**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

** **

**FORM 10-K**

** **

| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-----------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                          |
| ** ** | **For the fiscal year ended March 31, 2008**                                                   |
| ** ** | ** **                                                                                          |
| **o**      | **TRANSITION REPORT UNDER SECTION 13  OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |

 

**Commissionfile number:**  **000-51890**

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(DEBTOR AND DEBTOR-IN-POSSESSIONas of April 10, 2008)**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                   | ** ** | **20-4191157**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (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)                           |

 

Registrant’s telephone number including areacode:  **(720) 374-4200**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of Class**                | ** ** | **Name of exchange on which registered** |
|---------------------------------------------|------------|-------------------------------------------------------------------|
| Common Stock, Par Value of $0.001 per share |       |                                                              |

 

Securities registered pursuant to Section 12(g) ofthe Act:  **None**

 

Indicate by check mark whether the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct. Yes  o   No  x

 

Indicate by check mark whether the Registrant isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes  o   No  x

 

Indicate by check mark whether the Registrant (1) filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x   No  o

 

Indicate by check markif disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”or “accelerated filer” and “smaller reporting company” in Rule 12b-2 ofthe Exchange Act:

 

| Large accelerated filer  o | Accelerated filer x | Non-accelerated filer o                         | Smaller reporting  company o |
|----------------------------|--------------------------|-------------------------------------------------|-----------------------------------|
|                       |                     | (Do not check if a  smaller  reporting company) |                              |

 

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

 

The aggregate market value of common stock held bynon-affiliates of the Company computed by reference to the last quoted price atwhich such stock sold on such date as reported by the Nasdaq National Market asof September 30, 2007 was $226,812,395.

 

The number of shares of the Company’s common stockoutstanding as of June 23, 2008 is 36,945,744.

 

DocumentsIncorporated By Reference.   Part III of this Form 10-Kwill be filed with the Securities and Exchange Commission as an amendment tothis Form 10-K in accordance with General Instruction G(3).

 

 

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**TABLE OF CONTENTS**

 
| ** ** | ** ** | ** **                                                                                                          | ** ** | **Page** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
|       |       |                                                                                                                |       |     |
|       |       | **PART I**                                                                                                     |       |     |
|       |       |                                                                                                                |       |     |
| Item 1:    |       | Business                                                                                                            |       | 3        |
| Item  1A:  |       | Risk  Factors                                                                                                       |       | 12       |
| Item 1B:   |       | Unresolved  Staff Comments                                                                                          |       | 19       |
| Item  2:   |       | Properties                                                                                                          |       | 20       |
| Item 3:    |       | Legal Proceedings                                                                                                   |       | 21       |
| Item 4:    |       | Submission  of Matters to a Vote of Security Holders                                                                |       | 21       |
|       |       |                                                                                                                |       |     |
|       |       | **PART II**                                                                                                    |       |     |
|       |       |                                                                                                                |       |     |
| Item 5:    |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 22       |
| Item 6:    |       | Selected Financial  Data                                                                                            |       | 24       |
| Item 7:    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 31       |
| Item 7A:   |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 53       |
| Item 8:    |       | Financial  Statements and Supplementary Data.                                                                       |       | 54       |
| Item 9:    |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 54       |
| Item 9A:   |       | Controls and  Procedures                                                                                            |       | 54       |
| Item 9B:   |       | Other Information                                                                                                   |       | 54       |
|       |       |                                                                                                                |       |     |
|       |       | **PART III**                                                                                                   |       |     |
|       |       |                                                                                                                |       |     |
| Item 10:   |       | Directors,  Executive Officers and Corporate Governance                                                             |       | 55       |
| Item 11:   |       | Executive  Compensation                                                                                             |       | 55       |
| Item 12:   |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       | 55       |
| Item 13:   |       | Certain  Relationships and Related Transactions and Director Independence.                                          |       | 55       |
| Item 14:   |       | Principal  Accountant Fees and Services                                                                             |       | 55       |
|       |       |                                                                                                                |       |     |
|       |       | **PART IV**                                                                                                    |       |     |
|       |       |                                                                                                                |       |     |
| Item 15:   |       | Exhibits  and Financial Statement Schedules                                                                         |       | 56       |

 

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**PART I**

 

**Item 1:  Business**

 

**Forward-Looking Statements.**

 

This report contains forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934(the “Exchange Act”) that describe the business and prospects of FrontierAirlines Holdings, Inc. and its subsidiaries and the expectations of ourcompany and management. All statements included in this report that addressactivities, events or developments that we expect, believe, intend oranticipate will or may occur in the future, are forward-looking statements.When used in this document, the words “estimate,” “anticipate,” “intend,” “project,”“believe” and similar expressions are intended to identify forward-lookingstatements. Forward-looking statements are inherently subject to risks anduncertainties, many of which cannot be predicted with accuracy and some ofwhich might not even be anticipated.

 

You shouldunderstand that many important factors, in addition to those discussed orincorporated by reference in this report, could cause our results to differmaterially from those expressed in the forward-looking statements. Potentialfactors that could affect our results include, in addition to others notdescribed in this report, those described in Item 1A of this report under ‘‘RisksRelated to Frontier’’ and ‘‘Risks Associated with the Airline Industry.’’ Inlight of these risks and uncertainties, the forward-looking events discussed inthis report might not occur.Weundertake no obligation to publicly update or revise any forward-lookingstatements to reflect events or circumstances that may arise after the date ofthis report

 

In this report, references to “us,” “we,” orthe “company” refer to Frontier Airlines Holdings, Inc. unless the contextrequires otherwise.

 

**Chapter 11 Bankruptcy Filings**

 

On April 10, 2008 (the “Petition Date”), Frontier AirlinesHoldings, Inc. (“Frontier Holdings”) and its subsidiaries FrontierAirlines, Inc. (“Frontier Airlines”) and Lynx Aviation, Inc. (“Lynx”),filed voluntary petitions for reorganization under Chapter 11 of Title 11of the United States Code (the “Bankruptcy Code”) in the United StatesBankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).  The cases are being jointly administeredunder Case No. 08-11298 (RDD). We cannot provide any assurance as to whatvalues, if any, will be ascribed in our bankruptcy proceedings to our variouspre-petition liabilities, common stock and other securities. We believe thatour currently outstanding common stock will have no value and will be canceledunder any plan of reorganization we might propose and that the value of ourvarious pre-petition liabilities and other securities is highly speculative.Accordingly, caution should be exercised with respect to existing and futureinvestments in any of these liabilities or securities. In addition, trading ofour common stock on the NASDAQ Stock Exchange was suspended on April 22,2008, and our common stock was delisted from the NASDAQ Stock Exchange on May 22,2008.  Additional information about ourChapter 11 filing is available on the internet atwww.frontierairlines.com/restructure and Bankruptcy Court filings and claimsinformation are also available at www.frontier-restructuring.com*.*

 

**Chapter 11 Process**

 

Frontier Holdings, Frontier Airlines and Lynx(collectively the “Debtors”) are currently operating as “debtors in possession”under the jurisdiction of the Bankruptcy Court and in accordance with theapplicable provisions of the Bankruptcy Code and orders of the BankruptcyCourt. In general, as debtors in possession, we are authorized under Chapter 11to continue to operate as an ongoing business, but may not engage intransactions outside the ordinary course of business without the prior approvalof the Bankruptcy Court. In several recent bankruptcies in our industry, theairline ceased operations, and we can give no assurance that we will be able tocontinue to operate our business or successfully reorganize.

 

The Bankruptcy Court has approved variousmotions for relief designed to allow us to continue normal operations.  The Bankruptcy Court’s orders authorize us,among other things, in our discretion to: (a) pay pre-petition andpost-petition employee wages, salaries, benefits and other employeeobligations; (b) pay certain vendors and other providers in the ordinarycourse for goods and services received from and after the Petition Date; (c) honor

 

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customer service programs, including our *EarlyReturns* frequent flyer program and our ticketing programs; (d) honorcertain obligations arising prior to the Petition Date related to ourinterline, clearinghouse, code sharing and other similar agreements; and (e) continuemaintenance of existing bank accounts and existing cash management systems.

 

Shortly after the Petition Date, the Debtorsbegan notifying all known current or potential creditors of the Chapter 11filing. Subject to certain exceptions under the Bankruptcy Code, the Debtors’Chapter 11 filing automatically enjoined, or stayed, the continuation ofany judicial or administrative proceedings or other actions against the Debtorsor their property to recover on, collect or secure a claim arising prior to thePetition Date. Thus, for example, most creditor actions to obtain possession ofproperty from the Debtors, or to create, perfect or enforce any lien againstthe property of the Debtors, or to collect on monies owed or otherwise exerciserights or remedies with respect to a pre-petition claim are enjoined unless anduntil the Bankruptcy Court lifts the automatic stay. Vendors are being paid forgoods furnished and services provided after the Petition Date in the ordinarycourse of business.

 

As required by the Bankruptcy Code, the UnitedStates Trustee for the Southern District of New York appointed an officialcommittee of unsecured creditors (the “Creditors’ Committee”).  The Creditors’ Committee and its legalrepresentatives have a right to be heard on all matters that come before theBankruptcy Court with respect to the Debtors. The Creditors’ Committee has been generally supportive of the Debtors’positions on various matters; however, there can be no assurance that theCreditors’ Committee will support the Debtors’ positions on matters to bepresented to the Bankruptcy Court in the future or on any plan ofreorganization, once proposed.  Disagreements between the Debtors and the Creditors’ Committee couldprotract the Chapter 11 proceedings, negatively impact the Debtors’ abilityto operate and delay the Debtors’ emergence from the Chapter 11proceedings.

 

Under Section 365 and other relevantsections of the Bankruptcy Code, we may assume, assume and assign, or rejectcertain executory contracts and unexpired leases, including, withoutlimitation, leases of real property, aircraft and aircraft engines, subject tothe approval of the Bankruptcy Court and certain other conditions. Anydescription of an executory contract or unexpired lease in this Form 10-K,including where applicable our express termination rights or a quantificationof our obligations, must be read in conjunction with, and is qualified by, anyoverriding rejection rights we have under Section 365 of the BankruptcyCode.

 

Notwithstanding the general discussion aboveof the impact of the automatic stay, under Section 1110 of the BankruptcyCode (“Section 1110”), certain secured parties, lessors and conditionalsales vendors may have extra rights regarding taking possession of certainqualifying aircraft, aircraft engines and other aircraft-related equipment thatare leased or subject to a security interest or conditional sale contractpursuant to their agreement with the Debtors. Section 1110 provides that,unless the Debtors agree to perform under the agreement and cure all defaultswithin 60 days after the Petition Date, such financing party can takepossession of such equipment.

 

Section 1110 effectively shortens theautomatic stay period to 60 days with respect to Section 1110-eligibleaircraft, engines and related equipment subject to the following twoconditions. First, the debtor may extend the 60-day period by agreement of therelevant financier, with Bankruptcy Court approval. Alternatively, the debtormay agree, with court approval, to perform all of the obligations under theapplicable financing and cure any defaults thereunder as required by theBankruptcy Code (which does not preclude later rejecting any relatedlease).  On June 9, 2008, we agreedto perform our obligations under our applicable financings, and we believe wehave cured the defaults under these financings. We have resolved all cure issues with a majority of our aircraftfinanciers.  We are, however, negotiatingwith respect to a few remaining aircraft obligations, primarily related to ourAirbus 318 aircraft, and the ultimate outcome of these negotiations cannot bepredicted with certainty. To the extent we are unable to reach agreements withthese aircraft financiers, those parties may seek to take action with respectto the related aircraft, including taking possession of the aircraft.

 

In order to successfully exit Chapter 11,the Debtors will need to propose, and obtain confirmation by the BankruptcyCourt of a plan of reorganization that satisfies the requirements of theBankruptcy Code. A plan of reorganization would, among other things, resolvethe Debtors’ pre-petition obligations, set forth the revised capital structureof the newly reorganized entity and provide for corporate governance subsequentto exit from bankruptcy.

 

The Debtors have the exclusive right for120 days after the Petition Date to file a plan of reorganization and, ifwe do so, 60 additional days to obtain necessary acceptances of ourplan.  We will likely file one or more 

 

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motions to request extensions of these time periods.  If the Debtors’ exclusivity period lapsed,any party in interest would be able to file a plan of reorganization for any ofthe Debtors.  In addition to being votedon by holders of impaired claims and equity interests, a plan of reorganizationmust satisfy certain requirements of the Bankruptcy Code and must be approved,or confirmed, by the Bankruptcy Court in order to become effective.

 

A plan of reorganization has been accepted byholders of claims against and equity interests in the Debtors if (1) atleast one-half in number and two-thirds in dollar amount of claims actuallyvoting in each impaired class of claims have voted to accept the plan and (2) atleast two-thirds in amount of equity interests actually voting in each impairedclass of equity interests has voted to accept the plan.  Under certain circumstances set forth in Section 1129(b) ofthe Bankruptcy Code, however, the Bankruptcy Court may confirm a plan even ifsuch plan has not been accepted by all impaired classes of claims and equityinterests. A class of claims or equity interests that does not receive orretain any property under the plan on account of such claims or interests isdeemed to have voted to reject the plan. The precise requirements andevidentiary showing for confirming a plan notwithstanding its rejection by oneor more impaired classes of claims or equity interests depends upon a number offactors, including the status and seniority of the claims or equity interestsin the rejecting class (i.e., secured claims or unsecured claims, subordinatedor senior claims, preferred or common stock). Generally, with respect to commonstock interests, a plan may be “crammed down” even if the stockholders receiveno recovery if the proponent of the plan demonstrates that (1) no classjunior to the common stock is receiving or retaining property under the planand (2) no class of claims or interests senior to the common stock isbeing paid more than in full.

 

The timing of filing a plan of reorganizationby us will depend on the timing and outcome of numerous other ongoing mattersin the Chapter 11 proceedings. There can be no assurance at this time that a plan of reorganizationwill be confirmed by the Bankruptcy Court, or that any such plan will beimplemented successfully.

 

We have incurred and will continue to incursignificant costs associated with our reorganization. The amount of thesecosts, which are being expensed as incurred commencing in April 2008, areexpected to significantly affect our results of operations.

 

Under the priority scheme established by theBankruptcy Code, unless creditors agree otherwise, pre-petition liabilities andpost-petition liabilities must be satisfied in full before stockholders areentitled to receive any distribution or retain any property under a plan ofreorganization. The ultimate recovery to creditors and/or stockholders, if any,will not be determined until confirmation of a plan or plans of reorganization.No assurance can be given as to what values, if any, will be ascribed in theChapter 11 cases to each of these constituencies or what types or amountsof distributions, if any, they would receive. A plan of reorganization couldresult in holders of our liabilities and/or securities, including our commonstock, receiving no distribution on account of their interests and cancellationof their holdings. As discussed above, if the requirements of Section 1129(b) ofthe Bankruptcy Code are met, a plan of reorganization can be confirmed notwithstandingits rejection by the holders of our common stock and notwithstanding the factthat such holders do not receive or retain any property on account of theirequity interests under the plan. Because of such possibilities, the value ofour liabilities and securities, including our common stock, is highlyspeculative. We urge that appropriate caution be exercised with respect toexisting and future investments in any of the liabilities and/or securities ofthe Debtors.  At this time there is noassurance we will be able to restructure as a going concern or successfullypropose, or implement a plan of reorganization.

 

**Item 1:  Business**

 

**General**

 

We are a low cost, affordable fare airline operating primarily in a huband spoke fashion connecting cities coast to coast through our hub at DenverInternational Airport (“DIA”).  We are the second largest jet service carrier at DIA based on departures.  We offer our customers a differentiatedproduct, with new Airbus and Bombardier aircraft, comfortable passengercabins that we configure with one class of seating, ample leg room, affordable pricing, and in-seat DirectTV with24 channels of live television entertainment and four additional channels ofcurrent-run pay-per-view movies on our mainline routes.  In January 2007, the U.S. Department ofTransportation (“DOT”) designated us as a major carrier.  As of June 23, 2008, we (including ourwholly owned subsidiary Lynx) operated routes linking our Denver hub to 52 U.S.cities spanning the nation from coast to coast, five cities in Mexico, one cityin Canada and one city in Costa Rica.

 

In December 2007, Lynxobtained its operating certificate to provide scheduled air transportationservice 

 

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from the Federal AviationAdministration (“FAA”).  The aircraft areoperated by Lynx Aviation under its operating certificate.  Lynx Aviation began revenue service onDecember 7, 2007 upon receiving FAA certification.  As of June 23, 2008, Lynx Aviation hastaken delivery of ten Q400 aircraft.Lynx Aviation currently provides service to 12 destinations.

 

As of June 23, 2008, weoperated a mainline fleet of 60 jets (38 of which we lease and 22 of which weown), consisting of 47 Airbus A319s, 11 Airbus A318s and two Airbus A320s, anda regional fleet of 10 Bombardier Q400 turboprop aircraft operated byLynx.  During the years ended March 31,2008 and 2007, we increased year-over-year mainline capacity by 12.0% and14.4%, respectively, and we increased year-over-year mainline passengertraffic by 19.3% and 14.7%, respectively.

 

On January 11, 2007, we entered into an agreementwith Republic Airlines, Inc. (“Republic”) for Republic to operate 17Embraer 170 aircraft with capacity of 76-seats. On April 23, 2008, as part of our bankruptcy proceeding, weannounced a mutual agreement with Republic Airlines on the terms under whichFrontier would reject the agreement as of June 22, 2008.  Republic Airlines retains their rights tofile claims in the bankruptcy proceedings as a result of this rejectedagreement. The agreement provided for a structured reduction and gradualphase-out of Republic’s 12 aircraft which had been delivered to us from ourdaily operation. The phase-out was completed on June 22, 2008.

 

In order to increase connecting traffic, we have acode share agreement with Great Lakes Aviation Ltd.  We expect Lynx to provide additionalconnecting traffic to markets where regional jet service would not be aseconomically feasible to operate or would be operationally restricted.  We also have interline agreements with 33domestic and international airlines serving cities on our route system.  Generally, these agreements include jointticketing and baggage services and other conveniences designed to expedite theconnecting process.

 

In November 2006, we partnered with AirTranAirways to create the first Low Cost Carrier referral and frequent flyerpartnership in the industry that offers travelers the ability to reach morethan 80 destinations across four countries. This partnership enables both airlines to increase destination optionsby linking phone and online reservations systems as well as enabling Frontier’sEarlyReturns® and AirTran’s A+ Rewards members to earn and redeemmileage/travel credits on both airlines.

 

In September 2007, we signed a limited-termcontract with ExpressJet Airlines, Inc. (“ExpressJet”) to operate two tofour 50-seat Embraer 145XR jets on routes intended to be serviced by LynxAviation.  ExpressJet provided thisservice between November 15, 2007 and December 6, 2007, until LynxAviation received their FAA certificate. These routes are now serviced by Lynx Aviation.

 

Our filings with the SEC are available at no cost onour website, www.frontierairlines.com, in the Investor Relations foldercontained in the section titled “About Frontier” and are also available at theSEC’s website, http://www.sec.gov.  Thesereports include our annual report on Form 10-K, our quarterly reports on Form 10-Q,our current reports on Form 8-K, Section 16 reports on Forms 3, 4 and5, and any related amendments or other documents that we file with or furnishthe SEC, and are made available as soon as reasonably practicable after we fileor furnish the materials with the SEC.

 

We were incorporated in 2006 under the laws of theState of Delaware to become a holding company for Frontier Airlines.  Frontier Airlines and Lynx Aviation areincorporated under the laws of the State of Colorado.  Our corporate headquarters are located at7001 Tower Road, Denver, Colorado 80249. Our administrative office telephone number is 720-374-4200 and ourreservations telephone number is 800-432-1FLY.

 

 See “— Risk Factors Relating to Frontier”and “— Risk Factors Relating to the Airline Industry” in Item 1A and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7 for additional discussion of trends and factors affecting us andour industry.

 

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**Business Strategy**

 

Our business strategy is to provide air service at affordable fares tohigh volume markets from our Denver hub and limited point-to-point routesoutside of our Denver hub while seeking ways to leverage our strong marketposition in Denver and excellent product and service.  Our strategy is based on the followingfactors:

 

·              Stimulate demand by offering acombination of low fares, quality service and frequent flyer credits in ourfrequent flyer program, *EarlyReturns®*.

·              Continue filling gaps in flightfrequencies to current markets from our Denver hub.

·              Continue to successfully defendour position in Denver against new entrants.

 

Our route system strategy encompasses connectingour Denver hub to top business and leisure destinations.  We currently serve 44 of the top 50destinations from Denver, as defined by the DOT’s Origin and Destination MarketSurvey.  As of June 23, 2008, weoperate routes linking our Denver hub to 59 destinations including Mexico,Costa Rica and Canada.

 

We believe we have created a widely recognized brandthat distinguishes us from our competitors and identifies us as a safe,reliable, low-fare airline focused on customer service and providing a highquality travel experience. Similarly, we believe that customer awareness of ourbrand has contributed to our ability to leverage our brand preference in marketingefforts and positions us to be a preferred marketing partner with companiesacross many different industries. We have a strong company culture and will continue to focus ondifferentiating the product and service we provide to our passengers.  Our frequent flyer program offers someof the most generous benefits in the industry, including a free round-tripaward ticket within the contiguous U.S. or between the contiguous U.S. andCanada after accumulating only 15,000 miles (35,000 miles to Costa Rica and25,000 miles to Alaska or any of our destinations in Mexico). We believe our friendly and dedicatedemployees, affordable pricing, accommodating service, in-flight entertainmentsystems and comfortable airplanes distinguish our product and service from ourcompetitors.  Safety is a primaryconcern, and we are proud that our maintenance staff has been awarded the FAADiamond Award for Excellence for nine straight years – an award that recognizesour commitment to the ongoing training and education of our maintenance staff.

 

**Airline Industry**

 

The Airline Deregulation Act of 1978 produced a highlycompetitive airline industry, freed of government regulations that for 40 yearsprior to the Deregulation Act had dictated where domestic airlines could flyand how much they could charge for their services. Since then, we and othersmaller carriers have entered markets long dominated by larger airlines withsubstantially greater resources, such as United Airlines, American Airlines,Northwest Airlines and Delta Air Lines.

 

We compete principallywith United, the dominant carrier at DIA. United has a competitive advantagedue to its larger number of flights from DIA, its significantly broaderdomestic and international route system, its mature and robust loyalty program,and its offering a multiple class cabin for most of its flights.   In February 2003, United launched a newlow-fare airline, Ted, which we believe was developed in an attempt to operatewith lower costs than United’s mainline operations to compete with us and otherlow-cost carriers.  United recentlyannounced that it intends to eliminate Ted as a separate carrier.

 

In January 2006, Southwest Airlines, the largestlow-cost U.S. airline, introduced service at DIA.  Southwest Airlines currently has 82 flightsout of DIA to 25 destinations, and has announced plans to add another fivedestinations out of DIA with 92 scheduled daily flights in September 2008.  Southwest pioneered the low-cost modelby operating a single aircraft fleet with high utilization, being highlyproductive in the use of its people and assets, providing a simplified farestructure and offering only a single class of seating with no seatassignments.  These methods, coupled withsignificant favorable fuel hedging positions, enable Southwest to offer faresthat are significantly lower than those charged by other U.S. airlines.  We believe we need to match these low faresin the routes in which we compete with Southwest in order to retain market share,which has impacted our yields.  Furtherexpansion by Southwest into other markets we serve would require us to respondin similar fashion.

 

During March 2008, United, Ted, and its commuteraffiliates had a total market share at DIA of approximately 49.8%, down from55.4% during March 2007.  During March 2008,Southwest had a total market share at DIA of approximately 6.6%, up from 4.6%during March 2007.  Our market shareat DIA, including our 

 

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codeshareaffiliates and Lynx Aviation, during March 2008 was 26.7%, up from 21.0%during March 2007.  As of June 2008,our seat share was 23.9%, United’s seat share was 47.4% and Southwest’s seatshare was 11.9%.  We compete with Unitedand Southwest primarily on the basis of fares, fare flexibility, the number ofmarkets in which we operate and the number of frequencies within a market, ourfrequent flyer programs, brand recognition (particularly in Denver market), thelevel of passenger entertainment available on our aircraft and the quality of ourcustomer service.

 

Where we do not compete directly with United and/orSouthwest, we compete with many other air carriers for the limited number ofpassengers desiring to travel between the cities we serve.  With excess capacity in these and almost allmarkets, it is extremely difficult to demand fare levels sufficient to offsetthe high costs of operating an airline, particularly with the current highprices for aviation fuel.

 

At the present time, New York’s LaGuardia and John F.Kennedy International Airports and Washington Ronald Reagan National Airportare regulated by means of “slot” allocations, which represent governmentauthorization to take off or land at a particular airport within a specifiedtime period.  FAA regulations require theuse of each slot at least 80% of the time and provide for forfeiture of slotsin certain circumstances. At New York LaGuardia airport, we currently hold fourhigh-density exemption slots, with two seasonal slots, and at the present time,we utilize six of these slots to operate three daily round-trip flights betweenDIA and LaGuardia.  At Washington RonaldReagan National Airport, we currently hold and are using eight beyond perimeterslots for four round-trip flights between DIA and Reagan National.

 

Another airport we serve, John Wayne InternationalAirport in Santa Ana, California (SNA), is also slot controlled at the locallevel as mandated by a federal court order. We currently hold and use six arrival and departure slots at SNA, forthree daily round-trips between DIA and SNA.

 

The Open Skies Agreement between the U.S. and theEuropean Union, or E.U., which took effect in March 2008, allows any U.S.or European carrier to fly any route between any city in the E.U. and any cityin the U.S. We believe that this new accord will result in increasedcompetition in the U.S. airline industry by providing customers with an evengreater choice of airlines to fly.

 

**Maintenance and Repairs**

 

All of our aircraft maintenance and repairs are accomplished inaccordance with our maintenance program approved by the FAA.  Since mid-1996, we have trained, staffed andsupervised our own maintenance work force in Denver, Colorado.  We sublease a portion of Continental Airlines’hangar at DIA where we currently perform most of our own line maintenance andlonger interval maintenance. The sublease for the facility expired in February 2007,and we are currently on a month-to-month lease. We also maintain line maintenance facilities in Phoenix, Arizona andKansas City, Missouri.  FAA approvedoutside contractors perform other major maintenance, such as line maintenanceat our spoke cities, longer interval maintenance when we do not have adequatefacilities or staff to meet maintenance needs and major engine repairs.

 

We have attempted to level our engine maintenance expenses by enteringinto a maintenance cost per hour agreement with GE Engine Services, Inc. (“GE”).  For our owned aircraft, thisagreement is for a 12-year period from the effective date for our ownedaircraft or May 1, 2019, whichever comes first.  For each covered leased aircraft, theagreement term coincides with the initial lease term of 12 years.  This agreement precludes us from usinganother third party for such services during the term on the coveredengines.  This agreement requiresnon-refundable monthly payments, which are increased periodically, at aspecified rate multiplied by the number of flight hours the engine operatedduring that month.  Currently,engines on all of our owned and most of our leased aircraft are subject to theGE agreement.  For thecovered leased aircraft, the lessors pay GE directly for the repair of aircraftengines in conjunction with this agreement from reserve accounts establishedunder the applicable lease documents and are required to pay any amounts abovefunded reserves in the event of a shortfall if maintenance expenses incurredare outside scheduled maintenance and not otherwise covered by a reserve.  For our owned aircraft, we pay GE directly.

 

Under our aircraft lease agreements, we pay allexpenses relating to the maintenance and operation of our aircraft, and we arerequired to pay supplemental monthly payments to the lessors based onusage.  Supplemental payments, whichincrease annually, are applied against the cost of scheduled majormaintenance.  To the extent thesereserves are not used for major maintenance during the lease terms, excesssupplemental payments are 

 

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forfeited to theaircraft lessors after termination of the lease.  Additionally, to the extent actualmaintenance expenses incurred exceed these reserves, we are required to paythese amounts.

 

Our monthly mainline completion factors for the yearsended March 31, 2008, 2007, and 2006, excluding cancellations that werenot related to maintenance, averaged 99.6%, 99.9% and 99.9%, respectively.  The completion factor is the percentage ofour scheduled flights that were operated by us, whether or not delayed (i.e.,not canceled).  We believe that our highmonthly completion factors are attributable to the reliability of our newAirbus fleet and the record of excellence in our maintenance department.

 

For nine consecutive yearsstarting in 1999, our maintenance and engineering department received the FAA’shighest award, the Diamond Certificate of Excellence, in recognition of 100percent of our maintenance and engineering employees completing advancedaircraft maintenance training programs.  TheDiamond Award recognizes advanced training for aircraft maintenanceprofessionals throughout the airline industry. We were one of the first Part 121 domestic air carrier to achieve100 percent participation in this training program by our maintenanceemployees.

 

**Fuel**

 

Fuel prices haveincreased significantly over the past three years.  During the years ended March 31, 2008,2007, and 2006, jet fuel, including hedging activities and our regional partneroperations, accounted for 35.3%, 31.8% and 31.1%, respectively, of ouroperating expenses.  We have arrangementswith major fuel suppliers for substantial portions of our fuel requirements,and we believe that these arrangements assure an adequate supply of fuel forcurrent and anticipated future operations. Jet fuel costs are subject to wide fluctuations as a result of suddendisruptions in supply beyond our control. Therefore, we cannot predict the future availability and cost of jetfuel with any degree of certainty.  Ourmainline average fuel prices per gallon including realized and non-cash mark tomarket hedging activities, taxes and into-plane fees for the last three fiscalyears were as follows:

 
| **Fiscal Year  Ended** | ** ** | **Average Fuel  Price per  Gallon** | ** ** | **Monthly Low  Price per Gallon** | ** ** | **Monthly High  Price per Gallon** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------|------------|
|                        |       |                                          |       |                                             |       |                                              |       |
| March 31,  2008        |       | $                                             | 2.45       |                                             | $          | 2.04                                              |       | $ | 3.04 |   |
| March 31,  2007        |       | $                                             | 2.12       |                                             | $          | 1.57                                              |       | $ | 2.47 |   |
| March 31,  2006        |       | $                                             | 1.99       |                                             | $          | 1.66                                              |       | $ | 2.65 |   |

 

As of June 23, 2008, the average price per gallonwas approximately $4.22.  Due to ourChapter 11 filing, all fuel hedge contracts outstanding as of March 31,2008 were terminated in May 2008 and subsequently settled, which resultedin cash receipts of $23,409,000.  We donot currently have any further hedging contracts in place.

 

Increases in fuelprices have had and could continue to have a material adverse effect on ouroperations and financial results.  Basedon our current fleet and operations, we estimate that a 1¢ increase in the price of fuel per gallonincreases our operating expenses by approximately $1,900,000 on an annualizedbasis.  This number will increase ordecrease if we change our capacity. Our ability to pass on increasedfuel costs to passengers through price increases or fuel surcharges may belimited, particularly because of our affordable fare strategy and intensecompetition.

 

**Employees**

 

As of June 23, 2008,we had approximately 6,170 employees, including 5,035 full-time and 1,135part-time and on-call personnel.  Ouremployees include 806 pilots, 1,121 flight attendants, 1,512 customer serviceagents, 193 scouts and on-call personnel, 749 ramp service agents, 449 reservationsagents, 151 aircraft appearance agents, 100 catering agents, 533 mechanics andrelated personnel, and 558 general management and administrativepersonnel.  We consider our relationswith our employees to be good.

 

Approximately 20% of ouremployees are represented by unions.  Ourrelations with our labor unions are governed by the Railway Labor Act. Underthe Railway Labor Act, a labor union seeking to represent an 

 

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unrepresented craft or class of employees is required to file with theNational Mediation Board (“NMB”) an application alleging a representationdispute, along with authorization cards signed by at least 35% of the employeesin that craft or class. The NMB then investigates the dispute and, if it findsthe labor union has obtained a sufficient number of authorization cards,conducts an election to determine whether to certify the labor union as thecollective bargaining representative of that craft or class. Under the NMB’susual rules, a labor union will be certified as the representative of theemployees in a craft or class only if more than 50% of those employees vote forunion representation. A certified labor union then enters into a collectivebargaining agreement with the employer.  Under the Railway Labor Act,a collective bargaining agreement between an airline and a labor union does notexpire, but instead becomes amendable as of a stated date. Either party mayrequest the NMB to appoint a federal mediator to participate in thenegotiations for a new or amended agreement.

 

The following tablereflects our principal collective bargaining agreements, and their respectiveamendable dates:

 
| ** **                                           | ** ** | **Approximate Number** | ** ** | ** **                                              | ** ** | **Contract**            |
|------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------------------------|------------|-------------------------|
| **Employee Group**                              | ** ** | **of Employees**       | ** ** | **Representing Union**                             | ** ** | **Amendable Date** |
|                                                 |       |                        |       |                                                    |       |                    |
| Pilots                                               |       | 714                         |       | Frontier Airline  Pilots Association (“FAPA”) |       | March 2011         |
|                                                 |       |                        |       |                                                    |       |                    |
| Mechanics                                            |       | 301                         |       | Teamsters  Airline Division                             |       | January 2009       |
|                                                 |       |                        |       |                                                    |       |                    |
| Dispatchers                                          |       | 19                          |       | Transport  Workers Union                                |       | September 2012     |
|                                                 |       |                        |       |                                                    |       |                    |
| Aircraft  appearance agents and maintenance cleaners |       | 151                         |       | Teamsters  Airline Division                             |       | September 2015     |
|                                                 |       |                        |       |                                                    |       |                    |
| Material  Specialist                                 |       | 32                          |       | International  Brotherhood of Teamsters                 |       | January 2009       |

 

In May and June 2008, we successfullynegotiated temporary wage and benefit concessions from all  represented employee groups. We also tookwage and benefit concessions from non-represented employee groups as we attemptto restructure under the Bankruptcy Code. We will reexamine all employee concessions in September 2008 basedon our financial condition at that time and the then current economicconditions.

 

**Government Regulation**

 

All interstate air carriers are subject to regulationby the DOT, the FAA and other state and federal government agencies.   The DOT has authority to issue certificatesof public convenience and necessity required for airlines to provide domesticair transportation. The DOT’s jurisdiction extends primarily to the economicaspects of air transportation, such as certification and fitness, insurance,advertising, computer reservation systems, deceptive and unfair competitivepractices, and consumer protection matters such as compliance with the AirCarrier Access Act, on-time performance, denied boarding, discrimination andbaggage liability.  The DOT also isauthorized to require reports from air carriers and to investigate andinstitute proceedings to enforce its economic regulations and may, in certaincircumstances, assess civil penalties, revoke operating authority and seekcriminal sanctions.

 

The FAA’s regulatory authority relates primarily toflight operations and air safety, including aircraft certification andoperations, crew licensing and training, maintenance standards, and aircraftstandards.  The FAA also overseesaircraft noise regulation, ground facilities, dispatch, communications, weatherobservation, and flight and duty time. It also controls access to certain airports through slot allocations,which represent government authorization for airlines to take off and land atcontrolled airports during specified time periods.

 

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The availability of international routes to U.S. carriers is regulatedby treaties and related agreements between the United States and foreigngovernments.  The United States typicallyfollows the practice of encouraging foreign governments to enter into “openskies” agreements that allow multiple carrier designation on foreignroutes.  In some cases, countries havesought to limit the number of carriers allowed to fly these routes.  Certain foreign governments imposelimitations on the ability of air carriers to serve a particular city and/orairport within their country from the U.S. For a U.S. carrier to fly to any such international destination, it mustfirst obtain approval from both the U.S. and the “foreign countryauthority”.   On April 3, 2007, the U.S. Department ofTransportation issued an “Open-Skies Notice” inviting all U.S. air carriers nowcertificated to conduct foreign scheduled air transportation and interested inapplying for blanket open-skies certificate authority to file applications withthe Department.  We filed for and obtained this blanket authority in April 2007.

 

The Transportation Security Administration and U.S. Customs andBorder Protection, divisions of the Department of Homeland Security, areresponsible for certain civil aviation security matters, including passengerand baggage screening at U.S. airports and international passengerprescreening prior to entry into or departure from the United States. Since2002, the TSA has imposed an Aviation Security Infrastructure Fee on allairlines to assist in the cost of providing aviation security. The feesassessed are based on airlines’ actual 2000 security costs.   Pursuant to authority granted to the TSA toimpose additional fees on air carriers if necessary to cover additional federalaviation security costs, the TSA has imposed an additional annual SecurityInfrastructure Fee on certain airlines, including us.  The industry has opposed and disagrees withthe higher assessment and is working with the TSA on a resolution.

 

Airlines are also subject to various other federal, state, local andforeign laws and regulations. The U.S. Department of Justice (“DOJ”) hasjurisdiction over airline competition matters. The U.S. Postal Service hasauthority over certain aspects of the transportation of mail. Labor relationsin the airline industry are generally governed by the Railway Labor Act.Environmental matters are regulated by various federal, state, local andforeign governmental entities. Privacy of passenger and employee data is regulatedby domestic and foreign laws and regulations.

 

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**Item 1A. Risk Factors**

 

In addition to the other information contained in this Form 10-K,the following risk factors should be considered carefully in evaluating ourbusiness and us.  Our business, financialcondition or results of operations could be materially adversely affected byany of these risks.  In addition, please read“Forward-Looking Statements” in this Form 10-K, where we describe additionaluncertainties associated with our business and the forward-looking statementsincluded or incorporated by reference in this Form 10-K. Our actualresults could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including the risks faced by usdescribed below and elsewhere included or incorporated by reference in this Form 10-K.Please note that additional risks not presently known to us or that wecurrently deem immaterial may also impair our business and operations.

 

**RisksRelated to Frontier**

* *

***We filed for protection under Chapter 11 ofthe Bankruptcy Code on April 10, 2008.***

* *

During our Chapter 11 proceedings, ouroperations, including our ability to execute our business plan, are subject tothe risks and uncertainties associated with bankruptcy. Risks and uncertaintiesassociated with our Chapter 11 proceedings include the following:

 

·                                          actions anddecisions of our creditors and other third parties with interests in ourChapter 11 proceedings may be inconsistent with our plans;

 

·                                          our ability toobtain court approval with respect to motions in the Chapter 11proceedings prosecuted from time to time;

 

·                                          our ability todevelop, prosecute, confirm and consummate a plan of reorganization withrespect to the Chapter 11 proceedings;

 

·                                          our ability toretain management and other key individuals;

 

·                                          our ability toobtain and maintain normal terms with bank card processors and credit cardcompanies, vendors and service providers;

 

·                                          our ability tomaintain contracts that are critical to our operations; and

 

·                                          risks associatedwith third parties seeking and obtaining court approval to terminate or shortenthe exclusivity period for us to propose and confirm a plan of reorganization,to appoint a Chapter 11 trustee or to convert the cases to Chapter 7cases.

 

These risks and uncertainties could affectour business and operations in various ways. For example, negative events orpublicity associated with our Chapter 11 proceedings could adverselyaffect our sales of tickets and the relationship with our customers, as well aswith vendors and employees, which in turn could adversely affect our operationsand financial condition, particularly if the Chapter 11 proceedings areprotracted. Also, transactions outside of the ordinary course of business aresubject to the prior approval of the Bankruptcy Court, which may limit ourability to respond timely to certain events or take advantage of certainopportunities.

 

Because of the risks and uncertaintiesassociated with our Chapter 11 proceedings, the ultimate impact thatevents that occur during these proceedings will have on our business, financialcondition and results ofoperations cannot be accurately predicted or quantified, and there issubstantial doubt about our ability to continue as a going concern.

* *

***We face significantliquidity challenges which could impact our ability to continue our operations.***

* *

We have substantial liquidity needs in theoperation of our business and face significant liquidity challenges due tohistorically high aircraft fuel prices, low passenger yields, credit cardprocessor holdbacks and cash reserves and other cost pressures. Accordingly, webelieve that our cash and cash equivalents and short-term investments will 

 

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remainunder pressure during 2008 and thereafter. We are uncertain we will be able toobtain debtor in possession financing during our Chapter 11proceedings.  Accordingly, as we continueto seek debtor in possession financing, we will also attempt to address ourliquidity concerns through the sale of aircraft and other assets, the sale andleaseback of aircraft and other assets, rejection of Republic Airlinescontract, negotiations with our credit card processors and other liquidityenhancement opportunities.   We cannot guarantee that these efforts to raisecash and improve our liquidity will be successful, in which case we could beforced to discontinue our operations

*** ***

***The implementationof our business plan cannot keep pace with fuel costs.***

* *

Duringthe last year, we implemented cost and profit improvement initiatives. Wehave increased passenger revenue by 17.4% over the prior year and our passengeryields by 4.5%.  The increase in ourpassenger yields can be primarily attributed to the increase in our load factoryear-over-year by 4.9 points and an increase of our average fare from $102.59to $103.71 or 1.1%.  We are reviewing ourplan and anticipate reducing capacity in September 2008 related to the sale ofaircraft.  The cost reduction and revenue improvementbenefits we are realizing under our plan are, however, being outpaced byhistorically high aircraft fuel prices. We continue to operate in a weakpricing environment, which limits our ability to increase fares to offset highfuel costs. We cannot assure you that we will achieve the targeted benefitsunder our business plan or that these benefits, even if achieved, will beadequate for us to maintain financial viability due to fuel costs.

 

***We are vulnerable to increases inaircraft fuel costs.***

 

High oil prices have had a significantadverse impact on our results of operations over the past two fiscal years. Wecannot predict our future cost and availability of fuel, or the impact ofdisruptions in oil supplies or refinery productivity based on naturaldisasters, which affect our ability to compete. The unavailability of adequatefuel supplies could have a material adverse effect on our operations andprofitability. In addition, larger airlines may have a competitive advantagebecause they pay lower prices for fuel and other airlines, such as SouthwestAirlines, may have substantial fuel hedges that give them a competitiveadvantage.  Because fuel costs area significant portion of our operating costs, substantial changes in fuel costsmaterially affect our operating results.  Fuel prices continue to besusceptible to, among other factors, speculative trading in the commoditiesmarket, political unrest in various parts of the world, Organization ofPetroleum Exporting Countries policy, the rapid growth of economies in Chinaand India, the levels of inventory carried by industries, the amounts ofreserves built by governments, refining capacity, and weather.  These andother factors that impact the global supply and demand for aircraft fuel mayaffect our financial performance due to its high sensitivity to fuelprices.  A one cent change in the cost of each gallon of fuel would impactoperating expenses by approximately $1.9 million per year (based on our currentfleet and aircraft fuel consumption).  Our liquidity will benegatively impacted by the record high price of fuel, which as of June 23,2008, was $4.22 per gallon

 

Fuel is a major component of our operatingexpenses, accounting for 35.3% of our total operating expenses for the yearended March 31, 2008, up from 31.8% for the year ended March 31,2007. On an actual basis, mainline fuel costs including the impact of hedgingincreased to $446.8 million, representing an average cost of $2.45 per gallon,from $343.1 million, or $2.12 per gallon, over the same periods.  Our ability to pass on increased fuel costshas been and may continue to be limited by economic and competitive conditions.

