 2010.  By comparison, for the same period in 2009, we recorded total operating revenue of $142.1 million, income from operations of $44.5 million and net income of $28.2 million.  We achieved a 21.4% operating margin for the first quarter of 2010 with system growth in departures of 10.1% and available seat miles (“ASMs”) of 16.9%, despite a 47.6% increase in system average fuel cost per gallon from $1.47 for the first quarter of 2009 to $2.17 for the same period of 2010.

Operating Revenue

Our operating revenue increased 19.4% to $169.6 million in the first quarter of 2010 from $142.1 million for the same period of 2009 primarily due to a 22.4% increase in scheduled service revenue and a 16.8% increase in ancillary revenue from air-related charges.  The scheduled service revenue and ancillary revenue from air-related charges increases were primarily driven by a 12.1% increase in the number of scheduled service passengers along with increases in scheduled service base fare and charges for certain ancillary revenue items.

System ASMs increased by 16.9% driven by a 10.1% increase in departures and a 6.2% increase in system average stage length.  We managed an increase in system operating revenue per ASM (“RASM”) of 2.1% as a result of a year-over-year increase in scheduled service total average fare from $108.61 to $116.49, offset, in part, by the effect of a longer stage length.

Scheduled service revenue.  Scheduled service revenue increased 22.4% to $110.4 million in the first quarter of 2010, from $90.2 million in the same period of 2009.  The increase was a result of a 12.1% increase in the number of scheduled service passengers and an increase in the scheduled service total average fare from $108.61 in the first quarter of 2009 to $116.49 in the same period of 2010.  Passenger growth was driven primarily as a result of a 10.3% year-over-year increase in departures from 9,141 to 10,081.  Significant contributors to the departure growth were the addition of 589 departures attributable to our new service to Los

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Angeles not operated in the first quarter of 2009, an increase of 401 departures from route expansion to our Phoenix market, and increased frequency of flying to the San Francisco Bay area, San Diego and Punta Gorda, Florida.  In particular, the first quarter of 2009 did not reflect a full quarter of flying to Punta Gorda, Florida, as scheduled service began in March 2009 from two small cities.  We offered service into Phoenix on 20 routes at March 31, 2010 compared to 15 routes at March 31, 2009.  Departure growth was partially offset by a decrease in departures to our major leisure destinations other than Phoenix and Los Angeles.  Our route network consisted of 134 routes at March 31, 2010, an increase from 116 routes at March 31, 2009.

Ancillary revenue.  Ancillary revenue increased 15.4% to $47.6 million in the first quarter of 2010 up from $41.3 million in the same period of 2009, driven by a 12.1% increase in scheduled service passengers and a 2.9% increase in ancillary revenue per scheduled passenger from $34.09 to $35.08.  The following table details ancillary revenue per scheduled service passenger from air-related charges and third party products:

On a per-passenger basis, 89.6% and 88.5% of our total ancillary revenue consists of air-related charges for the first quarters of 2010 and 2009, respectively. The increase in air-related charges per-passenger was primarily attributable to higher baggage fees as we increased fees to comparable industry levels.  Our baggage fees currently range between $15 and $25 per checked bag, depending on the flight segment.  Third party products declined on a per passenger basis (but increased slightly in absolute terms) due to Las Vegas contributing a smaller percentage of our total passengers. Our third party products revenue per passenger for Las Vegas is higher than our other destinations due to large volume of hotel rooms we sell in Las Vegas.

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:

(a)   Includes credit card fees and travel agency commissions

During the first quarter 2010, we generated gross revenue of $22.5 million from third party products, which resulted in net revenue of $4.9 million. The majority of the gross revenue was generated from the sale of hotel room nights at our leisure destinations packaged to our customers with scheduled air service.  Despite the majority of these hotel rooms sold being in the Las Vegas market, we achieved a significant increase in the sale of hotel rooms in our other leisure destinations in the first quarter of 2010 compared to the same period in 2009.  We believe our continued efforts in software enhancements and additional product offerings, along with our loyal customer base, could result in meaningful long-term revenue growth in the sale of third party products.

Fixed fee contract revenue.  Fixed fee contract revenue increased 11.5% to $11.3 million in the first quarter of 2010 from $10.1 million in the same period of 2009. The increase in fixed fee contract revenue was primarily due to increased block hours flown under our fixed fee flying agreement with Harrah’s from 1,735 in the first quarter of 2009 to 2,047 for the same period of 2010.  For the periods presented, the change in mix of our other fixed fee flying programs and ad-hoc flying had minimal impact on our fixed fee contract revenue.

Other revenue.  We generated other revenue of $0.3 million in the first quarter of 2010 compared to $0.6 million in the same period of 2009 primarily from flight equipment leased to third parties.

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Operating Expenses

Our operating expenses increased 36.6% to $133.4 million in 2010 compared to $97.6 million in 2009 largely due to a 71.8% increase in our fuel expense.

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

Despite an increase of 6.2% in system average stage length and a 6.3% reduction in departures per average aircraft, operating expense per passenger, excluding fuel, increased only 6.6% from $49.62 to $52.89.  The increase in average fuel cost per gallon of 47.6% and the longer stage length resulted in a $14.11 increase in fuel expense per passenger from $25.80 to $39.91.

