**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**ý****                                ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

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

 

**o****                                ****TRANSITIONREPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission file number:  1-12805**

 

**FRONTIERAIRLINES, INC.**

(Exact name of registrantas 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 for thepast 90 days.  Yes ý No o

 

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

 

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý

 

The number of shares ofthe Company’s Common Stock outstanding as of October 27, 2005 was 36,187,397.

 

 

----

 

**TABLE OFCONTENTS**

 
| **PART I. FINANCIAL INFORMATION** |
|----------------------------------------|
|                                   |   |
| **Item 1.**                            | **Financial Information** |   |
|                                   |   |   |
|                                   | Balance Sheets (unaudited) at September 30,  2005 and March 31, 2005 |   |
|                                   | Statements of Operations (unaudited)  for the three and six months ended September 30, 2005 and 2004 |   |
|                                   | Statements of Cash Flows (unaudited) for  the three and six months ended September 30, 2005 and 2004 |   |
|                                   | Notes to Financial Statements  (unaudited) |   |
|                                   |   |   |
| **Item 2.**                            | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |   |
|                                   |   |   |
| **Item 3.**                            | **Quantitative and Qualitative  Disclosures about Market Risk** |   |
|                                   |   |   |
| **Item 4.**                            | **Controls and Procedures** |   |
|                                   |   |   |
| **PART II. OTHER  INFORMATION**   |
|                                   |   |   |
| **Item 4.**                            | **Submission of Matters to a Vote of  Security Holders** |   |
|                                   |   |   |
| **Item 6.**                            | **Exhibits** |   |

 

----

 

**PART I.  FINANCIAL INFORMATION**

 

**FRONTIER AIRLINES, INC.**

**BalanceSheets**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                       | ** ** | **September 30,** | ** **  | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|-------------|--------------------|------------|
| ** **                                                                                                                                                                                                       | ** ** | **2005**               | ** **  | **2005**           | ** ** |
| ** **                                                                                                                                                                                                       | ** ** | ** **             | ** **  | ** **         | ** ** |
| **Assets**                                                                                                                                                                                                       |       |                   |        |               |       |
| Current assets:                                                                                                                                                                                                  |       |                   |        |               |       |
| Cash and cash  equivalents                                                                                                                                                                                       |       | $                      | 144,095,692 |               | $          | 171,794,772 |   |
| Short-term  investments                                                                                                                                                                                          |       | —                 |        | 3,000,000          |       |
| Restricted  investments                                                                                                                                                                                          |       | 43,772,598             |        | 28,011,395         |       |
| Receivables, net  of allowance for doubtful accounts of $1,090,000 and $927,000 at  September 30, 2005 and March 31, 2005, respectively                                                                |       | 36,816,538             |        | 37,748,785         |       |
| Security and  other deposits                                                                                                                                                                                     |       | 284,000                |        | 1,900,250          |       |
| Prepaid expenses  and other assets                                                                                                                                                                               |       | 28,345,225             |        | 18,740,220         |       |
| Inventories, net  of allowance of $0 and $3,973,000 at September 30, 2005 and  March 31,2005, respectively                                                                                             |       | 9,805,035              |        | 7,564,342          |       |
| Assets held for  sale (note 11)                                                                                                                                                                                  |       | 4,519,330              |        | 1,317,334          |       |
| Deferred tax  assets                                                                                                                                                                                             |       | 6,367,935              |        | 5,472,643          |       |
| Total current  assets                                                                                                                                                                                            |       | 274,006,353            |        | 275,549,741        |       |
| Property and  equipment, net (note 4)                                                                                                                                                                            |       | 519,067,637            |        | 455,813,682        |       |
| Security and  other deposits                                                                                                                                                                                     |       | 18,091,210             |        | 18,662,421         |       |
| Aircraft  pre-delivery payments                                                                                                                                                                                  |       | 22,384,857             |        | 22,976,090         |       |
| Restricted  investments                                                                                                                                                                                          |       | 4,401,913              |        | 11,126,307         |       |
| Deferred loan  expenses and other assets                                                                                                                                                                         |       | 6,601,568              |        | 7,882,430          |       |
| Total assets                                                                                                                                                                                                     |       | $                      | 844,553,538 |               | $          | 792,010,671 |   |
|                                                                                                                                                                                                             |       |                   |        |               |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                   |       |                   |        |               |       |
| Current  liabilities:                                                                                                                                                                                            |       |                   |        |               |       |
| Accounts payable                                                                                                                                                                                                 |       | $                      | 27,103,682  |               | $          | 37,240,376 |   |
| Air traffic  liability                                                                                                                                                                                           |       | 123,477,223            |        | 112,688,811        |       |
| Other accrued  expenses (note 6)                                                                                                                                                                                 |       | 52,116,231             |        | 55,337,203         |       |
| Current portion  of long-term debt (note 7)                                                                                                                                                                      |       | 21,668,356             |        | 18,222,539         |       |
| Short-term  borrowings                                                                                                                                                                                           |       | —                 |        | 5,000,000          |       |
| Deferred revenue  and other current liabilities (note 5)                                                                                                                                                         |       | 7,796,178              |        | 5,361,422          |       |
| Total current  liabilities                                                                                                                                                                                       |       | 232,161,670            |        | 233,850,351        |       |
| Long-term debt  (note 7)                                                                                                                                                                                         |       | 324,798,315            |        | 282,792,222        |       |
| Deferred tax  liability                                                                                                                                                                                          |       | 20,142,040             |        | 17,331,125         |       |
| Deferred revenue  and other liabilities (note 5)                                                                                                                                                                 |       | 22,156,572             |        | 20,116,667         |       |
| Total  liabilities                                                                                                                                                                                               |       | 599,258,597            |        | 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, 100,000,000 shares authorized;  36,172,897 and 35,995,342 issued and outstanding at September 30, 2005  and March 31, 2005, respectively |       | 36,173                 |        | 35,995             |       |
| Additional  paid-in capital                                                                                                                                                                                      |       | 189,910,040            |        | 188,165,820        |       |
| Unearned ESOP  shares                                                                                                                                                                                            |       | (756,884               | )           | (2,270,652         | )          |
| Other comprehensive  income (note 8)                                                                                                                                                                             |       | 216,132                |        | 271,267            |       |
| Retained  earnings                                                                                                                                                                                               |       | 55,889,480             |        | 51,717,876         |       |
| Total  stockholders’ equity                                                                                                                                                                                 |       | 245,294,941            |        | 237,920,306        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                  |       | $                      | 844,553,538 |               | $          | 792,010,671 |   |

 

See accompanyingnotes to financial statements.

 

1

----

** **

**FRONTIER AIRLINES, INC.**

**Statementsof Operations**

**For the Three and Six Months Ended September 30,2005 and 2004**

**(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended** | ** **  | **Six Months Ended**   | ** ** |
|------------------------------------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                                           | ** ** | **September 30,** | ** **  | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                           | ** ** | **2005**               | ** **  | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                            | ** ** | ** **             | ** **  | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Passenger                                            |       | $                      | 229,396,918 |                   | $          | 188,173,402 |   | $ | 437,464,401 |   | $ | 357,610,883 |   |
| Passenger-  regional partner                         |       | 23,390,798             |        | 21,909,768             |       | 46,344,828 |   | 41,036,213 |   |
| Cargo                                                |       | 1,372,811              |        | 1,246,009              |       | 2,591,745 |   | 2,673,504 |   |
| Other                                                |       | 4,262,952              |        | 3,105,595              |       | 8,432,566 |   | 5,537,244 |   |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Total revenues                                       |       | 258,423,479            |        | 214,434,774            |       | 494,833,540 |   | 406,857,844 |   |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Operating  expenses:                                 |       |                   |        |                   |       |   |   |   |   |
| Flight operations                                    |       | 34,438,318             |        | 31,772,649             |       | 68,909,601 |   | 63,561,813 |   |
| Aircraft fuel  expense                               |       | 70,912,494             |        | 44,715,069             |       | 130,742,042 |   | 84,718,251 |   |
| Aircraft lease  expense                              |       | 23,471,531             |        | 22,307,400             |       | 46,902,912 |   | 41,198,226 |   |
| Aircraft and  traffic servicing                      |       | 34,113,637             |        | 31,229,011             |       | 65,866,881 |   | 62,921,215 |   |
| Maintenance                                          |       | 18,517,694             |        | 19,261,318             |       | 38,528,352 |   | 38,155,915 |   |
| Promotion and  sales                                 |       | 18,645,214             |        | 19,250,304             |       | 40,517,127 |   | 39,088,980 |   |
| General and  administrative                          |       | 12,070,562             |        | 12,033,531             |       | 24,321,629 |   | 22,327,775 |   |
| Operating  expenses - regional partner               |       | 26,307,635             |        | 23,568,339             |       | 50,425,522 |   | 44,861,774 |   |
| Aircraft lease  and facility exit costs (note 9)     |       | 52,627                 |        | —                 |       | 3,364,515 |   | — |   |
| (Gains) losses  on sales of assets, net (note 11)    |       | (603,139               | )           | 74,404                 |       | (691,177 | ) | 604,231 |   |
| Impairment and  other related charges                |       | —                 |        | 4,213,565              |       | — |   | 4,601,200 |   |
| Depreciation                                         |       | 6,862,322              |        | 6,606,142              |       | 13,534,399 |   | 13,224,581 |   |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Total operating  expenses                            |       | 244,788,895            |        | 215,031,732            |       | 482,421,803 |   | 415,263,961 |   |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Operating income  (loss)                             |       | 13,634,584             |        | (596,958               | )          | 12,411,737 |   | (8,406,117 | ) |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Nonoperating  income (expense):                      |       |                   |        |                   |       |   |   |   |   |
| Interest income                                      |       | 1,911,084              |        | 785,699                |       | 3,275,482 |   | 1,356,269 |   |
| Interest expense                                     |       | (5,043,696             | )           | (3,112,843             | )          | (9,161,814 | ) | (6,020,859 | ) |
| Other, net                                           |       | (47,786                | )           | (103,353               | )          | (150,424 | ) | (168,717 | ) |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Total  nonoperating income (expense), net            |       | (3,180,398             | )           | (2,430,497             | )          | (6,036,756 | ) | (4,833,307 | ) |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Income (loss)  before income tax expense (benefit)   |       | 10,454,186             |        | (3,027,455             | )          | 6,374,981 |   | (13,239,424 | ) |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Income tax  expense (benefit)                        |       | 3,548,834              |        | (945,485               | )          | 2,203,377 |   | (4,583,736 | ) |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Net income  (loss)                                   |       | $                      | 6,905,352   |                   | $          | (2,081,970 | ) | $ | 4,171,604 |   | $ | (8,655,688 | ) |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Earnings (loss)  per share:                          |       |                   |        |                   |       |   |   |   |   |
| Basic                                                |       | $                      | 0.19        |                   | $          | (0.06 | ) | $ | 0.12 |   | $ | (0.24 | ) |
| Diluted                                              |       | $                      | 0.18        |                   | $          | (0.06 | ) | $ | 0.11 |   | $ | (0.24 | ) |
|                                                 |       |                   |        |                   |       |   |   |   |   |
| Weighted average  shares of common stock outstanding |       |                   |        |                   |       |   |   |   |   |
| Basic                                                |       | 36,166,329             |        | 35,609,942             |       | 36,097,371 |   | 35,606,702 |   |
| Diluted                                              |       | 38,531,436             |        | 35,609,942             |       | 38,452,645 |   | 35,606,702 |   |

 

Seeaccompanying notes to financial statements.

 

2

----

 

**FRONTIER AIRLINES, INC.**

**Statementsof Cash Flows**

**For the Six Months Ended September 30, 2005 and2004**

**(Unaudited)**

 
| ** **                                                                                        | ** ** | **Six Months Ended**   | ** **  |
|---------------------------------------------------------------------------------------------------|------------|------------------------|-------------|
| ** **                                                                                        | ** ** | **September 30,** | ** **  | **September 30,** | ** ** |
| ** **                                                                                        | ** ** | **2005**               | ** **  | **2004** | ** ** |
| ** **                                                                                        | ** ** | ** **             | ** **  | ** ** | ** ** |
| Cash flows from  operating activities:                                                            |       |                   |        |   |   |
| Net income  (loss)                                                                                |       | $                      | 4,171,604   |   | $ | (8,655,688 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided (used) by operating  activities: |       |                   |        |   |   |
| Compensation  expense under long-term incentive plans and employee ownership plans                |       | 1,576,557              |        | 1,455,089 |   |
| Depreciation and  amortization                                                                    |       | 13,962,296             |        | 13,529,469 |   |
| Impairment  recorded on long-lived assets                                                         |       | —                 |        | 3,267,145 |   |
| Impairment  recorded on inventories                                                               |       | —                 |        | 1,334,056 |   |
| Deferred income  taxes                                                                            |       | 2,210,519              |        | (4,660,292 | ) |
| Unrealized  derivative loss (gain)                                                                |       | 725,520                |        | (3,634,452 | ) |
| Losses (gains)  on disposal of equipment and assets held for sale                                 |       | (725,267               | )           | 635,137 |   |
| Changes in  operating assets and liabilities:                                                     |       |                   |        |   |   |
| Restricted  investments                                                                           |       | (11,070,809            | )           | (11,863,958 | ) |
| Receivables                                                                                       |       | 932,247                |        | (7,450,420 | ) |
| Security and  other deposits                                                                      |       | (34,768                | )           | (117,560 | ) |
| Prepaid expenses  and other assets                                                                |       | (9,605,005             | )           | (5,838,994 | ) |
| Inventories                                                                                       |       | (2,291,960             | )           | (3,206,479 | ) |
| Other assets                                                                                      |       | 642,252                |        | 354,081 |   |
| Accounts payable                                                                                  |       | (10,136,694            | )           | 804,742 |   |
| Air traffic  liability                                                                            |       | 10,788,412             |        | 10,619,954 |   |
| Other accrued  expenses                                                                           |       | (3,220,972             | )           | 4,186,561 |   |
| Deferred revenue  and other liabilities                                                           |       | 4,474,661              |        | (1,085,412 | ) |
| Net cash  provided (used) by operating activities                                                 |       | 2,398,593              |        | (10,327,021 | ) |
|                                                                                              |       |                   |        |   |   |
| Cash flows from  investing activities:                                                            |       |                   |        |   |   |
| Proceeds from  maturities of held-to-maturity investments                                         |       | 3,000,000              |        | 2,000,000 |   |
| Purchase of  available for sale securities                                                        |       | —                 |        | (12,800,000 | ) |
| Aircraft lease  and purchase deposits made                                                        |       | (15,891,653            | )           | (11,729,360 | ) |
| Aircraft lease  and purchase deposits returned or applied                                         |       | 18,705,115             |        | 22,322,062 |   |
| Decrease in  restricted investments                                                               |       | 2,034,000              |        | 2,251,700 |   |
| Proceeds from  the sale of aircraft and equipment                                                 |       | 2,042,677              |        | 63,904,333 |   |
| Capital  expenditures                                                                             |       | (81,413,464            | )           | (109,119,426 | ) |
| Net cash used in  investing activities                                                            |       | (71,523,325            | )           | (43,170,691 | ) |
|                                                                                              |       |                   |        |   |   |
| Cash flows from  financing activities:                                                            |       |                   |        |   |   |
|                                                                                              |       |                   |        |   |   |
| Proceeds from  the exercise of stock options                                                      |       | 1,417,324              |        | 75,335 |   |
| Proceeds from  long-term borrowings                                                               |       | 54,700,000             |        | 22,000,000 |   |
| Principal  payments on long-term borrowings                                                       |       | (9,248,090             | )           | (9,614,152 | ) |
| Payment of  financing fees                                                                        |       | (443,582               | )           | (319,087 | ) |
| Principal  payments on short-term borrowings                                                      |       | (5,000,000             | )           | — |   |
| Net cash  provided by financing activities                                                        |       | 41,425,652             |        | 12,142,096 |   |
|                                                                                              |       |                   |        |   |   |
| Net decrease in  cash and cash equivalents                                                        |       | (27,699,080            | )           | (41,355,616 | ) |
|                                                                                              |       |                   |        |   |   |
| Cash and cash  equivalents, beginning of period                                                   |       | 171,794,772            |        | 130,008,729 |   |
|                                                                                              |       |                   |        |   |   |
| Cash and cash  equivalents, end of period                                                         |       | $                      | 144,095,692 |   | $ | 88,653,113 |   |

 

Seeaccompanying notes to financial statements.