 

Although we implemented a fuel hedging program in 2002, under which weentered into Gulf Coast jet fuel and West Texas Intermediate crude derivativecontracts that partially protected us against significant increases in fuelprices, we currently do not hold any hedge positions because all outstandinghedges were settled in May 2008 due to our Chapter 11 proceedings.

 

***We depend heavily on the Denver market to besuccessful.***

 

Our businessstrategy has historically focused on adding flights to and from our Denver baseof operations. Currently, 99% of our flights originate or depart from DIA (thisdoes not include seasonal non-hub flying to Mexico).  A reduction in our share of the Denvermarket, increased competition, or reduced passenger traffic to or from Denvercould have a material adverse effect on our financial condition and results ofoperations. In addition, our dependence on a hub system operating out of DIAmakes us more susceptible 

 

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to adverse weather conditionsand other traffic delays in the Rocky Mountain region than some of ourcompetitors that may be better able to spread these traffic risks over largerroute networks.

 

***We face intense competition byUnited Airlines and other airlines at DIA, and Southwest Airlines’ service toand from Denver has increased competition on certain of our routes.***

 

The airlineindustry is highly competitive.  Wecompete with United in our hub in Denver, and we anticipate that we willcompete with United in any additional markets we elect to serve in the future.United and United’s regional airline affiliates are the dominant carriers outof DIA, accounting for approximately 49.8% of all revenue passengers out of DIAfor March 2008. In addition, Southwest Airlines started service to andfrom Denver in January 2006 and currently has 82 daily departures.  Southwest’s introductory fares weresignificantly below the fares we were able to obtain prior to its arrival. Farepressure exerted by Southwest on its announced routes and on any futureexpansion in Denver by Southwest will require us to be fare competitive, andmay place additional downward pressure on our yields. In addition, in the lastfour years Alaska Airlines, JetBlue Airways and AirTran Airways have commencedservice at DIA. These airlines have offered low introductory fares and competeon several of our routes. Fare wars, predatory pricing, ‘‘capacity dumping,’’in which a competitor places additional aircraft on selected routes, and othercompetitive activities could adversely affect us. The future activities ofUnited, Southwest and other carriers may have a material adverse effect on ourrevenue and results of operations.

 

***We experience high costs at DIA, which mayimpact our results of operations.***

 

We operate ourhub of flight operations from DIA where we experience high costs. Financed throughrevenue bonds, DIA depends on landing fees, gate rentals, income from airlinesand the traveling public, and other fees to generate income to service its debtand to support its operations. Our cost of operations at DIA will vary astraffic increases or diminishes at the airport or as significant improvementprojects are undertaken by the airport. We believe that our operating costs atDIA substantially exceed those that other airlines incur at most hub airportsin other cities, which decreases our ability to compete with other airlineswith lower costs at their hub airports.

 

***Our all-Airbus mainline fleet creates certainconcentration risks.***

 

As of March 31,2008, we operated 62 Airbus aircraft. We completed our transition from Boeingaircraft to operating only Airbus aircraft on our mainline routes in April 2005.One of the key elements of this strategy is to produce cost savings becausecrew training is standardized for aircraft of a common type, maintenance issuesare simplified, spare parts inventory is reduced, and scheduling is moreefficient.

 

Since weoperate only Airbus aircraft and GE engines on our mainline routes, we aredependent on single manufacturers for future aircraft acquisitions ordeliveries, spare parts or warranty service. If Airbus is unable to perform itsobligations under existing purchase agreements, or is unable to provide futureaircraft or services, whether by fire, strike or other events that affect itsability to fulfill contractual obligations or manufacture aircraft or spareparts, we would have to find another supplier for our aircraft. If acceptableAirbus aircraft were otherwise not available in the marketplace, Boeingaircraft is likely to be the only other manufacturer from which we couldpurchase or lease alternate aircraft. If we were forced to acquire Boeingaircraft, we would need to address fleet transition issues, includingsubstantial costs associated with retraining our employees, acquiring new spareparts, and replacing our manuals. In addition, the fleet efficiency benefitsdescribed above may no longer be available.

 

Our businesswould be significantly disrupted if an FAA airworthiness directive or servicebulletin were issued that resulted in the grounding of Airbus aircraft or GEengines of the type we operate while the defect was being corrected. Ourbusiness could also be harmed if the public avoids flying Airbus aircraft dueto an adverse perception about the aircraft’s safety or dependability due to anaccident or other incident involving an Airbus aircraft of the type we fly.

 

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***Our maintenance expenses may be higher thanwe anticipate and will increase as our fleet ages.***

 

We bear thecost of all routine and major maintenance on our owned and leased aircraft.Maintenance expenses comprise a significant portion of our operating expenses.In addition, we are required periodically to take aircraft out of service forheavy maintenance checks, which can increase costs and reduce revenue. We alsomay be required to comply with regulations and airworthiness directives the FAAissues, the cost of which our aircraft lessors may only partially assumedepending upon the magnitude of the expense. Although we believe that our ownedand leased aircraft are currently in compliance with all FAA issuedairworthiness directives, additional airworthiness directives likely will berequired in the future, necessitating additional expense.

 

Because theaverage age of our Airbus aircraft is approximately 3.9 years, our aircraft requireless maintenance now than they will in the future. We have incurred lowermaintenance expenses because most of the parts on our aircraft are undermulti-year warranties. Our maintenance costs will increase significantly, bothon an absolute basis and as a percentage of our operating expenses, as ourfleet ages and these warranties expire.

 

***Our landing fees may increase because oflocal noise abatement procedures.***

 

As a result oflitigation and pressure from residents in the areas surrounding airports, airportoperators have taken actions over the years to reduce aircraft noise. Theseactions have included regulations requiring aircraft to meet prescribed decibellimits by designated dates, curfews during nighttime hours, restrictions onfrequency of aircraft operations, and various operational procedures for noiseabatement. The Airport Noise and Capacity Act of 1990 recognized the right ofairport operators with special noise problems to implement local noiseabatement procedures as long as the procedures do not interfere unreasonablywith the interstate and foreign commerce of the national air transportationsystem. Compliance with local noise abatement procedures may lead to increasedlanding fees.

 

An agreementbetween the City and County of Denver and another county adjacent to Denverspecifies maximum aircraft noise levels at designated monitoring points in thevicinity of DIA with significant amounts payable by the city to the othercounty for each substantiated noise violation under the agreement. DIA hasincurred these payment obligations and likely will incur such obligations inthe future, which it will pass on to us and other air carriers serving DIA byincreasing landing fees.  Additionally,noise regulations could be enacted in the future that would increase ourexpenses and could have a material adverse effect on our operations.

 

***Unionization affects our costs and may affectour operations.***

 

Five of ouremployee groups are represented by unions: our pilots, dispatchers, mechanics,material specialists and aircraft appearance agents.  In addition, since 1997 union organizingattempts were defeated by our flight attendants and ramp service agents. Thecollective bargaining agreement with our mechanics union, IBT, expires in January 2009.  In February 2007, FAPA pilot membershipratified a four year agreement that amends the previous five-year contractsigned in May 2005.  In March 2006,our material specialists voted for union representation by the IBT.  In September 2007, the materialspecialists approved a four year agreement. In September 2006, the contract with our dispatchers, who arerepresented by the TWU, expired.  In September 2007,our dispatchers signed a five year collective bargaining agreement.   The Aircraft Appearance Agents and MaintenanceCleaners contract became effective September 2005 and is in effect until September 2015.

 

If we areunable to reach agreements with any of the represented work groups when theircontracts open for renegotiation, or if currently non-represented employeeswere to unionize and we were unable to reach agreement on the terms of theiremployment, we may need to go to mediation and may experience widespreademployee dissatisfaction. We could be subject to work slowdowns or stoppages.In addition, we may be subject to disruptions by organized labor protestingcertain groups for their non-union status or 

 

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conducting sympathy action forfellow members striking at other airlines. Any of these events would bedisruptive to our operations and could harm our business.

 

***The lack of marketing alliances could harmour business.***

 

Many airlineshave marketing alliances with other airlines, under which they market andadvertise their status as marketing alliance partners. Among other things, theyshare the use of two-letter flight designator codes to identify their flightsand fares in the computerized reservation systems and permit reciprocity intheir frequent flyer programs. We do not have an extensive network of marketingpartners. The lack of marketing alliances puts us at a competitive disadvantageto global network carriers, whose ability to attract passengers through morewidespread alliances, particularly on international routes, may adverselyaffect our passenger traffic and our results of operations.

 

***If we are unable to attract and retainqualified personnel at reasonable costs, our business will be harmed.***

 

We aredependent on the experience and industry knowledge of our officers and otherkey employees to execute our business plans. Our deteriorating financialperformance, along with our Chapter 11 proceedings, create uncertaintythat has led to a significant increase in unwanted attrition. We are at risk oflosing management talent critical to the successful reorganization and ongoingoperation of our business. If we continue to experience a substantial turnoverin our leadership and other key employees, including as a result of plannedoverhead reductions required by our business plan, our performance could bematerially adversely impacted. Furthermore, we may be unable to attract andretain additional qualified executives as needed in the future.

 

***We rely heavily on automatedsystems and technology to operate our business and any failure of these systemscould harm our business.***

 

We areincreasingly dependent on automated systems and technology to operate ourbusiness, enhance customer service and achieve low operating costs, includingour computerized airline reservation system, telecommunication systems, website,check-in kiosks and in-flight entertainment systems. Substantial or repeatedsystem failures to any of the above systems could reduce the attractiveness ofour services and could result in our customers purchasing tickets from anotherairline. Any disruptions in these systems could result in the loss of importantdata, increase our expenses and generally harm our business.  In addition, a seemingly high percentage ofcustomers have been booking flights on our airline through third-partywebsites, which has increased our distribution costs.  If any of these third-party websitesexperiences system failures or discontinues listing our flights on its systems,our bookings and revenue may be adversely impacted.

 

We implementimprovements to our website and reservations system from time to time.Implementation of changes to these systems may cause operational and financialdisruptions if we experience transition or system cutover issues, if the newsystems do not perform as we expect them to, or if vendors do not deliversystems upgrades or other components on a timely basis. Any such disruptionsmay have the effect of discouraging some travelers from purchasing tickets fromus and increasing our reservations staffing.

 

***Any “ownership change” could limit ourability to utilize our net operating loss carryforwards.***

 

Underfederal income tax law, a corporation is generally permitted to deduct fromtaxable income in any year net operating losses carried forward from prioryears. As of March 31, 2008, we had approximately $421,100,000 of federaland state net operating loss (“NOL”) carryforwards.  Our ability to deduct net operating losscarryforwards could be subject to a significant limitation if we were toundergo an “ownership change” for purposes of Section 382 of the InternalRevenue Code of 1986, as amended, during or as a result of our Chapter 11proceedings.

 

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***Our financial results and reputation could beharmed in the event of an accident or incident involving our aircraft.***

 

An accident orincident involving one of our aircraft could involve repair or replacement of adamaged aircraft and its consequential temporary or permanent loss fromservice, and significant potential claims of injured passengers and others. Weare required by the DOT and our lenders and lessors to carry hull, liabilityand war risk insurance. Although we believe we currently maintain liabilityinsurance in amounts and of the type generally consistent with industrypractice, the amount of such coverage may not be adequate and we may be forcedto bear substantial losses from an accident. Substantial claims resulting froman accident in excess of our related insurance coverage would harm our businessand financial results. Moreover, any aircraft accident or incident, even iffully insured, could cause a public perception that we are less safe orreliable than other airlines, which would harm our business.

 

**RisksAssociated with the Airline Industry**

 

***The airline industry has incurred significantlosses resulting in airline restructurings and bankruptcies, which could resultin changes in our industry.***

 

Financiallosses throughout the airline industry in recent years have resulted inairlines renegotiating or attempting to renegotiate labor contracts,reconfiguring flight schedules, furloughing or terminating employees, andtaking other efficiency and cost-cutting measures.  Despite these actions, several airlines haveliquidated and ceased operations.  Othersare seeking reorganization under Chapter 11 of the Bankruptcy Code, whichpermits them to reduce labor rates, restructure debt, terminate pension plansand generally reduce their cost structure. As the industry encounters continued financial losses and high fuelcosts, airlines may institute pricing structures to achieve near-term survivalrather than long-term viability. It is foreseeable that further airlinereorganizations, bankruptcies, or consolidations may occur, the effects ofwhich we are unable to predict. We cannot assure you that the occurrence ofthese events, or potential changes resulting from these events, will not harmour business or the industry.

 

***We may be subject to terrorist attacks orother acts of war and increased costs or reductions in demand for air traveldue to hostilities in the Middle East or other parts of the world.***

 

Although theentire industry is substantially enhancing security equipment and procedures,it is impossible to guarantee that additional terrorist attacks, such as theterrorist attacks that occurred on September 11, 2001 and more recentthreats in August 2006, or other acts of war will not occur. Given theweakened state of the airline industry, if additional terrorist attacks or actsof war occur, particularly in the near future, it can be expected that theimpact of those attacks on the industry may be similar in nature to butsubstantially greater than those resulting from the September 11 terroristattacks.

 

***The airline industry is seasonal andcyclical, resulting in unpredictable liquidity and earnings.***

 

Because theairline industry is seasonal and cyclical, our liquidity and earnings willfluctuate and be unpredictable. Our operations primarily depend on passengertravel demand and seasonal variations. Our weakest travel periods are generallyduring the quarters ending in March and December. The airline industry isalso a highly cyclical business with substantial volatility. Airlinesfrequently experience short-term cash requirements. These requirements arecaused by seasonal fluctuations in traffic, which often reduce cash duringoff-peak periods, and various other factors, including price competition fromother airlines, national and international events, fuel prices, and generaleconomic conditions including inflation. Our operating and financial resultsare likely to be negatively impacted by national or regional economicconditions in the U.S., and particularly in Colorado.

 

***Our current insurance costs could increase ifthe U.S. government does not provide war risk coverage to airlines.***

 

Following the September 11terrorist attacks, aviation insurers dramatically increased airline insurancepremiums and significantly reduced the maximum amount of insurance coverageavailable to airlines for liability to persons other than passengers for claimsresulting from acts of terrorism, war or similar events to $50 million perevent and in the aggregate. In light of this development, under the Air 

 

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TransportationSafety and System Stabilization Act, the U.S. government has provided domesticairlines with excess war risk coverage above $50 million up to an estimated$1.6 billion per event for us.

 

In December 2002,through authority granted under the Homeland Security Act of 2002, the U.S.government expanded its insurance program to enable airlines to elect eitherthe government’s excess third-party war risk coverage or for the government tobecome the primary insurer for all war risks coverage.  We elected to take primary governmentcoverage in February 2003 and dropped the commercially available war riskcoverage.  The current government warrisk policy is in effect until August 31, 2008.  We do not know whether the government willextend the coverage beyond August 31, 2008 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.  Significant increases in insurance premiumswould harm our financial condition and results of operations.

 

***We are in a high fixed cost business, and anyunexpected decrease in revenue would harm us.***

 

The airlineindustry is characterized by low profit margins and high fixed costs primarilyfor personnel, fuel, aircraft ownership and lease costs and other rents. Theexpenses of an aircraft flight do not vary significantly with the number ofpassengers carried and, as a result, a relatively small change in the number ofpassengers or in pricing would have a disproportionate effect on our operatingand financial results. Accordingly, a shortfall from expected revenue yieldscan have a material adverse effect on our profitability and liquidity. We areoften affected by factors beyond our control, including weather conditions,traffic congestion at airports and increased security measures, and irrationalpricing from competitors, any of which could harm our operating results andfinancial condition.

 

***Delays or cancellations due to adverseweather conditions or other factors beyond our control could adversely affectus.***

 

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

 

***We are subject to strict federal regulations,and compliance with federal regulations increases our costs and decreases ourrevenue.***

 

Airlines aresubject to extensive regulatory and legal requirements that involve significantcompliance costs. Any future changes in regulatory oversight of airlinesgenerally, or low-fare carriers in particular, could result in a materialincrease in our operating expenses or otherwise hinder our business.  For example, the FAA issues directives andother regulations on the maintenance and operation of aircraft that necessitatesignificant expenditures.  We expect tocontinue incurring expenses to comply with the FAA’s regulations.

 

Other laws,regulations, taxes and airport rates and charges have also been imposedsignificantly increasing the cost of airline operations or reduce revenue. Forexample, the Aviation and Transportation Security Act mandates thefederalization of certain airport security procedures and imposes additional securityrequirements on airports and airlines, most of which are funded by a per tickettax on passengers and a tax on airlines. The TSA has also attempted to impose an additional annual SecurityInfrastructure Fee on certain airlines, including us.   A revision in the fee structure assessed bythe TSA could result in increased cost for us. The airline industry has opposedand disagrees with the higher assessment and is working with the TSA on aresolution.

 

18

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Although wehave the necessary authority from the DOT and the FAA to conduct flightoperations, we must maintain this authority by our continued compliance withapplicable statutes, rules and regulations pertaining to the airlineindustry, including any new rules and regulations that may be adopted inthe future. We believe that the FAA strictly scrutinizes smaller airlines likeours, which makes us susceptible to regulatory demands that can negativelyimpact our operations. We may not be able to continue to comply with allpresent and future rules and regulations. In addition, we cannot predictthe costs of compliance with these regulations and the effect of compliance onour profitability, although these costs may be material.

 

 **Item 1B.  Unresolved StaffComments**

 

None.

 

19

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**Item 2: Properties**

 

**Aircraft**

 

We currently operate 47 Airbus A319 aircraft,11 Airbus A318 aircraft and two Airbus A320 in all-coach seatingconfigurations.  Our Lynx Aviation subsidiaryoperates 10 Bombardier Q400 aircraft in all-coach seating configurations.  The age of these aircraft, their passengercapacities and expiration years for the leased aircraft are shown in thefollowing table:

 
| **Aircraft** | ** ** | **No. of**   | ** ** | **Year of**     | ** **       | **Approximate**      | ** ** | **Lease**      | ** **  |
|--------------|------------|--------------|------------|-----------------|------------------|----------------------|------------|----------------|-------------|
| **Model**    | ** ** | **Aircraft** | ** ** | **Manufacture** | ** **       | **Seating Capacity** | ** ** | **Expiration** | ** **  |
|         |       |         |       |            |             |                 |       |           |        |
| A319         |       |         | 36         |            | 2001 – 2007 |                 | 136        |           | 2013 - 2019 |   |
| A319         |       |         | 11         |            | 2001 – 2006 |                 | 136        |           | Owned       |   |
| A318         |       |         | 2          |            | 2004             |                 | 114        |           | 2016        |   |
| A318         |       |         | 9          |            | 2003 – 2007 |                 | 114        |           | Owned       |   |
| A320         |       |         | 2          |            | 2007             |                 | 162        |           | Owned       |   |
| Q400         |       |         | 5          |            | 2007             |                 | 74         |           | 2022        |   |
| Q400         |       |         | 5          |            | 2007             |                 | 74         |           | Owned       |   |

 

In March 2000,we entered into a purchase agreement with Airbus, as subsequently amended in April 2006,to purchase 38 Airbus aircraft.  We havetaken delivery of 30 of these aircraft, four of which we sold and leasedback.  In addition, prior to the deliveryof two aircraft in fiscal year 2004, we assigned delivery to a lessor andagreed to lease these aircraft over 12-year terms.  We have remaining firm purchase commitmentsfor eight Airbus aircraft.

 

On January 24,2008, we announced our intent to sell four of our owned Airbus aircraft.  This will allow us to slow capacity growthand increase our cash position.  On March 20,2008, we announced that we had entered into a Letter of Agreement with VTBLeasing to sell two of our Airbus A318 aircraft and two of our Airbus A319aircraft.  As of June 23, 2008, VTBLeasing has taken delivery of two Airbus A319 aircraft.  Depending upon our efforts to improveliquidity during our Chapter 11 proceedings, we may sell additional aircraft toimprove our cash position.

 

***The table above does not include any of 10 Bombardier Q400 aircraft forwhich we have purchase options.  Our lastoption expires in July 2010, subject to additional extension rights.***

 

20

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**Facilities**

 

We lease approximately 70,000 square feet of space for our headquartersfacility near DIA. The lease expires in January 2015.  We also lease an additional 20,000 squarefeet of space in a building adjacent to our main headquarters. This lease expiresin July 2008.  We are currentlyexamining options for office space to accommodate our projected needs.

 

Our Denver, Colorado reservations facility is a 16,000 square footfacility that we have leased for a 10-year lease term ending in June 2011.  In August 2000, we established a secondreservations center facility in Las Cruces, New Mexico.  This facility is approximately 12,000 squarefeet and is leased for a term of 122 months ending August 2010.

 

Lynx Aviation currently leases approximately 12,000 square feet ofspace in Westminster, Colorado. The lease expires in December 2012.

 

We have entered into an airport lease and facilities agreement expiringin 2010 with the City and County of Denver, Colorado, at DIA for ticket counterspace, 22 gates in Concourse A and associated operations space.  Because our overall rates and charges will bebased on the number of passengers and gross weight landed at the airport, it isnot possible at this time to determine the amount of future rates and chargesat DIA.

 

We sublease a portion ofContinental Airlines’ hangar at DIA.  Theprimary term of this sublease expired in February 2007 and we now occupythat facility on a month-to-month basis. Additionally, we lease maintenance facilities in Kansas City, Missouriand Phoenix, Arizona.

 

Each of our airportlocations requires leased space associated with gate operations, ticketing andbaggage operations.  We either lease theticket counters, gates, and airport office facilities at each of the airportswe serve from the appropriate airport authority or sublease them from otherairlines.

 

**Item 3: Legal Proceedings**

 

As discussedabove, Frontier Holdings and its subsidiaries filed voluntary petitions forreorganization under Chapter 11 of the United States Bankruptcy Code inthe United States Bankruptcy Court for the Southern District of New York andtheir cases are being jointly administered under Case No. 08-11298 (RDD).The Debtors continue to operate their business as “debtors-in-possession” underthe jurisdiction of the Bankruptcy Court and in accordance with the applicableprovisions of the Bankruptcy Code and orders of the Bankruptcy Court. As of thedate of the Chapter 11 filing, virtually all pending litigation wasstayed, and absent further order of the Bankruptcy Court, no party, subject tocertain exceptions, may take any action, also subject to certain exceptions, torecover on pre-petition claims against the Debtors. At this time, it is notpossible to predict the outcome of the Chapter 11 cases or their effect onour business.

 

From time totime, we are engaged in routine litigation incidental to our business.  Other than our Chapter 11 proceeding, webelieve there are no legal proceedings pending in which we are a party or ofwhich any of our property is the subject that are not adequately covered byinsurance maintained by us or which have sufficient merit to result in amaterial adverse affect upon our business, financial condition, results ofoperations, or liquidity.

 

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

 

None

 

21

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**PART II**

 

**Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases of Equity Securities**

 

**Price Range of Common Stock**

 

Until April 22, 2008, our common stock was traded on the NASDAQStock Exchange under the symbol “FRNT”. As a result of our Chapter 11 bankruptcy proceedings, trading of our common stock on the NASDAQStock Exchange was suspended on April 22, 2008, and our common stock wasdelisted from the NASDAQ Stock Exchange on May 22, 2008.  Our common stock has been quoted sinceits suspension from the NASDAQ on the Pink Sheets Electronic Quotation Service(“Pink Sheets”) maintained by Pink Sheets LLC for the National Quotation Bureau, Inc.The ticker symbol “FRNTQ” has been assigned to our common stock forover-the-counter quotations.

 

The following table shows the range of high and low sales prices pershare for our common stock for the periods indicated as reported by NASDAQ.

 
| ** **                         | ** ** | **High**   | ** ** | **Low**    | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Fiscal Year 2008 Quarter Ended** |       |       |       |       |       |
|                               |       |       |       |       |       |
| June 30, 2007                 |       | $          | 6.75       |       | $          | 5.51 |   |
| September 30, 2007            |       | $          | 6.32       |       | $          | 4.51 |   |
| December 31, 2007             |       | $          | 7.46       |       | $          | 5.20 |   |
| March 31, 2008                |       | $          | 5.44       |       | $          | 2.05 |   |
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Fiscal Year 2007 Quarter Ended** |       |       |       |       |       |
|                               |       |       |       |       |       |
| June 30, 2006                 |       | $          | 7.83       |       | $          | 5.66 |   |
| September 30, 2006            |       | $          | 8.63       |       | $          | 5.79 |   |
| December 31, 2006             |       | $          | 9.08       |       | $          | 6.87 |   |
| March 31, 2007                |       | $          | 8.07       |       | $          | 5.90 |   |

 

As of March 31, 2008, there were 1,727holders of record of the Company’s stock. The Company does not anticipate paying dividends on its common stock inthe foreseeable future.

 

We believe that our currently outstandingcommon stock will have no value and will be canceled under any plan ofreorganization that we propose. Accordingly, we urge that caution be exercisedwith respect to existing and future investments in our common stock and othersecurities.

 

For Equity Compensation Plan Information, seePart III, Item 12 – Security Ownership of Certain Beneficial Owners andManagers.

 

22

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**Performance Graph**

 

The following graph shows the cumulativetotal shareholder return on our common stock compared to the cumulative totalreturn of two other indices: (i) The Nasdaq National Market CompositeIndex of U.S. Companies (IXICN), and (ii) the Peer Group Index of similarline-of business companies consisting of Midwest Express Airlines (MEH),AirTran Holdings, Inc. (AAI), and JetBlue Airways Corporation (JBLU) (the“Peer Group”). Midwest Express Airlines became a private company and ceasedtrading in February 2008, and is not included in the Peer Group Index infiscal year 2008.  The graph shows thevalue at the end of each of the last five fiscal years of $100 invested in ourcommon stock or the indices on March 31, 2003, assumes reinvestment ofdividends, and takes into account stock splits. Historical stock priceperformance is not necessarily indicative of future stock price performance.

 

 
| ** **                            | ** ** | **Mar-03** | ** ** | **Mar-04** | ** ** | **Mar-05** | ** ** | **Mar-06** | ** ** | **Mar-07** | ** ** | **Mar-08** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Frontier Airlines Holdings, Inc. |       | 100        |       | 209.66     |       | 210.87     |       | 154.93     |       | 120.93     |       | 50.91      |       |
| NASDAQ Market Index                   |       | 100        |       | 67.25      |       | 149.07     |       | 174.46     |       | 180.56     |       | 168.89     |       |
| Peer Group Index                      |       | 100        |       | 218.09     |       | 141.19     |       | 289.25     |       | 431.11     |       | 72.58      |       |

 

23

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**Item 6:   SelectedFinancial Data**

 

The followingselected financial and operating data as of and for each of the years ended March 31,2008, 2007, 2006, 2005, and 2004 are derived from our audited financialstatements.  This data should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the consolidated financial statements and therelated notes thereto included elsewhere in this report.

 
| ** **                                                                                                 | ** ** | **Year Ended March 31,**              | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                 | ** ** | **(Amounts  in thousands except per share amounts)** | ** ** |
| **Consolidated  Statement of Operations Data:**                                                            |       |                                                 |       |   |   |   |   |   |   |   |   |
| Total operating revenue                                                                                    |       | $                                                    | 1,398,981  |   | $ | 1,170,949 |   | $ | 1,001,522 |   | $ | 837,585 |   | $ | 644,739 |   |
| Total operating expenses                                                                                   |       | 1,434,311                                            |       | 1,181,651 |   | 1,009,419 |   | 864,032 |   | 617,257 |   |
| Operating income (loss)                                                                                    |       | (35,030                                              | )          | (9,834 | ) | (7,897 | ) | (26,447 | ) | 27,482 |   |
| Income (loss) before income tax expense  (benefit) and cumulative effect of change in accounting principle |       | (60,354                                              | )          | (24,996 | ) | (20,468 | ) | (35,838 | ) | 20,457 |   |
| Income tax expense (benefit)                                                                               |       | (101                                                 | )          | (4,626 | ) | (6,497 | ) | (12,408 | ) | 7,822 |   |
| Net income (loss)                                                                                          |       | (60,253                                              | )          | $ | (20,370 | ) | $ | (13,971 | ) | $ | (23,430 | ) | $ | 12,635 |   |
| Net income (loss) per share:                                                                               |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic                                                                                                      |       | $                                                    | (1.64      | ) | $ | (0.56 | ) | $ | (0.39 | ) | $ | (0.66 | ) | $ | 0.39 |   |
| Diluted                                                                                                    |       | $                                                    | (1.64      | ) | $ | (0.56 | ) | $ | (0.39 | ) | $ | (0.66 | ) | $ | 0.36 |   |
|                                                                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Consolidated Balance Sheet Data:**                                                                       |       |                                                 |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and short-term  investments                                                         |       | $                                                    | 120,837    |   | $ | 202,981 |   | $ | 272,840 |   | $ | 174,795 |   | $ | 190,609 |   |
| Current assets                                                                                             |       | 306,286                                              |       | 340,405 |   | 390,957 |   | 275,550 |   | 269,733 |   |
| Total assets                                                                                               |       | 1,249,971                                            |       | 1,042,868 |   | 970,432 |   | 792,011 |   | 769,706 |   |
| Current liabilities                                                                                        |       | 449,367                                              |       | 359,326 |   | 301,011 |   | 233,850 |   | 181,659 |   |
| Long-term debt                                                                                             |       | 624,086                                              |       | 451,908 |   | 405,482 |   | 282,792 |   | 280,001 |   |
| Total liabilities                                                                                          |       | 1,097,852                                            |       | 833,372 |   | 741,656 |   | 554,090 |   | 511,764 |   |
| Stockholders’ equity                                                                                  |       | 152,119                                              |       | 209,496 |   | 228,776 |   | 237,920 |   | 257,942 |   |
| Working capital (deficit)                                                                                  |       | (143,081                                             | )          | (18,921 | ) | 89,946 |   | 41,700 |   | 88,074 |   |

 

24

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Frontier Holdings includes the following operations: our mainlineoperations, which currently consist of 60 Airbus aircraft; our RegionalPartners operations operated by Republic, Horizon and ExpressJet (“RegionalPartners”); and Lynx Aviation, which was in its start-up phase of operationsuntil December 7, 2007 when it began revenue operations.  Lynx Aviation and our Regional Partnersservices are separate from our mainline operations.

 

To evaluate the separate segments of our operations, management hassegregated the revenue and costs of our operations as follows:  Passenger revenue for our Regional Partnersand for Lynx Aviation represents the revenue collected for flights operated bythese carriers.  Operating expenses forRegional Partner flights include all direct costs associated with the flightsplus payments of performance bonuses if earned under the contract.  Certain expenses such as aircraft lease,maintenance and crew costs are included in the operating agreements with ourRegional Partners in which we reimburse these expenses plus a margin.  Operating expenses for Lynx Aviation includeall direct costs associated with the flights and the aircraft includingaircraft lease and depreciation, maintenance and crew costs.  Operating expenses for both Regional Partnersand Lynx Aviation also include other direct costs incurred for which we do notpay a margin.  These expenses areprimarily composed of fuel, airport facility expenses and passenger relatedexpenses. We also allocate indirect expenses between mainline, RegionalPartners and Lynx Aviation operations by using departures, available seatmiles, or passengers as a percentage of system combined departures, availableseat miles or passengers.

 

The following table provides certain of our financial and operatingdata for the years ended March 31, 2008, 2007, 2006, 2005, and 2004.  Mainline and combined data exclude theexpenses of Lynx Aviation prior to receiving FAA approval to fly.  The start-up costs excluded were $8,454,000and $3,139,000 for the years ended March 31, 2008 and 2007,respectively.  Lynx Aviation beganrevenue service on December 7, 2007. We do not believe that the results of Lynx Aviation during the yearended March 31, 2008 are indicative of future results because the fleetwas flown in sub-optimal routes, additional crew were required for training andLynx Aviation had low completion factors. The costs of operations of Lynx Aviation for the year ended March 31,2008 were $25,742,000.

 
| ** **                                  | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Selected Operating Data - Mainline:**     |       |                                    |       |   |   |   |   |   |   |   |   |
|                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Passenger revenue (000s) (1)                |       | $                                       | 1,218,242  |   | $ | 1,037,302 |   | $ | 878,681 |   | $ | 731,822 |   | $ | 615,390 |   |
| Revenue passengers carried (000s)           |       | 10,622                                  |       | 9,140 |   | 7,764 |   | 6,653 |   | 5,569 |   |
| Revenue passenger miles (RPMs) (000s) (3)   |       | 10,175,220                              |       | 8,532,577 |   | 7,436,830 |   | 6,587,589 |   | 5,120,587 |   |
| Available seat miles (ASMs) (000s) (4)      |       | 12,666,316                              |       | 11,310,070 |   | 9,885,599 |   | 9,115,868 |   | 7,153,740 |   |
| Passenger load factor (5)                   |       | 80.3                                    | %          | 75.4 | % | 75.2 | % | 72.3 | % | 71.6 | % |
| Break-even load factor (6)                  |       | 81.1                                    | %          | 76.0 | % | 75.8 | % | 75.0 | % | 68.8 | % |
| Block hours (7)                             |       | 264,468                                 |       | 234,965 |   | 202,300 |   | 182,581 |   | 142,466 |   |
| Departures                                  |       | 104,548                                 |       | 97,554 |   | 82,878 |   | 72,888 |   | 61,812 |   |
| Average seats per departure                 |       | 129.2                                   |       | 129.6 |   | 129.4 |   | 130.1 |   | 132.2 |   |
| Average stage length                        |       | 938                                     |       | 895 |   | 922 |   | 961 |   | 875 |   |
| Average length of haul                      |       | 958                                     |       | 934 |   | 958 |   | 990 |   | 919 |   |
| Average daily block hour utilization (8)    |       | 12.1                                    |       | 11.9 |   | 11.5 |   | 11.1 |   | 10.4 |   |
| Passenger yield per RPM (cents) (9)         |       | 11.83                                   |       | 12.05 |   | 11.68 |   | 11.03 |   | 11.96 |   |
| Total yield per RPM (cents) (10), (11)      |       | 12.45                                   |       | 12.62 |   | 12.22 |   | 11.44 |   | 12.37 |   |
| Passenger yield per ASM (RASM) (cents) (12) |       | 9.50                                    |       | 9.09 |   | 8.79 |   | 7.97 |   | 8.56 |   |
| Total yield per ASM (cents) (13)            |       | 10.00                                   |       | 9.52 |   | 9.19 |   | 8.26 |   | 8.86 |   |
| Cost per ASM (cents) (CASM)                 |       | 9.90                                    |       | 9.46 |   | 9.13 |   | 8.46 |   | 8.42 |   |
| Fuel expense per ASM (cents)                |       | 3.53                                    |       | 3.03 |   | 2.85 |   | 2.04 |   | 1.52 |   |
| Cost per ASM excluding fuel (cents) (14)    |       | 6.37                                    |       | 6.43 |   | 6.27 |   | 6.43 |   | 6.90 |   |
| Average fare (15)                           |       | $                                       | 103.71     |   | $ | 102.59 |   | $ | 103.05 |   | $ | 102.31 |   | $ | 103.54 |   |
| Average aircraft in service                 |       | 59.7                                    |       | 54.1 |   | 48.2 |   | 44.9 |   | 37.3 |   |
| Aircraft in service at end of period        |       | 62                                      |       | 57 |   | 50 |   | 47 |   | 38 |   |
| Average age of aircraft at end of period    |       | 3.9                                     |       | 3.2 |   | 2.6 |   | 2.5 |   | 3.9 |   |
| Average fuel cost per gallon (16)           |       | $                                       | 2.45       |   | $ | 2.12 |   | $ | 1.99 |   | $ | 1.41 |   | $ | 1.04 |   |
| Fuel gallons consumed (000’s)          |       | 182,793                                 |       | 161,616 |   | 141,474 |   | 131,906 |   | 104,799 |   |

 

25

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| ** **                                  | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| **Selected Operating Data - Lynx Aviation** |       |                                    |       |   |   |   |   |   |   |   |   |
|                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Passenger revenue (000s) (1)                |       | $                                       | 18,989     |   | — |   | — |   | — |   | — |   |
| Revenue passengers carried (000s)           |       | 234                                     |       | — |   | — |   | — |   | — |   |
| Revenue passenger miles (RPMs) (000s) (3)   |       | 103,196                                 |       | — |   | — |   | — |   | — |   |
| Available seat miles (ASMs) (000s) (4)      |       | 169,721                                 |       | — |   | — |   | — |   | — |   |
| Passenger load factor (5)                   |       | 60.8                                    | %          | — |   | — |   | — |   | — |   |
| Passenger yield per RPM (cents) (9)         |       | 18.40                                   |       | — |   | — |   | — |   | — |   |
| Passenger yield per ASM (cents) (12)        |       | 11.19                                   |       | — |   | — |   | — |   | — |   |
| Cost per ASM (cents)                        |       | 15.17                                   |       | — |   | — |   | — |   | — |   |
| Average fare                                |       | $                                       | 81.30      |   | — |   | — |   | — |   | — |   |
| Aircraft in service at end of period        |       | 10                                      |       | — |   | — |   | — |   | — |   |

** **
| ** **                                            | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Selected Operating Data - Regional Partners  (2):** |       |                                    |       |   |   |   |   |   |   |   |   |
|                                                  |       |                                    |       |   |   |   |   |   |   |   |   |
| Passenger revenue (000s) (1)                          |       | $                                       | 113,196    |   | $ | 94,164 |   | $ | 92,826 |   | $ | 84,269 |   | $ | 11,191 |   |
| Revenue passengers carried (000s)                     |       | 1,135                                   |       | 899 |   | 912 |   | 872 |   | 115 |   |
| Revenue passenger miles (RPMs) (000s) (3)             |       | 763,415                                 |       | 576,431 |   | 591,787 |   | 527,205 |   | 75,974 |   |
| Available seat miles (ASMs) (000s) (4)                |       | 1,030,916                               |       | 799,914 |   | 821,244 |   | 736,287 |   | 111,144 |   |
| Passenger load factor (5)                             |       | 74.1                                    | %          | 72.1 | % | 72.1 | % | 71.6 | % | 68.4 | % |
| Passenger yield per RPM (cents) (9)                   |       | 14.83                                   |       | 16.34 |   | 15.69 |   | 15.98 |   | 14.73 |   |
| Passenger yield per ASM (cents) (12)                  |       | 10.98                                   |       | 11.77 |   | 11.30 |   | 11.45 |   | 10.07 |   |
| Cost per ASM (cents)                                  |       | 14.18                                   |       | 13.55 |   | 13.01 |   | 12.56 |   | 13.17 |   |
| Average fare                                          |       | $                                       | 99.74      |   | $ | 104.72 |   | $ | 101.78 |   | $ | 96.66 |   | $ | 97.03 |   |
| Aircraft in service at end of period                  |       | 11                                      |       | 9 |   | 9 |   | 9 |   | 7 |   |

** **
| ** **                                | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Selected Operating Data - Combined:**   |       |                                    |       |   |   |   |   |   |   |   |   |
|                                      |       |                                    |       |   |   |   |   |   |   |   |   |
| Passenger revenue (000s) (1)              |       | $                                       | 1,350,427  |   | $ | 1,131,466 |   | $ | 971,507 |   | $ | 816,091 |   | $ | 626,581 |   |
| Revenue passengers carried (000s)         |       | 11,991                                  |       | 10,039 |   | 8,676 |   | 7,525 |   | 5,684 |   |
| Revenue passenger miles (RPMs) (000s) (3) |       | 11,041,831                              |       | 9,109,008 |   | 8,028,617 |   | 7,114,794 |   | 5,196,561 |   |
| Available seat miles (ASMs) (000s) (4)    |       | 13,866,953                              |       | 12,109,984 |   | 10,706,843 |   | 9,852,155 |   | 7,264,884 |   |
| Passenger load factor (5)                 |       | 79.6                                    | %          | 75.2 | % | 75.0 | % | 72.2 | % | 71.5 | % |
| Passenger yield per RPM (cents) (9)       |       | 12.10                                   |       | 12.32 |   | 11.98 |   | 11.39 |   | 12.01 |   |
| Total yield per RPM (cents) (10), (11)    |       | 12.67                                   |       | 12.85 |   | 12.47 |   | 11.77 |   | 12.41 |   |
| Yield per ASM (cents) (12)                |       | 9.63                                    |       | 9.27 |   | 8.98 |   | 8.23 |   | 8.59 |   |
| Total yield per ASM (cents) (13)          |       | 10.09                                   |       | 9.67 |   | 9.35 |   | 8.50 |   | 8.87 |   |
| Cost per ASM (cents)                      |       | 10.34                                   |       | 9.76 |   | 9.43 |   | 8.77 |   | 8.50 |   |
|                                           |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

26

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----

| (1)    |   | “Passenger  revenue” includes revenue for reduced rate stand-by passengers, charter  revenue, administrative fees, and revenue recognized for unused tickets that  are greater than one year from issuance date. The incremental revenue from  passengers connecting from regional flights on our Regional Partners and Lynx  Aviation to mainline flights is included in our mainline passenger revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    |   | Regional  Partners operating data includes the operations of Republic, Horizon,  ExpressJet and Mesa Airlines. In September 2007, we signed a  limited-term contract with ExpressJet Airlines, Inc. to operate two to  four 50-seat Embraer 145XR jets on behalf of Frontier. The ExpressJet service  started on November 15, 2007 and terminated on December 6, 2007  upon our commencement of Lynx Aviation service. On January 11, 2007, we  signed an agreement with Republic under which Republic would operate up to 17  Embraer 170 aircraft with capacity of 76-seats under our Frontier JetExpress  brand. The service began on March 4, 2007 and replaced our agreement  with Horizon, which expired on return of the last aircraft in  November 2007. In September 2003, we signed an agreement with  Horizon, under which Horizon operated up to nine 70-seat CRJ 700 aircraft  under our Frontier JetExpress brand. The service began on January 1,  2004 and replaced our codeshare with Mesa Airlines, which terminated on  December 31, 2003. In accordance with Emerging Issues Task Force  No. 01-08, “*Determining Whether an  Arrangement Contains a Lease” (“EITF 01-08”)*, we have concluded  that the Horizon, Republic and ExpressJet agreements contain leases because  the agreements convey the right to use a specific number and specific type of  aircraft over a stated period of time. Therefore, we are recording revenue  and expenses related to these agreements on a gross basis. Under the Mesa  agreement, we recorded JetExpress revenue reduced by related expenses net in  other revenue. JetExpress operations under the Mesa agreement from April 1,  2003 to December 31, 2003 and from February 1, 2003 to  March 31, 2003 are not included in Regional Partner statistics in 2004  and 2003 because the Mesa arrangement was effective prior to May 28,  2003, the effective date of EITF 01-08. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   | *Amounts included  in other revenue for Mesa for the year ended March 31, 2004 were $25.2  million, net of operating expenses of $23.4 million, for a net amount  included in other revenue of $1.7 million. Mesa’s RPMs and ASMs for the year  ended March 31, 2004 were 148,163,000 and 174,435,000, respectively.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    |   | “Revenue  passenger miles,” or RPMs, are determined by multiplying the number of  fare-paying passengers carried by the distance flown. This represents the  number of miles flown by revenue paying passengers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (4)    |   | “Available  seat miles,” or ASMs, are determined by multiplying the number of seats  available for passengers by the number of miles flown.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (5)    |   | “Passenger  load factor” is determined by dividing revenue passenger miles by available  seat miles. This represents the percentage of aircraft seating capacity that  is actually utilized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (6)    |   | “Break-even load factor” is  the passenger load factor that will result in operating revenue being equal  to operating expenses, assuming constant revenue per passenger mile and  expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