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

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

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Aircraft fuel expense.  Aircraft fuel expense increased 71.8% to $57.4 million in the first quarter of 2010, up from $33.4 million in the same period of 2009, primarily driven by a substantial increase in the system average cost per gallon from $1.47 to $2.17.   System departure growth of 10.1% and a 6.2% increase in average stage length for the first quarter of 2010 resulted in the use of 15.8% more gallons of fuel, which increased from 22.8 million consumed to 26.4 million consumed.  This also contributed to the aircraft fuel expense increase for the period.

Salary and benefits expense.  Salary and benefits expense increased 10.6% to $25.9 million in the first quarter of 2010 from $23.4 million in the same period of 2009.  Excluding accrued employee bonus expense and stock compensation expense, salaries and benefits increased 20.7% attributable to a 12.9% increase in full-time equivalent employees and a 6.7% increase in the salary and benefits expense per full-time equivalent.  Our salary and benefits expense per full-time equivalent increase was partially attributable to higher medical benefit premiums in the first quarter of 2010.  The increase in our full-time equivalent employees was driven by a 17.3% increase in the average number of our aircraft in service from 39.4 aircraft during the first quarter of 2009 to 46.2 aircraft during the same period of 2010.  We employed approximately 1,602 full-time equivalent employees at March 31, 2010, compared to 1,419 full-time equivalent employees at March 31, 2009.  Our number of full-time equivalents per average operating aircraft decreased from 36 for the first quarter of 2009 to 35 for the same period of 2010.  Accrued employee bonus expense decreased by 33.1% driven by the year-over-year decrease in first quarter operating income.

Station operations expense.  Station operations expense increased 19.4% to $15.7 million in the first quarter of 2010 compared to $13.1 million in the same period of 2009 as a result of a 10.1% increase in system departures and an 8.0% increase in station operations expense per departure.  The increase in station operations expense per departure was largely due to start up expenses in the opening of our operational base at Orlando International Airport in February 2010 and increases in airport fees at several airports where we operate.

Maintenance and repairs expense.  Maintenance and repairs expense increased 14.7% to $12.8 million in the first quarter of 2010 compared to $11.1 million in the same period of 2009.  The increase was attributable to the costs associated with increased repair of rotable parts and usage of expendable parts as a result of the growth of our fleet as the average number of aircraft in service increased from 39.4 aircraft during the first quarter of 2009 to 46.2 aircraft during the same period of 2010.   While we performed the same number of scheduled heavy maintenance checks during the first quarter of 2010 as in the prior year, a broader work scope for the prior year checks, in accordance with our maintenance program, resulted in less expensive checks during the first quarter of 2010 and a partial offset to the overall maintenance and repairs expense increase.

Sales and marketing expense.  Sales and marketing expense increased 13.8% to $5.1 million in the first quarter of 2010 compared to $4.5 million in the same period of 2009, primarily driven by an increase in credit card discount fees associated with the 20.2% increase in scheduled service and ancillary revenue.

Aircraft lease rentals expense.  Aircraft lease rentals expense was $0.5 million in the first quarter of 2010 compared to $0.4 million in the same period of 2009.   Four aircraft were under operating lease agreements for the first quarter of 2010 while two aircraft were under operating lease agreements for the same period of 2009.

Depreciation and amortization expense.  Depreciation and amortization expense increased to $8.7 million in the first quarter of 2010 from $6.9 million for the same period of 2009, an increase of 26.3%, as the number of operating aircraft owned (including those leased to a third party) or subject to capital lease, increased by 14.6%, from 41 at March 31, 2009 to 47 at March 31, 2010.  The increase was also attributable to the impact of lowering the residual values of our aircraft, the accelerated depreciation for planned retirement of one MD-87 aircraft and additional depreciation related to non-aircraft equipment purchases during 2009.

Other expense.  Other expense increased by 53.7% to $7.4 million in the first quarter of 2010 compared to $4.8 million in the same period of 2009 due mainly to increased losses from engine dispositions, higher aviation insurance rates which became effective in the fourth quarter of 2009, and increased flight operations and administrative expenses attributable to company growth.  In many situations, the use of spare engines and rotable parts is less expensive than performing maintenance and repairs of existing engines and rotable parts.  Engine dispositions could result from a decision to replace rather than repair engines.

Other (Income) Expense

Other (income) expense was relatively flat, from a net other expense of $0.4 million for the first quarter of 2009, to a net other expense of $0.5 million for the same period of 2010. The increased expense is primarily attributable to a reduction of interest income earned on cash balances in the first quarter of 2010 compared to the same period of 2009 partially offset by a reduction in interest expense due to lower debt balances.

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Income Tax Expense

Our effective income tax rate was 36.8% for the first quarter of 2010 compared to 36.1% for the same period of 2009. The higher effective tax rate for the first quarter of 2010 was largely due to the geographic mix from our flying and the impact this had on the state income tax portion of the tax provision. While we expect our tax rate to be fairly consistent in the near term, it will tend to vary depending on recurring items such as the amount of income we earn in each state and the state tax rate applicable to such income. Discrete items particular to a given year may also affect our tax rates.

Comparative Consolidated Operating Statistics

The following tables set forth our operating statistics for the three months ended March 31, 2010 and 2009: