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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission File Number 001-33166

Allegiant Travel Company

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

The number of shares of the registrant’s common stock outstanding as of the close of business on August 1, 2008 was 20,295,270.

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Allegiant Travel Company

Form 10-Q

June 30, 2008

INDEX

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PART 1. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share amounts)

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

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ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

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

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ALLEGIANT TRAVEL COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, in thousands, except per share amounts)

Note 1 – Summary of Significant Accounting Policies

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

These unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations, and cash flows of the Company for the respective periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto included in the annual report of the Company on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission.

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

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

Reclassifications:  Certain reclassifications have been made to the prior period’s financial statements to conform to 2008 classifications.  These classifications had no effect on the previously reported net income.

Note 2 – Newly Issued Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), Business Combinations (“SFAS 141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined the effect that the adoption of SFAS 141(R) will have on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined the effect that the adoption of SFAS 160 will have on its consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of SFAS 157 (“FSP FAS 157-2”).  The FSP amends SFAS 157, to delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The FSP defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of the FSP. The Company has not yet determined the effect on the

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Company’s consolidated financial statements that adoption of SFAS 157 will have for those items within the scope of the FSP.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133 (“SFAS 161”).  The Statement requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company has not yet determined the effect that SFAS 161 will have on the Company’s consolidated financial statements.

Note 3 – Income Taxes

For the three and six months ended June 30, 2008, the Company did not have any material unrecognized tax benefits.  The Company estimates that no significant unrecognized tax benefits will be recorded within the next twelve months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.  There was no significant accrued interest at June 30, 2008.  No penalties were accrued at June 30, 2008.

The Company files its tax returns as prescribed by the laws of the jurisdictions in which it operates.  Prior to May 2004, the Company elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code wherein the taxable income or loss of the Company was included in the income tax returns of its shareholders.  In May 2004, the Company reorganized as a limited liability company and was therefore taxed as a partnership for federal income tax purposes until the reorganization into a corporation effected at the time of the Company’s initial public offering in December 2006.  Under these previous structures, the Company did not pay federal income tax at the entity level on its taxable income for these periods.  Instead, the members of the limited liability company or shareholders of the Subchapter S corporation were liable for income tax on the taxable income as it affected their tax returns.  The Company was also subject to tax at the entity level in certain states in which it operates.  Deferred income taxes to which the Company was subject under these previous structures were not material.

The Company (or its predecessor entities) is no longer subject to U.S. Federal income tax examinations for years before 2004.  Various state and local tax returns remain open to examination.  The Company believes that any potential assessment resulting from such examinations would be immaterial.

Note 4 – Stockholders’ Equity

On May 24, 2007, the Company sold 156 shares in a public offering.  In conjunction with the public offering, on June 13, 2007, the underwriters exercised their overallotment option to purchase an additional 592 shares from the Company.  The Company received approximately $22,300 in net proceeds from the sale of these shares.

In January 2008, the Board of Directors authorized a share repurchase program to acquire through open market purchases up to $25,000 of the Company’s common stock. As of June 30, 2008, the Company has repurchased 554 shares of the Company’s common stock through open market purchases at an average cost of $28.55 per share for a total expenditure of $15,809.   No share repurchases were made by the Company during the second quarter of 2008.

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Note 5 – Earnings Per Share

The following table sets forth the computation of net income per share, on a basic and diluted basis for the periods indicated:

Note 6 – Long-Term Debt

Long-term debt, including capital lease obligations, consists of the following:

In April 2008, the Company borrowed $18,000 under a loan agreement secured by unencumbered aircraft.  The notes payable issued under the loan agreement bear interest at 6% per annum and are payable in monthly installments through April 2012.

In June 2008, the Company exercised the purchase options for five MD-80 aircraft under capital leases.  In conjunction with the exercise, the Company borrowed and received proceeds of $7,670 secured by two of these aircraft previously subject to capital leases.  The notes payable issued under the loan agreement bear interest at 6.8% per annum and are payable in monthly installments through June 2011.

Note 7 – Investment in Joint Venture

AFH, Inc., a wholly owned subsidiary of Allegiant Travel Company, entered into a joint venture agreement with Orlando Sanford International, Inc. (“OSI”) to handle certain fuel operations for the Orlando Sanford International Airport. The joint

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venture, which began operations in January 2007, is responsible for the purchase and transport of jet fuel to a fuel farm facility owned and operated by OSI, and for the sale of jet fuel to air carriers. In addition, AFH, Inc. is responsible for the administrative functions for the joint venture. The Company accounts for its 50% interest in the joint venture agreement under the equity method. AFH, Inc.’s proportionate allocation of net income is reported in the Company’s consolidated statements of income in Other (income) expense with an adjustment to the recorded investment in the Company’s consolidated balance sheets.

