10-K 1 v177281_10k.htm


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

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

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

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

Securities registered pursuant to Section 12(g) of the Act:
 
Common Stock, par value $.001 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 
Yes o No x 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). £  Yes   £   No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of ”large accelerated filer," "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
(Do not check if a smaller reporting company)
 Smaller reporting company o

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

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

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



 
TABLE OF CONTENTS

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

 
Forward-Looking Statements

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

3

 
PART I
 
ITEM 1. BUSINESS

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

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

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

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

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

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

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

4

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

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

Fixed-fee Routes

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

Branded Routes

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

routes

5

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

8

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

Business Strategy

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

Branded Operations

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

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

Fixed-Fee Operations

Code-Share Agreements

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

US Airways Code-Share Agreements

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

9

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

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

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

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

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

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

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

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

The Delta Code-Share Agreements

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

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

10

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

The United Code-Share Agreements

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

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

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

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

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

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

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

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

11

 
Competition and Economic Conditions

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

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

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

Regulatory Matters
 
Government Regulation

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

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

12

 
Environmental Regulation

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

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

Safety and Health Regulation

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

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

Security Regulation

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

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

Additional Information

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

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


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

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

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

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

15

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are vulnerable to increases in aircraft fuel costs.

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

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

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

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

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

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

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

19

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

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

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

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

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

The lack of marketing alliances could harm our business.

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

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

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

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

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

Risks Associated with the Airline Industry

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

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

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

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

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

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

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

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

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

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

 
The airline industry is heavily regulated.

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

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

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

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

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

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

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

23

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

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

Risks Related To Our Common Stock

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

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

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

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None
 
25

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

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

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

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

Ground Operations and Properties

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

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

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

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

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

27

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

Performance Graph
 
chart

28

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

Unregistered Sales of Equity Securities

None

29

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

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

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

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

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

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

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

Overview

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

 
Operating Expenses

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

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

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

Promotion and Sales

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


Goodwill Impairment

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

Other Impairment Charges

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

Gain on Bargain Purchase

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

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

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


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

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


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


The following table sets forth information regarding the Company’s revenues and expenses for the years ended December 31, 2009, 2008, and 2007. Individual expense components are also expressed in cents per available seat mile (“ASM”).
 
Consolidated Results of Operations
 
Years ended December 31,
 
   
2009
   
2008
   
2007
 
   
Amount
   
Cents
per ASM
   
Amount
   
Cents
per ASM
   
Amount
   
Cents
per ASM
 
   
(in thousands)
         
(in thousands)
         
(in thousands)
       
OPERATING REVENUES:
                                   
Fixed-fee service
  $ 1,180,209           $ 1,462,211           $ 1,274,607        
Passenger service
    389,653             -             -        
Cargo and other
    72,356             17,544             18,070        
Total operating revenues
    1,642,218             1,479,755             1,292,677        
                                           
OPERATING EXPENSES:
                                         
Wages and benefits
    342,364       2.00       252,336       1.91       226,521       1.97  
Aircraft fuel
    236,620       1.38       327,791       2.48       296,573