**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended June 30, 2005**

 

**o****                                ****TRANSITION REPORT UNDER SECTION 13OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission file number:  1-12805**

 

**FRONTIERAIRLINES, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Colorado**                                                   | ** ** | **84-1256945**                        |
|----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporated or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                           |       |                                  |
| **7001  Tower Road, Denver, CO**                               | ** ** | **80249**                             |
| (Address of  principal executive offices)                      |       | (Zip Code)                            |

 

Issuer’s telephone numberincluding area code: ** (720) 374-4200**

 

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

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in rule 12b-2 of the Exchange Act).  Yes ý  No o

 

The number of shares ofthe Company’s Common Stock outstanding as of July 22, 2005 was 36,172,342.

 

 

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**TABLE OF CONTENTS**

 

**PART I. FINANCIAL INFORMATION**

 
| **Item  1.** | **Financial  Information**                                                                      | **1**      |
|--------------|-------------------------------------------------------------------------------------------------|------------|
|         |                                                                                            |       |
|         | Balance Sheets at June 30, 2005 and March 31,  2005                                   | 1          |
|         | Statements of Operations for the three months  ended June 30, 2005 and 2004                | 2          |
|         | Statements of Cash Flows for the three months ended June 30,  2005 and 2004                | 3          |
|         | Notes  to the Financial Statements                                                              | 4          |
|         |                                                                                            |       |
| **Item 2.**  | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | **10**     |
| ** **   | ** **                                                                                      | ** ** |
| **Item 3.**  | **Quantitative and Qualitative  Disclosures about Market Risk**                                 | **29**     |
|         |                                                                                            |       |
| **Item 4.**  | **Controls and Procedures**                                                                     | **31**     |
|         |                                                                                            |       |
| ** **   | **PART II. OTHER INFORMATION**                                                             | **32**     |
|         |                                                                                            |       |
| **Item 6.**  | **Exhibits**                                                                                    | **32**     |

 

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**PART I.  FINANCIAL INFORMATION**

 

**FRONTIER AIRLINES, INC.**

**Balance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                                                                                           | ** ** | **June 30,  2005** | ** **  | **March 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|--------------------------|------------|
| **Assets**                                                                                                                                                                                           |       |                    |        |                     |       |
| Current  assets:                                                                                                                                                                                     |       |                    |        |                     |       |
| Cash  and cash equivalents                                                                                                                                                                           |       | $                       | 174,284,385 |                     | $          | 171,794,772 |   |
| Short-term  investments                                                                                                                                                                              |       | —                  |        | 3,000,000                |       |
| Restricted  investments                                                                                                                                                                              |       | 35,589,340              |        | 28,011,395               |       |
| Receivables,  net of allowance for doubtful accounts of $862,000 and $927,000 at June 30,  2005 and March 31, 2005, respectively                                                           |       | 43,710,295              |        | 37,748,785               |       |
| Security  and other deposits                                                                                                                                                                         |       | 1,900,250               |        | 1,900,250                |       |
| Prepaid  expenses and other assets                                                                                                                                                                   |       | 23,579,660              |        | 18,740,220               |       |
| Inventories,  net of allowance of $0 and $3,973,000 at June 30, 2005 and March 31,2005,  respectively                                                                                      |       | 8,340,789               |        | 7,564,342                |       |
| Assets  held for sale (note 10)                                                                                                                                                                      |       | 5,989,297               |        | 1,317,334                |       |
| Deferred  tax assets                                                                                                                                                                                 |       | 6,235,001               |        | 5,472,643                |       |
| Total  current assets                                                                                                                                                                                |       | 299,629,017             |        | 275,549,741              |       |
| Property  and equipment, net (note 3)                                                                                                                                                                |       | 487,067,397             |        | 455,813,682              |       |
| Security  and other deposits                                                                                                                                                                         |       | 18,290,064              |        | 18,662,421               |       |
| Aircraft  pre-delivery payments                                                                                                                                                                      |       | 21,494,061              |        | 22,976,090               |       |
| Restricted  investments                                                                                                                                                                              |       | 5,815,772               |        | 11,126,307               |       |
| Deferred  loan expenses and other assets                                                                                                                                                             |       | 6,711,277               |        | 7,882,430                |       |
| Total Assets                                                                                                                                                                                         |       | $                       | 839,007,588 |                     | $          | 792,010,671 |   |
|                                                                                                                                                                                                 |       |                    |        |                     |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                        |       |                    |        |                     |       |
| Current  liabilities:                                                                                                                                                                                |       |                    |        |                     |       |
| Accounts  payable                                                                                                                                                                                    |       | $                       | 43,175,958  |                     | $          | 37,240,376 |   |
| Air  traffic liability                                                                                                                                                                               |       | 137,322,827             |        | 112,688,811              |       |
| Other  accrued expenses (note 5)                                                                                                                                                                     |       | 56,154,292              |        | 55,337,203               |       |
| Current  portion of long-term debt (note 6)                                                                                                                                                          |       | 19,645,705              |        | 18,222,539               |       |
| Short-term  borrowings                                                                                                                                                                               |       | —                  |        | 5,000,000                |       |
| Deferred  revenue and other current liabilities (note 4)                                                                                                                                             |       | 6,583,308               |        | 5,361,422                |       |
| Total  current liabilities                                                                                                                                                                           |       | 262,882,090             |        | 233,850,351              |       |
| Long-term  debt (note 6)                                                                                                                                                                             |       | 301,512,302             |        | 282,792,222              |       |
| Deferred  tax liability                                                                                                                                                                              |       | 16,511,033              |        | 17,331,125               |       |
| Deferred  revenue and other liabilities (note 4)                                                                                                                                                     |       | 21,130,100              |        | 20,116,667               |       |
| Total  liabilities                                                                                                                                                                                   |       | 602,035,525             |        | 554,090,365              |       |
|                                                                                                                                                                                                 |       |                    |        |                     |       |
| Stockholders’  equity:                                                                                                                                                                          |       |                    |        |                     |       |
| Preferred  stock, no par value, authorized 1,000,000 shares; none issued                                                                                                                             |       | —                  |        | —                   |       |
| Common  stock, no par value, stated value of $.001 per share, authorized 100,000,000;  36,109,342 and 35,995,342 issued and outstanding at June 30, 2005 and March 31,  2005, respectively |       | 36,109                  |        | 35,995                   |       |
| Additional  paid-in capital                                                                                                                                                                          |       | 189,255,763             |        | 188,165,820              |       |
| Unearned  ESOP shares                                                                                                                                                                                |       | (1,513,768              | )           | (2,270,652               | )          |
| Other  comprehensive income                                                                                                                                                                          |       | 209,831                 |        | 271,267                  |       |
| Retained  earnings                                                                                                                                                                                   |       | 48,984,128              |        | 51,717,876               |       |
| Total  stockholders’ equity                                                                                                                                                                     |       | 236,972,063             |        | 237,920,306              |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                     |       | $                       | 839,007,588 |                     | $          | 792,010,671 |   |

 

Seeaccompanying notes to financial statements.

 

1

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**FRONTIER AIRLINES, INC.**

**Statementsof Operations**

**For the Three Months Ended June 30, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                    | ** ** | **June 30,  2005** | ** **  | **June 30,  2004** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| Revenues:                                                                     |       |                    |        |                    |       |
| Passenger                                                                     |       | $                       | 208,067,483 |                    | $          | 169,437,481 |   |
| Passenger-  regional partner                                                  |       | 22,954,030              |        | 19,126,445              |       |
| Cargo                                                                         |       | 1,218,934               |        | 1,427,495               |       |
| Other                                                                         |       | 4,169,614               |        | 2,431,649               |       |
|                                                                          |       |                    |        |                    |       |
| Total  revenues                                                               |       | 236,410,061             |        | 192,423,070             |       |
|                                                                          |       |                    |        |                    |       |
| Operating  expenses:                                                          |       |                    |        |                    |       |
| Flight  operations                                                            |       | 34,793,709              |        | 31,789,164              |       |
| Aircraft  fuel expense                                                        |       | 59,829,548              |        | 40,003,182              |       |
| Aircraft  lease expense                                                       |       | 23,108,954              |        | 18,890,826              |       |
| Aircraft  and traffic servicing                                               |       | 31,753,244              |        | 31,692,204              |       |
| Maintenance                                                                   |       | 20,010,658              |        | 18,956,086              |       |
| Promotion  and sales                                                          |       | 21,871,913              |        | 19,838,676              |       |
| General  and administrative                                                   |       | 12,251,067              |        | 10,294,244              |       |
| Operating  expenses - regional partner                                        |       | 24,117,887              |        | 21,293,435              |       |
| Aircraft  lease exit costs (note 8)                                           |       | 3,311,888               |        | —                  |       |
| (Gains)  loss on sales of assets, net                                         |       | (88,038                 | )           | 529,828                 |       |
| Impairments  and other related charges                                        |       | —                  |        | 326,146                 |       |
| Depreciation                                                                  |       | 6,672,077               |        | 6,618,439               |       |
|                                                                          |       |                    |        |                    |       |
| Total  operating expenses                                                     |       | 237,632,907             |        | 200,232,230             |       |
|                                                                          |       |                    |        |                    |       |
| Operating  loss                                                               |       | (1,222,846              | )           | (7,809,160              | )          |
|                                                                          |       |                    |        |                    |       |
| Nonoperating  income (expense):                                               |       |                    |        |                    |       |
| Interest  income                                                              |       | 1,364,398               |        | 570,570                 |       |
| Interest  expense                                                             |       | (4,118,118              | )           | (2,908,016              | )          |
| Other,  net                                                                   |       | (102,639                | )           | (65,363                 | )          |
|                                                                          |       |                    |        |                    |       |
| Total  nonoperating expense, net                                              |       | (2,856,359              | )           | (2,402,809              | )          |
|                                                                          |       |                    |        |                    |       |
| Loss  before income tax benefit                                               |       | (4,079,205              | )           | (10,211,969             | )          |
|                                                                          |       |                    |        |                    |       |
| Income  tax benefit                                                           |       | (1,345,457              | )           | (3,638,251              | )          |
|                                                                          |       |                    |        |                    |       |
| Net  loss                                                                     |       | $                       | (2,733,748  | )                       | $          | (6,573,718 | ) |
|                                                                          |       |                    |        |                    |       |
| Loss  per share - basic and diluted                                           |       | $                       | (0.08       | )                       | $          | (0.18 | ) |
|                                                                          |       |                    |        |                    |       |
| Weighted  average shares of common stock outstanding – basic and diluted |       | 36,027,655              |        | 35,603,426              |       |

 

See accompanying notes to financial statements.

 

2

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**FRONTIER AIRLINES, INC.**

**Statements of Cash Flows**

**For the Three Months Ended June 30, 2005 and 2004**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended**  | ** **  |
|------------------------------------------------------------------------------------|------------|-------------------------|-------------|
| ** **                                                                         | ** ** | **June 30,  2005** | ** **  | **June 30,  2004** | ** ** |
| ** **                                                                         | ** ** | ** **              | ** **  | ** ** | ** ** |
| Cash  flows from operating activities:                                             |       |                    |        |   |   |
| Net  loss                                                                          |       | $                       | (2,733,748  | ) | $ | (6,573,718 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities:   |       |                    |        |   |   |
| Compensation  expense under long-term incentive plans and employee ownership plans |       | 791,457                 |        | 727,545 |   |
| Depreciation  and amortization                                                     |       | 6,875,569               |        | 6,769,046 |   |
| Impairment  recorded on inventories                                                |       | —                  |        | 387,635 |   |
| Deferred  tax benefit                                                              |       | (1,337,216              | )           | (3,675,807 | ) |
| Unrealized  derivative loss                                                        |       | 1,006,779               |        | 476,928 |   |
| Loss  (gain) on disposal of equipment                                              |       | (1,893                  | )           | 525,722 |   |
| Changes  in operating assets and liabilities:                                      |       |                    |        |   |   |
| Restricted  investments                                                            |       | (2,687,410              | )           | (3,531,333 | ) |
| Receivables                                                                        |       | (5,961,510              | )           | 302,884 |   |
| Security  and other deposits                                                       |       | (60,768                 | )           | (207,239 | ) |
| Prepaid  expenses and other assets                                                 |       | (4,839,440              | )           | (3,868,723 | ) |
| Inventories                                                                        |       | (1,473,164              | )           | (1,136,368 | ) |
| Other  assets                                                                      |       | 231,229                 |        | 271,706 |   |
| Accounts  payable                                                                  |       | 5,935,582               |        | 2,034,817 |   |
| Air  traffic liability                                                             |       | 24,634,016              |        | 14,790,643 |   |
| Other  accrued expenses                                                            |       | 817,089                 |        | 1,848,304 |   |
| Deferred  revenue and other liabilities                                            |       | 2,235,317               |        | (119,813 | ) |
| Net  cash provided by operating activities                                         |       | 23,431,889              |        | 9,022,229 |   |
|                                                                               |       |                    |        |   |   |
| Cash  flows from investing activities:                                             |       |                    |        |   |   |
| Decrease  in short-term investments                                                |       | 3,000,000               |        | 2,000,000 |   |
| Aircraft  lease and purchase deposits made                                         |       | (7,325,932              | )           | (6,441,090 | ) |
| Aircraft  lease and purchase deposits returned or applied                          |       | 9,241,086               |        | 22,336,824 |   |
| Decrease  in restricted investments                                                |       | 420,000                 |        | 1,295,800 |   |
| Proceeds  from the sale of aircraft and equipment                                  |       | 431,035                 |        | 63,625,010 |   |
| Capital  expenditures                                                              |       | (42,408,666             | )           | (103,068,885 | ) |
| Net  cash used in investing activities                                             |       | (36,642,477             | )           | (20,252,341 | ) |
|                                                                               |       |                    |        |   |   |
| Cash  flows from financing activities:                                             |       |                    |        |   |   |
| Net  proceeds from issuance of common stock                                        |       | 844,360                 |        | 63,363 |   |
| Proceeds  from long-term borrowings                                                |       | 24,900,000              |        | 22,000,000 |   |
| Principal  payments on long-term borrowings                                        |       | (4,756,754              | )           | (5,626,295 | ) |
| Payment  of financing fees                                                         |       | (287,405                | )           | (257,837 | ) |
| Principal  payments on short-term borrowings                                       |       | (5,000,000              | )           | — |   |
| Net  cash provided by financing activities                                         |       | 15,700,201              |        | 16,179,231 |   |
|                                                                               |       |                    |        |   |   |
| Net  increase in cash and cash equivalents                                         |       | 2,489,613               |        | 4,949,119 |   |
|                                                                               |       |                    |        |   |   |
| Cash  and cash equivalents, beginning of period                                    |       | 171,794,772             |        | 130,008,729 |   |
|                                                                               |       |                    |        |   |   |
| Cash  and cash equivalents, end of period                                          |       | $                       | 174,284,385 |   | $ | 134,957,848 |   |

 

See accompanying notes to financial statements.

 

3

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**FRONTIERAIRLINES, INC.**

**Notes to Financial Statements**

**June 30, 2005**

 

**1.****               Basis ofPresentation**

 

The accompanyingunaudited financial statements have been prepared in accordance with generallyaccepted accounting principles for interim financial information and theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements and should beread in conjunction with the Company’s Annual Report on Form 10-K for theyear ended March 31, 2005.  Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  In the opinion of management,all adjustments (consisting only of normal recurring adjustments) considerednecessary for a fair presentation have been included.  The results of operations for the threemonths ended June 30, 2005 are not necessarily indicative of the resultsthat will be realized for the full year.

 

Financial resultsfor the Company, and airlines in general, are seasonal in nature.  Historically, the Company’s first and secondfiscal quarters have been more profitable than its third and fourth fiscalquarters.  Operating results for thethree months ended June 30, 2005 are not necessarily indicative of theresults that may be expected for the year ended March 31, 2006.

 

***Reclassifications***

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

**2.****               Stock-Based Compensation**

 

Stock options andother stock-based compensation awards are accounted for using the intrinsicvalue method prescribed under Accounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees”*(“APB 25”) and related Interpretations in accounting for its employee stockoptions and follows the disclosure provisions of Statement of FinancialAccounting Standards No. 123 (“SFAS 123”). Accordingly, no compensation cost is recognized for options granted at aprice equal to the fair market value of the common stock on the date ofgrant.  Pro forma information regardingnet income and earnings per share is required by SFAS 123, which also requiresthat the information be determined as if the Company has accounted for its employeestock options under the fair value method of that Statement.  The fair value of each option grant wasestimated on the date of grant using the Black-Scholes option valuationmodel.  Had compensation cost for theCompany’s stock-based compensation plan been determined using the fair value ofthe options at the grant date, the Company’s pro forma net loss and loss pershare would be as follows:

 
| ** **                                                                                       | ** ** | **Three months  ended** | ** ** | **Three months  ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                                       | ** ** | **June 30, 2005**  | ** ** | **June 30, 2004**  | ** ** |
| ** **                                                                                       | ** ** | ** **              | ** ** | ** **              | ** ** |
| Net  loss, as reported                                                                           |       | $                       | (2,733,748 | )                       | $          | (6,573,718 | ) |
| Add:  stock-based compensation expense included in reported net loss, net of tax                 |       | 23,268                  |       | —                  |       |
| Less:  total compensation expense determined under fair value method for all awards,  net of tax |       | (204,424                | )          | (406,518                | )          |
| Pro  forma net loss                                                                              |       | $                       | (2,914,904 | )                       | $          | (6,980,236 | ) |
|                                                                                             |       |                    |       |                    |       |
| Loss  per share, basic and diluted:                                                              |       |                    |       |                    |       |
| As  reported                                                                                     |       | $                       | (0.08      | )                       | $          | (0.18 | ) |
| Pro  forma                                                                                       |       | $                       | (0.08      | )                       | $          | (0.20 | ) |

 

4

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For a detaileddescription regarding the assumptions used to calculate the compensationexpense noted above, refer to Note 13 of the Financial Statements included inthe Company’s Annual Report on Form 10-K for the year ended March 31,2005. The Company changed the weighted-average risk-free interest rate to 4.05%and the expected volatility to 74.4% from what was disclosed in the Company’sAnnual Report on Form 10-K for the year ended March 31, 2005 forgrants made during the three months ended June 30, 2005.

 

In March 2005,the Company adopted a new annual bonus and long-term incentive plan for theCompany’s officers and directors.  Thelong-term incentive plan included the issuance of 172,578 stock-only stockappreciation rights, 63,994 restricted stock units and a three-year cashincentive pool for the fiscal year ending March 31, 2006.  Annual bonuses and three-year cash incentivepools are paid out based upon pre-tax profits and a modifier based on ourannual pre-tax profit performance relative to peer group companies. There wasno bonus accrual for the three months ended June 30, 2005 as the Companyincurred a loss.

 

The restrictedstock award vests, if the executive is still employed by the Company at thetime, in five years from the grant date. The fair value of the restricted shares on the date of the grant is recordedas compensation expense over the vesting period.  The stock-only stock appreciation rights vest20% a year over five years.  Compensationexpense is based on the difference between the market price on the date ofgrant and the current market price of the award.  As of June 30, 2005, compensationexpense of $35,000 has been recognized for these awards.

 

**3.****               Propertyand Equipment, Net**

 

As of June 30,2005 and March 31, 2005 property and equipment consisted of the following:

 
| ** **                                                           | ** ** | **June 30,  2005** | ** **  | **March 31,  2005** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|-------------|--------------------------|------------|
|                                                                 |       |                    |        |                     |       |
| Aircraft,  spare aircraft parts, and improvements to leased aircraft |       | $                       | 515,343,860 |                     | $          | 489,324,022 |   |
| Ground  property, equipment and leasehold improvements               |       | 39,690,879              |        | 38,524,096               |       |
| Construction  in progress                                            |       | 919,428                 |        | 231,397                  |       |
|                                                                 |       | 555,954,167             |        | 528,079,515              |       |
| Less  accumulated depreciation                                       |       | (68,886,770             | )           | (72,265,833              | )          |
|                                                                 |       |                    |        |                     |       |
| Property  and equipment, net                                         |       | $                       | 487,067,397 |                     | $          | 455,813,682 |   |

 

5

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**4.****               DeferredRevenue and Other Liabilities**

 

At June 30,2005 and March 31, 2005, deferred revenue and other liabilities iscomprised of the following:

 
| ** **                                          | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
|                                                |       |                    |       |                     |       |
| Deferred  revenue related to co-branded credit card |       | $                       | 8,110,261  |                     | $          | 6,557,945 |   |
| Deferred  rent                                      |       | 18,949,641              |       | 18,271,668               |       |
| Other                                               |       | 653,506                 |       | 648,476                  |       |
|                                                |       |                    |       |                     |       |
| Total  deferred revenue and other liabilities       |       | 27,713,408              |       | 25,478,089               |       |
|                                                |       |                    |       |                     |       |
| Less  current portion                               |       | (6,583,308              | )          | (5,361,422               | )          |
|                                                |       |                    |       |                     |       |
|                                                |       | $                       | 21,130,100 |                     | $          | 20,116,667 |   |

 

**5.****               Other Accrued Expenses**

 

At June 30,2005 and March 31, 2005, other accrued expenses is comprised of thefollowing:

 
| ** **                                                                                     | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
|                                                                                           |       |                    |       |                     |       |
| Accrued  salaries and benefits                                                                 |       | $                       | 28,626,908 |                     | $          | 30,340,793 |   |
| Federal  excise and other passenger taxes payable                                              |       | 19,637,924              |       | 17,251,283               |       |
| Property  tax payable                                                                          |       | 3,440,411               |       | 2,279,718                |       |
| Remaining  lease payments for aircraft and facilities abandoned before lease termination  date |       | 771,918                 |       | 1,063,022                |       |
| Other                                                                                          |       | 3,677,131               |       | 4,402,387                |       |
|                                                                                           |       |                    |       |                     |       |
|                                                                                           |       | $                       | 56,154,292 |                     | $          | 55,337,203 |   |

 

**6.****               Long-termDebt**

 

During the quarter ended June 30,2005, the Company borrowed an additional $24,900,000 for the purchase of oneAirbus A319 aircraft.  The aircraft loanhas a term of 12 years and is payable in quarterly installments of $625,000 asof June 30, 2005, including interest, payable in arrears, with a floatinginterest rate adjusted quarterly based on LIBOR. The loan currently bearsinterest at an overall rate of 5.40% at June 30, 2005.  At the end of the term, there is a balloonpayment of $5,558,000.  A securityinterest in the aircraft secures the loan.

 

6

----

 

In March 2005,the Company entered into a 42-month revolving credit facility, (“CreditFacility”) to be used in support of letters of credit and for general corporatepurposes.  Under this facility, theCompany may borrow the lesser of $13,000,000 (“maximum commitment amount”) or50% of the current market value of pledged eligible spare parts.  The amount of letters of credit available isequal to the amount available under the facility less current borrowings.  The amount available under the Credit Facilityat June 30, 2005 was $10,244,000, which was reduced by letters of creditissued during the quarter of $6,500,000 for a net amount available for borrowingsof $3,744,000.   There were no amountsborrowed under the Credit Facility as of June 30, 2005.

 

**7.****               Comprehensive Income (Loss)**

 

A summary of thecomprehensive income (loss) is as follows:

 
| ** **                                                   | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                   | ** ** | ** **              | ** ** | ** **              | ** ** |
| Net  loss                                                    |       | $                       | (2,733,748 | )                       | $          | (6,573,718 | ) |
| Other  comprehensive income:                                 |       |                    |       |                    |       |
| Unrealized  gain (loss) on derivative instrument, net of tax |       | (61,436                 | )          | 297,952                 |       |
| Total  comprehensive loss                                    |       | $                       | (2,795,184 | )                       | $          | (6,275,766 | ) |

 

**8.****               AircraftLease and Facility Exit Costs**

 

In April 2005,the Company ceased using three of its Boeing 737-300 leased aircraft withoriginal lease termination dates in June 2005, August 2005 and May 2006.  The Company negotiated an early return andone-time payment for the one aircraft with an original lease termination dateof May 2006.  This resulted in acharge of $3,311,888, representing the estimated fair value of the remaininglease payments and a negotiated one-time termination payment.  This charge is included in the Statement ofOperations as aircraft lease exit costs. The aircraft facility exit cost liability of $1,277,901 is included inthe following Balance Sheet accounts: $771,918 in other accrued expenses;$98,733 in other long-term liabilities and $407,250 in accounts payable.

 

A summary of the activitycharged to these liabilities are as follows:

 
| ** **                       | ** ** | **Aircraft** | ** ** | **Facility** | ** ** | **Total**  | ** ** |
|----------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| **Balance, March 31, 2005** |       | $            | 932,800    |         | $          | 249,568    |       | $ | 1,182,368 |   |
| Additions                        |       | 3,311,888    |       | —       |       | 3,311,888  |       |
| Lease  payments                  |       | (3,183,146   | )          | (33,209      | )          | (3,216,355 | )          |
| **Balance, June 30, 2005**  |       | $            | 1,061,542  |         | $          | 216,359    |       | $ | 1,277,901 |   |

 

7

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**9.****               RetirementHealth Plan**

 

In conjunctionwith the Company’s collective bargaining agreement with its pilots, retiredpilots and their dependents may retain medical benefits under the terms andconditions of the Health and Welfare Plan for Employees of Frontier Airlines, Inc.(“the Retirement Health Plan”) until age 65. The costs of retiree medical benefits are continued under the samecontribution schedule as active employees.

 

Net periodicbenefit cost for the three months ended June 30, 2005 and 2004 include thefollowing components:

 
| ** **                     | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------------------|------------|
|                           |       |                    |       |                    |       |
| Service  cost                  |       | $                       | 238,479    |                    | $          | 239,913 |   |
| Interest  cost                 |       | 67,821                  |       | 54,598                  |       |
| Recognized  net actuarial loss |       | 15,171                  |       | 22,358                  |       |
| Net  periodic benefit cost     |       | $                       | 321,471    |                    | $          | 316,869 |   |

 

**10.****        Assets Held for Sale**

 

In April 2005,the Company retired the remaining Boeing aircraft and has classified allremaining Boeing 737-300 aircraft rotable spare parts and expendableinventories as “assets held for sale”.  Assuch, this disposal group has been valued at the lower of the carrying amountor the market value less selling costs.

 

In August 2004,the Company began selling Boeing spare parts and entered into agreements withvendors to sell these parts on a consignment basis.  The Company monitors resale values for Boeingparts quarterly using estimates obtained from outside vendors.  Based on the current market prices and recentsales history, the Company has determined that there is currently no additionalimpairment required for the Boeing rotable spare parts and expendableinventories.

 

**11.****        Recently Issued Accounting Standards**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayment”.  SFAS No. 123R is arevision of SFAS No. 123, “Accounting for Stock Based Compensation”, andsupersedes APB 25.  Among other items,SFAS 123R eliminates the use of APB 25 and the intrinsic value method ofaccounting, and requires companies to recognize the cost of employee servicesreceived in exchange for awards of equity instruments, based on the grant datefair value of those awards, in the financial statements.  The effective date of SFAS 123R will be thebeginning of the fiscal year that begins after June 15, 2005.  Early adoption, however, is allowed.

 

SFAS 123R permitscompanies to adopt its requirements using either a “modified prospective”method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognizedin the financial statements beginning with the effective date, based on therequirements of SFAS 123R for all share-based payments granted after that date,and based on the requirements of SFAS 123 for all unvested awards granted priorto the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the sameas under the “modified prospective” method, but also permits entities torestate financial statements of previous periods based on proforma disclosuresmade in accordance with SFAS 123.

 

The Companycurrently utilizes a standard option pricing model (i.e., Black-Scholes) tomeasure the fair value of stock options granted to Employees.  While SFAS 123R permits entities to continueto use such a 

 

8

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model, thestandard also permits the use of a “lattice” model.  The Company has not yet determined whichmodel it will use to measure the fair value of employee stock options upon theadoption of SFAS 123R.

 

SFAS 123R alsorequires that the benefits associated with the tax deductions in excess ofrecognized compensation cost be reported as a financing cash flow, rather thanas an operating cash flow as required under current literature.  This requirement will reduce net operatingcash flows and increase net financing cash flows in periods after the effectivedate.  These future amounts cannot beestimated because they depend on, among other things, when employees exercisestock options.

 

The Companycurrently expects to adopt SFAS 123R effective April 1, 2006, based on thenew effective date announced by the SEC using the modified-prospective method;however, the Company has not yet determined which of the aforementioned optionpricing models it will use.  In addition,the Company has not yet determined the financial statement impact of adopting SFAS123R for periods beyond fiscal year 2006.

 

9

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**Item2:  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

***Special Note About Forward-Looking Statements - This report containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934 that describe the business and prospects ofFrontier Airlines, Inc. and the expectations of our company andmanagement. All statements included in this report that address activities,events or developments that we expect, believe, intend or anticipate will ormay occur in the future, are forward-looking statements. When used in thisdocument, the words “estimate,” “anticipate,” “project” and similar expressionsare intended to identify forward-looking statements. Forward-looking statementsare inherently subject to risks and uncertainties, many of which cannot bepredicted with accuracy and some of which might not even be anticipated.  These risks and uncertainties include, butare not limited to:  the timing of, andexpense associated with, expansion and modification of our operations in accordancewith our business strategy or in response to competitive pressures or otherfactors; failure of our new markets to perform as anticipated; the inability toachieve a level of revenue through fares sufficient to obtain profitability dueto competition from other air carriers and excess capacity in the markets weserve;  the inability to obtainsufficient gates at Denver International Airport to accommodate the expansionof our operations; general economic factors and behavior of the fare-payingpublic and its potential impact on our liquidity; terrorist attacks or otherincidents that could cause the public to question the safety and/or efficiencyof air travel; operational disruptions, including weather; industryconsolidation; the impact of labor disputes; enhanced security requirements;changes in the government’s policy regarding relief or assistance to theairline industry; the economic environment of the airline industry generally; unforeseencosts of satisfying the return conditions imposed by lessors of Boeing aircraft;increased federal scrutiny of low-fare carriers generally that may increase ouroperating costs or otherwise adversely affect us; actions of competingairlines, such as increasing capacity and pricing actions of United Airlines (“United”)and other competitors and other actions taken by United either in or out ofbankruptcy protection; the availability of suitable aircraft, which may inhibitour ability to achieve operating economies and implement our business strategy;the unavailability of, or inability to secure upon acceptable terms, debt oroperating lease financing necessary to acquire aircraft which we have ordered;uncertainties regarding aviation fuel prices, and various risk factors to ourbusiness discussed elsewhere in this report. Because our business, like that of the airline industry generally, ischaracterized by high fixed costs relative to revenues, small fluctuations inour revenue per available seat mile (“RASM”) or cost per available seat mile (“CASM”)can significantly affect operating results****. These risks and factors are not exclusive, and we undertake noobligation to publicly update or revise any forward-looking statements toreflect events or circumstances that may arise after the date of this filing.  A discussion of some of these risk factors isincluded in the Company’s Annual Report on Form 10-K for the year ended March 31,2005.  These reports should be read intheir entirety since no single section deals with all aspects of thesematters.*

 

**OurBusiness**

 

Now in our 12th year of operations, we are a low cost,affordable fare airline operating primarily in a hub and spoke fashionconnecting cities coast to coast through our hub at Denver International Airport (“DIA”).  We are the second largest jet service carrier at DIA based on departures.  As of July 22, 2005, we, inconjunction with Frontier JetExpress operated by Horizon Air Industries, Inc.(“Horizon”), operate routes linking our Denver hub to 46 U.S. cities spanningthe nation from coast to coast and to five cities in Mexico.  During the year ended March 31, 2005, webegan certain point-to-point routes to Mexico from non-hub cities.  As of July 22, 2005, we provided jetservice to Cancun, Mexico directly from four non-hub cities.

 

We were organized in February 1994 and we beganflight operations in July 1994 with two leased Boeing 737-200 jets.  We have since expanded our fleet in serviceto 49 jets as of July 25, 2005 (33 of which we lease and 16 of which weown), consisting of 42 Airbus A319s and seven Airbus A318s.  In April 2005 we completed our plan toreplace our Boeing aircraft with new purchased and leased Airbus jetaircraft.  During the quarters ended June 30,2005 and 2004, we increased year-over-year capacity by 6.1% and 32.0%,respectively.  During the quarter ended June 30,2005, we increased mainline passenger traffic by 17.6% over the prior year,outpacing our increase in capacity during the period.  We intend to continue our growth strategy andwill add frequency to new markets and existing markets that we believe areunderserved.

 

In September 2003,we signed a 12-year agreement with Horizon, under which Horizon operates up to 

 

10

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nine 70-seat CRJ 700aircraft under our Frontier JetExpress brand. The service began on January 1, 2004 with three aircraft.  We have increased JetExpress aircraft to atotal of eight aircraft in service and one spare aircraft as of July 22,2005.  We control the scheduling of thisservice.  We reimburse Horizon for itsexpenses related to the operation plus a margin.  The agreement provides for financialincentives, penalties and changes to the margin based on the performance ofHorizon and our financial performance. As of July 22, 2005, Frontier JetExpress provides service toAlbuquerque, New Mexico; Boise, Idaho; Billings, Montana; El Paso, Texas;Little Rock, Arkansas; Oklahoma City, Oklahoma; Spokane, Washington; Tucson,Arizona; and Tulsa, Oklahoma, and supplements our mainline service to San Jose,California; Omaha, Nebraska; and Austin, Texas.

 

We currently operate on16 gates on Concourse A at DIA on a preferential basis.  We use these 16 gates and share use of up tofour common use regional jet parking positions to operate approximately 248daily mainline flight departures and arrivals and 52 Frontier JetExpress dailysystem flight departures and arrivals.

 

During the quarterended June 30, 2005, we added departures from DIA to the following citieswith commencement dates as follows:

 
| **Destination**     | ** ** | **Commencement  Date** |
|---------------------|------------|------------------------|
|                |       |                   |
| Detroit, Michigan   |       | May 8, 2005       |
| Tulsa, Oklahoma (1) |       | May 22, 2005      |
| Akron-Canton, Ohio  |       | June 15, 2005     |
| San Antonio, Texas  |       | June 26, 2005     |

 

----

(1) Operatedexclusively by Frontier JetExpress.

 

We intend to beginFrontier JetExpress service to Dayton International Airport and Fresno YosemiteInternational Airport with two daily round-trip frequencies on August 31,2005.

 

We have submitted applications to the United StatesDepartment of Transportation (“DOT”) for authority to provide jet transportationto Acapulco from our Denver hub.  On June 30,2005 we received approval from the DOT to fly non-stop from Kansas City toPuerto Vallarta, Mexico and we intend to offer three flights each weekcommencing December 17, 2005.   Wealso received approval from the DOT in June to fly non-stop from DIA toCozumel, Mexico and we intend to begin mainline service with round-tripfrequencies three times per week in December 2005

 

Due to our increasedtraffic in the first part of fiscal year 2006, we increased frequencies in thefollowing markets:  Reno, Nevada; SanJose, San Francisco; Sacramento California; Nashville, Tennessee; Dallas,Texas; St. Louis, Missouri; Milwaukee, Wisconsin; and Minneapolis-St. Paul,Minnesota.  In addition, we expanded the2005 season for Anchorage, Alaska to January 3, 2006 and added anotherfrequency on June 19, 2005.

 

In addition, we intend toincrease service to other destinations in Mexico as follows:  (1) resume seasonal service toIxtapa/Zihuatanejo on November 19, 2005, adding an additional weeklyfrequency from the 2004 season for a total of three round-trip frequencies perweek, (2) increase service from Denver to Cabo San Lucas and PuertoVallarta beginning December 17, 2005, with daily service plus anadditional Saturday frequency during peak periods to both destinations, and (3) increaseto three flights each day to Cancun from Denver during the peak winter holidayperiods, effective December 17, 2005.  This represents an increase in our Cancunservice from Denver and is part of our growing Cancun operation, whichcurrently includes non-stop service to Cancun from St. Louis, Kansas City, SaltLake City, Nashville and Denver.

 

Ourfilings with the Securities and Exchange Commission are available at no cost onour website, www.frontierairlines.com, in the Investor Relations foldercontained in the section titled “About Frontier”.  These reports include our annual report on Form 10-K,our quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16reports on Forms 3, 4 and 5, and any related amendments or other documents, andare made available as soon as reasonably practicable after we file thematerials with the SEC.

 

11

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Our corporate headquartersare located at 7001 Tower Road, Denver, Colorado 80249.  Our administrative office telephone number is720-374-4200 and our reservations telephone number is 800-432-1359.

 

**Overviewof Operations and the Industry**

 

We intend to continue ourfocused growth strategy, which included the completion of a fleet transitionfrom a Boeing fleet to an all Airbus fleet in April 2005.  One of the key elements of this strategy isto produce cost savings because crew training is standardized for aircraft of acommon type, maintenance issues are simplified, spare parts inventory isreduced, and scheduling is more efficient. As of July 22, 2005, we have remaining firm purchase commitmentsfor 11 Airbus 319 aircraft from Airbus, and intend to lease as many as fiveadditional A319 aircraft from third party lessors over the next two years.  We intend to use these additional aircraft toprovide service to new markets and/or to add frequencies to existing marketsthat we believe are underserved.

 

Webelieve we have a proven management team and a strong company culture and willcontinue to focus on differentiating the product and service we provide to ourpassengers.  We believe our affordablepricing, accommodating service and comfortable airplanes distinguish ourproduct and service from our competitors. Safety is a primary concern, and we are proud that our maintenance staffhas been awarded the FAA Diamond Award for Excellence for six straight years –an award that recognizes our commitment to the ongoing training and educationof our maintenance staff.  Our productbegins with the Airbus aircraft, which offers a comfortable passenger cabinthat we configure with one-class of comfortable seating, superb leg room, andin-seat 24 channel live television entertainment.  We also provide three additional channelsthat offer current-run pay-per-view movies. Augmenting our product is our team of dedicated employees who strive tooffer friendly customer service and keep operations running efficiently, whichwe believe leads to lower operating costs.

 

The airline industrycontinues to operate in an intensely competitive market.  We expect competition will remain intense, asadverse economic conditions continue to exist. Business and leisure travelers continue to reevaluate their travelbudgets and remain highly price sensitive. Increased competition has prompted aggressive strategies fromcompetitors through discounted fares and sales promotions.  Additionally, the intense competition hascreated financial hardship for some of our competitors that have been forced toreduce capacity or have been forced into bankruptcy protection.

 

OnJuly 21, 2005 our flight attendants finalized the vote in which theydecided not to be represented by the Association of FlightAttendants-CWA (“AFA-CWA”).  This is thefourth unsuccessful attempt by the AFA-CWA to represent our flight attendants.

 

**Quarter in Review**

 

During the quarter ended June 30,2005, we had a net loss of $2,734,000. This was driven by rising fuel costs and extremely challenging conditionsin the industry with sustained widespread price competition.  Fuel costs have risen sharply since January 2004and may continue to increase.  Our averagefuel cost per gallon, including hedging activities, was $1.78 during thequarter ended June 30, 2005, compared to $1.25 during the quarter ended June 30,2004, an increase of 42.4%.   The averagecost of fuel for the quarter ended June 30, 2005 includes unrealizedhedging losses of $1,007,000 or $0.03 per gallon, as compared to $477,000 ofunrealized hedging losses, or $0.01 per gallon, for the quarter ended June 30,2004.

 

**Highlights from the Quarter**

 

•                  Took delivery of four new Airbus A319 aircraftand retired three Boeing 737-300 aircraft.

 

•                  Began mainline service to Detroit, Michigan; Akron, Ohio; San Antonio,Texas and Frontier JetExpressservice to Tulsa, Oklahoma.

 

•                  Expanded service to Reno, Nevada from onedaily round-trip to two daily round-trips, service to/from San Jose from oneregional jet flight, operated by Frontier JetExpress, to two mainline flightsand one 

 

12

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regionaljet flight and added mainline service to Omaha, Nebraska.

 

•                  Signed pre-purchase seat agreements with AppleVacations for flights between Denver and four vacation destinations inMexico:  Cancun, Puerto Vallarta,Mazatlan and Cabo San Lucas which began in June 2005.

 

•                  Began providing a scheduled charter for AppleVacations between Chicago, Illinois and Cancun, Mexico.

 

•                  Unveiled the More Store(www.frontiermorestore.com), which is an online miles shopping experiencedesigned to provide Ascent and Summit level EarlyReturn® members with theability to purchase merchandise online with frequent flyer miles in anauction-style bidding process or with a stated amount of miles.

 

**Resultsof Operations**

 

We had a net loss of $2,734,000or 8¢ per diluted share for the quarter ended June 30, 2005, as comparedto a net loss of $6,574,000 or 18¢ per diluted share for the quarter ended June 30,2004.   Included in our net loss for thequarter ended June 30, 2005 were the following items before the effect of incometaxes: a charge of $3,312,000 relating to three leased Boeing 737-300 aircraftwe ceased using during the quarter and an unrealized loss on fuel hedges of$1,007,000.   These items, net of incometaxes, increased our net loss by 8¢ per share. Included in our net loss for the quarter ended June 30, 2004 werethe following items before the effect of income taxes:  a loss of $530,000 on the sale of two AirbusA319 aircraft in sale-leaseback transactions and other assets, a write down of$326,000 of the carrying value of expendable Boeing 737 inventory, and anunrealized loss on fuel hedges of $477,000.  These items, net of income taxes, increased our net loss by 3¢ pershare.

 

Our mainlinepassenger yield per RPM was 11.24¢ and 10.79¢ for the quarters ended June 30,2005 and 2004, respectively, or an increase of 4.2%.  Our mainline average fare was $102.06 for thequarter ended June 30, 2005 as compared to $100.50 for the quarter ended June 30,2004, an increase of 1.6%.  Our length ofhaul was 977 and 988 miles for the quarters ended June 30, 2005 and 2004,respectively, or a decrease of 1.1%.  Ourmainline load factor was 78.4% for the quarter ended June 30, 2005 ascompared to 70.7% for the quarter ended June 30, 2004, an increase of 7.7points.  The decrease in our length ofhaul and increase in our average fare are primarily due to longer haul lengthsin the quarter ended June 30,2004, and introductory fares in the quarterended June 30, 2004 for our launch of the first non-hub focus city of LosAngeles International Airport. (“LAX”). Due to disappointing passenger loads and yields, all point-to-pointroute service from LAX was discontinued by February 2005.  Our mainline passenger revenue per availableseat mile (“RASM”) for the quarter ended June 30, 2005 and 2004 was 8.82¢and 7.63¢, respectively, an increase of 15.6%.

 

Our mainline cost per availableseat mile, (“CASM”) for the quarters ended June 30, 2005 and 2004 was 9.10¢and 8.09¢, respectively, an increase of 12.5%. The increase in CASM was largely due to an increase in fuel expense of2.55¢ per ASM from 1.81¢ per ASM for the periods ending June 30, 2005 and2004, respectively, an increase of 40.9%. Our mainline CASM excluding fuel for the quarter ended June 30,2005 was 6.55¢ compared to 6.28¢ for the comparable period last year, anincrease of 4.3%.  Included in ourmainline CASM in the quarter ended June 30, 2005 was 0.14¢ for earlyreturn of three leased Boeing aircraft and 0.05¢ per ASM for rents associatedwith the late return of certain aircraft which. General wage increases andincreases in health insurance also caused CASM to increase by 0.05¢.  The increase in CASM was partially offset byan estimated 0.11¢ in credits expected as a result of the 2004 DenverInternational Airport landing fee and facilities calendar 2004 costreconciliation.

 

An airline’smainline break-even load factor is the passenger load factor that will resultin operating revenues being equal to operating expenses, assuming constantrevenue per passenger mile and expenses. For the quarter ended June 30, 2005, our mainline break-even loadfactor was 79.5% compared to our achieved passenger load factor of 78.4%.  Our mainline break-even load factor for thequarter ended June 30, 2004, was 74.1% compared to our achieved passengerload factor of 70.7%.  Our mainlinebreak-even load factor increased from the prior comparable period as a resultof an increase in our mainline CASM to 9.10¢ during the 

 

13

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period ended June 30,2005 (primarily due to increases in fuel costs) from 8.09¢ during the periodended June 30, 2004, or 12.5%, partially offset by a increase in ourmainline RASM of 15.6%.

 

Small fluctuations in our RASM or CASM cansignificantly affect operating results because we, like other airlines, havehigh fixed costs in relation to revenues. Airline operations are highlysensitive to various factors, including the actions of competing airlines andgeneral economic factors, which can adversely affect our liquidity, cash flowsand results of operations.

 

14

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The followingtable provides certain of our financial and operating data for the year ended March 31,2005 and the quarters ended June 30, 2005 and 2004.

 
| ** **                                         | ** ** | **Year Ended  March 31,** | ** ** | **Quarters Ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **2005**                       | ** ** | **2005**                         | ** ** | **2004** | ** ** |
|                                               |       |                           |       |                             |       |   |   |
| **Selected Operating Data:**                       |       |                           |       |                             |       |   |   |
| Passenger  revenue (000s) (1)                      |       |                           |       |                             |       |   |   |
| Mainline                                           |       | $                              | 731,822    |                             | $          | 208,067 |   | $ | 169,437 |   |
| Regional  Partner                                  |       | 84,269                         |       | 22,954                           |       | 19,126 |   |
| System  Combined                                   |       | $                              | 816,091    |                             | $          | 231,021 |   | $ | 188,563 |   |
| Revenue  passengers carried (000’s)           |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 6,653                          |       | 1,884                            |       | 1,584 |   |
| Regional  Partner                                  |       | 872                            |       | 233                              |       | 203 |   |
| System  Combined                                   |       | 7,525                          |       | 2,117                            |       | 1,787 |   |
| Revenue  passenger miles (RPMs) (000’s) (2)   |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 6,587,589                      |       | 1,840,099                        |       | 1,564,587 |   |
| Regional  Partner                                  |       | 527,205                        |       | 136,757                          |       | 131,554 |   |
| System  Combined                                   |       | 7,114,794                      |       | 1,976,856                        |       | 1,696,141 |   |
| Available  seat miles (ASMs) (000’s) (3)      |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 9,115,868                      |       | 2,345,897                        |       | 2,211,652 |   |
| Regional  Partner                                  |       | 736,287                        |       | 188,685                          |       | 177,578 |   |
| System  Combined                                   |       | 9,852,155                      |       | 2,534,582                        |       | 2,389,230 |   |
| Passenger  load factor (4)                         |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 72.3                           | %          | 78.4                             | %          | 70.7 | % |
| Regional  Partner                                  |       | 71.6                           | %          | 72.5                             | %          | 74.1 | % |
| System  Combined                                   |       | 72.2                           | %          | 78.0                             | %          | 71.0 | % |
|                                               |       |                           |       |                             |       |   |   |
| Mainline  break-even load factor (5)               |       | 75.0                           | %          | 79.5                             | %          | 74.1 | % |
| Mainline  block hours (6)                          |       | 182,581                        |       | 47,379                           |       | 43,974 |   |
| Mainline  departures                               |       | 72,888                         |       | 19,314                           |       | 17,650 |   |
| Mainline  average seats per departure              |       | 130                            |       | 129                              |       | 131 |   |
| Mainline  average stage length                     |       | 962                            |       | 940                              |       | 957 |   |
| Mainline  average length of haul                   |       | 990                            |       | 977                              |       | 988 |   |
| Mainline  average daily block hour utilization (7) |       | 11.1                           |       | 11.5                             |       | 11.7 |   |

 

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| ** **                                         | ** ** | **Year Ended  March 31,** | ** ** | **Quarters Ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **2005**                       | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                         | ** ** | ** **                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Selected Operating Data (continued):**           | ** ** | ** **                     | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Yield  per RPM (cents) (8) (9)                |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 11.03                          |       | 11.24                            |       | 10.79 |   |
| Regional  Partner                                  |       | 15.98                          |       | 16.78                            |       | 14.54 |   |
| System  Combined                                   |       | 11.39                          |       | 11.63                            |       | 11.08 |   |
| Total  yield per RPM (cents) (10)                  |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 11.38                          |       | 11.60                            |       | 11.08 |   |
| Regional  Partner                                  |       | 15.98                          |       | 16.78                            |       | 14.54 |   |
| System  Combined                                   |       | 11.72                          |       | 11.96                            |       | 11.34 |   |
| Yield  per ASM (cents) (9) (11)               |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 7.97                           |       | 8.82                             |       | 7.63 |   |
| Regional  Partner                                  |       | 11.45                          |       | 12.17                            |       | 10.77 |   |
| System  Combined                                   |       | 8.23                           |       | 9.07                             |       | 7.86 |   |
| Total  yield per ASM (cents) (12)                  |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 8.22                           |       | 9.10                             |       | 7.84 |   |
| Regional  Partner                                  |       | 11.45                          |       | 12.17                            |       | 10.77 |   |
| System  Combined                                   |       | 8.46                           |       | 9.33                             |       | 8.05 |   |
| Cost  per ASM (cents)                              |       |                           |       |                             |       |   |   |
| Mainline                                           |       | 8.42                           |       | 9.10                             |       | 8.09 |   |
| Regional  Partner                                  |       | 12.56                          |       | 12.78                            |       | 11.99 |   |
| System  Combined                                   |       | 8.73                           |       | 9.38                             |       | 8.38 |   |
| Mainline  fuel expense per ASM (cents)             |       | 2.04                           |       | 2.55                             |       | 1.81 |   |
| Mainline  cost per ASM excluding fuel (cents) (13) |       | 6.38                           |       | 6.55                             |       | 6.28 |   |
| Mainline  average fare (14)                        |       | $                              | 102.31     |                             | $          | 102.06 |   | $ | 100.50 |   |
| Mainline  average aircraft in service              |       | 44.9                           |       | 45.3                             |       | 41.4 |   |
| Mainline  aircraft in service at end of year       |       | 47                             |       | 48                               |       | 46 |   |
| Mainline  average age of aircraft at end of year   |       | 2.5                            |       | 1.9                              |       | 3.1 |   |
| Mainline  average fuel cost per gallon             |       | $                              | 1.41       |                             | $          | 1.78 |   | $ | 1.25 |   |
| Mainline  fuel gallons consumed (000s)             |       | 131,906                        |       | 33,691                           |       | 32,118 |   |

 

16

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(1)               “Passenger revenue” includes revenues for reducedrate stand-by passengers, charter revenues, administrative fees, and revenuerecognized for unused tickets that are greater than one year from issuancedate.  The incremental revenue frompassengers connecting from regional flights to mainline flights is included inour mainline passenger revenue.

(2)               “Revenue passenger miles,” or RPMs, aredetermined by multiplying the number of fare-paying passengers carried by thedistance flown.  This represents thenumber of miles flown by revenue paying passengers.

(3)               “Available seat miles,” or ASMs, aredetermined by multiplying the number of seats available for passengers by thenumber of miles flown.

(4)               “Passenger load factor” is determined bydividing revenue passenger miles by available seat miles.  This represents the percentage of aircraftseating capacity that is actually utilized.

(5)               “Break-even load factor” is the passenger loadfactor that will result in operating revenues being equal to operatingexpenses, assuming constant revenue per passenger mile and expenses.