 

3

----

 

**FRONTIER AIRLINES, INC.**

**Notes to Financial Statements**

**September 30, 2005(Unaudited)**

 

**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 theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements and should be read in conjunction with theCompany’s Annual Report on Form 10-K for the year ended March 31,2005.  The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.  In the opinion of management, all adjustments(consisting only of normal recurring adjustments) considered necessary for afair presentation have been included.

 

The Company operates inone business segment that provides transportation to passengers and cargo andincludes mainline operations and a regional partner.

 

Financial results for theCompany and airlines in general, are seasonal in nature.  More recently, results for the Company’sfirst and second fiscal quarters have exceeded its third and fourth fiscalquarters.  Results of operations for thethree and six months ended September 30, 2005 are not necessarilyindicative of the results that may be expected for the year ended March 31,2006.

 

***Reclassifications***

 

Certain prior yearamounts have been reclassified to conform to the current year presentationincluding the reclassification of investment securities of $71,400,000 ofauction rate securities, which were included in cash and cash equivalents at September 30,2004.  As a result of thisreclassification, the Company’s cash flow from investing activities for the sixmonths ended September 30, 2004 now includes the net change in auctionrate securities in short-term investments.

 

**2.****              Stock-BasedCompensation**

 

Stock options and otherstock-based compensation awards are accounted for using the intrinsic valuemethod 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 valuation model.

 

Had compensation cost forthe Company’s stock-based compensation plans had been determined using the fairvalue of the options at the grant date, the Company’s pro forma net income (loss)and income (loss) per share would have been as follows:

 

4

----

 
| ** **                                                                                       | ** ** | **Three months ended  September 30,** | ** ** | **Six months ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                       | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss), as reported                                                                  |       | $                                          | 6,905,352  |                                     | $          | (2,081,790 | ) | $ | 4,171,604 |   | $ | (8,655,688 | ) |
| Add: stock-based  compensation expense included in reported net earnings, net of tax             |       | 18,490                                     |       | —                                   |       | 41,757 |   | — |   |
| Less: total  compensation expense determined under fair value method for all awards, net  of tax |       | (173,783                                   | )          | (418,357                                 | )          | (378,207 | ) | (1,277,822 | ) |
| Pro forma net  income (loss)                                                                     |       | $                                          | 6,750,059  |                                     | $          | (2,500,327 | ) | $ | 3,835,154 |   | $ | (9,933,510 | ) |
|                                                                                             |       |                                       |       |                                     |       |   |   |   |   |
| Income (loss)  per share, basic:                                                                 |       |                                       |       |                                     |       |   |   |   |   |
| As reported                                                                                      |       | $                                          | 0.19       |                                     | $          | (0.06 | ) | $ | 0.12 |   | $ | (0.24 | ) |
| Pro forma                                                                                        |       | $                                          | 0.19       |                                     | $          | (0.07 | ) | $ | 0.11 |   | $ | (0.28 | ) |
| Income (loss)  per share, diluted:                                                               |       |                                       |       |                                     |       |   |   |   |   |
| As reported                                                                                      |       | $                                          | 0.18       |                                     | $          | (0.06 | ) | $ | 0.11 |   | $ | (0.24 | ) |
| Pro forma                                                                                        |       | $                                          | 0.18       |                                     | $          | (0.07 | ) | $ | 0.10 |   | $ | (0.28 | ) |

 

The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option-pricing model with the following weightedaverage assumptions used for grants during the six months ended September 30,2005: dividend yield of 0%; expected volatility of 74.4%; expected life of 5years; and risk-free interest rate of 4.05%. The weighted average fair value ofoptions granted during the six months ended September 30, 2005, was $6.81.The fair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted averageassumptions used for grants during the six months ended September 30,2004: dividend yield of 0%; expected volatility of 58.0%; expected life of 5years; and risk-free interest rate of 3.38%. The weighted average fair value ofoptions granted during the six months ended September 30, 2004, was $4.47.

 

In March 2005, theCompany adopted a new annual bonus and long-term incentive plan for the Company’sofficers and directors.  The long-termincentive plan included the issuance of 194,746 stock appreciation rightspayable in stock, 82,057 restricted stock units and a three-year cash incentivepool.  Forfeitures during the six-monthsended were 25,126 stock appreciation rights payable in stock and 7,495restricted stock units.  Annual bonusesand three-year cash incentive pools are paid out based upon pre-tax profits anda modifier based on the Company’s annual pre-tax profit performance relative topeer group companies. There was no bonus accrual under this plan for the sixmonths ended September 30, 2005 because the Company did not meet profitmargins required for payout under the plan.

 

The restricted stockaward vests, if the executive is still employed by the Company at the time, infive years from the grant date.  The fairvalue of the restricted stock units on the date of the grant is recorded ascompensation expense over the vesting period. The stock appreciation rights payable in stock vest 20% a year over fiveyears.  Compensation expense for thestock appreciation rights is based on the difference between the market priceon the date of grant and the current market price of the award.  During the six-months ended September 30,2005, compensation expense of $63,000 has been recognized for these awards.

 

5

----

 

**3.****               Earnings (loss) pershare**

 

The following table showsthe computation of basic and diluted earnings (loss) per common share:

 
| ** **                                              | ** ** | **Three months ended** | ** ** | **Six months ended**   | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                              | ** ** | **2005**               | ** ** | **2004**               | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Numerator:**                                          | ** ** | ** **             | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                      |       | $                      | 6,905,352  |                   | $          | (2,081,970 | ) | $ | 4,171,604 |   | $ | (8,655,688 | ) |
| **Denominator:**                                        |       |                   |       |                   |       |   |   |   |   |
| Weighted average  shares outstanding, basic             |       | 36,166,329             |       | 35,609,942             |       | 36,097,371 |   | 35,606,702 |   |
| Dilutive effect  of employee stock options              |       | 570,421                |       | —                 |       | 566,100 |   | — |   |
| Dilutive effect  of warrants                            |       | 1,794,686              |       | —                 |       | 1,789,174 |   | — |   |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| Adjusted,  weighted average shares outstanding, diluted |       | 38,531,436             |       | 35,609,942             |       | 38,452,645 |   | 35,606,702 |   |
|                                                    |       |                   |       |                   |       |   |   |   |   |
| Earnings (loss)  per share, basic                       |       | $                      | 0.19       |                   | $          | (0.06 | ) | $ | 0.12 |   | $ | (0.24 | ) |
| Earnings (loss)  per share, diluted                     |       | $                      | 0.18       |                   | $          | (0.06 | ) | $ | 0.11 |   | $ | (0.24 | ) |

 

For the three and sixmonths ended September 30, 2005, outstanding options of 1,055,451 wereexcluded from the calculation of net income per diluted common share becausetheir exercise prices exceeded the average market price of the common stock forthe period.  For the three and six monthsended September 30, 2004, outstanding options and warrants of 6,440,011were excluded from the diluted earnings per share because the effect would havebeen anti-dilutive.

 

**4.****               Property andEquipment, Net**

 

As of September 30,2005 and March 31, 2005, property and equipment consisted of thefollowing:

 
| ** **                                                           | ** ** | **September 30,** | ** **  | **March 31,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------|-------------|--------------------|------------|
| ** **                                                           | ** ** | **2005**               | ** **  | **2005**           | ** ** |
|                                                                 |       |                   |        |               |       |
| Aircraft, spare  aircraft parts, and improvements to leased aircraft |       | $                      | 553,489,995 |               | $          | 489,324,022 |   |
| Ground property,  equipment and leasehold improvements               |       | 39,514,102             |        | 38,524,096         |       |
| Construction in  progress                                            |       | 671,504                |        | 231,397            |       |
|                                                                 |       | 593,675,601            |        | 528,079,515        |       |
| Less accumulated  depreciation                                       |       | (74,607,964            | )           | (72,265,833        | )          |
|                                                                 |       |                   |        |               |       |
| Property and  equipment, net                                         |       | $                      | 519,067,637 |               | $          | 455,813,682 |   |

 

6

----

 

**5.****               Deferred Revenueand Other Liabilities**

 

At September 30,2005 and March 31, 2005, deferred revenue and other liabilities werecomprised of the following:

 
| ** **                                          | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                          | ** ** | **2005**               | ** ** | **2005**           | ** ** |
|                                                |       |                   |       |               |       |
| Deferred revenue  related to co-branded credit card |       | $                      | 10,285,235 |               | $          | 6,557,945 |   |
| Deferred rent  credit                               |       | 19,009,635             |       | 18,271,668         |       |
| Other                                               |       | 657,880                |       | 648,476            |       |
|                                                |       |                   |       |               |       |
| Total deferred  revenue and other liabilities       |       | 29,952,750             |       | 25,478,089         |       |
|                                                |       |                   |       |               |       |
| Less current portion                                |       | (7,796,178             | )          | (5,361,422         | )          |
|                                                |       |                   |       |               |       |
|                                                |       | $                      | 22,156,572 |               | $          | 20,116,667 |   |

 

**6.****               Other AccruedExpenses**

 

At September 30,2005 and March 31, 2005, other accrued expenses were comprised of thefollowing:

 
| ** **                                                                                    | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                    | ** ** | **2005**               | ** ** | **2005**           | ** ** |
|                                                                                          |       |                   |       |               |       |
| Accrued salaries  and benefits                                                                |       | $                      | 31,318,014 |               | $          | 30,340,793 |   |
| Federal excise  and other passenger taxes payable                                             |       | 10,016,109             |       | 17,251,283         |       |
| Property taxes  payable                                                                       |       | 3,813,876              |       | 2,279,718          |       |
| Remaining lease  payments for aircraft and facilities abandoned before lease termination date |       | 223,278                |       | 1,063,022          |       |
| Other                                                                                         |       | 6,744,954              |       | 4,402,387          |       |
|                                                                                          |       |                   |       |               |       |
|                                                                                          |       | $                      | 52,116,231 |               | $          | 55,337,203 |   |

 

**7.****               Long-term Debt**

 

During the six monthsended September 30, 2005, the Company borrowed $54,700,000 for thepurchase of two Airbus A319 aircraft, including a junior loan of $4,900,000 onan aircraft purchased in July 2005. The senior loans have terms of 12 years and are payable in quarterlyinstallments of $625,000 and $628,000, respectively, as of September 30,2005, including interest, payable in arrears, with a floating interest rateadjusted quarterly based on LIBOR. These loans currently bear interest at ratesof 5.86% and 5.48%, respectively, at September 30, 2005.  At the end of the term, there are balloonpayments of $5,558,000 and $4,900,000, respectively.  A security interest in the two purchasedaircraft secures the loans.  The juniorloan has an eight-year term with quarterly installments of $236,000.  The loan bears interest at a floatinginterest rate adjusted quarterly based on LIBOR, which currently is 7.38%.

 

7

----

 

In March 2005, theCompany entered into a 42-month revolving credit facility (“Credit Facility”)to be used in support of letters of credit and for general corporate purposes.  Under this facility, the Company may borrowthe lesser of $13,000,000 (“maximum commitment amount”) or 50% of the currentmarket value of pledged eligible spare parts. The amount of letters of credit available is equal to the amountavailable under the facility less current borrowings.  The amount available under the CreditFacility at September 30, 2005 was $10,244,000, which was reduced byletters of credit issued during the quarter of $6,500,000 for a net amountavailable for borrowings of $3,744,000.  There was $5,000,000 outstanding under the Credit Facility at March 31,2005 and there were no amounts outstanding as of September 30, 2005.

 

InJuly 2005, the Company entered into a twelve-month credit agreement (the “Agreement”)with a bank for a $5,000,000 revolving letter of credit facility. Under theAgreement, $3,500,000 may be used for the issuance of letters of credit, whichmust be collateralized by a borrowing base consisting of certain receivablebalances at the time of issuance. As of September 30, 2005, the aggregateamount of letters of credit issued under the Agreement was $1,188,659 and acash compensating balance of $2,000,000 was maintained to secure the letters ofcredit, which has been classified as restricted investments on the balancesheet.

 

TheCredit Facility and the Agreement contain standard events of defaultprovisions, including a financial covenant to maintain $120,000,000 ofunrestricted cash with a 30-day cure period.

 

**8.****               ComprehensiveIncome (Loss)**

 

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

 
| ** **                                                    | ** ** | **Three months ended  September 30,** | ** ** | **Six months ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                            |       | $                                          | 6,905,352  |                                     | $          | (2,081,790 | ) | $ | 4,171,604 |   | $ | (8,655,688 | ) |
| Other  comprehensive income:                                  |       |                                       |       |                                     |       |   |   |   |   |
| Unrealized gain  (loss) on derivative instruments, net of tax |       | 6,301                                      |       | (48,945                                  | )          | (55,135 | ) | 249,007 |   |
| Total  comprehensive income (loss)                            |       | $                                          | 6,911,653  |                                     | $          | (2,130,735 | ) | $ | 4,116,469 |   | $ | (8,406,681 | ) |

 

**9.****               Aircraft Lease andFacility Exit Costs**

 

In April 2005, theCompany ceased using three of its Boeing 737-300 leased aircraft with originallease 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 during the first quarter of $3,311,888, representing the estimated fairvalue of the remaining lease payments and a negotiated one-time terminationpayment.  In September 2005, the Companyrecorded $52,627 of facility lease exit costs related to a property in which asublease was not obtained in the period originally estimated for an airportexited in fiscal year 2005.  Thisreflects the Company’s revised estimated future payments on this lease.  These charges are included in the Statementof Operations as aircraft and facility lease exit costs.  The aircraft facility exit cost liability of$301,139 is included in the following Balance Sheet accounts:  $223,278 in other accrued expenses and$77,861 in other long-term liabilities.