***A reconciliation of the components of the calculation of mainlinebreak-even load factor is as follows:***

 
| ** **                                                               | ** ** | **Year Ended March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                               | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | **(in thousands)**                      | ** ** |
| Net loss (income)                                                        |       | $                                       | 60,253     |   | $ | 20,370 |   | $ | 13,971 |   | $ | 23,430 |   | $ | (12,635 | ) |
| Income tax (expense) benefit                                             |       | 101                                     |       | 4,626 |   | 6,497 |   | 12,408 |   | (7,822 | ) |
| Passenger revenue – Mainline                                        |       | 1,218,242                               |       | 1,037,302 |   | 878,681 |   | 731,822 |   | 615,390 |   |
| Passenger revenue – Regional Partners                               |       | 113,196                                 |       | 94,164 |   | 92,826 |   | 84,269 |   | 11,191 |   |
| Passenger revenue – Lynx Aviation                                   |       | 18,989                                  |       | — |   | — |   | — |   | — |   |
| Regional partner expense                                                 |       | (146,211                                | )          | (108,355 | ) | (106,866 | ) | (92,481 | ) | (14,634 | ) |
| Lynx Aviation expenses                                                   |       | (34,196                                 | )          | (3,139 | ) | — |   | — |   | — |   |
| Charter revenue                                                          |       | (14,539                                 | )          | (8,861 | ) | (10,011 | ) | (5,381 | ) | (2,724 | ) |
| Passenger revenue - mainline (excluding  charter) required to break even |       | $                                       | 1,215,835  |   | $ | 1,036,107 |   | $ | 875,098 |   | $ | 754,067 |   | $ | 588,766 |   |

 

***The calculation of the break-even load factor:***

 
| ** **                                                                             | ** ** | **Year Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Passenger revenue - mainline (excluding  charter) ($000s)                              |       | $                                       | 1,215,835  |   | $ | 1,036,107 |   | $ | 875,098 |   | $ | 754,067 |   | $ | 588,766 |   |
| Mainline yield per RPM (cents)                                                         |       | 11.83                                   |       | 12.05 |   | 11.68 |   | 11.03 |   | 11.96 |   |
| Mainline revenue passenger miles (000s) to  break even assuming constant yield per RPM |       | 10,277,557                              |       | 8,598,398 |   | 7,492,277 |   | 6,836,510 |   | 4,922,793 |   |
| Mainline ASMs (000’s)                                                             |       | 12,666,316                              |       | 11,310,070 |   | 9,885,599 |   | 9,115,868 |   | 7,153,740 |   |
| **Mainline break-even load factor**                                                    |       | 81.1                                    | %          | 76.0 | % | 75.8 | % | 75.0 | % | 68.8 | % |
|                                                                                        |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

27

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| (7)    |   | “Block  hours” represent the time between aircraft gate departure and aircraft gate  arrival.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (8)    |   | “Average  daily block hour utilization” represents the total block hours divided by the  number of aircraft days in service, divided by the weighted average of  aircraft in our fleet during that period. The number of aircraft includes all  aircraft on our operating certificate, which includes scheduled aircraft, as  well as aircraft out of service for maintenance and operational spare  aircraft, and excludes aircraft removed permanently from revenue service or  new aircraft not yet placed in revenue service. This represents the amount of  time that our aircraft spend in the air carrying passengers.                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (9)    |   | “Passenger  yield per RPM” is determined by dividing passenger revenue (excluding charter  revenue) by revenue passenger miles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (10)   |   | For purposes  of these yield calculations, charter revenue is excluded from passenger  revenue. These figures may be deemed non-GAAP financial measures under  regulations issued by the Securities and Exchange Commission. We believe that  presentation of yield excluding charter revenue is useful to investors  because charter flights are not included in RPMs or ASMs.  Furthermore,  in preparing operating plans and forecasts, we rely on an analysis of yield  exclusive of charter revenue. Our presentation of non-GAAP financial measures  should not be viewed as a substitute for our financial or statistical results  based on GAAP. The calculation of passenger revenue excluding charter revenue  is as follows: |

 
| ** **                                                                                  | ** ** | **Year Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Passenger revenue - as reported                                                             |       | $                                       | 1,350,427  |   | $ | 1,131,466 |   | $ | 971,507 |   | $ | 816,091 |   | $ | 626,581 |   |
| Less: Passenger revenue – Regional Partners                                            |       | 113,196                                 |       | 94,164 |   | 92,826 |   | 84,269 |   | 11,191 |   |
| Less: Passenger revenue – Lynx Aviation                                                |       | 18,989                                  |       | — |   | — |   | — |   | — |   |
| Passenger revenue - mainline service                                                        |       | 1,218,242                               |       | 1,037,302 |   | 878,681 |   | 731,822 |   | 615,390 |   |
| Less: charter revenue                                                                       |       | 14,539                                  |       | 8,861 |   | 10,011 |   | 5,381 |   | 2,724 |   |
| Passenger revenue – mainline (excluding  charter, Regional Partners and Lynx Aviation) |       | 1,203,703                               |       | 1,028,441 |   | 868,670 |   | 726,441 |   | 612,666 |   |
| Add: Passenger revenue – Regional Partners                                             |       | 113,196                                 |       | 94,164 |   | 92,826 |   | 84,269 |   | 11,191 |   |
| Add: Passenger revenue – Lynx Aviation                                                 |       | 18,989                                  |       | — |   | — |   | — |   | — |   |
| Passenger revenue, system combined                                                          |       | $                                       | 1,335,888  |   | $ | 1,122,605 |   | $ | 961,496 |   | $ | 810,710 |   | $ | 623,857 |   |

 
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (11)   |   | “Total yield  per RPM” is determined by dividing total revenue by revenue passenger miles.  This represents the average amount one passenger pays to fly one mile.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (12)   |   | “Passenger  yield per ASM” or “RASM” is determined by dividing passenger revenue  (excluding charter revenue) by available seat miles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (13)   |   | “Total  yield per ASM” is determined by dividing total revenue by available seat  miles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (14)   |   | This may be deemed a  non-GAAP financial measure under regulations issued by the Securities and  Exchange Commission. We believe the presentation of financial information  excluding fuel expense is useful to investors because we believe that fuel  expense tends to fluctuate more than other operating expenses. Excluding fuel  from the cost of mainline operations facilitates the comparison of results of  operations between current and past periods and enables investors to better  forecast future trends in our operations. Furthermore, in preparing operating  plans and forecasts, we rely, in part, on trends in our historical results of  operations excluding fuel expense. However, our presentation of non-GAAP  financial measures should not be viewed as a substitute for our financial  results determined in accordance with GAAP. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (15)   |   | “Average  fare” excludes revenue included in passenger revenue for charter and reduced  rate stand-by passengers, administrative fees, and revenue recognized for  unused tickets that are greater than one year from issuance date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (16)   |   | “Average fuel cost per  gallon” includes non-cash mark to market gains/(losses) from fuel hedging of  $1,847,000, $12,753,000, $(2,163,000), $2,837,000, and $469,000 for the years  ended March 31, 2008, 2007, 2006, 2005, and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

28

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The break-out of our mainline, Regional Partners andLynx Aviation operations from our consolidated statement of operations for theyears ended March 31, 2008, 2007 and 2006 is as follows (in thousands):

*** ***
| ** **                                               | ** ** | **Year Ended March 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                               | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                               | ** ** | **(in thousands)**                 | ** ** |
| Revenue:                                                 |       |                                    |       |   |   |   |   |
| Passenger- Mainline                                      |       | $                                       | 1,218,242  |   | $ | 1,037,302 |   | $ | 878,681 |   |
| Passenger - Regional Partners                            |       | 113,196                                 |       | 94,164 |   | 92,826 |   |
| Passenger - Lynx Aviation                                |       | 18,989                                  |       | — |   | — |   |
| Cargo                                                    |       | 6,091                                   |       | 6,880 |   | 5,677 |   |
| Other                                                    |       | 42,463                                  |       | 32,603 |   | 24,338 |   |
|                                                     |       |                                    |       |   |   |   |   |
| Total revenue                                            |       | 1,398,981                               |       | 1,170,949 |   | 1,001,522 |   |
|                                                     |       |                                    |       |   |   |   |   |
| Operating expenses:                                      |       |                                    |       |   |   |   |   |
| Flight operations                                        |       | 179,304                                 |       | 161,144 |   | 141,316 |   |
| Aircraft fuel                                            |       | 446,791                                 |       | 343,082 |   | 281,906 |   |
| Aircraft lease                                           |       | 112,856                                 |       | 108,623 |   | 94,229 |   |
| Aircraft and traffic servicing                           |       | 183,239                                 |       | 166,409 |   | 138,492 |   |
| Maintenance                                              |       | 102,384                                 |       | 87,733 |   | 77,238 |   |
| Promotion and sales                                      |       | 129,625                                 |       | 115,516 |   | 89,751 |   |
| General and administrative                               |       | 60,713                                  |       | 53,674 |   | 48,979 |   |
| Operating expenses - Regional Partners                   |       | 146,211                                 |       | 108,355 |   | 106,866 |   |
| Operating expenses - Lynx Aviation                       |       | 34,196                                  |       | 3,139 |   | — |   |
| Employee separation costs and other charges  (reversals) |       | 442                                     |       | (57 | ) | 3,414 |   |
| Loss (gains) on sales of assets, net                     |       | 1,791                                   |       | (656 | ) | (1,144 | ) |
| Post-retirement liability curtailment gain               |       | (6,361                                  | )          | — |   | — |   |
| Depreciation                                             |       | 43,120                                  |       | 34,689 |   | 28,372 |   |
| Total operating expenses                                 |       | 1,434,311                               |       | 1,181,651 |   | 1,009,419 |   |
|                                                     |       |                                    |       |   |   |   |   |
| Business interruption insurance proceeds                 |       | 300                                     |       | 868 |   | — |   |
|                                                     |       |                                    |       |   |   |   |   |
| Operating loss                                           |       | $                                       | (35,030    | ) | $ | (9,834 | ) | $ | (7,897 | ) |

 

29

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***Small fluctuations in our RASM or CASM can significantlyaffect operating results because we, like other airlines, have high fixed costsin relation to revenue. Airline operations are highly sensitive to variousfactors, including the actions of competing airlines and general economicfactors, which can adversely affect our liquidity, cash flows and results ofoperations.***

*** ***

***The following table provides our operating revenue and expensesfor our mainline operations expressed as cents per total mainline ASMs and as apercentage of total mainline operating revenue, as rounded, for years ended March 31,2008, 2007, and 2006.  Regional Partnersand Lynx Aviation revenue, expenses and ASMs were excluded from this table toprovide comparable amounts to the prior periods presented. This data should beread in conjunction with “Selected Financial Data” contained in Item 6 of thisreport.***

 
| ** **                                 | ** ** | **2008**              | ** ** | **2007**        | ** ** | **2006**              | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **Revenue/Cost  Per** | ** ** | **% Of  Total** | ** ** | **Revenue/Cost  Per** | ** ** | **% Of  Total** | ** ** | **Revenue/Cost  Per** | ** ** | **% Of  Total** | ** ** |
| ** **                                 | ** ** | **ASM**               | ** ** | **Revenue**     | ** ** | **ASM**               | ** ** | **Revenue** | ** ** | **ASM** | ** ** | **Revenue** | ** ** |
| ** **                                 | ** ** | **(in cents)**        | ** ** | **(in cents)**  | ** ** | **(in cents)**        | ** ** |
| Revenue:                                   |       |                  |       |            |       |                  |       |   |   |   |   |   |   |
| Passenger - mainline                       |       | 9.62                  |       | 96.2            | %          | 9.17                  |       | 96.3 | % | 8.89 |   | 96.7 | % |
| Cargo                                      |       | 0.05                  |       | 0.5             | %          | 0.06                  |       | 0.7 | % | 0.06 |   | 0.6 | % |
| Other                                      |       | 0.33                  |       | 3.3             | %          | 0.29                  |       | 3.0 | % | 0.24 |   | 2.7 | % |
| Total revenue                              |       | 10.00                 |       | 100.0           | %          | 9.52                  |       | 100.0 | % | 9.19 |   | 100.0 | % |
|                                       |       |                  |       |            |       |                  |       |   |   |   |   |   |   |
| Operating expenses:                        |       |                  |       |            |       |                  |       |   |   |   |   |   |   |
| Flight operations                          |       | 1.42                  |       | 14.2            | %          | 1.42                  |       | 15.0 | % | 1.43 |   | 15.5 | % |
| Aircraft fuel expense                      |       | 3.53                  |       | 35.3            | %          | 3.03                  |       | 31.9 | % | 2.85 |   | 31.0 | % |
| Aircraft lease expense                     |       | 0.89                  |       | 8.9             | %          | 0.96                  |       | 10.1 | % | 0.95 |   | 10.4 | % |
| Aircraft and traffic servicing             |       | 1.45                  |       | 14.5            | %          | 1.47                  |       | 15.5 | % | 1.40 |   | 15.2 | % |
| Maintenance                                |       | 0.81                  |       | 8.1             | %          | 0.78                  |       | 8.1 | % | 0.78 |   | 8.5 | % |
| Promotion and sales                        |       | 1.02                  |       | 10.2            | %          | 1.02                  |       | 10.7 | % | 0.91 |   | 9.9 | % |
| General and administrative                 |       | 0.48                  |       | 4.8             | %          | 0.48                  |       | 5.0 | % | 0.50 |   | 5.4 | % |
| Employee separation and other exit costs   |       | —                |       | —          |       | —                |       | — |   | 0.03 |   | 0.4 | % |
| Loss (gain) on sales of assets, net        |       | 0.01                  |       | 0.1             | %          | (0.01                 | )          | (0.1 | )% | (0.01 | ) | (0.1 | )% |
| Post-retirement liability curtailment gain |       | (0.05                 | )          | (0.5            | )%         |                  |       |   |   |   |   |   |   |
| Depreciation                               |       | 0.34                  |       | 3.4             | %          | 0.31                  |       | 3.2 | % | 0.29 |   | 3.1 | % |
| Total operating expenses                   |       | 9.90                  |       | 99.0            | %          | 9.46                  |       | 99.4 | % | 9.13 |   | 99.3 | % |

 

30

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**Item 7:           Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

**Overview**

** **

On April 10, 2008,Frontier Holdings, Frontier Airlines, and Lynx (collectively, the “Debtors”)filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code inthe Bankruptcy Court for the Southern District of New York.  The Debtors’ cases are being jointlyadministered under Case No. 08-11298 (RDD).  The Debtors will continue to operate theirbusinesses as “debtors-in-possession” under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Codeand orders of the Bankruptcy Court.  Inseveral recent bankruptcies in our industry, however, the airline ceasedoperations, and we can give no assurance that we will be able to continue tooperate our business or successfully reorganize.

 

Our Chapter 11 filings followed an unexpected attemptby our principal credit card processor to substantially increase a “holdback”of customer receipts from the sale of tickets. This change in established practices would have represented a materialnegative change to our cash forecasts and business plan, put severe restraintson our liquidity and made it impossible for us to continue normaloperations.  Due to historically highaircraft fuel prices, continued low passenger mile yields, cash holdbacksinstituted by our other credit card processor, and the threatened new holdback,we determined that we could not continue to operate without the protectionsprovided by Chapter 11.

 

During theyear ended March 31, 2008, we had a net loss of $60,253,000 or $1.64 perdiluted share, as compared to a net loss of $20,370,000 or 56¢ per dilutedshare for the year ended March 31, 2007. Included in our net loss for theyear ended March 31, 2008 were the following items (i) a decrease infuel expense for non-cash mark to market derivative gains of $1,847,000 andrealized cash settlements of $30,740,000 on fuel hedging contracts; (ii) apost-retirement liability curtailment gain of $6,361,000; (iii) $8,454,000of start-up costs for Lynx Aviation; (iv) $3,339,000 in accelerateddepreciation for our seat replacement project; (v) $1,791,000 in netlosses on sales of assets; and (vi) $442,000 in employee separationcost.  Included in our net loss for theyear ended March 31, 2007 were the following items: (i) a decrease infuel expense for non-cash mark to market derivative gains of $12,753,000 and anincrease in fuel expense of $3,925,000 paid to counter-party for fuel hedgesettlements; (ii) $656,000 in gains on Boeing parts held for sale (iii) $3,139,000of start-up costs for Lynx Aviation; and (iv) a tax valuation allowance of$3,980,000.

 

We increased passenger revenue by 17.4% inthe year ended March 31, 2008, over the prior year which is a result ofincreasing our capacity (as measured by ASM’s) by 12.0% while increasing ourpassenger yields by 4.5%.  The increasein our passenger revenue can be primarily attributed to the increase in ourload factor year-over-year by 4.9 points and an increase of our average farefrom $102.59 to $103.71 or 1.1%.

 

We have relatively low operating expensesexcluding fuel because we currently operate a single fleet of aircraft on ourmainline routes in a single class of service with high aircraft utilizationrates.  Our mainline CASM, or cost peravailable seat mile, for the year ended March 31, 2008 and 2007 was 9.90¢and 9.46¢, respectively, an increase of 4.7%. The increase in mainline CASM was largely due to an increase in fuelexpense to 3.53¢ per ASM from 3.03¢ per ASM for the years ended March 31,2008 and 2007, respectively, an increase of 16.5%.  Mainline CASM excluding fuel was 6.37¢ perASM as compared to 6.43¢ per ASM for the years ended March 31, 2008 and 2007,respectively, a decrease of 0.9%.  Thisdecrease in mainline CASM excluding fuel is partially due a one-time gain on acurtailment of a pension plan of $6,361,000, or 0.05¢ per ASM, and loweraircraft lease expense per ASM, or a reduction of 0.07¢ per ASM over prioryear, primarily as a result of an increase in utilization rates of our fleet.

 

Despite ourimprovements in passenger yields and decrease in mainline CASM excluding fuel,historically high aircraft fuel prices continue to have a material adverseeffect on our financial performance.  Ourlosses over the past three years have been primarily driven by rising fuelcosts and our inability to pass these increases on to our customers due to ahighly competitive market.  We have seena sharp rise in fuel costs since January 2005, and fuel costs may continueto increase or remain at these historically high levels.  Our average fuel cost per gallon, includinghedging activities, was $2.45 for the year ended March 31, 2008 comparedto $2.12 for the year ended March 31, 2007, an increase of 15.6%.  Since March 31, 2008, our aircraft fuelexpense has increased by approximately 60% excluding the benefits of hedging,which would have equated to an estimated $325,000,000 increase in fuel expense on an annualized basis to our March 31,2008 results.  Additionally, we continueto operate in a highly competitive pricing environment, which limits ourability to increase fares to offset high fuel costs.

 

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As of April 10, 2008(the date we filed for relief under the Bankruptcy Code), we had in excess of$108 million in unrestricted cash, cash equivalents and short-term investments.Our ability, both during and after the Chapter 11 case, to continue as agoing-concern is dependent upon, among other things, our ability (i) tosuccessfully achieve required cost savings to complete our restructuring; (ii) tomaintain adequate liquidity; (iii) to generate cash from operations; (iv) tosecure financing; (v) to negotiate favorable terms with our bankcardprocessors and credit card companies;  (vi) toconfirm a plan of reorganization under the Bankruptcy Code; and (vii) toachieve profitability. Uncertainty as to the outcome of these factors raisessubstantial doubt about our ability to continue as a going-concern. Theaccompanying consolidated financial statements do not include any adjustmentsthat might result should we be unable to continue as a going-concern. A plan ofreorganization could materially change the amounts currently disclosed in theconsolidated financial statements.

 

**Our Business Plan**

** **

As a result of the continuingdrastic escalation in fuel costs and our Chapter 11 proceeding, we arecontinuing an aggressive examination of many aspects of our business.  We are implementing a comprehensiverestructuring effort to achieve cost competitiveness by attempting to obtaineconomic concessions from key stakeholders, such as employees and vendors, inorder to allow us to reduce costs, create financial flexibility and restore itslong-term viability and profitability.

 

Our evaluation has encompassed our network, coststructure, fleet composition, both mainline and regional, and balance sheet.

 

***Network Adjustments***

*** ***

In November 2007, we announced our plan toreinforce capacity to our top destinations to support the start-up of LynxAviation by closing unprofitable routes and increasing frequencies and capacityin several markets served through our hub at DIA.  In January 2008, we discontinued serviceto Mexico from several of our non-hub markets, discontinued service toGuadalajara, Mexico from DIA, and discontinued service from Memphis, Tennesseeto Ft. Lauderdale and Orlando, Florida, and Las Vegas, Nevada.  In April 2008, we discontinued serviceto Baton Rouge, Louisiana, Palm Beach, Florida, and Ixtapa/Zihuatanejo, Mexico.We also further discontinued service to Mexico from several of our non-hubmarkets. We also adjusted seasonal service in several markets that we serve.

 

Throughout our December 2007 fiscal quarterwe continued to make several network adjustments to better align to ourstrengths.  We implemented moreconstrained day of week capacity deployment and reduced capacity or eliminatedservice in several non-Denver domestic markets, non-Denver point-to-point flyingto Mexico, and red-eye flying. These changes resulted in a more modestyear-over year mainline growth rate of five to six percent for our fiscalfourth quarter versus the originally scheduled 15 percent growth.  System-wide capacity growth for our fiscalfourth quarter was a 13 percent increase, as compared to a planned 21 percentincrease.  The termination of theagreement with Republic Airlines for regional jet service in April 2008resulted in us reducing our capacity in our fiscal first quarter 2009.  We are finalizing more adjustments that willfurther rationalize our network and leverage our position in Colorado and theWestern marketplace.

 

In May 2008, we closed on the sale of twoAirbus A319 aircraft, finalized documentation to sell an additional two A318aircraft in August 2008 and in September 2008 we are further reducingour capacity with route adjustments and the sale of aircraft.  We are currently negotiating agreements tosell an additional seven Airbus A319 aircraft for a total of 11 aircraft.  With these reductions in our fleet, in September 2008we will implement reductions in our personnel and operations to achieve thecost savings associated with this reduction in our fleet and routes.

 

In June 2008, United Airlines, our primarycompetitor in the Denver marketplace, announced (i) further cuts that willresult in the retirement of 100 mainline jets and a one-time reduction ofdomestic capacity by up to 18% and (ii) discontinuation of their discountcarrier, TED.  Many other airlines have announcedsimilar reductions in fleet and capacity. We will continue to monitor how this impacts our position in the marketplace.

 

With the route adjustments, termination of theRepublic contract and the planned sale of a total of 11 aircraft, we anticipatesystem-wide capacity to decline by approximately 8% in our fiscal quarterending September

 

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30,2008 over the same period last year and system-wide capacity to decline by 20%in the fiscal quarter ending December 31, 2008 as compared to the sameperiod last year.

 

***Cost Structure***

*** ***

In December 2007,we announced that we were reducing our indirect labor work force by 10%. Thejobs eliminated were corporate jobs not directly related to flight operationsand resulted in a severance accrual of $442,000 with annual savings of$2,900,000.  The sale of the additionalaircraft in September and October, if completed, this will force us toreevaluate our exiting workforce and adjust accordingly.

 

In May 2008,the Company reached agreements with the pilot and dispatchers unions ontemporary wage and benefit concessions. In June 2008, the Teamsters Union, which represents approximately450 mechanics, tool room employees and others, also agreed to temporary wageand benefit concessions.  All otheremployees were given wage reductions effective June 1, 2008.

 

One of the key elements to keeping our mainline costs low ismaintaining the same family of Airbus aircraft.  This strategy producescost savings because crew training is standardized for aircraft of a commontype, maintenance issues are simplified, spare parts inventory is reduced, andscheduling is more efficient.  Theaddition of the Bombardier Q400 turboprop aircraft operated through our LynxAviation subsidiary will allow us to add routes to under-served markets inColorado and elsewhere in the Rocky Mountain region using the economicallycorrect gauge of equipment and operating performance.   We also keep our operating costs low byoperating a single class of service, which simplifies our operations, enhancesproductivity, increases our capacity and offers an operating cost advantage.

 

***Managing Our Capacity***

*** ***

For fiscal 2009, we expect toreduce mainline capacity by approximately 10% versus fiscal 2008.  After a thorough fleet analysis and takingaccount of the dramatic increases in the price of fuel and the potentialimpacts of a slowing economy, we have elected to sell an additional seven ofour 22 owned Airbus aircraft, in addition to the four aircraft being sold toVTB Leasing for a total of 11.  Theadditional sale of these aircraft allows us to slow our capacity growth andimprove our cash position. The first two Airbus 319 aircraft were sold to VTBLeasing in May 2008.

 

On April 23, 2008, we announced that we reached amutual agreement with Republic Airways on the terms under which Frontier wouldreject the capacity purchase agreement. There was a structured reduction and gradual phase-out of Republic’s 12aircraft from our daily operation which was completed in mid-June 2008.  In conjunction with the termination ofservice by Republic, we stopped service to six markets.

 

The airline industry continues to operate in anintensely competitive environment.  Weexpect competition will remain intense, as over-capacity in the industrycontinues to exist.  Business and leisuretravelers continue to reevaluate their travel budgets and remain highly pricesensitive.  Increased competition has promptedaggressive strategies from competitors through discounted fares and salespromotions.

** **

**Results of Operations – Year Ended March 31,2008 Compared to Year Ended March 31, 2007**

** **

We had a consolidated net loss of $60,253,000 or $1.64 per dilutedshare for the year ended March 31, 2008, as compared to a consolidated netloss of $20,370,000 or 56¢ per diluted share for the year ended March 31,2007.

 

**Mainline Revenue**

** **

Industry fare pricingbehavior has a significant impact on our revenue.  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 demand and revenue in these markets.

 

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***Passenger Revenue - Mainline*.**  Mainline passenger revenue totaled$1,218,242,000 for the year ended March 31, 2008 compared to$1,037,302,000 for the year ended March 31, 2007, an increase of17.4%.  Mainline passenger revenueincludes revenue for reduced rate stand-by passengers, charter revenue,administrative fees, revenue recognized for tickets that are not used withinone year from their issue dates and revenue recognized from our co-brandedcredit card agreement.

 

Revenue frompassenger tickets flown generated 90.4% of our mainline passenger revenue andincreased $163,894,000 or 17.5% over the prior year.  The increase in flown ticket sales resultedfrom a 12.0% increase in ASMs, or $112,446,000, an increase of 4.9 points inload factor, or $68,078,000, offset by a decrease of 1.5% in our yields fromticket sales, or $16,630,000.   Thepercentage of revenue generated from other sources compared to total mainlinepassenger revenue is as follows: Administrative fees were 2.8%, revenuerecognized for tickets that were not used within one year from issuance were3.1%, charter revenues were 1.2% and revenue from the travel component of ourco-branded credit card were 2.0%.  Thesesources of revenue increased total mainline passenger revenue by $23,461,000 ascompared to the prior year, an increase of 26.6%. This increase is primarilydue to our 16.2% increase in passengers and the increased usage of ourco-branded credit card.

 

***Other Revenue***.  Other revenue, comprised principally of therevenue from the marketing component of our co-branded credit card, interlineand ground handling fees, liquor sales, LiveTV sales, pay-per-view movies andexcess baggage fees totaled $42,463,000 and $32,603,000 for the years ended March 31,2008 and March 31, 2007, respectively, an increase of 30.2% and were 3.3%and 3.0% of total mainline operating revenue for the years ended March 31,2008 and 2007, respectively.  Theincrease in other revenue was primarily due to the increase in the revenueearned from carrying excess baggage, ground handling services provided to othercarriers, and the marketing component of our co-branded credit card agreementand other partnership agreements.

 

**Mainline Operating Expenses**

** **

Total mainlineoperating expenses were $1,253,904,000 and $1,070,157,000 for the years ended March 31,2008 and 2007, respectively, an increase of 17.2%, and represented 99.0% and99.4% of total mainline revenue, respectively.

 

***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 13.5% to $278,955,000 compared to $245,750,000, and were22.0% and 22.8% of total mainline revenue for the years ended March 31,2008 and 2007, respectively.  Salaries,wages and benefits increased over the prior comparable period largely as aresult of an increase in the number of full-time equivalent employees tosupport our continued capacity growth. Our full-time equivalent employee countincreased 8.3% from approximately 4,800 at March 31, 2007 to 5,200 at March 31,2008. The increase in employees and related salaries, wages and benefitssupported the 12.0% increase in mainline capacity.

 

***Flight Operations.***  Flight operations expenses increased 11.3% to$179,304,000 as compared to $161,144,000, and were 14.2% and 15.0% of totalmainline revenue, for the year ended March 31, 2008 and 2007,respectively.  Flight operations expensesincreased due to an increase in mainline block hours from 234,965 for the yearended March 31, 2007 to 264,468 for the year ended March 31, 2008, anincrease of 12.6%.  Flight operationsexpenses include all expenses related directly to the operation of the aircraftexcluding depreciation of owned aircraft and aircraft lease expenses andincluding insurance expenses, pilot and flight attendant compensation,in-flight catering, crew overnight expenses, flight dispatch and flightoperations administrative expenses.

 

Pilot andflight attendant salaries before payroll taxes and benefits increased 10.1% to$104,543,000 compared to $94,953,000, and were 8.3% and 8.8% of total mainlinerevenue for the year ended March 31, 2008 and 2007, respectively.  We employed approximately 1,707 activemainline pilots and flight attendants at March 31, 2008 as compared to1,586 at March 31, 2007, an increase of 7.6%.

 

Aircraft insurance expenses totaled $8,118,000 (0.7%of total mainline revenue) and $9,819,000 (0.9% of total mainline revenue) forthe years ended March 31, 2008 and 2007, respectively.  Aircraft insurance expenses were 76¢ and$1.07 per passenger for the years ended March 31, 2008 and 2007,respectively.  Our aircraft hull andliability coverage renewed on January 1, 2006 to December 31, 2006 atrates that were reduced by 9.9%.  Ourrates were further reduced by 33.4% for the policy that covered January 1,2007 to December 31, 2007.  Ourrates were further reduced by almost 18% for the policy that covered January 1,2008 to December 31, 2008. In December

 

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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.  We expectthat if the 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 thedirect cost of fuel including taxes as well as the cost of delivering fuel intothe aircraft.  Aircraft fuel expensesalso include cash settlements and non-cash mark to market hedge adjustmentsrelated to our fuel hedging activities.  Aircraftfuel expense of $446,791,000 for 182,793,000 gallons used and $343,082,000 for161,616,000 gallons used, resulted in an average fuel expense of $2.45 and$2.12 per gallon for the years ended March 31, 2008 and 2007,respectively, an increase of 15.6% per gallon. Aircraft fuel expense, excluding hedging losses and gains, were $2.62and $2.18 per gallon for the year ended March 31, 2008 and 2007,respectively, an increase of 20.2%. Aircraft fuel expenses represented 35.3% and 31.9% of total mainlinerevenue for the years ended March 31, 2008 and 2007, respectively.  Fuel prices are subject to change weekly aswe purchase a very small portion in advance for inventory. Fuel consumption forthe years ended March 31, 2008 and 2007 averaged 691 and 688 gallons perblock hour, respectively, an increase of 0.4%. The fuel burn increased largely as a result of the 4.9 point increase inour load factor during the year ended March 31, 2008 which was partiallyoffset by the delivery of four more fuel efficient A318 aircraft as compared tothe year ended March 31, 2007.

 

Our aircraft fuelexpenses for the year ended March 31, 2008 was reduced by non-cash mark tomarket derivative gains of $1,847,000 and cash settlements of $30,740,000received from a counter-party.  Ouraircraft fuel expenses for the year ended March 31, 2007 include anon-cash mark to market derivative gain of $12,753,000 recorded as a decreaseto fuel expense offset by cash settlements of $3,925,000 paid to acounter-party recorded as an increase in fuel expense.

 

***Aircraft and Engine Lease.***Aircraft lease expensestotaled $112,856,000 (8.9% of total mainline revenue) and $108,623,000 (10.1%of total mainline revenue) for the years ended March 31, 2008 and 2007,respectively, an increase of 3.9%.  Theincrease in lease expense is due to an increase in the average number of leasedaircraft from 36.7 to 38.0, or 3.5%.

*** ***

***Aircraft and Traffic Servicing.***  Aircraft and traffic servicing expenses were$183,239,000 and $166,409,000, for the years ended March 31, 2008 and2007, respectively, an increase of 10.1%, and represented 14.5% and 15.5% oftotal mainline revenue.  Aircraft andtraffic servicing expenses include all expenses incurred at airports includinglanding fees, facilities rental, station labor, ground handling expenses,glycol de-icing expense, and interrupted trip expenses associated with delayedor cancelled flights.  Interrupted tripexpenses are amounts paid to other airlines to protect passengers on cancelledflights as well as hotel, meal and other incidental expenses.   Aircraft and traffic servicing expenses willincrease with the addition of new cities to our route system or as rates andcharges at airports where we operate are increased.  During the year ended March 31, 2008,our departures increased to 104,548 from 97,554, an increase of 7.2%.  Aircraft and traffic servicing expenses were$1,753 per departure for the year ended March 31, 2008 as compared to$1,706 per departure for the year ended March 31, 2007, an increase of $47per departure or 2.8%.   This increasewas primarily due to rent increases for the additional six gates at DIA and$2,668,000 of additional glycol expenses incurred during the year ended March 31,2008.

 

***Maintenance.***  Maintenance expenses of $102,384,000 and$87,733,000 were 8.1% of total mainline revenue for the years ended March 31,2008 and 2007, and increased by 16.7%.   Maintenance expenses include the costs of alllabor, parts and supplies related to the maintenance of the aircraft.  Maintenance cost per block hour was $387 and$373 for the years ended March 31, 2008 and 2007, respectively, anincrease of 3.8%.  During the year ended March 31,2008, our engine maintenance reserve payments increased by $4,400,000 due to anincrease in our rates under the applicable lease and also due to two majorunscheduled maintenance events that were not covered by maintenance agreementswhich increased maintenance expenses by $1,315,000.  Maintenance expenses will increase as theaverage age of our aircraft increases and our aircraft require more scheduledmaintenance events. The average age of our aircraft was 3.9 years as of March 31,2008 as compared to 3.2 as of March 31, 2007.

 

***Promotion and Sales****. *Promotion and salesexpenses totaled $129,625,000 and $115,516,000, an increase of 12.2%, and were10.2% and 10.7% of total mainline revenue for the years ended March 31,2008 and 2007,

 

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respectively. These expenses include advertising expenses, telecommunicationsexpenses, wages and benefits for reservation agents and related supervision aswell as marketing management and sales personnel, credit card fees, travelagency commissions and computer reservations costs.  During the year ended March 31, 2008,promotion and sales expenses per mainline passenger decreased to $12.20 from$12.64 for the year ended March 31, 2007. Promotion and sales expenses decreased per passenger primarily due to areduction in spending on promotions and advertising.

 

***General and Administrative.***  Generaland administrative expenses for the years ended March 31, 2008 and 2007totaled $60,713,000 and $53,674,000, respectively, an increase of 13.1%, andwere 4.8% and 5.0% of total mainline revenue, respectively. General andadministrative expenses include the wages and benefits for our executiveofficers and various other administrative personnel including legal, accounting,information technology, corporate communications, training and human resourcesand other expenses associated with these departments.  General and administrative expenses alsoinclude employee health benefits, accrued vacation, and general insuranceexpenses including worker’s compensation for all of our employees. General andadministrative expenses increased primarily due to general wage rate increases,expenses due to changes in management, an increase in our vacation liability,offset by a decrease in our workers compensation expense as compared to thesame period last year.

 

***Depreciation.***  Depreciation expenses were $43,120,000 and$34,689,000, an increase of 24.3%, and were approximately 3.4% and 3.2% oftotal mainline revenue for the years ended March 31, 2008 and 2007,respectively.  These expenses includedepreciation of aircraft and aircraft components, office equipment, groundstation equipment, and other fixed assets. The increase in depreciation is primarily due to an increase in the averagenumber of purchased aircraft in service to 21.6 during the year ended March 31,2008 as compared to 17.7 purchased aircraft in service for the year ended March 31,2007, an increase of 22.0%.  The increasein depreciation expense is also due to a project to replace our Airbus seatswith new lighter weight leather seats, which resulted in accelerateddepreciation of $3,339,000 on the replaced Airbus aircraft seats. This projectwas completed in May 2008. The increase is also due to investments in rotableaircraft components, aircraft improvements and ground equipment to support the12.0% increase in our capacity during the year ended March 31, 2008.

 

***Post-Retirement Liability CurtailmentGain. ***In December 2007,the *Fair Treatment for Experienced Pilots*Act (the “Pilots Act”), was enacted. This act increased the retirement age for commercial pilots to 65 from60.  Pilots that have not reached age 60will now be allowed to work for five more years, provided they pass regularmedical and piloting exams. *** ***Pursuant to our collectivebargaining agreement with our pilots, if pilots are forced to retire due to FAArequirements, the retired pilots and their dependents could retain medicalbenefits under the terms and conditions of the Health and Welfare Plan forEmployees of Frontier Airlines, Inc. until age 65.  However, as a result of the Pilots Act, thisretirement health benefit is no longer required.  It is only required for pilots who reachedmandatory retirement age prior to the effective date of the Pilots Act.*** ***Assuch, we recorded a one-time post-retirement liability curtailment gain of$6,361,000 to reflect the impact of the Pilots Act, which was the reduction inpost-retirement liability for pilots who had not yet attained the age of 60.

 

***Business InterruptionInsurance Proceeds.***  During the year ended March 31, 2008, werecorded insurance proceeds of $300,000 as a result of final settlements ofbusiness interruption claims. During the year ended March 31, 2007 we recorded insurance proceeds of $868,000 as aresult of final settlements of business interruption claims that covered lostprofits when our service to Cancun, Mexico and New Orleans, Louisiana wasdisrupted by hurricanes during the fiscal year ended March 31, 2006.

 

**Consolidated Nonoperating Expenses**

** **

***Nonoperating Expense. ***Net nonoperatingexpense totaled $25,324,000 for the year ended March 31, 2008 as comparedto net nonoperating expense of $15,162,000 for the year ended March 31,2007, an increase of 67.0%.

 

*****InterestIncome.**** *Interest income decreased to$12,048,000 from $14,982,000 during the year ended March 31, 2008 from theyear ended March 31, 2007, a decrease of 19.6%, as a result of a decreasein our average cash position as compared to the prior year.

 

***Interest Expense. ***Interest expenseincreased to $36,444,000 for the year ended March 31, 2008 from$29,899,000 for the year ended March 31, 2007, an increase of 26.1%. Debtrelated to aircraft increased from $386,755,000 as of March 31, 2007 to$567,318,000 as of March 31, 2008 with a decrease in the average weightedinterest rate from 7.15% to 5.50% as of March 31, 2007 and 2008,respectively.  The increase in interestexpense

 

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was due to additional debt for the increasein the average number of owned aircraft during the year from 17.7 to 21.6,offset by a 23.1% decrease in the weighted average borrowing rate.

 

***Income Tax Benefit.**** *We recorded anincome tax benefit of $101,000 during the year ended March 31, 2008,comprised of current state refunds.  Wehave a valuation allowance for all deferred tax assets that are not realizablethrough the reversal of existing taxable temporary differences as of March 31,2008 and 2007, accordingly, deferred tax expense is zero during the fiscal yearended March 31, 2008.  We recordedan income tax benefit of $4,626,000 during the year ended March 31, 2007,which includes a valuation allowance of $3,980,000 which resulted in aneffective tax rate of 18.5%.  During theyear ended March 31, 2008 we increased our valuation allowance by$21,418,000 against deferred tax assets since it was more likely than not thatthese tax benefits were not going to be realized due to lack of taxable incomein these jurisdictions before those net operating loss carryforwards expire andconcerns about our ability to continue as a going concern.

 

***Loss on Early Extinguishment of Debt. ***Prior to theclosing of the five sale-leaseback transactions for Bombardier Q400 aircraftduring the year ended March 31, 2008, we had temporary financing for theaircraft which we repaid and wrote off $283,000 of debt issuance fees.

 

***Regional Partners***

*** ***

***Regional Partner revenue werederived from flights operated by Republic, Horizon and ExpressJet.  Our mainline passenger revenue increased as aresult of incremental revenue from passengers connecting to/from regionalflights.  Regional Partner operatingexpense include all direct costs associated with Regional Partners flights plusa margin and payments of performance bonuses if earned under the contract.  Certain expenses such as aircraft lease,maintenance and crew costs are included in the operating agreements with ourRegional Partners, and we reimbursed these expenses plus a margin.  Regional Partner operating expenses alsoinclude other direct costs incurred for which we do not pay a margin.  These expenses are primarily composed offuel, airport facility expenses and passenger related expenses.***

*** ***

***Passenger Revenue – Regional Partner.***  Regional Partner revenue totaled $113,196,000 for the yearended March 31, 2008 and $94,164,000 for the year ended March 31,2007, a 20.2% increase.  The increase inrevenue is due to a 26.3% increase in passengers offset by a decrease in theaverage fare to $99.74 from $ 104.72, a decrease of 4.8%.  The decrease in average fare is largely dueto the increase in connecting traffic over the year ended March 31, 2007,which results in a lower fare than local traffic.

*** ***

***Operating Expenses – Regional Partner.***  Regionalpartner expense for the year ended March 31, 2008 and 2007 totaled$146,211,000 and $108,355,000, respectively, a 34.9% increase, and were 129.2%and  115.1% of total regional partnerrevenue, respectively.  The increase inRegional Partner expenses as compared to revenue was primarily related to thetransition of our regional jet service from Horizon to Republic, which causedboth airlines to operate with a sub-optimal number of aircraft during the yearand an increase in fuel costs to $51,817,000 for the year ended March 31,2008 as compared to $33,163,000 during the same period in the prior year.

*** ***

***LynxAviation***

*** ***

***Passenger Revenue – Lynx Aviation*.**  Passenger revenue from flights operated byLynx Aviation after obtaining its operating certificate on December 6,2007 totaled $18,989,000 for the year ended March 31, 2008.