 

Areconciliation of the components of the calculation of mainline break-even loadfactor is as follows:

 
| ** **                                                                                  | ** ** | **Year Ended**     | ** ** | ** **                       | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                                                                  | ** ** | **March 31,** | ** ** | **Quarters Ended June 30,** | ** ** |
| ** **                                                                                  | ** ** | **2005**           | ** ** | **2005**                         | ** ** | **2004**   | ** ** |
| ** **                                                                                  | ** ** | **(in thousands)** | ** ** |
| Net  loss                                                                                   |       | $                  | 23,430     |                             | $          | 2,734      |       | $ | 6,574 |   |
| Income  tax benefit                                                                         |       | 12,408             |       | 1,345                            |       | 3,638      |       |
| Passenger  revenue                                                                          |       | 731,822            |       | 208,067                          |       | 169,437    |       |
| Regional  partner expense                                                                   |       | (92,481            | )          | (24,118                          | )          | 19,126     |       |
| Regional  partner revenue                                                                   |       | 84,269             |       | 22,954                           |       | (21,293    | )          |
| Charter  revenue                                                                            |       | (5,381             | )          | (1,211                           | )          | (656       | )          |
|                                                                                        |       |               |       |                             |       |       |       |
| Passenger  revenue (excluding charter and regional partner revenue) required to  break-even |       | $                  | 754,067    |                             | $          | 209,771    |       | $ | 176,826 |   |

 

The calculation of the break-even load factor follows:

 
| ** **                                                                                           | ** ** | **Year Ended**     | ** ** | ** **                       | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **March 31,** | ** ** | **Quarters Ended June 30,** | ** ** |
| ** **                                                                                           | ** ** | **2005**           | ** ** | **2005**                         | ** ** | **2004**   | ** ** |
| ** **                                                                                           | ** ** | **(in thousands)** | ** ** |
|                                                                                                 |       |               |       |                             |       |       |       |
| Passenger  revenue (excluding charter and regional partner revenue) required to break-  even ($000s) |       | $                  | 754,067    |                             | $          | 209,771    |       | $ | 176,826 |   |
| Mainline  yield per RPM (cents)                                                                      |       | 11.03              |       | 11.24                            |       | 10.79      |       |
|                                                                                                 |       |               |       |                             |       |       |       |
| Mainline  revenue passenger miles (000s) to break even assuming constant yield per RPM               |       | 6,838,110          |       | 1,866,030                        |       | 1,638,795  |       |
|                                                                                                 |       |               |       |                             |       |       |       |
| Mainline  available seat miles (000’s)                                                          |       | 9,115,868          |       | 2,345,897                        |       | 2,211,652  |       |
|                                                                                                 |       |               |       |                             |       |       |       |
| **Mainline break-even load factor**                                                                  |       | 75.0               | %          | 79.5                             | %          | 74.1       | %          |
|                                                                                                      |            |                    |            |                                  |            |            |            |  |  |  |

 

*Note –Some amounts may not add or recalculate due to rounding.*

 

17

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(6)               “Mainline block hours” represent the timebetween aircraft gate departure and aircraft gate arrival.

(7)               “Mainline average daily block hour utilization”represents the total block hours divided by the number of aircraft days inservice, divided by the weighted average of aircraft in our fleet during thatperiod.  The number of aircraft includes all aircraft on our operatingcertificate, which includes scheduled aircraft, as well as aircraft out ofservice for maintenance and operational spare aircraft, and excludes aircraftremoved permanently from revenue service or new aircraft not yet placed inrevenue service.  This represents theamount of time that our aircraft spend in the air carrying passengers.

(8)               “Yield per RPM” is determined by dividingpassenger revenues (excluding charter revenue) by revenue passenger miles.

(9)               For purposes of these yield calculations,charter revenue is excluded from passenger revenue.  These figures may be deemed non-GAAPfinancial measures under regulations issued by the Securities and ExchangeCommission.  We believe that presentation of yield excludingcharter revenue is useful toinvestors because charter flights are not included in RPM’s or ASM’s.  Furthermore, in preparing operating plans andforecasts, we rely on an analysis of yield exclusive of charter revenue.  Our presentation of non-GAAP financialmeasures should not be viewed as a substitute for our financial or statisticalresults based on GAAP.  The calculationof passenger revenue excluding charter revenue is as follows:

 
| ** **                                       | ** ** | **Year Ended**     | ** ** | ** **                       | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                       | ** ** | **March 31,** | ** ** | **Quarters Ended June 30,** | ** ** |
| ** **                                       | ** ** | **2005**           | ** ** | **2005**                         | ** ** | **2004**   | ** ** |
| ** **                                       | ** ** | ** **         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Passenger  revenues - mainline, as reported      |       | $                  | 731,822    |                             | $          | 208,067    |       | $ | 169,437 |   |
| Less:  charter revenue                           |       | 5,381              |       | 1,211                            |       | 656        |       |
| Passenger  revenues - mainline excluding charter |       | 726,441            |       | 206,856                          |       | 168,781    |       |
| Add:  Passenger revenues - regional partner      |       | 84,269             |       | 22,954                           |       | 19,126     |       |
| Passenger  revenues, system combined             |       | $                  | 810,710    |                             | $          | 229,810    |       | $ | 187,907 |   |

 

(10)         “Totalyield per RPM” is determined by dividing total revenues by revenue passengermiles.  This represents the averageamount one passenger pays to fly one mile.

(11)         “Yieldper ASM” or “RASM” is determined by dividing passenger revenues (excludingcharter revenue) by available seat miles.

(12)         “Totalyield per ASM” is determined by dividing total revenues by available seatmiles.

(13)         Thismay be deemed a non-GAAP financial measure under regulations issued by theSecurities and Exchange Commission.  Webelieve the presentation of financial information excluding fuel expense isuseful to investors because we believe that fuel expense tends to fluctuatemore than other operating expenses. Excluding fuel from the cost of mainline operations facilitates thecomparison of results of operations between current and past periods andenables investors to forecast future trends in our operations.  Furthermore, in preparing operating plans andforecasts, we rely, in part, on trends in our historical results of operationsexcluding fuel expense.  However, ourpresentation of non-GAAP financial measures should not be viewed as asubstitute for our financial results determined in accordance with GAAP.

(14)         “Mainlineaverage fare” excludes revenue included in passenger revenue for charter and reducedrate stand-by passengers, administrative fees, and revenue recognized forunused tickets that are greater than one year from issuance date.

 

18

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The followingtable provides our operating revenues and expenses for our mainline operationsexpressed as cents per total mainline ASMs and as a percentage of totalmainline operating revenues, as rounded, for the year ended March 31, 2005and the quarters ended June 30, 2005 and 2004.  Regional partner revenues, expenses and ASMswere excluded from this table to provide comparable amounts to the prior periodpresented.

 
| ** **                            | ** ** | **Year Ended March 31,** | ** ** | **Quarters Ended June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **2005**                      | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                            | ** ** | ** **                    | ** ** | **% Of**                         | ** ** | ** ** | ** ** | **% Of** | ** ** | ** ** | ** ** | **% Of** | ** ** |
| ** **                            | ** ** | **Cost Per**                  | ** ** | **Total**                        | ** ** | **Cost Per** | ** ** | **Total** | ** ** | **Cost Per** | ** ** | **Total** | ** ** |
| ** **                            | ** ** | **ASM**                       | ** ** | **Revenue**                      | ** ** | **ASM** | ** ** | **Revenue** | ** ** | **ASM** | ** ** | **Revenue** | ** ** |
|                                  |       |                          |       |                             |       |   |   |   |   |   |   |   |   |
| Revenues:                             |       |                          |       |                             |       |   |   |   |   |   |   |   |   |
| Passenger  - mainline                 |       | 8.03                          |       | 97.6                             | %          | 8.87 |   | 97.5 | % | 7.66 |   | 97.8 | % |
| Cargo                                 |       | 0.05                          |       | 0.7                              | %          | 0.05 |   | 0.6 | % | 0.07 |   | 0.8 | % |
| Other                                 |       | 0.14                          |       | 1.7                              | %          | 0.18 |   | 1.9 | % | 0.11 |   | 1.4 | % |
| Total  revenues                       |       | 8.22                          |       | 100.0                            | %          | 9.10 |   | 100.0 | % | 7.84 |   | 100.0 | % |
|                                  |       |                          |       |                             |       |   |   |   |   |   |   |   |   |
| Operating  expenses:                  |       |                          |       |                             |       |   |   |   |   |   |   |   |   |
| Flight  operations                    |       | 1.45                          |       | 17.6                             | %          | 1.48 |   | 16.3 | % | 1.44 |   | 18.3 | % |
| Aircraft  fuel expense                |       | 2.04                          |       | 24.8                             | %          | 2.55 |   | 28.0 | % | 1.81 |   | 23.1 | % |
| Aircraft  lease expense               |       | 0.95                          |       | 11.6                             | %          | 0.99 |   | 10.8 | % | 0.85 |   | 10.9 | % |
| Aircraft  and traffic servicing       |       | 1.42                          |       | 17.3                             | %          | 1.36 |   | 14.8 | % | 1.43 |   | 18.3 | % |
| Maintenance                           |       | 0.84                          |       | 10.2                             | %          | 0.85 |   | 9.4 | % | 0.86 |   | 10.9 | % |
| Promotion  and sales                  |       | 0.84                          |       | 10.2                             | %          | 0.93 |   | 10.3 | % | 0.90 |   | 11.5 | % |
| General  and administrative           |       | 0.53                          |       | 6.5                              | %          | 0.52 |   | 5.7 | % | 0.47 |   | 6.0 | % |
| Aircraft  lease exit costs            |       | —                        |       | —                           |       | 0.14 |   | 1.6 | % | — |   | — |   |
| Losses  on sales of assets            |       | —                        |       | —                           |       | — |   | — |   | 0.02 |   | 0.3 | % |
| Impairment  and other related charges |       | 0.06                          |       | 0.7                              | %          | — |   | — |   | 0.01 |   | 0.1 | % |
| Depreciation                          |       | 0.29                          |       | 3.5                              | %          | 0.28 |   | 3.1 | % | 0.30 |   | 3.8 | % |
| Total  operating expenses             |       | 8.42                          |       | 102.4                            | %          | 9.10 |   | 100.0 | % | 8.09 |   | 103.2 | % |

 

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**Revenues**

 

Industry farepricing behavior has a significant impact on our revenues.  Because of the elasticity of passengerdemand, we believe that increases in fares may at certain levels result in adecrease in passenger demand in many markets. We cannot predict future fare levels, which depend to a substantialdegree on actions of competitors and the economy.  When sale prices or other price changes areinitiated by competitors in our markets, we believe that we must, in mostcases, match those competitive fares in order to maintain our market share.  In addition, certain markets we serve aredestinations that cater to vacation or leisure travelers, resulting in seasonalfluctuations in passenger revenues in these markets.

 

*Mainline PassengerRevenue*s.  Mainline passengerrevenues totaled $208,067,000 for the quarter ended June 30, 2005 comparedto $169,437,000 for the quarter ended June 30, 2004, an increase of 22.8%.  Mainline passenger revenue includes revenuesfor reduced rate standby passengers, administrative fees, revenue recognizedfor tickets that are not used within one year from their issue dates, andrevenue recognized from our co-branded credit card arrangement.  We carried 1,884,000 mainline revenuepassengers during the quarter ended June 30, 2005 compared to 1,584,000mainline revenue passengers during the quarter ended June 30, 2004, anincrease of 18.9%.  We had an average of45.3 aircraft in service during the quarter ended June 30, 2005 comparedto an average of 41.4 aircraft in service during the quarter ended June 30,2004, an increase of 9.4%.  Mainline ASMsincreased to 2,345,897,000 for the quarter ended June 30, 2005 from2,211,652,000 for the quarter ended June 30, 2004, an increase of 6.1%.  Mainline RPMs for the quarter ended June 30,2005 were 1,840,099,000 compared to 1,564,587,000 for the quarter ended June 30,2004, an increase of 17.6%, outpacing the increase in mainline ASMs.  Ourmainline RASM increased to 8.82¢ from 7.63¢, an increase of 15.6%.  Our mainline average fare was $102.06 for thequarter ended June 30, 2005 as compared to $100.50 for the quarter ended June 30,2004, an increase of 1.6%.  Our length ofhaul was 977 and 988 miles for the quarters ended June 30, 2005 and 2004,respectively, or a decrease of 1.1%.  Ourmainline load factor increased to 78.4% for the quarter ended June 30,2005 as compared to 70.7% for the quarter ended June 30, 2004, an increaseof 7.7 points.  The decrease in ourlength of haul, our increase in load factors and increase in our average farewere related to the elimination of the LAX focus city in the fourth quarter offiscal year 2005, which included transcontinental flights between the east andwest coast, introductory fares and disappointing load factors.

 

*PassengerRevenues – Regional Partner*. Regional partner revenues, consisting of revenues from FrontierJetExpress operated by Horizon, totaled $22,954,000 for the quarter ended June 30,2005 and $19,126,000 for the quarter ended June 30, 2004, or a 20.0%increase.  The incremental revenue frompassengers connecting from regional flights to mainline flights is included inour mainline passenger revenue. Frontier JetExpress started with three aircraftin January 2004 and completed its fleet on May 23, 2004 with eightaircraft in service and one spare.  Assuch, the increase in revenue from Frontier JetExpress is partially a result ofan increase in the average number of aircraft in service during the period from7.4 to 8.0, an increase of 8.1% with a corresponding increase of 14.7% of thetotal number of passengers traveled.  Theincrease in revenue can also be attributed to an increase in the average fareto $98.52 from $94.23, or an increase of 4.6%.