 

8

----

 

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

 
| ** **                           | ** ** | **Aircraft** | ** ** | **Facility** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|--------------|------------|--------------|------------|------------|------------|
| **Balance, March 31, 2005**     |       | $            | 932,800    |         | $          | 249,568    |       | $ | 1,182,368 |   |
| ** **                           |       |         |       |         |       |       |       |
| Additions                            |       | 3,311,888    |       | 52,627       |       | 3,364,515  |       |
|                                 |       |         |       |         |       |       |       |
| Lease payments                       |       | (4,152,774   | )          | (92,970      | )          | (4,245,744 | )          |
| **Balance, September 30, 2005** |       | $            | 91,914     |         | $          | 209,225    |       | $ | 301,139 |   |

 

**10.****        Retirement Health Plan**

 

In conjunction with theCompany’s collective bargaining agreement with its pilots, retired pilots andtheir dependents may retain medical benefits under the terms and conditions ofthe Health and Welfare Plan for Employees of Frontier Airlines, Inc. untilage 65.  The costs of retiree medical benefitsare continued under the same contribution schedule as active employees.

 

Net periodic benefit costfor the three and six months ended September 30, 2005 and 2004 includesthe following components:

 
| ** **                    | ** ** | **Three months ended  September 30,** | ** ** | **Six months ended  September 30,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                    | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                          |       |                                       |       |                                     |       |   |   |   |   |
| Service cost                  |       | $                                          | 238,479    |                                     | $          | 237,812 |   | $ | 476,958 |   | $ | 477,725 |   |
| Interest cost                 |       | 67,821                                     |       | 54,598                                   |       | 135,643 |   | 109,196 |   |
| Recognized net actuarial loss |       | 15,171                                     |       | 22,358                                   |       | 30,343 |   | 44,716 |   |
| Net periodic benefit cost     |       | $                                          | 321,471    |                                     | $          | 314,768 |   | $ | 642,944 |   | $ | 631,637 |   |

 

**11.****        Assets Held for Sale**

 

In April 2005, theCompany retired the remaining Boeing aircraft and has classified all remainingBoeing 737-300 aircraft rotable spare parts and expendable inventories as “assetsheld for sale”.  As such, these assets havebeen valued at the lower of the carrying amount or the estimated market valueless selling costs.

 

In August 2004, theCompany began selling Boeing spare parts and entered into agreements with vendorsto sell these parts on a consignment basis. The Company monitors resale values for Boeing parts quarterly usingestimates obtained from outside vendors. Based on the current market prices and recent sales history, the Companyhas determined that there is currently no additional impairment required forthe Boeing rotable spare parts and expendable inventories.

 

Gains and losses thatresulted from the sale of these assets are recognized as they are sold and reportedin income from operations as a component of (gains) losses on sales of assets,net.  During the six-months ended September 30,2005, the Company realized a net gain of $923,300 on the sale of these assets.

 

9

----

 

**12.****        Recently Issued AccountingStandards**

 

In December 2004,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-BasedPayments”.  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.

 

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, companies may restate financialstatements of previous periods based on proforma disclosures made in accordancewith SFAS 123.

 

The Company currentlyaccounts for stock based compensation under APB 25 and utilizes a standardoption pricing model (i.e., Black-Scholes) to measure the fair value of stockoptions granted to employees.  While SFAS123R permits entities to continue to use such a model, the standard alsopermits the use of a “lattice” model.

 

SFAS 123R also requiresthat the benefits associated with the tax deductions in excess of recognizedcompensation cost be reported as a financing cash flow, rather than as anoperating 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 Company currentlyexpects to adopt SFAS 123R effective April 1, 2006, and to use themodified prospective method; however, the Company has not yet determined whichof the aforementioned option pricing models it will use.  In addition, the Company has not yetdetermined the financial statement impact of adopting SFAS 123R.

 

10

----

** **

**Item 2:  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

***Special Note About Forward-Looking Statements - This report containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934 that describe the business and prospects of FrontierAirlines, Inc. and the expectations of our company and management. Allstatements included in this report that address activities, events ordevelopments that we expect, believe, intend or anticipate will or may occur inthe future, are forward-looking statements. When used in this document, thewords “estimate,” “anticipate,” “project” and similar expressions are intendedto identify forward-looking statements. Forward-looking statements areinherently 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 inaccordance with our business strategy or in response to competitive pressuresor other factors; failure of our new markets to perform as anticipated; theinability to achieve a level of revenue through fares sufficient to obtainprofitability due to competition from other air carriers and excess capacity inthe markets we serve;  the inability toobtain sufficient gates at Denver International Airport to accommodate theexpansion of our operations; general economic factors and behavior of thefare-paying public and its potential impact on our liquidity; terrorist attacksor other incidents that could cause the public to question the safety and/orefficiency of air travel; hurricanes and their impact on oil production, operationaldisruptions, including weather; industry consolidation; the impact of labordisputes; enhanced security requirements; changes in the government’s policyregarding relief or assistance to the airline industry; the economic environmentof the airline industry generally; increased federal scrutiny of low-farecarriers generally that may increase our operating costs or otherwise adverselyaffect us; actions of competing airlines, such as increasing capacity andpricing actions of United Airlines (“United”), Southwest Airlines, and othercompetitors, particularly in some of our Mexico destinations due to theincrease in the number of domestic airlines authorized to serve Mexico marketsfrom the United States of America under recent changes to the bilateralagreement in place between the two countries; the availability of suitableaircraft, which may inhibit our ability to achieve operating economies andimplement our business strategy; the unavailability of, or inability to secureupon acceptable terms, debt or operating lease financing necessary to acquireaircraft which we have ordered; uncertainties regarding aviation fuel prices,and various risk factors to our business discussed elsewhere in this report.  Because our business, like that of theairline industry generally, is characterized by high fixed costs relative torevenues, small fluctuations in our revenue per available seat mile (“RASM”) orcost per available seat mile (“CASM”) can significantly affect operatingresults****.  These risks and factors arenot exclusive, and we undertake no obligation to publicly update or revise anyforward-looking statements to reflect events or circumstances that may ariseafter the date of this filing.  Adiscussion of some of these risk factors is included in the Company’s AnnualReport on Form 10-K for the year ended March 31, 2005.  These reports should be read in theirentirety since no single section deals with all aspects of these matters.*

** **

**Our Business**

 

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 October 25, 2005, we, inconjunction with Frontier JetExpress operated by Horizon Air Industries, Inc.(“Horizon”), operate routes linking our Denver hub to 47 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 October 25, 2005, we also providedjet service 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 October 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 three and sixmonths ended September 30, 2005, we increased year-over-year capacity by5.7% and 5.9%, respectively.  During thethree and six months ended September 30, 2005, we increased mainlinepassenger traffic by 11.6% and 14.5% over the prior comparable periods,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.

 

Recently our services to Cancun, Mexico, New Orleans,Louisiana and Florida have been disrupted by hurricanes and other extremeweather, impacting our service levels to these destinations and also impactingour revenues and cost of doing

 

11

----

 

business.  We are always at riskof severe weather in any destination we serve. While we believe we have developed sound strategies for addressing operationalissues created by severe weather, we remain exposed to significant operationalinterruptions.  The two Gulf Coasthurricanes also severely damaged crude oil production and refinery capacity inthe region.  As a result of thesedisruptions, the cost of jet aviation fuel increased within weeks by nearly$1.00 per gallon and caused fuel shortages at several airports that we serve.

 

In addition, with respect to our Mexico service, wenote that the United States of America and the nation of Mexico recentlyamended its bilateral agreement relating to commercial air service.  Previously, only two U.S. based airlines werepermitted to provide air service between the United States and Mexico.  In many cases, we were one of the two U.S.based airlines providing service to the cities we serve in Mexico.  The recent amendments to the bilateralagreement expanded the authorized service levels to three U.S. based airlinesper city pair.  It is therefore highlylikely that we will see other airlines seeking to add service to some of theMexico destinations we serve, therefore increasing competition and perhapsplacing downward pressure on air fares in these markets.

 

In September 2003,we signed a 12-year agreement with Horizon, under which Horizon operates up tonine 70-seat CRJ 700 aircraft under our Frontier JetExpress brand.  The service began on January 1, 2004with three aircraft.  We increasedJetExpress aircraft to a total of eight aircraft in service and one spareaircraft as of June 1, 2004.  Wecontrol the scheduling of this service. We reimburse Horizon for its expenses related to the operation plus amargin.  The agreement provides forfinancial incentives, penalties and changes to the margin based on theperformance of Horizon and our financial performance.  As of October 25, 2005, FrontierJetExpress provides service to Albuquerque, New Mexico; Boise, Idaho; Billings,Montana; Dayton, Ohio; El Paso, Texas; Fresno, California; Little Rock,Arkansas; Oklahoma City, Oklahoma; Spokane, Washington; Tucson, Arizona; andTulsa, Oklahoma, and supplements our mainline service to Austin, Texas; Omaha,Nebraska, and San Jose, California.  Weintend to begin using the ninth aircraft in scheduled service in December 2005.

 

We currently operate on 16 gates on Concourse A at DIAon a preferential basis.  We use these 16gates and share use of up to four common use regional jet parking positions tooperate approximately 230 daily mainline flight departures and arrivals and 50Frontier JetExpress daily system flight departures and arrivals.

 

During the six monthsended September 30, 2005, we added departures from DIA to the followingcities with 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    |       |
| Dayton, Ohio (1)       |       | August 31,2005   |       |
| Fresno, California (1) |       | August 31,2005   |       |

 

----

(1)  Operatedexclusively by Frontier JetExpress.

 

In September 2005, we suspended our one dailyflight to New Orleans, Louisiana due to Hurricane Katrina.

 

We have submitted the following applications to theUnited States Department of Transportation (“DOT”) to provide jettransportation which have been approved:

 
| **Roundtrip Service**                             | ** ** | **Planned Commencement Date** | ** ** | **Planned flight frequency** | ** ** |
|---------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
|                                              |       |                          |       |                         |       |
| DIA to Acapulco, Mexico (1)                       |       | December 18,  2005       |       | Two times  per week          |       |
| Kansas City,  Missouri to Puerto Vallarta, Mexico |       | December 17,  2005       |       | Three  times per week        |       |
| DIA to Cozumel, Mexico                            |       | December 17,  2005       |       | Three  times per week        |       |

 

12

----

 

----

(1) Seasonalservice only

 

We have also submitted applications to the DOT forauthority to provide roundtrip jet transportation for the followingroutes:  (1) Indianapolis, Indianato Cancun, Mexico; (2) Chicago Midway Airport to Cancun, Mexico; and (3) LosAngeles International Airport to Cabo San Lucas, Mexico.

 

Due to our increased traffic in the first part offiscal year 2006, we increased frequencies in the following markets: Reno,Nevada; San Jose, San Francisco; Sacramento California; Nashville, Tennessee;Dallas, Texas; St. Louis, Missouri; Milwaukee, Wisconsin; and Minneapolis-St.Paul, Minnesota.  In addition, we expandedthe 2005 season for Anchorage, Alaska to January 3, 2006 and added anotherseasonal frequency from June 19, 2005 to January 3, 2006.

 

In October 2005, we announced the addition of onedaily mainline flight to five of our top destinations as follows:  Denver to Salt Lake City from four daily flightsto five beginning November 6, 2005; Denver to Dallas from five dailyflights to six beginning December 18, 2005; Denver to Phoenix from sixdaily flights to seven beginning January 4, 2006, Denver to Las Vegas fromsix daily flights to seven beginning January 4, 2005; and Denver toChicago-Midway Airport from four daily flights to five beginning on January 4,2006.

 

In addition, we intend to increase service to otherdestinations in Mexico as follows:  (1) resumeseasonal service to Ixtapa/Zihuatanejo on November 19, 2005, adding anadditional weekly frequency from the 2004 season for a total of threeround-trip frequencies per week, (2) increase service from Denver to CaboSan Lucas and Puerto Vallarta beginning December 17, 2005, with dailyservice plus an additional Saturday frequency during peak periods to bothdestinations, and (3) increase to three flights each day to Cancun fromDenver during the peak winter holiday periods, effective December 17,2005.  This represents an increase in ourCancun service 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.

 

Our corporateheadquarters are 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.

 

**Overview of Operations and theIndustry**

 

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 October 25, 2005, we have remaining firm purchase commitmentsfor 11 Airbus 319 aircraft from Airbus, and we intend to lease as many as fouradditional 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.

 

13

----

 

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.

 

**Highlights from the Quarter**

 

•                  Took delivery of one new purchased Airbus A319aircraft.

 

•                  Began Frontier JetExpress service to Dayton,Ohio and Fresno, California.

 

•                  Frontierfiled a “shelf” registration statement with the Securities and ExchangeCommission, which we can use to periodically sell up to $250,000,000 inpreferred and common stock, and debt and other securities.

 

•                  InSeptember 2005, we reached an agreement on a new contract covering ouraircraft appearance agents and maintenance cleaners following a negotiationwith the International Brotherhood of Teamsters.  The term of the collective bargaining agreementis ten years.

 

14

----

** **

**Operating Statistics**

** **

The following tableprovides certain of our financial and operating data for the three and sixmonths ended September 30, 2005 and 2004:

 
| ** **                                 | ** ** | **Quarters  Ended  September 30,** | ** ** | ** ** | ** ** | **Six  Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2005**                                | ** ** | **2004**   | ** ** | **Change**                                | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| **Selected  Operating Data - Mainline:**   |       |                                    |       |       |       |                                      |       |       |       |   |   |   |   |
|                                       |       |                                    |       |       |       |                                      |       |       |       |   |   |   |   |
| Passenger revenue  (000s) (1)              |       | $                                       | 229,397    |       | $          | 188,173                                   |       | 21.9       | %          | $ | 437,464 |   | $ | 357,611 |   | 22.3 | % |
| Revenue  passengers carried (000s)         |       | 2,028                                   |       | 1,750      |       | 15.9                                      | %          | 3,912      |       | 3,334 |   | 17.3 | % |
| Revenue passenger  miles (RPMs) (000s) (2) |       | 1,940,880                               |       | 1,738,682  |       | 11.6                                      | %          | 3,780,979  |       | 3,303,269 |   | 14.5 | % |
| Available seat  miles (ASMs) (000s) (3)    |       | 2,518,515                               |       | 2,383,573  |       | 5.7                                       | %          | 4,864,412  |       | 4,595,225 |   | 5.9 | % |
| Passenger load  factor (4)                 |       | 77.1                                    | %          | 72.9       | %          | 4.2                                       | pts.       | 77.7       | %          | 71.9 | % | 5.8 pts. |   |
| Break-even load  factor (5)                |       | 72.5                                    | %          | 73.5       | %          | (1.0                                      | )pt.       | 75.9       | %          | 73.8 | % | 2.1 pts. |   |
| Block hours (6)                            |       | 50,976                                  |       | 47,086     |       | 8.3                                       | %          | 98,355     |       | 91,060 |   | 8.0 | % |
| Departures                                 |       | 21,189                                  |       | 18,937     |       | 11.9                                      | %          | 40,503     |       | 36,587 |   | 10.7 | % |
| Average seats per  departure               |       | 129.4                                   |       | 130.3      |       | (0.7                                      | )%         | 129.3      |       | 130.4 |   | (0.8 | )% |
| Average stage  length                      |       | 919                                     |       | 968        |       | (5.1                                      | )%         | 929        |       | 966 |   | (3.8 | )% |
| Average length of  haul                    |       | 957                                     |       | 994        |       | (3.7                                      | )%         | 967        |       | 991 |   | (2.4 | )% |
| Average daily  block hour utilization (7)  |       | 11.4                                    |       | 11.2       |       | 1.8                                       | %          | 11.4       |       | 11.4 |   | — |   |
| Yield per RPM  (cents) (8), (9)            |       | 11.69                                   |       | 10.74      |       | 8.8                                       | %          | 11.47      |       | 10.76 |   | 6.6 | % |
| Total yield per  RPM (cents) (9), (10)     |       | 12.11                                   |       | 11.07      |       | 9.4                                       | %          | 11.86      |       | 11.07 |   | 7.1 | % |
| Yield per ASM  (cents) (9), (11)           |       | 9.01                                    |       | 7.84       |       | 14.9                                      | %          | 8.92       |       | 7.74 |   | 15.2 | % |
| Total yield per  ASM (cents) (9), (12)     |       | 9.33                                    |       | 8.08       |       | 15.5                                      | %          | 9.22       |       | 7.96 |   | 15.8 | % |
| Cost per ASM  (cents)                      |       | 8.68                                    |       | 8.03       |       | 8.1                                       | %          | 8.88       |       | 8.06 |   | 10.2 | % |
| Fuel expense per  ASM (cents)              |       | 2.82                                    |       | 1.87       |       | 50.8                                      | %          | 2.69       |       | 1.84 |   | 46.2 | % |
| Cost per ASM  excluding fuel (cents) (13)  |       | 5.86                                    |       | 6.16       |       | (4.9                                      | )%         | 6.19       |       | 6.22 |   | (0.5 | )% |
| Average fare (14)                          |       | $                                       | 103.47     |       | $          | 100.05                                    |       | 3.4        | %          | $ | 102.79 |   | $ | 100.26 |   | 2.5 | % |
| Average aircraft  in service               |       | 48.8                                    |       | 45.5       |       | 7.3                                       | %          | 47.2       |       | 43.5 |   | 8.5 | % |
| Aircraft in  service at end of period      |       | 49                                      |       | 44         |       | 11.4                                      | %          | 49         |       | 44 |   | 11.4 | % |
| Average age of  aircraft at end of period  |       | 2.1                                     |       | 2.7        |       | (22.2                                     | )%         | 2.1        |       | 2.7 |   | (22.2 | )% |
| Average fuel cost  per gallon              |       | $                                       | 1.94       |       | $          | 1.29                                      |       | 50.4       | %          | $ | 1.86 |   | $ | 1.27 |   | 46.5 | % |
| Fuel gallons  consumed (000’s)        |       | 36,471                                  |       | 34,641     |       | 5.3                                       | %          | 70,253     |       | 66,759 |   | 5.2 | % |

 

15

----

 
| ** **                                       | ** ** | **Quarters  Ended  September 30,** | ** ** | ** ** | ** ** | **Six  Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------|------------|------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                       | ** ** | **2005**                                | ** ** | **2004**   | ** ** | **Change**                                | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                             |       |                                    |       |       |       |                                      |       |       |       |   |   |   |   |
| **Selected  Operating Data - Regional Partner:** |       |                                    |       |       |       |                                      |       |       |       |   |   |   |   |
|                                             |       |                                    |       |       |       |                                      |       |       |       |   |   |   |   |
| Passenger revenue  (000s) (1)                    |       | 23,391                                  |       | 21,910     |       | 6.8                                       | %          | 46,345     |       | 41,036 |   | 12.9 | % |
| Revenue  passengers carried (000s)               |       | 234                                     |       | 233        |       | 0.4                                       | %          | 467        |       | 436 |   | 7.1 | % |
| Revenue passenger  miles (RPMs) (000s) (2)       |       | 148,956                                 |       | 142,157    |       | 4.8                                       | %          | 285,713    |       | 273,711 |   | 4.4 | % |
| Available seat  miles (ASMs) (000s) (3)          |       | 204,432                                 |       | 190,771    |       | 7.2                                       | %          | 393,117    |       | 368,349 |   | 6.7 | % |
| Passenger load  factor (4)                       |       | 72.9                                    | %          | 74.5       | %          | (1.6                                      | )pts.      | 72.7       | %          | 74.3 | % | (1.6 | )pts. |
| Yield per RPM  (cents) (8), (9)                  |       | 15.70                                   |       | 15.41      |       | 1.9                                       | %          | 16.22      |       | 14.99 |   | 8.2 | % |
| Yield per ASM  (cents) (9), (11)                 |       | 11.44                                   |       | 11.48      |       | (0.3                                      | )%         | 11.79      |       | 11.14 |   | 5.8 | % |
| Cost per ASM  (cents)                            |       | 12.87                                   |       | 12.35      |       | 4.2                                       | %          | 12.83      |       | 12.18 |   | 5.3 | % |
| Average fare (14)                                |       | $                                       | 99.99      |       | $          | 93.98                                     |       | 6.4        | %          | $ | 99.28 |   | $ | 94.10 |   | 5.5 | % |
| Aircraft in  service at end of period            |       | 9                                       |       | 9          |       | —                                    |       | 9          |       | 9 |   | — |   |
|                                                  |            |                                         |            |            |            |                                           |            |            |            |  |  |  |  |  |  |  |  |

 

16

----

 
| ** **                                 | ** ** | **Quarters  Ended  September 30,** | ** ** | ** ** | ** ** | **Six  Months Ended  September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|-----------------------------------------|------------|------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                 | ** ** | **2005**                                | ** ** | **2004**   | ** ** | **Change**                                | ** ** | **2005**   | ** ** | **2004** | ** ** | **Change** | ** ** |
| **Selected  Operating Data - Combined:**   |       |                                    |       |       |       |                                      |       |       |       |   |   |   |   |
|                                       |       |                                    |       |       |       |                                      |       |       |       |   |   |   |   |
| Passenger revenue  (000s) (1)              |       | $                                       | 252,788    |       | $          | 210,083                                   |       | 20.3       | %          | $ | 483,809 |   | $ | 398,647 |   | 21.4 | % |
| Revenue  passengers carried (000s)         |       | 2,262                                   |       | 1,983      |       | 14.1                                      | %          | 4,379      |       | 3,770 |   | 16.2 | % |
| Revenue passenger  miles (RPMs) (000s) (2) |       | 2,089,836                               |       | 1,880,839  |       | 11.1                                      | %          | 4,066,692  |       | 3,576,980 |   | 13.7 | % |
| Aailable seat  miles (ASMs) (000s) (3)     |       | 2,722,947                               |       | 2,574,344  |       | 5.8                                       | %          | 5,257,529  |       | 4,963,574 |   | 5.9 | % |
| Passenger load  factor (4)                 |       | 76.7                                    | %          | 73.1       | %          | 3.6                                       | pts.       | 77.3       | %          | 72.1 | % | 5.2 | pts. |
| Yield per RPM  (cents) (8)                 |       | 11.98                                   |       | 11.10      |       | 7.9                                       | %          | 11.81      |       | 11.09 |   | 6.5 | % |
| Total yield per  RPM (cents) (9), (10)     |       | 12.37                                   |       | 11.40      |       | 8.5                                       | %          | 12.17      |       | 11.37 |   | 7.0 | % |
| Yield per ASM  (cents) (11)                |       | 9.19                                    |       | 8.11       |       | 13.3                                      | %          | 9.13       |       | 7.99 |   | 14.3 | % |
| Total yield per  ASM (cents) (12)          |       | 9.49                                    |       | 8.33       |       | 13.9                                      | %          | 9.41       |       | 8.20 |   | 14.8 | % |
| Cost per ASM  (cents)                      |       | 8.99                                    |       | 8.35       |       | 7.7                                       | %          | 9.18       |       | 8.37 |   | 9.7 | % |
|                                            |            |                                         |            |            |            |                                           |            |            |            |  |  |  |  |  |  |  |  |

 

----

(1)         “Passenger revenue” includes revenues forreduced rate stand-by passengers, charter revenues, administrative fees, andrevenue recognized for unused tickets that are greater than one year fromissuance date.  The incremental revenuefrom passengers connecting from regional flights to mainline flights isincluded in our mainline passenger revenue.

(2)         “Revenue passenger miles,” or RPMs, are determinedby multiplying the number of fare-paying passengers carried by the distanceflown.  This represents the number ofmiles 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 mainlinepassenger load factor that will result in operating revenues being equal tooperating expenses, assuming constant revenue per passenger mile and expenses.

 

17

----

 

Forpurposes of these calculations, charter revenue is excluded from passengerrevenue.  These figures may be deemednon-GAAP financial measures under regulations issued by the Securities andExchange Commission.  We believe that presentation of break-even loadfactor excluding charter revenue isuseful to investors because charter flights are not included in RPM’s or ASM’s.  Furthermore, in preparing operating plans andforecasts, we rely on an analysis of break-even load factor exclusive ofcharter revenue.  Our presentation ofnon-GAAP financial measures should not be viewed as a substitute for ourfinancial or statistical results based on GAAP.

 

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

 
| ** **                                                                                             | ** ** | **Three months Ended September 30,** | ** ** | **Six Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                             | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                             | ** ** | **(In thousands)**                        | ** ** | **(In thousands)**                      | ** ** |
| Net (income) loss                                                                                      |       | $                                         | (6,905     | )                                       | $          | 2,082 |   | $ | (4,172 | ) | $ | 8,656 |   |
| Income tax  (expense) benefit                                                                          |       | (3,549                                    | )          | 945                                     |       | (2,203 | ) | 4,584 |   |
| Passenger  revenue                                                                                     |       | 229,397                                   |       | 188,173                                 |       | 437,464 |   | 357,611 |   |
| Revenue -  regional partner                                                                            |       | 23,391                                    |       | 21,910                                  |       | 46,345 |   | 41,036 |   |
| Charter revenue                                                                                        |       | (2,497                                    | )          | (1,384                                  | )          | (3,708 | ) | (2,040 | ) |
| Operating  expenses - regional partner                                                                 |       | (26,308                                   | )          | (23,568                                 | )          | (50,426 | ) | (44,862 | ) |
|                                                                                                   |       |                                      |       |                                    |       |   |   |   |   |
| Passenger  revenue - mainline (excluding charter and regional partner revenue) required  to break even |       | $                                         | 213,529    |                                    | $          | 188,158 |   | $ | 423,300 |   | $ | 364,985 |   |

 

The calculation ofthe break-even load factor follows:

 
| ** **                                                                                                    | ** ** | **Three Months Ended September 30,** | ** ** | **Six Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2005**                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                    | ** ** | **(In thousands)**                        | ** ** | **(In thousands)**                      | ** ** |
| Passenger  revenue- mainline (excluding charter and regional partner revenue) required  to break even ($000s) |       | $                                         | 213,529    |                                    | $          | 188,158 |   | $ | 423,300 |   | $ | 364,985 |   |
| Mainline yield  per RPM (cents)                                                                               |       | 11.69                                     |       | 10.74                                   |       | 11.47 |   | 10.76 |   |
|                                                                                                          |       |                                      |       |                                    |       |   |   |   |   |
| Mainline revenue  passenger miles (000s) to break even assuming constant yield per RPM                        |       | 1,826,595                                 |       | 1,751,937                               |       | 3,690,497 |   | 3,392,054 |   |
| Mainline  available seat miles (000’s)                                                                   |       | 2,518,515                                 |       | 2,383,573                               |       | 4,864,412 |   | 4,595,225 |   |
| Mainline  break-even load factor excluding charter revenue                                                    |       | 72.5                                      | %          | 73.5                                    | %          | 75.9 | % | 73.8 | % |
|                                                                                                               |            |                                           |            |                                         |            |  |  |  |  |  |  |  |  |

 

----

(6)         “Block hours” represent the time betweenaircraft gate departure and aircraft gate arrival.

(7)         “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.

 

18

----

 

(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:

 

**Passengerrevenue adjustment**

 
| ** **                                      | ** ** | **Quarters Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **2005**                               | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                            |       |                                   |       |                                     |       |   |   |   |   |
| Passenger revenues - mainline, as reported      |       | $                                      | 229,397    |                                     | $          | 188,173 |   | $ | 437,464 |   | $ | 357,611 |   |
| Less: charter  revenue                          |       | 2,497                                  |       | 1,384                                    |       | 3,708 |   | 2,040 |   |
| Passenger revenues - mainline excluding charter |       | 226,900                                |       | 186,789                                  |       | 433,756 |   | 355,571 |   |
| Add: Passenger  revenues - regional partner     |       | 23,391                                 |       | 21,910                                   |       | 46,345 |   | 41,036 |   |
| Passenger revenues, system combined             |       | $                                      | 250,291    |                                     | $          | 208,699 |   | $ | 480,101 |   | $ | 396,607 |   |

 

----

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

(11)  “Yield per ASM”or “RASM” is determined by dividing passenger revenues (excluding charterrevenue) by available seat miles.

(12)  “Total yieldper ASM” is determined by dividing total revenues by available seat miles.

(13)  This may bedeemed a non-GAAP financial measure under regulations issued by the Securitiesand Exchange Commission.  We believe thepresentation of financial information excluding fuel expense is useful toinvestors because we believe that fuel expense tends to fluctuate more thanother operating expenses.  Excluding fuelfrom the cost of mainline operations facilitates the comparison of results ofoperations between current and past periods and enables investors to forecastfuture trends in our operations. Furthermore, in preparing operating plans and forecasts, we rely, inpart, on trends in our historical results of operations excluding fuelexpense.  However, our presentation ofnon-GAAP financial measures should not be viewed as a substitute for ourfinancial results determined in accordance with GAAP.

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

 

19

----

** **

**Results of Operations**

 

**Summary**

 

During the quarter ended September 30,2005, we had net income of $6,905,000, or 18¢ per diluted share, as compared toa net loss of $2,082,000, or a loss of 6¢ per diluted share, for the quarterended September 30, 2004.  We hadnet income despite rising fuel costs and extremely challenging conditions inthe industry with sustained widespread price competition.  Fuel costs have risen sharply since January 2004and may continue to increase.  Ouraverage fuel cost per gallon, including hedging activities, was $1.94 duringthe quarter ended September 30, 2005, compared to $1.29 during the quarterended September 30, 2004, an increase of 50.4%.   The average cost of fuel for the quarterended September 30, 2005 includes unrealized hedging gains of $281,000, or$0.01 per gallon, as compared to $4,111,000 of unrealized hedging gains, or$0.12 per gallon, for the quarter ended September 30, 2004.