 

***Lynx Aviation Expenses******.*** Lynx Aviation was in the start-upphase of operations until December 7, 2007 when it began revenueservice.  For the year ended March 31,2008, operating expenses were $34,196,000. We do not believe that the results of Lynx Aviation during the yearended March 31, 2008 are indicative of future results because the fleetwas flown in sub-optimal routes, additional crew were required for training andLynx Aviation had low completion factors.

 

***During the yearended March 31, 2008, Lynx Aviation incurred $8,454,000 of start-upexpense related to flight operation expenses primarily related to pilotsalaries and training, maintenance expenses related to salaries and wages formaterial specialists personnel, line maintenance performed on aircraft andtraining for our Lynx Aviation mechanics and general and administrative costsprimarily related to costs of constructing our internal manual and proceduresto FAA standards and the FAA certification process.  After obtaining an operating certificate in December 2007,additional direct and allocated costs of $25,742,000 were incurred related to5,228 departures.***

 

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***During the yearended March 31, 2007, Lynx Aviation incurred $3,139,000 of start-up costsprimarily related to consulting and legal expenses incurred in conjunction withsigning the purchase agreement with Bombardier, Inc. for Q400 aircraft andthe formation of the subsidiary.***

 

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**Resultsof Operations – Year Ended March 31, 2007 Compared to Year Ended March 31,2006**

 

We had a consolidated netloss of $20,370,000 or 56¢ per diluted share for the year ended March 31,2007, as compared to a consolidated net loss of $13,971,000 or 39¢ per dilutedshare for the year ended March 31, 2006. Included in our net loss for the year ended March 31, 2007 were thefollowing items: (i) a decrease in fuel expense for non-cash mark tomarket derivative gains of $12,753,000 and an increase in fuel expense of$3,925,000 paid to counter-party for fuel hedge settlements; (ii) $656,000in gains on Boeing parts held for sale (iii) $3,139,000 of start-up costsfor Lynx Aviation; and (iv) a tax valuation allowance of $3,980,000.

 

Included in our net lossfor the year ended March 31, 2006 were the following items before theeffect of income taxes: (i)  aircraft lease and facility exit charges of$3,414,000 primarily relating to three leased Boeing 737-300 aircraft that weceased using during the first quarter; (ii) gains of $1,144,000 related tothe sale of Boeing parts held for sale and other assets; and (iii) anincrease in fuel expense for non-cash mark to market losses on fuel hedges of$2,163,000 and a decrease of $5,338,000 for net receipts for fuel hedgesettlements.

 

**MainlineRevenue**

 

***Passenger Revenue - Mainline*.**  Mainline passenger revenue totaled$1,037,302,000 for the year ended March 31, 2007 compared to $878,681,000for the year ended March 31, 2006, an increase of 18.1%.  Mainline passenger revenue include revenuefor reduced rate stand-by passengers, charter revenue, administrative fees,revenue recognized for tickets that are not used within one year from theirissue dates and revenue recognized from our co-branded credit card agreement.

 

Revenue from ticketedpassenger sales generated 90.4% of our mainline passenger revenue and increased$137,676,000 or 17.2% over the year ended March 31, 2006.  The increase in mainline revenue earned fromticketed passenger sales resulted from a 14.4% increase in ASMs, or$115,282,000, an increase of 0.2 points in load factor, or $2,596,000, and anincrease in our yields from ticket sales of 2.2% or $19,798,000.   The percentage of revenue generated fromother sources compared to total mainline passenger revenue are as follows:Administrative fees were 2.7%; revenue recognized for tickets that were notused within one year from issuance were 3.0%, charter revenue were 0.9% andrevenue from the travel component of our co-branded credit card were 1.9%.  These sources of revenue increased totalmainline passenger revenue by $20,317,000 as compared to the year ended March 31,2006.

 

***Other Revenue***. Other revenue, comprised principally of the revenue from the marketingcomponent of our co-branded credit card, interline and ground handling fees,liquor sales, LiveTV sales, pay-per-view movies and excess baggage fees totaled$32,603,000 and $24,338,000 for the year ended March 31, 2007 and March 31,2006, respectively, an increase of 34.0% and were 3.0% and 2.7% of total mainlineoperating revenue for the years ended March 31, 2007 and 2006.  The increase in other revenue was primarilydue to the increase of $6,646,000 in the revenue earned for the marketingcomponent of our co-branded credit card agreement and other partnershipagreements.

 

**MainlineOperating Expenses**

 

Total mainline operatingexpenses were $1,070,157,000 and $902,553,000 for the years ended March 31,2007 and 2006, respectively, an increase of 18.6%, and represented 99.4% and99.3% of total mainline revenue, respectively. Mainline operating expenses increased slightly as a percentage ofmainline revenue during the year ended March 31, 2006 largely a result ofa 6.5% increase in our aircraft fuel cost per gallon for the year ended March 31,2006 as compared to the prior comparable period.

 

*****Salaries, Wages and Benefits****.*  Salaries,wages and benefits increased 12.0% to $245,750,000 compared to $219,380,000,and were 22.8% and 24.1% of total mainline revenue for the years ended March 31,2007 and 2006, respectively.  Salaries,wages and benefits increased over the prior comparable period largely as aresult of an increase in the number of full-time equivalent employees tosupport our continued capacity growth. Our full-time equivalent employee count increased from approximately4,200 at March 31, 2006 to 4,800 at March 31, 2007, or 14.3%.

 

***FlightOperations.***  Flight operations expenses increased 14.0% to$161,144,000 as compared to $141,316,000, and were 15.0% and 15.5% of totalmainline revenue, for the year ended March 31, 2007 and 2006, 

 

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respectively. Flight operations expenses increased due to an increase in mainlineblock hours from 202,300 for the year ended March 31, 2006 to 234,965 forthe year ended March 31, 2007, an increase of 16.1%.

 

Pilot and flight attendant salaries before payrolltaxes and benefits increased 15.0% to $94,953,000 compared to $82,566,000, andwere 8.8% and 9.1% of total mainline revenue for the year ended March 31,2007 and 2006, respectively.  We employedapproximately 1,865 full time equivalent pilots and flight attendants at March 31,2007 as compared to 1,614 at March 31, 2006, an increase of 15.6%.  We increased the number of pilots and flightattendants over the prior year to support the 16.1% increase in block hours andthe 12.2% increase in the average aircraft in service.

 

Aircraft insurance expenses totaled $9,819,000 (0.9%of total mainline revenue) and $9,896,000 (1.1% of total mainline revenue) forthe years ended March 31, 2007 and 2006, respectively.  Aircraft insurance expenses were $1.07 perpassenger and $1.27 per passenger for the years ended March 31, 2007 and2006, respectively, a decrease on a per passenger basis of 15.7%.  Our aircraft hull and liability coveragerenewed on January 1,2006 to December 31, 2006 at rates that were reduced by 9.9%.  Our rates were further reduced by 33.4% forthe policy that covers January 1, 2007 to December 31, 2007.

 

***Aircraft Fuel.**** *Aircraftfuel expense of $343,082,000 for 161,616,000 gallons used and $281,906,000 for141,474,000 gallons used and resulted in an average fuel cost of $2.12 and$1.99 per gallon for the year ended March 31, 2007 and 2006, respectively,an increase of 6.5% per gallon.  Aircraftfuel expense, excluding hedging losses and gains, were $2.18 and $2.02 pergallon for the year ended March 31, 2007 and 2006, respectively, anincrease of 7.9%.  Aircraft fuel expensesrepresented 31.9% and 31.0% of total mainline revenue for the years ended March 31,2007 and 2006, respectively.  Fuelconsumption for the years ended March 31, 2007 and 2006 averaged 688 and699 gallons per block hour, respectively, a decrease of 1.6%.  Fuel consumption per block hour decreasedduring the year ended March 31, 2007 from the prior year due to theimplementation of several fuel conservation initiatives.

 

Our aircraft fuelexpenses for the year ended March 31, 2007 include a non-cash mark tomarket derivative gain of $12,753,000 recorded as a decrease to fuel expenseoffset by cash settlements of $3,925,000 paid to a counter-party recorded as anincrease in fuel expense.   Our aircraftfuel expenses for the year ended March 31, 2006 include a non-cash mark tomarket derivative loss of $2,163,000 recorded an increase to fuel expenseoffset by cash settlements of $5,338,000 received from a counter-party recordedas a decrease in fuel expense.

 

***Aircraft and Engine Lease.***Aircraft lease expenses totaled$108,623,000 (10.1% of total mainline revenue) and $94,229,000 (10.4% of totalmainline revenue) for the years ended March 31, 2007 and 2006,respectively, an increase of 15.3%.  Theincrease in lease expense is due to an increase in the average number of leasedaircraft from 32.7 to 36.7, or 12.2%, and increases in lease rates for four ofour aircraft that have variable rents based on LIBOR.

*** ***

***Aircraftand Traffic Servicing.*** Aircraft and traffic servicing expenses were$166,409,000 and $138,492,000, an increase of 20.2%, for the years ended March 31,2007 and 2006, respectively, and represented 15.5% and 15.2% of total mainlinerevenue.  Aircraft and traffic servicingexpenses will increase with the addition of new cities to our routesystem.  During the year ended March 31,2007, our departures increased to 97,554 from 82,878 for the year ended March 31,2006, an increase of 17.7%.  Aircraft andtraffic servicing expenses were $1,706 per departure for the year ended March 31,2007 as compared to $1,671 per departure for the year ended March 31,2006, an increase of 2.1%.  Aircraft andtraffic servicing during the year ended March 31, 2007 included anincrease in glycol expenses of $3,300,000, or 83.6%, over the prior yearprimarily related to the significant snow storms in Denver in December 2006and January 2007.  In addition, wehad additional operating costs of $5,106,000 during the year ended March 31,2007 as compared to the fiscal year ended March 31, 2006 primarily relatedto our Los Angeles to San Francisco shuttle, which operated five times a day,and an increase in the rates charged by the Los Angeles airport.

 

***Maintenance.*** Maintenance expenses of $87,733,000 and $77,238,000 were 8.1% and 8.5%of total revenue for the years ended March 31, 2007 and 2006,respectively, an increase of 13.7% as compared to the year ended March 31,2006.  Maintenance cost per block hourwas $373 and $382 for the years ended March 31, 2007 and 2006,respectively, a decrease of 2.4%, primarily related to several leased aircraftin which supplemental rent amounts reached the maximum reserve amount requiredduring the year and increases in maintenance labor performed in which wereceive reimbursement against these reserves.

 

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***Promotionand Sales****. *Promotion and sales expenses totaled$115,516,000 and $89,751,000 and were 10.7% and 9.9% of total mainline revenuefor the years ended March 31, 2007 and 2006, respectively, an increase of28.7%.  During the year ended March 31,2006, promotion and sales expense was reduced by $4,444,000 due to thefavorable resolution of a sales and use tax credit on the taxation of ticketingservices that related to the period September 2001 to March 2005.  During the year ended March 31, 2007,promotion and sales expenses, per mainline passenger increased to $12.64 from$12.13 (excluding the sales and use tax credit) for the year ended March 31,2006.  Promotion and sales expenses permainline passenger increased primarily as a result of an increase in the commission rates paid to external travel websites,an increase in advertising expenses and the inclusion of the favorable taxruling in the fiscal year 2006 promotion and sales expense.

 

***Generaland Administrative.***  General and administrative expenses for the years ended March 31,2007 and 2006 totaled $53,674,000 and $48,979,000, respectively, an increase of9.6%, and were 5.0% and 5.4% of total mainline revenue, respectively. Generaland administrative expenses increased due to increases in our worker’scompensation expense, consulting and legal expenses (primarily related to thestart-up of Lynx Aviation) offset by a reduction in our health insuranceexpense as compared to the year ended March 31, 2006.

 

***Depreciation.*** Depreciation expenses were $34,689,000 and $28,372,000 and wereapproximately 3.2% and 3.1% of total mainline revenue for the years ended March 31,2007 and 2006, respectively, an increase of 22.3%.  These expenses include depreciation ofaircraft and aircraft components, office equipment, ground station equipment,and other fixed assets.  The increase indepreciation is primarily due to an increase in the average number of purchasedaircraft in service to 17.7 during the year ended March 31, 2007 ascompared to 15.5 purchased aircraft in service for the year ended March 31,2006, an increase of 14.2%.  The increasein depreciation expense is also due to accelerated depreciation on our aircraftseats which we are replacing over the next two fiscal years and investments inrotable aircraft components, aircraft improvements and ground equipment tosupport the 14.4% increase in our capacity during the year ended March 31,2007.

 

***Business interruption insurance proceeds.***  We recorded insurance proceeds of $868,000 forthe year ended March 31, 2007 as a result of final settlements of businessinterruption claims that covered lost profits when our service to Cancun,Mexico and New Orleans, Louisiana were disrupted by hurricanes during thefiscal year ended March 31, 2006.

 

**Consolidated NonoperatingExpenses**

 

***Nonoperating(Income) Expense. ***Net nonoperating expense totaled $15,162,000for the year ended March 31, 2007 as compared to net nonoperating expenseof $12,571,000 for the year ended March 31, 2006, an increase of 20.6%.

 

*****Interest Income.****** ***Interest income increased to $14,982,000 from$9,366,000 during the year ended March 31, 2007 from the year ended March 31,2006 as a result of an increase in short-term interest rates earned oninvestments and an increase in our average cash position during the year ended March 31,2007 largely as a result of the net proceeds of $88,759,000 from ourconvertible notes offering in December 2005.

 

***InterestExpense.***  Interest expense, net of capitalizedinterest, increased to $29,899,000 for the year ended March 31, 2007 from$21,758,000 for the year ended March 31, 2006, an increase of 37.4%.  The increase in interest expense was a resultof additional debt for the acquisition of three additional purchased aircraft,an increase in the weighted average borrowing rate and additional debt of$92,000,000 from our convertible notes offering in December 2005.  Debt related to aircraft increased from$335,756,000 as of March 31, 2006 to $386,755,000 as of March 31,2007 with an increase in the average weighted interest rate from 6.55% to 7.15%as of March 31, 2006 and 2007, respectively.

 

***IncomeTax Benefit.**** *We recorded an income taxbenefit of $4,626,000during the year ended March 31, 2007, which includes a valuation allowanceof $3,980,000 which resulted in an effective tax rate of 18.5%, compared to anincome tax benefit of $6,497,000 during the year ended March 31, 2006 at a31.7% rate.  During the year ended March 31,2007, our tax benefit was at a federal rate of 35.0% plus the blended staterate of 2.7% (net of federal benefit) and was decreased by the tax effect ofpermanent differences of 3.6%.  Duringthe years ended March 31, 2007 and 2006, we recorded valuation allowancesof $3,980,000 and $273,000 against federal and certain state net operating losscarryforwards because it was more likely than not that these tax benefits 

 

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were not going to berealized due to lack of taxable income in these jurisdictions before those netoperating loss carryforwards expire.

 

***Regional Partner***

*** ***

***Passenger Revenue – Regional Partner.***  Regional partner revenue totaled $94,164,000 for the yearended March 31, 2007 and $92,826,000 for the year ended March 31,2006, a 1.4% increase.  The increase inrevenue is due to an increase in the average fare to $104.72 during the yearended March 31, 2007 from $101.78 during the year ended March 31,2006, an increase of 2.9%.

*** ***

***Operating Expenses – Regional Partner.***  Regionalpartner expense for the year ended March 31, 2007 and 2006 totaled$108,355,000 and $106,866,000, respectively, a 1.4% increase, and was 115.1% oftotal regional partner revenue for each of the years ended March 31, 2007and 2006. The increase in expenses is primarily due to a $1,450,000 increase infuel expense for the regional partner operations as compared to the prior year.

*** ***

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***Liquidityand Capital Resources***

*** ***

The matters described herein, to the extent that they relate to futureevents or expectations, may be significantly affected by our Chapter 11proceedings. Those proceedings will involve, or may result in, variousrestrictions on our activities, limitations on financing, the need to obtainBankruptcy Court approval for various matters and uncertainty as torelationships with vendors, suppliers, customers and others whom we may conductor seek to conduct business.

 

Our liquidity depends to a large extent on the number of passengers whofly with us, the fares they pay, our operating and capital expenditures, ourfinancing activities, the amount of cash holdbacks imposed by our credit cardprocessors, and the cost of fuel.  Ourliquidity will be negatively impacted by the record high price of fuel which asof June 23, 2008 was $4.22 per gallon, and an increase in the cashholdbacks by our credit card processors. On May 16, 2008, we closed on the sale of two Airbus 319 aircraftto VTB Leasing, for proceeds of $59,000,000. This resulted in retirement ofdebt of $33,754,000 related to the mortgage on the sold aircraft and a bookgain of $9,200,000 on the transactions. We are currently pursuing a number of liquidityimprovement alternatives, including debtor in possession financing, additionalsales or sale-leasebacks of aircraft and other assets, and negotiation of thecash holdbacks or letters of credit associated with our Visa/MasterCard creditcard processing agreement.  While we arenegotiating many of these alternatives, the ultimate outcome of thesenegotiations and our resulting liquidity improvement cannot be predicted withcertainty.  If these efforts to raisecash and improve liquidity are not successful, we could be forced todiscontinue our operations.

 

We had cash andcash equivalents of $120,837,000 and $202,981,000 at March 31, 2008 and March 31,2007, respectively.  At March 31,2008, total current assets were $306,286,000 as compared to $449,367,000 oftotal current liabilities, resulting in a working capital deficit of$143,081,000.  At March 31, 2007,total current assets were $340,405,000 as compared to $359,326,000 of totalcurrent liabilities, resulting in a working capital deficit of$18,921,000.  The decrease in workingcapital is primarily due to additional pre-delivery payments made of $28,332,000future aircraft deliveries, an increase in the current portion of long-termdebt of $11,385,000 as a result of additional debt for aircraft purchases,capital expenditures for aircraft and other assets in excess of financings andpayments on long-term debt of $113,961,000 offset by cash provided by operatingactivities of $30,673,000.

 

***Operating Activitie****s.* Cash provided by operating activities for the year ended March 31,2008 was $30,673,000 as compared to cash provided by operating activities of$23,227,000 for the year ended March 31, 2007, an increase of $7,446,000.The increase in operating cash flows was primarily due to an increase in ourair traffic liability and an increase in our accounts payable balance, offsetby the use of cash for our restricted investments.   During the year ended March 31, 2008, a$42,263,000 increase in our air traffic liability was due to a 25% increase inour number of segments booked as compared to March 31, 2007.  Accounts payable increased due to slowerpayments to our vendors.  These wereoffset by a $22,114,000 increase in restricted investments to $31,275,000 ascompared to an increase of $9,161,000 during the year ended March 31,2007, primarily due to increased hold-back provisions from our credit cardprocessors and an increase in our air traffic liability over prior year.

 

***Investing Activities***.  Cash used ininvesting activities for the year ended March 31, 2008 was$294,534,000.  Capital expenditures were$350,844,000 for the year ended March 31, 2008, which included thepurchase of three Airbus A318 aircraft, two Airbus A320 aircraft and tenBombardier Q400 aircraft, new leather seat sets for 53 aircraft, the purchaseof LiveTV equipment, rotable aircraft components, aircraft improvements,information technology enhancements, and ground equipment.  Aircraft lease and purchase deposits made foraircraft deliveries during the period were $28,332,000.  We also received $92,525,000 primarily fromthe sale of five of the 10 newly acquired Bombardier Q400 aircraft insale-leaseback transactions.

 

***Cash used ininvesting activities for the year ended March 31, 2007 was$141,310,000.  Capital expenditures were$137,324,000 for the year ended March 31, 2007, which included thepurchase of three Airbus A319 aircraft, one Airbus A318 aircraft and one spareengine, the purchase of LiveTV equipment, rotable aircraft components, aircraftimprovements, information technology enhancements, and ground equipment.  Aircraft lease and purchase deposits madeduring the period were $47,933,000, including $15,276,000 for pre-deliverypayments on Bombardier Q400 aircraft.  Wealso received $41,933,000 primarily from the sale of one of three newlyacquired Airbus A319 aircraft and a spare engine in two sale-leasebacktransactions.***

*** ***

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***Financing Activities****.*  Cash receivedfrom financing activities for the year ended March 31, 2008 was $181,717,000.  During the year ended March 31, 2008, weborrowed $297,525,000 for the purchase of three Airbus A318, two Airbus A320and 10 Bombardier Q400 aircraft.  Thesewere offset by debt principal payments of $113,961,000 on 29 of our ownedAirbus and Bombardier aircraft and $2,603,000 in financing fees.

 

Cash provided by financing activities for the year ended March 31,2007 was $48,224,000.  During the yearended March 31, 2007, we paid $23,439,000 of debt principal payments on 19owned aircraft and we borrowed $74,438,000 for two additional Airbus A319aircraft and one Airbus A318 aircraft. We also were required to increase ourcompensating balance at a bank by $750,000 to secure letters of credit.

 

***Other Items That Impact Our Liquidity***

 

We continue to assess our liquidity position in lightof record high fuel prices, significant legal and professional fees associatedwith our Chapter 11 bankruptcy proceeding, our aircraft purchase commitmentsand other capital requirements, the economy, our competition, and otheruncertainties surrounding the airline industry.    For further information on our financingplans, activities and commitments, see “Contractual Obligations” and “CommercialCommitments and Off Balance Sheet Arrangements” below.

 

Ourpurchase rights for 17 Airbus aircraft expired on July 1, 2007.  We have options to purchase 10 Bombardieraircraft, the last of which expires in July 2010, subject to additionalextension rights.  If we are unable tosecure all the necessary financing it could result in the loss of pre-deliverypayments and deposits (see discussion in the Contractual Obligations sectionbelow).

 

**ContractualObligations**

 

The following table summarizes our contractualobligations as of March 31, 2008, for debt; operating leases; aircraftorder commitments; capital leases; interest and related payments; othermaterial, noncancelable purchase obligations; other liabilities.  We are in the process of evaluating ourexecutory contracts in order to determine which contracts will be assumed inour Chapter 11 proceedings. Therefore, obligations as currently quantified in the table below and inthe text immediately following the footnotes to the table will continue tochange:

 
| ** **                                                | ** ** | ** ** | ** ** | **Less than** | ** ** | **2-3**   | ** ** | **4-5**   | ** ** | **After**        | ** ** |
|-----------------------------------------------------------|------------|------------|------------|--------------------|------------|-----------|------------|-----------|------------|------------------|------------|
| ** **                                                | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **Years** | ** ** | **years** | ** ** | **5 years** | ** ** |
|                                                      |       |       |       |               |       |      |       |      |       |             |       |
| Long-term debt -  principal (1)                           |       | $          | 662,318    |               | $          | 38,144    |       | $         | 86,350     |             | $          | 106,305 |   | $ | 431,519 |   |
| Long-term debt -  interest (1)                            |       | 281,189    |       | 36,362             |       | 65,534    |       | 53,442    |       | 125,851          |       |
| Short-term  borrowings – principal and interest (2)  |       | 3,308      |       | 3,308              |       | —    |       | —    |       | —           |       |
| Operating leases  (3)                                     |       | 1,136,390  |       | 157,244            |       | 275,613   |       | 253,307   |       | 450,226          |       |
| Unconditional  purchase obligations (4) (5) (6) |       | 374,044    |       | 88,748             |       | 247,544   |       | 37,752    |       | —           |       |
| Total  contractual cash obligations                       |       | $          | 2,457,249  |               | $          | 323,806   |       | $         | 675,041    |             | $          | 450,806 |   | $ | 1,007,596 |   |

 

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(1)           AtMarch 31, 2008, we had loans covering 13 Airbus A319 aircraft, nine AirbusA318 aircraft, five Bombardier Q400 aircraft and two Airbus A320 aircraft.  Two of the loans have a term of ten years andare payable in equal monthly installments, including interest, payable inarrears.  These loans require monthlyprincipal and interest payments of $218,000 and $215,000, bear interest at6.71% and 6.54%, and mature in May and August 2011, at which time aballoon payment totaling $10,200,000 is due with respect to each loan.  The remaining 22 loans have interest ratesbased on LIBOR plus margins that adjust quarterly or semi-annually.  At March 31, 2008, interest rates forthese loans ranged from 3.88% to 6.79%.  Eachof these loans has a term of 12 years, and each loan has balloon paymentsranging from $2,640,000 to $9,312,000 at the end of the term.  All of the loans are secured by the aircraft.  Actual interest payments will change based onchanges in LIBOR.  In July 2005, we 

 

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alsoentered into a junior loan in the amount of $4,900,000 on an Airbus A319aircraft.  This loan has a seven-yearterm with quarterly installments of approximately $250,000.  The loan bears interest at a floating rateadjusted quarterly based on LIBOR, which was 8.06% at March 31, 2008.

 

InDecember 2005, we issued $92,000,000 of 5% convertible notes due2025.  At any time on or after December 20,2010, we may redeem any of the convertible notes for the principal amount plusaccrued interest.  Note holders mayrequire us to repurchase the notes for cash for the principal amount plusaccrued interest only on December 15, 2010, 2015 and 2020 or at any timeprior to their maturity following a designated event as defined in theindenture for the convertible notes. Holders may convert the notes into shares of our common stock at aconversion rate of 96.7352 shares per $1,000 principal amount (representing aconversion price of approximately $10.34 per share).  In the contractual obligations table above,the convertible notes are reflected based on their stated maturity of December 2025with the corresponding interest payments. However, these notes may be called at the earlier times discussed above,which would impact the timing of the principal payments.

 

(2)           In November 2007, we entered into apre-delivery deposit facility (“PDP Facility”) for the purpose of financingobligations to make pre-delivery payments on eight A320 aircraft.  The PDP Facility allows us to draw amounts upto $22,200,000 for aircraft deliveries through August 2010.  As of March 31, 2008, we had $3,139,000outstanding under the PDP Facility for A320 aircraft deliveries scheduled for February 2009.  As such, the amount outstanding is classifiedas short-term borrowings on the consolidated balance sheet.

 

(3)          Asof March 31, 2008, we leased 36 Airbus A319 type aircraft, two Airbus A318aircraft, and five Bombardier Q400 aircraft under operating leases withexpiration dates ranging from 2013 to 2022. Under all of our leases, we have made cash security deposits, whichtotaled $23,090,000 at March 31, 2008. Additionally, we are required to make additional rent payments to coverthe cost of major scheduled maintenance overhauls of these aircraft. Theseadditional rent payments are based on the number of flight hours flown and/orflight departures and are not included as an obligation in the table above.During the years ended March 31, 2008, 2007 and 2006, additional rentexpense to cover the cost of major scheduled maintenance overhauls of theseaircraft totaled $27,583,000, $26,187,000 and $24,933,000, respectively, andare included in maintenance expense in the statements of operations.  On January 11, 2007, we signed an agreementwith Republic, under which Republic would operate up to 17 Embraer 170 aircrafteach with capacity of up to 76 seats. The contract period was for an 11-year period starting on the date thelast aircraft is placed in service, which was scheduled for December 2008.  The service began on March 4, 2007 andreplaced our agreement with Horizon. On April 23, 2008, we announced thatwe reached a mutual agreement with Republic on the terms under which Frontierwould reject the agreement.  A structuredreduction and gradual phase-out of Republic’s 12 aircraft from our dailyoperation was completed in mid-June 2008. In the contractual obligations table above, only the amounts to be paidduring the negotiated wind-down period of approximately $7,600,000 are included.

 

***We alsolease office space, spare engines and office equipment for our headquarters andairport facilities, and certain other equipment with expiration dates rangingfrom 2008 to 2015.  In addition, we leasecertain airport gate facilities and maintenance facilities on a month-to-monthbasis.  Amounts for leases that are on amonth-to-month basis are not included as an obligation in the table above.  The table above also excludes lease paymentsfor a new headquarters building which we terminated during the bankruptcyprocess in May 2008.***

*** ***

(4)          Asof March 31, 2008, we have remaining firm purchase commitments for eightadditional aircraft from Airbus that have scheduled delivery dates beginning inFebruary 2009 and continuing through November 2011 and one remainingfirm purchase commitment for one spare Airbus engine scheduled for delivery in December 2009.  Included in the purchase obligations are theremaining amounts due Airbus, amounts for spare aircraft components to supportthe additional aircraft and  remainingnew leather aircraft seats for one additional ship set yet to bepurchased.  We are not under anycontractual obligations with respect to spare parts or the new aircraft seats.

 

We have notsecured financing for the purchase of our remaining eight Airbus aircraft.  To complete the purchase of the remainingeight Airbus aircraft scheduled for delivery starting in February 2009, wemust secure additional aircraft financing totaling approximately $280,000,000assuming bank financing was used for these remaining aircraft.    The terms of the purchase agreements do notallow for cancellations of any of the purchase commitments.  If we are unable to secure all the necessary financingit could result in the loss of pre-delivery payments and deposits previouslypaid to the manufacturers. We expect to finance these remaining 

 

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firm commitmentsthrough various financing alternatives, including, but not limited to, domesticand foreign bank financing, leveraged lease arrangements or sale/leasebacktransactions.   There can be noassurances that additional financing will be available when required or will beon acceptable terms. Additionally, the terms of the purchase agreement with themanufacturers would require us to pay penalties or damages in the event of anybreach of contract with our supplier, including possible termination of theagreement.  As of March 31, 2008, wehad made pre-delivery payments on future aircraft deliveries totaling$12,738,000 which relates to aircraft for which we have not secured financing.

 

(5)          In October 2002, we entered into a purchase and 12-year servicesagreement with LiveTV to bring DIRECTV AIRBORNETM satellite programming to everyseatback in our Airbus fleet.  We intendto install LiveTV in every new Airbus aircraft we place in service.  The table above includes amounts for theinstallation of DirecTV for the remaining eight Airbus aircraft we currentlyexpect to purchase. In January 2008, we signed a hardware agreement underwhich LiveTV agreed to repurchase LiveTV equipment installed and make paymentsover a specified period for this equipment. The table does not include payments to be received under our newhardware agreement with LiveTV.

 

(6)          In March 2004, we entered into a services agreement with Sabre, Inc.for its SabreSonicä passenger solution to power our reservations and check-in capabilitiesalong with a broad scope of technology for streamlining our operations andimproving revenue.  The table aboveincludes minimum annual system usage fees. Usage fees are based on passengers booked, and actual amounts paid maybe in excess of the minimum per the contract terms.

 

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**CommercialCommitments**and Off-Balance SheetArrangements**

 

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

 

As we enter new markets,increase the amount of space we lease, or add leased aircraft, we are oftenrequired to provide the airport authorities and lessors with a letter ofcredit, bond or cash security deposits. We also provide letters of credit for our workers’ compensationinsurance.  As of March 31, 2008, wehad outstanding letters of credit, bonds and cash security deposits totaling$21,939,000, $2,616,000 and $25,123,000, respectively.

 

We also have an agreementwith a financial institution where we can issue letters of credit of up to anagreed upon percentage of spare parts inventories less amounts borrowed underthe credit facility.  As of March 31,2008, we had $18,187,000 available under this facility. We have reduced theamount available for borrowings by letters of credit issued of $14,560,000 andcash draws of $3,000,000.

 

In July 2005, weentered into an additional agreement with another financial institution for a$5,000,000 revolving line of credit that permits us to issue letters of creditup to $3,500,000.  In June 2006, therevolving line of credit was increased to $5,750,000 and it now permits us toissue letters of credit up to $5,000,000 and matured in June 2008.  As of March 31, 2008, we have utilized$4,534,000 under this agreement for standby letters of credit that providecredit support for certain facility leases. In June 2008, we entered into a stipulation with thefinancial institution, which was approved by the bankruptcy court, and whichresulted in the financial institution releasing its liens on our workingcapital in exchange for cash collateral.  This stipulation also providedfor the issuance of new letters of credit going forward.  The amount ofcash collateral required was for full cash collateralization of letters ofcredit outstanding, less the $2,750,000 already cash secured.

 

We have a contract with abankcard processor that requires a holdback of bankcard funds equal to acertain percentage of our air traffic liability associated with the estimatedamount of bankcard transactions.  As of March 31,2008, that amount totaled $54,500,000. In June 2008, we reached a revised agreement with this bankcardprocessor that requires adjustments to the reserve account on a monthly basisbased on our current and projected air traffic liability associated with theseestimated bankcard transactions.  As of June 20,2008, this revised agreement results in an increase to the holdback toapproximately $61,940,000.  The Companyand the creditors committee continue to negotiate the terms of the revisedagreement.  In addition, a credit cardcompany began a holdback during the fiscal year ending March 31, 2008which totaled $15,500,000 at March 31, 2008.  As of June 20, 2008, our requirementsresulted in an increase to $22,655,000 for this credit card company.

 

We use the AirlineReporting Corporation (“ARC”) to provide reporting and settlement services fortravel agency sales and other related transactions.  In order to maintain the minimum bond (orirrevocable letter of credit) coverage of $100,000, ARC requires participatingcarriers to meet, on a quarterly basis, certain financial tests such as workingcapital ratio and percentage of debt to debt plus equity.  As of March 31, 2008, we met thesefinancial tests and presently are only obligated to provide the minimum amountof $100,000 in coverage to ARC.  If wefail the minimum testing requirements, we would be required to increase ourbonding coverage to four times the weekly agency net cash sales (sales net ofrefunds and agency commissions). Based on net cash sales remitted to us for theweek ended June 20, 2008, the bond coverage would be increased to$5,985,000 if we failed the tests.  If wewere unable to increase the bond amount as a result of our then financialcondition, we could be required to issue a letter of credit that would restrictcash in an amount equal to the letter of credit.  In May 2008, ARC started requiring aholdback which was equal to $1,280,000 as of June 23, 2008.

 

***Hedging Transactions***

 

In November 2002, we initiated a fuel hedgingprogram using a variety of financial derivative instruments.  These fuel hedges do not qualify for hedgeaccounting under SFAS 144, and, as such, realized and non-cash mark to marketadjustments to the fair value of the hedge contracts, are included in aircraftfuel expense.  The results of operationsfor the years ended March 31, 2008, 2007 and 2006 include non-cash mark tomarket derivative gains/(losses) of $1,847,000, $12,753,000 and $(2,163,000),respectively. Cash settlements for fuel derivatives contracts for the yearended March 31, 2008, 2007, and 2006 were receipts of $30,740,000,payments of $3,925,000, and receipts of $5,338,000, respectively.

 

Due to our Chapter 11 filing, all fuel hedge contracts outstanding asof March 31, 2008 were terminated in 

 

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May 2008 andsubsequently settled which resulted in receipts of $23,409,000.

 

***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.  For owned aircraft, this agreement requiresmonthly payments at a specified rate multiplied by the number of flight hoursthe engines were operated during that month. The costs under this agreement for our purchased aircraft for the yearsended March 31, 2008, 2007 and 2006 were approximately $9,890,000,$6,374,000 and $3,545,000, respectively. Any unplanned maintenance expenses not otherwise covered by reserves arepaid by us.  For our leased aircraft thatare covered by the agreement, we do not make the flight hour payments to GEunder the agreement; instead we make engine maintenance reserve payments whichare expensed as paid as required under the applicable lease agreements.  At the time a leased engine makes a scheduledmaintenance shop visit, the lessors pay GE directly for the repair of aircraftengines from reserve accounts established under the applicable leasedocuments.  To the extent actual maintenanceexpenses incurred exceed these reserves, we are required to pay these amounts.

 

***Fuel Consortia***

 

We participate in numerous fuel consortia with other carriers at majorairports to reduce the costs of fuel distribution and storage. Interlineagreements govern the rights and responsibilities of the consortia members andprovide for the allocation of the overall costs to operate the consortia basedon usage. The consortia (and in limited cases, the participating carriers) haveentered into long-term agreements to lease certain airport fuel storage anddistribution facilities that are typically financed through tax-exempt bonds(either special facilities lease revenue bonds or general airport revenuebonds), issued by various local municipalities. In general, each consortiumlease agreement requires the consortium to make lease payments in amountssufficient to pay the maturing principal and interest payments on the bonds. Asof March 31, 2008, approximately $544,262,000 principal amount of suchbonds were secured by fuel facility leases at major hubs in which weparticipate, as to which each of the signatory airlines has provided indirectguarantees of the debt. Our exposure is approximately $23,811,000 principalamount of such bonds based on our most recent consortia participation. Ourexposure could increase if the participation of other carriers decreases or ifother carriers default.  The guaranteeswill expire when the tax-exempt bonds are paid in full, which ranges from 2011to 2033.  We can exit any of our fuelconsortia agreements with limited penalties and certain advance noticerequirements. We have not recorded a liability on our consolidated balancesheets related to these indirect guarantees.

 

***Represented Employees***

 

In September 2005,our aircraft appearance agents signed a 10-year agreement.  This employee group is represented by theInternational Brotherhood of Teamsters (“IBT”).

 

In March 2006, ourmaterial specialists voted for union representation by the IBT, affectingapproximately 22 employees.  In September 2007,a four year agreement was reached between Frontier and the IBT, with aneconomic re-opener in July 2008, to correspond to the maintenance unioncontract.

 

In February 2007, Frontier and the FrontierAirline Pilots Association (“FAPA”) announced that FAPA membership ratified anew collective bargaining agreement. The new four-year agreement amends theprevious five-year contract signed in May 2000. Implementation of theapproved agreement began in March 2007.

 

In September 2007,our dispatchers signed an amended five year collective bargaining agreementwith Frontier. The contract with our dispatchers, who are represented by theTransport Workers Union (“TWU”), affects approximately 16 employees.

 

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**CriticalAccounting Policies**

 

The preparation of financial statements in conformitywith U.S generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period.  Actualresults could differ from those estimates. As a result of the filing for Chapter 11, the realization of assets andliquidation of liabilities are subject to uncertainty.  A plan of reorganization could materiallychange the amounts and classifications reported in the consolidated financialstatements, which do not give effect to any adjustments to the carrying valueof assets or amounts of liabilities as a consequence of confirmation of a planof reorganization.

 

Critical accounting policies are defined as those thatare both important to the portrayal of our financial condition and results, andrequire management to exercise significant judgments.  Our most critical accounting policies aredescribed briefly below.

 

***Revenue Recognition***

 

*Passenger tickets*- Passenger, cargo, and other revenue are recognized when the transportation isprovided or after the tickets expire, one year after date of issuance, and arenet of excise taxes, passenger facility charges and security fees.  Revenue that have been deferred are includedin the accompanying consolidated balance sheets as air traffic liability.  Included in passenger revenue are change feesimposed on passengers for making schedule changes to non-refundabletickets.  Change fees are recognized as revenue at the time the changefees are collected from the passenger as they are a separate transaction thatoccurs subsequent to the date of the original ticket sale.

 

*Taxes and Fees* – We are requiredto charge certain taxes and fees on our passenger tickets.  These taxes and fees include U.S. federaltransportation taxes, federal security charges, airport passenger facilitycharges and foreign arrival and departure taxes.  These taxes and fees are legal assessments onthe customer, for which we have an obligation to act as a collection agent.  Because we are not entitled to retain thesetaxes and fees, such amounts are not included in passenger revenue.  We record a liability when the amounts arecollected and reduce the liability when payments are made to the applicablegovernment agency or operating carrier.

 

***Aircraft Maintenance***

 

We operate under an FAA-approved continuous inspectionand maintenance program.  We account formaintenance activities on the direct expense method.  Under this method, major overhaul maintenancecosts are recognized as expense as maintenance services are performed, asflight hours are flown for nonrefundable maintenance payments required by leaseagreements, and as the obligation is incurred for payments made under serviceagreements.  Routine maintenance andrepairs are charged to operations as incurred.

 

Effective January 1, 2003, we executed a 12-yearengine services agreement with GE covering the scheduled and unscheduled repairof Airbus engines.  This agreement wasextended to May 1, 2019 in September 2004.  Under the terms of the services agreement, weagreed to pay GE an annual rate per-engine-hour, payable monthly, and GEassumed the responsibility to overhaul our engines on Airbus aircraft asrequired during the term of the services agreement, subject to certainexclusions.   We believe the rateper-engine hour approximates the periodic cost we would have incurred toservice those engines.  Accordingly,these payments are expensed as the obligation is incurred.

 

***Derivative Instruments***

 

We account for derivative financial instruments inaccordance with the provisions of Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”).  SFAS 133 requires us to measure allderivatives at fair value and to recognize them in the balance sheet as anasset or liability.  For derivativesdesignated as cash flow hedges, changes in fair value of the derivative aregenerally reported in other comprehensive income and are subsequentlyreclassified into earnings when the hedged item affects earnings.  Changes in fair value of derivativeinstruments not designated as hedging instruments and ineffective portions ofhedges are recognized in earnings in the current period.

 

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We enter into derivative instruments to hedge theinterest payments associated with a portion of our LIBOR-based borrowings andfuel purchases.  We designate certaininterest rate swaps as qualifying cash flow hedges.  We also enter into derivative instruments toreduce exposure to the effect of fluctuations in fuel prices.  These transactions are accounted for astrading instruments under SFAS 133.  As aresult, we record these instruments at fair market value and recognize realizedand mark to market gains and losses in aircraft fuel expense.

 

***Accounting forlong-lived assets****.*

 

In accounting for long-lived assets, we make estimates about theexpected useful lives, projected residual values and the potential forimpairment.  In estimating useful livesand residual values of our aircraft, we have relied upon estimates fromindustry experts as well as our anticipated utilization of the aircraft.

 

Our long-lived assets are evaluated for impairment at least annually orwhen events and circumstances indicate that the assets may be impaired.Indicators include operating or cash flow losses, significant decreases inmarket value or changes in technology. All of our long-lived assets are relatively new and our aircraft areactively deployed in our route system. We have also recently sold aircraft in amounts in excess of theircarrying values.  We have not identifiedany significant impairments related to our long-lived assets at this time.

 

***Customer Loyalty Program***

 

In 2001, we established *EarlyReturns**®*, a frequent flyerprogram to encourage travel on our airline and foster customer loyalty.  We account for the *EarlyReturns**®* program under theincremental cost method whereby travel awards are valued at the incrementalcost of carrying one passenger based on expected redemptions.  Those incremental costs are based onexpectations of expenses to be incurred on a per passenger basis and includefood and beverages, fuel, liability insurance, and ticketing costs.  The incremental costs do not includeallocations of overhead expenses, salaries, aircraft cost or flight profit orlosses.   We do not record a liabilityfor mileage earned by participants who have not reached the level to becomeeligible for a free travel award.  We donot record a liability for the expected redemption of miles for non-travelawards since the cost to us of these awards is negligible.

 

As of March 31, 2008 and 2007, we estimated thatapproximately 472,000 and 324,000 round-trip flight awards, respectively, wereeligible for redemption by *EarlyReturns**®* members who havemileage credits exceeding the 15,000-mile free round-trip domestic ticket awardthreshold.  As of March 31, 2008 and2007, we had recorded a liability of approximately $10,059,000 and $4,249,000,respectively, for these rewards.