 

*CargoRevenues.*  Cargorevenues, consisting of revenues from freight and mail service, totaled $1,219,000and $1,427,000 for the quarters ended June 30, 2005 and 2004, representing0.6% and 0.8% of total operating revenues excluding regional partner revenues,respectively, or a decrease of 14.6%. During the quarter ended June 30, 2004, we determined that carryingmail for the United States Postal Service was not profitable and we terminatedour contract effective July 1, 2004. As such, cargo revenues for the quarter ended June 30, 2005 onlyincluded revenue from our freight service.

 

*OtherRevenues*.  Otherrevenues, comprised principally of interline and ground handling fees, liquorsales, LiveTV sales, pay-per-view movies and excess baggage fees, totaled$4,170,000 and $2,432,000 or 1.9% and 1.4% of total operating revenuesexcluding regional partner revenue for the quarters ended June 30, 2005and 2004, respectively, an increase of 71.5%.  Other revenue increased over the priorcomparable period primarily as a result of increased passenger purchases ofLiveTV and pay-per-view movies and an increase in ground handling feeagreements.

 

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**OperatingExpenses**

 

Operating expensesinclude expenses related to flight operations, aircraft and traffic servicing,maintenance, promotion and sales, Frontier JetExpress operations, general andadministrative, depreciation and expenses related to our transition to an allAirbus fleet.  Total operating expenseswere $237,633,000 and $200,232,000 for the quarters ended June 30, 2005and 2004, respectively, and represented 100.5% and 104.1% of total revenue,respectively.  Operating expenses decreasedas a percentage of revenue during the quarter ended June 30, 2005 largelya result of an increase in our average fare coupled with an increase in ourload factors of 10.9%. This increase was significantly offset by an increase of42.4% in our aircraft fuel cost per gallon for the quarter ended June 30,2005 as compared to the quarter ended June 30, 2004.

 

***Salaries,Wages and Benefits****.*  We record salaries, wages and benefits withinthe specific expense category identified in our statements of operations towhich they pertain.  Salaries, wages andbenefits increased 14.2% to $54,335,000 compared to $47,581,000, and were 25.5%and 27.5% of total mainline revenues for the quarter ended June 30, 2005and 2004, respectively.  Salaries, wagesand benefits increased over the prior comparable periods largely as a result ofan increase in the number of employees to support our continued capacitygrowth, general wage increases, increases in heath insurance costs and increasesin workers compensation insurance. Our employee count increased fromapproximately 4,400 in June 2004 to approximately 4,520 in June 2005,or an increase of 2.7%.

 

***FlightOperations.***  Flightoperations expenses increased 9.5% to $34,794,000 as compared to $31,789,000,and were 16.3% and 18.3% of total mainline revenue for the quarters ended June 30,2005 and 2004, respectively.  Flightoperations expenses increased due to an increase in mainline block hours from43,974 for the quarter ended June 30, 2004 to 47,379 for the quarter endedJune 30, 2005, an increase of 7.7%. Flight operations expenses include all expenses related directly to theoperation of the aircraft excluding depreciation of owned aircraft and aircraftlease expenses and including insurance expenses, pilot and flight attendantcompensation, in-flight catering, crew overnight expenses, flight dispatch andflight operations administrative expenses.

 

Aircraft insuranceexpenses totaled $2,696,000 (1.3% of total mainline revenue) and $2,646,000(1.5% of total mainline revenue) for the quarters ended June 30, 2005 and2004, respectively.  Aircraft insuranceexpenses were .15¢ and .17¢ per RPM for the quarters ended June 30, 2005and 2004, respectively.  Our aircrafthull and liability coverage renewed on June 7, 2004 for one year with a30% decrease in premiums from the prior policy year and we extended our policyon June 7, 2005 through December 31, 2005 at premiums that were furtherreduced by 14%.  In December 2002, through authoritygranted under the Homeland Security Act of 2002, the U.S. government expandedits insurance program to enable airlines to elect either the government’sexcess third-party war risk coverage or for the government to become theprimary insurer for all war risks coverage. We elected to take primary government coverage in February 2003 anddropped the commercially available war risk coverage. The current FAAwar risk policy is in effect until August 31, 2005.  We do not know whether the government willextend the coverage beyond August 2005, and if it does, how long the extensionwill last.  We expect that if thegovernment stops providing excess war risk coverage to the airline industry,the premiums charged by aviation insurers for this coverage will besubstantially higher than the premiums currently charged by the government orthe coverage will not be available from reputable underwriters.

 

Pilot and flight attendant salaries before payrolltaxes and benefits increased 18.1% to $19,938,000 compared to $16,889,000, andwere 9.3% and 9.7% of passenger mainline revenue for the quarters ended June 30,2005 and 2004, respectively.  We employedapproximately 1,307 pilots and flight attendants at June 30, 2005 ascompared to 1,326 at June 30, 2004, a decrease of 1.4%.  The decrease in the number of pilots andflight attendants employed is attributable to better utilization of our reservecrews. The increase in salaries was due to general increases in wage rates.

 

***Aircraft fuel expense.**** *Aircraftfuel expenses include both the direct cost of fuel including taxes as well asthe cost of delivering fuel into the aircraft. Aircraft fuel costs of $59,830,000 for 33,691,000 gallons used and $40,003,000for 32,118,000 gallons used and resulted in an average fuel cost of 1.78¢ and 1.25¢per 

 

21

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gallon for the quartersended June 30, 2005 and 2004, respectively, an increase of 42.4%.  Aircraft fuel costs, excluding unrealizedhedging losses, were 1.75¢ and 1.23¢ per gallon for the quarters ended June 30,2005 and 2004, respectively.  Aircraftfuel expenses represented 28.0% and 23.1% of total mainline revenue for thequarters ended June 30, 2005 and 2004, respectively.  Fuel prices are subject to change weekly, aswe purchase a very small portion in advance for inventory.  The results of operations for the quarterended June 30, 2005 include an unrealized derivative loss of $1,007,000and a realized net gain of approximately $2,130,000 in cash settlementsreceived from a counter-party recorded as a decrease in fuel expense.   Theresults of operations for the quarter ended June 30, 2004 include anunrealized derivative loss of $477,000 and a realized net gain of approximately$543,000 in cash settlements received from a counter-party recorded as adecrease in fuel expense.  Fuelconsumption for the quarters ended June 30, 2005 and 2004 averaged 711 and730 gallons per block hour, respectively, or a decrease of 2.6%.  Fuel consumption per block hour decreasedduring the quarter ended June 30, 2005 from the prior comparable periodbecause of the transition to the more fuel-efficient Airbus aircraft ascompared to the Boeing fleet, which has slightly higher fuel burn rates, and bylimiting the use of the Auxiliary Power Unit on the aircraft during take offand taxi from the gate.

 

***Aircraft LeaseExpenses.*** Aircraft lease expenses totaled $23,109,000(10.8% of total mainline revenue) and $18,891,000 (10.9% of total mainlinerevenue) forthe quarters ended June 30, 2005 and 2004, respectively, or an increase of22.3%.  The increase in lease expense isdue to an increase in the average number of leased aircraft (an increase from27.5 to 31.3, or 13.8%), the costs associated with the late return of certainBoeing aircraft, and increases in lease rates for four of our aircraft thathave variable rents based on LIBOR rates.

 

***Aircraftand Traffic Servicing.*** Aircraft and traffic servicingexpenses were $31,753,000 and $31,692,000, or an increase of 0.2%, for thequarters ended June 30, 2005 and 2004, respectively, and represented 14.8%and 18.3% of total mainline revenue. Aircraft and traffic servicing expenses include all expenses incurred atairports including landing fees, facilities rental, station labor, groundhandling expenses, and interrupted trip expenses associated with delayed orcancelled flights.  Interrupted tripexpenses are amounts paid to other airlines to protect passengers as well ashotel, meal and other incidental expenses. Aircraft and traffic servicing expenses will increase with the additionof new cities to our route system.  As ofJune 30, 2005, we served 52 cities compared to 49 cities as of June 30,2004, or an increase of 6.1%.  During thequarter ended June 30, 2005, our departures increased to 19,314 from17,650, or an increase of 9.4%.  Aircraftand traffic servicing expenses were $1,644 per departure for the quarter ended June 30,2005 as compared to $ 1,796 per departure for the quarter ended June 30,2004, or a decrease of 8.5%.  Included inthe quarter ended June 30, 2005 was a credit expected as a result of the 2004Denver International Airport landing fee and facilities calender 2004 costreconciliation of $119 per departure.  Thisdecrease in the amount per departure is related to the realization of economiesof scale.

 

***Maintenance.***  Maintenance expenses of $20,011,000 and $18,956,000were 9.4% and 10.9% of total revenue for the quarters ended June 30, 2005and 2004, respectively, and increased by 5.6% in the current period as comparedto last year.   Maintenance expenses includeall labor, parts and supplies expenses related to the maintenance of theaircraft.  Maintenance cost per blockhour was $422 and $431 for the quarters ended June 30, 2005 and 2004, respectively,a decrease of 2.1%.  Maintenance cost perblock hour decreased as a result of our transition to an all Airbus fleet thatare less costly to maintain than our older Boeing aircraft which was offsetslightly by costs associated with the return of six Boeing aircraft.  Our mainline average age of aircraft was 1.9years as of June 30, 2005 as compared to 3.1 years as of June 30,2004.  As the Airbus aircraft age, theywill require more maintenance and maintenance expenses per block hour willincrease.

 

***Promotionand Sales****. *Promotion and sales expensestotaled $21,872,000 and $19,839,000 and were 10.3% and 11.5% of total revenueexcluding revenues from our regional partner operations for the quarters ended June 30,2005 and 2004, respectively, a quarter-over-quarter increase of 10.2%.  These expenses include advertising expenses,telecommunications expenses, wages and benefits for reservation agents andrelated supervision as well as marketing management and sales personnel, creditcard fees, travel agency commissions and computer reservations costs.  During the quarter ended June 30, 2005,promotion and sales expenses per mainline passenger decreased to $11.61 from$12.52 for the quarter ended June 30, 2004.  Promotion and sales expenses per mainlinepassenger decreased as a result of advertisingexpenses incurred in 2004 for advertising in the Los Angeles, California area topromote brand awareness for the then new focus city.

 

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***Generaland Administrative.*** General and administrative expenses for the quarters ended June 30,2005 and 2004 totaled $12,251,000 and $10,294,000, respectively, and were 5.7%and 6.0% of total mainline revenue, respectively, an increase of 19.0%. Generaland administrative expenses include the wages and benefits for several of ourexecutive officers and various other administrative personnel including legal,accounting, information technology, aircraft procurement, corporatecommunications, training and human resources and other expenses associated withthese departments.  Employee healthbenefits, accrued vacation and bonus expenses, general insurance expensesincluding worker’s compensation, and write-offs associated with credit card andcheck fraud are also included in general and administrative expenses.  General and administrative expenses increasedprimarily due to increased rates for heath insurance and worker’s compensationin addition to expenses related to our compliance with the Sarbanes-Oxley Actof 2002.

 

***Regional Partner Expense.*** Regional partner expense for the quarter ended June 30, 2005 and2004 totaled $24,118,000 and $21,293,000, respectively, and was 105.1% and111.3% of total regional partner revenues, respectively.  Regional partner expenses include all directcosts associated with Frontier JetExpress operated by Horizon.  The increase in costs is due to an increasein average number of aircraft in service and the increase in number ofpassengers carried.

 

***Aircraft Lease Exit Costs.**** *InApril 2005, we finalized our transition to an all Airbus fleet and ceasedusing three of our Boeing 737-300 leased aircraft which had original leasetermination dates in June 2005, August 2005 and May 2006.  We negotiated an early termination fee forthe aircraft with an original termination date of May 2006.  As such, we recorded a charge of $3,312,000to reflect the estimated fair value of the remaining lease payments and aone-time early return payment.  Therewere no similar costs incurred during the quarter ended June 30, 2004.

 

***Gains and Losses on Sales of Assets, net*.**   During the quarter ended June 30, 2005 wereceived net gains totaling $88,000 primarily on the sale of Boeing spareparts. During the quarter ended June 30, 2004, we incurred a losstotaling $489,000 on the sale-leaseback of two Airbus A319 aircraft and net lossesof $41,000 on the sale of other assets.

 

***Depreciation.***  Depreciation expenses of $6,672,000 and $6,618,000and were approximately 3.1% and 3.8% of total mainline revenue for the quartersended June 30, 2005 and 2004, respectively.  These expenses include depreciation ofaircraft and aircraft components, office equipment, ground station equipment,and other fixed assets.  Depreciationexpense remained flat year over year due to the fact that the average number ofaircraft owned was 14.2 during the quarter ended June 30, 2005 as comparedto 13.9 during the quarter ended June 30, 2004.

 

***NonoperatingIncome (Expense). ***Netnonoperating expense totaled $2,856,000 for the quarter ended June 30,2005 as compared to net nonoperating expense of $2,403,000 for the quarterended June 30, 2004.

 

Interest income increasedto $1,364,000 from $571,000 during the quarter ended June 30, 2005 fromthe prior comparable period as a result of an increase in short-term interest ratesearned on investments.  Interest expenseincreased to $4,118,000 for the quarter ended June 30, 2005 from $2,908,000for the quarter ended June 30, 2004. The increase in interest expense was due to additional debt for thepurchase of one additional airplane and an increase in the weighted averageborrowing rate.   Aircraft debt increasedfrom $313,761,000 as of June 30, 2004 to $321,158,000 as of June 30,2005with an increase in the average weighted interest rate from 3.53% to 5.27% asof June 30, 2004 and 2005, respectively.