 

Included in our netincome for the quarter ended September 30, 2005 were the following itemsbefore the effect of income taxes:  unrealizedgains on fuel hedges of $281,000 and gains of $603,000 related primarily to thesale of Boeing parts held for sale.  These items, net of income taxes, increased our net income by 2¢ pershare.  Included in our net loss for thequarter ended September 30, 2004 were the following items before theeffect of income taxes:  a loss of$74,000 on the sale of other assets, a write down of $4,214,000 of the carryingvalue of expendable Boeing 737 inventory, and an unrealized gain on fuel hedgesof $4,111,000.   These items, net ofincome taxes, decreased our net loss by 1¢ per share.

 

Our mainline passengeryield per RPM was 11.69¢ and 10.74¢ for the quarters ending September 30,2005 and 2004, respectively, an increase of 8.8%.  Our mainline average fare was $103.47 for thequarter ended September 30, 2005 as compared to $100.05 for the quarter endingSeptember 30, 2004, an increase of 3.4%. Our length of haul was 957 and 994 miles for the quarters ended September 30,2005 and 2004, respectively, a decrease of 3.7%.  Our mainline load factor was 77.1% for thequarter ended September 30, 2005 as compared to 72.9% for the quarterended September 30, 2004, an increase of 4.2 points.  We substantially decreased flying on August 15,2004 and eliminated service to Los Angeles International Airport (“LAX”) as afocus city in the fourth quarter of fiscal year 2005, which includedtranscontinental flights between the east and west coast, introductory faresand disappointing load factors.  The LAXservice resulted in longer system-wide length of haul relative to our non-LAXroute structure we currently have in place. Our average fare increase is partially due to the lower fares offeredlast year for the LAX focus city and is also due to several industry fareincreases that Frontier has matched.  Ourmainline passenger revenue per available seat mile (“RASM”) for the quarterended September 30, 2005 and 2004 was 9.01¢ and 7.84¢, respectively, anincrease of 14.9%.

 

We continue to focus on controlling non-fuelcosts.  Our mainline cost per availableseat mile (“CASM”) for the quarters ended September 30, 2005 and 2004 was8.68¢ and 8.03¢, respectively, an increase of 8.1%.  The increase in mainline CASM was largely dueto an increase in fuel expense of 2.82¢ per ASM from 1.87¢ per ASM for the quartersended September 30, 2005 and 2004, respectively, an increase of 50.8%.  Mainline CASM, excluding fuel was 8.68¢ and8.03¢, respectively, an increase of 8.1%. However, included in mainline CASM for the quarters ended September 30,2005 was a reduction of our sales and promotion expense of $3,589,000, or .14¢per ASM, due to a favorable sales and use tax credit on the taxation ofticketing services which related to the periods starting with September 2001through June 2005 and a credit of $603,000, or .02¢ per ASM, primarilyrelated to gains recognized on the sale of Boeing spare parts.  Mainline CASM was also impacted by anincrease of .04¢ per ASM in flight operations, a .04¢ per ASM in aircraft andtraffic servicing and a .07¢ per ASM increase in sales and promotion (excludinga favorable credit of 14¢ per ASM on the taxation of ticketing services).  This was offset by a .07¢ per ASM decrease incost per ASM in maintenance.

 

An airline’s mainlinebreak-even load factor is the passenger load factor that will result inoperating revenues being equal to operating expenses, assuming constant revenueper passenger mile and expenses.  For thequarter ended September 30, 2005, our mainline break-even load factor was72.5% compared to our achieved passenger load factor of 77.1%.  Our mainline break-even load factor for thequarter ended September 30, 2004, was 73.5% compared to our achievedpassenger load factor of 72.9%.  Ourmainline break-even load factor decreased from the prior comparable period as aresult of an increase in our mainline RASM of 15.5%, which was partially offsetby an increase in our mainline CASM to 8.68¢ during the quarter ended September 30,2005 (primarily due to increases in fuel costs) from 8.03¢ during the quarter endedSeptember 30, 2004, or 8.1%,

 

20

----

 

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 highly sensitiveto various factors, including the actions of competing airlines and generaleconomic factors, which can adversely affect our liquidity, cash flows andresults of operations.

 

21

----

 

To a large extent,changes in operating expenses for airlines are driven by changes in capacity,or ASMs.  The following table provides our operating revenues and expensesfor our mainline operations expressed as cents per total mainline ASMs and as apercentage of total mainline operating revenues, as rounded, for the three andsix month ended September 30, 2005 and 2004.  Regional partner revenues, expenses and ASMswere excluded from this table.

 
| ** **                              | ** ** | **Three  Months Ended  September 30,** | ** ** | **Six  Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                    | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                              | ** ** | **Per  total  ASM**                         | ** ** | **%  of Total  Revenue**                  | ** ** | **Per  total  ASM** | ** ** | **%  of Total  Revenue** | ** ** | **Per  total  ASM** | ** ** | **%  of Total  Revenue** | ** ** | **Per  total  ASM** | ** ** | **%  of Total  Revenue** | ** ** |
|                                    |       |                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues:                               |       |                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Passenger  - mainline                   |       | 9.11                                        |       | 97.6                                      | %          | 7.90 |   | 97.7 | % | 9.00 |   | 97.5 | % | 7.78 |   | 97.8 | % |
| Cargo                                   |       | 0.05                                        |       | 0.6                                       | %          | 0.05 |   | 0.7 | % | 0.05 |   | 0.6 | % | 0.06 |   | 0.7 | % |
| Other                                   |       | 0.17                                        |       | 1.8                                       | %          | 0.13 |   | 1.6 | % | 0.17 |   | 1.9 | % | 0.12 |   | 1.5 | % |
| Total revenues                          |       | 9.33                                        |       | 100.0                                     | %          | 8.08 |   | 100.0 | % | 9.22 |   | 100.0 | % | 7.96 |   | 100.0 | % |
|                                    |       |                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses:                     |       |                                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Flight  operations                      |       | 1.37                                        |       | 14.7                                      | %          | 1.33 |   | 16.5 | % | 1.42 |   | 15.4 | % | 1.38 |   | 17.4 | % |
| Aircraft  fuel expense                  |       | 2.82                                        |       | 30.2                                      | %          | 1.87 |   | 23.2 | % | 2.69 |   | 29.1 | % | 1.84 |   | 23.1 | % |
| Aircraft  lease expense                 |       | 0.93                                        |       | 10.0                                      | %          | 0.94 |   | 11.6 | % | 0.96 |   | 10.5 | % | 0.90 |   | 11.3 | % |
| Aircraft  and traffic servicing         |       | 1.35                                        |       | 14.5                                      | %          | 1.31 |   | 16.2 | % | 1.35 |   | 14.7 | % | 1.37 |   | 17.2 | % |
| Maintenance                             |       | 0.74                                        |       | 7.9                                       | %          | 0.81 |   | 10.0 | % | 0.79 |   | 8.6 | % | 0.83 |   | 10.4 | % |
| Promotion  and sales                    |       | 0.74                                        |       | 7.9                                       | %          | 0.81 |   | 10.0 | % | 0.83 |   | 9.0 | % | 0.85 |   | 10.7 | % |
| General  and administrative             |       | 0.48                                        |       | 5.1                                       | %          | 0.50 |   | 6.3 | % | 0.50 |   | 5.4 | % | 0.49 |   | 6.1 | % |
| Aircraft  lease and facility exit costs |       | —                                      |       | —                                    |       | — |   | — |   | 0.07 |   | 0.8 | % | — |   | — |   |
| (Gains)/losses  on sales of assets, net |       | (0.02                                       | )          | (0.3                                      | )%         | — |   | — |   | (0.01 | ) | (0.2 | )% | 0.01 |   | 0.2 | % |
| Impairment  and other related charges   |       | —                                      |       | —                                    |       | 0.18 |   | 2.2 | % | — |   | — |   | 0.10 |   | 1.3 | % |
| Depreciation                            |       | 0.27                                        |       | 3.0                                       | %          | 0.28 |   | 3.4 | % | 0.28 |   | 3.0 | % | 0.29 |   | 3.6 | % |
| Total operating expenses                |       | 8.68                                        |       | 93.0                                      | %          | 8.03 |   | 99.4 | % | 8.88 |   | 96.3 | % | 8.06 |   | 101.3 | % |

 

**Three Months ended September 30,2005 as compared to the Three Months ended September 30, 2004**

 

**Mainline Revenues**

 

Industry fare pricingbehavior 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 marketshare.  In addition, certain markets weserve are destinations that cater to vacation or leisure travelers, resultingin seasonal fluctuations in passenger revenues in these markets.

 

***MainlinePassenger Revenue*s.** Mainline passenger revenues totaled $229,397,000 for the quarter ended September 30,2005 compared to $188,173,000 for the quarter ended September 30, 2004, anincrease of 21.9%.  Mainline passengerrevenue includes revenues for reduced rate standby passengers, administrativefees, revenue recognized for tickets that are not used within one year fromtheir issue dates, and revenue recognized from our 

 

22

----

 

co-branded credit cardarrangement.  We carried 2,028,000mainline revenue passengers during the quarter ended September 30, 2005compared to 1,750,000 mainline revenue passengers during the quarter ended September 30,2004, an increase of 15.9%.  We had anaverage of 48.8 aircraft in service during the quarter ended September 30,2005 compared to an average of 45.5 aircraft in service during the quarterended September 30, 2004, an increase of 7.3%.  Mainline ASMs increased to 2,518,515,000 forthe quarter ended September 30, 2005 from 2,383,573,000 for the quarterended September 30, 2004, an increase of 5.7%.  Mainline RPMs for the quarter ended September 30,2005 were 1,940,880,000 compared to 1,738,682,000 for the quarter ended September 30,2004, an increase of 11.6%, outpacing the increase in mainline ASMs.  Ourmainline RASM increased to 9.33¢ from 8.08¢, an increase of 15.5%.  Our mainline average fare was $103.47 for thequarter ended September 30, 2005 as compared to $100.05 for the quarterended September 30, 2004, an increase of 3.4%.  Our length of haul was 957 and 994 miles forthe quarters ended September 30, 2005 and 2004, respectively, a decreaseof 3.7%.  Our mainline load factorincreased to 77.1% for the quarter ended September 30, 2005 as compared to72.9% for the quarter ended September 30, 2004, an increase of 4.2points.  We substantially decreasedflying on August 15, 2004 and eliminated service in LAX as a focus city inthe fourth quarter of fiscal year 2005, which included transcontinental flightsbetween the east and west coast, introductory fares and disappointing loadfactors.  The LAX service resulted inlonger system-wide length of haul relative to our non-LAX route structure wecurrently have in place.  Our averagefare increase is partially due to the lower fares offered last year for the LAXfocus city and is also due to several industry fare increases that havesustained in the market place.

 

***Cargo Revenues****.*  Cargo revenues, consisting of revenues fromfreight and mail service, totaled $1,373,000 and $1,246,000 for the quartersended September 30, 2005 and 2004, representing 0.6% and 0.7% of totaloperating revenues excluding regional partner revenues, respectively, an increaseof 10.2%.

 

***Other Revenues*.** Other revenues, comprised principally of interline and ground handlingfees, liquor sales, LiveTV sales, pay-per-view movies and excess baggage fees,totaled $4,263,000 and $3,106,000, or 1.8% and 1.6% of total operating revenuesexcluding regional partner revenues for the quarters ended September 30,2005 and 2004, respectively, an increase of 37.3%.  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 revenue from ground handlingfee agreements with other airlines.

 

23

----

 

**Mainline Operating Expenses**

 

Mainline operatingexpenses include expenses related to flight operations, aircraft and trafficservicing, maintenance, promotion and sales, general and administrative,depreciation and expenses related to our transition to an all Airbusfleet.  Total mainline operating expenseswere $218,481,000 and $191,463,000 for the quarters ended September 30,2005 and 2004, respectively, and represented 93.0% and 99.4% of total mainlinerevenue, respectively.  Operatingexpenses decreased as a percentage of revenues during the quarter ended September 30,2005 largely a result of an increase in our average fare coupled with an increasein our load factors of 5.8%. This increase was significantly offset by anincrease of 50.4% in our aircraft fuel cost per gallon for the quarter ended September 30,2005 as compared to the quarter ended September 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 9.0% to $54,286,000 compared to $49,803,000, and were 23.1%and 25.9% of total mainline revenues for the quarter ended September 30,2005 and 2004, respectively.  Salaries,wages and benefits increased over the prior comparable periods largely as aresult of general wage increases, increases in heath insurance costs andincreases in workers compensation insurance. Our employee count increased fromapproximately 4,510 in September 2004 to approximately 4,570 in September 2005,or an increase of 1.3%.  Our employee countremained relatively unchanged despite a 5.7% increase in ASMs due to economiesof scale.

 

***FlightOperations.***  Flightoperations expenses increased 8.4% to $34,438,000 as compared to $31,773,000,and were 14.7% and 16.5% of total mainline revenue for the quarters ended September 30,2005 and 2004, respectively.  Flightoperations expenses increased partially due to an increase in mainline blockhours from 47,086 for the quarter ended September 30, 2004 to 50,976 forthe quarter ended September 30, 2005, an increase of 8.3%.  Flight operations expenses include allexpenses related directly to the operation of the aircraft excludingdepreciation of owned aircraft and aircraft lease expenses and includinginsurance expenses, pilot and flight attendant compensation, in-flightcatering, crew overnight expenses, flight dispatch and flight operationsadministrative expenses.

 

Pilot and flight attendant salaries before payrolltaxes and benefits increased 16.4% to $20,148,000 compared to $17,303,000, andwere 8.8% and 9.2% of passenger mainline revenue for the quarters ended September 30,2005 and 2004, respectively.  We employedapproximately 1,355 pilots and flight attendants at September 30, 2005 ascompared to 1,315 at September 30, 2004, an increase of 3.0%.  The increase of 3.0% in the number of pilotsand flight attendants is less than the 8.3% increase in block hours due to adecrease in required pilot training after the completion of the Airbustransition and improvements in crew utilization.   The increase in salaries was due to generalincreases in wage rates.

 

Aircraft insuranceexpenses totaled $2,552,000 (1.2% of total mainline revenue) and $2,634,000(1.4% of total mainline revenue) for the quarters ended September 30, 2005and 2004, respectively.  Aircraft insuranceexpenses were .13¢ and .15¢ per RPM for the quarters ended September 30,2005 and 2004, respectively.  We renewedour aircraft hull and liability coverage renewed on June 7, 2004 for oneyear with a 30% decrease in premiums from the prior policy year and we extendedour policy on June 7, 2005 through December 31, 2005 at premiums thatwere further reduced by 13%. In December 2002, through authority granted under the HomelandSecurity Act of 2002, the U.S. government expanded its insurance program toenable airlines to elect either the government’s excess third-party war riskcoverage or for the government to become the primary insurer for all war riskscoverage.  We elected to take primarygovernment coverage in February 2003 and dropped the commerciallyavailable war risk coverage.  Thecurrent FAA war risk policy is in effect until December 31, 2005.  We do not know whether the government willextend the coverage beyond December 2005, and if it does, how long theextension will last.  We expect that ifthe government stops providing excess war risk coverage to the airlineindustry, 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.