 

We sell points in *EarlyReturns**®* to thirdparties.  The portion of the sale that isfor travel is deferred and recognized as passenger revenue when we estimatetransportation is provided.  Theremaining portion, referred to as the marketing component, is recognized in themonth received and included in other revenue.

 

***Co-Branded Credit Card Arrangement***

 

We entered into a co-branded credit card arrangementwith a MasterCard issuing bank in March 2003.  In May 2007, this agreement was amendedto extend the contract to December 2014 with enhanced financial terms.  The terms of this affinity agreement providethat we will receive a fixed fee for each new account, which varies based onthe type of account, and a percentage of the annual renewal fees that the bankreceives.  We receive an increased feefor new accounts solicited by us.  Wealso receive fees for the purchase of frequent flier miles awarded to thecredit card customers.

 

We account for all fees received under the co-brandedcredit card program by allocating the fees between the portion that representsthe estimated value of the subsequent travel award to be provided, and theportion which represents a marketing fee to cover marketing and other relatedcosts to administer the program.  Thislatter portion (referred to as the marketing component) represents the residualafter determining the value of the travel component.  The component representing travel isdetermined by reference to an equivalent restricted fare, which is used as aproxy for the value of travel of a frequent flyer mileage award. The travelcomponent is deferred and recognized as revenue over the estimated usage periodof the frequent flyer mileage awards of 20 months.  We have estimated the period over which thefrequent flier mileage awards will be used based on the history of usage of thefrequent flier mileage awards.  We recordthe marketing component of the revenue earned under this agreement in otherrevenue in the month received.

 

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For the year ended March 31, 2008, we receivedtotal fees of $44,369,000.  Of thatamount, $25,545,000 was deferred as the travel award component, with theremaining marketing component of $18,824,000 recognized as other revenue. Forthe year ended March 31, 2007, we received total fees of $36,917,000.  Of that amount, $25,219,000 was deferred asthe travel award component, with the remaining marketing component of$11,698,000 recognized as other revenue. For the year ended March 31, 2006, we received total fees of$24,986,000.  Of that amount, $19,686,000was deferred as the travel award component, and the remaining marketingcomponent of $5,300,000 was recognized as other revenue.  Amortization of deferred revenue recognizedin earnings during the years ended March 31, 2008, 2007 and 2006 was$24,789,000, $20,158,000 and $11,059,000, respectively.

 

***Income Taxes***

 

We account for income taxes using the asset andliability method.  Under that method,deferred income taxes are recognized for the tax consequences of “temporarydifferences” by applying enacted statutory tax rates applicable to future yearsto differences between the financial statement carrying amounts and tax basesof existing assets and liabilities and net operating losses (“NOL’s”) and taxcredit carryforwards.  A valuationallowance is provided to the extent that it is more likely than not thatdeferred tax assets will not be realized.

 

During the year ended March 31, 2008, weincreased our valuation allowance for deferred tax assets by $21,418,000. The ultimate realization of deferred tax assets is dependent upon thegeneration of future taxable income during the periods in which those temporarydifferences become deductible.  We have a valuation allowance for alldeferred tax assets that are not realizable through the reversal of existingtaxable temporary differences since it is more likely that not that thesebenefits would not be realized due to concerns about our ability to continue asa going concern.  The NOL’s that have been generated are due in large partto the accelerated depreciation over a shorter useful life for taxpurposes.   Our ability to deduct net operating loss carryforwardscould be subject to a significant limitation if we were to undergo an “ownershipchange” for purposes of Section 382 of the Internal Revenue Code of 1986,as amended, during or as a result of our Chapter 11 proceedings.

 

***Self-Insurance***

 

Weare self insured for the majority of our group health insurance costs, subjectto specific retention levels.  We rely onclaims experience and the advice of consulting actuaries and administrators indetermining an adequate liability for self-insurance claims.  Our self-insurance healthcare liabilityrepresents our estimate of claims that have been incurred but not reported asof March 31, 2008.  This liability,which totaled $2,061,000 at March 31, 2008, was estimated based on ourclaims experience.  We determine theactual average claims cost per employee and the number of days between theincurrence of a claim and the date it is paid. The estimate of our liability for employee healthcare represents ourestimate of unreported claims with an increase in claims based on trendfactors.

 

Weare also self-insured for the majority of our workers’ compensationexpenses.  Our liability for workers’compensation claims is the estimated total cost of the claims on afully-developed basis, up to a maximum amount, based on reserves for theseclaims that are established by a third-party administrator.  The liability at March 31, 2008 totaled$6,023,000.

 

Whilewe believe that the estimate of our self-insurance liabilities are reasonable,significant differences in our experience or a significant change in any of ourassumptions could materially affect the amount of healthcare and workerscompensation expenses we have recorded.

 

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

 

***We estimate the fair value of stock options and stock appreciationrights granted using the Black-Scholes-Merton option pricing model and theassumptions shown in Note 14 to our consolidated financial statements. Weestimate the expected term of options granted using our historical exercisepatterns, which we believe are representative of future exercise behavior.  We estimate volatility of our common stockusing the historical closing prices of our common stock using the period equalto the expected term of the options, which we believe is representative of thefuture behavior of our common stock. Our risk-free interest rate assumption isdetermined using the Federal Reserve nominal rates for U.S. Treasuryzero-coupon bonds with maturities similar to those of the expected term of theaward being valued. We have never paid any cash dividends on our common stockand we do***

 

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***not anticipate paying any cash dividends in the foreseeable future.Therefore, we assumed an expected dividend yield of zero. Stock-basedcompensation expense for restricted stock units (“RSU”) are based on the fairvalue of our common stock on the date of grant and is amortized over thevesting period, generally five years. Each RSU is settled in shares of ourcommon stock after the vesting period. We record stock-based compensationexpense only for those options and awards expected to vest using an estimatedforfeiture rate based on our historical pre-vesting forfeiture data andperiodically will revise those estimates in subsequent periods if actualforfeitures differ from those estimates.***

*** ***

**NewAccounting Standards Not Yet Adopted**

 

In September 2006,the FASB issued Statement of Financial Accounting Standards No. 157, *Fair Value Measurements*, (“FAS 157”). FAS 157 defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and expands disclosures about fair value measurements.FAS 157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. We do not believethe adoption of FAS 157 will result in a material cumulative effect adjustmenton our consolidated financial statements when adopted on April 1, 2008.

 

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159*, The Fair Value Option for Financial Assets and Financial Liabilities*(“FAS159”). FAS 159 permits companies to choose to measure many financial instrumentsand certain other items at fair value, following the provisions of SFAS No. 157.FAS 159 is effective for fiscal years beginning after November 15, 2007.We have not yet determined the impact of adopting FAS 159.

 

In March 2008, the FASB issued Statement of FinancialAccounting Standards No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities - an Amendment of FASB Statement133* (“FAS 161”). This standard enhances required disclosuresregarding derivatives and hedging activities to help investors betterunderstand how derivative instruments and hedging activities affect an entity’sfinancial position, financial performance and cash flows.  Requirements under FAS 161 include disclosureof the objectives for using derivative instruments, disclosure of the fairvalues of derivative instruments and their gains and losses in a tabularformat, disclosure of credit risk related features, and cross-referencingwithin the footnotes of derivative-related information.  FAS 161 is effective for fiscal years andinterim periods beginning after November 15, 2008. The Company expects tocomply with the disclosure provision of adopting FAS 161 upon adoption.

 

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**Item 7A: Quantitative and Qualitative Disclosures About Market Risk**

 

***Aircraft Fuel***

 

Our earnings are affected by changes in the price and availability ofaircraft fuel.  Market risk is estimatedas a hypothetical 10 percent change in the average cost per gallon of fuel forthe year ended March 31, 2008. Based on actual fuel usage for the year ended March 31, 2008, sucha change would have had the effect of increasing or decreasing our totalaircraft fuel expense by approximately $53,920,000, excluding the benefit ofour fuel hedging.  Comparatively, basedon our total projected fleet after capacity reductions in fiscal year 2009,this would have the effect of increasing or decreasing our aircraft fuelexpense in fiscal year 2009 by approximately $42,700,000 measured as of March 31,2008, excluding the effects of our fuel hedging arrangements which were settledin May 2008.

 

Our results of operations for the year ended March 31,2008 include cash settlements on fuel derivative contracts of $30,740,000recorded as a decrease to fuel expense and non-cash mark to market gains of$1,847,000 recorded as a decrease in fuel expense with respect to fuel hedgingagreements.  As of March 31, 2008,the fair value of the hedge agreements recorded on the balance sheet as anasset was $15,576,000.

 

Due to our Chapter 11 filing, all fuel hedge contracts outstanding asof March 31, 2008 were terminated in May 2008 and subsequentlysettled which resulted in receipts of $23,409,000.

 

***Interest***

 

We are susceptible to market risk associated with changes in variableinterest rates on long-term debt obligations we incurred and will incur tofinance the purchases of our Airbus aircraft. Interest expense on 74.3% of our outstanding debt at March 31, 2008is subject to interest rate adjustments every three to six months based uponchanges in the applicable LIBOR rate.  Achange in the base LIBOR rate of 100 basis points (1.0%) would have the effectof increasing or decreasing our annual interest expense by $4,941,000 assumingthe loans outstanding that are subject to interest rate adjustments at March 31,2008 totaling $494,119,000 are outstanding for the entire period.

 

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**Item 8: Financial Statements and Supplementary Data**

 

Our consolidatedfinancial statements are filed as a part of this report immediately followingthe signature page.

 

**Item9:  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

Not applicable.

 

**Item 9A:  Controls andProcedures**

 

**DisclosureControls and Procedures**

 

Our management,with the participation of our Chief Executive Officer and acting ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) under the SecuritiesExchange Act of 1934, as amended) as of March 31, 2008. Based on thatevaluation, the Chief Executive Officer and Principal Financial Officerconcluded that our disclosure controls and procedures were effective to ensurethat the information required to be disclosed by us in this Annual Report on Form 10-Kwas recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and instructions for Form 10-K.

 

**Management’sReport on Internal Control over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Rule 13a-15(f) under the ExchangeAct). Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we conductedan evaluation of the effectiveness of our internal control over financialreporting based on the framework in Internal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on that evaluation,our management concluded that our internal control over financial reporting waseffective as of March 31, 2008.

 

Frontier AirlinesHoldings, Inc.’s independent registered public accounting firm has issuedan audit report on the effectiveness of the Company’s internal control overfinancial reporting.  That report hasbeen included herein.

 

**Changesin Internal Control**

 

There were no changes in our internal control over financial reportingidentified in connection with the evaluation of our controls performed duringthe quarter ended March 31, 2008 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**Item9B. Other Information**

 

On June 27, 2008, Mr. Edward M. Christie, III wasappointed as the Chief Financial Officer for Frontier Airlines Holdings, Inc.  Mr. Christie has held several positionsin the Company since joining the finance department in December 2002, mostrecently serving as the Company’s Senior Vice President – Finance.  Prior to joining Frontier, Mr. Christieserved as Vice President - Finance at a Denver asset-based financeinstitution.  Mr. Christie is 37years old and holds a Bachelor’s degree in Business Administration - Financefrom the University of Arizona.

 

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**PART III**

 

**Item10:  Directors, Executive Officers andCorporate Governance.**

 

**Codeof Ethics**

 

 The information required by this Item will befiled with the Securities and Exchange Commission as an amendment to this Form 10-Kin accordance with General Instruction G(3).

 

**AuditCommittee Financial Expert**

 

 The information required by this Item will be filed with theSecurities and Exchange Commission as an amendment to this Form 10-K inaccordance with General Instruction G(3).

 

**Item11.   Executive Compensation.**

 

The informationrequired by this Item will be filed with the Securities and Exchange Commissionas an amendment to this Form 10-K in accordance with GeneralInstruction G(3).

 

**Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

The information requiredby this Item will be filed with the Securities and Exchange Commission as anamendment to this Form 10-K in accordance with General Instruction G(3).

 

**Item13.   Certain Relationships and RelatedTransactions, and Director Independence.**

 

****Theinformation required by this Item will be filed with the Securities andExchange Commission as an amendment to this Form 10-K in accordance withGeneral Instruction G(3).

 

I**tem 14.   Principal AccountingFees and Services.**

 

The information requiredby this Item will be filed with the Securities and Exchange Commission as anamendment to this Form 10-K in accordance with GeneralInstruction G(3).

 

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**PART IV**

 

**Item15(a):  Exhibits and Financial StatementSchedules**

 
| **Exhibit  Numbers**                                                                                | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                |
| Exhibit 2 – Plan of acquisition,  reorganization, arrangement, liquidation or succession: |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1                                                                                                 |       | Agreement and Plan of Merger, dated as of  January 31, 2006, by and among Frontier Airlines, Inc., Frontier  Airlines Holdings, Inc., and FA Sub, Inc. (Annex I to Amendment  No. 1 to the Registration Statement on Form S-4 filed by Frontier  Airlines Holdings, Inc. on February 14, 2006, File  No. 333-131407).                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Exhibit 3 – Articles of Incorporation and  Bylaws:                                        |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.1                                                                                                 |       | Amended and Restated Certificate of Incorporation of  Frontier Airlines Holdings, Inc. (Annex II to Amendment No. 1 to  the Registration Statement on Form S-4 filed by Frontier Airlines  Holdings, Inc. on February 14, 2006, File No. 333-131407).                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2                                                                                                 |       | Bylaws of Frontier Airlines Holdings, Inc.  (Annex III to Amendment No. 1 to the Registration Statement on  Form S-4 filed by Frontier Airlines Holdings, Inc. on  February 14, 2006, File No. 333-131407).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Exhibit 4 –  Instruments defining the rights of security holders:                         |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1                                                                                                 |       | Specimen common  stock certificate of Frontier Airlines Holdings, Inc. (Exhibit 4.1  to the Company’s Annual Report on Form 10-K for the year ended  March 31, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2                                                                                                 |       | Frontier Airlines, Inc. Warrant to Purchase  Common Stock, No. 1 – Air Transportation Stabilization Board. Two  Warrants, dated as of February 14, 2003, substantially identical in all  material respects to this Exhibit, have been entered into with each of the  Supplemental Guarantors granting each Supplemental Guarantor a warrant to  purchase 191,697 shares under the same terms and conditions described in this  Exhibit. Portions of this Exhibit have been excluded from the publicly  available document and an order granting confidential treatment of the  excluded material has been received. (Exhibit 4.6 to the Company’s Current Report on Form 8-K  dated March 25, 2003). |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2(a)                                                                                              |       | Warrant Supplement to Frontier Airlines, Inc. Warrant to Purchase Common Stock, No. 1 – Air Transportation Stabilization Board. Two Warrant Supplements dated March 17, 2006, substantially identical in all material respects to this Exhibit have been entered into with each of the Supplemental Guarantors. (Exhibit 4.2(a) to the Company’s Annual Report on Form 10-K for the year ended March 31, 2006).                                                                                                                                                                                                                                                                                 |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.3                                                                                                 |       | Registration Rights Agreement dated as of  February 14, 2003 by and between and Frontier Airlines, Inc. as the  Issuer, and the Holders of Warrants to Purchase Common Stock. Portions of  this Exhibit have been omitted excluded from the publicly available  document and an order granting confidential treatment of the excluded  material has been received. (Exhibit 4.5 to the Company’s Current Report  on Form 8-K dated March 25, 2003).                                                                                                                                                                                                                                                            |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Exhibit 10 –  Material Contracts:                                                         |
|                                                                                                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1                                                                                                |       | Airport Use and  Facilities Agreement, Denver International Airport (Exhibit 10.7 to the Company’s  Annual Report on Form 10-KSB for the year ended March 31, 1995;  Commission File No. 0-4877).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

56

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| 10.2    |   | Space and Use  Agreement between Continental Airlines, Inc. and the Company.  (Exhibit 10.43 to the Company’s Annual Report on Form 10-K for the  year ended March 31, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.2(a) |   | Second Amendment  to Space and Use Agreement between Continental Airlines, Inc. and the  Company. Portions of this Exhibit have been omitted and filed separately  with the Securities and Exchange Commission in a confidential treatment  request under Rule 24b-2 of the Securities Exchange Act of 1934, as  amended (Exhibit 10.3(a) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2003).                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3    |   | Airbus A318/A319  Purchase Agreement dated as of March 10, 2000 between AVSA, S.A.R.L.,  Seller, and Frontier Airlines, Inc., Buyer. Portions of this exhibit  have been excluded from the publicly available document and an order granting  confidential treatment of the excluded material has been received.  (Exhibit 10.51 to the Company’s Annual Report on Form 10-K for the  year ended March 31, 2000).                                                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3(a) |   | Amendment  No. 9 to the A318/A319 Purchase Agreement dated as of March 10,  2000 between AVSA, S.A.R.L. and Frontier Airlines, Inc. Portions of this  exhibit have been excluded from the publicly available document and filed  separately with the SEC in a confidential treatment request under  Rule 24b-2 of the Securities Exchange Act of 1934, as amended.  (Exhibit 10.3(a) to the Company’s Annual Report on Form 10-K  for the year ended March 31, 2006).                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.3(b) |   | Amendment  No. 11 to the A318/A319 Purchase Agreement dated as of March 10,  2000 between AVSA, S.A.R.L. and Frontier Airlines, Inc.  (Exhibit 10.3(b) to the Company’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2007).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.4    |   | Aircraft Lease  Common Terms Agreement dated as of April 20, 2000 between General  Electric Capital Corporation and Frontier Airlines, Inc. Portions of  this exhibit have been excluded from the publicly available document and an  order granting confidential treatment of the excluded material has been  received. (Exhibit 10.52 to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2000).                                                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.5    |   | Aircraft Lease  Agreement dated as of April 20, 2000 between Aviation Financial Services, Inc.,  Lessor, and Frontier Airlines, Inc., Lessee, in respect of 15 Airbus  A319 Aircraft. After 3 aircraft were leased under this Exhibit with  Aviation Financial Services, Inc. as Lessor, related entities of  Aviation Financial Services, Inc. replaced it as the Lessor, but each  lease with these related entities is substantially identical in all material  respects to this Exhibit. Portions of this exhibit have been excluded from  the publicly available document and an order granting confidential treatment  of the excluded material has been received. (Exhibit 10.53 to the  Company’s Annual Report on Form 10-K for the year ended March 31,  2000). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6    |   | Lease dated as  of May 5, 2000 for Frontier Center One, LLC, as landlord, and Frontier  Airlines, Inc., as tenant. Portions of this exhibit have been excluded  from the publicly available document and an order granting confidential  treatment of the excluded material has been received. (Exhibit 10.55 to  the Company’s Annual Report on Form 10-K for the year ended March 31,  2000).                                                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.6(a) |   | Amendment Number  Two to Lease Agreement. Portions of this exhibit have been omitted and filed  separately with the Securities and Exchange Commission in a confidential  treatment request under Rule 24b-2 of the Securities Exchange Act of  1934, as amended. (Exhibit 10.7(a) to the Company’s Annual Report  on Form 10-K for the year ended March 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7    |   | Operating  Agreement of Frontier Center One, LLC, dated as of May 10, 2000 between  Shea Frontier Center, LLC, and 7001 Tower, LLC, and Frontier  Airlines, Inc. Portions of this exhibit have been excluded from the  publicly available document and an order granting confidential treatment of  the excluded material has been received. (Exhibit 10.56 to the Company’s  Annual Report on Form 10-K for the year ended March 31, 2000).                                                                                                                                                                                                                                                                                                                                                  |

 

57

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| 10.8      |   | Standard  Industrial Lease dated April 27, 2000, between Mesilla Valley Business  Park, LLC, landlord, and Frontier Airlines, Inc., tenant. Portions of this  exhibit have been excluded from the publicly available document and an order  granting confidential treatment of the excluded material has been received.  (Exhibit 10.57 to the Company’s Annual Report on Form 10-K for the  year ended March 31, 2000).                                      |
|-----------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.9      |   | General Terms  Agreement No. 6-13616 between CFM International and Frontier  Airlines, Inc. Portions of this exhibit have been excluded from the  publicly available document and an order granting confidential treatment of  the excluded material has been received. (Exhibit 10.60 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2000).                                                                            |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.10     |   | Lease Agreement  dated as of December 15, 2000 between Gateway Office Four, LLC, Lessor,  and Frontier Airlines, Inc., Lessee. (Exhibit 10.61 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  December 31, 2000).                                                                                                                                                                                                                      |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11     |   | Code Share  Agreement dated as of May 3, 2001 between Frontier Airlines, Inc.  and Great Lakes Aviation, Ltd. Portions of this exhibit have been excluded  from the publicly available document and an order granting confidential  treatment of the excluded material has been received. (Exhibit 10.62 to  the Company’s Annual Report on Form 10-K for the year ended  March 31, 2001).                                                                    |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.11(a)  |   | Amendment No. 1  to the Codeshare Agreement dated as of May 3, 2001 between Frontier  Airlines, Inc. and Great Lakes Aviation, Ltd. Portions of the exhibit  have been excluded from the publicly available document and an order granting  confidential treatment of the excluded material has been received.  (Exhibit 10.62(a) to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2001).                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| +10.12    |   | Employee Stock  Ownership Plan of Frontier Airlines, Inc. as amended and restated,  effective August 1, 2006 and executed September 7, 2006.  (Exhibit 10.66 to the Company’s Quarterly Report on Form 10-Q for  the quarter ended December 31, 2001).                                                                                                                                                                                                   |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| +10.12(a) |   | Amendment of the  Employee Stock Ownership Plan of Frontier Airlines, Inc. as amended and  restated, effective August 1, 2006 and executed September 7, 2006  for EGTRRA. (Exhibit 10.66(a) to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2001).                                                                                                                                                               |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.12(b)  |   | Second Amendment  to the Employee Stock Ownership Plan of Frontier Airlines, Inc. executed  March 30, 2006 and effective April 3, 2006.  (Exhibit 10.12(b) to the Company’s Annual Report on Form 10-K  for the year ended March 31, 2006).                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| +10.13    |   | Director  Compensation Agreement between Frontier Airlines, Inc. and Samuel D. Addoms  dated effective April 1, 2002. This agreement was modified on  April 1, 2003, to expressly describe the second installment exercise  period as on or after December 31, 2003, and the third installment  exercise period as on or after April 1, 2004. (Exhibit 10.67 to the  Company’s Annual Report on Form 10-K for the year ended March 31,  2002). |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| +10.13(a) |   | Amendment No. 2 to the Director Compensation  Agreement between Frontier Airlines, Inc. and Samuel D. Addoms dated  effective April 1, 2003. (Exhibit 10.13(a) to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2006).                                                                                                                                                                                          |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.14     |   | Secured Credit  Agreement dated as of October 10, 2002 between Frontier  Airlines, Inc. and Credit Agricole Indosuez in respect to three Airbus  319 aircraft. Portions of this exhibit have been excluded form the publicly  available document and an order granting confidential treatment of the  excluded material has been received. (Exhibit 10.75 to the Company’s  Quarterly Report on Form 10-Q/A for the quarter ended September 30,  2002).            |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.15     |   | Aircraft  Mortgage and Security Agreement dated as of October 10, 2002 between  Frontier                                                                                                                                                                                                                                                                                                                                                                                               |

 

58

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|       |   | Airlines, Inc.  and Credit Agricole Indosuez in respect to 3 Airbus 319 aircraft. Portions of  this exhibit have been excluded form the publicly available document and an  order granting confidential treatment of the excluded material has been  received. (Exhibit 10.76 to the Company’s Quarterly Report on  Form 10-Q/A for the quarter ended September 30, 2002).                                                                                                                                                                                                                                                                                                                                                                     |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.16      |   | Codeshare  Agreement dated as of September 18, 2003 between Horizon Air Industries,  Inc. and Frontier Airlines, Inc. Portions of this exhibit have been omitted  and filed separately with the Securities and Exchange Commission in a  confidential treatment request under Rule 24b-2 of the Securities  Exchange Act of 1934, as amended. (Exhibit 10.23 to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2003).                                                                                                                                                                                                                                                                                  |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.17      |   | Aircraft Lease  Agreement dated as of December 5, 2003 between International Lease  Finance Corporation, Inc., and Frontier Airlines, Inc., Lessee, in  respect of 1 Airbus A319 Aircraft. Frontier has signed leases for 4  additional Airbus 319 aircraft with this Lessor under Aircraft Lease  Agreements that are substantially identical in all material respects to this  Exhibit. Portions of this Exhibit have been omitted and filed separately  with the Securities and Exchange Commission in a confidential treatment  request under Rule 24b-2 of the Securities Exchange Act of 1934, as  amended. (Exhibit 10.24 to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2003). |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.18     |   | Frontier  Airlines 2004 Equity Incentive Plan. (Exhibit B to the Company’s 2004  Annual Meeting of Shareholders; filed July 26, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.18 (a) |   | Amendment to  Frontier Airlines 2004 Equity Incentive Plan executed March 30, 2006 and  effective April 3, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.19     |   | Executive Bonus  Plan for the Company’s fiscal year ending March 31, 2006  (Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the  year ended March 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.20     |   | Long Term  Incentive Plan for the Company’s fiscal year ending March 31, 2006  (Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the  year ended March 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.21     |   | Form of  Stock Appreciation Rights Agreement for issuance of stock appreciation rights  pursuant to the Frontier Airlines 2004 Equity Incentive Plan to plan  participants, including named executive officers (Exhibit 10.23 to the  Company’s Annual Report on Form 10-K for the year ended March 31,  2005).                                                                                                                                                                                                                                                                                                                                                                                                                                |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.22     |   | Form of  Incentive Stock Option Agreement for issuance on incentive stock options  pursuant to the Frontier Airlines 2004 Equity Incentive Plan to plan  participants, including named executive officers (Exhibit 10.24 to the  Company’s Annual Report on Form 10-K for the year ended March 31,  2005).                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.23     |   | Form of  Stock Unit Agreement for issuance of restricted stock units pursuant to the  Frontier Airlines 2004 Equity Incentive Plan to plan participants, including  named executive officers (Exhibit 10.25 to the Company’s Annual Report  on Form 10-K for the year ended March 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| +10.24     |   | Form of  Non-Qualified Stock Option Agreement for issuance of non-qualified stock  options pursuant to the Frontier Airlines 2004 Equity Incentive Plan to  qualifying members of the Company’s Board of Directors (Exhibit 10.26 to  the Company’s Annual Report on Form 10-K for the year ended  March 31, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.25      |   | Underwriting  Agreement dated December 1, 2005, by and among Frontier  Airlines, Inc., Morgan Stanley & Co. Incorporated, and  Citigroup Global Markets, Inc. (Exhibit 1.1 to a Form 8-K  filed on December 7, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.26      |   | Indenture  dated December 7, 2005, by and between Frontier Airlines, Inc. and  U.S. Bank National                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

59

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|                                              |         | Association,  as Trustee (Exhibit 4.1 to Amendment No. 1 to Frontier’s  Registration Statement on Form S-3, File No. 333-128407, filed on  November 23, 2005).                                                                                                                                                                                                                                                                                                |
|---------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.27                                             |         | First  Supplemental Indenture dated December 7, 2005, by and between Frontier  Airlines, Inc. and U.S. Bank National Association, as Trustee  (Exhibit 4.2 to a Form 8-K filed on December 7, 2005).                                                                                                                                                                                                                                                               |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.28                                             |         | Second  Supplemental Indenture dated April 3, 2006, by and among Frontier  Airlines, Inc., Frontier Airlines Holdings, Inc., and U.S. Bank  National Association, as Trustee. (Exhibit 10.29 to the Company’s Annual  Report on Form 10-K for the year ended March 31, 2006).                                                                                                                                                                            |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.29                                             |         | Purchase Agreement dated September 1, 2006 between  Bombardier, Inc. and Frontier Airlines Holdings, Inc., relating to  the purchase of Bombardier Q400 aircraft. Portions of this exhibit have been  excluded from the publicly available document and an order granting confidential  treatment of the excluded material has been received. (Exhibit 10.30 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2006). |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.30                                             |         | Airline Service Agreement between Frontier Airlines  Holdings, Inc. and Republic Airlines, Inc. dated January 11,  2007.(Exhibit 10.31 to the  Company’s Annual Report on Form 10-K for the year ended March 31,  2007).                                                                                                                                                                                                                                 |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 21 – List of Subsidiaries       |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 21.1*                                             |         | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ***Exhibit 23 – Consents of Experts:*** |
| *** ***                                      | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.1*                                             |         | Consent of KPMG  LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 31 –  Certifications:           |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1*                                             |         | Section 302 certification of President and Chief Executive  Officer, Sean E. Menke.                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2*                                             |         | Section 302  certification of Chief Financial Officer, Edward M. Christie, III.                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Exhibit 32 –  Certifications:           |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1**                                            |         | Section 906  certifications of President and Chief Executive Officer, Sean E. Menke                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                              |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2**                                            |         | Section 906  certifications of Chief Financial Officer, Edward M. Christie, III                                                                                                                                                                                                                                                                                                                                                                                                   |

 

----

| *  | Filed herewith.                                           |
|----|-----------------------------------------------------------|
| ** | Furnished herewith.                                       |
| +  | Management contract or compensatory plan or  arrangement. |

 

60

----

 

**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 HOLDINGS, INC.                    |
|--------------------------|-----------------------------------------------------|
|                     |                                                |
| Date: June 30, 2008 | By: /s/ Sean E. Menke                               |
|                     | Sean E. Menke, Chief Executive Officer and Director |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
|                     | FRONTIER AIRLINES HOLDINGS, INC.                                         |
|--------------------------|--------------------------------------------------------------------------|
|                     |                                                                     |
|                     |                                                                     |
| Date: June 30, 2008 | By:                                                                      | /s/ Edward M. Christie, III |
|                     | Edward Christie III, Senior Vice President and Chief  Financial  Officer |
|                     |                                                                     |
|                     |                                                                     |
| Date: June 30, 2008 | By:                                                                      | /s/ Heather R. Iden |
|                     | Heather R. Iden, Vice President Controller                               |
|                     |                                                                     |
| Date: June 30, 2008 | By: /s/ D. Dale Browning                                                 |
|                     | D. Dale Browning, Director                                               |
|                     |                                                                     |
| Date: June 30, 2008      | By: /s/ Rita M. Cuddihy                                                  |
|                     | Rita M. Cuddihy, Director                                                |
|                     |                                                                     |
| Date: June 30, 2008 | By: /s/ Paul Stephen Dempsey                                             |
|                     | Paul Stephen Dempsey, Director                                           |
|                     |                                                                     |
| Date: June 30, 2008 | By: /s/ Patricia A. Engels                                               |
|                     | Patricia A. Engels, Director                                             |
|                     |                                                                     |
| Date: June 30, 2008 | By: /s/ B. LaRae Orullian                                                |
|                     | B. LaRae Orullian, Director                                              |
|                     |                                                                     |
| Date: June 30, 2008 | By: /s/ Jeffery S. Potter                                                |
|                     | Jeffery S. Potter, Director                                              |
|                     |                                                                     |
| Date: June 30, 2008 | By: /s/ Robert D. Taylor                                                 |
|                     | Robert D. Taylor, Director                                               |
|                     |                                                                     |
| Date: June 30, 2008 | By: /s/ James B. Upchurch                                                |
|                     | James B. Upchurch, Director                                              |

 

61

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**Report ofIndependent Registered Public Accounting Firm**

** **

The Board ofDirectors and Stockholders

Frontier AirlinesHoldings, Inc. :

 

We have audited the accompanying consolidated balancesheets of Frontier Airlines Holdings, Inc. and subsidiaries (Debtors-In-Possessionas of April 10, 2008) (the Company) as of March 31, 2008 and2007, and the related consolidated statements of operations, stockholders’equity and other comprehensive income (loss), and cash flows for each of theyears in the three-year period ended March 31, 2008. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Frontier Airlines Holdings, Inc. and subsidiaries(Debtors-In-Possession as of April 10, 2008) as of March 31, 2008 and2007, and the results of their operations and their cash flows for each of theyears in the three-year period ended March 31, 2008, in conformity withU.S. generally accepted accounting principles.

 

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a going concern.As discussed in note 1 to the consolidated financial statements, theCompany filed petitions for reorganization under Chapter 11 of Title 11 ofthe United States Code (the Bankruptcy Code), and this raises substantialdoubt about the Company’s ability to continue as a going concern. Management’splan concerning this matter is also discussed in note 1 to theconsolidated financial statements. The consolidated financial statements do notinclude adjustments that might result from the outcome of this uncertainty.

 

As discussed in note 2 to the consolidatedfinancial statements, the Company adopted the provisions of FinancialAccounting Standards Board (FASB) Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation ofFASB No. 109*, effective April 1, 2007, and theprovisions of FASB No. 123(R), *Share-Based Payment*,effective April 1, 2006.

 

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), FrontierAirlines Holdings, Inc.’s internal control over financial reporting as of March 31,2008, based on criteria established in *Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), and our report dated June 27,2008 expressed an unqualified opinion on the effectiveness of the Company’sinternal control over financial reporting.

 

 

/s/ KPMG LLP

 

Denver, ColoradoJune 27, 2008

 

F-1

----

 

**Report of Independent Registered Public AccountingFirm**

** **

The Board ofDirectors and StockholdersFrontier Airlines Holdings, Inc.:

 

We have audited Frontier Airlines Holdings, Inc.and subsidiaries’ (Debtors-In-Possession as of April 10, 2008)(the Company) internal control over financial reporting as of March 31,2008, based on criteria established in *Internal Control –Integrated**Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Frontier Airlines Holdings, Inc.’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Annual Report on Internal Controlover Financial Reporting. Our responsibility is to express an opinion on the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Ouraudit also included performing such other procedures as we considered necessaryin the circumstances. We believe that our audit provides a reasonable basis forour opinion.

 

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Frontier Airlines Holdings, Inc.(Debtors-In-Possession as of April 10, 2008) maintained, in all materialrespects, effective internal control over financial reporting as of March 31,2008, based on criteria established in *Internal Control –Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), theconsolidated balance sheets of Frontier Airlines Holdings, Inc. andsubsidiaries as of March 31, 2008 and 2007, and the related consolidatedstatements of operations, stockholders’ equity and other comprehensive income(loss), and cash flows for each of the years in the three-year period ended March 31,2008, and our report dated June 27, 2008 expressed an unqualified opinionon those consolidated financial statements, and included an explanatoryparagraph related to the Company’s ability to continue as a going concern.

 

 

/s/ KPMG LLP

 

Denver, ColoradoJune 27, 2008

 

F-2

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

**ConsolidatedBalance Sheets**

**March 31,2008 and 2007**

**(In thousands, except share data)**

 
| ** **                                                                                                                                                                                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                                                                                                                          |       |     |       |     |       |
| Current assets:                                                                                                                                                                                                     |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                                                                           |       | $        | 120,837    |     | $          | 202,981 |   |
| Investment securities                                                                                                                                                                                               |       | 8,501    |       | —   |       |
| Restricted investments                                                                                                                                                                                              |       | 74,119   |       | 42,844   |       |
| Receivables, net of allowance for doubtful accounts  of $400 and $632 at March 31, 2008 and 2007, respectively                                                                                                 |       | 57,687   |       | 50,691   |       |
| Prepaid expenses and other assets                                                                                                                                                                                   |       | 26,428   |       | 26,163   |       |
| Inventories, net of allowance of $490 and $329 at  March 31, 2008 and 2007, respectively                                                                                                                       |       | 17,451   |       | 15,685   |       |
| Assets held for sale (note 4)                                                                                                                                                                                       |       | 1,263    |       | 2,041    |       |
| Total current assets                                                                                                                                                                                                |       | 306,286  |       | 340,405  |       |
| Property and equipment, net (note 6)                                                                                                                                                                                |       | 870,444  |       | 605,131  |       |
| Security and other deposits (note 9)                                                                                                                                                                                |       | 25,123   |       | 20,850   |       |
| Aircraft pre-delivery payments                                                                                                                                                                                      |       | 12,738   |       | 52,453   |       |
| Restricted investments                                                                                                                                                                                              |       | 2,845    |       | 2,845    |       |
| Deferred loan fees and other assets                                                                                                                                                                                 |       | 32,535   |       | 21,184   |       |
| **Total Assets**                                                                                                                                                                                                    |       | $        | 1,249,971  |     | $          | 1,042,868 |   |
|                                                                                                                                                                                                                |       |     |       |     |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                       |       |     |       |     |       |
| Current liabilities:                                                                                                                                                                                                |       |     |       |     |       |
| Accounts payable                                                                                                                                                                                                    |       | $        | 79,732     |     | $          | 52,001 |   |
| Air traffic liability                                                                                                                                                                                               |       | 226,017  |       | 183,754  |       |
| Other accrued expenses (note 8)                                                                                                                                                                                     |       | 84,058   |       | 80,324   |       |
| Current portion of long-term debt (note 11)                                                                                                                                                                         |       | 38,232   |       | 26,847   |       |
| Short-term borrowings (note 11)                                                                                                                                                                                     |       | 3,139    |       | —   |       |
| Deferred revenue and other liabilities (note 7)                                                                                                                                                                     |       | 18,189   |       | 16,400   |       |
| Total current liabilities                                                                                                                                                                                           |       | 449,367  |       | 359,326  |       |
| Long-term debt related to aircraft notes (note 11)                                                                                                                                                                  |       | 532,086  |       | 359,908  |       |
| Convertible notes (note 11)                                                                                                                                                                                         |       | 92,000   |       | 92,000   |       |
| Deferred revenue and other liabilities (note 7)                                                                                                                                                                     |       | 24,399   |       | 22,138   |       |
| **Total liabilities**                                                                                                                                                                                               |       | $        | 1,097,852  |     | $          | 833,372 |   |
|                                                                                                                                                                                                                |       |     |       |     |       |
| Commitments and contingencies (notes 1,3, 8,11and  18)                                                                                                                                                              |       |     |       |     |       |
|                                                                                                                                                                                                                |       |     |       |     |       |
| Stockholders’ equity:                                                                                                                                                                                          |       |     |       |     |       |
| Preferred stock, no par value, authorized 1,000,000  shares; none issued                                                                                                                                            |       | —   |       | —   |       |
| Common stock, no par value, stated value of $.001  per share, authorized 100,000,000 shares; 36,945,744 and 36,627,455 shares  issued and outstanding at March 31, 2008 and March 31, 2007,  respectively |       | 37       |       | 37       |       |
| Treasury stock, stated at cost (note 13)                                                                                                                                                                            |       | —   |       | (1,838   | )          |
| Additional paid-in capital                                                                                                                                                                                          |       | 195,874  |       | 193,943  |       |
| Unearned ESOP shares (note 13)                                                                                                                                                                                      |       | (616     | )          | —   |       |
| Accumulated other comprehensive loss, net of tax                                                                                                                                                                    |       | (299     | )          | (22      | )          |
| Retained earnings (deficit)                                                                                                                                                                                         |       | (42,877  | )          | 17,376   |       |
| **Total stockholders’ equity**                                                                                                                                                                                 |       | 152,119  |       | 209,496  |       |
| **Total Liabilities and Stockholders’ Equity**                                                                                                                                                                 |       | $        | 1,249,971  |     | $          | 1,042,868 |   |

 

See accompanying notes to the consolidated financial statements.

 

F-3

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

**ConsolidatedStatements of Operations**

**YearsEnded March 31, 2008, 2007 and 2006**

**(In thousands, except per share amounts)**

 
| ** **                                                | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-----------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Revenues:                                                 |       |      |       |      |       |      |       |
| Passenger                                                 |       | $         | 1,350,427  |      | $          | 1,131,466 |       | $ | 971,507 |   |
| Cargo                                                     |       | 6,091     |       | 6,880     |       | 5,677     |       |
| Other                                                     |       | 42,463    |       | 32,603    |       | 24,338    |       |
|                                                      |       |      |       |      |       |      |       |
| Total revenues                                            |       | 1,398,981 |       | 1,170,949 |       | 1,001,522 |       |
|                                                      |       |      |       |      |       |      |       |
| Operating expenses:                                       |       |      |       |      |       |      |       |
| Flight operations                                         |       | 186,120   |       | 161,544   |       | 141,316   |       |
| Aircraft fuel                                             |       | 454,822   |       | 343,082   |       | 281,906   |       |
| Aircraft lease                                            |       | 116,099   |       | 108,623   |       | 94,229    |       |
| Aircraft and traffic servicing                            |       | 188,245   |       | 166,525   |       | 138,492   |       |
| Maintenance                                               |       | 106,166   |       | 87,978    |       | 77,238    |       |
| Promotion and sales                                       |       | 131,645   |       | 115,536   |       | 89,751    |       |
| General and administrative                                |       | 64,490    |       | 56,019    |       | 48,979    |       |
| Operating expenses - regional partners                    |       | 146,211   |       | 108,355   |       | 106,866   |       |
| Post-retirement liability curtailment gain (note 15)      |       | (6,361    | )          | —    |       | —    |       |
| Employee separation and exit costs (reversals) (note  10) |       | 442       |       | (57       | )          | 3,414     |       |
| Loss (gain) on sales of assets, net                       |       | 1,791     |       | (656      | )          | (1,144    | )          |
| Depreciation                                              |       | 44,641    |       | 34,702    |       | 28,372    |       |
|                                                      |       |      |       |      |       |      |       |
| Total operating expenses                                  |       | 1,434,311 |       | 1,181,651 |       | 1,009,419 |       |
|                                                      |       |      |       |      |       |      |       |
| Business interruption insurance proceeds (note 18)        |       | 300       |       | 868       |       | —    |       |
|                                                      |       |      |       |      |       |      |       |
| Operating loss                                            |       | (35,030   | )          | (9,834    | )          | (7,897    | )          |
|                                                      |       |      |       |      |       |      |       |
| Nonoperating income (expense):                            |       |      |       |      |       |      |       |
| Interest income                                           |       | 12,048    |       | 14,982    |       | 9,366     |       |
| Interest expense                                          |       | (36,444   | )          | (29,899   | )          | (21,758   | )          |
| Loss on early extinguishment of debt (note 11)            |       | (283      | )          | —    |       | —    |       |
| Other, net                                                |       | (645      | )          | (245      | )          | (179      | )          |
|                                                      |       |      |       |      |       |      |       |
| Total nonoperating income (expense), net                  |       | (25,324   | )          | (15,162   | )          | (12,571   | )          |
|                                                      |       |      |       |      |       |      |       |
| Loss before income tax benefit                            |       | (60,354   | )          | (24,996   | )          | (20,468   | )          |
|                                                      |       |      |       |      |       |      |       |
| Income tax benefit (note 12)                              |       | (101      | )          | (4,626    | )          | (6,497    | )          |
|                                                      |       |      |       |      |       |      |       |
| Net loss                                                  |       | $         | (60,253    | )         | $          | (20,370   | )          | $ | (13,971 | ) |
|                                                      |       |      |       |      |       |      |       |
| Loss per share:                                           |       |      |       |      |       |      |       |
| Basic and diluted (note 16)                               |       | $         | (1.64      | )         | $          | (0.56     | )          | $ | (0.39 | ) |
|                                                      |       |      |       |      |       |      |       |
| Weighted average shares of common stock outstanding:      |       |      |       |      |       |      |       |
| Basic and diluted                                         |       | 36,662    |       | 36,608    |       | 36,167    |       |

 

See accompanying notes to the consolidated financial statements.