Note 8 – Financial Instruments and Risk Management:

Airline operations are inherently dependent on energy, and are therefore impacted by changes in jet fuel prices. Aircraft fuel expense represented approximately 56.8% and 47.4% of the Company’s operating expenses for the three months ended June 30, 2008 and 2007, respectively.  For the six months ended June 30, 2008 and 2007, aircraft fuel expense represented approximately 55.2% and 46.0%, respectively, of the Company’s operating expenses.  The Company endeavors to acquire jet fuel at the lowest possible cost. To manage a portion of the aircraft fuel price risk, the Company has previously used jet fuel and heating oil option contracts or swap agreements. The Company did not purchase or hold derivative financial instruments for trading purposes.

As of June 30, 2008, the Company had no derivative instruments on its projected fuel consumption.  In January 2008, the last derivative instrument from a prior hedging program settled.  The Company’s derivatives have historically not qualified as hedges for financial reporting purposes in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  Accordingly, changes in the fair value of such derivative contracts, which amounted to gains of $380 for the three months ended June 30, 2007, and losses of $11 and gains of $1,904 for the six months ended June 30, 2008 and 2007, respectively, were recorded as a “(Gain) loss on fuel derivatives, net” within Other (income) expense in the condensed consolidated statements of income.  These amounts include both realized gains and losses and mark-to-market adjustments of the fair value of the derivative instruments at the end of each period.  The fair value of hedge contracts amounted to $81 as of December 31, 2007 and was recorded in “Other current assets” in the condensed consolidated balance sheets.

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Note 9 – Commitments and Contingencies

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

Note 10 – Subsequent Events

In July 2008, the Company purchased for cash two MD-80 aircraft that had been operated by the Company under operating leases.

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

The following discussion and analysis presents factors that had a material effect on our results of operations during the three and six month periods ended June 30, 2008 and 2007.  Also discussed is our financial position as of June 30, 2008 and December 31, 2007. You should read this discussion in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this Form 10-Q and our consolidated financial statements appearing in our annual report on Form 10-K for the year ended December 31, 2007.  This discussion and analysis contains forward-looking statements. Please refer to the section below entitled “Special Note About Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

We are a leisure travel company. The focus of our business is a low-cost passenger airline marketed to leisure travelers in small cities. Our business model emphasizes low operating costs, diversified revenue sources, and the transport of passengers from small cities to leisure destinations. Our route network, pricing philosophy, product offering and advertising are all intended to appeal to leisure travelers and make it attractive for them to purchase air travel and related services from us.

We provide service primarily to Las Vegas (Nevada), Phoenix (Arizona), Ft. Lauderdale (Florida), Orlando (Florida), and Tampa/St. Petersburg (Florida), five of the most popular leisure destinations in the United States. We have positioned our business to take advantage of current lifestyle and demographic trends in the U.S. we believe are positive drivers for the leisure travel industry. The most notable demographic shift occurring in the U.S. is the aging of the baby boomer generation as they enter their peak earning years and have more time and disposable income to spend on leisure travel. We believe a large percentage of our customers fall within the baby boomer demographic and we target these customers through the use of advertisements in more than 300 print circulations.

As an adjunct to our scheduled service business, we also fly charter (“fixed fee”) services, both on a long-term contract basis (primarily for Harrah’s Entertainment Inc.) and on an on-demand adhoc basis.

Our Fleet:

The following table sets forth the number and type of aircraft in service and operated by us at the dates indicated:

(a)            Aircraft owned includes the following number subject to capital leases: June 30, 2008 – two, December 31, 2007 – seven, and June 30, 2007 – five.

(b)           Does not include six owned MD-80 aircraft leased to a third party.

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Our Markets:

Our scheduled service consists of limited frequency nonstop flights into leisure destinations from small cities. As of June 30, 2008, we offered scheduled service from 51 small cities primarily into our major leisure destinations of Las Vegas, Phoenix, Ft. Lauderdale, Orlando, and Tampa/St. Petersburg, including seasonal service, and additional service to other leisure destinations from Bellingham (Washington).  The following shows the number of destinations and small cities served as of the dates indicated:

Results of Operations

Comparison of three months ended June 30, 2008 to three months ended June 30, 2007

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

We recorded total operating revenue of $131.6 million, income from operations of $4.7 million and net income of $2.6 million for the three months ended June 30, 2008.  By comparison, for the same period in 2007, we recorded total operating revenue of $88.9 million, income from operations of $14.2 million and net income of $10.0 million.