 

***IncomeTax Benefit.**** *We recorded an income tax benefit of $1,345,000 during the quarterended June 30, 2005 at a 33.0% rate, compared to an income tax benefit of$3,638,000 during the quarter ended June 30, 2004 at a 36.0% rate.  The fluctuation in our tax rate is due to theimpact of permanent differences as a percentage of income.

 

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**Liquidityand Capital Resources**

 

Our liquiditydepends to a large extent on the number of passengers who fly with us, thefares they pay, our operating and capital expenditures, our financingactivities, and the cost of fuel.  Wedepend on lease or mortgage-style financing to acquire all of our aircraft,including 16 additional Airbus aircraft that as of June 30, 2005 arescheduled for delivery through March 2008.

 

We had cash, cashequivalents and short-term investments of $174,284,000 and $174,795,000 at June 30,2005 and March 31, 2005, respectively. At June 30, 2005 total current assets were $299,629,000 as comparedto $262,882,000 of total current liabilities, resulting in working capital of$36,747,000.  At March 31, 2005,total current assets were $275,550,000 as compared to $233,850,000 of totalcurrent liabilities, resulting in working capital of $41,700,000.

 

*Operatingactivities.*  Cashprovided by operating activities for the quarter ended June 30, 2005 was$23,432,000 as compared to $9,022,000 for the quarter ended June 30, 2004.The increase in operating cash flows was primarily due to the growth of ourbusiness and better operating results in the first quarter of fiscal year 2005compared to the same period last year.

 

*InvestingActivities*.  Cash usedin investing activities for the quarter ended June 30, 2005 was $36,642,000.  Capital expenditures were $42,409,000 for thequarter ended June 30, 2005 and included the purchase of one Airbus A319aircraft, the purchase of LiveTV equipment, rotable aircraft components,aircraft improvements and ground equipment. Aircraft lease and purchasedeposits made during the period were $7,326,000, which was offset bypre-delivery payments totaling $7,502,000 and $1,739,200 applied against thepurchase of an Airbus A319 aircraft and LiveTV equipment, respectively.

 

Cash used ininvesting activities for the quarter ended June 30, 2004 was$20,252,000.  Capital expenditures were$103,069,000 for the quarter ended June 30, 2004, and included thepurchase of one Airbus A318 aircraft and two Airbus A319 aircraft. Wesubsequently completed sale-leaseback transactions on both A319 aircraft.  Additionally, capital expenditures includedthe purchase of LiveTV equipment, rotable aircraft components, aircraftimprovements and ground equipment.  Aircraftlease and purchase deposits made during the period were $6,441,000. We appliedthe pre-delivery payments totaling $6,412,000 for the purchase of an AirbusA318 aircraft to the purchase of that aircraft and the pre-delivery depositstotaling $14,716,000 for the two Airbus A319 aircraft were returned to us.  We received $63,625,000 from the sale of thetwo A319 aircraft and other equipment.

 

*FinancingActivities.*  Cashprovided by financing activities for the quarter ended June 30, 2005 was$15,700,000.  During the quarter ended June 30,2005, we borrowed $24,900,000 for the purchase of one Airbus A319 aircraft,paid $4,757,000 of debt principal payments on our 15 owned aircraft and werepaid short-term borrowings of $5,000,000 under a revolving line of credit.  During the quarter ended June 30, 2005we also received $844,000 from the exercise of common stock options and paid$287,000 of fees for debt financing.

 

Cash provided by financingactivities for the quarter ended June 30, 2004 was $16,179,000.  During the quarter ended June 30, 2004,we borrowed $22,000,000 for the purchase of one Airbus A318 aircraft and paid$5,626,000 of debt principal payments.

 

***Other Items that Impact our Liquidity***

 

Weentered into an agreement with two vendors to market and sell all of our Boeing737-200 and certain Boeing 737-300 spare parts inventories.  We are in the process of transferring theremaining Boeing inventories to these vendors. We began to actively sell these parts in August 2004.  As of June 30, 2005, the carrying valueof our Boeing rotables and expendable spare parts classified as assets held forsale totaled $5,989,000.  This amountrepresents the market value of the remaining Boeing spare parts, less sellingcosts.  If the actual net proceeds receivedfor these Boeing parts are less than the amounts we have estimated based on estimatesobtained from our vendors, we may recognize additional impairments on theseparts.  During the 

 

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quarterended June 30, 2005, we have recognized $544,000 in gross proceedsresulting in a net gain on our expendable and rotable inventory totalingapproximately $88,000.

 

We continue to assess ourliquidity position in light of our aircraft purchase commitments and othercapital requirements, the economy, our competition, and other uncertaintiessurrounding the airline industry.  Priorto applying for a government guaranteed loan under the Stabilization Act, wefiled a shelf registration with the Securities and Exchange Commission in April 2002that allows us to sell equity or debt securities from time to time as marketconditions permit.  In September 2003,we completed a public offering of 5,050,000 shares of our common stock forapproximately $81,100,000, substantially all of which were used to prepay thegovernment guarantee loan.  As of June 30,2005, there is $64,150,000 remaining on the shelf registration.   We may need to continue to explore avenuesto enhance our liquidity if our current economic and operating environment doesnot improve.  We intend to continue toexamine domestic or foreign bank aircraft financing, bank lines of credit andaircraft sale-leasebacks, the sale of equity or debt securities, and othertransactions as necessary to support our capital and operating needs.  For further information on our financingplans and activities and commitments, see “Contractual Obligations” and “CommercialCommitments” below.

 

We expect to continuegenerating positive cash flow from our operations for the foreseeablefuture.  We have obtained financing forall of our aircraft deliveries scheduled for calendar years 2005 and 2006 andexpect to have adequate liquidity to cover our contractual obligations.  However, we cannot predict future trends orpredict whether current trends and conditions will continue.  Our future liquidity and capital resourcesmay be impacted by many factors, including “Risk Factors” discussed in Item 1of our annual report on Form 10-K.

 

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**ContractualObligations**

 

The following tablesummarizes our contractual obligations as of June 30, 2005:

 
| ** **                                                | ** ** | **Less than** | ** **  | **1-3**     | ** ** | **4-5**     | ** ** | **After**   | ** **  | ** **    | ** ** |
|-----------------------------------------------------------|------------|---------------|-------------|-------------|------------|-------------|------------|-------------|-------------|---------------|------------|
| ** **                                                | ** ** | **1 year**    | ** **  | **years**   | ** ** | **years**   | ** ** | **5 years** | ** **  | **Total**     | ** ** |
|                                                      |       |          |        |        |       |        |       |        |        |          |       |
| Long-term  debt – principal (1)                      |       | $             | 19,646,000  |        | $          | 42,712,000  |       | $           | 47,731,000  |          | $          | 211,069,000 |   | $ | 321,158,000 |   |
| Long-term  debt – interest (1)                       |       | 16,655,000    |        | 29,989,000  |       | 25,155,000  |       | 34,368,000  |        | 106,167,000   |       |
| Operating  leases (2)                                     |       | 130,015,000   |        | 260,396,000 |       | 246,208,000 |       | 634,925,000 |        | 1,271,544,000 |       |
| Unconditional  purchase obligations (3) (4) (5) |       | 109,391,000   |        | 391,937,000 |       | 9,213,000   |       | —      |        | 510,541,000   |       |
| Total  contractual cash obligations                       |       | $             | 275,707,000 |        | $          | 725,034,000 |       | $           | 328,307,000 |          | $          | 880,362,000 |   | $ | 2,209,410,000 |   |

 

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(1)          At June 30,2005, we had 15 loan agreements for ten Airbus A319 aircraft and five AirbusA318 aircraft.  Two of the loans have aterm of 10 years and are payable in equal monthly installments, includinginterest, payable in arrears.  Theseloans require monthly principal and interest payments of $215,000 and $218,000,bear interest with rates of 6.71% and 6.54%, with maturities in May and August 2011,at which time a balloon payment totaling $10,200,000 is due with respect toeach loan.  The remaining 13 loans have interest ratesbased on LIBOR plus margins that adjust quarterly or semi-annually.  At June 30, 2005, interest rates forthese loans ranged from 4.44% to 5.64%. Each of these loans has a term of 12 years, and each loan has balloonpayments ranging from $2,640,000 to $7,770,000 at the end of the term.  All of the loans are secured by theaircraft.  Actual interest payments willchange based on changes in LIBOR.

 

(2)          Asof June 30, 2005, we lease 31 Airbus A319 type aircraft, two Airbus A318aircraft, and two Boeing 737 type aircraft under operating leases withexpiration dates ranging from 2005 to 2017. The Boeing 737 type aircraft are no longer in service and the tableabove includes lease payments through the end of the lease terms.  Under all of our leases, we have made cashsecurity deposits or arranged for letters of credit representing approximatelytwo months of lease payments per aircraft. At June 30, 2005, we had made cash security deposits of $17,789,000and had arranged for letters of credit of $440,000, which is collateralized byrestricted cash balances.  Additionally,we are required to make additional rent payments to cover the cost of majorscheduled maintenance overhauls of these aircraft.  These additional rent payments are based onthe number of flight hours flown and/or flight departures and are not includedas an obligation in the table above.

 

During the fiscal year ended March 31,2004, we entered into additional aircraft lease agreements for two Airbus A318aircraft and 18 Airbus A319 aircraft. Three of the aircraft leases were a result of sale-leasebacktransactions of three new Airbus aircraft. As of June 30, 2005, we have taken delivery of 16 of theseaircraft.  The remaining four aircraftare scheduled for delivery beginning in March 2006 through February 2007.  As of June 30, 2005, we have made $668,000in security deposit payments for future leased aircraft deliveries.  Total lease obligations include four A319aircraft not yet received.

 

We also leaseoffice and hangar space, spare engines and office equipment for ourheadquarters and airport facilities, and certain other equipment withexpiration dates ranging from 2005 to 2015. In addition, we lease certain airport gate facilities on a month-to-monthbasis.  Amounts for leases that are on amonth-to-month basis are not included as an obligation in the table above.

 

(3)          As of June 30,2005, we have remaining firm purchase commitments for 12 additional aircraftand two spare engines, which have scheduled delivery dates beginning in July 2005and continuing through March 2008. Included in the purchase commitments are the remaining amounts dueAirbus and amounts for spare aircraft components to support the additionalpurchase and leased aircraft.  We are notunder any contractual obligations with respect to spare parts.  Under the terms of the purchase agreement, weare required to make scheduled pre-delivery payments for these aircraft.  These payments are non-refundable 

 

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with certain exceptions.  As of June 30, 2005, we had madepre-delivery payments on future deliveries totaling $21,494,000 to secure theseaircraft.

 

We have executed the term sheet for the debt financing for a A319aircraft scheduled for delivery from Airbus July 2005.  The terms of these agreements permit us toborrow up to $24,900,000 per aircraft or 80% of the appraised base value of theaircraft, whichever is less, over a period of 12 years at floating interestrates with a balloon payment equal to 20% of the original loan amount due atmaturity.

 

We have signed a letter of intent for thesale-leaseback of one owned and three spare engines scheduled for deliverybetween October 2004 and February 2006.  In October 2004, we completed thesale-leaseback of two of these engines with proceeds totaling $12,186,000.  The terms of this agreement allow us to selleach spare engine to the buyer at the time of delivery, and then lease theengines back for a period of ten years commencing on the delivery date.  The agreement will provide financing for anadditional two spare engines which we expect we will order in the future.  The purchase amounts for these spare enginesare included as purchase obligations above.

 

(4)          In October 2002,we entered into a purchase and 12-year services agreement with LiveTV to bringDIRECTV AIRBORNETM satellite programming to every seatback in our Airbusfleet.  We intend to install LiveTV inevery new aircraft we place in service. The table above includes amounts for the installation of DirectTV forthe remaining 12 aircraft to be purchased and the remaining four aircraft to beleased, less $346,000 of deposits already paid for one of the installations.

 

(5)          We entered into aservices agreement with Sabre, Inc. for its SabreSonicä  passenger solution to power our reservationsand check-in capabilities along with a broad scope of technology forstreamlining our operations and improving revenues.  The table above includes minimum annual feesfor system usage fees.  Usage fees arebased on passengers booked and actual amounts paid may be in excess of theminimum per the contract terms.