 

F-4

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

**Consolidated Statements of Stockholders’ Equityand Other Comprehensive Income (Loss)**

**YearsEnded March 31, 2008, 2007 and 2006**

**(Inthousands, except shares)**

 
| ** **                                                     | ** ** | ** ** | ** ** | ** **   | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **    | ** ** | ** **             | ** ** |
|----------------------------------------------------------------|------------|------------|------------|--------------|------------|----------------|------------|--------------|------------|------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | ** **   | ** ** | **Additional** | ** ** | **Unearned** | ** ** | **other**              | ** ** | **Retained**  | ** ** | **Total**              | ** ** |
| ** **                                                     | ** ** | **Common** | ** ** | **Treasury** | ** ** | **paid-in**    | ** ** | **ESOP**     | ** ** | **comprehensive**      | ** ** | **Earnings**  | ** ** | **stockholders’** | ** ** |
| ** **                                                     | ** ** | **Stock**  | ** ** | **Stock**    | ** ** | **capital**    | ** ** | **shares**   | ** ** | **income (loss)** | ** ** | **(deficit)** | ** ** | **equity**             | ** ** |
|                                                           |       |       |       |         |       |           |       |         |       |                   |       |          |       |                   |       |
| **Balances, March 31, 2005**                              |       | $          | 36         |         | $          | —         |       | $            | 188,166    |                   | $          | (2,271        | )          | $                      | 272        |   | $ | 51,717 |   | $ | 237,920 |   |
| Net loss                                                       |       | —     |       | —       |       | —         |       | —       |       | —                 |       | (13,971       | )          | (13,971                | )          |
| Other comprehensive loss -                                     |       |       |       |         |       |           |       |         |       |                   |       |          |       |                   |       |
| Unrealized loss on derivative instruments, net of tax  of $74  |       | —     |       | —       |       | —         |       | —       |       | (121                   | )          | —        |       | (121                   | )          |
| Total comprehensive loss                                       |       |       |       |         |       |           |       |         |       |                   |       |          |       | (14,092                | )          |
| Exercise of common stock options                               |       | —     |       | —       |       | 1,551          |       | —       |       | —                 |       | —        |       | 1,551                  |       |
| Tax benefit from exercises of stock options                    |       | —     |       | —       |       | 281            |       | —       |       | —                 |       | —        |       | 281                    |       |
| Contribution of common stock to employee stock  ownership plan |       | 1          |       | —       |       | 2,791          |       | (2,792       | )          | —                 |       | —        |       | —                 |       |
| Amortization of employee stock compensation                    |       | —     |       | —       |       | 147            |       | 2,969        |       | —                 |       | —        |       | 3,116                  |       |
| **Balances, March 31, 2006**                              |       | 37         |       | —       |       | 192,936        |       | (2,094       | )          | 151                    |       | 37,746        |       | 228,776                |       |
| Net loss                                                       |       | —     |       | —       |       | —         |       | —       |       | —                 |       | (20,370       | )          | (20,370                | )          |
| Other comprehensive loss -                                     |       |       |       |         |       |           |       |         |       |                   |       |          |       |                   |       |
| Unrealized loss on derivative instruments, net of tax  of $40  |       | —     |       | —       |       | —         |       | —       |       | (151                   | )          | —        |       | (151                   | )          |
| Impact of adoption of SFAS 158, net of tax of $14  (note 13)   |       | —     |       | —       |       | —         |       | —       |       | (22                    | )          | —        |       | (22                    | )          |
| Total comprehensive loss                                       |       |       |       |         |       |           |       |         |       |                   |       |          |       | (20,543                | )     |
| Exercise of common stock options                               |       | —     |       | —       |       | 162            |       | —       |       | —                 |       | —        |       | 162                    |       |
| Purchase of treasury shares — 300,000 shares              |       | —     |       | (1,838       | )          | —         |       | —       |       | —                 |       | —        |       | (1,838                 | )          |
| Amortization of employee stock compensation                    |       | —     |       | —       |       | 845            |       | 2,094        |       | —                 |       | —        |       | 2,939                  |       |
| **Balances, March 31, 2007**                              |       | 37         |       | (1,838       | )          | 193,943        |       | —       |       | (22                    | )          | 17,376        |       | 209,496                |       |
| Net loss                                                       |       | —     |       | —       |       | —         |       | —       |       | —                 |       | (60,253       | )          | (60,253                | )          |
| Other comprehensive loss -                                     |       |       |       |         |       |           |       |         |       |                   |       |          |       |                   |       |
| Post-retirement liability curtailment gain                     |       | —     |       | —       |       | —         |       | —       |       | 22                     |       | —        |       | 22                     |       |
| Unrealized loss on auction rate securities                     |       | —     |       | —       |       | —         |       | —       |       | (299                   | )          | —        |       | (299                   | )          |
| Total comprehensive loss                                       |       | —     |       | —       |       | —         |       | —       |       | —                 |       | —        |       | (60,530                | )          |
| Transfer of treasury shares to ESOP                            |       | —     |       | 1,838        |       | —         |       | (1,838       | )          | —                 |       | —        |       | —                 |       |
| Exercise of common stock options                               |       | —     |       | —       |       | 40             |       | —       |       | —                 |       | —        |       | 40                     |       |
| Contribution of common stock to employee stock  ownership plan |       | —     |       | —       |       | 822            |       | (822         | )          | —                 |       | —        |       | —                 |       |
| Amortization of employee stock compensation                    |       | —     |       | —       |       | 1,069          |       | 1,584        |       | —                 |       | —        |       | 2,653                  |       |
| Transfer of accrued ESOP to unearned ESOP                      |       | —     |       | —       |       | —         |       | 460          |       | —                 |       | —        |       | 460                    |       |
| **Balances, March 31, 2008**                              |       | $          | 37         |         | $          | —         |       | $            | 195,874    |                   | $          | (616          | )          | $                      | (299       | ) | $ | (42,877 | ) | $ | 152,119 |   |

 

See accompanying notes tothe consolidated financial statements.

 

F-5

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

**ConsolidatedStatements of Cash Flows**

**Years ended March 31, 2008, 2007, and 2006**

**(In thousands)**

 
| ** **                                                                               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ***Cash flows from operating  activities:***                                             |       |     |       |     |       |     |       |
| Net loss                                                                                 |       | $        | (60,253    | )        | $          | (20,370  | )          | $ | (13,971 | ) |
| Adjustments to reconcile net loss to net cash and                                        |       |     |       |     |       |     |       |
| cash equivalents provided by operating activities:                                       |       |     |       |     |       |     |       |
| Compensation expense under long-term incentive plans  and employee stock ownership plans |       | 2,653    |       | 3,409    |       | 3,116    |       |
| Depreciation and amortization                                                            |       | 46,176   |       | 36,219   |       | 29,439   |       |
| Provisions recorded on inventories and write-off of  assets beyond economic repair       |       | 1,423    |       | 1,409    |       | 86       |       |
| Loss (gains) on sales of assets, net                                                     |       | 1,791    |       | (656     | )          | (1,144   | )          |
| Mark to market derivative (gains) losses, net                                            |       | (1,847   | )          | (12,753  | )          | 2,163    |       |
| Post-retirement liability curtailment gain                                               |       | (6,361   | )          | —   |       | —   |       |
| Loss on early extinguishment of debt                                                     |       | 283      |       | —   |       | —   |       |
| Deferred income taxes                                                                    |       | —   |       | (4,883   | )          | (6,551   | )          |
| Changes in operating assets and liabilities:                                             |       |     |       |     |       |     |       |
| Restricted investments                                                                   |       | (31,275  | )          | (9,161   | )          | 3,326    |       |
| Receivables                                                                              |       | (2,415   | )          | (9,000   | )          | (3,943   | )          |
| Prepaid expenses and other assets                                                        |       | (374     | )          | (2,981   | )          | (4,442   | )          |
| Inventories                                                                              |       | (1,927   | )          | (9,012   | )          | 405      |       |
| Other assets                                                                             |       | (1,021   | )          | (1,205   | )          | 735      |       |
| Accounts payable                                                                         |       | 27,731   |       | 7,046    |       | 7,714    |       |
| Air traffic liability                                                                    |       | 42,263   |       | 30,091   |       | 40,974   |       |
| Other accrued expenses                                                                   |       | 10,578   |       | 12,135   |       | 12,346   |       |
| Deferred revenue and other liabilities                                                   |       | 3,248    |       | 2,939    |       | 9,389    |       |
| Net cash provided by operating activities                                                |       | 30,673   |       | 23,227   |       | 79,642   |       |
|                                                                                     |       |     |       |     |       |     |       |
| ***Cash flows from investing  activities:***                                             |       |     |       |     |       |     |       |
| Aircraft lease and purchase deposits made                                                |       | (28,332  | )          | (47,933  | )          | (36,117  | )          |
| Decrease in restricted investments                                                       |       | —   |       | —   |       | 2,034    |       |
| Purchase of available-for-sale securities                                                |       | (10,000  | )          | —   |       | —   |       |
| Sale of available-for-sale securities                                                    |       | 1,200    |       | —   |       | 3,000    |       |
| Proceeds from the sale of property and equipment and  assets held for sale               |       | 917      |       | 2,014    |       | 9,843    |       |
| Proceeds from sale- leaseback transactions                                               |       | 92,525   |       | 41,933   |       | —   |       |
| Capital expenditures                                                                     |       | (350,844 | )          | (137,324 | )          | (74,262  | )          |
| Net cash used in investing activities                                                    |       | (294,534 | )          | (141,310 | )          | (95,502  | )          |
|                                                                                     |       |     |       |     |       |     |       |
| ***Cash flows from financing  activities:***                                             |       |     |       |     |       |     |       |
| Net proceeds from issuance of common stock                                               |       | 40       |       | 162      |       | 1,551    |       |
| Purchase of treasury shares                                                              |       | —   |       | (1,838   | )          | —   |       |
| Payment to bank for compensating balance                                                 |       | —   |       | (750     | )          | (2,000   | )          |
| Proceeds from long-term borrowings                                                       |       | 297,525  |       | 74,438   |       | 146,700  |       |
| Payments received on note receivable                                                     |       | 716      |       | —   |       | —   |       |
| Principal payments on aircraft notes                                                     |       | (113,961 | )          | (23,439  | )          | (19,959  | )          |
| Payments on short-term borrowings                                                        |       | —   |       | —   |       | (5,000   | )          |
| Payment of financing fees                                                                |       | (2,603   | )          | (349     | )          | (4,387   | )          |
| Net cash provided by financing activities                                                |       | 181,717  |       | 48,224   |       | 116,905  |       |
|                                                                                     |       |     |       |     |       |     |       |
| Net increase (decrease) in cash and cash equivalents                                     |       | (82,144  | )          | (69,859  | )          | 101,045  |       |
| Cash and cash equivalents, beginning of year                                             |       | 202,981  |       | 272,840  |       | 171,795  |       |
| Cash and cash equivalents, end of year                                                   |       | $        | 120,837    |     | $          | 202,981  |       | $ | 272,840 |   |

 

See accompanying notes tothe consolidated financial statements

 

F-6

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

 

**Notes tothe Consolidated Financial Statements**

**March 31,2007**

 

**1.****                         ****Chapter 11 Reorganization**

 

On April 10, 2008 (the “PetitionDate”), Frontier Airlines Holdings, Inc. (“Frontier Holdings”) and itssubsidiaries Frontier Airlines, Inc. (“Frontier Airlines”) and LynxAviation, Inc. (“Lynx Aviation”) filed voluntary petitions forreorganization under Chapter 11 of Title 11 of the United States Code (the“Bankruptcy Code”) in the United States Bankruptcy Court for the SouthernDistrict of New York (the “Bankruptcy Court”). The cases are being jointly administered under Case No. 08-11298(RDD). Frontier Holdings, Frontier Airlines, and Lynx Aviation (collectivelythe “Debtors” or the “Company”) will continue to operate as “debtors-in-possession”under the jurisdiction of the Bankruptcy Court and in accordance with theapplicable provisions of the Bankruptcy Code and orders of the BankruptcyCourt. In general, as debtors-in-possession, the Debtors are authorized underChapter 11 to continue to operate as an ongoing business, but may notengage in transactions outside of the ordinary course of business without theprior approval of the Bankruptcy Court. No assurance can be provided as to what values, if any, will be ascribedin the Debtors’ bankruptcy proceedings to the Debtors’ pre-petitionliabilities, common stock and other securities. The Company believes itscurrently outstanding common stock will have no value and will be canceledunder any plan of reorganization it might propose and that the value of theDebtors’ various pre-petition liabilities and other securities is highlyspeculative. Accordingly, caution should be exercised with respect to existingand future investments in any of these liabilities or securities.

 

***Reporting Requirements***

 

As a result of its bankruptcy filing, the Company is now periodicallyrequired to file various documents with and provide certain information to, theBankruptcy Court, including statements of financial affairs, schedules ofassets and liabilities, and monthly operating reports in forms prescribed byfederal bankruptcy law, as well as certain financial information on anunconsolidated basis. Such materials will be prepared according to requirementsof federal bankruptcy law.  While theyaccurately provide then-current information required under federal bankruptcylaw, they are nonetheless unconsolidated, unaudited, and are prepared in aformat different from that used in Frontier Holdings consolidated financialstatements filed under the securities laws. Accordingly, the Company believes that the substance and format do notallow meaningful comparison with its regular publicly-disclosed consolidatedfinancial statements.  Moreover, the materialsfiled with the Bankruptcy Court are not prepared for the purpose of providing abasis for an investment decision relating to the Company’s securities, or forcomparison with other financial information filed with the Securities andExchange Commission (“SEC”).

 

***Reasons for Bankruptcy***

 

The Debtors’ Chapter 11 filings followed anunexpected attempt by the Company’s principal credit card processor in April 2008to substantially increase a “holdback” of customer receipts from the sale oftickets.  This change in establishedpractices would have represented a material negative change to the Debtors’cash forecasts and business plan, put severe restraints on the Debtors’liquidity and made it impossible for the Debtors to continue normaloperations.  Due to historically highaircraft fuel prices, continued low passenger mile yields, cash holdbacksinstituted by the Company’s other credit card processor, and the threatenedincreased holdback from the Company’s principal credit card processor, theCompany determined that the Debtors could not continue to operate without theprotections provided by

 

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**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

Chapter 11.

 

***First Day Orders***

 

The Bankruptcy Court has approved variousmotions for various relief designed to allow the Debtors to continue normaloperations.  The Bankruptcy Court’sorders authorize the Debtors, among other things, in their discretion to: (a) paycertain pre-petition and post-petition employee wages, salaries, benefits andother employee obligations; (b) pay vendors and other providers in theordinary course for goods and services received from and after the PetitionDate; (c) honor customer service programs, including the *Early Returns* frequent flyer program and our ticketingprograms; (d) honor certain obligations arising prior to the Petition Daterelated to our interline, clearinghouse, code sharing and other similaragreements; and (e) continue maintenance of existing bank accounts andexisting cash management systems.

 

***Notifications***

 

Shortly after the PetitionDate, the Debtors began notifying all known current or potential creditors ofthe Chapter 11 filing. Subject to certain exceptions under the BankruptcyCode, the Debtors’ Chapter 11 filing automatically enjoined, or stayed,the continuation of any judicial or administrative proceedings or other actionsagainst the Debtors or their property to recover on, collect or secure a claimarising prior to the Petition Date. Thus, for example, most creditor actions toobtain possession of property from the Debtors, or to create, perfect orenforce any lien against the property of the Debtors, or to collect on moniesowed or otherwise exercise rights or remedies with respect to a pre-petitionclaim are enjoined unless and until the Bankruptcy Court lifts the automaticstay. Vendors are being paid for goods furnished and services provided afterthe Petition Date in the ordinary course of business.  The deadline for the filing of proofs ofclaims against the Debtors in these cases has yet to be established by theBankruptcy Court.

 

***Creditors’ Committee***

 

As required by theBankruptcy Code, the United States Trustee for the Southern District of NewYork appointed an official committee of unsecured creditors (the “Creditors’Committee”).  The Creditors’ Committeeand its legal representatives have a right to be heard on all matters that comebefore the Bankruptcy Court with respect to the Debtors.  The Creditors’ Committee has been generallysupportive of the Debtors’ positions on various matters; however, there can beno assurance that the Creditors’ Committee will support the Debtors’ positionson matters to be presented to the Bankruptcy Court in the future or on any planof reorganization, once proposed.  Disagreements between the Debtors and the Creditors’ Committee couldprotract the Chapter 11 proceedings, negatively impact the Debtors’ability to operate and delay the Debtors’ emergence from the Chapter 11proceedings.

 

***Executory Contracts – Section 365***

 

Under Section 365 andother relevant sections of the Bankruptcy Code, the Debtors may assume, assumeand assign, or reject certain executory contracts and unexpired leases,including, without limitation, leases of real property, aircraft and aircraftengines, subject to the approval of the Bankruptcy Court and certain otherconditions. Any description of an executory contract or unexpired lease in thisForm 10-K, including where applicable the Debtors’ express terminationrights or a quantification of our obligations, must be read in conjunctionwith, and is qualified by, any overriding rejection rights the Debtors haveunder Section 365 of the Bankruptcy Code. As of the date of this filing, the Company’s most significant

 

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**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

executory contracts rejectedinclude the Republic Airlines, Inc. regional partner contract as discussedin Note 2 and the contract for a new headquarters building.  Claims may arise as a result of rejecting anyexecutory contract.  These financialstatements do no include the effects of any future claims.  Certain claims filed may have priority aboveunsecured creditors.

 

***Secured Debtors Rights – Section 1110***

 

Notwithstanding the generaldiscussion above of the impact of the automatic stay, under Section 1110of the Bankruptcy Code (“Section 1110”), certain secured parties, lessorsand conditional sales vendors may have extra rights regarding taking possessionof certain qualifying aircraft, aircraft engines and other aircraft-relatedequipment that are leased or subject to a security interest or conditional salecontract pursuant to their agreement with the Debtors. Section 1110provides that, unless the Debtors agree to perform under the agreement and cureall defaults within 60 days after the Petition Date, such financing partycan take possession of such equipment.

 

Section 1110effectively shortens the automatic stay period to 60 days with respect to Section 1110-eligibleaircraft, engines and related equipment subject to the following twoconditions. First, the debtor may extend the 60-day period by agreement of therelevant financier, with court approval. Alternatively, the debtor may agree,with Bankruptcy Court approval, to perform all of the obligations under theapplicable financing and cure any defaults thereunder as required by theBankruptcy Code (which does not preclude later rejecting any relatedlease).  On June 9, 2008, theDebtors agreed to perform their obligations under the applicable financings,and the Debtors believe they have cured the defaults under thesefinancings.  the Debtors have resolvedall cure issues with a majority of their aircraft financiers.  The Debtors are, however, negotiating withrespect to a few remaining aircraft obligations, primarily related to theirAirbus 318 aircraft, and the ultimate outcome of these negotiations cannot bepredicted with certainty. To the extent the Debtors are unable to reachagreements with these aircraft financiers, those parties may seek to takeaction with respect to the related aircraft.

 

***Plan of Reorganization***

 

In order to successfullyexit Chapter 11, the Debtors will need to propose, and obtain confirmationby the Bankruptcy Court of a plan of reorganization that satisfies therequirements of the Bankruptcy Code. A plan of reorganization would, amongother things, resolve the Debtors’ pre-petition obligations, set forth therevised capital structure of the newly reorganized entity and provide forcorporate governance subsequent to exit from bankruptcy.

 

The Debtors have theexclusive right for 120 days after the Petition Date to file a plan ofreorganization and, if we do so, 60 additional days to obtain necessaryacceptances of our plan.  The Debtorswill likely file one or more motions to request extensions of these time periods.  If the Debtors’ exclusivity period lapsed,any party in interest would be able to file a plan of reorganization for any ofthe Debtors.  In addition to being votedon by holders of impaired claims and equity interests, a plan of reorganizationmust satisfy certain requirements of the Bankruptcy Code and must be approved,or confirmed, by the Bankruptcy Court in order to become effective.

 

A plan of reorganization hasbeen accepted by holders of claims against and equity interests in the Debtorsif (1) at least one-half in number and two-thirds in dollar amount ofclaims actually voting in each impaired class of claims have voted to acceptthe plan and (2) at least two-thirds in amount of equity interestsactually voting in each impaired class of equity interests has voted to acceptthe plan.  Under certain circumstancesset forth in Section 1129(b) of the Bankruptcy Code, however, theBankruptcy

 

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** **

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

Court may confirm a planeven if such plan has not been accepted by all impaired classes of claims andequity interests. A class of claims or equity interests that does not receiveor retain any property under the plan on account of such claims or interests isdeemed to have voted to reject the plan. The precise requirements andevidentiary showing for confirming a plan notwithstanding its rejection by oneor more impaired classes of claims or equity interests depends upon a number offactors, including the status and seniority of the claims or equity interestsin the rejecting class (i.e., secured claims or unsecured claims, subordinatedor senior claims, preferred or common stock). Generally, with respect to commonstock interests, a plan may be “crammed down” even if the shareowners receiveno recovery if the proponent of the plan demonstrates that (1) no classjunior to the common stock is receiving or retaining property under the planand (2) no class of claims or interests senior to the common stock isbeing paid more than in full.

 

The timing of filing a planof reorganization by the Debtors will depend on the timing and outcome ofnumerous other ongoing matters in the Chapter 11 proceedings.  There can be no assurance at this time that aplan of reorganization will be confirmed by the Bankruptcy Court, or that anysuch plan will be implemented successfully.

 

***Reorganization Costs***

 

The Debtors have incurredand will continue to incur significant costs associated with ourreorganization. The amount of these costs, which are being expensed asincurred, are expected to significantly affect the Debtors’ results ofoperations.

 

Under the priority schemeestablished by the Bankruptcy Code, unless creditors agree otherwise,pre-petition liabilities and post-petition liabilities must be satisfied infull before stockholders are entitled to receive any distribution or retain anyproperty under a plan of reorganization. The ultimate recovery to creditorsand/or stockholders, if any, will not be determined until confirmation of aplan or plans of reorganization. No assurance can be given as to what values,if any, will be ascribed in the Chapter 11 cases to each of these constituenciesor what types or amounts of distributions, if any, they would receive. A planof reorganization could result in holders of the Debtors’ liabilities and/orsecurities, including the Company’s common stock receiving no distribution onaccount of their interests and cancellation of their holdings. As discussedabove, if the requirements of Section 1129(b) of the Bankruptcy Codeare met, a plan of reorganization can be confirmed notwithstanding itsrejection by the holders of the Company’s common stock and notwithstanding thefact that such holders do not receive or retain any property on account oftheir equity interests under the plan. Because of such possibilities, the valueof the Debtors’ liabilities and securities, including the Company’s commonstock is highly speculative. The Debtors urge that appropriate caution beexercised with respect to existing and future investments in any of theliabilities and/or securities of the Debtors. Furthermore, as discussed above, at this time there is no assurance theDebtors will be able to restructure as a going concern or successfully propose,or implement a plan of reorganization.

 

Since the April 10,2008 bankruptcy filing subsequent to yearend, the Company incurred, and willcontinue to incur, significant costs associated with the reorganization. Theamount of these costs, which are being expensed as incurred, are expected tosignificantly affect the results of operations.

 

***Risks and Uncertainties***

 

As of the Petition Date, theCompany had in excess of $108 million in unrestricted cash, cash equivalentsand short-term investments. The ability of the Company, both during and afterthe Chapter 11 case, to

 

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**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

continue as a going-concernis dependent upon, among other things, (i) the ability of the Company tosuccessfully achieve required cost savings to complete its restructuring; (ii) theability of the Company to maintain adequate liquidity; (iii) the abilityof the Company to generate cash from operations; (iv) the ability of theCompany to secure Debtor in Possession Financing; (v) to negotiate favorable terms with our bankcard processors and creditcard companies;  (vi) the ability of the Company to confirm a plan of reorganization under theBankruptcy Code; and (vii) the Company’s ability to achieve profitability.Uncertainty as to the outcome of these factors raises substantial doubt aboutthe Company’s ability to continue as a going-concern. The accompanyingconsolidated financial statements do not include any adjustments to reflect orprovide for the consequences of the bankruptcy proceedings.  In particular such financial statements donot purport to show (a) as to assets, their realization value on aliquidation basis or their availability to satisfy liabilities; (b)  as topre-petition liabilities, the amounts that may be allowed for claims orcontingencies, or the status and priority thereof; (c) as to stockholderaccounts, the effect of any changes that may be made in the capitalization ofthe Company; or (d) as to operations, the effects of any changes that maybe made in its business.  A plan ofreorganization could materially change the amounts currently disclosed in theconsolidated financial statements.

 

The negative events or publicity associated withthe Debtor’s Chapter 11 proceedings could adversely affect sales oftickets and the relationship with customers, as well as with vendors andemployees, which in turn could adversely affect the Debtor’s operations andfinancial condition, particularly if the Chapter 11 proceedings areprotracted. Also, transactions outside of the ordinary course of business aresubject to the prior approval of the Bankruptcy Court, which may limit theDebtors’ ability to respond timely to certain events or take advantage ofcertain opportunities.  Because of therisks and uncertainties associated with the Debtors’ Chapter 11proceedings, the ultimate impact that events that occur during theseproceedings will have on the Debtors’ business, financial condition and resultsof operations cannotbe accurately predicted or quantified, and there is substantial doubt about theDebtors’ ability to continue as a going concern.

 

As a result of the filing,realization of assets and liquidation of liabilities are subject touncertainty. While operating as a debtor-in-possession under the protection ofChapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval orotherwise as permitted in the normal course of business, the Debtors may sellor otherwise dispose of assets and liquidate or settle liabilities for amountsother than those reflected in the condensed consolidated financial statements.Further, a plan of reorganization could materially change the amounts andclassifications reported in the consolidated historical financial statements,which do not give effect to any adjustments to the carrying value of assets or amountsof liabilities that might be necessary as a consequence of confirmation of aplan of reorganization.

 

***Liquidity and Going ConcernMatters***

 

The accompanyingconsolidated financial statements have been prepared assuming the Company willcontinue as a going concern.  Thisassumes a continuing of operations and the realization of assets andliabilities in the ordinary course of business. The consolidated financial statements do not include any adjustmentsthat might result if the Company were forced to discontinue operations.  The Company has substantial liquidity needsin the operation of its business and faces significant liquidity challenges dueto historically high aircraft fuel prices which have reached record levels in June 2008.  The Company remains uncertain as to whetherthey will obtain debtor in possession financing during the Chapter 11proceedings.

 

The Company’s business planwill focus on network adjustments, managing the cost structure and managingcapacity.  The Company’s plans include makingcontinued capacity and route adjustments

 

F-11

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**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

designed to improveprofitability and has terminated its regional partner agreement with RepublicAirlines.  The Company is also addressingliquidity needs by instituting plans for all or some of the following; the saleof aircraft, sales and leaseback transactions for aircraft, termination oflease agreements; and rejection and/or renegotiation of contracts.  The Company’s plan also includes theimplementation of significant cost saving strategies, including workforcereductions and temporary wage and benefit concessions.

 

**2.****                         ****Nature of Business and Summary ofSignificant Accounting Policies**

 

***Nature of Business***

 

The Company provides air transportation forpassengers and freight through its wholly-owned subsidiaries.  On April 3, 2006, Frontier Airlines, Inc.(“Airlines”) completed its corporate reorganization (the “Reorganization”) andas a result, Airlines became a wholly-owned subsidiary of Frontier AirlinesHoldings, Inc., a Delaware corporation. Airlines was incorporated in the State of Colorado on February 8,1994 and commenced operations on July 5, 1994.  In September 2006, the Company formed anew subsidiary, Lynx Aviation, Inc. (“Lynx Aviation”).  The Company, in conjunction with its regionaljet partner, currently operates routes linking from its Denver, Colorado hub to59 destinations including Mexico, Canada and Costa Rica.  As of March 31, 2008, the Companyoperated a fleet of 49 Airbus A319 aircraft, 11 Airbus A318 aircraft, twoAirbus A320 aircraft, 11 Embraer 170 aircraft (operated by Republic Airlines, Inc.through June 22, 2008) and ten Bombardier Q400 aircraft (operated by LynxAviation) from its base in Denver, and had approximately 6,200 employees.

 

***Lynx Aviation***

 

Frontier Holdings enteredinto a purchase agreement with Bombardier, Inc. for ten Q400 turbopropaircraft, each with a seating capacity of 74, with the option to purchase tenadditional aircraft.  The purchaseagreement was assumed by Lynx Aviation and Lynx Aviation took title of thefirst ten aircraft deliveries which were purchased during the year ended March 31,2008.  During the year ended March 31,2008, Lynx Aviation completed five sale-leaseback transactions on theseaircraft. The aircraft are operated by Lynx Aviation under a separate operatingcertificate. Lynx Aviation may exercise its option to purchase the optionaircraft no later than 12 months prior to the first day of the month of thescheduled delivery date.

 

Lynx Aviation has entered into a capacitypurchase agreement with Frontier, effective December 7, 2007, wherebyFrontier pays Lynx Aviation a contractual amount for the purchased capacityregardless of the revenue collected on those flights.  The amount paid to Lynx Aviation is based onoperating expenses plus a margin.  Thepayments made under this agreement are eliminated in consolidation, and thepassenger revenues generated by Lynx Aviation are included in passengerrevenues in the consolidated statements of operations.  Payments made under the capacity purchaseagreement during the year ended March 31, 2008 were $14,045,000.   See Note 19 for operating segmentinformation which includes the presentation of our operating segments and withhow their operations impact the overall network and profitability.

 

***Regional Partners***

 

The Company’s agreement withRepublic Airlines, Inc. (“Republic”), which commenced in January 2007,under which Republic operated up to 17 76-seat Embraer 170 aircraft, terminatedin June 2008.  The contract was foran 11-year period from the in-service date of the last aircraft, which wasscheduled for December 2008.  Theservice began on March 4, 2007 and replaced all CRJ 700 aircraft operatedby Horizon Air Industries, Inc. (“Horizon”).  The contract with Horizon expired on returnof the last aircraft in November 2007. Frontier established the scheduling, routes and pricing of the flightsoperated under the

 

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**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

Republic agreement. TheCompany compensated Republic for its services based on Republic’s operatingexpenses plus a margin on certain of its expenses.  The agreement provided for financialincentives and penalties based on the performance of Republic which are accruedfor in the period earned.  In April 2008,as part of the bankruptcy proceeding, the Company reached a mutual agreement onthe terms under which Frontier would reject the agreement for a structuredreduction and gradual phase-out of 12 delivered aircraft, which was completedon June 22, 2008.

 

In September 2007,Frontier signed a limited-term contract with ExpressJet Airlines, Inc. (“ExpressJet”)to operate two to four 50-seat Embraer 145XR jets on behalf of Frontier.  These jets were used to service previouslyannounced routes that were intended to be serviced by Lynx Aviation.  Lynx Aviation replaced ExpressJet on theseroutes as soon as its certification was completed.  The service by ExpressJet started November 15,2007 and terminated on December 6, 2007.

 

In September 2003, theCompany signed an agreement with Horizon under which Horizon operated up tonine 70-seat CRJ 700 aircraft.  In September 2006,the Company amended the agreement with Horizon to provide that all nine CRJ-700aircraft would be returned to Horizon during a one-year ramp down period whichbegan in January 2007. The contract was terminated upon completion of theramp down period in November 2007.

 

In accordance with EmergingIssues Task Force No. 01-08, “*Determining Whether anArrangement Contains a Lease*” (“EITF 01-08”), the Company hasconcluded that each agreement with the Regional Partners contains a lease asthe agreement conveys the right to use a specific number and specific type ofaircraft over a stated period of time, and as such, has reported revenues andexpenses related to Regional Partners on a gross basis.  Revenues for jointly served routes arepro-rated to the segment operated by the Regional Partners based on miles flownand are included in passenger revenues. Expenses directly related to the flights flown by the Regional Partnersare included in operating expenses — regional partners.  The Company allocates indirect expensesbetween mainline and Regional Partners operations by using Regional Partnersdepartures, available seat miles, or passengers as a percentage of systemcombined departures, available seat miles or passengers.

 

***Preparation of Financial Statements and Use of Estimates***

 

The preparation of financial statements inconformity with U.S. 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.

 

***Reclassification of Prior Year Amounts***

 

Certain prior year itemshave been reclassified to conform to the current year presentation.

 

***Cash and Cash Equivalents***

 

For financial statement purposes, the Company considers cash andshort-term cash investments with an original maturity of three months or lessto be cash equivalents.

 

Short-term cash investments consist of the following: (a) bondmoney market funds and commercial paper with maturities of less than threemonths, classified as held-to-maturity and are carried at amortized cost

 

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**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

which approximates fair value and (b) money market funds withmaturities of less than three months, classified as available for salesecurities and stated at fair value. Held-to-maturity securities are those securities in which the Companyhas the ability and intent to hold the security until maturity.  Interest income is recognized when earned.There were no unrealized gains or losses on these investments for the yearsended March 31, 2008, 2007 and 2006.

 

***Investments Securities***

 

Investment securities consist of auction ratesecurities with auction reset periods less than 12 months, classified asavailable-for-sale securities and stated at fair value.

 

***Restricted Investments***

 

Restricted investments primarily relate to funds held by companieswhich process credit card sale transactions and credit card processors areinvested in money market accounts.  Theyalso include certificates of deposit that secure certain letters of creditissued for workers compensation claim reserves and certain airportauthorities.  Restricted investments arecarried at cost, which management believes approximates fair value.  Maturities are for one year or less and theCompany intends to hold restricted investments until maturity.

 

The Company  has a contract witha bankcard processor that requires a holdback of bankcard funds equal to acertain percentage of our air traffic liability associated with the estimatedamount of bankcard transactions.  As of March 31,2008, that amount totaled $54,500,000. In June 2008 the Company reached a revised agreement with thisbankcard processor that requires adjustments to the reserve account on amonthly basis based on current and projected air traffic liability associatedwith these estimated bankcard transactions. As of June 20, 2008, this agreement results in an increase to theholdback to approximately $61,940,000. The Company and the creditors committeecontinue to negotiate the terms of the revised agreement.  In addition, a credit card company began aholdback during the fiscal year ending March 31, 2008 which totaled$15,500,000 at March 31, 2008.  Asof June 20, 2008, the requirements resulted in an increase to $22,655,000for this credit card company.

 

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**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

 

**Notes tothe Consolidated Financial Statements, continued**

 

***Valuation and QualifyingAccounts***

 

The followingtable summarizes the Company’s valuation and qualifying accounts as of March 31,2008, 2007, and 2006, and the associated activity for the years then ended.

 

| ** **                       | ** ** | **Allowance for**     | ** ** | **Allowance for**  | ** ** |
|----------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | **Doubtful Accounts** | ** ** | **Inventory**           | ** ** |
| ** **                       | ** ** | **(In thousands)**    | ** ** | **(In thousands)** | ** ** |
| Balance at March 31, 2005   |       | $                          | 927        |                    | $          | 3,973 |   |
|                             |       |                       |       |                    |       |
| Additional provisions            |       | 579                        |       | 169                     |       |
| Deductions (1)                   |       | (245                       | )          | (165                    | )          |
| Transfer to assets held for sale |       | —                     |       | (3,599                  | )          |
| Balance at March 31, 2006   |       | $                          | 1,261      |                    | $          | 378 |   |
|                             |       |                       |       |                    |       |
| Additional provisions            |       | 400                        |       | 159                     |       |
| Deductions (1)                   |       | (1,029                     | )          | —                  |       |
| Transfer to assets held for sale |       | —                     |       | (208                    | )          |
| Balance at March 31, 2007   |       | 632                        |       | $                       | 329        |   |
|                             |       |                       |       |                    |       |
| Additional provisions            |       | 636                        |       | 161                     |       |
| Deductions (1)                   |       | (868                       | )          |                    |       |
| Balance at March 31, 2008   |       | $                          | 400        |                    | $          | 490 |   |

 

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(1)  Uncollectible accounts written off,net of recoveries, for the allowance of doubtful accounts

 

The allowance for doubtful accounts isprimarily based on the specific identification method.

 

***Inventories***

 

Inventories consist ofexpendable aircraft spare parts, supplies and aircraft fuel and are stated atthe lower of cost or market.  Inventoriesare accounted for on a first-in, first-out basis and are charged to expense asthey are used.  An allowance forobsolescence on aircraft spare parts is provided over the remaining useful lifeof the related aircraft to reduce the carrying costs to lower of cost ormarket.

 

***Assets Held For Sale***

 

Assets held for sale arevalued at the lower of the carrying amount or the estimated market value lessselling costs.  The Company monitorsresale values for its assets held for sale quarterly using an analysis ofcurrent sales and estimates obtained from outside vendors.

 

***Property and Equipment***

 

Property and equipment are carried atcost.  Major additions, betterments andrenewals are capitalized.  Depreciationis provided for on a straight-line basis to estimated residual values overestimated depreciable lives as follows:

 

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**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

** **

**Notes to the Consolidated Financial Statements,continued**

 
| **Description**                                       | ** ** | **Lives**                                           |
|-------------------------------------------------------|------------|-----------------------------------------------------|
| Aircraft:                                             |       |                                                |
| Airbus A318,  A319 & A320                    |       | 25 years                                            |
| Bombardier Q400                                       |       | 20 years                                            |
| Aircraft spare parts                                  |       | 10 years                                            |
| Improvements to leased aircraft                       |       | Shorter of the life of improvementsor term of lease |
| Capitalized software                                  |       | 3 to 5 years                                        |
| Ground property; equipment and leasehold improvements |       | 3 to 5 years or term of lease, which ever is less   |

 

Residual values for aircraftare at 25% of the aircraft cost and 10% for aircraft spare parts.  In estimating useful lives and residualvalues of our aircraft, the Company relies upon estimates from industry expertsas well as their anticipated utilization of the aircraft.

 

Manufacturers’ and LessorCredits:  The Company receives credits inconnection with its purchase and lease of aircraft for engines, auxiliary powerunits and other rotable parts.  Thesecredits are deferred until the aircraft, engines, auxiliary power units andother rotable parts are delivered and then applied as a reduction of the costof the related equipment.  The Companyalso receives credits in connection with certain aircraft lease agreements.  These credits are recognized as a credit tolease expense over the lease term.

 

***Deferred Loan Fees***

 

Deferred loan fees are deferred and amortizedover the term of the related debt obligation.

 

***Fair Value of FinancialInstruments***

 

The Company estimates the fair value of itsmonetary assets and liabilities based upon existing interest rates related tosuch assets and liabilities compared to current rates of interest forinstruments with a similar nature and degree of risk.  The Company estimates that the carrying valueof all of its monetary assets and liabilities approximates fair value as of March 31,2008 and 2007 with the exception of its fixed rate loans and investmentsecurities.

 

The estimated fair value of the Company’sfixed rate loans (which is based on current rates available to the Company fordebt of the same remaining maturity), and the estimated fair value of theCompany’s convertible bonds (which is based on the last available trading priceas of March 31, 2008), was approximately $120,154,000 as compared to thecarrying amount of $171,338,000 at March 31, 2008. The estimated fairvalue of the Company’s fixed rate loans (which is based on current ratesavailable to the Company for debt of the same remaining maturity), and theestimated fair value of the Company’s convertible bonds (which is based on thelast available trading price as of March 31, 2007) was approximately$119,923,000 as compared to the carrying amount of $126,314,000 at March 31,2007.

 

At March 31, 2008, the fair valuesof the auction rate securities (“ARS”), all of which are collateralized bystudent loan portfolios and are guaranteed by the United States Government,were estimated through discounted cash flow models. These models consider,among other things, the timing of expected future successful auctions, collateralizationof underlying security investments and the credit worthiness of the 

 

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** **

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

** **

**Notes to the Consolidated Financial Statements,continued**

 

issuer. Beginning in February 2008, theauctions for most of the Company’s holdings in ARS were unsuccessful, resultingin the Company continuing to hold them beyond their typical auction resetdates. As a result of the lack of liquidity in the ARS market for the yearended March 31, 2008, the Company recorded an unrealized loss on ourARS of $299,000, which is reflected in accumulated other comprehensive loss inthe consolidated balance sheet.  Inaddition to adjusting the carrying value of its ARS, if the assessment of thevaluation adjustment in future periods is other than temporary, the Companywould record an impairment charge through the Statement of Operations.

 

***Revenue Recognition***

 

*Passenger tickets* - Passenger,cargo, and other revenues are recognized when the transportation is provided orafter the tickets expire, one year after date of issuance, and are net ofexcise taxes, passenger facility charges and security fees.  Revenues thathave been deferred are included in the accompanying consolidated balance sheetsas air traffic liability.  Included inpassenger revenue are change fees imposed on passengers for making schedulechanges to non-refundable tickets.  Change fees are recognized as revenueat the time the change fees are collected from the passenger as they are aseparate transaction that occurs subsequent to the date of the original ticketsale.

 

*Taxes and Fees* – The Company isrequired to charge certain taxes and fees on passenger tickets.  These taxes and fees include U.S. federaltransportation taxes, federal security charges, airport passenger facilitycharges and foreign arrival and departure taxes.  These taxes and fees are legal assessments onthe customer, for which the Company has an obligation to act as a collectionagent.  Because the Company is notentitled to retain these taxes and fees, such amounts are not included inpassenger revenue.  The Company records aliability when the amounts are collected and reduce the liability when paymentsare made to the applicable government agency or operating carrier.

 

***Passenger TrafficCommissions and Related Expenses***

 

Passenger traffic commissions and related expenses areexpensed when the transportation is provided and the related revenue isrecognized.  Passenger trafficcommissions and related expenses not yet recognized are included as a prepaidexpense.

 

***Aircraft Maintenance***

 

The Company operates under an FAA-approvedcontinuous inspection and maintenance program. The Company accounts formaintenance activities on the direct expense method.  Under this method, major overhaul maintenancecosts are recognized as expense as maintenance services are performed, asflight hours are flown for nonrefundable maintenance payments required by leaseagreements, and as the obligation is incurred for payments made under serviceagreements.  Routine maintenance andrepairs are charged to operations as incurred.