As of June 30, 2008, we had a fleet of 37 aircraft in service, compared with a fleet of 27 aircraft in service as of June 30, 2007. The growth of our fleet permitted us to increase available seat miles (“ASMs”) by 27.0% for the three months ended June 30, 2008 compared to the same period in 2007.  Departures increased by 36.5% while our average stage length decreased by 7.0%.

Compared to the three months ended June 30, 2007, scheduled service and other flying (fixed fee and non-revenue) ASMs increased in the same period of 2008 by 24.3% and 50.8%, respectively.  As a result of the percentage increase in other flying during this period, scheduled service ASMs represented 87.9% of total system ASMs for the three months ended June 30, 2008, compared to 89.8% for the three months ended June 30, 2007.

Operating Revenue

Our operating revenue increased 47.9% to $131.6 million in the three months ended June 30, 2008 from $88.9 million in the same period of 2007, driven by increases in revenue passenger miles (“RPMs”) and operating revenue per ASM.  RPMs increased by 33.9% as a result of the 27.0% increase in ASMs and an increase in our load factor.  Operating revenue per ASM increased by 16.5% primarily as a result of the increase in our average ancillary fare per passenger for the three months ended June 30, 2008, compared to the same period of 2007, along with an increase in our load factor.

Scheduled service revenue.    Scheduled service revenue increased 33.6%, or $22.0 million, to $87.6 million for the three months ended June 30, 2008, from $65.6 million in the same period of 2007 due to a 32.4% increase in scheduled service RPMs.  The decrease in average stage length of 4.4%, along with an increase of 5.5 percentage points in the scheduled

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service load factor, resulted in a 7.4% year-over-year increase in total scheduled service revenue per ASM from 7.88¢ to 8.46¢.

Fixed fee contract revenue.    Fixed fee contract revenue was $12.6 million in the three months ended June 30, 2008 compared to $7.5 million in the same period of 2007.  Fixed fee contract revenue increased principally because in 2008 we initiated service under a new agreement for flying with a third Harrah’s Entertainment Inc. subsidiary and new flying which began in May 2008 under a charter services agreement with MLT Vacations.  The new flying was offset by a reduction in seasonal charter service during the three months ended June 30, 2008 for Apple Vacations West, Inc. compared to the same period in 2007.  In July 2008, MLT Vacations has terminated the charter services agreement with us effective October 2008.

Ancillary revenue.    Ancillary revenue increased 84.4% to $29.1 million in the three months ended June 30, 2008 up from $15.8 million in the same period of 2007. The increase in ancillary revenue was due to a 39.2% increase in scheduled service passengers and a 32.5% increase in ancillary revenue per passenger from $20.94 to $27.75 due primarily to the sale of new products and higher prices on certain existing products.

Other revenue.  Lease revenue of $2.2 million was generated during the three months ended June 30, 2008 related to the purchase of six MD-80 aircraft and three engines on lease to another airline.  These aircraft and engines are expected to be returned to us in the second half of 2008 and during 2009.

Operating Expenses

Our operating expenses increased by 69.7%, or $52.1 million, to $126.9 million in the three months ended June 30, 2008, up from $74.8 million during the same period in 2007.

In general, our operating expenses are significantly affected by changes in our capacity, as measured by ASMs. The following table presents unit costs defined as Operating expense per ASM (“CASM”), for the indicated periods. The table also presents CASM, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by available seat miles. This statistic provides management and investors the ability to measure and monitor our cost performance absent fuel price volatility. Both the cost and availability of fuel are subject to many economic and political factors and are therefore beyond our control.

Overall, Operating CASM increased by 33.7% primarily from increases in aircraft fuel expense and maintenance and repairs expense.   Aircraft fuel expense and maintenance and repairs expense increased 103.3% and 99.6%, respectively, during the three months ended June 30, 2008 compared to the same period in 2007, which has significantly outpaced the ASM growth of 27.0% over the same period.  Operating CASM, excluding fuel, increased by 9.7% primarily as a result of the increase in maintenance and repairs expense.