 

**CommercialCommitments**

 

***Letters of Credit and Cash Deposits***

 

As we enter newmarkets, increase the amount of space we lease, or add leased aircraft, we areoften required to provide the airport authorities and lessors with a letter ofcredit, bond or cash security deposits. These generally approximate up to three months of rent and fees.  We also provide letters of credit for ourworkers’ compensation insurance.  As of June 30,2005, we had outstanding letters of credit, bonds, and cash security depositstotaling $13,506,000, $1,512,000, and $20,190,000, respectively.  In order to meet these requirements, we havea letter of credit agreement with a financial institution for up to$20,000,000, which expires December 1, 2005.  This facility can be used only for theissuance of standby letters of credit. Any amounts drawn under this facility are fully collateralized bycertificates of deposit, which are carried as restricted investments on ourbalance sheet.  As of June 30, 2005,we have utilized $6,008,000 under this credit agreement for standby letters ofcredit that provide credit support for certain leases.  In the event that this facility is notrenewed beyond their present expiration dates, the certificates of depositwould be redeemed and paid to the various lessors as cash security deposits inlieu of standby letters of credit.  As aresult, there would be no impact on our liquidity if these agreements were notrenewed.  In the event that the suretycompanies determined that issuing bonds on our behalf were a risk they were nolonger willing to underwrite, we would be required to collateralize certain ofthese lease obligations with either cash security deposits or standby lettersof credit, which would decrease our liquidity.  We also have anagreement with one other financial institution where we can issue letters ofcredit of up to 50% of certain spare parts inventories less amounts borrowedunder the credit facility, and as of June 30, 2005, we had $10,244,000available under this facility, which is reduced by letters of credit issued of$6,500,000.

 

We have a contractwith a bankcard processor that requires us to pledge a certificate of depositequal to a certain percentage of our air traffic liability associated with bankcardcustomers.  As of June 30, 2005,that amount totaled $33,572,000.  Theamount is adjusted quarterly in arrears based on our air traffic liability 

 

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associated withbankcard transactions.  As of September 1,2005, we are required to increase the amount by approximately $6,295,000.

 

We use the AirlineReporting Corporation (“ARC”) to provide reporting and settlement services fortravel agency sales and other related transactions.  In order to maintain the minimum bond (orirrevocable letter of credit) coverage of $100,000, ARC requires participatingcarriers to meet, on a quarterly basis, certain financial tests such as, butnot limited to, working capital ratio, and percent of debt to debt plusequity.  As of June 30, 2005, we metthese financial tests and presently are only obligated to provide the minimumamount of $100,000 in coverage to ARC. If we were to fail the minimum testing requirements, we would berequired to increase our bonding coverage to four times the weekly agency netcash sales (sales net of refunds and agency commissions). Based on net cashsales remitted to us for the week ended July 22, 2005, the coverage wouldbe increased to $8,801,000 if we failed the tests.  If we were unable to increase the bond amountas a result of our then financial condition, we could be required to issue aletter of credit that would restrict cash in an amount equal to the letter ofcredit.

 

***Hedging Transactions***

 

In November 2002, we initiated a fuel hedgingprogram comprised of swap and collar agreements.  Under a swap agreement, the cash settlementsare calculated based on the difference between a fixed swap price and a pricebased on an agreed upon published spot price for jet fuel.  If the index price is higher than the fixedprice, we receive the difference between the fixed price and the spot price.  If the index price is lower, we pay thedifference.  A collar agreement has a capprice, a primary floor price, and, in the case of a three-way collar, asecondary floor price.  When the hedgedproduct’s index price is above the cap, we receive the difference between theindex and the cap.  When the hedgedproduct’s index price is below the primary floor but above the secondary floor,we pay the difference between the index and the primary floor.  However, when the price is below thesecondary floor, we are only obligated to pay the difference between theprimary and secondary floor prices.  Whenthe price is between the cap price and the primary floor, no payments arerequired. The unrealized net loss on derivative contracts at June 30, 2005was $1,007,000 and the realized net gain was $2,130,000 for the quarter ended June 30,2005.  The Company has entered into thefollowing swap and collar agreements that cover periods during fiscal year2006:

 
| ** **         | ** ** | ** **    | ** ** | ** **              | ** ** | ** **                                 | ** ** | ** **                                           | ** ** | **Percentage**     | ** ** |
|--------------------|------------|---------------|------------|-------------------------|------------|--------------------------------------------|------------|------------------------------------------------------|------------|--------------------|------------|
| ** **         | ** ** | ** **    | ** ** | **Notional volume**     | ** ** | ** **                                 | ** ** | **Price**                                            | ** ** | **of estimated**   | ** ** |
| **Date**           | ** ** | **Product *** | ** ** | **(barrels per month)** | ** ** | **Period covered**                         | ** ** | **(per gallon or barrel)**                           | ** ** | **fuel purchases** | ** ** |
|               |       |          |       |                    |       |                                       |       |                                                 |       |               |       |
| November 2004 |       | Jet A         |       | 75,000                  |       | April 1,  2005 - June 30,2005    |       | $ 1.34 per  gallon, with a floor of $1.20       |       | 28                 | %          |
|               |       |          |       |                    |       |                                       |       |                                                 |       |               |       |
| May 2005      |       | Crude oil     |       | 60,000                  |       | July 1,  2005 - December 31,2005 |       | $ 53.00 per  barrel cap, with a floor of $50.73 |       | 20                 | %          |

 

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*Jet A product isfor Gulf Coast Jet A fuel.  Crude oil isfor West TexasIntermediate crude oil.

 

In March 2003,we entered into an interest rate swap agreement with a notional amount of$27,000,000 to hedge a portion of our LIBOR based borrowings through June 30,2007.  Under the interest rate swapagreement, we are paying a fixed rate of 2.45% and receive a variable ratebased on the three month LIBOR.  Duringthe quarters ended June 30, 2005 and 2004, interest expense was decreasedby $49,000 and increased by $60,000, respectively, for this agreement.  Approximately $348,000 of unrealized lossesare included in accumulated other comprehensive loss, net of income taxes of$212,000, as of June 30, 2005.

 

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***Maintenance Contracts***

 

Effective January 1,2003, we entered into an engine maintenance agreement with GE Engine Services, Inc.(“GE”) covering the scheduled and unscheduled repair of our aircraft engines usedon most of our Airbus aircraft, subsequently modified and extended in September 2004.  The agreement is for a 12-year period fromthe effective date for our owned aircraft or May 1, 2019, whichever comesfirst. For each leased aircraft, the term coincides with the initial lease termof 12 years.  This agreement precludes usfrom using another third party for such services during the term.  This agreement requires monthly payments at aspecified rate multiplied by the number of flight hours the engines wereoperated during that month.  The amountsdue based on flight hours are not included in the Contractual Obligations tableabove.  The costs under this agreementfor our purchased aircraft for the quarters ended June 30, 2005 and 2004were approximately $609,000 and $663,000, respectively.  For our leased aircraft, we do not make theflight hour payments to GE under the agreement. Instead we make enginemaintenance reserve payments as required under the applicable leaseagreements.  At the time a leased enginemakes a scheduled shop visit, the lessors pay GE directly for the repair ofaircraft engines from reserve accounts established under the applicable leasedocuments.

 

**CriticalAccounting Policies**

 

The Company’s criticalaccounting policies have not changed from those reported in Management’sDiscussion and Analysis of Financial Condition and Results of Operations in theCompany’s 2005 Annual Report on Form 10-K.

 

**NewAccounting Standards**

 

In December 2004,the FASB issued SFAS No. 123(R), Share-Based Payments.  SFAS No. 123(R), revised FASB Statement No. 123,Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees. SFAS No. 123(R) focuses primarily on the accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions.  SFAS No. 123(R)requires companies to recognize in the statement of operations the cost ofemployee services received in exchange for awards of equity instruments basedon the grant-date fair value of those awards (with limited exceptions).  In April 2005, the effective date forSFAS No. 123(R) was changed to the first fiscal year that begins after June 15,2005.  Accordingly, we plan to adopt SFASNo. 123(R) on April 1, 2006 and use the modified-prospectivetransition method.  Under themodified-prospective method, we will recognize compensation expense in thefinancial statements issued subsequent to the date of adoption for allshare-based payments granted, modified or settled after April 1, 2006 aswell as for any awards that were granted prior to April 1, 2006 for whichrequisite service has been provided as of April 1, 2006.  We will recognize compensation expense onawards granted subsequent to April 1, 2006 using the fair values determinedby a valuation model prescribed by SFAS(R). The compensation expense on awards granted prior to April 1, 2006will be recognized using the fair values determined for the pro formadisclosures on stock-based compensation. The amount of compensation expense that will be recognized on awardsthat have not fully vested will exclude the compensation expense cumulativelyrecognized in the pro forma disclosures on stock-based compensation.

 

**Item3:  Quantitative and QualitativeDisclosures About Market Risk**

 

***Aircraft Fuel***

 

Our earnings are affectedby changes in the price and availability of aircraft fuel.  Market risk is estimated as a hypothetical 10percent change in the average cost per gallon of fuel for the year ended March 31,2005.  Based on fiscal year 2005 actualfuel usage, such a change would have had the effect of increasing or decreasingour aircraft fuel expense by approximately $18,577,000 in fiscal year2005.  Comparatively, based on projectedfiscal year 2006 fuel usage, including fuel required for our regional partner,such a change would have the effect of increasing or decreasing our aircraftfuel expense by approximately $20,223,000 in fiscal year 2006, excluding theeffects of our fuel hedging arrangements. The increase in exposure to fuel price fluctuations in fiscal year 2006is due to the increase of our average aircraft fleet size projected for theyear 

 

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ending March 31,2006 and the related gallons expected to be purchased.

 

On November 12, 2004, we entered into a two-waycollar agreement that hedges approximately 27% of our expected fuelrequirements for the quarter ended June 30, 2005.  This collar uses Gulf Coast Jet A as itsbasis.  The additional derivativetransaction is a collar agreement that uses West Texas Intermediate crude oilas its basis.  The cap price is set at$39.00 per barrel, and the floor is set at $34.85 per barrel.  The results of operations for the quarterended June 30, 2005 include an unrealized derivative loss of $1,007,000that is included in fuel expense and a realized net gain of $2,130,000 in cashsettlements received from a counter-party recorded as a decrease in fuelexpense with respect to these two agreements. On May 13, 2005, we enteredinto an additional derivative transaction that hedges approximately 20% of ourprojected fuel requirements for the period from July 1, 2005 to December 31,2005.  This collar agreement has a capprice of $53.00 per barrel and the floor is set at $50.73 per barrel.  As of June 30, 2005, the fair value ofthis agreement is recorded in the balance sheet as an asset of $2,133,000.

 

***Interest***

 

We are susceptible tomarket risk associated with changes in variable interest rates on long-termdebt obligations we incurred and will incur to finance the purchases of ourAirbus aircraft.  Interest expense on 87.8%of the debt on our owned Airbus A319 and A318 aircraft is subject to interestrate adjustments every three to six months based upon changes in the applicableLIBOR rate.  A change in the base LIBORrate of 100 basis points (1.0%) would have the effect of increasing ordecreasing our annual interest expense by $2,821,000 assuming the loansoutstanding that are subject to interest rate adjustments at June 30, 2005totaling $282,078,000 are outstanding for the entire period.

 

In March 2003, weentered into an interest rate swap agreement with a notional amount of$27,000,000 to hedge a portion of our LIBOR based borrowings.  Under the interest rate swap agreement, weare paying a fixed rate of 2.45% and receive a variable rate based on the threemonth LIBOR over the term of the swap that expires in March 2007.  As of June 30, 2005, we had hedged approximately14.5% of our variable interest rate loans that are based on three-month LIBORrates.  As of June 30, 2005, thefair value of the swap agreement is recorded in the balance sheet as an asset of$204,000.

 

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**Item 4.****           Controls and Procedures**

 

***Evaluation ofDisclosure Controls and Procedures***

 

The Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as defined in Rule 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) as of the end of theperiod covered by this report. Based upon that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that the Company’s disclosure controls and procedures are effectivein ensuring that information relating to the Company required to be included inthe Company’s Exchange Act filings is resolved, processed, summarized andreported within the time specified in the applicable rules and forms.

 

***Changes in Internal Controls***

 

There were no changes made in the Company’s internalcontrols over financial reporting that occurred during the Company’s mostrecent fiscal quarter that have materially affected, or are reasonably likelyto materially affect, the Company’s internal controls over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 6:****                                  Exhibits**

 
| **Exhibit** |       |                                                                                                                                     |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|
| **Numbers** | ** ** | **Description  of Exhibits**                                                                                                             |
|        |       |                                                                                                                                     |
| 31.1*       |       | Certification of  President and Chief Executive Officer of Frontier, Inc. pursuant to Section 302  Sarbanes-Oxley Act of 2002. |
|        |       |                                                                                                                                     |
| 31.2*       |       | Certification of Chief  Financial Officer of Frontier, Inc. pursuant to Section 302  Sarbanes-Oxley Act of 2002.               |
|        |       |                                                                                                                                     |
| 32**        |       | Certification of Chief  Executive Officer and Chief Financial Officer Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.   |

 

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*                   Filed herewith.

**          Furnished herewith.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                       | FRONTIER AIRLINES, INC.                         |
|----------------------------|-------------------------------------------------|
|                       |                                            |
|                       |                                            |
| Date: August 1,  2005 | By:                                             |  /s/ Paul H. Tate |
|                       | Paul H. Tate, Senior  Vice President and        |
|                       | Chief Financial Officer                         |
|                       |                                            |
|                       |                                            |
| Date: August 1,  2005 | By:                                             |  /s/ Elissa A.  Potucek |
|                       | Elissa A. Potucek, Vice  President, Controller, |
|                       | Treasurer and Principal  Accounting Officer     |

 

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