 

Effective January 1, 2003, the Companyentered 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 the Company’s owned aircraft or May 1, 2019,whichever comes first. For each leased aircraft, the term coincides with theinitial lease term of 12 years.  Thisagreement precludes the Company from using another third party for suchservices during the term.  For ownedaircraft, this agreement requires monthly payments at a specified ratemultiplied by the number of flight hours the engines were operated during thatmonth.  The costs under this agreementfor our 

 

F-17

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

** **

**Notes to the Consolidated Financial Statements,continued**

 

purchased aircraft for the years ended March 31,2008, 2007 and 2006 were approximately $9,890,000, $6,374,000 and $3,545,000,respectively.  Any unplanned maintenanceexpenses not otherwise covered by reserves are paid by the Company.  For leased aircraft that are covered by theagreement, the Company does not make the flight hour payments to GE under theagreement; instead the Company makes engine maintenance reserve payments whichare expensed as paid as required under the applicable lease agreements.  At the time a leased engine makes a scheduledmaintenance shop visit, the lessors pay GE directly for the repair of aircraftengines from reserve accounts established under the applicable leasedocuments.  To the extent actualmaintenance expenses incurred exceed these reserves, the Company is required topay these amounts.

 

###### ***Advertising Costs***

######  

***The Company expenses the costs ofadvertising as promotion and sales expense in the year incurred.  Advertising expense was $10,114,000,$12,904,000 and $9,588,000 for the years ended March 31, 2008, 2007 and2006, and the amount of expense recognized related to advertising bartertransactions were $2,113,000, $3,814,000, and $2,104,000, respectively.  During the years ended March 31, 2008,2007 and 2006, the amount of revenue recognized related to advertising bartertransactions was $1,128,000, $2,463,000, and $1,511,000, respectively.  Prepaid barter expenses as of March 31,2008 and 2007 were $721,000 and $1,038,000, respectively.***

*** ***

***Impairment of Long-Lived Assets***

 

The Company records impairment losses onlong-lived assets used in operations when indicators of impairment are presentand the undiscounted future cash flows estimated to be generated by thoseassets are less than the carrying amount of the assets.  If an impairment occurs, the loss is measuredby comparing the fair value of the asset to its carrying amount.

 

***Income Taxes***

 

The Company accounts for income taxes using the asset and liabilitymethod.  Under that method, deferredincome taxes are recognized for the tax consequences of “temporary differences”by applying enacted statutory tax rates applicable to future years todifferences between the financial statement carrying amounts and tax bases ofexisting assets and liabilities and net operating losses and tax creditcarryforwards.  A valuation allowance isprovided to the extent that it is more likely than not that deferred tax assetswill not be realized.  The effect ondeferred taxes from a change in tax rates is recognized in income in the periodthat includes the enactment date. Effective April 1, 2007, the Company adopted the provisions ofFinancial Accounting Standards Board (“FASB”) Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB No. 109.

 

***Loss Per Common Share***

 

Basic loss per common share excludes the effect of potentially dilutivesecurities and is computed by dividing income by the weighted-average number ofcommon shares outstanding for the period. Diluted earnings per common share reflects the potential dilution of allsecurities that could share in earnings. Shares outstanding include sharescontributed to the Employee Stock Ownership Plan.

 

***Customer Loyalty Program***

 

The Company offers *EarlyReturns*, afrequent flyer program to encourage travel on its airline and customerloyalty.  The Company accounts for the *EarlyReturns* program under the incremental cost methodwhereby 

 

F-18

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

** **

**Notes to the Consolidated Financial Statements,continued**

 

travel awards are valued at the incremental cost of carrying onepassenger based on members that have obtained earned a travel award.  Those incremental costs are based onexpectations of expenses to be incurred on a per passenger basis and includefood and beverages, fuel, liability insurance, and ticketing costs.  The incremental costs do not includeallocations of overhead expenses, salaries, aircraft cost or flight profit orlosses. The Companyrecords a liability for mileage earned by participants who have reached thelevel to become eligible for a free travel award.  The liability includes awards based on thenumber of complete free travel awards accumulated in a participant account andexcludes any obligation for partial awards. The Company does not record a liability for the expected redemption ofmiles for non-travel awards since the cost of these awards to us is negligible.

 

As of March 31,2008 and 2007, the Company estimated that approximately 472,000 and 324,000round-trip flight awards, respectively, were eligible for redemption byEarlyReturns members who have mileage credits exceeding the 15,000-mile freeround-trip domestic ticket award threshold. As of March 31, 2008 and 2007, the Company had recorded a liabilityof approximately $10,059,000 and $4,249,000, respectively, for theserewards.  The increase in the liabilityis primarily related to the increase in the incremental cost of carriage whichis significantly impacted by fuel price fluctuations.

 

The Company alsosells points in *EarlyReturns* tothird parties.  The portion of the salethat is for travel is deferred and recognized as passenger revenue when theCompany estimates the transportation is provided.  The remaining portion, referred to as themarketing component, is recognized as other revenue in the month received.

 

***Co-Branded Credit CardArrangement***

 

***The Companyentered into a co-branded credit card arrangement with a MasterCard issuingbank in March 2003.  This affinityagreement provides that the Company will receive a fixed fee for each newaccount, which varies based on the type of account, and a percentage of theannual renewal fees that the bank receives. The Company receives an increased fee for new accounts it solicits.  The Company also receives fees for thepurchase of frequent flier miles awarded to the credit card customers.***

*** ***

The Company accounts for all fees received under the co-branded creditcard program by allocating the fees between the portion that represents theestimated value of the subsequent travel award to be provided, and the portionwhich represents a marketing fee to cover marketing and other related costs toadminister the program.  This latterportion (referred to as the marketing component) represents the residual afterdetermination of the value of the travel component.  The component representing travel isdetermined by reference to an equivalent restricted fare, which is used as aproxy for the value of travel of a frequent flyer mileage award. The travelcomponent is deferred and recognized as revenue over the estimated usage periodof the frequent flyer mileage awards of 20 months.  The Company has estimated the period overwhich the frequent flier mileage awards will be used based on the usage periodhistory of the frequent flier mileage awards. The Company records the marketingcomponent of the revenue earned under this agreement as other revenue in themonth received.

 

For the year ended March 31, 2008, the Company received total feesof $44,369,000.  Of that amount,$25,545,000 was initially deferred as the travel component, and the remainingmarketing component of $18,824,000 was recognized as other revenue.  For the year ended March 31, 2007, theCompany received total fees of $36,917,000 under the credit cardagreement.  Of that amount, $25,219,000was deferred as the travel component, and the remaining marketing component of$11,698,000 was recognized as other revenue. For the year ended March 31, 2006, the Company received total feesof $24,986,000.  Of that amount,$19,686,000 was deferred as the travel component, and the remaining marketingcomponent of 

 

F-19

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

** **

**Notes to the Consolidated Financial Statements,continued**

 

$5,300,000 was recognized as other revenue.  Amortization of deferred revenue recognizedin earnings during the years ended March 31, 2008, 2007 and 2006 was$24,789,000, $20,158,000 and $11,059,000, respectively.

 

###### ***Supplemental Disclosure of Cash Flow Information***

######  

***Cash Paid During the Year for****:*

 
| ** ** | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **(In thousands)** | ** ** |
| Interest   |       | $                       | 34,197     |     | $          | 28,047   |       | $ | 18,911 |   |
| Taxes      |       | $                       | 91         |     | $          | 176      |       | $ | 7 |   |

 

Interest incurred during the year ended March 31,2008 was $39,062,000, of which $2,618,000 was capitalized.  Interest incurred during the year ended March 31,2007 was $31,948,000, of which $2,050,000 was capitalized.

 

***Non-Cash Items****:*

 

**Applicationof Pre-Delivery Payments** - In the years ended March 31, 2008, 2007 and 2006, the Companyapplied pre-delivery payments of $67,023,000, $34,946,000 and $19,513,000,respectively, towards the purchase price of aircraft and LiveTV equipment.

 

**LiveTVHardware Agreement** -During the year ended March 31, 2008, the Company sold LiveTV equipment of$14,668,000 in exchange for a note receivable (see Note 5).  The Company also had a non-cash charge of$1,900,000 for the difference between the net present value of the of thepurchase price and the net book value of the equipment sold.

 

**Impairmentof Available for Sale Securities** - During the year ended March 31, 2008, the Company wrote-down thefair value of available-for-sale securities by $299,000, which is reflected inother comprehensive loss.

 

***Derivative Instruments***

 

TheCompany accounts for derivative financial instruments in accordance with theprovisions of Statement of Financial Accounting Standards No. 133, *“Accounting for Derivative Instruments and HedgingActivities”* (“SFAS 133”), as amended andinterpreted.  SFAS 133 requires theCompany to measure all derivatives at fair value and to recognize them in thebalance sheet as an asset or liability. For derivatives designated as cash flow hedges, changes in fair value ofthe derivative are generally reported in other comprehensive income (“OCI”) andare subsequently reclassified into earnings when the hedged item affectsearnings.  Changes in fair value ofderivative instruments not designated as hedging instruments and ineffectiveportions of hedges are recognized in earnings in the current period.

 

***Accounting for Long-LivedAssets.***

 

Inaccounting for long-lived assets, the Company makes estimates about theexpected useful lives, projected residual values and the potential forimpairment.  In estimating useful livesand residual values of the aircraft, the Company has relied upon actualindustry experience with the same or similar aircraft types and the anticipatedutilization of the aircraft.  The Company’slong-lived assets are evaluated for impairment at least annually or when eventsand circumstances indicate that the assets may be impaired. Indicators includeoperating or cash flow losses, significant decreases in market value or changesin technology.  The Company’s assets areall relatively new and aircraft are actively deployed in the 

 

F-20

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

** **

**Notes to the Consolidated Financial Statements,continued**

 

Company’sroute system.  The Company has recentlysold aircraft in amounts that are in excess of their carrying values.  The Company has not identified anysignificant impairments related to long-lived assets at this time.

 

***Self-Insurance***

 

TheCompany is self-insured for the majority of the group health insurance costs,subject to specific retention levels. The Company records its liability for health insurance claims based onits estimate of claims that have been incurred but not reported.

 

TheCompany is also self-insured for the majority of its workers’ compensationcost.  The liability for workers’compensation claims is the estimated total cost of the claims on afully-developed basis, up to a maximum stop loss coverage.  The Company engaged a specialist to assist inevaluating estimates of reserves for claims.

 

***Stock-Based Compensation***

 

Effective April 1, 2006, the Companyadopted the provisions of Statement of Financial Accounting Standards No. 123(R),*Share-Based Payment*, and relatedinterpretations (“SFAS 123(R)”), to account for stock-based compensation usingthe modified prospective transition method and therefore did not restate priorperiod results.  SFAS 123(R) supersedesAccounting Principles Board Opinion No. 25*,Accounting for Stock Issued to Employees* (“APB No. 25”), andrevises guidance in SFAS 123,*Accounting forStock-Based Compensation*. Among other things, SFAS 123(R) requiresthat compensation expense be recognized in the financial statements forshare-based awards based on the grant date fair value of those awards. Themodified prospective transition method applies to both (1) unvested awardsunder the Company’s 2004 Equity Incentive Plan (“2004 Plan”) outstanding as of March 31,2006, based on the grant date fair value estimated in accordance with the proforma provisions of SFAS 123 and (2) any new share-based awards grantedsubsequent to March 31, 2006, based on the grant-date fair value estimatedin accordance with the provisions of SFAS 123(R). Additionally, stock-basedcompensation expense includes an estimate for pre-vesting forfeitures and isrecognized over the requisite service periods of the awards on a straight-linebasis, which is commensurate with the vesting term. The Company’s options aretypically granted with graded vesting provisions, and compensation cost isamortized over the service period using the straight-line method.

 

***New Accounting StandardsNot Yet Adopted***

 

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *Fair Value Measurements*(“FAS 157”). FAS 157 defines fair value, establishes a framework for measuringfair value under U.S. generally accepted accounting principles and expandsdisclosures about fair value measurements. FAS 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007 andinterim periods within those fiscal years. The Company has considered theimpact of adopting FAS 157 and does not believe it will result in a materialcumulative effect adjustment on the consolidated financial statements whenadopted on April 1, 2008.

 

In February 2007, theFASB issued Statement of Financial Accounting Standards No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*(“FAS 159”). This standard permits companies to choose to measure manyfinancial instruments and certain other items at fair value, following the 

 

F-21

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

** **

**Notes to the Consolidated Financial Statements,continued**

 

provisions of FAS 157. FAS159 is effective for fiscal years beginning after November 15, 2007. TheCompany has not yet determined the impact of adopting FAS 159.

 

In March 2008, the FASB issued Statementof Financial Accounting Standards No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities - an Amendment of FASBStatement 133*(“FAS 161”). This standard enhances requireddisclosures regarding derivatives and hedging activities to help investorsbetter understand how derivative instruments and hedging activities affect anentity’s financial position, financial performance and cash flows.  Requirements under FAS 161 include disclosureof the objectives for using derivative instruments, disclosure of the fairvalues of derivative instruments and their gains and losses in a tabularformat, disclosure of credit risk related features, and cross-referencingwithin the footnotes of derivative-related information.  FAS 161 is effective for fiscal years and interimperiods beginning after November 15, 2008. The Company expects to complywith the disclosure provision of adopting FAS 161 upon adoption.

 

***3.***         DerivativeInstruments

*** ***

***Fuel Hedging***

*** ***

The Company’s operations are inherently dependent upon the price of andavailability of aircraft fuel.  In November 2002,the Company initiated a fuel hedging program using a variety of financialderivative instruments.  These fuel hedges do not qualify for hedgeaccounting under SFAS 133, and, as such, realized and non-cash marks to marketadjustments are included in aircraft fuel expense.

 

The results of operations for the year ended March 31, 2008, 2007and 2006 include non-cash mark to market derivative gains/(losses) of$1,847,000, $12,753,000 and $(2,163,000), respectively. Cash settlements forfuel derivatives contracts settled during the years ended March 31, 2008,2007 and 2006 were receipts of $30,740,000, payments of $3,925,000 and receiptsof $5,338,000, respectively.

 

Due to the Company’s Chapter 11 filings, allfuel hedge contracts outstanding as of March 31, 2008 were terminated in May 2008and subsequently settled for cash proceeds of $23,409,000.  Our statement of operations in 2008 includeda reduction of fuel expense of $30,740,000 as a result of our cash settlementsand $1,847,000 in non-cash mark to market derivative gains from our fuelhedging contracts, that are not expected to reoccur in the Company’s fiscalyear ended March 31, 2009. Additionally, the price for fuel has risen from the average price duringthe fiscal year ended March 31, 2008 of $2.45 per gallon to $4.22 as of June 23,2008.

 

The following table summarizes the components of aircraft fuel expensefor the years ended March 31, 2008, 2007 and 2006:

 
| ** **                                                    | ** ** | **Year Ended March 31** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                    | ** ** | **(In thousands)**                | ** ** |
| Aircraft fuel expense – mainline and Lynx Aviation       |       | $                                      | 454,822    |   | $ | 343,082 |   | $ | 281,906 |   |
| Aircraft fuel expense – included in regional  partners   |       | 51,817                                 |       | 33,163 |   | 31,713 |   |
| Total system-wide fuel expense                                |       | 506,639                                |       | 376,245 |   | 313,619 |   |
| Changes in fair value and settlement of fuel hedge  contracts |       | 32,587                                 |       | 8,828 |   | 3,175 |   |
| Total raw aircraft fuel expense                               |       | $                                      | 539,226    |   | $ | 385,073 |   | $ | 316,794 |   |

 

TheCompany entered into the following swap and collar agreements outstanding at March 31,2008 and 2007, which had fair values resulting in assets of $15,576,000 and$13,729,000, respectively:

 

F-22

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

** **

**Notes to the Consolidated Financial Statements,continued**

 

**March 31, 2008:**

 
| **Date**           | ** ** | **Product***              | ** ** | **Notional volume**  (barrels per month)** | ** ** | **Period covered**                             | ** ** | **Price (per gallon or barrel)**                                                           | ** ** |
|--------------------|------------|---------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| November 2007 |       | Jet A Crack  Spread Swaps |       | 87,000                                          |       | January 1,  2008 - March 31, 2008    |       | Swap priced at  $19.30 per barrel                                                          |       |
|               |       |                      |       |                                            |       |                                           |       |                                                                                       |       |
| November 2007 |       | Jet A Crack  Spread Swaps |       | 176,000                                         |       | April 1,  2008 - June, 30,2008            |       | Swap priced at  $17.80 per barrel                                                          |       |
|               |       |                      |       |                                            |       |                                           |       |                                                                                       |       |
| November 2007 |       | Jet A Crack  Spread Swaps |       | 186,000                                         |       | July 1,  2008-September 30, 2008     |       | Swap priced at  18.95 per barrel                                                           |       |
|               |       |                      |       |                                            |       |                                           |       |                                                                                       |       |
| January 2008  |       | Crude Oil                 |       | 106,000                                         |       | April 1,  2008 - June, 30,2008            |       | Three way collar  with a call of $90.00 per barrel (capped at $105.00) and a put of $85.50 |       |
|               |       |                      |       |                                            |       |                                           |       |                                                                                       |       |
| January 2008  |       | Crude Oil                 |       | 111,000                                         |       | July 1,  2008-September 30, 2008     |       | Three way collar  with a call of $89.00 per barrel (capped at $104.00) and a put of $82.95 |       |
|               |       |                      |       |                                            |       |                                           |       |                                                                                       |       |
| January 2008  |       | Crude Oil                 |       | 103,000                                         |       | October 1,  2008 - December 31, 2008 |       | Three way collar  with a call of $88.00 per barrel (capped at $103.00) and a put of $80.70 |       |
|               |       |                      |       |                                            |       |                                           |       |                                                                                       |       |
| January 2008  |       | Crude Oil                 |       | 102,000                                         |       | January 1,  2009 - March 31, 2009    |       | Three way collar  with a call of $87.00 per barrel (capped at $102.00) and a put of $79.05 |       |

 

F-23

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

**March 31, 2007:**

 
| **Date**          | ** ** | **Product*** | ** ** | **Notional volume**   (barrels per month)** | ** ** | **Period covered**                            | ** ** | **Price (per gallon or barrel)**              |   |
|-------------------|------------|--------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|--------|
| January 2007 |       | Jet A        |       | 100,000                                     |       | April 1, 2007 - June, 30,2007            |       | $1.817 per gallon, with a floating price      |   |
|              |       |         |       |                                        |       |                                          |       |                                          |   |
| January 2007 |       | Crude Oil    |       | 40,000                                      |       | July 1, 2007-September 30, 2007     |       | $64.70 per barrel cap, with a floor of $59.15 |   |
|              |       |         |       |                                        |       |                                          |       |                                          |   |
| January 2007 |       | Crude Oil    |       | 80,000                                      |       | October 1, 2007 - December 31, 2007 |       | $65.90 per barrel cap, with a floor of $59.90 |   |
|              |       |         |       |                                        |       |                                          |       |                                          |   |
| January 2007 |       | Crude Oil    |       | 80,000                                      |       | April 1, 2007 - June, 30, 2007           |       | $59.30 per barrel cap, with a floor of $49.30 |   |
|              |       |         |       |                                        |       |                                          |       |                                          |   |
| January 2007 |       | Crude Oil    |       | 80,000                                      |       | July 1, 2007-September 30, 2007     |       | $60.75 per barrel cap, with a floor of $50.45 |   |
|              |       |         |       |                                        |       |                                          |       |                                          |   |
| January 2007 |       | Crude Oil    |       | 80,000                                      |       | October 1, 2007 - December 31, 2007 |       | $62.00 per barrel cap, with a floor of $51.10 |   |
|              |       |         |       |                                        |       |                                          |       |                                          |   |
| January 2007 |       | Crude Oil    |       | 80,000                                      |       | January 1, 2008 - March 31, 2008    |       | $62.60 per barrel cap, with a floor of $52.10 |   |

 

----

| *  | Jet A is Gulf Coast Jet  A fuel. Crude oil is West Texas Intermediate crude oil. Jet A Crack spread  swaps are hedges in which the Company has hedged the difference between Gulf  Cost Jet A fuel costs and the West Texas Intermediate crude oil costs. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** | One barrel is equal to 42 gallons.                                                                                                                                                                                                                        |

 

**4.****        ****Assets Held For Sale**

 

In April 2005, the Company retired itsremaining Boeing aircraft and has classified all remaining Boeing aircraftrotable spare parts and expendable inventories as “assets held for sale.”  As such, these assets have been valued at thelower of the carrying amount or the estimated market value less selling costs.

 

In August 2004, theCompany began selling Boeing spare parts and entered into agreements with twovendors to sell these parts on a consignment basis.  The Company monitors resale values for Boeingparts quarterly using estimates obtained from outside vendors.  During the year ended March 31, 2005,the Company recorded total impairments on Boeing rotable spare parts andexpendable inventories of $5,123,000 due to declines in the resale values ofthese parts.  Based on the current marketprices and recent sales history, the Company has determined that there iscurrently no additional impairment required for the Boeing rotable spare partsand expendable inventories for the years ending March 31, 2008 and2007.  During the years ended March 31,2008 and 2007, the Company realized net gains of $429,000 and $1,203,000,respectively, on the sale of these assets.

 

F-24

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possessionas of April 10, 2008)**

** **

**Notes to the ConsolidatedFinancial Statements, continued**

 

**5.****        ****Live TV**

 

In January 2008, theCompany entered into two separate agreements with LiveTV LLC (“LiveTV”): anIn-Flight Entertainment System Hardware Agreement (“Hardware Agreement”); andan In-Flight Entertainment System Services Agreement (“Service Agreement”)which replaced the existing LiveTV agreement in place.  Under the Hardware Agreement, the Companysold all of its purchased in-seat video entertainment systems to LiveTV inexchange for a note receivable payable to the Company over the lesser of theremaining useful life of the aircraft in which the equipment was installed or12 years.  The Company recognized a losson the sale of the equipment of $1,900,000 for the difference between the netpresent value of the purchase price of the equipment sold and its net bookvalue.

 

The Services Agreementprovides the Company’s customers with in-seat video entertainment and LiveTVretains all access fee revenues under the agreement, subject to certainquarterly minimum revenue guarantees if certain usage percentage thresholds arenot met.  As such, as of January 2008,the Company no longer records revenue for LiveTV and pay-per movies or paysmonthly service fees, and only records expenses for services in which theCompany provided the service free to the customer. To the extent usage thresholdsare not met, the quarterly minimum revenue guarantee is payable for thedifference between achieved revenue and the quarterly minimum.

 

**6.****        ****Property and Equipment, Net**

 

At March 31, 2008 and 2007, property and equipment consisted ofthe following:

 
| ** **                                                           | ** ** | **2008**                | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                           | ** ** | **(in thousands)** | ** ** |
| Aircraft, spare aircraft parts, and improvements to  leased aircraft |       | $                       | 942,162    |     | $          | 667,364 |   |
| Ground property, equipment and leasehold  improvements               |       | 55,176                  |       | 42,301   |       |
| Computer software                                                    |       | 17,280                  |       | 10,234   |       |
| Construction in progress                                             |       | 4,548                   |       | 5,191    |       |
|                                                                 |       | 1,019,166               |       | 725,090  |       |
| Less accumulated depreciation                                        |       | (148,722                | )          | (119,959 | )          |
|                                                                 |       |                    |       |     |       |
| Property and equipment, net                                          |       | $                       | 870,444    |     | $          | 605,131 |   |

 

Property and equipmentincludes capitalized interest of $2,864,000 and $1,970,000 at March 31,2008 and March 31 2007, respectively.

 

During the year ended March 31,2008, the Company recorded additional depreciation expense of $3,339,000related to a change in estimate of the useful life of its aircraft seats due tothe implementation of a program to replace its Airbus seats with new leatherseats which was completed in May 2008.

 

In December 2007, theCompany executed sale-lease back transactions on five Bombardier Q400aircraft.  The gain on the sale-leaseback transactions was $801,000, which was deferred over the new lease terms of15 years.  In June 2006, the Company completed a sale-leaseback transactionfor an Airbus 319 that resulted in a gain of $733,000. This gain was deferredand is being amortized over the 12-year lease term.

 

F-25

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

***Sale of Aircraft***

 

In March 2008 the Company signed aletter of intent for the sale of four aircraft. In May 2008, the Company sold two Airbus A319 aircraft for proceedsof $59,000,000, with total net book values of $52,116,000. This resulted inretirement of debt of $33,754,000 related to the mortgage on the sold aircraftand a book gain of $9,200,000 on the transactions.  The Company plans to sell the remaining twoAirbus A318 aircraft in August 2008 with net book values estimated to be$44,800,000.  The Company also plans tosell or return to lessors another seven aircraft starting in September throughNovember 2008.  These assets havenot been classified as assets held for sale on the balance sheet due to thefact that these assets are still held and used in the Company’s operations.

 

**7.****        ****Deferred Revenue and OtherLiabilities**

 

At March 31, 2008 and March 31, 2007,deferred revenue and other liabilities consisted of the following:

 

| ** **                                                    | ** ** | **2008**                | ** ** | **2007** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                    | ** ** | **(in thousands)** | ** ** |
| Deferred revenue primarily related to co-branded  credit card |       | $                       | 24,472     |     | $          | 19,047 |   |
| Deferred rent                                                 |       | 17,489                  |       | 18,861   |       |
| Other                                                         |       | 627                     |       | 630      |       |
|                                                          |       |                    |       |     |       |
| Total deferred revenue and other liabilities                  |       | 42,588                  |       | 38,538   |       |
| Less: current portion                                         |       | (18,189                 | )          | (16,400  | )          |
|                                                          |       | $                       | 24,399     |     | $          | 22,138 |   |

 

**8.****        ****Other Accrued Expenses**

 

At March 31, 2008 and March 31, 2007, otheraccrued expenses consisted of the following:

 

| ** **                                       | ** ** | **2008**                | ** ** | **2007** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                       | ** ** | **(In thousands)** | ** ** |
| Accrued salaries and benefits                    |       | $                       | 37,456     |     | $          | 42,616 |   |
| Federal excise and other passenger taxes payable |       | 30,298                  |       | 26,914   |       |
| Property tax payable and income taxes payable    |       | 3,801                   |       | 2,593    |       |
| Other                                            |       | 12,503                  |       | 8,201    |       |
|                                             |       |                    |       |     |       |
| Total other accrued expenses                     |       | $                       | 84,058     |     | $          | 80,324 |   |

 

F-26

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

**9.****        ****Lease Commitments**

 

***Aircraft Leases***

 

At March 31, 2008 and 2007, the Companyoperated 43 and 38****leased****aircraft,respectively, which are accounted for under operating lease agreements withinitial terms of 12-15 years.   Securitydeposits related to leased aircraft and future leased aircraft deliveries at March 31,2008 and 2007 totaled $23,090,000 and $18,205,000, respectively, and arereported in the consolidated balance sheets in security and other deposits.

 

In addition to scheduled future minimum leasepayments, the Company isrequired to make supplemental payments to cover the cost of major scheduledmaintenance overhauls of these aircraft. Thesesupplemental payments are based onthe number of flight hours flown and/or flight departures and are included inmaintenance expense. The lease agreements require theCompany to pay taxes, maintenance, insurance, and other operating expensesapplicable to the leased property.  Tothe extent these reserves are not used for major maintenance during the leaseterms, excess supplemental payments are forfeited to the aircraft lessors aftertermination of the lease.  Additionally,to the extent actual maintenance expenses incurred exceed these reserves, theCompany is required to pay these amounts. During the years ended March 31,2008, 2007 and 2006, supplemental payments were $27,583,000, $26,187,000 and$24,933,000, respectively.

 

***Other Leases***

 

The Company leases office and hangar space,spare engines and office equipment for its headquarters, reservation facilities,airport facilities, and certain other equipment.  The Company also leases certain airport gatefacilities on a month-to-month basis. Amounts for leases that are on a month-to-month basis are not includedas an obligation in the table below.  Thetable also excludes lease payments for a new headquarter building which wasterminated during the bankruptcy process in May 2008.

 

At March 31, 2008, commitments under non-cancelable operatingleases (excluding aircraft supplemental payment requirements) with terms inexcess of one year were as follows:

 

| ** **                        | ** ** | **Aircraft**            | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| ** **                        | ** ** | **(In thousands)** | ** ** |
| **Fiscal year ending:** |       |                    |       |      |       |      |       |   |   |   |
| 2009                              |       | $                       | 127,030    |      | $          | 30,214    |       | $ | 157,244 |   |
| 2010                              |       | 119,678                 |       | 26,472    |       | 146,150   |       |
| 2011                              |       | 119,678                 |       | 9,785     |       | 129,463   |       |
| 2012                              |       | 119,678                 |       | 7,581     |       | 127,259   |       |
| 2013                              |       | 119,678                 |       | 6,370     |       | 126,048   |       |
| Thereafter                        |       | 437,594                 |       | 12,632    |       | 450,226   |       |
|                              |       |                    |       |      |       |      |       |
| Total minimum lease payments      |       | $                       | 1,043,336  |      | $          | 93,054    |       | $ | 1,136,390 |   |

 

Rental expense under operating leases,including month-to-month leases, for the years ended March 31, 2008, 2007and 2006 was $172,321,000, $159,206,000, and $138,911,000, respectively.

 

F-27

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

In April 2008, the Company reached amutual agreement on the terms under which the Company would reject the contractwith Republic.  The table above has beenupdated to reflect payments of $7,600,000 under the contract through thewind-down period which ended in mid-June 2008.

 

For leases that contain escalations, theCompany records the total rent payable during the lease term on a straight-linebasis over the term of the lease and records the difference between the rentpaid and the straight-line rent as a deferred rent liability.

 

**10.****     ****Employee Separation and ExitCosts**

 

In December 2007, the Company announcedthat it was reducing its indirect labor work force by 10 percent.  The jobs eliminated were corporate jobs notdirectly related to flight operations and resulted in a severance accrual of$442,000.  The Company will make theremaining cash payments through June 30, 2008.

 

During the year ended March 31, 2006, the Company ceased usingthree of its Boeing 737-300 leased aircraft with original lease terminationdates in June 2005, August 2005 and May 2006.  The Company negotiated an early return andone-time payment for the one aircraft with an original lease termination dateof May 2006.  This resulted in acharge of $3,312,000, representing the estimated fair value of the remaininglease payments and a negotiated one-time termination payment.  Also, during the year ended March 31,2006, the Company also recorded $102,000 of facility lease exit costs relatedto a property in which a sublease was not obtained in a period originallyestimated for an airport exited in fiscal year 2005.  These charges are reported in theconsolidated statements of operations as employee separation and exit costs.

 

A summary of the activity charged to the severance and leasetermination liabilities is as follows:

 

| ** **                       | ** ** | **Employee Separation** | ** ** | **Exit Costs** | ** ** | **Total** | ** ** |
|----------------------------------|------------|------------------------------|------------|---------------------|------------|-----------|------------|
| ** **                       | ** ** | **(In thousands)**      | ** ** |
| **Balance, March 31, 2006** |       | $                            | —     |                | $          | 210       |       | $ | 210 |   |
| Lease payments                   |       | —                       |       | (153                | )          | (153      | )          |
| Reversals                        |       | —                       |       | (57                 | )          | (57       | )          |
| **Balance, March 31, 2007** |       | $                            | —     |                | $          | —    |       | $ | — |   |
| ** **                       |       |                         |       |                |       |      |       |
| Accrual                          |       | 442                          |       | —              |       | 442       |       |
| Payments                         |       | (370                         | )          | —              |       | (370      | )          |
| **Balance, March 31, 2008** |       | $                            | 72         |                | $          | —    |       | $ | 72 |   |

 

In June 2008, the Company announcedcapacity reductions of approximately 17%, in which the Company anticipates itwill incur significant employee separation costs associated with a proportionalreduction in force.

 

F-28

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

**11.****     ****Long-Term Debt and Short-TermBorrowings**

 

***Long-term debtand short-term borrowings at March 31, 2008 and 2007 consisted of thefollowing:***

 

| ** **                                                                                                                                                                                               | ** ** | **2008**                | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                                                                                                                                               | ** ** | **(In thousands)** | ** ** |
|                                                                                                                                                                                                     |       |                    |       |     |       |
| **Convertible Notes, fixed interest rate of 5.0%  (1)**                                                                                                                                                  |       | $                       | 92,000     |     | $          | 92,000 |   |
|                                                                                                                                                                                                     |       |                    |       |     |       |
| **Credit Facility (2)**                                                                                                                                                                                  |       | 3,000                   |       | —   |       |
|                                                                                                                                                                                                     |       |                    |       |     |       |
| **Debt Secured by Aircraft:**                                                                                                                                                                            |       |                    |       |     |       |
| Aircraft notes payable, fixed interest rates with a  6.55% and 6.62% weighted average interest rate at March 31, 2008 and  2007 (3)                                                                 |       | 79,338                  |       | 34,314   |       |
| Aircraft notes payable, variable interest rates  based on LIBOR plus a margin, for an overall weighted average rate of 4.59%  and 7.18% at March 31, 2008 and March 31, 2007, respectively (4) |       | 484,601                 |       | 348,426  |       |
| Aircraft junior note payable, variable interest rate  based on LIBOR plus a margin, with a rate of 8.06% and 8.38% at  March 31, 2008 and March 31, 2007, respectively (5)                     |       | 3,379                   |       | 4,015    |       |
| Aircraft pre-delivery deposit financing, variable  interest rate based on LIBOR plus a margin, with a rate of 5.38% at  March 31, 2008 (6)                                                          |       | 3,139                   |       | —   |       |
|                                                                                                                                                                                                     |       |                    |       |     |       |
| Total Debt                                                                                                                                                                                               |       | 665,457                 |       | 478,755  |       |
| Less: current maturities                                                                                                                                                                                 |       | (38,232                 | )          | (26,847  | )          |
| Less: short-term borrowings                                                                                                                                                                              |       | (3,139                  | )          | —   |       |
| Long-Term debt                                                                                                                                                                                           |       | $                       | 624,086    |     | $          | 451,908 |   |

 

Maturities of long-term debt, includingballoon payments, are based on the contractual terms of the obligation asfollows (In thousands):

 
| **Fiscal Year Ending:** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2009                              |       | $          | 41,283     |   |
| 2010                              |       | 43,453     |       |
| 2011                              |       | 42,898     |       |
| 2012                              |       | 62,662     |       |
| 2013                              |       | 43,642     |       |
| Thereafter                        |       | 431,519    |       |
|                              |       |       |       |
|                              |       | $          | 665,457    |   |

 

F-29

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

(1)       ***Convertible Notes due 2025***

 

On December 7, 2005, the Company completed the sale of $92,000,000aggregate principal amount of 5.0% Convertible Notes due 2025 (“ConvertibleNotes”) in a public offering pursuant to the Company’s shelf registrationstatement.  Interest is payablesemi-annually and began on June 15, 2006. The Convertible Notes are unsecured and rank effectively junior in rightof payment to existing and future secured debt, including the Company’s CreditFacility and aircraft notes.  At any timeon or after December 20, 2010, the Company may redeem any of theConvertible Notes for cash at a redemption price of 100% of the principalamount plus accrued interest.  Holdersmay require the Company to repurchase the Convertible Notes for cash at arepurchase price of 100% of the principal amount plus accrued interest on December 15,2010, 2015 and 2020. The Convertible Notes were transferred to Frontier AirlinesHoldings, Inc. on April 3, 2006 when the Company completed its corporate reorganization.

 

The Convertible Notes are convertible, at the option of the holders,into shares of the Company’s common stock at a conversion rate of 96.7352shares per principal amount of notes (representing a conversion price ofapproximately $10.34 per share), subject to certain adjustments, at any timeprior to maturity.  Upon conversion, theCompany will have the right to deliver a combination of cash and shares ofcommon stock.  In addition, holders ofthe Convertible Notes have the right to require the Company to repurchase thenotes upon the occurrence of a specified designated event at a price of 100% ofthe principal amount plus accrued interest. Upon the occurrence of a specifieddesignated event prior to December 15, 2010, the conversion rate will beincreased by a specified number of shares for a maximum of 2,224,910 additionalshares issued.

 

The Company incurred and capitalized $3,241,000 in fees in connectionwith the sale of the Convertible Notes, which are included in deferred loanfees and other assets.  The debt issuancecosts have been amortized using the effective interest rate method over theshortest period in which the note holders may require the Company to repurchasethe notes, which is five-years.

 

(2)       ***Credit Facility***

 

In March 2005, theCompany entered into a two-year revolving credit facility (“Credit Facility”)to support letters of credit and for general corporate purposes. The initialCredit Facility was renewed for another period ending July 2009.  Under this facility, the Company may borrowthe lesser of $20,000,000 (“maximum commitment amount”) or an agreed uponpercentage of the current market value of pledged eligible spare parts.  The amount available for letters of credit isequal to the maximum commitment amount under the facility less current borrowings.  Interest under the Credit Facility is basedon a designated rate plus a margin.  Inaddition, there is a quarterly commitment fee on the unused portion of thefacility based on the maximum commitment amount.  The Credit Facility contains a covenant thatwill not permit the Company to maintain an unrestricted cash and cashequivalent position of less than $90,000,000, with a 30-day cure period. Theamount available for borrowings under the Credit Facility based on a percentageof the current market value of the pledged eligible spare parts at March 31,2008 was $18,187,000.  The Company hasreduced the amount available for borrowings by letters of credit issued of$14,560,000 and short-term borrowings of $3,000,000.  The amount available for borrowings under theCredit Facility based on the current market value of the pledged eligible spareparts at March 31, 2007 was $16,500,000, which was reduced by letters ofcredit issued of $11,300,000.

 

F-30

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

(3)       ***Secured Aircraft Notes payable –fixed interest rates***

 

***During the year ended March 31,2002, the Company entered into a credit agreement for the purchase of threeAirbus aircraft.  During the year ended March 31,2003, the Company entered into a sale-leaseback transaction for one of thesepurchased aircraft and repaid the loan with the proceeds of the sale.   The two remaining aircraft loans have a termof 10 years and are payable in equal fixed monthly installments, includinginterest, payable in arrears.  Theremaining loans require monthly principal and interest payments of $218,000 and$215,000, respectively, bear interest with rates of 6.71% and 6.54%, withmaturities in May and August 2011, at which time a balloon paymenttotaling $10,200,000 is due with respect to each loan.***

*** ***

***During the year ended March 31,2008, the Company borrowed $48,326,000 for the purchase of three BombardierQ400 aircraft.  These aircraft loans haveterms of 15 years and are payable in semi-annual installments with a floatinginterest rate adjusted semi-annually based on LIBOR. A security interest in theaircraft secures the loan.***

*** ***

(4)       ***Secured Aircraft Notes payable –variable interest rates***

 

During the years ended March 31, 2003through March 31, 2008, the Company borrowed $549,503,000 for the purchaseof 22 Airbus aircraft.  These seniorloans have terms of 12 years and are payable in monthly installments with afloating interest rate adjusted quarterly based on LIBOR.  At the end of the term, there are balloonpayments for each of these loans.  Asecurity interest in the aircraft secures the loans.

 

During the year ended March 31, 2008,the Company borrowed $32,346,000 for the purchase of two Bombardier Q400aircraft. These aircraft loans have terms of 15 years and are payable insemi-annual installments with a floating interest rate adjusted semi-annuallybased on LIBOR.  A security interest inthe aircraft secures these loans.  Also,during the year ended March 31, 2008, the Company borrowed $80,188,000 forthe purchase of five Bombardier Q400 aircraft which were subsequently sold in asale-lease back transaction for a gain of $801,000.  The gain was deferred and is being amortizedover the term of the associated leases of 15 years.

 

(5)       ***Junior Secured Aircraft Notespayable – variable interest rates***

 

During the year ended March 31, 2006,the Company borrowed $4,900,000 for the purchase of an Airbus aircraft.  This junior loan has a seven-year term withquarterly installments currently of $250,000.

 

(6)       ***Pre-Delivery Deposit Financing***

 

In November 2007, the Company enteredinto a pre-delivery deposit facility (“PDP Facility”) for the purpose offinancing obligations to make pre-delivery payments on eight A320aircraft.  The PDP Facility allows theCompany to draw amounts up to $22,200,000 for aircraft deliveries through August 2010. As of March 31,2008, the Company had $3,139,000 outstanding under the PDP Facility for A320aircraft delivery scheduled for February 2009. As such, the amountoutstanding is classified as a short-term borrowing on the consolidated balancesheet.

 

F-31

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

***Other Revolving Facility andLetters of Credit***

 

In July 2005, the Company entered intoan agreement with a financial institution for a $5,000,000 revolving line ofcredit that allows the Company to issue letters of credit up to$3,500,000.  In June 2006, therevolving letter of credit was increased to $5,750,000 and it now permits us toissue letters of credit up to $5,000,000 and matured in June 2008. As of March 31,2008, the Company has utilized $4,534,000 under this agreement for standbyletters of credit that provide credit support for certain facility leases.  A cash compensating balance of $2,750,000 wasrequired to be maintained and to secure the letters of credit, as of March 31,2008 and 2007, which has been classified as a restricted investment on theconsolidated balance sheets.

 

In June 2008, the Company enteredinto a stipulation with the financial institution, which was approved bythe bankruptcy court, and which resulted in the financial institution releasingits liens on the Company’s working capital in exchange for cashcollateral.  This stipulation also provided for the issuance of newletters of credit going forward.  The amount of cash collateral requiredwas for full cash collateralization of letters of credit outstanding, less the$2,750,000 already cash secured.

 

***Sale-Lease Back Transactions andLoss on Early Extinguishment of Debt***

 

During the year ended March 31, 2008,the Company executed sale-lease back transactions on five Bombardier Q400aircraft loans.  The gains on thesale-lease back transactions totaled $801,000, which was deferred over the newlease terms of 15 years.  Also, prior tothe sale-leaseback transactions, the Company paid off interim loans on theBombardier Q400 aircraft and wrote-off $283,000 of debt issuance fees andrecorded this as a loss on early extinguishment of debt in the consolidatedstatement of operations.

 

***Debt covenants***

 

Asof March 31, 2008, the Company was in compliance with their debtcovenants, however, the Company’s Chapter 11 filing triggered defaultprovisions in its debt and lease agreements. Payment defaults have been cured as of June 9, 2008 for all debtsecured by aircraft.