In addition to per ASM costs, management evaluates our operating expenses on a per passenger basis.  The following table presents unit costs defined on a per passenger basis for the indicated periods.  The table also presents Operating expense per passenger, excluding fuel, which represents operating expenses, less aircraft fuel expense, divided by the number of passengers carried.

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Quarter over quarter, our passenger volume increase of 42.3% outpaced the cost increases in salary and benefits, station operations, sales and marketing, and other costs for a reduction of 2.1% in operating expense per passenger, excluding fuel.  Passenger volume increase is attributable to our 5.5 percentage point increase in the scheduled service load factor during the second quarter of 2008 compared to the same period of 2007.  Primary contributors to the change in operating expenses at a lower percentage were a 10.1% decrease in salary and benefits monthly average expense per full time equivalent employee and a 6.2% decrease in station operations expense per departure.

Aircraft fuel expense.    Aircraft fuel expense increased 103.3%, or $36.6 million, to $72.1 million in the three months ended June 30, 2008 up from $35.5 million in the same period of 2007. This change was due to a 29.0% increase in gallons consumed and a 58.0% increase in the average cost per gallon to $3.52 per gallon during the three months ended June 30, 2008 compared to $2.23 per gallon in the same period of 2007.

Salary and benefits expense.    Salary and benefits expense increased 22.7% to $17.2 million in the three months ended June 30, 2008 up from $14.0 million in the same period of 2007. This increase is largely attributable to a 36.6% increase in full-time equivalent employees to support our system growth during this period, offset by a reduction in accrued employee bonus expense compared to the prior year. We employed 1,299 full-time equivalent employees as of June 30, 2008, compared to 951 full-time equivalent employees as of June 30, 2007.

Station operations expense.    Station operations expense increased 28.0% to $10.5 million in the three months ended June 30, 2008 compared to $8.2 million in the same period of 2007.   The percentage increase in station operations expense lagged the 36.5% increase in departures as station operations expense per departure decreased by 6.2%.

Maintenance and repairs expense.    Maintenance and repairs expense increased by 99.6%, or $5.7 million, to $11.3 million in the three months ended June 30, 2008 up from $5.7 million in the same period of 2007.  The increase is largely attributable to seven scheduled heavy maintenance checks performed in the three months ended June 30, 2008 compared to three performed in the same period of 2007, along with three engine overhauls performed in the three months ended June 30, 2008 compared to one performed in the same period of 2007.  We believe maintenance and repairs expense was unusually high in the three months ended June 30, 2008, and unusually low in the three months ended June 30, 2007.  The timing of maintenance events may cause our maintenance and repairs expense to vary significantly from period to period.

Sales and marketing expense.    Sales and marketing expense increased 21.0% to $3.7 million in the three months ended June 30, 2008 compared to $3.0 million in the same period of 2007.  This increase is primarily due to an increase in credit card discount fees associated with the 33.6% increase in scheduled service revenue in the three months ended June 30, 2008 compared to the same period in 2007.  Sales and marketing expense declined as a percentage of revenue from 3.4% in the three months ended June 30, 2007 to 2.8% in the same period of 2008.

Aircraft lease rentals expense.    Aircraft lease rentals expense increased by 42.5% to $0.9 million in the three months ended June 30, 2008 up from $0.7 million in the same period of 2007 due to an increase in the number of leased aircraft from three as of June 30, 2007 to four as of June 30, 2008.  We purchased two of these aircraft after June 30, 2008.

Depreciation and amortization expense.    Depreciation and amortization expense was $6.0 million in the three months ended June 30, 2008 compared to $3.7 million in the same period of 2007, an increase of 60.3%, as the number of aircraft owned, subject to capital lease, or leased to a third party, increased from 24 as of June 30, 2007 to 39 as of June 30, 2008.

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Other expense.    Other expense increased by 29.4% to $5.2 million during the three months ended June 30, 2008 compared to $4.0 million in same period of 2007 due mainly to increased aviation insurance, administrative, facilities, and training expenses associated with our company’s growth.

Other (Income) Expense

Other (income) expense decreased from an income amount of $1.6 million in the three months ended June 30, 2007 to a net other expense amount of $0.5 million for the same period of 2008.  The change was principally due to a reduction of $1.4 million in interest income earned due to lower prevailing interest rates and a net gain on fuel derivatives of $0.4 million in the three months ended June 30, 2007 not repeated in 2008.

Income Tax Expense

Our effective tax rate remained relatively consistent at 36.4% for the three months ended June 30, 2008 compared to 36.8% in the same period of 2007.  Our reported effective tax rate for the second quarter of 2008 may not be indicative of our effective tax rates for future quarters of 2008 or for 2008 as a whole.