 

***Aircraft Fuel.**** *Aircraft fuel expenses include both the direct cost offuel including taxes as well as the cost of delivering fuel into the aircraft.  Aircraft fuel costs of $70,912,000 for 36,471,000gallons used and $44,715,000 for 34,641,000 gallons used and resulted in anaverage fuel cost of 1.94¢ and 1.29¢ per gallon for the quarters ended September 30,2005 and 2004, respectively, an increase of 58.6%.  Aircraft fuel costs, excluding unrealizedhedging gains, were 1.95¢ and 1.41¢ per gallon for the quarters ended September 30,2005 and 2004, respectively.  Aircraftfuel 

 

24

----

 

expenses represented 30.2% and 23.1% of total mainlinerevenue for the quarters ended September 30, 2005 and 2004,respectively.  Fuel prices are subject tochange weekly, as we purchase a very small portion in advance forinventory.  The results of operations forthe quarter ended September 30, 2005 include an unrealized derivative gainof $281,000 and a realized gains of $1,834,000 in cash settlements receivedfrom a counter-party recorded as a decrease in fuel expense.   The results of operations for the quarterended September 30, 2004 include an unrealized derivative gain of $4,111,000.  Fuel consumption for the quarters ended September 30,2005 and 2004 averaged 715 and 736 gallons per block hour, respectively, adecrease of 2.9%.  Fuel consumption perblock hour decreased during the quarter ended September 30, 2005 from theprior comparable period because of the completed transition to the morefuel-efficient Airbus aircraft as compared to the Boeing fleet; by limiting theuse of the auxiliary power units on the aircraft during take off and taxi toand from gates; by tanking fuel from lower fuel cost cities; and by performingsingle engine taxis.

 

***Aircraft Lease.***Aircraft lease expenses totaled $23,472,000 (10.0% of total mainline revenue) and$22,307,000 (11.6% of total mainline revenue) for the quarters ended September 30,2005 and 2004, respectively, an increase of 5.2%.  Aircraft lease expenses increased due to a4.8% increase in the average number of leased aircraft in the periods (31.5 to33.0).  The increase is also due toincreases in lease rates for four of our aircraft that have variable rentsbased on LIBOR and additional rent related to two spare engine leases.

 

***Aircraftand Traffic Servicing.*** Aircraft and traffic servicingexpenses were $34,114,000 and $31,229,000, an increase of 9.2%, for thequarters ended September 30, 2005 and 2004, respectively, and represented14.5% and 16.2% 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 ofSeptember 30, 2005, we served 42 cities with mainline services as comparedto 39 cities as of September 30, 2004, an increase of 7.7%.  During the quarter ended September 30,2005, our departures increased to 21,189 from 18,937 for the quarter ended September 30,2004, an increase of 11.9%.  Aircraft andtraffic servicing expenses were $1,610 per departure for the quarter ended September 30,2005 as compared to $1,649 per departure for the quarter ended September 30,2004, a decrease of 2.4%.  This decreasein the amount of expenses per departure is related to the realization ofeconomies of scale.

 

***Maintenance.*** Maintenance expenses of $18,518,000 and$19,261,000 were 7.9% and 10.0% of total revenue for the quarters ended September 30,2005 and 2004, respectively, a decrease of 3.9%.    Maintenance expenses include all labor,parts and supplies expenses related to the maintenance of the aircraft.  Maintenance cost per block hour was $363 and$409 for the quarters ended September 30, 2005 and 2004, respectively, adecrease of 11.2%.  Maintenance cost perblock hour decreased as a result of our transition to an all Airbus fleet that isless costly to maintain than our older Boeing aircraft, offset slightly bycosts associated with the cost of maintenance associated with meeting thereturn condition requirements of three Boeing aircraft during the period.  Our mainline average age of aircraft was 2.1years as of September 30, 2005 as compared to 2.7 years as of September 30,2004.  As the Airbus aircraft age, theywill require more maintenance and maintenance expenses per block hour willincrease.

 

***Promotion and Sales****. *Promotion and salesexpenses totaled $18,645,000 and $19,250,000 and were 7.9% and 10.0% of totalrevenue excluding revenues from our regional partner operations for thequarters ended September 30, 2005 and 2004, respectively, a decrease of3.1%.  These expenses include advertisingexpenses, telecommunications expenses, wages and benefits for reservationagents and related supervision as well as marketing management and salespersonnel, credit card fees, travel agency commissions, computer reservationscosts. These expenses are partially offset by marketing programs in which we receivedproceeds for the sale of frequent flyer miles. During the quarter ended September 30, 2005, promotion and salesexpense included a favorable sales and use tax credit of $3,589,000 withrespect to the taxation of ticketing services which related to the periods fromSeptember 2001 through June 30, 2005. During the quarter ended September 30, 2005, promotion and salesexpenses, excluding the sales tax adjustment in 2005, per mainline passenger decreasedto $10.96 from $11.00 during the quarter ended September 30, 2004.  Promotion and sales expenses per mainlinepassenger decreased as a result of anincrease in frequent flyer miles sold related to our co-branded credit card anda new point exchange agreement with American Express.

 

25

----

 

***Generaland Administrative.*** General and administrative expenses for the quarters ended September 30,2005 and 2004 totaled $12,071,000 and $12,034,000, respectively, and were 5.1%and 6.3% of total mainline revenue, respectively, an increase of 0.3%.  General and administrative expenses includethe wages and benefits for several of our executive officers and various otheradministrative personnel including legal, accounting, information technology,aircraft procurement, corporate communications, training and human resourcesand other expenses associated with these departments.  Employee health benefits, accrued vacationand bonus expenses, and general insurance expenses including worker’scompensation. General and administrative expenses increased primarily due toincreased rates for heath insurance and worker’s compensation, which was offsetby a decrease in our accrued vacation liability.

 

***Aircraft Lease and Facility Exit Costs.**** *Asa result of exiting a city lease in fiscal year 2005, we recorded a liabilityfor the estimated remaining time we would be obligated to continue to pay forthe leased space.  As of September 30,2005 we had to record an additional expense of $53,000 for a revised estimatedtime until a sublease will be obtained. We may need to record additional expenses if a sublease is not obtainedin the time period we estimated.  Therewere no similar costs incurred during the quarter ended September 30,2004.

 

***Gains and Losses on Sales ofAssets, net*.**  During the quarter ended September 30, 2005 we recognized net gainstotaling $603,000 primarily on the sale of Boeing spare parts.  During the quarter ended September 30,2004, we incurred a loss totaling $74,000 on the sale of other assets andBoeing parts.

 

***Depreciation.***  Depreciation expenses of $6,862,000 and $6,606,000were approximately 2.9% and 3.4% of total mainline revenue for the quartersended September 30, 2005 and 2004, respectively, an increase of 3.9%.  These expenses include depreciation of aircraftand aircraft components, office equipment, ground station equipment, and otherfixed assets.  Depreciation expenseincreased slightly year over year due to the fact that the average number ofaircraft owned was 15.9 during the quarter ended September 30, 2005 ascompared to 14.0 during the quarter ended September 30, 2004, an increaseof 13.6%, offset by Boeing rotable parts that were depreciated in 2004, but arenot currently depreciated because they are held for sale.

 

***NonoperatingIncome (Expense). ***Netnonoperating expense totaled $3,180,000 for the quarter ended September 30,2005 as compared to net nonoperating expense of $2,430,000 for the quarterended September 30, 2004, an increase of 30.9%

 

Interest income increasedto $1,911,000 from $786,000 during the quarter ended September 30, 2005from the prior comparable period as a result of an increase in short-terminterest rates earned on investments. Interest expense increased to $5,044,000 for the quarter ended September 30,2005 from $3,113,000 for the quarter ended September 30, 2004, an increaseof 62.0%.  The increase in interestexpense was a result of additional debt for the purchase of two additional purchasedaircraft and an increase in the weighted average borrowing rate.   Debt related to aircraft increased from$309,773,000 as of September 30, 2004 to $346,467,000 as of September 30,2005 with an increase in the average weighted interest rate from 3.88% to 5.64%as of September 30, 2004 and 2005, respectively.

 

**Regional Partner**

 

***Passenger Revenues – RegionalPartner***.  Regional partner revenues,consisting of revenues from Frontier JetExpress operated by Horizon, totaled$23,391,000 for the quarter ended September 30, 2005 and $21,910,000 forthe quarter ended September 30, 2004, a 6.8% increase.  The incremental revenue from passengersconnecting from regional flights to mainline flights is included in ourmainline passenger revenue. The increase in revenue is primarily due to anincrease in the average fare to $99.99 for the quarter ended September 30,2005 from $93.98 for the quarter ended September 30, 2004, an increase of6.4%.

 

***Operating Expense – Regional Partner Expense.***  Regional partner expense for the quarterended September 30, 2005 and 2004 totaled $26,307,000 and $23,568,000, respectively,was 112.5% and 107.6% of total regional partner revenues, respectively.  Regional partner expenses include all directcosts associated with Frontier JetExpress operated by Horizon. The increase in costs is primarily due to a57.8% increase in fuel cost and the addition of four additional destinations ascompared to September 30, 2004.

 

26

----

 

**Six Months ended September 30,2005 as compared to the Six Months ended September 30, 2004**

 

**Summary**

 

We had net income of $4,172,000or 11¢ per diluted share for the six months ended September 30, 2005, ascompared to a net loss of $8,656,000 or a loss of 24¢ per diluted share for thesix months ended September 30, 2004.  Included in our net income for the six months ended September 30,2005 were the following items before the effect of income taxes:  a charge of $3,312,000 relating to threeleased Boeing 737-300 aircraft we ceased using during the first quarter, gainsof $691,000 related to the sale of Boeing parts held for sale and other assetsand an unrealized loss on fuel hedges of $726,000.   These items, net of income taxes, decreasedour net income by 6¢ per share.  Includedin our net loss for the six months ended September 30, 2004 were thefollowing items before the effect of income taxes:  a loss of $604,000 on the sale of two AirbusA319 aircraft in sale-leaseback transactions and other assets, a write down of$4,601,000 of the carrying value of expendable Boeing 737 inventory, and anunrealized gain on fuel hedges of $3,634,000.  These items, net of income taxes, increased our net loss by 3¢ pershare.

 

Our mainline passengeryield per RPM was 11.47¢ and 10.76¢ for the six months ended September 30,2005 and 2004, respectively, an increase of 6.6%.  Our mainline average fare was $102.79 for thesix months ended September 30, 2005 as compared to $100.26 for the sixmonths ended September 30, 2004, an increase of 2.5%.  Our length of haul was 967 and 991 miles forthe six months ended September 30, 2005 and 2004, respectively, a decreaseof 2.4%.  Our mainline load factor was77.7% for the six months ended September 30, 2005 as compared to 71.9% forthe six months ended September 30, 2004, an increase of 5.8 points.  We substantially decreased flying on August 15,2004 and eliminated service to LAX as a focus city in the fourth quarter offiscal year 2005, which included transcontinental flights between the east andwest coast, introductory fares and disappointing load factors. The decrease inhaul length is relative to our non-LAX route structure we currently have inplace.  Our average fare increase ispartially due to the lower fares offered last year for the LAX focus city andis also due to several industry fare increases that have sustained in the marketplace.   Our RASM for the six monthsended September 30, 2005 and 2004 was 8.92¢ and 7.74¢, respectively, anincrease of 15.2%.

 

Our mainline CASM for thesix months ended September 30, 2005 and 2004 was 8.88¢ and 8.06¢, respectively,an increase of 10.2%.  The increase in mainlineCASM was largely due to an increase in fuel expense of 2.69¢ per ASM from 1.84¢per ASM for the periods ending September 30, 2005 and 2004, respectively,an increase of 46.2%.  Mainline CASM,excluding fuel was 6.19¢ per ASM as compared to 6.22¢ per ASM for the periodsending September 30, 2005 and 2004, respectively, a decrease of 0.5%.  However, included in mainline CASM for thequarter ended September 30, 2005 was a reduction of our sales andpromotion expense of $3,144,000, or .06¢ of CASM, due to a favorable sales anduse tax credit on the taxation of ticketing services which related to September 2001through March 2005 and a reduction of $2,748,000, or .06¢ of CASM, toflight operations as a result of the 2004 DIA landing fee and facilitiescalendar 2004 cost reconciliation.  Thesewere offset by $3,365,000, or .07¢ of CASM, for aircraft lease and facilityexit costs and $3,086,000, or .06¢ of CASM, for maintenance costs for returnedBoeing aircraft and rents associated with the late return of certain Boeingaircraft. Mainline CASM was also impacted by .06¢ per ASM increase in aircraftlease expense, a .04¢ per ASM increase in flight operations and a .05¢ per ASM increasein sales and promotion (excluding a favorable tax credit of .06¢ per ASM on thetaxation of ticketing services).  Thesewere offset by .04¢ per ASM decrease in maintenance and a .02¢ per ASM decreasein aircraft traffic and servicing.

 

For the six months ended September 30,2005, our mainline break-even load factor was 75.9% compared to our achievedpassenger load factor of 77.7%.  Ourmainline break-even load factor for the six months ended September 30,2004, was 73.8% compared to our achieved passenger load factor of 71.9%.  Our mainline break-even load factor increasedfrom the prior comparable period as a result of an increase in our mainlineCASM to 8.88¢ during the six month period ended September 30, 2005(primarily due to increases in fuel costs) from 8.06¢ during the six month periodended September 30, 2004, or 10.2%, partially offset by an increase in ourmainline RASM of 15.2%.

 

27

----

 

**Mainline Revenues**

 

***MainlinePassenger Revenue*s.** Mainline passenger revenues totaled $437,464,000 for the six months endedSeptember 30, 2005 compared to $357,611,000 for the six months ended September 30,2004, an increase of 22.3%.  We carried3,912,000 mainline revenue passengers during the six months ended September 30,2005 compared to 3,334,000 mainline revenue passengers during the six months endedSeptember 30, 2004, an increase of 17.3%. We had an average of 47.2 aircraft in service during the six months endedSeptember 30, 2005 compared to an average of 43.5 aircraft in serviceduring the six months ended September 30, 2004, an increase of 8.5%.  Mainline ASMs increased to 4,864,412,000 forthe six months ended September 30, 2005 from 4,595,225,000 for the sixmonths ended September 30, 2004, an increase of 5.9%.  Mainline RPMs for the six months ended September 30,2005 were 3,780,979,000 compared to 3,303,269,000 for the six months ended September 30,2004, an increase of 14.5%, outpacing the increase in mainline ASMs.  Ourmainline RASM increased to 8.92¢ from 7.74¢, an increase of 15.2%.  Our mainline average fare was $102.79 for thesix months ended September 30, 2005 as compared to $100.26 for the sixmonths ended September 30, 2004, an increase of 2.5%.  Our length of haul was 967 and 991 miles forthe six months ended September 30, 2005 and 2004, respectively, a decreaseof 2.4%.  Our mainline load factorincreased to 77.7% for the six months ended September 30, 2005 as comparedto 71.9% for the six months ended September 30, 2004, an increase of 5.8points.  The decrease in our length ofhaul, our increase in load factors and increase in our average fare wererelated 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.