 

**12.****     ****Income Taxes**

 

Income tax expense (benefit) for the years ended March 31, 2008,2007, and 2006 is presented below:

 

| ** **                      | ** ** | **Current**             | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|---------------------------------|------------|-------------------------|------------|--------------|------------|-----------|------------|
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Year ended March 31, 2008: |       |                    |       |         |       |      |       |
| U.S. federal                    |       | $                       | —     |         | $          | —    |       | $ | — |   |
| State and local                 |       | (101                    | )          | —       |       | (101      | )          |
|                            |       | $                       | (101       | )            | $          | —    |       | $ | (101 | ) |
|                            |       |                    |       |         |       |      |       |
| Year ended March 31, 2007: |       |                    |       |         |       |      |       |
| U.S. federal                    |       | $                       | —     |         | $          | (4,177    | )          | $ | (4,177 | ) |
| State and local                 |       | 257                     |       | (706         | )          | (449      | )          |
|                            |       | $                       | 257        |         | $          | (4,883    | )          | $ | (4,626 | ) |
|                            |       |                    |       |         |       |      |       |
| Year ended March 31, 2006: |       |                    |       |         |       |      |       |
| U.S. federal                    |       | $                       | —     |         | $          | (6,410    | )          | $ | (6,410 | ) |
| State and local                 |       | 54                      |       | (141         | )          | (87       | )          |
|                            |       | $                       | 54         |         | $          | (6,551    | )          | $ | (6,497 | ) |

 

F-32

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

The differences between the Company’s effective rate for income taxesand the federal statutory rate of 35% are shown in the following table:

 
| ** **                                                     | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                                     | ** ** | **(In thousands)** | ** ** |
| Income tax benefit at the statutory rate                       |       | $                       | (21,124    | )        | $          | (8,749   | )          | $ | (7,164 | ) |
| State and local income tax, net of federal income  tax benefit |       | (1,515                  | )          | (667     | )          | (579     | )          |
| State net operating loss adjustment                            |       | (219                    | )          | (63      | )          | —   |       |
| Valuation allowance                                            |       | 21,418                  |       | 3,980    |       | 273      |       |
| Nondeductible expenses                                         |       | 912                     |       | 777      |       | 732      |       |
| Adjustment to deferred taxes                                   |       | 456                     |       | (176     | )          | 76       |       |
| Other, net                                                     |       | (29                     | )          | 272      |       | 165      |       |
|                                                           |       | $                       | (101       | )        | $          | (4,626   | )          | $ | (6,497 | ) |
|                                                           |       |                    |       |     |       |     |       |
| Effective tax rate                                             |       | 0.2                     | %          | 18.5     | %          | 31.7     | %          |

 

The tax effects of temporary differences thatgive rise to significant portions of the deferred tax assets (liabilities) at March 31,2008 and 2007 are presented below:

 
| ** **                                                       | ** ** | **2008**                | ** ** | **2007** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                       | ** ** | **(In thousands)** | ** ** |
| Deferred tax assets:                                             |       |                    |       |     |       |
| Net operating loss carryforwards                                 |       | $                       | 159,252    |     | $          | 121,618 |   |
| Accrued vacation                                                 |       | 5,230                   |       | 4,058    |       |
| Accrued workers compensation liability                           |       | 2,259                   |       | 2,704    |       |
| Deferred rent                                                    |       | 6,560                   |       | 7,105    |       |
| Provision recorded on inventory and impairments of  fixed assets |       | 1,806                   |       | 1,657    |       |
| Start-up/organizational costs, net                               |       | 7,233                   |       | 1,173    |       |
| Stock-based compensation                                         |       | 558                     |       | 214      |       |
| Alternative minimum tax credit carryforward                      |       | 1,758                   |       | 1,757    |       |
| Accruals                                                         |       | 4,696                   |       | 2,456    |       |
| Deferred loan fees and other assets                              |       | 2,000                   |       | 208      |       |
| Other                                                            |       | 450                     |       | 341      |       |
| Deferred tax assets                                              |       | 191,802                 |       | 143,291  |       |
| Valuation allowance                                              |       | (25,939                 | )          | (4,521   | )          |
| Net deferred tax assets                                          |       | 165,863                 |       | 138,770  |       |
| Deferred tax liabilities:                                        |       |                    |       |     |       |
| Property and equipment                                           |       | (158,688                | )          | (132,367 | )          |
| Prepaid commissions                                              |       | (1,285                  | )          | (1,198   | )          |
| Other                                                            |       | (5,890                  | )          | (5,205   | )          |
| Total gross deferred tax liabilities                             |       | (165,863                | )          | (138,770 | )          |
|                                                             |       |                    |       |     |       |
| Net deferred tax liability                                       |       | $                       | —     |     | $          | — |   |

 

F-33

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

During the years ended March 31, 2008and 2007, the Company recorded a valuation allowance against net deferred taxassets.  In assessing the realizability of deferred tax assets, managementconsiders whether it is more likely than not that some portion, or all, of thedeferred tax assets will not be realized.  The ultimate realization ofdeferred tax assets is dependent upon the generation of future taxable incomeduring the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,projected future taxable income, and tax planning strategies in making thisassessment.  The Company acquired a significant number of new aircraftover the past seven years in conjunction with their fleet transitionplan.  New aircraft purchases are depreciated for tax purposes over sevenyears compared to book depreciation of 25 years, resulting in significantdeferred tax liabilities that will reverse over their seven year taxlife.  The net operating losses that have been generated over the pastseven years are due in large part to the accelerated depreciation over ashorter useful lifes for tax purposes.  The Company expects their fleetacquisitions to be substantially complete by fiscal 2009.  Since theCompany’s net operating losses do not begin to expire until 2023, the Companyexpects these net operating losses to be available in future periods when taxdepreciation is at minimal levels, and taxable income is projected to exceedbook income. Based upon the level of historical book losses, the Companyestablished a valuation allowance during the year ended March 31, 2007 forthe net deferred tax asset.   Based upon the projections for futuretaxable income over the periods in which the deferred tax assets becomedeductible, and available tax planning strategies, management believes it ismore likely than not that the Company will realize the benefits of thedeductible differences, net of the existing valuation allowances at March 31,2008 and 2007.   The amount of thedeferred tax asset considered realizable, however, could be reduced in the nearterm if estimates of future taxable income during the carryforward period arereduced.  The Company has included in the total valuation allowance, avaluation allowance for state net operating loss carryforwards expected toexpire unused which totaled $1,343,000 and $583,000 at March 31, 2008 and2007, respectively.

 

As of March 31, 2008, the Company hadfederal net operating loss carryforwards totaling $421,100,000, expiring asfollows:  $45,600,000 in 2023, $58,900,000 in 2024, $92,300,000 in 2025,$51,800,000 in 2026 and $69,500,000 in 2027 and $103,000,000 estimated for 2008which would expire in 2028.

 

In July 2006, the Financial AccountingStandards Board (FASB) issued FASB Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes – an Interpretation of FASBStatement No. 109*” (FIN 48). The purpose of FIN 48 is toclarify certain aspects of the recognition and measurement related toaccounting for income tax uncertainties. Under FIN 48 the impact of an uncertain tax position must be recognizedin the financial statements if that position is more likely than not of beingsustained upon audit by the relevant taxing authority.

 

The Company adopted the provisions of FIN 48as of April 1, 2007.  At that timethe Company did not have any material uncertain tax positions, as a result,there were no adjustments to the opening balance sheet retained earnings.  The Company believes that its tax filingpositions and deductions related to tax periods subject to examination will besustained upon audit and does not anticipate any adjustments will

 

F-34

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

result in a material adverse effect on theCompany’s financial condition, results of operations, or cash flow.  Therefore, no reserves for uncertain incometax positions have been recorded pursuant to FIN 48.

 

The Company’s policy is to recognize interestand penalties related to unrecognized tax benefits in interest expense andother non-operating income (expense), respectively, in our consolidatedstatement of operations.  For the yearended March 31, 2008 there was no interest expense or penalties related touncertain tax positions.

 

The Company has unused U.S. federal and stateNOLs for the years ended March 31, 2003 through March 31, 2008.  As such, these years remain subject toexamination by the relevant taxing authorities.

 

The Bankruptcy Court entered a final orderthat restricts the trading on the common stock and debt interests in theCompany.  The NOLs can be used to offsetfuture taxable income, and thus are a valuable asset of the Company’sestate.  Certain trading in the Company’sstock (or debt when the Company is in bankruptcy) could adversely affect theCompany’s ability to use the NOLs.  Thus,the Company obtained an order that enables it to closely monitor certaintransfers of stock and claims, and restricts those transfers that maycompromise the Company’s ability to use its NOLs.  However, if a change in ownership does occur,as defined in IRC Section 382, this could result in the need for anaddition valuation allowance, which the Company expects would be material. Asof March 31, 2008, the Company does not believe an ownership change hasoccurred.

 

**13.****     ****Stockholders’ Equity**

 

***Warrants andStock Purchase Rights***

 

In February 2003, the Company issuedwarrants to purchase 3,833,946 shares of common stock at $6.00 per share to theAir Transportation Stabilization Board (“ATSB”) and to two other guarantorswhich were exercisable immediately.  Thewarrants had an estimated fair value of $9,283,000 when issued and expire sevenyears after issuance. The fair value for these options was estimated at thedate of grant using a Black-Scholes option pricing model. These warrants weresubsequently repriced in September 2003 as a result of the Company’ssecondary public offering and again in December 2005 as a result of theCompany’s convertible debt offering to $5.87 per share.  In May 2006, the ATSB transferred theownership of all its outstanding warrants to seven institutional investors. Oneother guarantor transferred ownership of its outstanding warrants in December 2003.

 

***Treasury Stockand Unearned ESOP Shares***

 

In March 2007, the Company purchased300,000 shares of its common stock for $1,838,000.  These shares were purchased to fund the Company’s2007 contribution to the Employee Stock Ownership Plan (“ESOP”). These shareswere subsequently contributed to the ESOP.

 

**14.****     ****Equity Based Compensation Plans**

 

On September 9, 2004, the shareholdersof Frontier approved the 2004 Plan. Frontier Holdings assumed all of the outstanding options and awardsunder the 2004 Plan effective upon the closing of the Reorganization.  The 2004 Plan, which includes stock optionsissued since 1994 under a previous equity incentive plan, allows theCompensation Committee of the Board of Directors to grant stock options, stockappreciation rights payable only in stock (“SARs”), and restricted stock units(“RSUs”), any or all of which may be made contingent upon the achievement ofservice or performance criteria.  Eligibleparticipants

 

F-35

----

 

**FRONTIER AIRLINES HOLDINGS, INC.**

**(Debtor and Debtor-in-Possession as of April 10,2008)**

 

**Notes to the Consolidated Financial Statements,continued**

 

include members of the Company’s Board ofDirectors, all full-time director and officer level employees of the Company,and such other employees as may be identified by the Compensation Committeefrom time to time who are legally eligible to participate.  Subject to plan limits, the CompensationCommittee has the discretionary authority to determine the size and timing ofan award and the vesting requirements related to the award.  The 2004 Plan expires September 12,2009.  The 2004 Plan allows up to amaximum of 2,500,000 shares for option grants and 500,000 shares for RSUs,subject to adjustment only to reflect stock splits and similar recapitalizationevents.  The Company issues new shares ofcommon stock for stock option and SARs exercised and settlement of vestedrestricted units.  With certainexceptions, stock options and SARs issued under the 2004 Plan generally vest inequal installments over a five-year period from the date of grant and expireten years from the grant date.  RSUscliff vest on the third or fifth anniversary of the date of grant.  As of March 31, 2008, the Company had1,560,000 shares available for future grants.

 

SFAS 123(R) requires the Company toestimate pre-vesting option forfeitures at the time of grant and periodicallyrevise those estimates in subsequent periods if actual forfeitures differ fromthose estimates. The Company records stock-based compensation expense only forthose awards expected to vest using an estimated forfeiture rate based on itshistorical pre-vesting forfeiture data. Previously, the Company accounted for forfeitures as they occurred underthe pro forma disclosure provisions of SFAS 123 for periods prior to April 1,2006.

 

For the years ended March 31, 2008 and March 31,2007, the Company recorded $1,069,000 and $845,000, respectively,  for stock options, stock appreciation rightsand restricted stock units, net of estimated forfeitures. Unrecognizedstock-based compensation expense related to unvested options and RSU awardsoutstanding as of March 31, 2008 was approximately $4,847,000, and will berecorded over the remaining vesting periods of one to five years. At March 31,2008, the remaining weighted average recognition period for options and RSUswas 3.5 years and 3.2 years, respectively.

 

SFAS 123(R) requires the benefitsassociated with tax deductions in excess of recognized compensation cost to bereported as a financing cash flow rather than as an operating cash flow aspreviously required. For the years ended March 31, 2008 and March 31,2007, the Company did not record any excess tax benefit generated from optionexercises.

 

Prior to April 1, 2006, the Companyaccounted for stock-based compensation in accordance with APB No. 25 andrelated interpretations.  Accordingly,compensation expense for a stock option grant was recognized only if theexercise price was less than the market value of the Company’s common stock onthe grant date. The accounting for stock-based compensation for restrictedstock units did not change with the adoption of SFAS 123(R).  Prior to the Company’s adoption of SFAS123(R), as required under the disclosure provisions of SFAS 123, as amended,the Company provided pro forma net loss and loss per common share for eachperiod as if the Company had applied the fair value method to stock optiongrants, amortized on a straight-line basis, to measure stock-based compensationexpense.

 

F-36

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

 

The following table illustrates the effect onthe net loss and loss per common share for the year ended March 31, 2006as if the Company had applied the fair value method to measure stock-basedcompensation, as required under the disclosure provisions of SFAS 123:

 
| ** **                                                                       | ** ** | **2006**                                                            | ** **     |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|----------------|
| ** **                                                                       | ** ** | **(In thousands,  except per share   amounts)** | ** **     |
| Net loss as reported                                              |       | $                                                                   |  (13,971) |   |
| Add: stock-based compensation expense included in  reported net loss, net of tax |       | 91                                                                  |           |
| Less: total compensation expense determined under  fair value method, net of tax |       | (533                                                                | )              |
| Pro forma net loss                                                               |       | $                                                                   | (14,413        | ) |
|                                                                             |       |                                                                |           |
| Loss per share, basic and diluted:                                               |       |                                                                |           |
| As reported                                                                      |       | $                                                                   | (0.39          | ) |
| Pro forma                                                                        |       | $                                                                   | (0.40          | ) |

 

The table below summarizes the impact on theCompany’s results of operations for the years ended March 31, 2008 and March 31,2007 of outstanding SARs and RSUs issued under the 2004 Plan as recognizedunder the provisions of SFAS 123(R):

 
| ** **                        | ** ** | **2008**                | ** ** | **2007** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                        | ** ** | **(In thousands)** | ** ** |
| Stock-based compensation expense: |       |                    |       |     |       |
| Stock options and SARs            |       | $                       | 667        |     | $          | 630 |   |
| RSUs                              |       | 402                     |       | 215      |       |
| Income tax benefit                |       | —                  |       | (213     | )          |
| Net increase to net loss          |       | $                       | 1,069      |     | $          | 632 |   |
|                              |       |                    |       |     |       |
| Increase to loss per share:       |       |                    |       |     |       |
| Basic and diluted                 |       | $                       | 0.03       |     | $          | 0.02 |   |

 

***Stock Optionsand SARs***

 

The Company utilizes a Black-Scholes-Mertonoption pricing model to estimate the fair value of share-based awards underSFAS 123(R), which is the same valuation technique the Company previously usedfor pro forma disclosures under SFAS 123.  The Black-Scholes-Merton optionpricing model incorporates various and subjective assumptions, includingexpected term and expected volatility.

 

F-37

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

 

The Company estimates the expected term ofoptions and SARs granted using its historical exercise patterns, which theCompany believes are representative of future exercise behavior.  The Company estimates volatility of itscommon stock using the historical closing prices of its common stock for the periodequal to the expected term of the options, which the Company believes isrepresentative of the future behavior of the common stock.  The Company’s risk-free interest rateassumption is determined using the Federal Reserve nominal rates for U.S.Treasury zero-coupon bonds with maturities similar to those of the expectedterm of the award being valued.  TheCompany has never paid any cash dividends on its common stock and the Companydoes not anticipate paying any cash dividends in the foreseeable future.Therefore, the Company assumed an expected dividend yield of zero.  Stock options and SARs are classified asequity awards.

 

The following table shows the Company’sassumptions used to compute the stock-based compensation expense and pro formainformation for stock option and SAR grants issued during the years ended March 31,2008, 2007 and 2006:

 
| ** **              | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assumptions:            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Risk-free interest rate |       | 4.43       | %          | 4.85       | %          | 4.06       | %          |
| Dividend yield          |       | 0          | %          | 0          | %          | 0          | %          |
| Volatility              |       | 60.38      | %          | 70.76      | %          | 74.41      | %          |
| Expected life (years)   |       | 5          |       | 5          |       | 5          |       |

 

The per share weighted-average grant-datefair value of SARs granted during fiscal year 2008 was $3.10 using the aboveweighted-average assumptions.

 

A summary of the stock option and SARsactivity and related information for the year ended March 31, 2008 is asfollows:

 
| ** **                       | ** ** | ** **  | ** ** | **Weighted-** | ** ** |
|----------------------------------|------------|-------------|------------|---------------|------------|
| ** **                       | ** ** | **Options** | ** ** | **Average**   | ** ** |
| ** **                       | ** ** | **and**     | ** ** | **Exercise**  | ** ** |
| ** **                       | ** ** | **SARs**    | ** ** | **Price**     | ** ** |
| Outstanding, March 31, 2007 |       | 2,414,593   |       | $             | 10.41      |   |
| Granted                          |       | 541,982     |       | $             | 5.81       |   |
| Exercised                        |       | (17,500     | )          | $             | 2.33       |   |
| Surrendered                      |       | (686,401    | )          | $             | 9.71       |   |
| Outstanding, March 31, 2008 |       | 2,252,674   |       | $             | 9.58       |   |
|                             |       |        |       |          |       |
| Exercisable at end of period     |       | 1,798,259   |       | $             | 10.29      |   |

 

Exercise prices for options and SARsoutstanding under the 2004 Plan as of March 31, 2008 ranged from $2.13 pershare to $24.17 per share.  Theweighted-average remaining contractual life of these equity awards is 3.8years.  The aggregate intrinsic value ofvested options and SARs was $9,000 as of March 31, 2008 and the intrinsicvalue of options exercised during the year ended March 31, 2008 was $57,000.

 

F-38

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

 

A summary of the outstanding and exercisableoptions and SARs at March 31, 2008, segregated by exercise price ranges,is as follows:

 
| ** **              | ** ** | ** **      | ** ** | ** **              | ** ** | **Weighted-**                 | ** ** | ** **      | ** ** | ** **              | ** ** |
|-------------------------|------------|-----------------|------------|-------------------------|------------|-------------------------------|------------|-----------------|------------|-------------------------|------------|
| ** **              | ** ** | **Options**     | ** ** | ** **              | ** ** | **Average**                   | ** ** | **Exercisable** | ** ** | ** **              | ** ** |
| ** **              | ** ** | **and**         | ** ** | **Weighted-**           | ** ** | **Remaining**                 | ** ** | **Options**     | ** ** | **Weighted-**           | ** ** |
| **Exercise Price** | ** ** | **SARs**        | ** ** | **Average**             | ** ** | **Contractual**               | ** ** | **and**         | ** ** | **Average**             | ** ** |
| **Range**               | ** ** | **Outstanding** | ** ** | **Exercise Price** | ** ** | **Life (in years)** | ** ** | **SARs**        | ** ** | **Exercise Price** | ** ** |
|                    |       |            |       |                    |       |                          |       |            |       |                    |       |
| $2.13 - $5.42           |       | 500,820         |       | $                       | 5.06       |                          | 1.5        |            | 450,000    |                    | $          | 5.04 |   |
| $5.72 - $7.42           |       | 501,411         |       | $                       | 6.30       |                          | 6.7        |            | 182,779    |                    | $          | 6.45 |   |
| $7.43 - $10.06          |       | 451,143         |       | $                       | 8.79       |                          | 4.1        |            | 384,180    |                    | $          | 8.76 |   |
| $10.12 - $15.63         |       | 457,500         |       | $                       | 12.07      |                          | 3.4        |            | 439,500    |                    | $          | 12.06 |   |
| $15.75 - $24.17         |       | 341,800         |       | $                       | 18.78      |                          | 3.1        |            | 341,800    |                    | $          | 18.78 |   |
|                    |       | 2,252,674       |       | $                       | 9.59       |                          | 3.8        |            | 1,798,259  |                    | $          | 10.31 |   |

 

***RestrictedStock Units***

 

SFAS 123R requires that the grant-date fairvalue of RSUs be equal to the market price of the share on the date of grant ifvesting is based on a service condition. The grant-date fair value of RSU awards are being expensed over thevesting period.  RSUs are classified asequity awards. As of March 31, 2008, the Company had outstanding RSUs withservice conditions and vesting periods that range from three to five years.

 

A summary of the activity for RSUs for thetwelve months ended March 31, 2008 is as follows:

 
| ** **                       | ** ** | **RSUs**           | ** ** |
|----------------------------------|------------|--------------------|------------|
| ** **                       | ** ** | ** **         | ** ** | **Weighted-** | ** ** |
| ** **                       | ** ** | ** **         | ** ** | **Average** | ** ** |
| ** **                       | ** ** | **Number of** | ** ** | **Grant Date** | ** ** |
| ** **                       | ** ** | **RSUs**           | ** ** | **Market Value** | ** ** |
| Outstanding, March 31, 2007 |       | 194,946            |       | $ | 8.36 |   |
| Granted                          |       | 257,796            |       | $ | 5.86 |   |
| Surrendered                      |       | (136,021           | )          | $ | 7.08 |   |
| Released                         |       | (789               | )          | $ | 6.13 |   |
| Outstanding, March 31, 2008 |       | 315,932            |       | $ | 6.88 |   |

 

F-39

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

 

**15.      Retirement Plans**

 

## ***ESOP***

## ** **

The Company has established an ESOP which isfor the benefit of each employee of the Company, except those employees coveredby a collective bargaining agreement that does not provide for participation inthe ESOP.  Company contributions to theESOP are discretionary and may vary from year to year.  In order for an employee to receive anallocation of Company common stock from the ESOP, the employee must be employedon the last day of the ESOP’s plan year, with certain exceptions.  The Company’s annual contribution to theESOP, if any, is allocated among the eligible employees of the Company as ofthe end of each plan year in proportion to the relative compensation (asdefined in the ESOP) earned that plan year by each of the eligibleemployees.  The ESOP does not provide forcontributions by participating employees. Employees vest in contributions made to the ESOP based upon their yearsof service with the Company.  A year ofservice is an ESOP plan year during which an employee has at least 1,000 hoursof service.  Vesting generally occurs atthe rate of 20% per year, beginning after the first year of service, so that aparticipating employee will be fully vested after five years of service.  Distributions from the ESOP will not be madeto employees during employment.  However,upon termination of employment with the Company, each employee will be entitledto receive the vested portion of his or her account balance.  Forfeitures are reallocated among activeparticipants.

 

In March 2008, the Company issued andcontributed 300,000 shares to the ESOP. In March 2007, the Company’s Boardof Directors approved the purchase of 300,000 shares of its common stock.  These shares were used to fund the 2007 ESOPcontribution, and the shares were contributed in April 2007. During theyear ended March 31, 2006, the Company issued and contributed 400,000shares to the ESOP.  Total Companycontributions to the ESOP from inception total 3,187,000 shares, including the300,000 shares contributed in March 2008.

 

The Company recognized compensation expenseduring the years ended March 31, 2008, 2007 and 2006 of $1,584,000,$2,564,000, and $2,969,000, respectively, related to its contributions to theESOP.  Compensation expense under theESOP is determined by multiplying the number of shares contributed by the fairmarket value of the shares on the date contributed, or the purchase price ofthe shares.  The fair value of theunearned ESOP shares contributed to the ESOP for the year ended March 31,2008 was $822,000.  The fair value of theunearned ESOP shares on March 31, 2008 was $759,000.

 

### ***Retirement Savings Plans***

###  

The Company has established a RetirementSavings Plan under section 401(k) of the Internal Revenue Code (“401(k) Plan”).  Participants may contribute from 1% to 60% oftheir pre-tax annual compensation up to the maximum amount allowed under theInternal Revenue Code.  Participants areimmediately vested in their voluntary contributions.  The Company’s Board of Directors has electedto match 50% of participant contributions up to 10% of salaries from May 2000through December 2007 for the participants of the 401(k) Plan.  During the years ended March 31, 2008,2007, and 2006, the Company recognized compensation expense associated with thematching contributions to the 401(k) Plan totaling $6,036,000, $5,107,000,and $4,201,000, respectively.  Futurematching contributions, if any, will be determined annually by the Board ofDirectors.  In order to receive thematching contribution, participants must be employed on the last day of theplan year.  Participants vest in employercontributions made to the 401(k) Plan based upon their years of servicewith the Company.  A year of service is aplan year during which a participant has at least 1,000 hours of service.  Vesting generally occurs at the rate of 20%per year,

 

F-40

----

 

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

 

beginning after the first year of service, sothat a participant will be fully vested after five years of service.  Upon termination of employment with theCompany, each participant will be entitled to receive the vested portion of hisor her account balance.  The Companysuspended the match effective June 1, 2008.

 

On March 2, 2007, the Companyestablished the Frontier Airlines, Inc. Pilots Retirement Plan (“the FAPAPlan”) for pilots covered under the collective bargaining agreement with theFrontier Airlines Pilots’ Association. The FAPA Plan is a defined contributionretirement plan.  The Company contributesup to 6% of each eligible and active participant’s compensation.  Contributions begin after a pilot has reachedtwo years of service and the contributions vest immediately.  Participants are entitled to begin receivingdistributions of all vested amounts beginning at age 59 1⁄2. During the yearsended March 31, 2008 and 2007, the Company recognized compensation expenseassociated with the contributions to the FAPA Plan of $2,951,000 and $238,000,respectively.

 

***Retirement Health Plans***

*** ***

***In conjunctionwith the Company’s collective bargaining agreement with its pilots, retiredpilots and their dependents, were entitled retain medical benefits under theterms and conditions of the Health and Welfare Plan for Employees of FrontierAirlines, Inc. (the “Retirement Health Plan”) until age 65.  On December 14, 2007, the Fair Treatmentfor Experienced Pilots Act (the “Pilots Act”) was enacted.  This act, increased the retirement age forcommercial pilots to 65 from 60.  Pilotsthat have not reached age 60 will now be allowed to work for five more years,provided they pass regular medical and piloting exams.***

*** ***

***Pursuant to theCompany’s collective bargaining agreement with its pilots, if pilots are forcedto retire due to FAA requirements, the retired pilots and their dependentscould retain medical benefits under the terms and conditions of the RetirementHealth Plan until age 65.  However, as aresult of the Pilots Act, this retirement health benefit is no longer required.It is only required for pilots who reached mandatory retirement age prior tothe effective date of the Pilots Act.***

*** ***

***The Companyrecorded a one-time post-retirement liability curtailment gain of $6,361,000 toreflect the impact of the Pilots Act, which was a reduction in post-retirementliability for pilots who had not yet attained the age of 60.  A liability of $319,000 remains for thepilots who had previously reached the mandatory retirement age prior to thePilots Act.***

*** ***

***On March 31,2007, the Company adopted the recognition and disclosure provisions of SFAS158.  SFAS 158 required the Company torecognize the funded status (i.e., the difference between the fair value ofplan assets and the projected benefit obligations) of its benefit plans in the March 31,2007 consolidated balance sheet, with a corresponding adjustment to accumulatedother comprehensive income, net of tax.  The net adjustment to other comprehensive income at adoption was$36,000, ($22,000 net of tax) and represents the net unrecognized actuariallosses and unrecognized prior service costs.***

 

F-41

----

** **

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

*** ***

***The followingtable provides a reconciliation of the changes in the benefit obligations underthe Retirement Health Plan for the years ended March 31, 2008 and 2007:***

*** ***

***Reconciliationof benefit obligation:***

*** ***
| ** **                        | ** ** | **2008**                | ** ** | **2007** | ** ** |
|-----------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                        | ** ** | **(In thousands)** | ** ** |
| Obligation at beginning of period |       | $                       | 5,790      |     | $          | 5,130 |   |
| Service cost                      |       | 693                     |       | 992      |       |
| Interest cost                     |       | 233                     |       | 318      |       |
| Benefits paid                     |       | —                  |       | (17      | )          |
| Curtailment gain                  |       | (6,397                  | )          | —   |       |
| Net actuarial gain                |       | —                  |       | (633     | )          |
| Obligation at end of period       |       | $                       | 319        |     | $          | 5,790 |   |

*** ***

***The followingis a statement of the funded status as of March 31, 2008 and 2007:***

*** ***
| ** **                      | ** ** | **2008**                | ** ** | **2007** | ** ** |
|---------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Funded status                   |       | $                       | (319       | )        | $          | (5,790 | ) |
| Unrecognized net actuarial loss |       | —                  |       | 36       |       |
| SFAS 158 adjustment             |       | —                  |       | (36      | )          |
| Accrued benefit liability       |       | $                       | (319       | )        | $          | (5,790 | ) |

*** ***

***Net periodicbenefit cost of the Retirement Health Plan for the years ended March 31,2008, 2007 and 2006 include the following components.***

*** ***
| ** **                          | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Service cost                        |       | $                       | 693        |     | $          | 992      |       | $ | 954 |   |
| Interest cost                       |       | 233                     |       | 318      |       | 271      |       |
| Recognized net actuarial loss       |       | —                  |       | 11       |       | 61       |       |
| Curtailment gain                    |       | (6,397                  | )          | —   |       | —   |       |
| Net periodic benefit cost (benefit) |       | $                       | (5,471     | )        | $          | 1,321    |       | $ | 1,286 |   |

*** ***

***Certain otherunion employees are included in a multi-employer pension plan to which theCompany makes contributions in accordance with the union contract.  Such contributions are made on a monthlybasis in accordance with the requirements of the union contract.  Contributions to multi-employer pension planswere $614,000, $558,000 and $537,000 for the years ended March 31, 2008,2007 and 2006, respectively.***

 

F-42

----

*** ***

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

*** ***

***16.      Loss Per Share***

*** ***

The Company accounts for earnings per sharein accordance with SFAS No. 128, *Earnings per Share.*  Basic net income (loss) per share is computedby dividing net income (loss) by the weighted average number of common shares outstandingduring the periods presented.  Dilutednet income per share reflects the potential dilution that could occur ifoutstanding stock option and warrants were exercised.  In addition, diluted convertible securitiesare included in the denominator while interest on convertible debt, net of taxand capitalized interest, is added back to the numerator.

 

During the years ended March 31, 2008 and 2007, interest on theconvertible notes of $2,629,000 and $1,947,000, respectively, net of tax in2007 and capitalized interest, and shares of 8,900,000 that would be issuedupon assumed conversion of the convertible notes, were excluded from thecalculation of diluted earnings per share because they were anti-dilutive.  For the years ended March 31, 2008, 2007 and2006, the common stock equivalents of the weighted average options, SARS, RSUs,and warrants outstanding of 64,000, 830,000 and 1,884,000, respectively, wereexcluded from the calculation of diluted earnings per share because they wereanti-dilutive.  For the years ended March31, 2008, 2007 and 2007, the weighted average options, SARs, and RSUsoutstanding of 2,533,000, 2,116,000 and 1,561,000, respectively, were excludedfrom the calculation of diluted earnings per share because the exercise priceswere greater than the average market price of the common shares.

 

**17.      Concentration of Credit Risk**

 

The Company does not believe it is subject to any significantconcentration of credit risk relating to receivables.  At March 31, 2008 and 2007, 45.4% and63.9% of the Company’s receivables related to tickets sold to individualpassengers through the use of major credit cards, travel agencies approved bythe Airlines Reporting Corporation, tickets sold by other airlines and used bypassengers on Company flights, manufacturers’ credits and the Internal RevenueService.  Receivables related to ticketssold are short-term, generally being settled shortly after sale or in the monthfollowing ticket usage.

 

F-43

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**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

 

**18.      Commitments and Contingencies**

 

***Legal Proceedings***

 

As discussed above, the Company filed voluntary petitions for reorganizationunder Chapter 11 of the United States Bankruptcy Code in the United StatesBankruptcy Court for the Southern District of New York and their cases arebeing jointly administered under Case No. 08-11298 (RDD). The Debtors continueto operate their business as “debtors-in-possession” under the jurisdiction ofthe Bankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code and orders of the Bankruptcy Court. As of the date of theChapter 11 filing, virtually all pending litigation was stayed, and absentfurther order of the Bankruptcy Court, no party, subject to certain exceptions,may take any action, also subject to certain exceptions, to recover onpre-petition claims against the Debtors. At this time, it is not possible topredict the outcome of the Chapter 11 cases or their effect on our business.

 

From time to time, the Company is engaged in routine litigationincidental to our business.  The Companybelieves there are no legal proceedings pending in which the Company is a partyor of which any of our property may be subject to that are not adequatelycovered by insurance maintained by us, or which, if adversely decided, wouldhave a material adverse affect upon its business or financial condition.

 

***Insurance***

 

During the year ended March 31, 2008,the Company’s services to and from Denver, Colorado were disrupted by two majorsnowstorms that impacted the Company’s service levels, revenues and operatingcosts.  The Company maintains businessinterruption insurance to cover lost profits and received proceeds to recoverlost profits related to these events of $300,000.

 

Duringthe year ended March 31, 2007, the Company recorded insurance proceeds of$868,000.  These insurance proceeds werea result of final settlements of business interruption claims that covered lostprofits when the Company’s service to Cancun, Mexico and New Orleans, Louisianawas disrupted by hurricanes during the fiscal year ended March 31, 2006.

 

***Purchase Commitments***

 

***As of March 31,2008, the Company has remaining firm purchase commitments for eight additionalaircraft and one spare Airbus engine, which have scheduled delivery datescontinuing through November 2011.  The Company has not yet obtained financingfor any of the scheduled aircraft deliveries. Under the terms of the purchase agreement, the Company is required tomake scheduled pre-delivery payments for these aircraft.  These payments are non-refundable with certainexceptions. As of March 31, 2008, the Company had made pre-delivery payments onfuture deliveries totaling $12,738,000 to secure these aircraft purchases.***

*** ***

The Company has aggregate additional amounts due under purchasecommitments and estimated amounts for buyer-furnished equipment, spare partsfor purchased aircraft and to equip the aircraft with LiveTV. The Company is not under any contractualobligations with respect to spare parts. In addition, theCompany has commercial commitments under an agreement with SabreSonicäfor its passenger reservations and check-in capabilities.  The estimated aggregate amount for purchasecommitments is $374,044,000; $88,748,000 which is due in fiscal year 2008.

 

F-44

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** **

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

 

***Fuel Consortia***

 

The Company participates in numerous fuelconsortia with other carriers at major airports to reduce the costs of fueldistribution and storage. Interline agreements govern the rights andresponsibilities of the consortia members and provide for the allocation of theoverall costs to operate the consortia based on usage. The consortia (and inlimited cases, the participating carriers) have entered into long-termagreements to lease certain airport fuel storage and distribution facilitiesthat are typically financed through tax-exempt bonds (either special facilitieslease revenue bonds or general airport revenue bonds), issued by various localmunicipalities. In general, each consortium lease agreement requires theconsortium to make lease payments in amounts sufficient to pay the maturingprincipal and interest payments on the bonds. As of March 31, 2008,approximately $544,262,000 principal amount of such bonds were secured by fuelfacility leases at major hubs in which the Company participates, as to whicheach of the signatory airlines has provided indirect guarantees of the debt.The Company’s exposure is approximately $23,811,000 principal amount of suchbonds based on our most recent consortia participation. The Company’s exposurecould increase if the participation of other carriers decreases of if othercarriers default. The Company can exit all of their fuel consortia agreementswith limited penaltiesandcertain advance notice requirements. The guarantees will expire when thetax-exempt bonds are paid in full, which ranges from 2011 to 2033. The Companyhas not recorded a liability on our consolidated balance sheets related tothese indirect guarantees.

 

***Employees***

 

As of March 31, 2008, the Company had 6,170 employees, of whichapproximately 20% are represented by unions. Of those employees covered by collective bargaining agreements, nocontracts are currently under negotiation or becoming amendable in fiscal year2009.  The Company believes that mutuallyacceptable agreements can be reached with such employees, although the ultimateoutcome of the negotiations is unknown at this time.

 

**19.      Operating Segment Information**

 

SFAS No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” requires disclosuresrelated to components of a company for which separate financial information isavailable that is evaluated regularly by a company’s chief operating decisionmaker in deciding the allocation of resources and assessing performance. TheCompany has three primary operating and reporting segments, which consists ofmainline operations, Regional Partner operations, and Lynx Aviationoperations.  Mainline operations includeservice operated by Frontier using Airbus aircraft.  Regional Partner operations include regionaljet service operated by Republic, Horizon and ExpressJet.  Lynx Aviations operations, a subsidiary ofFrontier Holdings, includes service operated using Bombardier Q400 aircraft,which began revenue flight service on December 7, 2007.  The Company evaluates segment performancebased on several factors, of which the primary financial measure is operatingincome (loss). However, the Company does not manage the business or allocateresources solely based on segment operating profit or loss, and schedulingdecisions of the Company’s chief operating decision maker are based on theircontribution to the overall network.

 

To evaluate the separatesegments of the Company’s operations, management has segregated the revenuesand costs of its operations as follows: Passenger revenue for mainline, Regional Partners and Lynx Aviationrepresents the revenue collected for flights operated by the Airbus fleet, theaircraft under lease through contracts with Regional Partners and theBombardier Q400 fleet.  Operatingexpenses for Regional Partner flights include all direct costs associated withthe flights plus payments of performance bonuses if

 

F-45

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**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

 

earned under thecontract.  Certain expenses such asaircraft lease, maintenance and crew costs are included in the operatingagreements with our Regional Partners in which we reimburse these expenses plusa margin.  Operating expenses for LynxAviation include all direct costs associated with the flights and the aircraftincluding aircraft lease and depreciation, maintenance and crew costs.  Operating expenses for both Regional Partnersand Lynx Aviation also include other direct costs incurred for which theCompany does not pay a margin.  These expensesare primarily composed of fuel, airport facility expenses and passenger relatedexpenses. The Company also allocates indirect expenses between mainline,Regional Partners and Lynx Aviation operations by using departures, availableseat miles, or passengers as a percentage of system combined departures,available seat miles or passengers.

 

Financial information for the years ended March 31,2008, 2007 and 2006 for the Company’s operating segments is as follows:

 
| ** **                              | ** ** | **2008**                | ** ** | **2007** | ** ** | **2006**  | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------|------------|-----------|------------|
| ** **                              | ** ** | **(In thousands)** | ** ** |
| Operating revenues:                     |       |                    |       |     |       |      |       |
| Mainline – passenger and other (1) |       | $                       | 1,266,796  |     | $          | 1,076,785 |       | $ | 908,696 |   |
| Regional Partners – passenger      |       | 113,196                 |       | 94,164   |       | 92,826    |       |
| Lynx  Aviation – passenger         |       | 18,989                  |       | —   |       | —    |       |
| Consolidated                            |       | $                       | 1,398,981  |     | $          | 1,170,949 |       | $ | 1,001,522 |   |
|                                    |       |                    |       |     |       |      |       |
| Operating income (loss):                |       |                    |       |     |       |      |       |
| Mainline  (2)                           |       | $                       | 13,192     |     | $          | 7,496     |       | $ | 6,143 |   |
| Regional Partner                        |       | (33,015                 | )          | (14,191  | )          | (14,040   | )          |
| Lynx  Aviation (3)                      |       | (15,207                 | )          | (3,139   | )          | —    |       |
| Consolidated                            |       | $                       | (35,030    | )        | $          | (9,834    | )          | $ | (7,897 | ) |

 
| ** **                      | ** ** | **March 31,  2008** | ** ** | **March 31,  2007** | ** ** |
|---------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Total  assets at end of period: |       |                     |       |                     |       |
| Mainline                        |       | $                        | 1,129,123  |                     | $          | 1,016,431 |   |
| Regional Partner                |       | 202                      |       | 528                      |       |
| Lynx  Aviation                  |       | 110,338                  |       | 20,631                   |       |
| Other (4)                       |       | 10,308                   |       | 5,278                    |       |
| Consolidated                    |       | $                        | 1,249,971  |                     | $          | 1,042,868 |   |

 

----

| (1) | Other revenues  included in Mainline revenue consist primarily of cargo revenue, the  marketing component of revenues earned under a co-branded credit card  agreement and auxiliary services.                      |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Mainline  operating income (loss) includes realized and non-cash mark-to-market  adjustments on fuel hedges, a post-retirement liability curtailment gain in  2008 and employee separation costs and other charges. |
| (3) | Lynx Aviation  operating costs consisted solely of start-up costs prior to December 7,  2007.                                                                                                                  |
| (4) | Includes the  parent company, Frontier Holdings, Inc., including its investments in  Frontier and Lynx Aviation, which are eliminated in consolidation.                                                        |

 

F-46

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*** ***

**FRONTIERAIRLINES HOLDINGS, INC.**

**(Debtorand Debtor-in-Possession as of April 10, 2008)**

** **

**Notes tothe Consolidated Financial Statements, continued**

*** ***

***20.     ***Selected Quarterly Financial Data (Unaudited)

 
| ** **         | ** ** | **First**                                                                      | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------|------------|--------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **         | ** ** | **Quarter**                                                                    | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **         | ** ** | **(In thousands, except for per share amounts)** | ** ** |
| **2008**           |       |                                                                           |       |        |       |        |       |        |       |
| Revenues           |       | $                                                                              | 344,770    |        | $          | 372,966     |       | $           | 333,909    |   | $ | 347,336 |   |
| Operating expenses |       | $                                                                              | 343,167    |        | $          | 350,419     |       | $           | 359,511    |   | $ | 381,214 |   |
| Net income (loss)  |       | $                                                                              | (3,483     | )           | $          | 17,317      |       | $           | (32,508    | ) | $ | (41,579 | ) |
|               |       |                                                                           |       |        |       |        |       |        |       |
| Loss per share:    |       |                                                                           |       |        |       |        |       |        |       |
| Basic              |       | $                                                                              | (0.10      | )           | $          | 0.47        |       | $           | (0.89      | ) | $ | (1.13 | ) |
| Diluted            |       | $                                                                              | (0.10      | )           | $          | 0.39        |       | $           | (0.89      | ) | $ | (1.13 | ) |
|               |       |                                                                           |       |        |       |        |       |        |       |
| **2007**           |       |                                                                           |       |        |       |        |       |        |       |
| Revenues           |       | $                                                                              | 304,808    |        | $          | 312,470     |       | $           | 271,253    |   | $ | 282,418 |   |
| Operating expenses |       | $                                                                              | 294,127    |        | $          | 309,381     |       | $           | 289,719    |   | $ | 288,424 |   |
| Net income (loss)  |       | $                                                                              | 3,957      |        | $          | 509         |       | $           | (14,406    | ) | $ | (10,430 | ) |
|               |       |                                                                           |       |        |       |        |       |        |       |
| Loss per share:    |       |                                                                           |       |        |       |        |       |        |       |
| Basic              |       | $                                                                              | 0.11       |        | $          | 0.01        |       | $           | (0.39      | ) | $ | (0.29 | ) |
| Diluted            |       | $                                                                              | 0.10       |        | $          | 0.01        |       | $           | (0.39      | ) | $ | (0.29 | ) |

 

F-47

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