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Comparison of six months ended June 30, 2008 to six months ended June 30, 2007

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

We recorded total operating revenue of $264.7 million, income from operations of $19.0 million and net income of $12.3 million for the six months June 30, 2008.  By comparison, for the same period in 2007, we recorded total operating revenue of $173.3 million, income from operations of $28.5 million, and net income of $19.7 million.

As of June 30, 2008, we had a fleet of 37 aircraft in service, compared with a fleet of 27 aircraft in service as of June 30, 2007.  The growth of our fleet permitted us to increase ASMs by 31.6% for the six months ended June 30, 2008, compared to the same period in 2007 as departures increased by 42.2% and average stage length decreased by 7.5%.

Compared to the six months ended June 30, 2007, scheduled service ASMs increased by 33.9% in the same period of 2008, while other flying (fixed fee and non-revenue) increased 17.2%.

Operating Revenue

Our operating revenue increased 52.8%, or $91.4 million, to $264.7 million during the six months ended June 30, 2008 from $173.3 million in the same period of 2007.  This was primarily driven by a 37.8% increase in RPMs and a 16.1% increase in operating revenue per ASM.  The increase in RPMs resulted from the 31.6% increase in ASMs and an increase of our load factor.  The operating revenue per ASM increase of 16.1% primarily resulted from the increase in our average ancillary fare per passenger for the six months ended June 30, 2008 compared to the same period of 2007, along with an increase in our load factor.

Scheduled service revenue.  Scheduled service revenue increased 44.8%, or $55.5 million, to $179.4 million in the six months ended June 30, 2008 from $123.9 million in the same period of 2007 due to a 41.6% increase in scheduled service RPMs.   The decrease in average stage length of 3.2%, along with an increase of 4.8 percentage points in the scheduled service load factor to 88.6%, resulted in an 8.2% year-over-year increase in scheduled service revenue per ASM from 7.69¢ to 8.32¢.

Fixed fee contract revenue.  Fixed fee contract revenue increased 28.5% to $26.8 million during the six months ended June 30, 2008, up from $20.9 million for the same period of 2007.  The increase was attributable to flying under a new agreement in 2008 with a third Harrah’s subsidiary along with increase in flying for other charter operators and ad-hoc operations compared to the same period in the prior year.  As indicated above, the contract with MLT Vacations has been terminated effective October 2008.

Ancillary revenue.  Ancillary revenue increased 97.7% to $56.2 million in the six months ended June 30, 2008, up from $28.6 million in the same period of 2007.   The increase in ancillary revenue was due to a 47.4% in scheduled service passengers and a 33.6% increase in ancillary revenue per passenger from $20.02 to $26.75 due primarily to the sale of several new products and higher prices on certain existing products.

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Other revenue.  Lease revenue of $2.2 million was generated during the six months ended June 30, 2008 related to the purchase of six MD-80 aircraft and three engines on lease to another airline.  These aircraft and engines are expected to be returned to us in the second half of 2008 and during 2009.

Operating Expenses

Our operating expenses increased by 69.6%, or $100.8 million, to $245.7 million during the six months ended June 30, 2008, up from $144.8  million during the same period in 2007.

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

Overall, Operating CASM increased by 28.9% primarily from increases in aircraft fuel expense and maintenance and repairs expense.  Aircraft fuel expense and maintenance and repairs expense  increased 103.4% and 78.5%, respectively, during the six months ended June 30, 2008 compared to the same period in 2007, which has significantly outpaced the ASM growth of 31.6% over the same period.  Operating CASM, excluding fuel, increased by 6.9% primarily as a result of the increase in maintenance and repairs expense.

The following table presents our Operating expense per passenger and Operating expense per passenger, excluding fuel, for the indicated periods:

During the first six months of 2008, our passenger volume increase of 47.6% outpaced the cost increases in salary and benefits expense, station operations, sales and marketing, and other costs for a reduction of 4.6% in operating expense per passenger, excluding fuel.  Passenger volume increase is attributable to our 4.8 percentage points increase in the scheduled service load factor during the six months ended June 30, 2008 compared to the same period of 2007.  Primary contributors to the change in operating expenses at a lower percentage were a 7.7% decrease in salary and benefits monthly average expense per full time equivalent employee and a 6.0% decrease in station operations expense per departure.