 

***Cargo Revenues****.*  Cargo revenues, consisting of revenues fromfreight and mail service, totaled $2,592,000 and $2,674,000 for the six months endedSeptember 30, 2005 and 2004, representing 0.6% and 0.7% of total operatingrevenues excluding regional partner revenues, respectively, a decrease of 3.1%.  During the quarter ended June 30, 2004,we determined that carrying mail for the United States Postal Service was notprofitable and we terminated our contract effective July 1, 2004.  As such, cargo revenues for the six months endedSeptember 30, 2005 only included revenue from our freight service.

 

***Other Revenues*.** Other revenues, comprised principally of interline and ground handlingfees, liquor sales, LiveTV sales, pay-per-view movies and excess baggage fees,totaled $8,433,000 and $5,537,000 or 1.9% and 1.5% of total operating revenuesexcluding regional partner revenue for the six months ended September 30,2005 and 2004, respectively, an increase of 52.3%.  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 revenue from ground handlingfee agreements with other airlines.

 

28

----

 

**Mainline Operating Expenses**

 

Total mainline operatingexpenses were $431,996,000 and $370,402,000 for the six months ended September 30,2005 and 2004, respectively, and represented 96.3% and 101.3% of total mainlinerevenue, respectively.  Operatingexpenses decreased as a percentage of revenue during the quarter ended September 30,2005 largely a result of an increase in our RASM coupled with an increase inour load factors of 8.1%.  This increasewas significantly offset by an increase of 46.5% in our aircraft fuel cost pergallon for the six months ended September 30, 2005 as compared to the priorcomparable period.

 

***Salaries,Wages and Benefits****.*  Salaries, wages and benefits increased 11.4%to $108,491,000 compared to $97,377,000, and were 24.2% and 26.6% of totalmainline revenues for the six months ended September 30, 2005 and 2004,respectively.  Salaries, wages andbenefits increased over the prior comparable periods largely as a result ofgeneral wage increases, increases in heath insurance costs and workerscompensation insurance. Our employee count remained relatively flat with anincrease of 1.3% from the same comparable period last year despite a 5.9%increase in ASMs.

 

***FlightOperations.***  Flightoperations expenses increased 8.4% to $68,910,000 as compared to $63,562,000,and were 15.4% and 17.4% of total mainline revenue for the six months ended September 30,2005 and 2004, respectively.  Flightoperations expenses increased due to an increase in mainline block hours from91,060 for the six months ended September 30, 2004 to 98,355 for the sixmonths ended September 30, 2005, an increase of 8.0%.

 

Pilot and flight attendant salaries before payrolltaxes and benefits increased 16.7% to $39,919,000 compared to $34,192,000, andwere 9.1% and 9.6% of passenger mainline revenue for the six months ended September 30,2005 and 2004, respectively.  We employedapproximately 3.0% more pilot and flight attendants as compared to thecomparable period last year.  Theincrease of 3.0% in the number of pilots and flight attendants is less than the8.0% increase in block hours due to a decrease in required pilot training afterthe completion of the Airbus transition and improvements in crew utilization.  The increase in salaries was due to generalincreases in wage rates.

 

Aircraft insuranceexpenses totaled $5,249,000 (1.2% of total mainline revenue) and $5,280,000(1.4% of total mainline revenue) for the six months ended September 30,2005 and 2004, respectively.  Aircraftinsurance expenses were .14¢ and .16¢ per RPM for the six months ended September 30,2005 and 2004, respectively.  Ouraircraft hull and liability coverage renewed on June 7, 2004 for one yearwith a 30% decrease in premiums from the prior policy year and we extended ourpolicy on June 7, 2005 through December 31, 2005 at premiums thatwere further reduced by 13%.

 

***Aircraft Fuel.**** *Aircraft fuel costs of $130,742,000 for 70,253,000gallons used and $84,718,000 for 66,759,000 gallons used and resulted in anaverage fuel cost of 1.86¢ and 1.27¢ per gallon for the six months ended September 30,2005 and 2004, respectively, an increase of 46.5%.  Aircraft fuel costs, excluding unrealizedhedging losses and gains, were 1.85¢ and 1.32¢ per gallon for the six monthsended September 30, 2005 and 2004, respectively.  Aircraft fuel expenses represented 29.1% and23.1% of total mainline revenue for the six months ended September 30,2005 and 2004, respectively.  Fuel pricesare subject to change weekly, as we purchase a very small portion in advancefor inventory.  The results of operationsfor the six months ended September 30, 2005 include an unrealizedderivative loss of $726,000 and a realized gains of $3,965,000 in cashsettlements received from a counter-party recorded as a decrease in fuelexpense.   The results of operations forthe six months ended September 30, 2004 include an unrealized derivativegain of $3,634,000 and a realized net gain of approximately $543,000 in cashsettlements received from a counter-party recorded as a decrease in fuelexpense.  Fuel consumption for the sixmonths ended September 30, 2005 and 2004 averaged 714 and 733 gallons perblock hour, respectively, a decrease of 2.6%. Fuel consumption per block hour decreased during the six months ended September 30,2005 from the prior comparable period because of the transition to the morefuel-efficient Airbus aircraft as compared to the Boeing fleet, which hasslightly higher fuel burn rates, and by limiting the use of the auxiliary powerunit on the aircraft during take off and taxi to and from the gates.

 

***Aircraft Lease.***Aircraft lease expenses totaled $46,903,000 (10.5% of total mainline revenue) and$41,198,000 (11.3% of total mainline revenue) for the six months ended September 30,2005 and 2004, respectively, an increase of 13.8%.  The increase in lease expense is due to anincrease in the average number of leased aircraft (an increase from 29.5 to32.2, or 9.2%), costs associated with the late return of certain Boeingaircraft, increases in lease rates for four of our aircraft that have variablerents based on LIBOR, and additional rent related to two spare engine leases.

 

29

----

 

***Aircraftand Traffic Servicing.*** Aircraft and traffic servicingexpenses were $65,867,000 and $62,921,000, an increase of 4.7%, for the sixmonths ended September 30, 2005 and 2004, respectively, and represented14.7% and 17.2% of total mainline revenue. Aircraft and traffic servicing expenses will increase with the additionof new cities to our route system.  Duringthe six months ended September 30, 2005, our departures increased to 40,503from 36,587, an increase of 10.7%.  Includedin the six months ended September 30, 2005 was a credit granted as aresult of the 2004 DIA landing fee and facilities calendar 2004 costreconciliation of $68 per departure.  Aircraftand traffic servicing expenses, excluding the DIA landing fee and facilitycalendar adjustment, were $1,694 per departure for the six months ended September 30,2005 as compared to $1,720 per departure for the six months ended September 30,2004, a decrease of 1.5%.  This decreasein the amount of expense per departure is related to the realization ofeconomies of scale.

 

***Maintenance.*** Maintenance expenses of $38,528,000 and$38,156,000 were 8.6% and 10.4% of total revenue for the six months ended September 30,2005 and 2004, respectively, and increased by 1.0% in the current period ascompared to last year.  Maintenance costper block hour was $392 and $419 for the six months ended September 30,2005 and 2004, respectively, a decrease of 6.4%.

 

***Promotionand Sales****. *Promotion and sales expensestotaled $40,517,000 and $39,089,000 and were 9.0% and 10.7% of total revenueexcluding revenues from our regional partner operations for the six monthsended September 30, 2005 and 2004, respectively, an increase of 3.7%.  During the six months ended September 30,2005 we reduced promotion and sales expense by $3,144,000 due to a favorable salesand use tax credit on the taxation of ticketing services which related to September 2001to March 2005.  During the sixmonths ended September 30, 2005, promotion and sales expenses, excludingthe sales tax adjustment in 2005, per mainline passenger decreased to $11.16from $11.72 for the six months ended September 30, 2004.  Promotion and sales expenses per mainlinepassenger decreased as a result of advertisingexpenses incurred during the six months ended September 30, 2004 foradvertising in the Los Angeles, California area to promote brand awareness forthe then new focus city which was offset by an increase in frequent flyer milessold.

 

***Generaland Administrative.*** General and administrative expenses for the six months ended September 30,2005 and 2004 totaled $24,322,000 and $22,328,000, respectively, and were 5.4%and 6.1% of total mainline revenue, respectively, an increase of 8.9%.

 

***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 September 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 $3,312,000in the quarter ended June 30,2005 to reflect the estimated fair value ofthe remaining lease payments and a one-time early return payment.  There were no similar costs incurred duringthe six months ended September 30, 2004.

 

***Gains and Losses on Sales ofAssets, Net*.**  During the six months ended September 30, 2005, we received netgains totaling $691,000 primarily on the sale of Boeing spare parts.  During the six months ended September 30,2004, we incurred a loss totaling $489,000 on the sale-leaseback of two AirbusA319 aircraft and net losses of $115,000 on the sale of other assets.

 

***Depreciation.***  Depreciation expenses of $13,534,000 and$13,225,000 and were approximately 3.0% and 3.6% of total mainline revenue forthe six months ended September 30, 2005 and 2004, respectively.  Depreciation expense increased slightly overthe prior comparable period as a result of the increase of the average numberof aircraft owned increase to 15.0 during the six months ended September 30,2005 as compared to 14.0 during the six months ended September 30, 2004.

 

***NonoperatingExpense. ***Netnonoperating expense totaled $6,037,000 for the six months ended September 30,2005 as compared to net nonoperating expense of $4,833,000 for the six months endedSeptember 30, 2004, an increase of 7.1%

 

Interest income increasedto $3,275,000 from $1,356,000 during the six months ended September 30,2005 from the prior comparable period as a result of an increase in short-terminterest rates earned on investments.  Interest

 

30

----

 

expense increased to$9,162,000 for the six months ended September 30, 2005 from $6,021,000 forthe six months ended September 30, 2004. The increase in interest expense was due to additional debt for thepurchase of two additional Airbus aircraft and an increase in the weightedaverage borrowing rate.   Aircraft debtincreased from $309,773,000 as of September 30, 2004 to $346,467,000 as ofSeptember 30, 2005 with an increase in the average weighted interest ratefrom 3.88% to 5.64% as of September 30, 2004 and 2005, respectively.

 

***IncomeTax Expense (Benefit).**** *We recorded an income tax expense of $2,203,000 during the sixmonths ended September 30, 2005 at a 34.6% rate, compared to an income taxbenefit of $4,584,000 during the six months ended September 30, 2004 at a 34.6%rate.  The fluctuation in our tax rate isdue to the impact of permanent differences as a percentage of income.

 

**Regional Partner**

 

***Passenger Revenues – RegionalPartner***.  Regional partner revenues,from Frontier JetExpress operated by Horizon totaled $46,345,000 for the sixmonths ended September 30, 2005 and $41,036,000 for the six months ended September 30,2004, a 12.9% increase.  The increase inrevenue is due to an increase in the average fare to $99.28 from $94.10, anincrease of 5.5% offset by a decrease in the passenger load factor by 1.6points from the prior comparable period.

 

***Operating Expenses – Regional Partner.*** Regional partner expense for the six months ended September 30,2005 and 2004 totaled $50,426,000 and $44,862,000, respectively, and was 108.8%and 109.3% of total regional partner revenues, respectively.  Regional partner expenses include all directcosts associated with Frontier JetExpress operated by Horizon. The increase incosts is primarily due to a 49.1% increase in fuel cost and the addition of fouradditional destinations as compared to the same period in 2004.

 

31

----

 

**Liquidity and Capital Resources**

 

Our liquidity depends toa large extent on the number of passengers who fly with us, the fares they pay,our operating and capital expenditures, our financing activities, and the costof fuel.  We depend on lease ormortgage-style financing to acquire all of our aircraft, including 15additional Airbus aircraft that as of September 30, 2005 are scheduled fordelivery through March 2008.  We havefinancing commitments on seven of the 15 aircraft scheduled for delivery.

 

We had cash, cashequivalents and short-term investments of $144,096,000 and $174,795,000 at September 30,2005 and March 31, 2005, respectively. At September 30, 2005, total current assets were $274,006,000 ascompared to $232,162,000 of total current liabilities, resulting in workingcapital of $41,844,000.  At March 31,2005, total current assets were $275,550,000 as compared to $233,850,000 oftotal current liabilities, resulting in working capital of $41,700,000.

 

*OperatingActivities.*  Cashprovided by operating activities for the six months ended September 30,2005 was $2,399,000 as compared to a use of cash of $10,327,000 for the sixmonths ended September 30, 2004.  Theincrease in operating cash flows was primarily due to better operating results duringthe six months ended September 30, 2005 as compared to the same periodlast year, which was offset by $13,358,000 for payments of vendor obligationsand accrued liabilities.

 

*InvestingActivities*.  Cash usedin investing activities for the six months ended September 30, 2005 was $71,523,000.  Capital expenditures were $81,413,000 for thesix months ended September 30, 2005 and included the purchase of two AirbusA319 aircraft, the purchase of LiveTV equipment, rotable aircraft components,aircraft improvements and ground equipment.  Aircraft lease and purchase deposits madeduring the period were $15,892,000, which was offset by pre-delivery paymentstotaling $18,705,000 applied against the purchase of two Airbus A319 aircraftand LiveTV equipment.

 

Cash used in investing activities for the six months endedSeptember 30, 2004 was $43,171,000. Capital expenditures were $109,119,000 for the six months ended September 30,2004, and included the purchase of one Airbus A318 aircraft and two Airbus A319aircraft.  We subsequently completedsale-leaseback transactions on both A319 aircraft.  Additionally, capital expenditures includedthe purchase of LiveTV equipment, rotable aircraft components, aircraftimprovements and ground equipment. Aircraft lease and purchase deposits made during the period were $11,729,000. We applied the pre-delivery paymentstotaling $6,412,000 for the purchase of an Airbus A318 aircraft to the purchaseof that aircraft and the pre-delivery deposits totaling $14,716,000 for the twoAirbus A319 aircraft were returned to us. We received $63,904,000 from the sale of the two A319 aircraft and otherassets.

 

*FinancingActivities.*  Cashprovided by financing activities for the six months ended September 30,2005 was $41,425,000.  During the sixmonths ended September 30, 2005, we borrowed $54,700,000 for the purchaseof two Airbus A319 aircraft, paid $9,248,000 of debt principal payments on our 16owned aircraft and we repaid short-term borrowings of $5,000,000 under arevolving line of credit.  During the sixmonths ended September 30, 2005, we also received $1,417,000 from theexercise of common stock options and paid $444,000 of fees for debt financing.

 

Cash provided by financing activities for the six months ended September 30,2004 was $12,142,000.  During the sixmonths ended September 30, 2004, we borrowed $22,000,000 for the purchaseof one Airbus A318 aircraft and paid $9,614,000 of debt principal payments.

 

***OtherItems 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 and rotables.  As of September 30, 2005, we havetransferred the remaining Boeing inventories to these vendors.  We began to actively sell these parts in August 2004.  As of September 30, 2005, the carryingvalue of our Boeing rotables and expendable spare parts classified as assetsheld for sale totaled $4,519,000.  Thisamount represents the estimated market value of the remaining Boeing spareparts, less selling costs.  If the actualnet proceeds received for these Boeing parts are less than the amounts we haveestimated based on estimates obtained 

 

32

----

 

fromour vendors, we may recognize additional impairments on these parts.  During the six month period ended September 30,2005, we have received $2,007,000 in gross proceeds resulting in a net gain onour expendable and rotable inventory totaling approximately $923,000.

 

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.  In September 2005,we filed an amended registration statement with the Securities and ExchangeCommission, which will enable us to periodically sell up to $250,000,000 inpreferred and common stock and debt and other securities.  We may need to continue to explore avenues toenhance 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 financing plansand activities and commitments, see “Contractual Obligations” and “CommercialCommitments” below.

 

We have obtainedfinancing for all of our aircraft deliveries scheduled for calendar years 2005and 2006 and expect to have adequate liquidity to cover our contractualobligations.  However, we cannot predictfuture trends or predict whether current trends and conditions willcontinue.  Our future liquidity andcapital resources may be impacted by many factors, including “Risk Factors”discussed in Item 1 of our annual report on Form 10-K.

 

33

----

 

**ContractualObligations**

 

The following table summarizes our contractualobligations as of September 30, 2005:

 
| ** **                                                | ** ** | **Less than  1 year** | ** **  | **1-3  years** | ** ** | **4-5  years** | ** ** | **After  5 years** | ** **  | **Total**     | ** ** |
|-----------------------------------------------------------|------------|-----------------------|-------------|----------------|------------|----------------|------------|--------------------|-------------|---------------|------------|
|                                                      |       |                  |        |           |       |           |       |               |        |          |       |
| Long-term  debt - principal payments (1)                  |       | $                     | 21,668,000  |           | $          | 47,130,000     |       | $                  | 53,080,000  |          | $          | 224,588,000 |   | $ | 346,466,000 |   |
| Long-term  debt - interest payments (1)                   |       | 18,562,000            |        | 33,328,000     |       | 27,972,000     |       | 37,312,000         |        | 117,174,000   |       |
| Operating  leases (2)                                     |       | 129,520,000           |        | 259,370,000    |       | 243,346,000    |       | 611,794,000        |        | 1,244,030,000 |       |
| Unconditional  purchase obligations (3) (4) (5) |       | 148,342,000           |        | 323,038,000    |       | 7,792,000      |       | —             |        | 479,172,000   |       |
| Total  contractual cash obligations                       |       | $                     | 318,092,000 |           | $          | 662,866,000    |       | $                  | 332,190,000 |          | $          | 873,694,000 |   | $ | 2,186,842,000 |   |

 

----

(1)         At September 30,2005, we had 16 loan agreements for 11 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 14 loans have interest ratesbased on LIBOR plus margins that adjust quarterly or semi-annually.  At September 30, 2005, interest ratesfor these loans ranged from 4.69% to 5.94%. 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.  In July 2005,we also entered into a junior loan in the amount of $4,900,000 on an aircraftpurchased in July.  This loan has aneight year term with quarterly installments of $236,000.  The loan bears interest at a floating rateadjusted quarterly based on LIBOR, which currently is 7.38%.

 

(2)         Asof September 30, 2005, we lease 31 Airbus A319 type aircraft, two AirbusA318 aircraft, and one Boeing 737 type aircraft under operating leases withexpiration dates ranging from 2005 to 2017. The Boeing 737 type aircraft is no longer in service and the table aboveincludes 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 September 30, 2005, we had made cash security deposits of$16,173,000.  Additionally, we arerequired to make additional rent payments to cover the cost of major scheduledmaintenance overhauls of these aircraft. These additional rent payments are based on the number of flight hoursflown and/or flight departures and are not included as an obligation in thetable 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.  Threeof the aircraft leases were a result of sale-leaseback transactions of threenew Airbus aircraft.  As of September 30,2005, we have taken delivery of 16 of these aircraft.  The remaining four aircraft are scheduled fordelivery beginning in March 2006 through February 2007.  As of September 30, 2005, we have made$668,000 in security deposit payments for future leased aircraftdeliveries.  Total operating leaseobligations include the four aircraft not yet received.

 

We also lease office andhangar space, spare engines and office equipment for our headquarters andairport facilities, and certain other equipment with expiration dates rangingfrom 2005 to 2015.  In addition, we leasecertain airport gate facilities on a month-to-month basis.  Amounts for leases that are on amonth-to-month basis are not included as an obligation in the table above.

 

(3)         As of September 30,2005, we have remaining firm purchase commitments for 11 additional aircraft whichhave scheduled delivery dates beginning in June 2006 and continuingthrough March 2008.  We also haveremaining firm purchase commitments for two spare engines scheduled fordelivery for December 2005 and May 2006.  Included in the purchase commitments are theremaining amounts due Airbus and amounts for spare aircraft components to 

 

34

----

 

support the additional purchase and leasedaircraft.  We are not under anycontractual 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 withcertain exceptions.  As of September 30,2005, we had made pre-delivery payments on future deliveries totaling$22,385,000 to secure these aircraft.

 

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 11 aircraft we currently expect to be purchased and the remainingfour aircraft we currently expect to be leased, less deposits made of $173,000.

 

(5)         In March 2004,we entered into a services 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 new markets, increase the amount of spacewe lease, or add leased aircraft, we are often required to provide the airportauthorities and lessors with a letter of credit, bond or cash securitydeposits.  These generally approximate upto three months of rent and fees.  Wealso provide letters of credit for our workers’ compensation insurance.  As of September 30, 2005, we hadoutstanding letters of credit, bonds, and cash security deposits totaling$12,091,000, $1,713,000, and $18,375,000, 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 September 30,2005, we have utilized $4,402,000 under this credit agreement for standbyletters of credit 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 another financial institution where we can issue letters ofcredit of up to 50% of certain spare parts inventories less amounts borrowedunder the credit facility. As of September 30, 2005, we had $10,244,000available under this facility, which is reduced by letters of credit issued of$6,500,000.  In July 2005, weentered into an additional agreement with another financial institution for a$5,000,000 revolving letter of credit where we can issue letters of credit upto $3,500,000.  As of September 30,2005, we have utilized $1,189,000 under this agreement for standby letters ofcredit that provide credit support for certain facility leases.

 

We have a contract with a bankcard processor thatrequires us to pledge a certificate of deposit equal to a certain percentage ofour air traffic liability associated with bankcard customers.  As of September 30, 2005, that amounttotaled $39,867,000.  The amount isadjusted quarterly in arrears based on our air traffic liability associatedwith bankcard transactions.  As of November 1,2005, our requirement results in a decrease of approximately $2,781,000.

 

We use the Airline Reporting Corporation (“ARC”) toprovide reporting and settlement services for travel agency sales and otherrelated transactions.  In order tomaintain the minimum bond (or irrevocable letter of credit) 

 

35

----

 

coverage of $100,000, ARC requires participating carriersto meet, on a quarterly basis, certain financial tests such as, but not limitedto, working capital ratio, and percent of debt to debt plus equity.  As of September 30, 2005, we met thesefinancial tests and presently are only obligated to provide the minimum amountof $100,000 in coverage to ARC.  If wewere to fail the minimum testing requirements, we would be required to increaseour bonding coverage to four times the weekly agency net cash sales (sales netof refunds and agency commissions). Based on net cash sales remitted to us forthe week ended October 21, 2005, the coverage would be increased byapproximately $4,325,000 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 hedging program comprised of swap and collaragreements.  Under a swap agreement, thecash settlements are calculated based on the difference between a fixed swapprice and a price based on an agreed upon published spot price for theunderlying commodity.  If the index priceis higher than the fixed price, we receive the difference between the fixedprice and the spot price.  If the indexprice is lower, we pay the difference.  Acollar agreement has a cap price, a primary floor price, and, in the case of athree-way collar, a secondary floor price. When the hedged product’s index price is above the cap, we receive thedifference between the index and the cap. When the hedged product’s index price is below the primary floor butabove the secondary floor, we pay the difference between the index and theprimary floor.  However, when the priceis below the secondary floor, we are only obligated to pay the differencebetween the primary and secondary floor prices. When the price is between the cap price and the primary floor, nopayments are required.  The unrealizednet loss on derivative contracts at September 30, 2005 was $726,000 andthe realized net gain for hedge cash settlements during the three and sixmonths ended September 30, 2005 was $1,834,000 and $3,965,000,respectively.  We have entered into thefollowing swap and collar agreements that cover periods during fiscal year2006:

 
| **Date**           | ** ** | **Product *** | ** ** | **Notional volume****    | ** ** | **Period covered**                         | ** ** | **Price**                                      | ** ** | **Percentage  of estimated  fuel purchases** | ** ** |
|--------------------|------------|---------------|------------|--------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
|               |       |          |       | **(barrels  per month)** |       |                                       |       | **(per  gallon or barrel)**                    |       |                                         |       |
|               |       |          |       |                     |       |                                       |       |                                           |       |                                         |       |
| 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                                           | %          |

 

----

* JetA is Gulf Coast Jet A fuel.  Crude oil isWest Texas Intermediatecrude oil.

** One barrel is equal to 42 gallons.

 

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 over the term of the swap that expires in March 2007.  During the three and six months ended September 30,2005, interest expense was decreased by $49,000 and $84,000, respectively, forthis agreement.  During the three and sixmonths ended September 30, 2004, interest expense was increased by $60,000and $151,000, respectively, for this agreement. Approximately $216,000 of unrealized gains are included in accumulatedother comprehensive income, net of income taxes of $130,000, as of September 30,2005.

 

36

----

 

***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 enginesused on most of our Airbus aircraft.  Theagreement was 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.  The 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 six months ended September 30, 2005 and2004 were approximately $1,268,000 and $1,260,000, 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**

 

Our critical accountingpolicies have not changed from those reported in Management’s Discussion andAnalysis of Financial Condition and Results of Operations in our 2005 AnnualReport on Form 10-K.

 

**NewAccounting Standards**

 

In December 2004,the FASB issued SFAS No. 123R, Share-Based Payments.  SFAS No. 123R, 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.  We plan to adopt SFAS No. 123(R)on April 1, 2006 and use the modified prospective transition method.  Under the modified-prospective method, wewill recognize compensation expense in the financial statements issuedsubsequent to the date of adoption for all share-based payments granted,modified or settled after April 1, 2006 as well as for any awards thatwere granted prior to April 1, 2006 for which requisite service has beenprovided as of April 1, 2006.  As wecurrently account for share-based payments under APB 25, we will recognizecompensation expense on awards granted subsequent to April 1, 2006 usingthe fair values determined by a valuation model prescribed by SFAS No. 123R.  The compensation expense on awards grantedprior to April 1, 2006 will be recognized using the fair values determinedfor the pro forma disclosures on stock-based compensation.  The amount of compensation expense that willbe recognized on awards that have not fully vested will exclude thecompensation expense cumulatively recognized in the pro forma disclosures onstock-based compensation.

 

37

----

 

**Item 3: Quantitative and Qualitative Disclosures about Market Risk**

 

***Aircraft Fuel***

 

Our earnings areaffected by 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 six months ended September 31,2005.  Based on actual fuel usage for thesix-months ended September 2005, such a change would have had the effectof increasing or decreasing our mainline and regional partner aircraft fuelexpense by approximately $14,891,000 for the six months ended September 30,2005, excluding fuel hedging. Comparatively, based on projected fiscal year 2006 fuel usage for ourmainline operations and regional partner, this would have the effect ofincreasing or decreasing our aircraft fuel expense by approximately $30,724,000,000 in fiscal year 2006 as compared to approximately $21,492,000 for fiscalyear 2005, excluding the effects of our fuel hedging arrangements.

 

On November 12,2004, we entered into a two-way collar agreement that hedged approximately 28%of our expected fuel requirements for the quarter ended June 30,2005.  This collar used Gulf Coast Jet Aas its basis.  The additional derivativetransaction is a collar agreement that uses West Texas Intermediate crude oilas its basis.  The cap price is set at $1.34per gallon, and the floor is set at $1.20 per gallon. On May 13, 2005, weentered into an additional derivative transaction that uses West TexasIntermediate crude oil as its basis and hedge 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. Theresults of operations for the six months ended September 30, 2005 includean unrealized derivative loss of $726,000 that is included in fuel expense andrealized gains of $3,695,000 in cash settlements received from a counter-partyrecorded as a decrease in fuel expense with respect to these twoagreements.  As of September 30,2005, the fair value of this agreement is recorded in the balance sheet as anasset of $2,414,000.

 

***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 88.9%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 $3,080,000 assuming the loansoutstanding that are subject to interest rate adjustments at September 30,2005 totaling $308,021,000 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 September 30, 2005, we had hedgedapproximately 5.1% of our variable interest rate loans that are based onthree-month LIBOR rates.  As of September 30,2005, the fair value of the swap agreement is recorded in the balance sheet asan asset of $214,000.

 

38

----

 

**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.

 

**PART II.  OTHER INFORMATION**

 

**Item 4:**        **Submission of Matters to a Vote of Security Holders**

 

Our annual meetingof shareholders was held on September 8, 2005 at which a quorum for thetransaction of business was present.  Onematter was voted upon, as described below.

 

Members of theBoard of Directors elected at the meeting were Samuel D. Addoms, D. DaleBrowning, Paul S. Dempsey, Patricia A. Engels, William B. McNamara, B. LaraeOrullian, Jeff S. Potter, and James B. Upchurch.  The votes cast with respect to each nomineewere as follows:

 

| 33,003,112 “For” Mr. Addoms;   |   | 158,997 “Withheld”       |   |
|-----------------------------------------------|--------|------------------------------------|--------|
| 32,607,594 “For” Mr. Browning; |   | 554,515 “Withheld   |   |
| 32,992,989 “For” Mr. Dempsey;  |   | 169,120 “Withheld”       |   |
| 33,083,026 “For” Ms. Engels;   |   | 79,083 “Withheld”        |   |
| 33,056,747 “For” Mr. McNamara; |   | 105,362 “Withheld”       |   |
| 32,878,813 “For” Ms. Orullian; |   | 283,296 “Withheld”       |   |
| 33,004,628 “For” Mr. Potter;   |   | 157,481 “Withheld”       |   |
| 33,089,716 “For” Mr. Upchurch; |   | 72,393 “Withheld”        |   |

 

39

----

 

**PART II.  OTHER INFORMATION**

 

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

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

 

----

*                 Filed herewith.

**          Furnished herewith.

 

40

----

 

**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: October 31,  2005 | By:                                             | /s/ Paul H. Tate |   |
|                         | Paul H. Tate, Senior  Vice President and        |
|                         | Chief Financial Officer                         |
|                         |                                            |
|                         |                                            |
| Date: October 31,  2005 | By:                                             | /s/ Elissa A. Potucek |   |
|                         | Elissa A. Potucek, Vice  President, Controller, |
|                         | Treasurer and Principal  Accounting Officer     |

 

----