Aircraft fuel expense   Aircraft fuel expense increased 103.4% to $135.6 million in the six months ended June 30, 2008, up from $66.6 million in the same period of 2007. This change was primarily due to a 34.0% increase in gallons consumed and an increase in the average cost per gallon to $3.19 per gallon during the six months ended June 30, 2008 compared to $2.10 per gallon in the same period of 2007.

Salary and benefits expense.    Salary and benefits expense increased 27.5 % to $34.3 million in the six months ended June 30, 2008, up from $26.9 million in the same period of 2007.   The increase is largely attributable to a 36.6% increase in full-time equivalent employees to support our system growth during this period, offset by a reduction in accrued employee bonus expense compared to the prior year.  We employed 1,299 full-time equivalent employees as of June 30, 2008, compared to 951 full-time equivalent employees as of June 30, 2007.

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Station operations expense.    Station operations expense increased 33.7%, or $5.7 million, to $22.5 million in the six months ended June 30, 2008 compared to $16.8 million in the same period of 2007.   The percentage increase in station operations expense lagged the 42.2% increase in departures as station operations expense per departure decreased by 6.0%.

Maintenance and repairs expense.    Maintenance and repairs expense increased by 78.5%, or $9.6 million, to $21.8 million in the six months ended June 30, 2008 up from $12.2 million in the same period of 2007.  An increase in scheduled heavy maintenance checks to 11 for the first half of 2008 from six in the same period of 2007 and an increase in engine overhauls to four in the first half of 2008 compared to two in the same period of 2007 were the primary drivers of the higher maintenance and repairs expense in the current year.  The timing of maintenance events may cause our maintenance and repairs expense to vary significantly from period to period.

Sales and marketing expense.    Sales and marketing expense increased 32.0%, or $1.9 million, to $8.0 million in the six months ended June 30, 2008, compared to $6.1 million in the same period of 2007.   The increase is primarily due to an increase in credit card discount fees associated with the 44.8% increase in scheduled service revenue in the six months ended June 30, 2008 compared to the same period of 2007.  Sales and marketing expense declined as a percentage of revenue from 3.5% in the six months ended June 30, 2007 to 3.0% in the same period of 2008.

Aircraft lease rentals expense.    Aircraft lease rentals expense increased by 48.6% to $1.9 million in the six months ended June 30, 2008 up from $1.3 million in the same period of 2007 due to an increase in number of leased aircraft from three as of June 30, 2007 to four as of June 30, 2008.  We purchased two of these aircraft after June 30, 2008.

Depreciation and amortization expense.    Depreciation and amortization expense was $11.0 million in the six months ended June 30, 2008 compared to $7.4 million in the same period of 2007, an increase of 48.8% as the number of aircraft owned, subject to capital leases, or leased to a third party increased from 24 as of June 30, 2007 to 39 as of June 30, 2008.

Other expense.    Other expense increased by 40.7% to $10.6 million in the six months ended June 30, 2008 compared to $7.5 million in same period of 2007 due mainly to increased aviation insurance, administrative, facilities, and training expenses associated with our company’s growth.

Other (Income) Expense

Other (income) expense decreased from an income amount of $3.6 million in the six months ended June 30, 2007 to a net other expense of $0.2 million in the same period of 2008.  The change is primarily due to a decrease in interest income of $1.5 million as a result of lower interest rates on invested cash, along with a minimal net loss on fuel derivatives from one settled contract during 2008 compared to a net gain on fuel derivatives of $1.9 million in the six months ended June 30, 2007.

Income Tax Expense

Our tax rate is affected by recurring items, such as tax rates in various states and the relative amount of income we earn in each jurisdiction, which we expect to be fairly consistent in the near term.  It is also affected by discrete items that may occur in any given year, but are not consistent from year to year.  Our effective tax rate was 34.6% for the six months ended June 30, 2008 compared to 38.5% in the same period of 2007.  The tax rate during the first six months of 2007 was higher due to a non-recurring tax provision adjustment impacting the six months ended June 30, 2007, that resulted from the reorganization consummated at the time of our initial public offering in December 2006.  The lower effective tax rate for the six months ended June 30, 2008 was also attributable to the geographic mix of our flying and the impact this had on the state income tax portion of the tax provision.  Our reported effective tax rate for the first half of 2008 may not be indicative of our effective tax rates for future quarters of 2008 or for 2008 as a whole.

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Comparative Consolidated Operating Statistics

The following tables set forth our operating statistics for the three and six months ended June 30, 2008 and 2007: